FALCON DRILLING CO INC, 424A, 1996-11-14

FALCON DRILLING CO INC
424A, 1996-11-14
DRILLING OIL & GAS WELLS

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<PAGE> 1

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* *
* INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A *
* REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED *
* WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT *
* BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE *
* REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT *
* CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY *
* NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH *
* SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO *
* REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH *
* STATE. *
* *
***************************************************************************

Filed Pursuant to Rule 424(a)
Registration No. 333-15707

SUBJECT TO COMPLETION, DATED NOVEMBER 13, 1996

7,000,000 Shares

[FALCON DRILLING COMPANY,
INC. LOGO] Falcon Drilling Company, Inc.

Common Stock
($.01 par value)

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

Of the 7,000,000 shares of Common Stock, $0.01 par value ("Common Stock"), of
Falcon Drilling Company, Inc. ("Falcon" or the "Company") being offered
hereby, 3,000,000 shares are being sold by the Company and 4,000,000
shares are being sold by the Selling Stockholders. The Company will not
receive any of the proceeds from the sale of shares by the Selling
Stockholders. See "Selling Stockholders." Of the 7,000,000 shares of
Common Stock being offered, 5,950,000 shares are initially being
offered in the United States and Canada (the "U.S. Shares") by the
U.S. Underwriters (the "U.S. Offering") and 1,050,000 shares are
initially being concurrently offered outside the United States
and Canada (the "International Shares") by the Managers (the
"International Offering" and, together with the U.S.
Offering, the "Offering"). The offering price and
underwriting discounts and commissions of the U.S.
Offering and the International Offering are
identical. The Common Stock is traded on The Nasdaq
Stock Market's National Market ("NNM") under the
symbol "FLCN." On November 12, 1996 the last
reported sale price of the Common Stock on the
NNM was $32 1/8 per share. See "Price Range
of Common Stock."

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

FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH
AN INVESTMENT IN THE COMMON STOCK, SEE "RISK FACTORS" ON PAGE 7.

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

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 AD-
EQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions Company(1) Stockholders
-------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
Per Share................................... $ $ $ $
Total (2)................................... $ $ $ $
</TABLE>

(1) Before deduction of expenses payable by the Company, estimated at
$ .
(2) The Company and certain of the Selling Stockholders have granted the U.S.
Underwriters and the Managers an option, exercisable by CS First Boston
Corporation for 30 days from the date of this Prospectus, to purchase a
maximum of 250,000 additional shares of Common Stock from the Company and a
maximum of 800,000 shares of additional outstanding shares from such Selling
Stockholders to cover over-allotments of shares. If the option is exercised
in full, the total Price to Public will be $ , Underwriting
Discounts and Commissions will be $ , Proceeds to Company will be
$ , and Proceeds to Selling Stockholders will be $ .

The U.S. Shares are offered by the several U.S. Underwriters when, as and
if delivered to and accepted by the U.S. Underwriters and subject to their right
to reject orders in whole or in part. It is expected that the U.S. Shares will
be ready for delivery on or about , 1996, against payment in
immediately available funds.

CS First Boston

Donaldson, Lufkin & Jenrette
Securities Corporation

Salomon Brothers Inc

Schroder Wertheim & Co.

Simmons & Company
International

The date of this Prospectus is November , 1996.
<PAGE> 2
PEREGRINE I --

DYNAMICALLY

POSITIONED DRILLSHIP

FOR DEEPWATER SERVICE

The Company owns three dynamically positioned drillships.
The dynamic positioning system allows the ship to position
itself over the drill site through the use of thrusters
controlled by a satellite navigation system. These
[PHOTO OF drillships feature the same drilling equipment typical of
DRILLING RIG] other offshore rigs but are uniquely suited to operate in
extremely deep water. there are currently only eight active
dynamically positioned drillships. Two of the Company's
drillships are currently working offshore Brazil under long
term contracts with Petrobras, the third drillship
contracted to Shell, Exxon and BHP under multi-well
contracts for work offshore Australia and West Africa.

PHOENIX III --

CANTILEVERED MAT-

SUPPORTED JACKUP RIG

A jackup rig is designed to provide a stable drilling
platform for exploration, development and workover
activities in offshore waters. The units are towed to
location, where the hull is elevated above the water surface
on connected support legs. The Company's rigs feature a mat,
to which the legs are connected, which sits on the seabed.
Mat rigs are particularly suited for soft bottom conditions
such as exist in the Gulf of Mexico. The hull features
multiple levels which contain the drilling equipment and
[PHOTO OF crew quarters. Six of the Company's jackup units feature a
DRILLING RIG] cantilevered drill floor which can be moved away from the
hull to work over an existing platform structure. These
units are capable of working in up to 200 feet of water with
25,000 foot drilling capability. The Company also operates
ten slot-type units, which do not feature a cantilevered
drill floor but are rated to work in up to 250 feet of
water, and three submersible offshore rigs which work in up
to 85 feet of water with a cantilevered drill floor.

IN CONNECTION WITH THIS OFFERING, CS FIRST BOSTON CORPORATION ON BEHALF OF THE
U.S. UNDERWRITERS AND THE MANAGERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH
STABILIZE OR MAINTAIN THE MARKET PRICES OF THE COMMON STOCK AT A LEVEL ABOVE
THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE
EFFECTED ON THE NASDAQ STOCK MARKET OR OTHERWISE. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

IN CONNECTION WITH THIS OFFERING, CERTAIN U.S. UNDERWRITERS AND MANAGERS (AND
SELLING GROUP MEMBERS, IF ANY) AND THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN
PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ STOCK
MARKET IN ACCORDANCE WITH RULE 10b-6A UNDER THE SECURITIES EXCHANGE ACT OF
1934. (SEE "UNDERWRITING.")

DURING THIS OFFERING, CERTAIN PERSONS AFFILIATED WITH PERSONS PARTICIPATING IN
THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR THEIR OWN ACCOUNTS OR FOR THE
ACCOUNTS OF OTHERS IN THE COMMON STOCK PURSUANT TO EXEMPTIONS FROM RULES 10b-6,
10b-7, AND 10b-8 UNDER THE SECURITIES EXCHANGE ACT OF 1934.
<PAGE> 3

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by and should be read in
conjunction with the detailed information and consolidated financial statements,
including the notes thereto, appearing elsewhere or incorporated by reference in
this Prospectus.

THE COMPANY

Falcon provides contract drilling and workover services for the domestic
and international oil and gas industry. Falcon owns and operates the largest
fleet of barge drilling rigs in the world, the largest fleet of mat-supported
offshore drilling rigs in the U.S. Gulf of Mexico, and three of the world's
eight currently active dynamically positioned drillships.

Falcon's strategy is to identify contract drilling markets which have
experienced an excess supply of equipment, but where Falcon expects a
substantial increase in future demand due in large part to the effect of
technology on drilling economics. By entering these markets, Falcon has been
able to acquire equipment on attractive terms and establish a significant
presence in such markets, thereby creating opportunities for profitable growth.

The initial focus of Falcon's strategy was the barge drilling business.
Historically, the largest such market has been in the U.S. Gulf Coast,
principally South Louisiana, where barge drilling and workover activity has been
increasing. Falcon's management believes that this increasing activity is
primarily attributable to attractive prospects in the area for deep natural gas
drilling, increased 3-D seismic survey activity and the mid-1994 settlement of a
long standing dispute between the State of Louisiana and Texaco, the area's
largest leaseholder. Falcon subsequently expanded into complementary businesses,
including the Venezuelan shallow-water rig market and the U.S. Gulf Coast barge
workover market. Falcon also began building a significant presence in the U.S.
Gulf of Mexico offshore drilling market, as demand began to rebound from
historically low levels in the early 1990s.

In late 1995, Falcon began building a significant presence in the deepwater
market with an initial emphasis on dynamically positioned drillships. Deepwater
oil and gas exploration and production costs are being significantly reduced by
improvements in technology. In addition, privatization initiatives and greater
political stability in many oil and gas producing regions of the world have
broadened access to attractive deepwater acreage. Management believes that these
developments will lead to increased demand for drilling equipment with greater
water depth capability. Falcon targeted dynamically positioned drillships for
acquisition because their water depth capability can be efficiently upgraded
with existing technology to service ultra deepwater locations.

OPERATIONS

Domestic Barge Drilling Rigs. Falcon entered the barge drilling business in
1988, and currently operates 25 of the 32 barge drilling rigs with rated
drilling capacity of 14,000 feet or deeper that are actively marketed in the
U.S. Gulf Coast area. Falcon also owns 15 units which are cold stacked and which
it believes represent substantially all of the existing barge rigs with deep
drilling capacity that are located in the U.S. Gulf Coast market but are not
currently being actively marketed.

Domestic Barge Workover Rigs. In 1994, Falcon expanded into the
shallow-water oil and gas well workover and service business. Currently, Falcon
operates ten workover and shallow drilling rigs in the U.S. Gulf Coast area and
is the second largest barge rig workover contractor in the United States. Due to
a substantial overlap in the customer base for these activities, this business
enhances Falcon's position as the leading supplier of barge rig services in the
shallow-water markets generally.

Domestic Offshore Rigs. Falcon commenced offshore operations in late 1992
in order to take advantage of improving demand in the Gulf of Mexico, where it
now operates 15 mat-supported jackup rigs, the largest such fleet in the
industry, and two submersible rigs.

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<PAGE> 4

International Shallow-Water Drilling Rigs. In 1994, Falcon began to expand
its international operations in order to capitalize on the attractive day rates
and longer terms typical of international drilling contracts and the opportunity
to utilize cold stacked barge rigs. Falcon currently operates three modified
barge rigs in Lake Maracaibo, Venezuela, under contracts with Maraven, S.A.
("Maraven"), a subsidiary of Venezuela's state-owned oil company. Falcon also
operates a jackup rig in West Africa and a submersible rig in Venezuela.

Deepwater Rigs. During 1996, Falcon commenced operation of three
dynamically positioned drillships that can operate in water depths ranging from
3,300 feet to 6,750 feet. Two of these units, Peregrine I and Peregrine II, are
working offshore Brazil under term contracts with Petroleo Brasileiro, S.A.
("Petrobras"). The third drillship, Peregrine III, is committed under a
multi-well contract to work for subsidiaries of Shell and Exxon in West Africa,
following completion of current operations in Australia. The Company intends to
continue to expand its deepwater operations. The Company has contracted to
purchase the hull for a fourth dynamically positioned drillship (the Peregrine
IV), which Falcon currently plans to complete with a water depth capability in
excess of 9,000 feet. In October 1996, Falcon announced plans to acquire two
conventionally moored drillships, the Deepsea Ice and the Deepsea Duchess, which
compete with semisubmersible drilling rigs. Demand for semi-submersibles has
increased significantly, which management believes will improve the prospects
for these units. Falcon also owns the Pacesetter III, a cold stacked
semisubmersible drilling rig, which it plans to upgrade and reactivate.

THE OFFERING

The share information set forth below excludes 1,050,000 additional shares
of Common Stock subject to purchase upon the exercise of the over-allotment
option granted to the U.S. Underwriters and the Managers by the Company and
certain Selling Stockholders. It is currently anticipated that 250,000 of such
additional shares will be sold by the Company and the remaining 800,000
additional shares will be sold by such Selling Stockholders, although the
Company and such Selling Stockholders may agree to allocate the option
obligation among themselves in a different manner prior to the consummation of
the Offering. See "Selling Stockholders."

<TABLE>
<S> <C>
Common Stock offered:
By the Company............................. 3,000,000 shares
By the Selling Stockholders................ 4,000,000 shares
----------
Total.............................. 7,000,000 shares

Common Stock offered for sale in:
U.S. Offering.............................. 5,950,000 shares
International Offering..................... 1,050,000 shares
----------
Total.............................. 7,000,000 shares

Common Stock to be outstanding after the 38,546,650 shares
Offering...................................

Use of proceeds.............................. To expand the Company's deepwater operations
through the acquisition of additional rigs
and the refurbishment and upgrade of certain
of its existing rigs, and to repay amounts
outstanding under the Company's working
capital facility.

Nasdaq Stock Market symbol................... "FLCN"
</TABLE>

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<PAGE> 5

SUMMARY HISTORICAL FINANCIAL AND OTHER DATA

The following table presents summary consolidated financial data derived
from Falcon's financial statements. The information in the table should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and the
notes thereto included elsewhere or incorporated by reference in this
Prospectus.

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
YEAR ENDED DECEMBER 31, (UNAUDITED)
--------------------------------- ---------------------
1993 1994 1995 1995 1996
------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues(1)........................ $61,840 $138,503 $177,505 $128,613 $220,965
Operating costs.................... 46,126 95,256 120,992 86,934 141,311
General and administrative
expenses........................ 5,520 11,887 13,871 10,327 13,191
Depreciation....................... 2,990 9,445 16,527 11,703 20,839
------- -------- -------- ------- -------
Operating income................... 7,204 21,915 26,115 19,649 45,624
Interest expense................... 2,743 12,046 18,021 13,277 18,158
Amortization of deferred costs..... 538 690 2,140 1,642 2,108
Foreign currency translation loss
(gain).......................... -- -- (1,023) -- --
Other expense (income)............. (927) (1,969) (2,850) (2,359) (3,283)
------- -------- -------- ------- -------
Income before taxes and minority
interest........................ 4,850 11,148 9,827 7,089 28,641
Income tax provision............... 952 3,232 3,481 2,319 10,597
------- -------- -------- ------- -------
Income before minority interest.... 3,898 7,916 6,346 4,770 18,044
Minority interest.................. -- 3,486 1,291 1,291 --
------- -------- -------- ------- -------
Net income......................... 3,898 4,430 5,055 3,479 18,044
Preferred stock dividends and
accretion....................... 743 565 374 304 --
------- -------- -------- ------- -------
Net income applicable to common
shares.......................... $ 3,155 $ 3,865 $ 4,681 $ 3,175 $ 18,044
======= ======== ======== ======= =======
Net income per common share........ $ 0.14 $ 0.14 $ 0.16 $ 0.11 $ 0.50
======= ======== ======== ======= =======
Shares used to compute net income
per common share................ 21,899 26,880 29,593 28,243 35,991
======= ======== ======== ======= =======
OTHER FINANCIAL DATA:
EBITDA(2).......................... $11,121 $ 33,329 $ 45,492 $ 33,711 $ 69,746
</TABLE>

<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30,
1996
--------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................................................... $ 6,309
Equipment and property, net.................................................. 417,456
Total assets................................................................. 513,724
Debt due within one year..................................................... 3,124
Long-term debt............................................................... 312,405
Total stockholders' equity................................................... 134,615
</TABLE>

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<PAGE> 6

Domestic barge workover rigs(5) --
Rigs available for service................ -- 6.4 7.0 7.0 8.4
Utilization rate of rigs available for
service................................ -- 58% 59% 58% 59%
Average date rate(4)...................... -- $ 8,768 $ 8,858 $ 8,967 $ 8,921

Domestic offshore rigs --
Rigs available for service(6)(7).......... -- 12.0 12.5 11.6 15.4
Utilization rate of rigs available for
service................................ -- 85% 79% 78% 96%
Average day rate(4)....................... -- $17,015 $15,060 $14,484 $19,144

International shallow-water rigs --
Rigs available for service(6)(8).......... 1.0 0.7 4.0 4.0 4.7
Utilization rate of rigs available for
service................................ 99% 99% 96% 99% 87%
Average day rate(4)....................... $17,600 $21,162 $19,553 $19,550 $20,223

Deepwater rigs --
Rigs available for service................ -- -- -- -- 1.3
Utilization rate of rigs available for
service................................ -- -- -- -- 94%
Average day rate(4)....................... -- -- -- -- $52,666
</TABLE>

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

(1) Revenues include management fee income of $2,987,000 and $92,000 for the
years ended December 31, 1993 and 1994, respectively, from rigs owned by
affiliates. No management fee income was earned in 1995 or the 1996 period,
as rigs previously owned by affiliated entities were acquired by Falcon.

(2) EBITDA (earnings before interest expense, taxes, depreciation and
amortization) is frequently used by securities analysts and is presented
here to provide additional information about Falcon's operations. EBITDA
should not be considered as an alternative to net income as an indicator of
Falcon's operating performance or as an alternative to cash flows as a
better measure of liquidity.

(3) Includes three rigs purchased in September 1994, which Falcon previously
operated under a charter arrangement. Includes one rig leased to Falcon
commencing in March 1996.

(4) Rates reflected are base day rates which do not include additional charges
for marine and other equipment commonly furnished in connection with certain
of the drilling contracts.

(5) Falcon's initial interest in the workover business was acquired April 1,
1994. No results prior to that date are included herein. Includes two rigs
leased to Falcon commencing in the first quarter of 1996.

(6) Rig 203, a submersible rig that was mobilized to Venezuela in November 1995,
is included in domestic offshore rigs until that time and in international
shallow-water rigs thereafter.

(7) Includes one rig operated under charter to Falcon through June 1995 and one
rig operated under charter to Falcon since August 1996.

(8) Excludes two rigs operated in Venezuela by a joint venture in which Falcon
has a 37.5% interest.

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<PAGE> 7

RISK FACTORS

Prospective investors should consider carefully the following factors, in
addition to the other information contained or incorporated by reference in this
Prospectus.

FORWARD-LOOKING INFORMATION

The statements included herein regarding future financial performance and
results and the other statements that are not historical facts are
forward-looking statements. The words "expect," "project," "estimate," "predict"
and similar expressions are also intended to identify forward-looking
statements. Such statements involve risks, uncertainties and assumptions,
including, but not limited to, industry conditions, prices of crude oil and
natural gas, foreign operations and other factors discussed below and in
Falcon's other filings with the Securities and Exchange Commission (the
"Commission"). Should one or more of these risks or uncertainties materialize,
or should underlying assumptions prove incorrect, actual outcomes may vary
materially from those indicated.

DEPENDENCE ON OIL AND GAS INDUSTRY; INDUSTRY CONDITIONS

Falcon's operations are materially dependent upon the levels of activity in
oil and natural gas exploration, development and production. Such activity
levels are affected both by short-term and long-term trends in oil and natural
gas prices. In recent years, oil and natural gas prices and, therefore, the
level of drilling, exploration, development and production activity, have been
volatile. Worldwide military, political and economic events, including
initiatives by the Organization of Petroleum Exporting Countries, have
contributed to, and are likely to continue to contribute to, price volatility.
As events during recent years have demonstrated, any prolonged reduction in oil
and natural gas prices will depress the level of exploration, development and
production activity and result in a corresponding decline in the demand for
Falcon's services and, therefore, have a material adverse effect on Falcon's
revenues and profitability. Most of Falcon's equipment is currently in service
in the U.S. Gulf of Mexico shallow-water and offshore drilling markets where the
demand for drilling and related services is subject to substantial fluctuations.
In addition to adverse effects that future declines in demand could have on
Falcon, ongoing movement or reactivation of offshore rigs or new construction of
rigs could adversely affect day rates and utilization levels, even in an
environment of stronger natural gas prices and increased drilling activity.
Falcon can predict neither the future level of demand for its services nor
future conditions in the drilling industry.

Increases in worldwide drilling demand since mid-1995 and the attendant
increase in the number of rigs operating has resulted in a shortage of qualified
rig personnel in the industry. If the Company is unable to attract and retain
sufficient qualified personnel, its ability to put cold stacked and newly
acquired rigs into service will be restricted. Further, labor shortages could
result in wage increases, which could, without offsetting increases in revenues,
reduce the Company's operating margins.

LEVERAGE AND LIQUIDITY

Falcon is highly leveraged and will require substantial cash flow to meet
its debt service requirements. Falcon's ability to meet its debt obligations
will depend on Falcon's future performance, which is subject to general economic
and business factors beyond Falcon's control. The degree of Falcon's leverage
may affect Falcon's vulnerability to adverse economic, regulatory and industry
conditions; Falcon's ability to obtain additional financing to fund future
working capital requirements, capital expenditures, acquisitions or other
general corporate requirements; and the portion of Falcon's cash flow from
operations that must be dedicated to debt service requirements, thereby reducing
the funds available for operations and future business opportunities.

ENTRY INTO DEEPWATER DRILLING MARKET

Falcon has a limited history of operating in the deepwater drilling market.
The deepwater market requires the use of floating rigs utilizing more
sophisticated technologies than those of the bottom-supported rigs that
previously constituted Falcon's offshore fleet. In addition, deepwater
operations are frequently conducted in

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<PAGE> 8

environments that are harsher than those typically encountered in shallow-water
operations. Falcon will be required to hire and retain personnel capable of
operating effectively in a deepwater environment. There can be no assurance that
Falcon will be successful in these efforts.

RISK OF UPGRADE AND REFURBISHMENT PROJECTS

In connection with the expansion of its deepwater operations and
reactivation of certain of its barge drilling rigs, Falcon expects to make
substantial completion, upgrade and refurbishment capital expenditures. Such
projects are subject to the risks of delay or cost overruns inherent in any
large construction project, including shortages of materials or skilled labor,
unforeseen engineering problems, work stoppages, weather interference,
unanticipated cost increases, and inability to obtain any of the requisite
permits or approvals. Significant cost overruns or delays would adversely affect
Falcon's financial condition and results of operations. In particular, there is
a current shortage of certain types of drilling equipment that could delay and
increase the cost of the drillship projects. Significant delays could also
adversely affect Falcon's marketing plans for the drillships and could
jeopardize the long-term contracts under which Falcon plans to operate the
drillships.

FOREIGN OPERATIONS

Falcon currently conducts operations in Venezuela, Brazil, Southeast Asia,
and West Africa. Operations in foreign countries generally are subject to
various risks associated with doing business outside the United States,
including risk of war, general strikes, civil disturbances, guerrilla activity,
foreign exchange restrictions, currency fluctuations and devaluations and
governmental activities that may limit or 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. Falcon may also encounter
difficulty in enforcing its contract rights in foreign countries, particularly
against state-owned oil companies. No prediction can be made as to what foreign
governmental regulations may be enacted in the future that could be applicable
to the drilling industry.

Long-term contracts with Petrobras and Maraven, entities owned by foreign
governments, account for approximately 14% of the Company's current day rate
revenues. Initial payments to Falcon under the contract with Petrobras assigned
to Falcon in connection with the acquisition of the Peregrine II were delayed
pending Brazilian central bank approval of the assignment, which approval was
required in order for Petrobras to pay in U.S. dollars. In 1994, the Venezuelan
government imposed a program of currency exchange controls and taxes on certain
financial transactions that temporarily affected the ability of the state-owned
oil company and its affiliates, including Maraven, to make payments in U.S.
dollars or other hard currencies to oil service contractors. While this program
is no longer in effect and payments are presently being made to oil service
contractors, there is no assurance that they will continue to be made; any
similar government restrictions imposed in the future could adversely affect
Falcon's operations.

Falcon records its transactions and prepares its financial statements in
U.S. dollars. Fluctuations in the value of the currencies in which Falcon
conducts its business relative to the U.S. dollar could cause currency
translation losses with respect to Falcon's foreign operations. Falcon cannot
predict the effect of exchange rate fluctuations upon future operating results.

RIG FLEET AGE

The majority of Falcon's rigs were built during the years 1978-1982, the
period of the industry's most recent building cycle. With increasing age, the
likelihood that a rig will require major repairs in order to remain operational
increases. These repairs may result in rigs being unavailable for service from
time to time, potentially reducing the Company's revenues, and may require
increasing amounts of capital.

OPERATIONAL RISKS AND INSURANCE

Falcon's operations are subject to the hazards inherent in the drilling
business, including blowouts, craterings, fires, collisions and groundings of
drilling equipment and damage or loss from adverse weather and seas. These
hazards could cause substantial damage to the environment, personal injury and
loss of life, suspend drilling operations or seriously damage or destroy the
property and equipment involved and could

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<PAGE> 9

cause substantial damage to producing formations and surrounding areas. Falcon's
offshore drilling equipment also is subject to hazards inherent in marine
operations, such as capsizing, grounding, collision and damage from weather or
sea conditions or unsound location. In addition, Falcon may be subject to
liability for oil spills, reservoir damage and other accidents that could cause
substantial damages. The occurrence of a significant event, including pollution
or environmental damage, could materially and adversely affect Falcon's
operations and financial condition. Moreover, no assurance can be given that
Falcon will be able to maintain adequate insurance in the future at rates it
considers reasonable or that any particular types of coverage will be available.
Falcon does not maintain business interruption insurance, and damage to its
equipment, even if such damage is covered by insurance, may result in a loss of
revenues against which Falcon is not insured.

GOVERNMENT REGULATION

Falcon's operations are subject to governmental laws and regulations
relating to the protection of the environment and to health and safety. Many of
Falcon's operations take place in or near ecologically sensitive areas, such as
wetlands, beaches and inland waterways. Numerous federal and state environmental
laws regulate drilling activities and impose liability for causing pollution in
inland, coastal and offshore waters. State and federal legislation also provide
special protection to water quality and animal and marine life that could be
affected by Falcon's activities. The regulations applicable to Falcon's
operations include certain regulations controlling the release of materials into
the environment and requiring removal, remediation or response. Each of the
primary statutory and regulatory programs that apply to Falcon's operations
provides for civil penalties for violation of the requirements of the programs,
as well as citizen's suits, natural resource damages, potential injunctions,
cease and desist orders and civil and criminal penalties.

Environmental regulation has led to higher drilling costs, a more difficult
and lengthy well permitting process and, in general, has adversely affected many
companies' decisions to drill wells in wetland areas of the U.S. Gulf Coast
market and, in some cases, in international markets. Prohibitions on drilling in
some areas are likely to remain in effect or even be extended. Such laws and
regulations may expose Falcon to liability for the conduct of, or conditions
caused by, others or for acts of Falcon that were in compliance with all
applicable laws at the time such acts were performed. Laws and regulations
protecting the environment have generally become more stringent in recent years
and could become more stringent in the future. Some environmental statutes
impose strict liability, rendering a person liable for environmental damage
without regard to negligence or fault on the part of such person.

RELIANCE ON MANAGEMENT

Falcon relies on the services of several key individuals, including Steven
A. Webster, its Chief Executive Officer. The loss of the services of any of
these individuals could have a material adverse effect on Falcon.

COMPETITION

Falcon experiences competition from other operators in all of the drilling
markets in which it operates. In international markets, Falcon faces competition
from newly constructed rigs and, in certain markets, from other types of rigs
that may be suitable for similar deployment, including jackup rigs in Lake
Maracaibo, Venezuela, and semisubmersible rigs in Brazil. The offshore drilling
market is highly competitive and no one competitor is dominant. While price is a
primary factor in the selection of drilling contractors, a contractor's safety
record, crew quality, service record and equipment capability are also important
factors. Certain of Falcon's competitors have greater financial resources than
Falcon.

