CLIFFS DRILLING CO, 10-K, 1998-03-06

CLIFFS DRILLING CO
10-K, 1998-03-06
DRILLING OIL & GAS WELLS

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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

FORM 10-K

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 COMMISSION FILE NUMBER 0-16703

CLIFFS DRILLING COMPANY
(Exact Name of Registrant as Specified in its Charter)

<TABLE>
<S> <C>
DELAWARE 76-0248934
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1200 SMITH STREET, SUITE 300 77002
HOUSTON, TEXAS (Zip Code)
(Address of principal executive offices)
</TABLE>

Registrant's telephone number, including area code: (713) 651-9426

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

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<S> <C>
COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE
(Title of Class) (Name of Each Exchange on Which Registered)
</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 the 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 Registrant's common stock, $.01 par
value, held by nonaffiliates as of March 4, 1998 was $627,702,676. All executive
officers and directors of the Registrant are treated as if they may be deemed
affiliates of the Registrant.

Number of shares of Common Stock, $.01 par value, of the Registrant
outstanding at March 4, 1998 was 15,913,506.

DOCUMENTS INCORPORATED BY REFERENCE

<TABLE>
<CAPTION>
DOCUMENTS REFERENCED IN THIS REPORT
--------- -------------------------
<S> <C>
Certain portions of the Registrant's definitive proxy
statement for the 1998 Annual Meeting of Shareholders..... Part III
</TABLE>

(Exhibit Index Located on Pages 50 to 55)
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TABLE OF CONTENTS TO FORM 10-K

<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I
1. Business and Properties..................................... 2
and
2.
General..................................................... 2
Recent Developments......................................... 2
Industry Conditions and Company Strategy.................... 3
Contract Drilling and MOPU Operations....................... 4
Oil and Gas Operations...................................... 8
Environmental Controls...................................... 9
Government Regulation....................................... 9
Risks and Insurance......................................... 9
Risks Inherent in Foreign Operations........................ 10
Employees................................................... 10
Other Properties............................................ 11
3. Legal Proceedings........................................... 11
4. Submission of Matters to a Vote of Security-Holders......... 11
PART II
5. Market For Registrant's Common Equity and Related
Stockholder Matters....................................... 11
6. Selected Financial Data..................................... 13
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 15
8. Financial Statements and Supplementary Data................. 23
9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................. 23
PART III
10. Directors and Executive Officers of the Registrant.......... 24
11. Executive Compensation...................................... 24
12. Security Ownership of Certain Beneficial Owners and
Management................................................ 24
13. Certain Relationships and Related Transactions.............. 24
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 24
SIGNATURES......................................................... 26
</TABLE>

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PART I

ITEMS 1. AND 2. BUSINESS AND PROPERTIES

GENERAL

Cliffs Drilling Company, a Delaware corporation (the "Company"), is an
international contract drilling and engineering company. The Company is
primarily engaged in daywork drilling, engineering services, and to a lesser
extent, the development and operation of mobile offshore production units
("MOPUs"). The Company has historically deployed its assets in areas where it
can achieve long-term growth and generate stable cash flows and net income. This
strategy has led to six consecutive years of positive net income. The Company's
domestic operations are concentrated in the Texas/Louisiana Gulf Coast region
and its foreign operations are concentrated in Venezuela and the Middle East.
The Company currently owns 16 jack-up drilling rigs, 11 land rigs, 3 platform
rigs and 4 MOPUs.

The Company and its predecessors have been in the contract drilling
business since 1978. The Company entered the turnkey drilling business in 1982
in an effort to more fully utilize its existing fleet of rigs and complement its
daywork drilling operations. In response to the economic conditions which
adversely affected the domestic contract drilling business during the 1980s, the
Company undertook a strategic plan in 1989 to further diversify its scope of
operations and geographic concentration beyond the traditional domestic daywork
drilling market. The Company's management implemented a proactive approach to
identify, develop and exploit several market segments which provided higher
margins and more reliable operating income and cash flow. To achieve its
strategic objectives, the Company continued to emphasize its turnkey drilling
operations, expanded its well engineering and management services, became a
leader in the development and operation of MOPUs and deployed its drilling rigs
into selected international markets. With the implementation of this strategy,
the Company has positioned itself to benefit from increases in drilling and
production activities in several markets worldwide.

This Form 10-K includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements other than
statements of historical facts included in this Form 10-K regarding the
Company's financial position, business strategy, budgets and plans and
objectives of management for future operations are forward-looking statements.
Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, it can give no assurance that such
expectations will prove to have been correct. Important factors that could cause
actual results to differ materially from the Company's expectations ("Cautionary
Statements") are disclosed within "ITEMS 1. and 2. Business and Properties,"
"ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations" and elsewhere in this Form 10-K.

RECENT DEVELOPMENTS

On December 29, 1997, the Company completed the acquisition of 2 offshore
platform drilling rigs, one self-propelled jack-up drilling/workover rig and
substantially all of the assets used in the offshore contract drilling business
in Trinidad (the "Well Services Acquisition") previously operated by Well
Services (Marine) Ltd. ("Well Services"), pursuant to an Asset Purchase
Agreement dated as of December 29, 1997, by and among Cliffs Drilling Trinidad
Offshore Limited, a Trinidad and Tobago private limited company which is
wholly-owned by the Company and one of its affiliates; Well Services; Charles A.
Brash of San Fernando, Trinidad, W.I.; and Phillip A. Pollonais of San Fernando,
Trinidad, W.I. (collectively the "Sellers"). The purchase price totaled $44.0
million, consisting of cash of $23.5 million and the issuance by the Company of
437,939 shares of Common Stock, $.01 par value per share ("Common Stock"). An
additional $3.0 million of contingent cash consideration may be paid to the
Sellers if certain post-closing criteria are met. The outcome of the contingency
is not determinable at this time, and relates to the ultimate valuation of the
assets acquired. The 2 platform rigs and the jack-up drilling/workover rig are
currently operating under contracts in Trinidad. Substantially all of the
employees of Well Services used in its offshore drilling business have become
employees of the Company.

In March, 1998, the Company received a letter of intent from PDVSA
Exploration and Production, the Venezuelan government-owned oil company
("PDVSA"), to drill 60 turnkey wells in Venezuela. Aggregate revenues for the 60
wells are expected to range from approximately $450 million to $500 million
depending upon, among other things, various options to be elected by PDVSA. The
Company expects to commence drilling under the program in

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March or April, 1998. The program is expected to extend over approximately three
and one-half years and will utilize 7 of the Company's land drilling rigs which
are currently located in Venezuela. No assurance can be given that a contract
with acceptable terms will be negotiated, that all 60 wells will ultimately be
drilled, or that the program can be completed within the intended time frame.

On June 9, 1997, the Company effected a two-for-one stock split in the form
of a 100% stock dividend to holders of record on May 22, 1997 (the "Stock
Split"). All references to number of shares and per share amounts have been
restated to reflect the Stock Split, unless otherwise indicated.

INDUSTRY CONDITIONS AND COMPANY STRATEGY

Activity in the contract drilling industry and related oil service
businesses has improved recently due to increased worldwide demand for oil and
natural gas. Over the past several years, the supply of offshore drilling rigs
has declined while the demand for such rigs has increased, resulting in the
highest utilization rates since 1985. In addition, oil and gas companies have
experienced decreases in exploration and production costs from technological
advances such as increased use of 3-D seismic surveys, advances in drill bits
and completion technologies and use of new production techniques such as MOPUs
and subsea completions. In an effort to more quickly realize the significant gas
revenues attainable from shallow water drilling in the Gulf of Mexico, oil and
gas companies are producing reserves at faster rates. These enhanced production
methods increase the net present value of the reserves produced and
significantly shorten the reserve life in the Gulf of Mexico, thereby
necessitating additional drilling. In addition, the U.S. natural gas market has
improved after experiencing weak market conditions throughout the early 1990s.
All of these factors have resulted in increased demand for offshore drilling
rigs and an increase in both utilization and dayrates for jack-up drilling rigs.
During the last few months, crude oil prices have declined from 1997 levels. If
weak commodity prices were to extend over a long period of time, the Company's
business could be adversely affected. However, management believes the current
market dynamics in the Gulf of Mexico, South America, the Middle East and other
international areas will result in high utilization of the Company's rigs and
services.

As part of its business strategy, the Company has sought to identify
business opportunities that would expand its asset base, increase profitability
and enhance shareholder value. The Company's acquisition criteria include, among
others, transactions designed to increase operating leverage and diversify
geographically.

Acquisitions and Dispositions of Assets

Effective October 1, 1997, the Company exercised an option to purchase a
platform drilling rig which is currently operating in Brazil. The cash purchase
price was $4.3 million.

Effective August 1, 1997, the Company acquired substantially all of the
remaining 50% interest in the West Indies Drilling Joint Venture (the "WINDJV").
The purchase price was $8.4 million consisting of $6.0 million of cash and $2.4
million of debt assumed, net of various working capital amounts acquired.

On January 24, 1997, the Company completed the acquisition of the stock of
a subsidiary of Andrade Gutierrez Perfuracao Ltda., which owned the jack-up
drilling rig ATENA, four 1500 HP land drilling rigs, miscellaneous drilling
equipment and a contract to operate a platform rig in Brazil (the "AGP
Acquisition"). The purchase price was $28.5 million in cash.

On September 30, 1996, the Company acquired a land rig from Quarles
Drilling Corp. for $2.9 million.

On June 19, 1996, Cliffs Drilling No. 11 completed its two-year bareboat
charter as a workover rig in the U.S. Gulf of Mexico, and the charterer
exercised its option to purchase the unit for $5.4 million, resulting in a gain
of $2.7 million.

Southwestern Rigs was (a) $103.8 million in cash (after reductions of $6.2
million for required refurbishments of certain Southwestern Rigs not made prior
to closing) plus (b) issuance of 1.2 million shares (pre-split basis) of the
Company's Common Stock and (c) assumption of certain contractual liabilities,
including the Company's guarantee of $4.25 million in indebtedness of the WINDJV
to Citibank N.A. related to the refurbishment of the jack-up drilling rig owned
by it (together with accrued but unpaid interest thereon and costs of
collection). The 50% interest in the WINDJV acquired by the Company is actually
the interest held by Cliffs Drilling Trinidad Limited, which the Company
acquired on the same day.

On May 10, 1996, the Company acquired the jack-up drilling rig OCEAN
MAGALLANES from Diamond Offshore Southern Company ("Diamond") for $4.5 million.
The Company renamed this unit Cliffs Drilling 155.

CONTRACT DRILLING AND MOPU OPERATIONS

Management has adopted a proactive approach to identify, develop and
exploit 3 market segments which the Company believes provide higher margins and
reliable operating income and cash flow. The Company's major business segments
are daywork drilling, engineering services and MOPU operations. See Note 13 of
Notes to Consolidated Financial Statements.

Daywork Drilling

The Company began operations as a daywork contract driller in the Gulf of
Mexico and the Texas/Louisiana Gulf Coast region. Because of depressed
conditions in the domestic oil and gas industry during the 1980s and early
1990s, the Company sold certain drilling rigs and deployed its remaining rigs
into selected international markets. These strategic decisions were made to
enable the Company to stabilize cash flows during an extended market downturn.
The Company currently has an established base of term contracts in both drilling
and production operations.

Under daywork drilling contracts, the Company provides a drilling rig with
required personnel to the operator, who supervises the drilling of the
contracted well. Compensation to the Company is based on a negotiated rate per
day that the rig is utilized. Daywork drilling contracts generally specify the
type of equipment to be used, the size of the hole and the depth of the proposed
well. Under a daywork drilling contract, the Company generally bears no part of
the costs due to downhole losses (such as time delays for various reasons,
including stuck drill stem and blowout).

Most of the Company's drilling contracts are obtained through competitive
bids. Generally, domestic drilling contracts are for a single well or multiple
wells, while foreign drilling contracts are generally for a period of one to
three years, with the terms and rates varying depending upon the nature and
duration of the work, the equipment and services supplied and other matters. The
contracts typically obligate the Company to pay certain operating expenses,
including wages of drilling personnel, maintenance expenses, incidental rig
supplies, equipment and local office facilities. Domestic drilling contracts are
typically subject to termination by the customer on short notice. Foreign
drilling contracts generally require longer notice periods for termination and
also may require that the customer pay mobilization and demobilization expenses.

The Company currently owns and operates 30 drilling rigs, including 16
jack-up drilling rigs, 11 land drilling rigs and 3 platform drilling rigs. Of
the 16 jack-up drilling rigs owned by the Company, 15 are cantilevered, 7 have
top drives and substantially all have been refurbished in the last five years.
The Company currently operates 8 jack-up rigs in the Gulf of Mexico, 2 jack-up
rigs in each of Venezuela, Qatar and Trinidad, and one jack-up rig in Mexico.
One jack-up rig is currently in the shipyard undergoing conversion from a MOPU
to a drilling rig and is contracted to work offshore Venezuela for a one-year
term once the conversion is completed. The Company also operates 8 land rigs in
Venezuela, 2 platform rigs in Trinidad and one platform rig in Brazil. The
Company has 2 land rigs which are currently being reactivated in Venezuela and
one that will commence operations in June, 1998.

Engineering Services

The Company has been active in drilling wells on a turnkey basis since
1982. The Company believes that its downhole engineering expertise, extensive
operating experience, veteran personnel and risk management capabilities have
allowed the Company to reduce the risks inherent in turnkey drilling operations.

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Under a turnkey drilling contract, the Company contracts to drill a well to
a contract depth under specified conditions for a fixed price. In addition, the
Company provides technical expertise and engineering services, as well as most
of the equipment required for the well, and is compensated when the contract
terms have been satisfied. On a turnkey well, the Company from time to time
operates rigs subcontracted from other drilling contractors on a dayrate basis.
The Company also subcontracts substantially all of the related services and
manages the drilling process. The risks to the Company on a turnkey drilling
contract are substantially greater than on a well drilled on a daywork basis
because the Company assumes most of the risks associated with drilling
operations generally assumed by the operator in a daywork contract, including
risk of blowout, loss of hole, stuck drill stem, machinery breakdowns, abnormal
drilling conditions and risks associated with subcontractors' services, supplies
and personnel. The Company employs a technically proficient and experienced
engineering staff that examines the available seismic, geologic and drilling
data to identify and minimize many of the drilling risks assumed by the Company.
The Company believes that the application of this expertise allows it to
evaluate the risks of a proposed contract and bid accordingly. When possible,
the Company seeks fixed price contracts from its subcontractors to minimize or
eliminate cost fluctuations. The Company also maintains insurance coverage
against certain drilling hazards. See "Business and Properties -- Risks and
Insurance."

In recent years, the domestic turnkey drilling market has become more
competitive as more companies entered the market and margins were reduced.
Domestic turnkey operators have been very aggressive in pricing Gulf of Mexico
turnkeys, and competition is intense. The Company has shifted its emphasis
toward drilling more international turnkeys, principally in Venezuela, where
margins have been greater. International turnkeys have achieved greater
acceptance, and the Company believes that expansion opportunities exist in this
market. The Company believes its expertise has enabled it to be more selective
in its turnkey drilling operations and to achieve profitable turnkey drilling
operating results.

From 1982 through December 31, 1997, the Company completed 284 turnkeys
with aggregate revenues of $781.3 million, direct income before depreciation and
allocated overhead of $111.4 million and operating income of $81.5 million. The
Company completed 14 turnkey drilling contracts during 1997 and 13 turnkey
drilling contracts during 1996, with revenues of $91.2 million and $56.1
million, respectively. The increase in revenues was primarily attributable to
the mix of turnkey wells drilled during 1997 and 1996, respectively, with more
international turnkeys drilled during 1997. Four turnkey drilling contracts were
completed from December 31, 1997 to February 28, 1998 with contract revenues of
$28.1 million. The Company currently has one Venezuelan and 2 domestic turnkey
drilling contracts in progress with aggregate expected contract revenues of
approximately $16.5 million.

In March, 1998, the Company received a letter of intent from PDVSA to drill
60 turnkey wells in Venezuela. Aggregate revenues for the 60 wells are expected
to range from approximately $450 million to $500 million depending upon, among
other things, various options to be elected by PDVSA. The Company expects to
commence drilling under the program in March or April, 1998. The program is
expected to extend over approximately three and one-half years and will utilize
7 of the Company's land drilling rigs which are currently located in Venezuela.
No assurance can be given that a contract with acceptable terms will be
negotiated, that all 60 wells will ultimately be drilled, or that the program
can be completed within the intended time frame.

MOPU Operations

Since 1989, the Company has pioneered the development and operation of
MOPUs, which allow the Company to participate in the more stable oil and gas
production market. MOPUs are offshore production systems, usually converted
jack-up rigs, from which the drilling equipment is removed and production
equipment is installed. MOPUs are generally contracted on a dayrate basis for a
period of years or a period of time sufficient to obtain the economic production
from an offshore oil and gas field or wells within such field. These contracts
are characterized by relatively high operating margins, with most of the
operating costs assumed by the customer. Under such contracts, the Company is
generally responsible for maintenance, operation and repair of the MOPU hull
structure. The Company is generally not responsible for risk of pollution or for
damage to or replacement of the customer's production equipment, although the
Company generally is responsible for damage to its own production equipment. The
Company maintains insurance coverage against risk of damage to or loss of the
MOPUs and related equipment as is customary in the industry. See "Business and
Properties -- Risks and Insurance." It is not unusual for such contracts to
contain renewal provisions at the option of the customer.

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The Company currently owns 4 MOPUs capable of operating in both domestic
and foreign waters. Two of the MOPUs are currently operating in the Gulf of
Mexico and 2 are working in international locations. Contracts on the 2
international MOPUs include buy-out options.

Drilling Rigs and MOPUs

The following table provides the current status of and information about
the drilling rigs and MOPUs owned and operated by the Company. Most of these
assets are pledged to secure the Company's revolving credit facility (the
"Revolving Credit Facility") with ING (U.S.) Capital Corporation ("ING"),
formerly International Nederlanden (U.S.) Capital Corporation.

<TABLE>
<CAPTION>
RATED DEPTH
YEAR DELIVERED/ ---------------- TYPE OF EXPIRATION
EQUIPMENT TYPE(a) REFURBISHED WATER DRILLING LOCATION CONTRACT DATE
--------- ------- --------------- ----- -------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
JACK-UP DRILLING RIGS
Domestic(8)
Cliffs Drilling 100........ MC 1982 / 1993 100' 25,000' Gulf of Mexico Multiple Wells June, 1998
Cliffs Drilling 150........ IC 1979 / 1994 150' 20,000' Gulf of Mexico Multiple Wells March, 1999
Cliffs Drilling 151........ IC 1981 / 1993 150' 25,000' Gulf of Mexico Term Daywork September, 1998
Cliffs Drilling 152........ MC 1980 / 1993 150' 25,000' Gulf of Mexico Term Daywork June, 1998
Cliffs Drilling 153........ MC 1980 / 1994 150' 25,000' Gulf of Mexico Term Daywork September, 1998
Cliffs Drilling 154........ IC 1979 / 1996 150' 20,000' Gulf of Mexico Multiple Wells April, 1998
Cliffs Drilling 180........ MS 1978 / 1997 184' 25,000' Gulf of Mexico Multiple Wells May, 1998
Cliffs Drilling 200........ MC 1979 / 1992 200' 25,000' Gulf of Mexico Multiple Wells June, 1998
International(8)
LASALLE.................... IC 1982 / 1997 190' 25,000' Qatar Term Daywork April, 2000
Cliffs Drilling 101(b)..... MC 1973 / 1991 100' N/A Trinidad Term Daywork February, 1999
Cliffs Drilling 155........ IC 1980 / 1996 150' 22,000' Venezuela Term Daywork April, 1998
Cliffs Drilling 156........ IC 1983 150' 25,000' Venezuela Term Daywork March, 1998
Cliffs Drilling 160........ IC 1980 / 1996 160' 20,000' Qatar Term Daywork August, 1998
Cliffs Drilling 201........ MC 1980 / 1996 200' 20,000' Mexico Term Daywork October, 1998
Cliffs Drilling 202........ MC 1980 / 1998 200' 25,000' Shipyard Term Daywork June, 1999
Southwestern Marine 4...... MC 1982 / 1996 110' 25,000' Trinidad Term Daywork June, 1998
PLATFORM DRILLING RIGS
International(3)
Cliffs Drilling 1.......... -- 1988 -- 18,000' Trinidad Term Daywork January, 1999
Cliffs Drilling 3.......... -- 1993 -- 25,000' Trinidad Term Daywork September, 1998
Cliffs Drilling 17......... -- 1996 -- 12,000' Brazil Term Daywork November, 2000
LAND DRILLING RIGS
International(11)
Cliffs Drilling 28(c)...... -- 1977 / 1994 -- 25,000' Venezuela Term Daywork September, 2001
Cliffs Drilling 34......... -- 1980 / 1997 -- 18,000' Venezuela Multiple Wells August, 1998
Cliffs Drilling 35......... -- 1980 / 1997 -- 18,000' Venezuela Term Daywork June, 1999
Cliffs Drilling 36(c)...... -- 1982 / 1998 -- 18,000' Venezuela Term Daywork September, 2001
Cliffs Drilling 37(c)...... -- 1982 / 1998 -- 18,000' Venezuela Term Daywork September, 2001
Cliffs Drilling 40(c)...... -- 1980 / 1991 -- 25,000' Venezuela Term Daywork September, 2001
Cliffs Drilling 41(c)...... -- 1981 / 1994 -- 25,000' Venezuela Term Daywork September, 2001
Cliffs Drilling 42(c)...... -- 1981 / 1994 -- 25,000' Venezuela Term Daywork September, 2001
Cliffs Drilling 43(c)...... -- 1981 / 1991 -- 25,000' Venezuela Term Daywork September, 2001
Cliffs Drilling 54......... -- 1981 / 1995 -- 30,000' Venezuela Term Daywork December, 1999
Cliffs Drilling 55......... -- 1983 / 1997 -- 35,000' Venezuela Term Daywork May, 1998
MOBILE OFFSHORE PRODUCTION UNITS
Domestic(2)
Cliffs Drilling 4.......... -- 1967 / 1995 150' -- Gulf of Mexico Month-to-Month N/A
Cliffs Drilling 8.......... -- 1977 / 1993 250' -- Gulf of Mexico Term Daywork December, 1998
International(2)
Cliffs Drilling 10......... -- 1979 / 1993 250' -- Qatar Term Daywork October, 1998
LANGLEY.................... -- 1965 / 1996 150' -- Nigeria Term Daywork December, 2001
</TABLE>

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(a) Abbreviations:

MC = mat supported cantilever jack-up mobile offshore drilling unit

IC = independent leg cantilever jack-up mobile offshore drilling unit

MS = mat supported slot jack-up mobile offshore drilling unit

(b) Workover jack-up rig acquired in the Well Services Acquisition.

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Utilization

The Company's rigs are inactive from time to time. The Company believes
that its stacking procedures minimize stacking and maintenance costs, and that
the stacked rigs could be placed in service with minimal cost and delay should
it become attractive to do so. Currently, the Company's rig fleet is operating
at essentially full utilization. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for further discussion.

Foreign Operations

For the fiscal years ended December 31, 1997, 1996 and 1995, 63%, 55% and
63%, respectively, of the Company's consolidated revenues were derived from
foreign operations, principally in Venezuela and the Middle East. See Note 14 of
Notes to Consolidated Financial Statements.

The Company currently operates 7 jack-up drilling rigs in international
locations, including 2 jack-up rigs in each of Venezuela, Qatar and Trinidad,
and one jack-up drilling rig in Mexico. One jack-up rig is currently in the
shipyard undergoing conversion from a MOPU to a drilling rig and is contracted
to work offshore Venezuela for a one-year term once the conversion is completed.
The Company currently operates 8 land drilling rigs in Venezuela, 2 platform
rigs in Trinidad and one platform rig in Brazil. The Company has 2 land rigs
which are currently being reactivated in Venezuela and one that will commence
operations in June, 1998. In addition, the Company currently operates one MOPU
in Qatar and one MOPU in Nigeria.

On May 23, 1996, the Company acquired the stock of Viking Trinidad Limited
(renamed Cliffs Drilling Trinidad Limited), which owned a 50% interest in the
WINDJV. The WINDJV was a joint venture between Cliffs Drilling Trinidad Limited
and Well Services, which owned a jack-up drilling rig. On August 1, 1997, Cliffs
Drilling Trinidad Limited acquired an additional 49% interest in the WINDJV from
Well Services. On December 29, 1997, the Company acquired the remaining 1%
interest in the WINDJV from Well Services.

In 1996, the Company became a 50% joint venture partner with Perforadora
Central, S.A. de C.V. by forming Cliffs Central Drilling International ("CCDI")
for the marketing of drilling services in Mexico.

In 1996, the Company became a 1/3 (33 1/3%) owner of Servicios Integrados
Petroleros C.C.I., S.A. ("CCI"). CCI is a joint venture company among the
Company, Inelectra S.A. and Cementaciones Petroleras Venezolanas C.A. which
markets drilling services in Venezuela.

Operations of the Company which are conducted in foreign countries are
subject to certain political, economic and other uncertainties. See "Business
and Properties -- Risks Inherent in Foreign Operations."

Customers

The Company's largest customer for the years ended December 31, 1997 and
1996, Corpoven, S.A. ("Corpoven"), accounted for approximately 31% of the
Company's consolidated revenues during both years. The Company's 3 largest
customers for the year ended December 31, 1995, Corpoven, Maraven, S.A. and
Texaco Exploration & Production, Inc., accounted for approximately 66% of the
Company's consolidated revenues. The loss of any significant customer could, at
least on a short-term basis, have a material adverse impact on the Company's
results of operations. See Note 13 of Notes to Consolidated Financial
Statements.

Equipment and Supplies

The Company obtains required supplies, services and equipment from a
variety of sources. The Company has not in the past experienced significant
shortages of such materials necessary to conduct the Company's business.
However, equipment availability has been reduced and shortages could occur in
the future which could have a material adverse effect on the Company's
operations. There may be additional delays or shortages associated with
obtaining supplies, services and equipment, particularly with respect to the
Company's foreign operations.

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Labor

The Company employees both domestic and foreign personnel. The Company has
not in the past experienced significant shortages of qualified labor necessary
to conduct the Company's business. However, labor shortages could occur in the
future which could have a material adverse effect on the Company's operations.

Competition

Demand for offshore drilling rigs and utilization are much improved from
previous years. However, the drilling industry remains highly competitive, and
no one or few drilling contractors is dominant. The Company competes with
numerous other drilling contractors, some of which are substantially larger than
the Company and possess appreciably greater financial and other resources.
During the last several years, there have been several business consolidations
which have reduced the fragmented nature of the drilling industry. Although this
has decreased the total number of competitors, the Company believes that
competition for drilling contracts will continue to be intense in the
foreseeable future.

Price competition is generally the major factor in the energy service
industry, but the technical capability of specialized drilling equipment and
personnel at the time and place required by customers is also important. Other
competitive factors include technical and engineering expertise, work force
experience, rig suitability, safety record, efficiency, condition of equipment,
reputation and customer relations. The Company believes that it competes
favorably with respect to all of these factors. If demand for drilling rigs
increases in the future, rig availability may also become a competitive factor.
Competition is usually on a regional basis; however, drilling rigs are mobile
and can be moved from one region to another in response to increased demand, and
an oversupply of rigs in any region may result. The Company's domestic drilling
and MOPU operations are concentrated in the Texas/Louisiana Gulf Coast area, and
its foreign daywork and turnkey drilling operations are primarily in Venezuela
and the Middle East. In foreign markets, the Company competes with many of the
same competitors under the same factors as in the domestic markets. Demand for
onshore and offshore drilling and production equipment is also dependent on the
exploration and development programs of oil and gas companies, which are in turn
influenced by the financial condition of such companies, general economic
conditions, prices of oil and gas and political considerations and policies.
Improved technologies such as 3-D seismic, subsea completions, floating
production systems and directional drilling have reduced the number of wells
necessary to maintain or even increase supplies of oil and gas, and have
therefore improved overall industry fundamentals.

Historically, there have been few drilling contractors specializing in
turnkey drilling contracts because of the extent of engineering and technical
expertise required to manage the risks inherent in turnkey drilling operations,
the magnitude of management commitment and the financial resources required. In
recent years, the turnkey drilling market has become more competitive as more
companies entered the market and margins were reduced. Domestic turnkey
contractors have been very aggressive in pricing Gulf of Mexico turnkeys and
competition is intense.

In order to remain competitive in the current environment, the Company has
enhanced its geographical diversification, participated in turnkey drilling
contracts, developed and marketed well engineering and management services and
become active in the development and operation of MOPUs. The Company believes
that MOPUs offer several economic advantages to oil and gas operators, namely,
optimizing the use of exploration budgets by avoiding the high capital costs of
production platforms, providing more flexibility than conventional fixed
platforms in producing oil and gas and allowing for the economic development of
smaller reserves. Although the Company believes there is a market for additional
MOPUs, the Company can give no assurance that there will be sufficient demand
for MOPUs at rates which are profitable, particularly given the increased
capital costs of rigs which are suitable for conversion. Moreover, MOPUs are not
widely utilized, and most companies that do utilize MOPUs own and operate their
own units. The Company believes that its experience in MOPU operations enables
it to compete favorably in the MOPU market.

OIL AND GAS OPERATIONS

Since 1987, the Company has engaged in oil and gas exploration and
production activities in conjunction with marketing the Company's contract
drilling services, primarily turnkey, under the Company's contract drilling
support ("CDS") program. Under this program, the Company has taken working
interests in oil and gas properties in connection with the award to the Company
of a drilling contract. The Company's policy has been that its working interest
in such CDS wells would generally not exceed 25%. In 1993, the Company began to
de-emphasize its CDS
8
<PAGE> 10

program due to marginal financial performance of the segment. The Company's oil
and gas operations are not significant; therefore, applicable disclosures are
not required at December 31, 1997 and 1996 or for each of the three years in the
period ended December 31, 1997.

ENVIRONMENTAL CONTROLS

The Company believes it is in substantial compliance with applicable
federal, state, local and foreign laws and regulations relating to environmental
controls. Also, the existence of such laws and regulations has not had, nor at
this time is expected to have, any materially restrictive effect on the Company.
To date, the Company has not accounted for costs or capital expenditures
incurred for environmental control facilities separately from other costs
incurred in the operation of its businesses. The Company does not, however,
believe that any such costs or expenditures have been material, and the Company
does not expect that under present conditions such costs or expenditures will
become material in the foreseeable future.

GOVERNMENT REGULATION

The drilling of oil and gas wells is subject to various federal, state,
local and foreign laws, rules and regulations. The Company, as an owner or
operator of domestic offshore facilities, may be liable for the costs of removal
and damages arising out of a pollution incident to the extent set forth in the
Federal Water Pollution Control Act, as amended by the Oil Pollution Act of 1990
and the Outer Continental Shelf Lands Act. In addition, the Company may also be
subject to other civil claims arising out of any such incident. Certain of the
Company's facilities are also subject to regulations of the Environmental
Protection Agency ("EPA") that require the preparation and implementation of
spill prevention control and countermeasure plans relating to possible discharge
of oil into navigable waters. The Company supplements its activities in this
regard by membership in the Clean Gulf Association, which provides pollution
control facilities to its members. Other regulations of the EPA may require the
Company to take certain precautions in storing, handling and transporting
certain hazardous wastes. State statutory provisions relating to oil and natural
gas generally include requirements as to well spacing, waste prevention,
production limitations, pollution prevention and clean-up, obtaining drilling
permits and similar matters. The Company believes that it is in compliance in
all material respects with such laws, rules and regulations and that such
compliance has not had any material adverse effect on its operations or
financial condition.

The drilling industry is dependent on the demand for services from the oil
and gas exploration industry and, accordingly, is affected by changing tax laws,
price controls and other laws relating to the energy business. The Company's
business is affected generally by political developments and by federal, state,
local and foreign laws, rules and regulations which may relate directly to the
oil and gas industry. The adoption of laws, rules and regulations, both domestic
and foreign, which curtail exploration and development drilling for oil and gas
for economic, environmental and other policy reasons may adversely affect the
Company's operations by limiting available drilling and production
opportunities. The Company's foreign operations are subject to political,
economic and other uncertainties associated with foreign operations generally,
as well as the additional risks of fluctuating currency values and exchange
controls. Governments may from time to time suspend or curtail drilling
operations or leasing activities when such operations are considered to be
detrimental to the environment or to jeopardize public safety.

MOPUs and MOPU operations are subject to certain federal, state, local and
foreign laws, rules and regulations relating to engineering, design, structural,
safety, operational and inspection standards or requirements, and changes in
such standards or requirements could adversely affect the Company's MOPU
operations.

RISKS AND INSURANCE

The Company's operations are subject to the many hazards inherent in the
drilling business, including, for example, blowouts, cratering, fires,
explosions and adverse weather and seas. These hazards could cause personal
injury, suspend drilling operations or seriously damage or destroy the equipment
involved and could cause substantial damage to producing formations and
surrounding areas. Damage to the environment could also result from the
Company's operations, particularly through oil spillage and extensive,
uncontrolled fires. As a protection against operating hazards, the Company
maintains broad insurance coverage, including all risks physical damage,
employer's liability, comprehensive general liability or commercial contract
indemnity and workers' compensation insurance. The Company's

9
<PAGE> 11

third party liability insurance coverage is approximately $250 million per
occurrence. The Company believes that it is adequately insured for public
liability and property damage to others with respect to its operations. However,
such insurance may not be sufficient to protect the Company against liability
for all consequences of well disasters, extensive fire damage or damage to the
environment. The Company also carries insurance to cover physical damage to or
loss of its drilling rigs and MOPUs and loss of hire insurance coverage. In view
of difficulties that may be encountered in renewing such insurance at reasonable
rates, no assurance can be given that the Company will be able to maintain the
type and amount of coverage that it considers adequate. The occurrence of a
significant event for which the Company is not fully insured could have a
material adverse effect on the Company's financial position and results of
operations.

The Company also maintains insurance coverage to protect against certain
hazards inherent in its turnkey contract drilling and oil and gas operations.
This insurance was most recently renewed on October 1, 1997, and is scheduled
for renewal on October 1, 1999. This insurance, which is principally through
Underwriters at Lloyd's and Institute of London Underwriters Companies, covers
"control of well" (including blowouts above and below the surface); cratering;
seepage and pollution; and care, custody and control. The Company believes that
it maintains insurance in accordance with industry standards. The Company's
current insurance program provides $500,000 coverage per occurrence for care,
custody and control, and $75 million or $25 million, depending on the well
project, coverage per occurrence for control of well, cratering and seepage and
pollution associated with foreign operations. The amount of coverage per
occurrence provided by the Company's current insurance program for domestic
land, coastal and inland water, and offshore operations is $10 million, $20
million and $30 million, respectively, for control of well, cratering and
seepage and pollution. Each form of coverage provides for a retention amount for
the account of the Company, as well as a maximum limit of liability. Each
casualty is an occurrence, and there may be more than one such occurrence on a
well, each of which would be subject to a separate retention amount. No
assurance can be given that the Company will be able to maintain the types and
amounts of coverage that it considers adequate with respect to its turnkey
drilling and oil and gas operations. If the Company were unable to insure
against certain of these risks, either because such insurance was no longer
available or because the premium costs became too great in relation to the
coverage afforded, the Company's insurance might not be adequate to protect the
Company against liability from all consequences of well disasters, downhole
problems, extensive fire damage or damage to the environment. The occurrence of
a casualty or loss against which the Company is not fully insured could have a
material adverse effect on the Company's financial position.

