MARINE DRILLING COMPANIES INC, 424B5, 1999-05-21

MARINE DRILLING COMPANIES INC
424B5, 1999-05-21
DRILLING OIL & GAS WELLS

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<PAGE> 1

PROSPECTUS SUPPLEMENT FILED PURSUANT TO RULE 424(B)(5)
(To Prospectus Dated June 19, 1998) REGISTRATION NO. 333-56379

[MARINE DRILLING COMPANIES LOGO]4,600,000 SHARES

MARINE DRILLING COMPANIES, INC.

COMMON STOCK
$12.50 PER SHARE
------------------
Marine Drilling Companies, Inc. is selling 4,600,000 shares of its common
stock. The underwriters named in this prospectus may purchase up to 400,000
additional shares of common stock from Marine Drilling under certain
circumstances.

The common stock is listed on the New York Stock Exchange under the symbol
"MRL." The last reported sale price of the common stock on the New York Stock
Exchange on May 20, 1999 was $12.50 per share.

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

INVESTING IN THE COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE S-8 OF THIS PROSPECTUS SUPPLEMENT.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus supplement or the related prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.

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

<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----------
<S> <C> <C>
Public Offering Price $ 12.50 $57,500,000
Underwriting Discount $ 0.625 $ 2,875,000
Proceeds to Marine Drilling (before expenses) $11.875 $54,625,000
</TABLE>

The underwriters are offering the shares subject to various conditions. The
underwriters expect to deliver the shares to purchasers on or about May 26,
1999.

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

SALOMON SMITH BARNEY
CREDIT SUISSE FIRST BOSTON
ABN AMRO ROTHSCHILD
A DIVISION OF ABN AMRO INCORPORATED

May 21, 1999
<PAGE> 2

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS. MARINE
DRILLING HAS NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION.
MARINE DRILLING IS NOT MAKING AN OFFER OF THESE SECURITIES IN ANY STATE WHERE
THE OFFER IS NOT PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION PROVIDED
BY OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT OR THE
ACCOMPANYING PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE
FRONT OF THIS PROSPECTUS SUPPLEMENT.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Incorporation of Additional Documents
By Reference........................ S-2
Forward-Looking Statements............ S-3
Summary............................... S-4
Risk Factors.......................... S-8
Use of Proceeds....................... S-13
Capitalization........................ S-13
Common Stock Price Range and Dividend
Policy.............................. S-14
Selected Consolidated Financial,
Operating and Other Data............ S-15
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... S-16
Business.............................. S-24
Management............................ S-34
Underwriting.......................... S-36
Legal Matters......................... S-37
Experts............................... S-37
Index to Financial Statements......... F-1
</TABLE>

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS
Available Information................. 2
Incorporation of Certain Documents by
Reference........................... 2
The Company........................... 3
Use of Proceeds....................... 3
Ratio of Earnings to Fixed Charges and
Earnings to Fixed Charges and
Preferred Stock Dividends........... 3
Description of Debt Securities........ 4
Description of Common Stock and
Preferred Stock..................... 15
Description of Warrants............... 22
Plan of Distribution.................. 23
Legal Matters......................... 23
Experts............................... 24
</TABLE>

INCORPORATION OF ADDITIONAL DOCUMENTS BY REFERENCE

In addition to the documents referred to under "Incorporation of Certain
Documents By Reference" in the accompanying prospectus, this prospectus
supplement incorporates by reference the following documents filed by us with
the Securities and Exchange Commission:

- Annual Report on Form 10-K for the fiscal year ended December 31, 1998;
and

- Quarterly Report on Form 10-Q for the fiscal quarter ended March 31,
1999.

S-2
<PAGE> 3

FORWARD-LOOKING STATEMENTS

This prospectus supplement, particularly the sections entitled "Summary,"
"Risk Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," contains and incorporates by reference
certain "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933 (the "Securities Act") and Section 21E of the Securities
Exchange Act of 1934 (the "Exchange Act") that are not historical facts
concerning, among other things, market conditions, the demand for offshore
drilling services, future acquisitions and fleet expansion, future financings,
future rig contracts, future capital expenditures (including rig construction,
upgrades and refurbishments), and future results of operations. We cannot
guarantee that we have identified and properly weighed all of the factors which
affect market conditions and the demand for our rigs, that the public
information upon which we have relied is accurate or complete or that our
analysis of the market and the demand for our rigs is correct or that the
strategy based on this analysis will be successful. Certain factors and risks
that could cause actual results to differ from those identified in these
forward-looking statements include, among others:

- a sustained period of low oil or gas prices;

- the renegotiation or cancellation of our long-term contracts for the
MARINE 700 and the MARINE 500, whether as a result of our failure to
deliver the rig on time and in accordance with contract specifications or
because of some other reason;

- possible default under our bank credit facility covenants;

- inadequate insurance and indemnification protection for us against well
disasters and fire and environmental damage;

- our inability to obtain insurance at reasonable rates;

- a decrease in the demand for offshore drilling rigs, especially in the
U.S. Gulf of Mexico;

- the risks of operating in foreign countries, including actions taken by
those foreign countries and actions taken by the United States against
those foreign countries;

- our failure to successfully compete against our competitors that are
larger and that have a more diverse fleet of rigs and more resources;

- lower levels of rig utilization because of the reactivation of currently
inactive rigs or the construction of new rigs;

- delay or cost overruns in the construction, upgrade and refurbishment
projects we are currently conducting, including material and labor
shortages, engineering and project management problems, defects or damage
to current equipment, weather delays and problems in the permitting and
approval process;

- new laws or regulations that affect drilling opportunities or increase
their cost or our potential liability;

- the occurrence of certain risks inherent to offshore drilling, including
blowouts, cratering, fires and explosions, capsizing, grounding or
collision, weather and sea conditions; and

- uninsured costs of litigation.

For a further discussion of such factors and risks, see "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and our Annual Report on Form 10-K and Quarterly Report
on Form 10-Q, which are incorporated by reference in this prospectus supplement.
These forward-looking statements speak only as of the date of this prospectus
supplement. We disclaim any obligation to release publicly any updates or
revisions to any forward-looking statement contained in this prospectus
supplement to reflect any changes in our expectations regarding such statements
or any change in events, conditions or circumstances on which they are based.
S-3
<PAGE> 4

SUMMARY

The following is a general summary of the information contained in this
prospectus supplement. It does not contain all the information that may be
important to you. You should read carefully the entire prospectus and the other
information we refer to before you decide to invest in the shares. Except as
otherwise stated, references in this prospectus supplement to "we," "us," "our"
and similar references refer to Marine Drilling Companies, Inc. (the "Company")
and its consolidated subsidiaries, and not the underwriters.

THE COMPANY

We own and operate seventeen offshore drilling rigs domestically and
internationally, consisting of fifteen jack-up units, one of which is currently
configured as an accommodation unit, and two semi-submersible units.
Additionally, we operate a semi-submersible rig pursuant to a bareboat charter.
Our fleet of jack-up rigs currently consists of nine mat-supported units and six
independent leg units. With twelve jack-up rigs located in the U.S. Gulf of
Mexico, we believe that we are the fourth largest jack-up rig operator in that
market. Our two semi-submersible units consist of one second-generation rig,
which we are currently upgrading to fourth-generation capabilities, and one
fourth-generation rig currently under construction. Once completed, our
fourth-generation rigs will be deployed for use in deepwater drilling
operations.

We incorporated in Texas in January 1990, although our predecessor
companies have been engaged in offshore contract drilling since 1966. Our
principal executive office is located at One Sugar Creek Center Boulevard, Suite
600, Sugar Land, Texas 77478-3556 and our telephone number is (281) 243-3000.

BUSINESS STRATEGY

Our business strategy is designed to position us to capitalize on cyclical
upturns, and minimize exposure to cyclical downturns, in the worldwide jack-up
rig market. The key elements of this strategy are:

- U.S. Gulf of Mexico Jack-up Rig Fleet Focus. We are committed to
remaining a leading operator of jack-up rigs in the U.S. Gulf of Mexico.
We believe that our significant presence in the region offers logistical
advantages, including reduced mobilization costs and flexibility of crew
deployment, both of which reduce operating costs. We also believe that,
if oil and gas prices remain stable or improve further, there is
significant upside potential for dayrates in the U.S. Gulf of Mexico
jack-up rig market due to both a relatively stable supply of jack-up rigs
and an increasing rate of oil and natural gas reserve depletion in the
region, which could increase drilling activity.

- Balanced Long-Term and Short-Term Contract Portfolio. We seek to
appropriately balance our contract portfolio between long-term and
short-term contracts. We believe that a balanced contract portfolio will
help mitigate the cyclical nature of the drilling industry and will
provide for a component of longer-term, more predictable cash flow, while
maintaining the opportunity to capitalize on potential increases in
drilling rig dayrates worldwide. In the current market environment,
availability of long-term contracts has been primarily limited to
semi-submersible rigs used for offshore drilling in deepwater markets. To
capitalize on the long-term contracts available in this market, we are in
the process of completing the construction and upgrade of two semi-
submersible rigs, the MARINE 700 and the MARINE 500, for use in deepwater
drilling operations. We have entered into long-term contracts to operate
both of these rigs, which could generate contract revenues of
approximately $448 million over the life of the contracts (assuming full
utilization). We believe that these two contracts will help
counterbalance the short-term and spot market contract portion of our rig
portfolio.

- Growth Through Acquisitions and Upgrades. We are actively seeking
attractive opportunities for acquisitions to increase the size and
capabilities of our fleet. We believe that a prolonged period of
depressed industry fundamentals may result in assets becoming available
at attractive prices.

S-4
<PAGE> 5

Additionally, when market conditions warrant, we may elect to perform
upgrades on our existing rig fleet.

- Maintain an Appropriate Capital Structure. Because the offshore drilling
business is subject to substantial fluctuations in demand, pricing and
profitability, we seek to maintain a level of debt that can be adequately
supported by our working capital and long-term contract revenues. We
believe this approach will enable us to better withstand the volatility
associated with industry cycles.

To further our business strategy, we have undertaken two significant rig
construction and upgrade projects, the MARINE 700 and the MARINE 500.

The MARINE 700. In May 1997, we acquired the bare deck hull for the MARINE
700 for approximately $55 million to serve as the foundation for a
fourth-generation semi-submersible rig with 5,000 foot water depth drilling
capacity. In December 1997, we entered into a shipyard contract with HAM Marine,
Inc. ("HAM"), under which HAM would complete construction of the MARINE 700. The
shipyard contract calls for HAM to fabricate certain components of the rig and
install certain drilling equipment provided by us ("Owner Furnished Equipment"
or "OFE"). We currently estimate that the OFE will cost approximately $115
million, including capitalized interest and project management costs, and that
the shipyard costs will total $105 million, resulting in a total estimated cost
to complete the drilling rig of $220 million (exclusive of the $55 million hull
purchase cost). We currently believe that the rig will be completed in late June
1999, after which it is contracted to begin work for Esso Exploration Inc., a
subsidiary of Exxon Corporation ("Esso"), under a five year contract. We believe
Esso initially will use the rig for development drilling and well completion in
its Diana field, a major deepwater project in the U.S. Gulf of Mexico.

The MARINE 500. In December 1996, we acquired the MARINE 500, a
second-generation semi-submersible rig, for approximately $38 million. In
December 1997, we signed a contract with Jurong Shipyard Limited ("Jurong") in
Singapore to upgrade the MARINE 500 to fourth-generation capabilities. The
shipyard contract calls for Jurong to fabricate certain components of the rig
and to install certain OFE. We currently estimate that the OFE will cost
approximately $77 million, including capitalized interest and project management
costs, and that payments to the shipyard under the contract will be
approximately $48 million, resulting in a total estimated cost to upgrade the
drilling rig of $125 million (exclusive of the $38 million acquisition cost). We
currently believe that the rig will be completed in late May 1999, after which
it will begin work offshore Western Australia for a drilling consortium led by
West Australian Petroleum Pty, Ltd. ("WAPET"), an entity controlled by several
major integrated oil companies.

The following table summarizes certain terms of the drilling contracts for
the MARINE 700 and the MARINE 500.

<TABLE>
<CAPTION>
ESTIMATED
CONTRACT CONTRACTUAL
RIG CUSTOMER TERM BASE DAYRATE(1) REVENUE(2)
- --- -------- ------------- ---------------- ------------
<S> <C> <C> <C> <C>
MARINE 700................ Esso 5 Years $165,410 $298 million
MARINE 500................ WAPET; Until $127,500-168,600 $150 million
INPEX(3) Dec. 31, 2001
</TABLE>

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

(1) See "Business -- Customers and Contracts" for a complete description.

(2) Assumes full utilization at the normal operating dayrate for 360 days per
year for the contract term.

(3) Indonesia Petroleum, Ltd.

For a discussion of several significant risks associated with the MARINE
700 and MARINE 500, see "Risk Factors -- We face material construction and
contract risks related to MARINE 700 and MARINE 500."

S-5
<PAGE> 6

RECENT MARKET CONDITIONS

Dayrates for drilling rigs and industry-wide rig utilization declined
sharply in 1998 and the first quarter of 1999, including in the shallow water of
the U.S. Gulf of Mexico, where we operate most of our rigs. Oil and gas prices
reached multi-year lows in various markets in recent months. As a result, our
customers have made significant cutbacks in their drilling programs. This has
reduced industry-wide rig utilization in the U.S. Gulf of Mexico, which has not
only sharply reduced dayrates, but also shortened the average length of drilling
contracts. Although oil and gas prices have increased during the past two
months, we do not expect this increase to result in a significant improvement in
our dayrates and utilization unless our customers conclude that the increase in
oil and gas prices will continue for an extended period of time.

As of May 10, 1999, eight of our 15 jack-up rigs are committed under
short-term contracts that will expire in the second or third quarter of 1999,
one rig is under contract until the first quarter of 2000 and the remaining six
rigs are idle. All of the currently committed rigs are in the U.S. Gulf of
Mexico. The dayrates for a majority of these rigs are at or near our cash
operating cost. We currently have no rigs operating in international markets.
The current market conditions will adversely affect our results of operations
for at least the near term, substantially reducing our revenues, cash flows and
EBITDA and resulting in losses in 1999. Under current market conditions, we are
dependent upon the successful completion and operation of the MARINE 700 and the
MARINE 500 to avoid continued losses and negative EBITDA.

THE OFFERING

The following information assumes no exercise of the underwriters'
over-allotment option.

Common stock offered................ 4,600,000 shares

Common stock to be outstanding after
the offering........................ 57,088,194 shares

Use of proceeds..................... The net proceeds (estimated to be
approximately $54.4 million) will be
used to fund construction costs of the
MARINE 700 and MARINE 500.

New York Stock Exchange Symbol...... MRL

The number of shares to be outstanding reflected in the above table does
not include approximately 2,476,275 shares that may be issued pursuant to stock
options outstanding as of May 10, 1999 under our stock option plans.

S-6
<PAGE> 7

SUMMARY CONSOLIDATED FINANCIAL, OPERATING AND OTHER DATA

The following table sets forth our summary consolidated financial,
operating and other data as of and for the three months ended March 31, 1999 and
1998 and as of and for each of the years in the five-year period ended December
31, 1998. Our summary consolidated financial data as of and for the three months
ended March 31, 1999 and 1998 have been derived from our unaudited consolidated
financial statements and include all adjustments (consisting only of normal
recurring adjustments) that our management considers necessary for a fair
presentation of the interim periods. Results of interim periods are not
necessarily indicative of results for the full year. Our summary consolidated
financial data as of and for the five-year period ended December 31, 1998 has
been derived from our audited consolidated financial statements. The following
data should be read together with our historical consolidated financial
statements and the notes thereto and with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere in this
prospectus supplement.

<TABLE>
<CAPTION>
AS OF OR FOR THE
THREE MONTHS
ENDED MARCH 31, AS OF OR FOR THE YEAR ENDED DECEMBER 31,
------------------- ------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
-------- -------- --------- --------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER DAY AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................ $ 19,827 $ 57,464 $ 228,015 $ 190,257 $110,329 $ 63,067 $ 70,597
Contract drilling expenses.............. 17,572 24,053 102,166 77,847 59,770 55,091 50,575
Depreciation and amortization........... 4,728 5,033 20,191 16,995 11,576 9,377 7,733
General and administrative expenses..... 3,475 2,900 12,287 7,807 7,498 5,460 4,376
-------- -------- --------- --------- -------- -------- --------
Operating income (loss)................. (5,948) 25,478 93,371 87,608 31,485 (6,861) 7,913
Interest income, net.................... 30 451 1,202 1,823 366 639 1,280
Other income (expense).................. (45) 270 968 405 405 120 (70)
-------- -------- --------- --------- -------- -------- --------
Income (loss) before income taxes....... (5,963) 26,199 95,541 89,836 32,256 (6,102) 9,123
Income tax expense (benefit)............ (1,195) 9,441 34,720 31,456 11,586 (2,080) 3,193
-------- -------- --------- --------- -------- -------- --------
Net income (loss)............... $ (4,768) $ 16,758 $ 60,821 $ 58,380 $ 20,670 $ (4,022) $ 5,930
======== ======== ========= ========= ======== ======== ========
PER SHARE DATA:
Earnings (loss) per share:
Basic................................. $ (0.09) $ 0.32 $ 1.16 $ 1.13 $ 0.46 $ (0.09) $ 0.14
Diluted............................... (0.09) 0.32 1.15 1.11 0.45 (0.09) 0.13
Average common shares outstanding:
Basic................................. 52,402 51,987 52,217 51,572 44,918 43,812 43,819
Diluted............................... 52,402 52,600 52,726 52,452 45,748 43,812 44,802
OPERATING DATA:
Operating days.......................... 809 1,323 5,192 5,033 4,532 3,270 3,586
Utilization(1).......................... 56% 100% 92% 99% 99% 89% 87%
Average revenue per operating day....... $ 24,508 $ 43,440 $ 43,917 $ 37,805 $ 24,343 $ 19,289 $ 19,686
OTHER DATA:
EBITDA(2)............................... $ (1,265) $ 30,781 $ 114,530 $ 105,008 $ 43,466 $ 2,636 $ 15,576
Capital expenditures and acquisitions... 70,407 24,210 193,415 127,676 59,154 21,418 15,385
BALANCE SHEET DATA:
Cash and cash equivalents............... $ 29,265 $ 42,822 $ 12,576 $ 20,619 $ 71,961 $ 12,260 $ 18,872
Working capital......................... 5,222 59,537 6,699 55,472 96,671 23,316 48,529
Total assets............................ 546,504 376,145 475,684 334,182 254,947 134,545 143,215
Total debt.............................. 120,000 -- 50,000 -- 10,000 10,000 15,000
Shareholders' equity.................... 357,923 315,627 361,588 295,742 221,733 107,572 112,731
</TABLE>

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

(1) Based on the number of actively marketed rigs. Excluding rigs under
construction or in the process of substantial upgrading, we had an average
of 0.0 and 0.3 non-marketed rigs for the three months ended March 31, 1999
and 1998, respectively. During 1998, 1997, 1996, 1995 and 1994, we had an
average of 0.1, 1.1, 0.9, 3.0 and 0.8 non-marketed rigs, respectively.

(2) "EBITDA" means income (loss) from operations before interest expense, taxes,
depreciation and amortization expenses. Based on our experience in the
offshore drilling industry, we believe that EBITDA and related measures of
cash flow serve as important tools for measuring offshore drilling companies
in several areas such as liquidity, operating performance and leverage, and
for assessing the ability to service and incur debt. EBITDA should not be
considered as an alternative to net income as an indicator of our operating
performance, or as an alternative to cash flow as a better measure of
liquidity. EBITDA measures presented may not be comparable to other
similarly titled measures of other companies, and comparisons could be
misleading unless all companies and analysts calculate these measures in the
same fashion.

S-7
<PAGE> 8

Before making an investment in shares of our common stock, you should
carefully consider the following Risk Factors, as well as the other information
included or incorporated by reference in this prospectus supplement and the
accompanying prospectus. See "Forward-Looking Statements" and "Incorporation of
Additional Documents By Reference."

RISK FACTORS

WE ARE DEPENDENT ON THE CONDITION OF THE OIL AND GAS INDUSTRY. DECLINES IN OIL
AND GAS PRICES HAVE ADVERSELY AFFECTED OUR DAYRATES AND RIG UTILIZATION
RESULTING IN LOSSES FOR US.

Our operations depend on oil and natural gas exploration and development
drilling activity. This activity is affected by fluctuations in oil and natural
gas prices. Historically, these fluctuations have been volatile because of
changes in the supply of and demand for these resources, market uncertainty,
weather and other political and economic factors beyond our control. As a
result, we cannot predict future prices of oil and natural gas with any
certainty. Sustained low levels of oil and natural gas prices, however, depress
levels of exploration, development and production activity and result in a
decline in the demand for our services, which has an adverse effect on our
revenues and profitability.

Oil and gas prices began declining in 1997 and continued to decline
substantially further in 1998 and reached multi-year lows in early 1999. These
lower prices have had a material adverse effect on rig utilization and dayrates
in our industry, including in the U.S. Gulf of Mexico where 12 of our 15 jack-up
rigs are located. According to industry sources, as of May 11, 1999, worldwide
jack-up utilization and worldwide semi-submersible utilization were 65% and 63%,
respectively. Utilization for our jack-up fleet has declined from 100% in the
first quarter of 1998 to approximately 60% in the first quarter of 1999, and
dayrates in the U.S. Gulf of Mexico market for jack-up rigs similar to ours have
declined from a range of $35,000 to $65,000 in early 1998 to a range of $10,000
to $15,000 during April 1999. Dayrates in other regions and for semi-submersible
rigs have also declined over this period. Because of our substantial fixed
costs, our operating costs do not decrease proportionately with revenue
decreases.

As a result, our revenues, cash flow and earnings decreased in each of the
third quarter and fourth quarters of 1998 and the first quarter of 1999 from the
level of the prior quarter. We incurred a loss and negative EBITDA in the first
quarter of 1999. We expect our results of operations for at least the near term
to continue to reflect substantially reduced revenues, cash flows and EBITDA. In
addition, we will likely incur losses in 1999. Under current market conditions,
we are dependent upon the successful completion and operation of the Marine 700
and the Marine 500 to avoid continued losses and negative EBITDA.

In recent months, we have experienced a decrease in the average length of
our contracts. As of May 10, 1999, eight of our 12 rigs in the U.S. Gulf of
Mexico are committed under short-term contracts that will expire in the second
or third quarter of 1999, one rig is under contract until the first quarter of
2000 and the remaining three rigs are idle. Moreover, none of our international
jack-up rigs or semi-submersible rigs are currently working under contract. As a
result of the decline in demand for rigs, we continue to evaluate alternatives
to improve our competitive position in a depressed market. If market conditions
continue or worsen, these alternatives may include cold stacking additional
rigs, laying off additional employees or selling assets.

WE FACE MATERIAL CONSTRUCTION AND CONTRACT RISKS RELATED TO THE MARINE 700 AND
THE MARINE 500.

We are currently constructing the MARINE 700 and significantly upgrading
the MARINE 500 in order to provide services under two major drilling contracts.
Failure to successfully construct and deploy the MARINE 700 or the MARINE 500 on
a timely basis would materially adversely affect our results of operations and
financial condition.

S-8
<PAGE> 9

We have entered into a five-year contract with Esso for the MARINE 700. The
MARINE 700 contract requires that the rig meet certain design specifications and
construction quality standards. In addition, the rig must be delivered by July
15, 1999. If we do not deliver the rig by July 15, 1999 or fail to meet the
contractual design specifications, then Esso may cancel the contract unless the
delay is caused by Esso or its subcontractors.

The shipyard contract for the MARINE 700 initially contemplated a delivery
date of February 17, 1999. The MARINE 700 project encountered substantial
construction, engineering, weather and other delays during the fourth quarter of
1998 and during the beginning of 1999. In an effort to minimize any further
delays and to address significant timing and quality concerns regarding the
project raised by Esso and us, the shipyard and we substantially increased the
personnel working on the project in order to increase the project's completion
pace and improve quality control.

In the first quarter of 1999, we formally revised the scheduled delivery
date for the MARINE 700 to late in the second quarter of 1999 or more
particularly late May 1999 or early June 1999. However, our expected delivery
date has slipped further to a currently expected delivery date of late June
1999. Although we continue to believe that the rig will be delivered by the July
15, 1999 deadline, there is a significant risk that we will not meet this
deadline in light of the complexity inherent in this type of large construction
project, the history of delays to the scheduled delivery date, and the
relatively short time of only a few weeks between our current expected delivery
date and the deadline. Significant amounts of electrical and commissioning work
remain to be completed in a short period of time, which will require substantial
resources. Although some systems have been commissioned and accepted by Esso, we
and Esso have not yet reached an agreement on the remaining commissioning and
acceptance procedures, which, given Esso's quality concerns, could contribute to
delays in delivering the rig. In addition, the blow-out preventer, a critical
path item, has not yet been installed and tested. We could encounter future
weather or construction delays, difficulties with systems integration,
unexpected equipment failures or malfunctions or quality problems during the
commissioning process that could cause a delay in rig delivery.

In July 1997, we entered into a long-term drilling contract for the MARINE
500 with a drilling consortium led by WAPET. The contract requires us, prior to
delivery of the rig, to upgrade the MARINE 500 to meet certain performance
specifications. The contract was originally scheduled to commence during January
1999. However, due to delay in the arrival of the rig at the shipyard for
upgrade work, we do not expect the MARINE 500 to be available to WAPET until
late May 1999. Any material failure to meet design specifications under the
contract, could jeopardize the WAPET contract.

Both the MARINE 700 and the MARINE 500 are major construction projects. We
are dependent upon the shipyards working on the rigs. As in any large
construction project, these projects may be delayed or have cost overruns
because of material and skilled labor shortages, engineering and project
management problems, damage to current equipment, work stoppages, weather, cost
increases and problems in the commissioning, permitting and approval process.
Cost overruns or delays could significantly affect our revenues and
profitability. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" for a description of delay and cost overruns we have
encountered on the MARINE 700 and the MARINE 500 projects.

The design for the MARINE 700 has never been implemented or utilized for
actual drilling operations. Moreover, the MARINE 700 is the first new-build
project for the Pascagoula, Mississippi shipyard building it. These factors add
to the construction risks for the MARINE 700 project.

Contracts for a number of rigs owned by other contractors have been
canceled in recent months by their customers. Those customers have cited
performance problems, late delivery or other reasons to justify the
cancellations. Some of those cancellations are being contested. The currently
depressed market conditions and the availability of other rigs may increase
pressure on Esso or WAPET to renegotiate their contracts with us or attempt to
cancel their contracts. Esso or WAPET may no longer need our rig due to a
reduction in their exploration and development programs, or they may be able to
obtain a comparable rig at a lower dayrate.

S-9
<PAGE> 10

We believe that if we were required to find an alternative customer for the
MARINE 700 or the MARINE 500 or renegotiate with Esso or WAPET the terms of the
contracts based on current market conditions and given current dayrates, then
the contract dayrate, duration and other terms would be substantially less
favorable to us than the current contracts. In addition, there could be
significant delays in finding alternative customers. Thus the loss of, or a
renegotiation based on current market conditions of, the MARINE 700 contract or
the MARINE 500 contract would materially adversely affect our future results of
operations.

We have had discussions with Esso regarding a possible extension of the
July 15, 1999 deadline and/or amendment of the MARINE 700 contract terms in the
event the MARINE 700 is not delivered by July 15, 1999. These discussions were
very preliminary and did not result in an agreement or amendment to the Esso
contract. In one of these preliminary and non-binding discussions, one of Esso's
representatives raised the possibility of extending the contract deadline in
exchange for a substantial reduction of the dayrate. To date, we have indicated
to Esso that we are only willing to agree to a significantly smaller decrease in
the current contract dayrate in return for an extension of the deadline by
several months. We may not be able to reach agreement with Esso on the terms of
an extension, especially in light of the fact that Esso purports to believe that
there is a substantially greater probability that we will miss the July 15, 1999
deadline than we believe. On the other hand, we might enter into an agreement
with Esso that substantially reduces the contract dayrate, in which case the
reduction might apply even if we ultimately meet the July 15, 1999 deadline.

If the MARINE 700 and the MARINE 500 are successfully constructed and
accepted by their respective customers, the contracts for those rigs may still
be subsequently canceled if we encounter operational problems or under certain
other circumstances. These circumstances are described under
"Business -- Customers and Contracts."

Our ability to successfully perform under the MARINE 700 and the MARINE 500
contracts may be impaired by our limited operating history in the deepwater
drilling market, which requires the use of more sophisticated technologies than
those used by jack-up rigs. Other drilling contractors have encountered
operational problems with new deepwater drilling rigs. We did not enter the
deepwater drilling market until 1997 and some of our competitors have
significantly more experience in deepwater operations than we do.

WE WILL LIKELY DEFAULT UNDER OUR BANK FACILITY UNLESS WE OBTAIN A WAIVER.

We will likely be unable to satisfy the ratio of debt to EBITDA financial
covenant in our bank facility following the second quarter of 1999, even after
this offering. This failure would give the banks the right to cease lending
further amounts and to accelerate any amounts outstanding. As of May 10, 1999,
there was $130 million outstanding under the Bank Facility. Our financial
condition and liquidity would be materially adversely affected if we do not
obtain a waiver of this financial covenant. The banks are not obligated to agree
to any waiver. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Financial Condition -- Liquidity and Capital
Resources."

WE ARE SUBJECT TO OPERATIONAL RISKS.

Contract drilling operations are subject to a variety of risks including
blowouts, cratering, fires and explosions. The occurrence of any of these risks
could result in damage to or destruction of rigs, oil and gas wells, life and
property, environmental damage or suspension of our operations. Our drilling
equipment is also subject to the hazards of marine operations, including
capsizing, grounding, collision, weather, sea conditions and unsound location.
We currently maintain insurance coverage against certain general and marine
liabilities that we believe is customary in our industry. Except in limited
circumstances, this insurance does not cover liability for pollution or
environmental damage that happens below the water surface, but we are usually
indemnified against this liability by our customers. The insurance and
indemnification available to us, however, may not protect us from liability for
all of the results of well disasters or fire or environmental damage.
Furthermore, we may not be able to maintain adequate

S-10
<PAGE> 11

insurance in the future at reasonable rates or we may not be able to recover
amounts owing to us under the indemnities provided by our customers. Any of
these liabilities, if not covered by insurance or third party indemnification,
could have an adverse effect on us.

THE MAJORITY OF OUR RIGS ARE OLD.

The majority of our rigs were built between 1975 and 1982. These older rigs
are more likely to require major repairs in order to remain operational than
newer rigs. Rigs generally cannot operate when undergoing major repairs. If we
are required to perform significant repairs to our rigs, this will likely reduce
our revenues and may require significant capital investments.

WE CONDUCT FOREIGN OPERATIONS.