CONTROL BY CERTAIN STOCKHOLDERS

As of October 31, 1996, Falcon's executive officers and directors
beneficially owned approximately 47.9% of the outstanding shares of Common
Stock, and have the ability to control the election of Falcon's directors and
other matters requiring a stockholder vote.

9
<PAGE> 10

RESTRICTIONS ON FOREIGN OWNERSHIP

Falcon, as the owner of U.S. flag vessels, is subject to restrictions on
transfer of a controlling interest in Falcon to non-U.S. citizens. Falcon's
Certificate of Incorporation currently prohibits more than 45% of the
outstanding equity securities of Falcon from being owned by non-U.S. citizens
for so long as Falcon directly or indirectly owns U.S. flag registry vessels.
The limitations imposed by Falcon's Certificate of Incorporation may at times
restrict the ability of Falcon's stockholders to transfer shares of their stock
to non-U.S. citizens.

CERTAIN PROVISIONS RELATING TO CHANGES IN CONTROL

Falcon's Certificate of Incorporation and By-laws (i) restrict the ability
of Falcon's stockholders to call stockholders' meetings, (ii) provide that
Falcon's stockholders may not act by written consent, unless such action has
been approved by Falcon's Board of Directors, or change the number of directors,
(iii) provide for a staggered board and (iv) authorize the issuance of "blank
check" preferred stock. Additionally, Section 203 of the Delaware General
Corporation Law restricts certain "business combinations" between interested
stockholders and Falcon, which may render more difficult or tend to discourage
attempts to acquire Falcon. In addition, Falcon's debt instruments contain
provisions relating to changes in control. Such provisions and arrangements
could impede a merger, consolidation, takeover or other business combination
involving Falcon or discourage a potential acquiror from making a tender offer
or otherwise attempting to obtain control of Falcon.

USE OF PROCEEDS

The net proceeds to be received by the Company from the offering, after
deducting underwriting discounts and commissions and estimated expenses, are
estimated to be approximately $91.8 million (assuming the Underwriters'
over-allotment option is not exercised). Such net proceeds will be used for the
expansion of the Company's deepwater operations through the acquisition of
additional drilling rigs and the refurbishment and upgrade of certain existing
rigs, and to repay amounts outstanding under the Company's working capital
facility.

The Company has commitments to make a total of $40 million of expenditures
to expand and upgrade its rig fleet, including $25 million for the cash portion
of the purchase price for the Deepsea Ice and the Deepsea Duchess, two
conventionally moored drillships, $8 million for the purchase and initial
mobilization of the Peregrine IV drillship hull, and $7 million for the upgrade
of the Peregrine III, a dynamically positioned drillship. In addition, the
Company intends to spend $25 million, subject to market conditions, to upgrade
the Pacesetter III, a semisubmersible, and another $13 million for an additional
upgrade of the Peregrine III, subject to the negotiation by the Company of
amendments to the current long-term contract for the Pacesetter III. See
"Business -- Deepwater Operations."

The $25 million cash portion of the purchase price for the Deepsea Ice and
the Deepsea Duchess may be reduced to $5 million by causing the Deepsea Ice to
be purchased by a third party and leased to the Company.

Proceeds of the Offering will be used initially to reduce outstanding debt
under the Company's revolving credit facility ($25 million as of November 12,
1996). To the extent proceeds are not applied to expand and upgrade the
Company's fleet or repay debt, such proceeds may be used for general corporate
purposes. Borrowings under the Company's working capital facility bear interest
at a floating rate equal to LIBOR plus 1.5% to 2.0% (depending upon the
outstanding principal balance) and mature in November 1999. The weighted average
interest rate applicable to the Company's borrowings under its working capital
facility as of November 1, 1996 was 8.12%.

The Company anticipates having additional opportunities to acquire, upgrade
and refurbish for active service other drilling and related equipment. The
Company currently expects that any such future capital requirements would be
funded with cash generated from operations or additional borrowings.

The Company will not receive any of the proceeds from the sale of the
Common Stock being sold by Selling Stockholders.

10
<PAGE> 11

PRICE RANGE OF COMMON STOCK

The Common Stock is traded under the symbol "FLCN." The following table
sets forth the high and low sale prices per share of the Common Stock as
reported by The Nasdaq Stock Market for each calendar quarter since such
commencement of trading.

<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
1995:
Third Quarter (commencing July 28)........................ $13 1/2 $ 9 1/4
Fourth Quarter............................................ 15 1/4 9 7/8
1996:
First Quarter............................................. 25 5/8 12
Second Quarter............................................ 28 1/2 22 1/4
Third Quarter............................................. 27 7/8 20
Fourth Quarter (through November 12)...................... 36 1/4 25 3/4
</TABLE>

The last reported sale price of the Common Stock, as reported by The Nasdaq
Stock Market on November 12, 1996, was $32 1/8 per share. As of October 31,
1996, there were 92 record holders of Common Stock.

11
<PAGE> 12

CAPITALIZATION

The following table sets forth the capitalization of the Company at
September 30, 1996, and as adjusted to give effect to the Offering and the
application of the estimated $91.8 million of net proceeds therefrom as
described in "Use of Proceeds" (assuming the Underwriters' over-allotment option
is not exercised). This table should be read in conjunction with the
consolidated financial statements and the notes thereto included elsewhere or
incorporated by reference in this Prospectus.

<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
-------------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt:
Current maturities of long-term debt and other obligations......... $ 3,124 $ 3,124
======== ========
Long-term debt and other obligations, net of current maturities:
Fixed rate senior notes............................................ 230,000 230,000
Senior subordinated notes.......................................... 50,000 50,000
Floating rate senior notes......................................... 10,000 10,000
Working capital facility........................................... 20,000(1) --(1)
Notes payable and other obligations................................ 2,405 2,405
-------- --------
Total long-term debt....................................... 312,405 292,405
-------- --------
Stockholders' equity:
Common stock, $.01 par value, 100,000,000 shares authorized,
35,465,317 and 38,465,317 shares issued and outstanding,
respectively(2)................................................. 355 385
Additional paid-in capital......................................... 113,905 205,668
Accumulated earnings............................................... 20,355 20,355
-------- --------
Total stockholders' equity......................................... 134,615 226,408
-------- --------
Total capitalization....................................... $447,020 $ 518,813
======== ========
</TABLE>

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

(1) A portion of the net proceeds of the Offering will be used to repay the
Company's working capital facility pending expenditures for expansion and
upgrade of the Company's rig fleet. See "Use of Proceeds."

(2) Does not include 577,260 shares issuable upon exercise of outstanding
options and warrants that were currently exercisable, 1,508 shares issuable
pursuant to a certain warrant that was only exercisable to the extent that
certain other specified options and warrants were exercised and 346,669
shares issuable upon exercise of outstanding options that do not become
exercisable until January 1997 or later. Also does not include shares to be
issued as part of the purchase price for two conventionally moored
drillships to be acquired by the Company, which shares will have a market
value at closing of $15 million.

12
<PAGE> 13

SELECTED HISTORICAL FINANCIAL AND OTHER DATA

The following table sets forth certain historical data relating to Falcon.
For each of the five years ended December 31, 1995, such data are derived from
the audited consolidated financial statements of Falcon, which in the case of
the three years ended December 31, 1995, are included elsewhere in this
Prospectus. The selected financial data for the nine months ended September 30,
1995 and 1996, are unaudited but, in the opinion of management, include all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the results of operations for such periods. Such data are not
necessarily indicative of results that could be expected for a full year. The
selected financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements and the notes thereto included elsewhere
or incorporated by reference in this Prospectus.

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
YEAR ENDED DECEMBER 31, (UNAUDITED)
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues(1)..................... $ 9,085 $ 9,673 $61,840 $138,503 $177,505 $128,613 $220,965
Operating costs................. 10,224 9,674 46,126 95,256 120,992 86,934 141,311
General and administrative
expenses..................... 1,385 1,625 5,520 11,887 13,871 10,327 13,191
Depreciation.................... 1,263 1,696 2,990 9,445 16,527 11,703 20,839
------- ------- ------- -------- -------- ------- -------
Operating income (loss)......... (3,787) (3,322) 7,204 21,915 26,115 19,649 45,624
Interest expense................ 986 1,880 2,743 12,046 18,021 13,277 18,158
Amortization of deferred
costs........................ 1,124 158 538 690 2,140 1,642 2,108
Foreign currency translation
loss (gain).................. -- -- -- -- (1,023) -- --
Other expense (income).......... 62 -- (927) (1,969) (2,850) (2,359) (3,283)
------- ------- ------- -------- -------- ------- -------
Income (loss) before taxes...... (5,959) (5,360) 4,850 11,148 9,827 7,089 28,641
Income tax provision............ -- -- 952 3,232 3,481 2,319 10,587
------- ------- ------- -------- -------- ------- -------
Income (loss) before minority
interest..................... (5,959) (5,360) 3,898 7,916 6,346 4,770 18,044
Minority interest............... -- -- -- 3,486 1,291 1,291 --
------- ------- ------- -------- -------- ------- -------
Net income (loss)............... (5,959) (5,360) 3,898 4,430 5,055 3,479 18,044
Preferred stock dividends and
accretion.................... -- -- 743 565 374 304 --
------- ------- ------- -------- -------- ------- -------
Net income (loss) applicable to
common shares................ $(5,959) $(5,360) $ 3,155 $ 3,865 $ 4,681 $ 3,175 $ 18,044
======= ======= ======= ======== ======== ======= =======
Net income (loss) per common
share(2)..................... -- $ (0.46) $ 0.14 $ 0.14 $ 0.16 $ 0.11 $ 0.50
======= ======= ======= ======== ======== ======= =======
Shares used to compute net
income (loss) per common
share........................ -- 11,695 21,899 26,880 29,593 28,243 35,991
======= ======= ======= ======== ======== ======= =======
OTHER FINANCIAL DATA:
EBITDA(3)....................... $(2,586) $(1,626) $11,121 $ 33,329 $ 45,492 $ 33,711 $ 69,746
</TABLE>

<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
--------------------------------------------------------- SEPTEMBER 30,
1991 1992 1993 1994 1995 1996
------- ------- ------- -------- -------- -------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............ $ 563 $ 572 $ 6,708 $ 4,868 $ 9,016 $ 6,309
Equipment and property, net.......... 21,310 36,124 72,655 170,823 265,608 417,456
Total assets......................... 24,801 42,515 109,994 224,146 341,023 513,724
Long-term debt and other
obligations....................... 16,299 35,536 46,438 145,524 179,362 312,405
Total stockholders' equity........... 6,334 974 31,011 34,087 115,516 134,615
</TABLE>

13
<PAGE> 14

Domestic barge workover rigs(6) --
Rigs available for service................. -- 6.4 7.0 7.0 8.4
Utilization rate of rigs available for
service................................. -- 58% 59% 58% 59%
Average date rate(5)....................... -- $ 8,768 $ 8,858 $ 8,967 $ 8,921

Domestic offshore rigs --
Rigs available for service(7)(8)........... -- 12.0 12.5 11.6 15.4
Utilization rate of rigs available for
service................................. -- 85% 79% 78% 96%
Average day rate(5)........................ -- $17,015 $15,060 $14,484 $19,144

International shallow-water rigs --
Rigs available for service(7)(9)........... 1.0 0.7 4.0 4.0 4.7
Utilization rate of rigs available for
service................................. 99% 99% 96% 99% 87%
Average day rate(5)........................ $17,600 $21,162 $19,553 $19,550 $20,223
Deepwater rigs --
Rigs available for service................. -- -- -- -- 1.3
Utilization rate of rigs available for
service................................. -- -- -- -- 94%
Average day rate(5)........................ -- -- -- -- $52,666
</TABLE>

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

(1) Revenues include management fee income of $170,000, $2,987,000 and $92,000
for the years ended December 31, 1992, 1993 and 1994, respectively, from
rigs owned by affiliates. No management fee income was earned in 1995 or the
1996 period, as rigs previously owned by affiliated entities were acquired
by Falcon.

(2) Earnings per share have been omitted for 1991 because such information is
not meaningful due to the roll up of the predecessor partnership interests
and recapitalization of Falcon that occurred in 1991.

(3) EBITDA (earnings before interest expense, taxes, depreciation and
amortization) is frequently used by securities analysts and is presented
here to provide additional information about Falcon's operations. EBITDA
should not be considered as an alternative to net income as an indicator of
Falcon's operating performance or as an alternative to cash flows as a
better measure of liquidity.

(4) Includes three barge rigs purchased in September 1994, which Falcon
previously operated under a charter arrangement. Includes one rig leased to
Falcon commencing in March 1996.

(5) Rates reflected are base day rates which do not include additional charges
for marine and other equipment commonly furnished in connection with
certain of the drilling contracts.

(6) Falcon's initial interest in the workover business was acquired April 1,
1994. No results prior to that date are included herein. Includes two rigs
leased to Falcon commencing in the first quarter of 1996.

(7) Rig 203, a submersible rig that was mobilized to Venezuela in November 1995,
is included in domestic offshore rigs until that time and in international
shallow-water rigs thereafter.

(8) Includes one rig operated under charter to Falcon through June 1995 and one
rig operated under charter to Falcon since August 1996.

(9) Excludes two rigs operated in Venezuela by a joint venture in which Falcon
has a 37.5% interest.

14
<PAGE> 15

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

GENERAL

The Company's financial condition and historical results of operations have
been significantly affected by a series of acquisitions that have resulted in
the Company's current fleet of barge and offshore rigs. As of October 31, 1996,
the Company's rig fleet was composed of 76 rigs, including 43 barge drilling
rigs, ten barge workover rigs, 16 jackup drilling rigs, three submersible
drilling rigs, three dynamically positioned drillships and one semisubmersible
drilling rig. Included in these totals are one jackup drilling rig, one barge
drilling rig and two barge workover rigs leased from third parties.

Changes in the number of actively marketed rigs and their geographic
locations significantly affect the Company's capital expenditure requirements,
working capital requirements and results of operations. As of December 31, 1995,
the Company's active domestic rig fleet included 19 barge drilling rigs, seven
barge workover rigs, 14 jackup drilling rigs and one submersible drilling rig
and the active international rig fleet included three drilling barges and one
submersible drilling rig, all in Venezuela. Since then, the Company's active rig
fleet has changed significantly. As of October 31, 1996, the active domestic
fleet included 25 barge drilling rigs, ten barge workover rigs, 15 jackup
drilling rigs and two submersible drilling rigs, and the active international
rig fleet included three drilling barges and one submersible drilling rig in
Venezuela, one jackup drilling rig in Nigeria, two drillships in Brazil and one
drillship in Australia. In addition, the Company owns a minority position in a
venture that operates two barge drilling rigs in Venezuela.

Revenues. The Company's revenues are determined primarily by (a) the number
of rigs it has available for service and (b) demand for contract drilling and
workover services, which affects the utilization rate and day rates of the
Company's active rigs. In response to increased demand, the Company has
reactivated previously cold stacked rigs for both the domestic and international
markets, particularly Venezuela. In the future, the Company, in response to
changes in demand, may withdraw rigs from active service or reactivate
additional rigs, which could decrease or increase revenues, respectively.

Operating Costs. Operating costs include all direct costs and expenditures
associated with operating active rigs and cold stacking inactive rigs. These
costs and expenditures vary based on rig utilization and the number of rigs
actively marketed by the Company. These costs and expenditures include rig labor
costs, repair, maintenance and supply expenditures, insurance costs, fuel costs,
mobilization costs and other costs related to operations.

Operating Income. Operating income is primarily affected by revenue
factors, but is also a function of varying levels of operating expenses. Changes
in day rates do not affect operating expenses. Significant changes in rig
utilization can change the level of operating expenses from period to period as
the Company may adjust the level of its actively marketed rig fleet to match
more closely the anticipated level of demand. General and administrative
expenses, which generally include the costs of the Company's shore-based support
functions, also affect operating income. These costs generally do not vary
significantly from period to period unless the Company materially expands its
asset base, nor do they vary over short periods of time with changes in rig
utilization. Depreciation, which is determined by the level of the Company's
capital expenditures and depreciation practices, is the other major determinant
of operating income.

CHANGES IN FINANCIAL CONDITION

Rig acquisitions, financings completed, the increase in active units as
described above and cash flow generated from operations were responsible for the
significant changes in the Company's financial position between December 31,
1995, and September 30, 1996. The following are the most significant of the
acquisitions and financings completed since December 31, 1995:

1) The purchase of two dynamically positioned drillships, the upgrade of a
third drillship and the acquisition of spares for approximately $119
million.

15
<PAGE> 16

2) The purchase of one jackup drilling rig, one barge drilling rig and one
submersible drilling rig for approximately $28 million.

3) The upgrade and activation of eight barge drilling and workover rigs for
approximately $11 million.

4) The charter to the Company of one jackup drilling rig and three barge
drilling and workover rigs.

5) The placement of $120 million of senior unsecured notes in March 1996.

RESULTS OF OPERATIONS

Comparative data relating to the Company's revenues and operating expenses
by major areas of operations are listed below.

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
YEAR ENDED DECEMBER 31, (UNAUDITED)
------------------------------- --------------------
1993 1994 1995 1995 1996
------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues:
Domestic barge drilling................ $50,164 $ 58,922 $ 75,145 $ 58,204 $ 77,464
Domestic barge workover................ -- 9,020 14,350 10,676 12,760
Domestic offshore drilling............. 5,149 63,430 56,687 37,200 79,946
International shallow-water drilling... 6,527 7,131 31,323 22,533 28,230
Deepwater operations................... -- -- -- -- 22,565
------- -------- -------- -------- --------
$61,840 $138,503 $177,505 $128,613 $220,965
======= ======== ======== ======== ========
Operating costs:
Domestic barge drilling................ $39,387 $ 42,585 $ 50,672 $ 38,377 $ 50,416
Domestic barge workover................ -- 4,934 8,497 6,064 10,499
Domestic offshore drilling............. 1,462 42,536 46,102 32,289 51,161
International shallow-water drilling... 5,277 5,201 15,721 10,204 15,197
Deepwater operations................... -- -- -- -- 14,038
------- -------- -------- -------- --------
$46,126 $ 95,256 $120,992 $ 86,934 $141,311
======= ======== ======== ======== ========
Rig operating income:
Domestic barge drilling................ $10,777 $ 16,337 $ 24,473 $ 19,827 $ 27,048
Domestic barge workover................ -- 4,086 5,853 4,612 2,261
Domestic offshore drilling............. 3,687 20,894 10,585 4,911 28,785
International shallow-water drilling... 1,250 1,930 15,602 12,329 13,033
Deepwater operations................... -- -- -- -- 8,527
------- -------- -------- -------- --------
15,714 43,247 56,513 41,679 79,654
General and administrative expenses.... 5,520 11,887 13,871 10,327 13,191
Depreciation expense................... 2,990 9,445 16,527 11,703 20,839
------- -------- -------- -------- --------
Operating income............... $ 7,204 $ 21,915 $ 26,115 $ 19,649 $ 45,624
======= ======== ======== ======== ========
</TABLE>

For the Nine-Month Periods Ended September 30, 1995 and 1996

Revenues. Revenues for the nine months ended September 30, 1996, increased
$92.3 million, or 71.8%, from the same period in the prior year. The increase is
attributable primarily to (a) the commencement during 1996 of deepwater drilling
activity with two drillships and the mobilization fee of $2.5 million recorded
in the third quarter attributable to a third drillship which was delivered to
Brazil in September and commenced drilling operations in November, (b) an
increase in domestic barge drilling revenues of 33.1% attributable to 3.2
additional average available rigs, an increase in utilization from 81% to 88%,
and an increase in the average day rate of $669, and (c) an increase in domestic
offshore drilling revenues of 114.9% attributable to 3.8 additional average
available rigs, an increase in utilization from 78% to 96%, and an increase in
the average day rate of $4,660.

16
<PAGE> 17

Operating Costs. Rig operating costs for the nine months ended September
30, 1996, increased $54.4 million, or 62.5%, from the same period in the prior
year. Operating costs for all of the Company's lines of business increased
primarily as a result of increases in the number of actively marketed rigs.

Operating Income. Operating income for the nine months ended September 30,
1996, increased $26.0 million, or 132.1%, from the same period in the prior
year. Rig operating income increased $38.0 million, which was partially offset
by increases in general and administrative expense of $2.9 million and
depreciation of $9.1 million. The contribution to operating income increased for
all lines of business except domestic barge workover operations, which decreased
by $2.4 million. This decrease in operating income was due to an increase in
operating costs caused by an increase in marketed units and a smaller
corresponding increase in revenues, which was attributable to flat day rates and
utilization. The commencement of deepwater drilling contributed $8.5 million to
rig operating income and the improvement in domestic barge drilling and domestic
offshore drilling results produced $7.2 million and $23.9 million in increased
contribution, respectively. The increase in depreciation was attributable to
additional rigs being acquired. General and administrative expenses increased
primarily due to the startup of deepwater drilling operations.

Interest Expense. Interest expense increased by $4.9 million due to higher
levels of debt, including the issuance of $120 million in senior notes in March
1996.

Amortization of Deferred Costs. Amortization of deferred costs increased by
approximately $500,000 as a result of costs associated with the Company's senior
debt placement in March 1996.

Other Income and Expenses. Other income for both periods was approximately
the same.

Net Income. Net income applicable to common shares increased by $14.9
million, or 468.3%, due primarily to the commencement of deepwater drilling
operations and improved operating results in the Company's other lines of
business except for domestic barge workover operations. The increased
contribution from the operating divisions was partially offset by higher
depreciation expense, higher general and administrative expenses, higher
interest expense and a higher provision for income taxes.

For the Years Ended December 31, 1993, 1994 and 1995

Revenues. Revenues were $61.8 million, $138.5 million and $177.5 million
for the years ended December 31, 1993, 1994, and 1995, respectively. The
increases in revenues were primarily due to the acquisition and placing in
service of additional drilling equipment.

Approximately 92%, 48% and 60% of revenues in 1993, 1994 and 1995,
respectively, were accounted for by the Company's domestic barge and
international shallow-water drilling operations. Domestic offshore drilling
operations accounted for 8% in 1993, 46% in 1994 and 32% in 1995. Revenues from
domestic barge workover operations which commenced on April 1, 1994, represented
6% in 1994 and 8% in 1995.

Operating Costs. Operating costs were $46.1 million, $95.3 million and
$121.0 million for the years ended December 31, 1993, 1994, and 1995,
respectively. The increase in operating costs was primarily the result of the
expansion of the Company's operations and increased utilization.

Operating Income. Operating income was $7.2 million, $21.9 million, and
$26.1 million for the years ended December 31, 1993, 1994 and 1995,
respectively. The increases in operating income were primarily attributable to
the increases in revenue, partially offset by the increases in operating costs,
general and administrative expenses and depreciation expense. The increase in
general and administrative expenses for each of such years was primarily due to
the increasing number of shore based personnel required to support the Company's
growing rig fleet. Depreciation expense increased each year as a result of the
Company's expanded rig fleet.

Interest Expense. Interest expense was $2.7 million in 1993, $12.0 million
in 1994 and $18.0 million in 1995. The increased interest expense during such
periods primarily reflects (i) the issuance by the Company of $120 million in
senior notes in 1994, (ii) the issuance by the Company of $50 million in
subordinated notes in 1995, and (iii) increased borrowings during 1995 under the
Company's revolving credit facility.

17
<PAGE> 18

Amortization of Deferred Costs. Amortization of deferred costs was
$500,000, $700,000 and $2.1 million for the years ended December 31, 1993, 1994,
and 1995, respectively. The increases were due primarily to increases in
deferred financing costs associated with the Company's debt and equity
financings during the periods.

Foreign Currency Translation Gain. In December 1995, the Venezuelan
government devalued its currency (the Bolivar). At the time of the devaluation,
the obligations of the Company payable in Bolivars exceeded the receivables of
the Company that were payable in Bolivars, and accordingly, the Company
recognized a translation gain of $1.0 million during the fourth quarter of 1995,
which has been included in other income. No foreign currency translation gains
or losses were recorded during 1993 and 1994.

Other Income and Expense. Other Income was $927,000 in 1993, $2.0 million
during 1994, and $2.9 million in 1995. Substantially all of the other income for
all three years ended December 31, 1993, 1994 and 1995, was from gains on the
sale of surplus assets and interest income.

Net Income. Net income applicable to common shares was $3.2 million in
1993, $3.9 million in 1994 and $4.7 million in 1995. The increase in 1994 as
compared to 1993 was primarily the result of a larger marketed barge drilling
and offshore fleet and the Company's entry into the barge workover business. The
increase in 1995 as compared to 1994 was primarily as a result of improved
operating results in the Company's domestic barge and international shallow
drilling operations, which more than offset a decline in the results for the
Company's offshore rig fleet and increases in depreciation expense, interest
expense, and general and administrative expenses.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities was $33.8 million for the nine
months ended September 30, 1996, compared to $11.0 million for the comparable
prior period. The $22.8 million increase was the result of improved operating
results, partially offset by an increase in the receivables component of working
capital at September 30, 1996. Operating results improved primarily as a result
of a significant expansion of the Company's operations.

Net cash used in investing activities was $165.7 million for the nine
months ended September 30, 1996, compared to $77.6 million for the comparable
prior period. The increase of $88.1 million was primarily due to expenditures
related to the expansion of the Company's rig fleet, including approximately
$119 million expended in connection with the acquisition, upgrade and purchase
of fleet spares related to the Company's dynamically positioned deep water
drillships, the Peregrine I, II and III. In addition, during the nine months
ended September 30, 1996, the Company also expended approximately $28.2 million
in connection with the acquisition of three other drilling rigs (one barge rig,
one submersible rig and one jackup rig) and approximately $26.1 million on the
purchase of drillpipe, rig reactivations, and rig upgrades. Included in the $119
million of expenditures related to the Company's drillship operations was
approximately $60.0 million for the upgrade of the Peregrine I and the purchase
of additional riser, BOP equipment and other fleet spares and rig inventory. The
upgrade of the Peregrine I was completed during the third quarter of 1996 and
the rig was mobilized to Brazil, where it commenced operations in early
November, approximately four months behind the Company's original intended
delivery date. The upgrade of the Peregrine I exceeded the Company's original
cost estimates as a result of increased shipyard time due to delays in equipment
deliveries and additional rig upgrades which increased the water depth
capability of the rig.