RISKS INHERENT IN FOREIGN OPERATIONS

For the fiscal year ended December 31, 1997, 63% of the Company's
consolidated revenues was derived from foreign sources or from services
performed abroad, principally in Venezuela and the Middle East. Foreign
operations and export sales are subject in varying degrees to risks inherent in
doing business abroad. Such risks include the possibility of unfavorable changes
in tax or other laws; partial or total expropriation; currency exchange rate
fluctuations and restrictions on currency repatriation; the disruption of
operations from labor and political disturbances, insurrection or war; and the
requirements of partial local ownership of operations in certain countries.
Foreign governments may from time to time suspend or curtail drilling operations
or leasing activities when such operations are considered to be detrimental to
the environment or to jeopardize public safety. Generally, the Company purchases
insurance to protect against some or all losses due to events of political
risks, such as nationalization, expropriation, war, confiscation and
deprivation. Occasionally, customers will indemnify the Company against such
losses. See "Business and Properties -- Government Regulation."

EMPLOYEES

At December 31, 1997, the Company employed 1,725 persons as follows:

<TABLE>
<CAPTION>
SALARIED HOURLY
EMPLOYEES EMPLOYEES
--------- ---------
<S> <C> <C>
Domestic.................................................... 155 517
Venezuela................................................... 262 395
Trinidad.................................................... 77 245
Other....................................................... 54 20
</TABLE>

10
<PAGE> 12

There were no collective bargaining contracts covering the Company's
domestic employees or employees in foreign locations in effect as of December
31, 1997, except for employees in Venezuela who are covered by the Collective
Labor Contract of the Venezuelan Petroleum Industry.

OTHER PROPERTIES

The Company owns an office building and warehouse on a 2.5 acre tract of
land in Lafayette Parish, Louisiana. The Company leases additional properties,
including its executive offices in Houston, Texas, a yard in Lafayette,
Louisiana, and several field offices in international locations.

ITEM 3. LEGAL PROCEEDINGS

The Company is party to a number of lawsuits which are ordinary, routine
litigation incidental to the Company's business, the outcome of which,
individually, or in the aggregate, is not expected to have a material adverse
effect on the Company's financial condition or results of operations.

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

The Company did not hold a meeting of stockholders or otherwise submit any
matter to a vote of stockholders in the fourth quarter of 1997.

PART II

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

The Common Stock of the Company is traded on the New York Stock Exchange
under the symbol "CDG." The following table sets forth the range of high and low
sales prices per share of Common Stock for each calendar quarter, as reported by
The Nasdaq stock market for the periods through April 2, 1997, and as reported
by the New York Stock Exchange for periods from and after April 3, 1997, when
the Common Stock began trading on the New York Stock Exchange.

<TABLE>
<CAPTION>
SALES PRICE*
---------------
HIGH LOW
---- ---
<S> <C> <C>
1997
1st Quarter............................................... $39 3/4 $20 5/8
2nd Quarter............................................... $37 1/8 $26 15/16
3rd Quarter............................................... $70 1/2 $36 3/8
4th Quarter............................................... $82 $42
1996
1st Quarter............................................... $ 7 7/8 $ 6 7/8
2nd Quarter............................................... $17 $ 7 5/8
3rd Quarter............................................... $18 3/8 $12 7/8
4th Quarter............................................... $34 5/8 $16 3/4
</TABLE>

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

* Retroactively adjusted to reflect a two-for-one stock split effected in the
form of a 100% stock dividend effective May 22, 1997.

On March 4, 1998, the closing sale price of the Company's Common Stock, as
reported by the New York Stock Exchange, was $39 5/8 per share. On that date,
there were approximately 1,706 holders of record of the Company's Common Stock.

The Company has never paid cash dividends on its Common Stock, and it is
not anticipated that cash dividends will be paid to holders of Common Stock in
the foreseeable future. Under the Company's 10.25% Senior Notes due 2003 (the
"Senior Notes") and Revolving Credit Facility with ING, the Company is
restricted from declaring, making

11
<PAGE> 13

or paying cash dividends on the Common Stock. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Note 9 of Notes
to Consolidated Financial Statements.

The Company's $2.3125 Convertible Exchangeable Preferred Stock ("Preferred
Stock") was traded on The Nasdaq stock market during 1995 under the symbol
"CLDRP." On January 17, 1996, the Company issued 2,113,557 shares (pre-split
basis) of Common Stock upon conversion of 1,115,988 shares of its 1,150,000
issued and outstanding shares of Preferred Stock. The remaining 34,012 shares of
Preferred Stock were redeemed for cash in the amount of $25.69 per share plus
$.22 per share in accrued and unpaid dividends thereon through the redemption
date at a cost to the Company of approximately $.9 million. Holders of shares of
the Preferred Stock had the option to convert any or all of such shares of
Preferred Stock into fully paid and nonassessable shares of Common Stock of the
Company prior to the redemption date at a rate of 1.89394 shares of Common Stock
for each full share of Preferred Stock. No payment or adjustment was made upon
any conversion of shares of Preferred Stock on account of any dividends on the
shares surrendered for conversion, and the holder lost any right to payment of
dividends on the shares surrendered for conversion. No fractional shares of
Common Stock were issued upon conversion but, in lieu thereof, an appropriate
amount was paid in cash by the Company based upon the reported last sales price
for the shares of Common Stock on the date of conversion. The right of holders
of Preferred Stock to convert shares of Preferred Stock into Common Stock
terminated on the redemption date.

On December 29, 1997, the Company purchased substantially all of the assets
used in the offshore contract drilling business in Trinidad previously owned and
operated by Well Services. The purchase price totaled $44.0 million, consisting
of cash of $23.5 million and the issuance by the Company of 437,939 shares of
Common Stock. The shares of Common Stock were issued to Well Services in
reliance on an exemption from registration provided by Section 4(2) of the
Securities Act of 1933, as amended, as a transaction by the issuer not involving
a public offering. An additional $3.0 million of contingent cash consideration
may be paid to the Sellers if certain post-closing criteria are met. See
"Business and Properties -- Recent Developments."

12
<PAGE> 14

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth certain selected consolidated financial
information of the Company. The amounts as of and for each of the five years in
the period ended December 31, 1997 have been derived from audited consolidated
financial statements of the Company. This information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and Notes
thereto included elsewhere herein. The selected consolidated financial data
provided below are not necessarily indicative of the future results of
operations or financial performance of the Company.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Revenues.............................. $263,632 $133,109 $ 83,289 $ 83,693 $ 65,538
Costs and Expenses:
Operating Expenses................. 148,158 91,984 67,713 50,907 35,171
Depreciation, Depletion and
Amortization..................... 20,443 10,388 7,271 14,008 17,438
Contract Termination Provision..... -- -- -- 5,193 577
General and Administrative
Expense.......................... 8,731 6,300 5,289 5,114 4,807
-------- -------- -------- -------- --------
Operating Income...................... 86,300 24,437 3,016 8,471 7,545
Interest Expense...................... (17,838) (9,265) (199) (826) (1,356)
Income Tax Expense.................... (25,124) (6,996) (2,406) (790) (685)
Other Income (Expense)(1)............. 3,321 6,246 5,035 (799) (1,878)
-------- -------- -------- -------- --------
Net Income............................ 46,659 14,422 5,446 6,056 3,626
Dividends Applicable to Preferred
Stock(2)........................... -- (31) (2,659) (2,659) (2,659)
-------- -------- -------- -------- --------
Net Income Applicable to Common and
Common Equivalent Shares........... $ 46,659 $ 14,391 $ 2,787 $ 3,397 $ 967
======== ======== ======== ======== ========
Net Income Per Common Share(3):
Basic.............................. $ 3.06 $ 1.05 $ 0.34 $ 0.40 $ 0.11
======== ======== ======== ======== ========
Diluted............................ $ 3.01 $ 1.02 $ 0.34 $ 0.40 $ 0.11
======== ======== ======== ======== ========
Weighted Average Number of Common and
Common Equivalent Shares
Outstanding(2)(3)(4):
Basic.............................. 15,237 13,736 8,192 8,428 8,984
======== ======== ======== ======== ========
Diluted............................ 15,493 14,083 8,213 8,447 9,028
======== ======== ======== ======== ========
SUMMARY BALANCE SHEET DATA:
Working Capital....................... $ 57,816 $ 68,221 $ 33,859 $ 19,331 $ 20,402
Property and Equipment, Net........... 369,227 216,474 65,950 71,248 86,506
Total Assets.......................... 500,151 339,546 128,962 120,167 133,523
Notes Payable, Long-Term.............. -- -- -- -- 13,108
10.25% Senior Notes(5)................ 203,606 150,000 -- -- --
Redeemable Preferred Stock(2)......... -- -- 28,750 28,750 28,750
Total Shareholders' Equity(2)(4)(6)... $215,929 $142,168 $ 74,015 $ 70,881 $ 72,494
</TABLE>

13
<PAGE> 15

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

(1) The following summarizes items of "Other Income (Expense)":

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1997 1996 1995 1994 1993
------- ------ ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Gain on Disposition of Assets... $ 3,150 $3,694 $ 2,666 $ 665 $ 2,016
Interest Income................. 1,941 2,725 1,065 815 858
Exchange Rate Gain (Loss)....... (174) -- 2,554 (1,168) (443)
Litigation Settlement and
Expenses...................... -- -- -- -- (3,703)
Other, net...................... (1,596) (173) (1,250) (1,111) (606)
------- ------ ------- ------- -------
Other Income (Expense)... $ 3,321 $6,246 $ 5,035 $ (799) $(1,878)
======= ====== ======= ======= =======
</TABLE>

(2) On January 17, 1996, the Company issued 2,113,557 shares (pre-split basis)
of Common Stock upon conversion of 1,115,988 shares of its 1,150,000 issued
and outstanding shares of Preferred Stock. The remaining 34,012 shares of
Preferred Stock were redeemed for cash in the amount of $25.69 per share
plus $0.22 per share in accrued dividends thereon at a cost to the Company
of approximately $.9 million.

(3) The net income per common share amounts and weighted average number of
common and common equivalent shares outstanding prior to 1997 have been
restated as required to comply with Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("SFAS No 128"). For further
discussion of earnings per share and the impact of SFAS No. 128, see Note 1
of Notes to Consolidated Financial Statements. In addition, net income per
common share and weighted average number of common and common equivalent
shares have been retroactively adjusted to reflect a two-for-one stock split
effected in the form of a 100% stock dividend effective May 22, 1997.

(4) The Company issued 1,200,000 shares (pre-split basis) of Common Stock on May
23, 1996 in connection with the acquisition of the Southwestern Rigs and
437,939 shares of Common Stock on December 29, 1997 in connection with the
Well Services Acquisition.

(5) In part to finance the acquisition of the Southwestern Rigs, the Company
sold $150 million of Senior Notes on May 23, 1996. On August 7, 1997, the
Company sold an additional $50 million of Senior Notes at a premium for
various rig acquisitions and upgrades.

(6) The Company has not paid any cash dividends on its Common Stock.

14
<PAGE> 16

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

GENERAL

Activity in the contract drilling industry and related oil service
businesses has improved recently due to increased worldwide demand stemming from
higher levels of pricing for oil and natural gas. Over the past several years,
the supply of offshore drilling rigs has declined while the demand for such rigs
has increased, resulting in increases in worldwide utilization rates. The
financial condition and results of operations of the Company and other drilling
contractors are dependent upon the price of oil and natural gas, as demand for
their services is primarily dependent upon the level of spending by oil and gas
companies for exploration, development and production activities. Crude oil and
natural gas prices have continued to fluctuate over the last several years.
During the last few months, crude oil prices have declined from 1997 levels.
This price volatility creates some market uncertainties, despite the overall
improvement in oil and gas market fundamentals. The Company's daywork drilling
operations have benefited from the tight supply of jack-up drilling rigs both in
the U.S. Gulf of Mexico and internationally. Increased exploration activity
coupled with a reduction in rig availability has resulted in increasing dayrates
and utilization of the Company's drilling rigs. The same factors have positively
and negatively affected the Company's engineering services business segment, in
that increased exploration activity has caused an increase in demand for the
Company's engineering services; however, reduced rig availability has made it
more difficult for the Company to contract drilling rigs required for
performance of turnkey drilling operations.

The oil and gas industry has experienced extreme market cycles over the
past decade. The Company has endeavored to mitigate the effect of this
volatility by diversifying its scope of operations. To achieve its strategic
objective, the Company established separate but related lines of business in
daywork drilling, engineering services and MOPU operations. The Company also has
pursued foreign drilling and production opportunities in order to expand
geographically. Each of the Company's business segments will continue to be
affected, however, by the unsettled energy markets, which are influenced by a
variety of factors, including general economic conditions, the extent of
worldwide oil and gas production and demand therefor, government regulations and
environmental concerns.

RESULTS OF OPERATIONS

Year 1997 Versus 1996

The Company recognized net income of $46.7 million in 1997 compared to net
income of $14.4 million in 1996. Revenues increased $130.5 million and operating
income increased $61.9 million from 1996 to 1997. These increases were partially
offset by $8.6 million of increased interest expense associated with the Senior
Notes and $18.1 million of increased income taxes. Improved operating results
from the Company's daywork drilling and engineering services business segments
contributed to the increases in revenues and operating income.

<TABLE>
<CAPTION>
INCREASE
1997 1996 (DECREASE)
-------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Daywork Drilling.......................................... $173,602 $ 77,882 $ 95,720
Engineering Services...................................... 91,723 60,517 31,206
MOPU Operations........................................... 8,663 4,329 4,334
Oil and Gas............................................... 410 1,156 (746)
Eliminations.............................................. (10,766) (10,775) 9
-------- -------- --------
Consolidated...................................... $263,632 $133,109 $130,523
======== ======== ========
Operating Income (Loss):
Daywork Drilling.......................................... $ 71,623 $ 23,048 $ 48,575
Engineering Services...................................... 20,446 8,036 12,410
MOPU Operations........................................... 3,582 2,872 710
Oil and Gas............................................... (330) (3,108) 2,778
Corporate Office.......................................... (9,021) (6,411) (2,610)
-------- -------- --------
Consolidated...................................... $ 86,300 $ 24,437 $ 61,863
======== ======== ========
</TABLE>

15
<PAGE> 17

Daywork Drilling

Daywork drilling revenues increased $95.7 million and operating income
increased $48.6 million in 1997 compared to 1996. Since May, 1996, the Company
has acquired 12 jack-up drilling rigs, 5 land rigs, 3 platform rigs and the
WINDJV, which owns an additional jack-up drilling rig. Of the $48.6 million
increase in operating income, $38.9 million was generated from these rig
acquisitions. See "Business and Properties -- Industry Conditions and Company
Strategy," "Business and Properties -- Contract Drilling and MOPU Operations"
and "Liquidity and Capital Resources." Operating income also increased due to
improved dayrates for the Company's drilling rigs.

One jack-up rig is currently in the shipyard undergoing conversion from a
MOPU to a drilling rig and is contracted to work offshore Venezuela for a
one-year term once the conversion is completed.

The Company operates its drilling rigs on both a term and a spot
(well-to-well) basis. Drilling rigs contracted on a term basis generally work in
various international locations, while drilling rigs contracted on a spot basis
generally work in the U.S. Gulf of Mexico. The following table summarizes
revenues, utilization and average dayrates for significant classes of the
Company's drilling rigs:

<TABLE>
<CAPTION>
INCREASE
1997 1996 (DECREASE)
-------- ------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Daywork Drilling Revenues(1):
Jack-up Rigs:
International................................... $ 49,866 $17,989 $31,877
Domestic........................................ 77,849 33,984 43,865
Land Rigs.......................................... 32,812 20,403 12,409
Platform/Workover Rigs............................. 5,604 1,251 4,353
Other(2)........................................... 7,471 4,255 3,216
-------- ------- -------
Total........................................... $173,602 $77,882 $95,720
======== ======= =======
Average Rig Utilization(3):
Jack-up Rigs:
International................................... 100% 100%
Domestic........................................ 98% 96%
Land Rigs.......................................... 95% 100%
Platform/Workover Rigs............................. 98% 87%

Average Dayrates(4):
Jack-up Rigs:
International................................... $ 29,609 $25,724
Domestic........................................ 29,793 22,667
Land Rigs.......................................... 12,750 9,085
Platform/Workover Rigs............................. 12,304 5,259
</TABLE>

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

(1) Includes revenues earned from affiliates.

(2) Includes WINDJV operations in Trinidad prior to August 1, 1997, Brazilian
operations prior to October 1, 1997, CCDI joint venture operations in
Mexico, CCI joint venture operations in Venezuela during 1997 and 2 labor
maintenance contracts in Venezuela.

(3) Utilization rates are based upon the number of actively marketed rigs in the
fleet and exclude rigs which are unavailable for operations during periods
of refurbishment and upgrade.

(4) Daywork drilling revenues, less non-recurring revenues, divided by aggregate
contract days, adjusted to exclude days under contract at zero dayrate.

Engineering Services

Engineering services revenues increased $31.2 million and operating income
increased $12.4 million in 1997 compared to 1996. The Company completed 14
turnkey contracts in 1997 compared to 13 turnkey contracts in 1996.

16
<PAGE> 18

Ten of the 14 contracts completed during 1997 were international contracts in
Venezuela, while only 5 international contracts were completed during 1996.
International operating margins are currently stronger than domestic margins and
increased during 1997 due to improved drilling efficiencies and a reduction in
lost time well activities. Domestic turnkey contractors continue to bid wells
very aggressively, resulting in intense competition which has adversely affected
the Company's domestic turnkey margins.

The Company had 5 turnkey wells in progress at December 31, 1997, 4 of
which were completed by February 28, 1998.

MOPU Operations

MOPU revenues increased $4.3 million and operating income increased $.7
million in 1997 compared to 1996. The increases in revenues and operating income
were primarily due to operations associated with 2 MOPUs, neither of which
operated during 1996.

The Company currently owns 4 MOPUs, all of which are under contract and
currently operating.

Oil and Gas

Oil and gas revenues decreased $.7 million and operating losses decreased
$2.8 million in 1997 compared to 1996. Revenues decreased primarily due to
declines in production of both oil and gas. Operating losses in 1996 were
primarily due to approximately $2.9 million in costs associated with an
unsuccessful well drilled during the fourth quarter of 1996. The Company does
not expect any significant activity related to oil and gas exploration and
production activities during 1998.

Corporate Overhead

Corporate overhead increased $2.6 million in 1997 compared to 1996. The
increase was primarily due to increased costs associated with the Southwestern
operations and other employment-related costs.

Other Income (Expense) and Income Taxes

The Company recognized $39.6 million of other expense in 1997 compared to
$10.0 million of other expense in 1996. The net increase resulted primarily from
an $8.6 million increase in interest expense associated with the Senior Notes
and an increase in income taxes of $18.1 million. See "Liquidity and Capital
Resources."

The increase in income taxes relates primarily to the overall increase in
income from 1996 to 1997. The effective tax rates were 35% and 33% in 1997 and
1996, respectively, with 63% and 26%, respectively, of the recorded expense
constituting current taxes. The Company has utilized all foreign tax credit
carryforwards and current year foreign tax credits as a reduction of 1997
domestic income taxes and accordingly, has eliminated the related valuation
allowance of $1.6 million provided in prior years. See Note 6 of Notes to
Consolidated Financial Statements.

17
<PAGE> 19

Year 1996 Versus 1995

The Company recognized net income, before preferred dividends, of $14.4
million in 1996 compared to net income of $5.4 million in 1995. Revenues
increased $49.8 million and operating income increased $21.4 million from 1995
to 1996. Improved operating results from the Company's daywork drilling and
engineering services business segments contributed to the increases in revenues
and operating income.

<TABLE>
<CAPTION>
INCREASE
1996 1995 (DECREASE)
-------- ------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Daywork Drilling.......................................... $ 77,882 $26,363 $51,519
Engineering Services...................................... 60,517 56,970 3,547
MOPU Operations........................................... 4,329 4,920 (591)
Oil and Gas............................................... 1,156 2,788 (1,632)
Eliminations.............................................. (10,775) (7,752) (3,023)
-------- ------- -------
Consolidated...................................... $133,109 $83,289 $49,820
======== ======= =======
Operating Income (Loss):
Daywork Drilling.......................................... $ 23,048 $ 2,761 $20,287
Engineering Services...................................... 8,036 2,609 5,427
MOPU Operations........................................... 2,872 2,492 380
Oil and Gas............................................... (3,108) 541 (3,649)
Corporate Office.......................................... (6,411) (5,387) (1,024)
-------- ------- -------
Consolidated...................................... $ 24,437 $ 3,016 $21,421
======== ======= =======
</TABLE>

Daywork Drilling

Daywork drilling revenues increased $51.5 million and operating income
increased $20.3 million in 1996 compared to 1995. Of the $20.3 million increase
in operating income, $14.3 million was generated from 10 of 11 jack-up drilling
rigs acquired in May, 1996. Operating income also increased due to improved
dayrates for the Company's jack-up drilling rigs and land rigs. In addition,
Cliffs Drilling 54 worked the entire year in 1996 compared to approximately one
quarter of the year in 1995. Cliffs Drilling 201 worked the majority of 1996,
while it was stacked during all of 1995. These improvements in operating income
were partially offset by the loss of income associated with the Marquette, which
was declared a compromised total loss by the Company's insurance underwriters as
a result of damage sustained in an earthquake in Venezuela in May, 1994 and hull
damage suffered during demobilization from Venezuela to the U.S. Gulf of Mexico.

On May 23, 1996, the Company completed the acquisition of 9 jack-up
drilling rigs and a 50% interest in the WINDJV which owns an additional jack-up
drilling rig, and their related assets operated by Southwestern. In addition, on
May 10, 1996, the Company acquired a jack-up drilling rig from Diamond and
renamed it Cliffs Drilling 155. Seven of the 11 acquired jack-up drilling rigs
were operating in the Gulf of Mexico and one jack-up rig was operating in each
of Venezuela, Qatar and Trinidad. The other jack-up rig acquired in May, 1996
commenced refurbishment activities during the fourth quarter of 1996 and began
operations in July, 1997. On September 30, 1996, the Company acquired an
additional land rig for $2.9 million. The Company refurbished the drilling rig
and mobilized the unit to Venezuela. The rig commenced operations during the
second quarter of 1997.

18
<PAGE> 20

<TABLE>
<CAPTION>
INCREASE
1996 1995 (DECREASE)
------- ------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Daywork Drilling Revenues(1):
Jack-up Rigs:
International.......................................... $17,989 $12,183 $ 5,806
Domestic............................................... 33,984 -- 33,984
Land Rigs................................................. 20,403 14,152 6,251
Platform/Workover Rigs.................................... 1,251 -- 1,251
Other(2).................................................. 4,255 28 4,227
------- ------- -------
Total............................................. $77,882 $26,363 $51,519
======= ======= =======
Average Rig Utilization(3):
Jack-up Rigs:
International.......................................... 100% 100%
Domestic............................................... 96% N/A
Land Rigs................................................. 100% 100%
Platform/Workover Rigs.................................... 87% N/A

Average Dayrates(4):
Jack-up Rigs:
International.......................................... $25,724 $20,133
Domestic............................................... 22,667 N/A
Land Rigs................................................. 9,085 7,335
Platform/Workover Rigs.................................... 5,259 N/A
</TABLE>

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

(1) Includes revenues earned from affiliates.

(2) Includes WINDJV operations in Trinidad, CCDI joint venture operations in
Mexico and 2 labor maintenance contracts in Venezuela.

(3) Utilization rates are based upon the number of actively marketed rigs in
the fleet and exclude rigs which are unavailable for operations during
periods of refurbishment and upgrade.

(4) Daywork drilling revenues less non-recurring revenues divided by aggregate
contract days, adjusted to exclude days under contract at zero dayrate.

Engineering Services

Engineering services revenues increased $3.5 million and operating income
increased $5.4 million in 1996 compared to 1995. The Company completed 13
turnkey contracts in 1996 compared to 15 turnkey contracts in 1995. Five of the
13 contracts completed during 1996 were international contracts in Venezuela,
which were completed at improved margins from wells drilled in prior years.
International operating margins increased during 1996 due to improved drilling
efficiencies and a reduction in lost time well activities. Domestic turnkey
contractors continue to bid wells very aggressively, resulting in intense
competition which has adversely affected the Company's domestic turnkey margins.

The Company had 3 turnkey wells in progress at December 31, 1996, all of
which were completed by February, 1997. The Company provided well engineering
and management services during 1996 and 1995, primarily in Venezuela. These
activities contributed operating income of $.4 million and $.7 million in 1996
and 1995, respectively.

19
<PAGE> 21

MOPU Operations

MOPU revenues decreased $.6 million and operating income increased $.4
million in 1996 compared to 1995. The decrease in revenues was primarily due to
3 MOPUs which were under operating or standby contracts during 1995 but were
idle in 1996. In addition, the Cliffs Drilling 11 was sold during June, 1996.
These decreases in revenue were partially offset by revenues associated with the
LANGLEY, which was under contract during all of 1996, while it was stacked
during most of 1995. Operating income associated with the LANGLEY offset the
decreases in operating income associated with the other MOPUs.

Oil and Gas

Oil and gas revenues decreased $1.6 million and operating income decreased
$3.6 million in 1996 compared to 1995. The decrease in revenues was primarily
due to a $1.4 million settlement of a contractual dispute with Columbia Gas
Transmission Corp., a subsidiary of Columbia Gas System Inc., recorded during
1995. The decrease in operating income was primarily due to approximately $2.9
million in costs associated with an unsuccessful well drilled during the fourth
quarter of 1996.

Corporate Overhead

Corporate overhead increased $1.0 million in 1996 compared to 1995. The
increase was primarily due to increased costs associated with the Southwestern
operations and an increase in employment-related costs.

Other Income (Expense) and Income Taxes

The Company recognized $10.0 million of other expense in 1996 compared to
$2.4 million of other income in 1995. The net change resulted primarily from a
$9.1 million increase in interest expense associated with the Senior Notes, an
increase in income taxes of $4.6 million and a decrease in exchange rate gains
of $2.6 million, offset in part by an increase in interest income and gains on
disposition of assets. See "Liquidity and Capital Resources."

The increase in income taxes relates primarily to the overall increase in
income from 1995 to 1996. The effective tax rates were 33% and 31% in 1996 and
1995, respectively, with the majority of the recorded expense constituting
deferred taxes. The Company recorded a deferred tax asset of $3.8 million for
foreign tax credit carryforwards at December 31, 1996 which expire during the
years 1998 through 2001. At December 31, 1996, the Company provided a valuation
allowance of $1.6 million with respect to its deferred tax assets, primarily
related to foreign tax credit carryforwards generated in previous years. A
majority of the Company's foreign source income is related to operations in
Venezuela. Companies operating in Venezuela are required to apply inflationary
accounting for tax purposes. Due to the volatile nature of this calculation and
the direct relationship it has on the overall effective tax rate on such income,
the Company was unable to conclude that it was more likely than not that the
resulting deferred tax assets would be fully realized. See Note 6 of Notes to
Consolidated Financial Statements.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents decreased $11.1 million from $39.2 million at
December 31, 1996 to $28.1 million at December 31, 1997. The decrease resulted
from $137.2 million used in investing activities, offset in part by $76.6
million provided by operating activities and $49.5 million provided by financing
activities.

Operating Activities

Net cash of $76.6 million provided by operating activities included $2.5
million used in working capital and other activities. "Accounts Receivable"
increased from December 31, 1996 to December 31, 1997 due primarily to the
timing of turnkey completions, increases in dayrates and the timing of cash
receipts related to domestic and international daywork drilling and engineering
services operations. "Accounts Payable and Other Accrued Expenses" increased
primarily due to rig refurbishment projects in process at December 31, 1997.

20
<PAGE> 22

Investing Activities

Net cash of $137.2 million used in investing activities included $28.5
million used to fund the AGP Acquisition which closed during January, 1997,
$23.5 million used to fund the Well Services Acquisition, $6.0 million used to
acquire substantially all of the remaining 50% interest in the WINDJV, $4.3
million used to fund the acquisition of a platform rig, and $84.5 million used
to fund upgrade and renovation activities on these and other drilling rigs and
MOPUs.

On January 24, 1997, the Company completed the AGP Acquisition which
included one jack-up drilling rig and 4 land rigs for a purchase price of $28.5
million in cash. The jack-up drilling rig acquired was renamed Cliffs Drilling
156 and is currently operating in Venezuela. The Company completed refurbishment
activities on 2 of the 4 land drilling rigs during 1997. One of the land
drilling rigs commenced operations in Venezuela during May, 1997, and the
Company has contracted the other unit for operations in Venezuela commencing
during the second quarter of 1998. The Company expects to complete refurbishment
activities on the other 2 land drilling rigs during the second quarter of 1998
and plans to use the units for turnkey operations in Venezuela.

On December 29, 1997, the Company completed the acquisition of 2 offshore
platform drilling rigs, one self-propelled jack-up drilling/workover rig and
substantially all of the assets used in the offshore contract drilling business
in Trinidad previously operated by Well Services. The purchase price totaled
$44.0 million, consisting of cash of $23.5 million and the issuance by the
Company of 437,939 shares of Common Stock. An additional $3.0 million of
contingent cash consideration may be paid to the Sellers if certain post-closing
criteria are met. The outcome of the contingency is not determinable at this
time, and relates to the ultimate valuation of the assets acquired. The 2
platform rigs and the jack-up drilling/workover rig are currently operating
under contracts in Trinidad.

Effective August 1, 1997, the Company acquired substantially all of the
remaining 50% interest of the WINDJV. The purchase price was $8.4 million
consisting of $6.0 million of cash and $2.4 million of debt assumed, net of
various working capital amounts acquired.

Effective October 1, 1997, the Company exercised an option to purchase a
platform drilling rig which is currently operating in Brazil. The cash purchase
price was $4.3 million.

The Company is currently converting one of its MOPUs to a jack-up drilling
rig at an estimated cost of $20.0 million. The Company expects to complete the
conversion during the second quarter of 1998 and commence operations pursuant to
a one-year contract during July, 1998. No assurance can be given that the
conversion will be completed within the expected time frame or within the
current cost estimate.

The Company has capital expenditure plans totaling approximately $49.5
million during 1998. Of this total, $11.2 million relates to the reactivation of
2 land drilling rigs acquired in the AGP acquisition for operations on
Venezuelan turnkeys, $9.5 million relates to conversion costs of a MOPU to a
jack-up drilling rig which commenced in 1997, $5.1 million relates to upgrades
of a rig obtained in the Well Services Acquisition and $23.7 million relates
primarily to other drilling rig capital expenditures and drill pipe purchases.
The Company intends to fund these capital expenditures with available cash and
internally-generated cash flow.

The Company received $5.6 million in proceeds from sales of property and
equipment and $3.7 million related to the collection of notes receivable. These
activities relate primarily to the disposition of the oil and gas related
interests underlying the long-term note receivable valued at $3.5 million at
December 31, 1996. This note was settled in full in connection with the
disposition of the oil and gas interests. The Company recorded a gain on
disposition of assets of $2.7 million.

Financing Activities

Senior Notes in the principal amount of $50.0 million were sold at a
premium by the Company on August 7, 1997. Proceeds to the Company from the sale
of the $50.0 million Senior Notes, prior to deducting costs of the offering,
were approximately $53.9 million. The Company used approximately $6.0 million of
the net proceeds to acquire substantially all of the remaining 50% interest of
the WINDJV, $5.7 million to repay indebtedness owed by the WINDJV, $4.3 million
to purchase a platform drilling rig in Brazil which was previously leased by the
Company and $23.5 million

21
<PAGE> 23

to fund the Well Services Acquisition. The Company intends to use the remainder
of the net proceeds to refurbish and renovate a portion of its existing rig
fleet and for other general corporate purposes.

In addition to the $50.0 million of Senior Notes sold during 1997, $150.0
million of Senior Notes were sold on May 23, 1996. Interest on the Senior Notes
is payable semi-annually during each May and November. The Senior Notes do not
require any payments of principal prior to their stated maturity on May 15,
2003, but the Company is required to make offers to purchase Senior Notes upon
the occurrence of certain events as defined in the indenture, such as asset
sales or a change of control of the Company. The Senior Notes are not redeemable
at the option of the Company prior to May 15, 2000. See Note 5 of Notes to
Consolidated Financial Statements.

The Senior Notes are senior unsecured obligations of the Company, ranking
pari passu in right of payment with all senior indebtedness and senior to all
subordinated indebtedness. The Senior Notes are unconditionally guaranteed on a
senior unsecured basis by the Subsidiary Guarantors, and the Subsidiary
Guarantees rank pari passu in right of payment with all senior indebtedness of
the Subsidiary Guarantors and senior to all subordinated indebtedness of the
Subsidiary Guarantors. The Subsidiary Guarantees may be released under certain
circumstances. The Senior Notes and the Subsidiary Guarantees are effectively
subordinated to all secured indebtedness, including amounts outstanding under
the Revolving Credit Facility. The Subsidiary Guarantees provide that each
Subsidiary Guarantor will unconditionally guarantee, jointly and severally, the
full and prompt performance of the Company's obligations under the indenture and
the Senior Notes. Each Subsidiary Guarantor is 100% owned by the Company.

The indenture under which the Senior Notes are issued imposes significant
operating and financial restrictions on the Company. Such restrictions affect,
and in many respects limit or prohibit, among other things, the ability of the
Company to incur additional indebtedness, make capital expenditures, create
liens, sell assets and make dividends or other payments. See Note 9 of Notes to
Consolidated Financial Statements.

On June 27, 1996, the Company and ING modified and amended the Company's
$20.0 million Revolving Credit Facility to, among other things, increase the
amount available under such facility to $35.0 million. The Revolving Credit
Facility matures on May 31, 1998. At December 31, 1997, the Company had no
indebtedness outstanding under the Revolving Credit Facility, but had $2.4
million in letters of credit outstanding, thereby leaving $32.6 million
available under the line of credit.

During 1997, the Company received $2.3 million associated with the exercise
of stock options by employees.

Exchange Rate Gains and Losses

Approximately 63% of the Company's revenues and a substantial portion of
its operating income were sourced from its foreign operations during 1997. These
operations are subject to customary political and foreign currency risks in
addition to operational risks. The Company has attempted to reduce these risks
through insurance and the structure of its contracts. The Company may be exposed
to the risk of foreign currency losses in connection with its foreign
operations. Such losses are the result of holding net monetary assets (cash and
receivables in excess of payables) denominated in foreign currencies during
periods of a strengthening U.S. dollar. The Company's foreign exchange gains and
losses are primarily attributable to the Venezuelan Bolivar. Venezuela
instituted currency exchange controls during June, 1994, which continued through
all of 1995 and substantially eliminated exchange losses attributable to the
Company's Venezuelan operations during most of 1995. The Company realized $1.2
million in gains in connection with Venezuelan Brady Bond transactions during
the first quarter of 1996; however, the Venezuelan government allowed the
Bolivar to "float" relative to other currencies on April 22, 1996. Significant
devaluation of the Bolivar occurred at that date, which subjected the Company to
exchange rate losses on its net monetary assets. Foreign currency exchange rate
losses of $1.2 million incurred during 1996 offset exchange rate gains realized
during the first quarter of 1996. The effects of these transactions are reported
as "Exchange Rate Gain (Loss)" in the Consolidated Statements of Operations. The
Company does not speculate in foreign currencies or maintain significant foreign
currency cash balances. The Company will continue to be exposed to future
foreign currency gains and losses if the currency continues to be volatile.
Despite the political and economic risks in Venezuela, the Company believes that
the country continues to be a favorable market for its services.