From time to time, we operate several of our rigs in international markets,
including Southeast Asia, the Middle East and other international markets.
Furthermore, the MARINE 500 is currently undergoing a major upgrade in a
shipyard in Singapore. When we operate in international markets, we are subject
to risks inherent to operating in foreign countries, including war, strikes,
civil disturbances, guerilla activity, currency fluctuations and devaluations
and governmental activity that disrupt markets, restrict payments or the
movement of funds or result in the deprivation of contract rights or the taking
of property without fair compensation. We cannot predict what foreign
governmental regulations may be enacted in the future that could affect the
drilling industry.

WE FACE SIGNIFICANT COMPETITION.

The contract drilling industry is highly competitive, cyclical and capital
intensive. We believe that intense competition for drilling contracts will
continue because of the ability of drilling contractors to move rigs to areas of
greater activity and higher dayrates, to reactivate currently inactive rigs that
have been or could be upgraded and to construct new rigs to meet increased
demand for drilling rigs in any given market. The movement, reactivation or new
construction of offshore drilling rigs, or a decrease in drilling activity in a
major market, could depress dayrates and affect utilization of our rigs, even
with stronger oil and natural gas prices. There is also increasing competition
in the deepwater drilling industry. Many of our competitors are larger than us
and have more diverse fleets and greater resources than we do. This allows them
to better withstand industry downturns, to compete on the basis of price and to
build new rigs or acquire existing rigs, all of which could affect our revenues
and profitability.

ENVIRONMENTAL LAWS COULD INCREASE OUR COSTS AND LIABILITIES AND RESTRICT OUR
OPERATIONS.

Our operations are subject to numerous foreign, federal, state and local
laws and regulations relating to the environment. These laws and regulations
expose us to liability for our own actions (including actions in compliance with
applicable laws and regulations at the time they were taken) and, under certain
circumstances, for the conduct of others. These laws and regulations have become
more stringent in recent years. In connection with such laws and regulations, we
may be required in certain circumstances to pay administrative, civil and
criminal penalties or to shut down some or all of our operations, temporarily or
permanently. Some environmental laws and regulations can impose unlimited,
"strict liability" on parties responsible for environmental damage without
regard to negligence or fault. For instance, parties, including drilling
companies, may be held strictly liable for cleanup costs and natural resource
damages resulting from oil spills under the Oil Pollution Act of 1990, as
amended ("OPA"). Drilling companies also can become subject to private personal
injury or property damage claims relating to environmental damage.

We are required to maintain evidence of financial responsibility sufficient
to cover cleanup costs relating to potential spills or related environmental
damage. New regulations under OPA require mobile offshore drilling units serving
as offshore facilities, including ours, to satisfy additional financial
responsibility requirements and may impact our operations in certain
circumstances. Failure to comply with applicable financial responsibility
requirements could require us to suspend operations and subject us to other
significant sanctions.

S-11
<PAGE> 12

In addition, from time to time legislation has been proposed that would
limit or prohibit drilling in environmentally sensitive areas or in areas of the
U.S. Gulf of Mexico and other U.S. offshore areas that, if enacted, may
adversely affect us. Similar restrictions have adversely affected us in the
past. Future laws, regulations or other governmental action that further
restricts or prohibits offshore drilling in the U.S. Gulf of Mexico or imposes
environmental protection requirements that increase the costs of offshore
exploration, development or production of oil and natural gas, could further
adversely affect us. In addition, liabilities under existing or future
environmental laws and regulations could have a material adverse effect on our
business, results of operations or financial condition.

OUR STOCK PRICE IS VOLATILE.

Our common stock has experienced significant price volatility, and such
volatility may continue in the future. The price of our common stock could
fluctuate widely in response to a variety of factors, including oil and gas
prices and industry conditions and any developments with regard to the customer
contracts for and the construction of the MARINE 700 and the MARINE 500.

GOVERNMENTAL REGULATION COULD ADVERSELY AFFECT OUR BUSINESS.

Our business is affected by political developments and by federal, state,
foreign and local laws and regulations relating to the oil and gas industry.
Laws and regulations that curtail exploration and development drilling for oil
and natural gas adversely affect us by limiting available drilling opportunities
for our customers. Additionally, laws relating to equipping and operating
offshore vessels may add to the cost of operating offshore drilling equipment.

THE FAILURE OF COMPUTER SYSTEMS TO RECOGNIZE THE YEAR 2000 COULD HAVE AN ADVERSE
EFFECT ON OUR BUSINESS.

Our information systems personnel are currently working with the third
party vendors to resolve the potential problems associated with the year 2000
and the processing of date sensitive information by our computer and other
systems. Based upon a continual evaluation and working with software vendors, we
believe that we will be able to implement successfully the changes necessary to
address the Year 2000 issues and do not expect the cost of such changes to have
a material impact on our financial position, results of operations or cash flows
in future periods. However, if such modifications or conversions are not made or
are not completed on time or if our Year 2000 issues are more complicated or
costly than we currently estimate, the Year 2000 issue could have a material
adverse impact on us. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Year 2000 Issue."

OUR CHARTER DOCUMENTS AND TEXAS LAW MAY DISCOURAGE AN ATTEMPT BY OTHERS TO
ACQUIRE CONTROL OF US.

The Texas Business Corporation Act contains provisions, including a
business combination law, which may delay or prevent an attempt by a third party
to acquire control of us. Our articles of incorporation and bylaws contain
provisions that authorize the issuance of preferred stock by our Board of
Directors and restrict foreign ownership of our common stock. We also have
adopted a stockholder rights plan which may have the effect of impeding a
hostile attempt to acquire control of us. See "Description of Common Stock and
Preferred Stock" in the accompanying prospectus.

S-12
<PAGE> 13

USE OF PROCEEDS

The net proceeds to be received by us from the issuance of the shares of
common stock will be approximately $54.4 million (net of underwriting discounts
and estimated offering expenses), or $59.1 million if the underwriters'
overallotment option is exercised in full. We expect to use all of these
proceeds to fund construction costs of the MARINE 700 and the MARINE 500, of
which there remained a total of $88 million at March 31, 1999. Pending these
uses, we will either invest the funds in short-term, interest bearing
investments or repay indebtedness under our bank facility. If we repay
indebtedness under our bank facility, we anticipate reborrowing such funds as
are necessary to pay MARINE 700 and MARINE 500 construction costs. As of March
31, 1999, the average interest rate on amounts borrowed under our bank facility
was approximately 5.7% per annum. The bank facility matures on August 12, 2003.
Borrowings under the bank facility were used to fund the purchase of the MARINE
306 and to fund construction and upgrade costs for the MARINE 700 and the MARINE
500.

ABN AMRO Bank N.V., the administrative agent and a lender under our bank
facility, is an affiliate of ABN AMRO Incorporated, an underwriter for this
offering.

CAPITALIZATION

The following table sets forth our unaudited consolidated capitalization
(i) as of March 31, 1999 and (ii) as adjusted to reflect this offering and prior
to the application of the net proceeds of the offering to fund construction and
upgrade costs on the MARINE 700 and the MARINE 500, assuming no exercise of the
underwriters' overallotment option. You should read this table along with our
selected historical financial data and our historical consolidated financial
statements and notes thereto included elsewhere in this prospectus supplement.

<TABLE>
<CAPTION>
AS OF MARCH 31, 1999
-------------------------
ACTUAL AS ADJUSTED
--------- ------------
(IN THOUSANDS, UNAUDITED)
<S> <C> <C>
Cash and cash equivalents................................... $ 29,265 $ 83,640
======== ========
Short-term borrowings....................................... -- --
======== ========
Long-term debt.............................................. $120,000 $120,000
Shareholders' equity
Preferred stock, $.01 par value; authorized 20,000,000
shares; no shares outstanding actual and adjusted......
Common stock, $.01 par value; authorized 200,000,000
shares; 52,471,042 outstanding actual and 57,071,042
outstanding as adjusted................................ $ 525 571
Common stock restricted................................... (1,408) (1,408)
Additional paid-in capital................................ 207,517 261,846
Retained earnings from January 1, 1993.................... 151,289 151,289
-------- --------
Total shareholders' equity........................ $357,923 $412,298
-------- --------
Total capitalization.............................. $477,923 $532,298
======== ========
</TABLE>

S-13
<PAGE> 14

COMMON STOCK PRICE RANGE AND DIVIDEND POLICY

Our common stock is traded on the NYSE under the symbol "MRL." Until August
14, 1998, our common stock was traded on the NASDAQ National Market System. The
following table sets forth the range of high and low sale prices per share of
our common stock as reported by the NYSE and the NASDAQ National Market System
for the periods indicated.

<TABLE>
<CAPTION>
HIGH LOW
------------ ------------
<S> <C> <C>
1997
First Quarter............................................... $24 $12 7/8
Second Quarter.............................................. 21 1/4 13 3/4
Third Quarter............................................... 31 13/16 19 3/4
Fourth Quarter.............................................. 36 1/16 17
1998
First Quarter............................................... $24 1/8 $13 1/8
Second Quarter.............................................. 26 11/16 14 3/4
Third Quarter............................................... 16 5/16 8
Fourth Quarter.............................................. 12 3/4 7
1999
First Quarter............................................... $11 3/4 $ 5 15/16
Second Quarter (through May 20, 1999)....................... 17 3/4 9 11/16
</TABLE>

The last sale price of our common stock as reported by the NYSE on May 20,
1999, was $12 1/2.

We have not paid cash dividends on our common stock in the past and do not
intend to pay dividends on our common stock in the foreseeable future. Our bank
facility limits our ability to pay dividends. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Financial
Condition -- Liquidity and Capital Resources."

S-14
<PAGE> 15

SELECTED CONSOLIDATED FINANCIAL, OPERATING AND OTHER DATA

The following table sets forth our selected consolidated financial,
operating and other data as of and for the three months ended March 31, 1999 and
1998, and as of and for each of the years in the five-year period ended December
31, 1998. Our selected consolidated financial data as of and for the three
months ended March 31, 1999 and 1998, have been derived from our unaudited
consolidated financial statements and include all adjustments (consisting only
of normal recurring adjustments) that our management considers necessary for a
fair presentation of the interim periods. Results of interim periods are not
necessarily indicative of results for the full year. Our selected consolidated
financial data as of and for the five-year period ended December 31, 1998 has
been derived from our audited consolidated financial statements. The following
data should be read together with our historical consolidated financial
statements and the notes thereto and with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere in this
prospectus supplement.

<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
------------------- ------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
-------- -------- --------- --------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER DAY AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................ $ 19,827 $ 57,464 $ 228,015 $ 190,257 $110,329 $ 63,067 $ 70,597
Contract drilling expenses.............. 17,572 24,053 102,166 77,847 59,770 55,091 50,575
Depreciation and amortization........... 4,728 5,033 20,191 16,995 11,576 9,377 7,733
General and administrative expenses..... 3,475 2,900 12,287 7,807 7,498 5,460 4,376
-------- -------- --------- --------- -------- -------- --------
Operating income (loss)................. (5,948) 25,478 93,371 87,608 31,485 (6,861) 7,913
Interest income, net.................... 30 451 1,202 1,823 366 639 1,280
Other income (expense).................. (45) 270 968 405 405 120 (70)
-------- -------- --------- --------- -------- -------- --------
Income (loss) before income taxes....... (5,963) 26,199 95,541 89,836 32,256 (6,102) 9,123
Income tax expense (benefit)............ (1,195) 9,441 34,720 31,456 11,586 (2,080) 3,193
-------- -------- --------- --------- -------- -------- --------
Net income (loss)....................... $ (4,768) $ 16,758 $ 60,821 $ 58,380 $ 20,670 $ (4,022) $ 5,930
======== ======== ========= ========= ======== ======== ========
PER SHARE DATA:
Earnings (loss) per share:
Basic................................. $ (0.09) $ 0.32 $ 1.16 $ 1.13 $ 0.46 $ (0.09) $ 0.14
Diluted............................... (0.09) 0.32 1.15 1.11 0.45 (0.09) 0.13
Average common shares outstanding:
Basic................................. 52,402 51,987 52,217 51,572 44,918 43,812 43,819
Diluted............................... 52,402 52,600 52,726 52,452 45,748 43,812 44,802
OPERATING DATA:
Operating days.......................... 809 1,323 5,192 5,033 4,532 3,270 3,586
Utilization(1).......................... 56% 100% 92% 99% 99% 89% 87%
Average revenue per operating day....... $ 24,508 $ 43,440 $ 43,917 $ 37,805 $ 24,343 $ 19,289 $ 19,686
OTHER DATA:
EBITDA(2)............................... $ (1,265) $ 30,781 $ 114,530 $ 105,008 $ 43,466 $ 2,636 $ 15,576
Capital expenditures and acquisitions... 70,407 24,210 193,415 127,676 59,154 21,418 15,385
BALANCE SHEET DATA:
Cash and cash equivalents............... $ 29,265 $ 42,822 $ 12,576 $ 20,619 $ 71,961 $ 12,260 $ 18,872
Working capital......................... 5,222 59,537 6,699 55,472 96,671 23,316 48,529
Total assets............................ 546,504 376,145 475,684 334,182 254,947 134,545 143,215
Total debt.............................. 120,000 -- 50,000 -- 10,000 10,000 15,000
Shareholders' equity.................... 357,923 315,627 361,588 295,742 221,733 107,572 112,731
</TABLE>

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

S-15
<PAGE> 16

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Demand for our offshore drilling services is primarily driven by the
worldwide expenditures for oil and gas drilling which is closely linked to the
underlying economics of oil and gas exploration, development and production. The
economics of oil and gas business activities are impacted by current and
projected oil and gas prices. Since the early 1980's, oil and gas prices have
been volatile and somewhat unpredictable, which has caused significant
fluctuations in oil and gas drilling expenditures. Many factors influence oil
and gas prices, including world economic conditions, worldwide oil and gas
production and the activities of the Organization of Petroleum Exporting
Countries ("OPEC").

The rates that the industry can charge for drilling services are a function
of not only demand for services but the supply of drilling rigs available in the
market to provide service. During the early 1980's, when oil and gas prices were
high and significant demand for drilling services existed, the industry built a
significant number of offshore drilling rigs. In the mid-1980's, when oil and
gas prices declined significantly and the corresponding demand for drilling
services declined, the supply of drilling rigs was significantly greater than
the industry needed. This resulted in an imbalance of supply and demand causing
low utilizations with dayrates declining to near cash operating costs. The
jack-up drilling market in the U.S. Gulf of Mexico is highly competitive. A
significant number of offshore drilling companies have rigs in this market and,
as a result, no one contractor is able to materially affect pricing levels.

During 1996 and early 1997, oil and gas prices rose to a level that
stimulated significant oil and gas drilling activity, resulting in improved
utilization and dayrates for the drilling industry. However, oil and gas prices
declined significantly beginning in 1997, and reached multi-year lows in various
markets in early 1999. As a result of declines in 1998 and early 1999, oil and
gas companies have made significant cutbacks in their drilling programs. This
has reduced industry-wide rig utilization, including in the U.S. Gulf of Mexico,
where the Company operates most of its rigs, which has not only sharply reduced
dayrates, but also shortened the average length of drilling contracts. Recently
oil and gas prices have improved; however, we believe that some stability in
these commodity prices must be sustained before exploration and production
spending by the oil and gas companies will be increased.

The following table sets forth recent industry rig utilization rates and
average utilization rates for the three months ended March 31, 1999 and 1998,
and for the years 1998, 1997 and 1996, according to Offshore Data Services:

<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
AS OF ------------ ------------------
MAY 11, 1999 1999 1998 1998 1997 1996
------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Gulf of Mexico jack-up rigs.............. 63% 60% 91% 81% 90% 87%
Worldwide jack-up rigs................... 65% 68% 88% 83% 89% 86%
Worldwide semi-submersible rigs.......... 63% 67% 78% 78% 81% 79%
</TABLE>

As of May 10, 1999, eight of the Company's 15 jack-up rigs are committed
under short-term contracts that will expire in the second or third quarter of
1999, one rig is under contract until the first quarter of 2000, and the
remaining six rigs are idle. All of the currently committed rigs are in the U.S.
Gulf of Mexico. The Company currently has no international rigs working. In
addition to the recent declines in rig utilization, current dayrates for
drilling rigs are substantially less than the dayrates that generally prevailed
during most of 1998 and are at or near cash operating costs. These current
market conditions will adversely affect the Company's results of operations for
at least the near term, substantially reducing its revenues, cash flows and
earnings and likely resulting in losses in 1999.

S-16
<PAGE> 17

RESULTS OF OPERATIONS

The number of rigs the Company has available for service and the
utilization rates and dayrates of the Company's active rigs are the most
significant factors affecting the Company's level of revenues. Operating costs
include all direct costs and expenditures associated with operating our rigs.
These costs include rig labor, repair, maintenance and supply expenditures,
insurance costs, mobilization costs and other costs related to operations.
Operating expenses do not necessarily fluctuate in proportion to changes in
operating revenues due to the continuation of personnel on board and equipment
maintenance when the rigs are idle. Labor costs increase primarily due to higher
salary levels, rig staffing requirements and inflation. Equipment maintenance
expenses fluctuate depending upon the type of activity the rig is performing and
the age and condition of the equipment. Inflation is another contributing factor
in the fluctuation of operating expenses.

The changes in operating income are more directly affected by revenue
factors than expense factors. Changes in dayrates directly impact revenues but
not expenses. Utilization rate changes have a significant impact on revenues,
but in the short-term do not affect expenses. Over a long period significant
changes in utilization may cause us to adjust the level of our actively marketed
rig fleet and labor force to match anticipated levels of demand, thus changing
the level of operating expenses. General and administrative expenses do not vary
significantly unless we materially expand our asset base. Depreciation, which is
affected by our level of capital expenditures and depreciation practices is
another major determinant of operating income, and is not affected by changes in
dayrates or utilization.

The following table sets forth certain information by operating segment and
for the total Company for the periods indicated:

<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE YEARS ENDED
ENDED MARCH 31, DECEMBER 31,
--------------------- ------------------------------
1999 1998 1998 1997 1996
--------- --------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER DAY DATA)
<S> <C> <C> <C> <C> <C>
JACK-UPS:
Operating days.................. 809 1,233 4,732 4,739 4,532
Utilization(1).................. 60% 100% 93% 100% 99%
Average revenue operating per
day.......................... $24,508 $42,024 $ 40,719 $ 36,324 $ 24,343
Revenue......................... 19,827 51,808 192,667 172,143 110,329
Contract drilling expenses(2)... 16,686 21,709 81,030 67,607 59,437
Depreciation and amortization... 3,929 3,409 13,923 11,260 9,912
Operating income (loss)......... (788) 26,690 97,714 93,276 40,980
SEMI-SUBMERSIBLES:(3)
Operating days.................. -- 90 460 294 --
Utilization(1).................. -- 100% 90% 93% --
Average revenue per operating
day.......................... $ -- $62,839 $ 76,864 $ 61,714 $ --
Revenue......................... -- 5,656 35,348 18,114 --
Contract drilling expenses(2)... 886 2,344 21,136 10,240 333
Depreciation and amortization... 1 987 3,272 3,242 --
Operating income (loss)......... (887) 2,325 10,940 4,632 (333)
TOTAL COMPANY:
Operating days.................. 809 1,323 5,192 5,033 4,532
Utilization(1).................. 56% 100% 92% 99% 99%
Average revenue per operating
day.......................... $24,508 $43,440 $ 43,917 $ 37,805 $ 24,343
Revenue......................... 19,827 57,464 228,015 190,257 110,329
Contract drilling expenses(2)... 17,572 24,053 102,166 77,847 59,770
Depreciation and amortization... 4,728 5,033 20,191 16,995 11,576
General and administrative
expenses..................... 3,475 2,900 12,287 7,807 7,498
Operating income (loss)......... (5,948) 25,478 93,371 87,608 31,485
</TABLE>

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

(1) Based on the number of actively marketed rigs. Excluding rigs under
construction or in the process of substantial upgrading, we had an average
of 0.0 and 0.3 non-marketed rigs for the three-months ended March 31, 1999
and 1998, respectively. During 1998, 1997 and 1996, we had an average of
0.1, 1.1 and 0.9 non-marketed rigs, respectively.

(2) Excludes depreciation and amortization and general and administrative
expenses.

(3) We did not operate any semi-submersibles prior to 1997.

S-17
<PAGE> 18

Three Months Ended March 31, 1999 Compared to Three Months Ended March 31,
1998

Revenues. Our drilling revenues decreased $37,637,000 or 65%, during the
first quarter of 1999 compared to the same period in 1998. The decrease in
revenues was primarily due to decreased average daily revenue and rig
utilization for the quarter ended March 31, 1999 to $24,508 per operating day
and 56%, respectively compared to $43,440 per operating day and 100%,
respectively for the first quarter of 1998.

Contract Drilling Expenses. Contract drilling expenses during the first
three months of 1999 decreased $6,481,000 or 27% compared to the first three
months of 1998. The decrease was primarily a result of lower repairs and
maintenance expense and labor costs, due to low utilization rates.

Depreciation and Amortization. Depreciation and amortization expense for
the first quarter of 1999 decreased $305,000 compared to the same period in
1998. The decrease in 1999 was attributable to the MARINE 500 which is not being
depreciated while in the shipyard being upgraded to fourth-generation
semi-submersible capabilities, partially offset by the depreciation costs
associated with the MARINE 306 which was acquired in December 1998.

General and Administrative. General and administrative expenses for the
first quarter of 1999 increased $575,000 or 20% to $3,475,000 from $2,900,000 in
the first quarter of 1998. The increase was attributed to non-recurring
severance costs and professional service fees incurred in 1999.

Interest Expense. Interest expense for the first three months of 1999 was
$113,000 compared to $86,000 during the first three months of 1998. The increase
was primarily the result of increased borrowings on the Amended Credit Facility,
net of capitalized interest.

Interest Income. Interest income decreased $394,000 or 73% to $143,000 in
the first three months of 1999 from $537,000 from the comparable prior-year
period. The decrease was related primarily to decreased cash balances as a
result of expenditures related to the Company's two major construction and
upgrade projects.

Income Taxes. Income tax expense decreased for the first quarter of 1999 as
compared to the same period in 1998, primarily due to a decrease in the
Company's pretax income.

Year Ended December 31, 1998 Compared to Year Ended December 31, 1997

Revenues. Our 1998 drilling revenues increased $37,758,000 or 20%, compared
to 1997. The increase in revenues was primarily due to a 16% increase in average
daily revenue to $43,917. An increase of 159 operating days in 1998 also
contributed to the increased revenues due to placing the MARINE 305 into service
in August 1997 and the MARINE 510 in May 1998. Partially offsetting these
increases was a 7% decline in rig utilization to 92% in 1998 from 99% in 1997.

Costs and Expenses. Contract drilling expenses in 1998 increased
$24,319,000 or 31% compared to 1997. The increase was primarily a result of
increased fleet size in the international market. The MARINE 305 was placed into
service in August 1997 and the MARINE 510 was placed in service in May 1998.
International rig operations typically have higher average operating costs than
domestic rig operations.

Depreciation and Amortization. Depreciation and amortization expense for
1998 increased $3,196,000 or 19% from $16,995,000 to $20,191,000 compared to the
same period in 1997. The increase in 1998 was due to a full year of depreciation
in 1998 associated with 1997 expenditures for the acquisition of the MARINE 500
and upgrade of the MARINE 305.

General and Administrative. General and administrative expenses increased
$4,480,000 or 57% to $12,287,000 in 1998 from $7,807,000 in 1997. The increase
was attributed to an increase in professional services and increased personnel
costs consistent with the increased level of operations, new deep water
contracts and increased international activity.

S-18
<PAGE> 19

Interest Expense. Interest expense for 1998 was $481,000 compared to
$575,000 during 1997. The decrease was primarily the result of the prepayment
and termination of our $35 million credit facility in February 1997.

Interest Income. Interest income decreased $715,000 or 30% from $2,398,000
in 1997 to $1,683,000 in 1998. The decrease was related primarily to decreased
cash balances throughout the year as a result of expenditures related to our two
major construction and upgrade projects.

Income Taxes. Income tax expense increased for 1998 as compared to the same
period in 1997, primarily due to an increase in our pretax income.

Year Ended December 31, 1997 Compared to Year Ended December 31, 1996

Revenues. Our 1997 drilling revenues increased $79,928,000 or 72%, compared
to 1996. Revenue increases from jack-up drilling operations accounted for
$61,814,000 of the increase. This increase was mainly attributable to increased
dayrates and slightly better utilization in 1997 compared to 1996 and the
activation of the MARINE 305 during August 1997 in Southeast Asia that
contributed $9,413,000 to the increase. The remaining $18,114,000 increase in
revenues was from placing the MARINE 500, our first semi-submersible, into
service at the beginning of 1997.

Contract Drilling Expenses. Contract drilling expenses in 1997 increased
$18,077,000 or 30% compared to contract drilling expenses in 1996. Of the
$18,077,000 increase, $8,170,000 can be attributed to jack-up drilling
operations. The addition of the MARINE 305 was responsible for $4,052,000 of the
increase. Labor costs due to higher salaries and additional personnel along with
increased maintenance costs partially offset by decreases in employer's
liability accounted for the remaining $4,118,000 attributed to jack-up
operations. The remaining increase in operating costs of $9,907,000 is due to
the operation of the MARINE 500, which began operating during the first quarter
of 1997.

Depreciation and Amortization. Depreciation and amortization expense for
1997 increased $5,419,000 or 47% from $11,576,000 to $16,995,000 compared to the
same period in 1996. The increase was due to depreciation associated with
expenditures for the following items: (1) the acquisition of the MARINE 500, (2)
acquisition of the MARINE 305, (3) upgrades to the MARINE 15 and the MARINE 300,
and (4) acquisitions of drill string and other drilling equipment.

General and Administrative Expenses. General and administrative expenses in
1997 increased $309,000 or 4% from $7,498,000 in 1996 to $7,807,000 compared to
1997. The increase was attributed to an increase in professional services and
other administrative expenses.

Interest Expense. Interest expense in 1997 was $575,000. We had interest
expense of $895,000 during 1996. The decrease was primarily the result of the
prepayment and termination of our old $35,000,000 credit facility in February
1997.

Interest Income. Interest income increased $1,137,000 or 90% from
$1,261,000 in 1996 to $2,398,000 in 1997. The increase was related primarily to
increased cash balances throughout the year, and to a lesser extent, higher
interest rates.

Income Taxes. Income tax expense increased for 1997 as compared to the same
period in 1996, primarily due to an increase in our pretax income.

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<PAGE> 20

FINANCIAL CONDITION -- LIQUIDITY AND CAPITAL RESOURCES

Liquidity. At March 31, 1999, we had working capital of $5,222,000 as
compared to working capital of $6,699,000 at December 31, 1998. Net cash
provided by operating activities for the three months ended March 31, 1999
decreased by $33,496,000 to $17,089,000 compared to $50,585,000 for the same
period in the prior year. The decrease is primarily attributable to the
decreased dayrates and rig operating activity. Cash used in investing activities
increased $46,364,000 during the first three months of 1999 to $70,400,000 from
$24,036,000 during the same period in 1998 due primarily to capital expenditures
related to the completion of the MARINE 700 and upgrade of the MARINE 500. Net
cash provided by financing activities during the first three months of 1999
consisted of $70,000,000 in proceeds from long-term debt borrowings.

Net cash provided by operating activities for the year ended December 31,
1998 increased by $60,523,000 to $133,108,000 compared to $72,585,000 for the
same period in the prior year. The increase is primarily attributable to the
increased dayrates and rig operating activity coupled with the timing of cash
receipts and payments. Cash used in investing activities increased $76,575,000
in 1998 to $191,892,000 from $115,317,000 in 1997 due to $190,896,000 of capital
expenditures, which were primarily related to the construction of the MARINE
700, the MARINE 500 upgrade and the acquisition of the MARINE 306. Net cash
provided by financing activities during 1998 was $50,741,000 consisting
primarily of $50,000,000 in proceeds from long-term debt borrowings.

In March 1997, we entered into a credit facility with certain banks
providing financing up to $100,000,000 to be used for rig acquisitions and
upgrades. This agreement included a revolving credit facility available through
December 31, 1999 at which point, it converted into a four-year term loan. The
credit facility called for interest and facility fees to be paid quarterly
during the terms of both facilities. The term loan facility provided for equal
quarterly principal payments beginning March 31, 2000. Interest accrued at a
rate of (i) LIBOR plus a margin of .75% to 1.25% or (ii) prime plus a margin of
0% to .50%, with margins determined pursuant to a debt to capital calculation.
The borrowings were secured by all of our rig fleet, except for the MARINE 700,
as well as certain other assets. In connection with the consummation of the
credit agreement, we repaid and terminated our then existing $35 million credit
facility with another bank.

On August 12, 1998, we entered into an agreement with a consortium of
domestic and international banks, which amended the credit facility to a
five-year revolver maturing August 2003, eliminated the term loan conversion
feature and increased the credit line to $200,000,000. This bank facility is now
secured by substantially all of our assets, including our rig fleet and the
stock of our material subsidiaries. We are required to satisfy customary lending
conditions and comply with various covenants and restrictions, including, but
not limited to, the maintenance of financial ratios and the restriction on
payments of dividends. The financial ratio covenants include requirements of a
ratio of EBITDA to interest expense of 2.0 to 1; a ratio of consolidated debt to
total capitalization of 0.45 to 1.0 prior to August 12, 1999 and 0.40 to 1.0
thereafter; positive working capital; a ratio of collateral value to the total
lending commitment of greater than 2.0 to 1.0, and a ratio of consolidated debt
to EBITDA of 3.0 to 1.0. Interest accrues at a rate of (i) LIBOR plus a margin
of .75% to 1.25% with margins determined pursuant to a debt to EBITDA
calculation or (ii) if a Base Rate Loan, the greater of (A) the prime lending
rate of the administrative agent or (B) the Federal Funds Rate plus 0.5%, plus
in certain cases a margin of up to 0.25% based on our ratio of consolidated
indebtedness to EBITDA.

We drew down $70,000,000 on the facility during the first quarter of 1999,
increasing total borrowings outstanding as of March 31, 1999 to $120,000,000.

If currently depressed market conditions continue, we expect that we will
continue to generate substantially reduced EBITDA. In addition, we have been
substantially increasing our indebtedness under the bank facility to fund
construction costs on the MARINE 700 and the MARINE 500. As a result, unless
there is a significant near-term improvement in market conditions, following the
second quarter of 1999, we will likely be unable to satisfy the ratio of
consolidated debt to EBITDA financial covenant in the bank facility. This
covenant requires the ratio of consolidated debt to EBITDA for the twelve-month
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<PAGE> 21

period ending on any given date to be no greater than 3.0 to 1. Under the bank
facility, our failure to satisfy this covenant would give the banks the right to
accelerate any outstanding amounts and/or to cease lending additional amounts.
We anticipate that the banks will, if needed, grant us a limited waiver from
this covenant in part due to our expectation of satisfying this covenant after
the MARINE 700 and the MARINE 500 are generating revenues under their existing
contracts for several quarters. There cannot be any assurance, however, that we
will be able to obtain any necessary bank waivers, or that any such breach of
this financial covenant will not have a material adverse effect on our
liquidity.