Net cash provided by financing activities was $129.2 million for the nine
months ended September 30, 1996, compared to $68.9 million for the comparable
prior period. The $60.3 million increase was primarily due to the issuance by
the Company of $120 million of Senior Notes on March 4, 1996. During the prior
nine-month period ended September 30, 1995, the Company had issued $50.0 million
of Senior Subordinated Notes.

During the fourth quarter of 1996, the Company currently expects to make
additional capital expenditures of (i) approximately $8.0 million for the
purchase of a hull and certain other equipment to be used in the construction of
the dynamically positioned drillship Peregrine IV and its initial mobilization,
(ii) $20.0 million

18
<PAGE> 19

for the purchase of the drillship Deepsea Duchess, (iii) $3.0 million for the
refurbishment of certain rig equipment, and (iv) $2.0 million for drillpipe and
other equipment expenditures. In addition to its expected capital expenditures
for the remainder of 1996, the Company may commit, upon receipt of acceptable
contracts, to the completion of the Peregrine IV and the upgrade of the
Pacesetter III at costs currently estimated at $120 million and $25 million,
respectively. Should the Company commit to these or any other similar projects,
the Company anticipates that a substantial portion of the funding would come
from third party equipment lessors or debt.

The Company has agreed to acquire both the Deepsea Ice and the Deepsea
Duchess for $40 million, but is negotiating to have a third party purchase the
Deepsea Ice for $20 million and lease it to the Company. The Company will pay
the $20 million balance of the Deepsea Ice/Deepsea Duchess purchase price with
$5 million in cash and the issuance to the seller of $15 million of Falcon
common stock.

As of September 30, 1996, the Company had cash and credit availability
under its line of credit totaling approximately $11.3 million. The Company has
recently entered into agreements with its commercial bank lenders that increase
its bank credit facilities from a maximum of $25 million to $65 million. The new
facilities consist of (i) a $25 million revolving loan facility secured by
accounts receivable, maturing in November 1999, and (ii) a $40 million revolving
loan facility secured by certain drilling rigs and receivables, maturing in
November 1998. The Company believes that its available funds, together with cash
generated from operations, will be sufficient to fund its capital expenditure
program, working capital and debt service requirements. Future commitments for
capital expenditures will depend upon market conditions and opportunities, as
well as the availability of adequate financing.

Although substantially all the Company's marketed rigs are currently under
contract, its domestic based rigs are typically contracted on a well-to-well
basis or on short term contracts which typically expire within six months. A
severe decline in demand for oil and gas drilling could therefore adversely
impact the Company's cash flow from operations. Should these circumstances occur
and persist for a material length of time, there could be no assurance that the
Company's cash flow from operations would remain adequate to meet its
requirements and the Company would likely scale back the scope of its operations
and dispose of excess or non-essential assets.

19
<PAGE> 20

BUSINESS

Falcon provides contract drilling and workover services for the domestic
and international oil and gas industry. Falcon owns and operates the largest
fleet of barge drilling rigs in the world and the largest fleet of mat-supported
offshore drilling rigs in the U.S. Gulf of Mexico. Falcon also owns and operates
three dynamically positioned drillships and has contracted to acquire two
conventionally moored drillships for use in the deepwater drilling market.

STRATEGY

DOMESTIC BARGE DRILLING OPERATIONS

Domestic Barge Drilling Rigs. Barge drilling rigs are mobile drilling
platforms that are submersible and are built to work in eight to 20 feet of
water. They are towed by tugboats to the drill site with the derrick lying down.
The lower hull is then submerged by flooding until it rests on the sea floor,
the derrick is raised and drilling operations are conducted with the barge in
this position. There are two basic types of barge rigs, "posted" and
"conventional." A posted barge is identical to a conventional barge except that
the hull and superstructure are separated by 10 to 14 foot columns, which
increases the water depth capabilities of the rig. Falcon's barge drilling rigs
are generally used in drilling for oil and natural gas in inland and
shallow-water coastal areas, but may also be used for workover activity.

20
<PAGE> 21

The following tables provide certain information as of October 31, 1996,
regarding Falcon's domestic barge drilling fleet:

POSTED BARGE RIGS FOR DEEP DRILLING

2 Skytop Brewster/Caterpillar.................... 2,000 1980 20,000 Cold Stacked
5 National/Caterpillar........................... 3,000 1981 25,000 Cold Stacked
7 Oilwell/Caterpillar............................ 2,000 1978 25,000 Flores & Rucks
8 Oilwell/Caterpillar............................ 2,000 1978 25,000 Cold Stacked
9 Oilwell/Caterpillar............................ 2,000 1981 25,000 Shell
10 Oilwell/Caterpillar............................ 2,000 1981 25,000 Exxon
16 National/EMD................................... 3,000 1981 30,000 Texaco
17 National/EMD................................... 3,000 1982 30,000 Shell
27 Continental Emsco/Caterpillar.................. 3,000 1978 30,000 Cold Stacked
39 National/EMD................................... 3,000 1970 30,000 Cold Stacked
41 National/EMD................................... 3,000 1981 30,000 Cold Stacked
44 Oilwell/Superior............................... 3,000 1979 30,000 Cold Stacked
45 Oilwell/Superior............................... 3,000 1979 30,000 Cold Stacked
46 Oilwell/EMD.................................... 3,000 1981 30,000 Cold Stacked
47 Oilwell/EMD.................................... 3,000 1982 30,000 OTV
48 Gardner Denver/Caterpillar..................... 3,000 1982 30,000 UPRC
49 Oilwell/Caterpillar............................ 3,000 1980 30,000 Hunt
52 Oilwell/Caterpillar............................ 2,000 1981 25,000 Available(3)
54 National/EMD................................... 3,000 1970 30,000 Fina
55 Ideco/EMD...................................... 3,000 1981 30,000 Mobil
56 National/Caterpillar........................... 2,000 1973 25,000 Enserch
57 National/Caterpillar........................... 2,000 1975 25,000 Cold Stacked
61 Mid-Continent/EMD.............................. 3,000 1978 30,000 Cliffs Oil & Gas
62 Mid-Continent/EMD.............................. 3,000 1978 30,000 Amerada Hess
63 Mid-Continent/EMD.............................. 3,000 1978 30,000 Shell
64 Mid-Continent/EMD.............................. 3,000 1979 30,000 Phillips
</TABLE>

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

(1) Rigs listed as cold stacked are not being actively marketed and are in need
of refurbishment to be activated. Falcon believes that these 15 rigs can be
activated for amounts ranging from $500,000 to $3.0 million per rig, or an
aggregate cost of approximately $30.0 million.

(2) This rig is leased to Falcon.

(3) This rig was recently demobilized from Venezuela and is expected to resume
working in the fourth quarter of 1996.

21
<PAGE> 22

Falcon also has a contract to purchase for $5.0 million three cold stacked
barge drilling rigs located in Mexico. The seller has claimed that logistical
difficulties prevent it from delivering those rigs to Falcon, and Falcon has
recently commenced a legal action to enforce its rights under that contract. It
is uncertain whether or when Falcon will be able to enforce the contract and
acquire these rigs.

Domestic Barge Drilling Market. Falcon's principal domestic market for its
barge drilling rigs is the shallow-water areas of the U.S. Gulf Coast (primarily
coastal Louisiana and, to a lesser extent, coastal regions of Alabama,
Mississippi and Texas). This area historically has been the world's largest
market for shallow-water drilling. Barge rigs are employed both inland, in
lakes, bays, rivers and marshes, and in shallow-water coastal areas. Falcon's
barge drilling fleet averaged 14.2 working rigs at an average day rate of
$12,667 during 1995 and 18.9 working rigs at an average day rate of $13,304
during the nine months ended September 30, 1996.

The structure of the domestic shallow-water market has changed materially
as the result of barge rigs being scrapped, committed to international markets
or taken out of service, and the consolidation of unprofitable barge rig
companies. The following table sets forth as of October 31, 1996, Falcon's
estimate of the number of barge drilling rigs with rated maximum drilling depth
capability in excess of 14,000 feet capable of working in the domestic market.
The table below excludes rigs that are suitable principally for workover and
shallow drilling.

<TABLE>
<CAPTION>
CONTRACTOR TOTAL IN SERVICE
---------- ----- ----------
<S> <C> <C>
Falcon............................................................ 40 25
Mallard Bay....................................................... 8 7
-- --
Total................................................... 48 32
</TABLE>

DOMESTIC BARGE WORKOVER AND SHALLOW DRILLING OPERATIONS

Domestic Barge Workover and Shallow Drilling Rigs. Barge workover and
shallow drilling rigs typically differ from barge drilling rigs both in the size
of the hull and the capability of the drilling equipment. Because workover
operations require less hoisting and mud system capacity, a smaller unit can be
used. In addition, workover rigs, which are equipped with specialized pumps and
handling tools, do not require heavy duty drill pipe. Operating costs for
workover rigs are lower because the rigs require smaller crews, use less fuel
and require less repair and maintenance. Certain rigs can also be utilized to
drill shallow wells to maximum depths ranging to 14,000 feet depending upon the
rig's capabilities.

The following table provides certain information regarding Falcon's fleet
of barge workover and shallow drilling rigs as of October 31, 1996:

<TABLE>
<CAPTION>
MAST MAXIMUM
CAPACITY YEAR DRILLING/WORKOVER
RIG DRAWWORKS (POUNDS) BUILT DEPTH (FEET) CUSTOMER
- ---- --------- --------- ----- ----------------- --------
<S> <C> <C> <C> <C> <C>
SDI Ideco H-30.......................... 250,000 1990(1) NA/15,000 Equinox
6 Ideco H-35.......................... 450,000 1978 NA/20,000 Badger
7 Gardner Denver 800.................. 800,000 1972 10,000/25,000 Apache
14 Skytop Brewster N95(2).............. 1,000,000 1978 18,000/30,000 Forman
16 Mid-Continent U36A.................. 550,000 1979 10,000/25,000 LL&E
18 Skytop Brewster N75................. 530,000 1980 12,000/25,000 Badger
19 National 80B........................ 750,000 1996(1) 14,000/25,000 Yuma
22 Wilson 75........................... 369,000 1991(1) NA/20,000 Texoil
23 Mid-Continent U-914(3).............. 1,000,000 1995(1) 14,000/25,000 Vintage
24 National 110M(4).................... 760,000 1978 14,000/25,000 Apache
</TABLE>

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

(1) These rigs were reconstructed on the date indicated using the existing hull,
existing equipment, or both.

(2) This rig is a posted barge capable of deep drilling operations, but is
currently marketed for workover activity in areas requiring a posted barge.

(3) This rig is leased to Falcon through December 1998.

(4) This rig is leased to Falcon through March 2000.

22
<PAGE> 23

Domestic Barge Workover and Shallow Drilling Market. The domestic barge
workover and shallow drilling business is based in the same geographical area as
the barge drilling market. The same factors which have affected the structure of
the barge drilling sector also have affected this sector, with considerable
consolidation of competitors and reduction of available rigs since the early
1980s. The following table sets forth as of October 31, 1996, Falcon's estimate
of the number of barge units in the workover and shallow drilling sector.
Shallow drilling units are those with rated maximum drilling depth capacity of
14,000 feet or less.

<TABLE>
<CAPTION>
CONTRACTOR TOTAL IN SERVICE
---------- ----- ----------
<S> <C> <C>
Falcon....................................................... 10 10
Mallard Bay.................................................. 20 15
Other Contractors............................................ 5 2
-- --
Total.............................................. 35 27
</TABLE>

Falcon's workover fleet averaged 4.2 working rigs at an average day rate of
$8,858 during 1995 and 4.9 working rigs at an average day rate of $8,921 during
the nine months ended September 30, 1996.

INTERNATIONAL SHALLOW-WATER OPERATIONS

International Shallow-Water Rigs. Barge rigs working in international
markets typically feature a larger hull and expanded crew quarters. In addition,
barge rigs designed to work in Lake Maracaibo, Venezuela, require modification
to work in a floating mode in up to 150 feet of water. The typical domestic
barge is modified by widening the hull from 54 feet to 100 feet, installing a
mooring system and cantilevering the drill floor. Three of Falcon's barge rigs
have been so modified and are currently operating in Lake Maracaibo pursuant to
Falcon's contracts with Maraven. After such modification, these rigs generally
are not suitable for deployment to other locations. The table under "Domestic
Barge Drilling Operations" includes three rigs that are equipped for general
international service by virtue of their larger hull size and crew quarters.

Falcon currently operates a submersible rig (Rig 203) in Venezuela under a
well-to-well contract with a subsidiary of British Petroleum. Falcon also
operates a jack-up drilling rig (FALRIG 83) offshore Nigeria under a one-year
contract with an affiliate of Global Marine Inc.

International Shallow-Water Markets. In recent years, demand for
shallow-water rigs for drilling and workover services in certain international
markets has increased. Potential international markets for shallow-water
drilling services include Venezuela, West Africa, Southeast Asia and Mexico.
Drilling in these international markets is typically driven by exploration for
and development of oil production. The attractiveness of international markets
to the drilling contractor is based on the long-term nature of the work and the
opportunity to earn day rates higher than domestic rates. Management of Falcon
believes that international markets, in which jackup rigs have historically been
utilized for offshore drilling, will utilize an increasing number of barge rigs
over the next several years and that these will come primarily from rigs
currently or formerly employed in the U.S. Gulf Coast shallow-water market.

DOMESTIC OFFSHORE OPERATIONS

Offshore Rigs. Falcon's offshore drilling rigs include jackup and
submersible units. Jackup 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 hull, which contains 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 mat attached to the lower portion
of the legs in order to provide a more stable foundation in soft bottom areas.
All of Falcon's jackup rigs are mat-supported rigs. Moving a rig to the drill
site involves jacking up its legs until the hull is floating on the surface of
the water. The hull is then towed to the drill site by tugboats and the legs are
jacked down until contact is made with the seabed. The jacking operation
continues until the hull is raised to the desired elevation above sea level and
drilling operations are conducted with the hull in its raised position. Six of
Falcon's jackup rigs are cantilever design, a feature that permits the drilling
platform to be extended out from

23
<PAGE> 24

the hull, allowing it to perform drilling or workover operations over
pre-existing platforms or structures. All of the Company's cantilevered jackup
rigs feature top drive systems. The other ten jackup rigs, including one rig
operating in the international shallow-water market, are slot-type design that
are configured for the drilling operations to take place through a keyway in the
hull. Jackup rigs with the cantilever feature or with a top drive system
historically have achieved higher day rates and utilization rates. Falcon's
jackup rigs are equipped for deep drilling in water depths of up to 250 feet.

A submersible rig is a mobile drilling platform that is towed to the drill
site and submerged to drilling position by flooding the lower hull until it
rests on the sea floor, with the upper deck above the water surface. After
completion of the drilling operation, the rig is refloated by pumping the water
out of the lower hull, after which it may be towed to another location. Each of
Falcon's three submersible rigs, including one rig operating in the
international shallow-water market, is equipped for deep drilling in water
depths up to 85 feet and features a cantilevered rig floor. One of the units is
equipped with a top drive and a third mud pump.

The following table provides certain information regarding Falcon's
domestic offshore rigs as of October 31, 1996:

<TABLE>
<CAPTION>
MAXIMUM MAXIMUM
WATER DRILLING YEAR
RIG RIG DESCRIPTION DEPTH (FEET) DEPTH (FEET) BUILT CUSTOMER
- ---------------- --------------------- ------------ ------------ ------------ --------------------
<S> <C> <C> <C> <C> <C>
SLOT-TYPE MAT-SUPPORTED JACKUP RIGS

FALRIG 17 Bethlehem JU-250MS 250 25,000 1974 ADTI
FALRIG 18 Bethlehem JU-250MS 250 25,000 1978 Zilkha
FALRIG 19 Bethlehem JU-250MS 250 30,000 1978 ADTI
FALRIG 20 Bethlehem JU-250MS 250 30,000 1982 ADTI
FALRIG 82(1) Baker Marine BMC 250 200 25,000 1979 UPRC
FALRIG 84 Bethlehem JU-250MS 250 25,000 1975 ADTI
Achilles Baker Marine BMC 250 200 25,000 1981 OEDC
Sea Hawk Bethlehem JU-250MS 250 25,000 1976 Apache
Taurus Bethlehem JU-250MS 250 25,000 1976 Newfield

CANTILEVERED MAT-SUPPORTED JACKUP RIGS(2)

Phoenix I Bethlehem JU-200MC 200 25,000 1981 ADTI
Phoenix II Bethlehem JU-200MC 200 25,000 1982 Houston Exploration
Phoenix III Bethlehem JU-200MC 200 25,000 1981 ADTI
Phoenix IV Bethlehem JU-200MC 200 25,000 1981 Petsec
FALRIG 85 Bethlehem JU-200MC 200 25,000 1979 Union Oil
FALRIG 86 Bethlehem JU-200MC 200 25,000 1980 ADTI

CANTILEVERED SUBMERSIBLE RIGS

FALRIG 77 Donhaiser Marine 85 30,000 1983 Flores & Rucks
FALRIG 78 Donhaiser Marine 85 30,000 1984 Seneca Resources
</TABLE>

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

(1) This rig is leased to Falcon.

(2) All of these rigs are equipped with top drive systems.

24
<PAGE> 25

Domestic Bottom-Supported Offshore Market. Falcon's domestic offshore
drilling fleet, which consists entirely of bottom-supported units, is located in
the U.S. Gulf of Mexico. Of a total of 128 bottom-supported offshore rigs (118
jackup and 10 submersible drilling rigs) in the U.S. Gulf of Mexico, 118 are
owned by the eight largest operators, including Falcon. The table below sets
forth Falcon's estimate of the operators of bottom-supported offshore drilling
rigs in the U.S. Gulf of Mexico market as of October 31, 1996:

<TABLE>
<CAPTION>
MAT-SUPPORTED
RIGS WITH
MINIMUM 200
BOTTOM-SUPPORTED FOOT WATER
RIGS(l) DEPTH
---------------- -------------------
CONTRACTOR TOTAL IN-SERVICE TOTAL IN-SERVICE
---------- ----- ---------- ----- ----------
<S> <C> <C> <C> <C>
Noble Drilling.................................... 23 18 10 9
Ensco............................................. 21 20 -- --
Falcon............................................ 17 17 15 15
Rowan Companies................................... 14 14 -- --
Diamond Offshore.................................. 12 11 3 3
Global Marine..................................... 11 11 -- --
Marine Drilling................................... 12 12 8 8
Cliffs Drilling................................... 8 7 1 1
Other contractors................................. 10 10 1 1
--- --- -- --
Total................................... 128 120 38 37
=== === == ==
</TABLE>

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

(1) Excludes bottom-supported units rated strictly for workover.

Falcon's domestic offshore fleet averaged 9.8 working rigs at an average
day rate of $15,060 during 1995 and 14.8 working rigs at an average day rate of
$19,144 for the nine months ended September 30, 1996.

International opportunities for Falcon's offshore bottom-supported rigs are
limited to areas where soft bottom conditions are conducive to the use of
mat-supported rigs, including certain offshore waters of India, the Persian
Gulf, Southeast Asia, West Africa and Mexico.

DEEPWATER OPERATIONS

Drillships and Semisubmersibles. Falcon began operation in the deepwater
drilling market in 1996 with the acquisition of three dynamically positioned
drillships. A drillship is a self-propelled ship specifically outfitted for
drilling operations, featuring drilling equipment typical of any offshore rig.
The older generation of drillships were conventionally moored and thus were
limited in terms of water depth capacity. Many of the drillships built after
1975 featured a dynamic positioning system which allowed the ship to position
itself over the drill site through the use of thrusters controlled by a
satellite navigation system. Drillships typically have greater variable load
capacity than semisubmersible drilling rigs, which make them better suited for
drilling in remote locations where resupply is expensive. Semisubmersible rigs,
which are not self-propelled but feature better motion characteristics due to
the shape of their hulls, are preferred in harsh environments.

At October 31, 1996, Falcon's active fleet of deepwater rigs consisted of
three dynamically positioned drillships.

The Peregrine I was acquired in September 1995 and thereafter was upgraded
to drill in up to 6,750 feet of water. The rig is a Gusto design Pelican class
drillship built in 1983. The Peregrine I is under contract for a five-year term
with Petrobras to work offshore Brazil in water depths of up to 3,900 feet. The
rig was mobilized to Brazil in September 1996, and operations commenced in
November 1996.

25
<PAGE> 26

This unit has been working in Brazil since 1986. The rig is a Gusto design
Pelican class drillship built in 1979 and rated to drill in up to 3,300 feet of
water.

The Peregrine III was acquired in May 1996. The rig has worked principally
in Southeast Asia and West Africa in recent years. Currently, it is working
offshore Australia and is expected to return to work in West African waters
under multi-well contracts with subsidiaries of Shell and Exxon that are
expected to run through March 1999. The rig is a Gusto design Pelican class
drillship built in 1976 and rated to drill in up to 4,000 feet of water.
Recently, the Company reached an agreement with Shell to increase its day rate,
based on certain upgrades to the unit, and believes additional upgrading,
including increasing the rig's water depth capability, is likely. The Company
intends to use approximately $20 million of the proceeds of the Offering to
complete such upgrades.

The Company has agreed to acquire a hull and engine package from Kherson
Shipyard (the Peregrine IV). The hull, with a larger displacement and size than
any currently operating dynamically positioned drillship, will be completed as a
dynamically positioned drillship rated to drill in 9,000 feet of water. The
Company will not undertake its completion unless and until it obtains a
satisfactory drilling contract and financing for the project. The Company has
not yet taken delivery of the hull from Kherson Shipyard.

In addition, the Company has agreed to acquire two conventionally moored
drillships currently based in Southeast Asia. The acquisition is expected to
close on or about November 29, 1996. The Deepsea Ice is equipped with a top
drive system and is rated to drill in up to 1,000 feet of water. The rig is
currently under contract through mid-1997. The Deepsea Duchess has also operated
principally in Southeast Asia. It is equipped with a top drive system and is
rated to drill in up to 1,000 feet of water. The rig was recently mobilized back
from the Mediterranean Sea, where it completed a contract and is being bid for
several prospective wells.

The Company also owns the Pacesetter III, a semisubmersible acquired in
1995. It has been cold stacked since 1986. The Company is currently evaluating
plans to refurbish it for operation in up to 1,500 feet of water, its original
water depth rating. The refurbishment is estimated to cost $25 million.

Deepwater Markets. Drillships and semisubmersibles operate in various
market areas around the world in water depths where jackup rigs and other
bottom-supported rigs are incapable of working. Activity in such water depths
has generally been increasing over the last several years.

Semisubmersibles, most of which are conventionally moored, have application
on a worldwide basis and are particularly favored in harsh environments due to
their superior motion characteristics. Depending on the generation of rig,
semisubmersibles are rated to drill in 600 feet to 5,000 feet of water. At
October 31, 1996, there were 117 semisubmersibles working, out of a total of 122
actively marketed units.

Dynamically positioned drillships are used to drill wells in the world's
deepest water depth locations, since these units are not constrained by the
limitations of conventional mooring. The largest market for these drillships is
Brazil, where Petrobras has been a leader in deepwater development. Five of the
eight active dynamically positioned drillships are committed to Petrobras. Other
markets which utilize these drillships include the U.S. Gulf of Mexico, West
Africa, Australia and Southeast Asia. In addition to the eight active units,
other units are being constructed or converted to dynamic positioning,
including: Ocean Clipper, Discoverer Enterprise, Glomar Explorer and Neddrill
Muravlenko. Long-term contract commitments have been announced for each of these
units.

Conventionally moored drillships generally compete with second- and
third-generation semisubmersibles in water depths up to 1,500 feet in certain
market areas, including the U.S. Gulf of Mexico, West Africa, the Indian Ocean,
Australia and Southeast Asia. In addition to four units which are owned by
state-owned oil companies which operate exclusively in India and Ghana, there
are only six remaining conventionally moored drillships. This type of drillship
is particularly suitable for operations in Southeast Asia, where locations are
widespread, resupply is difficult and sea conditions are favorable. With the
acquisition of the Deepsea Ice and Deepsea Duchess, Falcon would control two of
the four units in this market area.

26
<PAGE> 27

CONTRACTS AND CUSTOMERS

Falcon's drilling and workover rigs are generally operated under individual
day rate contracts. Falcon's customers include major, state-owned and
independent oil and gas companies, as well as turnkey operators that do not own
rig equipment but who assume the risks associated with operations conducted on a
fixed price basis. Historically, most domestic drilling contracts have been on a
well-by-well basis, while contracts in the international markets typically are
offered on a term basis. Workover contracts are also typically on a well-by-well
basis and are shorter in duration than drilling contracts.

Day rate contracts generally provide for a fixed day rate, regardless of
whether drilling is successful. Drilling contracts also provide for lower rates
during periods when the rig is being moved or when drilling operations are
interrupted or restricted by equipment breakdowns, adverse weather or water
conditions or other conditions beyond the control of Falcon. Under day rate
contracts, Falcon generally pays operating expenses of the rig, including wages
and the cost of incidental supplies. Revenues from day rate contracts have
historically accounted for a substantial portion of Falcon's revenues. Falcon
has generally been able to obtain contractual indemnification pursuant to which
Falcon's customers agree to protect and indemnify Falcon to some degree from
liability for reservoir, pollution and environmental damages, but there can be
no assurance that Falcon can obtain such indemnities in all of its contracts,
that the level of indemnification that can be obtained will be meaningful, that
such indemnification agreements will be enforceable or that the customer will be
financially able to comply with its indemnity obligations.

Falcon's customers, other than in the case of the term contracts or
commitments in Venezuela and Brazil, generally include major and independent oil
and gas companies and turnkey operators operating in the U.S. Gulf of Mexico. In
the years ended December 31, 1993, 1994, and 1995, Falcon contracted with 63, 80
and 75 customers, respectively, in this area. British Gas accounted for 11.1% of
total revenues in 1993. Applied Drilling Technology Inc., a provider of turnkey
drilling services, accounted for 11.2% of total revenues in 1994 and
approximately 11% of total revenues for the nine months ended September 30,
1996. Maraven accounted for 11.3% of total revenues in 1995. No other customer
accounted for more than 10% of total revenues in any such period.

Falcon owns and operates three modified Lake Maracaibo type barge rigs
under five-year contracts that commenced in December 1994 and January 1995. At
October 31, 1996, seven of the seventeen rigs in the Company's domestic offshore
fleet were operating under six-month contracts with Applied Drilling Technology,
Inc. With the Peregrine I and Peregrine II operating under long-term contracts,
Petrobras has become, and is anticipated to remain, a significant customer of
the Company.