22
<PAGE> 24

Cautionary Statements

The ability of the Company to fund working capital, capital expenditures
and debt service in excess of cash on hand will be dependent upon the success of
the Company's domestic and foreign operations. To the extent that internal
sources are insufficient to meet those cash requirements, the Company can draw
on its available credit facility or seek other debt or equity financing;
however, the Company can give no assurance that such other debt or equity
financing would be available on terms acceptable to the Company.

In any case, the satisfaction of long-term capital requirements will depend
upon successful implementation by the Company of its business strategy and
future results of operations. Management believes it has successfully
implemented the strategy to achieve results of operations commensurate with its
immediate and near-term liquidity requirements.

IMPACT OF YEAR 2000

The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. As a result, many
computer programs have time-sensitive software that recognize a date using "00"
as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions or engage in similar
normal business activities.

Based on a recent assessment, the Company determined that it will be
required to modify or replace portions of its accounting software so that its
computer systems will function properly with respect to dates in the year 2000
and thereafter. The Company does not believe that operational equipment
programming modifications are necessary. The Company has determined that it will
replace certain accounting software rather than invest in the modification of
existing programs. The replacement software is estimated to cost less than $1.0
million, the cost of which will be capitalized.

The project is estimated to be completed not later than December 31, 1998.
The Company presently believes that with modifications to existing software and
conversions to new software, the Year 2000 Issue will not pose significant
operational problems for its computer systems. However, if such modifications
and conversions are not made, or are not completed timely, the Year 2000 Issue
could have a material impact on operations of the Company.

The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources and other factors. However,
there can be no guarantee that these estimates will be achieved and actual
results could differ materially from those anticipated. Specific factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, the cost and extent of training
associated with needed conversions and similar uncertainties.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements and supplementary data of the Company
appear on pages 27 through 49 hereof and are incorporated by reference into this
Item 8. Selected quarterly financial data is set forth in Note 15 of Notes to
Consolidated Financial Statements, which is incorporated herein by reference.

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

There have been no changes in or disagreements with the Company's
accountants regarding accounting principles or practices for financial statement
disclosures.

23
<PAGE> 25

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information set forth under the captions "Election of Directors,"
"Executive Officers" and "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Company's definitive proxy statement for its 1998 Annual
Meeting of Shareholders, which is to be filed with the Securities and Exchange
Commission (the "Commission"), describes the directors and executive officers of
the Company and is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

The information set forth under the captions "Executive Compensation,"
"Board Compensation Committee Report on Executive Compensation," "Performance
Graph," "Security Ownership of Management" and "Election of Directors" in the
Company's definitive proxy statement for its 1998 Annual Meeting of
Shareholders, which is to be filed with the Commission, sets forth information
regarding management compensation and is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information set forth under captions "Principal Shareholders" and
"Security Ownership of Management" in the Company's definitive proxy statement
for its 1998 Annual Meeting of Shareholders, which is to be filed with the
Commission, describes the security ownership of certain beneficial owners and
management and is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information set forth under the caption "Certain Transactions" in the
Company's definitive proxy statement for its 1998 Annual Meeting of
Shareholders, which is to be filed with the Commission, sets forth information
regarding certain relationships and related transactions and is incorporated
herein by reference.

PART IV

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

(a) Financial Statements

(1) and (2) Financial Statements and Schedules

See "Index to Consolidated Financial Statements and Schedules" on
page 27.

(3) Exhibits

See "Exhibit Index" on pages 50 to 55.

The management contracts and compensatory plans or arrangements required to
be filed as Exhibits to this report are as follows:

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.7 -- Cliffs Drilling Company 1988 Incentive Equity Plan
(incorporated by reference to Exhibit 10.8 to the
Company's Registration Statement on Form S-1,
Registration No. 33-23508, filed under the Securities
Act).
10.7.1 -- Amendment No. 1 dated May 17, 1990 to the Cliffs Drilling
Company 1988 Incentive Equity Plan (incorporated by
reference to Exhibit 10.7.1 to the Company's Form 10-K
for the year ended December 31, 1993).
</TABLE>

24
<PAGE> 26

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.7.2 -- Amendment No. 2 dated May 20, 1993 to the Cliffs Drilling
Company 1988 Incentive Equity Plan (incorporated by
reference to Exhibit 10.7.2 to the Company's Form 10-K
for the year ended December 31, 1993).
10.7.3 -- Amendment No. 3 dated May 22, 1996 to the Cliffs Drilling
Company 1988 Incentive Equity Plan (incorporated by
reference to Exhibit 10.7.3 to the Company's Form 10-K
for the year ended December 31, 1996).
10.8 -- Cliffs Drilling Company Incentive Bonus Plan
(incorporated by reference to Exhibit 10.9 to the
Company's Registration Statement on Form S-1,
Registration No. 33-23508, filed under the Securities
Act).
10.9 -- Cliffs Drilling Company Retention Plan for Salaried
Employees (incorporated by reference to Exhibit 10.10 to
the Company's Registration Statement on Form S-1,
Registration No. 33-23508, filed under the Securities
Act).
10.9.1 -- Amendment No. 1 dated May 17, 1990 to the Cliffs Drilling
Company Retention Plan for Salaried Employees
(incorporated by reference to Exhibit 10.9.1 to the
Company's Form 10-K for the year ended December 31,
1993).
10.9.2 -- Amendment No. 2 dated May 21, 1992 to the Cliffs Drilling
Company Retention Plan for Salaried Employees
(incorporated by reference to Exhibit 10.9.2 to the
Company's Form 10-K for the year ended December 31,
1993).
10.10 -- Form of Indemnification Agreement between the Company and
its officers and directors (incorporated by reference to
Exhibit 10.11 to the Company's Registration Statement on
Form S-1, Registration No. 33-23508, filed under the
Securities Act).
10.11 -- Form of Restricted Stock Award Agreement entered into
between the Company and certain key executive officers
(incorporated by reference to Exhibit 10.12 to the
Company's Registration Statement on Form S-1,
Registration No. 33-23508, filed under the Securities
Act).
10.11.1 -- Form of Restricted Stock Award Agreement dated as of
December 31, 1992 entered into between the Company and
certain key executive officers (incorporated by reference
to Exhibit 10.10.1 to the Company's Form 10-K for the
year ended December 31, 1992).
10.11.2 -- Form of Deferred Stock Award Agreement dated as of
December 31, 1992 entered into between the Company and
certain key executive officers (incorporated by reference
to Exhibit 10.11.2 to the Company's Form 10-K for the
year ended December 31, 1993).
10.16 -- Form of Executive Agreement dated as of July 20, 1994
(incorporated by reference to Exhibit 10.20 to the
Company's Form 10-Q for the quarter ended June 30, 1994).
10.23 -- Cliffs Drilling Company Compensation Deferral Plan.
</TABLE>

(b) Reports on Form 8-K

A report dated October 16, 1997 was filed by the Company on Form 8-K
which reported that the Company entered into a letter of intent to acquire
2 offshore platform drilling rigs, one self-propelled jack-up
drilling/workover rig and substantially all of the assets used in the
offshore contract drilling business of Well Services.

A report dated December 29, 1997 was filed by the Company on Form 8-K
which reported that the Company completed the acquisition of 2 offshore
platform drilling rigs, one self-propelled jack-up drilling/workover rig
and substantially all of the assets used in the offshore contract drilling
business of Well Services.

25
<PAGE> 27

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.

<TABLE>
<S> <C>
March 5, 1998 CLIFFS DRILLING COMPANY
By: /s/ DOUGLAS E. SWANSON
--------------------------------------------------
Douglas E. Swanson
Chairman of the Board, President
and Chief Executive Officer
</TABLE>

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following on behalf of the Registrant and in
the capacities and on the dates indicated.

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

/s/ DOUGLAS E. SWANSON Chairman of the Board, March 5, 1998
- ----------------------------------------------------- President and Chief Executive
Douglas E. Swanson Officer
(Principal Executive Officer)

/s/ M. M. CONE Director March 5, 1998
- -----------------------------------------------------
M. M. Cone

/s/ H. ROBERT HIRSCH Director March 5, 1998
- -----------------------------------------------------
H. Robert Hirsch

/s/ DONALD W. KELLER Director March 5, 1998
- -----------------------------------------------------
Donald W. Keller

/s/ ROBERT M. MCINNES Director March 5, 1998
- -----------------------------------------------------
Robert M. McInnes

/s/ JOSEPH E. REID Director March 5, 1998
- -----------------------------------------------------
Joseph E. Reid

/s/ JOHN D. WEIL Director March 5, 1998
- -----------------------------------------------------
John D. Weil

/s/ EDWARD A. GUTHRIE Vice President -- Finance and March 5, 1998
- ----------------------------------------------------- Chief Financial Officer
Edward A. Guthrie (Principal Financial Officer)

/s/ CINDY B. TAYLOR Vice President -- Controller March 5, 1998
- ----------------------------------------------------- and Secretary
Cindy B. Taylor (Principal Accounting
Officer)
</TABLE>

26
<PAGE> 28

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES

<TABLE>
<CAPTION>
PAGES
-----
<S> <C>

Report of Independent Auditors.............................. 28

Consolidated Statements of Operations for Each of the Three
Years in the Period Ended December 31, 1997............... 29

Consolidated Balance Sheets, December 31, 1997 and 1996..... 30

Consolidated Statements of Cash Flows for Each of the Three
Years in the Period Ended December 31, 1997............... 31

Consolidated Statements of Changes in Shareholders' Equity
for Each of the Three Years in the Period Ended December
31, 1997.................................................. 32

Notes to Consolidated Financial Statements.................. 33
</TABLE>

All schedules for which provision is made in the applicable rules and
regulations of the Securities and Exchange Commission have been omitted as the
schedules are not required under the related instructions, are not applicable or
the information required thereby is set forth in the Consolidated Financial
Statements or the Notes thereto.

27
<PAGE> 29

REPORT OF INDEPENDENT AUDITORS

Shareholders and Board of Directors
Cliffs Drilling Company

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

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

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

ERNST & YOUNG LLP

Houston, Texas
February 13, 1998

28
<PAGE> 30

CLIFFS DRILLING COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
----------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
REVENUES:
Revenues................................................. $261,887 $132,341 $84,156
Income (Loss) from Equity Investments.................... 1,745 768 (867)
-------- -------- -------
263,632 133,109 83,289
COSTS AND EXPENSES:
Operating Expenses....................................... 148,158 91,984 67,713
Depreciation, Depletion and Amortization................. 20,443 10,388 7,271
General and Administrative Expense....................... 8,731 6,300 5,289
-------- -------- -------
177,332 108,672 80,273
-------- -------- -------
OPERATING INCOME........................................... 86,300 24,437 3,016
OTHER INCOME (EXPENSE):
Gain on Disposition of Assets............................ 3,150 3,694 2,666
Interest Income.......................................... 1,941 2,725 1,065
Interest Expense......................................... (17,838) (9,265) (199)
Exchange Rate Gain (Loss)................................ (174) -- 2,554
Other, net............................................... (1,596) (173) (1,250)
-------- -------- -------
INCOME BEFORE INCOME TAXES................................. 71,783 21,418 7,852
INCOME TAX EXPENSE......................................... 25,124 6,996 2,406
-------- -------- -------
NET INCOME................................................. 46,659 14,422 5,446
DIVIDENDS APPLICABLE TO PREFERRED STOCK.................... -- (31) (2,659)
-------- -------- -------
NET INCOME APPLICABLE TO COMMON AND COMMON EQUIVALENT
SHARES................................................... $ 46,659 $ 14,391 $ 2,787
======== ======== =======
NET INCOME PER COMMON SHARE:
Basic.................................................... $ 3.06 $ 1.05 $ 0.34
======== ======== =======
Diluted.................................................. $ 3.01 $ 1.02 $ 0.34
======== ======== =======
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING:
Basic.................................................... 15,237 13,736 8,192
======== ======== =======
Diluted.................................................. 15,493 14,083 8,213
======== ======== =======
</TABLE>

See accompanying notes to consolidated financial statements.

29
<PAGE> 31

CLIFFS DRILLING COMPANY

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
--------- --------
(IN THOUSANDS, EXCEPT
SHARE INFORMATION)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents................................. $ 28,122 $ 39,181
Accounts Receivable, net of allowance for doubtful
accounts of $352 and $797 at December 31, 1997 and
1996, respectively..................................... 53,341 28,866
Notes and Other Receivables, Current...................... 10,190 4,922
Inventories............................................... 7,551 5,807
Drilling Contracts in Progress............................ 16,503 17,669
Prepaid Insurance......................................... 1,772 7,408
Other Prepaid Expenses.................................... 6,595 6,349
--------- --------
Total Current Assets.............................. 124,074 110,202
PROPERTY AND EQUIPMENT, AT COST:
Rigs and Related Equipment................................ 453,915 283,223
Other..................................................... 15,373 16,530
--------- --------
469,288 299,753
Less: Accumulated Depreciation, Depletion and
Amortization........................................... (100,061) (83,279)
--------- --------
Net Property and Equipment........................ 369,227 216,474
NOTES AND OTHER RECEIVABLES, LONG-TERM...................... -- 3,510
INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES.... 1,828 4,434
DEFERRED CHARGES AND OTHER.................................. 5,022 4,926
--------- --------
TOTAL ASSETS...................................... $ 500,151 $339,546
========= ========

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts Payable.......................................... $ 33,171 $ 30,545
Accrued Interest.......................................... 2,673 2,007
Other Accrued Expenses.................................... 30,414 9,429
--------- --------
Total Current Liabilities......................... 66,258 41,981
10.25% SENIOR NOTES......................................... 203,606 150,000
DEFERRED INCOME TAXES....................................... 14,335 5,028
DEFERRED INCOME AND OTHER................................... 23 369
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common Stock, $.01 par value, 30,000,000 shares
authorized; 16,321,932 and 15,562,940 shares issued and
15,906,880 and 15,133,008 shares outstanding at
December 31, 1997 and 1996, respectively............... 163 80
Paid-in Capital........................................... 182,420 153,513
Retained Earnings (Deficit)............................... 40,942 (5,717)
Less: Notes Receivable from Officers for Restricted
Stock............................................ -- (186)
Restricted Stock.................................... (2,467) (223)
Treasury Stock, at cost, 415,052 and 429,932 shares
at December 31, 1997 and 1996, respectively...... (5,129) (5,299)
--------- --------
Total Shareholders' Equity........................ 215,929 142,168
--------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ $ 500,151 $339,546
========= ========
</TABLE>

See accompanying notes to consolidated financial statements.

30
<PAGE> 32

CLIFFS DRILLING COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
--------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income............................................... $ 46,659 $ 14,422 $ 5,446
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED
BY (USED IN) OPERATING ACTIVITIES:
Depreciation, Depletion and Amortization............... 20,443 10,388 7,271
Deferred Income Tax Expense............................ 9,307 5,184 1,848
Impairment of Oil and Gas Leasehold Cost............... -- 1,017 --
Mobilization Expense Amortization...................... 447 314 519
Gain on Disposition of Assets.......................... (3,150) (3,694) (2,666)
Amortization of Debt Issue Costs....................... 822 462 --
Amortization of Restricted Stock....................... 430 28 25
Amortization of Debt Premium........................... (269) -- --
Tax Benefit Associated with Exercise of Stock
Options............................................. 2,930 1,603 --
Other.................................................. 1,465 (1,352) 46
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts Receivable................................. (29,743) (19,907) (3,728)
Inventories......................................... (1,744) (1,667) 1,612
Drilling Contracts in Progress...................... 1,169 (6,324) (6,261)
Prepaid Insurance and Other Prepaid Expenses........ 4,943 (10,688) 2,500
Investments in and Advances to Unconsolidated
Affiliates........................................ (1,392) (928) 3,767
Accounts Payable and Other Accrued Expenses......... 24,277 18,256 4,546
--------- --------- --------
Net Cash Provided By Operating Activities......... 76,594 7,114 14,925
INVESTING ACTIVITIES:
Capital Expenditures..................................... (84,535) (36,027) (11,687)
Acquisition of Rigs and Related Equipment................ (61,969) (108,477) (1,750)
Acquisition of Equity Interest in Rig and Related
Equipment.............................................. -- (3,237) --
Proceeds from Sale of Property and Equipment............. 5,627 6,856 372
Insurance Proceeds from Loss of Rig and Related
Equipment.............................................. -- 292 14,308
Collection of Notes Receivable........................... 3,696 977 1,576
--------- --------- --------
Net Cash Provided By (Used In) Investing
Activities..................................... (137,181) (139,616) 2,819
FINANCING ACTIVITIES:
Proceeds from Borrowings................................. 60,375 150,000 7,000
Payments on Borrowings................................... (12,184) -- (7,000)
Proceeds from Exercise of Stock Options.................. 2,260 2,129 --
Debt Issue Costs......................................... (923) (5,309) --
Acquisition of Treasury Stock............................ -- (661) --
Payments for Redemption of Preferred Stock............... -- (850) --
Preferred Stock Dividends................................ -- (31) (2,659)
--------- --------- --------
Net Cash Provided By (Used In) Financing
Activities..................................... 49,528 145,278 (2,659)
--------- --------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....... (11,059) 12,776 15,085
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR............. 39,181 26,405 11,320
--------- --------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR................... $ 28,122 $ 39,181 $ 26,405
========= ========= ========
</TABLE>

See accompanying notes to consolidated financial statements.

31
<PAGE> 33

CLIFFS DRILLING COMPANY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
NOTES
RECEIVABLE
COMMON STOCK FROM
------------------ RETAINED OFFICERS FOR
PAR PAID-IN EARNINGS RESTRICTED RESTRICTED TREASURY
SHARES VALUE CAPITAL (DEFICIT) STOCK STOCK STOCK
---------- ----- -------- --------- ------------ ---------- --------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994............... 8,178,894 $ 45 $ 99,135 $(22,895) $(232) $ (57) $(5,115)
Net Income............................... -- -- -- 5,446 -- -- --
Preferred Stock Dividends Declared....... -- -- -- (2,659) -- -- --
Amortization of Restricted Stock......... -- -- -- -- -- 25 --
Employer Contributions to 401(k) Savings
Plan................................... 47,240 -- 51 -- -- -- 271
---------- ---- -------- -------- ----- ------- -------
BALANCE AT DECEMBER 31, 1995............... 8,226,134 45 99,186 (20,108) (232) (32) (4,844)
========== ==== ======== ======== ===== ======= =======
Net Income............................... -- -- -- 14,422 -- -- --
Preferred Stock Conversion............... 4,227,114 21 27,879 -- -- -- --
Preferred Stock Dividends Declared....... -- -- -- (31) -- -- --
Common Stock Issued in Connection with
Offshore Rig Acquisition............... 2,400,000 12 22,203 -- -- -- --
Restricted Stock Issuances............... 13,500 -- 220 -- -- (220) --
Acquisition of Treasury Stock............ (86,000) -- -- -- -- -- (661)
Collection of Officers' Notes
Receivable............................. -- -- -- -- 46 -- --
Amortization of Restricted Stock......... -- -- -- -- -- 29 --
Exercise of Stock Options................ 316,050 2 2,127 -- -- -- --
Tax Benefit Associated with Exercise of
Stock Options.......................... -- -- 1,603 -- -- -- --
Employer Contributions to 401(k) Savings
Plan................................... 36,210 -- 295 -- -- -- 206
---------- ---- -------- -------- ----- ------- -------
BALANCE AT DECEMBER 31, 1996............... 15,133,008 80 153,513 (5,717) (186) (223) (5,299)
========== ==== ======== ======== ===== ======= =======
Net Income............................... -- -- -- 46,659 -- -- --
Stock Split.............................. -- 76 (76) -- -- -- --
Common Stock Issued in Connection with
Offshore Rig Acquisition............... 437,939 4 20,496 -- -- -- --
Restricted Stock Issuances............... 90,600 1 3,165 -- -- (3,166) --
Restricted Stock Cancellations........... (17,800) -- (492) -- -- 492 --
Collection of Officers' Notes
Receivable............................. -- -- -- -- 186 -- --
Amortization of Restricted Stock......... -- -- -- -- -- 430 --
Exercise of Stock Options................ 243,900 2 2,258 -- -- -- --
Tax Benefit Associated with Exercise of
Stock Options.......................... -- -- 2,930 -- -- -- --
Employer Contributions to 401(k) Savings
Plan................................... 19,233 -- 626 -- -- -- 170
---------- ---- -------- -------- ----- ------- -------
BALANCE AT DECEMBER 31, 1997............... 15,906,880 $163 $182,420 $ 40,942 $ -- $(2,467) $(5,129)
========== ==== ======== ======== ===== ======= =======
</TABLE>

See accompanying notes to consolidated financial statements.

32
<PAGE> 34

CLIFFS DRILLING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Corporate Structure and Principles of Consolidation

The accompanying consolidated financial statements include the activities
and accounts of Cliffs Drilling Company (the "Company"), all wholly-owned
subsidiaries of the Company and the Company's international activities, which
are organized as foreign branches. All significant intercompany transactions and
balances are eliminated in consolidation.

The Company uses the equity method to account for affiliates in which it
does not have control. Cliffs Neddrill Central Turnkey International ("CNCTI"),
a joint venture among the Company, Neddrill Turnkey Drilling B.V. and
Perforadora Central, S.A. de C.V., was created to drill turnkey wells in the Bay
of Campeche and Bay of Tampico in Mexico. Drilling operations commenced in
February, 1993 and completed in 1995. On May 23, 1996, the Company acquired the
stock of Viking Trinidad Limited (renamed Cliffs Drilling Trinidad Limited),
which owned a 50% interest in the West Indies Drilling Joint Venture (the
"WINDJV"). The WINDJV was a joint venture between Cliffs Drilling Trinidad
Limited and Well Services (Marine) Limited ("Well Services"), which owned a
jack-up drilling rig. On August 1, 1997, Cliffs Drilling Trinidad Limited
acquired an additional 49% interest in the WINDJV from Well Services. On
December 29, 1997, the Company acquired the remaining 1% interest in the WINDJV
from Well Services. In 1996, the Company became a 50% joint venture partner with
Perforadora Central, S.A. de C.V. by forming Cliffs Central Drilling
International ("CCDI") for the marketing of drilling services in Mexico. In
1996, the Company became a 1/3 (33 1/3%) owner of Servicios Integrados
Petroleros C.C.I., S.A. ("CCI"). CCI is a joint venture company among the
Company, Inelectra S.A. and Cementaciones Petroleras Venezolanas C.A. which
markets drilling services in Venezuela.

Use of Estimates

The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.

Cash and Cash Equivalents

The Company's policy is to invest cash in short-term investments.
Uninvested cash balances are kept at minimum levels. Investments are valued at
cost, which approximates market. The Company considers all highly liquid cash
investments with a maturity date of three months or less when purchased to be
cash equivalents.

Concentration of Credit Risk

The market for the Company's services is the oil and gas industry, and the
Company's customers consist primarily of integrated and government-owned
international oil companies and independent oil and gas producers. Financial
instruments which potentially subject the Company to concentrations of credit
risk consist primarily of trade receivables. The Company has in place insurance
to cover certain exposure in its foreign operations and provides allowances for
potential credit losses when necessary. Accordingly, management considers such
credit risk to be limited.

Inventories

Inventories, consisting principally of tubular goods consumed in turnkey
drilling operations and spare drilling parts, are carried at cost, specific
identification method.

Drilling Contracts in Progress

The Company recognizes revenues and expenses related to its turnkey
drilling contracts when all terms and conditions of the contract have been
fulfilled. Consequently, the costs related to in-progress turnkey drilling
contracts are deferred as drilling contracts in progress until the contract is
completed and revenue is realized. The amount of drilling

33
<PAGE> 35
CLIFFS DRILLING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

contracts in progress is dependent on the volume of contracts, the duration of
the contract at the end of the reporting period and the contract amount.
Provision for losses on incomplete contracts is made when such losses are
anticipated.

The Company's Daywork Drilling business segment frequently leases its
jack-up and land drilling rigs to the Engineering Services business segment for
turnkey drilling operations. Revenues, expenses and profits generated by the
drilling rigs operating under turnkey contracts are deferred until the contract
is completed. While the turnkey contract is in progress, the rig operating
profit is offset against drilling contracts in progress. Rig operating losses
are recognized when incurred and are not deferred.

Rig Mobilization and Demobilization Costs

The Company defers costs of moving a drilling unit or MOPU under contract
to a new area of operation. The deferred mobilization costs are amortized on a
straight-line basis over the term of the applicable drilling contract.
Unamortized mobilization costs were $2,770,000 and $24,000 at December 31, 1997
and 1996, respectively.

Demobilization charges, in general, are reimbursed by the customer based
upon contract terms. In situations where demobilization charges are not
reimbursed and are expected to be material, estimated demobilization costs are
accrued over the term of the applicable contract. Unanticipated demobilization
costs are expensed as incurred at the completion of the contract.

Property and Equipment

Property and equipment are carried at original cost or at adjusted net
realizable value, as applicable. Major renewals and betterments are capitalized
in the property accounts, while the cost of repairs and maintenance is charged
to operating expenses in the period incurred.

Acquisitions of rigs and related equipment have been accounted for under
the purchase method of accounting and therefore, the results of the acquired
assets are combined with the Company's results only from the acquisition date
forward.

Interest on funds borrowed for construction of qualifying assets is
capitalized during the construction period. Amortization of capitalized interest
is included in "Depreciation, Depletion and Amortization" in the Consolidated
Statements of Operations.

Cost and accumulated depreciation, depletion and amortization are removed
from the accounts when assets are sold or retired, and the resulting gains or
losses are included in the Consolidated Statements of Operations.

Depreciation of property and equipment is provided on the straight-line
basis at rates based upon expected useful lives of the various classes of assets
as follows:

<TABLE>
<S> <C>
Rigs and Related Equipment:
Jack-Up Drilling Rigs..................................... 15 Years
Platform Drilling Rigs.................................... 15 Years
Land Drilling Rigs........................................ 16 Years
MOPUs..................................................... 10 Years
Drill Pipe................................................ 5 Years
Other (excluding oil and gas properties).................... 3 - 5 Years
</TABLE>

No depreciation expense is recorded during periods of construction or
refurbishment. To provide for any deterioration that may occur while the rigs
are not operating for an extended period of time, a minimum depreciation charge
is provided at a reduced rate of 25% of the normal depreciation rate.

Costs related to the exploration and development of oil and gas properties
are accounted for under the "Successful Efforts" method of accounting. Lease
acquisition costs related to oil, gas and mineral properties are capitalized
when

34
<PAGE> 36
CLIFFS DRILLING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

incurred. The acquisition costs of unproved properties, which are individually
significant, are assessed on a property-by-property basis, and a loss is
recognized by provision of a valuation allowance when the assessment indicates
an impairment in value. Exploration costs, excluding exploratory wells, are
charged to expense as incurred. Costs of drilling exploratory wells are
capitalized pending determination as to whether the wells have proved reserves
which justify commercial development. If commercial reserves are not found, the
drilling costs are charged to dry hole expense. Tangible and intangible drilling
costs applicable to productive exploratory wells and to the development of oil
and gas reserves are capitalized.

The cost of productive leaseholds is amortized by field on the unit of
production basis by applying the ratio of produced oil and gas to estimated
proved reserves. Lease and well equipment and intangible drilling costs
associated with productive wells are amortized based on proved developed
reserves.

Impairment of Long-Lived Assets

Effective October 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," ("SFAS No. 121") which
requires that certain long-lived assets be reviewed for impairment whenever
events indicate that the carrying amount of an asset may not be recoverable, and
that an impairment loss be recognized under certain circumstances in the amount
by which the carrying value exceeds the fair value of the asset. SFAS No. 121
requires assets to be grouped, for purposes of evaluating potential impairment
of assets, at the lowest level for which there are identifiable cash flows.
Previously, the Company evaluated impairment of its oil and gas assets on an
aggregate Company-wide basis, rather than a disaggregate basis. Upon the
issuance of SFAS No. 121 and receipt of an annual independent petroleum
engineering report, the Company began its analysis of impairment under the new
guidelines. This evaluation indicated that the undiscounted estimated future
cash flows attributable to the proved oil and gas reserves of one property were
less than its carrying amount. Accordingly, the Company recorded a $737,000
charge in 1995 to write the impaired property down to its fair value. The
impairment loss is included in "Depreciation, Depletion and Amortization" in the
Consolidated Statements of Operations.

Income Taxes

The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes." Deferred
income taxes are provided on items recognized in different periods for financial
and tax reporting purposes. See Note 6 of Notes to Consolidated Financial
Statements.

Stock Options

The Company accounts for stock options in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") and related interpretations. Under APB 25, generally, no compensation
expense is recognized for an employee stock option when the exercise price
equals the market price of the underlying stock on the date of grant. Effective
January 1, 1996, the Company adopted Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). As provided in
the statement, the Company elected to continue to measure compensation expense
using the guidelines of APB 25 and to include disclosures of net income and
earnings per share as if the fair value based method of accounting were
utilized. See Note 9 of Notes to Consolidated Financial Statements.

Revenue Recognition

The Company recognizes revenues from its daywork drilling and MOPU
operations as services are rendered, based upon the contracted daily rate
multiplied by the number of operating days in the period. Turnkey drilling
contract revenues are recognized when all terms and conditions of the contract
have been fulfilled. The Company recognizes oil and gas revenues from its
interests in producing wells based upon the sales method.

35
<PAGE> 37
CLIFFS DRILLING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Foreign Currency Translation

The U.S. dollar is the functional currency for all of the Company's
operations. Foreign currency gains and losses are included in the Consolidated
Statements of Operations during the period incurred.

Earnings Per Share

In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings Per Share," ("SFAS No. 128"). SFAS No. 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is similar to the previously reported fully diluted earnings
per share. The earnings per share amounts and weighted average number of common
and common equivalent shares outstanding prior to 1997 have been restated as
required to comply with SFAS No. 128. See Note 11 of Notes to Consolidated
Financial Statements.

Earnings per share and weighted average shares have been retroactively
adjusted to reflect a two-for-one stock split effected in the form of a 100%
stock dividend effective May 22, 1997 (the "Stock Split").

The Company issued 2,113,557 shares (pre-split basis) of Common Stock, $.01
par value ("Common Stock") upon conversion of 1,115,988 shares of its 1,150,000
issued and outstanding shares of $2.3125 Convertible Exchangeable Preferred
Stock ("Preferred Stock") on January 17, 1996. See Note 10 of Notes to
Consolidated Financial Statements.

Segment Reporting

In 1997, the Financial Accounting Standards Board issued Statement No. 131,
"Disclosures About Segments of an Enterprise and Related Information," ("SFAS
No. 131"). SFAS No. 131 changes the reporting of segment information in annual
financial statements and also requires reporting selected segment information in
interim financial reports to shareholders. SFAS No. 131 is effective for years
beginning after December 15, 1997 and is not expected to have a significant
impact on the Company's consolidated financial statements and related
disclosures upon adoption.

Change in Presentation

Certain financial statement items have been reclassified in prior years to
conform with the current year presentation.

2. NOTES AND OTHER RECEIVABLES, LONG-TERM

Effective January 1, 1993, the Company sold its 4 inland posted barge
drilling rigs and rights to certain oil and gas production payment proceeds
generated from a proceeds-of-production drilling program for an aggregate sales
price of $13,500,000, consisting of $5,000,000 in cash and $8,500,000 in notes.
The first note had a face amount of $1,000,000 and was repaid in March, 1995.
The second note had a face amount of $7,500,000, with interest calculated at the
base rate on corporate loans as quoted by the Wall Street Journal plus one and
one-half percent (1 1/2%). Principal and interest on the $7,500,000 note was
payable on a monthly basis solely from the proceeds of the oil and gas
production payment on which the note was based. The note was scheduled to mature
on January 1, 1998; however, it was repaid in May, 1997 in connection with the
Company's disposition of the various oil and gas related interests underlying
the long-term note receivable. The Company recorded a net gain of $2,718,000
related to the disposition of the oil and gas related interests.

3. PROPERTY AND EQUIPMENT

On December 29, 1997, the Company completed the acquisition of 2 offshore
platform drilling rigs, one self propelled jack-up drilling/workover rig and
substantially all of the assets used in the offshore contract drilling business
in

36
<PAGE> 38
CLIFFS DRILLING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Trinidad previously operated by Well Services. The purchase price totaled
$44,000,000 consisting of cash of $23,500,000 and the issuance by the Company of
437,939 shares of Common Stock. An additional $3,000,000 of contingent cash
consideration may be paid to the Sellers if certain post-closing criteria are
met. The outcome of the contingency is not determinable at this time, and
relates to the ultimate valuation of the assets acquired.

Effective October 1, 1997, the Company exercised an option to purchase a
platform drilling rig which is currently operating in Brazil. The purchase price
was $4,250,000.

Effective August 1, 1997, the Company acquired substantially all of the
remaining 50% interest of the WINDJV. The purchase price was $8,371,000
consisting of $6,000,000 of cash and $2,371,000 of debt assumed, net of various
working capital amounts acquired.

On January 24, 1997, the Company completed the acquisition of the stock of
a subsidiary of Andrade Gutierrez Perfuracao Ltda., which owned the jack-up
drilling rig ATENA, four 1,500 HP land drilling rigs, miscellaneous drilling
equipment and a contract to operate a platform rig in Brazil (the "AGP
Acquisition"). The purchase price was $28,500,000 in cash.

On September 30, 1996, the Company acquired a land rig from Quarles
Drilling Corp. for $2,850,000. The rig was refurbished and is currently
operating in Venezuela.

On June 19, 1996, Cliffs Drilling No. 11 completed its two-year bareboat
charter as a workover rig in the U.S. Gulf of Mexico and the charterer exercised
its option to purchase the unit for $5,392,000, resulting in a gain of
$2,684,000.

On May 23, 1996, the Company completed the acquisition of 9 jack-up
drilling rigs and a 50% interest in the WINDJV, which owned an additional
jack-up drilling rig, and their related assets (collectively referred to as the
"Southwestern Rigs") operated by Southwestern Offshore Corporation
("Southwestern"). The purchase price of the Southwestern Rigs was (a)
$103,800,000 in cash (after reductions of $6,200,000 for required refurbishments
of certain Southwestern Rigs not made prior to closing) plus (b) issuance of
1,200,000 shares (pre-split basis) of the Company's Common Stock, and (c)
assumption of certain contractual liabilities, including the Company's guarantee
of $4,250,000 in indebtedness of the WINDJV to Citibank N.A. related to the
refurbishment of the jack-up drilling rig owned by it (together with accrued but
unpaid interest thereon and costs of collection).

On May 10, 1996, the Company acquired the jack-up drilling rig OCEAN
MAGALLANES from Diamond Offshore Southern Company for $4,500,000. The Company
renamed this unit Cliffs Drilling 155, which is currently operating in
Venezuela.

On July 2, 1995, the jack-up drilling rig MARQUETTE suffered hull damage
during demobilization from Venezuela to the U.S. Gulf of Mexico. During an
inspection of the hull damage by the Company and its insurance adjusters, other
damage was discovered which was attributed to an earthquake in Venezuela in May,
1994. The rig was declared a compromised total loss by the Company's insurance
underwriters. The Company received $14,600,000 from its insurance underwriters
for damages to the MARQUETTE. The Company has scrapped the rig and salvaged
various rig equipment for use on other rigs or to sell. The Company recognized a
gain of $2,715,000 on the disposition of the unit during 1995.