Construction of MARINE 700. In May 1997, we acquired the bare deck hull of
the MARINE 700 for approximately $55,000,000. In December 1997, we entered into
an agreement with HAM under which HAM would complete construction of the MARINE
700 semi-submersible drilling rig for $87,000,000. The shipyard contract calls
for HAM to fabricate certain components of the rig and install certain OFE. The
shipyard contract calls for monthly progress payments based on the percentage of
completion. We originally estimated that the OFE would cost approximately
$99,000,000 including capitalized interest and project management costs
resulting in a total estimated cost to complete the drilling rig of $186,000,000
(exclusive of the $55,000,000 hull acquisition cost). Construction of the rig
has progressed since the signing of the shipyard contract and through March 31,
1999, we have paid HAM approximately $82,000,000 in progress payments and
incurred approximately $90,000,000 for OFE and other related construction costs.

The shipyard contract initially contemplated a delivery date of February
17, 1999. However, due to engineering, construction, weather and other delays,
we now expect to complete construction of the MARINE 700 in late June 1999.
Additionally, the anticipated cost to complete the drilling rig has increased to
approximately $220,000,000 (exclusive of the $55,000,000 hull purchase cost).
Included in the increase over the original cost estimate is the cost of change
orders initiated by Esso, the Company's customer. Current estimates for the cost
of these change orders is approximately $6,300,000, which we are entitled to
recover through an increase in the dayrate of approximately $5,000 per day
during the term of the five-year drilling contract with Esso.

MARINE 500 Upgrade. In December 1997, we signed a contract with Jurong
Shipyard Limited ("Jurong") in Singapore to upgrade the MARINE 500 to
fourth-generation capabilities for approximately $38,000,000. Change orders have
now increased the shipyard costs to approximately $48,000,000. In addition to
this $48,000,000, we currently estimate that the OFE will cost approximately
$77,000,000, including capitalized interest and project management costs,
resulting in a total estimated cost to complete the drilling rig of
approximately $125,000,000. Through March 31, 1999, we have paid Jurong
approximately $18,000,000 in progress payments and paid approximately
$67,000,000 for OFE and other related construction costs. The contract
anticipated that the rig would arrive in the Singapore shipyard on July 15, 1998
and be completed by December 31, 1998. Since the MARINE 500 did not arrive in
the shipyard until October 13, 1998 due to an extension of work under its
previous drilling contract, we now expect to complete construction of the MARINE
500 in late May 1999.

Capital Resources. During the first quarter of 1999 we expended $70,400,000
in capital expenditures consisting primarily of disbursements for the
construction of the MARINE 700, the upgrade of the MARINE 500, and the purchase
of other rig machinery. During the year ended December 31, 1998 we spent
$190,896,000 in capital expenditures consisting primarily of disbursements for
the construction of the MARINE 700, the upgrade of the MARINE 500, acquisition
of the MARINE 306 and the purchase of drill pipe and other rig machinery.

In December 1998, we acquired the MARINE 306 (formerly the "Maersk
Explorer"), a jack-up rig currently configured as an accommodation unit for
approximately $22,500,000. Currently, the rig is idle and is located in
Rotterdam.

The proceeds to be received by us from the issuance of the shares of common
stock to the underwriters will be approximately $54.4 million, net of
underwriting discounts and other offering expenses. We expect to use all of
these proceeds to fund construction and upgrade costs on the MARINE 700 and the
MARINE 500, of which there remained approximately $88 million as of March 31,
1999. We
S-21
<PAGE> 22

estimate that as of March 31, 1999 approximately $33.6 million in additional
funds will be necessary to complete the MARINE 700 and the MARINE 500, which we
anticipate funding through working capital or our bank facility.

We expect to spend approximately $170,000,000 in 1999 for capital
expenditures, consisting primarily of expenditures to upgrade and complete the
MARINE 500 and the MARINE 700, of which approximately $70.4 million had been
spent through March 31, 1999.

We will continue to pursue acquisitions of additional drilling rigs and
related equipment and/or businesses. Future acquisitions, if any, would likely
be funded from our working capital, the bank facility or through the issuance of
debt and/or equity securities. We cannot predict whether we will be successful
in acquiring additional rigs, and obtaining financing therefor, on acceptable
terms. In addition, it is currently anticipated that we will continue the
upgrading of rigs to enhance their capability to obtain longer-term contracts.
The timing and actual amounts expended by us in connection with our plans to
upgrade and refurbish selected rigs, as well as the type of rig modification
comprising each program, is subject to our discretion and will depend on our
view of market conditions, our cash flow, whether other acquisitions are made,
and other factors.

We anticipate that our available funds, together with cash generated from
operations and amounts that may be borrowed under the bank facility and other
potential funding sources, such as increased credit facilities and private or
public debt or equity offerings, will be sufficient to fund our required capital
expenditures, working capital and debt service requirements for the foreseeable
future. Future cash flows and the availability of other funding sources,
however, are subject to a number of uncertainties, especially the condition of
the oil and gas industry. We also expect, as discussed above, to need a wavier
under the bank facility. Accordingly, there can be no assurance that these
resources will be sufficient to fund our cash requirements. We are dependent on
the oil and gas industry and market prices. Declines in oil and gas prices have
adversely affected our day rates and rig utilization resulting in losses for us.
See the first section under the heading "Risk Factors."

YEAR 2000 ISSUE

Currently, we utilize third party software in all of our computer
applications. Our information systems personnel worked with the third party
vendors to resolve the potential problems associated with the year 2000 and the
processing of date sensitive information by our computers and other systems.
Based upon an evaluation and working with software vendors, we determined that
upgrading our existing accounting software to a current version would enable the
computer systems to function properly with respect to dates in the year 2000 and
thereafter, with minimal cost to us. This upgrade has been completed. We are
still evaluating the effect of the Year 2000 on non-information technology
systems, including telephone systems, office and rig-based electronic equipment
and devices with embedded microprocessors. Additionally, we are currently
contacting all key vendors and suppliers to ensure that they have a Year 2000
compliance plan in an effort to minimize our exposure to their potential Year
2000 problems. We anticipate completion of our evaluation of non-information
technology equipment, key vendors and suppliers and any remedial action and/or a
contingency plan, if necessary, by mid-1999. With modifications to existing
software and conversions to new software, the Year 2000 issue is not expected to
pose significant operational problems for our computer systems. However, if such
modifications or conversions are not made or are not completed on time or if our
Year 2000 issues are more complicated or costly than we currently estimate, the
Year 2000 issue could have a material adverse impact on us. We believe that we
will be able to implement successfully the changes necessary to address the Year
2000 issues with reliance on our third party vendors and do not expect the cost
of such changes to have a material impact on our financial position, results of
operations or cash flows in future periods.

STATEMENT OF FINANCIAL ACCOUNTING STANDARDS

In June 1998, the Financial Accounting Standards Board issued Statement of
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities," which establishes

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<PAGE> 23

standards for accounting for and disclosure of derivative instruments and
hedging activities. SFAS No. 133 is effective for fiscal years beginning after
June 15, 1999. We do not expect SFAS No. 133 to have a material effect on our
reported results.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk. We are subject to market risk exposure related to
changes in interest rates on our bank facility. Interest on borrowings under the
bank facility is at a pre-agreed upon percentage point spread from either the
prime interest rate or LIBOR. We may, at our option, fix the interest rate for
certain borrowings based on a spread over LIBOR for 30 days to 6 months, with
longer periods requiring bank approval. At March 31, 1999, we had $120 million
outstanding under our bank facility. Based upon this balance, an immediate
change of one percent in the interest rate would cause a change in interest
expense of approximately $1.2 million on an annual basis. Our objective in
maintaining these variable rate borrowings is the flexibility obtained regarding
early repayment without penalties and lower overall cost as compared with
fixed-rate borrowings.

Foreign Currency Exchange Rate Risk. We conduct business in several foreign
countries. Predominately all of our foreign operations are denominated in U.S.
dollars. We structure our drilling contracts in U.S. dollars to mitigate our
exposure to fluctuations in foreign currencies. Other than some limited trade
payables we do not currently have financial instruments that are sensitive to
foreign currency exchange rates.

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<PAGE> 24

BUSINESS

THE COMPANY

BUSINESS STRATEGY

- Balanced Long-Term and Short-Term Contract Portfolio. We seek to
appropriately balance our contract portfolio between long-term and
short-term contracts. We believe that a balanced contract portfolio will
help mitigate the cyclical nature of the drilling industry and will
provide for a component of longer-term, more predictable cash flow, while
maintaining the opportunity to capitalize on potential increases in
drilling rig dayrates worldwide. In the current market environment,
availability of long-term contracts has been primarily limited to
semi-submersible rigs used for offshore drilling in deep water markets.
To capitalize on the long-term contracts available in this market, we are
in the process of completing the construction and upgrade of two semi-
submersible rigs, the MARINE 700 and the MARINE 500, for use in deepwater
drilling operations. We have entered into long-term contracts to operate
both of these rigs, which could generate contract revenues of
approximately $448 million over the life of the contracts (assuming full
utilization). We believe that these two contracts will help
counterbalance the short-term and spot market contract portion of our rig
portfolio.

To further our business strategy, we have undertaken two significant rig
construction and upgrade projects, the MARINE 700 and the MARINE 500.

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<PAGE> 25

The MARINE 700. In May 1997, we acquired the uncompleted hull for the
MARINE 700 for approximately $55 million to serve as the foundation for a
fourth-generation semi-submersible rig with 5,000 foot water depth drilling
capacity. In December 1997, we entered into a shipyard contract with HAM, under
which HAM would complete construction of the MARINE 700. The shipyard contract
calls for HAM to fabricate certain components of the rig and install certain
OFE. We currently estimate that the OFE will cost approximately $115 million,
including capitalized interest and project management costs, and that the
shipyard costs will total $105 million, resulting in a total estimated cost to
complete the drilling rig of $220 million (exclusive of the $55 million hull
purchase cost). We currently believe that the rig will be completed in late June
1999, after which it is contracted to begin work for Esso under a five year
contract. We believe Esso initially will use the rig for development drilling
and well completion in its Diana field, a major deepwater project in the U.S.
Gulf of Mexico.

The MARINE 500. In December 1996, we acquired the MARINE 500, a
second-generation semi-submersible rig, for approximately $38 million. In
December 1997, we signed a contract with Jurong Shipyard Limited ("Jurong") in
Singapore to upgrade the MARINE 500 to fourth-generation capabilities. The
shipyard contract calls for Jurong to fabricate certain components of the rig
and to install certain OFE. We currently estimate that the OFE will cost
approximately $77 million, including capitalized interest and project management
costs, and that payments to the shipyard under the contract will be
approximately $48 million, resulting in a total estimated cost to upgrade the
drilling rig of $125 million (exclusive of the $38 million acquisition cost). We
currently believe that the rig will be completed in late May 1999, after which
it will begin work offshore Western Australia for WAPET, an entity controlled by
several major integrated oil companies.

The following table summarizes certain terms of the drilling contracts for
the MARINE 700 and the MARINE 500.

<TABLE>
<CAPTION>
ESTIMATED
CONTRACT CONTRACTUAL
RIG CUSTOMER TERM BASE DAYRATE(1) REVENUE(2)
- --- -------- ------------- ---------------- ------------
<S> <C> <C> <C> <C>
MARINE 700................ Esso 5 Years $165,410 $298 million
MARINE 500................ WAPET; Until Dec. $127,500-168,600 $150 million
INPEX(3) 31, 2001
</TABLE>

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

(1) See "Business -- Customers and Contracts" for a complete description.

(2) Assumes full utilization at the normal operating dayrate for 360 days per
year for the contract term.

(3) Indonesia Petroleum, Ltd.

For a discussion of several risks associated with the MARINE 700 and the
MARINE 500, see "Risk Factors -- We face material construction and contract
risks related to the MARINE 700 and the MARINE 500."

RECENT MARKET CONDITIONS

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<PAGE> 26

working internationally. The current market conditions will adversely affect our
results of operations for at least the near term, substantially reducing our
revenues, cash flows and EBITDA and resulting in losses in 1999. Under current
market conditions, we are dependent upon the successful completion and operation
of the Marine 700 and the Marine 500 to avoid continued losses and negative
EBITDA.

DRILLING RIG FLEET

Jack-up Rigs. We own 15 jack-up rigs, one of which is currently configured
as an accommodation unit. Jack-up rigs are mobile self-elevating drilling
platforms equipped with legs that can be lowered to the ocean floor until a
foundation is established to support the drilling platform. An offshore jack-up
rig consists of a hull, which supports the drilling equipment, jacking system,
crew quarters, loading and unloading facilities, storage areas for bulk and
liquid materials, helicopter landing deck and other related equipment. The rig
legs may operate independently or have a lower hull or mat attached to the lower
portion of the legs in order to provide a more stable foundation in soft bottom
areas.

Nine of our rigs are mat supported rigs and six are of independent leg
design. Five of the mat supported rigs and one of the independent leg rigs are
of slot type design, which are configured for the drilling operations to take
place through a slot in the hull. Our other four mat supported rigs and three of
the independent leg rigs have a cantilever feature which allows the extension of
the drilling equipment over a customer's platform to perform development
drilling or workover operations. Our jack-up rigs are capable of drilling to
depths of 20,000 to 30,000 feet in maximum water depths ranging from 200 to 300
feet.

There are several factors that determine the type of rig most suitable for
a particular job, the most significant of which include the water depth and
bottom conditions at the proposed drilling location, whether the drilling is
being done over a platform or other structure, and the intended well depth.
Independent leg jack-up rigs typically have greater water depth capability and
are advantageous in offshore areas where uneven bottom conditions or
obstructions, such as pipelines, exist. Mat supported rigs are advantageous in
offshore areas with soft bottom conditions. A slot design is appropriate for
drilling exploratory wells in the absence of any existing permanent structure,
such as a production platform, although some slot design rigs are capable of
drilling over production platforms. A cantilevered jack-up can extend its drill
floor and derrick over an existing, fixed structure, thereby permitting the rig
to drill or work over a well located on such a structure. Jack-up rigs with the
cantilever feature historically have achieved higher utilization and dayrates.

We have top drive drilling systems installed on ten of our rigs. A top
drive drilling system allows drilling with 90-foot lengths of drill pipe rather
than 30-foot lengths, thus reducing the number of required connections. A top
drive drilling system also permits rotation of the drill string while tripping
in or out of the hole. These characteristics increase drilling speed, personnel
safety and drilling efficiency and reduce the risk of the drill string sticking
during operations.

Currently we have two jack-up rigs located in international markets. We
have three additional rigs located in the U.S. Gulf of Mexico which are suitable
for operations in selected international waters and our other rigs could, with
certain modifications, work in other international markets. Our jack-ups, except
for the MARINE 306, are not suitable for those areas that require hostile
environment capabilities, such as the North Sea, nor are they capable of
operating in deep waters in excess of 200 to 300 feet.

Semi-submersible Rigs. We own two semi-submersibles, the MARINE 700 and the
MARINE 500, and have a long-term charter on one additional semi-submersible, the
MARINE 510. The MARINE 700 is presently under construction and the MARINE 500 is
presently being upgraded. Semi-submersibles operate in various market areas
around the world usually in water depths where jack-up rigs are incapable of
working. Semi-submersible rigs consist of an upper working and living deck
resting on vertical columns connected to lower hull members. Such rigs operate
in a "semi-submerged" position, remaining afloat, off bottom, in a position in
which the lower hull is from about 55 to 90 feet below the water line and the
upper deck protrudes well above the surface. The rig is typically anchored in
position and remains stable for drilling in the semi-submerged floating position
due in part to its wave transparency characteristics at

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<PAGE> 27

the water line. Semi-submersible rigs normally require water depth of at least
200 feet in order to conduct operations. Typically semi-submersible rigs are
more expensive to construct and operate than jack-up rigs.

The following table describes our drilling rigs as of March 31, 1999:

<TABLE>
<CAPTION>
YEAR RATED RATED
BUILT/ WATER DRILLING
NAME OF RIG MAKE/DESIGN TYPE UPGRADED DEPTH DEPTH LOCATION
- ----------- ----------- ---- --------- ----- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Independent Leg Jack-up Rigs:
MARINE 300 T(a)(b)(c)....... FGI*/L780 MOD II Cantilever 1981 250' 30,000' U.S. Gulf of Mexico
MARINE 301 T................ FGI*/L780 MOD II Cantilever 1981 300' 25,000' U.S. Gulf of Mexico
MARINE 303 T(c)............. FGI*/L780 MOD II Cantilever 1982 300' 30,000' U.S. Gulf of Mexico
MARINE 304 T(c)............. MLT**/84S Slot 1976/1993 300' 30,000' U.S. Gulf of Mexico
MARINE 305 T(c)............. Levingston III-S Cantilever 1975/1997 300' 30,000' Southeast Asia
Gusto
MARINE 306.................. Engineering Accommodation Unit 1975/1997 205' N/A North Sea
Mat Supported Jack-up Rigs:
MARINE 3.................... Bethlehem/262 Slot 1974 262' 25,000' U.S. Gulf of Mexico
MARINE 4.................... Bethlehem/250 Slot 1975 250' 25,000' U.S. Gulf of Mexico
MARINE 15 T................. Baker Marine/250 Slot 1981/1996 250' 25,000' U.S. Gulf of Mexico
MARINE 16 T................. Bethlehem/250 Slot 1981/1995 250' 20,000' U.S. Gulf of Mexico
MARINE 17................... Bethlehem/200 Cantilever 1981 200' 20,000' U.S. Gulf of Mexico
MARINE 18................... Bethlehem/250 Cantilever 1982 250' 20,000' U.S. Gulf of Mexico
MARINE 200 T................ Bethlehem/200 Cantilever 1981 200' 20,000' U.S. Gulf of Mexico
MARINE 201 T(c)............. Bethlehem/200 Cantilever 1981/1995 200' 20,000' Middle East
MARINE 225.................. Bethlehem/225 Slot 1969/1993 225' 20,000' U.S. Gulf of Mexico
Semi-Submersible Rigs:
MARINE 500 T(c)(d).......... Offshore Co. Semi-Submersible 1975/1999 5000' 30,000' Southeast Asia
MARINE 700(c)(e)............ Bingo 8000 Semi-Submersible 1999 5000' 30,000' U.S. Gulf of Mexico
6 Col Dual
MARINE 510(c)(f)............ Pontoon Semi-Submersible 1984/1996 600' 20,000' Southeast Asia
</TABLE>

- ---------------
(a) Can be modified to provide for 300-foot water depth capability.
(b) Designed to operate in environmentally sensitive areas such as Mobile Bay.
(c) Configured for international operations.
(d) Currently undergoing significant upgrades expected to be completed in late
May, 1999, which will increase its rated water depth from 600 feet to 5,000
feet.
(e) Currently under construction and is expected to be completed in late June,
1999.
(f) Operated under a five year charter agreement that expires in April 2003.
See "-- Contracts -- MARINE 510 Charter."
T Equipped with top drive drilling system.
* Friede Goldman International, Inc.
** Marathon LeTourneau.

In addition to the drilling rigs described above, in August 1998 we entered
into an agreement with the owner of the NANHAI VI, a 1500-foot water depth
semi-submersible, to market that rig on an exclusive basis. See
"-- Contracts -- Marketing Agreement for NANHAI VI."

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<PAGE> 28

<TABLE>
<S> <C>
Independent Leg Jack-up Rig -- This type of rig
consists of a floating hull with three independent
elevated legs. After being towed to the drilling
location, the legs are lowered until they penetrate
the seabed and the hull is jacked to the desired
elevation above sea level. The rig depicted in the
diagram has a cantilever feature that permits the rig
to operate over an existing, fixed platform or other
[GRAPHIC] structure.

Mat Supported Jack-up Rig -- This type of rig
consists of a floating upper hull with three legs
which are attached to a lower hull commonly referred
to as a mat. After being towed to the drilling
location, the legs are lowered until the mat contacts
the seabed and the upper hull is jacked to the
desired elevation above sea level. One advantage of
mat supported rigs is the ability to operate in areas
having soft seabed conditions where independent leg
rigs are prone to have excessive penetration and
subject to leg damage. The rig depicted is
[GRAPHIC] cantilevered.

Semi-submersible Rig -- This type of rig consists of
an upper working and living deck resting on vertical
columns connected to lower hull members. Such rigs
operate in a "semi-submerged" position, remaining
afloat, off bottom, in a position in which the lower
hull is from about 55 to 90 feet below the water line
and the upper deck protrudes well above the surface.
The rig is typically anchored in position and remains
stable for drilling in the semi-submerged floating
position due in part to its wave transparency
[GRAPHIC] characteristics at the water line.
</TABLE>

CUSTOMERS AND CONTRACTS

General. Our drilling contracts generally provide for compensation on a
"daywork" basis. Under daywork contracts, we receive a fixed amount per day for
providing drilling services using the rigs we operate. Under most daywork
contracts, we pay virtually all costs associated with operating the rig such as
labor, operating supplies and repair and maintenance. We typically negotiate
with the customer the cost of moving the rigs and related equipment to the job
site and the customer pays all other costs of drilling the well such as mud,
casing, logging and completion services. Daywork contracts may provide for lower
rates during periods when drilling operations are interrupted or restricted by
equipment breakdowns, adverse weather or water conditions or other conditions
beyond our control. Historically, we have not marketed our rigs under fixed
price or turnkey contracts.

A daywork contract generally extends over a period of time covering either
the drilling of a single well, a group of wells or a stated term. The customer
may terminate the contract if the drilling rig is destroyed or lost, or if
drilling operations are suspended for a specified period of time as a result of
breakdown of major equipment or other specific events. The duration of drilling
contracts is generally determined by market demand and competitive conditions.
Historically, domestic drilling contracts have tended to be on a well-by-well
basis, while contracts in the deep water and international jack-up markets have
been on a term basis. Our experience during recent years has been consistent
with this general rule,

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<PAGE> 29

with our rigs operating in the Gulf of Mexico generally having been contracted
on a well-to-well basis and our rigs operating internationally operating under
term contracts. Due to the highly cyclical nature of the offshore drilling
business, to the extent available, we will continue to focus on obtaining
additional term contracts, both foreign and domestic, in the future. Such
contracts help mitigate the volatility of our results.

We obtain most of our drilling contracts through competitive bidding
against other contractors in response to oil and gas companies' solicitations of
bids. Our current drilling contracts, both foreign and domestic, provide for
payment in U.S. Dollars.

We provide drilling services to a customer base that includes independent
and major foreign and domestic oil and gas companies. As is typical in the
industry, we do business with a relatively small number of customers at any
given time. During 1998, we performed services for approximately 25 different
customers, of which Applied Drilling Technology, Inc., a subsidiary of Global
Marine, one of our competitors, accounted for approximately 24% of our total
consolidated revenues and Carigali-Pttepi Operating Company Sdn Bhd, the
customer for the MARINE 500 prior to it going into the shipyard, accounted for
approximately 10% of revenues. During the first quarter of 1999, we performed
services for approximately 15 different customers. For the quarter ended March
31, 1999, Applied Drilling Technology accounted for approximately 33% of our
total consolidated revenues and Premier Oil Natana Sea Ltd. accounted for
approximately 13% of revenues. During 1999, when the MARINE 700 and the MARINE
500 contracts begin, we expect that Esso and WAPET will account for a
significant percentage of our revenues. See "Risk Factors -- We face material
construction and contract risks related to the MARINE 700 and the MARINE 500."
The loss of any one of our customers could, at least on a short-term basis, have
a material adverse effect on our profitability. We believe, however, that we
would have alternative customers for our services if we lost any single
customer, and that the loss of any one customer would not have a material
adverse effect on us on a long-term basis.

MARINE 700 Drilling and Construction Contracts. In January 1998, we signed
a long-term drilling contract with Esso for the MARINE 700. The contract had an
initial term of three years and gave Esso the option to extend the contract to a
five-year term. In June 1998, Esso exercised the option to extend the contract
to five years, with a normal operating dayrate of $165,410 per day ($159,910 per
day during moving and standby and $136,650 per day during force majeure events).
In addition to the normal operating dayrate, we will be entitled to obtain
approximately $5,000 per day cost recovery for certain construction and
equipment changes requested by Esso during the construction process. The
dayrates are also subject to adjustments for changes in indexed operating cost
elements, changes in costs arising from moving the rig outside the U.S. Gulf of
Mexico, or changes in personnel requirements. The Esso contract is expected to
generate aggregate dayrate revenues of approximately $298 million assuming full
utilization at normal operating dayrates over the five-year term, not including
the additional construction cost recoveries. The contract also entitles Esso to
elect up to five additional one-year extensions of the primary term at mutually
agreeable dayrates.

The specific design for the MARINE 700 has not been used before although it
is a variation of a design used in a number of currently operating rigs. In
addition, the MARINE 700 is the first new-build project for the HAM Marine, Inc.
shipyard in Pascagoula, Mississippi constructing the rig although HAM's parent
company, Friede Goldman International, Inc., has significant experience and has
allocated experienced supervisors to the project.

The MARINE 700 contract requires that the rig meet certain design
specifications and construction quality standards. If the unit does not meet
these specifications and standards then Esso may terminate the contract.

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<PAGE> 30

In addition to the requirement that certain design and construction quality
specifications be met, the Esso contract permits Esso to terminate the contract
prior to the end of the five year term in the following circumstances:

- if the rig is not completed in accordance with contract specifications
and ready to depart the shipyard to the first well location by July 15,
1999, unless the delay is caused by Esso or its subcontractors,

- if the design, construction or operation of the rig is not in accordance
with reasonable performance standards or if, in Esso's opinion, we make
unreasonably slow progress in the drilling work, and we fail to remedy
these problems within a reasonable time after written notice,

- if the rig is unsuitable, if the available deckload is less than 90% of
the stated capacity, or if marine or drilling equipment is below
manufacturer's specifications, in each case if such deficiencies cannot
be corrected within 30 days, or

- in the event of certain other breaches of the contract by us relating to
pollution control obligations and labor policies.

In addition, either party may terminate the contract in the event of the
occurrence or anticipation of a 60 day force majeure event, which means labor
disturbances, riots, war, acts of government or military agencies, fires,
floods, earthquakes and any other cause beyond the reasonable control of the
affected party that could not, with reasonable diligence, have been prevented or
provided against, but excluding financial distress.

In May 1997, we acquired the bare deck hull for the MARINE 700 for
approximately $55 million. In December 1997, we entered into an agreement with
HAM under which HAM would complete construction of the MARINE 700. The shipyard
contract calls for HAM to fabricate certain components of the rig and install
certain OFE. The shipyard contract calls for monthly progress payments based on
the percentage of completion. We currently estimate that the OFE will cost
approximately $115 million, including capitalized interest and project
management costs, and that the shipyard costs will total $105 million, resulting
in a total estimated cost to complete the drilling rig of $220 million
(exclusive of the $55 million hull purchase cost). Through March 31, 1999, we
have paid HAM approximately $82 million in progress payments and paid
approximately $90 million for OFE and other related construction costs.

The shipyard contract for the MARINE 700 initially contemplated a delivery
date of February 17, 1999; however, the project encountered substantial
construction, engineering, weather and other delays during the fourth quarter of
1998 and during the beginning of 1999. In an effort to minimize any further
delays and to address significant timing and quality concerns regarding the
project raised by Esso and us, we and the shipyard substantially increased the
personnel working on the project in order to increase the project's completion
pace and improve quality control. The costs of the increased personnel are
included in our current budgets for the project.

In the first quarter of 1999, we formally revised the scheduled delivery
date for the MARINE 700 to late in the second quarter of 1999 or, more
particularly, late May or early June 1999. We believe that significant
construction progress on the MARINE 700 was made during April and during May to
the date of this prospectus supplement. However, our expected delivery date has
slipped further, to where we now expect delivery in late June 1999. Although we
continue to believe that the rig will be delivered by the July 15, 1999
deadline, there is a significant risk that we will not meet this deadline in
light of the complexity inherent in this type of large construction project, the
history of delays to the scheduled delivery date and the relatively short time
of only a few weeks between our current expected delivery date and the deadline.
Significant amounts of electrical and commissioning work remain to be completed
in a short period of time, which will require substantial resources. Although
some systems have been commissioned and accepted by Esso, we and Esso have not
yet reached an agreement on the remaining commissioning and acceptance
procedures, which, given Esso's quality concerns, could contribute to delays

S-30
<PAGE> 31

in delivering the rig. In addition, the blow-out preventer, a critical path
item, has not yet been installed and tested. We could encounter future weather
delays, construction delays, unexpected equipment failures or malfunctions or
quality problems during the commissioning process that could cause a delay in
rig delivery.

We believe that if we were required to find an alternative customer for the
MARINE 700 or to renegotiate with Esso the terms of the contract based on
current market conditions and given current day rates, then the contract
dayrate, duration and other terms would be substantially less favorable to us
than the current Esso contract. In addition, there could be significant delays
in finding an alternative customer. Thus the loss of, or a renegotiation based
on current market conditions of, the Esso contract would materially adversely
affect our future results of operations.

We have had discussions with Esso regarding a possible extension of the
July 15, 1999 deadline and/or amendment of contract terms in the event the rig
is not delivered by July 15, 1999. These discussions were very preliminary and
did not result in an agreement or amendment to the Esso contract. In one of
these preliminary and non-binding discussions, one of Esso's representatives
raised the possibility of extending the contract deadline in exchange for a
substantial reduction of the dayrate. To date, we have indicated to Esso that we
are willing to agree to a significantly smaller decrease in the current contract
dayrate in return for an extension of the deadline by several months. We may not
be able to reach agreement with Esso on the terms of an extension, especially in
light of the fact that Esso purports to believe that there is a substantially
greater probability that we will miss the July 15, 1999 deadline than we do. On
the other hand, we might enter into an agreement with Esso that substantially
reduces the contract dayrate, in which case the reduction might apply even if we
ultimately meet the July 15, 1999 deadline.

MARINE 500 Drilling Contract. In July 1997, we entered into a drilling
contract with a drilling consortium led by WAPET for the MARINE 500. The
consortium consists of WAPET and Indonesia Petroleum, Ltd. ("INPEX"). Certain
other oil companies have an option to participate in the consortium. The
contract requires us, prior to delivery of the rig, to upgrade the rig to work
in water depths up to 5,000 feet with 15,000 psi drilling equipment, as
described below. The contract was originally scheduled for a three-year term
beginning in January 1999. However, because the rig was delayed in arriving at
the shipyard for the upgrade work as a result of work extensions for its
previous customer, we do not expect the rig to be available to commence drilling
until late May 1999. This delay, however, did not extend the term of the
contract, so the contract will still expire on December 31, 2001. During the
term of this contract, the MARINE 500 will work predominantly offshore Western
Australia, although the contract entitles the consortium members to use the rig
in Southeast Asia, the Pacific Rim, and New Zealand.