27
<PAGE> 28

MANAGEMENT

The following table sets forth certain information with respect to the
directors and principal executive officers of Falcon:

<TABLE>
<CAPTION>
NAME AGE POSITION
------------------------------ ---- -----------------------------------------------
<S> <C> <C>
Steven A. Webster............. 45 Chairman of the Board and Chief Executive
Officer
Bernie W. Stewart............. 52 Chief Operating Officer
Robert H. Reeves, Jr. ........ 59 Executive Vice President
Robert F. Fulton.............. 45 Executive Vice President and Chief Financial
Officer
Leighton E. Moss.............. 45 Vice President and General Counsel
Steven R. Meheen.............. 40 Vice President -- Deepwater Operations
Michael E. Blake.............. 38 President of Falcon Workover
Rodney W. Meisetschlaeger..... 43 Vice President -- Offshore Operations
Lloyd M. Pellegrin............ 49 Vice President -- Administration
Don P. Rodney................. 49 Vice President -- Finance
Purnendu Chatterjee........... 45 Director
Douglas A. P. Hamilton........ 50 Director
Kenneth H. Hannan, Jr. ....... 55 Director
James R. Latimer, III......... 50 Director
William R. Ziegler............ 54 Director
</TABLE>

Mr. Webster, a director and the Chairman and Chief Executive Officer of
Falcon since its organization in 1991, is a founder and original investor in
Falcon and its predecessors, which commenced operation in 1988. In addition to
his administrative duties, Mr. Webster has been responsible for developing
Falcon's strategic plan, raising capital and implementing its acquisition
program. He serves as a director of Crown Resources Corporation (a mining
company), a director of DI Industries, Inc. (a land drilling contractor), and as
a trust manager of Camden Property Trust (a real estate investment trust). Mr.
Webster is also a general partner of Equipment Asset Recovery Fund (an
investment fund).

Mr. Stewart joined Falcon in April 1996 as Chief Operating Officer. From
1993 until joining Falcon, Mr. Stewart was Chief Operating Officer for Hornbeck
Offshore Services, Inc., an offshore supply boat operator, where he was
responsible for overall supervision of that company's operations. From 1986
until 1993, he was President of Western Oceanics, Inc., an offshore drilling
contractor.

Mr. Reeves, Executive Vice President of Falcon since January 1993, is
responsible for managing Falcon's domestic barge rig business. Mr. Reeves joined
Two "R" Drilling Company Inc. in 1961 and served as its President from 1974
until joining Falcon in December 1992. Two "R" Drilling Company Inc., which was
the first company to utilize barge rigs, was co-founded by Mr. Reeves' father in
1944. Mr. Reeves was instrumental in building Two "R" Drilling Company Inc. into
a leading company in the shallow-water drilling market.

Mr. Fulton, Executive Vice President and Chief Financial Officer of Falcon
since January 1, 1995, is responsible for overseeing accounting, financial and
general administrative matters. From 1991 until joining Falcon in 1995, Mr.
Fulton served as an executive officer of Chiles Offshore Corporation (which has
merged with Noble Offshore Corporation, a wholly owned subsidiary of Noble
Drilling Corporation), most recently as Senior Vice President and Chief
Financial Officer.

Mr. Moss, Vice President and General Counsel of Falcon, joined Falcon on
January 1, 1996, and is primarily responsible for management of the legal
affairs of Falcon. From October 1995 until joining Falcon, Mr. Moss was a member
of the law firm of Gardere Wynne Sewell & Riggs, L.L.P. For more than five years
prior to October 1995, Mr. Moss was a member of the law firm of Sewell & Riggs,
P.C.

Mr. Meheen, Vice President -- Deepwater Operations of Falcon since January
1995, is responsible for development and operation of Falcon's deepwater
business. Mr. Meheen has been employed in offshore operations since 1976 for
Santa Fe Drilling, Maretech Pacific Ltd. and as a consultant with Mobil Oil.

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<PAGE> 29

Mr. Blake, President of Falcon Workover Company, Inc. since January 1996,
was president of the joint venture that had operated Falcon's workover business
since its formation in April 1994 until December 31, 1995. Prior to the
formation of that joint venture, Mr. Blake was President of Blake Drilling and
Workover Company and certain predecessor companies from 1986 and has been
employed by companies engaged in shallow-water barge drilling operations since
1981.

Mr. Meisetschlaeger, Vice President -- Offshore Operations of Falcon since
1993, is responsible for managing Falcon's offshore operations. He served in a
similar capacity for the Huthnance Drilling Division of W.R. Grace & Co. from
1981 until joining Falcon in 1993.

Mr. Pellegrin, Vice President -- Administration of Falcon since November
1992, has primary responsibility for administrative matters, personnel safety
and risk management. He held a similar position with Atlantic Pacific Marine
Corporation, where he worked from 1977 until joining Falcon in 1992.

Mr. Rodney, Vice President -- Finance of Falcon since November 1992, has
overall responsibility for the accounting and control functions for both the
offshore and barge divisions. He worked for Atlantic Pacific Marine Corporation
from 1977 through 1992, serving as controller for his last nine years.

Dr. Chatterjee, a director of Falcon since 1993, is an investor in public
and private companies and has been associated with the George Soros organization
for approximately eleven years. A corporation controlled by Dr. Chatterjee is
the general partner of a limited partnership that is Falcon's largest
stockholder. In January 1993, Dr. Chatterjee, without admitting or denying the
charges, resolved an action brought by the Securities and Exchange Commission
alleging that he had disclosed material non-public information by paying a fine
and consenting to an injunction that requires, among other things, observance of
applicable securities laws and regulations. Dr. Chatterjee is a director of
Geotek Communications, Inc., a broadcasting communications equipment company.

Mr. Hamilton, a director of Falcon since 1992, is a private investor who is
one of Falcon's original investors. He has experience in executive management in
various businesses and has been an investor in oil and gas ventures since 1983.

Mr. Hannan, a director of Falcon since 1991, is President of Colonial
Navigation, a New York-based shipping company that is affiliated with the
shipping interests of Francis and Marios Stafilopatis. Entities owned by the
Stafilopatis family were early investors in Falcon.

Mr. Latimer, a director of Falcon since 1993, is an independent oil and gas
operator and investor based in Dallas. He has experience managing a large
institutional portfolio of oil and gas properties and as a management
consultant. Mr. Latimer is also the President of Raptor Exploration Company,
Inc., a wholly owned subsidiary of Falcon through which Falcon participates in
oil and gas exploration and production activities.

Mr. Ziegler, a director of Falcon since 1991, is a partner of the law firm
of Parson & Brown and was a partner in the law firm of Whitman Breed Abbott &
Morgan and a predecessor firm until May 1994. Both firms have acted as counsel
to Falcon. He serves as a director of DI Industries, Inc. (a land drilling
contractor).

The Board of Directors of the Company intends to appoint Michael E. Porter,
the C. Roland Christensen Professor of Business Administration at Harvard
Business School, as a director of the Company, effective as of January 1, 1997.
Professor Porter is also a director of Alpha-Beta Technology, Inc., Nets, Inc.,
Parametric Technology Corporation and ThermoQuest Corporation.

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<PAGE> 30

SELLING STOCKHOLDERS

The following table sets forth information regarding beneficial ownership
of Common Stock by the Selling Stockholders before and after the Offering:

<TABLE>
<CAPTION>
NUMBER OF AFTER OFFERING
SHARES NUMBER OF -------------------------
OWNED PRIOR SHARES NUMBER OF
TO THE BEING SHARES
SELLING STOCKHOLDER OFFERING OFFERED OWNED PERCENT(1)
- ---------------------------------------- ----------- --------- --------- ----------
<S> <C> <C> <C> <C>
Open Society Institute.................. 2,000,000 2,000,000 -- --
Douglas A. P. Hamilton.................. 1,282,570(2) 1,113,500 169,070 *
Furzedown Trading Limited............... 700,000(3) 700,000 -- --
Roberto Marsella........................ 45,000 45,000 -- --
Roger B. Vincent........................ 48,000 45,000 3,000 *
Stephen M. Dearholt..................... 60,000 30,000 30,000 *
Donald Taylor........................... 30,000 30,000 -- --
Michael Keehner......................... 15,000 15,000 -- --
Kenneth C. Huff......................... 12,000 12,000 -- --
Michael E. Porter....................... 15,000 2,500 12,500 *
Katherine K. Stickney................... 3,000 2,000 1,000 *
Anna N. Stickney........................ 3,000 2,000 1,000 *
Albert Stickney III..................... 3,000 1,500 1,500 *
Susan K. Stickney....................... 3,000 1,500 1,500 *
---------
Total......................... 4,000,000
=========
</TABLE>

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

* Less than one percent.

(1) Based upon a total of 38,546,650 shares of Common Stock outstanding.

(2) Includes 82,500 shares of Common Stock issuable upon exercise of stock
options under the 1992 Stock Option Plan held by Mr. Hamilton. Mr. Hamilton
is a director of Falcon.

(3) Includes 460,864 shares owned by S-C Rig Investments, L.P. ("S-C Rig"), of
which Furzedown Trading Limited ("Furzedown") is a limited partner. Such
shares will be distributed to Furzedown prior to the closing of the
Offering. Furzedown has vested investment discretion with respect to
certain of its portfolio investments, including the Common Stock, in
Chatterjee Management Company, an entity that may be deemed to be
controlled by Dr. Purnendu Chatterjee, a director of the Company. S-C Rig
owns 11,644,221 shares of Common Stock prior to the Offering, and will own
11,183,357 shares, or 29.0% of the Common Stock outstanding, after the
Offering (assuming the Underwriters' over-allotment option is not
exercised).

The U.S. Underwriters and the Managers have been granted an option to
purchase up to 1,050,000 additional shares of Common Stock to cover
over-allotments. It is currently anticipated that 250,000 of such additional
shares will be sold by the Company and the remaining 800,000 additional shares
will be sold by Open Society Institute ("OSI") and Furzedown. If the
over-allotment option is exercised, the shares of Common Stock necessary to
satisfy the obligations of OSI and Furzedown will be transferred to such
entities from S-C Rig. Under these arrangements, if such over-allotment option
is exercised in full S-C Rig will own 10,383,357 shares, or 26.9% of the Common
Stock outstanding, after the Offering. The Company, OSI and Furzedown may agree,
however, to allocate the 1,050,000 share over-allotment option obligation among
themselves in a different manner prior to the consummation of the Offering.

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<PAGE> 31

UNDERWRITING

Under the terms and subject to the conditions contained in an Underwriting
Agreement dated , 1996 (the "U.S. Underwriting Agreement"), the
underwriters named below (the "U.S. Underwriters"), for whom CS First Boston
Corporation, Donaldson, Lufkin & Jenrette Securities Corporation, Salomon
Brothers Inc, Schroder Wertheim & Co. Incorporated and Simmons & Company
International are acting as representatives (the "Representatives"), have
severally but not jointly agreed to purchase from the Company and the Selling
Stockholders the following respective numbers of U.S. Shares:

<TABLE>
<CAPTION>
NUMBER OF
U.S.
UNDERWRITER SHARES
---------
<S> <C>
CS First Boston Corporation...............................................
Donaldson, Lufkin & Jenrette Securities Corporation.......................
Salomon Brothers Inc .....................................................
Schroder Wertheim & Co. Incorporated .....................................
Simmons & Company International...........................................

---------
Total........................................................... 5,950,000
=========
</TABLE>

The U.S. Underwriting Agreement provides that the obligations of the U.S.
Underwriters are subject to certain conditions precedent and that the U.S.
Underwriters will be obligated to purchase all the U.S. Shares offered hereby
(other than those shares covered by the over-allotment option described below)
if any are purchased. The U.S. Underwriting Agreement provides that, in the
event of a default by a U.S. Underwriter, in certain circumstances the purchase
commitments of non-defaulting U.S. Underwriters may be increased or the U.S.
Underwriting Agreement may be terminated.

The Company and the Selling Stockholders have entered into a Subscription
Agreement (the "Subscription Agreement") with the Managers of the International
Offering (the "Managers") providing for the concurrent offer and sale of the
International Shares outside the United States and Canada. The closing of the
U.S. Offering is a condition to the closing of the International Offering and
vice versa.

The Company and certain Selling Stockholders have granted to the U.S.
Underwriters and the Managers an option, exercisable by CS First Boston
Corporation, expiring at the close of business on the 30th day after the date of
this Prospectus, to purchase up to 1,050,000 additional shares at the initial
public offering price, less the underwriting discounts and commissions, all as
set forth on the cover page of this Prospectus. Such option may be exercised
only to cover over-allotments in the sale of the shares of Common Stock offered
hereby. To the extent that this option to purchase is exercised, each U.S.
Underwriter and each Manager will become obligated, subject to certain
conditions, to purchase approximately the same percentage of additional shares
being sold to the U.S. Underwriters and the Managers as the number of U.S.
Shares set forth next to such U.S. Underwriter's name in the preceding table and
as the number set forth next to such Manager's name in the corresponding table
in the prospectus relating to the International Offering bears to the sum of the
total number of shares of Common Stock in such tables.

The Company and the Selling Stockholders have been advised by the
Representatives that the U.S. Underwriters propose to offer the U.S. Shares in
the United States and Canada to the public initially at

31
<PAGE> 32

the public offering price set forth on the cover page of this Prospectus and,
through the Representatives, to certain dealers at such price less a concession
of $ per share, and the U.S. Underwriters and such dealers may allow a
discount of $ per share on sales to certain other dealers. After the
initial public offering, the public offering price and concession and discount
to dealers may be changed by the Representatives.

The public offering price, the aggregate underwriting discounts and
commissions per share and per share concession and discount to dealers for the
U.S. Offering and the concurrent International Offering will be identical.
Pursuant to an Agreement between the U.S. Underwriters and Managers (the
"Intersyndicate Agreement") relating to the Common Stock Offering, changes in
the public offering price, concession and discount to dealers will be made only
upon the mutual agreement of CS First Boston Corporation, as representative of
the U.S. Underwriters, and CS First Boston Limited ("CSFBL"), on behalf of the
Managers.

Pursuant to the Intersyndicate Agreement, each of the U.S. Underwriters has
agreed that, as part of the distribution of the U.S. Shares and subject to
certain exceptions, it has not offered or sold, and will not offer or sell,
directly or indirectly, any shares of Common Stock or distribute any prospectus
relating to the Common Stock to any person outside the United States or Canada
or to any other dealer who does not so agree. Each of the Managers has agreed or
will agree that, as part of the distribution of the International Shares and
subject to certain exceptions, it has not offered or sold, and will not offer or
sell, directly or indirectly, any shares of Common Stock or distribute any
prospectus relating to the Common Stock in the United States or Canada or to any
other dealer who does not so agree. The foregoing limitations do not apply to
stabilization transactions or to transactions between the U.S. Underwriters and
the Managers pursuant to the Intersyndicate Agreement. As used herein, "United
States" means the United States of America (including the States and the
District of Columbia), its territories, possessions and other areas subject to
its jurisdiction. "Canada" means Canada, its provinces, territories, possessions
and other areas subject to its jurisdiction, and an offer or sale shall be in
the United States or Canada if it is made to (i) any individual resident in the
United States or Canada or (ii) any corporation, partnership, pension,
profit-sharing or other trust or other entity (including any such entity acting
as an investment adviser with discretionary authority) whose office most
directly involved with the purchase is located in the United States or Canada.

Pursuant to the Intersyndicate Agreement, sales may be made between the
U.S. Underwriters and the Managers of such number of shares of Common Stock as
may be mutually agreed upon. The price of any shares so sold will be the public
offering price, less such amount as may be mutually agreed upon by CS First
Boston Corporation, as representative of the U.S. Underwriters, and CSFBL, on
behalf of the Managers, but not exceeding the selling concession applicable to
such shares. To the extent there are sales between the U.S. Underwriters and the
Managers pursuant to the Intersyndicate Agreement, the number of shares of
Common Stock initially available for sale by the U.S. Underwriters or by the
Managers may be more or less than the amount appearing on the cover page of the
Prospectus. Neither the U.S. Underwriters nor the Managers are obligated to
purchase from the other any unsold shares of Common Stock.

This Prospectus may be used by underwriters and dealers in connection with
sales of International Shares to persons located in the United States, to the
extent such sales are permitted by the contractual limitations on sales
described above.

The Company, the Selling Stockholders and certain of their affiliates have
agreed that they will not offer, sell, contract to sell, announce their
intention to sell, pledge or otherwise dispose of, directly or indirectly, or
file with the Securities and Exchange Commission a registration statement under
the Securities Act of 1933 (the "Securities Act") relating to, any additional
shares of its Common Stock or securities convertible into or exchangeable or
exercisable for any shares of its Common Stock without the prior written consent
of CS First Boston Corporation for a period after the date of this Prospectus of
180 days for the Company and 90 days for the Selling Stockholders, except that
the Company may (i) issue and sell Common Stock pursuant to any employee stock
option plan, stock ownership plan or dividend reinvestment plan in effect on the
date of this Prospectus, (ii) issue Common Stock issuable upon the conversion of
securities or the exercise of warrants

32
<PAGE> 33

outstanding on the date of this Prospectus, and (iii) issue up to $15 million of
Common Stock pursuant to the Company's agreement to acquire the Deepsea Ice and
the Deepsea Duchess.

The Company and the Selling Stockholders have agreed to indemnify the U.S.
Underwriters against certain liabilities, including civil liabilities under the
Securities Act, or to contribute to payments that the U.S. Underwriters and the
Managers may be required to make in respect thereof.

Donaldson, Lufkin & Jenrette Securities Corporation received customary fees
in connection with the placement of the Company's senior fixed rate notes,
floating rate notes, and senior subordinated notes, and in connection with the
Company's two prior public offerings of Common Stock. Salomon Brothers Inc
received customary fees in connection with a placement of the Company's senior
fixed rate notes, and in connection with one of the Company's prior public
offerings of Common Stock. Simmons & Company International received customary
fees in connection with the Company's two prior public offerings of Common
Stock.

In connection with this Offering, CS First Boston Corporation and certain
of the U.S. Underwriters and selling group members (if any) and their respective
affiliates may engage in passive market making transactions in the Common Stock
on The Nasdaq Stock Market in accordance with Rule 10b-6A under the Securities
Exchange Act of 1934 (the "Exchange Act") during a period before commencement of
offers or sales of the Shares offered hereby. The passive market making
transactions must comply with applicable volume and price limits and be
identified as such.

NOTICE TO CANADIAN RESIDENTS

RESALE RESTRICTIONS

The distribution of U.S. Shares in Canada is being made only on a private
placement basis exempt from the requirement that the Company prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of U.S. Shares are effected. Accordingly, any resale of U.S. Shares in
Canada must be made in accordance with applicable securities laws which will
vary depending on the relevant jurisdiction, and which may require resales to be
made in accordance with available statutory exemptions or pursuant to a
discretionary exemption granted by the applicable Canadian securities regulatory
authority. Purchasers are advised to seek legal advice prior to any resale of
U.S. Shares.

REPRESENTATIONS OF PURCHASERS

Each purchaser of U.S. Shares in Canada who receives a purchase
confirmation will be deemed to represent to the Company and the Selling
Stockholders and the dealer from whom such purchase confirmation is received
that (i) such purchaser is entitled under applicable provincial securities laws
to purchase such U.S. Shares without the benefit of a prospectus qualified under
such securities laws, (ii) where required by law, that such purchaser is
purchasing as principal and not as agent, and (iii) such purchaser has reviewed
the text above under "Resale Restrictions."

RIGHTS OF ACTION AND ENFORCEMENT

The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
section 32 of the Regulation under the Securities Act (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available, including
common law rights of action for damages or rescission or rights of action under
the civil liability provisions of the U.S. federal securities laws.

All of the issuer's directors and officers as well as experts named herein
may be located outside of Canada and, as a result, it may not be possible for
Ontario purchasers to effect service of process within Canada upon the issuer or
such persons. All or a substantial portion of the assets of the issuer and such
persons may be located outside of Canada and, as a result, it may not be
possible to satisfy a judgment against the issuer or such persons in Canada or
to enforce a judgment obtained in Canadian courts against such issuer or persons
outside of Canada.

33
<PAGE> 34

NOTICE TO BRITISH COLUMBIA RESIDENTS

A purchaser of U.S. Shares to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any U.S.
Shares acquired by such purchaser pursuant to this offering. Such report must be
in the form attached to British Columbia Securities Commission Blanket Order BOR
#95/17, a copy of which may be obtained from the Company. Only one such report
must be filed in respect of U.S. Shares acquired on the same date and under the
same prospectus exemption.

CERTAIN UNITED STATES TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS

The following is a general discussion of certain U.S. federal income and
estate tax consequences of the ownership and disposition of Common Stock
applicable to Non-U.S. Holders of such Common Stock who acquire and own such
Common Stock as a capital asset within the meaning of section 1221 of the
Internal Revenue Code of 1986, as amended (the "Code"). A "Non-U.S. Holder" is
any person other than (i) a citizen or resident of the United States, (ii) a
corporation or partnership created or organized in the United States or under
the laws of the United States or of any state, or (iii) an estate or trust whose
income is includable in gross income for United States federal income tax
purposes regardless of its source. For purposes of the withholding tax on
dividends discussed below, a non-resident fiduciary of an estate or trust will
be considered a Non-U.S. Holder.

This discussion does not consider specific facts and circumstances that may
be relevant to a particular Non-U.S. Holder's tax position (including the fact
that in the case of a Non-U.S. Holder that is a partnership, the U.S. tax
consequences of holding and disposing of shares of Common Stock may be affected
by certain determinations made at the partner level) and does not consider U.S.
state and local or non-U.S. tax consequences. This discussion also does not
consider the tax consequences for any person who is a shareholder, partner or
beneficiary of a holder of the Common Stock. Further, it does not consider
Non-U.S. Holders subject to special tax treatment under federal income tax laws
(including banks and insurance companies, dealers in securities, and holders of
securities held as part of a "straddle," "hedge," or "conversion transaction").
The following discussion is based on provisions of the Code, the applicable
Treasury regulations promulgated and proposed thereunder, and administrative and
judicial interpretations as of the date hereof, all of which are subject to
change either retroactively or prospectively. THE FOLLOWING SUMMARY IS INCLUDED
HEREIN FOR GENERAL INFORMATION. EACH PROSPECTIVE NON-U.S. HOLDER IS URGED TO
CONSULT A TAX ADVISOR WITH RESPECT TO THE U.S. FEDERAL TAX CONSEQUENCES OF
HOLDING AND DISPOSING OF COMMON STOCK, AS WELL AS ANY TAX CONSEQUENCES THAT MAY
ARISE UNDER THE LAWS OF ANY U.S. STATE, LOCAL OR OTHER U.S. OR NON-U.S. TAXING
JURISDICTION.

DIVIDENDS

In general, dividends (to the extent of earnings and profits for federal
income tax purposes) paid to a Non-U.S. Holder of Common Stock will be subject
to withholding of U.S. federal income tax at a 30% rate or such lower rate as
may be specified by an applicable income tax treaty. Dividends that are
effectively connected with such holder's conduct of a trade or business in the
United States or, if a tax treaty applies, attributable to a permanent
establishment, or, in the case of an individual, a "fixed base," in the United
States ("U.S. trade or business income"), are generally subject to U.S. federal
income tax at regular rates, but are not generally subject to the 30%
withholding tax if the Non-U.S. Holder files the appropriate form with the
payor. Any U.S. trade or business income received by a Non-U.S. Holder that is a
corporation may also, under certain circumstances, be subject to an additional
"branch profits tax" at a 30% rate or such lower rate as may be applicable under
an income tax treaty.

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<PAGE> 35

and other requirements, which would include the requirement that the Non-U.S.
Holder file a form which contains the holder's name and address and an official
statement by the competent authority in the foreign country (as designated in
the applicable tax treaty) attesting to the holder's status as a resident
thereof.

A Non-U.S. Holder of Common Stock that is eligible for a reduced rate of
U.S. withholding tax pursuant to an income tax treaty may obtain a refund of any
excess amounts currently withheld by filing an appropriate claim for a refund
with the U.S. Internal Revenue Service.

DISPOSITION OF COMMON STOCK

Under current U.S. law, a Non-U.S. Holder generally will not be subject to
U.S. federal income tax in respect of gain recognized on a disposition of Common
Stock unless (i) the gain is U.S. trade or business income, (ii) the Non-U.S.
Holder is an individual who is present in the United States for 183 or more days
in the taxable year of the disposition and meets certain other requirements,
(iii) the Non-U.S. Holder is subject to tax pursuant to the provisions of U.S.
tax law applicable to certain United States expatriates, or (iv) the Company was
a "U.S. real property holding corporation" for federal income tax purposes
(unless the Common Stock is "regularly traded on an established securities
market" and the Non-U.S. Holder did not hold, directly or indirectly, at any
time during the five-year period ending on the date of disposition of Common
stock, more than 5% of the Common stock). The Company believes that it is not
now and has not been within the past five years, and anticipates that it will
not become, a "U.S. real property holding corporation" for U.S. federal income
tax purposes.

FEDERAL ESTATE TAXES

Common Stock owned or treated as owned by an individual who is a Non-U.S.
Holder at the time of death will be included in the individual's gross estate
for U.S. federal estate tax purposes, unless an applicable estate tax treaty
provides otherwise. Such individual's estate may be subject to United States
federal estate tax on the property includable in the estate for U.S. federal
estate tax purposes.

U.S. INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX

The Company must report annually to the Internal Revenue Service and to
each Non-U.S. Holder the amount of dividends paid to, and the tax withheld with
respect to, each Non-U.S. Holder. These reporting requirements apply whether or
not withholding was reduced or eliminated by an applicable tax treaty. Copies of
these information returns may also be made available under the provisions of a
specific treaty or agreement to the tax authorities in the country in which the
Non-U.S. Holder resides. The United States backup withholding tax (which
generally is a withholding tax imposed at the rate of 31% on certain payments to
persons that fail to furnish the information required under the United States
information reporting requirements) generally will not apply to dividends paid
on the Common Stock to a Non-U.S. Holder at an address outside the United
States.