Interest capitalization associated with rig refurbishments during the years
ended December 31, 1997, 1996 and 1995 was $629,000, $730,000 and $0,
respectively.

37
<PAGE> 39
CLIFFS DRILLING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES

The Company's investments in and advances to unconsolidated affiliates are
not significant at or for the years ended December 31, 1997 and 1996; therefore,
applicable disclosures were not required. The following information summarizes
the Statement of Operations of CNCTI for the year ended December 31, 1995:

<TABLE>
<S> <C>
Revenues.................................................... $24,052,000
Operating expenses.......................................... 26,638,000
-----------
Operating loss............................................ (2,586,000)
Other, net.................................................. 433,000
-----------
Net loss.................................................. $(2,153,000)
===========
</TABLE>

5. NOTES PAYABLE

Long-term debt at December 31, 1997 consists solely of 10.25% Senior Notes
due 2003 (the "Senior Notes") in the aggregate principal amount of $200,000,000
and debt premium, net of amortization, of $3,606,000. In addition to the
$150,000,000 of Senior Notes sold during 1996, the Company sold $50,000,000 of
Senior Notes on August 7, 1997 at a premium of $3,875,000. Considering the
premium, the effective interest rate on the $50,000,000 Senior Notes is 9.5%.
Interest on the Senior Notes is payable semi-annually during each May and
November. The Senior Notes do not require any payments of principal prior to
their stated maturity on May 15, 2003, but the Company is required to make
offers to purchase Senior Notes upon the occurrence of certain events as defined
in the indenture, such as asset sales or a change of control of the Company.

On or after May 15, 2000, the Senior Notes are redeemable at the option of
the Company, in whole or in part, at a price of 105% of principal if redeemed
during the twelve months beginning May 15, 2000, at a price of 102.5% of
principal if redeemed during the twelve months beginning May 15, 2001, or at a
price of 100% of principal if redeemed after May 15, 2002, in each case together
with interest accrued to the redemption date. Notwithstanding the foregoing, the
Company may at its option use all or a portion of the proceeds from a public
equity offering consummated on or prior to May 15, 1999, to redeem up to
$50,000,000 principal amount of the Senior Notes at a redemption price equal to
110% of the principal amount, provided that at least $150,000,000 in aggregate
principal amount of the Senior Notes remain outstanding immediately after such
redemption.

The Senior Notes are senior unsecured obligations of the Company, ranking
pari passu in right of payment with all senior indebtedness and senior to all
subordinated indebtedness. The Senior Notes are unconditionally guaranteed (the
"Subsidiary Guarantees") on a senior unsecured basis by the Company's principal
subsidiaries (the "Subsidiary Guarantors"), and the Subsidiary Guarantees rank
pari passu in right of payment with all senior indebtedness of the Subsidiary
Guarantors and senior to all subordinated indebtedness of the Subsidiary
Guarantors. The Subsidiary Guarantees may be released under certain
circumstances. The Senior Notes and the Subsidiary Guarantees are effectively
subordinated to all secured indebtedness, including amounts outstanding under
the Revolving Credit Facility. The Subsidiary Guarantees provide that each
Subsidiary Guarantor will unconditionally guarantee, jointly and severally, the
full and prompt performance of the Company's obligations under the indenture and
the Senior Notes. Each Subsidiary Guarantor is 100% owned by the Company.

Separate financial statements and other disclosures concerning the
Subsidiary Guarantors are not presented because management has determined such
financial statements and other disclosures are not material to investors. The
assets, equity, income and cash flows of the non-guarantor subsidiaries on an
individual and combined basis are less

38
<PAGE> 40
CLIFFS DRILLING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

than 1% of the consolidated assets, equity, income and cash flows, respectively,
of the Company and are inconsequential. The combined condensed financial
information of the Company's Subsidiary Guarantors is as follows:

<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Current Assets.............................................. $ 31,872 $ 19,798
Non-Current Assets.......................................... 214,462 140,042
-------- --------
Total Assets...................................... $246,334 $159,840
======== ========
Current Liabilities......................................... $ 21,417 $ 8,078
Non-Current Liabilities..................................... 189,004 135,499
Equity...................................................... 35,913 16,263
-------- --------
Total Liabilities and Equity...................... $246,334 $159,840
======== ========
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues.................................................... $ 96,166 $ 51,081 $ 1,921
Operating Income (Loss)..................................... $ 41,400 $ 14,224 $ (787)
Net Income (Loss)........................................... $ 19,650 $ 5,264 $ (531)
</TABLE>

The Senior Notes had a fair value of $214,960,000 at December 31, 1997, or
a 7.48% premium to carrying value, based upon the quoted market price of the
debt.

The Company executed the Second Restated Credit Agreement with
International Nederlanden (U.S.) Capital Corporation, now known as ING (U.S.)
Capital Corporation ("ING") during the first quarter of 1994, thereby converting
its $10,000,000 working capital credit facility to a $20,000,000 revolving line
of credit ("Revolving Credit Facility") subject to certain borrowing base
limitations. All advances to the Company from the Revolving Credit Facility bear
interest at one-quarter of one percent ( 1/4%) per annum plus the greater of the
prevailing Federal Funds Rate plus one-half percent ( 1/2%) or a referenced
average prime rate; or at the adjusted LlBOR rate plus two percent (2%) per
annum. The foregoing rates are subject to an increase of one-half percent
( 1/2%) in the event certain financial criteria are not met. The Company is also
obligated to pay ING (i) a commitment fee equal to one-half percent ( 1/2%) per
annum on the average daily unadvanced portion of the commitments and (ii) a
letter of credit fee of two percent (2%) per annum on the average daily undrawn
and unexpired amount of each letter of credit during the period that sum remains
outstanding.

On June 27, 1996, the Company and ING modified and amended the $20,000,000
Revolving Credit Facility to, among other things, increase the amount available
under such facility to $35,000,000. The Revolving Credit Facility matures on May
31, 1998.

The Revolving Credit Facility is secured by accounts receivable, certain
rig inventory and equipment, certain oil and gas properties and the stock of
certain subsidiaries of the Company. Under the Second Restated Credit Agreement
with ING, as amended, the Company is required to comply with various covenants
including, but not limited to, the maintenance of various financial ratios, and
is restricted from declaring, making or paying any dividends on the Common
Stock.

39
<PAGE> 41
CLIFFS DRILLING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Availability and borrowings under the Revolving Credit Facility are as
follows:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Line of credit available.................................... $32,583 $32,583
Short-term borrowings outstanding........................... -- --
Letters of credit outstanding............................... 2,417 2,417
</TABLE>

Interest payments on all indebtedness amounted to $17,035,000, $7,527,000
and $198,000 for the years ended December 31, 1997, 1996 and 1995, respectively.

6. INCOME TAXES

During 1996 and 1997, the Company utilized all net operating loss
carryforwards and foreign tax credit carryforwards generated in prior years
which were available to offset future taxable income. For financial reporting
purposes, a valuation allowance of $1,589,000 was provided at December 31, 1996
to reduce deferred tax assets to a level which, more likely than not, would be
realized. The valuation allowance was eliminated during 1997 to reflect the use
of the related foreign tax assets in the reduction of current year liabilities.

The Company provided for $25,124,000 and $6,996,000 of income taxes for the
years ended December 31, 1997 and 1996, respectively. This represents an
effective tax rate of 35% and 33% for the years 1997 and 1996, respectively.
Current taxes consist of Federal income taxes and taxes paid in foreign
jurisdictions. Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and amounts used for income tax purposes. The significant
components of deferred tax assets and liabilities are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation................................ $11,886 $ 7,235
Certain prepaid expenses.................................. 620 2,593
Mobilization.............................................. 970 --
Foreign income taxes...................................... 1,399 --
Undistributed earnings of subsidiaries.................... -- 250
------- -------
Total deferred tax liabilities......................... 14,875 10,078
Deferred tax assets:
Accounts receivable reserves.............................. 123 279
Restricted stock.......................................... 76 --
Foreign tax credits....................................... -- 3,811
Minimum tax credits....................................... -- 641
Net operating loss carryforwards.......................... -- 492
Percentage depletion carryforward......................... -- 678
Other, net................................................ 341 738
------- -------
Total deferred tax assets.............................. 540 6,639
Valuation allowance for deferred tax assets................. -- (1,589)
------- -------
Net deferred tax assets................................ 540 5,050
------- -------
Net deferred tax liabilities........................... $14,335 $ 5,028
======= =======
</TABLE>

40
<PAGE> 42
CLIFFS DRILLING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Tax benefits of $2,930,000 and $1,603,000 associated with the exercise of
non-qualified stock options during the years ended December 31, 1997 and 1996,
respectively, are reflected as a component of shareholders' equity.

For financial reporting purposes, income before income taxes includes the
following components:

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Income before income taxes:
United States....................................... $15,778 $ 992 $ 125
Foreign............................................. 56,005 20,426 7,727
------- ------- ------
Total....................................... $71,783 $21,418 $7,852
======= ======= ======
</TABLE>

Significant components of the provision for income taxes attributable to
continuing operations are as follows:

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal............................................. $10,907 $ 144 $ 100
Foreign............................................. 4,910 1,668 458
------- ------- ------
Total Current............................... 15,817 1,812 558
Deferred:
Federal............................................. 7,908 5,184 1,848
Foreign............................................. 1,399 -- --
------- ------- ------
Total Deferred.............................. 9,307 5,184 1,848
------- ------- ------
$25,124 $ 6,996 $2,406
======= ======= ======
</TABLE>

The reconciliation of income tax attributable to continuing operations
computed at the U.S. federal statutory tax rates to income tax expense is:

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax at U.S. statutory rates........................... $25,124 $ 7,496 $2,748
Foreign tax provision................................. 6,308 1,668 458
Foreign tax credits available......................... (4,909) (1,361) --
Alternative minimum tax provision..................... -- 144 100
Alternative minimum credits available................. -- (144) (100)
Change in valuation allowance......................... (1,589) (720) (368)
Safe harbor lease termination......................... -- -- (897)
Other, net............................................ 190 (87) 465
------- ------- ------
Income tax expense.......................... $25,124 $ 6,996 $2,406
======= ======= ======
</TABLE>

Income tax payments amounted to $11,508,000, $1,854,000 and $531,000 for
the years ended December 31, 1997, 1996 and 1995.

7. PRO FORMA FINANCIAL INFORMATION

The following unaudited pro forma financial information gives effect to the
acquisition of the Southwestern Rigs using the purchase method of accounting
given the related assumptions and adjustments, the offering of $150,000,000
41
<PAGE> 43
CLIFFS DRILLING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

of Senior Notes and the issuance of 1,200,000 shares (pre-split basis) of the
Company's Common Stock valued at an average price of $18.51 per share (pre-split
basis) in connection with the Southwestern Rigs acquisition.

The pro forma financial information is based upon the historical
consolidated financial statements of the Company and Southwestern for the years
ended December 31, 1996 and 1995. The historical financial statements of
Southwestern include the operating results of the Southwestern Rigs during the
periods indicated to the date of acquisition, May 23, 1996. However, the
financial statements of Southwestern exclude depreciation expense related to the
Southwestern Rigs because Southwestern managed, rather than owned, the rigs. The
historical results of Southwestern include the results of operations of the rigs
that were available for service during the indicated periods. During the year
ended December 31, 1995, 40% of the Southwestern Rigs were not available for
service as a result of being cold stacked or refurbished.

The pro forma financial information was prepared assuming that the
transactions described above were consummated as of January 1, 1995. The pro
forma financial information has been prepared based upon assumptions deemed
appropriate by the Company and may not be indicative of actual results. The
historical results of Southwestern's operations are included with the Company's
results beginning May 23, 1996. The unaudited Pro Forma Consolidating Statements
of Operations for the years ended December 31, 1996 and 1995 are included in the
Company's Forms 8-K dated September 19, 1997 and May 23, 1996, respectively.

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------------
1996 1995
----------- -----------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
(UNAUDITED)
<S> <C> <C>
Revenues.................................................... $147,672 $108,854
Net Income (Loss)........................................... $ 10,273 $ (7,937)
Net Income (Loss) Per Common Share:
Basic..................................................... $ 0.70 $ (1.00)
Diluted................................................... $ 0.68 $ (1.00)
</TABLE>

8. DEFINED CONTRIBUTION PLAN

The Company has a defined contribution plan ("401(k) Plan"). Under the
401(k) Plan, an employee who has reached age 21 and completed 90 days of service
is eligible to participate in the plan through contributions that range in one
percent multiples up to 16% of salary, with a 1997 dollar maximum of $9,500. In
addition, the Company contributes (or "matches") on behalf of each participant
shares of Common Stock equal to 100% of the portion of each participant's
contribution which does not exceed 6% of the participant's annual salary.
Employer contributions for certain highly compensated employees may be further
limited through the operation of the non-discrimination requirements found in
Sections 401(k) and 401(m) of the Internal Revenue Code.

Employee contributions can be invested in any or all of 6 investment
options in multiples of 5%. Employer contributions are invested in the Company's
Common Stock. Employee contributions are 100% vested and non-forfeitable.
Employer contributions are subject to a graded vesting schedule, with
participants becoming fully vested upon completion of five years employment
service with the Company. Distributions from the 401(k) Plan are made upon
retirement, death, disability or separation of service. Participants may borrow
up to one-half ( 1/2) of their vested interest in the plan, limited to a maximum
of $50,000. Contributions to the 401(k) Plan and earnings on contributions are
not included in a participant's gross income until distributed to the
participant. Contributions to the 401(k) Plan by the Company were $531,000,
$413,000 and $365,000 for the years 1997, 1996 and 1995, respectively.

42
<PAGE> 44
CLIFFS DRILLING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9. CAPITAL STOCK

The Company's Revolving Credit Facility and the indenture governing the
Senior Notes of the Company restrict payment of dividends on the Common Stock.
Specifically, the indenture restricts the payment of dividends based on (i)
availability of funds under a formula based on previously unapplied cumulative
net income since April 1, 1996 plus certain stock sale proceeds raised after May
15, 1996 plus $10,000,000 and (ii) satisfaction of the then applicable minimum
interest coverage ratio for debt incurrence. Cumulative net income for purposes
of the test excludes gains or losses on asset sales and certain other
non-recurring charges or credits as specified in the indenture. Although the
Company was not prohibited from paying cash dividends under the terms of the
indenture as of December 31, 1997, management does not intend to declare any
cash dividends in the foreseeable future.

The Company has a 1988 Incentive Equity Plan under which stock options,
stock appreciation rights, restricted stock and deferred stock awards for up to
650,000 shares (pre-split basis) of the Company's Common Stock may be awarded to
officers, directors and key employees. The Company's 1988 Incentive Equity Plan
is designed to attract and reward key executive personnel. At December 31, 1997,
the Company had 38,850 shares of Common Stock reserved for issuance under the
1988 Incentive Equity Plan.

Stock Options

Stock options granted pursuant to the 1988 Incentive Equity Plan expire not
more than ten years from the date of grant and typically vest over three years,
with 50% vesting after one year and 25% vesting in each of the succeeding two
years. All of the options granted by the Company were granted at an option price
equal to the fair market value of the Common Stock at the date of grant.

Changes in the number of outstanding options on the Company's Common Stock
are summarized as follows:

<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
SHARES UNDER EXERCISE PRICE
OPTION (PER SHARE)
------------ --------------
<S> <C> <C>
Outstanding Options at December 31, 1994.................... 524,400 $ 6.68
Canceled.................................................. (4,400) $ 6.85
--------
Outstanding Options at December 31, 1995.................... 520,000 $ 6.68
========
Granted................................................... 368,000 $13.82
Exercised................................................. (316,050) $ 6.74
Canceled.................................................. (500) $ 6.44
--------
Outstanding Options at December 31, 1996.................... 571,450 $11.24
========
Granted................................................... 86,500 $33.39
Exercised................................................. (243,900) $ 9.27
Canceled.................................................. (80,000) $14.00
--------
Outstanding Options at December 31, 1997.................... 334,050 $17.76
========
Exercisable, December 31,
1995...................................................... 475,250 $ 6.71
1996...................................................... 199,700 $ 6.60
1997...................................................... 103,550 $10.27
</TABLE>

43
<PAGE> 45
CLIFFS DRILLING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

At December 31, 1997, the following options were outstanding and
exercisable and had the indicated weighted average remaining contractual lives:

<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE RANGE OF AVERAGE
NUMBER EXERCISE NUMBER EXERCISE EXERCISE REMAINING
OF PRICE OF PRICE PRICES CONTRACTUAL
OPTIONS (PER SHARE) OPTIONS (PER SHARE) (PER SHARE) LIFE (YEARS)
- ------- ----------- ------- ----------- --------------- ------------
<S> <C> <C> <C> <C> <C>
247,550 $12.30 103,550 $10.27 $6.44 - $14.00 7.3
86,500 $33.39 -- -- $32.75 - $69.50 9.4
- ------- -------
334,050 $17.76 103,550 $10.27 $6.44 - $69.50 7.8
======= =======
</TABLE>

Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its employee stock options under the fair value method of that statement.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following assumptions:

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------
1997 1996
----- -----
<S> <C> <C>
Weighted Average Risk-Free Interest Rate.................... 6.5% 6.3%
Dividend Yield.............................................. 0.0% 0.0%
Weighted Average Stock Price Volatility Factor.............. 60.1% 41.7%
Expected Life of the Options (Years)........................ 4 4
</TABLE>

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options. The calculated
weighted average fair values of options granted during 1997 and 1996 were $17.41
and $5.67, respectively.

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' expected life. This pro forma
financial information is calculated in accordance with SFAS 123, but is not
likely to be representative of the effects on reported net income in future
years. The Company's pro forma information follows:

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------
1997 1996
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Pro Forma Net Income........................................ $45,965 $13,973
Pro Forma Net Income Per Common Share:
Basic..................................................... $ 3.02 $ 1.02
Diluted................................................... $ 2.95 $ 0.99
</TABLE>

Restricted Stock

The Company's Board of Directors has awarded restricted stock to the
Company's officers and key employees from time to time. Awards totaling 90,600
shares and one award of 5,000 shares (pre-split) were made during 1997 and 1996,
respectively. Restrictions on 1997 awards of 88,600 shares lapse with respect to
25% of the entire award after

44
<PAGE> 46
CLIFFS DRILLING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

one year and after each of the succeeding three years. Restrictions on 1997
awards of 2,000 shares lapse with respect to 33 1/3% of the entire award after
one year and after each of the succeeding two years. The 1996 award of 5,000
shares (pre-split) was forfeited during 1997. Expense related to amortization of
restricted stock was $430,000, $29,000 and $25,000 for the years 1997, 1996 and
1995, respectively. Deferred compensation expense relative to non-vested shares
of restricted stock, measured by the market value of the stock on the date of
grant, is being amortized on a straight-line basis over the restriction period.
The unamortized deferred compensation expense, which has been deducted from
equity in the Consolidated Balance Sheets, amounted to $2,467,000 and $223,000
at December 31, 1997 and 1996, respectively.

Effective December 31, 1992, the Company's Board of Directors approved the
sale of 35,000 shares of restricted Common Stock to certain key executives. The
price paid for the restricted stock was $6.63 per share. The Company extended
full recourse, interest-bearing loans to the key executives in the aggregate
amount of $232,000. Interest was calculated at seven and one-half percent
(7 1/2%) per annum payable quarterly and accrued on the last day of March, June,
September and December until the notes were due on December 31, 1997. All such
loans were paid by December 31, 1997. In connection with the restricted stock
sale, the Company executed deferred stock agreements with the executives which
provided for a share match in the event certain performance criteria were
achieved over the five-year period ending December 31, 1997. The performance
measures were attained by the Company, resulting in an award of 14,400
additional shares of Common Stock on February 18, 1998. Compensation expense of
$590,000 related to the deferred stock awards was accrued during 1997 when it
became probable that the Company performance criteria would be met. No such
compensation expense was accrued during the years ended December 31, 1996 and
1995.

10. REDEEMABLE PREFERRED STOCK

On January 17, 1996, the Company issued 2,113,557 shares (pre-split) of
Common Stock upon conversion of 1,115,988 shares of its 1,150,000 issued and
outstanding shares of Preferred Stock. The remaining 34,012 shares of Preferred
Stock were redeemed for cash in the amount of $25.69 per share plus $0.22 per
share in accrued dividends thereon at a cost to the Company of approximately
$881,000.

45
<PAGE> 47
CLIFFS DRILLING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

11. EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted
earnings per share:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Numerator:
Net Income......................................... $46,659 $14,422 $ 5,446
Preferred Stock Dividends.......................... -- (31) (2,659)
------- ------- -------
Numerator for Basic Earnings Per Share -- Income
Available to Common Shareholders................ 46,659 14,391 2,787
Effect of Dilutive Securities:
Preferred Stock Dividends....................... -- 31 --
------- ------- -------
Numerator for Diluted Earnings Per Share -- Income
Available to Common Shareholders After Assumed
Conversions..................................... $46,659 $14,422 $ 2,787
Denominator:
Denominator for Basic Earnings Per
Share -- Weighted Average Shares................ 15,237 13,736 8,192
Effect of Dilutive Securities:
Stock Options................................... 196 147 12
Restricted Stock................................ 56 6 9
Contingent Deferred Stock....................... 4 -- --
Convertible Exchangeable Preferred Stock........ -- 194 --
------- ------- -------
Dilutive Potential Common Shares................... 256 347 21
Denominator for Diluted Earnings Per
Share -- Adjusted Weighted Average Shares and
Assumed Conversions............................. 15,493 14,083 8,213
Net Income Per Common Share:
Basic.............................................. $ 3.06 $ 1.05 $ 0.34
======= ======= =======
Diluted............................................ $ 3.01 $ 1.02 $ 0.34
======= ======= =======
</TABLE>

12. COMMITMENTS AND CONTINGENT LIABILITIES

The Company leases its headquarters office, office equipment and other
items under operating leases expiring at various dates during the next five
years. Management expects that, in the normal course of business, leases that
expire will be renewed or replaced by other leases. Total rent expense under
operating leases was $1,534,000, $856,000 and $560,000 for the years ended
December 31, 1997, 1996 and 1995, respectively. Minimum future obligations under
non-cancelable operating leases at December 31, 1997 for the following five
years are $1,324,000, $828,000, $679,000, $173,000 and $0, respectively.

The Company has other contingent liabilities resulting from litigation,
claims and commitments incidental to the ordinary course of business. Management
believes that the probable resolution of such contingencies will not materially
affect the financial position or results of operations of the Company.

46
<PAGE> 48
CLIFFS DRILLING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

13. BUSINESS SEGMENTS

During each of the three years in the period ended December 31, 1997, the
Company conducted the following business activities:

Daywork Drilling -- domestic and foreign drilling of oil and gas wells
on a dayrate basis for major and independent oil and gas companies on land,
inland waters and offshore.

Engineering Services -- domestic and foreign drilling of oil and gas
wells on a turnkey basis for major and independent oil and gas companies on
land, inland waters and offshore and foreign well engineering and
management services.

MOPU Operations -- domestic and foreign operation of mobile offshore
production units on a dayrate basis for major and independent oil and gas
companies.

Oil and Gas -- domestic exploration, development and production of
hydrocarbon reserves.

<TABLE>
<CAPTION>
DEPRECIATION,
OPERATING DEPLETION
INCOME IDENTIFIABLE CAPITAL AND
REVENUES (LOSS) ASSETS EXPENDITURES AMORTIZATION
-------- --------- ------------ ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
December 31, 1997
Daywork Drilling.............................. $173,602 $71,623 $422,587 $168,822 $15,750
Engineering Services.......................... 91,723 20,446 40,685 -- 27
MOPU Operations............................... 8,663 3,582 34,866 6,976 4,065
Oil and Gas................................... 410 (330) 2,013 456 311
Corporate Office.............................. -- (9,021) -- -- 290
Eliminations.................................. (10,766) -- -- -- --
-------- ------- -------- -------- -------
Consolidated................................ $263,632 $86,300 $500,151 $176,254 $20,443
======== ======= ======== ======== =======
December 31, 1996
Daywork Drilling.............................. $ 77,882 $23,048 $257,555 $158,650 $ 9,021
Engineering Services.......................... 60,517 8,036 42,521 -- 32
MOPU Operations............................... 4,329 2,872 35,661 7,719 793
Oil and Gas................................... 1,156 (3,108) 3,809 350 654
Corporate Office.............................. -- (6,411) -- -- 111
Eliminations.................................. (10,775) -- -- -- (223)
-------- ------- -------- -------- -------
Consolidated................................ $133,109 $24,437 $339,546 $166,719 $10,388
======== ======= ======== ======== =======
December 31, 1995
Daywork Drilling.............................. $ 26,363 $ 2,761 $ 56,639 $ 11,814 $ 4,193
Engineering Services.......................... 56,970 2,609 37,302 -- 30
MOPU Operations............................... 4,920 2,492 30,017 825 1,360
Oil and Gas................................... 2,788 541 5,004 798 1,732
Corporate Office.............................. -- (5,387) -- -- 98
Eliminations.................................. (7,752) -- -- -- (142)
-------- ------- -------- -------- -------
Consolidated................................ $ 83,289 $ 3,016 $128,962 $ 13,437 $ 7,271
======== ======= ======== ======== =======
</TABLE>

Intersegment sales between the Daywork Drilling and Engineering Services
business segments were $10,766,000, $10,775,000 and $7,752,000 for the years
ended December 31, 1997, 1996 and 1995, respectively. Such intersegment sales
were accounted for at prices comparable to unaffiliated customer sales.

Identifiable assets by industry segment include assets directly identified
with those operations. Capital expenditures for the year ending December 31,
1997 include $20,500,000 of non-cash investing activity related to 437,939
shares of Common Stock issued in connection with the acquisition of the assets
used in the offshore contract drilling business in Trinidad of Well Services and
$9,250,000 of non-cash investing activity related to the acquisition of
substantially all of the remaining 50% interest of the WINDJV. Capital
expenditures for the year ending December 31, 1996 include

47
<PAGE> 49
CLIFFS DRILLING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

$22,215,000 of non-cash investing activity related to 1,200,000 shares
(pre-split basis) of Common Stock issued in connection with the acquisition of
the Southwestern Rigs.

The Company derived a significant amount of its revenues from a few
customers in each of the three years in the period ended December 31, 1997. The
following table summarizes information with respect to these major customers.

<TABLE>
<CAPTION>
% OF
CONSOLIDATED
CUSTOMER REPORTING SEGMENT REVENUES
-------- ----------------- ------------
<S> <C> <C>
December 31, 1997
Corpoven, S.A............................ Daywork Drilling and Engineering Services 31%
December 31, 1996
Corpoven, S.A............................ Daywork Drilling and Engineering Services 31%
December 31, 1995
Corpoven, S.A............................ Daywork Drilling and Engineering Services 35%
Maraven, S.A............................. Daywork Drilling and Engineering Services 19%
Texaco Exploration & Production, Inc..... Engineering Services 12%
</TABLE>

14. DISTRIBUTION OF EARNINGS AND ASSETS

The following table sets forth financial information with respect to the
Company and its subsidiaries on a consolidated basis by geographical area.

<TABLE>
<CAPTION>
OPERATING
INCOME IDENTIFIABLE
REVENUES (LOSS) ASSETS
-------- --------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
December 31, 1997
United States............................................ $ 97,199 $33,218 $204,985
Venezuela................................................ 124,242 41,217 144,025
Qatar.................................................... 26,448 11,937 59,466
Trinidad................................................. 4,782 2,249 68,578
Other.................................................... 10,961 6,410 23,097
Corporate Overhead....................................... -- (8,731) --
-------- ------- --------
Total............................................ $263,632 $86,300 $500,151
======== ======= ========
December 31, 1996
United States............................................ $ 59,961 $ 6,874 $220,520
Venezuela................................................ 56,242 14,639 58,890
Qatar.................................................... 5,767 1,562 20,298
Trinidad................................................. 909 699 3,955
Other.................................................... 10,230 6,963 35,883
Corporate Overhead....................................... -- (6,300) --
-------- ------- --------
Total............................................ $133,109 $24,437 $339,546
======== ======= ========
December 31, 1995
United States............................................ $ 30,783 $ 2,178 $ 82,934
Venezuela................................................ 51,308 5,881 45,434
Other.................................................... 1,198 246 594
Corporate Overhead....................................... -- (5,289) --
-------- ------- --------
Total............................................ $ 83,289 $ 3,016 $128,962
======== ======= ========
</TABLE>

48
<PAGE> 50
CLIFFS DRILLING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Revenues, operating income (loss) and identifiable assets have been
reclassified in prior years to conform with the current year presentation.

15. QUARTERLY FINANCIAL DATA (UNAUDITED)

Quarterly operating results for the years ended December 31, 1997 and 1996
are summarized as follows:

<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE QUARTER ENDED
---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1997:
Revenues.............................. $60,876 $60,470 $68,120 $74,166
Operating Income...................... 14,576 22,367 23,880 25,477
Net Income............................ 6,958 13,628 12,291 13,782(1)
Net Income per Common Share:
Basic............................... $ 0.46 $ 0.90 $ 0.80 $ 0.90(1)(2)
Diluted............................. $ 0.45 $ 0.89 $ 0.79 $ 0.88(1)(2)

1996:
Revenues.............................. $29,078 $13,778 $43,497 $46,756(3)
Operating Income...................... 4,331 2,461 9,585 8,060(3)
Net Income............................ 3,700 1,985 4,309 4,428(3)
Net Income Applicable to Common and
Common Equivalent Shares............ 3,669 1,985 4,309 4,428(3)
Net Income per Common Share:
Basic............................... $ 0.31 $ 0.15 $ 0.29 $ 0.30(2)(3)
Diluted............................. $ 0.30 $ 0.15 $ 0.29 $ 0.29(2)
</TABLE>

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

(1) The second quarter of 1997 includes a net gain on disposition of assets of
$2,575,000.

(2) The 1996 and first three quarters of 1997 earnings per share amounts have
been restated to comply with SFAS No. 128. In addition, the 1996 and first
quarter of 1997 earnings per share and weighted average shares have been
retroactively adjusted to reflect the Stock Split.

(3) During the second quarter of 1996, the Company did not complete any turnkey
wells in its Engineering Services division. Fourth quarter 1996 results
include $2,941,000 in costs associated with an unsuccessful well drilled by
the Company's oil and gas business segment.