The consortium drilling contract is a master agreement that contemplates
separate drilling contracts with the individual consortium members at a base
dayrate of $127,500, which is adjusted for each contract based on operating
costs in the area in which the rig is to be used. Two of the consortium members,
WAPET and INPEX, have committed drilling contracts under the consortium
agreement and have agreed under the consortium agreement to be liable for the
contract minimum payments to us for the initial contract term ending December
31, 2001. The other consortium members have made no commitments under the
agreement, and are not liable for any payments under the consortium contract
until they commit to a drilling contract. The INPEX drilling contract is a
two-well contract with up to three option wells to be drilled at an operating
dayrate of $150,000 per day. The WAPET drilling contract provides for a dayrate
of $168,600 for an unspecified number of wells. Under the contract, a
mobilization rate of $166,240, or 98.6% of the operating dayrate, will begin
when the rig leaves the shipyard in Singapore, at which time we will also be
entitled under the consortium drilling contract to receive an upfront fee of $6
million. The contract provides that the consortium can terminate the contract at
any time after January 1, 2001 in exchange for a termination payment of $95,890
for each day remaining in the term of the contract, subject to offset if the rig
is otherwise employed. In addition, either party can terminate the WAPET
drilling contract after 20 days of certain force majeure events and in the event
of certain breaches.

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<PAGE> 32

MARINE 510 Charter. In July 1997, we entered into a Charter Agreement with
Shanghai Bureau of Marine Geological Survey ("SBMGS") to charter the KANTAN 3
(now referred to as the MARINE 510), a semi-submersible rig, for a period of
five years. The MARINE 510 is a 600-foot water depth rig based upon the
Pacesetter design and was built in China in 1984. The Charter Agreement began in
mid-May 1998. The Charter Agreement and related agreements require us to pay
approximately $26,000 per day during the first year, $23,000 per day during the
second year and $24,500 per day for the last three years of the charter for each
day that the MARINE 510 is working. The MARINE 510 is currently idle in
Singapore. In January 1999, we reached a letter agreement with SBMGS, subject to
a definitive agreement, to amend the Charter. This amendment would allow for a
variable charter hire fee equal to 60% of rig operating profit (dayrate revenue
less operating expenses) and provides an option for us to extend the Charter for
up to five years beyond the original five year term. To date, we and SBMGS have
been unable to agree on final terms for the amendment and SBMGS has recently
proposed terminating the agreement. We are currently evaluating our alternatives
with respect to the contract, which may include agreeing to terminate it.

Marketing Agreement for NANHAI VI. In August 1998, we entered into an
agreement, effective through October 1, 1999, with China's Southern Drilling
Company to market the 1500-foot water depth rated semi-submersible NANHAI VI.
The NANHAI VI is a self-propelled, semi-submersible drilling rig, which was
built in 1982 and modified and refurbished in 1995. The rig is technically and
economically suitable to be upgraded to 4,000-foot water depth capability.
Estimated total lead time required to secure the equipment needed for the
upgrade, complete the project and move the rig to first drilling location is one
year. If the rig is required to be upgraded, the cost of the upgrade will be
funded by the owner. Under the agreement, we are to receive (1) $3,000 per day
in management fees while the rig is operating and (2) 50% of all rig-level
profits after management fees and amortization over a 36-month period of the
costs of any upgrades to the vessel. We are actively marketing the rig, which is
currently working for its owners, but would be made available upon consummation
of a mutually agreeable drilling contract.

FACILITIES

Our principal executive offices are located in Sugar Land, Texas and occupy
approximately 19,000 square feet of leased space. We also lease a warehouse,
storage and repair facility, including approximately 31 acres of land and 60,000
square feet of buildings, in Rosharon, Texas (near Houston). In connection with
our foreign operations we lease offices, warehouse space and/or employee living
quarters in Australia, Indonesia and Singapore.

LITIGATION

Jagson International Limited ("Jagson"), an Indian entity, has brought suit
against Marine Drilling Companies, Inc. and Marine 300 Series, Inc. The
plaintiff has alleged that we agreed to charter two jack-up rigs to the
plaintiff during 1992 and that we breached the agreement by failing to charter
the rigs resulting in damages in excess of $14,500,000. In August 1995, Jagson
filed a suit against us in New Delhi, India that was subsequently withdrawn and
filed a second suit in New Delhi against us in October 1995 that was dismissed
by the court. In May 1996, Jagson filed a third suit against us in Bombay, India
for the same claim and attempted to attach the MARINE 201, located in India at
the time. In March 1998, the court dismissed the motion for attachment. Although
the third suit is still on file with the court, the MARINE 201 is no longer in
India and there have been no further proceedings in the lawsuit. We dispute the
existence of the agreement and intend to vigorously defend the suit if Jagson
pursues it further. We do not believe this dispute will have a material adverse
effect on our results of operations or financial condition.

Various other claims have been filed against us and our subsidiaries in the
ordinary course of business, particularly claims alleging personal injuries.
Management believes that we have adequate insurance coverage and has established
adequate reserves for any liabilities that may reasonably be expected to result
from these claims. In the opinion of our management, no pending claims, actions
or proceedings against us

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<PAGE> 33

or our subsidiaries are expected to have a material adverse effect on our
financial position or results of operations.

EMPLOYEES

As of May 10, 1999, we had approximately 914 employees. The number of
employees varies throughout the year depending on the level of drilling
activity. We consider relations with our employees to be good. None of our
employees is presently represented by labor unions.

Crew quality is an important factor considered by the customer in selecting
a rig. Accordingly, we seek experienced personnel when selecting crews from
among the available applicants and we maintain a safety and personnel training
program.

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<PAGE> 34

MANAGEMENT

The following table sets forth name, age and positions of our directors and
executive officers as of May 17, 1999. Each director will hold office until the
next annual meeting of stockholders or until his successor has been elected and
qualified. Executive officers are elected by, and serve at the discretion of,
our Board of Directors.

<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ---- --- -----------
<S> <C> <C>
Jan Rask.................................. 43 President, Chief Executive Officer and Director
Hugh L. Adkins............................ 52 Executive Vice President and Chief Operating
Officer
V. G. "Buddy" Bounds...................... 63 Senior Vice President -- Projects
T. Scott O'Keefe.......................... 43 Senior Vice President, Chief Financial Officer and
Secretary
O. Peter Blom............................. 51 Vice President -- Engineering and Business
Development
George H. Gentry, III..................... 40 Vice President -- Human Resources
Dale W. Wilhelm........................... 36 Vice President and Controller
Robert L. Barbanell....................... 68 Director and Chairman of the Board
David A. B. Brown......................... 55 Director
Howard I. Bull............................ 58 Director
J. C. Burton.............................. 60 Director
David B. Robson........................... 60 Director
Robert C. Thomas.......................... 70 Director
</TABLE>

Jan Rask has been President, Chief Executive Officer and Director since
June 1996. Mr. Rask served as President and Chief Executive Officer of Arethusa
(Off-Shore) Limited from May 1993 until the acquisition of Arethusa by Diamond
Offshore Drilling, Inc. in April 1996. Mr. Rask joined Arethusa's principal
operating subsidiary in 1990 as its President and Chief Executive Officer. Mr.
Rask is also a director of Veritas DGC, Inc.

Hugh L. Adkins was appointed Executive Vice President and Chief Operating
Officer in January 1998. He served as Senior Vice President and Operating
Manager from March 1993 until January 1998. From March 1992 until March 1993, he
was Vice President and Operations Manager. Prior to that time he was the Safety
Manager of the Company from August 1990 to March 1992. Mr. Adkins is a director
of Norton Drilling Services, Inc.

V. G. "Buddy" Bounds was appointed Senior Vice President -- Projects of the
Company in January 1998. Prior to that time, he served as Director of Deepwater
Operations since joining the Company in October 1996. Prior to joining the
Company, he was Senior Vice President -- Operations of Arethusa Off-Shore
Company since 1992, after serving in the same position with Zapata Offshore
Company from March 1990 to September 1992.

T. Scott O'Keefe joined the Company in January 1998 as Senior Vice
President, Chief Financial Officer and Secretary. Prior to joining the Company
he was Senior Vice President and Chief Financial Officer of Grey Wolf, Inc.
since September 1996. From April 1995 through August 1996, Mr. O'Keefe was a
financial consultant providing services to various companies including Grey
Wolf, Inc. Prior to April 1995, he was with Convest Energy Corporation and its
affiliates for approximately ten years, most recently as Vice President and
Chief Financial Officer. Mr. O'Keefe is a certified public accountant.

O. Peter Blom joined the Company in August 1998 as Vice
President -- Engineering and Business Development. Mr. Blom served as Vice
President -- Operations and Business Development of Arethusa (Offshore) Limited
from May 1992 until the acquisition of Arethusa by Diamond Offshore Drilling,
Inc.

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<PAGE> 35

in April 1996. He joined Arethusa's principal operating subsidiary as its Vice
President in 1990 and has held other leading positions in the offshore drilling
industry since 1975.

George H. Gentry, III joined the Company in November 1998 as Vice
President -- Human Resources. Prior to joining the Company he was Director of
Human Resources for Input/Output, Inc. from October 1997 until November 1998.
Prior to joining Input/Output he was with Tenneco Energy for thirteen years,
most recently as Vice President, Human Resources.

Dale W. Wilhelm joined the Company in May 1998 as Vice President and
Controller. Prior to joining the Company, he was Corporate Controller of
Continental Emsco Company since August 1997 and Serv-Tech, Inc. since September
1994. Before joining Serv-Tech, Inc., he was Assistant Corporate Controller of
CRSS Inc. since May 1990. Prior to this Mr. Wilhelm was with the public
accounting and consulting firm of KPMG Peat Marwick since September 1985, most
recently as Audit Manager. Mr. Wilhelm is a certified public accountant.

Robert L. Barbanell has been a Director of the Company since June 1995 and
served as its interim President from May 9, 1996 to July 18, 1996. Mr. Barbanell
has served as President of Robert L. Barbanell Associates, Inc., a financial
consulting firm, since July 1994. Mr. Barbanell was employed by Bankers Trust
New York Corporation from June 1986 to June 1994 as Managing Director and from
December 1981 to June 1986 as Senior Vice President. He is also a director of
Cantel Industries, Inc., Kaye Group, Inc. and Sentry Technology Corporation.

David A. B. Brown has been a Director of the Company since June 1995. Mr.
Brown has served as President of The Windsor Group, Inc., a strategy consulting
firm, since 1984. Prior to that time, Mr. Brown was Chairman of the Board of the
Comstock Group from 1988 to 1990. Mr. Brown is also a director of BTU
International Inc. and EMCOR Group, Inc.

Howard I. Bull, a private investor, has been a Director of the Company
since June 1995. Mr. Bull served as President, Director and Chief Executive
Officer of Dal-Tile International Inc., a manufacturer and distributor of
ceramic tile, from April 1994 to June 1997. Prior to that time, Mr. Bull served
as President of the Air Conditioning Business Group of York International
Corporation ("York") from May 1992 to February 1993 and as the President of the
York Applied Systems Division of York from January 1990 to May 1992. From
February 1979 to November 1990, Mr. Bull was employed by Baker Hughes, Inc. in
several executive positions. Mr. Bull is also a director of National Oilwell,
Inc.

J. C. Burton has been a Director of the Company since May 1998. He served
in various engineering and managerial positions with Amoco Corporation from 1963
until his retirement on March 31, 1998. Most recently, he was Group Vice
President, International Operations Group, for Amoco Exploration and Production
Company.

David B. Robson has been a Director of the Company since May 1998. He has
served as Chairman of the Board and Chief Executive Officer of Veritas DGC Inc.
since August 1996. Prior to that time, he held similar positions with Veritas
Energy Services, Inc. and its predecessors since 1974.

Robert C. Thomas has been a Director of the Company since February 1998.
Mr. Thomas has served as Senior Associate of Cambridge Energy Research
Associates since June 1994. Prior to that time, he served as Chairman and Chief
Executive Officer of Tenneco Gas, a subsidiary of Tenneco, Inc., from June 1990
to March 1994. Mr. Thomas is also a director of PetroCorp Incorporated.

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<PAGE> 36

UNDERWRITING

Subject to the terms and conditions stated in the underwriting agreement
dated the date hereof, each underwriter named below has severally agreed to
purchase, and Marine Drilling has agreed to sell to such underwriter, the number
of shares set forth opposite the name of such underwriter.

<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Salomon Smith Barney Inc. .................................. 1,791,000
Credit Suisse First Boston Corporation...................... 1,791,000
ABN AMRO Incorporated....................................... 188,000
Dain Rauscher Wessels, a division of Dain Rauscher
Incorporated (Common Stock)............................... 83,000
Gaines, Berland Inc......................................... 83,000
Hanifen, Imhoff Inc......................................... 83,000
Harris Webb & Garrison Inc.................................. 83,000
HCFP/BRENNER Securities LLC................................. 83,000
Howard, Weil, Labouisse, Friedrichs Incorporated............ 83,000
Sanders Morris Mundy........................................ 83,000
Southcoast Capital Corporation.............................. 83,000
Southeast Research Partners, Inc............................ 83,000
Southwest Securities, Inc................................... 83,000
---------
Total............................................. 4,600,000
---------
</TABLE>

The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares included in this offering are subject to
approval of certain legal matters by counsel and to certain other conditions.
The underwriters are obligated to purchase all the shares (other than those
covered by the over-allotment option described below) if they purchase any of
the shares.

The underwriters, for whom Salomon Smith Barney Inc., Credit Suisse First
Boston Corporation and ABN AMRO Incorporated are acting as representatives,
propose to offer some of the shares directly to the public at the public
offering price set forth on the cover page of this prospectus and some of the
shares to certain dealers at the public offering price less a concession not in
excess of $0.38 per share. The underwriters may allow, and such dealers may
reallow, a concession not in excess of $0.10 per share on sales to certain other
dealers. If all of the shares are not sold at the initial offering price, the
representatives may change the public offering price and the other selling
terms.

Marine Drilling has granted to the underwriters an option, exercisable for
30 days from the date of this prospectus, to purchase up to 400,000 additional
shares of common stock at the public offering price less the underwriting
discount. The underwriters may exercise such option solely for the purpose of
covering over-allotments, if any, in connection with this offering. To the
extent such option is exercised, each underwriter will be obligated, subject to
certain conditions, to purchase a number of additional shares approximately
proportionate to such underwriter's initial purchase commitment.

Marine Drilling and its executive officers and directors have agreed that,
for a period of 120 days from the date of this prospectus, they will not,
without the prior written consent of Salomon Smith Barney Inc., dispose of or
hedge any shares of common stock of Marine Drilling, or any securities
convertible into or exchangeable for common stock, subject to certain
exceptions. Salomon Smith Barney Inc. in its sole discretion may release any of
the securities subject to these lock-up agreements at any time without notice.

The common stock is listed on the New York Stock Exchange under the symbol
"MRL."

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<PAGE> 37

The following table shows the underwriting discounts and commissions to be
paid to the underwriters by Marine Drilling in connection with this offering.
These amounts are shown assuming both no exercise and full exercise of the
underwriters' option to purchase additional shares of common stock.

<TABLE>
<CAPTION>
PAID BY MARINE DRILLING
---------------------------
NO EXERCISE FULL EXERCISE
----------- -------------
<S> <C> <C>
Per share................................................... $ 0.625 $ 0.625
Total....................................................... $2,875,000 $3,125,000
</TABLE>

In connection with the offering, Salomon Smith Barney Inc., on behalf of
the underwriters, may purchase and sell shares of common stock on the open
market. These transactions may include over-allotment, syndicate covering
transactions and stabilizing transactions. Over-allotment involves syndicate
sales of common stock in excess of the number of shares to be purchased by the
underwriters in the offering, which creates a syndicate short position.
Syndicate covering transactions involve purchases of the common stock in the
open market after distribution has been completed in order to cover syndicate
short positions. Stabilizing transactions consist of certain bids or purchases
of common stock made for the purpose of preventing or retarding a decline in the
market price of the common stock while the offering is in progress.

The underwriters also may impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when
Salomon Smith Barney Inc., in covering syndicate short positions or making
stabilizing purchases, repurchases shares originally sold by that syndicate
member.

Any of these activities may cause the price of the common stock to be
higher than the price that otherwise would exist in the open market in the
absence of such transactions. These transactions may be effected on the New York
Stock Exchange or in the over-the-counter market, or otherwise and, if
commenced, may be discontinued at any time.

Marine Drilling estimates that the total expenses of this offering will be
approximately $250,000.

The representatives have performed certain investment banking and advisory
services for Marine Drilling from time to time for which they have received
customary fees and expenses. The representatives may, from time to time, engage
in transactions with and perform services for Marine Drilling in the ordinary
course of their business. ABN AMRO Bank N.V., which is the administrative agent
and a lender under the bank facility, is an affiliate of ABN AMRO Incorporated.
ABN AMRO Incorporated is not a bank. Securities sold, offered, or recommended by
ABN AMRO Incorporated are not insured by the Federal Deposit Insurance
Corporation; are not guaranteed or endorsed by any bank; are not deposits or any
obligation or responsibility of ABN AMRO Bank N.V. or any of its affiliated
banks or thrifts and are subject to investment risks, including possible loss in
excess of principal deposit.

Marine Drilling has agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, or to
contribute to payments the underwriters may be required to make in respect of
any of those liabilities.

LEGAL MATTERS

Certain legal matters in connection with this offering will be passed upon
for us by Vinson & Elkins L.L.P., Houston, Texas, and for the underwriters by
Cravath, Swaine & Moore, New York, New York.

EXPERTS

Our consolidated financial statements as of December 31, 1998 and 1997, and
for each of the years in the three-year period ended December 31, 1998, have
been included or incorporated by reference herein in reliance upon the report of
KPMG LLP, independent certified public accountants, incorporated by reference
herein, and upon the authority of such firm as experts in accounting and
auditing.

S-37
<PAGE> 38

With respect to the unaudited interim financial information for the
three-month periods ended March 31, 1999 and 1998, respectively, included or
incorporated by reference herein, the independent certified public accountants
have reported that they applied limited procedures in accordance with
professional standards for a review of such information. However, their separate
reports included in our quarterly report on Form 10-Q for the quarter ended
March 31, 1999, and incorporated by reference herein, states that they did not
audit and they do not express an opinion on that interim financial information.
Accordingly, the degree of reliance on their reports on such information should
be restricted in light of the limited nature of the review procedures applied.
The accountants are not subject to the liability provisions of Section 11 of the
Securities Act for their report on the unaudited interim financial information
because that report is not a "report" or a "part" of the prospectus or
prospectus supplement prepared or certified by the accountants within the
meaning of Sections 7 and 11 of the Securities Act.

S-38
<PAGE> 39

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets at March 31, 1999 (unaudited)
and at December 31, 1998 and 1997......................... F-3
Consolidated Statements of Operations for the three months
ended March 31, 1999 and 1998 (unaudited) and for the
years ended December 31, 1998, 1997 and 1996.............. F-4
Consolidated Statement of Shareholders' Equity for the three
months ended March 31, 1999 (unaudited) and for the years
ended December 31, 1998, 1997 and 1996.................... F-5
Consolidated Statement of Cash Flows for the three months
ended March 31, 1999 and 1998 (unaudited) and for the
years ended December 31, 1998, 1997 and 1996.............. F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>

F-1
<PAGE> 40

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Shareholders
Marine Drilling Companies, Inc.:

We have audited the consolidated balance sheets of Marine Drilling
Companies, Inc. and subsidiaries as of December 31, 1998 and 1997 and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1998.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 financial position of Marine
Drilling Companies, Inc. and subsidiaries as of December 31, 1998 and 1997, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1998, in conformity with generally
accepted accounting principles.

KPMG LLP

Houston, Texas
January 26, 1999

F-2
<PAGE> 41

MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

ASSETS

<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, -------------------
1999 1998 1997
------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents................................. $ 29,265 $ 12,576 $ 20,619
Accounts receivable -- trade and other, net............... 14,057 23,176 46,680
Prepaid expenses and other................................ 1,198 3,290 4,592
Inventory................................................. 484 579 456
-------- -------- --------
Total current assets.............................. 45,004 39,621 72,347
Property and Equipment...................................... 570,843 500,510 310,122
Less accumulated depreciation............................. 73,553 68,881 49,635
-------- -------- --------
Property and equipment, net....................... 497,290 431,629 260,487
Other....................................................... 4,210 4,434 1,348
-------- -------- --------
$546,504 $475,684 $334,182
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 14,712 $ 8,927 $ 6,367
Accrued expenses.......................................... 24,207 20,667 7,824
Current tax liability..................................... -- 2,558 2,113
Employer's liability claims, current...................... 863 770 571
-------- -------- --------
Total current liabilities......................... 39,782 32,922 16,875
Long-term debt.............................................. 120,000 50,000 --
Employer's liability claims, non-current and other.......... 1,598 2,046 1,776
Deferred income taxes....................................... 27,201 29,128 18,090
Minority interest in subsidiary............................. -- -- 1,699
Shareholders' Equity:
Common stock, par value $.01. Authorized 200,000,000
shares; issued and outstanding 52,471,042, 52,365,537
and 51,890,444 shares as of March 31, 1999, December
31, 1998 and December 31, 1997, respectively........... 525 524 519
Common stock restricted................................... (1,408) (1,596) (1,249)
Additional paid-in capital................................ 207,517 206,603 201,236
Retained earnings from January 1, 1993.................... 151,289 156,057 95,236
-------- -------- --------
Total shareholders' equity........................ 357,923 361,588 295,742
-------- -------- --------
Commitments and contingencies............................... -- -- --
-------- -------- --------
$546,504 $475,684 $334,182
======== ======== ========
</TABLE>

See notes to consolidated financial statements.

F-3
<PAGE> 42

MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES

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

<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31, FOR THE YEARS ENDED DECEMBER 31,
--------------------- ---------------------------------
1999 1998 1998 1997 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues.................................. $19,827 $57,464 $228,015 $190,257 $110,329
Costs and Expenses:
Contract drilling....................... 17,572 24,053 102,166 77,847 59,770
Depreciation and amortization........... 4,728 5,033 20,191 16,995 11,576
General and administrative.............. 3,475 2,900 12,287 7,807 7,498
------- ------- -------- -------- --------
25,775 31,986 134,644 102,649 78,844
------- ------- -------- -------- --------
Operating income (loss)................. (5,948) 25,478 93,371 87,608 31,485
------- ------- -------- -------- --------
Other Income (Expense):
Interest expense........................ (113) (86) (481) (575) (895)
Interest income......................... 143 537 1,683 2,398 1,261
Other income (expense).................. (45) 270 968 405 405
------- ------- -------- -------- --------
(15) 721 2,170 2,228 771
------- ------- -------- -------- --------
Income (loss) before income taxes......... (5,963) 26,199 95,541 89,836 32,256
Income tax expense (benefit).............. (1,195) 9,441 34,720 31,456 11,586
------- ------- -------- -------- --------
Net income (loss)......................... $(4,768) $16,758 $ 60,821 $ 58,380 $ 20,670
======= ======= ======== ======== ========
Earnings (loss) per share:
Basic................................... $ (0.09) $ 0.32 $ 1.16 $ 1.13 $ 0.46
Diluted................................. $ (0.09) $ 0.32 $ 1.15 $ 1.11 $ 0.45
Average common shares:
Basic................................... 52,402 51,987 52,217 51,572 44,918
Diluted................................. 52,402 52,600 52,726 52,452 45,748
</TABLE>

See notes to consolidated financial statements.

F-4
<PAGE> 43

MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
THREE MONTHS ENDED MARCH 31, 1999 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
COMMON STOCK
----------------------------------------
ISSUED IN TREASURY ADDITIONAL
------------------- ------------------ PAID-IN RESTRICTED RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCK EARNINGS
---------- ------ -------- ------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1995.......... 44,169,643 $442 534,210 $(2,016) $ 92,720 $ (505) $ 16,931
Net Income........................... -- -- -- -- -- -- 20,670
Issuance of stock for stock
offering........................... 5,584,700 56 -- -- 79,109 -- --
Issuance of stock for MARINE 305..... 882,352 9 -- -- 7,491 -- --
Issuance of restricted common
stock.............................. 80,833 1 -- -- 560 (561) --
Accrual of compensation expense...... -- -- -- -- -- 438 --
Common stock options exercised....... 477,650 4 (484,120) 1,824 907 -- (745)
Issuance of common stock for
401(k)............................. 62,891 1 (50,090) 192 789 -- --
Pre-quasi-reorganization net
operating loss carryforwards....... -- -- -- -- 834 -- --
Tax benefits related to common stock
issued pursuant to long term
incentive plan..................... -- -- -- -- 2,528 -- --
Issuance of stock for Non-Employee
Directors' Plan.................... 4,450 -- -- -- 54 -- --
---------- ---- -------- ------- -------- ------- --------
Balances at December 31, 1996.......... 51,262,519 513 -- -- 184,992 (628) 36,856
Net income........................... -- -- -- -- -- -- 58,380
Issuance of restricted common
stock.............................. 76,500 -- -- -- 1,323 (1,323) --
Accrual of compensation expense...... -- -- -- -- -- 590 --
Forfeitures of restricted common
stock.............................. (12,000) -- -- -- (112) 112 --
Common stock options exercised....... 494,333 5 -- -- 1,370 -- --
Issuance of common stock for
401(k)............................. 66,277 1 -- -- 1,285 -- --
Pre-quasi-reorganization net
operating loss carryforwards....... -- -- -- -- 8,310 -- --
Tax benefits related to common stock
issued pursuant to long term
incentive plan..................... -- -- -- -- 3,993 -- --
Issuance of stock for Non-Employee
Directors' Plan.................... 2,815 -- -- -- 60 -- --
Other................................ -- -- -- -- 15 -- --
---------- ---- -------- ------- -------- ------- --------
Balances at December 31, 1997.......... 51,890,444 519 -- -- 201,236 (1,249) 95,236
Net income........................... -- -- -- -- -- -- 60,821
Issuance of restricted common
stock.............................. 76,900 1 -- -- 1,176 (1,177) --
Accrual of compensation expense...... -- -- -- -- -- 659 --
Forfeitures of restricted common
stock.............................. (10,000) -- -- -- (171) 171 --
Common stock options exercised....... 272,675 3 -- -- 748 -- --
Issuance of common stock for
401(k)............................. 130,890 1 -- -- 1,670 -- --
Tax benefits related to common stock
issued pursuant to long term
incentive plan..................... -- -- -- -- 1,892 -- --
Issuance of stock for Non-Employee
Directors' Plan.................... 4,628 -- -- -- 62 -- --
Other................................ -- -- -- -- (10) -- --
---------- ---- -------- ------- -------- ------- --------
Balances at December 31, 1998.......... 52,365,537 524 -- -- 206,603 (1,596) 156,057
Net loss............................. -- -- -- -- -- -- (4,768)
Issuance of restricted common
stock.............................. 500 -- -- -- 8 (8) --
Accrual of compensation expense...... -- -- -- -- -- 162 --
Forfeitures of restricted common
stock.............................. (3,875) -- -- -- (34) 34 --
Common stock options exercised....... 45,833 -- -- -- 377 -- --
Issuance of common stock for
401(k)............................. 63,047 1 -- -- 436 -- --
Tax benefits related to common stock
issued pursuant to long term
incentive plan..................... -- -- -- -- 127 -- --
---------- ---- -------- ------- -------- ------- --------
Balances at March 31, 1999............. 52,471,042 $525 -- $ -- $207,517 $(1,408) $151,289
========== ==== ======== ======= ======== ======= ========
</TABLE>

See notes to consolidated financial statements.

F-5
<PAGE> 44

MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
FOR THE THREE
MONTHS
ENDED MARCH 31, FOR THE YEARS ENDED DECEMBER 31,
------------------- --------------------------------
1999 1998 1998 1997 1996
-------- -------- --------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss)......................................... $ (4,768) $ 16,758 $ 60,821 $ 58,380 $ 20,670
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Deferred income taxes................................... (1,927) 3,670 11,038 4,361 7,585
Pre-quasi-reorganization net operating loss
carryforwards......................................... -- -- -- 8,310 834
Tax benefits related to common stock issued pursuant to
long-term incentive plan.............................. 127 1,919 1,892 3,993 2,528
Depreciation and amortization........................... 4,728 5,033 20,191 16,995 11,576
Loss (Gain) on disposition of equipment................. 11 (122) (884) (156) (410)
Accrual of compensation expense, net.................... 162 165 659 590 438
Issuance of common stock to the employee retirement plan
and the Non-Employee Directors' Plan.................. 814 389 1,733 1,345 1,036
Increase in receivables................................. 9,119 2,034 23,504 (25,286) (3,300)
(Increase) decrease in prepaid expenses, other and
inventory............................................. 2,187 2,286 1,179 (2,690) 294
Increase (decrease) in payables, accrued expenses and
employer's liability claims........................... 6,412 18,435 16,317 8,384 (1,344)
Other................................................... 224 18 (3,342) (1,641) (627)
-------- -------- --------- --------- --------
Net cash provided by operating activities........... 17,089 50,585 133,108 72,585 39,280
-------- -------- --------- --------- --------
Cash Flows From Investing Activities:
Purchase of short-term investments........................ -- -- -- (19,514) (9,729)
Maturity of short-term investments........................ -- -- -- 29,967 --
Purchase of equipment..................................... (70,407) (24,210) (190,896) (73,490) (51,654)
Acquisition of company, net of cash acquired.............. -- -- (2,519) (52,531) --
Proceeds from disposition of equipment.................... 7 174 1,523 251 649
-------- -------- --------- --------- --------
Net cash used in investing activities............... (70,400) (24,036) (191,892) (115,317) (60,734)
-------- -------- --------- --------- --------
Cash Flows From Financing Activities:
Proceeds from long-term debt.............................. 70,000 -- 50,000 -- 21,500
Proceeds from sale of common stock........................ -- -- -- -- 79,582
Proceeds from exercise of stock options................... -- 654 751 1,375 1,990
Issuance cost of sale of common stock..................... -- -- (10) 15 (417)
Payments of debt.......................................... -- -- -- (10,000) (21,500)
-------- -------- --------- --------- --------
Net cash provided by (used in) financing
activities........................................ 70,000 654 50,741 (8,610) 81,155
-------- -------- --------- --------- --------
Net increase (decrease) in cash and cash
equivalents....................................... 16,689 27,203 (8,043) (51,342) 59,701
Cash and cash equivalents at beginning of period............ 12,576 15,619 20,619 71,961 12,260
-------- -------- --------- --------- --------
Cash and cash equivalents at end of period.................. $ 29,265 $ 42,822 $ 12,576 $ 20,619 $ 71,961
======== ======== ========= ========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest................................................ $ 967 $ 75 $ 553 $ 620 $ 956
Income taxes............................................ 3,011 2,437 21,345 11,835 640
Noncash investing and financing activities:
Issuance of 882,352 shares for MARINE 305 rig
acquisition........................................... $ -- $ -- $ -- $ -- $ 7,500
Issuance of restricted common stock (500, and 62,300
shares in three months ended March 31, 1999 and 1998,
respectively and 76,900, 76,500 and 80,833 shares in
years ended December 31, 1998, 1997 and 1996,
respectively)......................................... 8 958 1,177 1,323 561
Forfeitures of restricted common stock (3,875 shares in
three months ended March 31, 1999 and 10,000, and
12,000 shares in years ended December 31, 1998 and
1997, respectively)................................... (34) -- (171) (112) --
Business acquisition, net of cash acquired:
Working capital, other than cash........................ $ -- $ -- $ -- $ 766 $ --
Plant and equipment..................................... -- -- -- (54,186) --
Purchase price in excess of the net assets acquired..... -- -- -- (828) --
Minority interest....................................... -- -- (2,519) 1,717 --
-------- -------- --------- --------- --------
Net cash used for acquisition....................... $ -- $ -- $ (2,519) $ (52,531) $ --
======== ======== ========= ========= ========
</TABLE>

See notes to consolidated financial statements.