The payment of the proceeds from the disposition of Common Stock to or
through the U.S. office of a broker is subject to information reporting and
backup withholding at a rate of 31% unless the owner certifies its non-U.S.
status under penalty of perjury or otherwise establishes an exemption. The
payment of the proceeds from the disposition of Common Stock to or through the
foreign office of a foreign broker generally will not be subject to backup
withholding and information reporting. In the case of the payment of proceeds
from the disposition of Common Stock effected by a foreign office of a broker
that is a U.S. person or a "U.S. related person," existing regulations require
information reporting on the payment unless the broker receives a statement from
the owner, signed under penalty of perjury, certifying its non-U.S. status or
the broker has documentary evidence in its files as to the Non-U.S. Holder's
foreign status and the broker has no actual knowledge to the contrary. For this
purpose, a "U.S. related person" is (i) a "controlled foreign corporation" for
U.S. federal income tax purposes or (ii) a foreign person 50% or more of whose
gross income from all sources for the three-year period ending with the close of
its taxable year preceding the payment (or for such part of the period that the
broker has been in existence) is derived from activities that are effectively
connected with the conduct of a U.S. trade or business. Existing regulations
reserve on the question of whether

35
<PAGE> 36

reportable payments made through foreign offices of a broker that is a U.S.
person or "U.S. related person" will be subject to backup withholding, but
provide that if a rule imposing backup withholding were adopted it would be
prospective only. Proposed regulations state that backup withholding will not
apply to such payments (absent actual knowledge that the payee is a U.S.
person).

Any amounts withheld under the backup withholding rules from a payment to a
Non-U.S. Holder will be allowed as a refund or a credit against such Non-U.S.
Holder's U.S. federal income tax liability, provided that the required
information is furnished to the Internal Revenue Service.

LEGAL MATTERS

The legality of the shares of Common Stock offered hereby is being passed
upon for Falcon by Parson & Brown, New York, New York. William R. Ziegler, a
partner of Parson & Brown, is a member of the board of directors of Falcon and
owns beneficially an aggregate of 2,221,300 shares of Common Stock. See
"Management." In addition, an associate of Parson & Brown is the Secretary of
Falcon and holds options granted pursuant to Falcon's 1992 Stock Option Plan to
acquire an aggregate of 15,000 shares of Common Stock. Certain legal matters in
connection with the sale of the shares of Common Stock offered hereby will be
passed upon for the Underwriters by Andrews & Kurth L.L.P., Houston, Texas.

EXPERTS

The audited financial statements included or incorporated by reference in
this Prospectus and elsewhere in the Registration Statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included or incorporated by reference
herein in reliance upon the authority of said firm as experts in giving said
reports.

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<PAGE> 37

AVAILABLE INFORMATION

Falcon is subject to the requirements of the Exchange Act, and in
accordance therewith files periodic reports, proxy statements and other
information with the Commission. Such reports and other information may be
inspected, and copies may be obtained, at the Commission's Public Reference
Section, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, as
well as the following regional offices: 7 World Trade Center, Suite 1300, New
York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois
60606. Copies of the foregoing material can also be obtained at prescribed rates
from the Public Reference Section of the Commission.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents previously filed by Falcon with the Commission
pursuant to the Exchange Act are incorporated in this Prospectus by reference:
(a) Annual Report on Form 10-K for the year ended December 31, 1995; (b)
Quarterly Reports on Form 10-Q for the quarters ended March 31, 1996, June 30,
1996 and September 30, 1996; (d) Current Report on Form 8-K dated February 21,
1996; and (d) the description of Common Stock contained in registration
statement on Form 8-A under Section 12 of the Exchange Act, including any
amendment or report updating such description. In addition, all documents filed
by Falcon pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act
after the date of this Prospectus and prior to the termination of the offering
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 (such documents, and the
documents enumerated above, being hereinafter referred to as "Incorporated
Documents"). Any statement contained in an Incorporated Document 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 Incorporated
Document modifies or supersedes such statement. Any such statement shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus.

Falcon will provide without charge to each person, including any beneficial
owner, to whom a copy of this Prospectus has been delivered, upon the written or
oral request of any such person, a copy of any or all of the Incorporated
Documents, other than exhibits to such documents, unless such exhibits are
specifically incorporated by reference therein. Requests shall be directed to
Falcon Drilling Company, Inc., 1900 West Loop South, Suite 1800, Houston, Texas
77027, Attention: Don P. Rodney, Vice President -- Finance (telephone number
(713) 623-8984).

This Prospectus constitutes a part of the Registration Statement on Form
S-3 filed by Falcon with the Commission under the Securities Act of 1933, as
amended (the "Securities Act"). This Prospectus omits certain of the information
contained in the Registration Statement, and reference is hereby made to the
Registration Statement and to the exhibits thereto for further information with
respect to Falcon and the Common Stock. Any statements contained herein
concerning the provisions of any documents are not necessarily complete, and
reference is made to the copy of such document filed as an exhibit to the
Registration Statement or otherwise filed with the Commission. Each such
statement is qualified in its entirety by such reference. The information
relating to Falcon contained in this Prospectus should be read together with the
information contained in the Incorporated Documents.

37
<PAGE> 38

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF FALCON DRILLING COMPANY, INC.:
Report of Independent Public Accountants............................................ F-2
Consolidated Balance Sheets as of December 31, 1994, 1995 and September 30, 1996
(Unaudited)...................................................................... F-3
Consolidated Statements of Operations for the Years Ended December 31, 1993, 1994
and 1995 and the Nine Months Ended September 30, 1995 (Unaudited) and 1996
(Unaudited)...................................................................... F-4
Consolidated Statements of Cash Flows for the Years Ended December 31, 1993, 1994
and 1995 and the Nine Months Ended September 30, 1995 (Unaudited) and 1996
(Unaudited)...................................................................... F-5
Consolidated Statements of Stockholders' Equity for the Years Ended December 31,
1993, 1994 and 1995 and the Nine Months Ended September 30, 1996 (Unaudited)..... F-7
Notes to Consolidated Financial Statements.......................................... F-8
</TABLE>

F-1
<PAGE> 39

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Falcon Drilling Company, Inc.:

We have audited the accompanying consolidated balance sheets of Falcon
Drilling Company, Inc. (a Delaware corporation) (Falcon) and subsidiaries as of
December 31, 1994 and 1995 and the related consolidated statements of
operations, cash flows and stockholders' equity for each of the three years in
the period ended December 31, 1995. These financial statements are the
responsibility of Falcon's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 financial statements referred to above present fairly,
in all material respects, the financial position of Falcon Drilling Company,
Inc. and subsidiaries as of December 31, 1994 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Houston, Texas
March 19, 1996

F-2
<PAGE> 40

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 1994 AND 1995
AND SEPTEMBER 30, 1996 (UNAUDITED)

DECEMBER 31, SEPTEMBER 30,
------------------- 1996
1994 1995 (UNAUDITED)
-------- -------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 4,868 $ 9,016 $ 6,309
Accounts receivable, net of allowance for doubtful
accounts of $463, $375 and $625 at December 31, 1994
and 1995 and September 30, 1996, respectively.......... 31,795 38,000 68,834
Other current assets...................................... 5,577 4,888 3,080
-------- -------- -----------
Total current assets.............................. 42,240 51,904 78,223
EQUIPMENT AND PROPERTY:
Drilling rigs and equipment............................... 185,818 295,004 464,635
Vessels and other equipment............................... 2,197 3,903 6,106
-------- -------- -----------
188,015 298,907 470,741
Less -- Accumulated depreciation.......................... (17,192) (33,299) (53,285)
-------- -------- -----------
170,823 265,608 417,456
OTHER ASSETS................................................ 10,483 23,511 18,045
INVESTMENT IN UNCONSOLIDATED JOINT VENTURES................. 600 -- --
-------- -------- -----------
Total assets...................................... $224,146 $341,023 $ 513,724
======== ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities.................. $ 22,747 $ 31,326 $ 42,576
Income tax payable........................................ 95 141 166
Debt and other obligations due within one year............ 17,021 3,999 3,124
-------- -------- -----------
Total current liabilities......................... 39,863 35,466 45,866
LONG-TERM DEBT AND OTHER OBLIGATIONS, less current
portion................................................... 141,379 179,362 312,405
DEFERRED INCOME TAXES....................................... 3,315 10,679 20,838
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST IN CONSOLIDATED
SUBSIDIARIES.............................................. 1,357 -- --
PREFERRED STOCK, Series B redeemable, no par value, 500, 0,
and 0 shares designated, issued and outstanding on
December 31, 1994 and 1995 and September 30, 1996,
respectively.............................................. 4,145 -- --
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 100,000,000 shares
authorized, 15,922,500, 35,244,384 and 35,465,317
shares issued and outstanding at December 31, 1994 and
1995 and September 30, 1996, respectively.............. 159 352 355
Preferred stock, no par value, 526,489 shares of all
Series authorized, 25,989 shares of Series A
designated. Each of the 25,989 shares outstanding was
converted into 300 shares of common stock on August 2,
1995................................................... 14,328 -- --
Additional paid-in capital................................ 21,970 112,853 113,905
Accumulated earnings (deficit)............................ (2,370) 2,311 20,355
-------- -------- -----------
Total stockholders' equity........................ 34,087 115,516 134,615
-------- -------- -----------
Total liabilities and stockholders' equity........ $224,146 $341,023 $ 513,724
======== ======== =========
</TABLE>

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

F-3
<PAGE> 41

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1995 (UNAUDITED)
AND SEPTEMBER 30, 1996 (UNAUDITED)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
YEAR ENDED DECEMBER 31, (UNAUDITED)
------------------------------- --------------------
1993 1994 1995 1995 1996
------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES....................... $58,853 $138,411 $177,505 $128,613 $220,965
MANAGEMENT FEES FROM RELATED PARTIES..... 2,987 92 -- -- --
COSTS AND EXPENSES:
Operating costs........................ 46,126 95,256 120,992 86,934 141,311
General and administrative expenses.... 5,520 11,887 13,871 10,327 13,191
Depreciation........................... 2,990 9,445 16,527 11,703 20,839
------- -------- -------- ------- -------
OPERATING INCOME......................... 7,204 21,915 26,115 19,649 45,624
OTHER (INCOME) EXPENSE:
Interest expense....................... 2,743 12,046 18,021 13,277 18,158
Amortization of deferred costs......... 538 690 2,140 1,642 2,108
Foreign currency translation gain...... -- -- (1,023) -- --
Other income, net...................... (927) (1,969) (2,850) (2,359) (3,283)
------- -------- -------- ------- -------
INCOME BEFORE INCOME TAXES AND MINORITY
INTEREST............................... 4,850 11,148 9,827 7,089 28,641
INCOME TAX PROVISION..................... 952 3,232 3,481 2,319 10,597
------- -------- -------- ------- -------
INCOME BEFORE MINORITY
INTEREST............................... 3,898 7,916 6,346 4,770 18,044
MINORITY INTEREST........................ -- 3,486 1,291 1,291 --
------- -------- -------- ------- -------
NET INCOME............................... 3,898 4,430 5,055 3,479 18,044
PREFERRED STOCK DIVIDENDS AND
ACCRETION.............................. 743 565 374 304 --
------- -------- -------- ------- -------
NET INCOME APPLICABLE TO COMMON SHARES... $ 3,155 $ 3,865 $ 4,681 $ 3,175 $ 18,044
======= ======== ======== ======= =======
NET INCOME PER COMMON SHARE.............. $ 0.14 $ 0.14 $ 0.16 $ 0.11 $ 0.50
======= ======== ======== ======= =======
</TABLE>

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

F-4
<PAGE> 42

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 (UNAUDITED)
AND SEPTEMBER 30, 1996 (UNAUDITED)

<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
YEAR ENDED DECEMBER 31, (UNAUDITED)
---------------------------------- ---------------------
1993 1994 1995 1995 1996
-------- --------- --------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................. $ 3,898 $ 4,430 $ 5,055 $ 3,479 $ 18,044
Adjustments to reconcile net income to net cash provided by
(used in) operating activities --
Depreciation and amortization............................ 3,528 10,135 18,667 13,345 22,947
Realized gain on sale of assets.......................... -- (1,337) (962) (778) (775)
Minority interest in earnings of subsidiary.............. -- 3,486 1,291 1,291 --
Provision for deferred income taxes...................... 902 1,643 3,481 2,319 10,159
Foreign currency translation gain........................ -- -- (1,023) -- --
Changes in assets and liabilities --
Accounts receivable, trade............................. (11,463) (8,446) (6,251) (5,840) (30,834)
Other assets, less increase in deposits for rigs and
equipment............................................ (4,947) (5,026) (283) (486) 3,021
Accounts payable and accrued liabilities............... 4,913 13,746 3,582 (2,327) 11,275
-------- --------- --------- -------- --------
Net cash provided by (used in) operating
activities......................................... (3,169) 18,631 23,557 11,003 33,837
-------- --------- --------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of FALRIG Offshore Inc., net of cash acquired..... -- (25,389) -- -- --
Purchase of FALRIG Offshore (USA), L.P., net of cash
acquired................................................. -- (28,015) -- -- --
Purchases of equipment and property........................ (12,802) (50,348) (104,138) (78,817) (173,220)
(Deposits) refunds of deposits for drillpipe, rigs and
equipment, net........................................... -- -- (11,155) -- 6,174
Distribution for minority owner's interest in Blake
Workover................................................. -- -- (1,804) (1,804) --
Cash increase arising from the consolidation of FALRIG
Offshore (USA), L.P. .................................... 3,990 -- -- -- --
Proceeds from sale of equipment and property............... -- 2,550 3,201 3,019 1,307
Other...................................................... 12 -- -- -- --
-------- --------- --------- -------- --------
Net cash used in investing activities................ (8,800) (101,202) (113,896) (77,602) (165,739)
-------- --------- --------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of debt........................................... 16,699 120,000 50,000 50,000 140,000
Payments of outstanding debt............................... (5,179) (35,288) (19,071) (18,984) (22,831)
Borrowings pursuant to revolving credit
facility................................................. -- 5,000 28,000 16,000 32,000
Payments of amounts borrowed pursuant to revolving credit
facility................................................. -- -- (28,000) (11,000) (17,000)
Issuance of common stock, net.............................. -- -- 70,423 35,027 1,054
Debt issuance costs........................................ -- (5,130) (2,125) (2,125) (4,028)
Issuance of Series A and B preferred stock, net of offering
expenses................................................. 6,585 -- -- -- --
Redemption of preferred stock.............................. -- (3,500) (3,500) -- --
Dividends on preferred stock............................... -- (351) (1,019) -- --
-------- --------- --------- -------- --------
Net cash provided by financing activities............ 18,105 80,731 94,708 68,918 129,195
-------- --------- --------- -------- --------
EFFECT OF EXCHANGE RATES ON CASH............................. -- -- (221) -- --
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......... 6,136 (1,840) 4,148 2,319 (2,707)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............. 572 6,708 4,868 4,868 9,016
-------- --------- --------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................... $ 6,708 $ 4,868 $ 9,016 $ 7,187 $ 6,309
======== ========= ========= ======== ========
</TABLE>

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

F-5
<PAGE> 43

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 (UNAUDITED)
AND SEPTEMBER 30, 1996 (UNAUDITED)

<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
YEAR ENDED DECEMBER 31, (UNAUDITED)
---------------------------------- --------------------
1993 1994 1995 1995 1996
-------- --------- --------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid............................................... $ 2,378 $ 6,925 $ 17,488 $ 16,607 $ 24,760
Income taxes paid........................................... -- 2,125 -- 593 30
Purchase of FALRIG Offshore, Inc., net of cash acquired --
Equipment and property.................................... -- (36,005) -- -- --
Accounts receivable, net.................................. -- (3,850) -- -- --
Other current assets...................................... -- (85) -- -- --
Accounts payable and accrued liabilities.................. -- 1,247 -- -- --
Income taxes payable...................................... -- 1,584 -- -- --
Deferred income taxes..................................... -- 11,720 -- -- --
-------- --------- --------- -------- --------
Net cash used for acquisition......................... -- (25,389) -- -- --
Noncash investing and financing activities --
Warrants exercised for shares of common stock and debt
cancellation.............................................. 145 4 -- -- --
Issuance of Series A and B preferred stock in satisfaction
of advance from a stockholder (Chatterjee Interests)...... 15,000 -- -- -- --
Issuance of common stock for debt cancellation.............. -- 605 -- -- --
Issuance of common stock for 49% interest in FALRIG Offshore
(USA), L.P. .............................................. 12,409 -- -- -- --
Debt issuance for acquisition of partnership interest....... 2,200 -- -- -- --
Obligation for rig acquisition recorded for financial
statement purposes........................................ 5,000 -- -- -- --
Debt issuance for rig acquisition........................... -- 11,700 -- -- --
Issuance of common stock for purchase of 50% of Blake
Workover and one barge rig................................ -- -- 6,325 -- --
</TABLE>

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

F-6
<PAGE> 44

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED)

<TABLE>
<CAPTION>
SERIES A
CONVERTIBLE
COMMON STOCK PREFERRED STOCK ADDITIONAL ACCUMULATED
-------------------- ------------------- PAID-IN EARNINGS
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT)
---------- ------ ------- -------- ---------- -----------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1993........................ 11,695,200 $117 -- $ -- $ 7,421 $(6,564)
NET INCOME...................................... -- -- -- -- -- 3,898
ISSUANCE OF PREFERRED STOCK, net of offering
expenses of $672.............................. -- -- 25,989 14,328 -- --
ISSUANCE OF COMMON STOCK FOR PARTNERSHIP
INTEREST...................................... 3,600,000 36 -- -- 12,373 --
ISSUANCE OF COMMON STOCK FOR EXTENSION OF
PURCHASE OPTION............................... 150,000 2 -- -- 1,426 (1,428)
WARRANTS EXERCISED FOR SHARES OF COMMON STOCK
AND DEBT CANCELLATION......................... 99,900 -- -- -- 145 --
DIVIDENDS AND ACCRETION OF REDEEMABLE PREFERRED
STOCK......................................... -- -- -- -- -- (743)
---------- ---- ------- -------- -------- -------
BALANCE, December 31, 1993...................... 15,545,100 155 25,989 14,328 21,365 (4,837)
NET INCOME...................................... -- -- -- -- -- 4,430
ISSUANCE OF COMMON STOCK FOR CONVERSION OF
SUBORDINATED DEBT............................. 212,700 2 -- -- 603 --
WARRANTS EXERCISED FOR SHARES OF COMMON STOCK... 164,700 2 -- -- 2 --
EXCESS OF COST OF ASSETS ACQUIRED FROM
SHAREHOLDERS IN EXCESS OF SHAREHOLDER'S
HISTORICAL NET BOOK VALUE..................... -- -- -- -- -- (1,398)
DIVIDENDS AND ACCRETION OF REDEEMABLE PREFERRED
STOCK......................................... -- -- -- -- -- (565)
---------- ---- ------- -------- -------- -------
BALANCE, December 31, 1994...................... 15,922,500 159 25,989 14,328 21,970 (2,370)
NET INCOME...................................... -- -- -- -- -- 5,055
CONVERSION OF SERIES A CONVERTIBLE PREFERRED
STOCK......................................... 7,796,700 78 (25,989) (14,328) 14,250 --
ISSUANCE OF COMMON STOCK........................ 7,425,000 75 -- -- 65,225 --
ISSUANCE OF COMMON STOCK FOR PURCHASE OF
BUSINESS AND ASSETS........................... 702,778 7 -- -- 6,318 --
ISSUANCE OF COMMON STOCK FOR EXERCISE OF
WARRANTS AND OPTIONS.......................... 3,397,406 33 -- -- 5,090 --
DIVIDENDS AND ACCRETION OF PREFERRED STOCK...... -- -- -- -- -- (374)
---------- ---- ------- -------- -------- -------
BALANCE, December 31, 1995...................... 35,244,384 $352 -- $ -- $112,853 $ 2,311
NET INCOME (unaudited).......................... -- -- -- -- -- 18,044
ISSUANCE OF COMMON STOCK FOR EXERCISE OF
WARRANTS AND OPTIONS (unaudited).............. 220,933 3 -- -- 1,052 --
---------- ---- ------- -------- -------- -------
BALANCE, September 30, 1996 (unaudited)......... 35,465,317 $355 -- -- $113,905 $20,355
========== ==== ======= ======== ======== =======
</TABLE>

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

F-7
<PAGE> 45

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1995
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)

1. BUSINESS, FORMATION OF COMPANY AND ACQUISITIONS AND SIGNIFICANT
ACCOUNTING POLICIES:

BUSINESS

Falcon Drilling Company, Inc., and its subsidiaries (collectively Falcon)
are primarily engaged in domestic and international oil and gas contract
drilling and workover operations for oil and gas companies and turnkey
operators. The consolidated financial statements of Falcon include the accounts
of Falcon and its wholly-owned subsidiaries and its controlled subsidiaries.
Intercompany accounts and transactions have been eliminated in consolidation.

FORMATION OF FALCON AND ACQUISITIONS

Falcon commenced business in November 1991 when the partnership interests
of eight partnerships were exchanged for shares of Falcon's common stock in a
transaction which was accounted for in a manner similar to a
pooling-of-interests. The historical book values of the partnerships' accounts
were carried over at the former partnerships' basis in such assets, and
prior-period financial statements have been prepared to give effect to the
poolings as of the beginning of the earliest period presented.

Falcon Rig Investment Corporation

In 1992, Falcon through an affiliated company acquired rigs and other
assets from Two "R" Drilling Company, Inc. (Two "R") and Atlantic Pacific Marine
Corporation (APMC) for cash of $6,080,360 and $7,738,640 respectively. In
addition to the above cash payments on the Two "R" transaction, FRIC and Falcon
entered into contingent profits interest agreements whereby annual payments of
15% of an agreed upon amount will be paid to the rigs' former owners and a
former mortgage holder. This agreed upon amount can be generally described as
domestic barge net income, less overhead, depreciation and interest attributable
to these operations. The periods for determination of these begin in 1993 and
continue through 1997 or until payment of $5 million has been made. There were
no required payments in 1993, 1994 or 1995 or the nine months ended September
30, 1996 (unaudited).

The FALRIG Partnership

FALRIG Offshore (USA), L.P. (the FALRIG Partnership), an affiliate of
Falcon, acquired five jackup rigs and other equipment (the Grace Rigs) from the
Huthnance Drilling Division of Grace Offshore Company, a subsidiary of W. R.
Grace and Co., in April 1993 for a purchase price of $25 million which consisted
of $20 million in cash and a $5 million note payable. In April 1993, the FALRIG
Partnership entered into a management agreement with a wholly owned subsidiary
of Falcon whereby such subsidiary began managing the Grace Rigs. Management fees
of approximately $1,400,000 from the FALRIG Partnership have been included in
revenues in Falcon's consolidated statement of operations for the year ended
December 31, 1993.

On December 31, 1993, Falcon acquired a 49% ownership interest in the
FALRIG Partnership, by issuing 3,600,000 shares of common stock to the S-C
Interests. Such shares were recorded at $12,409,000, which approximates the
former owner's historical cost basis in the FALRIG Partnership. The former owner
of the 49% limited partnership interest in the FALRIG Partnership was also an
owner of the majority of Falcon's outstanding stock on December 31, 1993. As
Falcon exercised control over the operations of the FALRIG Partnership through a
management agreement, owned a 49.5% partnership interest in the FALRIG
Partnership and had an agreement to acquire the remaining ownership interest in
the FALRIG Partnership in

F-8
<PAGE> 46

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1994, Falcon consolidated the balance sheet of the FALRIG Partnership at
December 31, 1993, recording a minority interest in the subsidiary of
$12,666,000. Falcon began consolidating the operating results of the FALRIG
Partnership as of January 1, 1994.

Falcon agreed to acquire the remaining ownership interests in the FALRIG
Partnership in two additional transactions: (a) 50% of the partnership interest
in the FALRIG Partnership acquired from the Mullen Group for $28 million in
cash, a noninterest-bearing note for $4 million, plus a contingent purchase
price of up to $3 million payable January 17, 1995, based on post-acquisition
revenues of the assets acquired, and the (b) 0.5% partnership interest in the
FALRIG Partnership purchased from an affiliate of Falcon, Kestrel Offshore Inc.
(Kestrel), for cash of $344,400. Sixty % of Kestrel was owned by individuals who
are also officers and directors of Falcon. Falcon funded the cash portion of the
acquisition from the proceeds of the offering of the Fixed Rate Notes (Note 5).

As part of the consideration for the purchase of the Mullen Group's 50%
partnership interest, Falcon had to procure a $3 million letter of credit
securing Falcon's obligation to close with the Mullen Group and a commitment to
post an additional letter of credit for $17 million that could be drawn against
to finance a portion of the cash purchase price. In November of 1993, the letter
of credit and commitment to issue a letter of credit were issued by an affiliate
of the S-C Interests. In consideration for arranging the two letters of credit,
Falcon and Falcon Offshore, Inc. jointly agreed to pay to the S-C Interests (i)
a fee of $1 million upon the issuance of the $3 million letter of credit and a
commitment for the $17 million letter of credit and (ii) an additional fee of
$500,000, which fees were paid on December 24, 1993 and have been included in
the acquisition cost of the FALRIG Partnership.

The FALRIG Corporation

In early 1992, Falcon negotiated the purchase of four jackup rigs (the
Teledyne Rigs) from the Offshore Drilling Division of Teledyne Inc. (Teledyne)
and subsequently transferred its rights to acquire the Teledyne Rigs to FALRIG
Offshore Inc. (the FALRIG Corporation). In May of 1992, the FALRIG Corporation
purchased the Teledyne Rigs for a cash purchase price of $4.1 million. The
FALRIG Corporation entered into a management agreement with Falcon whereby
Falcon refurbished and began operating the Teledyne Rigs. Management fees of
approximately $1,170,000 and $1,587,000, have been included as revenue in
Falcon's consolidated statements of operations for the years ended December 31,
1992 and 1993, respectively. The FALRIG Corporation was owned equally by members
of the Mullen Group and the Stafilopatis Group.

In November 1993, Falcon directly and through its affiliates entered into a
series of agreements to acquire the outstanding debt and the full equity
interests of the FALRIG Corporation for a purchase price of approximately $25
million. In January 1994, Falcon completed the acquisition of the FALRIG
Corporation with the proceeds of the Fixed Rate Note offering (Note 5). Falcon
began consolidating the operating results of the FALRIG Corporation as of
January 24, 1994.

Taladro Associates (Taladro), a general partnership composed of three
members of the Webster Group, two of whom are also officers of Falcon and two of
whom are also directors of Falcon, who each own approximately equal percentages
of Taladro, held a 4.3% contingent profit participation interest in the net
proceeds of the sale of the stock of the FALRIG Corporation by the Stafilopatis
Group, which on closing of the acquisition of the FALRIG Corporation resulted in
payment of approximately $583,000 to Taladro.