49
<PAGE> 51

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1 -- Reorganization and Distribution Agreement dated as of
June 8, 1988 among Cleveland-Cliffs Inc, The
Cleveland-Cliffs Iron Company, Cliffs Drilling Company,
now Cliffs Resources, Inc., Cliffs Exploration Company,
now Cliffs Oil and Gas Company, Cliffs Drilling
International, Inc. and New Cliffs Drilling Company, now
Cliffs Drilling Company, the Registrant (the "Company")
(incorporated by reference to Exhibit 2.1 to the
Company's Registration Statement on Form S-1,
Registration No. 33-23508, filed under the Securities
Act).
2.2 -- Acquisition Agreement dated as of May 13, 1996 by and
among Southwestern Offshore Corporation, Viking Supply
Ships A.S., Ocean Master III Inc., Production Partner
Inc., Trivium Investments Limited, Helge Ringdal, the
Company, Cliffs Drilling Asset Acquisition Company and
Cliffs Drilling Merger Company (incorporated by reference
to Exhibit 2.2 to the Company's Form 8-K dated May 23,
1996).
2.3 -- Stock Purchase Agreement dated as of December 6, 1996 by
and among Delavney-Gestao E Consultadoria LDA.,
Construtora Andrade Gutierrez S.A., Andrade Gutierrez
Perfuracao LTDA., Driltech Inc. and the Company
(incorporated by reference to Exhibit 2.3 to the
Company's Form 10-K for the year ended December 31,
1996).
2.3.1 -- Amendment No. 1 dated as of January 24, 1997 to Stock
Purchase Agreement dated as of December 6, 1996 by and
among Delavney-Gestao E Consultadoria LDA., Construtora
Andrade Gutierrez S.A., Andrade Gutierrez Perfuracao
LTDA., Driltech Inc. and the Company (incorporated by
reference to Exhibit 2.3.1 to the Company's Form 10-K for
the year ended December 31, 1996).
2.3.2 -- Amendment No. 2 dated as of April 24, 1997 to Stock
Purchase Agreement dated as of December 6, 1996 by and
among Delavney-Gestao E Consultadoria LDA., Construtora
Andrade Gutierrez S.A., Andrade Gutierrez Perfuracao
LTDA., Driltech Inc. and the Company (incorporated by
reference to Exhibit 2.3.2 to the Company's Form 10-Q for
the quarter ended March 31, 1997).
2.4 -- Asset Purchase Agreement dated as of December 29, 1997 by
and among Cliffs Drilling Trinidad Offshore Limited, Well
Services (Marine) Ltd., Charles A. Brash and Phillip A.
Pollonais (incorporated by reference to Exhibit 2.4 to
the Company's Form 8-K dated December 29, 1997).
3.1.1 -- Certificate of Incorporation of New Cliffs Drilling
Company (incorporated by reference to Exhibit 3.1.1 to
the Company's Form 10-Q for the quarter ended June 30,
1997).
3.1.2 -- Certificate of Amendment of Certificate of Incorporation
(incorporated by reference to Exhibit 3.1.2 to the
Company's Form 10-Q for the quarter ended June 30, 1997).
3.1.3 -- Certificate of Designations of $2.3125 Convertible
Exchangeable Preferred Stock of the Company (incorporated
by reference to Exhibit 3.1.3 to the Company's Form 10-Q
for the quarter ended June 30, 1997).
3.1.4 -- Certificate of Amendment of Certificate of Incorporation
of the Company (incorporated by reference to Exhibit
3.1.4 to the Company's Form 10-Q for the quarter ended
June 30, 1997).
3.1.5 -- Certificate of Elimination of $2.3125 Convertible
Exchangeable Preferred Stock of the Company (incorporated
by reference to Exhibit 3.1.5 to the Company's Form 10-Q
for the quarter ended June 30, 1997).
</TABLE>

50
<PAGE> 52

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1.6 -- Certificate of Designations of Series A Junior
Participating Preferred Stock of the Company
(incorporated by reference to Exhibit 3.1.6 to the
Company's Form 10-Q for the quarter ended June 30, 1997).
3.2 -- By-Laws of the Company (incorporated by reference to
Exhibit 3.2 to the Company's Registration Statement on
Form S-1, Registration No. 33-23508, filed August 4,
1988).
4.1 -- Certificate of Incorporation of the Company, as amended
(included as Exhibits 3.1.1, 3.1.2, 3.1.3, 3.1.4, 3.1.5
and 3.1.6).
4.2 -- By-Laws of the Company (included as Exhibit 3.2).
4.3 -- Indenture dated as of May 15, 1996 among the Company, as
issuer, Cliffs Drilling Asset Acquisition Company, Cliffs
Drilling Merger Company, Cliffs Drilling International,
Inc. and Cliffs Oil and Gas Company, as subsidiary
guarantors, and Fleet National Bank, predecessor of State
Street Bank and Trust Company, as trustee, including a
Form of the Company's 10.25% Senior Notes due 2003
(incorporated by reference to Exhibit 4.3 to the
Company's Form 8-K dated May 23, 1996).
4.3.1 -- First Supplemental Indenture dated as of July 11, 1996
among the Company, as issuer, Southwestern Offshore
Corporation (f/k/a Cliffs Drilling Asset Acquisition
Company), Cliffs Drilling Merger Company, Cliffs Drilling
International, Inc., Cliffs Oil and Gas Company and DRL,
Inc., as subsidiary guarantors, and Fleet National Bank,
predecessor of State Street Bank and Trust Company, as
trustee (incorporated by reference to Exhibit 4.3.1 to
the Company's Registration Statement on Form S-4,
Registration No. 333-08273, filed July 17, 1996).
4.3.2 -- Second Supplemental Indenture dated as of January 24,
1997 among the Company, as issuer, Southwestern Offshore
Corporation (f/k/a Cliffs Drilling Asset Acquisition
Company), Cliffs Drilling Merger Company, Cliffs Drilling
International, Inc., Cliffs Oil and Gas Company, DRL,
Inc. and Greenbay Drilling Company Ltd., as subsidiary
guarantors, and Fleet National Bank, predecessor of State
Street Bank and Trust Company, as trustee (incorporated
by reference to Exhibit 4.6.2 to the Company's Form 10-K
for the fiscal year ended December 31, 1996).
4.3.3 -- Third Supplemental Indenture dated as of August 29, 1997
among the Company, as issuer, Southwestern Offshore
Corporation (f/k/a Cliffs Drilling Asset Acquisition
Company), Cliffs Drilling Merger Company, Cliffs Drilling
International, Inc., Cliffs Oil and Gas Company, DRL,
Inc., Cliffs Drilling Trinidad Limited and West Indies
Drilling Joint Venture, as subsidiary guarantors, and
State Street Bank and Trust Company, successor to Fleet
National Bank, as trustee (incorporated by reference to
Exhibit 4.3.3 to the Company's Registration Statement on
Form S-4, Registration No. 333-36325, filed September 24,
1997).
*4.3.4 -- Fourth Supplemental Indenture dated as of March 2, 1998
among the Company, as issuer, Southwestern Offshore
Corporation (f/k/a Cliffs Drilling Asset Acquisition
Company), Cliffs Drilling Merger Company, Cliffs Drilling
International, Inc., Cliffs Oil and Gas Company, DRL,
Inc., Cliffs Drilling Trinidad Limited, West Indies
Drilling Joint Venture, Cliffs Drilling (Barbados)
Holdings ESRL, Cliffs Drilling (Barbados) SRL and Cliffs
Drilling Trinidad Offshore Limited, as subsidiary
guarantors, and State Street Bank and Trust Company,
successor to Fleet National Bank, as trustee.
4.4 -- Registration Rights Agreement dated as of May 23, 1996 by
and among the Company, Cliffs Drilling Asset Acquisition
Company, Cliffs Drilling Merger Company, Cliffs Drilling
International, Inc., Cliffs Oil and Gas Company,
Jefferies & Company, Inc. and ING Baring (U.S.)
Securities, Inc. (incorporated by reference to Exhibit
4.4 to the Company's Form 8-K dated May 23, 1996).
</TABLE>

51
<PAGE> 53

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
4.5 -- Registration Rights Agreement dated as of May 23, 1996 by
and among the Company, Viking Supply Ships A.S. and
Production Partner Inc. (incorporated by reference to
Exhibit 4.5 to the Company's Form 8-K dated May 23,
1996).
4.6 -- Rights Agreement dated effective June 17, 1997 between
the Company and Harris Trust and Savings Bank, which
includes as Exhibit B thereto the Form of Right
Certificate (incorporated by reference to Exhibit 4.3 to
the Company's Registration Statement on Form 8-A filed
June 6, 1997).
4.7 -- Indenture dated as of August 7, 1997 among the Company,
as issuer, Southwestern Offshore Corporation, Cliffs
Drilling Merger Company, Cliffs Drilling International,
Inc., Cliffs Oil and Gas Company and DRL, Inc., as
subsidiary guarantors, and State Street Bank and Trust
Company, as trustee, including a form of the Company's
10.25% Senior Notes due 2003 (incorporated by reference
to Exhibit 4.4 to the Company's Registration Statement on
Form S-4, Registration No. 333-36325, filed September 24,
1997).
4.7.1 -- First Supplemental Indenture dated as of August 29, 1997
among the Company, as issuer, Southwestern Offshore
Corporation, Cliffs Drilling Merger Company, Cliffs
Drilling International, Inc., Cliffs Oil and Gas Company,
DRL, Inc., Cliffs Drilling Trinidad Limited and the West
Indies Drilling Joint Venture, as subsidiary guarantors,
and State Street Bank and Trust Company, as trustee,
(incorporated by reference to Exhibit 4.4.1 to the
Company's Registration Statement on Form S-4,
Registration No. 333-36325, filed September 24, 1997).
*4.7.2 -- Second Supplemental Indenture dated as of March 2, 1998
among the Company, as issuer, Southwestern Offshore
Corporation, Cliffs Drilling Merger Company, Cliffs
Drilling International, Inc., Cliffs Oil and Gas Company,
DRL, Inc., Cliffs Drilling Trinidad Limited, West Indies
Drilling Joint Venture, Cliffs Drilling (Barbados)
Holdings ESRL, Cliffs Drilling (Barbados) SRL and Cliffs
Drilling Trinidad Offshore Limited, as subsidiary
guarantors, and State Street Bank and Trust Company, as
trustee.
4.8 -- Registration Rights Agreement dated as of July 31, 1997
by and among the Company, Southwestern Offshore
Corporation, Cliffs Drilling Merger Company, Cliffs
Drilling International, Inc., Cliffs Oil and Gas Company,
DRL, Inc., Jefferies & Company, Inc. and ING Baring
(U.S.) Securities, Inc. (incorporated by reference to
Exhibit 4.5 to the Company's Registration Statement on
Form S-4, Registration No. 333-36325, filed September 24,
1997).
4.9 -- Registration Rights Agreement dated as of December 29,
1997 by and among the Company, Well Services (Marine)
Ltd., Charles A. Brash and Phillip A. Pollonais
(incorporated by reference to Exhibit 4.9 to the
Company's Form 8-K dated December 31, 1997).
10.1 -- Reorganization and Distribution Agreement dated as of
June 8, 1988 (incorporated by reference to Exhibit 2.1 to
the Company's Registration Statement on Form S-1, No.
33-23508, filed under the Securities Act).
10.2 -- Tax Sharing Agreement dated as of June 21, 1988 between
Cleveland-Cliffs Inc, Cliffs Resources, Inc., Cliffs Oil
and Gas Company, Cliffs Drilling International, Inc. and
the Company (incorporated by reference to Exhibit 10.2 to
the Company's Registration Statement on Form S-1,
Registration No. 33-23508, filed under the Securities
Act).
10.3 -- Benefits Agreement dated as of June 21, 1988 between
Cleveland-Cliffs Inc, Cliffs Resources, Inc. and the
Company (incorporated by reference to Exhibit 10.3 to the
Company's Registration Statement on Form S-1,
Registration No. 33-23508, filed under the Securities
Act).
</TABLE>

52
<PAGE> 54

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.4 -- Drilling Agreement dated January 17, 1986 between Cliffs
Resources, Inc. and TransAmerican Natural Gas
Corporation, Debtor and Debtor-in-Possession and Certain
of its Affiliates (incorporated by reference to Exhibit
10.4 to the Company's Registration Statement on Form 10,
File No. 0-16703).
10.5 -- Agreement dated April 28, 1987, as amended by Additional
Agreements dated August 26, 1987, and February 12, 1988,
between Cliffs Resources, Inc. and Neddrill Nederland
B.V. (incorporated by reference to Exhibit 10.7 in the
Company's Registration Statement on Form 10, File No.
0-16703).
10.6 -- Agreement dated June 1, 1990, between Cliffs Drilling
International, Inc. and Neddrill Turnkey Drilling B.V.
(incorporated by reference to Exhibit 10.7.3 to the
Company's Form 10-K for the year ended December 31,
1990).
10.7 -- Cliffs Drilling Company 1988 Incentive Equity Plan
(incorporated by reference to Exhibit 10.8 to the
Company's Registration Statement on Form S-1,
Registration No. 33-23508, filed under the Securities
Act).
10.7.1 -- Amendment No. 1 dated May 17, 1990 to the Cliffs Drilling
Company 1988 Incentive Equity Plan (incorporated by
reference to Exhibit 10.7.1 to the Company's Form 10-K
for the year ended December 31, 1993).
10.7.2 -- Amendment No. 2 dated May 20, 1993 to the Cliffs Drilling
Company 1988 Incentive Equity Plan (incorporated by
reference to Exhibit 10.7.2 to the Company's Form 10-K
for the year ended December 31, 1993).
10.7.3 -- Amendment No. 3 dated May 22, 1996 to the Cliffs Drilling
Company 1988 Incentive Equity Plan (incorporated by
reference to Exhibit 10.7.3 to the Company's Form 10-K
for the year ended December 31, 1996).
10.8 -- Cliffs Drilling Company Incentive Bonus Plan
(incorporated by reference to Exhibit 10.9 to the
Company's Registration Statement on Form S-1,
Registration No. 33-23508, filed under the Securities
Act).
10.9 -- Cliffs Drilling Company Retention Plan for Salaried
Employees (incorporated by reference to Exhibit 10.10 to
the Company's Registration Statement on Form S-1,
Registration No. 33-23508, filed under the Securities
Act).
10.9.1 -- Amendment No. 1 dated May 17, 1990 to the Cliffs Drilling
Company Retention Plan for Salaried Employees
(incorporated by reference to Exhibit 10.9.1 to the
Company's Form 10-K for the year ended December 31,
1993).
10.9.2 -- Amendment No. 2 dated May 21, 1992 to the Cliffs Drilling
Company Retention Plan for Salaried Employees
(incorporated by reference to Exhibit 10.9.2 to the
Company's Form 10-K for the year ended December 31,
1993).
10.10 -- Form of Indemnification Agreement between the Company and
its officers and directors (incorporated by reference to
Exhibit 10.11 to the Company's Registration Statement on
Form S-1, Registration No. 33-23508, filed under the
Securities Act).
10.11 -- Form of Restricted Stock Award Agreement entered into
between the Company and certain key executive officers
(incorporated by reference to Exhibit 10.12 to the
Company's Registration Statement on Form S-1,
Registration No. 33-23508, filed under the Securities
Act).
10.11.1 -- Form of Restricted Stock Award Agreement dated as of
December 31, 1992 entered into between the Company and
certain key executive officers (incorporated by reference
to Exhibit 10.10.1 to the Company's Form 10-K for the
year ended December 31, 1992).
</TABLE>

53
<PAGE> 55

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.11.2 -- Form of Deferred Stock Award Agreement dated as of
December 31, 1992 entered into between the Company and
certain key executive officers (incorporated by reference
to Exhibit 10.11.2 to the Company's Form 10-K for the
year ended December 31, 1993).
10.12 -- Exploration and Development Agreement dated as of May 25,
1988 among the Company, Mosbacher Offshore, Inc. and
Cliffs Oil and Gas Company (incorporated by reference to
Exhibit 10.13 to the Company's Registration Statement on
Form S-1, Registration No. 33-23508, filed under the
Securities Act).
10.12.1 -- Letter Agreement dated February 15, 1991 extending
Exploration and Development Agreement (incorporated by
reference to Exhibit 10.13.1 to the Company's Form 10-K
for the year ended December 31, 1990).
10.13 -- Second Restated Credit Agreement dated as of March 28,
1994 by and among the Company, Cliffs Oil and Gas
Company, Cliffs Drilling International, Inc. and
Internationale Nederlanden (U.S.) Capital Corporation,
now ING (U.S.) Capital Corporation (incorporated by
reference to Exhibit 10.14.1 to the Company's Form 10-Q
for the quarter ended March 31, 1994).
10.13.1 -- First Amendment to Second Restated Credit Agreement dated
as of May 17, 1994 by and among the Company, Cliffs Oil
and Gas Company, Cliffs Drilling International, Inc. and
Internationale Nederlanden (U.S.) Capital Corporation,
now ING (U.S.) Capital Corporation (incorporated by
reference to Exhibit 10.13.1 to the Company's Form 10-K
for the year ended December 31, 1994).
10.13.2 -- Second Amendment to Second Restated Credit Agreement
dated as of September 26, 1995 by and among the Company,
Cliffs Oil and Gas Company, Cliffs Drilling
International, Inc. and Internationale Nederlanden (U.S.)
Capital Corporation, now ING (U.S.) Capital Corporation
(incorporated by reference to Exhibit 10.13.2 to the
Company's Form 10-K for the year ended December 31,
1995).
10.13.3 -- Third Amendment to Second Restated Credit Agreement dated
as of December 19, 1995 by and among the Company, Cliffs
Oil and Gas Company, Cliffs Drilling International, Inc.
and Internationale Nederlanden (U.S.) Capital
Corporation, now ING (U.S.) Capital Corporation
(incorporated by reference to Exhibit 10.13.3 to the
Company's Form 10-K for the year ended December 31,
1995).
10.13.4 -- Fourth Amendment to Second Restated Credit Agreement
dated as of June 27, 1996 by and among the Company,
Cliffs Oil and Gas Company, Cliffs Drilling
International, Inc., Southwestern Offshore Corporation,
DRL, Inc. and Internationale Nederlanden (U.S.) Capital
Corporation, now ING (U.S.) Capital Corporation
(incorporated by reference to Exhibit 10.13.3 to the
Company's Form 10-Q for the quarter ended June 30, 1996).
10.14 -- Cliffs Neddrill Central Turnkey International Joint
Venture Agreement dated December 15, 1992, by and among
Cliffs Drilling International, Inc., Neddrill Turnkey
Drilling B.V. and Perforadora Central S.A. de C.V.
(incorporated by reference to Exhibit 10.22 to the
Company's Form 10-K for the year ended December 31,
1992).
10.15 -- Asset Purchase and Sale Agreement dated March 30, 1993,
between the Company, as seller, and Cerrito Investment
Corporation (incorporated by reference to Exhibit 10.23
to the Company's Form 10-Q for the quarter ended March
31, 1993).
10.16 -- Form of Executive Agreement dated as of July 20, 1994
(incorporated by reference to Exhibit 10.20 to the
Company's Form 10-Q for the quarter ended June 30, 1994).
10.17 -- Acquisition Agreement dated as of May 13, 1996 (included
as Exhibit 2.2).
10.18 -- Stock Purchase Agreement dated as of December 6, 1996
(included as Exhibit 2.3).
</TABLE>

54
<PAGE> 56

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.18.1 -- Amendment No. 1 dated as of January 24, 1997 to Stock
Purchase Agreement dated December 6, 1996 (included as
Exhibit 2.3.1).
10.18.2 -- Amendment No. 2 dated as of April 24, 1997 to Stock
Purchase Agreement dated as of December 6, 1996 (included
as Exhibit 2.3.2).
10.19 -- Indenture dated as of May 15, 1996 (included as Exhibit
4.3).
10.19.1 -- First Supplemental Indenture dated as of July 11, 1996
(included as Exhibit 4.3.1).
10.19.2 -- Second Supplemental Indenture dated as of January 24,
1997 (included as Exhibit 4.3.2).
10.19.3 -- Third Supplemental Indenture dated as of August 29, 1997
(included as Exhibit 4.3.3).
10.19.4 -- Fourth Supplemental Indenture dated as of March 2, 1998
(included as Exhibit 4.3.4).
10.20 -- Joint Venture Agreement dated as of April 18, 1996
between Well Services (Marine) Limited and Viking
Trinidad Limited, as Partners, and Well Services (Marine)
Limited, as Operator, establishing the West Indies
Drilling Joint Venture (incorporated by reference to
Exhibit 99.1 to the Company's Form 8-K dated May 23,
1996).
10.20.1 -- First Amendment dated effective as of April 1, 1996 to
Joint Venture Agreement between Well Services (Marine)
Limited and Viking Trinidad Limited, as Partners, and
Well Services (Marine) Limited, as Operator (incorporated
by reference to Exhibit 99.1.1 to the Company's Form 8-K
dated May 23, 1996).
*10.20.2 -- Purchase and Sale and Joint Venture Amendment Agreement
dated as of July 23, 1997 by and between Well Services
(Marine) Limited and Cliffs Drilling Trinidad Limited
(f/k/a Viking Trinidad Limited).
10.21 -- Asset Purchase Agreement dated as of December 29, 1997
(included as Exhibit 2.4).
10.22 -- Indenture dated as of August 7, 1997 (included as Exhibit
4.7).
10.22.1 -- First Supplemental Indenture dated as of August 29, 1997
(included as Exhibit 4.7.1).
10.22.2 -- Second Supplemental Indenture dated as of March 2, 1998
(included as Exhibit 4.7.2).
*10.23 -- Cliffs Drilling Company Compensation Deferral Plan.
*21.1 -- Subsidiaries of the Registrant.
*23.1 -- Consent of Ernst & Young LLP.
*27 -- Financial Data Schedule.
</TABLE>

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

* Filed herewith

All other exhibits are omitted because they are not applicable, or not
required, or because the required information is included in the Consolidated
Financial Statements or Notes thereto.

<PAGE> 1
Exhibit 4.3.4

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

CLIFFS DRILLING COMPANY,

SUBSIDIARY GUARANTORS

Named Herein

and

STATE STREET BANK AND TRUST COMPANY
SUCCESSOR TO FLEET NATIONAL BANK

Trustee

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

FOURTH SUPPLEMENTAL INDENTURE
(SERIES A/B SECURITIES)

Dated as of March 2, 1998

-----------

Supplementing and Amending the Indenture
dated as of May 15, 1996
as amended by the First Supplemental Indenture
dated as of July 11, 1996
and the Second Supplemental Indenture
dated as of January 24, 1997
and the Third Supplemental Indenture
dated as of August 29, 1997

- --------------------------------------------------------------------------------
<PAGE> 2

FOURTH SUPPLEMENTAL INDENTURE

THIS FOURTH SUPPLEMENTAL INDENTURE dated as of March 2, 1998, is
between CLIFFS DRILLING COMPANY, a Delaware corporation (the "Company"), the
SUBSIDIARY GUARANTORS (as defined herein) and STATE STREET BANK AND TRUST
COMPANY, SUCCESSOR TO FLEET NATIONAL BANK, a national banking association (the
"Trustee").

RECITALS OF THE COMPANY

A. The Company has duly authorized the creation of an issue of 10.25%
Senior Notes due 2003, Series A (the "Series A Securities") and an issue of
10.25% Senior Notes due 2003, Series B (the "Series B Securities" and the Series
A Securities and the Series B Securities, as amended or supplemented from time
to time in accordance with the terms of the Indenture (as defined herein), being
herein collectively called the "Securities"), of substantially the tenor and in
the aggregate principal amount set forth in the Indenture.

B. The Company and the Subsidiary Guarantors have heretofore made,
executed and delivered to the Trustee an Indenture dated as of May 15, 1996
(referred to herein as the "Original Indenture") pursuant to which the
Securities are issuable, and a First Supplemental Indenture dated as of July 11,
1996, a Second Supplemental Indenture dated as of January 24, 1997 and a Third
Supplemental Indenture dated as of August 29, 1997 (the Original Indenture as
supplemented by the First Supplemental Indenture, the Second Supplemental
Indenture and the Third Supplemental Indenture being referred to herein as the
"Original Supplemented Indenture").

C. The Securities are guaranteed by the Subsidiary Guarantors (as
defined in the Indenture) on the terms provided in the Indenture.

D. It is deemed desirable to supplement and amend the Original
Supplemented Indenture to add three Restricted Subsidiaries of the Company as
Subsidiary Guarantors (the Original Supplemented Indenture, as so supplemented
and amended by this Fourth Supplemental Indenture, being sometimes referred to
herein as the "Indenture").

E. Article IX, Section 9.1 of the Original Indenture provides that
under certain conditions the Company, the Subsidiary Guarantors and Trustee,
may, without the consent of any Holders, from time to time and at any time,
enter into an indenture or indentures supplemental thereto, for the purpose,
inter alia, of adding any Restricted Subsidiary as an additional Subsidiary
Guarantor (subsection (g)).

- 1 -

<PAGE> 3

F. In addition, Article X, Section 10.13 of the Original Indenture
provides that certain Restricted Subsidiaries of the Company shall become
Subsidiary Guarantors by executing and delivering a supplemental indenture
agreeing to be bound by the terms of the Original Indenture.

G. The Series A Securities were issued on May 23, 1996 under the
Original Indenture, and the Series B Securities were issued in exchange for the
Series A Securities on August 30, 1996.

H. Greenbay Drilling Company Ltd., which was added as a Subsidiary
Guarantor pursuant to the Second Supplemental Indenture, has been merged with
and into the Company.

I. All things necessary to authorize the execution and delivery of this
Fourth Supplemental Indenture, to effect the modifications of the Original
Supplemented Indenture provided for in this Fourth Supplemental Indenture, and
to make the Original Supplemented Indenture, as further supplemented and amended
by this Fourth Supplemental Indenture, a valid agreement of the Company, in
accordance with its terms, have been done.

NOW, THEREFORE, in consideration of the premises and the purchase of
the Securities by the Holders, the Company, the Subsidiary Guarantors and the
Trustee mutually covenant and agree for the equal and proportionate benefit of
the respective Holders from time to time of the Securities as follows:

ARTICLE I

MODIFICATION OF THE ORIGINAL INDENTURE

SECTION 1.1 AMENDMENT OF ARTICLE I OF THE ORIGINAL INDENTURE. Section
1.1 of the Original Supplemented Indenture is amended by changing the definition
of "Subsidiary Guarantor" to read as follows:

"'Subsidiary Guarantor' means (i) Southwestern Offshore
Corporation (f/k/a Cliffs Drilling Asset Acquisition Company), a
Delaware corporation, (ii) Cliffs Drilling Merger Company, a Delaware
corporation, (iii) Cliffs Drilling International, Inc., a Delaware
corporation, (iv) Cliffs Oil and Gas Company, a Delaware corporation,
(v) DRL, Inc., a Delaware corporation, (vi) Cliffs Drilling Trinidad
Limited, a company organized under the laws of Trinidad and Tobago,
(vii) West Indies Drilling Joint Venture, a joint venture partnership
organized under the laws of Trinidad and Tobago, (viii) Cliffs Drilling
(Barbados) Holdings ESRL, a Barbados exempt societies with restricted
liability, (ix) Cliffs Drilling (Barbados) SRL, a Barbados societies
with restricted liability, (x) Cliffs Drilling Trinidad Offshore
Limited, a company organized under the laws of Trinidad and Tobago,
(xi) each of the Company's other Restricted Subsidiaries, if any,
executing a supplemental indenture in compliance with the provisions of
Section 10.13(a)

- 2 -

<PAGE> 4

hereof, and (xii) any Person that becomes a successor guarantor of the
Securities in compliance with the provisions of Section 13.2 hereof."

ARTICLE II

ADDITIONAL SUBSIDIARY GUARANTOR

SECTION 2.1 ADDITION OF SUBSIDIARY GUARANTORS. Cliffs Drilling
(Barbados) Holdings ESRL, a Barbados exempt societies with restricted liability,
Cliffs Drilling (Barbados) SRL, a Barbados societies with restricted liability,
and Cliffs Drilling Trinidad Offshore Limited, a company organized under the
laws of Trinidad and Tobago, by execution of this Fourth Supplemental Indenture
each hereby agree to be bound by the terms of the Indenture as a Subsidiary
Guarantor.

SECTION 2.2 SUBSIDIARY GUARANTEE OF THE SECURITIES. Exhibit A, attached
hereto and incorporated herein by reference, sets forth the form of Subsidiary
Guarantee from the Original Indenture to which Cliffs Drilling (Barbados)
Holdings ESRL, Cliffs Drilling (Barbados) SRL and Cliffs Drilling Trinidad
Offshore Limited agree to be bound by execution and delivery of this Fourth
Supplemental Indenture.

ARTICLE III

PARTICULAR REPRESENTATIONS
AND COVENANTS OF THE COMPANY

SECTION 3.1 AUTHORITY OF THE COMPANY. The Company is duly authorized by
a resolution of the Board of Directors to execute and deliver this Fourth
Supplemental Indenture, and all corporate action on its part required for the
execution and delivery of this Fourth Supplemental Indenture has been duly and
effectively taken.

SECTION 3.2 AUTHORITY OF THE SUBSIDIARY GUARANTORS. Each of the
Subsidiary Guarantors is duly authorized by a resolution of its respective Board
of Directors or similar body to execute and deliver this Fourth Supplemental
Indenture, and all corporate action on the part of each required for the
execution and delivery of this Fourth Supplemental Indenture has been duly and
effectively taken.

SECTION 3.3 TRUTH OF RECITALS AND STATEMENTS. The Company warrants that
the recitals of fact and statements contained in this Fourth Supplemental
Indenture are true and correct, and that the recitals of fact and statements
contained in all certificates and other documents furnished hereunder will be
true and correct.

- 3 -

<PAGE> 5

ARTICLE IV

CONCERNING THE TRUSTEE

SECTION 4.1 ACCEPTANCE OF TRUSTS. The Trustee accepts the trusts
hereunder and agrees to perform the same, but only upon the terms and conditions
set forth in the Original Supplemented Indenture and in this Fourth Supplemental
Indenture, to all of which the Company, Subsidiary Guarantors and the respective
Holders of Securities at any time hereafter outstanding agree by their
acceptance thereof.

SECTION 4.2 RESPONSIBILITY OF TRUSTEE FOR RECITALS, ETC. The recitals
and statements contained in this Fourth Supplemental Indenture shall be taken as
the recitals and statements of the Company, and the Trustee assumes no
responsibility for the correctness of the same. The Trustee makes no
representations as to the validity or sufficiency of this Fourth Supplemental
Indenture, except that the Trustee is duly authorized to execute and deliver
this Fourth Supplemental Indenture.

ARTICLE V

MISCELLANEOUS PROVISIONS

SECTION 5.1 RELATION TO THE INDENTURE. The provisions of this Fourth
Supplemental Indenture shall become effective immediately upon the execution and
delivery hereof. This Fourth Supplemental Indenture and all the terms and
provisions herein contained shall form a part of the Indenture as fully and with
the same effect as if all such terms and provisions had been set forth in the
Original Indenture. The Original Indenture is hereby ratified and confirmed and
shall remain and continue in full force and effect in accordance with the terms
and provisions thereof, as supplemented and amended by the First Supplemental
Indenture, the Second Supplemental Indenture, the Third Supplemental Indenture
and this Fourth Supplemental Indenture; and the Original Indenture, the First
Supplemental Indenture, the Second Supplemental Indenture, the Third
Supplemental Indenture and this Fourth Supplemental Indenture shall be read,
taken and construed together as one instrument.

SECTION 5.2 MEANING OF TERMS. Any capitalized term used in this Fourth
Supplemental Indenture and not defined herein that is defined in the Original
Indenture shall have the meaning specified in the Original Indenture, unless the
context shall otherwise require.

SECTION 5.3 COUNTERPARTS OF FOURTH SUPPLEMENTAL INDENTURE. This Fourth
Supplemental Indenture may be executed in several counterparts, each of which
shall be deemed an original, but all of which together shall constitute one
instrument.

- 4 -

<PAGE> 6

SECTION 5.4 GOVERNING LAW. This Fourth Supplemental Indenture shall be
governed by and construed in accordance with the laws of the State of New York.

IN WITNESS WHEREOF, the parties hereto have caused this Fourth
Supplemental Indenture to be duly executed, all as of the day and year first
above written.

Company: CLIFFS DRILLING COMPANY

By: /s/ Edward A. Guthrie
----------------------------------------
Edward A. Guthrie
Vice President - Finance

Subsidiary Guarantors: CLIFFS DRILLING MERGER COMPANY
CLIFFS DRILLING INTERNATIONAL, INC.
CLIFFS OIL AND GAS COMPANY
SOUTHWESTERN OFFSHORE CORPORATION
(f/k/a Cliffs Drilling Asset Acquisition
Company)

By: /s/ Edward A. Guthrie
----------------------------------------
Edward A. Guthrie
Vice President - Finance

DRL, INC.

By: /s/ Edward A. Guthrie
----------------------------------------
Edward A. Guthrie, Vice President

CLIFFS DRILLING TRINIDAD LIMITED

By: /s/ Edward A. Guthrie
----------------------------------------
Edward A. Guthrie, Director

- 5 -

<PAGE> 7

WEST INDIES DRILLING JOINT VENTURE

By: CLIFFS DRILLING TRINIDAD LIMITED
Partner and Firm Manager

By: /s/ Edward A. Guthrie
---------------------------------
Edward A. Guthrie, Director

CLIFFS DRILLING (BARBADOS) HOLDINGS ESRL
CLIFFS DRILLING (BARBADOS) SRL

By: /s/ Douglas E. Swanson
--------------------------------------
Douglas E. Swanson, Manager

CLIFFS DRILLING TRINIDAD OFFSHORE LIMITED

By: /s/ Edward A. Guthrie
--------------------------------------
Edward A. Guthrie, Director

Trustee: STATE STREET BANK AND TRUST COMPANY,
SUCCESSOR TO FLEET NATIONAL BANK

By: /s/ Susan C. Merker
--------------------------------------
Susan C. Merker
Assistant Vice President

- 6 -

<PAGE> 8

EXHIBIT A

FORM OF SUBSIDIARY GUARANTEE

Subject to the limitations set forth in the Indenture, the initial
Subsidiary Guarantors and, if any, all additional Subsidiary Guarantors (as
defined in the Indenture referred to in the Series ____ Security upon which this
notation is endorsed and each being hereinafter referred to as a "Subsidiary
Guarantor," which term includes any additional or successor Subsidiary Guarantor
under the Indenture) have, jointly and severally, unconditionally guaranteed (a)
the due and punctual payment of the principal (and premium, if any) of and
interest on the Securities, whether at maturity, acceleration, redemption or
otherwise, (b) the due and punctual payment of interest on the overdue principal
of and interest on the Securities, if any, to the extent lawful, (c) the due and
punctual performance of all other obligations of the Company to the Holders or
the Trustee, all in accordance with the terms set forth in the Indenture, and
(d) in case of any extension of time of payment or renewal of any Securities or
any of such other obligations, the same will be promptly paid in full when due
or performed in accordance with the terms of the extension or renewal, whether
at Stated Maturity, by acceleration or otherwise.

The obligations of each Subsidiary Guarantor are limited to the maximum
amount as will, after giving effect to all other contingent and fixed
liabilities of such Subsidiary Guarantor and after giving effect to any
collections from or payments made by or on behalf of any other Subsidiary
Guarantor in respect of the obligations of such other Subsidiary Guarantor under
its Subsidiary Guarantee or pursuant to its contribution obligations under the
Indenture, result in the obligations of such Subsidiary Guarantor under the
Subsidiary Guarantee not constituting a fraudulent conveyance or fraudulent
transfer under federal or state law. Each Subsidiary Guarantor that makes a
payment or distribution under a Subsidiary Guarantee shall be entitled to a
contribution from each other Subsidiary Guarantor in a pro rata amount based on
the Adjusted Net Assets of each Subsidiary Guarantor.

No stockholder, officer, director, employee, incorporator or Affiliate
as such, past, present or future, of any Subsidiary Guarantor shall have any
personal liability under its Subsidiary Guarantee by reason of his or its status
as such stockholder, officer, director, employee, incorporator or Affiliate, or
any liability for any obligations of any Subsidiary Guarantor under the
Securities or the Indenture or for any claim based on, in respect of, or by
reason of such obligations or their creation.

Any Subsidiary Guarantor may be released from its Subsidiary Guarantee
upon the terms and subject to the conditions provided in the Indenture.

All terms used in this notation of Subsidiary Guarantee which are
defined in the Indenture referred to in this Series ____ Security upon which
this notation of Subsidiary Guarantees is endorsed shall have the meanings
assigned to them in such Indenture.

<PAGE> 9

The Subsidiary Guarantees shall be binding upon the Subsidiary
Guarantors and shall inure to the benefit of the Trustee and the Holders and, in
the event of any transfer or assignment of rights by any Holder or the Trustee
respecting the Series _____ Security upon which the foregoing Subsidiary
Guarantees are noted, the rights and privileges herein conferred upon that party
shall automatically extend to and be vested in such transferee or assignee, all
subject to the terms and conditions hereof and in the Indenture.

The Subsidiary Guarantees shall not be valid or obligatory for any
purpose until the certificate of authentication on the Series ____ Security upon
which the foregoing Subsidiary Guarantees are noted shall have been executed by
the Trustee under the Indenture by the manual signature of one of its authorized
signatories.

<PAGE> 1
Exhibit 4.7.2

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

CLIFFS DRILLING COMPANY,

SUBSIDIARY GUARANTORS

NAMED HEREIN

and

STATE STREET BANK AND TRUST COMPANY

Trustee

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

SECOND SUPPLEMENTAL INDENTURE
(SERIES C/D SECURITIES)

Dated as of March 2, 1998

-----------

Supplementing and Amending the Indenture
dated as of August 7, 1997
as amended by the First Supplemental Indenture
dated as of August 29, 1997

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

<PAGE> 2

SECOND SUPPLEMENTAL INDENTURE

THIS SECOND SUPPLEMENTAL INDENTURE dated as of March 2, 1998, is
between CLIFFS DRILLING COMPANY, a Delaware corporation (the "Company"), the
SUBSIDIARY GUARANTORS (as defined herein) and STATE STREET BANK AND TRUST
COMPANY, a national banking association (the "Trustee").

RECITALS OF THE COMPANY

A. The Company has duly authorized the creation of an issue of 10.25%
Senior Notes due 2003, Series C (the "Series C Securities") and an issue of
10.25% Senior Notes due 2003, Series D (the "Series D Securities" and the Series
C Securities and the Series D Securities, as amended or supplemented from time
to time in accordance with the terms of the Indenture (as defined herein), being
herein collectively called the "Securities"), of substantially the tenor and in
the aggregate principal amount set forth in the Indenture.

B. The Company and the Subsidiary Guarantors have heretofore made,
executed and delivered to the Trustee an Indenture dated as of August 7, 1997
(referred to herein as the "Original Indenture") pursuant to which the
Securities are issuable, and a First Supplemental Indenture dated as of August
29, 1997 (the Original Indenture as supplemented by the First Supplemental
Indenture being referred to herein as the "Original Supplemented Indenture").

C. The Securities are guaranteed by the Subsidiary Guarantors (as
defined in the Indenture) on the terms provided in the Indenture.

D. It is deemed desirable to supplement and amend the Original
Supplemented Indenture to add three Restricted Subsidiaries of the Company as
Subsidiary Guarantors (the Original Supplemented Indenture, as so supplemented
and amended by this Second Supplemental Indenture, being sometimes referred to
herein as the "Indenture").

-1-

<PAGE> 3

G. The Series C Securities were issued on August 7, 1997 under the
Original Indenture, and the Series D Securities were issued in exchange for the
Series D Securities on December 17, 1997.

H. All things necessary to authorize the execution and delivery of this
Second Supplemental Indenture, to effect the modifications of the Original
Supplemented Indenture provided for in this Second Supplemental Indenture, and
to make the Original Supplemented Indenture, as further supplemented and amended
by this Second Supplemental Indenture, a valid agreement of the Company, in
accordance with its terms, have been done.

