LOEWS CORP, 8-K, 1997-09-16

LOEWS CORP
8-K, 1997-09-16
FIRE, MARINE & CASUALTY INSURANCE

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<PAGE> 1

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

_____________________

FORM 8-K

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Date of Report (date of earliest event reported): September 16, 1997

LOEWS CORPORATION
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C> <C>
Delaware 1-6541 13-264102
(State of Incorporation) (Commission File (IRS Employer
Number) Identification
Number)
</TABLE>

<TABLE>
<S> <C>
667 Madison Avenue
New York, New York 10021-8087
(Address of Principal Executive Offices) (Zip Code)
</TABLE>

Registrant's telephone number, including area code: (212) 545-2000
<PAGE> 2
ITEM 5. OTHER EVENTS.

On September 16, 1997, the Registrant announced that it entered into
an agreement to sell $1,000,000,000 principal amount of its 3 1/8% Exchangeable
Subordinated Notes due September 15, 2007 (the "Notes") pursuant to an
underwritten offering (the "Offering"). In addition, the Registrant has
granted a 30-day option to the Underwriters to purchase up to an additional
$150,000,000 principal amount of the Notes at the offering price to cover
over-allotments. The Notes are exchangeable into shares of the common stock,
par value $.01 per share (the "Diamond Offshore Common Stock"), of Diamond
Offshore Drilling, Inc. ("Diamond Offshore") at any time from October 1, 1998
to, and including, September 15, 2007.

The following reports, filed by Diamond Offshore in accordance with
its reporting requirements under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), are included as Annexes to this filing and are
incorporated herein by reference:

Annex 1 Annual Report on Form 10-K for the Fiscal Year Ended December
31, 1996, filed with the Commission on March 3, 1997.

Annex 2 Definitive Proxy Statement on Schedule 14A, filed with the
Commission on April 1, 1997.

Annex 3 Quarterly Report on Form 10-Q for the Quarterly Period Ended
June 30, 1997, filed with the Commission on July 29, 1997.

Annex 4 Quarterly Report on Form 10-Q for the Quarterly Period Ended
March 31, 1997, filed with the Commission on April 28, 1997.

Annex 5 Current Report on Form 8-K, filed with the Commission on
July 14, 1997.

Annex 6 Current Report on Form 8-K, filed with the Commission on
April 15, 1997.

When included in any of the Annexes, the words "expects", "intends",
"plans", "anticipates", "estimates" and analogous expressions are intended to
identify forward-looking statements. Such statements inherently are subject to
a variety of risks and uncertainties that could cause actual results to differ
materially from those projected. Such risks and uncertainties include, among
others, general economic and business conditions, industry fleet capacity,
changes in foreign and domestic oil and gas exploration and production
capacity, changes in competition, changes in foreign, political, social and
economic conditions, regulatory initiatives and compliance with governmental
regulations, customer preferences and various other matters, many of which are
beyond the Registrant's control. These forward-looking statements speak only
as of the date of the respective Annex or Annexes in which they are contained.
The Registrant expressly disclaims any obligation or undertaking, on behalf of
Diamond Offshore or otherwise, to release publicly any updates or revisions to
any forward-looking statement
<PAGE> 3
contained herein to reflect any changes in the Registrant's expectations with
regard thereto or any change in events, conditions or circumstances on which
any statement is based.

ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS

23.1 Consent of Deloitte & Touche LLP.

99.1 Press release, dated September 16, 1997.
<PAGE> 4
SIGNATURE

Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned hereunto duly authorized.

Dated: September 16, 1997

LOEWS CORPORATION

By /s/ Peter W. Keegan
-----------------------------------
Senior Vice President and
Chief Financial Officer
<PAGE> 5
EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
23.1 Consent of Deloitte & Touche LLP.

99.1 Press release, dated September 16, 1997.
</TABLE>
<PAGE> 6
Annex 1

================================================================================

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

FORM 10-K

(MARK ONE)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 1996

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

For the transition period from to

Commission file number 1-13926

DIAMOND OFFSHORE DRILLING, INC.
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C>
DELAWARE 76-0321760
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
</TABLE>

15415 KATY FREEWAY
HOUSTON, TEXAS 77094
(Address and zip code of principal executive offices)

(281) 492-5300
(Registrant's telephone number, including area code)

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

<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
<C> <C>
Common Stock, $.01 par value per share New York Stock Exchange
</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. [ ]

The aggregate market value of the voting stock held by non-affiliates was
$2,204,360,325 as of January 31, 1997.

As of January 31, 1997, 68,386,262 shares of common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Diamond Offshore Drilling, Inc. Notice of Annual Meeting of
Stockholders and Proxy Statement relating to the 1997 Annual Meeting of
Shareholders, which the Registrant intends to file within 120 days of December
31, 1996, are incorporated by reference in Part III of this form.
================================================================================
<PAGE> 7
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
NO.
----
<S> <C> <C>
PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 9
Item 3. Legal Proceedings........................................... 9
Item 4. Submission of Matters to a Vote of Security Holders......... 9

PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters......................................... 11
Item 6. Selected Financial Data..................................... 12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 13
Item 8. Financial Statements and Supplementary Data................. 23
Consolidated Financial Statements........................... 24
Notes to Consolidated Financial Statements.................. 28
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 41

PART III
Information called for by Part III has been omitted as Registrant
intends to file with the Securities and Exchange Commission not later
than 120 days after the close of its fiscal year a definitive Proxy
Statement pursuant to Regulation 14A.

PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K ................................................... 41
Signatures............................................................ 44

</TABLE>
<PAGE> 8

PART I

ITEM 1. BUSINESS

GENERAL

Diamond Offshore Drilling, Inc., incorporated in Delaware in 1989, engages
principally in the contract drilling of offshore oil and gas wells. Unless the
context otherwise requires, references herein to the "Company" shall mean
Diamond Offshore Drilling, Inc. and its consolidated subsidiaries. The Company's
fleet of mobile offshore drilling rigs is one of the largest in the world and
includes the largest fleet of semisubmersible rigs currently working in the
world. The fleet is comprised of 30 semisubmersibles, 15 jack-ups and one
drillship. In addition, the Company operates a jack-up rig under bareboat
charter, which is currently scheduled to terminate in 1997.

ISSUANCE OF CONVERTIBLE SUBORDINATED NOTES

In February 1997, the Company issued $400.0 million, including $50.0
million from an over-allotment option, of 3 3/4 percent convertible subordinated
notes (the "Notes") due February 15, 2007. The Notes are convertible, in whole
or in part, at the option of the holder at any time following the date of
original issuance thereof and prior to the close of business on the business day
immediately preceding the maturity date, unless previously redeemed, into shares
of the Company's common stock ("Common Stock"), at a conversion price of $81 per
share (equivalent to a conversion rate of 12.346 shares per $1,000 principal
amount of Notes), subject to adjustment in certain circumstances. The Notes are
redeemable, in whole or from time to time in part, at the option of the Company,
at any time on or after February 22, 2001 at specified redemption prices, plus
accrued and unpaid interest to the date of redemption. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity" in Item 7 of this Report.

MERGER WITH ARETHUSA

On April 29, 1996, the Company acquired 100 percent of the common stock of
Arethusa (Off-Shore) Limited ("Arethusa"), a Bermuda corporation (the "Arethusa
Merger") in exchange for shares of Common Stock. Arethusa owned a fleet of 11
mobile offshore drilling rigs, operated two additional mobile offshore drilling
rigs pursuant to bareboat charters and provided drilling services worldwide to
international and government-controlled oil and gas companies. The fleet
consisted of eight semisubmersible rigs and five jack-up rigs. The Company
issued 17.9 million shares of Common Stock based on an exchange ratio of .88
shares for each share of Arethusa's issued and outstanding common stock. See
Note 2 to the Company's Consolidated Financial Statements in Item 8 of this
Report.

COMMON STOCK OFFERING

In October 1995, the Company sold 14,950,000 shares of Common Stock through
an initial public offering (the "Common Stock Offering"), including 1,950,000
shares from an over-allotment option. Loews Corporation ("Loews"), a Delaware
corporation of which the Company had been a wholly-owned subsidiary prior to the
Common Stock Offering, owned 35,050,000 of the outstanding shares of Common
Stock, or 70.1 percent, upon completion of the Common Stock Offering. After the
Arethusa Merger, Loews owns 51.3 percent of the outstanding Common Stock. The
net proceeds of the Common Stock Offering were used to repay all amounts due to
Loews under various borrowing arrangements and to pay a cash dividend to Loews.
See Note 3 to the Company's Consolidated Financial Statements in Item 8 of this
Report.

INDUSTRY CONDITIONS

The Company's business and operations depend principally upon the condition
of the oil and gas industry and, specifically, the exploration and production
expenditures of oil and gas companies. Historically, the offshore contract
drilling industry has been highly competitive and cyclical, with periods of low
demand, excess rig supply and low dayrates followed by periods of high demand,
short rig supply and high dayrates. The offshore contract drilling business is
influenced by a number of factors, including the current and anticipated

1
<PAGE> 9

prices of oil and natural gas, the expenditures by oil and gas companies for
exploration and production and the availability of drilling rigs. For a number
of years, depressed oil and natural gas prices and an oversupply of rigs had
adversely affected the offshore drilling market, particularly in the Gulf of
Mexico, where the prolonged weakness and uncertainty in the demand for and price
of natural gas resulted in a significant decline in exploration and production
activities, but such market has improved during 1995 and 1996. Demand for
drilling services outside the U.S. and the North Sea has been less volatile in
recent years, but remains dependent on a variety of political and economic
factors beyond the Company's control, including worldwide demand for oil and
natural gas, the ability of the Organization of Petroleum Exporting Countries
("OPEC") to set and maintain production levels and pricing, the level of
production of non-OPEC countries and the policies of the various governments
regarding exploration and development of their oil and natural gas reserves.

The deep water and harsh environment markets for semisubmersible rigs have
experienced improved demand and higher dayrates during the past two years, due
in part to the increasing impact of technological advances that have broadened
opportunities for offshore exploration and development. Both the Gulf of Mexico
and the North Sea semisubmersible markets have experienced increased utilization
and significantly higher dayrates since 1995. All of the Company's markets have
experienced increased utilization and higher dayrates in 1996, and customers
increasingly are seeking to contract rigs for a stated term (as opposed to
contracts for the drilling of a single well or a group of wells). The market for
jack-ups in the Gulf of Mexico, which weakened during 1994, began to stabilize
during 1995 and strengthened significantly in 1996. However, the Company cannot
predict whether and, if so, to what extent these recently improved conditions
will continue. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Outlook" in Item 7 of this Report.

THE FLEET

The Company's large, diverse fleet, which includes some of the most
technologically advanced rigs in the world, enables it to offer a broad range of
services worldwide in various markets, including the deep water market, the
harsh environment market (such as the North Sea), the conventional
semisubmersible market and the jack-up market.

Semisubmersibles. The Company owns and operates 30 semisubmersibles.
Semisubmersible rigs consist of an upper working and living deck resting on
vertical columns connected to lower hull members. Such rigs operate in a
"semisubmerged" position, remaining afloat, off bottom, in a position in which
the lower hull is from about 55 to 90 feet below the water line and the upper
deck protrudes well above the surface. The rig is typically anchored in position
and remains stable for drilling in the semi-submerged floating position due in
part to its wave transparency characteristics at the water line.

The Company owns and operates three fourth-generation semisubmersibles and
two semisubmersibles, the Ocean Quest and the Ocean Star, which have recently
been upgraded with fourth-generation capabilities. In addition, the Company is
currently upgrading an additional semisubmersible, the Ocean Victory, to work in
the deep water market of the Gulf of Mexico also with fourth-generation
capabilities. Fourth-generation semisubmersibles are larger than other
semisubmersibles, are capable of working in deep water or harsh environments and
have other advanced features. Currently the Ocean Valiant, the Ocean America and
the Ocean Quest are located in deep water areas of the Gulf of Mexico and the
Ocean Alliance is located in the harsh environment of the North Sea west of the
Shetland Islands. The Ocean Star is preparing for tow to its first drilling
location following the upgrade, which will be in a deep water area of the Gulf
of Mexico. The Ocean Victory is expected to be delivered in the fourth quarter
of 1997. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Capital Resources" in Item 7 of this Report.

In addition, the Company owns and operates 24 other semisubmersibles
(including five other Victory-class rigs), 21 of which operate in maximum water
depths of between 1,000 to 3,500 feet. The diverse capabilities of most of these
semisubmersibles enable them to work in both shallow and deep water environments
in the U.S. and in most markets outside the U.S. Currently, 13 of these
semisubmersibles are located in the Gulf of Mexico; four are located offshore
Brazil; three are located in the North Sea; two are located offshore Australia;
one is located offshore Malaysia; and one is located offshore South Africa.

2
<PAGE> 10

Jack-ups. The Company owns 15 jack-ups and operates one jack-up rig under
bareboat charter, which is currently scheduled to terminate in 1997. Jack-up
rigs are mobile, self-elevating drilling platforms equipped with legs that are
lowered to the ocean floor until a foundation is established to support the
drilling platform. The rig hull includes the drilling rig, jacking system, crew
quarters, loading and unloading facilities, storage areas for bulk and liquid
materials, heliport and other related equipment. Jack-ups are used extensively
for drilling in water depths from 20 feet to 350 feet. The water depth limit of
a particular rig is principally determined by the length of the rig's legs. A
jackup rig is towed by tugboats to the drillsite with its hull riding in the sea
as a vessel with its legs retracted. Once over a drillsite, the legs are lowered
until they rest on the seabed and jacking continues until the hull is elevated
above the surface of the water. After completion of drilling operations, the
hull is lowered until it rests in the water and then the legs are retracted for
relocation to another drillsite.

The principal market for the Company's jack-up rigs is currently the Gulf
of Mexico, where 12 of the Company's jack-up rigs are located. Of the Company's
jack-up rigs in the Gulf of Mexico, six are independent-leg cantilevered rigs,
two are mat-supported cantilevered rigs, two are independent-leg slot rigs, one
is a mat-supported slot rig and one is an independent-leg slot rig that has been
modified with skid-off capability.

Drillship. Drillships, which are typically self-propelled, are positioned
over a drillsite through the use of either an anchoring system or a computer
controlled thruster (dynamic positioning) system similar to those used on
certain semisubmersible rigs. Drillships normally require water depth of at
least 200 feet in order to conduct operations. The Company's drillship, the
Ocean Clipper I, which uses a conventional anchoring system, is currently being
upgraded to operate in the deep water market of the Gulf of Mexico with dynamic
positioning capabilities and is scheduled to be completed in mid-1997. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Capital Resources" in Item 7 of this Report.

Fleet Enhancements. The Company's strategy is to maximize dayrates and
utilization by adapting to trends in its markets, including enhancing its fleet
to meet customer demand for diverse drilling capabilities. The average age of
the Company's fleet of offshore drilling rigs (calculated as of December 31,
1996 and measured from year built) is 18.9 years. Many of the Company's rigs
have been upgraded during the last five years with enhancements such as
top-drive drilling systems, additional water depth capability, mud pump
additions or increases in deck load capacity, and the Company believes that it
will be feasible to continue to upgrade its rigs notwithstanding the average age
of its fleet. However, there can be no assurance as to if, when or to what
extent upgrades will continue to be made to rigs in the Company's fleet. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Capital Resources" in Item 7 of this Report.

The Ocean Quest, one of the Company's Victory-class rigs, was upgraded to
conduct drilling operations in the Gulf of Mexico in water depths of up to 3,500
feet and the rig was placed into service in September 1996. In March 1997, the
Company completed the major upgrade of the Ocean Star, including stability and
other enhancements such as water depth capabilities of up to 4,500 feet,
increased variable deck load to approximately 6,000 long tons, a top-drive
drilling system, a 15,000 psi blow-out prevention system, increased deck area,
and additional mud pit and tensioner capacity. The Ocean Victory is currently
undergoing an upgrade similar to the Ocean Quest and the Ocean Star which will
enable the rig to conduct drilling operations in water depths of up to 5,000
feet. The Ocean Victory is anticipated to be delivered during the fourth quarter
of 1997. Following the upgrades, the Company believes that these rigs will be
able to compete effectively in the fourth-generation deep water market.

Additional Victory-class upgrade potential exists, including conceptual
plans the Company is developing for the possible construction of an ultra-large
semisubmersible, the Ocean Legend. The Ocean Legend is intended to take
advantage of the cruciform design of the Victory-class semisubmersibles to
"square off" the rig by adding large corner columns and other new equipment to
yield a rig with capabilities beyond a traditional fourth-generation unit at a
significantly reduced cost as compared to new construction. However, there can
be no assurance that the Ocean Legend project will be undertaken by the Company,
particularly in view of current dayrates that would be forgone by removing a rig
from service for upgrade. If such project is

3
<PAGE> 11

undertaken, there can be no assurance that the Ocean Legend can be built in a
cost-effective manner, that if a Victory-class rig is so upgraded, there will be
adequate demand for its services, or that competitors will not achieve
capability beyond that of fourth-generation semisubmersibles through other means
attractive to customers.

More detailed information concerning the Company's fleet of mobile offshore
drilling rigs, as of January 31, 1997, is set forth in the table below.

<TABLE>
<CAPTION>
WATER YEAR
DEPTH BUILT/LATEST CURRENT
TYPE AND NAME CAPABILITY(FT.) ATTRIBUTES ENHANCEMENT(a) LOCATION CUSTOMER(b)
------------- --------------- ---------- -------------- ------------------ -----------
<S> <C> <C> <C> <C> <C>
FOURTH-GENERATION SEMISUBMERSIBLES(3):
Ocean Alliance........................ 5,000 TDS; DP; 15K; 3M 1988/1995 North Sea Shell
Ocean America......................... 5,000 TDS; SP; 15K; 3M 1988/1992 Gulf of Mexico Exxon
Ocean Valiant......................... 5,000 TDS; SP; 15K; 3M 1988/1995 Gulf of Mexico Exxon
FOURTH-GENERATION DEEP WATER
CONVERSIONS(3):
Ocean Star(c)......................... 4,500 TDS; VC; 15K; 3M 1974/1997 Gulf of Mexico Texaco
Ocean Quest........................... 3,500 TDS; VC; 15K; 3M 1973/1996 Gulf of Mexico Chevron
Ocean Victory(d)...................... 600 VC 1972 Gulf of Mexico Vastar
OTHER SEMISUBMERSIBLES(24):
Ocean Worker(e)....................... 3,500 TDS; 3M 1982/1992 Gulf of Mexico Shell
Ocean Voyager......................... 3,200 TDS; VC 1973/1995 Gulf of Mexico Enserch
Ocean Winner(e)....................... 3,000 TDS; 3M 1977/1996 Gulf of Mexico Chevron
Ocean Yatzy(e)........................ 3,000 TDS; DP; 15K 1989 Brazil Petrobras
Ocean Yorktown(e)..................... 2,850 TDS 1976/1996 Brazil Petrobras
Ocean Concord(e)...................... 2,200 TDS; 3M 1975/1995 Gulf of Mexico Shell
Ocean Lexington(e).................... 2,200 TDS; 3M 1976/1995 Gulf of Mexico Marathon
Ocean Saratoga(e)..................... 2,200 TDS; 3M 1976/1995 Gulf of Mexico Shell
Ocean Endeavor........................ 2,000 TDS; VC 1975/1994 Gulf of Mexico British-Borneo
Ocean Rover........................... 2,000 TDS; VC; 15K 1973/1992 Gulf of Mexico Amerada Hess
Ocean Prospector...................... 1,700 VC 1971/1981 Gulf of Mexico AGIP
Ocean Bounty.......................... 1,500 TDS; VC; 3M 1977/1992 Australia BHPP
Ocean Guardian........................ 1,500 TDS; SP; 3M 1985 North Sea BP
Ocean New Era......................... 1,500 TDS 1974/1990 Gulf of Mexico LL&E
Ocean Princess........................ 1,500 TDS; 15K 1977/1996 North Sea Mobil
Ocean Whittington(e).................. 1,500 TDS; 3M 1974/1995 Gulf of Mexico Burlington
Ocean Epoch........................... 1,200 TDS 1977/1990 Australia Shell
Ocean General......................... 1,200 TDS 1976/1990 Malaysia Petronas
Ocean Nomad........................... 1,200 TDS 1975/1995 North Sea Shell
Ocean Baroness........................ 1,200 TDS; VC 1973/1995 Brazil Petrobras
Ocean Ambassador...................... 1,100 TDS; 3M 1975/1995 Gulf of Mexico Shell
Ocean Century......................... 800 1973 Gulf of Mexico Stacked
Ocean Liberator....................... 600 1974 South Africa Mossgas
Ocean Zephyr.......................... 600 1972 Brazil Petrobras
JACK-UPS(16):
Ocean Titan........................... 350 TDS; IS; 15K; 3M 1974/1989 Gulf of Mexico CNG
Ocean Tower........................... 350 IS; 3M 1972 Gulf of Mexico Ashland
Ocean King............................ 300 TDS; IC 1973/1989 Gulf of Mexico Chevron
Miss Kitty(e), (f).................... 300 IC 1982 India ONGC
Ocean Nugget.......................... 300 TDS; IC 1976/1995 Gulf of Mexico Texaco
Ocean Summit.......................... 300 SDS; IC 1972/1991 Gulf of Mexico Coastal
Ocean Warwick......................... 300 TDS; IS; SO 1971/1984 Gulf of Mexico Stacked
Ocean Champion........................ 250 MS 1975/1985 Gulf of Mexico LL&E
Ocean Columbia........................ 250 TDS; IC 1978/1990 Gulf of Mexico Anadarko
Ocean Heritage(e)..................... 250 TDS; IC 1981/1995 Indonesia Maxus
Ocean Sovereign(e).................... 250 TDS; IC 1981/1994 Indonesia Maxus
Ocean Spartan......................... 250 TDS; IC 1980/1994 Gulf of Mexico Amerada Hess
Ocean Spur............................ 250 TDS; IC 1981/1994 Gulf of Mexico BHP(g)
Ocean Crusader........................ 200 TDS; MC 1982/1992 Gulf of Mexico Chevron
Ocean Drake........................... 200 TDS; MC 1983/1986 Gulf of Mexico Chevron
Ocean Scotian(e)...................... 200 TDS; IC; 15K 1981/1988 Netherlands Elf
DRILLSHIP(1):
Ocean Clipper I(h).................... 1,200 SP 1976 Gulf of Mexico BP
</TABLE>

4
<PAGE> 12

<TABLE>
<CAPTION>
ATTRIBUTES
----------
<S> <C> <C> <C> <C> <C>
DP = Dynamically Positioned/Self-Propelled MS = Mat-Supported Slot Rig TDS = Top-Drive Drilling System
IC = Independent-Leg Cantilevered Rig SDS = Side-Drive Drilling VC = Victory-Class
System
IS = Independent-Leg Slot Rig SO = Skid-Off Capability 3M = Three Mud Pumps
MC = Mat-Supported Cantilevered Rig SP = Self-Propelled 15K = 15,000 psi Blow-Out
Preventer
</TABLE>

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

(a) Such enhancements include the installation of top-drive drilling systems,
water depth upgrades, mud pump additions and increases in deck load
capacity.

(b) For ease of presentation in this table, customer names have been shortened
or abbreviated.

(d) Committed under a three-year term contract with Vastar in the Gulf of Mexico
upon completion of a major upgrade.

(e) Formerly an Arethusa rig.

(f) Operated under bareboat charter, which is currently scheduled to terminate
in 1997.

(g) Managed daywork project operated by Diamond Offshore Turnkey Services
("DOTS").

(h) Committed under a letter of intent for a four-year term contract with BP in
the Gulf of Mexico upon completion of a major upgrade.

MARKETS

The Company's principal markets for its offshore contract drilling services
are the Gulf of Mexico, Europe, including principally the U.K. sector of the
North Sea, South America and Australia/Southeast Asia. The Company actively
markets its rigs worldwide. In the past, rigs in the Company's fleet have also
operated in various other markets throughout the world. See Note 13 to the
Company's Consolidated Financial Statements in Item 8 of this Report.

The Company believes that its presence in multiple markets provides a
competitive advantage. For example, the Company believes that its experience
with safety and other regulatory matters in the U. K. has been beneficial in
Australia and in the Gulf of Mexico and that production experience gained
through Brazilian and North Sea operations has potential application worldwide.
Additionally, the Company believes that its performance for a customer in one
market segment or area enables it to better understand that customer's needs and
serve that customer in different market segments or other geographic locations.

OFFSHORE CONTRACT DRILLING SERVICES

The Company's contracts to provide offshore drilling services vary in their
terms and provisions. The Company often obtains its contracts through
competitive bidding, although it is not unusual for the Company to be awarded
drilling contracts without competitive bidding. Drilling contracts generally
provide for a basic drilling rate on a fixed dayrate basis regardless of whether
such drilling results in a productive well. Drilling contracts may also provide
for lower rates during periods when the rig is being moved or when drilling
operations are interrupted or restricted by equipment breakdowns, adverse
weather or water conditions or other conditions beyond the control of the
Company. Under dayrate contracts, the Company generally pays the operating
expenses of the rig, including wages and the cost of incidental supplies.
Revenues from dayrate contracts have historically accounted for a substantial
portion of the Company's revenues. In addition, the Company has worked some of
its rigs under dayrate contracts pursuant to which the customer also agrees to
pay the Company an incentive bonus based upon performance.

A dayrate drilling contract generally extends over a period of time
covering either the drilling of a single well, a group of wells (a "well-to-well
contract") or a stated term (a "term contract") 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. In addition, certain of the Company's contracts permit
the customer to

5
<PAGE> 13

terminate the contract early by giving notice and in some circumstances may
require the payment of an early termination fee by the customer. The contract
term in many instances may be extended by the customer exercising options for
the drilling of additional wells at fixed or mutually agreed terms, including
dayrates.

The duration of offshore drilling contracts is generally determined by
market demand and the respective management strategy of the offshore drilling
contractor and its customers. In periods of rising demand for offshore rigs,
contractors typically prefer well-to-well contracts that give contractors the
flexibility to profit from increasing dayrates. In contrast, during these
periods customers with reasonably definite drilling programs typically prefer
longer term contracts to maintain dayrate prices at the lowest level possible.
Conversely, in periods of decreasing demand for offshore rigs, contractors
generally prefer longer term contracts to preserve dayrates at existing levels
and ensure utilization, while the customers prefer well-to-well contracts that
allow them to obtain the benefit of lower dayrates. In general, the Company
seeks to have a reasonable balance of single well, well-to-well and term
contracts to minimize the downside impact of a decline in the market while still
participating in the benefit of increasing dayrates in a rising market. Although
most of the Company's semisubmersible rigs are committed on a term basis, the
Company's jack-up rigs are primarily committed for short-term single well or
well-to-well arrangements.

The Company, through DOTS, a wholly-owned subsidiary of the Company, offers
a portfolio of drilling and production services to complement the Company's
offshore contract drilling business. These services include overall project
management and drilling and production operations on a turnkey or
modified-turnkey basis. Under a turnkey contract, the drilling contractor agrees
to perform a specified drilling service, such as drilling a well to a specified
depth for a fixed price. Under a turnkey contract, the drilling contractor bears
the financial risk of delays in completion of the project and profitability
depends upon the contractor's ability to keep expenses within estimates used to
determine the contract price. Drilling of a well under a turnkey contract
therefore typically requires a cash commitment in excess of those drilled under
conventional dayrate contracts and exposes the contractor to risks of potential
financial losses that generally are substantially greater than those that would
ordinarily exist when drilling under a conventional dayrate contract. The
financial results of a turnkey contract depend upon the performance of the
drilling unit, drilling conditions, and other factors, some of which are beyond
the control of DOTS. However, during 1996, DOTS primarily provided project
management services on a dayrate basis that are not accompanied by the
substantial risks of turnkey contracts. For the year ended December 31, 1996,
DOTS contributed $2.5 million of operating income to the Company's consolidated
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Results of Operations" in Item 7 of this
Report.

The Company may also seek alternative uses for the rigs in its fleet that
are no longer competitive in the drilling market and do not meet the Company's
criteria for modification. Such alternative uses may include employment of these
rigs as mobile offshore production units or as a part of floating production
systems. These operations have not been a significant part of the Company's
business.

DISPOSITION OF ASSETS

During 1996, the Company's bareboat charter of a jack-up drilling rig
acquired in the Arethusa Merger terminated and the Company no longer operates
this rig. In addition, in 1996, the Company sold two shallow water jack-ups and
one semisubmersible, each of which was inactive. In December 1996, the Company
exited the land drilling business with the sale of its land rigs and associated
equipment for approximately $26.0 million, resulting in an after-tax gain for
the year ended December 31, 1996 of $15.6 million or $0.25 per share. The assets
sold consisted of ten land drilling rigs, 18 trucks, a yard facility and various
other equipment.

CUSTOMERS

The Company provides offshore drilling services to a customer base that
includes major and independent oil and gas companies and government-owned oil
companies. Occasionally, several customers have accounted for 10.0 percent or
more of the Company's annual consolidated revenues, although the identity of
such customers may vary from year to year. During 1996, the Company performed
services for approximately 80 different customers and Shell Oil Company and
British Petroleum Co., PLC ("BP") accounted for

6
<PAGE> 14

13.8 percent and 13.5 percent of the Company's annual total consolidated
revenues, respectively. During 1995, the Company performed services for
approximately 90 different customers and BP accounted for 16.5 percent of the
Company's annual total consolidated revenues. During 1994, the Company performed
services for approximately 90 different customers and no single customer
accounted for more than 8.2 percent of the Company's annual total consolidated
revenues. Management believes that at current levels of activity the Company has
alternative customers for its services such that the loss of a single customer
would not have a material adverse effect on the Company.

The Company's services are marketed principally through its Houston office,
with support from its regional offices in New Orleans, Louisiana; Aberdeen,
Scotland; Perth, Australia; Macae, Brazil; Jakarta, Indonesia; and Singapore.
Technical and administrative support functions for the Company's operations are
provided by its Houston office.

COMPETITION

The contract drilling industry is highly competitive. Customers often award
contracts on a competitive bid basis, and although a customer selecting a rig
may consider, among other things, a contractor's safety record, crew quality and
quality of service and equipment, the historical oversupply of rigs has created
an intensely competitive market in which price is the primary factor in
determining the selection of a drilling contractor. However, due to the recent
escalation of drilling activity, rig availability has, in some cases, also
become a consideration. The Company believes that competition for drilling
contracts will continue to be intense in the foreseeable future. Contractors are
also able to adjust localized supply and demand imbalances by moving rigs from
areas of low utilization and dayrates to areas of greater activity and
relatively higher dayrates. In addition, there are inactive non-marketed rigs or
rigs being operated in non-drilling activities that could be reactivated to meet
an increase in demand for drilling rigs in any given market. Such movements or
reactivations or a decrease in drilling activity in any major market could
depress dayrates and could adversely affect utilization of the Company's rigs.
See "-- Offshore Contract Drilling Services."

In addition, the recent improvement in the current results of operations
and prospects for the offshore contract drilling industry as a whole has led to
increased rig construction and enhancement programs by the Company's competitors
and, if present trends continue for an extended period, may lead to new entrants
into the market. A significant increase in the supply of technologically
advanced rigs capable of drilling in deep water may have an adverse effect on
the average operating dayrates for the Company's rigs, particularly its more
advanced semisubmersible units, and on the overall utilization level of the
Company's fleet. In such case, the company's results of operations would be
adversely affected.

GOVERNMENTAL REGULATION

The Company's operations are subject to numerous federal, state and local
environmental laws and regulations that relate directly or indirectly to its
operations, including certain regulations controlling the discharge of materials
into the environment, requiring removal and clean-up under certain
circumstances, or otherwise relating to the protection of the environment. For
example, the Company may be liable for damages and costs incurred in connection
with oil spills for which it is held responsible. Laws and regulations
protecting the environment have become increasingly stringent in recent years
and may in certain circumstances impose "strict liability" rendering a company
liable for environmental damage without regard to negligence or fault on the
part of such company. 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 that 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.

The United States Oil Pollution Act of 1990 ("OPA '90") and similar
legislation enacted in Texas, Louisiana and other coastal states address oil
spill prevention and control and significantly expand liability exposure across
all segments of the oil and gas industry. OPA '90, such similar legislation and
related regulations impose a variety of obligations on the Company related to
the prevention of oil spills and liability for damages resulting from such
spills. OPA '90 imposes strict and with limited exceptions joint and several

7
<PAGE> 15

liability upon each responsible party for oil removal costs and a variety of
public and private damages. OPA '90 also imposes ongoing financial
responsibility requirements on a responsible party. A failure to comply with
such ongoing requirements or inadequate cooperation in a spill may subject a
responsible party, including in some cases the Company, to civil or criminal
enforcement action. OPA '90 also requires the U.S. Minerals Management Service
to promulgate regulations to implement the financial responsibility requirements
for offshore facilities. If implemented as written, the financial responsibility
requirements of OPA '90 could have the effect of significantly increasing the
amount of financial responsibility that oil and gas operators must demonstrate
to comply with OPA '90. While industry groups and marine insurance carriers are
seeking modification of these requirements, implementation of these requirements
in their current form could adversely affect the ability of some of the
Company's customers to operate in U.S. waters, which could have a material
adverse effect on the Company.