Condor

In March 1993, an affiliate of Falcon, Condor Drilling Company, L.P.
(Condor), acquired four barge drilling rigs (the Cliffs Rigs) from Cliffs
Drilling Company (Cliffs) for a purchase price of $6 million consisting of $5
million in cash and a $1 million note issued by Condor to Cliffs. The S-C
Interests owned all of the limited partnership interests of Condor. The general
partnership interest in Condor was owned by the

F-9
<PAGE> 47

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

chairman of the board of Falcon. In August 1993, Falcon began operating the
first of the Cliffs Rigs pursuant to a zero cost bareboat charter agreement with
Condor and held an option to purchase the Cliffs Rigs from Condor for a purchase
price of $7 million consisting of $6 million in cash and the assumption of the
$1 million note payable to Cliffs. On December 31, 1993, as previously agreed,
Falcon issued 150,000 shares of common stock to the S-C Interests in
consideration for the extension of Falcon's option to purchase the Cliffs Rigs.
Falcon exercised its option to buy the Cliffs Rigs on September 30, 1994. The $6
million cash payment was deferred until March 31, 1995. Because of the S-C
Interests' significant ownership of Falcon, the assets and liabilities of the
Cliffs Rigs acquisition were recorded at the S-C Interests' historical cost
basis. Accordingly, at December 31, 1993, the 150,000 shares issued were
recorded as an increase in additional paid-in capital and in accumulated
deficit, based on the estimated fair market value of the stock issued;
similarly, the purchase price paid upon exercise of the option on September 30,
1994, to the S-C Interests in excess of the owners' historical net book value of
$1.4 million was treated as an increase of accumulated deficit. Imputed rental
expense related to the operation of the Cliffs Rigs from commencement of
operations through December 31, 1993, is immaterial to the financial statements
taken as a whole and has not been recorded. For the nine months prior to the
acquisition ended September 30, 1994, Falcon imputed rental expense of $300,000
which has been recorded as an increase to operating costs in the consolidated
statement of operations.

Blake Workover

During the second quarter of 1994, a wholly-owned subsidiary of Falcon,
Falcon Workover Company, Inc. (Falcon Workover), acquired a 50% interest in a
newly-formed partnership, Blake Workover & Drilling Company (Blake Workover).
Blake Workover was formed for the purpose of acquiring four barge workover rigs
and associated assets from Blake Drilling & Workover Co., Inc. (Blake Drilling).
Falcon managed the operations of Blake Workover and provided marketing,
administrative and other services to Blake Workover. The purchase price of the
four rigs and associated assets purchased from Blake Drilling was $5,750,000, of
which $2,750,000 was paid in cash and the remaining $3,000,000 was evidenced by
a note from Blake Workover to Blake Drilling. The note was secured by a first
mortgage on the rigs. The cash portion of the purchase price was provided by the
proceeds of a loan from Falcon to Blake Workover, which was secured by a second
mortgage on the rigs. Falcon Workover leased two workover barge rigs to Blake
Workover pursuant to a three-year zero cost bareboat charter in exchange for its
50% interest and an undertaking from Blake Workover to refurbish these rigs.
Prior to its initial purchase of an interest in Blake Workover, Falcon leased
the two barge workover rigs to Blake Drilling. Included in Falcon's revenues are
$298,000 and $74,000 for the years ended December 31, 1993 and 1994,
respectively, attributable to such lease. On June 8, 1994, Blake Workover
borrowed $605,000 from Falcon pursuant to a note agreement to purchase the
La-Tex 4 workover rig. The note bears interest at 5%, is due in three years and
is secured by a mortgage lien on the rig.

The acquisition of the remaining 50% interest in Blake Workover and certain
crewboats and tugboats utilized in the business of Blake Workover was completed
on August 15, 1995 through the issuance of 638,889 shares of Falcon's common
stock and cash of $6.8 million, which included the retirement of debt
outstanding of $2.3 million.

The following presents the unaudited pro forma results of operations of
Falcon for the years ended December 31, 1993, 1994 and 1995, as if the
above-described acquisitions of the FALRIG Partnership, the FALRIG Corporation
and the 50% interest of Blake Workover had occurred on January 1, 1993 and as if
the

F-10
<PAGE> 48

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

remaining 50% in Blake Workover and certain crewboats and tugboats used in the
business of Blake Workover had occurred on January 1, 1994 (in thousands, except
per share amounts):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1993 1994 1995
-------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Pro forma operating revenues.......................... $132,657 $143,589 $177,505
Pro forma net income before taxes and minority
interest............................................ 13,436 10,571 9,789
Pro forma net income applicable to common shares...... 7,145 5,757 5,496
Pro forma net income per common share................. $ 0.28 $ 0.20 $ 0.18
</TABLE>

The pro forma results presented above are not necessarily indicative of the
actual results that would have occurred had the acquisitions actually taken
place at the beginning of the periods presented. In addition, the pro forma
results are not intended to be a projection of future results of combined
operations.

FOI and Turnstone

On October 1, 1993, Falcon entered into an agreement with the chairman of
the board of Falcon, who was also the owner of Falcon Offshore, Inc. (FOI),
whereby Falcon had the right to purchase the outstanding equity interest of FOI
for a nominal purchase price and assumption of its subordinated debt. In July
1993, FOI entered into a purchase arrangement which would allow FOI to acquire a
jackup rig, the Seahawk, following a period of refurbishment. An operating
arrangement was entered into between the parties which allowed FOI to operate
the Seahawk for payments which were applied against the agreed-upon purchase
price. Payment for the equity interest in FOI and assumption of its subordinated
debt were completed in January 1994, and payment for the purchase of the Seahawk
was made in February 1994. As the agreement to purchase the equity interest in
FOI was entered into in 1993, the agreement for FOI to purchase the Seahawk was
entered into in 1993, significant expenditures were made to refurbish the
Seahawk in 1993 and the Seahawk was placed in service in 1993, Falcon has
recorded the Seahawk as a purchase for financial reporting purposes in 1993 and
depreciation expense has been recorded from the date it was placed in service
(October 1993).

In August 1993, an affiliate of Falcon, Turnstone Drilling Company, L.P.
(Turnstone), purchased a submersible rig (renamed Rig 203) for a purchase price
of $2.2 million funded by a nonrecourse secured note payable to a bank. The
general partnership interest in Turnstone was owned by a company controlled by
the chairman of the board of Falcon. In November 1993, Falcon entered into a
management agreement with Turnstone providing for Falcon to operate Rig 203. Due
to Falcon's affiliation with FOI and Turnstone and the exercise of the options
to purchase FOI and Turnstone at nominal purchase prices in January 1994, the
financial statements of FOI and Turnstone from inception have been consolidated
with the financial statements of Falcon and, accordingly, the accounts and
transactions between Falcon, FOI and Turnstone have been eliminated in
consolidation. In the fourth quarter of 1995, in connection with deploying Rig
203 to Venezuela, Turnstone's note secured by the rig was assumed by Falcon
Drilling Company, Inc. and Turnstone was dissolved.

Dynamically positioned drillships, the Peregrine I, II and III

In September 1995, Falcon purchased a dynamically positioned drillship, the
Peregrine I for a purchase price of $9.8 million. At December 31, 1995 the
Peregrine I was in Singapore undergoing refurbishment. Falcon incurred
refurbishment and upgrade costs and the purchase of additional riser, BOP
equipment and other fleet spares and inventory of approximately $6.5 million
during 1995 and $60 million during the nine months ended September 30, 1996,
which costs are included in rigs and equipment. Falcon has entered into a
contract with Petroleo Brasiliero S.A. providing for the Peregrine I to drill
offshore Brazil for a five-year period. In September 1996, Falcon recorded a
$2.5 million fee realized when the Peregrine I was delivered to Brazil in
November which is reflected in revenues for the nine months ended September 30,
1996 (unaudited). The Peregrine I commenced operations in November, 1996
(unaudited).

F-11
<PAGE> 49

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In August 1995, Falcon exchanged a written offer and acceptance with UME
Drilling, Ltd. ("UME") to acquire the Pacnorse I, a dynamically positioned
drillship. UME refused to complete the sale and Falcon initiated litigation in
England to assert its contract rights to prevent the sale of the vessel to
another party. The English court required Falcon to post a $5 million deposit to
secure the undertaking of its pleadings. This deposit was included in other
assets in Falcon's December 31, 1995 consolidated balance sheet. In February
1996, Falcon acquired the Pacnorse I (renamed Peregrine II) for a purchase price
of $24 million, dismissed the litigation, and received a refund of the $5
million deposit. Falcon assumed the drilling contract with Petrobras for a term
through the third quarter of 1998 (unaudited).

In May 1996, Falcon completed the purchase of the Pelerin, a dynamically
positioned drillship, for a purchase price of approximately $33.0 million and
changed the name of the vessel to the Peregrine III (unaudited). Falcon has
assumed a series of drilling contracts which management estimates will utilize
the Peregrine III through 1998 (unaudited). Prior to the purchase, the Peregrine
III was managed on behalf of its owner by Foramer, S.A. and as one of the
conditions of purchase, Falcon entered into a management agreement with Foramer
pursuant to which Foramer was to manage the vessel until December 31, 1996
(unaudited). During October 1996, the management agreement with Foramer was
terminated for a fee of $250,000 (unaudited) and Falcon assumed responsibility
for managing the vessel. Falcon signed a new technical services agreement with
Foramer whereby Foramer is to provide Falcon with particular drillship personnel
through February 1997 (unaudited).

In June 1996, Falcon entered into a contract to purchase a substantially
completed drillship hull for approximately $8.0 million (unaudited). Management
estimates that it will cost approximately $120 million to complete the
construction necessary for this hull to become an operational drillship,
although Falcon currently has no construction obligations relative to this hull
(unaudited). Management does not intend to undertake the completion of this hull
until Falcon has obtained a long-term commitment for the use of the completed
drillship and arranged for financing of the construction (unaudited).

Additional Expansion of Rig Fleets

In June 1994, Falcon entered into an agreement with Eilert-Olsen
Investments, Inc. (Eilert-Olsen), to buy the equity interest of Eilert-Olsen for
a nominal purchase price. In June of 1994, Eilert-Olsen acquired three barge
drilling rigs for a cost of approximately $2.8 million consisting of cash of
approximately $900,000 and the assumption of debt of approximately $1.9 million
secured by the three barge drilling rigs. Falcon advanced $900,000 to
Eilert-Olsen in June of 1994 and has subsequently advanced approximately
$265,000, $803,000 and $337,000 (unaudited) to pay principal and interest due on
this debt for the years ended December 31, 1994 and December 31, 1995 and for
the nine months ended September 30, 1996, respectively. Due to Falcon's
affiliation with Eilert-Olsen and the option to purchase Eilert-Olsen at a
nominal purchase price, the financial statements of Eilert-Olsen from inception
have been consolidated with the financial statements of Falcon and, accordingly,
the accounts and transactions between Falcon and Eilert-Olsen have been
eliminated in consolidation.

In June 1995, Falcon sold a stacked jackup rig resulting in a gain of
approximately $751,000.

In July 1995, Falcon entered into an agreement with the Rowan Companies,
Inc. and Rowan International, Inc. (collectively, "Rowan"), providing for
Falcon's purchase of three posted barge drilling rigs for an aggregate purchase
price of $12.2 million. Falcon acquired one of these rigs in October 1995 and
the remaining two rigs in November 1995. In July 1995, Falcon also purchased
four barge drilling rigs and a barge hull for a purchase price of $9.8 million.
Falcon sold two of these barge drilling rigs to a third party for a purchase
price of $4 million for which Falcon received credits toward the future purchase
of drillpipe. Unused credits of $2.6 million are included in other assets at
December 31, 1995.

F-12
<PAGE> 50

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In September 1995, Falcon purchased i) a barge drilling rig for a purchase
price of $1,275,000, consisting of cash of $700,000 and 63,889 shares of
Falcon's Common Stock and ii) five offshore drilling rigs for $37.8 million and
related equipment for $400,000 from Sonat Offshore Drilling, Inc.

In November 1995, Falcon purchased the semi-submersible rig Pacesetter III
for a purchase price of $2 million.

In January 1996, Falcon purchased the barge drilling rig Gus Androes for a
purchase price of $6 million.

In March 1996, Falcon purchased the submersible rig Real Explorer (renamed
FALRIG 78) for a purchase price of $8 million.

In March 1996, Falcon entered into a contract to purchase the D.K.
McIntosh, a 250 foot water depth, mat-supported, slot-type jackup drilling rig.
In April 1996, Falcon completed the purchase of the D.K. McIntosh for a purchase
price of $8.5 million (unaudited). This rig incurred structural damage while
being transported to offshore West Africa and was partially repaired for
approximately $4.0 million (unaudited). Management estimates additional repair
costs of $2.0 million will be incurred to finalize repairs to the rig once it
completes its current service commitments (unaudited). Management believes that
the total refurbishment costs will be reimbursed by Falcon's insurance provider
(unaudited).

SIGNIFICANT ACCOUNTING POLICIES

Interim Financial Information

The interim consolidated financial statements as of September 30, 1996, and
for the nine months ended September 30, 1995 and 1996, are unaudited, and
certain information and footnote disclosures, normally included in financial
statements prepared in accordance with generally accepted accounting principles,
have been omitted. In the opinion of management, all adjustments, consisting
only of normal recurring adjustments, necessary to fairly present the financial
position, results of operations and cash flows with respect to the consolidated
interim financial statements, have been included. The results of operations for
the interim periods are not necessarily indicative of the results for the entire
fiscal year.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted account principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

For purposes of reporting cash flows, all liquid investments with
maturities at date of purchase of three months or less are considered cash
equivalents.

Equipment and Property

Equipment and property are stated at cost. Depreciation of drilling rigs,
vessels and equipment is provided on the straight-line method over their
remaining estimated useful lives from the date the rigs are acquired by Falcon,
including periods when the rigs are in a nonoperating status. Falcon anticipates
being required to refurbish significantly and modify some of its rigs in order
to operate in international and domestic drilling markets. At December 31, 1995,
drilling rigs and other related equipment with a carrying value of $19,947,000
were held in a nonoperating status pending modification and decisions regarding
their deployment. Such assets are being depreciated, and management believes
their market value exceeds their net book value.

F-13
<PAGE> 51

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Routine maintenance and repairs are charged to operations as incurred;
significant betterments are capitalized. Interest capitalized in connection with
significant betterments totaled zero, $647,000, and $405,000 in 1993, 1994, and
1995, respectively. Falcon incurred $5,704,183, $14,716,905 and $19,052,904 in
repair and maintenance expense in 1993, 1994, and 1995, respectively. The costs
of assets sold, retired or otherwise disposed of are removed from the accounts
at the time of disposition, and any resulting gains or losses are reflected in
the period's results of operations. Drilling rigs are being depreciated over an
estimated useful life of 15 years. Vessels and other equipment are depreciated
over estimated lives of three to five years.

Deferred Costs

Falcon has incurred costs and paid fees in connection with Falcon's various
financing arrangements, primarily the Senior Notes and the Subordinated Notes
(Note 5). These costs, primarily legal fees, underwriters costs and loan
commitment fees, have been deferred and are included in other assets at December
31, 1995 and are being amortized into the results of operations over the term of
the related financing instruments (primarily seven years for the Senior Notes
and 10 years for the Subordinated Notes). Accumulated amortization of deferred
costs is $690,000 and $2,795,000 at December 31, 1994 and 1995, respectively.
Also included in other assets as of December 31, 1994 and 1995 is approximately
$2.1 million and $3.1 million, respectively, in costs associated with the
mobilization of three barge rigs to Venezuela pursuant to an agreement with
Maraven (Note 3). Falcon is amortizing these costs over the five year term of
the agreement which began in January 1995.

Revenue Recognition

Falcon recognizes revenue from operations on the basis of the number of
days worked at the contractual day rate. Management fees which arise principally
from services provided to affiliated entities are recognized as earned. Falcon
earned management fees of $2,987,000 and $92,000 for the years ended December
31, 1993 and 1994, respectively.

Net Income Per Common Share

Net income per share of common stock has been computed on the basis of the
weighted average number of common shares outstanding during the period and,
where dilutive, the effect of common stock contingently issuable, which arises
primarily from the exercise of stock options and warrants and the conversion of
certain subordinated notes and convertible preferred stock. The weighted average
number of common shares and common share equivalents outstanding during the
years ended December 31, 1993, 1994, and 1995 are 21,898,800, 26,879,719, and
29,593,096 respectively. The weighted average number of common shares and common
share equivalents during the nine months ended September 30, 1995 and 1996 are
28,242,875 and 35,991,120, respectively (unaudited). Accrued dividends on the
Series B redeemable preferred stock as well as the accretion of the difference
between the value of the Series B redeemable preferred stock at the date of
issue and the redemption value have been deducted from net income for purposes
of calculating net income applicable to common stock. Fully diluted earnings per
share are considered to be equal to primary earnings per share in all periods
presented because the effects of potentially dilutive securities that are not
common stock equivalents were either antidilutive or immaterial.

Foreign Currency Translation

Falcon accounts for foreign currency translations in accordance with
Statement of Financial Accounting Standards No. 52 "Foreign Currency
Translation." The U.S. dollar is the functional currency for Falcon's foreign
operations. Foreign currency exchange gains and losses are included in other
income as incurred. Net foreign currency exchange gains amounted to $1.0 million
in 1995. There were no significant foreign currency exchange gains or losses in
1994 or 1993.

F-14
<PAGE> 52

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Reclassification

Certain prior year amounts have been reclassified to conform to the current
year presentation.

New Accounting Standards

In March 1995, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
This statement is effective for financial statements for fiscal years beginning
after December 15, 1995. In the opinion of management, implementation of this
statement will not have a material effect on Falcon's financial position or
results of operations.

The FASB also issued SFAS No. 123, "Accounting for Stock Based
Compensation", effective for fiscal years beginning after December 15, 1995.
This statement allows companies to choose to adopt the statement's new rules for
accounting for employee stock-based compensation plans. For those companies who
choose not to adopt the new rules, the statement requires disclosures as to what
earnings and earnings per share would be if the new rules were adopted.
Management intends to adopt the disclosure requirements of this statement in
1996.

2. INVESTMENT IN FOREIGN JOINT VENTURE:

In 1991, Falcon and an unrelated entity created a joint venture by forming
two foreign corporations (the Venezuelan joint venture). Falcon agreed to
transfer two of its barge rigs and certain related equipment into the foreign
corporations in exchange for $3 million in cash, two $1.5 million
noninterest-bearing notes and stock representing a 37.5% interest in the entity
owning and operating the rigs. Falcon used the cash received to repay $3 million
of the debt outstanding on the rigs and equipment. The Venezuelan joint venture
borrowed $14.5 million from a foreign bank which was utilized to refurbish the
barge rigs. This bank loan is secured by the barge rigs. Falcon has provided a
standby guarantee for approximately $3.1 million of the Venezuelan joint
venture's original bank debt incurred to refurbish the two barge rigs. This
guarantee proportionately reduces as the venture's debt is repaid. Repayment of
the venture's outstanding debt is contingent upon the venture realizing positive
cash flow from its contracts with a subsidiary of the Venezuelan state-owned oil
company. Falcon's $3 million gain represented by the notes received on the
transfer of equipment has been deferred by Falcon and netted against Falcon's
investment in the foreign corporations in the accompanying consolidated balance
sheet. Falcon accounts for its interests in the Venezuelan joint venture under
the cost method as it does not exercise significant influence over the venture.
As of December 31, 1994, Falcon had received cash distributions of approximately
$279,000 which Falcon recorded as a reduction of the investment in the joint
venture. During the year ended December 31, 1995, Falcon had received additional
cash distributions of approximately $1.5 million of which approximately $600,000
were recorded by Falcon to reduce the investment in the joint venture to zero
and $965,000 are included in revenues in the consolidated statement of
operations for the year ended December 31, 1995. Falcon received additional cash
distributions of approximately $1,195,000 during 1996 which are included in
revenues in the consolidated statement of operations for the nine months ended
September 30, 1996 (unaudited).

3. SEGMENT, CONCENTRATION OF CREDIT RISKS AND MAJOR CUSTOMERS:

Falcon operates in one principal business segment, diversified contract
drilling and workover services. Operations are conducted in the U.S. Gulf of
Mexico and related coastal areas and in foreign locations. One of Falcon's barge
rigs operated in Tunisia from 1991 through February 1994.

Since late 1994, Falcon has operated two barge drilling rigs and a workover
barge rig in Lake Maracaibo, Venezuela under an agreement with Maraven, S.A.
(Maraven). Refurbishment costs of approximately

F-15
<PAGE> 53

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

$33 million, including $647,000 in capitalized interest, were incurred in
connection with the deployment of these rigs to Venezuela.

In July 1994, Falcon completed the refurbishment and modifications of a
barge drilling rig for general service in international markets at an
approximate cost of $6 million. This rig operated under contract to an affiliate
of British Petroleum in the Orinoco region of Venezuela until mid-1996 when it
returned to the U.S. Gulf Coast.

In November 1995, Falcon completed a refurbishment project at a cost of
approximately $5.9 million on Rig 203 and mobilized this rig to Venezuela to
begin service under a well-to-well contract.

Revenues, operating income and identifiable assets of the United States,
Tunisian and Venezuelan operations are as follows (in thousands):

<TABLE>
<CAPTION>
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Revenues --
United States.................................... $ 52,326 $131,280 $146,182
Tunisia.......................................... 6,527 2,208 --
Venezuela........................................ -- 4,923 31,323
-------- -------- --------
Total.................................... $ 58,853 $138,411 $177,505
======== ======== ========
Operating income (loss) --
United States.................................... $ 6,133 $ 20,643 $ 16,318
Tunisia.......................................... 1,071 (522) --
Venezuela........................................ -- 1,794 9,797
-------- -------- --------
Total.................................... $ 7,204 $ 21,915 $ 26,115
======== ======== ========
Identifiable assets --
United States.................................... $108,037 $175,267 $263,845
Tunisia.......................................... 1,957 -- --
Venezuela........................................ -- 48,879 77,178
-------- -------- --------
Total.................................... $109,994 $224,146 $341,023
======== ======== ========
</TABLE>

The market for Falcon's service is the oil and gas industry, and Falcon's
customers consist primarily of major oil and gas companies (including
government-owned companies) and turnkey operators. Falcon's credit risks
primarily consist of accounts receivable from such customers. Management
performs ongoing credit evaluations of its customers and provides allowances for
credit losses when necessary.

Major customers are those that individually account for more than 10% of
Falcon's total nonaffiliate operating revenues. British Gas accounted for 11% of
nonaffiliate operating revenues for the year ended December 31, 1993. Applied
Drilling Technology, Inc. accounted for 11% of nonaffiliate operating revenues
for the year ended December 31, 1994. Maraven, S.A. accounted for 11% of
nonaffiliate operating revenues for the year ended December 31, 1995.

During 1996, the Company began operating two dynamically positioned
drillships, Peregrine I and II, under contracts with Petrobras in Brazil and a
third drillship, the Peregrine III, off the coast of Australia.

4. INCOME TAXES:

Falcon follows Statement of Financial Accounting Standards No. 109 (SFAS
No. 109), "Accounting for Income Taxes." Under SFAS No. 109, the tax provision
is determined based upon the liability method in which deferred tax assets and
liabilities are recognized based on differences between the financial statement
and tax basis of assets using enacted tax rates.

F-16
<PAGE> 54

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

SFAS No. 109 provides in part that a deferred tax asset shall be evaluated
for realization based on a more likely than not criteria using a valuation
allowance. No valuation allowance was deemed necessary at December 31, 1994 and
1995.

The components of the net deferred tax liability are as follows (in
thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
------- -------
<S> <C> <C>
Deferred tax liabilities --
Excess of book basis of assets over tax basis.................. $10,735 $25,118
Other.......................................................... -- 313
------- -------
10,735 25,431
------- -------
Deferred tax assets --
Net operating loss carryforwards............................... 7,291 14,323
Excess of book basis of accrued expenses over tax basis........ 88 429
Other.......................................................... 41 --
------- -------
Subtotal.................................................... 7,420 14,752
------- -------
Valuation allowance............................................ -- --
------- -------
Net deferred tax assets........................................ 7,420 14,752
------- -------
Net deferred tax liability.................................. $ 3,315 $10,679
======= =======
</TABLE>

The components of the income tax provision are as follows (in thousands):

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------------
1993 1994 1995
---- ------ ------
<S> <C> <C> <C>
Federal --
Current.................................................. $ 50 $ -- $ --
Deferred................................................. 902 2,413 1,056
State --
Deferred................................................. -- 63 686
Foreign --
Current.................................................. -- 756 --
Deferred................................................. -- -- 1,739
---- ------ ------
$952 $3,232 $3,481
==== ====== ======
</TABLE>

Included in the deferred federal tax provisions are the following: excess
of tax depreciation expense over book depreciation expense, expenses accrued for
financial statement purposes which are not yet deductible for tax purposes, and
other benefits which have been reduced by the tax benefit of the U.S. net
operating loss carryforward created. The 1993 deferred provision was also
reduced by the reversal of a valuation allowance of $825,000 provided in 1992.
On December 31, 1993, Falcon acquired an indirect partnership interest in the
FALRIG Partnership and the tax effect of the excess of the net assets acquired
for financial statement purposes over the related tax basis of $770,000 was
recorded as a deferred tax liability. In May 1994, Falcon completed the
acquisition of the remaining partnership interest in the FALRIG Partnership and
the tax effect of the excess of the net assets acquired for tax purposes over
those for financial statement purposes of $12.1 million has been recorded as a
deferred tax asset. In January 1994, Falcon acquired the equity interest of the
FALRIG Corporation and the tax effect of the excess of the net assets acquired
for financial statement purposes over the related tax basis of $11.7 million has
been recorded as a deferred tax liability. In

F-17
<PAGE> 55

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

September 1994, Falcon acquired the Cliffs Rigs (Note 1) and the tax effect of
the excess of the net assets acquired for tax purposes over those for financial
statement purposes of $560,000 has been recorded as a deferred tax asset. In
August 1995, Falcon acquired the remaining 50% interest in Blake Workover and
certain crewboats and tugboats utilized in the business of Blake Workover (Note
1). The tax effect of the excess of net assets acquired for financial statement
purposes over the related tax basis of $3.9 million has been recorded as a
deferred tax liability as of December 31, 1995.