ARTICLE I

MODIFICATION OF THE ORIGINAL INDENTURE

SECTION 1.1 AMENDMENT OF ARTICLE I OF THE ORIGINAL INDENTURE. Section
1.1 of the Original Indenture is amended by changing the definition of
"Subsidiary Guarantor" to read as follows:

-2-
<PAGE> 4

ARTICLE II

ADDITIONAL SUBSIDIARY GUARANTOR

SECTION 2.1 ADDITION OF SUBSIDIARY GUARANTORS. Cliffs Drilling
(Barbados) Holdings ESRL, a Barbados exempt societies with restricted liability,
Cliffs Drilling (Barbados) SRL, a Barbados societies with restricted liability,
and Cliffs Drilling Trinidad Offshore Limited, a company organized under the
laws of Trinidad and Tobago, by execution of this Second Supplemental Indenture
each hereby agree to be bound by the terms of the Indenture as a Subsidiary
Guarantor.

ARTICLE III

PARTICULAR REPRESENTATIONS
AND COVENANTS OF THE COMPANY

SECTION 3.1 AUTHORITY OF THE COMPANY. The Company is duly authorized by
a resolution of the Board of Directors to execute and deliver this Second
Supplemental Indenture, and all corporate action on its part required for the
execution and delivery of this Second Supplemental Indenture has been duly and
effectively taken.

SECTION 3.2 AUTHORITY OF THE SUBSIDIARY GUARANTORS. Each of the
Subsidiary Guarantors is duly authorized by a resolution of its respective Board
of Directors or similar body to execute and deliver this Second Supplemental
Indenture, and all corporate action on the part of each required for the
execution and delivery of this Second Supplemental Indenture has been duly and
effectively taken.

SECTION 3.3 TRUTH OF RECITALS AND STATEMENTS. The Company warrants that
the recitals of fact and statements contained in this Second Supplemental
Indenture are true and correct, and that the recitals of fact and statements
contained in all certificates and other documents furnished hereunder will be
true and correct.

ARTICLE IV

CONCERNING THE TRUSTEE

-3-
<PAGE> 5

Subsidiary Guarantors and the respective Holders of Securities at any time
hereafter outstanding agree by their acceptance thereof.

SECTION 4.2 RESPONSIBILITY OF TRUSTEE FOR RECITALS, ETC. The recitals
and statements contained in this Second Supplemental Indenture shall be taken as
the recitals and statements of the Company, and the Trustee assumes no
responsibility for the correctness of the same. The Trustee makes no
representations as to the validity or sufficiency of this Second Supplemental
Indenture, except that the Trustee is duly authorized to execute and deliver
this Second Supplemental Indenture.

ARTICLE V

MISCELLANEOUS PROVISIONS

SECTION 5.1 RELATION TO THE INDENTURE. The provisions of this Second
Supplemental Indenture shall become effective immediately upon the execution and
delivery hereof. This Second Supplemental Indenture and all the terms and
provisions herein contained shall form a part of the Indenture as fully and with
the same effect as if all such terms and provisions had been set forth in the
Original Indenture. The Original Indenture is hereby ratified and confirmed and
shall remain and continue in full force and effect in accordance with the terms
and provisions thereof, as supplemented and amended by the First Supplemental
Indenture and this Second Supplemental Indenture; and the Original Indenture,
the First Supplemental Indenture and this Second Supplemental Indenture shall be
read, taken and construed together as one instrument.

SECTION 5.2 MEANING OF TERMS. Any capitalized term used in this Second
Supplemental Indenture and not defined herein that is defined in the Original
Indenture shall have the meaning specified in the Original Indenture, unless the
context shall otherwise require.

SECTION 5.3 COUNTERPARTS OF SECOND SUPPLEMENTAL INDENTURE. This Second
Supplemental Indenture may be executed in several counterparts, each of which
shall be deemed an original, but all of which together shall constitute one
instrument.

SECTION 5.4 GOVERNING LAW. This Second Supplemental Indenture shall be
governed by and construed in accordance with the laws of the State of New York.

-4-
<PAGE> 6

IN WITNESS WHEREOF, the parties hereto have cause this Second
Supplemental Indenture to be duly executed, all as of the day and year first
above written.

Company: CLIFFS DRILLING COMPANY

By: /s/ Edward A. Guthrie
-----------------------------------------
Edward A. Guthrie
Vice President - Finance

DRL, INC.

By: /s/ Edward A. Guthrie
-----------------------------------------
Edward A. Guthrie
Vice President

CLIFFS DRILLING TRINIDAD LIMITED

By: /s/ Edward A. Guthrie
----------------------------------------
Edward A. Guthrie, Director

-5-
<PAGE> 7

WEST INDIES DRILLING JOINT VENTURE

By: CLIFFS DRILLING TRINIDAD LIMITED,
Partner and Firm Manager

By: /s/ Edward A. Guthrie
----------------------------------
Edward A. Guthrie, Director

CLIFFS DRILLING (BARBADOS) HOLDINGS ESRL
CLIFFS DRILLING (BARBADOS) SRL

By: /s/ Douglas E. Swanson
-------------------------------------
Douglas E. Swanson, Manager

CLIFFS DRILLING TRINIDAD OFFSHORE LIMITED

By: /s/ Edward A. Guthrie
-------------------------------------
Edward A. Guthrie, Director

Trustee: STATE STREET BANK AND TRUST COMPANY

By: /s/ Susan C. Merker
-------------------------------------
Susan C. Merker
Assistant Vice President

-6-
<PAGE> 8

EXHIBIT A

FORM OF SUBSIDIARY GUARANTEE

Any Subsidiary Guarantor may be released from its Subsidiary Guarantee
upon the terms and subject to the conditions provided in the Indenture.

<PAGE> 9

<PAGE> 1
Exhibit 10.20.2

PURCHASE AND SALE AND
JOINT VENTURE AMENDMENT AGREEMENT

This Purchase and Sale and Joint Venture Amendment Agreement
("Agreement") entered into as of July 23, 1997, by and between WELL SERVICES
(MARINE) LIMITED, a Trinidad and Tobago private company ("Well Services"), and
CLIFFS DRILLING TRINIDAD LIMITED, a Trinidad and Tobago private company
("Cliffs Trinidad").

R E C I T A L S

I. Well Services and Cliffs Trinidad (collectively the
"Partners") each own a fifty percent (50%) general partnership
interest in WEST INDIES DRILLING JOINT VENTURE, a Trinidad and
Tobago joint venture ("W.I. Drilling").

II. W.I. Drilling owns a jack-up drill rig known as Southwestern
Marine 4, which is currently under a 3-year drilling contract
with Trinmar Limited, a Trinidad and Tobago company
("Trinmar").

III. Well Services desires to sell, transfer and assign a further
49% interest in W.I. Drilling (the "Sold Interest") to Cliffs
Trinidad, and Cliffs Trinidad wishes to purchase and accept
the transfer of the Sold Interest.

NOW, THEREFORE, in consideration of the premises and of the respective
covenants, agreements, representations, and warranties hereinafter set forth,
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereby agree as follows:

I. PURCHASE AND SALE; ASSUMPTION OF LIABILITIES

1.01. PURCHASE OF THE WELL SERVICES INTEREST. Subject to the terms
and conditions hereinafter set forth, the following actions concerning the
partnership interests in W. I. Drilling shall occur at the Closing (as defined
in Section 1.05 hereof):

(a) Well Services shall sell, transfer, assign, and deliver to
Cliffs Trinidad, and Cliffs Trinidad shall purchase from Well
Services, as of the Closing Date, the Sold Interest, free and
clear of any and all liens, claims and encumbrances.

(b) Cliffs Trinidad shall deliver to Well Services the Purchase
Price, as defined in Section 1.04 hereof, for such Sold
Interest, in immediately available funds by wire transfer to a
bank account to be designated by Well Services.

1.02. TERMINATION OF WELL SERVICES BENEFITS. As of the Closing
Date, upon transfer of the Sold Interest, all of Well Services' benefits,
rights and interests in, to and under the Sold Interest (the "Benefits")
pursuant to the provisions of the joint venture agreement between Cliffs
Trinidad and Well Services dated March 18, 1996, as amended by First Amendment
to Joint Venture Agreement dated April 1, 1996 (the "Venture Agreement") shall
immediately cease,
<PAGE> 2
except that the Partners hereby declare and agree that the remaining 1%
interest in W.I. Drilling owned by Well Services ("Remaining Interest") shall
retain a value of TEN DOLLARS ($10.00) ("Remaining Value"). Except for the
Remaining Value, Well Services shall have no further rights or benefits, under
the Venture Agreement, accruing to its Remaining Interest. The Purchase Price
(defined in Section 1.05 below) paid by Cliffs Trinidad will be in full and
final payment and satisfaction of all of the Sold Interest and the Benefits,
and Wells Services will not be entitled to any further income, profits or
distributions whatsoever attributable to the Sold Interest from W.I. Drilling
or Cliffs Trinidad, except for any payments due under the Rig Management
Agreement defined below.

1.03. ASSUMPTION OF WELL SERVICES' LIABILITIES. In addition to the
Purchase Price to be paid by Cliffs Trinidad, subject to the provisions of
Sections 3.01 and 6.02, Cliffs Trinidad agrees to assume at the Closing, with
effect from the Closing Date, all liabilities and obligations of Well Services
to W. I. Drilling and to any third parties in connection with the ownership and
benefits of the Sold Interest ("Ownership Obligations"), except for Well
Services' obligations and duties as Rig Manager ("Manager") under the Rig
Management Agreement ("Rig Management Obligations").

1.04. CONSIDERATION. In consideration of the transfer of Sold
Interest to Cliffs Trinidad at the Closing, Cliffs Trinidad shall pay to Well
Services the amount of SIX MILLION AND NO/100 DOLLARS ($6,000,000) ("Purchase
Price") and shall assume all of the Ownership Obligations.

1.05. CLOSING PLACE AND DATE. The closing of the transactions
contemplated by this Agreement (the "Closing") shall take place with effect
from 10:00 A.M., Trinidad time, on August 1, 1997 (the "Closing Date").

II. TRANSFER OF WELL SERVICES INTEREST

2.01. TRANSFER OF VENTURE ASSETS. On the Closing Date, Well Services
shall transfer the Sold Interest to Cliffs Trinidad, free and clear of all
liens, claims and encumbrances, in exchange for the Purchase Price.

2.02. RIG MANAGEMENT AGREEMENT. After the Closing Date, the Rig
Management Agreement executed by W. I. Drilling, Viking Trinidad Limited
(which interest was previously assigned to Cliffs Trinidad) and Well Services,
dated as of May 1, 1996 ("Rig Management Agreement") shall continue in full
force and effect as written. After such date, Well Services' agrees to perform
and continue to perform all of the Rig Management Obligations and its duties
and obligations as Rig Manager under the terms of the Rig Management Agreement,
all of which terms and provisions shall survive the Closing.

2.03. AMENDMENT TO VENTURE AGREEMENT.

(a) All capitalized terms used but not defined herein shall have
the meaning given to them in the Loan Agreement. The Venture
Agreement is hereby amended with effect as of and from the
Closing Date, as follows:

-2-
<PAGE> 3
(i) By deleting all reference in the Venture Agreement to
"Viking Trinidad Limited", "Viking", "Viking Supply
Ships, A.S.", and "Viking Supply" and replacing such
names in each case with "Cliffs Drilling Trinidad
Limited" or "Cliffs", as appropriate, with the effect
that the two partners to the Venture Agreement, as of
and after the Closing Date, will be Cliffs Drilling
Trinidad Limited ("Cliffs") and Well Services.

(ii) By deleting in its entirety the last sentence of the
definition of "Percentage Interest" in Section 1.6 of
the Venture Agreement and replacing it with the
following:

"The Percentage Interests of the Partners
shall be as follows:

<TABLE>
<CAPTION>
PARTNER PERCENTAGE INTEREST
------- -------------------
<S> <C>
Cliffs 99%
Well Services 1%
</TABLE>

; provided, however, that, with effect from
August 1, 1997, Well Services shall not be
entitled to any further income or profits and
shall not suffer or be subject to further
losses of the Firm."

(iii) By generally amending the Venture Agreement, wherever
relevant, to make it clear that, with effect from
August 1, 1997, notwithstanding any other provision
to the contrary therein contained, Well Services
shall have no further benefits or rights, and shall
be subject to no further losses or obligations under
the Venture Agreement, except that its Percentage
Interest shall retain a value of $10.00 but no more.

(iv) Section 5.2(a) shall be deleted in its entirety and
replaced by the following:

(a) The Management Committee shall be composed of
two (2) members appointed by Cliffs.

(v) By deleting any reference in Section 5.4 to Well
Services as the Firm Manager, amending such Section
to appoint Cliffs as Firm Manager in place of Well
Services and making conforming changes throughout the
Venture Agreement, if necessary, to reflect that
Cliffs is the Firm Manager as of the Closing Date.

(vi) By deleting Section 5.6 in its entirety.

(vii) By deleting Section 5.8 in its entirety and replacing
it with the following:

-3-
<PAGE> 4
The Firm Manager shall be Cliffs and the Firm shall
be and continue to be bound by the terms and
conditions of the Rig Management Agreement. The
Manager under the Rig Management Agreement shall be
Well Services until terminated by the Firm Manager.

(viii) The references to Viking and the Viking addresses in
Section 10.3 are amended to read as follows:

CLIFFS DRILLING TRINIDAD LIMITED
c/o Stephanie Daly
Pollonais & Blanc
62 Sackville Street
Port of Spain
Trinidad, West Indies
Telephone: (868) 623-5461
Facsimile: (868) 625-8415

with a copy to:

CLIFFS DRILLING COMPANY
1200 Smith Street, Suite 300
Houston, Texas 77002
Telephone: (713) 651-9426
Facsimile: (713) 951-0649
Attn: Ed Guthrie

(b) The remainder of the Venture Agreement not amended or
supplemented hereby remains in full force and effect as
written.

(c) WELL SERVICES HEREBY SPECIFICALLY RELEASES AND RELINQUISHES
ANY RIGHTS AND BENEFITS IT MAY HAVE IN THE MANAGEMENT OF W.I.
DRILLING AND AS FIRM MANAGER OF W. I. DRILLING AND AGREES THAT
IT HAS RECEIVED ADEQUATE CONSIDERATION FOR THE RELEASE AND
RELINQUISHMENT OF RIGHTS AND BENEFITS HEREBY GIVEN AND FOR THE
REDUCTION OF ITS PERCENTAGE INTEREST UNDER THE VENTURE
AGREEMENT FROM 50% TO 1% WITH NO FURTHER RIGHT TO PARTICIPATE
IN PROFITS OR LOSSES. Well Services gives this release and
relinquishment of rights voluntarily.

2.04. OPTION TO PURCHASE REMAINING INTEREST. Well Services hereby
grants Cliffs Trinidad the absolute, irrevocable and unfettered right to
purchase the Remaining Interest for a purchase price of Ten Dollars
(U.S.$10.00) ("Final Payment"), exercisable by notice in writing from Cliffs
Trinidad to Well Services at any time after the Closing. The purchase of the
Remaining Interest shall be completed and closed, and the necessary transfer of
the Remaining Interest executed and delivered to Cliffs Trinidad by Well
Services, within five (5) days after receipt by Well Services from Cliffs
Trinidad of (a) the notice from Cliffs Trinidad exercising its option herein
granted (b) and the Final Payment (certified as having been received by
messenger or courier service or by receipt returned to Cliffs Trinidad through
the Trinidad

-4-
<PAGE> 5
and Tobago postal service) ("Cliffs Closing Documents"). If, after proof in
the manner set forth above of receipt by Well Services of the Cliffs Closing
Documents, Well Services fails to respond to the exercise of the option to
purchase by Cliffs Trinidad or fails to complete the sale of the Remaining
Interest within the time limit above specified, the transfer and assignment of
the Remaining Interest shall be deemed to occur immediately upon deposit by
Cliffs Trinidad in the Trinidad and Tobago mails, of the Final Payment,
addressed to Well Services at its address set out in the Venture Agreement.
Upon closing of this purchase option, however same occurs, Well Services shall
immediately cease to be a Partner with a 1% Percentage Interest in the Venture.

III. REPRESENTATIONS AND WARRANTIES

3.01. REPRESENTATIONS AND WARRANTIES OF WELL SERVICES. Well
Services represents and warrants to Cliffs Trinidad as of the date of this
Agreement and on the Closing Date, as follows:

(a) Organization, Good Standing, Power. Well Services is a
company duly organized, validly existing, and in good standing
under the laws of Trinidad and Tobago with all requisite
corporate power and authority to enter into and perform its
obligations under this Agreement.

(b) Authorization. The execution, delivery, and performance of
this Agreement have been duly authorized by all requisite
corporate action of Well Services. This Agreement is a legal,
valid, and binding obligation of Well Services, enforceable
against it in accordance with its terms, subject to applicable
bankruptcy, reorganization, insolvency, and similar laws
affecting creditors' rights generally and subject, as to
enforceability, to general principles of equity (regardless of
whether enforcement is sought in a proceeding in equity or at
law).

(c) Title. Well Services shall transfer to Cliffs Trinidad at
Closing, title to the Sold Interest, free and clear of all
liens, pledges, encumbrances, charges, claims, security
interests, and any other adverse claims.

(d) No Conflicts. Neither the execution, delivery, or performance
of this Agreement by Well Services, nor the consummation of
the transactions contemplated hereby by Well Services (i) will
constitute a violation of or default under, or conflict with,
any note, bond, mortgage, indenture, deed of trust, lease,
license agreement, or other instrument or obligation to which
Well Services is a party or by which Well Services is bound,
or constitute a violation of, or conflict with, any provision
of Well Services' Memorandum and Articles of Association or
any order, writ, injunction, decree, statute, rule, or
regulation of any governmental, administrative, or regulatory
body applicable to Well Services or (ii) will require any
consent, approval, notice, or filing with respect to any of
the foregoing.

(e) No Defaults. Well Services is not in violation of any term or
provision of the Joint Venture Agreement or the Rig
Management Agreement; has performed its duties and obligations
under the Rig Management Agreement and as Firm Manager in a
professional and responsible manner; and has operated the
Vessel

-5-
<PAGE> 6
and performed its duties as Firm Manager in compliance with
all applicable laws, rules and regulations (including, but not
limited to, the environmental and pollution laws of Trinidad
and Tobago, the United States of America and all jurisdictions
where the Vessel has been operated by Well Services as Firm
Manager on behalf of W. I. Drilling).

(f) Environmental Claims; Other Claims. There are, and Well
Services has received, no outstanding notices of or processes
concerning any claims, fines, penalties, adverse
determinations, rulings or judgments, concerning the operation
of the Vessel or the Venture business, from any court,
tribunal, ministry or governmental or other regulatory
authority with respect to (i) pollution of the air, water or
environment, (ii) personal injury or death of any person,
(iii) any loss or claims for property damage, or (iv) any
other claim whatsoever, any of which would or could have a
material adverse effect on the Vessel or W. I. Drilling's
business. "Material adverse effect" for the purposes of this
Agreement shall mean an uninsured lien, claim, cost or loss in
excess of $100,000.

(g) Taxes. Well Services has paid or caused to be paid on behalf
of W. I. Drilling, and as of the Closing Date will have paid,
all taxes, fees and penalties due and owing on the Sold
Interest, the Vessel and the W. I. Drilling's operations.

(h) Insurance, Vessel Operations. Well Services has caused and as
Rig Manager will continue to cause (i) the Vessel to be
adequately insured for all perils and risks (including but not
limited to hull damage, pollution, personal injury and
property damage) which is normal and customary for a Vessel of
this kind and (ii) the Vessel to be properly and regularly
inspected by the appropriate regulatory authorities and as of
the Closing Date the Vessel will have in effect a valid ABS
+A1 Column Stabilized Drilling Unit Classification
Certificate, or other equivalent certificate, with no material
requirements or exceptions.

3.02. REPRESENTATIONS AND WARRANTIES OF CLIFFS TRINIDAD. Cliffs
Trinidad represents and warrants to Well Services as of the date of this
Agreement and as of the Closing Date, as follows:

(a) Organization, Good Standing, Power. Cliffs Trinidad is a
company duly organized, validly existing and in good standing
under the laws of Trinidad and Tobago with all requisite
corporate power and authority to enter into and perform its
obligations under this Agreement.

(b) Authorization. The execution, delivery, and performance of
this Agreement have been duly authorized by all necessary
corporate action of Cliffs Trinidad. This Agreement is a
legal, valid, and binding obligation of Cliffs Trinidad,
enforceable against it in accordance with its terms, subject
to applicable bankruptcy, reorganization, insolvency, and
similar laws affecting creditors' rights generally and
subject, as to enforceability, to general principles of equity
(regardless of whether enforcement is sought in a proceeding
in equity or at law).

-6-
<PAGE> 7
(c) No Conflicts. Neither the execution, delivery, or performance
of this Agreement by Cliffs Trinidad, nor the consummation of
the transactions contemplated hereby by it, will constitute a
violation of or default under, or conflict with, any note,
bond, mortgage, indenture, deed of trust, lease, license,
agreement, or other instrument or obligation to which Cliffs
Trinidad is a party or by which Cliffs Trinidad is bound or
constitute a violation of or conflict with any provision of
Cliffs Trinidad's Memorandum and Articles of Association, or
similar corporate document, or any order, writ, injunction,
decree, statute, rule, or regulation of any governmental,
administrative or regulatory body applicable to Cliffs
Trinidad or will require any consent, approval, notice, or
filing with respect to the foregoing.

IV. DISCLAIMER OF OTHER WARRANTIES

4.01. WELL SERVICES INTEREST AND ASSETS. EXCEPT FOR THE
REPRESENTATIONS AND WARRANTIES SET FORTH IN SECTION 3.01, INCLUDING BUT NOT
LIMITED TO WARRANTIES OF TITLE TO, AND OF NO LIENS, LIABILITIES OR CLAIMS ON
THE SOLD INTEREST, THE SOLD INTEREST IS TRANSFERRED BY WELL SERVICES WITH NO
WARRANTY OR REPRESENTATION OF ANY OTHER KIND WITH RESPECT THERETO OR WITH
RESPECT TO THE VESSEL.

V. CONDITIONS TO CLOSING

The Closing, sale and transfer of the Sold Interest to Cliffs Trinidad
is subject to the following conditions:

5.01. WELL SERVICES' CORPORATE DOCUMENTS. Well Services shall
provide Cliffs Trinidad with the following corporate documentation:

a. A certified copy of resolutions of the Well Services' Board of
Directors, authorizing the sale of the Sold Interest at the
Purchase Price stated above to Cliffs Trinidad, further
ratifying the execution and delivery of this Agreement and
authorizing specified officers of Well Services to sign the
documents listed above and all other necessary documents
required by this Agreement.

b. A Certificate of Incumbency for the authorized signatories
issued by the Secretary of Well Services.

c. A certificate of ownership and encumbrance from the Liberian
Bureau of Maritime Affairs showing no liens or encumbrances
over the Vessel except in favor of Citibank N.A. ("Lender").

5.02. CLIFFS TRINIDAD'S CORPORATE DOCUMENTS. Cliffs Trinidad shall
provide Well Services with the following documentation:

-7-
<PAGE> 8
a. A certified copy of resolutions of its Board of Directors,
authorizing the acceptance of the transfer of the Vessel, the
purchase of the Sold Interest at the Purchase Price stated
above and the assumption of the Liabilities, ratifying the
execution and delivery of this Agreement and authorizing
specified officers of Cliffs Trinidad to sign the documents
listed above and all other necessary documents required by
this Agreement.

b. A Certificate of Incumbency for the authorized signatories
issued by the Secretary of Cliffs Trinidad.

5.03. OTHER DOCUMENTS AND MATTERS.

Cliffs Trinidad shall deliver or cause to be delivered a
release of the Guaranty dated May 2, 1996, as amended, executed by
Well Services in connection with a loan in the original face amount
of $8,500,000 from the Lender to W.I. Drilling, secured by a mortgage
("Mortgage") of the Vessel ("Citibank Loan").

5.04. PURCHASE PRICE. Cliffs Trinidad shall pay and deliver the
Purchase Price to Well Services.

VI. MISCELLANEOUS

6.01. TAXES, ETC. Any taxes, fees and expenses connected with the
sale of the Well Services Interest and all transfer, stamp, sales, use, value
added or other taxes of any nature whatsoever imposed by the Trinidadian
government or any other governmental entity prior to or at the time of Closing
shall be borne by Cliffs Trinidad.

6.02. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNITY. THE
REPRESENTATIONS AND WARRANTIES OF WELL SERVICES GIVEN IN THIS AGREEMENT SHALL
SURVIVE THE CLOSING. FURTHERMORE WELL SERVICES AGREES TO INDEMNIFY, DEFEND AND
HOLD HARMLESS CLIFFS TRINIDAD AND W. I. DRILLING FOR A PERIOD OF TWELVE MONTHS
FROM AND AFTER THE CLOSING DATE FROM AND AGAINST, AND SHALL PROMPTLY PAY TO
CLIFFS TRINIDAD OR W.I. DRILLING, AS APPROPRIATE, THE FULL AMOUNT OF, ANY LOSS,
CLAIM, DAMAGE, TAXES, AMOUNT OR EXPENSE, (INCLUDING ATTORNEYS' FEES) INCURRED
BY CLIFFS TRINIDAD OR W.I. DRILLING, EITHER DIRECTLY OR INDIRECTLY, FROM (a)
ANY BREACH OF OR INACCURACY IN THE REPRESENTATIONS AND WARRANTIES OF WELL
SERVICES CONTAINED IN THIS AGREEMENT; AND (b) ANY LIABILITY, CLAIM, DEBT,
OBLIGATION OR LOSS WHATSOEVER, ARISING OUT OF ANY INACCURACY OR CLAIM IN
RESPECT OF THE MATTERS REFERENCED IN SECTION 3.01 ABOVE. IN ADDITION ALL
REPRESENTATIONS, WARRANTIES, INDEMNITIES AND OBLIGATIONS OF WELL SERVICES AS
RIG MANAGER UNDER THE RIG MANAGEMENT AGREEMENT, SHALL CONTINUE TO BIND WELL
SERVICES UNTIL THE RIG MANAGEMENT AGREEMENT TERMINATES ACCORDING TO ITS TERMS.

-8-
<PAGE> 9
6.03. ARBITRATION. If any dispute (whether in contract or tort)
should arise in connection with the interpretation, fulfillment and performance
of this Agreement, the sale and delivery of the Vessel, the Sold Interest or
other Assets, the assumption of the Ownership Obligations and the performance
of other acts and delivery of other documents required hereby, same shall be
decided by arbitration in Houston, Texas in accordance with commercial
arbitration rules of the American Arbitration Association ("AAA") and shall be
referred to a single arbitrator to be appointed by AAA. All awards of the
arbitrator shall be final and binding.

The award tendered by the arbitrator shall be final and binding upon
the parties and may, if necessary, be enforced by any court of competent
jurisdiction or any other competent authority in the same manner as a judgment
or order of such court or authority. The arbitrator may render an award for
damages or specific performance, may award interest and attorneys' fees if so
requested and may grant or order preliminary or injunctive relief to either
party, as he or she sees fit. The arbitrator's and the AAA's fees and expenses
shall be borne equally by the parties.

This Agreement and all arbitration proceedings shall be governed,
construed and interpreted by the rules of the AAA, laws of Trinidad and Tobago,
and to the extent not inconsistent therewith, the common law of England,
absent any conflicts of law rules which would require the laws of some other
jurisdiction to be applied.

The parties hereto agree that this Agreement and the performance of
the parties hereunder is commercial in nature and any award of the arbitrator
may be recognized and enforced against the losing party in any state or federal
court of competent jurisdiction.

6.04. SEVERABILITY. If any provision hereof is or becomes illegal,
invalid or unenforceable under applicable law, such provision shall be fully
severable, and the remaining provisions hereof shall continue in full force and
effect.

6.05. BINDING AGREEMENT; ASSIGNMENT. This Agreement is binding upon
and inures to the benefit of each party and its respective successors and
assigns; provided that Well Services may not assign any of its rights or
obligations hereunder without the prior written consent of Cliffs Trinidad.

6.06 EXPENSES. Cliffs Trinidad and Well Services shall each pay
their own attorneys fees and expenses in connection with the negotiation,
preparation and execution of this

-9-

<PAGE> 10

Agreement and all other agreements and documents executed and delivered in
connection herewith.

6.07. ADDRESS FOR NOTICES. All notices shall be given by next day
courier, receipt confirmed, or facsimile telecommunication, receipt verified,
as follows:

Sellers: WELL SERVICES (MARINE) LIMITED
Otaheite Industrial Park
South Oropouche
Trinidad, West Indies
Attn: Charles Brash
Telephone: (809) 677-7475
Facsimile: (809) 677-7003

Buyers: CLIFFS DRILLING TRINIDAD LIMITED
c/o Pollonais & Blanc
62 Sackville St.
Port of Spain
Trinidad, W.I.
Telephone: (868) 623-5461
Facsimile: (868) 625-8415
Attn: Stephanie Daly

with a copy to: CLIFFS DRILLING COMPANY
1200 Smith Street, Suite 300
Houston, Texas 77002
Telephone: (713) 651-9426
Facsimile: (713) 951-0649
Attn: Edward Guthrie

All notices shall be deemed to have been received as of the date set
forth on the verification receipt.

6.08. COUNTERPARTS. This Agreement may be signed by the parties in
one or more counterparts each of which shall constitute an original and all of
which when read together shall constitute one and the same instrument.

Executed as of the 23rd day of July, 1997.

CLIFFS DRILLING TRINIDAD LIMITED

By: /s/ Jim R. Wise
----------------------------
Jim R. Wise
Director

WELL SERVICES (MARINE) LIMITED

By: /s/ Charles Brash
----------------------------
Charles Brash
Chairman

-10-

<PAGE> 1
EXHIBIT 10.23

CLIFFS DRILLING COMPANY

COMPENSATION DEFERRAL PLAN
<PAGE> 2
TABLE OF CONTENTS

<TABLE>
<S> <C>
ARTICLE 1 - DEFINITIONS

1.1 Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Active Participant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.3 Adjusted Beginning Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.4 Allocation Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.5 Allocation Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.6 Annual Incentive Bonus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.7 Base Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.8 Beneficiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.9 Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.10 Change of Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.11 Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.12 Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.13 Company Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.14 Deferral Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.15 Deferral Agreement Effective Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.16 Deferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.17 Deferred Stock Deferral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.18 Deferred Stock Deferral Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.19 Director . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.20 Director's Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.21 Director's Fee Deferral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.22 Director's Fee Deferral Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.23 Disability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.24 Elective Deferral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.25 Elective Deferral Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.26 Eligible Class . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.27 Employee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.28 Employer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.29 Employer Matching Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.30 Employer Matching Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.31 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.32 Highly Compensated Employee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.33 Incentive Bonus Deferral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.34 Incentive Bonus Deferral Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.35 Incentive Equity Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.36 Investment Gain or Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.37 Investment Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.38 Officer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.39 Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.40 Option Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.41 Option Stock Deferral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.42 Option Stock Deferral Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.43 Participant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.44 Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.45 Plan Document . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.46 Plan Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
1.47 Plan Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.48 Qualified Domestic Relations Order . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.49 Regular Salary Deferral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.50 Regular Salary Deferral Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.51 Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.52 Restricted Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.53 Restricted Stock Deferral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.54 Restricted Stock Deferral Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.55 Retirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.56 Savings Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.57 Separation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.58 Sponsor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.59 Unforeseeable Emergency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.60 Valuation Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.61 Valuation Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

ARTICLE 2 - PARTICIPATION

2.1 Designation of Active Participants by Board of Directors . . . . . . . . . . . . . . . . . . . . . . . 7
2.2 Commencement of Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.3 Cessation of Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.4 Recommencement of Participation by Former Participants . . . . . . . . . . . . . . . . . . . . . . . . 7
2.5 Frozen Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

ARTICLE 3 - PARTICIPANT DEFERRALS AND EMPLOYER MATCHING ALLOCATIONS

3.1 Deferral Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
3.2 Regular Salary Deferrals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
3.3 Incentive Bonus Deferrals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
3.4 Option Stock Deferrals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
3.5 Restricted Stock Deferrals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
3.6 Deferred Stock Deferrals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3.7 Director's Fee Deferrals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3.8 Employer Matching Credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

ARTICLE 4 - ALLOCATIONS

4.1 Information Statements from Employer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
4.2 Allocation of Elective Deferrals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
4.3 Allocation of Employer Matching Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
4.4 Participant Selection of Investment Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
4.5 Allocation of Investment Gain or Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
4.6 Effective Date of Allocations and Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
4.7 No Vesting Unless Otherwise Prescribed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

ARTICLE 5 - BENEFITS AND EVENTS ENTITLING PARTICIPANTS TO DISTRIBUTION OF BENEFITS

5.1 Benefit upon Death, Retirement, or Disability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
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5.2 Benefit upon Separation for Any Reason Other Than Death, Retirement, or Disability . . . . . . . . . . 12
5.3 Specified Date Election of Interim Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5.4 Forfeiture of Nonvested Amounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5.5 Time for Determining Account Balances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5.6 Accounting for Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5.7 Receipt of Domestic Relations Order . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5.8 Withdrawal for Unforeseeable Emergency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

ARTICLE 6 - DISTRIBUTION OF BENEFITS

6.1 Time of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
6.2 Distribution Methods Available . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
6.3 Distribution Method in Event of Separation Other Than upon Death, Retirement, or Disability . . . . . . 14
6.4 Choice of Distribution Methods in Event of Death, Retirement, or Disability . . . . . . . . . . . . . . 14
6.5 Change of Distribution Method After Commencement of Benefits . . . . . . . . . . . . . . . . . . . . . 14
6.6 Distributions from Stock Deferral and Employer Matching Accounts . . . . . . . . . . . . . . . . . . . 15
6.7 Single Sum Payment of Small Amounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
6.8 Qualified Domestic Relations Orders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
6.9 Distributions to Disabled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
6.10 Designation of Beneficiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
6.11 No Duplication of Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
6.12 Missing Distributees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
6.13 Claims Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
6.14 Claims Appeal Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
6.15 Participant's Right to Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

ARTICLE 7 - COMMITTEE

7.1 Appointment, Term, Resignation, and Removal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
7.2 Powers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
7.3 Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
7.4 Quorum and Majority Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
7.5 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
7.6 Disqualification of Committee Members . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
7.7 Disclosure to Participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
7.8 Standard of Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
7.9 Liability of Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
7.10 Indemnification of Committee Members . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
7.11 Bonding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
7.12 Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
7.13 Persons Serving in Dual Fiduciary Roles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
7.14 Administrator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
7.15 Standard of Judicial Review of Committee Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

ARTICLE 8 - ADOPTION OF PLAN BY OTHER EMPLOYERS

8.1 Adoption Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
8.2 No Joint Venture Implied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
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ARTICLE 9 - AMENDMENT AND TERMINATION

9.1 Sponsor's Right to Amend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
9.2 Limitations on Right to Amend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
9.3 Retroactive Amendments to Meet Labor or Tax Requirements . . . . . . . . . . . . . . . . . . . . . . . 21
9.4 Sponsor's Right to Terminate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
9.5 Vesting upon Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

ARTICLE 10 - MISCELLANEOUS

10.1 Requirements of Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
10.2 No Rights as Stockholder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
10.3 Changes in the Sponsor's Capital Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
10.4 Establishment of Trust Fund not Required . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
10.5 Plan Does Not Constitute an Employment Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
10.6 Spendthrift Clause . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
10.7 Form of Elections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
10.8 Governing Laws; Parties to Legal Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
10.9 Plan Document Controlling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
10.10 Severability of Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
10.11 Cross References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
10.12 Securities Law Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
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CLIFFS DRILLING COMPANY

COMPENSATION DEFERRAL PLAN

THIS AGREEMENT by Cliffs Drilling Company, a Delaware corporation (the
"Sponsor"),

W I T N E S S E T H:

WHEREAS, the Sponsor desires to establish a program that will
compensate for certain limits on elective deferrals and employer matching
contributions imposed on certain executive employees under the Cliffs Drilling
Company 401(k) Savings Plan;

WHEREAS, the Sponsor desires to provide the opportunity for certain
executive employees to accumulate supplemental funds for retirement or special
needs prior to retirement through the deferral of portions of their regular
salary and other compensation; and

WHEREAS, the plan hereby established is intended to constitute an
unfunded plan of deferred compensation for a select group of management or
highly compensated employees;

NOW, THEREFORE, the Sponsor hereby adopts the plan hereinafter set
forth.