The Federal Water Pollution Control Act of 1972, commonly referred to as
the Clean Water Act ("CWA"), prohibits the discharge of certain substances into
the navigable waters of the U.S. without a permit. The regulations implementing
the CWA require permits to be obtained by an operator before certain exploration
or drilling activities occur. Violations of monitoring, reporting and permitting
requirements can result in the imposition of civil and criminal penalties. The
provisions of the CWA can also be enforced by citizens' groups. Many states have
similar laws and regulations.

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. Violation of lease terms relating to environmental
matters 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 the cancellation of leases. Such
enforcement liabilities can result from either governmental or citizen
prosecution.

INDEMNIFICATION AND INSURANCE

The Company's operations are subject to 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, injury to or death of rig and other personnel
and damage to or destruction of the Company's, the Company's customer's or a
third party's property or equipment. Damage to the environment could also result
from the Company's operations, particularly through oil spillage or 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 has insurance coverage and contractual
indemnification for certain risks, but there can be no assurance that such
coverage or indemnification will adequately cover the Company's loss or
liability in many circumstances or that the Company will continue to carry such
insurance or receive such indemnification. Except with respect to its
fourth-generation semisubmersibles, the Company does not maintain business
interruption insurance and may elect to discontinue this coverage for its
fourth-generation semisubmersibles at any time.

OPERATIONS OUTSIDE THE UNITED STATES

Operations outside the United States accounted for approximately 37.1
percent, 36.4 percent and 34.0 percent of the Company's total consolidated
revenues from unaffiliated customers for the years ended December 31, 1996, 1995
and 1994, respectively. The Company's non-U.S. operations are subject to certain
political, economic and other uncertainties not encountered in U.S. operations,
including risks of war and civil disturbances (or other risks that may limit or
disrupt markets), expropriation and the general hazards associated with the
assertion of national sovereignty over certain areas in which operations are
conducted. The Company's operations outside the United States may face the
additional risk of fluctuating currency values, hard currency shortages,
controls of currency exchange and repatriation of income or capital. See
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Other -- Currency Risk" in Item 7 of this Report. No prediction
can be made as to what governmental regulations may be enacted in the future
that could adversely affect the international drilling industry.

8
<PAGE> 16

EMPLOYEES

As of December 31, 1996, the Company had approximately 3,770 employees
(including international crews furnished through labor contractors),
approximately 160 of whom were union members. The Company has experienced
satisfactory labor relations and provides comprehensive benefit plans for its
employees. The Company does not consider the possibility of a shortage of
qualified personnel to be a material factor in its business. However, because
the demand for oil field services is increasing rapidly, retention of qualified
people is likely to become more difficult without significant increases in
compensation.

ITEM 2. PROPERTIES.

The Company owns an eight-story office building containing approximately
182,000 net rentable square feet on approximately 6.2 acres of land located in
Houston, Texas, where the Company has its corporate headquarters, an 18,000
square foot building and 20 acres of land in New Iberia, Louisiana for its
offshore drilling warehouse and storage facility, and a 13,000 square foot
building and five acres of land in Aberdeen, Scotland for its North Sea
operations. The Company also owns a warehouse facility on approximately 6.6
acres of land near Houston, Texas which was acquired through the Arethusa Merger
and which the Company plans to sell. Also, the Company currently leases various
office, warehouse and storage facilities and lots in Louisiana, Scotland,
Australia, Malaysia, Singapore, Indonesia, India, the Netherlands and Brazil to
support its offshore drilling operations.

ITEM 3. LEGAL PROCEEDINGS.

Brown Services, Inc. and KOS Industries, Inc. v. Michael D. Brown, BSI
International, Inc., Robert Brown, Robert Furlough, Power House International,
Inc., Zapata Off-Shore Company and Zapata Corporation; No. 92-05691 in the 334th
Judicial District Court of Harris County, Texas, filed February 7, 1992.
Plaintiffs have sued Zapata Off-Shore Company and Zapata Corporation (the
"Zapata Defendants") for tortious interference with contract and conspiracy to
tortiously interfere with contract. Plaintiffs seek $14.0 million in actual
damages and unspecified punitive damages, plus costs of court, interest and
attorney's fees. A former subsidiary of Arethusa, which is now a subsidiary of
the Company, is defending and indemnifying the Zapata Defendants pursuant to a
contractual defense and indemnification agreement. The Company believes the
Zapata Defendants have adequate defenses and intends to vigorously defend their
position.

The Company and its subsidiaries are named defendants in certain other
lawsuits and are involved from time to time as parties to governmental
proceedings, all arising in the ordinary course of business. For a description
of one such lawsuit, see Note 8 to the Company's Consolidated Financial
Statements in Item 8 of this Report. Although the outcome of lawsuits or other
proceedings involving the Company and its subsidiaries cannot be predicted with
certainty and the amount of any liability that could arise with respect to such
lawsuits or other proceedings cannot be predicted accurately, management does
not expect these matters to have a material adverse effect on the financial
position or results of operations of the Company.

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

There were no matters submitted to a vote of security holders of the
Company during the fourth quarter of 1996.

9
<PAGE> 17

EXECUTIVE OFFICERS OF THE REGISTRANT

In reliance on General Instruction G(3) to Form 10-K, information on
executive officers of the Registrant is included in this Part I. The executive
officers of the Company are elected annually by the Board of Directors to serve
until the next annual meeting of the Board of Directors, or until their
successors are duly elected and qualified, or until their earlier death,
resignation, disqualification or removal from office. Information with respect
to the executive officers of the Company is set forth below.

<TABLE>
<CAPTION>
AGE AS OF
NAME JANUARY 31, 1997 POSITION
---- ---------------- --------
<S> <C> <C>
Robert E. Rose............ 58 President, Chief Executive Officer and Director
Lawrence R. Dickerson..... 44 Senior Vice President and Chief Financial
Officer
David W. Williams......... 39 Senior Vice President -- Contracts and
Marketing
Richard L. Lionberger..... 46 Vice President, General Counsel and Secretary
Gary T. Krenek............ 38 Controller
</TABLE>

Robert E. Rose has served as President and Chief Executive Officer of the
Company and as a director since June 1989.

Lawrence R. Dickerson has served as Senior Vice President of the Company
since April 1993 and has served as a Vice President and the Chief Financial
Officer of the Company since June 1989.

David W. Williams has served as Senior Vice President of the Company since
December 1994 and was a Marketing Vice President between February 1992 and May
1994. Mr. Williams was employed by Noble Drilling Corporation, a contract
drilling company, from May 1994 through December 1994 as Vice President of
Marketing.

Richard L. Lionberger has served as Vice President, Secretary and General
Counsel of the Company since February 1992.

Gary T. Krenek has served as Controller of the Company since February 1992.

10
<PAGE> 18

PART II

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

PRICE RANGE OF COMMON STOCK

The Company's Common Stock is listed on the New York Stock Exchange
("NYSE") under the symbol "DO". The following table sets forth, for the calendar
quarters indicated, the high and low closing prices of Common Stock as reported
by the NYSE. No information is provided for Common Stock prior to the date of
the Common Stock Offering.

<TABLE>
<CAPTION>
COMMON STOCK
-------------
HIGH LOW
---- ---
<S> <C> <C>
1996
First Quarter............................................... $433/8 $333/8
Second Quarter.............................................. 57 431/2
Third Quarter............................................... 581/8 47
Fourth Quarter.............................................. 643/8 541/4
1995
Fourth Quarter.............................................. $34 $24
</TABLE>

On January 31, 1997, the closing price, as reported by the NYSE, was
$66 1/8 per share. As of January 31, 1997, there were approximately 86 holders
of record of Common Stock. This number does not include the stockholders for
whom shares are held in a "nominee" or "street" name.

DIVIDEND POLICY

There were no cash dividends declared for 1996 or 1995, except for a $2.1
million special dividend paid to Loews in 1995 in connection with the Common
Stock Offering. See Note 3 to the Company's Consolidated Financial Statements in
Item 8 of this Report. Any future determination as to payment of dividends will
be made at the discretion of the Board of Directors of the Company and will
depend upon the Company's operating results, financial condition, capital
requirements, general business conditions and such other factors that the Board
of Directors deems relevant. In addition, the payment of cash dividends is
limited by the terms of the Company's revolving credit facility with a group of
banks (the "Credit Facility"). At December 31, 1996, the Company could have
declared and paid dividends of $25.0 million in the aggregate within the
limitations of the Credit Facility. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity" in Item 7 and Note 7
to the Company's Consolidated Financial Statements in Item 8 of this Report.

11
<PAGE> 19

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth certain historical consolidated financial
data relating to the Company. The selected consolidated financial data are
derived from the financial statements of the Company as of and for the periods
presented. The selected consolidated financial data below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in Item 7 and the Company's Consolidated Financial
Statements (including the Notes thereto) in Item 8 of this Report.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1996(1) 1995 1994 1993 1992(2)
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total revenues............................................. $611,430 $336,584 $307,918 $288,069 $214,885
Operating expenses:
Contract drilling........................................ 341,654 259,560 256,919 228,211 199,201
Depreciation (3)......................................... 75,767 52,865 55,366 46,819 49,667
General and administrative............................... 15,640 13,857 11,993 11,785 15,401
Gain on sale of assets................................... (35,122) (1,349) (1,736) (3,201) (231)
Operating income (loss).................................... 213,491 11,651 (14,624) 4,455 (49,153)
Interest expense........................................... (2,326) (27,052) (31,346) (25,906) (28,591)
Other income (expense), net................................ 1,540 1,598 (455) (219) (207)
Income tax (expense) benefit (4)........................... (66,317) 6,777 11,621 5,041 24,575
Net income (loss).......................................... 146,388 (7,026) (34,804) (16,629) (53,376)
Net income per share....................................... 2.35 -- -- -- --
Weighted average shares outstanding........................ 62,231 -- -- -- --
Pro forma net income per share (5)......................... -- 0.20 -- -- --

OTHER FINANCIAL DATA:
Capital expenditures (6)................................... $267,000 $ 66,646 $ 21,146 $ 14,345 $ 16,214
EBITDA (7)................................................. 254,136 63,167 39,006 48,073 283
Cash provided by (used in) operating activities (8)........ 207,822 52,781 42,562 32,904 (12,164)
Ratio of earnings to fixed charges (9)..................... 31.56x -- -- -- --
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------
1996 1995 1994 1993 1992
---------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.......................................... $ 114,967 $ 63,523 $ 57,521 $ 52,904 $ 35,391
Drilling and other property and equipment, net........... 1,198,160 502,278 488,664 498,740 478,454
Goodwill, net (1)........................................ 129,825 -- -- -- --
Total assets............................................. 1,574,500 618,052 588,158 592,162 582,418
Long-term debt (10)...................................... 63,000 -- 394,777 353,483 233,216
Stockholders' equity (11)................................ 1,194,732 492,894 124,066 158,361 275,300
</TABLE>

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

(1) The Company acquired all of the common stock of Arethusa in consideration
of 17.9 million shares of Common Stock effective April 29, 1996. See Note 2
to the Company's Consolidated Financial Statements in Item 8 of this
Report.

(2) The Company acquired all of the common stock of Odeco Drilling Inc. for
approximately $376.6 million in cash effective January 1, 1992.

(3) Effective January 1, 1996 and 1993, the Company revised the estimated
useful lives for certain classes of its offshore drilling rigs. The
estimated useful lives of the Company's offshore drilling rigs, after the
change in estimate, range from 10 to 25 years. As compared to the original
estimate of useful lives, this change resulted in a reduction of
approximately $8.5 million and $6.3 million in depreciation expense during
1996 and 1993, respectively, and a corresponding increase in operating
income.

(4) Prior to the Common Stock Offering, the Company was included in the
consolidated U.S. federal income tax return of Loews. Effective January 1,
1992, a tax sharing agreement with Loews was adopted to allow for the
recognition of expenses and benefits related to taxable income and losses
as if the Company filed a separate consolidated return. In conjunction with
the Common Stock Offering, the tax sharing agreement was terminated and all
assets and liabilities were settled by offsetting these amounts

12
<PAGE> 20

against notes payable to Loews. For taxable periods subsequent to the
Common Stock Offering, the Company has filed a consolidated U.S. federal
income tax return on a stand-alone basis.

(5) Pro forma net income per share gives effect to the Common Stock Offering
and the after-tax effects of a reduction in interest expense. Assuming the
Common Stock Offering had occurred at January 1, 1995, the Company would
have recognized net income of $10.0 million, or $0.20 per share of Common
Stock, after adjusting for the after-tax effects of a reduction in interest
expense. See Note 1 to the Company's Consolidated Financial Statements in
Item 8 of this Report.

(6) In addition to these capital expenditures, the Company expended $550.7
million in equity consideration and $25.0 million, $10.6 million, and
$410.9 million in cash for rig acquisitions during the years ended December
31, 1996, 1994, 1993, and 1992, respectively. No amounts were expended for
rig acquisitions during the year ended December 31, 1995.

(7) EBITDA (operating income (loss) plus depreciation minus gain on sale of
assets) is a supplemental financial measure used by the Company in
evaluating its business and should be read in conjunction with all of the
information in the Selected Financial Data as well as the Company's
Consolidated Financial Statements (including the Notes thereto) included in
Item 8 of this Report prepared in accordance with generally accepted
accounting principles. EBITDA should not be considered as an alternative to
operating income (loss) or cash flow from operations as an indication of
the Company's performance or as a measure of liquidity.

(8) See the Company's Consolidated Financial Statements (including the Notes
thereto) in Item 8 of this Report.

(9) The deficiency in the Company's earnings available for fixed charges for
the years ended December 31, 1995, 1994, 1993 and 1992 was approximately
$13.8 million, $46.4 million, $21.7 million, and $78.0 million. Fixed
charges for the years ended December 31, 1992 through December 31, 1995
consisted primarily of interest expense on notes payable to Loews. For all
periods presented, the ratio of earnings to fixed charges has been computed
on a total enterprise basis. Earnings represent income (loss) from
continuing operations plus income taxes and fixed charges. Fixed charges
represent interest, whether expensed or capitalized.

(10) Long-term debt consisted solely of notes payable to Loews for the years
ended December 31, 1994, 1993 and 1992.

(11) In connection with the Common Stock Offering, the Company paid a special
dividend of $2.1 million to Loews with a portion of the proceeds. No other
cash dividends were paid during the periods presented.

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

The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements (including the Notes thereto) in Item 8 of
this Report.

FORWARD-LOOKING STATEMENTS

When included in this Report, the words "expects," "intends," "plans,"
"anticipates," "estimates," and analogous expressions are intended to identify
forward-looking statements. Such statements inherently are subject to a variety
of risks and uncertainties that could cause actual results to differ materially
from those projected. Such risks and uncertainties include, among others,
general economic and business conditions, industry fleet capacity, changes in
foreign and domestic oil and gas exploration and production activity,
competition, changes in foreign, political, social and economic conditions,
regulatory initiatives and compliance with governmental regulations, customer
preferences and various other matters, many of which are beyond the Company's
control. These forward-looking statements speak only as of the date of this
Report. The Company expressly disclaims any obligation or undertaking to release
publicly any updates or revisions to any forward-looking statement contained
herein to reflect any change in the Company's expectations with regard thereto
or any change in events, conditions or circumstances on which any statement is
based.

13
<PAGE> 21

RESULTS OF OPERATIONS

General

Revenues. The Company's revenues vary based upon demand, which affects the
number of days the fleet is utilized and the dayrates received. Revenues can
also increase or decrease as a result of the acquisition or disposal of rigs. In
order to improve utilization or realize higher dayrates, the Company may
mobilize its rigs from one market to another. During periods of mobilization,
however, revenues may be adversely affected. As a response to changes in demand,
the Company may withdraw a rig from the market by stacking it or may reactivate
a rig which was previously stacked, which may decrease or increase revenues,
respectively.

Revenues from dayrate drilling contracts are recognized currently. The
Company may receive lump-sum payments in connection with specific contracts.
Such payments are recognized as revenues over the term of the related drilling
contract. Mobilization revenues less costs incurred to mobilize an offshore rig
from one market to another are recognized over the term of the related drilling
contract. Revenues from offshore turnkey contracts are recognized on the
completed contract method, with revenues accrued to the extent of turnkey costs
until the specified turnkey depth and other contract requirements are met.

Operating Income (Loss). Operating income (loss) is primarily affected by
revenue factors, but is also a function of varying levels of operating expenses.
Operating expenses are not affected by changes in dayrates, nor are they
necessarily significantly affected by fluctuations in utilization. For instance,
if a rig is to be idle for a short period of time, the Company realizes few
decreases in operating expenses since the rig is typically maintained in a
prepared state with a full crew. However, if the rig is to be idle for an
extended period of time, the Company may reduce the size of a rig's crew and
take steps to "cold stack" the rig, which lowers expenses and partially offsets
the impact on operating income associated with loss of revenues. The Company
recognizes as an operating expense maintenance activities such as painting,
inspections and routine overhauls that maintain rather than upgrade its rigs.
These expenses vary from period to period. Costs of rig enhancements are
capitalized and depreciated over the expected useful lives of the enhancements.
Increased depreciation expense decreases operating income in periods subsequent
to capital upgrades. From time to time, the Company sells assets in the ordinary
course of its business and gains or losses associated with such sales are
included in operating income (loss).

Merger with Arethusa. Effective April 29, 1996, the Arethusa Merger was
completed. Arethusa owned a fleet of 11 mobile offshore drilling rigs, operated
two additional mobile offshore drilling rigs pursuant to bareboat charters, and
provided drilling services worldwide to international and government-controlled
oil and gas companies. Because the Arethusa Merger was accounted for as a
purchase for financial reporting purposes, results of operations include those
of Arethusa from the effective date of the Arethusa Merger. See Note 2 to the
Company's Consolidated Financial Statements in Item 8 of this Report.

Industry Conditions. The Company's business and operations depend
principally upon the condition of the oil and gas industry and, specifically,
the exploration and production expenditures of oil and gas companies.
Historically, the offshore contract drilling industry has been highly
competitive and cyclical, with periods of low demand, excess rig supply and low
dayrates followed by periods of high demand, short rig supply and high dayrates.
The offshore contract drilling business is influenced by a number of factors,
including the current and anticipated prices of oil and natural gas, the
expenditures by oil and gas companies for exploration and production and the
availability of drilling rigs. Demand for drilling services remains dependent on
a variety of political and economic factors beyond the Company's control,
including worldwide demand for oil and natural gas, the ability of OPEC to set
and maintain production levels and pricing, the level of production of non-OPEC
countries and the policies of the various governments regarding exploration and
development of their oil and natural gas reserves.

Years Ended December 31, 1996 and 1995

Comparative data relating to the Company's revenues and operating expenses
by equipment type are listed below (eliminations offset dayrate revenues earned
when the Company's rigs are utilized in its turnkey operations and intercompany
expenses charged to rig operations). Certain amounts applicable to the prior

14
<PAGE> 22

periods have been reclassified to conform to the classifications currently
followed. Such reclassifications do not affect earnings.

During September 1996, the Company completed its major upgrade of the Ocean
Quest, expanding the rig to have fourth-generation capabilities. Upon
completion, the Ocean Quest is included in Fourth-Generation Semisubmersibles
for discussion purposes (prior period information will continue to include the
rig in Other Semisubmersibles). The Company's drillship, Ocean Clipper I, is
included in Other Semisubmersibles for discussion purposes.

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------- INCREASE/
1996 1995 (DECREASE)
-------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUES
Fourth-Generation Semisubmersibles............. $112,022 $ 67,393 $ 44,629
Other Semisubmersibles......................... 341,163 168,582 172,581
Jack-ups....................................... 122,503 68,829 53,674
Turnkey........................................ 32,798 27,121 5,677
Land........................................... 22,675 19,926 2,749
Other.......................................... -- 4 (4)
Eliminations................................... (19,731) (15,271) (4,460)
-------- -------- --------
Total Revenues......................... $611,430 $336,584 $274,846
======== ======== ========
CONTRACT DRILLING EXPENSE
Fourth-Generation Semisubmersibles............. $ 37,512 $ 34,717 $ 2,795
Other Semisubmersibles......................... 191,937 129,795 62,142
Jack-ups....................................... 85,149 60,798 24,351
Turnkey........................................ 30,344 30,297 47
Land........................................... 19,631 17,899 1,732
Other.......................................... (865) 3,011 (3,876)
Eliminations................................... (22,054) (16,957) (5,097)
-------- -------- --------
Total Contract Drilling Expense........ $341,654 $259,560 $ 82,094
======== ======== ========
OPERATING INCOME (LOSS)
Fourth-Generation Semisubmersibles............. $ 74,510 $ 32,676 $ 41,834
Other Semisubmersibles......................... 149,226 38,787 110,439
Jack-ups....................................... 37,354 8,031 29,323
Turnkey........................................ 2,454 (3,176) 5,630
Land........................................... 3,044 2,027 1,017
Other.......................................... 865 (3,007) 3,872
Eliminations................................... 2,323 1,686 637
General and Administrative Expense............. (15,640) (13,857) (1,783)
Depreciation and Amortization Expense.......... (75,767) (52,865) (22,902)
Gain on Sale of Assets......................... 35,122 1,349 33,773
-------- -------- --------
Total Operating Income................. $213,491 $ 11,651 $201,840
======== ======== ========
</TABLE>

Revenues. The $44.6 million increase in revenues from fourth-generation
semisubmersibles resulted from improvements in dayrates ($26.5 million) and
increases in utilization ($18.1 million). The improvement in utilization for
1996 was partially attributable to the relocation of two fourth-generation rigs
during the prior year, reducing the days worked for these rigs during that
period. The $172.6 million increase in revenues from other semisubmersibles was
primarily attributable to $90.9 million of revenues from the eight
semisubmersibles acquired in the Arethusa Merger and increases in dayrates in
both the North Sea and the Gulf of Mexico. The $53.7 million increase in
revenues from jack-ups resulted primarily from revenues associated with rigs
acquired in the Arethusa Merger and improvements in dayrates in the Gulf of
Mexico. The

15
<PAGE> 23

$5.7 million increase in turnkey revenues resulted from an increase in project
management service revenue during 1996 as compared to the prior year.

Contract Drilling Expense. Contract drilling expense for fourth-generation
semisubmersibles increased $2.8 million primarily due to the major upgrade of
the Ocean Quest which, upon completion in September 1996, is included as a
fourth-generation semisubmersible as compared to the prior year. The $62.1
million increase for other semisubmersibles resulted from the additional rigs
acquired in the Arethusa Merger, increased expenses for shipyard repairs on
three rigs, and increased expenses attributable to improved utilization during
1996. These increases were partially offset by a reduction in local payroll
expenses resulting from the relocation of a rig and decreased expenses for a rig
undergoing a major upgrade during 1996. The $24.4 million increase in jack-up
expense resulted primarily from the rigs acquired in the Arethusa Merger,
partially offset by decreased operating expenses for two rigs which were cold
stacked during 1996 (one of which was sold in July 1996). Turnkey expense was
relatively unchanged from the prior year. Other contract drilling expense
decreased $3.9 million primarily due to collections from a settlement in
connection with a lawsuit and collections on accounts receivable written off in
the prior year.

General and Administrative Expense. General and administrative expense of
$15.6 million for the year ended December 31, 1996 increased due to the Arethusa
Merger; however, these increases were partially offset by cost savings in rent
due to the February 1996 purchase of the building in which the Company has its
corporate headquarters. In addition, approximately $.8 million of general and
administrative expense associated with the major upgrades of the Ocean Quest,
the Ocean Star, the Ocean Victory and the Ocean Clipper I was capitalized to
these projects during 1996.

Depreciation and Amortization Expense. Depreciation and amortization
expense of $75.8 million for the year ended December 31, 1996 increased
primarily due to additional expense for (i) the eight semisubmersibles and three
jack-up drilling rigs acquired in the Arethusa Merger, (ii) goodwill
amortization expense associated with the Arethusa Merger, (iii) three rig
upgrades completed in 1995, and (iv) capital expenditures associated with the
Company's continuing rig enhancement program. Partially offsetting these
increases was a change in accounting estimate to increase the estimated useful
lives for certain classes of rigs. This change reduced depreciation expense by
approximately $8.5 million, as compared to the year ended December 31, 1995.

Gain on Sale of Assets. Gain on sale of assets for the year ended December
31, 1996 consists primarily of the sale of all of the operational assets of
Diamond M Onshore, Inc., a wholly-owned subsidiary of the Company, to Drillers,
Inc. resulting in a gain of $24.0 million. In addition, the Company sold two
shallow water jack-up drilling rigs, the Ocean Magallanes and the Ocean
Conquest, and one semisubmersible, the Ocean Zephyr II, resulting in gains
totaling $10.8 million.

Interest Expense. Interest expense of $2.3 million for the year ended
December 31, 1996 primarily consists of $2.2 million to expense origination
costs, including costs previously capitalized, in connection with the
restructuring of the Company's Credit Facility during December 1996. The
decrease from $27.1 million for the prior year was attributable to a reduction
in outstanding indebtedness resulting from the repayment of the Company's loan
from Loews in connection with the Common Stock Offering. In addition, interest
costs associated with the Company's financing arrangements were capitalized with
respect to qualified construction projects during 1996. See Notes 3 and 5 to the
Company's Consolidated Financial Statements in Item 8 of this Report.

Income Tax (Expense) Benefit. Income tax (expense) benefit for the year
ended December 31, 1996 was $(66.3) million as compared to $6.8 million for the
prior year. This change resulted primarily from the increase of $226.5 million
in the Company's income before income tax expense, partially offset by the
recognition of benefits for utilization of net operating losses in a foreign
jurisdiction in 1996. In addition, during the year ended December 31, 1995, the
Company's tax benefit reflected the effects of profits in foreign jurisdictions
where the Company's tax liability was minimal. See Note 11 to the Company's
Consolidated Financial Statements in Item 8 of this Report.

16
<PAGE> 24

Net Income (Loss). Net income (loss) for the year ended December 31, 1996
increased $153.4 million to $146.4 million, as compared to $(7.0) million for
the prior year. The increase resulted primarily from an increase in operating
income of $201.8 million and a decrease in interest expense of $24.7 million,
partially offset by an increase in income tax expense of $73.1 million.

Years Ended December 31, 1995 and 1994

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------- INCREASE/
1995 1994 (DECREASE)
-------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUES
Fourth-Generation Semisubmersibles............... $ 67,393 $ 46,862 $ 20,531
Other Semisubmersibles........................... 168,582 134,302 34,280
Jack-ups......................................... 68,829 89,883 (21,054)
Turnkey.......................................... 27,121 25,296 1,825
Land............................................. 19,926 21,443 (1,517)
Other............................................ 4 11 (7)
Eliminations..................................... (15,271) (9,879) (5,392)
-------- -------- --------
Total Revenues........................... $336,584 $307,918 $ 28,666
======== ======== ========
CONTRACT DRILLING EXPENSE
Fourth-Generation Semisubmersibles............... $ 34,717 $ 30,207 $ 4,510
Other Semisubmersibles........................... 129,795 124,090 5,705
Jack-ups......................................... 60,798 66,723 (5,925)
Turnkey.......................................... 30,297 25,957 4,340
Land............................................. 17,899 18,240 (341)
Other............................................ 3,011 1,581 1,430
Eliminations..................................... (16,957) (9,879) (7,078)
-------- -------- --------
Total Contract Drilling Expense.......... $259,560 $256,919 $ 2,641
======== ======== ========
OPERATING INCOME (LOSS)
Fourth-Generation Semisubmersibles............... $ 32,676 $ 16,655 $ 16,021
Other Semisubmersibles........................... 38,787 10,212 28,575
Jack-ups......................................... 8,031 23,160 (15,129)
Turnkey.......................................... (3,176) (661) (2,515)
Land............................................. 2,027 3,203 (1,176)
Other............................................ (3,007) (1,570) (1,437)
Eliminations..................................... 1,686 -- 1,686
General and Administrative Expense............... (13,857) (11,993) (1,864)
Depreciation Expense............................. (52,865) (55,366) 2,501
Gain on Sale of Assets........................... 1,349 1,736 (387)
-------- -------- --------
Total Operating Income (Loss)............ $ 11,651 $(14,624) $ 26,275
======== ======== ========
</TABLE>

Revenues. The $20.5 million increase in revenues from fourth-generation
semisubmersibles resulted primarily from increases in dayrates in the North Sea
and the Gulf of Mexico. In addition, $3.9 million in revenue resulting from
amortization of lump-sum payments, including mobilization fees in excess of
mobilization costs, was recognized during 1995. These increases were partially
offset by a reduction of revenues resulting from the mobilization between
markets of two fourth-generation rigs during the first quarter of 1995. The
$34.3 million increase in revenues from other semisubmersibles is primarily
attributable to increases in dayrates and utilization in both the North Sea and
the Gulf of Mexico. The operations of two of

17
<PAGE> 25

three rigs acquired during the second and third quarters of 1994 contributed a
$6.0 million increase in other semisubmersible revenue. In addition, revenues of
$2.5 million resulting from amortization of a lump-sum payment were recognized
during 1995. These increases were partially offset by a reduction of revenues
resulting from the mobilization between markets of three other semisubmersibles:
the Ocean Nomad from South America to the North Sea, the Ocean Princess from
Southeast Asia to the North Sea, and the Ocean Baroness from Trinidad to Brazil.
The $21.1 million decrease in revenues from jack-ups resulted from cold stacking
two rigs located in the Gulf of Mexico in mid-1995, both of which were utilized
during the prior year, coupled with lower dayrates as compared to 1994.
Partially offsetting these decreases was an increase in utilization for two
jack-ups which were moved from Venezuela to the Gulf of Mexico during the first
half of 1994. The $1.8 million increase in turnkey revenues resulted from an
increase in the number of turnkey wells drilled. Eleven turnkey wells were
drilled during the year ended December 31, 1995 as compared to nine wells
drilled during the prior year. The $1.5 million decrease in land revenues
resulted primarily from a decline in utilization as compared to 1994.

Contract Drilling Expense. The $4.5 million increase in contract drilling
expense for fourth-generation semisubmersibles resulted from improved
utilization of the two rigs located in the Gulf of Mexico and increased expenses
for the mobilization of two rigs during the first quarter of 1995 to relocate
the rigs between the Gulf of Mexico and the North Sea. The $5.7 million increase
in contract drilling expense for other semisubmersibles resulted primarily from
additional operating costs of $9.4 million associated with the three rigs
acquired in 1994, including mobilization costs of $4.0 million. In addition,
improved utilization for a rig operating in the North Sea resulted in a $2.3
million increase in operating costs. These increases were partially offset by
cost reductions of $5.7 million from the cold stacking of two rigs located in
the Gulf of Mexico. One of these semisubmersibles, the Ocean Prospector, was
cold stacked in the first quarter and reactivated during the fourth quarter of
1995. The other rig, the Ocean Quest, was cold stacked in the third quarter of
1994 and, in 1995, was undergoing significant rig enhancements in preparation
for a three-year term contract. The $5.9 million decrease in contract drilling
expense for jack-ups resulted primarily from cost reductions associated with the
cold stacking of two rigs in the Gulf of Mexico. The $4.3 million increase in
turnkey expense resulted primarily from the increase in the number of turnkey
wells drilled and cost overruns on one turnkey well in progress at December 31,
1995, for which an estimated loss of $3.6 million was recorded.

General and Administrative Expense. General and administrative expense
increased $1.9 million in 1995 due to increases in staff and other
administrative expenses and the commencement in 1995 of the Diamond Offshore
Management Bonus Program, an incentive plan for cash bonuses to selected
officers and key employees of the Company.

Depreciation Expense. Depreciation expense of $52.9 million for 1995
included a $2.1 million write-down in the carrying value of a semisubmersible,
as compared to a $5.5 million write-down on another semisubmersible included in
depreciation expense for 1994. Partially offsetting this decrease was an
additional $1.2 million of depreciation expense associated with the three rigs
acquired during the second and third quarters of 1994.

Gain on Sale of Assets. Gain on sale of assets for the year ended December
31, 1995 of $1.3 million resulted from the sale of a semisubmersible which was
held for disposition and from sales of miscellaneous assets. Gain on sale of
assets for the year ended December 31, 1994 of $1.7 million primarily resulted
from the sale of eight land drilling rigs.

Interest Expense. Interest expense for the year ended December 31, 1995
decreased $4.2 million to $27.1 million as compared to $31.3 million for the
prior year. This decrease resulted from the repayment of all of the Company's
outstanding indebtedness to Loews in connection with the Common Stock Offering.
See Note 3 to the Company's Consolidated Financial Statements in Item 8 of this
Report.

Foreign Currency Transaction Losses. Foreign currency transaction losses of
$.2 million for 1995 decreased $1.1 million from $1.3 million for 1994. This
decrease was primarily due to a loss of $.7 million recognized in 1994 for the
accumulated translation adjustment upon discontinuance of operations in
Venezuela. See "-- Other -- Currency Risk".

18
<PAGE> 26

Other Income. Other income increased $.9 million to $1.8 million as
compared to $.9 million for 1994. This increase was primarily attributable to
additional interest income resulting from an increase in average cash balances
during 1995.

Income Tax Benefit. Income tax benefit for the year ended December 31, 1995
decreased $4.8 million to $6.8 million, as compared to $11.6 million for 1994.
This decrease resulted primarily from a decrease in the Company's net loss
before income tax benefit of $32.6 million, as compared to 1994. See Note 11 to
the Company's Consolidated Financial Statements in Item 8 of this Report.