A reconciliation of federal statutory and effective income tax rates for
each of the three years ended December 31, 1995, is shown below.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Statutory rate.................................................. 34% 35% 35%
State income taxes, net of federal income tax benefit........... -- 1 6
Alternative minimum tax rate.................................... 1 -- --
Utilization of NOL carryforward................................. (15) -- --
Foreign income taxes, net of federal income tax benefit......... -- 6 --
-- --
---
Effective rate.................................................. 20% 42% 41%
=== == ==
</TABLE>

As of December 31, 1994 and 1995, Falcon's net operating losses (NOLs) for
income tax purposes were $20,831,000 and $40,923,000, respectively (tax effect
$7,291,000 and $14,323,000, respectively). These tax NOLs expire from 2006
through 2010 if not utilized before such dates. A change in ownership of Falcon
under the Internal Revenue Code can cause a limitation in the ability of Falcon
to use existing NOLs in any one year. In the opinion of management, any
limitation caused by a change of ownership will not materially limit the
availability of NOLs in the aggregate.

F-18
<PAGE> 56

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. LONG-TERM DEBT AND OTHER OBLIGATIONS:

Falcon had the following debt outstanding as of December 31, 1994 and 1995
and at September 30, 1996 (in thousands):

<TABLE>
<CAPTION>
SEPTEMBER
DECEMBER 31, 30,
-------------------- 1996
1994 1995 (UNAUDITED)
-------- -------- -----------
<S> <C> <C> <C>
8 7/8% Series B Senior Notes, due 2003...................... -- -- $ 120,000
9 3/4% Series B Senior Notes, due 2001...................... $110,000 $110,000 110,000
Floating Rate Senior Notes, bearing interest at LIBOR plus
3.5%, redeemable in varying amounts beginning in 1998..... 10,000 10,000 10,000
12 1/2% Series B Senior Subordinated Notes, due 2005........ -- 50,000 50,000
Borrowings pursuant to a credit agreement with two banks,
bearing interest at LIBOR plus 2.5% or 1% over the higher
of the prime rate or the federal funds rate plus .5%,
secured by certain accounts receivable.................... 5,000 5,000 20,000
Secured promissory note payable to Grace Offshore Company,
bearing interest at 8.7%, secured by certain FALRIG
Partnership jackup rigs, principal payments of $1,667 due
March 31, 1996, 1997 and 1998............................. 5,000 5,000 3,333
Note payable to a bank, noninterest-bearing through August
16, 1994 and at LIBOR plus 1.5% through maturity at
December 31, 1999......................................... 1,969 1,969 1,074
Notes payable by affiliates, secured by certain rigs,
bearing interest at 7.0%, due in varying amounts
commencing July 1994 with final payment due June 30,
1999...................................................... 1,700 1,392 1,122
Promissory note to Blake Drilling and Workover Co., Inc.,
bearing interest at 5%, secured by certain rigs, principal
due in varying amounts commencing January 1995 with final
payment made August 15, 1995.............................. 3,000 -- --
Construction payables and accrued liabilities at December
31, 1994, which were refinanced with $6 million in
additional long-term borrowings in 1995 pursuant to credit
agreements with two banks................................. 6,000 -- --
Note payable to a former owner of the FALRIG Partnership,
noninterest-bearing, due March 31, 1995................... 3,167 -- --
Obligations payable to the former owners of the FALRIG
Partnership, noninterest-bearing, paid March 31, 1995..... 2,489 -- --
Obligations payable to the former owners of the FALRIG
Corporation, noninterest-bearing, paid March 31, 1995..... 3,075 -- --
Note payable to Cliffs, bearing interest at 7.75%, due
December 31, 1995 paid in March, 1995..................... 1,000 -- --
Obligation payable to the Chatterjee Interests, bearing
interest at 10%, due March 31, 1995....................... 6,000 -- --
-------- -------- --------
158,400 183,361 315,529
Less -- Amounts due within one year....................... (17,021) (3,999) (3,124)
-------- -------- --------
$141,379 $179,362 $ 312,405
======== ======== ========
</TABLE>

F-19
<PAGE> 57

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

On January 24, 1994, Falcon completed an offering of $110 million, 9 3/4%
Series A Senior Notes due 2001. These Series A Senior Notes were exchanged
during 1994 for similar 9 3/4% Series B Senior Notes in an offering registered
with the Securities and Exchange Commission. Following the registration and
exchange, only the 9 3/4% Series B Senior Notes (the Fixed Rate Notes) remain
outstanding. The Fixed Rate Notes mature on January 15, 2001, and bear interest
at a rate of 9.75%, payable semiannually on January 15 and July 15. Falcon has
the option to redeem up to 30% of the Fixed Rate Notes through January 15, 1997,
at a redemption price of 109% of the principal amount thereof with the proceeds
of the sale and issuance of capital stock of Falcon provided that at least $50
million in aggregate principal of the Fixed Rate Notes remains outstanding
following redemption. Falcon used a portion of the proceeds to finance a series
of previously planned transactions, including the prepayment of certain
outstanding debts as indicated below and the consummation of certain
acquisitions as discussed in Note 1.

On February 23, 1994, Falcon issued $10 million of Floating Rate Notes
which bear interest at LIBOR plus 3.5% and are redeemable at 103.5% of the
principal amount outstanding plus unpaid accrued interest at any time following
18 months after issuance. The principal amounts of the Floating Rate Notes are
due in payments of $1,000,000, $2,000,000 and $2,000,000 on the fourth, fifth
and sixth years following issuance, respectively, with the balance due January
24, 2001.

The Fixed Rate Notes and Floating Rate Notes are collectively referred to
as the Senior Notes. The Senior Notes are guaranteed by certain of Falcon's
subsidiaries (see Note 11).

On September 12, 1994, Falcon established a revolving credit facility with
two banks providing for borrowings of up to $25.0 million subject to adequate
levels of eligible accounts receivable, which amounts borrowed are secured by
Falcon's accounts receivable. Falcon had borrowings outstanding under this
credit facility of $5.0 million at December 31, 1994 and 1995 and $20.0 million
at September 30, 1996 (unaudited). Approximately $18.8 million and $5 million
(unaudited) of additional borrowings were available under this facility at
December 31, 1995 and September 30, 1996, respectively. This facility, as
amended, provides that amounts borrowed will bear interest at floating rates
based on LIBOR plus 2 1/2% or 1% over the greater of the prime rate or the
federal funds rate plus 1/2%. The facility requires Falcon to maintain a
minimum current ratio, tangible net worth, as defined, fixed charge coverage
ratio, interest coverage ratio and a maximum ratio of debt to equity and a
maximum amount of capital expenditures, as defined. The facility also provides
for payments of commitment fees on the unused portion of the facility at a rate
of one-half of one percent per year.

The Company has entered into agreements with its commercial bank lenders to
increase its bank credit facilities from a maximum of $25 million to $65 million
(unaudited). The new facilities would consist of (i) a $25 million revolving
loan facility secured by accounts receivable, maturing in November 1999, and
(ii) a $40 million revolving loan facility secured by certain drilling rigs and
receivables, maturing in November 1998 (unaudited).

During January 1995, Falcon drew down an additional $6 million pursuant to
the terms of this credit facility and paid certain accounts payable which were
outstanding at December 31, 1994, and had been incurred for the refurbishment of
three rigs deployed to Venezuela (Note 3). The costs of these refurbishments
were capitalized as rigs and equipment at December 31, 1994. The payment of this
$6 million of accounts payables did not require the use of working capital and,
accordingly, Falcon's consolidated financial statements at December 31, 1994,
reflect the reclassification of $6 million from accounts payable and accrued
liabilities to long-term debt.

In March 1995, Falcon issued $50 million of Series A Senior Subordinated
Notes due 2005, resulting in net proceeds of approximately $48 million to Falcon
after deducting offering-related expenses of approximately $2 million. These
Series A Senior Subordinated Notes were exchanged in 1995 for similar Series B
Senior Subordinated Notes (the Subordinated Notes) in an offering registered
with the Securities and Exchange Commission. The Subordinated Notes mature on
March 15, 2005, and bear interest at a rate of 12.5%, payable semiannually on
March 15 and September 15. Falcon has the option to redeem up to 30% of

F-20
<PAGE> 58

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the Subordinated Notes through March 15, 1998, at a redemption price of 111.5
percent of the principal amount of such notes with the proceeds of a public
offering of Falcon's capital stock, provided that at least $35 million in
aggregate principal of the Subordinated Notes remains outstanding immediately
after giving effect to such redemption. Beginning March 15, 2000, Falcon may
redeem the Subordinated Notes at annually declining redemption prices beginning
at 104.688 percent of the principal amount of such notes. Upon change in control
of Falcon, as defined in the Indenture for such Subordinated Notes, Falcon will
be required to make an offer to purchase the Subordinated Notes at 101 percent
of the principal amount thereof. The Subordinated Notes are senior unsecured
obligations of Falcon subordinated in right of payment to all other existing or
future senior indebtedness of Falcon.

In October 1995, Falcon arranged to borrow $20 million under a short term
debt facility from one of the banks that provides Falcon's revolving credit
facility. Falcon did not borrow funds under the facility due to the completion
of Falcon's public offering of common stock in November 1995. (Note 6). Included
in interest expense for the quarter ended December 31, 1995 is $259,000 in fees
paid to obtain the short term debt facility.

In February 1996, pursuant to another agreement, Falcon borrowed $20
million from one of the banks that provides Falcon's revolving credit facility.
The amounts borrowed bore interest at prime plus one % and were payable on the
earlier of December 31, 1996 or upon completion of a capital market transaction,
as defined. In February 1996, Falcon paid fees of $300,000 in connection with
obtaining this loan. In March 1996, Falcon repaid the $20 million indebtedness
with proceeds from the issuance of the 8 7/8% Notes due 2003 described below.

In March 1996, Falcon completed the offering and sale of $120 million
principal amount of 8 7/8% Series A Senior Notes due 2003 (the 8 7/8% Notes),
resulting in net proceeds of approximately $116 million to Falcon after
deducting offering-related expenses. The 8 7/8% Notes mature on March 15, 2003,
and bear interest at a rate of 8 7/8%, payable semiannually on March 15 and
September 15 of each year beginning September 15, 1996. The 8 7/8% Notes are
unsecured obligations of Falcon, ranking pari passu in right of payment with all
other senior indebtedness of Falcon, and senior in right of payment to all
subordinated indebtedness of Falcon. The 8 7/8% Notes are not guaranteed by any
of Falcon's subsidiaries, and thus are structurally subordinated to the Senior
Notes and other indebtedness of the subsidiaries. Further, they are effectively
subordinated to any secured indebtedness of Falcon to the extent of the
collateral securing such secured indebtedness. The 8 7/8% Notes were issued
pursuant to an indenture which provides that (i) Falcon has the option to redeem
the 8 7/8% Notes in whole or in part on or after March 15, 2000, at a redemption
price of 104.4375% of principal amount during the twelve month period commencing
March 15, 2000, 102.2188% of principal amount during the twelve month period
commencing March 15, 2001 and 100% of principal amount after March 15, 2002,
(ii) upon change in control of Falcon, as defined, Falcon will be required to
make an offer to purchase the 8 7/8% Notes at a purchase price equal to 101% of
the principal amount thereof.

Included in long-term debt and other obligations as of December 31, 1994
are amounts due the former owners of the FALRIG Partnership and the FALRIG
Corporation. These amounts include: a noninterest-bearing note of $3,167,000 and
a contingent payment of $2,489,000 (both payable to a former owner of the FALRIG
Partnership), which were discounted at 9.75% through their original maturity
date in January 1995, and a contingent payment of approximately $3,075,000
(payable to the former owners of the FALRIG Corporation), which was discounted
at 9.75% for the period through its original maturity date in January 1995, and
is included in debt and other obligations due within one year. Falcon repaid
this debt in the first quarter of 1995.

Falcon has assumed a nonrecourse secured note originally payable by
Turnstone to a bank in the amount of $1.9 million, secured by Rig 203. Such note
bears interest at LIBOR (5.53% at December 31, 1995) through August 16, 1998, at
which time the interest rate increases to LIBOR plus 1.5%. Note payments equal
to 50% of the cash flow, as defined, derived from Rig 203 are payable
concurrently until all of the borrower's capital costs in connection with Rig
203 have been recovered and, after such costs are recovered, note

F-21
<PAGE> 59

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

payments equal to 80% of such cash flow are payable, with any unpaid balance due
on December 31, 1999. Rig 203 has been deployed to Venezuela (Note 3), and based
on Falcon's estimates of its future revenues, the principal amount of this note
has been included under current maturities of long-term debt.

Falcon had a credit agreement with a financial institution through January
24, 1994 (the Credit Agreement), pursuant to which Falcon could borrow up to
$17.5 million. Amounts borrowed pursuant to the Credit Agreement primarily bore
interest at a rate equal to the commercial paper rate as defined in the Credit
Agreement plus 4.5% which resulted in an interest rate of 7.83% at December 31,
1993. In January 1994, Falcon repaid the outstanding $16.5 million balance of
the Credit Agreement, together with $496,000 of prepayment premiums, out of a
portion of the proceeds of the Senior Notes.

The annual maturities of the debt outstanding at December 31, 1995 are
$3,999,000 in 1996, $7,057,000 in 1997, $3,085,000 in 1998, $2,220,000 in 1999,
$2,000,000 in 2000, and $165,000,000 thereafter.

Falcon estimates the fair value of its debt obligations to be $190,033,000
compared to a historical value of $183,361,000, both as of December 31, 1995.

6. STOCKHOLDERS' EQUITY:

COMMON STOCK

In 1994, the board of directors of Falcon approved (a) an amendment of
Falcon's certificate of incorporation increasing the authorized shares of
Falcon's common stock to 28,500,000 shares and (b) a stock split effected in the
form of a stock dividend of 299 shares of common stock for each outstanding
share of common stock of Falcon. Accordingly, share amounts presented for all
periods have been restated to reflect the stock dividend.

In June 1995, the board of directors of Falcon approved an amendment of
Falcon's certificate of incorporation (a) increasing the authorized shares of
Falcon's common stock to 100,000,000 shares and (b) increasing the authorized
shares of Falcon's preferred stock to 526,489 shares.

On July 28, 1995, Falcon, a participating stockholder and a group of
underwriters entered into an agreement resulting in the initial public sale by
Falcon of 4,250,000 shares of common stock and the sale of 750,000 shares of
common stock by the participating shareholder. The initial public offering
closed on August 2, 1995 and resulted in net proceeds to Falcon of $34.4 million
after deducting offering-related expenses of $3.9 million, including
approximately $302,000 of related expenses incurred in 1994 and included in
other assets as of December 31, 1994.

On November 15, 1995, Falcon, participating stockholders and a group of
underwriters entered into an agreement resulting in the public sale of 3,175,000
shares of common stock by Falcon and the sale of 2,000,000 shares of common
stock by selling shareholders. The public offering closed on November 21, 1995
and resulted in net proceeds to Falcon of $30.9 million after deducting
offering-related expenses of approximately $2.4 million.

PREFERRED STOCK

Falcon has 526,489 shares of preferred stock, no par value, authorized. The
board of directors has the authority to issue the unissued shares of preferred
stock and to establish the designation and terms thereof. In January 1993,
Falcon issued to the S-C Interests 25,989 shares of Series A convertible
preferred stock, 1,000 shares of Series B redeemable preferred stock, and a
shadow warrant to purchase up to 1,847,100 shares of common stock at an exercise
price of $.01 per share in full satisfaction of a $15 million advance and for
$6,993,843 in cash. Offering expenses of $314,000 and $672,000 related to the
Series A convertible preferred stock and Series B redeemable preferred stock,
respectively, were deducted from the proceeds of the issuance of the preferred
stock. Falcon had an agreement with an affiliate of the Hamilton Group to pay an
investment services fee of three % of capital placed by the affiliate; $660,000
was paid in connection with the preferred stock sale and treated as expenses of
the offering.

F-22
<PAGE> 60

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Series A convertible preferred stock (a) had the same dividend and
voting rights as the common stock of Falcon, on an as-converted basis, (b) was
convertible into 300 shares of common stock of Falcon for each share of Series A
convertible preferred stock, and (c) was automatically convertible into common
stock upon any closing before January 28, 1997 of an underwritten initial public
offering of equity securities meeting certain specifications. The Series A
convertible preferred stock was converted into 7,796,700 shares of Falcon's
common stock in connection with Falcon's initial public offering on August 2,
1995.

The Series B redeemable preferred stock (a) was entitled to an annual cash
dividend of $700 per share from January 29, 1993, through December 31, 1995,
which was payable in one installment on December 31, 1995, (b) had a liquidation
preference equal to $7,000 per share plus all unpaid accrued dividends, (c) was
redeemable at the option of Falcon at any time for a redemption price of $7,000
per share plus all accrued and unpaid dividends and, if redeemed after December
31, 1995, the redemption price was to be increased by an amount equal to 2.5%
per quarter on the balance of any unpaid redemption price, (d) was redeemable at
the option of the holder at any time on or after December 31, 1995, at a
redemption price of $7,000 per share plus any accrued unpaid dividends, plus an
amount equal to 2.5% of any unpaid redemption price per quarter beginning
December 31, 1995, and (e) was secured by a junior mortgage on a portion of
Falcon's barge rig fleet. The difference between the redemption value of $7,000
and the value of the Series B redeemable preferred stock at the date of issue
was accreted by a ratable charge to retained earnings during the redemption
period until redeemed.

Falcon elected to redeem 500 shares of its Series B redeemable preferred
stock in January 1994 for $3.9 million, including accrued dividends of
approximately $351,000 as of the redemption date. Upon the redemption of the 500
shares of Series B redeemable preferred stock, the junior mortgage on a portion
of the barge rig fleet was released by the holder of the remaining 500 shares of
Falcon's Series B redeemable preferred stock. On December 27, 1995, Falcon
redeemed the remaining 500 outstanding shares of Series B redeemable preferred
stock for $4,520,000.

WARRANTS

In connection with the sale of various of Falcon's subordinated notes in
August 1992 (all of which had been repaid by December 1994), Falcon issued (a)
2,800 Class A warrants, each of which represented the right to purchase 300
shares of Falcon's common stock for $3.33 per share, and (b) 2,600 Class B
warrants, each of which represented the right to purchase 600 shares of Falcon's
common stock at an exercise price of $3.33 per share. The exercise price of the
Class A and B warrants was adjusted to $2.42 per share subsequent to their
issuance. Two hundred Class A warrants were exercised on July 31, 1993, while
1,200 Class A warrants expired on such date. During 1995, 1,400 Class A
warrants, and 2,600 Class B warrants, were exercised which resulted in the
issuance of 1,980,000 shares of Falcon's common stock for cash of approximately
$4,800,000. At December 31, 1995 no Class A or Class B warrants were
outstanding.

In connection with the sale of preferred stock to the S-C Interests in
January 1993, Falcon issued a shadow warrant exercisable for up to an aggregate
of 1,847,100 shares of Falcon's common stock at a purchase price of $.01 per
share of common stock. Such warrant is exercisable only to the extent that
certain other warrants, options and convertible securities of Falcon are
exercised or converted. The aggregate number of shares for which the shadow
warrant was exercisable by the S-C Interests was reduced to 1,567,100 shares
upon the expiration of 1,200 of the Class A warrants and the exercise of 200
Class A warrants on July 31, 1993, as discussed above. On March 31, 1994,
various convertible subordinated debtholders exercised options to convert
$605,000 in convertible subordinated debt for 212,700 shares of common stock and
holders of bonus warrants (issued in connection with the prepayment of
convertible subordinated debt) exercised such warrants. In connection therewith,
150,900 shares of common stock were issued under the shadow warrant.
Additionally, rights to acquire 94,692 shares of common stock pursuant to the
shadow warrant expired during 1994, bringing the number of shares exercisable
under the shadow warrant to 1,321,508 as of December 31,

F-23
<PAGE> 61

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1994. As a result of the exercise of the Class A and Class B warrants in 1995,
1,320,006 shares of common stock were issued pursuant to the shadow warrant. The
number of shares for which the shadow warrant was exercisable at December 31,
1995 was 1,508.

Certain members of the Mullen Group hold warrants to purchase an aggregate
of 120,000 shares of common stock of Falcon at an exercise price of $3.33 per
share. During 1995, 60,000 warrants were exercised resulting in the issuance of
60,000 Shares of Common Stock for cash proceeds of $199,800. The number of
shares for which the Mullen Group options were exercisable at December 31, 1995
was 60,000. These options were exercised in the fourth quarter of 1996
(unaudited).

In connection with the prepayment of certain convertible debt in January
1993, bonus warrants to acquire approximately 16,000 shares of common stock were
issued to an executive of Falcon, the owners of Taladro and a third party. Bonus
warrants to purchase approximately 13,800 shares of common stock were exercised
in March 1994 by the executive of Falcon and Taladro. The third party's bonus
warrants to purchase approximately 2,300 shares of common stock remain
outstanding at December 31, 1995 and expire on December 31, 1997 if not
previously exercised.

In November 1994 Falcon signed a letter of intent to merge with Marine
Drilling Companies, Inc. (Marine), a publicly traded offshore drilling company.
Negotiations to conclude a definite agreement were conducted for a three-month
period but were terminated on February 15, 1995, due primarily to market
conditions in the U.S. Gulf of Mexico offshore market. Acquisition expenses
related to the Marine transaction of approximately $410,000 were included in
general and administrative expense in the fourth quarter of 1994.

STOCK OPTION PLANS

Falcon adopted, effective January 1, 1992, a stock option plan (1992 Stock
Option Plan) pursuant to which an aggregate of 495,000 incentive stock options
or nonqualified stock options were granted to directors, officers and employees
of Falcon on November 10, 1992. The exercise price of these stock options range
from $3.33 to $3.70 per share, which was the estimated fair market value of the
stock at the date of grant. These options were immediately vested and expire on
November 10, 2002, with the exception of 107,400 options which vest in varying
increments over three years and expire on November 10, 1997. During 1995, 37,400
of these options were exercised, resulting in the receipt of approximately
$125,000 in proceeds by Falcon. During the nine months ending September 30,
1996, 175,600 of these options were exercised resulting in the receipt of
approximately $624,000 in proceeds by Falcon (unaudited).

In 1994, the board of directors of Falcon authorized the grant of options
to purchase an aggregate of 285,000 shares to certain members of management of
Falcon (1994 Stock Option Plan). Such options entitle the option holder to
purchase one share of Falcon's common stock, vest in one-third increments over
three years, expire in January 2004, and have an exercise price of $10 per
share. During the nine months ended September 30, 1996, 42,000 of these options
were exercised, resulting in the receipt of approximately $420,000 in proceeds
by Falcon (unaudited.)

On February 16, 1995, the board of directors adopted a third stock option
plan covering up to 500,000 shares of common stock (the 1995 Stock Option Plan),
and granted options under the plan to purchase an aggregate of 125,000 shares to
directors, officers and employees of Falcon. These options vest in one-third
increments over a three-year period beginning on the date of grant, expire in
February 2005 and have an exercise price of $10 per share. During the nine
months ended September 30, 1996, an additional 215,000 options were granted
under the plan to officers of Falcon at exercise prices ranging from $12.13 to
$19.44. One-third of these options vested on the date of the grant and one-third
vest on each of the next two anniversaries of the date of the grant. For the
nine months ending September 30, 1996, 3,333 of these options were exercised
resulting in the issuance of 3,333 shares of Falcon's common stock and the
receipt of approximately $33,330 in proceeds received by Falcon (unaudited).

F-24
<PAGE> 62

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

STOCKHOLDERS' AGREEMENT

In January 1993, four stockholder groups of Falcon (consisting of (a) the
Webster Group, a group of officers, directors and shareholders of Falcon, (b)
the Hamilton Group, (c) the Stafilopatis Group, and (d) the S-C Interests)
entered into an amended stockholders' agreement (the Amended Stockholders'
Agreement), which, among other things, prescribed the composition of the board
of directors with representation for each group. It also prohibited the S-C
Interests from engaging in proxy solicitations and like activities or combining
with or acting in concert with other shareholders with respect to the voting of
shares of Falcon (the Standstill Provisions). The Standstill Provisions expire
upon the first anniversary of a sale by Falcon in a public offering of at least
25% of its outstanding equity securities. All other provisions of the Amended
Stockholders' Agreement expired upon completion of Falcon's initial public
offering on August 2, 1995.

7. COMMITMENTS AND CONTINGENCIES:

Falcon is currently involved in various lawsuits and other contingencies
arising out of operations in the normal course of business. In the opinion of
management, uninsured losses, if any, in excess of those accrued will not have a
material adverse effect on Falcon's consolidated financial position or results
of operations.

SELF INSURANCE

Falcon is self-insured for the deductible portion of its insurance
coverage. In the opinion of management, adequate accruals have been made based
on known and estimated exposures up to the deductible portion of Falcon's
insurance coverages. Management believes that future claims and liabilities in
excess of the amounts accrued are fully insured.

EMPLOYMENT AGREEMENTS

Falcon has multiyear employment agreements with several of its officers.
The employment agreements with Falcon's officers provide for annual salaries and
discretionary bonuses to be determined by the board of directors. The board of
directors of Falcon approved discretionary cash bonuses totaling $2.25 million
and $250,000 in 1994 and 1995, respectively, to an executive in reward for his
extraordinary contribution to the growth of Falcon.

401(K) PLAN

On October 1, 1993 Falcon adopted a contributory 401(k) savings plan for
its domestic employees. The plan provides that employees may contribute up to
16% of pretax earnings up to designated amounts and Falcon may elect to match
such contributions at its discretion. Falcon did not incur expenses related to
matching contributions in 1993 and incurred $461,000 and $522,000 in such
expenses in 1994 and 1995, respectively. On January 1, 1994, Falcon adopted an
employee-funded medical, life and disability insurance plan.

OPERATING LEASES

Falcon leases certain facilities and equipment under operating leases.
Falcon also enters into charters with drilling rig and vessel owners which
frequently have variable payment terms depending on whether the leased rig or
vessel is operating. Total lease expense on drilling rigs and vessels was
$2,662,370, $6,363,860 and $6,134,465 for the years ended December 31, 1993,
1994 and 1995, respectively. Falcon incurred total rental expenses exclusive of
leased rigs and vessels of $795,555, $2,078,856 and $2,201,948 during the years
ended December 31, 1993, 1994 and 1995, respectively. Aggregate minimum future
annual rental commitments

F-25
<PAGE> 63

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

under unaffiliated noncancelable operating leases with lease terms in excess of
one year as of December 31, 1995, are as follows:

COMMITMENTS RELATING TO CERTAIN RIGS

Falcon has entered into an agreement to purchase three barge drilling rigs
for an approximate cost of $5.25 million and estimated mobilization costs of
$700,000. At December 31, 1995, Falcon had made deposits of approximately
$500,000 which have been included in other assets. The seller of three of these
rigs is encountering logistical problems in connection with their delivery to
Falcon. The Company has recently commenced a legal action to enforce its rights
under that contract. Management of Falcon believes the deposit on these rigs is
refundable should the delivery of these rigs not be accomplished.