ARTICLE 1
DEFINITIONS

The terms defined in this Article shall have the meanings attributed
to them unless the context obviously requires another meaning:

1.1 ACCOUNT. "Account" shall mean any of the ledger accounts
pertaining to a Participant that are maintained by the Committee to reflect the
Participant's interest in the Plan. The Committee shall establish the Accounts
specifically described in the Plan and any additional Accounts that the
Committee considers to be necessary in order to reflect the entire interest of
the Participant in the Plan. Each of the Accounts shall reflect any Elective
Deferrals, Employer Matching Credits, and Investment Gain or Loss allocable to
the Account.

1.2 ACTIVE PARTICIPANT. "Active Participant" shall mean an
individual designated as such by the Board of Directors.

1.3 ADJUSTED BEGINNING BALANCE. "Adjusted Beginning Balance" shall
mean the balance of an Account as of the last Valuation Date preceding the
current Valuation Period, reduced by the amount of any distributions allocable
to that Account made during the current Valuation Period.

1.4 ALLOCATION DATE. "Allocation Date" shall mean the last day of
each calendar month.

1.5 ALLOCATION PERIOD. "Allocation Period" shall mean the period
beginning on the day following an Allocation Date (or on the first day of the
first Plan Year, in the case of the first Allocation Period) and ending on the
immediately succeeding Allocation Date.
<PAGE> 7
1.6 ANNUAL INCENTIVE BONUS. "Annual Incentive Bonus" shall mean the
cash bonus, if any, awarded to a Participant for a Plan Year.

1.7 BASE COMPENSATION. "Base Compensation" shall mean the total cash
remuneration paid to an Employee by the Employer for personal services as
reported on the Employee's federal income tax withholding statement or
statements (Form W-2 or its subsequent equivalent), excluding, however,
bonuses, sick pay, and excluding special payments, such as moving expenses, and
benefits provided under any Employer sponsored employee benefit program. For
purposes of determining an Employee's compensation, any election by such
Employee to reduce his regular cash remuneration under Sections 125 or 401(k)
of the Code, or under this Plan, shall be treated as if the Employee did not
make such election.

1.8 BENEFICIARY. "Beneficiary" shall mean any person(s), trust(s),
or other entity(ies), including the Participant's estate, entitled to receive
the benefits payable hereunder upon the Participant's death.

1.9 BOARD OF DIRECTORS. "Board of Directors" shall mean the board of
directors of the Sponsor.

1.10 CHANGE OF CONTROL. "Change of Control" shall mean either a
Change in Control or a Potential Change in Control, as such terms are defined
in the Incentive Equity Plan.

1.11 CODE. "Code" shall mean the Internal Revenue Code of 1986, as
amended.

1.12 COMMITTEE. "Committee" shall mean the committee appointed by
the Sponsor to administer the Plan.

1.13 COMPANY STOCK. "Company Stock" shall mean shares of the common
stock, $.01 par value, of the Sponsor.

1.14 DEFERRAL AGREEMENT. "Deferral Agreement" shall mean an
agreement of the type described in Section 3.1.

1.15 DEFERRAL AGREEMENT EFFECTIVE DATE. "Deferral Agreement
Effective Date" shall mean, except as otherwise provided in this Section, the
first day of the Plan Year beginning after the properly completed and executed
Deferral Agreement is received by the Committee. "Deferral Agreement Effective
Date" shall mean February 1, 1998, in the case of any Deferral Agreement
executed before that date. As applicable to an Active Participant who has
become an Employee or Director within the ten-day period immediately preceding
the execution of the Deferral Agreement, "Deferral Agreement Effective Date"
shall mean the date the Deferral Agreement is executed. The Deferral Agreement
shall be effective with respect to any Base Compensation, Annual Incentive
Bonus, or Director's Fee earned and payable on or after the Deferral Agreement
Effective Date. The Deferral Agreement shall be effective with respect to
Option Stock with respect to which an Option is or becomes exercisable on or
after the Deferral Agreement Effective Date. The Deferral Agreement shall be
effective with respect to any Restricted Stock that becomes nonforfeitable
after the Deferral Agreement Effective Date. The Deferral Agreement shall be
effective with respect to any Deferred Stock that is issued after the Deferral
Agreement Effective Date.

1.16 DEFERRED STOCK. "Deferred Stock" shall mean shares of Company
Stock awarded or issued to a Participant as deferred stock under any
stock-based compensation plan or program adopted or maintained from time to
time by the Sponsor.

1.17 DEFERRED STOCK DEFERRAL. "Deferred Stock Deferral" shall mean
the Participant's deferral made pursuant to the provisions of Section 3.6, if
any.

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<PAGE> 8
1.18 DEFERRED STOCK DEFERRAL ACCOUNT. "Deferred Stock Deferral
Account" shall mean the ledger account maintained by the Committee for each
Participant that reflects any Deferred Stock Deferrals made by the Participant
and any Investment Gain or Loss attributable to such deferrals.

1.19 DIRECTOR. "Director" shall mean a member of the board of
directors of the Employer.

1.20 DIRECTOR'S FEE. "Director's Fee" shall mean all cash
compensation (not including expense reimbursements) payable by the Employer for
services rendered as a Director, including annual retainers and board and
committee meeting fees.

1.21 DIRECTOR'S FEE DEFERRAL. "Director's Fee Deferral" shall mean
the Participant's deferral made pursuant to the provisions of Section 3.7 if
any.

1.22 DIRECTOR'S FEE DEFERRAL ACCOUNT. "Director's Fee Deferral
Account" shall mean the ledger account maintained by the Committee for each
Participant that reflects any Director's Fee Deferrals made by the Participant
and any Investment Gain or Loss attributable to such deferrals.

1.23 DISABILITY. "Disability" shall mean a physical or mental
condition which, in the judgment of the Committee, totally and presumably
permanently prevents a Participant from engaging in substantial gainful
employment with his Employer.

1.24 ELECTIVE DEFERRAL. "Elective Deferral" shall mean either (i)
the Participant's Regular Salary Deferral, Incentive Bonus Deferral, Option
Stock Deferral, Deferred Stock Deferral, Restricted Stock Deferral, or
Director's Fee Deferral; or (ii) all such deferrals.

1.25 ELECTIVE DEFERRAL ACCOUNT. "Elective Deferral Account" shall
mean either (i) the Participant's Regular Salary Deferral Account, Incentive
Bonus Deferral Account, Director's Fee Deferral Account, Option Stock Deferral
Account, Deferred Stock Deferral Account, or Restricted Stock Deferral Account;
or (ii) all such Accounts.

1.26 ELIGIBLE CLASS. "Eligible Class" shall mean all Directors,
Officers, and Highly Compensated Employees of the Employer.

1.27 EMPLOYEE. "Employee" shall mean an individual who is reflected
as a common law employee of the Employer in the records of the Employer.

1.28 EMPLOYER. "Employer" shall mean the Sponsor and any other
business organization that has adopted this Plan.

1.29 EMPLOYER MATCHING CREDIT. "Employer Matching Credit" shall mean
the credit made pursuant to the provisions of Section 3.8, if any.

1.30 EMPLOYER MATCHING ACCOUNT. "Employer Matching Account" shall
mean the ledger account maintained by the Committee for each Participant that
reflects any portion of the Employer Matching Credits allocated to the
Participant and any Investment Gain or Loss attributable to such credits.

1.31 ERISA. "ERISA" shall mean the Employee Retirement Income
Security Act of 1974, as amended.

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<PAGE> 9
1.32 HIGHLY COMPENSATED EMPLOYEE. "Highly Compensated Employee"
shall mean an Employee who is among the Employees whose Base Salary is $100,000
or more per Plan Year, as adjusted from time to time by the Board of Directors.

1.33 INCENTIVE BONUS DEFERRAL. "Incentive Bonus Deferral" shall mean
the Participant's deferral made pursuant to the provisions of Section 3.3, if
any.

1.34 INCENTIVE BONUS DEFERRAL ACCOUNT. "Incentive Bonus Deferral
Account" shall mean the ledger account maintained by the Committee for each
Participant that reflects any Incentive Bonus Deferrals made by the Participant
and any Investment Gain or Loss attributable to such deferrals.

1.35 INCENTIVE EQUITY PLAN. "Incentive Equity Plan" shall mean the
Cliffs Drilling Company 1988 Incentive Equity Plan, as amended from time to
time, or any replacement or successor plan adopted by the Sponsor. Any
reference to a specific provision of the Incentive Equity Plan shall be deemed
to include a reference to the corresponding provision of any amended,
replacement, or successor Incentive Equity Plan.

1.36 INVESTMENT GAIN OR LOSS. "Investment Gain or Loss" shall mean,
with respect to a Participant's Regular Salary Deferral Account, Incentive
Bonus Deferral Account, Director's Fee Deferral Account, and the dollar
denominated portion of the Deferred Stock Deferral Account, the amount
determined by applying the rate of return for the applicable Investment
Option(s) for the Valuation Period then ending to the Adjusted Beginning
Balance of such Account. With respect to a Participant's Option Stock Deferral
Account, Restricted Stock Deferral Account, Employer Matching Account, and the
portion of the Deferred Stock Deferral Account denominated in shares of Company
Stock, Investment Gain or Loss shall mean the dividends or other distributions
on shares of Company Stock credited to such Accounts, which dividends or other
distributions shall be converted to shares of Company Stock in the same manner
as is applicable to Deferred Stock Awards under the Incentive Equity Plan.

1.37 INVESTMENT OPTION. "Investment Option" shall mean the fund or
other measure of investment return selected pursuant to Section 4.4.

1.38 OFFICER. "Officer" shall mean the chief executive officer, the
president, any vice president, the secretary, and the treasurer of the
Employer, as well as any other officer specified in the bylaws of the Employer
or designated by the board of directors of the Employer pursuant to their
authority under such bylaws.

1.39 OPTION. "Option" shall mean a stock option awarded to a
Participant under any stock-based compensation plan or program adopted or
maintained from time to time by the Sponsor.

1.40 OPTION STOCK. "Option Stock" shall mean shares of Company Stock
issued or issuable to a Participant pursuant to the exercise of a stock option
granted under any stock-based compensation plan or program adopted or
maintained from time to time by the Sponsor.

1.41 OPTION STOCK DEFERRAL. "Option Stock Deferral" shall mean the
Participant's deferral made pursuant to the provisions of Section 3.4, if any.

1.42 OPTION STOCK DEFERRAL ACCOUNT. "Option Stock Deferral Account"
shall mean the ledger account maintained by the Committee for each Participant
that reflects any Option Stock Deferrals made by the Participant and any
Investment Gain or Loss attributable to such deferrals.

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<PAGE> 10
1.43 PARTICIPANT. "Participant" shall mean a person who qualifies as
such under the provisions of Article 2.

1.44 PLAN. "Plan" shall mean all aspects of the program known as
Cliffs Drilling Company Compensation Deferral Plan, the purpose of which is to
provide retirement, death, and other severance benefits to Participants,
surviving spouses, and other Beneficiaries. The Plan comprehends the Plan
Document under which it is maintained; and the rights, powers, duties, and
obligations of the Employers, the Participants, the Beneficiaries, and all
other interested parties.

1.45 PLAN DOCUMENT. "Plan Document" shall mean this agreement, as
amended from time to time.

1.46 PLAN QUARTER. "Plan Quarter" shall mean each of the three-month
periods ending on the last day of the third, sixth, ninth, and twelfth months
of each Plan Year.

1.47 PLAN YEAR. "Plan Year" shall mean the 12-consecutive-month
annual accounting period of the Plan, which shall end on the last day of
December of each calendar year.

1.48 QUALIFIED DOMESTIC RELATIONS ORDER. "Qualified Domestic
Relations Order" shall mean any order determined by the Committee to be a
qualified domestic relations order within the meaning of Section 414(p) of the
Code.

1.49 REGULAR SALARY DEFERRAL. "Regular Salary Deferral" shall mean
the Participant's compensation deferral made pursuant to the provisions of
Section 3.2, if any.

1.50 REGULAR SALARY DEFERRAL ACCOUNT. "Regular Salary Deferral
Account" shall mean the ledger account maintained by the Committee for each
Participant that reflects any Regular Salary Deferrals made by the Participant
and any Investment Gain or Loss attributable to such deferrals.

1.51 REGULATION. "Regulation" shall mean the Internal Revenue
Service regulation specified, as it may be changed from time to time.

1.52 RESTRICTED STOCK. "Restricted Stock" shall mean shares of
Company Stock awarded or issued to a Participant as restricted stock under any
stock-based compensation plan or program adopted or maintained from time to
time by the Sponsor.

1.53 RESTRICTED STOCK DEFERRAL. "Restricted Stock Deferral" shall
mean the Participant's deferral made pursuant to the provisions of Section 3.5,
if any.

1.54 RESTRICTED STOCK DEFERRAL ACCOUNT. "Restricted Stock Deferral
Account" shall mean the ledger account maintained by the Committee for each
Participant that reflects any Restricted Stock Deferrals made by the
Participant and any Investment Gain or Loss attributable to such deferrals.

1.55 RETIREMENT. "Retirement" shall mean Separation of a Participant
(i) after completion of 15 years of service and attainment of age 55, (ii)
after attainment of age 62, or (iii) only in the case of a Participant who has
not been an Employee at any time during his participation in the Plan, at any
time. For purposes of this Section, years of service shall be determined under
the rules applied in determining years of service for purposes of vesting under
the Savings Plan.

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1.56 SAVINGS PLAN. "Savings Plan" shall mean The Cliffs Drilling
Company 401(k) Savings Plan, as amended from time to time, or any replacement
or successor plan adopted by the Sponsor. Any reference to a specific provision
of the Savings Plan shall be deemed to include a reference to the corresponding
provision of any amended, replacement, or successor Savings Plan.

1.57 SEPARATION. "Separation" shall mean an individual's termination
of employment (or service as a Director) with an Employer without commencing or
continuing employment (or service as a Director) with any other Employer.

1.58 SPONSOR. "Sponsor" shall mean Cliffs Drilling Company, a
Delaware corporation, or any other business organization that assumes the
primary responsibility for maintaining this Plan with the consent of the last
preceding Sponsor.

1.59 UNFORESEEABLE EMERGENCY. "Unforeseeable Emergency" shall mean a
severe financial hardship to the Participant resulting from a sudden and
unexpected illness or accident of the Participant or of a dependent (as defined
in Section 152(a) of the Code) of Participant, loss of the Participant's
property due to casualty, or other similar extraordinary and unforeseeable
circumstances arising as a result of events beyond the control of the
Participant. Circumstances which constitute an unforeseeable emergency will
depend upon the facts of each case, but, in any case, no emergency withdrawal
may be made to the extent that such financial hardship is or may be relieved
(i) through reimbursement or compensation by insurance or otherwise, (ii) by
liquidation of the Participant's assets, to the extent that liquidation of such
assets would not itself cause severe financial hardship, or (iii) by cessation
of Elective Deferrals. The term "unforeseeable emergency" does not include the
need to send the Participant's child to college or the desire to purchase a
home.

1.60 VALUATION DATE. "Valuation Date" shall mean the last day of
each Plan Quarter and any other day or days selected by the Committee on which
the Plan (or any portion thereof) is to be valued. One or more investment
funds may have different Valuation Dates from other investment funds.
Valuation Dates must be announced to all Participants.

1.61 VALUATION PERIOD. "Valuation Period" shall mean the period
beginning on the day following a Valuation Date (or on the first day of the
first Plan Year, in the case of the first Valuation Period) and ending on the
immediately succeeding Valuation Date.

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ARTICLE 2
PARTICIPATION

2.1 DESIGNATION OF ACTIVE PARTICIPANTS BY BOARD OF DIRECTORS. The
Board of Directors may designate from time to time such members of the Eligible
Class as it shall from time to time determine to be Active Participants. An
Active Participant shall continue as such until the earlier of (i) the date the
individual ceases to be a member of the Eligible Class, or (ii) the date
specified by the Board of Directors as the date on which the individual shall
no longer be an Active Participant.

2.2 COMMENCEMENT OF PARTICIPATION. An Employee or Director shall
become a Participant on the later of (i) the effective date of the adoption of
the Plan by such individual's Employer, or (ii) the date on which such
individual is first designated as an Active Participant by the Board of
Directors.

2.3 CESSATION OF PARTICIPATION. An individual who has become a
Participant shall cease to be a Participant on the later of (i) the first date
on which he ceases to be an Active Participant, or (ii) the first date on which
no portion of his Accounts remains to be distributed and no amounts remain to
be credited to his Accounts.

2.4 RECOMMENCEMENT OF PARTICIPATION BY FORMER PARTICIPANTS. A former
Participant shall again become a Participant on the date, if any, on which such
individual is again designated as an Active Participant by the Board of
Directors.

2.5 FROZEN ACCOUNTS. A Participant's Accounts shall be frozen as of
the date that he is no longer an Active Participant. A Participant whose
Accounts have been frozen shall not be permitted to make additional deferrals
under the Plan, nor shall his Accounts share in the allocation of any Employer
Matching Credits which are allocated to Participants' Accounts as of a date on
or after the date as of which his Account is frozen. Such a Participant's
Accounts, however, shall continue to share in any Investment Gain or Loss of
the Plan during the period of time that his Accounts are frozen. The Accounts
of such a Participant shall be unfrozen immediately upon his redesignation as
an Active Participant, and he shall thereupon participate in the Plan in
accordance with the terms thereof.

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ARTICLE 3
PARTICIPANT DEFERRALS AND EMPLOYER MATCHING ALLOCATIONS

3.1 DEFERRAL AGREEMENTS. A Deferral Agreement shall be an agreement
in a form satisfactory to the Committee to prospectively receive one or more
items of compensation from the Employer in a reduced amount and to have the
Committee credit an amount equal to the amount of the reduction to the
Participant's Account. The Deferral Agreement shall specify the amount of the
deferral to be considered (i) a Regular Salary Deferral, (ii) an Incentive
Bonus Deferral, (iii) an Option Stock Deferral, (iv) a Deferred Stock Deferral,
(v) a Restricted Stock Deferral, and (vi) a Director's Fee Deferral. Any such
Deferral Agreement shall be revocable or irrevocable in accordance with its
terms, provided that no revocation shall be retroactive or permit payment to
the Participant of any amount deferred prior to the date of revocation. A
Participant shall be entitled to prospectively modify his Deferral Agreement at
least once a year. The Committee shall establish and announce to the
Participants the rules governing the administration of Elective Deferrals,
including any limitations upon the amount that may be deferred and the
procedures for and any limitations upon a Participant's right to revoke or
change his designation. Elective Deferrals may be made by periodic payroll
deductions or by other methods, as determined from time to time by the
Committee.

3.2 REGULAR SALARY DEFERRALS. Each Active Participant shall specify
in his Deferral Agreement the percentage (not to exceed 50 percent) of his Base
Compensation to be deferred under this Plan as a Regular Salary Deferral. Such
deferrals shall commence on the Deferral Agreement Effective Date.

3.3 INCENTIVE BONUS DEFERRALS. Each Active Participant shall specify
in his Deferral Agreement the percentage of his Annual Incentive Bonus, if any,
to be deferred under this Plan as an Incentive Bonus Deferral. Such deferrals
shall commence on the Deferral Agreement Effective Date.

3.4 OPTION STOCK DEFERRALS. Each Active Participant shall specify in
his Deferral Agreement any shares of Option Stock to be deferred under this
Plan. Such specification shall identify the date(s) of the Stock Option(s)
covered by the Deferral Agreement, the date each installment of Option Stock
will be exercisable, and the number of shares of Option Stock to be deferred
under this Plan from each such installment. Contemporaneously with the
execution and delivery of any Deferral Agreement described in this Section, the
Active Participant shall execute all documents and take all such other action
as may be necessary or appropriate to surrender his right to exercise the
Option with respect to the shares of Option Stock covered by the Deferral
Agreement. Such deferrals shall apply to Option Stock with respect to which an
Option is exercisable on or after the Deferral Agreement Effective Date. The
amount deferred shall be the number of shares of Company Stock (including
fractional shares) determined by the formula N = S x (CP - EP) / CP; where N =
number of shares of Company Stock to be credited to the Active Participant's
Option Stock Deferral Account; S = number of shares of Option Stock in the
installment covered by the Deferral Agreement; CP = current price of one share
of Company Stock; and EP = exercise price of one share of Option Stock. Current
price shall be determined separately for each installment of Option Stock
covered by the Deferral Agreement as of the later of the Deferral Agreement
Effective Date or the date the installment would have become exercisable under
the terms of the Option.

3.5 RESTRICTED STOCK DEFERRALS. Each Active Participant shall
specify in his Deferral Agreement any shares of Restricted Stock to be deferred
under this Plan. Such specification shall identify the date(s) of the
Restricted Stock award(s) covered by the Deferral Agreement, the date each
installment of Restricted Stock will cease to be subject to restrictions, and
the number of shares of Restricted Stock to be deferred under this Plan from
each such installment. Contemporaneously with the execution and delivery of
any Deferral Agreement described in this Section, the Active Participant shall
execute all

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<PAGE> 14
documents and take all such other action as may be necessary or appropriate to
transfer the shares of Restricted Stock covered by the Deferral Agreement to
the Sponsor. Such deferrals shall apply to Restricted Stock with respect to
which restrictions lapse on or after the Deferral Agreement Effective Date.

3.6 DEFERRED STOCK DEFERRALS. Each Active Participant shall specify
in his Deferral Agreement any shares of Deferred Stock to be deferred under
this Plan. Such specification shall identify the date(s) of the Deferred Stock
award(s) covered by the Deferral Agreement, the date each installment of
Deferred Stock is receivable, and the number of shares of Deferred Stock to be
deferred under this Plan from each such installment. To the extent that the
Participant has the right to receive cash in lieu of shares of Company Stock
under the terms of the Deferred Stock award, the Participant may specify that
credits to his Deferred Stock Account shall be made in cash instead of in
shares of Company Stock. Such deferrals shall apply to Deferred Stock which
becomes receivable on or after the Deferral Agreement Effective Date.

3.7 DIRECTOR'S FEE DEFERRALS. Each Active Participant who is a
Director shall specify in his Deferral Agreement the percentage of his
Director's Fee to be deferred under this Plan as a Director's Fee Deferral.
Such deferrals shall commence on the Deferral Agreement Effective Date.

3.8 EMPLOYER MATCHING CREDITS. The Employer shall, for each Plan
Year, make an Employer Matching Credit on behalf of each Active Participant in
an amount equal to (i) the rate at which matching contributions are made under
the Savings Plan multiplied by the sum of his Regular Salary Deferral and
Incentive Bonus Deferral for the Plan Year, provided that for purposes of this
Section only such sum may not exceed six percent of his Base Compensation for
the Plan Year, minus (ii) the amount of the actual employer matching
contribution for the Participant under the Savings Plan for the Plan Year.

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ARTICLE 4
ALLOCATIONS

4.1 INFORMATION STATEMENTS FROM EMPLOYER. As soon as practical after
each Allocation Date, the Employer shall provide the Committee with a schedule
setting forth the amount of its Employer Matching Credit for each Active
Participant; the names of its Active Participants and other Participants; the
amount and type of Elective Deferral(s) of each of its Active Participant's;
and the amount of Base Compensation and Director's Fees paid to each Active
Participant. Such schedules shall be conclusive evidence of such facts.

4.2 ALLOCATION OF ELECTIVE DEFERRALS. The Committee shall allocate
to each Participant an amount equal to his Elective Deferrals for each
Allocation Period. Each Participant's share shall be credited to his Regular
Salary Deferral Account, Incentive Bonus Deferral Account, Option Stock
Deferral Account, Deferred Stock Deferral Account, Restricted Stock Deferral
Account, and Director's Fee Deferral Account to the extent of the amount of the
corresponding type of deferral. Allocations to the Participant's Regular Salary
Deferral Account, Incentive Bonus Deferral Account, and Director's Fee Deferral
Account shall be in units representing dollars. Allocations to the
Participant's Option Stock Deferral Account and Restricted Stock Deferral
Account shall be in units representing shares of Company Stock. Allocations to
the Participant's Deferred Stock Deferral Account shall be in units
representing shares of Company Stock, except to the extent otherwise elected by
the Participant pursuant to Section 3.6.

4.3 ALLOCATION OF EMPLOYER MATCHING CREDIT. The Committee shall
separately allocate the Employer Matching Credit for each Plan Year among the
Employer's Active Participants by allocating to each such Participant an amount
equal to the Employer Matching Credit made on his behalf. Each Participant's
share shall be credited to his Employer Matching Account. The Employer Matching
Credit shall be in units representing shares of Company Stock.

4.4 PARTICIPANT SELECTION OF INVESTMENT OPTIONS. Each Participant
shall specify the Investment Options to be applied in determining Investment
Gain or Loss on his Elective Deferral Accounts (other than his Option Stock
Deferral Account, Deferred Stock Deferral Account, or Restricted Stock Deferral
Account). The Investment Options shall be (i) the variable rate of interest per
annum quoted as the "prime rate" in the Wall Street Journal as the base rate on
corporate loans posted by at least 75 percent of the nation's largest banks,
plus two percent; or (ii) any investment fund available to participants in the
Savings Plan, other than any Company Stock fund. The Committee shall establish
rules pertaining to the administration of the choice of Investment Options,
including but not limited to selection of forms, rules for making selections
effective, establishing the frequency of permitted changes, the minimum
percentage covered by any Investment Option, and all other necessary or
appropriate regulations.

4.5 ALLOCATION OF INVESTMENT GAIN OR LOSS. The Committee shall
determine the rate of return on each Investment Option as of each Valuation
Date. The Committee shall then allocate the Investment Gain or Loss for the
Valuation Period then ended to each Account.

4.6 EFFECTIVE DATE OF ALLOCATIONS AND ADJUSTMENTS. The Committee
shall credit to each Participant's Accounts such Participant's Elective
Deferrals, so that all such amounts shall be entered in the Participant's
Accounts as soon as administratively practicable following the date on which
they would have been paid to or otherwise been includable in gross income for
federal income tax purposes in the absence of a deferral election. The
Committee shall credit to each Participant's Employer Matching Account such
Participant's portion of the Employer Matching Credit so that all such Employer
Matching

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Credits shall become effective and be entered in each Participant's Account as
of the last day of the Plan Year to which they are attributable. The Committee
shall credit to each Participant's Accounts such Participant's portion of the
adjustments and allocations required by Section 4.5, so that all such
allocations shall become effective and be entered in such Participant's
Accounts as of the Valuation Date with respect to which they are attributable.

4.7 NO VESTING UNLESS OTHERWISE PRESCRIBED. No allocations,
adjustments, credits, or transfers shall ever vest in any Participant any
right, title, or interest in the Plan except at the times and upon the terms
and conditions herein set forth.

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<PAGE> 17
ARTICLE 5
BENEFITS AND EVENTS ENTITLING PARTICIPANTS
TO DISTRIBUTION OF BENEFITS

5.1 BENEFIT UPON DEATH, RETIREMENT, OR DISABILITY. A Participant
whose Separation occurs on account of Retirement or Disability shall be
entitled to a benefit equal to the total amount credited to all of his Accounts
other than his Restricted Stock Deferral Account, plus (ii) all vested shares
of Company Stock credited to his Restricted Stock Deferral Account. A share of
Company Stock credited to a Participant's Restricted Stock Deferral Account
(including any share credited as Investment Gain or Loss) shall be vested as of
any date for purposes of this Section if it is attributable to the deferral of
a share of Restricted Stock that would have become nonforfeitable on or before
such date under the terms of the award of such share of Restricted Stock. Each
Participant's interest in his Restricted Stock Deferral Account shall be fully
vested and nonforfeitable after any Change of Control. The Beneficiary of a
Participant whose Separation occurs on account of death shall be entitled to a
benefit equal to the amount determined under the preceding provisions of this
Section.

5.2 BENEFIT UPON SEPARATION FOR ANY REASON OTHER THAN DEATH,
RETIREMENT, OR DISABILITY. A Participant whose Separation occurs for any
reason other than death, Retirement, or Disability shall be entitled to a
benefit equal to the sum of (i) the total amount credited to all of his
Accounts other than his Restricted Stock Deferral Account and his Employer
Matching Account, plus (ii) all vested shares of Company Stock credited to his
Restricted Stock Deferral Account (as determined in the manner specified in
Section 5.1), plus (iii) his vested percentage of the total amount credited to
his Employer Matching Account. Except as otherwise expressly provided in this
Plan, a Participant's vested percentage shall be determined under the vesting
provisions applicable to the Participant's interest in his matching employer
contribution account under the Savings Plan. Each Participant's interest in his
Employer Matching Account shall be fully vested and nonforfeitable after any
Change of Control.

5.3 SPECIFIED DATE ELECTION OF INTERIM DISTRIBUTION. A Participant
may elect to receive distribution of a specified amount or percentage of the
vested balance of his Account in one of the methods specified in Section 6.2.
The election shall specify the date upon which the distribution is to be made
or commenced. Such date may be prior to the Participant's Separation, but shall
not be less than 12 months after the date the election is made and delivered to
the Committee. The election shall be made on such form as may be prescribed for
that purpose by the Committee, and shall be irrevocable.

5.4 FORFEITURE OF NONVESTED AMOUNTS. A Participant shall forfeit the
nonvested portion of his Employer Matching Account if and when he incurs a
forfeiture of any nonvested portion of his matching employer contribution
account under the Savings Plan. Forfeited amounts shall not be restored upon
resumption of employment by a Participant or former Participant.

5.5 TIME FOR DETERMINING ACCOUNT BALANCES. The amount credited to a
Participant's Accounts shall be determined, for purposes of this Article, as of
the Valuation Date coincident with or next following the date of the
Participant's Separation.

5.6 ACCOUNTING FOR DISTRIBUTIONS. The balance of an Account shall be
reduced as of the first day of the Valuation Period by the amount of any
forfeitures, withdrawals, payments, distributions, or other amounts properly
chargeable to such Account during such Valuation Period.

5.7 RECEIPT OF DOMESTIC RELATIONS ORDER. The receipt of a judicial
decree or order shall constitute an event permitting distribution under the
Plan, provided that such judicial decree or order

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<PAGE> 18
would constitute a Qualified Domestic Relations Order if the requirement that
such an order not require a plan to make distribution to an alternate payee
prior to a Participants earliest retirement age, as defined in Section
414(p)(4)(B) of the Code, were disregarded.

5.8 WITHDRAWAL FOR UNFORESEEABLE EMERGENCY. Any Participant may make
application to the Committee to withdraw in a single sum from his Elective
Deferral Accounts and from the vested balance of his Employer Matching Account
such amount, and not more than that amount, as is reasonably needed to satisfy
the emergency need. Whether or not a Participant has incurred an Unforeseeable
Emergency shall be determined by the Committee on the basis of all relevant
facts available to the Committee and in accordance with written procedures
established by the Committee. Such written procedures shall specify the
requirements for requesting and receiving distributions on account of
Unforeseeable Emergency, including what forms must be submitted and to whom.
The Committee shall uniformly and consistently apply such written procedures so
that all Participants in similar circumstances are treated alike. All
determinations regarding Unforeseeable Emergency must be made in accordance
with objective nondiscretionary criteria. Such determinations must also comply
with applicable Department of Treasury regulations and rulings. An application
for a withdrawal made pursuant to this Section must be in writing and must
state the reason or reasons for the need of such Participant to make such a
withdrawal. Such application must specify the amount necessary to satisfy the
Participant's Unforeseeable Emergency. The Committee shall be entitled to rely
upon the Participant's representations set forth in his application, to the
extent that such reliance is reasonable. A distribution made pursuant to this
Section shall not exceed the amount necessary to meet the Unforeseeable
Emergency of the Participant. The amount of an Unforeseeable Emergency
withdrawal may include any amounts necessary to pay any federal, state, or
local income taxes reasonably anticipated to result from the distribution.
Applications under this Section shall be processed as soon as administratively
feasible. The Committee shall direct the Employer when to disburse any funds as
an Unforeseeable Emergency withdrawal.

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ARTICLE 6
DISTRIBUTION OF BENEFITS

6.1 TIME OF DISTRIBUTION. Subject to any contrary provisions in this
Article, distributions provided for in the Plan shall be made or commenced as
soon as practical, and in any event, within one year after the Participant's
Separation.

6.2 DISTRIBUTION METHODS AVAILABLE. Except as otherwise provided in
Section 6.6, distributions shall be paid in cash. Distributions shall be made
in any one of the following optional distribution methods:

(a) A single sum.

(b) Equal annual installments for a period of five years.

(d) Equal annual installments for a period of fifteen years.

The present value of the total distribution under any method shall be no less
than the Participant's vested Account balance. If an installment method is
applicable, the Participant's Account shall be maintained as a part of the Plan
and be subject to crediting of further Investment Gain or Loss, but not subject
to any further Elective Deferrals or Employer Matching Credits, after
commencement of distribution. The income earned thereon shall be credited to
such Account and distributed to the Participant annually.

6.3 DISTRIBUTION METHOD IN EVENT OF SEPARATION OTHER THAN UPON DEATH,
RETIREMENT, OR DISABILITY. If a Participant's Separation occurs for any reason
other than death, Retirement, or Disability, distribution shall be made in a
single sum, and any election of a different form of distribution shall be
ineffective.

6.4 CHOICE OF DISTRIBUTION METHODS IN EVENT OF DEATH, RETIREMENT, OR
DISABILITY. Each Participant shall have the right to elect the method of
distribution applicable to him in the event of his Separation on account of
death, Retirement, or Disability. An election of an option available under
Section 6.2 shall be made at the time the first Deferral Agreement is executed
by the Participant. The Participant may revoke a prior election and make a new
election at any time; provided, however, that no election (other than the
initial election) made less than 13 months prior to the Participant's
Separation shall be effective. In the event an election is determined to be
ineffective under the immediately preceding sentence, the most recent election
made at least 13 months prior to the date of the Participant's Separation shall
be effective, or if there is no such election, the Participant's initial
election shall be effective. If no election is on file with the Committee,
distribution shall be made in a single sum. An election, change, or rescission
of an option must be made by executing and properly filing the form or forms
approved by the Committee. Proof of age and other information may be required
by the Committee.

6.5 CHANGE OF DISTRIBUTION METHOD AFTER COMMENCEMENT OF BENEFITS.
Except as provided in this Section, an election of the method of distribution
shall be irrevocable after benefit payments commence. A Participant may revoke
an election of distribution method and elect a different method after
commencement of distribution, but in the event of any such change, the then
current balance of the Participant's Account shall be reduced by 20 percent,
which amount shall be deemed a forfeiture under the Plan.