Net Loss. Net loss for 1995 decreased $27.8 million to $7.0 million, as
compared to $34.8 million for 1994. The decrease resulted primarily from an
increase in operating income of $26.3 million.

OUTLOOK

The deep water and harsh environment markets for semisubmersible rigs have
experienced improved demand and higher dayrates during the past two years, due
in part to the increasing impact of technological advances, including 3-D
seismic, horizontal drilling, and subsea completion procedures. Both the Gulf of
Mexico and the North Sea semisubmersible markets have experienced increased
utilization and significantly higher dayrates since 1995. All of the Company's
markets have experienced increased utilization and higher dayrates in 1996, and
customers increasingly are seeking to contract rigs for a stated term (as
opposed to contracts for the drilling of a single well or a group of wells). In
1996, average operating dayrates earned by the Company's fourth-generation and
other semisubmersible rigs increased 39 percent and 43 percent, respectively,
from those earned during 1995. In addition, the Company's semisubmersible rigs
marketed and available for contract are essentially fully utilized and, of the
Company's 30 semisubmersibles, 25 have term commitments with renewal
opportunities staggered throughout 1997 and beyond.

The Company continues to enhance its fleet to meet customer demand for
diverse drilling capabilities, including those required for deep water and harsh
environment operations. During September 1996, the Company completed the major
upgrade of the Ocean Quest and the rig began a three-year commitment. The rig,
which had been cold stacked in the Gulf of Mexico, now has fourth-generation
capabilities, including variable deckload of 6,000 long tons, a mooring system
to meet 3,500 foot water depth requirements, enhanced subsea equipment, and
upgraded drilling fluid systems. In March 1997, the Company completed the major
upgrade of the Ocean Star, including stability and other enhancements similar to
the Ocean Quest. The Ocean Victory, previously stacked in the North Sea, arrived
in the Gulf of Mexico in September 1996 and began modifications in connection
with its three-year deep water drilling program anticipated to begin during the
fourth quarter of 1997. In addition, the upgrade continues on the Ocean Clipper
I, which is anticipated to be completed in mid-1997.

The market for jack-up rigs continues to strengthen. In 1996, average
operating dayrates earned by the Company's jack-up fleet increased approximately
40 percent from those earned during 1995. The Company's marketed jack-up rigs in
the Gulf of Mexico are currently experiencing full utilization, although
contracts generally remain on a short-term or well-to-well basis. The Company
considers its upcoming contract expirations for these rigs typical of prevailing
market conditions. The Company's three international jack-ups and the jack-up
which the Company operates under bareboat charter are contracted for terms
expiring from May 1997 through February 1998.

Historically, the offshore contract drilling market has been highly
competitive and cyclical, and the Company cannot predict the extent to which
current conditions will continue. In addition, the recent improvement in the
current results of operations and prospects for the offshore contract drilling
industry as a whole has led to increased rig construction and enhancement
programs by the Company's competitors and, if present trends continue for an
extended period, may lead to new entrants into the market. A significant
increase in the supply of technologically advanced rigs capable of drilling in
deep water may have an adverse effect on the average operating dayrates for the
Company's rigs, particularly its more advanced semisubmersible units, and on the
overall utilization level of the Company's fleet. In such case, the Company's
results of operations would be adversely affected.

19
<PAGE> 27

LIQUIDITY

Net cash provided by operating activities for the year ended December 31,
1996 increased by $155.0 million to $207.8 million, as compared to $52.8 million
for the prior year. This increase was primarily attributable to a $153.4 million
increase in net income, a $25.0 million increase in depreciation and
amortization expense, and a $14.5 million increase from changes in operating
assets and liabilities from 1995, partially offset by an increase of $33.8
million from gain on sale of assets. Cash used in investing activities increased
$135.2 million primarily due to $224.4 million of capital expenditures for rig
upgrades as compared to $19.0 million in 1995. This increase was partially
offset by $20.9 million of cash acquired in the Arethusa Merger and $40.6
million of proceeds from sales of assets. Cash provided by financing activities
for 1996 includes $73.0 million of net borrowings under the Company's financing
arrangements and $5.0 million of proceeds from the exercise of stock options
assumed in the Arethusa Merger. These increases were partially offset by $67.5
million of cash used in financing activities for repayment of debt assumed in
the Arethusa Merger. Cash provided by financing activities for 1995 consists of
the net proceeds from the Common Stock Offering, after repayment of the loans
from and the payment of a special dividend to Loews. See Note 3 to the Company's
Consolidated Financial Statements in Item 8 of this Report.

The Company has used funds available under the Credit Facility, together
with cash flow from operations, to fund its capital expenditure and working
capital requirements. The Credit Facility is a revolving line of credit for a
five-year term providing a maximum credit commitment of $200.0 million until
December 2001. As defined in the agreement, borrowings under the Credit Facility
bear interest, at the Company's option, at a per annum rate equal to the
Eurodollar Rate plus .500 percent until June 30, 1997, and thereafter plus .375
percent or a base rate (equal to the greater of (i) the prime rate announced by
the agent bank, (ii) the Federal Funds Effective Rate plus .500 percent or (iii)
the Adjusted Certificate of Deposit Rate plus .500 percent). The Company is
required to pay a commitment fee on the unused available portion of the maximum
credit commitment of .200 percent until June 30, 1997 and of .150 percent
thereafter. Borrowings are unsecured by mortgages or liens on, or pledges of,
assets, but are guaranteed by all of the Company's material domestic
subsidiaries. The Credit Facility also contains covenants that limit the amount
of total consolidated debt, require the maintenance of certain consolidated
financial ratios and limit dividends and similar payments. As of December 31,
1996, the Company was in compliance with each of these covenants. See Note 7 to
the Company's Consolidated Financial Statements in Item 8 of this Report.

In February 1997, the Company issued $400.0 million, including $50.0
million from an over-allotment option, of 3 3/4 percent Notes due February 15,
2007. The Notes are convertible, in whole or in part, at the option of the
holder at any time following the date of original issuance thereof and prior to
the close of business on the business day immediately preceding the maturity
date, unless previously redeemed, into shares of Common Stock, at a conversion
price of $81 per share (equivalent to a conversion rate of 12.346 shares per
$1,000 principal amount of Notes), subject to adjustment in certain
circumstances. Interest on the Notes is payable in cash semi-annually on each
February 15 and August 15, commencing on August 15, 1997. Upon conversion, any
accrued interest will be deemed paid by the appropriate portion of Common Stock
received by the holder upon such conversion. The Notes are redeemable, in whole
or from time to time in part, at the option of the Company, at any time on or
after February 22, 2001 at specified redemption prices, plus accrued and unpaid
interest to the date of redemption. The Notes are general unsecured obligations
of the Company, subordinated in right of payment to the prior payment in full of
the principal and premium, if any, and interest on all indebtedness of the
Company for borrowed money, other than the Notes, with certain exceptions, and
effectively subordinated in right of payment to the prior payment in full of all
indebtedness of the Company's subsidiaries. The Notes do not restrict the
Company's ability to incur other indebtedness or additional indebtedness of the
Company's subsidiaries.

In management's opinion, the Company's cash generated from operations and
proceeds from the Notes are sufficient to meet its anticipated short and
long-term liquidity needs, including its capital expenditure requirements. The
Company's operating revenues and cash flows are primarily determined by average
operating dayrates and overall fleet utilization, which, in turn, are dependent
on the worldwide level of offshore oil and gas exploration and production
activity.

20
<PAGE> 28

CAPITAL RESOURCES

Cash requirements for capital commitments result from rig upgrades to meet
specific customer requirements and from the Company's continuing rig enhancement
program, including top-drive drilling system installations and water depth and
drilling capability upgrades. It is management's opinion that significant
improvements in operating cash flow resulting from current conditions of
improved dayrates and the increasing number of term contracts for rigs in
certain markets, in conjunction with proceeds from the Notes, will be sufficient
to meet these capital commitments. In addition, the Company may, from time to
time, issue debt or equity securities, or a combination thereof, to finance
capital expenditures or acquisitions of assets and businesses. The Company's
ability to effect any such issuance will be dependent on the Company's results
of operations, its current financial condition and other factors beyond its
control.

During the year ended December 31, 1996, the Company expended $224.4
million, including capitalized interest expense, for significant rig upgrades in
connection with contract requirements. The Company has budgeted $189.2 million
for capital expenditures on rig upgrades during 1997. Included in this amount is
approximately $162.5 million for expenditures in conjunction with the upgrades
of the Ocean Clipper I, the Ocean Star, and the Ocean Victory for deep water
drilling in the Gulf of Mexico. The Company sought to mitigate financial risk
associated with these projects by deferring commencement of the upgrades until
term commitments were secured with major integrated or large independent oil
companies with projected contract revenues substantially covering the upgrade
costs. The Company expects to evaluate other projects as opportunities arise.

Also, during the year ended December 31, 1996, the Company expended $42.6
million associated with its continuing rig enhancement program and other
corporate requirements, including $8.2 million to purchase the land and the
eight-story building in which the Company had leased office space for its
corporate headquarters. The Company has budgeted $70.7 million for 1997 capital
expenditures associated with its continuing rig enhancement program, spare
equipment and other corporate requirements.

The Company is continually considering potential transactions including,
but not limited to, enhancement of existing rigs, the purchase of existing rigs,
construction of new rigs and the acquisition of other companies engaged in
contract drilling. Certain of the potential transactions reviewed by the Company
would, if completed, result in its entering new lines of business, although, in
general, these opportunities have been related in some manner to the Company's
existing operations. For example, the Company has explored the possibility of
acquiring certain floating production systems, crew accommodation units and oil
service companies providing subsea products, technology and services, and
shipping assets such as oil tankers, through the acquisition of existing
businesses or assets or new construction. Although the Company does not, as of
the date hereof, have any commitment with respect to a material acquisition, it
could enter into such agreement in the future and such acquisition could result
in a material expansion of its existing operations or result in its entering a
new line of business. Some of the potential acquisitions considered by the
Company could, if completed, result in the expenditure of a material amount of
funds or the issuance of a material amount of debt or equity securities.

OTHER

Disposition of Assets. In December 1996, the Company sold all of the
operational assets of Diamond M Onshore, Inc., a wholly-owned subsidiary of the
Company, to Drillers, Inc. for approximately $26.0 million in cash. The assets
sold consisted of ten land drilling rigs, all of which were operating, 18
trucks, a yard facility in Alice, Texas and various other associated equipment.
In addition, the Company sold two shallow water jack-ups and one
semisubmersible, each of which was inactive.

Currency Risk. Certain of the Company's subsidiaries use the local currency
in the country where they conduct operations as their functional currency.
Currency environments in which the Company has material business operations
include the U.K., Australia and Brazil. The Company generally attempts to
minimize its currency exchange risk by seeking international contracts payable
in local currency in amounts equal to the Company's estimated operating costs
payable in local currency and in U.S. dollars for the balance of the contract.
Because of this strategy, the Company has minimized its unhedged net asset or
liability positions

21
<PAGE> 29

denominated in local currencies and has not experienced significant gains or
losses associated with changes in currency exchange rates. However, at present
contracts covering three of the Company's four rigs operating in the U.K. sector
of the North Sea are payable in U.S. dollars. The Company has not hedged its
exposure to changes in the exchange rate between U.S. dollars and pounds
sterling for operating costs payable in pounds sterling, although it may seek to
do so in the future.

Currency translation adjustments are accumulated in a separate section of
stockholders' equity. When the Company ceases its operations in a currency
environment, the accumulated adjustments are recognized currently in results of
operations. During 1994, the Company recognized a loss of $.7 million for the
accumulated translation adjustment upon discontinuance of operations in
Venezuela. Additionally, translation gains and losses for the Company's
operations in Brazil have been recognized currently due to the hyperinflationary
status of this environment. The effect on results of operations has not been
material and is not expected to have a significant effect in the future due to
the recent stabilization of currency rates in Brazil.

Turnkey Operations. The Company, through DOTS, a wholly-owned subsidiary of
the Company, selectively engages in drilling services pursuant to turnkey
drilling contracts in which DOTS agrees to drill a well to a specified depth and
profitability of the contract depends upon its ability to keep expenses within
the estimates used by DOTS in determining the contract price. Drilling of a well
under a turnkey contract therefore typically requires a cash commitment by the
Company in excess of those drilled under conventional dayrate contracts and
exposes DOTS to risks of potential financial losses that generally are
substantially greater than those that would ordinarily exist when drilling under
a conventional dayrate contract. The financial results of a turnkey contract
depend upon the performance of the drilling unit, drilling conditions, and other
factors, some of which are beyond the control of DOTS. However, during 1996,
DOTS primarily provided project management services on a dayrate basis that are
not accompanied by the substantial risks of turnkey contracts. For the year
ended December 31, 1996, DOTS contributed $2.5 million of operating income to
the Company's consolidated results of operations.

22
<PAGE> 30

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEPENDENT AUDITORS' REPORT

Board of Directors and Stockholders
Diamond Offshore Drilling, Inc. and Subsidiaries
Houston, Texas

We have audited the accompanying consolidated balance sheets of Diamond
Offshore Drilling, Inc. and subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. 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, such consolidated financial statements present fairly, in
all material respects, the financial position of Diamond Offshore Drilling, Inc.
and subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.

DELOITTE & TOUCHE LLP

Houston, Texas
February 4, 1997

23
<PAGE> 31

DIAMOND OFFSHORE DRILLING, INC.
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

ASSETS

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
---------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 28,180 $ 10,306
Short-term investments.................................... -- 5,041
Accounts receivable....................................... 172,214 74,496
Rig inventory and supplies................................ 30,407 15,330
Prepaid expenses and other................................ 12,166 10,601
---------- --------
Total current assets.............................. 242,967 115,774
DRILLING AND OTHER PROPERTY AND EQUIPMENT, LESS ACCUMULATED
DEPRECIATION.............................................. 1,198,160 502,278
GOODWILL, NET OF AMORTIZATION............................... 129,825 --
OTHER ASSETS................................................ 3,548 --
---------- --------
Total assets...................................... $1,574,500 $618,052
========== ========

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 63,172 $ 32,765
Accrued liabilities....................................... 28,451 17,626
Taxes payable............................................. 26,377 1,860
Short-term borrowings..................................... 10,000 --
---------- --------
Total current liabilities......................... 128,000 52,251
LONG-TERM DEBT.............................................. 63,000 --
DEFERRED TAX LIABILITY...................................... 176,296 72,907
OTHER LIABILITIES........................................... 12,472 --
---------- --------
Total liabilities................................. 379,768 125,158
---------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock (par value $.01, 25,000,000 shares
authorized, none issued and outstanding).................. -- --
Common stock (par value $.01, 200,000,000 shares
authorized, 68,353,409 and 50,000,000 shares issued and
outstanding at December 31, 1996 and 1995,
respectively).......................................... 684 500
Additional paid-in capital................................ 1,220,032 665,107
Accumulated deficit....................................... (25,056) (171,444)
Cumulative translation adjustment......................... (928) (1,269)
---------- --------
Total stockholders' equity........................ 1,194,732 492,894
---------- --------
Total liabilities and stockholders' equity........ $1,574,500 $618,052
========== ========
</TABLE>

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

24
<PAGE> 32

DIAMOND OFFSHORE DRILLING, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
REVENUES.................................................... $611,430 $336,584 $307,918
OPERATING EXPENSES:
Contract drilling......................................... 341,654 259,560 256,919
Depreciation and amortization............................. 75,767 52,865 55,366
General and administrative................................ 15,640 13,857 11,993
Gain on sale of assets.................................... (35,122) (1,349) (1,736)
-------- -------- --------
Total operating expenses.......................... 397,939 324,933 322,542
-------- -------- --------
OPERATING INCOME (LOSS)..................................... 213,491 11,651 (14,624)
OTHER INCOME (EXPENSE):
Interest expense.......................................... (2,326) (27,052) (31,346)
Currency transaction losses............................... (28) (191) (1,316)
Other, net................................................ 1,568 1,789 861
-------- -------- --------
INCOME (LOSS) BEFORE INCOME TAX (EXPENSE) BENEFIT........... 212,705 (13,803) (46,425)
INCOME TAX (EXPENSE) BENEFIT................................ (66,317) 6,777 11,621
-------- -------- --------
NET INCOME (LOSS)........................................... $146,388 $ (7,026) $(34,804)
======== ======== ========
NET INCOME PER SHARE........................................ $ 2.35
========
WEIGHTED AVERAGE SHARES OUTSTANDING......................... 62,231
========
PRO FORMA NET INCOME PER SHARE (NOTE 1)..................... $ 0.20
========
</TABLE>

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

25
<PAGE> 33

DIAMOND OFFSHORE DRILLING, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CUMULATIVE TOTAL
------------------- PAID-IN ACCUMULATED TRANSLATION STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT EQUITY
---------- ------ ---------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1993............... 100 $ 1 $ 289,685 $(129,614) $(1,711) $ 158,361
Net loss...................... -- -- -- (34,804) -- (34,804)
Exchange rate changes, net.... -- -- -- -- 509 509
---------- ---- ---------- --------- ------- ----------
DECEMBER 31, 1994............... 100 1 289,685 (164,418) (1,202) 124,066
Net loss...................... -- -- -- (7,026) -- (7,026)
Capital contribution.......... -- -- 39,676 -- -- 39,676
350,500-for-one stock split... 35,049,900 350 (350) -- -- --
Issuance of common stock from
initial public offering..... 14,950,000 149 338,214 -- -- 338,363
Dividend to Loews............. -- -- (2,118) -- -- (2,118)
Exchange rate changes, net.... -- -- -- -- (67) (67)
---------- ---- ---------- --------- ------- ----------
DECEMBER 31, 1995............... 50,000,000 500 665,107 (171,444) (1,269) 492,894
Net income.................... -- -- -- 146,388 -- 146,388
Merger with Arethusa.......... 17,893,344 179 550,507 -- -- 550,686
Stock options exercised....... 460,065 5 4,418 -- -- 4,423
Exchange rate changes, net.... -- -- -- -- 341 341
---------- ---- ---------- --------- ------- ----------
DECEMBER 31, 1996............... 68,353,409 $684 $1,220,032 $ (25,056) $ (928) $1,194,732
========== ==== ========== ========= ======= ==========
</TABLE>

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

26
<PAGE> 34

DIAMOND OFFSHORE DRILLING, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
--------- --------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)...................................... $ 146,388 $ (7,026) $(34,804)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization....................... 75,767 50,794 49,908
Write-down of asset................................. -- 2,071 5,458
Gain on sale of assets and other.................... (35,122) (1,349) (1,736)
Accrued interest converted to notes payable to
Loews............................................. -- 27,044 31,294
Deferred tax provision (benefit).................... 17,278 (7,472) (13,534)
Changes in operating assets and liabilities:
Accounts receivable................................. (64,715) (16,692) 4,458
Rig inventory and supplies and other current
assets............................................ (2,789) (4,896) (698)
Other assets, non-current........................... (1,747) -- --
Accounts payable and accrued liabilities............ 22,155 10,984 817
Taxes payable....................................... 46,149 (706) 638
Other liabilities, non-current...................... 4,093 -- --
Other, net............................................. 365 29 761
--------- --------- --------
Net cash provided by operating activities...... 207,822 52,781 42,562
--------- --------- --------
INVESTING ACTIVITIES:
Cash acquired in the merger with Arethusa.............. 20,883 -- --
Capital expenditures................................... (267,000) (66,646) (21,146)
Proceeds from sale of assets........................... 40,589 1,516 2,486
Change in short-term investments....................... 5,041 (115) 95
Acquisition of drilling rigs and related equipment..... -- -- (25,000)
--------- --------- --------
Net cash used in investing activities.......... (200,487) (65,245) (43,565)
--------- --------- --------
FINANCING ACTIVITIES:
Net (repayments) borrowings (to) from Loews............ -- (331,245) 10,000
Proceeds from issuance of common stock................. -- 338,363 --
Dividend to Loews...................................... -- (2,118) --
Net borrowings on revolving line of credit............. 63,000 -- --
Short-term borrowings.................................. 10,000 -- --
Repayment of debt assumed in the merger with
Arethusa............................................ (67,477) -- --
Proceeds from stock options exercised.................. 5,016 -- --
--------- --------- --------
Net cash provided by financing activities...... 10,539 5,000 10,000
--------- --------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS.................. 17,874 (7,464) 8,997
Cash and cash equivalents, beginning of year........... 10,306 17,770 8,773
--------- --------- --------
Cash and cash equivalents, end of year................. $ 28,180 $ 10,306 $ 17,770
========= ========= ========
</TABLE>

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

27
<PAGE> 35

DIAMOND OFFSHORE DRILLING, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Business

Diamond Offshore Drilling, Inc. (the "Company") was incorporated in
Delaware on April 13, 1989. Loews Corporation ("Loews"), a Delaware corporation
of which the Company had been a wholly-owned subsidiary prior to the initial
public offering in October 1995 (the "Common Stock Offering"), owns 51.3 percent
of the outstanding common stock of the Company (see Note 3).

The Company, through wholly-owned subsidiaries, engages in the worldwide
contract drilling of offshore oil and gas wells and is a leader in deep water
drilling. The Company's fleet of 46 mobile offshore drilling rigs is one of the
largest in the world and includes the largest fleet of semisubmersible rigs
currently working in the world. The fleet is comprised of 30 semisubmersible
rigs, 15 jack-up rigs and one drillship.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company
after elimination of significant intercompany transactions and balances.

Cash and Cash Equivalents

All short-term, highly liquid investments that have an original maturity of
three months or less are considered cash equivalents.

Supplementary Cash Flow Information

Non-cash financing activities for the year ended December 31, 1996 included
$550.7 million for the issuance of 17.9 million shares of common stock and the
assumption of stock options for the purchase of 0.5 million shares in connection
with the merger between the Company and Arethusa (Off-Shore) Limited
("Arethusa"). Non-cash investing activities for the year ended December 31, 1996
included $532.9 million of net assets acquired in the merger with Arethusa (see
Note 2).

Non-cash financing activities for the year ended December 31, 1995 included
a capital contribution by Loews in September 1995 of $39.7 million which reduced
the outstanding debt to Loews. In addition, $27.0 million of interest expense
was accrued and included in the notes payable to Loews prior to such notes being
repaid with a portion of the proceeds from the Common Stock Offering (see Note
3). In connection with the Common Stock Offering, the tax sharing agreement with
Loews was terminated and all liabilities were settled by offsetting $50.9
million owed by Loews to the Company under the agreement against the notes
payable to Loews.

Non-cash financing activities for the year ended December 31, 1994 included
$31.3 million of interest expense accrued and included in the notes payable to
Loews.

Cash payments made for interest on long-term debt, including commitment
fees, and cash payments for U.S. income taxes were $3.5 million and $1.5
million, respectively, for the year ended December 31, 1996. No cash payments
for interest or U.S. income taxes were made in 1995 or 1994. Cash payments for
foreign income taxes were $2.4 million, $0.8 million, and $1.6 million for the
years ended December 31, 1996, 1995, and 1994, respectively.

Rig Inventory and Supplies

Inventories primarily consist of replacement parts and supplies held for
use in the operations of the Company. Inventories are stated at the lower of
cost or estimated value.

28
<PAGE> 36

Drilling and Other Property and Equipment

Drilling and other property and equipment is carried at cost. Maintenance
and repairs are charged to income currently while replacements and betterments
are capitalized. Costs incurred for major rig upgrades are accumulated in
construction work in progress, with no depreciation recorded on the additions,
until the month the upgrade is completed and the rig is placed into service.
Upon retirement or other disposal of fixed assets, the cost and related
accumulated depreciation are removed from the respective accounts and any gains
or losses are included in the results of operations.

Depreciation is provided on the straight-line method over the remaining
estimated useful lives from the date the asset is placed into service. The
Company believes that certain offshore drilling rigs, due to their upgrade and
design capabilities and their maintenance history, have an operating life in
excess of their depreciable life as originally assigned. For this reason, a
change in accounting estimate, effective January 1, 1996, increased the
estimated useful lives for certain classes of offshore drilling rigs. As
compared to the original estimate of useful lives, the effect of such change
reduced depreciation expense and increased net income for the year ended
December 31, 1996 by approximately $8.5 million and $5.5 million ($0.08 per
share), respectively. The estimated useful lives of the Company's offshore
drilling rigs, after the change in estimate, range from 10 to 25 years. Other
property and equipment is estimated to have useful lives ranging from 3 to 10
years.

Goodwill

Goodwill from the merger with Arethusa (see Note 2) is amortized on a
straight-line basis over 20 years. Amortization charged to operating expense
during the year ended December 31, 1996 totaled $4.5 million.

Impairment of Long-Lived Assets

The Company reviews its long-lived assets for impairment when changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.

In 1995, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." SFAS No. 121 requires that long-lived
assets and certain identifiable intangibles to be held and used be reported at
the lower of carrying amount or fair value. Assets to be disposed of and assets
not expected to provide any future service potential to the Company are recorded
at the lower of carrying amount or fair value less cost to sell. The adoption of
SFAS No. 121 did not have a material effect on the Company's financial position
or results of operations.

Income Taxes

Taxable income (loss) of the Company and its domestic subsidiaries was
included in the consolidated U.S. federal income tax return of Loews and other
members of the Loews affiliated group for all taxable periods ending prior to
the Common Stock Offering. 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.

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Except for selective
dividends, the Company intends to reinvest the unremitted earnings of its
non-U.S. subsidiaries and postpone their remittance indefinitely. Thus, no
additional U.S. taxes have been provided on earnings of these non-U.S.
subsidiaries. The Company's non-U.S. income tax liabilities are based upon the
results of operations of the various subsidiaries in those jurisdictions in
which they are subject to taxation.

Revenue Recognition

Income from dayrate drilling contracts is recognized currently. In
connection with such drilling contracts, the Company may receive lump-sum fees
for the mobilization of equipment and personnel. The net of

29
<PAGE> 37

mobilization fees received and costs incurred to mobilize an offshore rig from
one market to another is recognized over the term of the related drilling
contract. Absent a contract, mobilization costs are recognized currently.
Lump-sum payments received from customers relating to specific contracts are
deferred and amortized to income over the term of the drilling contract.

Income from offshore turnkey contracts is recognized on the completed
contract method, with revenues accrued to the extent of costs until the
specified turnkey depth and other contract requirements are met. Provisions for
future losses on turnkey contracts are recognized when it becomes apparent that
expenses to be incurred on a specific contract will exceed the revenue from the
contract.

Currency Translation

The Company's primary functional currency is the U.S. dollar. Certain of
the Company's subsidiaries use the local currency in the country where they
conduct operations as their functional currency. These subsidiaries translate
assets and liabilities at year-end exchange rates while income and expense
accounts are translated at average exchange rates. Translation adjustments are
reflected in the Consolidated Balance Sheets in "Cumulative translation
adjustment." Currency transaction gains and losses are included in current
operating results. Additionally, translation gains and losses of subsidiaries
operating in hyperinflationary economies are included in operating results
currently.

Net Income Per Share

Net income per share for the Company is computed by dividing net income by
the weighted average number of shares outstanding during the respective period.

Pro Forma Net Income Per Share Data

As described in Note 3, after its initial public offering, the Company had
50.0 million shares of common stock outstanding. Assuming the Common Stock
Offering had occurred as of January 1, 1995, the Company would have recognized
net income of $10.0 million, or $0.20 per share, for 1995, after adjusting for
the after-tax effects of a reduction in interest expense.

Use of Estimates in the Preparation of Financial Statements

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 amount of revenues and expenses during the reporting
period. Actual results could differ from those estimated.

Reclassifications

Certain amounts applicable to the prior periods have been reclassified to
conform to the classifications currently followed. Such reclassifications do not
affect earnings.

2. MERGER WITH ARETHUSA

In April 1996, the Company acquired 100 percent of the stock of Arethusa
(the "Arethusa Merger"). Arethusa owned a fleet of 11 mobile offshore drilling
rigs, operated two additional mobile offshore drilling rigs pursuant to bareboat
charters and provided drilling services worldwide to international and
government-controlled oil and gas companies. The consideration consisted of the
following (in thousands):

<TABLE>
<S> <C>
Common stock issued to Arethusa shareholders................ $539,305
Arethusa stock options assumed.............................. 11,381
--------
Total equity consideration................................ $550,686
========
</TABLE>

30
<PAGE> 38

The Company issued 17.9 million common shares to the Arethusa shareholders
based on an exchange ratio of .88 shares for each share of issued and
outstanding Arethusa common stock. The shares were valued for financial
reporting purposes at $30.14 based on a seven-day average of the closing price
of the Company's common stock at the time the Arethusa Merger was announced
(December 7, 1995). In addition to equity consideration, the Company has
incurred approximately $16.9 million of acquisition costs associated with the
Arethusa Merger.

The Arethusa Merger was accounted for as a purchase. The purchase price
included, at estimated fair value, current assets of $67.2 million, drilling and
other property and equipment of $505.5 million, and the assumption of current
liabilities of $19.0 million, other net long-term liabilities of $3.9 million,
and debt of $67.5 million. In addition, a deferred tax liability of $66.8
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
approximately $135.2 million, which has been accounted for as goodwill and is
being amortized over 20 years using the straight-line method. This purchase
price allocation is preliminary as the Company is awaiting additional
information concerning a litigation contingency which is disclosed in Note 8. If
it is subsequently determined that a liability is necessary for this litigation,
it would result in an increase in goodwill and goodwill amortization, resulting
in a decrease to operating income.

The accompanying Consolidated Statements of Operations reflect the
operating results of Arethusa since April 29, 1996, the effective date of the
Arethusa Merger. Pro forma consolidated operating results of the Company and
Arethusa for the year ended December 31, 1996 and 1995, assuming the acquisition
had been made as of January 1, 1996 and 1995, are summarized below:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995
----------- -----------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
Revenue..................................................... $667,543 $456,750
Net income.................................................. 153,409 (963)
Net income per share........................................ 2.26 (0.01)
</TABLE>

The pro forma information for the years ended December 31, 1996 and 1995
includes adjustments for additional depreciation based on the fair market value
of the drilling and other property and equipment acquired and the amortization
of goodwill arising from the transaction. The pro forma information for the year
ended December 31, 1995 also includes adjustments for (i) the acquisition of the
Arethusa Yatzy by Arethusa, which occurred May 3, 1995, (ii) the sale of the
Treasure Stawinner by Arethusa, which occurred June 30, 1995, (iii) the dividend
and capital distribution declared by Arethusa on June 30, 1995 and paid July 28,
1995, (iv) the Company's initial public offering and, in connection therewith,
the use of the proceeds to repay all of the Company's then outstanding
indebtedness to Loews and to fund the payment of a special dividend to Loews,
and (v) interest expense for working capital borrowings, and commitment and
other fees, under a credit facility as if each had occurred at January 1, 1995.
The pro forma information is not necessarily indicative of the results of
operations had the transactions been effected on the assumed dates.

3. COMMON STOCK OFFERING

Pursuant to the Common Stock Offering, the Company sold 14,950,000 shares
of common stock, including 1,950,000 shares from an over-allotment option.
Subsequent to the Common Stock Offering, the exercise of the over-allotment
option and a 350,500-for-one stock split, which was effective immediately prior
to consummation of the Common Stock Offering, the Company had 50,000,000 shares
of common stock outstanding.

Proceeds from the Common Stock Offering were used to repay all of the
Company's then outstanding debt to Loews of $336.2 million and the remainder of
such proceeds was used to pay Loews a special dividend of $2.1 million. In
addition, pursuant to a termination and settlement agreement, all assets and
liabilities under

31
<PAGE> 39

the tax sharing agreement with Loews were settled by offsetting amounts owed by
Loews to the Company thereunder against notes payable to Loews.

4. SHORT-TERM INVESTMENTS

During 1996 and 1995, the Company was party to a pledge agreement with a
bank whereby the bank has or will extend various financial accommodations to or
for the account of the Company, including issuing letters of credit, entering
into foreign exchange contracts or permitting intra-day overdrafts. In
consideration of and as a condition precedent to the making of such financial
accommodations by the bank, the Company was required to maintain a pledged
collateral account in which the bank had a continuing security interest. As of
December 31, 1995, pursuant to such agreement, the Company had $5.0 million in
U.S. Treasury Bills deposited in a pledged collateral account. Beginning in
November 1996, the bank no longer required the maintenance of a pledged
collateral account.

5. DRILLING AND OTHER PROPERTY AND EQUIPMENT

Cost and accumulated depreciation of drilling and other property and
equipment are summarized as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
Drilling rigs and equipment................................. $1,332,980 $ 689,438
Construction work in progress............................... 116,770 19,016
Land and buildings.......................................... 13,154 3,655
Office equipment and other.................................. 8,181 6,300
---------- ---------
Cost...................................................... 1,471,085 718,409
Less accumulated depreciation............................... (272,925) (216,131)
---------- ---------
Drilling and other property and equipment, net............ $1,198,160 $ 502,278
========== =========
</TABLE>

Construction Work in Progress

As of December 31, 1996, $64.8 million, $36.5 million and $15.4 million of
construction work in progress was related to the upgrades for the Ocean Star,
the Ocean Clipper I, and the Ocean Victory, respectively. As of December 31,
1995, $6.6 million and $3.2 million of construction work in progress was related
to the upgrades for the Ocean Quest and the Ocean Star, respectively, and the
remaining $9.2 million was related to upgrades to prepare the Ocean Baroness and
the Ocean Princess for contracts in Brazil and the North Sea, respectively.