F-6
<PAGE> 45

MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION RELATED TO MARCH 31, 1999 AND 1998 IS UNAUDITED)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION

Organization and Business -- The consolidated financial statements include
the accounts of Marine Drilling Companies, Inc. ("Parent") and its subsidiaries,
Marine Drilling Management Company ("MDMC"), Marine 300 Series, Inc. ("M300SI"),
Marine Drilling International, Inc. ("MDII") and Marine Drilling Companies
(Norway) ASA ("MDCN ASA"). Unless the context otherwise requires, the term
"Company" refers to Marine Drilling Companies, Inc. and its consolidated
subsidiaries. Intercompany balances and transactions have been eliminated in
consolidation.

The Company is engaged in the business of drilling oil and gas wells in
domestic and international locations. International operations have been
conducted in India and Southeast Asia.

Inventory -- Inventory is carried at the lower of cost or market and
consists of operating supplies primarily for the Company's international
operations.

Property and Equipment -- Property and equipment are stated at historical
cost or the cost assigned to the assets at December 31, 1992 in connection with
the adoption of quasi-reorganization accounting procedures. Depreciation is
provided on the straight-line method over the estimated remaining useful lives
of the assets that are as follows:

<TABLE>
<CAPTION>
YEARS
--------
<S> <C>
Jack-up rigs (new)........................................ 20 to 25
Jack-up rigs (used/refurbished)........................... 5 to 15
Semi-submersible rigs (new)............................... 25
Semi-submersible rigs (used).............................. 10 to 15
Drill string.............................................. 4
Other equipment........................................... 3 to 12
</TABLE>

Major renewals and improvements are capitalized and depreciated over the
respective asset's useful life. Expenditures for normal maintenance and repairs
are charged to expense as incurred. Maintenance and repairs amounted to
$1,830,000 and $3,437,000 for the three months ended March 31, 1999 and 1998,
respectively, and $12,345,000, $12,066,000 and $8,905,000 in 1998, 1997 and
1996, respectively. When property or equipment is retired, the related assets
and accumulated depreciation are removed from the accounts and a gain or loss is
reflected in other income (expense). The Company continues to depreciate idle
drilling equipment using the same rates as while operating. The Company
capitalizes interest expense related to certain capital expenditure projects.
Capitalized interest was approximately $1,002,000 for the three months ended
March 31, 1999 and $193,000, $49,000 and $61,000 for 1998, 1997 and 1996,
respectively. There was no capitalized interest for the three months ended March
31, 1998.

The Company reviews its long-lived assets and certain identifiable
intangible assets for impairment whenever events or certain changes in
circumstances indicate the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows expected to be generated by
the asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceed the fair value of the assets.

Employer's Liability Claims -- Employer's liability claims, principally
arising from actual or alleged personal injuries, are estimates of the Company's
liabilities for such occurrences. These claims are classified as current or
long-term based upon the periods in which such claims are expected to be funded.

F-7
<PAGE> 46
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Deferred Financing Costs -- Deferred financing costs are amortized over the
life of the related debt. Deferred financing costs, net of accumulated
amortization were $1,392,000, $1,472,000 and $783,000, at March 31, 1999,
December 31, 1998 and December 31, 1997, respectively.

Income Taxes -- Deferred tax assets and liabilities are recorded to reflect
the future tax consequences of differences between the financial statement and
tax bases of existing assets and liabilities. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.

Revenue Recognition -- Drilling revenues are recorded pursuant to day rate
contracts, under which the Company received a fixed amount per day for providing
drilling services using the rigs it operates. Revenues are recognized as earned.
In connection with drilling contracts, the Company may receive lump sum fees for
mobilization of equipment and personnel or for capital improvements to rigs.
Significant mobilization and reimbursements are deferred and amortized over the
term of the contract. There were no unamortized mobilization and reimbursements
as of March 31, 1999 and December 31, 1998. As of December 31, 1997, there was
$2,433,000 of unamortized mobilization and reimbursement fees related to the
Marine 305 contract.

Rig Mobilization Costs -- When significant costs are incurred in connection
with mobilizing a drilling rig for a new contract, the Company defers and
amortizes such costs over the term of the applicable drilling contract. There
were no unamortized mobilization costs as of March 31, 1999 and December 31,
1998. There was $2,487,000 of unamortized mobilization costs at December 31,
1997. Mobilization costs incurred in connection with rig purchases are
capitalized as part of the purchase price and are depreciated over the life of
the rig.

Stock-Based Compensation -- Statement of Financial Accounting Standards 123
("SFAS 123"), "Accounting for Stock-Based Compensation," encourages, but does
not require companies to record compensation costs for stock-based employee
compensation plans at fair value. The Company has chosen to continue to account
for stock-based compensation using the intrinsic value method prescribed in
Accounting Principals Board Opinion No. 25 "Accounting for Stock issued to
Employees," ("APB 25") and related interpretations. Accordingly, compensation
cost for stock options is measured as the excess, if any, of the quoted market
price of the Company's stock at the date of grant over the amount the employee
must pay to acquire the stock. The disclosures required by SFAS 123, however,
have been included in Note 8.

Cash and Cash Equivalents -- The Company generally considers all highly
liquid investments purchased with an original maturity of three months or less
to be cash equivalents. At March 31, 1999 and December 31, 1998, none of the
Company's cash on hand was restricted. At December 31, 1997, $5,000,000 of the
Company's cash on hand was restricted as a result of cash collateral
requirements related to a credit facility used for issuing letters of credit to
support the Company's international activities. There were no outstanding
letters of credit as of March 31, 1999. As of December 31, 1998 and 1997,
letters of credit totaling $908,000 and $2,500,000, respectively, were
outstanding.

Treasury Stock -- Treasury stock is acquired under the cost method and
valued upon reissuance using the first-in, first-out method. During 1995, the
Company purchased 735,633 shares of common stock at an aggregate cost of
$2,659,000. In addition, during 1995, the Company reissued 201,423 shares at an
aggregate cost of $643,000 for the employee and non-employee benefit plans. No
shares were repurchased during 1996, however, 534,210 shares were reissued at an
aggregate cost of $2,016,000 for the employee and non-employee benefit plans. At
December 31, 1998, the Company had remaining authorization under the stock
purchase program to acquire up to 4,000,000 shares.

F-8
<PAGE> 47
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Capital Structure -- The Company has one class of common stock, par value
$0.01. The stock is traded on the NYSE under the symbol MRL. There are
200,000,000 authorized shares of which 52,471,042 is issued and outstanding as
of March 31, 1999. Each share of common stock is allowed one voting right.

Earnings Per Share -- Effective December 1997 the Company was required to
adopt Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS 128"). SFAS 128 introduces the concept of basic earnings per share, which
represents net income divided by the weighted average common shares outstanding
without the dilutive effects of common stock equivalents (options, warrants,
etc). Common stock equivalents with a weighted average of 613,000, 509,000,
880,000 and 830,000 are reflected in the calculation of diluted earnings per
share for the quarter ended March 31, 1998 and the years ended December 31,
1998, 1997 and 1996, respectively. For the quarter ended March 31, 1999, there
were 2,388,505 stock options outstanding that were not included in the
computation of diluted earnings per share. For the years ended December 31, 1998
and 1996, respectively, there were 849,000 and 250,000 stock options outstanding
which were not included in the computation of diluted earnings per share because
the exercise price of these options was greater than the average market price of
the common shares. For the quarter ended March 31, 1998 and the year ended
December 31, 1997, there were no stock options outstanding that were not
included in the computation of diluted earnings per share. No adjustment to net
income was made in calculating diluted earnings per share for the quarters ended
March 31, 1999 and 1998 and the years ended December 31, 1998, 1997 and 1996.

Reclassification of Accounts -- Certain reclassifications have been made to
conform to current year presentation with no effect on net income.

Concentrations of Credit Risk -- The market for the Company's services and
products is the offshore oil and gas industry, and the Company's customers
consist primarily of independent and major oil and gas companies. The Company
performs ongoing credit evaluations of its customers and obtains collateral
security as deemed prudent. The Company has established an adequate allowance
for bad debts, and such losses have historically been within management's
expectations (see Note 11). At March 31, 1999, December 31, 1998 and December
31, 1997, the Company had cash deposits in one bank. In addition, the Company
had mutual funds and commercial paper with a variety of companies and financial
institutions with strong credit ratings, and such securities are held until
maturity. The Company believes that credit and market risk in such instruments
is minimal.

Fair Values of Financial Instruments -- The fair values of the Company's
cash equivalents, trade receivables and trade payables approximated their
carrying values due to the short-term maturities of these instruments. The
estimated fair value of long-term debt is equivalent to its carrying value due
to the floating interest rate (see Note 5).

Use of Estimates -- Management of the Company has made a number of
estimates and assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.

Interim Financial Information -- The consolidated interim financial
statements of the Company presented herein have been prepared without audit
pursuant to the rules and regulations of the Securities and Exchange Commission.
In the opinion of management, these statements include all adjustments (all of
which consist of normal recurring adjustments except as otherwise noted herein)
necessary to present fairly the Company's financial position and results of
operations for the interim periods presented. The results of operations for the
three months ended March 31, 1999 are not necessarily indicative of the results
of operations that may be expected for the year.

F-9
<PAGE> 48
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(2) ACCOUNTS RECEIVABLE -- TRADE AND OTHER, NET

Accounts receivables are summarized as follows (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, -----------------
1999 1998 1997
--------- ------- -------
<S> <C> <C> <C>
Trade receivables...................................... $13,418 $22,714 $38,613
Marine 15 fire insurance claim......................... -- -- 7,175
Other receivables...................................... 639 462 892
------- ------- -------
$14,057 $23,176 $46,680
======= ======= =======
</TABLE>

(3) PROPERTY AND EQUIPMENT

Property and equipment are stated at historical cost or the cost assigned
to the assets at December 31, 1992 in connection with the adoption of
quasi-reorganization accounting procedures, and are summarized as follows (in
thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, -------------------
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
Drilling rigs........................................ $292,129 $292,003 $209,483
Drill string......................................... 8,548 8,622 6,517
Other equipment...................................... 6,838 6,611 5,377
Construction in progress............................. 263,328 193,274 88,745
-------- -------- --------
$570,843 $500,510 $310,122
======== ======== ========
</TABLE>

Depreciation expense was $4,728,000 and $5,001,000 for the three months
ended March 31, 1999 and 1998, respectively, and $19,984,000, $16,631,000 and
$11,530,000 for the years ended December 31, 1998, 1997 and 1996, respectively.

(4) ACCRUED EXPENSES

Accrued expenses are summarized as follows (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ----------------
1999 1998 1997
--------- ------- ------
<S> <C> <C> <C>
Construction in progress................................ $13,722 $11,320 $ 43
Accrued payroll and related taxes....................... 3,594 3,491 2,439
Accrued health benefit plan claims...................... 829 740 530
Foreign tax liability................................... 1,995 1,963 845
Other accrued expenses.................................. 4,067 3,153 3,967
------- ------- ------
$24,207 $20,667 $7,824
======= ======= ======
</TABLE>

(5) LONG-TERM DEBT

In March 1997, the Company entered into a credit agreement ("Credit
Facility") with certain banks providing financing up to $100 million to be used
for rig acquisitions and upgrades. This agreement included a revolving credit
facility available through December 31, 1999, at which point it converted into a
four-year term loan. The Credit Facility called for interest and facility fees
to be paid quarterly during the terms of both facilities. The term loan facility
provided for principal payments quarterly in equal installments beginning March
31, 2000. Interest accrues at a rate of (i) LIBOR plus a margin of .75% to

F-10
<PAGE> 49
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1.25% or (ii) prime plus a margin of 0% to .50%, with margins determined
pursuant to a debt to capital calculation. The borrowings were secured by all of
the Company's current rig fleet, except for the MARINE 700, as well as certain
other assets.

On August 12, 1998, the Company entered into an agreement (the "Amended
Credit Facility") with a consortium of domestic and international banks, which
amends the Credit Facility to a five-year revolver, eliminates the term loan
conversion feature and increases the credit line to $200 million. The Amended
Credit Facility is secured by substantially all of the Company's assets,
including its rig fleet. The Company and its subsidiaries will be required to
comply with various covenants and restrictions, including, but not limited to,
the maintenance of financial ratios and the restriction on payments of
dividends. Interest will accrue at a rate of (i) LIBOR plus a margin of .75% to
1.25% with margins determined pursuant to a debt to EBITDA calculation or (ii)
prime if a Base Rate Loan. As of March 31, 1999, $120,000,000 was outstanding
under the Amended Credit Facility.

If currently depressed market conditions continue, the Company expects that
it will generate substantially reduced EBITDA. In addition, the Company has been
substantially increasing its indebtedness under the Amended Credit Facility to
fund construction costs on the MARINE 700 and the MARINE 500. As a result,
unless there is a significant near-term improvement in market conditions, the
Company, following the second quarter of 1999, will likely be unable to satisfy
the ratio of indebtedness to EBITDA financial covenant in the Amended Credit
Facility. This covenant requires the ratio of indebtedness to EBITDA for the
twelve-month period ending on any given date, to be no greater than 3.0 to 1.0.
Under the Amended Credit Facility, the Company's failure to satisfy this
covenant would give the banks the right to accelerate any outstanding amounts.
The Company anticipates that the banks will, if needed, grant the Company a
limited waiver from this covenant in part due to the Company's expectation of
satisfying this covenant after the MARINE 700 and MARINE 500 are generating
revenues under their existing contracts for several quarters. There cannot be
any assurance, however, that the Company will be able to obtain any necessary
bank waivers, or that any such breach of this financial covenant will not have a
material adverse effect on the Company's liquidity.

(6) INCOME TAXES

Income taxes consist of the following (in thousands):

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Current:
U.S. federal.......................................... $17,876 $12,197 $ 343
State................................................. 48 44 --
Foreign............................................... 3,866 2,551 296
------- ------- -------
21,790 14,792 639
------- ------- -------
Other:
U.S. federal -- deferred.............................. 11,038 4,361 7,585
Pre-quasi-reorganization net operating loss
carryforwards...................................... -- 8,310 834
Tax benefits related to common stock issued pursuant
to long-term incentive plan........................ 1,892 3,993 2,528
------- ------- -------
12,930 16,664 10,947
------- ------- -------
Total tax expense............................. $34,720 $31,456 $11,586
======= ======= =======
</TABLE>

F-11
<PAGE> 50
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

As a result of the adoption of quasi-reorganization accounting procedures
on December 31, 1992, the tax effect of the realization of tax attributes
generated prior thereto are recorded directly to shareholders' equity as an
adjustment to additional paid-in capital and are not reflected as a reduction of
income tax expense. The realization of tax attributes prior to the
quasi-reorganization are subject to the rules and guidance of the Internal
Revenue Service and United States Department of the Treasury as interpreted or
applied to situations similar to the Company.

For the years ended December 31, 1998, 1997 and 1996, the effective tax
rates for financial reporting purposes of 36%, 35% and 36%, respectively,
approximates the U.S. federal statutory rates of 35%, 35% and 35%. The effective
rate was higher than the statutory rate in 1998 and 1996 due to the effect of
foreign tax payments for which the Company did not receive U.S. federal tax
benefit.

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1998 and 1997 are presented below (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1997
------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ 3,775 $ 13,087
Alternative minimum tax carryforward...................... -- 688
Investment tax, general business and foreign tax credit
carryforwards.......................................... 291 442
Employer's liability claims............................... 863 733
Deferred compensation..................................... 119 --
Allowance for bad debts................................... 456 53
------- --------
Total gross deferred tax assets........................... 5,504 15,003
Less valuation allowance.................................. (4,066) (14,270)
------- --------
Net deferred tax assets................................... 1,438 733
------- --------
Deferred tax liabilities:
Plant and equipment, principally due to differences in
depreciation........................................... 30,001 17,929
Deferred expenses......................................... 119 766
Deferred intercompany gains and losses.................... 446 128
------- --------
Total gross deferred tax liabilities...................... 30,566 18,823
------- --------
Net deferred tax liability.................................. $29,128 $ 18,090
======= ========
</TABLE>

The valuation allowance for deferred tax assets as of December 31, 1998 and
1997 was $4,066,000 and $14,270,000 respectively. The net change in the total
valuation allowance for the years ended December 31, 1998 and 1997 was a
decrease of $10,204,000 and $14,710,000 respectively. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies in
making this assessment. Based upon projections for future taxable income over
the periods which the deferred tax assets are deductible and the Section 382
limitation as discussed below, management believes it is more likely than not
that the Company will realize the benefits of these deductible differences, net
of the existing valuation allowances at December 31, 1998.

At December 31, 1998, the Company had net operating loss carryforwards for
federal income tax purposes of $10,787,000, which if not utilized, expire in
years 2006 through 2011. The Company also had investment tax credit and general
business credit carryforwards for federal income tax purposes of approximately
$291,000 at December 31, 1998, which if not utilized, expire in years 1999 to
2000. In late

F-12
<PAGE> 51
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1995 and early 1996, certain venture capital firms holding significant
percentages of the Company's common stock sold or distributed their positions.
These transactions triggered an ownership change pursuant to Section 382 in
March 1996. As a result of this ownership change, the Company's use of its net
operating loss, investment tax credit and general business credit carryforwards
subsequent to that date will be limited.

(7) BENEFIT PLANS

1992 LONG TERM INCENTIVE PLAN -- In late 1992, the Company adopted the
Marine Drilling 1992 Long Term Incentive Plan ("1992 Plan") which was amended in
1996. Pursuant to the terms of the 1992 Plan, an aggregate of 10,000,000 shares
(subject to the restrictions described herein) of common stock are available for
distribution pursuant to stock options, SARs and restricted stock. The number of
shares of common stock available for distribution is further limited in that no
stock options, SARs or restricted stock may be issued if, immediately after such
issuance, the number of shares subject to outstanding stock options, SARs and
restricted stock awards would exceed 5% of the common stock then outstanding.
The shares of common stock subject to any stock option or SAR that terminates
without a payment being made in the form of common stock would again become
available for distribution pursuant to the 1992 Plan.

Restricted Common Stock. During 1998, 1997 and 1996, the Company issued
restricted stock grants consisting of 76,900, 76,500 and 80,833 shares,
respectively, of common stock. These grants generally lapse over four-year
periods and the values of the grants are based on the respective closing prices
on the day preceding each grant and are recognized as compensation expense over
the periods during which the restrictions lapse. Compensation expense related to
the issuance of restricted common stock for the years ended December 31, 1998,
1997 and 1996 was $648,000, $590,000 and $438,000, respectively. During 1998 and
1997, 10,000 and 12,000 shares, respectively, of restricted common stock were
forfeited. No restricted common stock was forfeited during 1996.

Common Stock Options. The exercise price of each option equals the market
price of the Company's stock on the date of grant. An option's maximum term is
ten years. The vesting period ranges from immediately to four years. This period
is determined at the issuance of each grant. The following table summarizes
stock option transactions pursuant to the 1992 Plan:

<TABLE>
<CAPTION>
1998 1997 1996
--------------------- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
FIXED OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
- ------------- ---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year........................... 1,299,547 $ 7.80 1,721,380 $ 5.63 1,880,650 $2.08
Granted.......................... 831,500 17.63 117,500 16.38 802,500 9.68
Exercised........................ (245,175) 2.56 (489,333) 2.77 (961,770) 2.07
Forfeited........................ (108,334) 15.74 (50,000) 2.50 --
---------- ---------- ----------
Outstanding at year end.......... 1,777,538 $12.64 1,299,547 $ 7.80 1,721,380 $5.63
========== ========== ==========
Options exercisable at
year-end....................... 662,079 473,714 573,880
Weighted-average fair value of
options granted during the
year........................... $ 10.94 $ 9.55 $ 5.74
</TABLE>

F-13
<PAGE> 52
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table summarizes information about fixed-price stock options
outstanding and exercisable at December 31, 1998:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------- ----------------------------------
NUMBER WEIGHTED-AVG. NUMBER
OUTSTANDING AT REMAINING WEIGHTED-AVG. EXERCISABLE AT WEIGHTED-AVG.
EXERCISE PRICES DECEMBER 31, 1998 CONTRACTUAL LIFE EXERCISE PRICE DECEMBER 31, 1998 EXERCISE PRICE
- --------------- ----------------- ---------------- -------------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
$ 1.25 to 2.50.......... 192,705 5.6 years $ 2.20 122,705 $ 2.03
$ 6.00 to 9.44.......... 675,000 7.9 years 9.02 368,333 8.94
$10.00 to 18.13.......... 734,833 8.7 years 16.13 171,041 13.45
$22.56 to 24.63.......... 175,000 9.3 years 23.42 -- --
--------- -------
1,777,538 8.1 years $12.64 662,079 $ 8.82
========= =======
</TABLE>

Based upon common stock outstanding as of December 31, 1998 and 1997 and
shares reserved for issuance as set forth above, the number of shares then
available for future stock options, SARs and restricted stock grants was
7,217,709 and 7,537,284 shares, respectively. The number of shares available due
to the 5% limitation was 809,279 and 1,273,730 shares, respectively.

No compensation costs were recognized in income for 1998, 1997 and 1996
because the Company has elected to continue accounting for such transactions
under APB 25.

NON-EMPLOYEE DIRECTORS' PLAN -- The Company adopted the 1995 Non-Employee
Directors' Plan (the "Directors' Plan") effective June 29, 1995. The Directors'
Plan provides for the grant of shares and options to acquire common stock to
each director who is not an employee of the Company. A maximum of 350,000 shares
may be issued pursuant to stock awards or options. Each option granted will vest
and become exercisable one year after its grant and will expire ten years from
the date the option is granted. The exercise price of each option equals the
market price of the Company's stock on the date of grant. No compensation costs
were recognized in income.

The following table summarizes stock option transactions under the
Director's Plan as of December 31, 1998:

<TABLE>
<CAPTION>
1998 1997 1996
------------------- ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
FIXED OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
- ------------- -------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year........ 67,500 $ 6.99 60,000 $ 4.94 50,000 $4.00
Granted................................. 40,000 21.63 12,500 15.63 10,000 9.63
Exercised............................... (27,500) 4.51 (5,000) 4.00 -- --
Forfeited............................... (7,500) 13.63 -- -- -- --
-------- ------- -------
Outstanding at year-end................. 72,500 $15.31 67,500 $ 6.99 60,000 $4.94
======== ======= =======
Options exercisable at year-end......... 32,500 55,000 50,000
Weighted-average fair value of Options
granted during the year............... $ 13.37 $ 9.08 $ 5.79
</TABLE>

F-14
<PAGE> 53
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table summarizes information about fixed-price stock options
outstanding and exercisable at December 31, 1998 under the Director's Plan.

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------- ----------------------------------
NUMBER WEIGHTED-AVG. NUMBER
OUTSTANDING AT REMAINING WEIGHTED-AVG. EXERCISABLE AT WEIGHTED-AVG.
EXERCISE PRICES DECEMBER 31, 1998 CONTRACTUAL LIFE EXERCISE PRICE DECEMBER 31, 1998 EXERCISE PRICE
- --------------- ----------------- ---------------- -------------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
$ 4.00 to 9.53...... 25,000 6.6 years $ 5.13 25,000 $ 5.13
$15.63 to 17.88...... 17,500 8.7 years 16.91 7,500 15.63
$22.88............... 30,000 9.4 years 22.88 -- --
------ ------
72,500 7.8 years $15.31 32,500 $ 7.55
====== ======
</TABLE>

During 1998 and 1997, 4,628 and 2,815 shares were issued as stock awards
and related compensation expense of $169,000 and $151,000 was recognized in 1998
and 1997, respectively.

EMPLOYEE 401(k) PROFIT SHARING PLAN -- The Company has a 401(k) Profit
Sharing Plan (the "401(k) Plan") covering substantially all of its employees who
have been employed at least three months. The Company matches employees'
contributions to the Plan on a dollar-for-dollar basis, in the form of Company
common stock, up to 6% of their eligible compensation. During 1998, 1997 and
1996, the Company made matching contributions with the Company's common stock
totaling $1,704,000, $1,303,000 and $1,014,000, respectively.

EXECUTIVE DEFERRED COMPENSATION PLAN -- The Company adopted the Executive
Deferred Compensation Plan (the "Executive Plan") effective December 31, 1994.
Employees who participate in the Executive Plan are selected by an
Administrative Committee. Under the Executive Plan, the participating executives
may elect (i) to defer up to 80% of compensation after reaching the limitations
applicable to the Company's 401(k) Plan and (ii) to defer any excess
contributions refunded by the 401(k) Plan. The Company matches executives'
contributions to the Executive Plan on a dollar-for-dollar basis, in cash up to
6% of their eligible compensation. As of December 31, 1998, and 1997 the amount
deferred under the Executive Plan was $338,000 and $252,000, respectively.

(8) ACCOUNTING FOR STOCK-BASED COMPENSATION

The Company has adopted the disclosure-only provisions of SFAS 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation cost has
been recognized for its fixed stock option plans. If the Company had elected to
recognize compensation cost based on the fair value of the options at the grant
date as prescribed by SFAS 123, net income and net income per share would
approximate the pro forma amounts indicated below (in thousands except per share
data):

<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Net income:
As reported........................................... $60,821 $58,380 $20,670
Pro forma............................................. 57,677 56,988 19,497
Basic earnings per share:
As reported........................................... 1.16 1.13 0.46
Pro forma............................................. 1.10 1.11 0.43
Diluted earnings per share:
As reported........................................... 1.15 1.11 0.45
Pro forma............................................. 1.09 1.09 0.43
</TABLE>

F-15
<PAGE> 54
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions.

<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Expected dividend yield................................... -- -- --
Expected price volatility................................. 70.0%.. 63.2% 63.8%
Risk-free interest rate................................... 5.3%... 5.4% 6.2%
5
Expected life of option................................... years.. 5 years 5 years
</TABLE>

The effects of applying SFAS 123 in the pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards prior to 1995,
and additional awards in future years were not anticipated in the calculations.

(9) SHAREHOLDERS RIGHTS PLAN

The Company adopted a shareholder rights plan on November 8, 1996, designed
to assure that the Company's shareholders receive fair and equal treatment in
the event of any proposed takeover of the Company and to guard against partial
tender offers and other abusive takeover tactics to gain control of the Company
without paying all shareholders a fair price. The rights plan was not adopted in
response to any specific takeover proposal. Under the rights plan, the Company
issued one preferred share purchase right (a "Right") with respect to each
outstanding share of common stock outstanding on November 20, 1996. Each Right
entitles the registered holder to purchase from the Company one one-thousandth
of a share of Junior Participating Preferred Stock, $.01 par value per share
(the "Preferred Shares"), of the Company at a price of $56.00 per one
one-thousandth of a Preferred Share, subject to adjustment. The Rights are not
currently exercisable and will become exercisable only in the event a person or
group acquires beneficial ownership of 15% or more of the Company's common
stock. Each whole Preferred Share will be entitled to receive a quarterly
preferential dividend in an amount per share equal to the greater of (i) $1.00
in cash or (ii) in the aggregate, 1,000 times the dividend declared on the
common stock. In the event of liquidation, the holders of the Preferred Shares
will be entitled to receive a preferential liquidation payment equal to the
greater of (i) $1,000 per share or (ii) in the aggregate, 1,000 times the
payment made on the shares of common stock. In the event of any merger,
consolidation or other transaction in which shares of common stock are exchanged
for or changed into other stock or securities, cash or other property, each
whole Preferred Share will be entitled to receive 1,000 times the amount
received per share of common stock. Each whole Preferred Share shall be entitled
to 1,000 votes on all matters submitted to a vote of the shareholders of the
Company, and Preferred Shares shall generally vote together as one class with
the common stock and any other capital stock on all matters submitted to a vote
of shareholders of the Company. The Rights will expire on November 19, 2006 (the
"Final Expiration Date"), unless the Final Expiration Date is extended or the
Rights are earlier redeemed or exchanged by the Company.

(10) COMMITMENTS AND CONTINGENCIES

India Lawsuit -- Jagson International Limited ("Jagson"), an Indian entity,
has brought suit against Marine Drilling Companies, Inc. and Marine 300 Series,
Inc. The plaintiff has alleged that the Company agreed to charter two jack-up
rigs to the plaintiff during 1992 and that it breached the agreement by failing
to charter the rigs resulting in damages in excess of $14,500,000. In August
1995, Jagson filed a suit against the Company in New Delhi, India that was
subsequently withdrawn and filed a second suit in New Delhi against the Company
in October 1995 that was dismissed by the court. In May 1996, Jagson filed a
third suit against the Company in Bombay, India for the same claim and attempted
to attach the MARINE 201, located in India at the time. In March 1998, the court
dismissed the motion for

F-16
<PAGE> 55
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

attachment. Although the third suit is still on file with the court, the MARINE
201 is no longer in India and there have been no further proceedings in the
lawsuit. The Company disputes the existence of the agreement and intends to
vigorously defend the suit if Jagson pursues it further. The Company does not
believe this dispute will have a material adverse effect on its results of
operations or financial condition.

Legal Proceedings -- The Company is involved in various other claims and
legal actions arising in the ordinary course of business. In the opinion of
management, the ultimate disposition of these matters will not have a material
adverse effect on the Company's consolidated financial position, results of
operations or liquidity.

Operating Leases -- The Company rents certain equipment and other property
under operating leases. Rental expense was $1,722,000, $1,836,000 and $2,208,000
in 1998, 1997 and 1996, respectively. Aggregate future minimum rental payments
relating to operating leases not including the charter fee for the MARINE 510,
are as follows (in thousands):

<TABLE>
<CAPTION>
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Office and equipment leases....................... $702 $452 $302 $294 $291
==== ==== ==== ==== ====
</TABLE>

Shipyard Contracts -- In December 1997, the company entered into an
agreement whereby HAM Marine, Inc. ("HAM") would complete construction of the
MARINE 700 semi-submersible drilling rig in their shipyard in Pascagoula,
Mississippi for $87 million. The shipyard contract calls for HAM to fabricate
certain components of the rig and install certain drilling equipment provided by
the Company ("Owner Furnished Equipment" or "OFE"). The shipyard contract calls
for monthly progress payments based on the percent complete.

The Company originally estimated that the OFE would cost approximately $99
million including capitalized interest and other soft costs resulting in a total
estimated cost to complete the drilling rig of $186 million. Construction of the
rig has progressed since the signing of the shipyard contract and through March
31, 1999, the Company has paid HAM approximately $82 million in progress
payments and incurred approximately $90 million for OFE and other related
construction costs.