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6.6 DISTRIBUTIONS FROM STOCK DEFERRAL AND EMPLOYER MATCHING ACCOUNTS.
Notwithstanding any other provision of the Plan, distributions of amounts
credited to the Participant's Option Stock Deferral Account, Restricted Stock
Deferral Account, Employer Matching Account, and the portion of the Deferred
Stock Deferral Account denominated in shares of Company Stock shall be paid in
shares of Company Stock, except that fractional shares shall be paid in cash.

6.7 SINGLE SUM PAYMENT OF SMALL AMOUNTS. Notwithstanding any other
provision of the Plan, each Participant (i) who does not die before benefit
payments are made or commenced and (ii) whose vested Account balance is $10,000
or less shall be paid in the form of a single sum payment. A surviving spouse
or other Beneficiary of a Participant whose Account balance is $10,000 or less
shall be paid in the form of a single sum payment.

6.8 QUALIFIED DOMESTIC RELATIONS ORDERS. Payment shall be made in
accordance with the provisions of any Qualified Domestic Relations Order.

6.9 DISTRIBUTIONS TO DISABLED. If the Committee determines that any
person to whom a payment is due is unable to care for his affairs because of
physical or mental disability, it shall have the authority to cause the
payments to be made to the spouse, brother, sister, or other person the
Committee determines to have incurred, or to be expected to incur, expenses for
that person unless a prior claim is made by a qualified guardian or other legal
representative. The Committee shall not be responsible to oversee the
application of those payments. Payments made pursuant to this power shall be a
complete discharge of all liability under the Plan. Any amount payable to a
minor under any provision of this Plan including the foregoing provisions of
this Section may be paid directly to the minor. The receipt by the minor shall
be a complete discharge of all liability under the Plan.

6.10 DESIGNATION OF BENEFICIARY. Each Participant has the right to
designate and to revoke the designation of his Beneficiary. Each designation or
revocation must be evidenced by a written document in the form required by the
Committee, signed by the Participant, and filed with the Committee. If no
designation is on file at the time of a Participant's death or if the Committee
determines that the designation is ineffective, the designated Beneficiary
shall be the Participant's spouse, if living, or if not, the executor,
administrator, or other personal representative of the Participant's estate.

6.11 NO DUPLICATION OF BENEFITS. There shall be no duplication of
benefits under this Plan.

6.12 MISSING DISTRIBUTEES. The Committee shall make reasonable
efforts to locate any person entitled to a distribution. Such efforts shall
include utilization of the services of the Social Security Administration and
the Internal Revenue Service to attempt to ascertain the current mailing
address of any such person or for the purpose of forwarding correspondence from
the Plan to any such person. If the efforts to locate a person entitled to a
distribution are unsuccessful, the Committee may instruct the Employer to
distribute such benefits into an interest-bearing federally-insured bank
account opened in such person's name or to purchase an annuity for such person.
Such person shall have an unconditional right to withdraw funds from any such
bank account. All ordinary and reasonable expenses incurred in connection with
attempting to locate a person entitled to benefits under the Plan and in
establishing an account or purchasing an annuity for a person who cannot be
located shall be deducted from the benefit payable to such person.

If a person entitled to a distribution cannot be located within one
year of the date any benefits payable under the Plan should be paid or commence
to be paid, the Participant's Account may be forfeited. Notwithstanding the
preceding sentence, if at any time prior to termination of the Plan, the
Participant or Beneficiary files a valid claim for the forfeited benefits
payable under the Plan, then (a) as

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soon as administratively practicable, the forfeited benefits payable to such
former Participant or Beneficiary shall be reinstated effective as of the date
or receipt of the claim and (b) as soon as administratively practicable
following the reinstatement of such forfeited benefits, the value of the
reinstated benefits shall be paid pursuant to the provisions of this Article to
the Participant or Beneficiary thereof.

In the event of the termination of the Plan, amounts payable to
persons who cannot be located that have not previously been forfeited and
reallocated shall be used to establish a bank account or individual retirement
account, or to purchase an annuity, for such person.

6.13 CLAIMS PROCEDURE. Submission of a claim for benefits by the
Participant or Beneficiary is not a condition to payment of benefits due
hereunder. However, if the Participant or Beneficiary believes that benefits
have not been properly paid, he must submit a claim for proper payment to the
Committee. Under normal circumstances, a final decision shall be made as to a
claim within 90 days after receipt of the claim. If the Committee notifies the
claimant in writing during the initial 90-day period, it may extend the period
up to 180 days after the initial receipt of the claim. The written notice must
contain the circumstances necessitating the extension and the anticipated date
for the final decision. If a claim is denied during the claims period, the
Committee must notify the claimant in writing. The denial must include the
specific reasons for it, the Plan provisions upon which the denial is based,
and the claims review procedure. If no action is taken during the claims
period, the claim is treated as if it were denied on the last day of the claims
period.

6.14 CLAIMS APPEAL PROCEDURE. If a Participant's or Beneficiary's
claim is denied and he wants a review, he must apply to the Committee in
writing. That application can include any comment or argument the claimant
wants to make. The claimant can either represent himself or appoint a
representative, either of whom has the right to inspect all documents
pertaining to the claim and its denial. The Committee can schedule any meeting
with the claimant or his representative that it finds necessary or appropriate
to complete its review. The request for review must be filed within 90 days
after the denial. If it is not, the denial becomes final. If a timely request
is made, the Committee must make its decision, under normal circumstances,
within 60 days of the receipt of the request for review. However, if the
Committee notifies the claimant prior to the expiration of the initial review
period, it can extend the period of review up to 120 days following the initial
receipt of the request for a review. All decisions of the Committee must be in
writing and must include the specific reasons for its action and the Plan
provisions on which its decision is based. If a decision is not given to the
claimant within the review period, the claim is treated as if it were denied on
the last day of the review period.

6.15 PARTICIPANT'S RIGHT TO ARBITRATION. If a Participant's claim is
not resolved to his satisfaction under the foregoing provisions of this
Article, the Participant may elect to have his claim decided by binding
arbitration under applicable rules of the American Arbitration Association. The
decision in any such arbitration shall be final and binding on the Sponsor, the
Committee, the Participant, and all other interested parties.

-16-
<PAGE> 22
ARTICLE 7
COMMITTEE

7.1 APPOINTMENT, TERM, RESIGNATION, AND REMOVAL. The Board of
Directors shall appoint a Committee to administer the Plan. The members of the
Committee shall serve until their resignation, death, or removal. Any member of
the Committee may resign at any time by giving written notice of such
resignation to the Sponsor. Any member of the Committee may be removed by the
Board of Directors, with or without cause. Vacancies in the Committee arising
by resignation, death, removal, or otherwise shall be filled by such persons as
may be appointed by the Board of Directors.

7.2 POWERS. The Committee shall have exclusive responsibility for
the administration of the Plan, according to the terms and provisions thereof,
and shall have all powers necessary to accomplish such purposes, including, but
not by way of limitation, the right, power, and authority:

(i) To make rules and regulations for the administration of
the Plan which are not inconsistent with the terms and provisions
thereof, provided such rules and regulations are evidenced in writing;

(ii) To construe all terms, provisions, conditions, and
limitations of the Plan; and its construction thereof made in good
faith and without discrimination in favor of or against any
Participant shall be final and conclusive on all persons;

(iii) To correct any defect, supply any omission, or
reconcile any inconsistency which may appear in the Plan in such
manner and to such extent as it shall deem expedient to carry out the
intent of the Sponsor in establishing and maintaining the Plan, and
its judgment in such matters shall be final and conclusive as to all
persons;

(iv) To select, employ, and compensate from time to time such
consultants, actuaries, accountants, attorneys, and other agents and
employees as the Committee may deem necessary or advisable for the
proper and efficient administration of the Plan, and any agent, firm,
or employee so selected by the Committee may be a disqualified person,
but only if the requirements of Section 4975(d) of the Code have been
met;

(v) To resolve all questions relating to the eligibility of
Employees and Directors to become Participants, and to determine the
Participant's vested percentage and the amount of compensation upon
which the benefits of each Participant shall be calculated;

(vi) To resolve all controversies relating to the
administration of the Plan, including but not limited to (a)
differences of opinion arising between the Employer and a Participant,
and (b) any questions it deems advisable to determine in order to
promote the uniform and nondiscriminatory administration of the Plan;

(vii) To direct and instruct the Employer in all matters
relating to the payment of Plan benefits and to determine a
Participant's entitlement to a benefit should he appeal a denial of
his claim for a benefit or any portion thereof; and

(viii) To delegate such of its clerical and recordation
duties under the Plan as it may deem necessary or advisable for the
proper and efficient administration of the Plan.

-17-
<PAGE> 23
7.3 ORGANIZATION. The Committee shall select from among its members
a chairman, who shall preside at all of its meetings, and shall select a
secretary, without regard as to whether that person is a member of the
Committee, who shall keep the minutes of its proceedings and all records,
documents, and data pertaining to its supervision of the administration of the
Plan.

7.4 QUORUM AND MAJORITY ACTION. A majority of the members of the
Committee shall constitute a quorum for the transaction of business, and the
vote of a majority of the members present at any meeting shall decide any
question brought before that meeting. In addition, the Committee may decide any
question by a vote, taken without a meeting, of a majority of its members.

7.5 SIGNATURES. The chairman, the secretary and any one or more of
the members of the Committee to which the Committee has delegated the power,
shall each, severally, have the power to execute any document on behalf of the
Committee, and to execute any certificate or other written evidence of the
action of the Committee.

7.6 DISQUALIFICATION OF COMMITTEE MEMBERS. A member of the Committee
who is also a Participant in the Plan shall not vote or act upon any matter
relating solely to himself, unless he is the sole member of the Committee.

7.7 DISCLOSURE TO PARTICIPANTS. The Committee shall make available
to each Participant and Beneficiary for his examination such records,
documents, and other data as are required under ERISA, but only at reasonable
times during business hours. No Participant or Beneficiary shall have the right
to examine any data or records reflecting the compensation paid to any other
Participant or Beneficiary, and the Committee shall be required to make no data
or records available other than those required by ERISA.

7.8 STANDARD OF PERFORMANCE. The Committee and each of its members
shall act in good faith when carrying out their responsibilities hereunder.

7.9 LIABILITY OF COMMITTEE. No member of the Committee shall be
liable for any act or omission of any other member of the Committee, any
Participant, or other agent appointed by the Committee. No member of the
Committee shall be liable for any act or omission on his own part, unless such
act or omission is the result of the Committee member's gross negligence or
willful misconduct. In this connection, each provision hereof is severable and
if any provision is found to be void as against public policy, it shall not
affect the validity of any other provision hereof.

7.10 INDEMNIFICATION OF COMMITTEE MEMBERS. The Sponsor shall
indemnify each member of the Committee and his heirs, successors, and assigns
against all expenses (including, without limitation, taxes of every kind and
character, the costs of investigating and responding to claims, the amount of
judgments, the amount of settlements made with a view to the curtailment of
costs of litigation, attorney's fees, interest, penalties, and all costs,
expenses, losses, and damages of every kind) incurred by such member, his
heirs, successors, or assigns in connection with or arising out of his having
served as a member of the Committee.

7.11 BONDING. No member of the Committee shall be required to give
bond for the performance of his duties hereunder unless required by a law which
cannot be waived.

7.12 COMPENSATION. The Committee shall serve without compensation
for their services, but shall be reimbursed by the Employers for all expenses
properly and actually incurred in the performance of their duties under the
Plan.

-18-
<PAGE> 24
7.13 PERSONS SERVING IN DUAL FIDUCIARY ROLES. Any person, group of
persons, corporations, firm, or other entity may serve in more than one
fiduciary capacity with respect to the Plan.

7.14 ADMINISTRATOR. For all purposes of ERISA, the Administrator of
the Plan shall be the Sponsor. The Administrator of the Plan shall have final
responsibility for compliance with all reporting and disclosure requirements
imposed with respect to the Plan under any federal or state law, or any
regulations promulgated thereunder.

7.15 STANDARD OF JUDICIAL REVIEW OF COMMITTEE ACTIONS. The Committee
has full and absolute discretion in the exercise of each and every aspect of
its authority under the Plan, including without limitation, the authority to
determine any person's right to benefits under the Plan, the correct amount and
form of any such benefits, the authority to decide any appeal, the authority to
review and correct the actions of any prior administrative committee, and all
of the rights, powers, and authorities specified in Sections 6.13, 6.14, and
7.2. Notwithstanding any provision of law or any explicit or implicit provision
of the Plan, any action taken, or ruling or decision made, by the Committee in
the exercise of any of its powers and authorities under the Plan shall be final
and conclusive as to all persons other than the Sponsor, including without
limitation all Participants and Beneficiaries, regardless of whether the
Committee or one or more members thereof may have an actual or potential
conflict of interest with respect to the subject matter of such action, ruling,
or decision. No such final action, ruling, or decision of the Committee shall
be subject to de novo review in any judicial proceeding; and no such final
action, ruling, or decision of the Committee may be set aside unless it is held
to have been arbitrary and capricious by a final judgment of a court having
jurisdiction with respect to the issue.

-19-
<PAGE> 25
ARTICLE 8
ADOPTION OF PLAN BY OTHER EMPLOYERS

8.1 ADOPTION PROCEDURE. Any business organization may, with the
approval of the Sponsor, adopt this Plan by:

(i) executing an authorized adoption instrument agreeing to
be bound as an Employer by all the terms, conditions, and limitations
of this Plan except those, if any, specifically described in the
adoption instrument; and

(ii) providing all information required by the Committee.

An adoption may be retroactive to the beginning of a Plan Year if
these conditions are complied with on or before the last day of that Plan Year.

8.2 NO JOINT VENTURE IMPLIED. The document which evidences the
adoption of the Plan by an Employer shall become a part of this Plan. However,
neither the adoption of this Plan by an Employer nor any act performed by it in
relation to this Plan shall ever create a joint venture or partnership relation
between it and any other Employer.

-20-
<PAGE> 26
ARTICLE 9
AMENDMENT AND TERMINATION

9.1 SPONSOR'S RIGHT TO AMEND. Subject to the limitations prescribed
by Section 9.2, the Sponsor may at any time and from time to time modify or
amend the Plan in whole or in part. Any amendment shall be made by an
instrument in writing, executed by the appropriate officer of the Sponsor,
setting forth the nature of the amendment and its effective date.

9.2 LIMITATIONS ON RIGHT TO AMEND. If the Plan is amended in any
manner, the nonforfeitable percentage of the balance of each Account
(determined as of the later of the date of the adoption of the amendment or of
the effective date of the amendment) of each Participant shall not be less than
such nonforfeitable percentage computed under the Plan without regard to such
amendment. No amendment shall decrease the Account balance of a Participant. If
any Employer is subject to the Securities Act of 1934, the Plan shall not be
amended more than once every six months, other than to comport with changes in
the Code, ERISA, or the rules thereunder, in any manner that would affect the
method of determining the amount, price, and timing of securities of such
Employer allocated to the Accounts of officers and directors or categories of
officers and directors of such Employer. Except as provided in the immediately
following sentence, the elimination of one or more forms of benefit payment,
whether with respect to benefits attributable to service before the amendment
or service after the amendment, shall not be prohibited under this Section. No
amendment adopted after a Change in Control shall apply to any Participant
without his express written consent.

9.3 RETROACTIVE AMENDMENTS TO MEET LABOR OR TAX REQUIREMENTS. It is
the intention of the Sponsor that distributions under the Plan be deductible
under the applicable provisions of the Code; that the Plan meet all
requirements of ERISA. The Sponsor shall make such amendments to the Plan as
may be necessary to carry out this intention. All such amendments may be made
retroactively as limited by the applicable federal law.

9.4 SPONSOR'S RIGHT TO TERMINATE. The Sponsor may terminate the Plan
by appropriate action evidenced in writing and delivered to the other
Employers. The Plan shall terminate as to an Employer upon the happening of any
of the following events:

(i) Delivery to the Sponsor of a notice of termination
executed by the Employer, based on the action described in the
preceding sentence and specifying the date as of which the Plan shall
terminate;

(ii) Adjudication of the Employer as a bankrupt, general
assignment by the Employer, based on the action described in the
preceding sentence, to or for the benefit of creditors, or cessation
of business of the Employer; and

(iii) Termination of the business of the Employer or the
transfer by the Employer of all or substantially all of its assets and
business without provision for continuing the Plan, except that, in
any such event, the Plan may be continued by any successor to the
Employer or any transferee of all or substantially all of its assets
and business, and in the event election is made to continue the Plan,
such successor or transferee shall automatically become substituted
for the Employer hereunder upon receipt by the Sponsor of written
notice of such election and delivery of the Sponsor's written consent
to the successor or transferee.

-21-
<PAGE> 27
9.5 VESTING UPON TERMINATION. Notwithstanding any other provision of
the Plan, upon the termination of the Plan, the rights of each Participant to
the amount credited to his Account at such time shall be nonforfeitable.

-22-
<PAGE> 28
ARTICLE 10
MISCELLANEOUS

10.1 REQUIREMENTS OF LAW. The Sponsor shall not be required to issue
any shares of Company Stock under the Plan if the issuance of such shares shall
constitute or result in a violation by the Participant, Beneficiary, or
Employer of any provision of any law, statute, or regulation of any
governmental authority. Specifically, in connection with any applicable statute
or regulation relating to the registration of securities, the Sponsor shall not
be required to issue such shares unless the Committee has received evidence
satisfactory to it to the effect that the Participant or Beneficiary will not
transfer such shares except in accordance with applicable law, including
receipt of an opinion of counsel satisfactory to the Sponsor to the effect that
any proposed transfer complies with applicable law. Any determination in this
connection by the Committee shall be final, binding, and conclusive. The
Sponsor may, but shall in no event be obligated to, register any shares covered
hereby pursuant to applicable securities laws of any country or political
subdivision thereof. In the event the shares issuable upon Separation are not
so registered, the Sponsor may imprint on the certificate evidencing such
shares any legend that counsel for the Sponsor considers necessary or advisable
to comply with applicable law. The Sponsor shall not be obligated to take any
other affirmative action in order to cause the issuance of shares of Company
Stock to comply with any law or regulation of any governmental authority.

10.2 NO RIGHTS AS STOCKHOLDER. No Participant shall have rights as a
stockholder with respect to shares of Company Stock until the date of issuance
of a stock certificate for such shares; and except as otherwise provided in
Sections 1.36 and 10.3, no adjustment for dividends, or otherwise, shall be
made if the record date therefor is prior to the date of issuance of such
certificate.

10.3 CHANGES IN THE SPONSOR'S CAPITAL STRUCTURE. The existence of
rights under this Plan shall not affect in any way the right or power of the
Sponsor or its stockholders to make or authorize any or all adjustments,
recapitalizations, reorganizations, or other changes in the Sponsor's capital
structure or its business, or any merger or consolidation of the Sponsor, or
any issue of bonds, debentures, preferred or prior preference stock ahead of or
affecting the Company Stock or the rights thereof, or the dissolution or
liquidation of the Sponsor, or any sale or transfer of all or any part of its
assets or business, or any other corporate act or proceeding, whether of a
similar character or otherwise.

If the Sponsor shall effect a subdivision or consolidation of shares
or other capital readjustment, the payment of a stock dividend, or other
increase or reduction of the number of shares of Company Stock outstanding,
without receiving compensation therefor in money, services, or property, then
the number and class of shares of Company Stock credited to each Participant's
Accounts shall be appropriately adjusted so that his Accounts shall be credited
with same total number and class of shares as he would have received had his
Accounts been distributed to him in full immediately prior to the event
requiring the adjustment.

If the Sponsor is merged or consolidated with another corporation or
if the Sponsor is liquidated or sells or otherwise disposes of substantially
all its assets, after the effective date of such merger, consolidation,
liquidation, sale, or other disposition, as the case may be, then the number
and class of shares of Company Stock credited to each Participant's Accounts
shall be appropriately adjusted so that his Accounts shall be credited with
same total number and class or classes of shares of such Company Stock or other
securities or property to which such holder would have been entitled if,
immediately prior to such merger, consolidation, liquidation, sale, or other
disposition, such holder had been the holder of record of a number of shares of
Company Stock equal to the number of shares credited to his Accounts.

-23-
<PAGE> 29
Except as hereinbefore expressly provided, the issue by the Sponsor of
shares of stock of any class, or securities convertible into shares of stock of
any class, for cash or property, or for labor or services either upon direct
sale or upon the exercise of rights or warrants to subscribe therefor, or upon
conversion of shares or obligations of the Sponsor convertible into such shares
or other securities, shall not affect, and no adjustment by reason thereof
shall be made with respect to, the number or class of shares of Company Stock
then credited to Participant's Accounts.

10.4 ESTABLISHMENT OF TRUST FUND NOT REQUIRED. No property is
required to be set aside nor is a trust fund of any kind required to be
established to secure the rights of any Participant hereunder. All amounts
credited to the Participant's Account at any time shall be solely a charge upon
the Participant's Employer and all Participants shall at all times rely solely
upon the general credit of their respective Employers for the payment of any
benefit which becomes payable hereunder. Notwithstanding the foregoing
provisions of this Section, the Sponsor may, in its discretion, contribute
funds and/or Company Stock to a grantor trust for the purpose, as it deems
appropriate, of paying benefits under the Plan. Such trust may be irrevocable,
but assets of the trust shall be subject to the claims of creditors of the
Employer. To the extent any benefits provided under the Plan are actually paid
from the trust, the Employer shall have no further obligation with respect
thereto, but to the extent not so paid, such benefits shall remain the
obligation of and shall be paid by, the Employer. The Participants shall have
the status of unsecured creditors insofar as their legal claim for benefits
under the Plan and the Participants shall have no security interest in the
grantor trust.

10.5 PLAN DOES NOT CONSTITUTE AN EMPLOYMENT CONTRACT. The adoption
and maintenance of the Plan shall not be deemed to be a contract between any
Employer and any Participant. Nothing contained herein shall be deemed to give
any Participant the right to be retained in the employment of the Employer or
to interfere with the rights of the Employer to discharge any Participant at
any time, nor shall it interfere with the Participant's right to terminate his
employment at any time.

10.6 SPENDTHRIFT CLAUSE. Except as otherwise specifically provided,
no principal or income payable or to become payable under the Plan shall be
subject to anticipation or assignment by any Participant or by any Beneficiary
or be subject to attachment by, or to the interference or control of, any
creditor of a Participant or Beneficiary, or be taken or reached by any legal
or equitable process in satisfaction of any debt or liability of a Participant
or Beneficiary prior to its actual receipt by such Participant or Beneficiary.
The interests of the Employer in any assets, earnings and profits related to
the Plan shall not be subject to garnishment, attachment, levy, or execution of
any kind for debts or defaults of any person, natural or legal, having an
interest in the Plan. Any attempted conveyance, transfer, assignment, mortgage,
pledge, or encumbrance of an interest in the Plan by a Participant or
Beneficiary, prior to distribution as herein provided, shall be absolutely and
wholly void, regardless of when such conveyance, transfer, assignment,
mortgage, pledge or encumbrance is intended to take place or become effective.
The Employer shall never under any circumstances be required to recognize any
conveyance, transfer, assignment, mortgage, or pledge by a Participant or
Beneficiary hereunder, of any interest in the Plan, and the Employer shall
never be required to pay any money or thing of value thereon or therefor to any
creditor of a Participant or Beneficiary, nor upon any debt created by a
Participant or Beneficiary for any cause whatsoever. This Section shall also
apply to the creation, assignment, or recognition of a right to any benefit
payable with respect to a Participant pursuant to a domestic relations order,
unless (i) such order is determined to be a Qualified Domestic Relations Order,
or (ii) such order was entered before January 1, 1985, and the Committee
determines that sufficient uncontroverted information is available to permit
such order to be treated in the same manner as a Qualified Domestic Relations
Order.

-24-
<PAGE> 30
10.7 FORM OF ELECTIONS. Except as otherwise specifically provided in
the Plan, in order to be effective, any election by a Participant or
Beneficiary that is required or permitted under the Plan shall be in writing on
a form provided or approved by the Committee, signed by the person entitled to
make the election, and filed with the Committee. Any permitted revocation of
such an election shall be irrevocable except to the extent specifically
provided otherwise in the applicable provision of the Plan.

10.8 GOVERNING LAWS; PARTIES TO LEGAL ACTIONS. The provisions of the
Plan shall be construed, administered and enforced according to the laws of the
United States and, to the extent not preempted, the state of Texas. The
Employer may at any time initiate any legal action or proceeding for the
determination of any questions, including questions of construction which may
arise, or for instruction, and the only necessary parties to such action or
proceeding shall be the Employer, except that any other person or persons may
be included as parties defendant at the election of the Employer.

10.9 PLAN DOCUMENT CONTROLLING. In the event that there is a
discrepancy between the terms of this document and the terms of any policy or
contract issued under the Plan, the provisions of this document shall control.

10.10 SEVERABILITY OF CLAUSES. Each provision of the Plan Document
is severable and if any provision is found to be unenforceable for any reason,
it shall not affect the validity of any other provision.

10.11 CROSS REFERENCES. All Section references are to Sections of
this document, unless otherwise specified.

10.12 SECURITIES LAW CONSIDERATIONS.

THE PLAN AND PARTICIPATIONS THEREUNDER HAVE NOT BEEN REGISTERED WITH
OR APPROVED BY THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR THE
SECURITIES REGULATORY AUTHORITY OF ANY STATE, NOR HAS SUCH COMMISSION OR THE
REGULATORY AUTHORITY OF ANY STATE PASSED UPON THE ACCURACY OR ADEQUACY OF THE
PLAN DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

THIS PLAN AND PARTICIPATIONS THEREUNDER ARE BEING OFFERED IN RELIANCE
UPON AN EXEMPTION FROM REGISTRATION PROVIDED BY REGULATION D UNDER THE
SECURITIES ACT. NO PUBLIC OR OTHER MARKET WILL DEVELOP FOR THE PLAN OR
PARTICIPATION THEREUNDER.

THE PLAN AND PARTICIPATIONS THEREUNDER ARE SUBJECT TO RESTRICTIONS ON
TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD UNLESS
REGISTERED UNDER THE SECURITIES ACT OF 1933 AND APPLICABLE STATE SECURITIES
LAWS OR PURSUANT TO AN EXEMPTION FROM REGISTRATION THEREUNDER.

PARTICIPATIONS IN THE PLAN WILL BE ILLIQUID. AS A RESULT, PROSPECTIVE
PARTICIPANTS SHOULD INVEST IN THE PLAN ONLY IF THEY CAN BEAR FOR AN INDEFINITE
PERIOD OF TIME THE ECONOMIC RISKS ASSOCIATED WITH AN ALIQUID INVESTMENT.

-25-
<PAGE> 31
IN MAKING AN INVESTMENT DECISION, PROSPECTIVE PLAN PARTICIPANTS MUST
RELY ON THEIR OWN EXAMINATION OF THE PLAN AND THE TERMS THEREOF, INCLUDING THE
MERITS AND RISKS INVOLVED. PARTICIPATION IN THE PLAN HAS NOT BEEN RECOMMENDED
BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY.

PROSPECTIVE PARTICIPANTS ARE NOT TO CONSTRUE THE CONTENTS OF THIS PLAN
DOCUMENT AS INVESTMENT, TAX OR LEGAL ADVICE. THIS PLAN DOCUMENT, AS WELL AS
THE NATURE OF THE INVESTMENT, SHOULD BE REVIEWED BY EACH PROSPECTIVE
PARTICIPANT'S INVESTMENT AND TAX ADVISER, ACCOUNTANT AND LEGAL COUNSEL. EACH
PARTICIPANT WILL BE REQUIRED TO REPRESENT IN SUCH PARTICIPANT'S LETTER OF
PARTICIPATION THAT SUCH PARTICIPANT UNDERSTANDS THE RISKS ASSOCIATED WITH AN
INVESTMENT IN THE PLAN, IS CAPABLE OF BEARING SUCH RISKS AND HAS NOT RELIED
UPON THE PLAN'S SPONSOR FOR INVESTMENT, TAX, ACCOUNTING OR LEGAL ADVICE, AND
THAT THE PARTICIPANT HAS RELIED ONLY ON SUCH PARTICIPANT'S OWN ADVISERS FOR
SUCH ADVICE.

THIS PLAN DOCUMENT HAS BEEN PREPARED SOLELY FOR THE BENEFIT OF
PROSPECTIVE PARTICIPANTS IN THE PLAN AND CONSTITUTES AN OFFER ONLY TO THE
PROSPECTIVE PARTICIPANT TO WHOM IT WAS DELIVERED BY THE SPONSOR. EACH
PROSPECTIVE PLAN PARTICIPANT, BY ACCEPTING DELIVERY OF THIS PLAN DOCUMENT,
AGREES TO RETURN IT AND ALL OTHER RELATED DOCUMENTS TO THE SPONSOR AT ITS
REQUEST IF THE PROSPECTIVE PARTICIPANT DECIDES NOT TO INVEST IN THE PLAN, IF
THE PROSPECTIVE PARTICIPANT'S SUBSCRIPTION IS NOT ACCEPTED OR IF THE PLAN IS
TERMINATED.

THIS PLAN DOCUMENT SHALL NOT BE CONSIDERED AN OFFER BY THE PLAN, THE
PLAN SPONSOR OR ANY OTHER PERSON IN ANY JURISDICTION IN WHICH SUCH AN OFFER IS
UNLAWFUL OR PROHIBITED.

IN WITNESS WHEREOF, the Sponsor has executed this Agreement this
30th day of January, 1998, to be effective as of January 1, 1998, except as
otherwise specified or as otherwise required to comply with applicable
provisions of the Code, any statute amending the Code, or any other applicable
statute, regulation, or ruling.

CLIFFS DRILLING COMPANY

ATTEST: By: /s/ Douglas E. Swanson
------------------------------------
President
/s/ Cindy B. Taylor
- ----------------------------------
Secretary

-26-
<PAGE> 32
THE STATE OF TEXAS )
)
COUNTY OF HARRIS )

This instrument was acknowledged before me on January 30, 1998, by
Douglas E. Swanson, President of Cliffs Drilling Company, a Delaware
corporation, on behalf of said corporation.

/s/ Brenda D. Turrentine
------------------------------------
Notary Public in and for
the State of Texas

-27-

<PAGE> 1
EXHIBIT 21.1

SUBSIDIARIES OF THE REGISTRANT

1. Cliffs Drilling International, Inc., a Delaware corporation wholly owned
by Cliffs Drilling Company.

2. Cliffs Oil and Gas Company, a Delaware corporation wholly owned by Cliffs
Drilling Company (f/k/a Cliffs Exploration Company, f/k/a Cliffs Offshore,
Inc.).

3. Southwestern Offshore Corporation, a Delaware corporation wholly owned by
Cliffs Drilling Company (f/k/a Cliffs Drilling Asset Acquisition Company).

4. Cliffs Drilling Merger Company, a Delaware corporation wholly owned by
Cliffs Drilling Company.

5. DRL, Inc., a Delaware corporation wholly owned by Cliffs Drilling Company
(f/k/a Cliffs Drilling Acquisition Company).

6. Cliffs Drilling Venezuela, Inc., a Delaware corporation wholly owned by
Cliffs Drilling Company.

7. Cliffs Drilling Trinidad Limited, a company organized under the laws of
the Republic of Trinidad and Tobago, owned 90% by Southwestern Offshore
Corporation and owned 10% by Cliffs Drilling Company (f/k/a Viking
Trinidad Limited).

8. Cliffs Drilling de Venezuela, S.A., a Venezuelan corporation wholly owned
by Cliffs Drilling Company.

9. Cliffs Drilling de Mexico, S.A. de C.V., a Mexican corporation wholly
owned by Cliffs Drilling International, Inc.

10. Cliffs Drilling do Brasil Servicos de Petroleo S/C Ltda., a Brazilian
corporation owned 99% by Cliffs Drilling Company and 1% by a third party
for the benefit of Cliffs Drilling Company.

11. West Indies Drilling Joint Venture, a joint venture in which
Cliffs Drilling Trinidad Limited owns a 99% interest and Cliffs Drilling
Company owns a 1% interest.

12. Cliffs Central Drilling International, a joint venture between Cliffs
Drilling International, Inc. and Perforadora Central, S.A. de C.V., in
which Cliffs Drilling International, Inc. owns a 50% interest.

13. Servicios Integrados Petroleros C.C.I., S.A., a Venezuelan joint venture
company among Cliffs Drilling Company, Inelectra S.A. and Cementaciones
Petroleras Venezolanas C.A., in which Cliffs Drilling Company owns a
one-third interest (33 1/3%) interest.

14. Cliffs Neddrill Central Turnkey International, a joint venture among Cliffs
Drilling International, Inc., Neddrill Turnkey Drilling B.V. and
Perforadora Central, S.A. de C.V., in which Cliffs Drilling International,
Inc. owns a one-third (33 1/3%) interest.

15. Cliffs Drilling Trinidad L.L.C., a Delaware limited liability company of
which Cliffs Drilling Company is the single member.

16. Cliffs Drilling (Barbados) Holdings SRL, a Barbados Exempt Societies
with Restricted Liability owned 99.99% by Cliffs Drilling Company and .01%
owned by Cliffs Drilling Trinidad L.L.C.
<PAGE> 2
SUBSIDIARIES OF THE REGISTRANT (CONTINUED)

17. Cliffs Drilling (Barbados) SRL, a regular Barbados Societies with
Restricted Liability, owned 99.99% by Cliffs Drilling (Barbados) Holdings
SRL and .01% owned by Cliffs Drilling Trinidad L.L.C.

18. Cliffs Drilling Trinidad Offshore Limited, a Trinidad and Tobago private
limited company wholly owned by Cliffs Drilling (Barbados) SRL.

<PAGE> 1
EXHIBIT 23.1

CONSENT OF INDEPENDENT AUDITORS

We consent to the incorporation by reference in the Registration
Statements (Form S-8 Nos. 333-27543, 33-29915, 33-37162, and 33-71778)
pertaining to the 1988 Incentive Equity Plan of Cliffs Drilling Company
and the Registration Statement (Form S-3 No. 333-45685) and related Prospectus
of Cliffs Drilling Company of our report dated February 13, 1998, with respect
to the consolidated financial statements of Cliffs Drilling Company included
in the Annual Report (Form 10-K) for the year ended December 31, 1997.

/s/ ERNST & YOUNG LLP

Houston, Texas
March 4, 1998

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF OPERATIONS AND THE CONSOLIDATED BALANCE SHEETS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 28,122
<SECURITIES> 0
<RECEIVABLES> 63,883
<ALLOWANCES> 352
<INVENTORY> 7,551
<CURRENT-ASSETS> 124,074
<PP&E> 469,288
<DEPRECIATION> 100,061
<TOTAL-ASSETS> 500,151
<CURRENT-LIABILITIES> 66,258
<BONDS> 203,606
0
0
<COMMON> 163
<OTHER-SE> 215,766
<TOTAL-LIABILITY-AND-EQUITY> 500,151
<SALES> 263,632
<TOTAL-REVENUES> 263,632
<CGS> 148,158
<TOTAL-COSTS> 177,332
<OTHER-EXPENSES> (3,578)
<LOSS-PROVISION> 257
<INTEREST-EXPENSE> 17,838
<INCOME-PRETAX> 71,783
<INCOME-TAX> 25,124
<INCOME-CONTINUING> 46,659
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 46,659
<EPS-PRIMARY> 3.06<F1>
<EPS-DILUTED> 3.01<F1>
<FN>
<F1>Reflects a two-for-one stock split effected
in the form of a 100% stock dividend effective
May 22, 1997. Prior financial data schedules have
not been restated to reflect the stock split.
</FN>

</TABLE>