For the year ended December 31, 1996, the Company capitalized interest cost
of $4.0 million in construction work in progress with respect to qualifying
construction projects.

Impairment of Assets

During 1995 and 1994, the Company recorded impairment losses of $2.1
million and $5.5 million, respectively, to decrease the carrying value of two
semisubmersible drilling rigs (one located in the Gulf of Mexico and the other
located in South America, both of which were sold in the fourth quarters of 1995
and 1996, respectively). The impairment losses, reflected in "Depreciation" in
the Consolidated Statements of Operations, reduced the carrying value of both
rigs to zero. Operating losses incurred by the rig located in the Gulf of Mexico
during the years ended December 31, 1995 and 1994 were not material. Operating
losses incurred by the rig located in South America during the years ended
December 31, 1996, 1995 and 1994 were approximately $0.4 million, $0.6 million
and $2.1 million, respectively. The Company did not record any impairment losses
for the year ended December 31, 1996.

32
<PAGE> 40

Disposition of Assets

During the year ended December 31, 1996, the Company sold all of the
operational assets of Diamond M Onshore, Inc., a wholly-owned subsidiary of the
Company, for approximately $26.0 million in cash which generated an after-tax
gain of $15.6 million, or $0.25 per share. The assets sold consisted of ten land
drilling rigs, all of which were operating, 18 trucks, a yard facility in Alice,
Texas and various other associated equipment.

In addition, two of the Company's shallow water jack-up drilling rigs (the
Ocean Magallanes and the Ocean Conquest) and a semisubmersible (the Ocean Zephyr
II), all of which had previously been stacked were sold during 1996 increasing
net income by $7.0 million, or $0.11 per share.

6. ACCRUED LIABILITIES

Accrued liabilities consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Personal injury and other claims............................ $18,629 $11,056
Payroll and benefits........................................ 8,336 6,346
Other....................................................... 1,486 224
------- -------
Total............................................. $28,451 $17,626
======= =======
</TABLE>

7. LONG-TERM DEBT

In connection with the Arethusa Merger, the Company assumed long-term debt
(including the current portion) of $67.5 million on two credit agreements with a
group of banks. During May 1996, using cash acquired in the Arethusa Merger
supplemented by borrowings on the Company's revolving credit facility with a
group of banks (the "Credit Facility"), both Arethusa loans were repaid in full.
Interest expense includes interest for the period from the effective date of the
Arethusa Merger to the date of repayment of the loans and the payment of
breakage and penalty charges.

The Credit Facility is a revolving line of credit for a five-year term
expiring in 2001 which provides a maximum credit commitment of $200.0 million,
increased from $150.0 million in December 1996. The unused credit available
under the Credit Facility at December 31, 1996 was $137.0 million. Interest
expense on borrowings under the Credit Facility are capitalized to qualified
construction projects (see Note 5). The weighted average interest rate,
including commitment and arrangement fees, was 8.5 percent for the year ended
December 31, 1996. The Company is required, under the Credit Facility, to
maintain certain consolidated financial ratios and the Credit Facility places
certain limitations on dividends and similar payments. As of December 31, 1996,
the Company was in compliance with each of these covenants and the Company could
have declared and paid dividends of $25.0 million in the aggregate within the
limitations of the Credit Facility.

8. COMMITMENTS AND CONTINGENCIES

The Company leases office facilities under operating leases which expire
through the year 2000. Total rent expense amounted to $1.6 million, $1.5 million
and $1.5 million for the years ended December 31, 1996, 1995 and 1994,
respectively. Minimum future rental payments under leases are approximately
$631,000, $245,000, $72,000 and $12,000 for the years 1997 through 2000,
respectively. There are no minimum future rental payments under leases after the
year 2000.

The Company is contingently liable as of December 31, 1996 and 1995 in the
amount of $22.6 million and $.8 million, respectively, under certain
performance, bid, and export bonds and bonds securing obligations in connection
with litigation. On the Company's behalf, banks have issued letters of credit
securing certain of these bonds.

33
<PAGE> 41

The survivors of a deceased employee of a subsidiary of the Company,
Diamond M Onshore, Inc., have sued such subsidiary in Duval County, Texas, for
damages as a result of the death of the employee. The plaintiffs have obtained a
judgment in the trial court for $15.7 million plus post-judgment interest. The
Company is vigorously prosecuting an appeal of the judgment. The Company has
received notices from certain of its insurance underwriters reserving their
rights to deny coverage on the Company's insurance policies in excess of $2.0
million for damages resulting from such lawsuit. Management believes that the
Company has complied with all conditions of coverage and expects that it will
ultimately be determined that the Company has insurance coverage for final
unappealable damages, if any, in the case. The Company has not established a
liability for such claim at this time.

A subsidiary of the Company is defending and indemnifying Zapata Off-Shore
Company and Zapata Corporation, pursuant to a contractual defense and
indemnification agreement, in a suit for tortious interference with contract and
conspiracy to tortiously interfere with contract. The plaintiffs seek $14.0
million in actual damages and unspecified punitive damages plus court costs,
interest and attorney's fees. The Company intends to vigorously defend the suit
and no liability has been established at this time.

Various other claims have been filed against the Company in the ordinary
course of business, particularly claims alleging personal injuries. Management
believes that the Company has established adequate reserves for any liabilities
that may reasonably be expected to result from these claims. In the opinion of
management, no pending or threatened claims, actions or proceedings against the
Company are expected to have a material adverse effect on the Company's
financial position or results of operations.

9. FINANCIAL INSTRUMENTS

Concentrations of Credit Risk

Financial instruments which potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and trade accounts
receivable. The Company maintains cash and cash equivalents and certain other
financial instruments with various financial institutions. A loss would occur if
one or more of these institutions fails to perform according to the terms of its
agreements. The Company's periodic evaluations of the relative credit standing
of these financial institutions are considered in the Company's investment
strategy.

Concentrations of credit risk with respect to trade accounts receivable are
limited due to the large number of entities comprising the Company's customer
base. Since the market for the Company's services is the oil and gas industry,
this customer base consists primarily of major oil companies and independent oil
and gas producers. The Company provides allowances for potential credit losses
when necessary. No such allowances were deemed necessary for the years
presented. As of December 31, 1996 and 1995, the Company had no significant
concentrations of credit risk.

Fair Values

SFAS No. 107 "Disclosure about Fair Value of Financial Instruments,"
requires the disclosure of the fair value of all financial instruments, both
assets and liabilities, for which it is practicable to estimate fair value. The
Company's financial instruments include short-term investments, accounts
receivable, short-term borrowings, and long-term debt. The carrying amounts of
the Company's financial instruments approximate fair value due to the nature of
such instruments. The estimated fair value amounts have been determined by the
Company using appropriate valuation methodologies and information available to
management as of December 31, 1996 and 1995. Considerable judgment is required
in developing these estimates, and accordingly, no assurance can be given that
the estimated values are indicative of the amounts that would be realized in a
free market exchange.

At December 31, 1995, the carrying amount of the Company's investment in
U.S. Treasury Bills was at fair value based upon the closing market prices
obtained from public sources. The Company believed it had the ability to hold
its fixed income investment until maturity; however, because the Company might
have sold

34
<PAGE> 42

its securities and reinvested the proceeds to take advantage of opportunities
generated by changing interest rates, the securities were classified as
available for sale.

10. RELATED PARTY TRANSACTIONS

The Company and Loews have entered into a services agreement which was
effective upon consummation of the Common Stock Offering (the "Services
Agreement") pursuant to which Loews agreed to continue to perform certain
administrative and technical services on behalf of the Company. Such services
include personnel, telecommunications, purchasing, internal auditing,
accounting, data processing and cash management services, in addition to advice
and assistance with respect to preparation of tax returns and obtaining
insurance. Under the Services Agreement, the Company is required to reimburse
Loews for (i) allocated personnel costs (such as salaries, employee benefits and
payroll taxes) of the Loews personnel actually providing such services and (ii)
all out-of-pocket expenses related to the provision of such services. The
Services Agreement may be terminated at the Company's option upon 30 days'
notice to Loews and at the option of Loews upon six months' notice to the
Company. In addition, the Company has agreed to indemnify Loews for all claims
and damages arising from the provision of services by Loews under the Services
Agreement, unless due to the gross negligence or willful misconduct of Loews.
Prior to the Common Stock Offering, Loews provided such services at an allocated
rate. The Company was charged $.2 million, $.7 million and $.9 million by Loews
for these support functions during the years ended December 31, 1996, 1995 and
1994, respectively.

Subsequent to the Common Stock Offering, Loews provided the Company with a
$150.0 million revolving line of credit which was available until February 1996
when the Credit Facility was arranged. Borrowings under this line of credit were
to bear interest, at the Company's option, at a per annum rate equal to a base
rate (equal to the greater of (i) the prime rate announced by Bankers Trust
Company or (ii) the Federal Funds rate plus .50 percent) plus .25 percent or the
Eurodollar rate plus 1.25 percent. The line of credit was unsecured, had no
financial or restrictive covenants, and the Company was not required to pay a
commitment fee to Loews. As of December 31, 1995, there were no amounts
outstanding under this line of credit.

11. INCOME TAXES

Prior to the Common Stock Offering, the Company and its subsidiaries were
party to a tax sharing agreement with Loews and the Company provided a tax
provision calculated as if on a stand-alone basis for U.S. federal income tax
purposes. In conjunction with the Common Stock Offering, the tax sharing
agreement was terminated and all assets and liabilities were settled by
offsetting amounts owed by Loews to the Company under the agreement against
notes payable to Loews (see Note 3).

An analysis of the Company's income tax (expense) benefit is as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
-------- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
U.S. -- current....................................... $(44,950) $ -- $ --
U.S. -- deferred...................................... (17,278) 7,472 13,559
Non-U.S. -- current................................... (3,486) (489) (1,541)
Non-U.S. -- deferred.................................. -- -- (25)
State and other....................................... (603) (206) (372)
-------- ------ -------
Total....................................... $(66,317) $6,777 $11,621
======== ====== =======
</TABLE>

35
<PAGE> 43

Significant components of the Company's deferred income tax assets and
liabilities are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ 18,686 $ 15,641
Investment tax credit carryforwards....................... 3,066 7,638
Worker's compensation accruals(1)......................... 4,562 2,971
Foreign tax credits....................................... 7,186 5,160
Other..................................................... 1,574 8,568
--------- ---------
Total deferred tax assets......................... $ 35,074 $ 39,978
--------- ---------
Deferred tax liabilities:
Depreciation and amortization............................. $(187,627) $ (98,401)
Non-U.S. deferred taxes................................... (7,796) (10,146)
Other..................................................... (11,385) (1,367)
--------- ---------
Total deferred tax liabilities.................... (206,808) (109,914)
--------- ---------
Net deferred tax liability...................... $(171,734) $ (69,936)
========= =========
</TABLE>

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

(1) Reflected in "Prepaid expenses and other" in the Company's Consolidated
Balance Sheets.

The Company believes that it is probable that its deferred tax assets of
$35.1 million will be realized on future tax returns, primarily from the
generation of future taxable income through both profitable operations and
future reversals of existing taxable temporary differences. However, if the
Company is unable to generate sufficient taxable income in the future through
operating results, a valuation allowance will be required as a charge to
expense.

In connection with the Arethusa Merger and the purchase of Odeco Drilling
Inc. in 1992, the Company acquired net operating loss ("NOL") and investment tax
credit ("ITC") carryforwards available to offset future taxable income. For the
year ended December 31, 1996, the Company utilized $53.2 million of such
carryforwards and has recorded a deferred tax asset for the benefit of the
remaining NOL and ITC carryforwards available to be carried forward to future
years, including those generated subsequent to the Common Stock Offering. Such
carryforwards expire as follows:

<TABLE>
<CAPTION>
TAX BENEFIT OF
NET OPERATING INVESTMENT
YEAR LOSSES TAX CREDITS
- ---- -------------- -----------
(IN THOUSANDS)
<S> <C> <C>
2003...................................................... $ -- $3,066
2006...................................................... 511 --
2007...................................................... 4,300 --
2008...................................................... 6,259 --
2009...................................................... 3,487 --
2010...................................................... 3,851 --
2011...................................................... 278 --
------- ------
Total..................................................... $18,686 $3,066
======= ======
</TABLE>

36
<PAGE> 44

The difference between actual income tax (expense) benefit and the tax
provision computed by applying the statutory federal income tax rate to income
(loss) before taxes is attributable to the following:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Income (loss) before income tax (expense) benefit:
U.S.............................................. $153,615 $(19,591) $(29,667)
Non-U.S.......................................... 59,090 5,788 (16,758)
-------- -------- --------
Worldwide........................................ $212,705 $(13,803) $(46,425)
======== ======== ========
Expected income tax (expense) benefit at federal
statutory rate................................... $(74,447) $ 4,831 $ 16,249
Non-U.S. income (loss):
Impact of taxation at different rates............ -- 1,270 1,716
Utilization of net operating loss
carryforwards................................. 6,843 -- --
Impact of non-U.S. losses for which a current tax
benefit is not available...................... (1,642) (1,004) (6,094)
Adjustment to prior year return.................... 1,737 -- --
State taxes and other.............................. 1,192 1,680 (250)
-------- -------- --------
Income tax (expense) benefit............. $(66,317) $ 6,777 $ 11,621
======== ======== ========
</TABLE>

Undistributed earnings of non-U.S. subsidiaries for which no deferred
income tax provision has been made for possible future remittances totaled
approximately $66.5 million at December 31, 1996. Substantially all of this
amount represents earnings reinvested as part of the Company's ongoing business.
It is not practicable to estimate the amount of taxes that might be payable on
the eventual remittance of such earnings. On remittance, certain countries
impose withholding taxes that, subject to certain limitations, are then
available for use as tax credits against a U.S. tax liability, if any. The
Company also has certain income tax loss carryforwards in non-U.S. tax
jurisdictions to which it has assigned no value because of the uncertainty of
utilization of these carryforwards. Approximately $21.1 million of such
carryforwards were utilized during 1996.

12. EMPLOYEE BENEFIT PLANS

Defined Contribution Plans

The Company maintains defined contribution retirement plans for its U.S.
and U.K. employees. The plan for U.S. employees (the "401(k) Plan") is designed
to qualify under Section 401(k) of the Internal Revenue Code of 1986, as amended
(the "Code"). Under the 401(k) Plan, each participant may elect to defer
taxation on a portion of his or her eligible earnings, as defined by the 401(k)
Plan, by directing the Company to withhold a percentage of such earnings. A
participating employee may also elect to make after-tax contributions to the
401(k) Plan. The Company contributes 3.75 percent of a participant's defined
compensation. For the years ended December 31, 1996, 1995 and 1994, the
Company's provision for contributions was $2.5 million, $2.4 million and $2.3
million, respectively.

The plan for U.K. employees provides that the Company contribute amounts
equivalent to the employee's contributions generally up to a maximum of 3
percent of the employee's defined compensation per year. For the years ended
December 31, 1996, 1995 and 1994, the Company's provision for contributions was
$.3 million, $.2 million and $.2 million, respectively.

In connection with the Arethusa Merger, the Company assumed Arethusa's
Profit Sharing Plan. The plan was established as a defined contribution
profit-sharing plan effective October 1, 1992 covering substantially all U.S.
citizens, U.S. permanent residents and third country national expatriates
employed by Arethusa Off-Shore Company, a wholly-owned subsidiary of Arethusa.
Participants could elect to make contributions by directing the Company to
withhold a percentage of their earnings. A participating employee

37
<PAGE> 45

could also elect to make after-tax contributions to the plan. The Company
contributed 3.75 percent of a participant's defined compensation. The Company's
provision for such contributions for the year ended December 31, 1996 was $.3
million.

Effective January 1, 1997, the Company modified the 401(k) Plan by merging
the Company's existing plan with the Arethusa Profit-Sharing Plan. Under the
plan, participating employees may contribute a portion of their pre-tax
compensation, up to a maximum of 15 percent of compensation. In addition to the
3.75 percent Company contribution, the Company will match 25 percent of the
first 6 percent of each employee's compensation contributed, subject to a
vesting schedule which entitles the employee to a percentage of the matching
contributions depending on years of service.

Deferred Compensation and Supplemental Retirement Plan

Effective December 17, 1996, the Company adopted the Deferred Compensation
and Supplemental Executive Retirement Plan. The Company will contribute any
portion of the 3.75 percent of the base salary contribution to the 401(k) Plan
that cannot be contributed because of the limitations of sections 401(a)(17) and
415 of the Code, retroactively to 1992. Additionally, the plan provides that
participants may defer up to 10 percent of base compensation and/or up to 100
percent of any performance bonus. Participants in this plan are highly
compensated employees of the Company and are fully vested in all amounts paid
into the plan.

Pension Plan

The defined benefit pension plan, established by Arethusa effective October
1, 1992, was frozen on April 30, 1996. At that date, all participants were
deemed fully vested in the plan which covered substantially all U. S. citizens
and U. S. permanent residents who were employed by Arethusa. Benefits are
calculated and paid based on an employee's years of credited service and average
compensation at the date the plan was frozen using an excess benefit formula
integrated with social security covered compensation.

Pension costs are determined actuarially and funded as required by the
Code. The plan's assets are invested in cash and cash equivalents, equity
securities, government and corporate debt securities. As a result of freezing
the plan, no current year service cost was accrued.

The significant actuarial assumptions as of the plan's year end are set
forth in the following table:

<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
--------------
<S> <C>
Discount Rate............................................... 7.5%
Expected long-term rate..................................... 9.0%
Compensation projection rate................................ N/A
</TABLE>

The funded status is set forth in the following table:

<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
--------------
(IN THOUSANDS)
<S> <C>
Benefit obligation -- Vested................................ $(8,536)
-- Non-vested............................ N/A
-------
Accumulated benefit obligation.............................. (8,536)
Effect of compensation projection........................... N/A
-------
Projected benefit obligation................................ (8,536)
Plan assets at fair value................................... 10,119
-------
Plan assets in excess of projected benefit obligation....... 1,583
Unrecognized gain........................................... (195)
-------
Prepaid pension cost........................................ $ 1,388
=======
</TABLE>

38
<PAGE> 46

Net periodic pension credit includes the following components:

<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
1996
--------------
(IN THOUSANDS)
<S> <C>
Service cost of benefits earned............................. $ --
Interest cost on projected benefit obligations.............. 259
Actual return on plan assets................................ (356)
-----
Net periodic pension credit................................. $ (97)
=====
</TABLE>

13. GEOGRAPHIC AREA ANALYSIS AND MAJOR CUSTOMERS

The following table summarizes, by geographic area, operating revenues and
operating income (loss) for the years ended December 31, 1996, 1995 and 1994,
and identifiable assets at the end of those periods. Interarea revenues from
affiliates primarily represent intercompany charter revenues and are accounted
for based on the estimated fair market value of the services.

<TABLE>
<CAPTION>
AUSTRALIA/
UNITED EUROPE/ SOUTHEAST SOUTH OTHER
STATES AFRICA ASIA AMERICA AREAS ELIMINATIONS TOTAL
-------- -------- ----------- -------- ------ -------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Revenues from unaffiliated customers...... $384,708 $126,618 $ 65,335 $ 34,769 $ -- $ -- $ 611,430
Interarea revenues from affiliates........ 31,147 -- -- 1,921 6,156 (39,224) --
Operating income (loss)................... 192,765 14,621 (6,106) 6,055 6,156 -- 213,491
Identifiable assets....................... 1,108,761 197,948 101,093 166,698 -- -- 1,574,500
YEAR ENDED DECEMBER 31, 1995
Revenues from unaffiliated customers...... $213,998 $ 47,645 $ 53,113 $ 21,828 $ -- $ -- $ 336,584
Interarea revenues from affiliates........ 9,335 1,389 -- 1,460 4,563 (16,747) --
Operating income (loss)................... 25,488 (6,755) (7,675) (3,970) 4,563 -- 11,651
Identifiable assets....................... 386,282 165,277 36,705 29,788 -- -- 618,052
YEAR ENDED DECEMBER 31, 1994
Revenues from unaffiliated customers...... $203,198 $ 19,159 $ 57,129 $ 26,133 $2,299 $ -- $ 307,918
Interarea revenues from affiliates........ 9,446 12,739 -- 2,373 730 (25,288) --
Operating income (loss)................... (1,540) (7,802) 2,783 (9,174) 1,109 -- (14,624)
Identifiable assets....................... 366,575 125,773 48,059 47,751 -- -- 588,158
</TABLE>

A substantial portion of the Company's assets are mobile, therefore 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 assets located outside the U.S. include cash and cash equivalents of
$6.2 million, $1.3 million and $2.5 million at December 31, 1996, 1995 and 1994,
respectively.

The Company's customer base includes major and independent oil and gas
companies and government-owned oil companies. During the year ended December 31,
1996, two customers contributed 13.8 percent and 13.5 percent of total revenues.
During the year ended December 31, 1995, one customer contributed 16.5 percent
of total revenues. For the year ended December 31, 1994, no single customer
contributed more than 8.2 percent of total revenues.

14. SUBSEQUENT EVENTS

On February 4, 1997, the Company issued $400.0 million, including $50.0
million from an over-allotment option, of 3 3/4 percent convertible subordinated
notes (the "Notes") due February 15, 2007. The Notes are convertible, in whole
or in part, at the option of the holder at any time following the date of
original issuance thereof and prior to the close of business on the business day
immediately preceding the maturity date, unless previously redeemed, into shares
of the Company's common stock, at a conversion price of $81 per share
(equivalent to a conversion rate of 12.346 shares per $1,000 principal amount of
Notes), subject to adjustment

39
<PAGE> 47

in certain circumstances. Interest on the Notes is payable in cash semi-annually
on each February 15 and August 15, commencing on August 15, 1997. Upon
conversion, any accrued interest will be deemed paid by the appropriate portion
of the common stock received by the holder upon such conversion. The Notes are
redeemable, in whole or from time to time in part, at the option of the Company,
at any time on or after February 22, 2001 at specified redemption prices, plus
accrued and unpaid interest to the date of redemption. The Notes are general
unsecured obligations of the Company, subordinated in right of payment to the
prior payment in full of the principal and premium, if any, and interest on all
indebtedness of the Company for borrowed money, other than the Notes, with
certain exceptions, and effectively subordinated in right of payment to the
prior payment in full of all indebtedness of the Company's subsidiaries. The
Notes do not restrict the Company's ability to incur other indebtedness or
additional indebtedness of the Company's subsidiaries.

Assuming both the issuance of the Notes and the Arethusa Merger (see Note
2) had occurred at the beginning of the year, pro forma net income would have
been approximately $146.3 million, or $2.15 per share, for the year ended
December 31, 1996. The pro forma information is not necessarily indicative of
the results of operations had the transactions been effected on January 1, 1996.

15. UNAUDITED QUARTERLY FINANCIAL DATA

Unaudited summarized financial data by quarter for the years ended December
31, 1996 and 1995 is shown below. Per share information has not been provided
for periods prior to the Common Stock Offering.

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1996
Revenues.................................... $106,868 $146,983 $170,622 $186,957
Operating income............................ 25,696 46,614 57,520 83,661
Income before income tax expense............ 26,130 46,784 57,929 81,862
Net income.................................. 18,732 33,022 38,480 56,154
Net income per share........................ 0.37 0.53 0.56 0.82
1995
Revenues.................................... $ 70,760 $ 76,106 $ 91,716 $ 98,002
Operating income (loss)..................... (8,730) 56 11,572 8,753
Income (loss) before income tax benefit..... (16,861) (8,299) 3,003 8,354
Net income (loss)........................... (11,572) (2,770) 1,422 5,894
Pro forma net income per share(1)........... -- -- -- 0.13
</TABLE>

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

(1) As described in Note 3, after its initial public offering, the Company had
50.0 million shares of common stock outstanding. Assuming the Common Stock
Offering had occurred at the beginning of the fourth quarter, the Company
would have recognized net income of $6.4 million, or $0.13 per share, after
adjusting for the after-tax effects of a reduction in interest expense.

40
<PAGE> 48

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

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS

ITEM 11. EXECUTIVE COMPENSATION

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information called for by Part III has been omitted as Registrant intends
to file with the Securities and Exchange Commission not later than 120 days
after the close of its fiscal year a definitive Proxy Statement pursuant to
Regulation 14A.

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>
Independent Auditors' Report................................ 23
Consolidated Balance Sheets................................. 24
Consolidated Statements of Operations....................... 25
Consolidated Statements of Stockholders' Equity............. 26
Consolidated Statements of Cash Flows....................... 27
Notes to Consolidated Financial Statements.................. 28
</TABLE>

(2) Financial Statement Schedules

No schedules have been included herein because the information
required to be submitted has been included in the Company's Consolidated
Financial Statements or the notes thereto, or the required information
is inapplicable.

<TABLE>
<S> <C>
(3) Index of Exhibits...................................... 42
</TABLE>

See Index of Exhibits for a list of those exhibits filed herewith,
which index also includes and identifies management contracts or
compensatory plans or arrangements required to be filed as exhibits to
this Form 10-K by Item 601(10)(iii) of Regulation S-K.

41
<PAGE> 49

(b) Reports on Form 8-K

There were no reports on Form 8-K filed during the quarter ended
December 31, 1996.

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
2.1 -- Plan of Acquisition among Diamond Offshore Drilling,
Inc., Diamond Offshore (USA) Inc. and AO Acquisition
Limited and Arethusa (Off-Shore) Limited dated February
9, 1996, as amended (incorporated by reference to
Exhibits 2.1 and 2.2 of the Company's Registration
Statement No. 333-2680 on Forms S-4/S-1).
2.2 -- Amalgamation Agreement between Arethusa (Off-Shore)
Limited and AO Acquisition Limited dated February 9, 1996
(incorporated by reference to Exhibit 2.3 of the
Company's Registration Statement No. 333-2680 on Forms
S-4/S-1).
3.1 -- Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 of the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995).
3.2 -- By-laws of the Company, as amended (incorporated by
reference to Exhibits 3.2, 3.2.1 and 3.2.2 of the
Company's Registration Statement No. 333-2680 on Forms
S-4/S-1).
4.1 -- Indenture, dated as of February 4, 1997, between the
Company and Chase Manhattan Bank, as Trustee
(incorporated by reference to Exhibit 4.1 of the
Company's Current Report on Form 8-K filed February 11,
1997).
4.2 -- Supplemental Indenture, dated as of February 4, 1997,
between the Company and Chase Manhattan Bank, as Trustee
(incorporated by reference to Exhibit 4.2 of the
Company's Current Report on Form 8-K filed February 11,
1997).
10.1 -- Fee Agreement between the Company and Arethusa
(Off-Shore) Limited dated February 9, 1996, as amended
(incorporated by reference to Exhibits 10.1 and 10.2 of
the Company's Registration Statement No. 333-2680 on
Forms S-4/S-1).
10.2 -- Stockholder's Agreement among the Company, Loews and
Arethusa (Off-Shore) Limited dated February 9, 1996, as
amended (incorporated by reference to Exhibits 10.3 and
10.4 of the Company's Registration Statement No. 333-2680
on Forms S-4/S-1).
10.3 -- Stockholder's Agreement among the Company, Diamond
Offshore (USA) Inc., AO Acquisition Limited and the other
parties signatory thereto dated February 9, 1996, as
amended (incorporated by reference to Exhibits 10.5 and
10.6 of the Company's Registration Statement No. 333-2680
on Forms S-4/S-1).
10.4 -- Termination and Settlement Agreement dated October 10,
1995 between Loews and the Company (incorporated by
reference to Exhibit 10.1 of the Company's Annual Report
on Form 10-K for the fiscal year ended December 31,
1995).
10.5 -- Registration Rights Agreement dated October 16, 1995
between Loews and the Company (incorporated by reference
to Exhibit 10.2 of the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1995).
10.6 -- Services Agreement dated October 16, 1995 between Loews
and the Company (incorporated by reference to Exhibit
10.3 of the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995).
10.7+ -- Agreement ("Rose Employment Agreement"), dated November
1, 1992, between the Company and Robert E. Rose
(incorporated by reference to Exhibit 10.7 of the
Company's Registration Statement No. 33-95484 on Form
S-1).
10.8+ -- Amendment, dated December 27, 1995, to the Rose
Employment Agreement (incorporated by reference to
Exhibit 10.5 of the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995).
</TABLE>

42
<PAGE> 50

<TABLE>
<C> <S>
10.9*+ -- Diamond Offshore Management Bonus Program, as amended and restated, and dated as of
December 31, 1996.
10.10*+ -- Diamond Offshore Executive Deferred Compensation and Supplemental Retirement Plan
effective December 17, 1996.
10.11 -- Credit Agreement among the Company, various lending institutions, Bankers Trust Company
and Christiana Bank og Kreditkasse, New York Branch, as Co-Arrangers, Bankers Trust
Company, as Administrative Agent, Christiana Bank og Kreditkasse, New York Branch, as
Documentation Agent, and The Fuji Bank, Limited, as Co-Agent, dated as of February 8,
1996 and amended and restated as of March 27, 1996 and further amended and restated as
of December 19, 1996 (incorporated by reference to Exhibit 10.1 of the Company's
Registration Statement No. 333-19987 on Form S-3).
10.12 -- Diamond Offshore Drilling, Inc. Nonqualified Stock Option Plan for Certain Former
Directors of Arethusa (incorporated by reference to Exhibit 10.17 of the Company's
Registration Statement No. 333-2680 on Forms S-4/S-1).
10.13 -- Diamond Offshore Drilling, Inc. Stock Option Plan for Certain Former Employees of
Arethusa (incorporated by reference to Exhibit 10.18 of the Company's Registration
Statement No. 333-2680 on Forms S-4/S-1).
10.14 -- Asset Purchase Agreement between Diamond M Onshore, Inc. and Drillers, Inc. dated as of
November 12, 1996 (incorporated by reference to Exhibit 10.2 of the Company's
Registration Statement No. 333-19987 on Form S-3).
10.15 -- Amendment No. 1, dated as of December 31, 1996, to Asset Purchase Agreement between
Diamond M Onshore, Inc. and Drillers, Inc. dated as of November 12, 1996 (incorporated
by reference to Exhibit 10.3 of the Company's Registration Statement No. 333-19987 on
Form S-3).
12.1* -- Statement re Computation of Ratios.
21.1* -- List of Subsidiaries of the Company.
23.1* -- Consent of Deloitte & Touche LLP
24.1* -- Powers of Attorney.
27.1* -- Financial Data Schedule.
</TABLE>

- ---------------
* Filed herewith.

+ Management contracts or compensatory plans or arrangements.

43
<PAGE> 51

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 3, 1997.

DIAMOND OFFSHORE DRILLING, INC.

By: /s/ LAWRENCE R. DICKERSON
-----------------------------------
Lawrence R. Dickerson
Senior Vice President and Chief
Financial Officer

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 and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>

/s/ ROBERT E. ROSE* President, Chief Executive Officer March 3, 1997
- ----------------------------------------------------- and Director (Principal
Robert E. Rose Executive Officer)

/s/ LAWRENCE R. DICKERSON* Senior Vice President and Chief March 3, 1997
- ----------------------------------------------------- Financial Officer (Principal
Lawrence R. Dickerson Financial Officer)

/s/ GARY T. KRENEK* Controller (Principal Accounting March 3, 1997
- ----------------------------------------------------- Officer)
Gary T. Krenek

/s/ JAMES S. TISCH* Chairman of the Board March 3, 1997
- -----------------------------------------------------
James S. Tisch

/s/ HERBERT C. HOFMANN* Director March 3, 1997
- -----------------------------------------------------
Herbert C. Hofmann

*By:/s/ RICHARD L. LIONBERGER
------------------------------------------------
Richard L. Lionberger
Attorney in Fact
</TABLE>

44
<PAGE> 52
INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
10.9*+ -- Diamond Offshore Management Bonus Program, as amended and restated, and
dated as of December 31, 1996.
10.10*+ -- Diamond Offshore Executive Deferred Compensation and
Supplemental Retirement Plan effective December 17, 1996.
12.1* -- Statement re Computation of Ratios.
21.1* -- List of Subsidiaries of the Company.
23.1* -- Consent of Deloitte & Touche LLP
24.1* -- Powers of Attorney
27.1* -- Financial Data Schedule.
</TABLE>

- ---------------
* previously filed with the Commission by Diamond Offshore in connection with
the filing of its Annual Report on Form 10-K for the Fiscal Year Ended
December 31, 1996.

+ Management contracts or compensatory plans or arrangements.

<PAGE> 53
Annex 2

SCHEDULE 14A
(RULE 14A-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION

PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934

Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec. 240.14a-11(c) or sec. 240.14a-12

DIAMOND OFFSHORE DRILLING, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)

- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(l) and
0-11.

(1) Title of each class of securities to which transaction applies:

- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:

- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):

- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:

- --------------------------------------------------------------------------------
(5) Total fee paid:

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

[ ] Fee paid previously with preliminary materials.

[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.