The shipyard contract initially contemplated a delivery date of February
17, 1999. However, due in part to three tropical storms along the Mississippi
Gulf Coast, including Hurricane Georges, and engineering and construction
delays, the expected completion date for the MARINE 700 is now late second
quarter 1999. Additionally, due to the delays, the anticipated construction and
outfitting cost has increased to approximately $220 million. Included in the
increase over the original cost estimate is the cost of change orders initiated
by Esso, the Company's customer. Current estimates for the cost of these change
orders is approximately $6.3 million which the Company is entitled to recover
through an increase in the dayrate during the term of the five-year drilling
contract of approximately $5,000 per day.

In December 1997, the Company signed a contract with Jurong Shipyard
Limited ("Jurong") in Singapore to upgrade the MARINE 500 to fourth-generation
capabilities for approximately $38 million. Change orders have now increased the
shipyard costs to approximately $48 million. In addition to this $48 million,
the Company currently estimates that the OFE will cost approximately $77
million, including capitalized interest and project management costs, resulting
in a total estimated cost to upgrade the drilling rig of approximately $125
million. Through March 31, 1999, the Company has paid Jurong approximately $18
million in progress payments and incurred approximately $67 million for OFE and
other related construction costs. The contract anticipated that the rig would
arrive in the Singapore shipyard on July 15, 1998 and be completed by December
31, 1998. Since the MARINE 500 did not arrive in the shipyard until October 13,
1998 due to an extension of work under its previous drilling contract, the
Company now expects to complete construction of the MARINE 500 during the second
quarter of 1999.

F-17
<PAGE> 56
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Charter Agreement -- In July 1997, the Company entered into a Charter
Agreement with Shanghai Bureau of Marine Geological Survey ("SBMGS") to charter
the KANTAN 3 (now referred to as the MARINE 510), a semi-submersible rig, for a
period of five years. The MARINE 510 is a 600-foot water depth rig based upon
the Pacesetter design and was built in China in 1984. The Charter Agreement
began in mid-May 1998. The Charter Agreement and related agreements require us
to pay approximately $26,000 per day during the first year, $23,000 per day
during the second year and $24,500 per day for the last three years of the
charter for each day that the MARINE 510 is working. The MARINE 510 is currently
idle in Singapore. In January 1999, the Company reached a letter agreement with
SBMGS, subject to a definitive agreement, to amend the Charter. This amendment
would allow for a variable charter hire fee equal to 60% of rig operating profit
(dayrate revenue less operating expenses) and provides an option for the Company
to extend the Charter for up to five years beyond the original five year term.
To date, the Company and SBMGS have been unable to agree on final terms for the
amendment and SBMGS has recently proposed terminating the agreement. The Company
is currently evaluating its alternatives with respect to the contract, which may
include agreeing to terminate it.

Marketing Agreement for NANHAI VI -- In August 1998, the Company entered
into an agreement effective through October 1, 1999, with China's Southern
Drilling Company to market and manage the 1500-foot water depth rated
semi-submersible NANHAI VI. The NANHAI VI is a self-propelled, semi-submersible
drilling rig, which was built in 1982 and modified and refurbished in 1995. The
rig is technically and economically suitable to be upgraded to 4,000-foot water
depth capability. Estimated total lead time required to secure the equipment
needed for the upgrade, complete the project and move the rig to first drilling
location is one year. If the rig is required to be upgraded, the cost of the
upgrade will be funded by the owner. The Company is actively marketing the rig,
which is currently working, but would be made available by Southern Drilling
Company upon consummation of a mutually agreeable drilling contract.

(11) SEGMENT AND RELATED INFORMATION

In 1997, the Financial Accounting Standards Board issued Statement No. 131
"Disclosures about Segments of an Enterprise and Related Reporting" (SFAS 131).
As required the Company has adopted SFAS 131. For reporting purposes the Company
defines its segments as shallow water drilling (jack-up rigs) and deepwater
drilling (semi-submersibles). The accounting policies of the reportable segments
are the same as those described in Note 1 of Notes to Consolidated Financial
Statements. The Company evaluates the performance of its operating segments
based on income before taxes and non-recurring items. Operating income consists
of revenues less the related operating costs and expenses, including
depreciation and allocated operation support, excluding interest and unallocated
corporate expenses. Identifiable assets by operating segment include assets
directly identified with those operations.

F-18
<PAGE> 57
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table sets forth consolidated financial information with
respect to the Company and its subsidiaries by operating segment (in thousands):

<TABLE>
<CAPTION>
JACK-UP SEMI CORPORATE &
OPERATIONS OPERATIONS OTHER TOTAL
---------- ---------- ----------- --------
<S> <C> <C> <C> <C>
THREE MONTHS ENDED MARCH 31:
1999
Revenues............................. $ 19,827 $ -- $ -- $ 19,827
Operating Income (Loss).............. (788) (887) (4,273) (5,948)
Identifiable Assets.................. 157,296 348,454 40,754 546,504
Capital Expenditures................. 594 69,582 231 70,407
Depreciation & Amortization.......... 3,929 1 798 4,728
1998
Revenues............................. $ 51,808 $ 5,656 $ -- $ 57,464
Operating Income (Loss).............. 26,690 2,325 (3,537) 25,478
Identifiable Assets.................. 174,096 143,328 58,721 376,145
Capital Expenditures................. 1,650 21,901 659 24,210
Depreciation & Amortization.......... 3,409 987 637 5,033
YEARS ENDED DECEMBER 31:
1998
Revenues............................. $192,667 $ 35,348 $ -- $228,015
Operating Income (Loss).............. 97,714 10,940 (15,283) 93,371
Identifiable Assets.................. 166,622 280,684 28,378 475,684
Capital Expenditures................. 27,368 158,267 5,261 190,896
Depreciation & Amortization.......... 13,923 3,272 2,996 20,191
1997
Revenues............................. $172,143 $ 18,114 $ -- $190,257
Operating Income (Loss).............. 93,276 4,632 (10,300) 87,608
Identifiable Assets.................. 179,584 123,280 31,318 334,182
Capital Expenditures................. 39,574 84,366 3,736 127,676
Depreciation & Amortization.......... 11,260 3,242 2,493 16,995
1996
Revenues............................. $110,329 $ -- $ -- $110,329
Operating Income (Loss).............. 40,980 (333) (9,162) 31,485
Identifiable Assets.................. 126,810 38,092 90,045 254,947
Capital Expenditures................. 17,967 38,062 3,125 59,154
Depreciation & Amortization.......... 9,912 -- 1,664 11,576
</TABLE>

F-19
<PAGE> 58
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company also provides services in both domestic and foreign locations.
The following table sets forth financial information with respect to the Company
and its subsidiaries by geographic area (in thousands):

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
------------------- ------------------------------
1999 1998 1998 1997 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues:
United States................. $ 19,827 $ 43,919 $161,974 $157,349 $104,969
India......................... -- 1,299 4,585 5,381 5,360
Southeast Asia................ -- 12,246 61,456 27,527 --
Long-Lived Assets:
United States................. 303,667 256,205 264,550 158,432 87,193
India......................... -- 13,588 -- 13,214 14,195
Southeast Asia................ 159,232 106,196 131,959 88,841 38,062
Other Foreign................. 34,391 156 35,120 -- 9,287
</TABLE>

The Company negotiates drilling contracts with a number of customers for
varying terms, and management believes it is not dependent upon any single
customer. For the three months ended March 31, 1999 and 1998 and the years 1998,
1997 and 1996, sales to customers that represented 10% or more of consolidated
drilling revenues were as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
------------------------------------------- ------------------------------
1999 1998 1998 1997
-------------------- -------------------- -------------------- -------
% OF % OF % OF
TOTAL TOTAL TOTAL
REVENUE REVENUE REVENUE REVENUE REVENUE REVENUE REVENUE
------- ---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Customer A............. $2,208 11% $ 1,261 2% $13,772 6% $11,371
Customer B............. 6,578 33% 11,652 20% 54,381 24% 48,235
Customer C............. 2,494 13% -- -- 26,205 12% --
Customer D............. -- -- 3,148 6% 13,488 6% 16,800
Customer E............. -- -- 6,458 11% 15,080 7% 9,410
Customer F............. -- -- 5,656 10% 19,792 8% 8,207

YEARS ENDED DECEMBER 31,
---------------------------------
1997 1996
---------- --------------------
% OF % OF
TOTAL TOTAL
REVENUE REVENUE REVENUE
---------- ------- ----------
<S> <C> <C> <C>
Customer A............. 6% $20,461 19%
Customer B............. 25% 17,629 16%
Customer C............. -- -- --
Customer D............. 9% 3,634 3%
Customer E............. 5% -- --
Customer F............. 4% -- --
</TABLE>

As is typical in the industry, the Company does business with a relatively
small number of customers at any given time. The loss of any one of such
customers could, at least on a short-term basis, have a material adverse effect
on the Company's profitability. Management believes, however, that at current
levels of drilling activity, the Company would have alternative customers for
its services if it lost any single customer and that the loss of any one
customer would not have a material adverse effect on the Company on a long-term
basis.

(12) RELATED PARTY TRANSACTIONS

In August 1997 Marine Drilling Companies (Norway) ASA acquired 100% of
Norwegian Drilling Technology AS ("NDT") a Norwegian corporation. Idar Iversen,
former President and Chief Executive Officer of Marine Drilling Companies
(Norway) ASA owned 50% of NDT at the time of the purchase. Mr. Iversen no longer
has any interests in NDT and is no longer employed by the Company.

F-20
<PAGE> 59
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(13) UNAUDITED QUARTERLY FINANCIAL DATA

A summary of unaudited quarterly consolidated financial information for
1999, 1998 and 1997 is as follows (in thousands):

<TABLE>
<CAPTION>
FIRST
1999 QUARTER
---- -------
<S> <C> <C> <C> <C>
Revenues....................................... $19,827
Operating loss................................. (5,948)
Loss before income taxes....................... (5,963)
Income tax benefit............................. (1,195)
Net loss....................................... (4,768)
Basic loss per share........................... $ (0.09)
Diluted loss per share......................... $ (0.09)
Basic average common shares.................... 52,402
Diluted average common shares.................. 52,402
</TABLE>

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1998 QUARTER QUARTER QUARTER QUARTER
---- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues....................................... $57,464 $64,141 $63,452 $42,958
Operating income............................... 25,478 30,864 26,199 10,830
Income before income taxes..................... 26,199 31,469 26,809 11,064
Income tax expense............................. 9,441 11,360 9,884 4,035
Net income..................................... 16,758 20,109 16,925 7,029
Basic earnings per share(1).................... $ 0.32 $ 0.38 $ 0.32 $ 0.13
Diluted earnings per share(1).................. $ 0.32 $ 0.38 $ 0.32 $ 0.13
Basic average common shares.................... 51,987 52,240 52,289 52,334
Diluted average common shares.................. 52,600 52,932 52,623 52,542
</TABLE>

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1997 QUARTER QUARTER QUARTER QUARTER
---- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues....................................... $36,750 $44,486 $51,198 $57,823
Operating income............................... 14,912 19,875 24,852 27,969
Income before income taxes..................... 15,659 20,520 25,206 28,451
Income tax expense............................. 5,481 7,182 8,918 9,875
Net income..................................... 10,178 13,338 16,288 18,576
Basic earnings per share(1).................... $ 0.20 $ 0.26 $ 0.32 $ 0.36
Diluted earnings per share(1).................. $ 0.19 $ 0.25 $ 0.31 $ 0.35
Basic average common shares.................... 51,330 51,408 51,651 51,884
Diluted average common shares.................. 52,494 52,604 52,601 52,856
</TABLE>

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

(1) Quarterly net income per common share may not total to annual results due to
rounding.

F-21
<PAGE> 60

PROSPECTUS

MARINE DRILLING COMPANIES, INC.

DEBT SECURITIES
PREFERRED STOCK
COMMON STOCK
LOGO WARRANTS
---------------------

Marine Drilling Companies, Inc. ("Marine" or the "Company") may offer and
sell from time to time, (i) unsecured debt securities, in one or more series,
consisting of notes, debentures or other evidences of indebtedness (the "Debt
Securities"), (ii) shares of preferred stock, par value $.01 per share of the
Company, in one or more series (the "Preferred Stock"), (iii) shares of common
stock of the Company, par value $.01 per share (the "Common Stock"), (iv)
warrants (the "Warrants") to purchase Common Stock and (v) guarantees, if any,
of the Company's payment obligations under any Debt Securities, given by one or
more subsidiaries of the Company named herein (the "Subsidiary Guarantees"). The
Company may offer and sell up to $300,000,000 aggregate public offering price of
Debt Securities, Preferred Stock, Common Stock, Warrants and Subsidiary
Guarantees (collectively, the "Securities"). The Securities may be offered in
separate series in amounts, and prices, and on terms to be determined at or
prior to the time of sale.

The specific terms of the particular Securities to be issued will be set
forth in a supplement to this Prospectus (a "Prospectus Supplement"), which will
be delivered together with this Prospectus, including, where applicable, (i) in
the case of Debt Securities, the specific designation, aggregate principal
amount, ranking as senior or subordinated Debt Securities, maturity, rate or
rates (or method of determining the same) and time or times for the payment of
interest, if any, any exchangeability or conversion terms, any terms for
optional or mandatory redemption or repurchase, or payment of additional amounts
or any sinking fund provisions, whether or not such Debt Securities are
guaranteed by subsidiaries of the Company, and any other specific terms of such
Debt Securities, (ii) in the case of Preferred Stock, the specific designation,
number of shares and liquidation value thereof and the dividend, liquidation,
redemption, voting and other rights, including conversion or exchange rights, if
any, and any other specific terms, (iii) in the case of Common Stock, the number
of shares, and (iv) in the case of Warrants, the number and terms thereof, the
number of shares of Common Stock issuable upon their exercise, the exercise
price, the terms of the offering and sale thereof and the duration and
detachability thereof. The Prospectus Supplement will also contain information
regarding the initial public offering price, the net proceeds to the Company
and, where applicable, the United States Federal income tax considerations
relating to the Securities covered by the Prospectus Supplement and a
description of certain factors that should be considered in connection with an
investment in the Securities covered by the Prospectus Supplement. Debt
Securities may be issued in registered form or bearer form with or without
interest coupons attached, or both. In addition, all or a portion of the Debt
Securities of a series may be issuable in temporary or permanent global form.
Debt Securities in bearer form are offered only to non-United States persons and
to offices located outside the United States of certain United States financial
institutions.

The Securities may be sold directly by the Company to investors, through
agents designated from time to time or to or through underwriters or dealers.
See "Plan of Distribution." If any agents of the Company or any underwriters are
involved in the sale of any Securities in respect of which the Prospectus is
being delivered, the names of such agents or underwriters and any applicable
commissions or discounts will be set forth in the Prospectus Supplement.

The Common Stock is listed on the New York Stock Exchange under the symbol
"MRL." The Prospectus Supplement will contain information about any listing on a
securities exchange of the Securities covered by the Prospectus Supplement.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

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

THIS PROSPECTUS MAY NOT BE USED TO CONSUMMATE SALES OF THE SECURITIES
UNLESS ACCOMPANIED BY A PROSPECTUS SUPPLEMENT.

June 19, 1998
<PAGE> 61

AVAILABLE INFORMATION

The Company is subject to the informational filing requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Reports, proxy
statements and other information filed by the Company may be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and the
Commission's Regional Offices located at Seven World Trade Center, New York, New
York 10048, and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material can be obtained by mail from the Public
Reference Branch of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. The Commission maintains a World Wide Website on the
Internet at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. The Common Stock is traded on the New York Stock Exchange.
Reports and other information concerning the Company can also be inspected at
the offices of the New York Stock Exchange at 20 Broad Street, New York, New
York 10005.

The Company has filed with the Commission a registration statement on Form
S-3 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"). This Prospectus does not contain all the information
contained in the Registration Statement, certain portions of which are omitted
as permitted by the rules and regulations of the Commission. For further
information with respect to the Company and the securities offered hereby,
reference is made to the Registration Statement, including the exhibits thereto,
which may be inspected at the Commission's offices, without charge or copies of
which may be obtained from the Commission upon payment of prescribed fees.
Statements contained in this Prospectus as to the contents of any contract or
other document filed as an exhibit to the Registration Statement are not
necessarily complete, and in each instance reference is hereby made to the copy
of such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference.
---------------------
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents filed by the Company with the Commission (File No.
0-18309) pursuant to the Exchange Act are incorporated herein by reference:

1. The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997.

2. The Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1998.

3. The description of the Common Stock contained in the Registration
Statement on Form 8-B filed with the Commission on February 21, 1990, as
amended by Form 8 filed with the Commission on November 9, 1992, and any
subsequent amendment thereto filed for the purpose of updating such
description.

4. The description of the Company's Preferred Share Purchase Rights
contained in the Company's Registration Statement on Form 8-A dated
November 15, 1996.

All other documents filed by the Company pursuant to Section 13(a), 13(c),
14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus and
prior to the termination of the offering of the Securities pursuant hereto shall
be deemed to be incorporated by reference in this Prospectus and to be a part
hereof from the date of filing of such documents. Any statement contained in a
document all or a portion of which is incorporated or deemed to be incorporated
by reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any statement so
modified shall not be deemed to constitute a part of this Prospectus except as
so modified, and any statement so superseded shall not be deemed to constitute
part of this Prospectus.

2
<PAGE> 62

The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, upon the
written or oral request of any such person, a copy of any or all of the
documents which are incorporated herein by reference, other than exhibits to
such documents (unless such exhibits are specifically incorporated by reference
into such documents). Requests should be directed to the Company, One Sugar
Creek Center Blvd., Suite 600, Sugar Land, Texas 77478-3556, Attention: Investor
Relations (telephone: 281/243-3000).

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

THE COMPANY

The Company is engaged in the offshore contract drilling of oil and gas
wells for independent and major oil and gas companies. As of the date of this
Prospectus, the Company owns and operates a fleet of 16 offshore drilling rigs,
consisting of five independent leg jack-up units, three of which have a
cantilever feature, nine mat supported jack-up units, four of which have a
cantilever feature, and two semi-submersible units. The Company operates an
additional semi-submersible drilling rig under a bareboat charter.

The Company was incorporated in Texas in January, 1990, although the
Company or its predecessors have been engaged in offshore contract drilling
since 1966. The Company's principal executive office is located at One Sugar
Creek Center Boulevard, Suite 600, Sugar Land, Texas 77478-3556 and the
Company's telephone number is (281) 243-3000. The "Company" or "Marine" refers
to Marine Drilling Companies, Inc. and its consolidated subsidiaries, unless
otherwise indicated or the context otherwise suggests.

USE OF PROCEEDS

Unless otherwise provided in the Prospectus Supplement, the net proceeds
from the sale of the Securities offered by this Prospectus and the Prospectus
Supplement (the "Offered Securities") will be used for general corporate
purposes, which may include repayment of indebtedness, acquisitions, additions
to working capital, and capital expenditures. Until so utilized, it is expected
that such net proceeds will be invested in interest bearing time deposits or
short-term marketable securities.

RATIO OF EARNINGS TO FIXED CHARGES AND
EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS

The following table sets forth the ratio of earnings to fixed charges and
combined ratio of earnings to fixed charges and preferred stock dividend
requirements for the Company for the periods indicated:

<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED
----------------------------------- MARCH 31,
1993 1994 1995 1996 1997 1998
---- ----- ----- ---- ----- ------------
<S> <C> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges........... 41.2 131.3 -- 33.1 94.8 223.0
Ratio of earnings to combined fixed charges
and preferred stock dividend
requirements............................... 41.2 131.3 -- 33.1 94.8 223.0
</TABLE>

For purposes of computing the ratio of earnings to fixed charges: (i)
earnings consist of income before provision for income taxes plus fixed charges
as described below, excluding capitalized interest for the period and (ii) fixed
charges consist of interest expensed and capitalized, amortization of debt
discount and expense relating to indebtedness and the portion of rental expense
representative of the interest factor attributable to leases for rental
property. For purposes of computing the ratio of earnings to combined fixed
charges and preferred stock dividend requirements: (a) earnings consist of
income before provision for income taxes plus fixed charges and preferred stock
dividend requirements, excluding capitalized interest for the period and (b)
fixed charges and preferred stock dividend requirements consist of interest
expensed and capitalized, amortization of debt discount and expense relating to
indebtedness, the portion of rental

3
<PAGE> 63

expense representative of the interest factor attributable to leases for rental
property and preferred stock dividends.

Because of losses, earnings were not sufficient to cover fixed charges by
$6,228,000 for the year ended December 31, 1995. The Company had no preferred
stock dividend requirement for the periods indicated.

DESCRIPTION OF DEBT SECURITIES

The Debt Securities will constitute either senior or senior subordinated
debt of the Company ("Senior Debt Securities"), or subordinated debt of the
Company ("Subordinated Debt Securities"). Senior Debt Securities and
Subordinated Debt Securities will be issued pursuant to separate indentures
(respectively, a "Senior Debt Indenture" and a "Subordinated Debt Indenture"),
in each case between the Company, the Subsidiary Guarantors and Chase Bank of
Texas, National Association as trustee (the "Trustee"), and in substantially the
form that has been filed as an exhibit to the Registration Statement of which
this Prospectus is a part, subject to such amendments or supplements as may be
adopted from time to time. The Senior Debt Indenture and the Subordinated Debt
Indenture, as amended or supplemented from time to time, are sometimes
hereinafter referred to individually as an "Indenture" and collectively as the
"Indentures." The following summaries of provisions of the Indentures and the
Debt Securities do not purport to be complete and such summaries are subject to
the detailed provisions of the applicable Indenture to which reference is hereby
made for a full description of such provisions, including the definition of
certain terms used herein. Article or section references in parentheses below
are to articles or sections in both Indentures unless otherwise indicated.
Wherever particular sections or defined terms of the applicable Indenture are
referred to, such sections or defined terms are incorporated herein by reference
as part of the statement made, and the statement is qualified in its entirety by
such reference. The Indentures are substantially identical, except for
provisions relating to subordination and conversion.

The Debt Securities may be issued from time to time in one or more series.
The following description of the Debt Securities sets forth certain general
terms and provisions of the Debt Securities of all series. The particular terms
of each series of Debt Securities offered by any Prospectus Supplement (the
"Offered Debt Securities") will be described therein.

PROVISIONS APPLICABLE TO BOTH SENIOR AND SUBORDINATED DEBT SECURITIES

General

The Debt Securities will be unsecured senior, senior subordinated or
subordinated obligations of the Company and may be issued from time to time in
one or more series. The payment obligations of the Company under any Debt
Securities may, if specified in any Prospectus Supplement, be fully and
unconditionally guaranteed by one or more of the following subsidiaries of the
Company: Marine Drilling Management Company, Marine Drilling International, Inc.
and Marine 300 Series, Inc. (the "Subsidiary Guarantors"). If any series of Debt
Securities is guaranteed by a Subsidiary Guarantor (a "Subsidiary Guarantee"),
the applicable Prospectus Supplement will identify each Subsidiary Guarantor and
describe such Subsidiary Guarantee, including the circumstances in which it may
be released. Any guarantee of Debt Securities by a Subsidiary Guarantor will be
on a full and unconditional basis.

Except as may be set forth in any Prospectus Supplement, the Indentures do
not limit the amount of Debt Securities, debentures, notes or other types of
indebtedness that may be issued by the Company or any of its Subsidiaries nor do
they restrict transactions between the Company and its affiliates or the payment
of dividends or other distributions by the Company to its stockholders. The
rights of holders of Debt Securities will be limited to the assets of the
Company and the Debt Securities will not be obligations of any of the Company's
Subsidiaries, except in the case of any Debt Securities that are guaranteed by
such Subsidiaries. In addition, other than as may be set forth in any Prospectus
Supplement, the Indentures do not and the Debt Securities will not contain any
covenants or other provisions that are intended to afford holders of the Debt
Securities special protection in the event of either a change of control of the
Company or a highly leveraged transaction by the Company.

4
<PAGE> 64

The Company conducts substantially all of its operations through its
Subsidiaries. Accordingly, the Company's ability to meet its cash obligations is
dependent upon the ability of its Subsidiaries to make cash distributions to the
Company. The ability of its Subsidiaries to make distributions to the Company is
and will continue to be restricted by, among other limitations, applicable
provisions of the laws of national and state governments and contractual
provisions. Except as may be set forth in any Prospectus Supplement, the
Indentures do not limit the ability of the Company's Subsidiaries to incur such
restrictions in the future. The right of the Company to participate in the
assets of any Subsidiary (and thus the ability of Holders of the Debt Securities
to benefit indirectly from such assets) is generally subject to the prior claims
of creditors, including trade creditors, of that Subsidiary, except to the
extent that the Company is recognized as a creditor of such Subsidiary, in which
case the Company's claims would still be subject to any security interest of
other creditors of such Subsidiary. Unless they are guaranteed by the Company's
Subsidiaries, therefore, the Debt Securities will be structurally subordinated
to creditors, including trade creditors, of Subsidiaries of the Company with
respect to the assets of the Subsidiaries against which such creditors have a
more direct claim.

Reference is made to the relevant Prospectus Supplement for the following
terms of and information relating to the Offered Debt Securities (to the extent
such terms are applicable to such Offered Debt Securities): (i) the title of the
Offered Debt Securities; (ii) the classification of such Debt Securities as
either Senior Debt Securities or Subordinated Debt Securities (including the
further classification of Senior Debt Securities as either senior debt or senior
subordinated debt); (iii) whether the Offered Debt Securities that constitute
Subordinated Debt Securities are convertible into Common Stock and, if so, the
terms and conditions upon which such conversion will be effected including the
initial conversion price or conversion rate (the "Conversion Price") and any
adjustments thereto, the conversion period and other conversion provisions in
addition to or in lieu of those described herein; (iv) any limit on the
aggregate principal amount of the Offered Debt Securities; (v) whether the
Offered Debt Securities are to be issuable as Registered Securities or Bearer
Securities or both, whether any of the Offered Debt Securities are to be
issuable initially in temporary global form and whether any of the Offered Debt
Securities are to be in permanent global form; (vi) the price or prices
(expressed as a percentage of the aggregate principal amount thereof) at which
the Offered Debt Securities will be issued; (vii) the date or dates on which the
Offered Debt Securities will mature; (viii) the rate or rates per annum (or the
method by which such will be determined) at which the Offered Debt Securities
will bear interest, if any, and the date from which any such interest will
accrue; (ix) the Interest Payment Dates on which any such interest on the
Offered Debt Securities will be payable, the Regular Record Date for any
interest payable on any Offered Debt Securities which are Registered Securities
on any Interest Payment Date and the extent to which, or the manner in which,
any interest payable on a temporary global Offered Debt Security on an Interest
Payment Date will be paid; (x) any mandatory redemption, sinking fund or
analogous provisions; (xi) each office or agency where, subject to the terms of
the Indentures as described below under "Payment and Paying Agents," the
principal of and any premium and interest on the Offered Debt Securities will be
payable and each office or agency where, subject to the terms of the Indentures
as described below under "Form, Exchange, Registration and Transfer," the
Offered Debt Securities may be presented for registration of transfer or
exchange; (xii) the right of the Company to redeem the Offered Debt Securities
at its option and the period or periods within which and the price or prices at
which the Offered Debt Securities may, pursuant to any optional or mandatory
redemption provisions, be redeemed, in whole or in part, and the other detailed
terms and provisions of any such optional or mandatory redemption; (xiii) the
denominations in which any Offered Debt Securities which are Registered
Securities will be issuable, if other than denominations of $1,000 and any
integral multiple thereof, and the denomination or denominations in which any
Offered Debt Securities which are Bearer Securities will be issuable, if other
than the denomination of $5,000; (xiv) the currency or currencies (including
composite currencies) in which payment of principal of and any premium and
interest on the Offered Debt Securities is payable if other than U.S. dollars;
(xv) any index used to determine the amount of payments of principal of and any
premium and interest on the Offered Debt Securities; (xvi) information with
respect to book-entry procedures, if any; (xvii) any deletions from,
modifications of or additions to the Events of Default or covenants of the
Company with respect to such Offered Debt Securities; (xviii) whether the

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Offered Debt Securities are to be guaranteed by Subsidiary Guarantors and, if
so, the terms of such Subsidiary Guarantees; (xix) whether the legal and
covenant defeasance provisions of the Indenture are applicable to the Offered
Debt Securities of such series and any additional means of discharge or
conditions thereto applicable to such series; (xx) any subordination provisions
with respect to the Offered Debt Securities of such series (and any related
Subsidiary Guarantees) in addition to or in lieu of those set forth herein; and
(xxi) any other terms of the Offered Debt Securities not inconsistent with the
provisions of the Indentures. (Section 301) Any such Prospectus Supplement will
also describe any special provisions for the payment of additional amounts with
respect to the Offered Debt Securities.

Debt Securities may be issued as Original Issue Discount Securities. An
Original Issue Discount Security is a Debt Security, including any Zero-Coupon
Security, which is issued at a price lower than the principal amount payable
upon the Stated Maturity thereof and which provides that upon redemption or
acceleration of the maturity thereof an amount less than the amount payable upon
the Stated Maturity thereof and determined in accordance with the terms of such
Debt Security shall become due and payable. Special United States federal income
tax considerations applicable to Debt Securities issued at an original issue
discount, including Original Issue Discount Securities, and special United
States tax considerations and other terms and restrictions applicable to any
Debt Securities which are issued in bearer form, offered exclusively to United
States Aliens or denominated in other than United States dollars, will be set
forth in the Prospectus Supplement relating thereto.