(1) Amount Previously Paid:

- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:

- --------------------------------------------------------------------------------
(3) Filing Party:

- --------------------------------------------------------------------------------
(4) Date Filed:

- --------------------------------------------------------------------------------
<PAGE> 54

[DIAMOND OFFSHORE DRILLING, INC. LOGO]

DIAMOND OFFSHORE DRILLING, INC.

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 5, 1997

To the Stockholders of
Diamond Offshore Drilling, Inc.:

NOTICE IS HEREBY GIVEN THAT the 1997 Annual Meeting of Stockholders of
Diamond Offshore Drilling, Inc., a Delaware corporation (the "Company"), will be
held at The Ritz Carlton Hotel, 1919 Briar Oaks Lane, Houston, Texas 77027 on
May 5, 1997, at 2:00 p.m., local time (the "Annual Meeting"), for the following
purposes: (1) to elect five directors, each to serve until the next annual
meeting of stockholders and until their respective successors are elected and
qualified or until their earlier resignation or removal; (2) to ratify the
appointment of independent certified public accountants for the Company and its
subsidiaries; and (3) to transact such other business as may properly come
before the Annual Meeting or any adjournments thereof.

The Company has fixed the close of business on March 31, 1997 as the record
date for determining stockholders entitled to notice of, and to vote at, the
Annual Meeting and any adjournments thereof. Stockholders who execute proxies
solicited by the Board of Directors of the Company retain the right to revoke
them at any time; unless so revoked, the shares of common stock, par value $.01
per share, of the Company represented by such proxies will be voted at the
Annual Meeting in accordance with the directions given therein. If a stockholder
does not specify a choice on such stockholders's proxy, the proxy will be voted
FOR the nominees for director named in the attached Proxy Statement and FOR the
ratification of appointment of the independent certified public accountants for
the Company and its subsidiaries named in such Proxy Statement. The list of
stockholders of the Company may be examined at the offices of the Company at
15415 Katy Freeway, Suite 100, Houston, Texas 77094.

Further information regarding the Annual Meeting is set forth in the
attached Proxy Statement.

YOU ARE CORDIALLY INVITED TO ATTEND THE ANNUAL MEETING. HOWEVER, WHETHER OR
NOT YOU PLAN TO ATTEND THE ANNUAL MEETING IN PERSON, PLEASE COMPLETE, DATE, SIGN
AND MAIL PROMPTLY THE ENCLOSED PROXY IN THE ENCLOSED POSTPAID ENVELOPE. THE
PROXY IS REVOCABLE AND WILL NOT BE USED IF YOU ARE PRESENT AND PREFER TO VOTE IN
PERSON.

By Order of the Board of Directors

Sincerely,

/s/ RICHARD L. LIONBERGER
-----------------------------------
Richard L. Lionberger
Vice President, General Counsel
and Secretary

April 1, 1997
15415 Katy Freeway
Houston, Texas 77094
<PAGE> 55

[DIAMOND OFFSHORE DRILLING, INC. LOGO]

PROXY STATEMENT

DIAMOND OFFSHORE DRILLING, INC.

FOR 1997 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 5, 1997

This Proxy Statement is being furnished to stockholders of Diamond Offshore
Drilling, Inc., a Delaware corporation (the "Company"), in connection with the
solicitation of proxies by the Board of Directors of the Company from such
stockholders for the 1997 Annual Meeting of Stockholders of the Company (the
"Annual Meeting") to be held on May 5, 1997 and any adjournments and
postponements thereof. Shares of the Company's common stock, par value $.01 per
share (the "Common Stock"), represented by a properly executed proxy in the
accompanying form will be voted at the meeting. The proxy may be revoked at any
time before its exercise by sending written notice of revocation to Richard L.
Lionberger, Corporate Secretary, Diamond Offshore Drilling, Inc., 15415 Katy
Freeway, Houston, Texas 77094, or by signing and delivering a proxy which is
dated later, or, if the stockholder attends the Annual Meeting in person, by
giving notice of revocation to the Inspector(s) of Election (as hereinafter
defined) at the Annual Meeting.

The Company has fixed the close of business on March 31, 1997 as the record
date (the "Record Date") for the determination of stockholders entitled to
notice of, and to vote at, the Annual Meeting. On that date there were
outstanding and entitled to vote 68,395,368 shares of Common Stock, which is the
Company's only class of voting securities. The presence at the Annual Meeting in
person or by proxy of the holders of a majority of the outstanding shares of
Common Stock entitled to vote thereat is required to constitute a quorum for the
transaction of business. Abstentions and broker non-votes will be counted in
determining whether a quorum is present. Each stockholder is entitled to one
vote for each share of Common Stock held of record. A plurality of the shares of
Common Stock present in person or represented by proxy and entitled to vote at
the Annual Meeting is required for the election of directors. Accordingly, the
five nominees for election as directors at the Annual Meeting who receive the
greatest number of votes cast for election by the holders of Common Stock of
record on the Record Date shall be the duly elected directors upon completion of
the vote tabulation at the Annual Meeting. The affirmative vote of the holders
of a majority of the shares of Common Stock present in person or represented by
proxy and entitled to vote at the Annual Meeting is required for approval of all
other items being submitted to the stockholders for their consideration.
Abstentions will be considered present for purposes of calculating the vote, but
will not be considered to have been voted in favor of the matter voted upon, and
broker non-votes will not be considered present for purposes of calculating the
vote.

Votes will be tabulated by ChaseMellon Shareholder Services, L.L.C., the
transfer agent and registrar for the Common Stock, and the results will be
certified by one or more inspectors of election who are required to resolve
impartially any interpretive questions as to the conduct of the vote (the
"Inspector(s) of Election"). In tabulating votes, a record will be made of the
number of shares voted for each nominee or other matter voted upon, the number
of shares with respect to which authority to vote for that nominee or such other
matter has been withheld, and the number of shares held of record by
broker-dealers and present at the Annual Meeting but not voting.

This Proxy Statement is expected to be first mailed or delivered to
stockholders of the Company entitled to notice of the Annual Meeting on or about
April 4, 1997.

The date of this Proxy Statement is April 1, 1997.
<PAGE> 56

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

The table below sets forth certain information with respect to each person
or entity known by the Company to be the beneficial owner of more than 5% of the
Common Stock as of December 31, 1996 (based upon Schedule 13D and Schedule 13G
filings by such persons with the Securities and Exchange Commission (the
"Commission") for beneficial ownership at such date).

<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT
TITLE OF CLASS NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
-------------- ------------------------------------ -------------------- ----------------
<S> <C> <C> <C>
Common Stock................ Loews Corporation 35,050,000(1) 51.3%
667 Madison Avenue
New York, N.Y. 10021-8087
Common Stock................ FMR Corp. 4,373,960(2) 6.4%
82 Devonshire Street
Boston, Mass. 02109
</TABLE>

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

(1) Loews Corporation, a Delaware corporation ("Loews"), has sole investment
power and sole voting power over 35,050,000 shares.

(2) FMR Corp. has sole voting power with respect to 634,736 shares and sole
dispositive power with respect to 4,373,960 shares in its capacity as
investment advisor and manager.

Because Loews holds more than a majority of the outstanding Common Stock of
the Company, Loews has the power to approve matters submitted for consideration
at the Annual Meeting without regard to the votes of the other stockholders. The
Company understands that Loews intends to vote FOR the election of management's
nominees for the Board of Directors and FOR the ratification of the appointment
of Deloitte & Touche LLP as the Company's independent auditors. There are no
agreements between the Company and Loews with respect to the election of
directors or officers of the Company or with respect to the other matters which
may come before the Annual Meeting.

SECURITY OWNERSHIP OF MANAGEMENT AND DIRECTORS

The following table shows the amount and nature of beneficial ownership of
the Common Stock and of Loews common stock beneficially owned by each director
of the Company, each executive officer of the Company and all directors and
executive officers of the Company as a group, as of January 28, 1997. Directors
and executive officers of the Company individually and as a group own less than
1% of equity securities of the Company. Except as otherwise noted, the named
beneficial owner has sole voting power and sole investment power with respect to
the number(s) of shares shown below.

<TABLE>
<CAPTION>
COMPANY LOEWS
NAME OF BENEFICIAL OWNER COMMON STOCK COMMON STOCK
------------------------ ---------------- ------------
<S> <C> <C>
James S. Tisch........................................ 0 138,000(1)
Herbert C. Hofmann.................................... 1,300(2) 750(2)
Raymond S. Troubh..................................... 2,500 5,000
Arthur L. Rebell...................................... 0 0
Robert E. Rose........................................ 2,100(3) 0
Lawrence R. Dickerson................................. 500(3) 0
David W. Williams..................................... 100 0
Richard L. Lionberger................................. 0 0
Gary T. Krenek........................................ 100(3)(4) 0
All Directors and Executive Officers as a Group....... 6,600 143,750
</TABLE>

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

(1) The number of shares includes 58,000 shares owned by the James and Merryl
Tisch Foundation, as to which Mr. Tisch has shared voting power and
investment power.

(2) The number of shares includes 300 shares of the Common Stock and 350 shares
of Loews common stock owned by his son, of which shares Mr. Hofmann
disclaims any beneficial ownership.

(3) Voting power and investment power with respect to shares listed for Mr.
Rose, Mr. Dickerson and Mr. Krenek are shared with the respective
individual's spouse.

(4) Mr. Krenek sold all 100 shares of Common Stock subsequent to January 28,
1997.

2
<PAGE> 57

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Thomas P. Richards, a former executive officer of the Company, failed to
make a timely filing of a Form 4 concerning the sale of 6,000 shares of Common
Stock in September 1996 and, in accordance with the rules promulgated under the
Securities Exchange Act of 1934, as amended, the transaction was reported as a
late transaction by Mr. Richards on Form 5.

ELECTION OF DIRECTORS

The Company's Board of Directors presently consists of five directors.
Following the Company's 1996 Annual Meeting of Stockholders, Arthur L. Rebell
was elected by the remaining directors to fill a vacancy on the Company's Board
of Directors created by the death of David M. Ifshin. Mr. Rebell is not a
director, officer or employee of Loews or an officer or employee of the Company.
All directors are elected annually to serve until the next annual meeting of
stockholders and until their respective successors are duly elected and
qualified or until their earlier resignation or removal. The executive officers
of the Company are elected annually by the Board of Directors to serve until the
next annual meeting of the Board of Directors and until their successors are
duly elected and qualified, or until their earlier death, resignation,
disqualification or removal from office. Information with respect to the current
directors and executive officers of the Company is set forth below.

The nominees for director are James S. Tisch, Herbert C. Hofmann, Arthur L.
Rebell, Robert E. Rose and Raymond S. Troubh. Each of the five directors to be
elected at the Annual Meeting will serve a term of one year to expire at the
Company's 1998 Annual Meeting of Stockholders or until his successor is elected
and qualified or until his earlier death, resignation, disqualification or
removal from office.

It is intended that the proxies received from holders of Common Stock, in
the absence of contrary instructions, will be voted at the Annual Meeting for
the election of Messrs. Tisch, Hofmann, Rebell, Rose and Troubh. Although the
Company does not contemplate that any of the nominees will be unable to serve,
decline to serve, or otherwise be unavailable as a nominee at the time of the
Annual Meeting, in such event the proxies will be voted in accordance with the
authority granted in the proxies for such other candidate or candidates as may
be nominated by the Board of Directors.

Further information concerning the nominees for election as directors at
the Annual Meeting, including their business experience during the past five
years, appears below.

<TABLE>
<CAPTION>
AGE AS OF
JANUARY 31,
NAME POSITION 1997 DIRECTOR SINCE
---- -------- ----------- --------------
<S> <C> <C> <C>
James S. Tisch(1)...................... Chairman of the Board 44 1989
Herbert C. Hofmann(1).................. Director 54 1992
Arthur L. Rebell(2).................... Director 55 1996
Robert E. Rose(1)...................... Director, President and
Chief Executive Officer 58 1989
Raymond S. Troubh(2)................... Director 70 1995
</TABLE>

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

(1) Member, Executive Committee of the Board of Directors

(2) Member, Audit Committee of the Board of Directors

James S. Tisch has served as Chairman of the Board since 1995 and as a
director of the Company since June 1989. Mr. Tisch has served as President and
Chief Operating Officer of Loews, a diversified holding company, since 1994 and
prior thereto served as Executive Vice President of Loews for more than five
years. Mr. Tisch, a director of Loews since 1986, also serves as a director of
CNA Financial Corporation, an 84% owned subsidiary of Loews, and serves as a
director of Vail Resorts, Inc.

3
<PAGE> 58

Herbert C. Hofmann has served as a director of the Company since January
1992. Mr. Hofmann has served as Senior Vice President of Loews since January
1992. He has served as President and Chief Executive Officer of Bulova
Corporation, a 97% owned subsidiary of Loews, since 1989. Bulova Corporation
distributes and sells watches and clocks.

Arthur L. Rebell has served as a director of the Company since July 1996.
Mr. Rebell has been a Professor of Mergers & Acquisitions at New York
University's Stern Graduate School of Business since 1996 and has served as a
Managing Director of Highview Capital since February 1997. Prior thereto, he
served as a Managing Director of Schroder Wertheim & Co. Inc. for more than five
years.

Robert E. Rose has served as a director and President and Chief Executive
Officer of the Company since June 1989.

Raymond S. Troubh has served as a director of the Company since November
1995. Mr. Troubh is a financial consultant, a former Governor of the American
Stock Exchange and a former general partner of Lazard Freres & Co., an
investment banking firm. Mr. Troubh also serves as a director of ADT Limited,
America West Airlines, Inc., ARIAD Pharmaceuticals, Inc., Becton, Dickinson and
Company, Foundation Health Corporation, General American Investors Company, The
MicroCap Fund, Inc., Olsten Corporation, Petrie Stores Corporation, Time Warner
Inc., Triarc Companies, Inc., and WHX Corporation.

DIRECTOR COMPENSATION

Directors who are employees of the Company are not paid any fees or
additional compensation for service as members of the Board of Directors or any
committee thereof. The annual retainer payable to directors of the Company who
are not employees of the Company or any of its subsidiaries or of Loews or any
other affiliated companies, for services as directors, is $20,000 per annum,
payable quarterly. Each member of the Audit Committee of the Board of Directors
of the Company receives a retainer of $2,500 per annum, payable quarterly, and
each director of the Company who is not an employee of the Company or any of its
subsidiaries or of Loews or any other affiliated companies is paid a fee of
$1,000 for attendance at each meeting of the Board of Directors and of the Audit
Committee thereof in addition to the reasonable costs and expenses incurred by
such directors in relation to their services as such.

BOARD OF DIRECTORS AND COMMITTEES

BOARD OF DIRECTORS

The Company's Board of Directors has five members and two standing
committees. During 1996, the Board of Directors held six meetings and took
action by unanimous written consent on one occasion. Further information
concerning the Board's standing committees appears below.

EXECUTIVE COMMITTEE

The Executive Committee of the Board of Directors consists of three
members, Mr. Tisch, Mr. Hofmann and Mr. Rose. The Executive Committee has all
the powers and exercises all the duties of the Board of Directors in the
management of the business of the Company that may lawfully be delegated to it
by the Board of Directors. These powers and duties include, among other things,
declaring a dividend, authorizing the issuance of stock, recommending to
stockholders mergers or a sale of substantially all of the assets of the
Company, providing advice and counsel to management of the Company, reviewing
management's recommendations for significant changes to the organizational
structure of the Company and recommending changes to the Board of Directors.
During 1996, the Executive Committee held one meeting and took action by
unanimous written consent on ten occasions.

4
<PAGE> 59

AUDIT COMMITTEE

The Audit Committee of the Board of Directors consists of two members, Mr.
Rebell and Mr. Troubh. The Audit Committee reviews and reports to the Board of
Directors on the scope and results of audits by the Company's independent
auditors. It recommends a firm of certified public accountants to serve as
auditors for the Company, authorizes all audit and other professional services
rendered by the auditors and periodically reviews the independence of the
auditors and the Company's internal accounting controls and internal audit
procedures. Membership on the Audit Committee is restricted to directors
independent of management and free from any relationship that, in the opinion of
the Board of Directors, would interfere with the exercise of independent
judgment as a committee member. Directors who are affiliates of the Company or
officers or employees of the Company or its subsidiaries or of Loews or any
other affiliated companies are not qualified for Audit Committee membership.
During 1996, the Audit Committee met two times.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

During the Company's fiscal year ended December 31, 1996, the Company had
no compensation committee or other committee of the Board of Directors
performing similar functions. Decisions concerning compensation of executive
officers were made during such fiscal year by persons who were members of the
Company's Board of Directors, including Robert E. Rose, an executive officer of
the Company.

NOMINATING COMMITTEE

During the Company's fiscal year ended December 31, 1996, the Company had
no nominating committee or other committee of the Board of Directors performing
similar functions.

EXECUTIVE OFFICERS

The executive officers of the Company are elected annually by the Board of
Directors to serve until the next annual meeting of the Board of Directors, or
until their successors are duly elected and qualified, or until their earlier
death, resignation, disqualification or removal from office. Information with
respect to the current executive officers of the Company is set forth below:

<TABLE>
<CAPTION>
AGE AS OF
JANUARY 31,
NAME 1997 POSITION
---- ----------- --------
<S> <C> <C>
Robert E. Rose....................... 58 President, Chief Executive Officer and Director
Lawrence R. Dickerson................ 44 Senior Vice President and Chief Financial Officer
David W. Williams.................... 39 Senior Vice President -- Contracts and Marketing
Richard L. Lionberger................ 46 Vice President, General Counsel and Secretary
Gary T. Krenek....................... 38 Controller
</TABLE>

Robert E. Rose has served as President and Chief Executive Officer of the
Company and as a director since June 1989.

Lawrence R. Dickerson has served as Senior Vice President of the Company
since April 1993 and prior thereto served as a Vice President and the Chief
Financial Officer since June 1989.

David W. Williams has served as Senior Vice President of the Company since
December 1994 and was a Marketing Vice President of the Company between February
1992 and May 1994. Mr. Williams was employed by Noble Drilling Corporation, a
contract drilling company, from May 1994 through December 1994 as Vice President
of Marketing.

Richard L. Lionberger has served as Vice President, General Counsel and
Secretary of the Company since February 1992.

Gary T. Krenek has served as Controller of the Company since February 1992.

5
<PAGE> 60

EXECUTIVE COMPENSATION

The following table shows for the years ended December 31, 1996, 1995 and
1994 the cash compensation paid by the Company, and a summary of certain other
compensation paid or accrued for such year, to its Chief Executive Officer and
each of the Company's four other most highly compensated executive officers as
of December 31, 1996 as well as one individual, Mr. Richards, for whom
information would have been provided as one of such four other most highly
compensated executive officers but for the fact that Mr. Richards was not
serving as an executive officer of the Company on December 31, 1996
(collectively, the "Named Executive Officers") for service in all capacities
with the Company and its subsidiaries.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL
COMPENSATION(1)(2)
-------------------- ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(3)
--------------------------- ---- -------- ------- ---------------
<S> <C> <C> <C> <C>
Robert E. Rose 1996 $500,000 297,578 19,258
President and Chief Executive Officer 1995 390,000 230,000 6,075
1994 363,315 -- 6,075

Lawrence R. Dickerson 1996 225,000 110,175 8,570
Senior Vice President and Chief Financial 1995 190,000 107,000 5,727
Officer 1994 168,000 -- 5,727

David W. Williams 1996 200,000 96,938 7,594
Senior Vice President -- Contracts and 1995 175,000 102,500 5,691
Marketing

Richard L. Lionberger 1996 154,517 47,500 6,136
Vice President, General Counsel and Secretary 1995 140,137 35,000 5,360
1994 134,842 -- 5,159

Gary T. Krenek 1996 101,228 44,000 3,890
Controller 1995 96,122 26,500 3,670

Thomas P. Richards (4) 1996 166,537 -- 26,477
Senior Vice President -- Worldwide Operations 1995 210,128 60,000 5,913
1994 199,615 -- 5,913
</TABLE>

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

(1) Amounts exclude perquisites and other personal benefits because such
compensation did not exceed the lesser of $50,000 or 10% of the total annual
salary reported for each Named Executive Officer.

(2) Amounts include salary and bonus earned, as well as all deferred portions of
bonuses based on service during the respective year indicated by the Named
Executive Officers. See "Board of Directors Report on Executive
Compensation -- Annual Cash Bonus Incentives."

(3) The amounts shown for 1996 include (i) the Company's contributions under the
Retirement Plan referred to below in the following amounts on behalf of the
following Named Executive Officers: Mr. Rose, $5,625; Mr. Dickerson, $5,625;
Mr. Williams, $5,625; Mr. Lionberger, $5,625; Mr. Krenek, $3,796; and Mr.
Richards, $5,625, (ii) the term portion of the life insurance premiums paid
by the Company in the following amounts on behalf of the following Named
Executive Officers: Mr. Rose, $508; Mr. Dickerson, $132; Mr. Williams, $94;
Mr. Lionberger, $223; Mr. Krenek, $94; and Mr. Richards, $204, (iii) the
Company's contributions under the Deferred Compensation and Supplemental
Executive Retirement Plan referred to below, adopted in 1996, in the
following amounts on behalf of the following Named Executive Officers: Mr.
Rose, $13,125; Mr. Dickerson, $2,813; Mr. Williams, $1,875; and Mr.
Lionberger, $288, and (iv) the amount paid for accumulated vacation in
connection with the resignation of Mr. Richards, $20,648.

(4) Mr. Richards ceased to be an executive officer of the Company in September
1996.

The Company maintains a defined contribution plan (the "Retirement Plan")
designed to qualify under Section 401(k) of the Internal Revenue Code of 1986,
as amended (the "Code"), pursuant to which the

6
<PAGE> 61

Company contributes 3.75 percent of the participant's base and overtime salary
subject to limitations on eligible salary. Employees are vested in all
contributions as made. Effective January 1, 1997, the Company modified the
Retirement Plan to provide that, in addition to the 3.75 percent contribution,
the Company will match 25 percent of the first 6 percent of each employee's
compensation contributed, subject to a vesting schedule that entitles the
employee to a percentage of the matching contributions based upon years of
service.

In addition, effective December 17, 1996, the Company adopted the Deferred
Compensation and Supplemental Executive Retirement Plan. The Company contributes
any portion of the 3.75 percent of the base salary contribution to the
Retirement Plan that cannot be contributed because of the limitations of
Sections 401(a)(17) and 415 of the Code, retroactively to January 1, 1996.
Additionally, the plan provides that participants may defer up to 10 percent of
base compensation and/or up to 100 percent of any performance bonus.
Participants in this plan are highly compensated employees of the Company and
are fully vested in all amounts paid into the plan.

EMPLOYMENT AGREEMENT

The Company and Robert E. Rose entered into and subsequently extended an
agreement dated November 1, 1992 (the "Employment Agreement"), providing for,
among other things, the employment of Mr. Rose as the President and Chief
Executive Officer of the Company until December 31, 1998. Mr. Rose currently
receives a salary at an annual rate of $535,000, subject to such increases as
the Board of Directors of the Company may from time to time determine. The
Employment Agreement provides that during the term of Mr. Rose's employment
thereunder and for a period of one year immediately following termination of
such employment by the Company for cause, Mr. Rose will not engage in any other
business which is in competition with the Company without written consent from
the Company. The Employment Agreement provides that, for a 120-day period after
consummation of a Change of Control (as defined in the Employment Agreement),
Mr. Rose has the right to terminate his employment and the Company would be
obligated to continue to compensate him for a three-year period at the annual
rate of salary then in effect.

BOARD OF DIRECTORS REPORT ON EXECUTIVE COMPENSATION

The following report concerning the specific factors, criteria and goals
underlying decisions on payments and awards of compensation to each of the
executive officers of the Company for the fiscal year ended December 31, 1996 is
provided by the Company's Board of Directors.

GENERAL

Recommendations regarding compensation of the Company's executive officers
are prepared by the Chief Executive Officer and submitted to the Executive
Committee of the Board of Directors for approval, except that the Chief
Executive Officer does not participate in the preparation of recommendations, or
the review, modification or approval thereof, with respect to his compensation.

The Company's compensation program is designed to enable the Company to
attract, motivate and retain high-quality senior management by providing a
competitive total compensation opportunity based on performance. Toward this
end, the Company provides for competitive base salaries and annual variable
performance incentives payable in cash for the achievement of financial
performance goals.

SALARIES

Every salaried employee of the Company is assigned a salary grade at the
commencement of employment pursuant to a system that considers objective
criteria, such as the employee's level of financial responsibility and
supervisory duties, and the education and skills required to perform the
employee's functions; however, the assignment of an employee to a particular
salary grade necessarily involves subjective judgments. Within each grade,
salaries are determined within a range based solely on subjective factors such
as the employee's contribution to the Company and individual performance. No
fixed, relative weights are assigned to these subjective factors. On occasion,
an officer's compensation will be fixed at a level above the maximum level for

7
<PAGE> 62

his or her salary grade in response to a subjective determination that the
officer's compensation, if set at the maximum level for his or her grade, would
be below the level merited by his or her contributions to the Company.

ANNUAL CASH BONUS INCENTIVES

Bonuses were awarded under the Diamond Offshore Management Bonus Program,
which is intended to provide a means whereby certain selected officers and key
employees of the Company may develop a sense of proprietorship and personal
involvement in the development and financial success of the Company, and
encourage the participants to remain with and devote their best efforts to the
business of the Company, thereby advancing the interests of the Company and its
stockholders. At the beginning of each year, the Executive Committee of the
Company's Board of Directors establishes a bonus pool (the "Annual Bonus Pool")
equal to (i) a percentage (the "Applicable Percentage") ranging from 10% to 40%
of the total salaries of all participants for the prior year (the "Performance
Year"), divided by (ii) the arithmetical average of (x) the Company's cash flow
plus capital expenses for the year prior to the Performance Year and (y) cash
flow plus capital expenses as budgeted for the Performance Year, multiplied by
(iii) actual cash flow plus capital expenses for such Performance Year. The
Executive Committee determines the Applicable Percentage based on such
committee's evaluation of the Company during the Performance Year relative to
peer companies and the performance of the Company's share price and
extraordinary events during the Performance Year. The Executive Committee
establishes the bonus payout from the Annual Bonus Pool to each participant (not
to exceed 50% of such participant's eligible salary, or 60% of eligible salary
in the case of the President and Chief Executive Officer and 30% of eligible
salary in the case of participants of salary grade 11 or below) based upon
corporate, group or individual performance, or a combination thereof, or such
other subjective criteria as the Executive Committee may determine to be
appropriate. The bonuses are payable in annual installments (25%, 15%, 15%, 15%,
15% and 15%) over the six calendar year period following the Performance Year
and, with certain exceptions, are forfeited if not paid prior to termination of
employment.

The foregoing Diamond Offshore Management Bonus Program is effective for
the 1996 Performance Year and subsequent Performance Years. Amounts paid as
bonuses with respect to the 1995 Performance Year were paid under the Diamond
Offshore Management Bonus Program in effect for the 1995 Performance Year (the
"1995 Plan"). Certain significant differences between the 1995 Plan and the
Diamond Offshore Management Bonus Program in effect for the 1996 Performance
Year include: an Applicable Percentage ranging from 10% to 35% under the 1995
Plan; bonus payouts under the 1995 Plan from the Annual Bonus Pool not exceeding
30% of the participant's eligible salary; and bonuses under the 1995 Plan
payable in annual installments (50%, 25% and 25%) over the three calendar year
period following the Performance Year.

The Competitor Group Index used in the total stockholder return comparison
(see "Common Stock Performance Graph" below) is not used to determine any cash
bonus incentives for executives of the Company, and the peer companies
considered for purposes of the Diamond Offshore Management Bonus Program do not
necessarily correspond with the companies considered for purposes of the
Competitor Group Index. Although the two groups of companies include several of
the same companies (based on their similarity to the Company), the composition
of the two groups does not exactly correspond, and there are no specific bases
upon which certain companies included for purposes of the Competitor Group Index
are not included in the peer group for purposes of the Diamond Offshore
Management Bonus Program.

COMPENSATION OF THE CHIEF EXECUTIVE OFFICER

Decisions regarding compensation (salary and bonus) of the Company's Chief
Executive Officer are made by the Executive Committee of the Board of Directors,
except that the Chief Executive Officer does not participate in the preparation
of recommendations, or the review, modification or approval thereof, with
respect to his compensation. Such decision for 1996 was determined subjectively,
and not necessarily tied to corporate performance, with consideration given to
the Chief Executive Officer's level of responsibility and importance to the
Company relative to other Company executives, his time with the Company,
individual

8
<PAGE> 63

performance and contributions to the successful implementation of significant
initiatives that are expected to benefit the Company in future years, including
the Company's capital upgrade program, on-going rationalization of its rig fleet
(purchases and sales) and quality and safety improvements. No fixed, relative
weights were assigned to these subjective factors.

THE BOARD OF DIRECTORS

James S. Tisch, Chairman
Herbert C. Hofmann
Arthur L. Rebell
Robert E. Rose
Raymond S. Troubh

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Prior to the initial public offering of the Common Stock in October 1995
(the "Initial Public Offering"), the Company was a wholly owned subsidiary of
Loews, and in connection with the Initial Public Offering, the Company and Loews
entered into agreements pursuant to which certain management, administrative and
other services are provided by Loews to the Company and certain other
obligations were assumed by the parties. These agreements were not the result of
arm's length negotiations between the parties.

SERVICES AGREEMENT. The Company and Loews entered into a services agreement
effective upon consummation of the Initial Public Offering (the "Services
Agreement") pursuant to which Loews agreed to continue to perform certain
administrative and technical services on behalf of the Company. Such services
include personnel, telecommunications, purchasing, internal auditing,
accounting, data processing and cash management services, in addition to advice
and assistance with respect to preparation of tax returns and obtaining
insurance. Under the Services Agreement, the Company is to reimburse Loews for
(i) allocated personnel costs (such as salaries, employee benefits and payroll
taxes) of the Loews personnel actually providing such services and (ii) all
out-of-pocket expenses related to the provision of such services. The Services
Agreement may be terminated at the Company's option upon 30 days' notice to
Loews and at the option of Loews upon six months' notice to the Company. In
addition, the Company has agreed to indemnify and hold harmless Loews for all
claims and damages arising from the provision of services by Loews under the
Services Agreement, unless due to the gross negligence or willful misconduct of
Loews. Under the Services Agreement, the Company paid Loews $184,837 for
services performed by Loews in 1996.

REGISTRATION RIGHTS AGREEMENT. Under a Registration Rights Agreement (the
"Registration Rights Agreement") between the Company and Loews, the Company,
subject to certain limitations, will file, upon the request of Loews, one or
more registration statements under the Securities Act of 1933, as amended,
subject to a maximum of three such requests, in order to permit Loews to offer
and sell any Common Stock that Loews may hold. Loews will bear the costs of any
such registered offering, including any underwriting commissions relating to
shares it sells in any such offering, any related transfer taxes and the costs
of complying with non-U.S. securities laws, and any fees and expenses of
separate counsel and accountants retained by Loews. The Company has the right to
require Loews to delay any exercise by Loews of its rights to require
registration and other actions for a period of up to 90 days if, in the judgment
of the Company, any offering by the Company then being conducted or about to be
conducted would be adversely affected. Subject to certain conditions, the
Company has also granted Loews the right to include its Common Stock in any
registration statements covering offerings of Common Stock by the Company, and
the Company will pay all costs of such offerings other than underwriting
commissions and transfer taxes attributable to the shares sold on behalf of
Loews. The Company will indemnify Loews, and Loews will indemnify the Company,
against certain liabilities in respect of any registration statement or offering
covered by the Registration Rights Agreement.

9
<PAGE> 64

COMMON STOCK PERFORMANCE GRAPH

The following graph sets forth the cumulative total stockholder return for
the Common Stock, the Standard & Poor's 500 Index and a Competitor Group Index
over the period during which the Common Stock has been publicly traded.

CUMULATIVE TOTAL STOCKHOLDER RETURN(1)
INDEXED TOTAL STOCKHOLDER RETURN
OCTOBER 11, 1995-DECEMBER 31, 1996

<TABLE>
<CAPTION>
MEASUREMENT PERIOD COMPETITOR
(FISCAL YEAR COVERED) THE COMPANY S&P 500 GROUP(2)
<S> <C> <C> <C>
OCTOBER 11, 1995 100 100 100
DECEMBER 29, 1995 141 107 115
DECEMBER 31, 1996 229 131 132
</TABLE>

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

(1) Total return assuming reinvestment of dividends. There were no dividends for
the period reported other than the $2.1 million special dividend paid to
Loews in connection with the Initial Public Offering (which special dividend
was not used in calculating total return). Assumes $100 invested on October
11, 1995, in Common Stock, the S&P 500 Index and a Company-constructed
competitor group index.

(2) The Company-constructed competitor group consists of the following
companies: Baker Hughes Incorporated, Dresser Industries, Inc., Energy
Service Company, Global Marine Inc., Halliburton Company, Noble Drilling
Corporation, Reading & Bates Corporation, Schlumberger Ltd., Tidewater
Marine Inc., Transocean Offshore, Inc. and Western Atlas Inc. Total return
calculations were weighted according to the respective company's market
capitalization.

10
<PAGE> 65

RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS

Upon the recommendation of the Audit Committee of the Board of Directors,
none of whose members is an officer of the Company, the Board of Directors has
appointed Deloitte & Touche LLP, independent certified public accountants, as
the principal independent auditors of the Company and its subsidiaries for
fiscal year 1997. It is intended that such appointment be submitted to the
stockholders for ratification at the Annual Meeting. Deloitte & Touche LLP has
served as the Company's auditors since 1989 and has no investment in the Company
or its subsidiaries. If the appointment of Deloitte & Touche LLP is not approved
or if that firm shall decline to act or their employment is otherwise
discontinued, the Board of Directors will appoint other independent auditors.

It is expected that representatives of Deloitte & Touche LLP will be
present at the Annual Meeting with an opportunity to make a statement should
they desire to do so and to respond to appropriate questions from stockholders.

STOCKHOLDER PROPOSALS

Stockholder proposals intended to be presented at the Company's 1998 Annual
Meeting of Stockholders must be addressed to: Corporate Secretary, Diamond
Offshore Drilling, Inc., 15415 Katy Freeway, Houston, Texas 77094, and must be
received no later than December 5, 1997.

OTHER MATTERS

While management has no reason to believe that any other business will be
presented, if any other matters should properly come before the Annual Meeting,
the proxies will be voted as to such matters in accordance with the best
judgment of the proxy holders.

By Order of the Board of Directors

RICHARD L. LIONBERGER
Vice President, General Counsel and
Secretary

11
<PAGE> 66
DIAMOND OFFSHORE DRILLING, INC.

COMMON

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE
1997 ANNUAL MEETING OF STOCKHOLDERS ON MAY 5, 1997

The undersigned hereby appoints Robert E. Rose, Lawrence R. Dickerson and
Richard L. Lionberger, and any one of them, and any substitute or substitutes,
to be the attorneys and proxies of the undersigned at the 1997 Annual Meeting of
Stockholders of Diamond Offshore Drilling, Inc. (the "Company") to be held at
The Ritz Carlton Hotel, 1919 Briar Oaks Lane, Houston, Texas 77027 at 2:00 p.m.
local time, and at any adjournments or postponements of said meeting, and to
vote at such meeting the shares of stock the undersigned held of record on the
books of the Company on the record date for the meeting.

THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR ALL NOMINEES AS DIRECTORS, FOR THE PROPOSAL TO RATIFY THE APPOINTMENT
OF DELOITTE & TOUCHE LLP AS THE INDEPENDENT ACCOUNTANTS OF THE COMPANY FOR
FISCAL YEAR 1997 AND IN ACCORDANCE WITH THE DISCRETION OF THE PERSONS
DESIGNATED ABOVE WITH RESPECT TO ANY OTHER BUSINESS THAT MAY PROPERLY COME
BEFORE THE MEETING.

- -------------------------------------------------------------------------------
FOLD AND DETACH HERE
<PAGE> 67

Please mark
your votes as [ X ]
indicated in
this example.

Item 1. Election of Directors

FOR all nominees listed WITHHOLD AUTHORITY
to the right (except as to vote for all nominees
marked to the contrary) listed to the right

[ ] [ ]

NOMINEES: James S. Tisch, Herbert C. Hofmann, Arthur L. Rebell, Robert E.
Rose and Raymond S. Troubh

INSTRUCTION: To withhold authority to vote for individual nominees, write their
name(s) below.

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

Item 2. Proposal to ratify the appointment of Deloitte & Touche LLP as the
Independent Public Accountants of the Company for fiscal year 1997.

FOR AGAINST ABSTAIN

[ ] [ ] [ ]

Item 3. In their discretion, upon such other matters that may properly come
before the meeting and any adjournments or postponements thereof.

____ Please sign exactly as your name
| appears on this Proxy Card. When
| signing as attorney, executor,
administrator, trustee, guardian
or corporate or partnership
official, please give full title
as such and the full name of the
entity on behalf of whom you are
signing. If a partnership,
please sign in partnership name
by authorized person.

DATED:____________________, 1997

________________________________
Signature of Stockholder

________________________________
Signature if held jointly

- -------------------------------------------------------------------------------
FOLD AND DETACH HERE
<PAGE> 68
Annex 3

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

FORM 10-Q

(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997

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

For the transition period from ................. to ...................

Commission file number 1-13926

DIAMOND OFFSHORE DRILLING, INC.
(Exact name of registrant as specified in its charter)

Delaware 76-0321760
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)

15415 Katy Freeway
Houston, Texas
77094
(Address of principal executive offices)
(Zip Code)

(281) 492-5300
(Registrant's telephone number, including area code)

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 the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.

As of July 18, 1997 Common stock, $.01 par value per share 69,649,474 shares

<PAGE> 69

DIAMOND OFFSHORE DRILLING, INC.

TABLE OF CONTENTS FOR FORM 10-Q

QUARTER ENDED JUNE 30, 1997

PAGE NO.
<S> <C>
COVER PAGE.......................................................................................1

DOCUMENT TABLE OF CONTENTS.......................................................................2

PART I. FINANCIAL INFORMATION...................................................................3

ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets...................................................3
Consolidated Statements of Income.............................................4
Consolidated Statements of Cash Flows.........................................5
Notes to Consolidated Financial Statements....................................6

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.....................................................12

PART II. OTHER INFORMATION......................................................................20

ITEM 1. LEGAL PROCEEDINGS..............................................................20

ITEM 2. CHANGES IN SECURITIES..........................................................20

ITEM 3. DEFAULTS UPON SENIOR SECURITIES................................................20

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................20

ITEM 5. OTHER INFORMATION..............................................................21

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...............................................21

SIGNATURES.......................................................................................22

INDEX OF EXHIBITS................................................................................23

</TABLE>

<PAGE> 70

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
----------- -----------
1997 1996
----------- -----------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents...................................................$ 41,145 $ 28,180
Investment securities........................................................ 196,624 --
Accounts receivable ......................................................... 197,092 172,214
Rig inventory and supplies .................................................. 31,282 30,407
Prepaid expenses and other .................................................. 15,985 12,166
----------- -----------
Total current assets ............................................. 482,128 242,967
DRILLING AND OTHER PROPERTY AND EQUIPMENT, LESS
ACCUMULATED DEPRECIATION .................................................... 1,383,393 1,198,160
GOODWILL, NET OF AMORTIZATION .................................................... 124,349 129,825
LONG-TERM INVESTMENT SECURITIES .................................................. 124,525 --
OTHER ASSETS ..................................................................... 10,269 3,548
----------- -----------
Total assets ...................................................... $ 2,124,664 $ 1,574,500
=========== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................................$ 61,820 $ 63,172
Accrued liabilities ......................................................... 40,871 28,451
Taxes payable ............................................................... 12,981 26,377
Short-term borrowings ....................................................... -- 10,000
----------- -----------
Total current liabilities ........................................ 115,672 128,000

LONG-TERM DEBT ................................................................... 400,000 63,000
DEFERRED TAX LIABILITY ........................................................... 191,325 176,296
OTHER LIABILITIES ................................................................ 18,597 12,472
----------- -----------
Total liabilities ................................................. 725,594 379,768
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock (par value $.01, 25,000,000 shares authorized, none issued
and outstanding) ........................................................ -- --
Common stock (par value $.01, 200,000,000 shares authorized, 69,649,474
and 68,353,409 shares issued and outstanding at June 30, 1997 and
December 31, 1996, respectively) ........................................ 696 684
Additional paid-in capital .................................................. 1,302,668 1,220,032
Retained earnings (accumulated deficit) ..................................... 96,408 (25,056)
Cumulative translation adjustment ........................................... (1,197) (928)
Unrealized gain on investment securities .................................... 495 --
----------- -----------
Total stockholders' equity ........................................ 1,399,070 1,194,732
----------- -----------
Total liabilities and stockholders' equity ........................ $ 2,124,664 $ 1,574,500
=========== ===========
</TABLE>

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

3
<PAGE> 71

DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share data)

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- -----------------------
1997 1996 1997 1996
------------ ------------- --------- ----------
<S> <C> <C> <C> <C>
Revenues ............................................... $ 228,534 $ 146,983 $ 433,267 $ 253,851

Operating expenses:
Contract drilling ................................. 98,221 81,597 187,960 147,754
Depreciation and amortization ..................... 27,230 18,396 53,042 30,465
General and administrative ........................ 4,859 3,449 9,800 6,552
Gain on sale of assets ............................ (5) (3,073) (70) (3,230)
--------- --------- --------- ---------
Total operating expenses ............................... 130,305 100,369 250,732 181,541
--------- --------- --------- ---------

Operating income ....................................... 98,229 46,614 182,535 72,310

Other income (expense):
Interest income ................................... 5,499 222 8,392 478
Interest expense .................................. (3,349) (104) (3,349) (104)
Other, net ........................................ 10 52 (175) 230
--------- --------- --------- ---------
Income before income tax expense ....................... 100,389 46,784 187,403 72,914

Income tax expense ..................................... (35,155) (13,762) (65,939) (21,160)
--------- --------- --------- ---------

Net income ............................................. $ 65,234 $ 33,022 $ 121,464 $ 51,754
========= ========= ========= =========

Net income per common and common
equivalent share .................................... $ 0.91 $ 0.53 $ 1.70 $ 0.92
========= ========= ========= =========

Weighted average shares outstanding:
Common shares ..................................... 69,413 62,166 68,901 56,083
Common equivalent shares .......................... 4,938 -- 3,983 --
--------- --------- --------- ---------

Adjusted .......................................... 74,351 62,166 72,884 56,083
========= ========= ========= =========

</TABLE>

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

4
<PAGE> 72

DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------
1997 1996
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ............................................. $ 121,464 $ 51,754
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ........................ 53,042 30,465
Gain on sale of assets ............................... (70) (3,230)
Gain on sale of investment securities ................ (10) --
Deferred tax provision ............................... 20,638 18,774
Accretion of discounts on investment securities ...... (5,318) (139)
Amortization of debt issuance costs .................. 201 160
Changes in operating assets and liabilities:
Accounts receivable .................................. (24,462) (35,974)
Rig inventory and supplies and other current assets .. (4,694) (3,344)
Other assets, non-current ............................ 357 (1,435)
Accounts payable and accrued liabilities ............. 10,979 9,101
Taxes payable ........................................ (15,779) 879
Other liabilities, non-current ....................... 3,018 1,167
Other, net ............................................. 290 (80)
--------- ---------
Net cash provided by operating activities ........ 159,656 68,098
--------- ---------

INVESTING ACTIVITIES:
Cash acquired in Arethusa merger ....................... -- 20,883
Capital expenditures ................................... (156,002) (100,463)
Purchase of accommodation vessel ....................... (80,776) --
Proceeds from sales of assets .......................... 1,888 4,842
Net purchases of short-term investment securities ...... (306,234) --
Purchases of long-term investment securities ........... (124,242) --
Proceeds from maturities of investment securities ...... 115,000 --
--------- ---------
Net cash used in investing activities ............ (550,366) (74,738)
--------- ---------

FINANCING ACTIVITIES:
Issuance of common stock ............................... 82,282 --
Net (repayments) borrowings on revolving line of credit (63,000) 70,000
Net repayments on short-term borrowings ................ (10,000) --
Issuance of convertible subordinated notes ............. 400,000 --
Repayment of debt assumed in Arethusa merger ........... -- (67,477)
Debt issuance costs .................................... (6,062) (2,033)
Proceeds from stock options exercised .................. 455 4,187
--------- ---------
Net cash provided by financing activities ........ 403,675 4,677
--------- ---------

NET CHANGE IN CASH AND CASH EQUIVALENTS ...................... 12,965 (1,963)
Cash and cash equivalents, beginning of period ......... 28,180 10,306
--------- ---------
Cash and cash equivalents, end of period ............... $ 41,145 $ 8,343
========= =========
</TABLE>

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

<PAGE> 73

DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. GENERAL

The consolidated financial statements of Diamond Offshore Drilling, Inc.
and subsidiaries (the "Company") should be read in conjunction with the Annual
Report on Form 10-K for the year ended December 31, 1996 (File No. 1-13926).

Interim Financial Information

The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all disclosures required by generally
accepted accounting principles for complete financial statements. The
consolidated financial information has not been audited but, in the opinion of
management, includes all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of the consolidated balance sheets,
statements of income, and statements of cash flows at the dates and for the
periods indicated. Results of operations for interim periods are not
necessarily indicative of results of operations for the respective full years.

Cash and Cash Equivalents

Short-term, highly liquid investments that have an original maturity of
three months or less which are considered part of the Company's cash management
activities, rather than part of its investing activities, are considered cash
equivalents.

Investment Securities

The Company's investments are classified as available for sale and stated
at fair value under the terms of Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Accordingly, any unrealized gains and losses, net of taxes, are
recorded as a separate component of stockholders' equity until realized. The
cost of debt securities is adjusted for accretion of discounts to maturity and
such accretion is included in interest income. The cost of securities sold is
based on the specific identification method and realized gains or losses and
declines in value, if any, judged to be other than temporary are reported in
the Consolidated Statements of Income in "Other income (expense)."

Supplementary Cash Flow Information

Non-cash financing activities for the six months ended June 30, 1996
included $550.7 million for the issuance of 17.9 million shares of common stock
and the assumption of 0.5 million stock options in connection with the merger
between the Company and Arethusa (Off-Shore) Limited ("Arethusa"). Non-cash
investing activities for the six months ended June 30, 1996 included $532.9
million of net assets acquired in the merger with Arethusa (see Note 2).

Cash payments made for interest on long-term debt, including commitment
fees, during the six months ended June 30, 1997 and 1996 totaled $0.6 million
and $1.7 million, respectively. Cash payments made for income taxes during the
six months ended June 30, 1997 and 1996 totaled $60.2 million and $1.9 million,
respectively.

6
<PAGE> 74
Capitalized Interest

Interest costs for construction and upgrade of qualifying assets are
capitalized. During the quarter and six months ended June 30, 1997, the Company
incurred interest costs of $4.0 million and $6.8 million, respectively.
Interest costs capitalized during the quarter and the six months ended June 30,
1997 were $0.7 million and $3.5 million, respectively. Total interest costs
incurred of $1.0 million and $1.3 million was capitalized during the quarter
and six months ended June 30, 1996, respectively.

Goodwill

Goodwill from the merger with Arethusa is amortized on a straight-line
basis over 20 years. Amortization expense totaled $1.7 million and $3.3 million
for the quarter and six months ended June 30, 1997, respectively. For the
quarter and six months ended June 30, 1996, amortization expense totaled $0.7
million.

Debt Issuance Costs

Debt issuance costs are included in the Consolidated Balance Sheets in
"Other assets" and are amortized over the term of the related debt.

Income Tax Expense

Except for selective dividends, the Company's practice has been to
reinvest the earnings of its non-U.S. subsidiaries and postpone their
remittance indefinitely. Thus, no additional U.S. taxes were provided on
earnings of these non-U.S. subsidiaries. However, beginning in 1997, the
Company changed its practice and now intends to repatriate these earnings in
the foreseeable future. As a result, beginning January 1, 1997, the Company has
provided U.S. taxes on all undistributed non-U.S. earnings. The disparity in
the effective tax rates between 1997 and 1996 reflects this change in practice.

Net Income Per Share

Net income per common and common equivalent share was computed by dividing
net income by the weighted average number of shares of common stock and common
stock equivalents outstanding during the periods. The convertible subordinated
notes (see Note 7) are considered to be common stock equivalents. Consequently,
the number of shares issuable assuming full conversion of these notes as of the
issuance date, February 4, 1997, was added to the number of common shares
outstanding with net income also adjusted to eliminate the after-tax effect of
interest expense on these notes. Fully diluted earnings per share is not
presented as there are no other contingent issuances of common stock.

The per share amounts presented do not reflect the effect of the
two-for-one stock split in the form of a stock dividend to stockholders of
record on July 24, 1997 (see Note 10). On a post-split basis, net income per
common and common equivalent share will be restated to $0.45 and $0.85 for the
quarter and six months ended June 30, 1997, respectively, as compared to $0.27
and $0.46 for the quarter and six months ended June 30, 1996, respectively.

In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings per Share," which requires dual presentation of basic and
diluted earnings per share for entities with complex capital structures. Basic
earnings per share excludes dilution and is computed by dividing net income by
the weighted average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. SFAS No. 128 is effective for financial statements for both
interim and annual periods ending after December 15, 1997. The Company plans to
adopt SFAS No. 128 for the fourth quarter of 1997 and, after the effective date,
all prior period earnings per share data presented will be restated to conform
to these provisions. For the three months ended June 30, 1997 and 1996, pro
forma earnings per share amounts computed using SFAS No. 128 would have been
$0.94 and $0.53, respectively, for basic earnings per share and $0.91 and $0.53,
respectively, for diluted earnings per share. Pro forma earnings per share
amounts for the six months ended June 30, 1997 and

7
<PAGE> 75
1996 would have been $1.76 and $0.92, respectively, for basic earnings
per share and $1.70 and $0.92, respectively, for diluted earnings per share.

On a post-split basis (see Note 10), pro forma earnings per share amounts
for the three months ended June 30, 1997 and 1996 computed using SFAS No. 128
would have been $0.47 and $0.27, respectively, for basic earnings per share and
$0.45 and $0.27, respectively, for diluted earnings per share. Pro forma
earnings per share amounts on a post-split basis for the six months ended June
30, 1997 and 1996 would have been $0.88 and $0.46, respectively, for basic
earnings per share and $0.85 and $0.46, respectively, for diluted earnings per
share.

Use of Estimates in the Preparation of Financial Statements

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 amount of revenues and expenses during the
reporting period. Actual results could differ from those estimated.

Reclassifications

Certain amounts applicable to the prior periods have been reclassified to
conform to the classifications currently followed. Such reclassifications do
not affect earnings.

2. MERGER WITH ARETHUSA

In April 1996, the Company acquired 100 percent of the stock of Arethusa
(the "Arethusa Merger") in exchange for approximately 17.9 million shares of
the Company's common stock. The shares were valued for financial reporting
purposes at $30.14 per share based on a seven-day average of the closing price
of the Company's common stock at the time the Arethusa Merger was announced
(December 7, 1995). In addition to equity consideration of approximately $550.7
million, the Company incurred approximately $16.9 million of cash acquisition
costs associated with the Arethusa Merger.

The Arethusa Merger was accounted for as a purchase and, accordingly, the
accompanying Consolidated Statements of Income reflect the operating results of
Arethusa since April 29, 1996, the effective date of the Arethusa Merger. If
the Arethusa Merger had been effective as of January 1, 1996, revenues for the
quarter ended June 30, 1996 would have increased on an unaudited pro forma
basis to $162.3 million, and net income and net income per share would have
changed on an unaudited pro forma basis to $34.7 million and $0.51,
respectively. For the six months ended June 30, 1996, revenues would have
increased on an unaudited pro forma basis to $310.0 million, and net income and
net income per share would have changed on an unaudited pro forma basis to
$58.8 million and $0.87, respectively. 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.

8
<PAGE> 76
3. INVESTMENT SECURITIES

Investment securities classified as available for sale at June 30, 1997
were as follows:

<TABLE>
<CAPTION>
------------ ------------ -----------
AMORTIZED UNREALIZED MARKET
COST GAINS VALUE
------------ ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Due within 1 year:
Debt securities issued by the U.S. Treasury ..... $ 196,455 $ 169 $ 196,624

Due after 1 year through 5 years:
Debt securities issued by the U.S. Treasury ..... 123,933 592 124,525
------------ ------------ -----------
Total .................................... $ 320,388 $ 761 $ 321,149
============ ============ ===========
</TABLE>

During the quarter and six months ended June 30, 1997, certain investment
securities due within one year were sold for proceeds of $99.6 million and
$199.4 million, respectively. The resulting net realized gains were not
material.

4. DRILLING AND OTHER PROPERTY AND EQUIPMENT

Cost and accumulated depreciation of drilling and other property and
equipment are summarized as follows:

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
------------ ------------
1997 1996
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Drilling rigs and equipment ............................ $ 1,532,116 $ 1,332,980
Construction work in progress .......................... 152,368 116,770
Land and buildings ..................................... 12,470 13,154
Office equipment and other ............................. 8,924 8,181
------------ ------------
Cost ................................................ 1,705,878 1,471,085
Less accumulated depreciation .......................... (322,485) (272,925)
------------ ------------
Total ............................................. $ 1,383,393 $ 1,198,160
============ ============

</TABLE>

Asset Acquisitions

During May 1997, the Company acquired the Polyconfidence, a
semisubmersible accommodation vessel with dynamic positioning capabilities, for
approximately $81.0 million in cash. The Polyconfidence was simultaneously
bareboat chartered through late 1997 to the seller of the vessel until
completion of its existing commitment. The Company is in discussions with
several oil companies regarding conversion of the Polyconfidence to a
semisubmersible drilling unit upon completion of its contract.

Asset Dispositions

In April 1997, the Company sold a warehouse facility on approximately 6.6
acres of land near Houston, Texas, which was acquired through the Arethusa
Merger, for approximately $0.6 million. No gain or loss was recognized on this
sale. During May 1996, the Company sold the Ocean Magallanes, a jack-up
drilling rig which had previously been stacked in Punta Arenas, Chile, for
approximately $4.2 million. The sale generated an after-tax gain during the
second quarter of 1996 of $2.0 million, or $0.03 per share.

9
<PAGE> 77
5. GOODWILL

The Arethusa Merger generated an excess of the purchase price over the
estimated fair value of the net assets acquired. Cost and accumulated
amortization of such goodwill is summarized as follows:

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
---------------- ---------------
1997 1996
---------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
Goodwill ....................................... $ 132,170 $ 134,331
Less accumulated amortization .................. (7,821) (4,506)
--------------- ---------------
Total ................................ $ 124,349 $ 129,825
=============== ===============
</TABLE>

During the six months ended June 30, 1997, an adjustment of
approximately $2.2 million was recorded to reduce goodwill before accumulated
amortization. This adjustment resulted primarily from a change in the fair
value of the net assets acquired in the Arethusa Merger.

6. ACCRUED LIABILITIES

Accrued liabilities consist of the following:

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
---------------- ---------------
1997 1996
---------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
Personal injury and other claims .................... $ 21,022 $ 18,629
Payroll and benefits ................................ 11,422 8,336
Interest payable .................................... 6,109 172
Other ............................................... 2,318 1,314
-------------- ---------------
Total .......................................... $ 40,871 $ 28,451
============== ===============
</TABLE>

7. LONG-TERM DEBT

Convertible Subordinated Notes

In February 1997, the Company issued $400.0 million of convertible
subordinated notes (the "Notes") due February 15, 2007. The Notes are
convertible into shares of the Company's common stock, at a conversion price of
$81.00 per share ($40.50 after the July 1997 two-for-one stock split - see Note
10), subject to adjustment in certain circumstances. The Notes have a stated
interest rate of 3.75 percent and an effective interest rate of 3.93 percent.
Interest is payable in cash semi-annually on each February 15 and August 15,
commencing on August 15, 1997.

The Notes are redeemable, in whole or, from time to time, in part, at the
option of the Company, at any time on or after February 22, 2001, at specified
redemption prices, plus accrued and unpaid interest to the date of redemption.
The Notes are general unsecured obligations of the Company, subordinated in
right of payment to the prior payment in full of the principal and premium, if
any, and interest on all indebtedness of the Company for borrowed money, other
than the Notes, with certain exceptions, and effectively subordinated in right
of payment to the prior payment in full of all indebtedness of the Company's
subsidiaries. The Notes do not restrict the Company's ability to incur other
indebtedness or additional indebtedness of the Company's subsidiaries.

Credit Facility

10
<PAGE> 78
certain indebtedness limitations, and limitations on dividends and similar
payments. As of June 30, 1997, the Company was in compliance with each of these
covenants. Commitment fees are paid based on the unused available portion of
the maximum credit commitment. No amounts were outstanding under the Credit
Facility at June 30, 1997. At December 31, 1996, $63.0 million was outstanding
under the Credit Facility.

In addition, the Company has lines of credit for short-term financing
aggregating $30.0 million from two U.S. banks. These arrangements provide for
borrowings at various interest rates and may be used on such terms as the
Company and the banks mutually agree. No amounts were outstanding under these
agreements at June 30, 1997. At December 31, 1996, $10.0 million was
outstanding under these agreements.

8. COMMON STOCK

In April 1997, the Company completed a public offering of 1.25 million
shares of common stock generating net proceeds of approximately $82.3 million.
The net proceeds were used to acquire the Polyconfidence, a semisubmersible
accommodation vessel (see Note 4).

9. COMMITMENTS AND CONTINGENCIES

The survivors of a deceased employee of a subsidiary of the Company,
Diamond M Onshore, Inc., have sued such subsidiary in Duval County, Texas, for
damages as a result of the death of the employee. The plaintiffs have obtained
a judgment in the trial court for $15.7 million plus post-judgment interest.
The Company is vigorously prosecuting an appeal of the judgment. The Company
has received notices from certain of its insurance underwriters reserving their
rights to deny coverage on the Company's insurance policies in excess of $2.0
million for damages resulting from such lawsuit. Management believes that the
Company has complied with all conditions of coverage for final unappealable
damages, if any, in the case. While the ultimate liability in this matter is
difficult to assess, it is management's belief that the final outcome is not
reasonably likely to have a material adverse effect on the Company's
consolidated financial position.

A former subsidiary of Arethusa, which is now a subsidiary of the Company,
is defending and indemnifying Zapata Off-Shore Company and Zapata Corporation
(the "Zapata Defendants"), pursuant to a contractual defense and
indemnification agreement, in a suit for tortious interference with contract
and conspiracy to tortiously interfere with contract. The plaintiffs seek $14.0
million in actual damages and unspecified punitive damages, plus costs of
court, interest and attorney's fees. The Company believes the Zapata Defendants
have adequate defenses and intends to vigorously defend their position, thus no
provision for any liability has been made in the financial statements.

10. SUBSEQUENT EVENTS

In July 1997, the Board of Directors declared a two-for-one stock split in
the form of a stock dividend to stockholders of record on July 24, 1997.
Following the stock split, approximately 139.3 million shares will be
outstanding. Also in July 1997, the Board of Directors declared a cash dividend
of $0.14 per common share, on the pre-split shares, payable August 7, 1997 to
stockholders of record on July 24, 1997.

11
<PAGE> 79
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements (including the Notes thereto) included
elsewhere herein.

GENERAL

Business. The Company is a leader in deep water drilling with a fleet of
47 offshore drilling rigs. The fleet consists of 31 semisubmersibles (including
an accommodation vessel), 15 jack-ups and one drillship and operates in the
waters of six of the world's seven continents.

Merger with Arethusa (Off-Shore) Limited. Effective April 29, 1996, the
merger with Arethusa (Off-Shore) Limited ("Arethusa") was completed (the
"Arethusa Merger"). Arethusa owned a fleet of 11 mobile offshore drilling rigs,
operated two additional mobile offshore drilling rigs pursuant to bareboat
charters, and provided drilling services worldwide to international and
government-controlled oil and gas companies. Because the Arethusa Merger was
accounted for as a purchase for financial reporting purposes, results of
operations include those of Arethusa from the effective date of the Arethusa
Merger. See Note 2 to the Company's Consolidated Financial Statements.

12
<PAGE> 80
RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 1997 AND 1996

Comparative data relating to the Company's revenues and operating expenses
by equipment type are listed below (eliminations offset (i) dayrate revenues
earned when the Company's rigs are utilized in its integrated services and (ii)
intercompany expenses charged to rig operations). Certain amounts applicable to
the prior period have been reclassified to conform to the classifications
currently followed. Such reclassifications do not affect earnings.

During September 1996 and March 1997, the Company completed its major
upgrades of the Ocean Quest and the Ocean Star, respectively, expanding these
rigs to have fourth-generation capabilities. Upon completion, these rigs are
included in Fourth-Generation Semisubmersibles for discussion purposes (prior
period information will continue to include the rigs in Other
Semisubmersibles). The Company's drillship, the Ocean Clipper I, is included in
Other Semisubmersibles for discussion purposes.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
---------------------- INCREASE/
1997 1996 (DECREASE)
--------- --------- --------
(in thousands)
<S> <C> <C> <C>
REVENUES
Fourth-Generation Semisubmersibles .... $ 49,215 $ 26,378 $ 22,837
Other Semisubmersibles ................ 130,916 84,948 45,968
Jack-ups .............................. 46,824 28,097 18,727
Integrated Services ................... 1,284 4,891 (3,607)
Land .................................. -- 5,440 (5,440)
Other ................................. 682 -- 682
Eliminations .......................... (387) (2,771) 2,384
--------- --------- --------
Total Revenues ................ $ 228,534 $ 146,983 $ 81,551
========= ========= ========
CONTRACT DRILLING EXPENSE
Fourth-Generation Semisubmersibles .... $ 13,696 $ 8,937 $ 4,759
Other Semisubmersibles ................ 57,188 49,390 7,798
Jack-ups .............................. 24,713 18,540 6,173
Integrated Services ................... 1,417 3,928 (2,511)
Land .................................. -- 4,392 (4,392)
Other ................................. 1,825 (312) 2,137
Eliminations .......................... (618) (3,278) 2,660
--------- --------- --------
Total Contract Drilling Expense $ 98,221 $ 81,597 $ 16,624
========= ========= ========
OPERATING INCOME
Fourth-Generation Semisubmersibles .... $ 35,519 $ 17,441 $ 18,078
Other Semisubmersibles ................ 73,728 35,558 38,170
Jack-ups .............................. 22,111 9,557 12,554
Integrated Services ................... (133) 963 (1,096)
Land .................................. -- 1,048 (1,048)
Other ................................. (1,143) 312 (1,455)
Eliminations .......................... 231 507 (276)
Depreciation and Amortization Expense . (27,230) (18,396) (8,834)
General and Administrative Expense .... (4,859) (3,449) (1,410)
Gain on Sale of Assets ................ 5 3,073 (3,068)
--------- --------- --------
Total Operating Income ........ $ 98,229 $ 46,614 $ 51,615
========= ========= ========
</TABLE>

Revenues. The $22.8 million increase in revenues from fourth-generation
rigs resulted primarily from $15.5 million in revenues generated during the
three months ended June 30, 1997 by the Ocean Quest and the Ocean Star upon
completion of their upgrade projects in September 1996 and March 1997,
respectively. In addition, operating dayrate improvements in the Gulf of Mexico
and the North Sea generated $7.3 million in

13
<PAGE> 81
increased revenues. The $46.0 million increase in revenues from other
semisubmersibles resulted, in part, from $22.8 million in additional revenues
from increased operating dayrates and $5.7 million in additional revenues from
improvements in utilization. Utilization during the second quarter of 1996 was
negatively impacted by rig downtime for repairs, modifications and surveys on
certain rigs. In addition, the eight other semisubmersibles acquired in the
Arethusa Merger contributed an additional $17.5 million of revenue for the
three months ended June 30, 1997 due to increased operating dayrates and the
inclusion of operating results for a complete quarter in 1997, as compared to
only two months included in the second quarter of 1996. The $18.7 million
increase in revenues from jack-ups resulted primarily from $14.8 million in
revenues contributed by increased operating dayrates, primarily in the Gulf of
Mexico. Also, additional revenue of $3.2 million was generated during the three
months ended June 30, 1997 by the four jack-ups acquired in the Arethusa
Merger, as compared to two months of revenue contributed in the comparable
period of the prior year. The $3.6 million decrease in revenues from integrated
services resulted primarily from projects of greater magnitude completed during
the three months ended June 30, 1996. The $5.4 million decrease in revenues
from land operations resulted from the sale of the Company's land division in
December 1996. The $0.7 million of revenues from other operations for the three
months ended June 30, 1997 is primarily bareboat charter fees for the
Polyconfidence, an accommodation vessel purchased in May 1997. See " - Capital
Resources."

Contract Drilling Expense. The $4.8 million increase in contract drilling
expense for fourth-generation rigs resulted primarily from operating costs
generated by the Ocean Quest and the Ocean Star during the three months ended
June 30, 1997 upon completion of their upgrade projects in September 1996 and
March 1997, respectively. The $7.8 million increase in contract drilling
expense for other semisubmersibles resulted primarily from additional costs of
$9.9 million generated by the eight semisubmersibles acquired in the Arethusa
Merger. These increases are partially offset by a reduction in operating costs
on the Ocean Ambassador and the Ocean Guardian, as compared to the three months
ended June 30, 1996 when these rigs were undergoing equipment modifications and
incurring increased expenses. The $6.2 million increase in expense for jack-ups
resulted primarily from a $5.7 million increase contributed by the rigs
acquired in the Arethusa Merger. The $2.5 million decrease in expense from
integrated services resulted primarily from projects of greater magnitude
completed during the three months ended June 30, 1996. The $4.4 million
decrease in expenses from land operations resulted from the sale of the
Company's land division in December 1996. The $2.1 million increase in other
drilling expense is primarily due to maintenance and repairs on spare
equipment, crew training programs for new employees, and write-offs of certain
receivables deemed uncollectable during the quarter ended June 30, 1997.

Depreciation and Amortization Expense. Depreciation and amortization
expense for the three months ended June 30, 1997 of $27.2 million increased
$8.8 million from $18.4 million due to additional expense for (i) the rigs
acquired in the Arethusa Merger, (ii) goodwill amortization expense associated
with the Arethusa Merger, (iii) the Ocean Quest and the Ocean Star which
completed their upgrades in September 1996 and March 1997, respectively, and
(iv) the Polyconfidence, acquired in May 1997. See " - Capital Resources."