Form, Exchange, Registration and Transfer

Debt Securities of a series may be issuable in definitive form solely as
Registered Securities, solely as Bearer Securities or as both Registered
Securities and Bearer Securities. Unless otherwise indicated in an applicable
Prospectus Supplement, Bearer Securities will have interest coupons attached.
(Section 201) The Indentures also provide that Debt Securities of a series may
be issuable in temporary or permanent global form. (Section 201)

Registered Securities of any series will be exchangeable for other
Registered Securities of the same series of any authorized denominations and of
a like aggregate principal amount and tenor. In addition, if Debt Securities of
any series are issuable as both Registered Securities and Bearer Securities, at
the option of the Holder, and subject to the terms of the applicable Indenture,
Bearer Securities (with all unmatured coupons, except as provided below, and all
matured coupons in default) of such series will be exchangeable for Registered
Securities of the same series of any authorized denominations and of a like
aggregate principal amount and tenor. Bearer Securities surrendered in exchange
for Registered Securities between a Regular Record Date or a Special Record Date
and the relevant date for payment of interest shall be surrendered without the
coupon relating to such date for payment of interest, and interest accrued as of
such date will not be payable in respect of the Registered Security issued in
exchange for such Bearer Security, but will be payable only to the Holder of
such coupon when due in accordance with the terms of the applicable Indenture.
Bearer Securities will not be issued in exchange for Registered Securities.
(Section 305)

Debt Securities may be presented for exchange as provided above, and
Registered Securities may be presented for registration of transfer (with the
form of transfer endorsed thereon duly executed), at the office of the Security
Registrar or at the office of any transfer agent designated by the Company for
such purpose with respect to any series of Debt Securities and referred to in an
applicable Prospectus Supplement, without service charge and upon payment of any
taxes and other governmental charges as described in the Indentures. Such
transfer or exchange will be effected upon the Security Registrar or such
transfer agent, as the case may be, being satisfied with the documents of title
and identity of the person making the request. The Trustee will serve initially
as Security Registrar. (Section 305) If a Prospectus Supplement refers to any
transfer agents (in addition to the Security Registrar) initially designated by
the Company with respect to any series of Debt Securities, the Company may at
any time rescind the designation of any such transfer agent or approve a change
in the location through which any such transfer agent acts, except that, if Debt
Securities of a series are issuable solely as Registered Securities, the Company
will be required to maintain a transfer agent in each Place of Payment for such
series and, if

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Debt Securities of a series are also issuable as Bearer Securities, the Company
will be required to maintain (in addition to the Security Registrar) a transfer
agent in a Place of Payment for such series located outside the United States.
The Company may at any time designate additional transfer agents with respect to
any series of Debt Securities. (Section 1002)

In the event of any redemption in part, the Company shall not be required
to (i) issue, register the transfer of or exchange Debt Securities of any series
during a period beginning at the opening of business 15 days prior to the
selection of Debt Securities of that series for redemption and ending on the
close of business on (A) if Debt Securities of the series are issuable only as
Registered Securities, the day of mailing of the relevant notice of redemption
and (B) if Debt Securities of the series are issuable as Bearer Securities, the
date of the first publication of the relevant notice of redemption or, if
Securities of the series are also issuable as Registered Securities and there is
no publication, the mailing of the relevant notice of redemption, (ii) register
the transfer of or exchange any Registered Security, or portion thereof, called
for redemption, except the unredeemed portion of any Registered Security being
redeemed in part, or (iii) exchange any Bearer Security called for redemption,
except to exchange such Bearer Security for a Registered Security of that series
and like tenor which is immediately surrendered for redemption. (Section 305)

Payment and Paying Agents

Unless otherwise indicated in an applicable Prospectus Supplement, payment
of principal of and any premium and interest on Bearer Securities will be
payable, subject to any applicable laws and regulations, at the offices of such
Paying Agents outside the United States as the Company may designate from time
to time, in the manner indicated in such Prospectus Supplement. (Section 1002)
Unless otherwise indicated in an applicable Prospectus Supplement, payment of
interest on Bearer Securities on any Interest Payment Date will be made only
against surrender to the Paying Agent of the coupon relating to such Interest
Payment Date. (Section 1001) No payment with respect to any Bearer Security will
be made at any office or agency of the Company in the United States or by check
mailed to any address in the United States or by transfer to any account
maintained with a bank located in the United States. Notwithstanding the
foregoing, payments of principal of and any premium and interest on Bearer
Securities denominated and payable in U.S. dollars will be made at the office of
the Company's Paying Agent in the Borough of Manhattan, City of New York, if
(but only if) payment of the full amount thereof in U.S. dollars at all offices
or agencies outside the United States is illegal or effectively precluded by
exchange controls or other similar restrictions. (Section 1002)

Unless otherwise indicated in an applicable Prospectus Supplement, payment
of principal of and any premium and interest on Registered Securities will be
made at the office of such Paying Agent or Paying Agents as the Company may
designate from time to time, except that at the option of the Company payment of
any interest may be made by check mailed on or before the due date to the
address of the Person entitled thereto as such address shall appear in the
Security Register. (Sections 307, 1002) Unless otherwise indicated in an
applicable Prospectus Supplement, payment of any installment of interest on
Registered Securities will be made to the Person in whose name such Registered
Security is registered at the close of business on the Regular Record Date for
such interest. (Section 307)

Unless otherwise indicated in an applicable Prospectus Supplement, the
Trustee will act as Paying Agent for payments with respect to Debt Securities
which are issuable solely as Registered Securities and the Company will maintain
a Paying Agent outside the United States for payments with respect to Debt
Securities (subject to limitations described above in the case of Bearer
Securities) which are issuable solely as Bearer Securities or as both Registered
Securities and Bearer Securities. Any Paying Agents outside the United States
and any other Paying Agents in the United States initially designated by the
Company for the Debt Securities will be named in an applicable Prospectus
Supplement. The Company may at any time designate additional Paying Agents or
rescind the designation of any Paying Agent or approve a change in the office
through which any Paying Agent acts, except that, if Debt Securities of a series
are issuable solely as Registered Securities, the Company will be required to
maintain a Paying Agent in each Place of Payment for such series and, if Debt
Securities of a series are issuable as Bearer

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Securities, the Company will be required to maintain (i) a Paying Agent in the
Borough of Manhattan, City of New York for principal payments with respect to
any Registered Securities of the series (and for payments with respect to Bearer
Securities of the series in the circumstances described above, but not
otherwise), and (ii) a Paying Agent in a Place of Payment located outside the
United States where Debt Securities of such series and any coupons appertaining
thereto may be presented and surrendered for payment. (Section 1002)

All moneys paid by the Company to a Paying Agent for the payment of
principal of and any premium or interest on any Debt Security which remain
unclaimed at the end of two years after such principal, premium or interest
shall have become due and payable will (subject to applicable escheat laws) be
repaid to the Company, and the Holder of such Debt Security or any coupon will
thereafter look only to the Company for payment thereof. (Section 1003)

Global Debt Securities

Debt Securities of a series may be issued in whole or in part in the form
of one or more global Debt Securities that will be deposited with, or on behalf
of, a depository identified in the Prospectus Supplement relating to such
series. Global Debt Securities may be issued in either registered or bearer form
and in either temporary or permanent form. (Section 203) Unless and until it is
exchanged in whole or in part for the individual Debt Securities represented
thereby, a global Debt Security may not be transferred except as a whole by the
depository for such global Debt Security to a nominee of such depository or by a
nominee of such depository to such depository or another nominee of such
depository or by the depository or any nominee to a successor depository or any
nominee of such successor.

The specific terms of the depository arrangement with respect to a series
of Debt Securities and certain limitations and restrictions relating to a series
of Bearer Securities in the form of one or more global Debt Securities will be
described in the Prospectus Supplement relating to such series.

Events of Default

Any one of the following events constitutes an Event of Default under each
Indenture with respect to Debt Securities of any series: (a) failure to pay any
interest on any Debt Security of that series when due, continued for 30 days;
(b) failure to pay principal of or any premium on any Debt Security of that
series when due; (c) failure to deposit any sinking fund payment, when due, in
respect of any Debt Security of that series; (d) failure to perform any other
covenant of the Company in such Indenture (other than a covenant included in
such Indenture solely for the benefit of a series of any Debt Securities other
than that series), continued for 60 days after written notice as provided in
such Indenture; (e) certain events in bankruptcy, insolvency or reorganization
involving the Company and (f) any other Event of Default provided with respect
to Debt Securities of that series. (Section 501)

If an Event of Default with respect to Debt Securities of any series at the
time Outstanding occurs and is continuing, either the Trustee or the Holders of
at least 25% in aggregate principal amount of the Outstanding Securities of that
series by notice as provided in the applicable Indenture may declare the
principal amount (or, if the Debt Securities of that series are Original Issue
Discount Securities, such portion of the principal amount as may be specified in
the terms of that series) of all the Debt Securities of that series to be due
and payable immediately. At any time after a declaration of acceleration with
respect to Debt Securities of any series has been made, but before a judgment or
decree for payment of money has been obtained by the Trustee, the Holders of a
majority in aggregate principal amount of the Outstanding Securities of that
series may, under certain circumstances, rescind and annul such acceleration.
(Section 502)

Each Indenture provides that, subject to the duty of the Trustee during
default to act with the required standard of care, the Trustee is under no
obligation to exercise any of its rights or powers under such Indenture at the
request or direction of any of the Holders, unless such Holders shall have
offered to the Trustee reasonable indemnity. (Sections 601, 603) Subject to such
provisions for the indemnification of the Trustee, the Holders of a majority in
aggregate principal amount of the Outstanding Securities of

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any series have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee, or exercising any trust or
power conferred on the Trustee, with respect to the Debt Securities of that
series; provided, however, that the Trustee is not obligated to take any action
unduly prejudicial to Holders not joining in such direction or involving the
Trustee in personal liability. (Section 512)

The Company is required to furnish to the Trustee annually a statement as
to the performance by the Company of its obligations under each Indenture and as
to any default in such performance. (Section 1006)

Defeasance

If so specified with respect to any particular series of Debt Securities
issued under an Indenture, the Company may discharge its indebtedness and its
obligations or certain of its obligations under such Indenture with respect to
such series by depositing funds or obligations issued or guaranteed by the
United States of America with the Trustee. (Sections 1301-1303)

Legal Defeasance and Discharge. Each Indenture provides that, if so
specified with respect to the Debt Securities of any series issued under such
Indenture (other than convertible Subordinated Debt Securities), the Company
(and, if applicable, the Subsidiary Guarantors) will be discharged from any and
all obligations in respect of the Debt Securities of such series (except for
certain obligations relating to temporary Debt Securities and exchange of Debt
Securities, registration of transfer or exchange of Debt Securities of such
series, replacement of stolen, lost or mutilated Debt Securities of such series,
maintenance of paying agencies to hold moneys for payment in trust and payment
of additional amounts, if any, required in consequence of United States
withholding taxes imposed on payments to non-United States persons) upon the
deposit with the Trustee, in trust, of money and/or U.S. Government Obligations
which through the payment of interest and principal in respect thereof in
accordance with their terms will provide money in an amount sufficient to pay
the principal of (and premium, if any), and each installment of interest on, the
Debt Securities of such series on the Stated Maturity of such payments in
accordance with the terms of such Indenture and the Debt Securities of such
series. (Sections 1302, 1304) Such a trust may only be established if, among
other things, the Company has delivered to the Trustee an Opinion of Counsel to
the effect that (i) the Company has received from, or there has been published
by, the Internal Revenue Service a ruling, or (ii) since the date of such
Indenture there has been a change in applicable federal income tax law, in
either case to the effect that, and based thereon such Opinion of Counsel shall
confirm that, the Holders of such series will not recognize income, gain or loss
for federal income tax purposes as a result of such deposit, defeasance and
discharge, and will be subject to federal income tax on the same amounts and in
the same manner and at the same times as would have been the case if such
deposit, defeasance and discharge had not occurred. (Section 1304) In the event
of any such defeasance and discharge of Debt Securities of such series, Holders
of such series would be entitled to look only to such trust fund for payment of
principal of and any premium and any interest on their Debt Securities until
Maturity.

Covenant Defeasance. Each Indenture also provides that, if so specified
with respect to the Debt Securities of any series issued thereunder, the Company
may omit to comply with certain restrictive covenants, and any such omission
shall not be an Event of Default with respect to the Debt Securities of such
series, upon the deposit with the Trustee, in trust, of money and/or U.S.
Government Obligations which through the payment of interest and principal in
respect thereof in accordance with their terms will provide money in an amount
sufficient to pay the principal of (and premium, if any), and each installment
of interest on, the Debt Securities of such series on the Stated Maturity of
such payments in accordance with the terms of such Indenture and the Debt
Securities of such series. The obligations of the Company under such Indenture
and the Debt Securities of such series other than with respect to such covenants
shall remain in full force and effect. (Section 1303) Such a trust may be
established only if, among other things, the Company has delivered to the
Trustee an Opinion of Counsel to the effect that the Holders of such series will
not recognize income, gain or loss for federal income tax purposes as a result
of such deposit and covenant defeasance and will be subject to federal income
tax on the same amounts and in the

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same manner and at the same times as would have been the case if such deposit
and covenant defeasance had not occurred. (Section 1304)

Although the amount of money and U.S. Government Obligations on deposit
with the Trustee would be intended to be sufficient to pay amounts due on the
Debt Securities of such series at the time of their Stated Maturity, in the
event the Company exercises its option to omit compliance with the covenants
defeased with respect to the Debt Securities of any series as described above,
and the Debt Securities of such series are declared due and payable because of
the occurrence of any Event of Default, such amount may not be sufficient to pay
amounts due on the Debt Securities of such series at the time of the
acceleration resulting from such Event of Default. The Company shall in any
event remain liable for such payments as provided in the applicable Indenture.

Federal Income Tax Consequences. Under current United States federal income
tax law, defeasance and discharge would likely be treated as a taxable exchange
of Debt Securities to be defeased for an interest in the defeasance trust. As a
consequence, a holder would recognize gain or loss equal to the difference
between the holder's cost or other tax basis for such Debt Securities and the
value of the holder's interest in the defeasance trust, and thereafter would be
required to include in income the holder's share of the income, gain or loss of
the defeasance trust. Under current United States federal income tax law,
covenant defeasance would ordinarily not be treated as a taxable exchange of
such Debt Securities.

Meetings, Modification and Waiver

Modifications and amendments of any Indenture may be made by the Company,
the Subsidiary Guarantors and the Trustee with the consent of the Holders of a
majority in aggregate principal amount of the Outstanding Securities of each
series affected by such modification or amendment; provided, however, that no
such modification or amendment may, without consent of the Holder of each
Outstanding Security affected thereby, (a) change the Stated Maturity of the
principal of, or any installment of principal of or interest on, any Debt
Security, (b) change the Redemption Date with respect to any Debt Security, (c)
reduce the principal amount of, or premium or interest on, any Debt Security,
(d) change any obligation of the Company to pay additional amounts, (e) reduce
the amount of principal of an Original Issue Discount Security payable upon
acceleration of the Maturity thereof, (f) change the coin or currency in which
any Debt Security or any premium or interest thereon is payable, (g) change the
redemption right of any Holder, (h) impair the right to institute suit for the
enforcement of any payment on or with respect to any Debt Security or any
conversion right with respect thereto, (i) reduce the percentage in principal
amount of Outstanding Securities of any series, the consent of whose Holders is
required for modification or amendment of such Indenture or for waiver of
compliance with certain provisions of such Indenture or for waiver of certain
defaults, (j) reduce the requirements contained in such Indenture for quorum or
voting, (k) change any obligation of the Company to maintain an office or agency
in the places and for the purposes required by such Indenture, (l) adversely
affect the right to convert Subordinated Debt Securities, if applicable, or (m)
modify any of the above provisions. (Section 902)

The Subordinated Debt Indenture may not be amended to alter the
subordination of any outstanding Subordinated Debt Securities without the
consent of each holder of Senior Indebtedness (as defined below under
"-- Provisions Applicable Solely to Subordinated Debt Securities") then
outstanding that would be adversely affected thereby. (Section 907 of the
Subordinated Debt Indenture)

The Holders of a majority in aggregate principal amount of the Outstanding
Securities of each series may, on behalf of all Holders of that series, waive,
insofar as that series is concerned, compliance by the Company with certain
restrictive provisions of the Indenture under which such series has been issued.
(Section 1007) The Holders of a majority in aggregate principal amount of the
Outstanding Securities of each series may, on behalf of all Holders of that
series, waive any past default under the applicable Indenture with respect to
any Debt Securities of that series, except a default (a) in the payment of
principal of, or premium, if any, or any interest on any Debt Security of such
series or (b) in respect of a

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covenant or provision of such Indenture which cannot be modified or amended
without the consent of the Holder of each Outstanding Security of such series
affected. (Section 513)

Each Indenture provides that in determining whether the Holders of the
requisite principal amount of the Outstanding Securities have given any request,
demand, authorization, direction, notice, consent or waiver thereunder or are
present at a meeting of the Holders for quorum purposes, (i) the principal
amount of an Original Issue Discount Security that is deemed to be Outstanding
will be the amount of the principal that would be due and payable as of the date
of such determination upon acceleration of the Maturity thereof, and (ii) the
principal amount of a Debt Security denominated in a foreign currency or
currency units will be the U.S. dollar equivalent, determined on the date of
original issuance of such Debt Security, of the principal amount of such Debt
Security or, in the case of an Original Issue Discount Security, the U.S. dollar
equivalent, determined on the date of original issuance of such Security, of the
amount determined as provided in (i) above. (Section 101)

Each Indenture contains provisions for convening meetings of the Holders of
a series if Debt Securities of that series are issuable as Bearer Securities.
(Section 1401) A meeting may be called at any time by the Trustee, and also,
upon request, by the Company or the Holders of at least 10% in aggregate
principal amount of the Outstanding Securities of such series, in any such case
upon notice given in accordance with "Notices" below. (Section 1402) Except for
any consent which must be given by the Holder of each Outstanding Security
affected thereby, as described above, any resolution presented at a meeting (or
adjourned meeting at which a quorum is present) may be adopted by the
affirmative vote of the Holders of a majority in aggregate principal amount of
the Outstanding Securities of that series; provided, however, that any
resolution with respect to any request, demand, authorization, direction,
notice, consent, waiver or other action which may be made, given or taken by the
Holders of a specified percentage, which is less than a majority, in aggregate
principal amount of the Outstanding Securities of a series may be adopted at a
meeting (or adjourned meeting duly reconvened at which a quorum is present) by
the affirmative vote of the Holders of such specified percentage in aggregate
principal amount of the Outstanding Securities of that series. Any resolution
passed or decision taken at any meeting of Holders of any series duly held in
accordance with the applicable Indenture will be binding on all Holders of that
series and related coupons. The quorum at any meeting, and at any reconvened
meeting, will be Persons holding or representing a majority in aggregate
principal amount of the Outstanding Securities of a series. (Section 1404)

Consolidation, Merger and Sale of Assets

The Company, without the consent of the Holders of any of the outstanding
Securities under either Indenture, may consolidate with or merge into, or
convey, transfer or lease its assets substantially as an entirety to, any Person
which is a corporation, partnership or trust organized and validly existing
under the laws of any jurisdiction of the United States, provided that any
successor Person assumes the Company's obligations on the Securities and under
such Indenture, that after giving effect to the transaction no Event of Default,
and no event which, after notice or lapse of time, would become an Event of
Default, shall have occurred and be continuing, and that certain other
conditions are met. (Section 801)

Notices

Except as otherwise provided in the Indentures, notices to Holders of
Bearer Securities will be given by publication at least twice in a daily
newspaper in The City of New York and in such other city or cities as may be
specified in such Bearer Securities. Notices to Holders of Registered Securities
will be given by mail to the addresses of such Holders as they appear in the
Security Register. (Section 106)

Title

Title to any Bearer Securities (including Bearer Securities in permanent
global form) and any coupons appertaining thereto will pass by delivery. The
Company, the Trustee and any agent of the Company or the Trustee may treat the
bearer of any Bearer Security and the bearer of any coupon and

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the registered owner of any Registered Security as the owner thereof (whether or
not such Debt Security or coupon shall be overdue and notwithstanding any notice
to the contrary) for the purpose of making payment and for all other purposes.
(Section 308)

Replacement of Securities and Coupons

Any mutilated Debt Security or a Debt Security with a mutilated coupon
appertaining thereto will be replaced by the Company at the expense of the
Holder upon surrender of such Debt Security to the Trustee. Debt Securities or
coupons that became destroyed, stolen or lost will be replaced by the Company at
the expense of the Holder upon delivery to the Trustee of evidence of
destruction, loss or theft thereof satisfactory to the Company and the Trustee;
in the case of any coupon which becomes destroyed, stolen or lost, such coupon
will be replaced by issuance of a new Debt Security in exchange for the Debt
Security to which such coupon appertains. In the case of a destroyed, lost or
stolen Debt Security or coupon, an indemnity satisfactory to the Trustee and the
Company may be required at the expense of the Holder of such Debt Security or
coupon before a replacement Debt Security will be issued. (Section 306)

Governing Law

The Indentures, the Debt Securities and coupons and any Subsidiary
Guarantees will be governed by, and construed in accordance with, the laws of
the State of New York. (Section 113)

Regarding the Trustee

The Trustee under each Indenture is Chase Bank of Texas, National
Association.

Each Indenture contains certain limitations on the right of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize for its own account on certain property received in
respect of any such claim as security or otherwise. (Section 613) The Trustee is
permitted to engage in certain other transactions; however, if it acquires any
conflicting interest (as described in the Indentures), it must eliminate such
conflict or resign. (Section 608)

PROVISIONS APPLICABLE SOLELY TO SENIOR DEBT SECURITIES

Senior Debt Securities will be issued under the Senior Debt Indenture, and
each series will rank pari passu as to the right of payment of principal and any
premium and interest with each other series issued thereunder. (Section 301)

If the Senior Debt Securities are issued on a senior subordinated basis,
the applicable Prospectus Supplement will describe the related subordination
provisions. All Senior Debt Securities, whether issued on a senior or senior
subordinated basis, will be senior in right of payment to each series of
Subordinated Debt Securities.

PROVISIONS APPLICABLE SOLELY TO SUBORDINATED DEBT SECURITIES

Subordination. The Subordinated Debt Securities will be subordinate and
junior in right of payment, to the extent set forth in the Subordinated Debt
Indenture, to all Senior Indebtedness (as defined below) of the Company.
(Article Sixteen of the Subordinated Debt Indenture)

"Senior Indebtedness" is defined in Section 101 of the Subordinated Debt
Indenture as Indebtedness (as defined below) of the Company, whether outstanding
on the date of the Subordinated Debt Indenture or thereafter created, incurred,
assumed, guaranteed or in effect guaranteed by the Company, unless the
instrument creating or evidencing such Indebtedness provides that such
Indebtedness is not senior or superior, in right of payment, to the Subordinated
Debt Securities or to other Indebtedness which is pari passu with, or
subordinated to, the Subordinated Debt Securities; provided, however, that in no
event shall Senior Indebtedness include (a) Indebtedness of the Company owed or
owing to any Subsidiary of the Company, (b) Indebtedness to trade creditors, (c)
any liability for taxes owed or owing by the Company, and (d) the Subordinated
Debt Securities. "Indebtedness" is defined in Section 101 of the Subordinated

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Debt Indenture as, with respect to any Person, (a) all liabilities and
obligations, contingent or otherwise, of any such Person, (i) in respect of
borrowed money (whether or not the recourse of the lender is to the whole of the
assets of such Person or only to a portion thereof), (ii) evidenced by bonds,
notes, debentures or similar instruments, (iii) representing the balance
deferred and unpaid of the purchase price of any property or services, except
such as would constitute trade payables to trade creditors in the ordinary
course of business, (iv) evidenced by bankers' acceptances or similar
instruments issued or accepted by banks, (v) for the payment of money relating
to a Capitalized Lease Obligation, or (vi) evidenced by a letter of credit or a
reimbursement obligation of such Person with respect to any letter of credit;
(b) all obligations of such Person under Interest Swap and Hedging Obligations;
(c) all liabilities of others of the kind described in the preceding clause (a)
or (b) that such Person has guaranteed or that is otherwise its legal liability
and all obligations to purchase, redeem or acquire any Capital Stock; and (d)
any and all deferrals, renewals, extensions, refinancings, refundings (whether
direct or indirect) of any liability of the kind described in any of the
preceding clause (a), (b) or (c), or this clause (d), whether or not between or
among the same parties.

The Subordinated Debt Indenture provides that no payment may be made by the
Company on account of the principal of or any premium or interest on the
Subordinated Debt Securities, or to acquire any of the Subordinated Debt
Securities (including repurchases of Subordinated Debt Securities at the option
of the Holders) for cash or property (other than Junior Securities), or on
account of any redemption provisions of the Subordinated Debt Securities, (i)
upon the maturity of any Senior Indebtedness of the Company by lapse of time,
acceleration (unless waived) or otherwise, unless and until all principal of and
any premium and interest on such Senior Indebtedness are first paid in full (or
such payment is duly provided for), or (ii) in the event of default in the
payment of any principal of or any premium or interest on any Senior
Indebtedness when it becomes due and payable, whether at maturity or at a date
fixed for prepayment or by declaration or otherwise (a "Payment Default"),
unless and until such Payment Default has been cured or waived or otherwise has
ceased to exist. (Section 1601 of the Subordinated Debt Indenture)

Upon (i) the happening of an event of default (other than a Payment
Default) that permits the holders of Senior Indebtedness or their representative
immediately to accelerate its maturity and (ii) written notice of such event of
default given to the Company and the Trustee by the holders of at least 25% in
the aggregate principal amount outstanding of such Senior Indebtedness or their
representative (a "Payment Notice"), then, unless and until such event of
default has been cured or waived or otherwise has ceased to exist, no payment
(by set off or otherwise) may be made by or on behalf of the Company on account
of the principal of or any premium or interest on the Subordinated Debt
Securities, or to acquire or repurchase any of the Subordinated Debt Securities
for cash or property, or on account of any redemption provisions of the
Subordinated Debt Securities, in any such case other than payments made with
Junior Securities of the Company. Notwithstanding the foregoing, unless (i) the
Senior Indebtedness in respect of which such event of default exists has been
declared due and payable in its entirety within 179 days after the Payment
Notice is delivered as set forth above (the "Payment Blockage Period"), and (ii)
such declaration has not been rescinded or waived, at the end of the Payment
Blockage Period, the Company shall be required to pay all sums not paid to the
Holders of the Subordinated Debt Securities during the Payment Blockage Period
due to the foregoing prohibitions and to resume all other payments as and when
due on the Subordinated Debt Securities. Any number of Payment Notices may be
given; provided, however, that (i) not more than one Payment Notice shall be
given within a period of any 360 consecutive days and (ii) no event of default
that existed upon the date of such Payment Notice or the commencement of such
Payment Blockage Period (whether or not such event of default is on the same
issue of Senior Indebtedness) shall be made the basis for the commencement of
any other Payment Blockage Period. (Section 1601 of the Subordinated Debt
Indenture)

Upon any distribution of assets of the Company upon any dissolution,
winding up, liquidation or reorganization of the Company, whether voluntary or
involuntary, in bankruptcy, insolvency, receivership or a similar proceeding or
upon assignment for the benefit of creditors or any marshaling of assets or
liabilities, (i) the holders of all Senior Indebtedness will first be entitled
to receive payment in full (or

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have such payment duly provided for) before the Holders are entitled to receive
any payment on account of the principal of or any premium or interest on the
Subordinated Debt Securities (other than Junior Securities) and (ii) any payment
or distribution of assets of the Company of any kind or character, whether in
cash, property or securities (other than Junior Securities) to which the Holders
or the Trustee on behalf of the Holders would be entitled (by set off or
otherwise), except for the subordination provisions contained in the
Subordinated Debt Indenture, will be paid by the liquidating trustee or agent or
other Person making such a payment or distribution directly to the holders of
Senior Indebtedness or their representative to the extent necessary to make
payment in full of all such Senior Indebtedness remaining unpaid, after giving
effect to any concurrent payment or distribution to the holders of such Senior
Indebtedness. (Section 1601 of the Subordinated Debt Indenture)

In the event that, notwithstanding the foregoing, any payment or
distribution of assets of the Company (other than Junior Securities) is received
by the Trustee or the Holders at a time when such payment or distribution is
prohibited by the foregoing provisions, such payment or distribution shall be
held in trust for the benefit of the holders of Senior Indebtedness, and shall
be paid or delivered by the Trustee or such Holders, as the case may be, to the
holders of the Senior Indebtedness remaining unpaid or unprovided for or their
representative or representatives, or to the trustee or trustees under any
indenture pursuant to which any instruments evidencing any of such Senior
Indebtedness may have been issued, ratably according to the aggregate amounts
remaining unpaid on account of the Senior Indebtedness held or represented by
each, for application to the payment of all Senior Indebtedness remaining
unpaid, to the extent necessary to pay or to provide for the payment of all such
Senior Indebtedness in full after giving effect to any concurrent payment or
distribution to the holders of such Senior Indebtedness. (Section 1601 of the
Subordinated Debt Indenture)

No provisions contained in the Subordinated Debt Indenture or the
Subordinated Debt Securities will affect the obligation of the Company, which is
absolute and unconditional, to pay, when due, principal of and any premium and
interest on the Subordinated Debt Securities as and when the same shall become
due and payable. The subordination provisions of the Subordinated Debt Indenture
and the Subordinated Debt Securities will not prevent the occurrence of any
Event of Default under the Subordinated Debt Indenture or limit the rights of
the Trustee or any Holder, subject to the three preceding paragraphs, to pursue
any other rights or remedies with respect to the Subordinated Debt Securities.
(Sections 501 and 1601 of the Subordinated Debt Indenture)

The Prospectus Supplement respecting any series of Subordinated Debt
Securities will set forth any subordination provisions applicable to such series
in addition to or different from those described above.

If any series of Subordinated Debt Securities is guaranteed by Subsidiary
Guarantees, then, except as otherwise specified in the applicable Prospectus
Supplement, the obligations of each Subsidiary Guarantor under such Subsidiary
Guarantees will be subordinated to the Senior Indebtedness of such Subsidiary
Guarantor to the same extent and in the same manner as the Subordinated Debt
Securities are subordinated to Senior Indebtedness of the Company. (Section 1611
of the Subordinated Debt Indenture)

By reason of such subordination, in the event of the liquidation,
bankruptcy, reorganization, insolvency, receivership or similar proceeding
involving the Company or an assignment for the benefit of creditors of the
Company or any of its subsidiaries or a marshaling of assets or liabilities of
the Company or its subsidiaries, holders of Senior Indebtedness and holders of
other obligations of the Company that are not subordinated to Senior
Indebtedness may receive more, ratably, than holders of the Subordinated Debt
Securities. Such subordination will not prevent the occurrence of any Default or
Event of Default or limit the rights of the Trustee or any Holder, subject to
the other provisions of the Indenture, to pursue any other rights or remedies
with respect of the Subordinated Debt Securities.

Conversion. The Subordinated Debt Indenture may provide for a right of
conversion of Subordinated Debt Securities into Common Stock (or cash in lieu
thereof). (Sections 301 and 1501 of the Subordinated Debt Indenture) The
following provisions will apply to Debt Securities that are convertible
Subordinated Debt Securities unless otherwise provided in the Prospectus
Supplement for such Debt Securities.

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<PAGE> 74

The Holder of any convertible Subordinated Debt Securities will have the
right exercisable at any time prior to the close of business on the second
Business Day prior to their Stated Maturity, unless previously redeemed or
otherwise purchased by the Company, to convert such Subordinated Debt Securities
into shares of Common Stock at the Conversion Price set forth in the Prospectus
Supplement, subject to adjustment. The Holder of convertible Subordinated Debt
Securities may convert any portion thereof which is $1,000 in principal amount
or any integral multiple thereof. (Section 1502 of the Subordinated Debt
Indenture)

In certain events, the Conversion Price may be subject to adjustment as set
forth in the applicable Prospectus Supplement for such Subordinated Debt
Securities.