General and Administrative Expense. General and administrative expense for
the three months ended June 30, 1997 of $4.8 million increased $1.4 million
from $3.4 million for the three months ended June 30, 1996 primarily due to
increased accruals for the Company's bonus and retention plan. The increased
accruals resulted from a higher estimated bonus pool for the 1997 performance
year and for additional participants in the plan. In addition, general and
administrative expense capitalized to major upgrades decreased to $0.2 million
for the three months ended June 30, 1997 from $0.4 million for the three months
ended June 30, 1996.

Interest Income. Interest income of $5.5 million for the three months
ended June 30, 1997 consists primarily of the accretion of discounts and
interest earned on investment securities purchased in 1997.

Interest Expense. Interest expense of $3.3 million for the three months
ended June 30, 1997 consists primarily of $4.0 million interest on $400.0
million of convertible subordinated notes issued in February 1997 (the
"Notes"), partially offset by $0.7 million interest capitalized to major
upgrades.

Income Tax Expense. Income tax expense of $35.2 million for the three
months ended June 30, 1997 increased $21.4 million from $13.8 million for the
three months ended June 30, 1996. This increase resulted primarily from the
$53.6 million increase in income before income tax expense as compared to the
three months ended June 30, 1996. In addition, the Company changed its practice
beginning in 1997 to provide U.S. taxes on all

14
<PAGE> 82
undistributed non-U.S. earnings. Prior to 1997, the Company reinvested
such earnings and postponed their remittance indefinitely. Thus, no additional
U.S. taxes were provided on earnings of non-U.S. subsidiaries.

SIX MONTHS ENDED JUNE 30, 1997 AND 1996

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------- INCREASE/
1997 1996 (DECREASE)
---------- ------------ ------------
(in thousands)
<S> <C> <C> <C>
REVENUES
Fourth-Generation Semisubmersibles ... $ 91,857 $ 47,843 $ 44,014
Other Semisubmersibles ............... 247,749 137,943 109,806
Jack-ups ............................. 90,379 48,233 42,146
Integrated Services .................. 5,595 18,517 (12,922)
Land ................................. -- 10,542 (10,542)
Other ................................ 682 -- 682
Eliminations ......................... (2,995) (9,227) 6,232
-----------------------------------
Total Revenues .............. $ 433,267 $ 253,851 $ 179,416
===================================
CONTRACT DRILLING EXPENSE
Fourth-Generation Semisubmersibles ... $ 25,169 $ 16,834 $ 8,335
Other Semisubmersibles ............... 112,523 80,880 31,643
Jack-ups ............................. 45,974 33,467 12,507
Integrated Services .................. 5,676 18,056 (12,380)
Land ................................. -- 9,165 (9,165)
Other ................................ 2,186 (210) 2,396
Eliminations ......................... (3,568) (10,438) 6,870
-----------------------------------
Total Contract Drilling Expense $ 187,960 $ 147,754 $ 40,206
===================================
OPERATING INCOME
Fourth-Generation Semisubmersibles ... $ 66,688 $ 31,009 $ 35,679
Other Semisubmersibles ............... 135,226 57,063 78,163
Jack-ups ............................. 44,405 14,766 29,639
Integrated Services .................. (81) 461 (542)
Land ................................. -- 1,377 (1,377)
Other ................................ (1,504) 210 (1,714)
Eliminations ......................... 573 1,211 (638)
Depreciation and Amortization Expense. (53,042) (30,465) (22,577)
General and Administrative Expense ... (9,800) (6,552) (3,248)
Gain on Sale of Assets ............... 70 3,230 (3,160)
-----------------------------------
Total Operating Income ....... $ 182,535 $ 72,310 $ 110,225
===================================
</TABLE>

Revenues. The $44.0 million increase in revenues from fourth-generation
semisubmersibles resulted primarily from $24.7 million in revenues generated
during the six months ended June 30, 1997 by the Ocean Quest and the Ocean Star
upon completion of their upgrade projects in September 1996 and March 1997,
respectively. In

15
<PAGE> 83
addition, improvements in dayrates in the Gulf of Mexico and the North Sea
contributed $16.1 million of additional revenue while increased utilization in
the North Sea contributed $3.2 million of additional revenue. The $109.8
million increase in revenues from other semisubmersibles was partly
attributable to $56.1 million contributed by the eight other semisubmersibles
acquired in the Arethusa Merger for the six months ended June 30, 1997 due to
increased operating dayrates and the inclusion of operating results for these
rigs for a complete six months in 1997 as compared to the inclusion of only two
months in the first half of 1996. Also during the first half of 1997,
improvements in dayrates for the rest of the Company's other semisubmersibles
resulted in $29.5 million of additional revenue and increased utilization
resulted in $24.2 million of additional revenue as compared to the six months
ended June 30, 1996. The $42.1 million increase in revenues from jack-ups
resulted primarily from $27.6 million of revenue contributed by improvements in
dayrates in the Gulf of Mexico and $13.3 million of revenue associated with the
rigs acquired in the Arethusa Merger. Revenues from integrated services
decreased approximately $12.9 million due to turnkey projects and project
management services of greater magnitude completed during the six months ended
June 30, 1996. The $10.5 million decrease in revenues from land operations
resulted from the sale of the Company's land division in December 1996. The
$0.7 million of revenues from other operations for the six months ended June
30, 1997 is primarily bareboat charter fees for the Polyconfidence, an
accommodation vessel purchased in May 1997. See " - Capital Resources."

Contract Drilling Expense. Contract drilling expense for fourth-generation
semisubmersibles increased $8.3 million over the first six months of the prior
year primarily due to $7.1 million of expenses generated by the Ocean Quest and
the Ocean Star upon completion of their upgrade projects in September 1996 and
March 1997, respectively. The $31.6 million increase in drilling expense for
other semisubmersibles resulted primarily from the additional rigs acquired in
the Arethusa Merger. In addition, expenses for the Ocean Princess and the Ocean
Baroness were reduced during the six month period ended June 30, 1996 due to
the capitalization of costs associated with modifications completed in 1996.
The $12.5 million increase in jack-up expense resulted primarily from the rigs
acquired in the Arethusa Merger. The $12.4 million decrease in integrated
services expense resulted from turnkey projects and project management services
of greater magnitude completed during the six months ended June 30, 1996. The
$9.2 million decrease in expense from land operations resulted from the sale of
the Company's land division in December 1996. The $2.4 million increase in
other drilling expense is primarily due to maintenance and repairs on spare
equipment, crew training programs for new employees, and write-offs of certain
receivables deemed uncollectable during the six months ended June 30, 1997.

Depreciation and Amortization Expense. Depreciation and amortization
expense of $53.0 million for the six months ended June 30, 1997 increased due
to additional expense for (i) the eleven rigs acquired in the Arethusa Merger,
(ii) goodwill amortization expense associated with the Arethusa Merger, (iii)
the Ocean Quest and the Ocean Star which completed their upgrades in September
1996 and March 1997, respectively, and (iv) the Polyconfidence, acquired in May
1997. See " - Capital Resources."

General and Administrative Expense. General and administrative expense of
$9.8 million for the six months ended June 30, 1997 increased primarily due to
additional overhead resulting from the Arethusa Merger and increased accruals
for the Company's bonus and retention plan. The increased accruals resulted
from a higher estimated bonus pool for the 1997 performance year and for
additional participants in the plan.

Interest Income. Interest income of $8.4 million for the six months ended
June 30, 1997 consists primarily of the accretion of discounts and interest
earned on investment securities purchased in 1997.

Interest Expense. Interest expense of $3.3 million for the six months
ended June 30, 1997 consists primarily of $6.8 million interest on the Notes,
partially offset by $3.5 million interest capitalized to major upgrades.

Income Tax Expense. Income tax expense for the six months ended June 30,
1997 was $65.9 million as compared to $21.2 million for the comparable period
of the prior year. This change resulted primarily from the increase of $114.5
million in the Company's income before income tax expense. In addition, the
Company changed its practice beginning in 1997 to provide U.S. taxes on all
undistributed non-U.S. earnings. Prior to 1997, the Company reinvested such
earnings and postponed their remittance indefinitely. Thus, no additional U.S.
taxes were provided on earnings of non-U.S. subsidiaries.

16
<PAGE> 84
OUTLOOK

When included in this Report, the words "expects," "intends," "plans,"
"anticipates," "estimates," and analogous expressions are intended to identify
forward-looking statements. Such statements inherently are subject to a variety
of risks and uncertainties that could cause actual results to differ materially
from those projected. Such risks and uncertainties include, among others,
general economic and business conditions, industry fleet capacity, changes in
foreign and domestic oil and gas exploration and production activity,
competition, changes in foreign, political, social and economic conditions,
regulatory initiatives and compliance with government regulations, customer
preferences and various other matters, many of which are beyond the Company's
control. These forward-looking statements speak only as of the date of this
Report. The Company expressly disclaims any obligation or undertaking to
release publicly any updates or revisions to any forward-looking statement
contained herein to reflect any change in the Company's expectations with
regard thereto or any change in events, conditions or circumstances on which
any statement is based.

Worldwide deep water exploration continues to provide opportunities for
the Company's semisubmersible fleet and the Company's jack-up fleet continues
to experience improving dayrates. The Company's ability to maintain the recent
favorable trends in revenue growth will be largely dependent on the condition
of the oil and gas industry and, specifically, the exploration and production
expenditures of oil and gas companies. The Company has benefited from
improvements in demand and from the recent tight supply of major offshore
drilling rigs, although the Company cannot predict how long these trends
will be maintained. To address the current tight supply situation, customers
continue to seek to contract rigs for a stated term (as opposed to contracts
for the drilling of a single well or a group of wells). As a result, more than
90 percent of the Company's estimated 1997 revenue is committed under existing
contracts.

Also, the completion of three major upgrades and their associated
multi-year commitments are expected to provide additional revenue in 1997. In
March 1997, the Company completed the upgrade of the Ocean Star and the rig
began a three-year commitment. The rig, which had been cold stacked, now has
fourth-generation capabilities, including stability and other enhancements such
as water depth capabilities of up to 4,500 feet, increased variable deck load
of approximately 6,000 long tons, a top-drive drilling system, a 15,000 psi
blow-out prevention system, increased deck area, and additional mud pit and
tensioner capacity. The Company also completed the upgrade of its drillship,
the Ocean Clipper I, to operate in the deep water market of the Gulf of Mexico
with dynamic positioning capabilities. The drillship began its four-year
contract in mid-July 1997, although certain equipment modifications are being
completed. In addition, the Ocean Victory, previously cold stacked, is
undergoing modifications in connection with a three-year deep water drilling
program anticipated to begin during the fourth quarter of 1997.

However, the offshore contract drilling industry historically has been
highly competitive and cyclical, and the Company cannot predict the extent to
which current conditions will continue. The improved opportunities for the
offshore contract drilling industry worldwide has resulted in increased demand
for and a shortage of qualified personnel and equipment, including drill pipe
and riser, necessary on offshore drilling rigs. The Company does not consider
the shortage of such personnel and equipment currently to be a material factor
in its business. However, because the demand for oil field services is
increasing rapidly, a significant increase in costs, including compensation, is
likely to occur if present trends continue for an extended period.

In addition, the recent improvement in the current results of operations
and prospects for the offshore contract drilling industry as a whole has led to
increased rig construction and enhancement programs by the Company's
competitors and, if present trends continue for an extended period, may lead to
new entrants into the market. A significant increase in the supply of
technologically advanced rigs capable of drilling in deep water may have an
adverse effect on the average operating dayrates for the Company's rigs,
particularly its more advanced semisubmersible units, and on the overall
utilization of the Company's fleet. In such case, the Company's results of
operations would be adversely affected.

LIQUIDITY

As of June 30, 1997, total cash and short and long-term investment
securities totaled $362.3 million, up from $28.2 million at December 31, 1996.
Cash provided by operating activities for the six months ended June 30, 1997
increased by $91.6 million to $159.7 million, from $68.1 million for the
comparable period of the prior year.

17
<PAGE> 85
This increase in operating cash flow was primarily attributable to a $69.7
million increase in net income for the first six months of 1997 and a $22.6
million increase in depreciation and amortization primarily resulting from the
Arethusa Merger.

Investing activities used $550.4 million in cash during the six months
ended June 30, 1997, compared to $74.7 million during the comparable period of
1996. During the six months ended June 30, 1997, the Company purchased the
Polyconfidence, a semisubmersible accommodation vessel working in the U.K.
sector of the North Sea, for approximately $81.0 million in cash. See " -
Capital Resources." In addition, the Company purchased U.S. Treasury bills and
U.S. Treasury notes with a portion of the proceeds from the sale of the Notes,
resulting in an increase in cash used in investing activities. Capital
expenditures also increased substantially during the six months ended June 30,
1997, as the Company continued to invest in major upgrades of its existing
fleet.

Cash provided by financing activities for the six months ended June 30,
1997 increased $399.0 million to $403.7 million, as compared to $4.7 million
for the comparable period of 1996. Sources of financing during 1997 consisted
primarily of the Company's issuance of the Notes, which resulted in net
proceeds of approximately $394.3 million. The Notes, issued in February 1997,
have a stated and effective interest rate of 3.75 percent and 3.93 percent,
respectively, and are due February 15, 2007. The Notes are convertible, in
whole or in part, at the option of the holder at any time prior to the close of
business on the business day immediately preceding the maturity date into
shares of the Company's common stock, at a conversion price of $81.00 per share
($40.50 after the July 1997 two-for-one stock split). Also, in April 1997, the
Company completed a public offering of 1.25 million shares of common stock
generating net proceeds of approximately $82.3 million. Financing applications
of cash during the six months ended June 30, 1997 included repayment of amounts
outstanding under the Company's short and long-term credit arrangements.

Other sources of liquidity include the Company's revolving line of credit
expiring December 2001 providing a maximum credit commitment of $200.0 million
(the "Credit Facility"). In addition, the Company has uncommitted lines of
credit for short-term financing aggregating $30.0 million from two U.S. banks.
These arrangements provide for borrowing at various interest rates and may be
used on such terms as the Company and the banks mutually agree. The Company
also maintains the ability to issue an aggregate of approximately $117.5
million in debt, equity and other securities under a Securities and Exchange
Commission shelf registration statement. In addition, the Company also
maintains the ability to issue, from time to time, up to four million shares
of its common stock, which shares are registered under a shelf registration
statement, in connection with one or more acquisitions by the Company of
securities or assets of other businesses.

In July 1997, the Board of Directors declared a two-for-one stock split in
the form of a stock dividend to stockholders of record on July 24, 1997.
Following the stock split, approximately 139.3 million shares will be
outstanding. In addition, the Board of Directors declared a cash dividend of
$0.14 per common share, on the pre-split shares, payable August 7, 1997 to
stockholders of record on July 24, 1997. The cash dividend is anticipated to
decrease operating cash by approximately $9.8 million.

The Company believes that it has the financial resources needed to meet
its business requirements in the foreseeable future, including capital
expenditures for major upgrades and continuing rig enhancements, and working
capital requirements.

CAPITAL RESOURCES

Cash requirements for capital commitments result from rig upgrades to meet
specific customer requirements and from the Company's continuing rig
enhancement program. The Company expects to spend approximately $189.2 million
during 1997 for rig upgrades, including approximately $162.5 million for
expenditures in conjunction with the upgrades of the Ocean Clipper I, the Ocean
Star, and the Ocean Victory for deep water drilling in the Gulf of Mexico. The
Company expended $121.3 million on these projects during the six months ended
June 30, 1997. In addition, the Company expects to spend approximately $25.0
million for a cantilever conversion project on the Company's jack-up rig, the
Ocean Warwick, of which $0.5 million has been expended through June 30, 1997.
The Company expects to evaluate other projects as opportunities arise.

In addition, the Company has budgeted $70.7 million for 1997 capital
expenditures associated with its continuing rig enhancement program, spare
equipment, and other corporate requirements. During the first six

18
<PAGE> 86
months of 1997, $30.9 million was expended on this program.

It is management's opinion that significant improvements in operating cash
flow resulting from current conditions of improved dayrates and the increasing
number of term contracts for rigs in certain markets, in conjunction with
proceeds from the Notes, will be sufficient to meet these capital requirements.

In April 1997, the Company acquired the Polyconfidence, a semisubmersible
accommodation vessel working in the U.K. sector of the North Sea. The Company's
cost to acquire the vessel was approximately $81.0 million in cash. See " -
Liquidity." The Polyconfidence was constructed in 1987 and has Class III
dynamic positioning capabilities. The Company is in discussions with several
oil companies regarding conversion of the Polyconfidence to a semisubmersible
drilling unit with fourth- or fifth-generation capabilities. Such a conversion
would be dependent upon the receipt of a term contract commitment at favorable
dayrates. Although the extent of the conversion would be dependent upon the
particular demands of the customer, the Company's preliminary estimate of
conversion cost is approximately $160.0 million to $175.0 million. The
Polyconfidence would begin its conversion at the conclusion of its present
accommodation unit contract, which is expected to occur in late 1997. Prior to
expiration of this contract, the Company receives approximately $15,000 per day
under a bareboat charter of the vessel. The Company expects to finance the
conversion of the Polyconfidence through the use of cash on hand or internally
generated funds. There can be no assurance that the vessel can or will be
upgraded to fourth- or fifth-generation capability in a cost-effective manner,
that if the vessel is so upgraded there will be adequate demand for its
services, or that competitors will not achieve comparable capabilities through
other means attractive to customers.

The Company is continually considering potential transactions, including,
but not limited to, enhancement of existing rigs, the purchase of additional
rigs, construction of new rigs and the acquisition of other companies engaged
in contract drilling. Certain of the potential transactions reviewed by the
Company would, if completed, result in its entering new lines of business,
although, in general, these opportunities have been related in some manner to
the Company's existing operations. For example, the Company has explored the
possibility of acquiring certain floating production systems, crew
accommodation units similar to the Polyconfidence and oil service companies
providing subsea products, technology and services, and shipping assets such as
oil tankers, through the acquisition of existing businesses or assets or new
construction. Although the Company does not, as of the date hereof, have a
pending commitment with respect to any material business opportunity, it could
enter into such an agreement in the future. Some of the potential acquisitions
considered by the Company could, if completed, result in the expenditure of a
material amount of funds or the issuance of a material amount of debt or equity
securities.

19
<PAGE> 87
PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Brown Services, Inc. and KOS Industries, Inc. v. Michael D. Brown, BSI
International, Inc., Robert Brown, Robert Furlough, Power House International,
Inc., Zapata Off-Shore Company and Zapata Corporation; No. 92-05691 in the
334th Judicial District Court of Harris County, Texas, filed February 7, 1992.
Plaintiffs have sued Zapata Off-Shore Company and Zapata Corporation (the
"Zapata Defendants") for tortious interference with contract and conspiracy to
tortiously interfere with contract. Plaintiffs seek $14.0 million in actual
damages and unspecified punitive damages, plus costs of court, interest and
attorney's fees. A former subsidiary of Arethusa, which is now a subsidiary of
the Company, is defending and indemnifying the Zapata Defendants pursuant to a
contractual defense and indemnification agreement. The Company believes the
Zapata Defendants have adequate defenses and intends to vigorously defend their
position.

The Company and its subsidiaries are named defendants in certain other
lawsuits and are involved from time to time as parties to governmental
proceedings, all arising in the ordinary course of business. For a description
of one such lawsuit, see Note 9 to the Company's Consolidated Financial
Statements in Part I of this Report. Although the outcome of lawsuits or other
proceedings involving the Company and its subsidiaries cannot be predicted with
certainty and the amount of any liability that could arise with respect to such
lawsuits or other proceedings cannot be predicted accurately, management does
not expect these matters to have a material adverse effect on the financial
position or results of operations of the Company.

ITEM 2. CHANGES IN SECURITIES

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

The Annual Meeting of Stockholders (the "Meeting") of Diamond Offshore
Drilling, Inc. was held on May 5, 1997 in Houston, Texas. At the Meeting, the
holders of 62,813,908 shares out of 68,395,368 shares entitled to vote as
of the record date were represented in person or by proxy, constituting a
quorum. The following matters were voted on and adopted by the margins
indicated:

a. To elect a five member Board of Directors, each to serve until the
next annual meeting of stockholders and until their successors are
elected and qualified.

Number of Shares
For Withheld Broker Non-Vote
---------- ---------------- ---------------
<S> <C> <C> <C>
James S. Tisch 62,436,176 377,732 0
Herbert C. Hofmann 62,611,022 202,886 0
Arthur L. Rebell 62,465,966 347,942 0
Robert E. Rose 62,611,117 202,791 0
Raymond S. Troubh 62,641,446 172,462 0

</TABLE>

b. To ratify the appointment of Deloitte & Touche LLP as independent
accountants and auditors for the Company for 1997.

<TABLE>
<CAPTION>
<S> <C>
For 62,751,022
Against or Withheld 2,635
Abstain 60,251
Broker Non-Vote 0
</TABLE>

<PAGE> 88
ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

See Index of Exhibits for a list of those exhibits filed herewith, which
index only includes those contracts executed or becoming effective during the
most recent period reflected in this Report pursuant to Instruction 2 to Item
601(b)(10) of Regulation S-K.

(b) The Company filed the following reports on Form 8-K during the second
quarter of 1997:

Date of Report Description of Event
-------------- --------------------
<S> <C>
April 15, 1997 Press release announcing first quarter earnings,
plans to acquire accommodation vessel, and underwriting
agreement for the public offering of 1.25 million shares
of common stock.

</TABLE>

21
<PAGE> 89

SIGNATURES

Pursuant to the requirements 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.

DIAMOND OFFSHORE DRILLING, INC.
(Registrant)

Date 29-Jul-1997 By: \s\ Robert E. Rose
----------- -----------------------------------------------
Robert E. Rose
President, Chief Executive Officer and Director

Date 29-Jul-1997 \s\ Gary T. Krenek
----------- ---------------------------------------------
Gary T. Krenek
Controller and Chief Accounting Officer

22
<PAGE> 90

INDEX OF EXHIBITS

Exhibit No. Description
- ----------- -----------
<S> <C>
3.1 Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 of the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1995).

3.2 By-laws of the Company, as amended (incorporated by reference
to Exhibits 3.2, 3.2.1 and 3.2.2 of the Company's Registration
Statement No. 333-2680 on Forms S-4/S-1).

4.1 Indenture, dated as of February 4, 1997, between the
Company and The Chase Manhattan Bank, as Trustee (incorporated by
reference to Exhibit 4.1 of the Company's Current Report on Form
8-K filed February 11, 1997).

4.2 Supplemental Indenture, dated as of February 4, 1997,
between the Company and The Chase Manhattan Bank, as Trustee
(incorporated by reference to Exhibit 4.2 of the Company's
Current Report on Form 8-K filed February 11, 1997).

11.1* Statement Re Computation of Per Share Earnings.

27.1* Financial Data Schedule.

</TABLE>

- -----------------------
* previously filed with the Commission by Diamond Offshore in connection with
the filing of its Quarterly Report on Form 10-Q for the Quarter Ended June 30,
1997.

23
<PAGE> 91
Annex 4

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

FORM 10-Q

(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________

Commission file number 1-13926

DIAMOND OFFSHORE DRILLING, INC.
(Exact name of registrant as specified in its charter)

Delaware 76-0321760
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)

15415 Katy Freeway
Houston, Texas
77094
(Address of principal executive offices)
(Zip Code)
(281) 492-5300
(Registrant's telephone number, including area code)

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 the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.

<TABLE>
<S> <C> <C>
As of April 18, 1997 Common stock, $.01 par value per share 69,645,368 shares
</TABLE>

<PAGE> 92

DIAMOND OFFSHORE DRILLING, INC.

TABLE OF CONTENTS FOR FORM 10-Q

QUARTER ENDED MARCH 31, 1997

<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
COVER PAGE.......................................................................................1

DOCUMENT TABLE OF CONTENTS.......................................................................2

PART I. FINANCIAL INFORMATION...................................................................3

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.....................................................11

PART II. OTHER INFORMATION......................................................................17

ITEM 1. LEGAL PROCEEDINGS..............................................................17

ITEM 2. CHANGES IN SECURITIES..........................................................17

ITEM 3. DEFAULTS UPON SENIOR SECURITIES................................................17

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................17

ITEM 5. OTHER INFORMATION..............................................................17

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...............................................17

SIGNATURES.......................................................................................18

INDEX OF EXHIBITS................................................................................19
</TABLE>

2
<PAGE> 93

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)

<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
--------------- ---------------
1997 1996
--------------- ---------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ...................................................... $ 39,258 $ 28,180
Investment securities .......................................................... 213,465 --
Accounts receivable ............................................................ 180,318 172,214
Rig inventory and supplies ..................................................... 30,754 30,407
Prepaid expenses and other ..................................................... 16,873 12,166
--------------- ---------------
Total current assets ......................................... 480,668 242,967
DRILLING AND OTHER PROPERTY AND EQUIPMENT, LESS
ACCUMULATED DEPRECIATION ....................................................... 1,247,561 1,198,160
LONG-TERM INVESTMENT SECURITIES ..................................................... 98,912 --
GOODWILL, LESS ACCUMULATED AMORTIZATION ............................................. 125,999 129,825
OTHER ASSETS ........................................................................ 10,619 3,548
--------------- ---------------
Total assets ................................................. $ 1,963,759 $ 1,574,500
=============== ===============

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................................................... $ 55,187 $ 63,172
Accrued liabilities ............................................................ 34,600 28,451
Taxes payable .................................................................. 18,745 26,377
Short-term borrowings .......................................................... -- 10,000
--------------- ---------------
Total current liabilities .................................... 108,532 128,000
LONG-TERM DEBT ...................................................................... 400,000 63,000
DEFERRED TAX LIABILITY .............................................................. 188,149 176,296
OTHER LIABILITIES ................................................................... 16,494 12,472
--------------- ---------------
Total liabilities ............................................ 713,175 379,768
--------------- ---------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock (par value $.01, 25,000,000 shares authorized, none
issued and outstanding) .................................................... -- --
Common stock (par value $.01, 200,000,000 shares authorized, 68,395,368
and 68,353,409 shares issued and outstanding at March 31, 1997 and
December 31, 1996, respectively) ........................................... 684 684
Additional paid-in capital ..................................................... 1,220,365 1,220,032
Retained earnings (accumulated deficit) ........................................ 31,174 (25,056)
Cumulative translation adjustment .............................................. (1,372) (928)
Unrealized loss on investment securities ....................................... (267) --
--------------- ---------------
Total stockholders' equity ................................... 1,250,584 1,194,732
--------------- ---------------
Total liabilities and stockholders' equity ................... $ 1,963,759 $ 1,574,500
=============== ===============
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.

3
<PAGE> 94

DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
REVENUES .......................................................... $ 204,733 $ 106,868

OPERATING EXPENSES:
Contract drilling.............................................. 89,739 66,157
Depreciation and amortization.................................. 25,812 12,069
General and administrative..................................... 4,941 3,103
Gain on sale of assets......................................... (65) (157)
-------------- --------------
Total operating expenses.................................. 120,427 81,172
-------------- --------------

OPERATING INCOME ..................................................... 84,306 25,696

OTHER INCOME (EXPENSE):
Interest income................................................ 2,893 256
Other, net..................................................... (185) 178
-------------- --------------
INCOME BEFORE INCOME TAX EXPENSE...................................... 87,014 26,130

INCOME TAX EXPENSE.................................................... (30,784) (7,398)
-------------- --------------

NET INCOME ........................................................... $ 56,230 $ 18,732
============== ==============

NET INCOME PER SHARE AND COMMON EQUIVALENT SHARE...................... $ 0.79 $ 0.37
============== ==============

WEIGHTED AVERAGE SHARES OUTSTANDING:
COMMON SHARES.................................................. 68,384 50,000
COMMON EQUIVALENT SHARES....................................... 3,018 --
-------------- --------------
ADJUSTED....................................................... 71,402 50,000
============== ==============
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.

4
<PAGE> 95

DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------------------
1997 1996
----------------- ------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ................................................... $ 56,230 $ 18,732
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization............................... 25,812 12,069
Gain on sale of assets ..................................... (65) (157)
Deferred tax provision ..................................... 13,870 7,124
Amortization of investment securities....................... (2,331) (69)
Amortization of debt issuance costs......................... 72 52
Changes in operating assets and liabilities:
Accounts receivable ........................................ (7,887) (13,128)
Rig inventory and supplies and other current assets ........ (5,054) 2,339
Other assets, non-current .................................. (176) (2,583)
Accounts payable and accrued liabilities ................... (1,836) (2,716)
Taxes payable............................................... (7,632) 541
Other liabilities, non-current ............................. 2,520 1,740
Other, net.................................................... 129 (288)
----------------- ------------------
Net cash provided by operating activities ............... 73,652 23,656
----------------- ------------------

INVESTING ACTIVITIES:
Capital expenditures ......................................... (73,923) (43,757)
Proceeds from sales of assets ................................ 440 478
Net purchases of investment securities........................ (211,200) --
Purchases of long-term investment securities.................. (99,474) --
----------------- ------------------
Net cash used in investing activities ................... (384,157) (43,279)
----------------- ------------------
FINANCING ACTIVITIES:
Net (repayments) borrowings on revolving line of credit....... (63,000) 15,000
Net repayments on short-term borrowings....................... (10,000) --
Issuance of convertible subordinated notes.................... 400,000 --
Debt issuance costs .......................................... (5,750) (1,816)
Proceeds from stock options exercised......................... 333 --
----------------- ------------------
Net cash provided by financing activities ............... 321,583 13,184
----------------- ------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS ........................... 11,078 (6,439)
Cash and cash equivalents, beginning of period ............... 28,180 10,306
----------------- ------------------
Cash and cash equivalents, end of period ..................... $ 39,258 $ 3,867
================= ==================
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.

5
<PAGE> 96

DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. GENERAL

Interim Financial Information

Cash and Cash Equivalents

Short-term, highly liquid investments that have an original maturity of
three months or less which are considered part of the Company's cash management
activities rather than part of its investing activities are considered cash
equivalents.

Investment Securities

The Company's investments are classified as available for sale and stated
at fair value under the terms of Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Accordingly, any unrealized gains and losses, net of taxes, are
recorded as a separate component of stockholders' equity until realized. The
cost of debt securities is adjusted for amortization of premiums and accretion
of discounts to maturity and such amortization is included in interest income.
The cost of securities sold is based on the specific identification method and
realized gains or losses and declines in value, if any, judged to be other than
temporary are reported in the Consolidated Statements of Income in "Other
income (expense)."

Supplementary Cash Flow Information

Cash payments made for interest on long-term debt, including commitment
fees, during the three months ended March 31, 1997 and 1996 totaled $524,000
and $37,000, respectively. Cash payments made for U.S. income taxes during the
three months ended March 31, 1997 totaled $23.6 million. No cash payments for
U.S. income taxes were made during the three months ended March 31, 1996. Cash
payments made for foreign income taxes during the three months ended March 31,
1997 and 1996 totaled $835,000 and $238,000, respectively.

Goodwill

Goodwill from the merger with Arethusa (Off-Shore) Limited ("Arethusa")
is amortized on a straight-line basis over 20 years.

6
<PAGE> 97

Debt Issuance Costs

Debt issuance costs are included in the Consolidated Balance Sheets in
"Other assets" and are amortized over the term of the related debt.

Net Income Per Share

Net income per share and common equivalent share was computed by dividing
net income by the weighted number of shares of common stock and common stock
equivalents outstanding during the periods. The convertible subordinated notes
(see Note 7) are considered to be common stock equivalents. Consequently, the
number of shares issuable assuming full conversion of these notes as of
February 4, 1997, the issuance date, was added to the number of common shares.
There was no adjustment needed to eliminate the interest on these notes due to
the capitalization of interest cost (see Note 4). Fully diluted earnings per
share is not presented as there are no other contingent issuances of common
stock.

In February 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 128, "Earnings per Share," which requires dual presentation of
basic and diluted earnings per share for entities with complex capital
structures. Basic earnings per share excludes dilution and is computed by
dividing net income by the weighted average number of common shares outstanding
for the period. Diluted earnings per share reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. SFAS No. 128 is effective for
financial statements for both interim and annual periods ending after December
15, 1997. For the three months ended March 31, 1997 and 1996, pro forma
earnings per share amounts computed using SFAS No. 128 would have been $0.82
and $0.37, respectively, for basic earnings per share and $0.79 and $0.37,
respectively, for diluted earnings per share.

Use of Estimates in the Preparation of Financial Statements

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 amount of revenues and expenses during the
reporting period. Actual results could differ from those estimated.

Reclassifications

Certain amounts applicable to the prior periods have been reclassified to
conform to the classifications currently followed. Such reclassifications do
not affect earnings.

2. MERGER WITH ARETHUSA

In April 1996, the Company acquired 100 percent of the stock of Arethusa
(the "Arethusa Merger"). Arethusa owned a fleet of 11 mobile offshore drilling
rigs, operated two additional mobile offshore drilling rigs pursuant to
bareboat charters and provided drilling services worldwide to international and
government-controlled oil and gas companies. The consideration consisted of the
following (in thousands):

<TABLE>
<S> <C>
Common stock issued to Arethusa shareholders.................. $ 539,305
Arethusa stock options assumed................................ 11,381

-------------
Total equity consideration............................... $ 550,686
=============
</TABLE>

The Company issued 17.9 million common shares to the Arethusa
shareholders based on an exchange ratio of .88 shares for each share of issued
and outstanding Arethusa common stock. The shares were valued for financial
reporting purposes at $30.14 based on a seven-day average of the closing price
of the Company's common stock at the time the Arethusa Merger was announced
(December 7, 1995). In addition to equity consideration, the Company incurred
approximately $16.9 million of acquisition costs associated with the Arethusa
Merger.