Fractional shares of Common Stock will not be issued upon conversion, but,
in lieu thereof, the Company will pay a cash adjustment based on the then
current market price for the Common Stock. (Section 1503 of the Subordinated
Debt Indenture) Upon conversion, no adjustments will be made for accrued
interest or dividends, and convertible Subordinated Debt Securities surrendered
for conversion between the record date for an interest payment and the Interest
Payment Date (except convertible Subordinated Debt Securities called for
redemption on a redemption date during such period) must be accompanied by
payment of an amount equal to the interest thereon which the Holder is to
receive. (Section 1502 of the Subordinated Debt Indenture)

In the case of any reclassification, consolidation or merger of the Company
with or into another Person or any merger of another Person with or into the
Company (with certain exceptions), or in case of any conveyance, transfer or
lease of the assets of the Company substantially as an entirety, each
convertible Subordinated Debt Security then outstanding will, without the
consent of any Holder thereof, become convertible only into the kind and amount
of securities, cash and other property receivable upon such reclassification,
consolidation, merger, conveyance, transfer or lease by a holder of the number
of shares of Common Stock into which such Subordinated Debt Security was
convertible immediately prior thereto, after giving effect to any adjustment
event, who failed to exercise any rights of election and received per share the
kind and amount received per share by a plurality of non-electing shares.
(Section 1505 of the Subordinated Debt Indenture)

DESCRIPTION OF COMMON STOCK AND PREFERRED STOCK

The Company's authorized capital stock consists of 200,000,000 shares of
Common Stock, par value $.01 per share, and 20,000,000 shares of Preferred
Stock, par value $.01 per share, each of which is described below. The summary
description of the capital stock of the Company contained herein is necessarily
general and reference should be made in each case to the Company's Restated
Articles of Incorporation and Bylaws, which are exhibits to the Registration
Statement of which this Prospectus is a part.

COMMON STOCK

Each share of Common Stock is subject to all rights, privileges,
preferences and priorities of any class of preferred stock of the Company. Each
share of Common Stock has an equal and ratable right to receive dividends as and
when declared by the Board of Directors out of any funds of the corporation
legally available for the payment thereof. The Company currently has no
intention to pay dividends on the shares of Common Stock in the foreseeable
future.

In the event of a liquidation, dissolution or winding up of the Company,
the holders of Common Stock are entitled to share equally and ratably in the
assets available for distribution after payment of all liabilities, including
any liquidation preferences payable to the holders of Preferred Stock that may
at the time be outstanding.

Each share of Common Stock is entitled to one vote in the election of
directors and on all other matters submitted to a vote of shareholders. Holders
of Common Stock have no right to cumulate their vote in the election of
directors.

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American Stock Transfer & Trust Company, 40 Wall Street, New York, New York
10005, acts as the transfer agent and registrar of the Common Stock.

PREFERRED SHARE PURCHASE RIGHTS

On November 8, 1996, the Board of Directors of the Company authorized the
issuance of one preferred share purchase right (a "Right") for each share of
Common Stock outstanding on November 20, 1996 and for each share of Common Stock
issued thereafter until the Distribution Date (as defined below) or the earlier
redemption or expiration of the Rights. Each Right entitles the registered
holder to purchase from the Company one one-thousandth of a share of Junior
Participating Preferred Stock, par value $.01 per share (the "Junior Preferred
Shares"), of the Company, at a price of $56.00 per one one-thousandth of a
Junior Preferred Share (the "Purchase Price"), subject to adjustment. The
description and terms of the Rights are set forth in a Rights Agreement (the
"Rights Agreement") dated as of November 15, 1996 between the Company and
American Stock Transfer & Trust Company, as Rights Agent (the "Rights Agent"),
and this description of the Rights is qualified in its entirety by reference to
such agreement, which is included as an exhibit to the Registration Statement of
which this Prospectus is a part.

Until the Distribution Date, the Rights will attach to all Common Stock
certificates representing outstanding shares and no separate Right Certificate
will be distributed. Accordingly, a Right will be issued for each share of
Common Stock issued hereunder. The Rights will separate from the shares of
Common Stock and a Distribution Date will occur upon the earlier of (i) 10
business days following a public announcement that a person or group of
affiliated or associated persons (an "Acquiring Person") has acquired beneficial
ownership of 15% or more of the outstanding Voting Shares (as defined in the
Rights Agreement) of the Company, or (ii) 10 business days following the
commencement or announcement of an intention to commence a tender offer or
exchange offer the consummation of which would result in the beneficial
ownership by a person or group of 15% or more of such outstanding Voting Shares.

Until the Distribution Date (or earlier redemption or expiration of the
Rights) the Rights will be evidenced by the certificates representing such
Common Stock. As soon as practicable following the Distribution Date, separate
certificates evidencing the Rights (the "Right Certificates") will be mailed to
holders of record of the shares of Common Stock as of the close of business on
the Distribution Date and such separate Right Certificates alone will thereafter
evidence the Rights. The Rights are not exercisable until the Distribution Date.
The Rights will expire on November 19, 2006 (the "Final Expiration Date"),
unless the Final Expiration Date is extended or the Rights are earlier redeemed
or exchanged by the Company as described below.

If a person or group were to acquire 15% or more of the Voting Shares of
the Company, each Right then outstanding (other than Rights beneficially owned
by the Acquiring Person, which would become null and void) would become a right
to buy for the Purchase Price that number of shares of Common Stock (or under
certain circumstances, the equivalent number of one one-thousandths of a Junior
Preferred Share) that at the time of such acquisition would have a market value
of two times the Purchase Price of the Right. If the Company were acquired in a
merger or other business combination transaction or assets constituting more
than 50% of its consolidated assets or producing more than 50% of its earning
power or cash flow were sold, proper provision will be made so that each holder
of a Right will thereafter have the right to receive, upon the exercise thereof
at the then current Purchase Price of the Right, that number of shares of common
stock of the acquiring company which at the time of such transaction would have
a market value of two times the Purchase Price of the Right.

The dividend and liquidation rights, and the non-redemption feature, of the
Junior Preferred Shares are designed so that the value of one one-thousandth of
a Junior Preferred Share purchasable upon exercise of each Right will
approximate the value of one Common Stock. The Junior Preferred Shares issuable
upon exercise of the Rights will be non-redeemable and rank junior to all other
series of the Company's preferred stock. Each whole Junior Preferred Share will
be entitled to receive a quarterly

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<PAGE> 76

preferential dividend in an amount per share equal to the greater of (i) $1.00
in cash, or (ii) in the aggregate, 1,000 times the dividend declared on the
shares of Common Stock. In the event of liquidation, the holders of the Junior
Preferred Shares will be entitled to receive a preferential liquidation payment
equal to the greater of (i) $1,000 per share, or (ii) in the aggregate, 1,000
times the payment made on the shares of Common Stock. In the event of any
merger, consolidation or other transaction in which shares of Common Stock are
exchanged for or changed into other stock or securities, cash or other property,
each whole Junior Preferred Share will be entitled to receive 1,000 times the
amount received per Common Stock. Each whole Junior Preferred Share will be
entitled to 1,000 votes on all matters submitted to a vote of the stockholders
of the Company, and Junior Preferred Shares will generally vote together as one
class with the Common Stock and any other capital stock on all matters submitted
to a vote of shareholders of the Company.

If required, the offer and sale of the Junior Preferred Shares issuable
upon exercise of the Rights will be registered under the Securities Act at such
time as the Rights become exercisable.

The number of one one-thousandths of a Junior Preferred Share or other
securities or property issuable upon exercise of the Rights, and the Purchase
Price payable, are subject to customary adjustments from time to time to prevent
dilution. The number of outstanding Rights and the number of one one-
thousandths of a Junior Preferred Share issuable upon exercise of each Right are
also subject to adjustment in the event of a stock split of the shares of Common
Stock or a stock dividend on the shares of Common Stock payable in shares of
Common Stock or subdivisions, consolidations or combinations of the shares of
Common Stock occurring, in any such case, prior to the Distribution Date.

At any time after the acquisition by a person or group of affiliated or
associated persons of beneficial ownership of 15% or more of the outstanding
Voting Shares of the Company and before the acquisition by a person or group of
50% or more of the outstanding Voting Shares of the Company, the Board of
Directors may, at its option, issue shares of Common Stock in mandatory
redemption of, and in exchange for, all or part of the then outstanding and
exercisable Rights (other than Rights owned by such person or group which would
become null and void) at an exchange ratio of one share of Common Stock (or one
one-thousandth of a Junior Preferred Share) for each two shares of Common Stock
for which each Right is then exercisable, subject to adjustment.

At any time prior to the first public announcement that a person or group
has become the beneficial owner of 15% or more of the outstanding Voting Shares,
the Board of Directors of the Company may redeem all but not less than all the
then outstanding Rights at a price of $0.01 per Right (the "Redemption Price").
The redemption of the Rights may be made effective at such time, on such basis
and with such conditions as the Board of Directors in its sole discretion may
establish. Immediately upon the action of the Board of Directors ordering
redemption of the Rights, the right to exercise the Rights will terminate and
the only right of the holders of Rights will be to receive the Redemption Price.

Until a Right is exercised, the holder thereof, as such, will have no
rights as a shareholder of the Company, including, without limitation, the right
to vote or to receive dividends.

The terms of the Rights may be amended by the Board of Directors of the
Company without the consent of the holders of the Rights, including an amendment
to extend the Final Expiration Date, and, provided a Distribution Date has not
occurred, to extend the period during which the Rights may be redeemed, except
that after the first public announcement that a person or group has become the
beneficial owner of 15% or more of the outstanding Voting Shares, no such
amendment may materially and adversely affect the interests of the holders of
the Rights.

The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the Company
on terms not determined by the Board of Directors to be in the best interests of
all shareholders. The Rights will not interfere with a merger or other business
combination approved by the Board of Directors, prior to the time that a person
or group has acquired beneficial ownership of 15% or more of the Common Stock,
since the Rights may be redeemed by the Company prior to that time.

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<PAGE> 77

PREFERRED STOCK

The following description of the terms of the Preferred Stock sets forth
certain general terms and provisions of the Preferred Stock to which an
applicable Prospectus Supplement may relate. Certain other terms of any series
of Preferred Stock offered by an applicable Prospectus Supplement will be
specified in such Prospectus Supplement. If so specified in the applicable
Prospectus Supplement, the terms of any series of Preferred Stock may differ
from the terms set forth below. The description of the terms of the Preferred
Stock set forth below and in an applicable Prospectus Supplement does not
purport to be complete and is subject to and qualified in its entirety by
reference to the Statement of Resolution relating to the applicable series of
Preferred Stock, which will be filed as an exhibit to, or incorporated by
reference in, the Registration Statement of which this Prospectus forms a part.

General. The Preferred Stock may be divided into and issued in one or more
series, each series to be so designated as to distinguish the shares thereof
from the shares of all other series and classes. The Board of Directors is
vested with the authority to establish and designate such series from time to
time, and within the limitations prescribed by law or set forth in the Company's
Restated Articles of Incorporation, to fix and determine the number,
preferences, limitations and relative rights, including voting rights, of the
authorized shares within each such series; provided, however, that the Board of
Directors may not decrease the number of shares within a series below the number
of shares within such series that is then issued. The Board of Directors shall
exercise such authority by the adoption of a resolution or resolutions as
prescribed by law.

The terms of any series of Preferred Stock may be amended without the
consent of the holders of any other series of Preferred Stock or of any class of
junior stock, provided such amendment does not adversely affect the holders of
such other series of Preferred Stock or class of junior stock. Shares of any
class of Preferred Stock which have been issued and reacquired in any manner and
are not held as treasury shares, including shares redeemed by purchase (whether
through the operation of a retirement or sinking fund or otherwise), will have
the status of authorized and unissued Preferred Stock and may be reissued as a
part of the series of which they were originally a part or may be reclassified
into and reissued as part of a new series.

No shares of Preferred Stock are, as of the date of this Prospectus, issued
or outstanding, although the Company has issued Rights to purchase Junior
Preferred Shares as described above under "-- Preferred Share Purchase Rights."
It is not possible to state the actual effect of the authorization and issuance
of a new series of Preferred Stock upon the rights of holders of the Common
Stock and other series of Preferred Stock unless and until the Board of
Directors determines the attributes of such new series of Preferred Stock and
the specific rights of its holders. Such effects might include, however, (i)
restrictions on dividends on Common Stock and other series of Preferred Stock if
dividends on such new series of Preferred Stock have not been paid; (ii)
dilution of the voting power of Common Stock and other series of Preferred Stock
to the extent that such new series of Preferred Stock has voting rights, or to
the extent that any such new series of Preferred Stock is convertible into
Common Stock; (iii) dilution of the equity interest of Common Stock and other
series of Preferred Stock; and (iv) limitation on the right of holders of Common
Stock and other series of Preferred Stock to share in the Company's assets upon
liquidation until satisfaction of any liquidation preference attributable to
such new series of Preferred Stock. While the ability of the Company to issue
Preferred Stock provides flexibility in connection with possible acquisitions
and other corporate purposes, its issuance could be used to impede an attempt by
a third party to acquire a majority of the outstanding voting stock of the
Company.

The Preferred Stock will have the dividend, liquidation, redemption and
voting rights set forth below unless otherwise provided in the Prospectus
Supplement relating to a particular series of the Preferred Stock. Reference is
made to the Prospectus Supplement relating to the particular series of the
Preferred Stock offered thereby for specific terms, including: (i) the
designation of such Preferred Stock, the number of shares offered and the
liquidation value thereof; (ii) the price at which such Preferred Stock will be
issued; (iii) the dividend rate (or method of calculation), the dates on which
dividends shall be payable, whether such dividends shall be cumulative or
noncumulative and, if cumulative, the dates from

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<PAGE> 78

which dividends shall commence to accumulate; (iv) the liquidation preference
thereof; (v) any redemption or sinking fund provisions; (vi) any conversion or
exchange provisions of such Preferred Stock; and (vii) any additional dividend,
liquidation, redemption, sinking fund and other rights, preferences, limitations
and restrictions of such Preferred Stock.

The Preferred Stock will, when issued, be fully paid and nonassessable.
Unless otherwise specified in the Prospectus Supplement relating to a particular
series of the Preferred Stock, each series of the Preferred Stock will rank on a
parity as to dividends and distributions in the event of a liquidation with each
other series of the Preferred Stock, if any. Holders of Preferred Stock will
have no preemptive rights to subscribe for or purchase shares of capital stock.

Dividend Rights. Holders of the Preferred Stock of each series will be
entitled to receive, when, as and if declared by the Board of Directors, out of
assets of the Company legally available therefor, cash dividends at such rates
and on such dates as are set forth in the Prospectus Supplement relating to such
series of the Preferred Stock. Such rate may be fixed or variable or both. Each
such dividend will be payable to the holders of record as they appear on the
stock books of the Company on such record dates as will be fixed by the Board of
Directors or a duly authorized committee thereof. Dividends on any series of the
Preferred Stock may be cumulative or noncumulative, as provided in the
Prospectus Supplement relating thereto. If the Board of Directors fails to
declare a dividend payable on a dividend payment date on any series of Preferred
Stock for which dividends are noncumulative, then the right to receive a
dividend in respect of the dividend period ending on such dividend payment date
will be lost, and the Company shall have no obligation to pay the dividend
accrued for that period, whether or not dividends are declared for any future
period.

Unless otherwise indicated in an applicable Prospectus Supplement, all
series of Preferred Stock will be senior in right as to dividends and in
liquidation to the Common Stock and any other class of stock of the Company
ranking junior to the Preferred Stock.

Rights Upon Liquidation. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Company, the holders of each
series of Preferred Stock will be entitled to receive out of assets of the
Company available for distribution to stockholders, before any distribution of
assets is made to holders of Common Stock or any other class of stock ranking
junior to such series of the Preferred Stock upon liquidation, liquidating
distributions in the amount set forth in the Prospectus Supplement relating to
such series of the Preferred Stock plus an amount equal to accrued and unpaid
dividends for the then-current dividend period and, if such series of the
Preferred Stock is cumulative, for all dividend periods prior thereto. If, upon
any voluntary or involuntary liquidation, dissolution or winding up of the
Company, the amounts payable with respect to the Preferred Stock of any series
and any other shares of stock of the Company ranking as to any such distribution
on a parity with such series of the Preferred Stock are not paid in full, the
holders of the Preferred Stock of such series and of such other shares will
share ratably in any such distribution of assets of the Company in proportion to
the full respective preferential amounts to which they are entitled. After
payment of the full amount of the liquidating distribution to which they are
entitled, the holders of such series of Preferred Stock will have no right or
claim to any of the remaining assets of the Company. Neither the sale of all or
substantially all the property or business of the Company nor the merger or
consolidation of the Company into or with any other corporation shall be deemed
to be a dissolution, liquidation or winding up, voluntary or involuntary, of the
Company.

Redemption. A series of the Preferred Stock may be redeemable, in whole or
in part, at the option of the Company, and may be subject to mandatory
redemption pursuant to a sinking fund, in each case upon terms, at the times and
at the redemption prices set forth in the Prospectus Supplement relating to such
series.

The Prospectus Supplement relating to a series of Preferred Stock that is
subject to mandatory redemption will specify the number of shares of such series
of Preferred Stock that will be redeemed by the Company in each year commencing
after a date to be specified, at a redemption price per share to be specified,
together with an amount equal to any accrued and unpaid dividends thereon to the
date of

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<PAGE> 79

redemption. The redemption price may be payable in cash, capital stock or in
cash received from the net proceeds of the issuance of capital stock of the
Company, as specified in the Prospectus Supplement relating to such series of
Preferred Stock.

If fewer than all the outstanding shares of any series of the Preferred
Stock are to be redeemed, whether by mandatory or optional redemption, the
selection of the shares to be redeemed will be determined by lot or pro rata as
may be determined by the Board of Directors or a duly authorized committee
thereof, or by any other method which may be determined by the Board of
Directors or such committee to be equitable. From and after the date of
redemption (unless default shall be made by the Company in providing for the
payment of the redemption price), dividends shall cease to accrue on the shares
of Preferred Stock called for redemption and all rights of the holders thereof
(except the right to receive the redemption price) shall cease.

In the event that full dividends, including accumulations in the case of
cumulative Preferred Stock, on any series of the Preferred Stock have not been
paid, such series of the Preferred Stock may not be redeemed in part and the
Company may not purchase or acquire any shares of such series of the Preferred
Stock otherwise than pursuant to a purchase or exchange offer made on the same
terms to all holders of such series of the Preferred Stock.

Conversion or Exchange Rights. The Prospectus Supplement for any series of
the Preferred Stock will state the terms, if any, on which shares of such series
are convertible into, or exchangeable for, securities of the Company or another
person.

Voting Rights. Unless otherwise determined by the Board of Directors and
indicated in the Prospectus Supplement relating to a particular series of
Preferred Stock, the holders of the Preferred Stock will not be entitled to
vote, except as expressly required by applicable law. In the event the Company
issues share of any series of Preferred Stock with voting rights, including any
voting rights in the case of dividend arrearages, unless otherwise specified in
the Prospectus Supplement relating to a particular series of Preferred Stock,
each such share will be entitled to one vote on matters on which holders of such
series of the Preferred Stock are entitled to vote. In the case of any series of
Preferred Stock having one vote per share on matters on which holders of such
series are entitled to vote, the voting power of such series, on matters on
which holders of such series and holders of other series of preferred stock are
entitled to vote as a single class, will depend on the number of shares in such
series, not on the aggregate liquidation preference or initial offering price of
the shares of such series of Preferred Stock.

Conditions and Restrictions Upon the Company. The Prospectus Supplement
relating to a series of the Preferred Stock will describe any conditions or
restrictions upon the Company which are for the benefit of such series,
including restrictions upon the creation of debt or other series of Preferred
Stock; payment of dividends; or distributions, acquisitions or redemptions of
shares ranking junior to such series.

VOTING

The Company's Restated Articles of Incorporation provide that (a) action
may be taken without a meeting, without prior notice, and without a vote, if a
consent or consents in writing, setting forth the action so taken, shall have
been signed by the holder or holders of shares having not less than the minimum
number of votes that would be necessary to take such action at a meeting of the
shareholders, and (b) the vote required to approve a merger, share exchange,
certain sales of assets, charter amendment or dissolution involving the Company
shall be a majority of each outstanding class of capital stock entitled to vote
thereon.

NO PREEMPTIVE RIGHTS

No holder of shares of the Company, including shares of Common Stock or
Preferred Stock, shall have any preemptive right or other right to purchase or
subscribe for or receive any shares of any class, or series thereof, of stock of
the Company, whether now or hereafter authorized, or any warrants, options,

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bonds, debentures or other securities convertible into, exchangeable for or
carrying any right to purchase any shares of any class, or series thereof, of
stock.

BUSINESS COMBINATION LAW

The Company is subject to Part Thirteen of the Texas Business Corporation
Act, known as the "Business Combination Law," which became effective September
1, 1997. In general, the Business Combination Law prevents an "affiliated
shareholder" (or its affiliates or associates) from entering into or engaging in
a "business combination" with an "issuing public corporation" during the
three-year period immediately following the date on which the affiliated
shareholder became an affiliated shareholder, unless (a) before the date such
person became an affiliated shareholder, the board of directors of the issuing
public corporation approves the business combination or the acquisition of
shares that caused the affiliated shareholder to become an affiliated
shareholder, or (b) not less than six months after the date such person became
an affiliated shareholder, the business combination is approved by the
affirmative vote of holders of at least two-thirds of the issuing public
corporation's outstanding voting shares not beneficially owned by the affiliated
shareholder or its affiliates or associates. For the purposes of the foregoing,
"affiliated shareholder" is defined generally as a person that is or was within
the preceding three-year period the beneficial owner of 20% or more of a
corporation's outstanding voting shares; "business combination" is defined
generally to include (i) mergers, share exchanges or conversions involving the
affiliated shareholder, (ii) dispositions of assets involving the affiliated
shareholder having an aggregate value equal to 10% or more of the market value
of the assets or of the outstanding common stock or representing 10% or more of
the earning power or net income of the corporation, (iii) certain issuances or
transfers of securities by the corporation to the affiliated shareholder other
than on a pro rata basis, (iv) certain plans or agreements relating to a
liquidation or dissolution of the corporation involving an affiliated
shareholder, (v) certain reclassifications, recapitalizations, distributions or
other transactions that would have the effect of increasing the affiliated
shareholder's percentage ownership of the corporation and (vi) the receipt of
tax, guarantee, loan or other financial benefits by an affiliated shareholder
other than proportionately as a shareholder of the corporation; and "issuing
public corporation" is generally defined to include most publicly held Texas
corporations, including the Company.

FOREIGN OWNERSHIP

The Restated Articles of Incorporation of the Company contain provisions
limiting foreign ownership of the capital stock of the Company. These provisions
were originally intended to, among other things, protect the Company's ability
to be deemed a United States citizen under Section 2 ("U.S. citizen") of the
Shipping Act, 1916, as amended (the "Shipping Act") which allowed the Company to
avail itself of certain types of U.S. government guaranteed financings
previously available only for U.S. flag vessels owned by U.S. citizens. Although
being a U.S. citizen is not currently necessary to obtain such financings, the
ability to be a U.S. citizen may be beneficial in the future should the Company
desire to obtain certain types of U.S. flag vessels. One of the conditions that
must be satisfied in order that a corporation may be deemed to be a U.S. citizen
is that a controlling interest therein is owned by citizens of the United
States. Thus, a transfer of Common Stock which would result in more than 50% of
the outstanding Common Stock being held by non-U.S. citizens would cause the
Company to then be ineligible to be a U.S. citizen. Under the provisions of the
Company's Restated Articles of Incorporation, (i) shares of any class of capital
stock of the Company are not issuable to and are not registrable upon transfer
in the name of any person who cannot demonstrate to the satisfaction of the
Company that such person is a U.S. citizen and is not holding such shares for
the account of any non-U.S. citizen, if as a result of such issuance or
registration of transfer the percentage of such class owned by non-U.S. citizens
would exceed a fixed percentage (the "Permitted Percentage"), which is equal to
2% less than the percentage that would prevent the Company from being a U.S.
citizen (currently 50%, thus resulting in a Permitted Percentage of 48%), and
any such transfer shall be void and ineffective as against the Company, and (ii)
if at any time non-U.S. ownership of any such class (either record or
beneficial) exceeds the Permitted Percentage, the Company may withhold payment
of dividends on such shares deemed to be in excess of the Permitted Percentage
and may suspend the voting rights of such shares. The Company's Restated
Articles of

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Incorporation do not prohibit transfers that would result in the Company's being
ineligible to engage in coastwise trade.

In addition to the foregoing, Section 9 of the Shipping Act provides that a
controlling interest in the Company may not be acquired by a non-U.S. citizen
without the consent of the U.S. Secretary of Transportation, acting through the
United States Maritime Administration ("MARAD"). Notwithstanding the provisions
of Section 9, current MARAD regulations authorize the transfer of a controlling
interest in a company as long as the United States is not at war, the transferee
is not a national of a country to which the transfer would be contrary to the
foreign policy of the United States and the Company's U.S. flag vessels remain
documented under the U.S. flag after the transfer. In the absence of MARAD
consent (either by the current regulations or otherwise) the transfer of a
controlling interest in the Company to non-U.S. citizens would enable MARAD to
exercise various remedies under the Shipping Act including seizure of vessels,
civil penalties and, in certain cases, criminal penalties.

Certificates representing the capital stock of the Company bear legends
concerning the restrictions on non-U.S. ownership. In addition, the Board of
Directors is authorized to adopt a bylaw provision for the establishment of a
dual stock certificate systems under which different forms of certificates may
be used to indicate whether or not the owner thereof is a U.S. citizen. To date,
the Board of Directors has not deemed it necessary to adopt such a system.

The restrictions imposed by the Company's Restated Articles of
Incorporation may at times preclude U.S. citizens from transferring their shares
of Common Stock to non-U.S. citizens. This may restrict the available market for
resales of shares of Common Stock and for the issuance of shares by the Company.

DESCRIPTION OF WARRANTS

The Company may issue Warrants for the purchase of Common Stock. Warrants
may be issued independently or together with Debt Securities, Preferred Stock or
Common Stock offered by any Prospectus Supplement and may be attached to or
separate from any such offered Securities. Each series of Warrants will be
issued under a separate warrant agreement (a "Warrant Agreement") to be entered
into between the Company and a bank or trust company, as warrant agent (the
"Warrant Agent"), all as set forth in the Prospectus Supplement relating to the
particular issue of Warrants. The Warrant Agent will act solely as an agent of
the Company in connection with the Warrants and will not assume any obligation
or relationship of agency or trust for or with any holders of Warrants or
beneficial owners of Warrants. The following summary of certain provisions of
the Warrants does not purport to be complete and is subject to, and is qualified
in its entirety by reference to, all provisions of the Warrant Agreements.

Reference is made to the Prospectus Supplement relating to the particular
issue of Warrants offered thereby for the terms of such Warrants, including,
where applicable: (i) the number of shares of Common Stock purchasable upon the
exercise of Warrants and the price at which such number of shares of Common
Stock may be purchased upon such exercise; (ii) the date on which the right to
exercise such Warrants shall commence and the date on which such right shall
expire (the "Expiration Date"); (iii) United States Federal income tax
consequences applicable to such Warrants; and (iv) any other terms of such
Warrants. Warrants will be offered and exercisable for U.S. dollars only.
Warrants will be issued in registered form only. The exercise price for Warrants
will be subject to adjustment in accordance with the applicable Prospectus
Supplement.

Each Warrant will entitle the holder thereof to purchase such number of
shares of Common Stock at such exercise price as shall in each case be set forth
in, or calculable from, the Prospectus Supplement relating to the Warrants,
which exercise price may be subject to adjustment upon the occurrence of certain
events as set forth in such Prospectus Supplement. After the close of business
on the Expiration Date (or such later date to which such Expiration Date may be
extended by the Company), unexercised Warrants will become void. The place or
places where, and the manner in which, Warrants may be exercised shall be
specified in the Prospectus Supplement relating to such Warrants.

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Prior to the exercise of any Warrants, holders of such Warrants will not
have any of the rights of holders of Common Stock purchasable upon such
exercise, including the right to receive payments of dividends, if any, on the
Common Stock purchasable upon such exercise, or to exercise any applicable right
to vote.

PLAN OF DISTRIBUTION

GENERAL

The Company may sell Securities to or through underwriters or dealers, and
also may sell Securities directly to one or more other purchasers or through
agents. The Prospectus Supplement will set forth the names of any underwriters
or agents involved in the sale of the Offered Securities and any applicable
commissions or discounts.

Underwriters, dealers or agents may offer and sell the Offered Securities
at a fixed price or prices, which may be changed, or from time to time at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices or at negotiated prices. In connection with the sale of the
Securities, underwriters or agents may be deemed to have received compensation
from the Company in the form of underwriting discounts or commissions and may
also receive commissions from purchasers of the Securities for whom they may act
as agent. Underwriters or agents may sell the Securities to or through dealers,
and such dealers may receive compensation in the form of discounts, concessions
or commissions from the underwriters or commissions from the purchasers for whom
they may act as agent.

The Securities (other than the Common Stock), when first issued, will have
no established trading market. Any underwriters or agents to or through whom
Securities are sold by the Company for public offering and sale may make a
market in such Securities, but such underwriters or agents will not be obligated
to do so and may discontinue any market making at any time without notice. No
assurance can be given as to the liquidity of the trading market for any such
Securities.

Any underwriters, dealers or agents participating in the distribution of
the Securities may be deemed to be underwriters, and any discounts and
commissions received by them and any profit realized by them on resale of the
Securities may be deemed to be underwriting discounts and commissions under the
Securities Act of 1933, as amended (the "1933 Act"). Underwriters, dealers or
agents may be entitled, under agreements entered into with the Company, to
indemnification against or contribution toward certain civil liabilities,
including liabilities under the 1933 Act.

LEGAL MATTERS

Unless otherwise specified in a Prospectus Supplement relating to
particular Securities, certain legal matters with respect to the validity of the
Securities will be passed upon for the Company by Vinson & Elkins L.L.P.,
Houston, Texas.

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EXPERTS

The consolidated financial statements of the Company and its subsidiaries
as of December 31, 1997 and 1996, and for each of the years in the three-year
period ended December 31, 1997, have been incorporated by reference herein and
in the Registration Statement in reliance upon the report of KPMG Peat Marwick
LLP, independent certified public accountants, incorporated by reference herein,
and upon the authority of such firm as experts in accounting and auditing.

With respect to the unaudited interim financial information for the periods
ended March 31, 1998 and 1997, incorporated by reference herein, the independent
certified public accountants have reported that they applied limited procedures
in accordance with professional standards for a review of such information.
However, their separate reports included in the Company's quarterly reports on
Form 10-Q for the quarter ended March 31, 1998, and incorporated by reference
herein, states that they did not audit and they do not express an opinion on
that interim financial information. Accordingly, the degree of reliance on their
reports on such information should be restricted in light of the limited nature
of the review procedures applied. The accountants are not subject to the
liability provisions of Section 11 of the Securities Act for their report on the
unaudited interim financial information because that report is not a "report" or
a "part" of the Registration Statement prepared or certified by the accountants
within the meaning of Sections 7 and 11 of the Securities Act.

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4,600,000 SHARES

MARINE DRILLING COMPANIES, INC.

COMMON STOCK

[MARINE DRILLING COMPANIES LOGO]

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PROSPECTUS SUPPLEMENT
MAY 21, 1999
(Including Prospectus dated June 19, 1998)
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SALOMON SMITH BARNEY
CREDIT SUISSE FIRST BOSTON
ABN AMRO ROTHSCHILD
A DIVISION OF ABN AMRO INCORPORATED

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