7
<PAGE> 98

3. INVESTMENT SECURITIES

Investment securities classified as available for sale at March 31, 1997
were as follows:

<TABLE>
<CAPTION>
--------------------------------------------
AMORTIZED UNREALIZED MARKET
COST LOSSES VALUE
--------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Due within 1 year:
Debt securities issued by the U.S.
Treasury . . . . . . . . . . . . . $ 213,523 $ (58) $213,465

Due after 1 year through 5 years:
Debt securities issued by the U.S.
Treasury . . . . . . . . . . . . . 99,265 (353) 98,912
--------------------------------------------
Total $ 312,788 $ (411) $312,377
============================================
</TABLE>

During the three months ended March 31, 1997, certain investment
securities were sold for proceeds of $99.8 million. The resulting realized loss
was not material.

4. DRILLING AND OTHER PROPERTY AND EQUIPMENT

Cost and accumulated depreciation of drilling and other property and
equipment are summarized as follows:

<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
-----------------------------------------
1997 1996
-----------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Drilling rigs and equipment . . . . . . . $ 1,427,618 $ 1,332,980
Construction work in progress. . . . . . . 95,232 116,770
Land and buildings . . . . . . . . . . . . 13,164 13,154
Office equipment and other . . . . . . . . 8,619 8,181
-----------------------------------------
Cost . . . . . . . . . . . . . . . . 1,544,633 1,471,085
Less accumulated depreciation . . . . . . (297,072) (272,925)
-----------------------------------------
Total. . . . . . . . . . . . . . $ 1,247,561 $ 1,198,160
=========================================
</TABLE>

For the three months ended March 31, 1997, the Company capitalized total
interest cost incurred of $2.8 million in construction work in progress with
respect to qualifying construction projects.

8
<PAGE> 99
5. GOODWILL

The Arethusa Merger generated an excess of the purchase price over the
estimated fair value of the net assets acquired. Cost and accumulated
amortization of such goodwill are summarized as follows:

<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
-----------------------------------------
1997 1996
-----------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Goodwill . . . . . . . . . . . . . . $ 132,170 $ 134,331
Less accumulated amortization . . . (6,171) (4,506)
-----------------------------------------
Total . . . . . . . . . . $ 125,999 $ 129,825
=========================================
</TABLE>

During the three months ended March 31, 1997, an adjustment of
approximately $2.2 million was recorded to reduce goodwill before accumulated
amortization. This adjustment was primarily necessary to properly reflect the
fair value of the net assets acquired in the Arethusa Merger.

6. ACCRUED LIABILITIES

Accrued liabilities consist of the following:

<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
-----------------------------------------
1997 1996
-----------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Personal injury and other claims. . . $ 20,217 $ 18,629
Payroll and benefits . . . . . . . . 8,648 8,336
Other . . . . . . . . . . . . . . . . 5,735 1,486
-----------------------------------------
Total . . . . . . . . . . . $ 34,600 $ 28,451
=========================================
</TABLE>

7. LONG-TERM DEBT

Convertible Subordinated Notes

On February 4, 1997, the Company issued $400.0 million, including $50.0
million from an over-allotment option, of 3 3/4 percent convertible
subordinated notes (the "Notes") due February 15, 2007. The Notes are
convertible, in whole or in part, at the option of the holder at any time prior
to the close of business on the business day immediately preceding the maturity
date, unless previously redeemed, into shares of the Company's common stock, at
a conversion price of $81 per share (equivalent to a conversion rate of 12.346
shares per $1,000 principal amount of Notes), subject to adjustment in certain
circumstances. Interest on the Notes is payable in cash semi-annually on each
February 15 and August 15, commencing on August 15, 1997. Upon conversion, any
accrued interest will be deemed paid by the appropriate portion of the common
stock received by the holder.

9
<PAGE> 100
Credit Facility

The Company may borrow up to $200.0 million at various interest rates, at
the Company's option, under the terms of a revolving credit facility with a
group of banks (the "Credit Facility") available through December 2001. The
Credit Facility contains provisions regarding the maintenance of certain
consolidated financial ratios, certain indebtedness limitations, and
limitations on dividends and similar payments. As of March 31, 1997, the
Company was in compliance with each of these covenants. Commitment fees are
paid based on the unused available portion of the maximum credit commitment. No
amounts were outstanding under the Credit Facility at March 31, 1997.

8. COMMITMENTS AND CONTINGENCIES

The survivors of a deceased employee of a subsidiary of the Company,
Diamond M Onshore, Inc., have sued such subsidiary in Duval County, Texas, for
damages as a result of the death of the employee. The plaintiffs have obtained
a judgment in the trial court for $15.7 million plus post-judgment interest.
The Company is vigorously prosecuting an appeal of the judgment. The Company
has received notices from certain of its insurance underwriters reserving their
rights to deny coverage on the Company's insurance policies in excess of $2.0
million for damages resulting from such lawsuit. Management believes that the
Company has complied with all conditions of coverage for final unappealable
damages, if any, in the case. The Company has not established a liability for
such claim at this time.

A former subsidiary of Arethusa, which is now a subsidiary of the Company,
is defending and indemnifying Zapata Off-Shore Company and Zapata Corporation
(the "Zapata Defendants"), pursuant to a contractual defense and
indemnification agreement, in a suit for tortious interference with contract
and conspiracy to tortiously interfere with contract. The plaintiffs seek $14.0
million in actual damages and unspecified punitive damages, plus costs of
court, interest and attorney's fees. The Company believes the Zapata Defendants
have adequate defenses and intends to vigorously defend their position. The
Company has not established a liability for such claim at this time.

9. SUBSEQUENT EVENT

In April 1997, the Company completed a public offering of 1.25 million
shares of common stock generating net proceeds of approximately $82.3 million.
The Company expects to use the net proceeds to acquire the Polyconfidence, a
semisubmersible accommodation vessel, currently working in the U.K. sector of
the North Sea. The Company's cost to acquire the vessel is expected to be
approximately $81.0 million in cash.

10
<PAGE> 101

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the
Company's Consolidated Financial Statements (including the Notes thereto)
included elsewhere herein.

GENERAL

Merger with Arethusa (Off-Shore) Limited. Effective April 29, 1996,
the merger with Arethusa (Off-Shore) Limited ("Arethusa") was completed (the
"Arethusa Merger"). Arethusa owned a fleet of 11 mobile offshore drilling rigs,
operated two additional mobile offshore drilling rigs pursuant to bareboat
charters, and provided drilling services worldwide to international and
government-controlled oil and gas companies. Because the Arethusa Merger was
accounted for as a purchase for financial reporting purposes, results of
operations include those of Arethusa from the effective date of the Arethusa
Merger. See Note 2 to the Company's Consolidated Financial Statements.

11
<PAGE> 102

RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 1997 AND 1996

Comparative data relating to the Company's revenues and operating
expenses by equipment type are listed below (eliminations offset dayrate
revenues earned when the Company's rigs are utilized in its turnkey operations
and intercompany expenses charged to rig operations). Certain amounts
applicable to the prior period have been reclassified to conform to the
classifications currently followed. Such reclassifications do not affect
earnings.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------- INCREASE/
1997 1996 (DECREASE)
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
REVENUES
Fourth-Generation Semisubmersibles......... $ 42,643 $ 21,465 $ 21,178
Other Semisubmersibles .................... 116,833 52,995 63,838
Jack-ups .................................. 43,554 20,136 23,418
Turnkey ................................... 4,311 13,626 (9,315)
Land ...................................... -- 5,102 (5,102)
Eliminations .............................. (2,608) (6,456) 3,848
--------- --------- ---------
Total Revenues .................... $ 204,733 $ 106,868 $ 97,865
========= ========= =========
CONTRACT DRILLING EXPENSE
Fourth-Generation Semisubmersibles......... $ 11,473 $ 7,898 $ 3,575
Other Semisubmersibles .................... 55,336 31,490 23,846
Jack-ups .................................. 21,260 14,927 6,333
Turnkey ................................... 4,259 14,128 (9,869)
Land ...................................... -- 4,772 (4,772)
Other ..................................... 361 102 259
Eliminations .............................. (2,950) (7,160) 4,210
--------- --------- ---------
Total Contract Drilling Expense.... $ 89,739 $ 66,157 $ 23,582
========= ========= =========
OPERATING INCOME
Fourth-Generation Semisubmersibles......... $ 31,170 $ 13,567 $ 17,603
Other Semisubmersibles .................... 61,497 21,505 39,992
Jack-ups .................................. 22,294 5,209 17,085
Turnkey ................................... 52 (502) 554
Land ...................................... -- 330 (330)
Other ..................................... (361) (102) (259)
Eliminations .............................. 342 704 (362)
Depreciation and Amortization Expense...... (25,812) (12,069) (13,743)
General and Administrative Expense......... (4,941) (3,103) (1,838)
Gain on Sale of Assets .................... 65 157 (92)
--------- --------- ---------
Total Operating Income ............ $ 84,306 $ 25,696 $ 58,610
========= ========= =========
</TABLE>

Revenues. The $21.2 million increase in revenues from
fourth-generation rigs resulted primarily from $9.2 million in revenues
generated during the three months ended March 31, 1997 by the Ocean Quest and
the Ocean Star upon completion of their upgrade projects in September 1996 and
March 1997, respectively, and $8.7 million generated during the three months
ended March 31, 1997 by increased operating dayrates in the Gulf of Mexico and
the North Sea. Also, improvements in utilization contributed approximately $3.2
million in revenues for the three months ended March 31, 1997. This increase in
utilization was primarily associated with shipyard

<PAGE> 103

repairs performed on the Ocean Alliance, which reduced the days worked during
the comparable period of the prior year. The $63.8 million increase in revenues
from other semisubmersibles resulted primarily from $37.5 million in revenues
generated during the three months ended March 31, 1997 by the eight
semisubmersibles acquired in the Arethusa Merger. Approximately $16.3 million
in additional revenues were generated from increased operating dayrates during
the three months ended March 31, 1997. Improvements in utilization contributed
approximately $10.0 million in revenues for the three months ended March 31,
1997, primarily due to a reduction in revenues in the first quarter of 1996
during the completion of modifications on the Ocean Princess and the Ocean
Baroness. The $23.4 million increase in revenues from jack-ups resulted
primarily from $12.8 million in revenues contributed by increased operating
dayrates, primarily in the Gulf of Mexico. In addition, $10.2 million in
revenues was generated during the three months ended March 31, 1997 by the four
jack-ups acquired in the Arethusa Merger. The $9.3 million decrease in revenues
from turnkey operations resulted from turnkey projects of greater magnitude
completed during the three months ended March 31, 1996, while revenues for the
three months ended March 31, 1997 consisted primarily of revenues from project
management services. The $5.1 million decrease in revenues from land operations
resulted from the sale of the Company's land division in December 1996.

Contract Drilling Expense. The $3.6 million increase in contract
drilling expense for fourth-generation rigs resulted primarily from operating
costs generated by the Ocean Quest and the Ocean Star during the three months
ended March 31, 1997 upon completion of their upgrade projects in September
1996 and March 1997, respectively. The $23.8 million increase in contract
drilling expense for other semisubmersibles resulted primarily from $18.4
million costs generated during the three months ended March 31, 1997 by the
rigs acquired in the Arethusa Merger. In addition, expenses for the three
months ended March 31, 1996 were reduced by the capitalization of costs
associated with modifications in progress on the Ocean Princess and the Ocean
Baroness. The $6.3 million increase in contract drilling expense for jack-ups
resulted from the four jack-ups acquired in the Arethusa Merger. The $9.9
million decrease in expenses from turnkey operations resulted from turnkey
projects of greater magnitude completed and cost overruns on one turnkey well
during the three months ended March 31, 1996. Expenses from turnkey operations
for the three months ended March 31, 1997 consisted primarily of costs
associated with project management services. The $4.8 million decrease in
expenses from land operations resulted from the sale of the Company's land
division in December 1996.

Depreciation and Amortization Expense. Depreciation and amortization
expense for the three months ended March 31, 1997 increased $13.7 million from
$12.1 million for the three months ended March 31, 1996 primarily due to
additional expense for (i) the eight semisubmersibles and three jack-up
drilling rigs acquired in the Arethusa Merger, (ii) goodwill amortization
expense associated with the Arethusa Merger, and (iii) the Ocean Quest and the
Ocean Star which completed their upgrades in September 1996 and March 1997,
respectively.

General and Administrative Expense. General and administrative expense
for the three months ended March 31, 1997 of $4.9 million increased $1.8
million from $3.1 million for the three months ended March 31, 1996 primarily
due to the Arethusa Merger. In addition, increased accruals during the three
months ended March 31, 1997 for the Company's bonus and retention plan
contributed to higher expenses. The increased accruals resulted from a higher
estimated bonus pool for the 1997 performance year and for additional
participants in the plan. Partially offsetting these increases was $0.3 million
of general and administrative expense capitalized to the major upgrades of the
Ocean Star, the Ocean Victory, and the Ocean Clipper I during the three months
ended March 31, 1997.

Interest Income. Interest income of $2.9 million for the three months
ended March 31, 1997 consisted primarily of the amortization of discounts and
interest earned on investment securities purchased in the first quarter of
1997.

Income Tax Expense. Income tax expense of $30.8 million for the three
months ended March 31, 1997 increased $23.4 million from $7.4 million for the
three months ended March 31, 1996. This increase resulted primarily from the
$60.9 million increase in income before income tax expense as compared to the
three months ended March 31, 1996.

13
<PAGE> 104
OUTLOOK

When included in this Report, the words "expects," "intends," "plans,"
"anticipates," "estimates," and analogous expressions are intended to identify
forward-looking statements. Such statements inherently are subject to a variety
of risks and uncertainties that could cause actual results to differ materially
from those projected. Such risks and uncertainties include, among others,
general economic and business conditions, industry fleet capacity, changes in
foreign and domestic oil and gas exploration and production activity,
competition, changes in foreign, political, social and economic conditions,
regulatory initiatives and compliance with government regulations, customer
preferences and various other matters, many of which are beyond the Company's
control. These forward-looking statements speak only as of the date of this
Report. The Company expressly disclaims any obligation or undertaking to
release publicly any updates or revisions to any forward-looking statement
contained herein to reflect any change in the Company's expectations with
regard thereto or any change in events, conditions or circumstances on which
any statement is based.

The Company expects its current revenue and operating income trends to
continue in 1997, as worldwide deep water exploration continues to provide
opportunities for the Company's fleet. The Company's revenue growth, in part,
will be dependent on the condition of the oil and gas industry and,
specifically, the exploration and production expenditures of oil and gas
companies. The increasing impact of technological advances, including 3-D
seismic, horizontal drilling, and subsea completion procedures, has improved
demand and resulted in higher dayrates, especially in the deep water and harsh
environment markets. Customers increasingly are seeking to contract rigs for a
stated term (as opposed to contracts for the drilling of a single well or a
group of wells). As a result, more than 80 percent of the Company's estimated
1997 revenue is committed under existing contracts.

Also, the completion of three major upgrades and their associated
multi-year commitments are expected to provide additional revenue in 1997. In
March 1997, the Company completed the upgrade of the Ocean Star and the rig
began a three-year commitment. The rig, which had been cold stacked, now has
fourth-generation capabilities, including stability and other enhancements such
as water depth capabilities of up to 4,500 feet, increased variable deck load
of approximately 6,000 long tons, a top-drive drilling system, a 15,000 psi
blow-out prevention system, increased deck area, and additional mud pit and
tensioner capacity. The Company's drillship, the Ocean Clipper I, is currently
being upgraded to operate in the deep water market of the Gulf of Mexico with
dynamic positioning capabilities and is scheduled to be completed in mid-1997.
In addition, the Ocean Victory, previously cold stacked, is undergoing
modifications in connection with its three-year deep water drilling program
anticipated to begin during the fourth quarter of 1997.

However, historically, the offshore contract drilling industry has been
highly competitive and cyclical, and the Company cannot predict the extent to
which current conditions will continue. In addition, the recent improvement in
the current results of operations and prospects for the offshore contract
drilling industry as a whole has led to increased rig construction and
enhancement programs by the Company's competitors and, if present trends
continue for an extended period, may lead to new entrants into the market. A
significant increase in the supply of technologically advanced rigs capable of
drilling in deep water may have an adverse effect on the average operating
dayrates for the Company's rigs, particularly its more advanced semisubmersible
units, and on the overall utilization of the Company's fleet. In such case, the
Company's results of operations would be adversely affected.

LIQUIDITY

As of March 31, 1997, total cash and short and long-term investment
securities totaled $351.6 million, up from $28.2 million at December 31, 1996.
Cash provided by operating activities for the three months ended March 31, 1997
increased by $50.0 million to $73.7 million, as compared to $23.7 million for
the comparable period of the prior year. This increase in operating cash flow
was primarily attributable to a $37.5 million increase in net income for the
first quarter of 1997 and a $13.7 million increase in depreciation and
amortization primarily resulting from the Arethusa Merger.

Investing activities used $384.2 million in cash during the three months
ended March 31, 1997, compared to $43.3 million during the comparable period of
1996. The Company purchased U.S. Treasury bills and U.S. Treasury notes with a
portion of the proceeds from the sale of $400.0 million convertible
subordinated notes (the

<PAGE> 105

"Notes") resulting in an increase in cash used in investing activities. In
addition, capital expenditures increased substantially during the three months
ended March 31, 1997, as the Company continued to invest in major upgrades of
its existing fleet.

Cash provided by financing activities for the three months ended March
31, 1997 increased $308.4 million to $321.6 million, as compared to $13.2
million for the comparable period of 1996. Sources of financing during 1997
consisted primarily of the Company's issuance of the Notes, which resulted in
net proceeds of approximately $394.3 million. The Notes, issued in February
1997, bear interest at 3 3/4 percent and are due February 2007. The Notes are
convertible, in whole or in part, at the option of the holder at any time prior
to the close of business on the business day immediately preceding the maturity
date into shares of the Company's common stock, at a conversion price of $81
per share (equivalent to a conversion rate of 12.346 shares per $1,000
principal amount of Notes). Financing applications of cash during the three
months ended March 31, 1997 included repayment of amounts outstanding under the
Company's short and long-term credit arrangements.

Other sources of liquidity include the Company's revolving line of credit
for a five-year term providing a maximum credit commitment of $200.0 million
(the "Credit Facility"). In addition, the Company has lines of credit for
short-term financing aggregating $30.0 million from two U.S. banks. These
arrangements provide for borrowing at various interest rates and may be used on
such terms as the Company and the banks mutually agree. The Company also
maintains the ability to issue an aggregate of approximately $117.5 million in
debt, equity and other securities under a Securities and Exchange Commission
shelf registration statement.

In April 1997, the Company completed a public offering of 1.25 million
shares of common stock generating net proceeds of approximately $82.3 million.
The Company expects to use the net proceeds to acquire the Polyconfidence, a
semisubmersible accommodation vessel currently working in the U.K. sector of
the North Sea. The Company's cost to acquire the vessel is expected to be
approximately $81.0 million in cash. See " - Capital Resources."

CAPITAL RESOURCES

Cash requirements for capital commitments result from rig upgrades to
meet specific customer requirements and from the Company's continuing rig
enhancement program. The Company expects to spend approximately $189.2 million
during 1997 for rig upgrades, including approximately $162.5 million for
expenditures in conjunction with the upgrades of the Ocean Clipper I, the Ocean
Star, and the Ocean Victory for deep water drilling in the Gulf of Mexico. The
Company expended $61.4 million on these projects during the three months ended
March 31, 1997. In addition, the Company expects to spend approximately $20.6
million for a cantilever conversion project on the Company's jack-up rig, the
Ocean Warwick, although only preliminary surveys and assessments related to
this project are in progress. The Company expects to evaluate other projects as
opportunities arise.

In April 1997, the Company agreed to acquire the Polyconfidence, a
semisubmersible accommodation vessel currently working in the U.K. sector of
the North Sea. The Company's cost to acquire the vessel is expected to be
approximately $81.0 million in cash. See "- Liquidity." The Polyconfidence was
constructed in 1987 and has Class III dynamic positioning capabilities. The
Company is in discussions with several oil companies regarding conversion of
the Polyconfidence to a semisubmersible drilling unit with fourth- or
fifth-generation capabilities. Such a conversion would be dependent upon the
receipt of a term contract commitment at favorable dayrates. Although the
extent of the conversion would be dependent upon the particular demands of the
customer, the Company's preliminary estimate of conversion cost is
approximately $160.0 to $175.0 million. The Polyconfidence would begin its
conversion at the conclusion of its present accommodation unit contract, which
is

<PAGE> 106

estimated to occur no later than March 1998. Prior to expiration of this
contract, the Company will receive approximately $15,000 per day under a
bareboat charter of the vessel. The Company expects to finance the conversion
of the Polyconfidence through the use of cash on hand or internally generated
funds. There can be no assurance that the vessel can or will be upgraded to
fourth- or fifth- generation capability in a cost-effective manner, that if the
vessel is so upgraded there will be adequate demand for its services, or that
competitors will not achieve comparable capabilities through other means
attractive to customers.

It is management's opinion that significant improvements in operating
cash flow resulting from current conditions of improved dayrates and the
increasing number of term contracts for rigs in certain markets, in conjunction
with proceeds from the Notes, will be sufficient to meet these capital
requirements.

The Company is continually considering potential transactions, including,
but not limited to, enhancement of existing rigs, the purchase of additional
rigs, construction of new rigs and the acquisition of other companies engaged
in contract drilling. Certain of the potential transactions reviewed by the
Company would, if completed, result in its entering new lines of business,
although, in general, these opportunities have been related in some manner to
the Company's existing operations. For example, the Company has explored the
possibility of acquiring certain floating production systems, crew
accommodation units similar to the Polyconfidence and oil service companies
providing subsea products, technology and services, and shipping assets such as
oil tankers, through the acquisition of existing businesses or assets or new
construction. As of the date hereof, except as described above, the Company has
no pending commitment with respect to any material business opportunity. There
can be no assurance that the Company will consummate the Polyconfidence
transaction, make other material acquisitions or investments or that, if made,
such acquisitions or investments will be successful.

16
<PAGE> 107
PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Brown Services, Inc. and KOS Industries, Inc. v. Michael D. Brown, BSI
International, Inc., Robert Brown, Robert Furlough, Power House International,
Inc., Zapata Off-Shore Company and Zapata Corporation; No. 92-05691 in the
334th Judicial District Court of Harris County, Texas, filed February 7, 1992.
Plaintiffs have sued Zapata Off-Shore Company and Zapata Corporation (the
"Zapata Defendants") for tortious interference with contract and conspiracy to
tortiously interfere with contract. Plaintiffs seek $14.0 million in actual
damages and unspecified punitive damages, plus costs of court, interest and
attorney's fees. A former subsidiary of Arethusa, which is now a subsidiary of
the Company, is defending and indemnifying the Zapata Defendants pursuant to a
contractual defense and indemnification agreement. The Company believes the
Zapata Defendants have adequate defenses and intends to vigorously defend their
position.

The Company and its subsidiaries are named defendants in certain other
lawsuits and are involved from time to time as parties to governmental
proceedings, all arising in the ordinary course of business. For a description
of one such lawsuit, see Note 8 to the Company's Consolidated Financial
Statements in Part I of this Report. Although the outcome of lawsuits or other
proceedings involving the Company and its subsidiaries cannot be predicted with
certainty and the amount of any liability that could arise with respect to such
lawsuits or other proceedings cannot be predicted accurately, management does
not expect these matters to have a material adverse effect on the financial
position or results of operations of the Company.

ITEM 2. CHANGES IN SECURITIES

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

See Index of Exhibits for a list of those exhibits filed herewith,
which index only includes those contracts executed or becoming effective during
the most recent period reflected in this Report pursuant to Instruction 2 to
Item 601(b)(10) of Regulation S-K.

(b) The Company filed the following reports on Form 8-K during the first
quarter of 1997:

<TABLE>
<CAPTION>
Date of Report Description of Event
-------------- --------------------
<S> <C>
January 29, 1997 Plan to offer $300.0 million of convertible subordinated notes
February 11, 1997 Sale of $400.0 million convertible subordinated notes
</TABLE>

17
<PAGE> 108

SIGNATURES

Pursuant to the requirements 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.

DIAMOND OFFSHORE DRILLING, INC.
(Registrant)

Date 28-Apr-1997 By: \s\ Lawrence R. Dickerson
----------- -------------------------
Lawrence R. Dickerson
Senior Vice President and
Chief Financial Officer

Date 28-Apr-1997 \s\ Gary T. Krenek
----------- -------------------------
Gary T. Krenek
Controller and Principal
Accounting Officer

<PAGE> 109

INDEX OF EXHIBITS

Exhibit No. Description

3.1 Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 of the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1995).

3.2 By-laws of the Company, as amended (incorporated by reference to
Exhibits 3.2, 3.2.1 and 3.2.2 of the Company's Registration
Statement No. 333-2680 on Forms S-4/S-1).

4.1 Indenture, dated as of February 4, 1997, between the
Company and Chase Manhattan Bank, as Trustee (incorporated by
reference to Exhibit 4.1 of the Company's Current Report on Form
8-K filed February 11, 1997).

4.2 Supplemental Indenture, dated as of February 4, 1997, between the
Company and Chase Manhattan Bank, as Trustee (incorporated by
reference to Exhibit 4.2 of the Company's Current Report on Form 8-K
filed February 11, 1997).

11.1* Statement re computation of per share earnings.

27.1* Financial Data Schedule.

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

* previously filed with the Commission by Diamond Offshore in connection with
the filing of its Quarterly Report on Form 10-Q for the Quarter Ended
March 31, 1997.

<PAGE> 110
Annex 5

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_____________

FORM 8-K

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

Date of report: JULY 14, 1997

Date of earliest event reported: JULY 10, 1997

DIAMOND OFFSHORE DRILLING, INC.
(Exact Name of Registrant as Specified in its Charter)

DELAWARE 1-13926 76-0321760
(State or Other Jurisdiction (Commission File Number) (IRS Employer
of Incorporation) Identification No.)

15415 KATY FREEWAY, HOUSTON, TEXAS 77094
(Address of Principal Executive Offices) (Zip Code)

Registrant's telephone number, including area code (281) 492-5300

NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
<PAGE> 111

INFORMATION TO BE INCLUDED IN THE REPORT

ITEM 5. OTHER EVENTS

On July 10, 1997, Diamond Offshore Drilling, Inc. ("Diamond Offshore")
(NYSE: DO) issued a press release announcing that its Board of Directors has
declared a two-for-one stock split in the form of a stock dividend to
stockholders of record on July 24, 1997. The Diamond Offshore Board has also
declared a quarterly dividend of $0.14 per common share, on the pre-split
shares, payable on August 7,1997 to shareholders of record as of July 24, 1997.

2
<PAGE> 112

ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS

(a) Financial statements of businesses acquired.

Not applicable.

(b) Pro forma financial information.

Not applicable.

Exhibit number Description
-------------- -----------

20.1* Press Release of Diamond Offshore Drilling, Inc. dated
July 10, 1997 (filed herewith).

* previously filed with the Commission by Diamond Offshore in connection with
the filing of its Current Report on Form 8-K dated July 14, 1997.

3
<PAGE> 113

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of
1934, Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.

DIAMOND OFFSHORE DRILLING, INC.

By: /s/ RICHARD L. LIONBERGER
----------------------------------
Richard L. Lionberger
Vice President, General Counsel
and Secretary

Dated: July 14, 1997

4
<PAGE> 114

EXHIBIT INDEX

Exhibit number Description
-------------- -----------

20.1* Press Release of Diamond Offshore Drilling, Inc. dated
July 10, 1997 (filed herewith).

- ----------

* previously filed with the Commission by Diamond Offshore in connection with
the filing of its Current Report on Form 8-K dated July 14, 1997.
<PAGE> 115
Annex 6

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_____________

FORM 8-K

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

Date of report: APRIL 15, 1997
-----------------------------------------------------------------
Date of earliest event reported: APRIL 14, 1997
------------------------------------------------

DIAMOND OFFSHORE DRILLING, INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)

<TABLE>
<S> <C> <C>
DELAWARE 1-13926 76-0321760
- ----------------------------------------------------------------------------------------------------------------------
(State or Other Jurisdiction (Commission File Number) (IRS Employer
of Incorporation) Identification No.)

15415 KATY FREEWAY, HOUSTON, TEXAS 77094
- ----------------------------------------------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
</TABLE>

Registrant's telephone number, including area code (281) 492-5300
------------------------------

NOT APPLICABLE
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE> 116

INFORMATION TO BE INCLUDED IN THE REPORT

ITEM 5. OTHER EVENTS

On April 14, 1997, Diamond Offshore Drilling, Inc. ("Diamond
Offshore") issued a press release announcing Diamond Offshore's earnings for
its fiscal quarter ended March 31, 1997 and a press release announcing Diamond
Offshore's plans to acquire the semisubmersible accommodation vessel
"Polyconfidence" and, to finance the purchase price of such vessel, to offer
approximately 1.25 million shares of Diamond Offshore's common stock, par value
$.01 per share ("Common Stock"), in a public offering. Filed herewith are (i)
both such press releases and (ii) the form of Underwriting Agreement proposed
to be entered into between Diamond Offshore and the underwriter(s) of
securities that may be issued pursuant to Diamond Offshore's Post-Effective
Amendment No. 1 to its Registration Statement on Form S-3 (No. 333-19987), as
filed with the Securities and Exchange Commission on March 28, 1997, which may
include Common Stock.

2
<PAGE> 117

ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS

Exhibit number Description

1.1* Form of Underwriting Agreement.

20.1* Press Release of Diamond Offshore Drilling, Inc. of
April 14, 1997 regarding earnings.

20.2* Press Release of Diamond Offshore Drilling, Inc. of
April 14, 1997 regarding acquisition of accommodation
service vessel and public offering.

- ----------

* previously filed with the Commission by Diamond Offshore in connection with
the filing of its Current Report on Form 8-K dated April 15, 1997.

3
<PAGE> 118

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, the Registrant has duly caused this report to be signed on
its behalf by the undersigned hereunto duly authorized.

DIAMOND OFFSHORE DRILLING, INC.

By: /s/ RICHARD L. LIONBERGER
---------------------------------
Richard L. Lionberger
Vice President, General Counsel
and Secretary

Dated: April 15, 1997

4
<PAGE> 119

EXHIBIT INDEX

Exhibit number Description

1.1* Form of Underwriting Agreement.

20.1* Press Release of Diamond Offshore Drilling, Inc. of
April 14, 1997 regarding earnings.

20.2* Press Release of Diamond Offshore Drilling, Inc. of
April 14, 1997 regarding acquisition of accommodation
service vessel and public offering.

- ----------

* previously filed with the Commission by Diamond Offshore in connection with
the filing of its Current Report on Form 8-K dated April 15, 1997.

<PAGE> 1

EXHIBIT 23.1

INDEPENDENT AUDITORS' CONSENT

We consent to the incorporation by reference in this Current Report on Form 8-K
of Loews Corporation of our report dated February 4, 1997, appearing in the
Annual Report on Form 10-K of Diamond Offshore Drilling Inc. for the year ended
December 31, 1996 and to use of the reference to us under the heading "Experts"
in the Loews Corporation Prospectus Supplement to be dated September 16, 1997
to the Prospectus dated February 20, 1997, which is part of Registration
Statement No. 333-22113 filed February 20, 1997 and Registration Statement
filed on September 16, 1997, pursuant to Rule 462(b).

DELOITTE & TOUCHE LLP
Houston, Texas

September 16, 1997

<PAGE> 1
EXHIBIT 99.1

Contact: Peter W. Keegan
Senior Vice President
(212) 521-2950

FOR IMMEDIATE RELEASE
- ---------------------

LOEWS CORP. ANNOUNCES EXCHANGEABLE
----------------------------------
SUBORDINATED NOTE OFFERING
--------------------------

NEW YORK, September 16, 1997 - Loews Corporation (NYSE:LTR) announced
that on September 16, 1997 it had entered into an agreement to sell
$1,000,000,000 principal amount of its 3 1/8% Exchangeable Subordinated Notes
due September 15, 2007. The Notes are exchangeable into shares of Diamond
Offshore Drilling, Inc. (NYSE:DO) common stock at any time from October 1, 1998
to September 15, 2007 at a price of $65.04 per DO share. Loews has granted to
the underwriters an option for thirty days to purchase up to an additional
$150,000,000 principal amount of Notes at the initial public offering price to
cover over-allotments. The managing underwriter for the Offering is Goldman,
Sachs & Co.

Loews currently owns 70,100,000 shares of Diamond Offshore common stock
constituting 50.3% of the outstanding shares, including the approximately
15,375,000 shares into which its Notes would be exchangeable. Exclusive of the
shares into which the Notes are exchangeable, Loews holds approximately
54,725,000 shares of Diamond Offshore common stock with a market value of
approximately $3.2 billion at current market prices.

###