The refurbishment and upgrade of Falcon's dynamically positioned drillship,
the Peregrine I, was completed in September of 1996. This drillship began
operating in November 1996 (unaudited). Falcon incurred refurbishment and
upgrade costs and the purchase of additional riser, BOP equipment and other
fleet spares and inventory of approximately $6.5 million during 1995 and
approximately $60 million (unaudited) during the nine months ended September 30,
1996, which costs are included as drilling rigs and equipment in the
accompanying consolidated balance sheets.

In May 1995, Falcon completed the purchase of the Pelerin (a dynamically
positioned drillship) for approximately $33 million and renamed the drillship
the Peregrine III (unaudited). Management has committed to spend an additional
$7 million on the Peregrine III for upgrades in connection with a contract
scheduled for early 1997 (unaudited). Prior to the purchase of the drillship,
the Peregrine III was managed on behalf of its owner by Foramer S.A. As one of
the conditions of purchase, Falcon entered into a management agreement with
Foramer pursuant to which Foramer was to manage the vessel until December 31,
1996 (unaudited). During October 1996, the management agreement with Foramer was
terminated for a fee of $250,000 and Falcon assumed responsibility for managing
the vessel (unaudited).

In June 1996, Falcon entered into a contract to purchase a substantially
completed drillship hull for approximately $8.0 million (unaudited). Falcon
estimates that it will cost approximately $120 million to complete the
construction necessary for this hull to become an operational drillship
(unaudited). Management is currently investigating alternatives for financing
this construction and Falcon currently has no construction obligations relative
to the drillship hull (unaudited). Management does not intend to undertake
completion of the drillship hull until Falcon has obtained a long-term
commitment for the use of the completed drillship and made arrangements for
financings (unaudited).

In October 1996, the Company entered into a letter of intent to purchase
two conventionally-moored drillships, the Deepsea Ice and Deepsea Duchess, at a
cost of approximately $40 million (unaudited). The Company is negotiating to
have a third party purchase the Deepsea Ice for $20 million (unaudited) and
lease it to the Company. The Deepsea Duchess purchase price is expected to be
funded by issuance to the seller of $15 million (unaudited) in market value of
common stock and $5 million (unaudited) in cash.

During 1996, the Company entered into several short-term leasing
arrangements with various parties for the use of one jackup rig, one barge
drilling rig, and two workover rigs. Future minimum lease payments relating to
these lease agreements are $2.1 million for the fourth quarter of 1996, $6.0
million in 1997, $6.0 million in 1998, $4.4 million in 1999 and $758,000 in 2000
(unaudited).

F-26
<PAGE> 64

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Pursuant to certain of Falcon's long term drilling contracts, the operator
may purchase three of Falcon's barge drilling rigs for specified prices which
decrease each year through 1999. Management of Falcon estimates that the option
price will be less than the carrying value for one of these rigs by
approximately $880,000 in 1998, and that the aggregate option price for the
three rigs will be below the aggregate carrying value for such rigs by
approximately $1.2 million and $3.5 million in 1998 and 1999, respectively.
Management does not expect the purchase option to be exercised and will continue
to evaluate the net book value of these rigs for possible future impairment.

OIL AND GAS EXPLORATION JOINT VENTURE

Falcon from time to time enters into arrangements whereby it contracts to
provide a rig and related services in connection with the acquisition of a
working interest in a well. Generally, these arrangements are entered into only
where Falcon believes a standard day rate contract, without any investment
obligations as a working interest, would not be available to Falcon.

During 1994, a subsidiary of Falcon (Raptor) acquired an interest in a
joint venture engaged in the development of drilling prospects in the general
areas of Falcon's barge drilling operations and, in one instance, has
participated with several other companies in the funding of seismic activities
in south Louisiana. Falcon utilizes the full cost method of accounting for its
oil and gas activities. Included in other assets at December 31, 1994 and 1995
and September 30, 1996 are $1.7 million, $2.8 million and $1.7 million
(unaudited), respectively, of Falcon's expenditures for its share of the funding
of the exploratory efforts of the joint venture. In June 1996, the joint venture
distributed these properties to Raptor and the other joint venturer, and Raptor
sold a portion of the distributed properties for $1.2 million cash and a
promissory note of approximately $700,000. The promissory note bears interest at
two percent over prime, and is due June 1, 1999, or earlier based upon revenues
generated by the properties. There is currently no production from the
properties sold. Falcon has no remaining funding commitments to these properties
as a result of the sale. During the year ended December 31, 1994, approximately
$873,000 was charged to operating expense relating to certain wells which were
discovered to be nonproducing wells. There were no charges to operating expense
from nonproducing wells during 1995.

Future participation in the development of oil and gas prospects and
related activities will depend in large part upon the availability of cash flows
and cash balances in excess of the Company's needs to fund its obligations and
further growth in its basic contract drilling business, as well as upon future
determinations by the Company as to the attractiveness of such other activities.

PROPOSED EQUITY OFFERING

In November 1996, Falcon initiated the process of filing a registration
statement with the Securities and Exchange Commission for the sale of 3,000,000
shares of common stock by Falcon and 4,000,000 shares of common stock by Selling
Shareholders.

LIQUIDITY

Liquidity of Falcon should be considered in light of the significant
fluctuations in demand experienced by drilling contractors as rapid changes in
oil and gas producers' expectations and budgets occur. These fluctuations can
rapidly impact Falcon's liquidity as supply and demand factors directly affect
utilization and day rates, which are the primary determinants of cash flow from
Falcon's operations.

Falcon believes that its available funds, together with cash generated from
operations and amounts that may be borrowed under the revolving credit agreement
will be sufficient to fund its capital expenditures, working capital and debt
service requirements for the remainder of 1996. Future cash flows are subject to
a number of uncertainties, particularly the condition of the oil and gas
industry and the related drilling activity in

F-27
<PAGE> 65

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Falcon's markets. There can therefore be no assurance that these resources will
continue to be sufficient to fund Falcon's cash requirements.

8. QUARTERLY FINANCIAL DATA (UNAUDITED):

Summarized quarterly financial data for the four quarters ended, December
31, 1994 and 1995, is as follows (in thousands, except per share amounts):

<TABLE>
<CAPTION>
UNAUDITED THREE MONTHS ENDED
---------------------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1994 1994 1994 1994 1995 1995 1995 1995
--------- -------- ------------- ------------ --------- -------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenues..... $32,119 $33,619 $33,026 $ 39,739 $41,217 $39,419 $47,977 $ 48,892
Operating costs and
expenses, excluding
depreciation.......... 23,220 25,206 29,620 29,097 31,313 31,735 34,213 37,602
Depreciation........... 1,793 2,163 2,663 2,826 3,604 3,802 4,296 4,825
Income (loss) before
income taxes and
minority
interest.............. 5,087 3,731 (2,069) 4,399 2,118 (246 ) 5,217 2,738
Net income (loss)
applicable to common
shares................ 2,210 1,660 (1,734) 1,729 894 (639 ) 2,920 1,506
Net income (loss) per
common share.......... $ .08 $ .06 $ (.11) $ .06 $ .03 $ (.04 ) $ .10 $ .04
</TABLE>

9. ADDITIONAL BALANCE SHEET AND STATEMENT OF OPERATIONS INFORMATION:

Other current assets include the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
------ ------
<S> <C> <C>
Short-term investments........................................... $3,264 $ 842
Prepaid insurance................................................ 914 1,125
Worker compensation insurance receivables........................ 1,166 2,600
Other............................................................ 233 321
------ ------
$5,577 $4,888
====== ======
</TABLE>

Other assets include the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
------- -------
<S> <C> <C>
Deposits on drillpipe, rigs, and equipment....................... $ 608 $11,763
Deferred financing costs......................................... 5,855 6,338
Oil and gas properties........................................... 1,758 2,821
Deferred mobilization costs...................................... 2,262 2,589
------- -------
$10,483 $23,511
======= =======
</TABLE>

F-28
<PAGE> 66

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Accounts payable and accrued liabilities include the following (in
thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
------- -------
<S> <C> <C>
Accounts payable, trade.......................................... $11,933 $15,891
Accrued interest................................................. 6,200 7,136
Accrued payroll.................................................. 869 1,763
Accrued sales taxes.............................................. 374 1,640
Accrued worker compensation claims............................... 944 1,225
Other............................................................ 2,427 3,671
------- -------
$22,747 $31,326
======= =======
</TABLE>

Other income (expense) includes the following items (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1993 1994 1995
---- ------ ------
<S> <C> <C> <C>
Interest income............................................ $ -- $1,036 $1,118
Gain on sale of assets..................................... 884 1,337 962
Other...................................................... 43 (404) 770
---- ------ ------
$927 $1,969 $2,850
==== ====== ======
</TABLE>

10. RELATED PARTY TRANSACTIONS:

Falcon's formation and growth was generated mainly through acquisitions.
Certain of these acquisitions were made through affiliates and related parties.
For further discussion relating to these acquisitions see Note 1 -- Formation of
Falcon and Acquisitions.

The former owners of Two "R", who are also officers of Falcon, lease
crewboats, tugboats and supply barges and other vessels to Falcon at a
contracted bareboat rate of $100 per day for crewboats and tugboats and $60 per
day for other vessels, with Falcon responsible for drydocking, painting and
repairs. The former owners received revenues of $674,000, $829,000 and $866,000,
respectively, for the years ended December 31, 1993, 1994 and 1995.

A director of Falcon, who is a stockholder of Falcon, a member of the
Webster Group and a partial owner of Kestrel and Taladro Associates, was a
partner through mid-1994 in a law firm which provided legal services to Falcon
and certain of its affiliated entities. Fees paid by Falcon to this law firm
were $570,000 and $501,000 in the years ended December 31, 1993 and 1994,
respectively. The director became a partner in a new law firm during mid-1994.
Fees paid by Falcon to this new law firm were $282,000 and $1,141,000 for the
years ended December 31, 1994 and 1995 respectively. A director of Falcon who
performs financial consulting services for Falcon from time to time and is also
an officer of a subsidiary of Falcon, received $161,000 and $120,000 for such
services in the years ended December 31, 1994 and 1995 respectively.

Falcon pays a quarterly fee to a privately held company controlled by the
S-C Interests, for financial advisory services. The fee is tied proportionately
to the aggregate total of the S-C Interests' equity investment in Falcon. Falcon
paid $247,000 and $126,000 for such services for the years ended December 31,
1994 and 1995, respectively.

11. SUPPLEMENTAL GUARANTOR INFORMATION:

Falcon's obligations under the Senior Notes are fully and unconditionally
guaranteed by Falcon and each of Falcon's directly held subsidiaries and certain
of Falcon's indirectly held subsidiaries on a joint and several

F-29
<PAGE> 67

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

basis. The indenture and note purchase agreement under which the Senior Notes
were issued provides for acquired subsidiaries subsequent to the issuance of the
Senior Notes to be designated as guarantors of the Senior Notes.

The indentures pursuant to which the Senior Notes, the 8 7/8% Notes and the
Subordinated Notes were issued provide that 12 specified barge rigs are to be
nonrecourse rigs whereby Falcon has the option to transfer such nonrecourse
barge rigs to nonguarantor subsidiaries at any time; provided, however, that
Falcon may, at its option and at any time, designate up to two of its barge rigs
in substitution for any two of the designated nonrecourse barge rigs. In
addition, up to two of Falcon's jackup rigs may be designated nonrecourse rigs
provided certain financial tests are met.

During December 1994, Falcon transferred three nonrecourse barge rigs to a
newly formed nonguarantor subsidiary, Falcon Drilling de Venezuela, Inc. During
March 1995, Falcon Drilling de Venezuela, Inc., was merged with a guarantor
subsidiary of Falcon in connection with the issuance of the Subordinated Notes,
and the three barge rigs previously designated as nonrecourse rigs ceased being
nonrecourse rigs. In the fourth quarter of 1995, in connection with deploying
Rig 203 to Venezuela, Turnstone's note secured by the rig was assumed by Falcon
Drilling Company, Inc. and Turnstone was dissolved. The following condensed
consolidating financial statements are presented for purposes of complying with
the reporting requirements of the parent company and the subsidiaries which are
guarantors under the Senior Notes. The financial statements at December 31,
1994, include Turnstone and Eilert-Olsen as nonguarantor subsidiaries, and at
December 31, 1995 and September 30, 1996, include only Eilert-Olsen as a
nonguarantor subsidiary. Falcon believes that separate financial statements and
other disclosures of the guarantors are not material.

Upon occurrence of an event of default, as defined, pursuant to a revolving
credit facility with two banks, the ability of certain subsidiaries of Falcon to
make distributions or other transfers to Falcon will be restricted.

F-30
<PAGE> 68

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CONDENSED CONSOLIDATING BALANCE SHEET

SEPTEMBER 30, 1996
(UNAUDITED) (IN THOUSANDS)

<TABLE>
<CAPTION>
FALCON DRILLING GUARANTOR NONGUARANTOR
ASSETS COMPANY, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents..... $ 4,224 $ 2,085 $ -- $ -- $ 6,309
Accounts receivable, net...... 24,871 43,963 -- -- 68,834
Other current assets.......... 3 3,077 -- -- 3,080
-------- -------- ------ --------- --------
Total current
assets.............. 29,098 49,125 -- -- 78,223
EQUIPMENT AND PROPERTY, net..... 65,647 349,254 2,555 -- 417,456
OTHER NONCURRENT ASSETS......... -- 18,045 -- -- 18,045
INVESTMENT IN SUBSIDIARIES AND
JOINT VENTURES, net........... 367,106 -- -- (367,106) --
-------- -------- ------ --------- --------
Total assets.......... $ 461,851 $416,424 $2,555 $ (367,106) $513,724
======== ======== ====== ========= ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued
liabilities................ $ 17,236 $ 25,506 $ -- $ -- $ 42,742
Debt due within one year...... -- 2,741 383 -- 3,124
-------- -------- ------ --------- --------
Total current
liabilities......... 17,236 28,247 383 -- 45,866
LONG-TERM DEBT, net............. 310,000 1,666 739 -- 312,405
DEFERRED INCOME TAXES........... -- 20,838 -- -- 20,838
STOCKHOLDERS' EQUITY:
Partnership capital........... -- 56,672 -- (56,672) --
Common stock.................. 355 -- -- -- 355
Additional paid-in capital.... 113,905 262,765 1,865 (264,630) 113,905
Accumulated earnings
(deficit).................. 20,355 46,236 (432) (45,804) 20,355
-------- -------- ------ --------- --------
Total stockholders'
equity.............. $ 134,615 $365,673 $1,433 $ (367,106) $134,615
-------- -------- ------ --------- --------
Total liabilities and
stockholders'
equity.............. $ 461,851 $416,424 $2,555 $ (367,106) $513,724
======== ======== ====== ========= ========
</TABLE>

F-31
<PAGE> 69

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CONDENSED CONSOLIDATING BALANCE SHEET

DECEMBER 31, 1995
(IN THOUSANDS)

<TABLE>
<CAPTION>
FALCON DRILLING GUARANTOR NONGUARANTOR
ASSETS COMPANY, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents....... $ 141 $ 8,875 $ -- $ -- $ 9,016
Accounts receivable, net........ 11,953 26,047 -- -- 38,000
Other current assets............ 2,524 2,364 -- -- 4,888
-------- -------- ------ --------- --------
Total current assets.... 14,618 37,286 -- -- 51,904
EQUIPMENT AND PROPERTY, net....... 18,598 244,313 2,697 -- 265,608
OTHER NONCURRENT
ASSETS.......................... 137 23,374 -- 23,511
INVESTMENT IN SUBSIDIARIES AND
JOINT VENTURES, net............. 268,118 -- -- (268,118) --
-------- -------- ------ --------- --------
Total assets............ $ 301,471 $304,973 $2,697 $ (268,118) $341,023
======== ======== ====== ========= ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued
liabilities.................. $ 8,985 $ 22,482 $ -- $ -- $ 31,467
Debt and other obligations due
within one year.............. 1,969 1,666 364 -- 3,999
-------- -------- ------ --------- --------
Total current
liabilities........... 10,954 24,148 364 -- 35,466
LONG-TERM DEBT, net............... 175,000 3,334 1,028 -- 179,362
DEFERRED INCOME TAXES............. 10,679 10,679
MINORITY INTEREST.................
PREFERRED STOCK...................
STOCKHOLDERS' EQUITY:
Partnership capital............. -- 56,672 -- (56,672) --
Common stock.................... 352 -- -- -- 352
Additional paid-in capital...... 112,854 191,921 1,603 (193,525) 112,853
Accumulated earnings
(deficit).................... 2,311 18,219 (298) (17,921) 2,311
-------- -------- ------ --------- --------
Total stockholders'
equity................ 115,517 266,812 1,305 (268,118) 115,516
-------- -------- ------ --------- --------
Total liabilities and
stockholders'
equity................ $ 301,471 $304,973 $2,697 $ (268,118) $341,023
======== ======== ====== ========= ========
</TABLE>

F-32
<PAGE> 70

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1994
(IN THOUSANDS)

<TABLE>
<CAPTION>
FALCON DRILLING GUARANTOR NONGUARANTOR
COMPANY, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............... $ -- $ 4,868 $ -- $ -- $ 4,868
Accounts receivable, net................ -- 31,290 902 (397) 31,795
Other current assets.................... 95 5,577 -- (95) 5,577
-------- -------- ------ --------- --------
Total current assets............ 95 41,735 902 (492) 42,240
EQUIPMENT AND PROPERTY, net............... 7,266 155,407 8,150 -- 170,823
INVESTMENT IN SUBSIDIARIES AND JOINT
VENTURES, net........................... 170,791 -- -- (170,191) 600
OTHER NONCURRENT ASSETS................... 3,260 10,483 -- (3,260) 10,483
-------- -------- ------ --------- --------
Total assets.................... $ 181,412 $207,625 $9,052 $ (173,943) $224,146
======== ======== ====== ========= ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued
liabilities.......................... $ -- $ 22,153 $ 991 $ (397) $ 22,747
Income tax payable...................... -- 95 -- -- 95
Debt and other obligations due within
one year............................. 15,976 801 339 (95) 17,021
-------- -------- ------ --------- --------
Total current liabilities....... 15,976 23,049 1,330 (492) 39,863
LONG-TERM DEBT, net....................... 126,362 14,947 3,330 (3,260) 141,379
DEFERRED INCOME TAXES..................... 842 2,473 -- -- 3,315
MINORITY INTEREST......................... -- 1,357 -- -- 1,357
PREFERRED STOCK........................... 4,145 -- -- -- 4,145
STOCKHOLDERS' EQUITY:
Partnership capital..................... -- 56,676 -- (56,676) --
Common stock............................ 159 -- -- -- 159
Preferred stock, Series A............... 14,328 -- -- -- 14,328
Additional paid-in capital.............. 21,970 105,669 4,208 (109,877) 21,970
Accumulated earnings (deficit).......... (2,370) 3,454 184 (3,638) (2,370)
-------- -------- ------ --------- --------
Total stockholders' equity...... 34,087 165,799 4,392 (170,191) 34,087
-------- -------- ------ --------- --------
Total liabilities and
stockholders' equity.......... $ 181,412 $207,625 $9,052 $ (173,943) $224,146
======== ======== ====== ========= ========
</TABLE>

F-33
<PAGE> 71

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED) (IN THOUSANDS)

<TABLE>
<CAPTION>
FALCON DRILLING GUARANTOR NONGUARANTOR
COMPANY, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES............... $ 10,217 $210,748 $ -- $ -- $220,965
COSTS AND EXPENSES:
Operating costs................ 6,877 134,434 -- -- 141,311
General and administrative
expenses.................... 404 12,787 -- -- 13,191
Depreciation................... 565 20,132 142 -- 20,839
-------- -------- ----- -------- --------
OPERATING INCOME................. 2,371 43,395 (142) -- 45,624
OTHER (INCOME) EXPENSE:
Interest expense............... 17,842 245 71 -- 18,158
Other (income) expense, net.... 146 (1,321) -- -- (1,175)
Equity in income of
subsidiaries................ (27,883) -- -- 27,883 --
-------- -------- ----- -------- --------
INCOME (LOSS) BEFORE INCOME
TAXES.......................... 12,266 44,471 (213) (27,883) 28,641
INCOME TAX PROVISION (BENEFIT)... (5,778) 16,454 (79) -- 10,597
-------- -------- ----- -------- --------
NET INCOME (LOSS)................ $ 18,044 $ 28,017 $ (134) $(27,883) $ 18,044
======== ======== ===== ======== ========
</TABLE>

F-34
<PAGE> 72

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)

<TABLE>
<CAPTION>
FALCON DRILLING GUARANTOR NONGUARANTOR
COMPANY, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES............... $ 11,726 $165,779 $ -- $ -- $177,505
COSTS AND EXPENSES:
Operating costs................ 8,495 112,497 -- -- 120,992
General and administrative
expenses.................... 471 13,400 -- -- 13,871
Depreciation................... 837 15,548 142 -- 16,527
-------- ------- ---- -------- --------
OPERATING INCOME................. 1,923 24,334 (142) -- 26,115
OTHER (INCOME) EXPENSE:
Interest expense............... 17,103 8,191 110 (7,383) 18,021
Other (income) expense, net.... (612) (8,504) -- 7,383 (1,733)
Equity in income of
subsidiaries................ (14,446) -- -- 14,446 --
-------- ------- ---- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES
AND MINORITY INTEREST.......... (122) 24,647 (252) (14,446) 9,827
INCOME TAX PROVISION (BENEFIT)... (6,468) 10,052 (103) -- 3,481
-------- ------- ---- -------- --------
INCOME (LOSS) BEFORE MINORITY
INTEREST....................... 6,346 14,595 (149) (14,446) 6,346
MINORITY INTEREST................ 1,291 -- -- -- 1,291
-------- ------- ---- -------- --------
NET INCOME (LOSS)................ $ 5,055 $ 14,595 $ (149) $(14,446) $ 5,055
======== ======= ==== ======== ========
</TABLE>

F-35
<PAGE> 73

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS)

<TABLE>
<CAPTION>
FALCON DRILLING GUARANTOR NONGUARANTOR
COMPANY, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES............... $65,876 $ 68,553 $3,982 $ -- $138,411
MANAGEMENT FEES FROM RELATED
PARTIES........................ 92 -- -- -- 92
COSTS AND EXPENSES:
Operating costs................ 47,712 44,215 3,329 -- 95,256
General and administrative
expenses.................... 10,853 1,027 7 -- 11,887
Depreciation................... 3,704 5,371 370 -- 9,445
------- ------- ------ -------- --------
OPERATING INCOME................. 3,699 17,940 276 -- 21,915
OTHER (INCOME) EXPENSE:
Interest expense............... 11,377 735 50 (116) 12,046
Other (income) expense, net.... (2,083) 688 -- 116 (1,279)
Equity in income of
subsidiaries................ (9,711) -- -- 9,711 --
------- -------- ------ - -------- --------
INCOME (LOSS) BEFORE INCOME TAXES
AND MINORITY INTEREST.......... 4,116 16,517 226 (9,711) 11,148
INCOME TAX PROVISION (BENEFIT)... (3,800) 6,937 95 -- 3,232
------- -------- ------ - -------- --------
INCOME (LOSS) BEFORE MINORITY
INTEREST....................... 7,916 9,580 131 (9,711) 7,916
MINORITY INTEREST................ (3,486) -- -- -- (3,486)
------- -------- ------ - -------- --------
NET INCOME (LOSS)................ $ 4,430 $ 9,580 $ 131 $ (9,711) $ 4,430
======= ======== ====== ======== ========
</TABLE>

F-36
<PAGE> 74

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED) (IN THOUSANDS)

<TABLE>
<CAPTION>
FALCON
DRILLING GUARANTOR NONGUARANTOR
COMPANY, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................ $ 18,044 $ 28,017 $ (134) $(27,883) $ 18,044
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities --
Equity in unconsolidated subsidiaries..... (27,883) -- -- 27,883 --
Depreciation and amortization............. 2,528 20,277 142 -- 22,947
Realized gain on the sale of assets....... -- (775) -- -- (775)
Provision for deferred income taxes....... -- 10,159 -- -- 10,159
Changes in current assets and
liabilities............................. (69,037) 52,237 262 -- (16,538)
--------- ----------- ------ -------- ----------
Net cash provided by (used in)
operating activities............... (76,348) 109,915 270 -- 33,837
--------- ----------- ------ -------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and property.......... (57,769) (115,451) -- -- (173,220)
Refunds on drillpipe, rigs and equipment, net
of deposits............................... 6,174 -- -- -- 6,174
Sale of equipment and property............... -- 1,307 -- -- 1,307
Intercompany advances........................ -- -- -- -- --
--------- ----------- ------ -------- ----------
Net cash used in investing
activities......................... (51,595) (114,144) -- -- (165,739)
--------- ----------- ------ -------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of debt............................. 172,000 -- -- -- 172,000
Proceeds from sale of stock.................. 1,078 -- -- -- 1,078
Payments of outstanding debt................. (37,000) (2,561) (270) -- (39,831)
Stock issuance costs......................... (24) -- -- -- (24)
Debt issuance costs.......................... (4,028) -- -- -- (4,028)
--------- ----------- ------ -------- ----------
Net cash provided by (used in)
financing activities............... 132,026 (2,561) (270) -- 129,195
--------- ----------- ------ -------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................. 4,083 (6,790) -- -- (2,707)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR......................................... 141 8,875 -- -- 9,016
--------- ----------- ------ -------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR....... $ 4,224 $ 2,085 $ -- $ -- $ 6,309
========= =========== ====== ======== ==========
</TABLE>

F-37
<PAGE> 75

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)

<TABLE>
<CAPTION>
FALCON
DRILLING GUARANTOR NONGUARANTOR
COMPANY, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................ $ 5,055 $ 14,595 $ (149) $(14,446) $ 5,055
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities --
Equity in unconsolidated
subsidiaries......................... (14,446) -- -- 14,446 --
Depreciation and amortization.......... 1,075 17,450 142 -- 18,667
Realized gain on the sale of assets.... -- (962) -- -- (962)
Minority interest in earnings of
subsidiary........................... 1,291 -- -- -- 1,291
Provision for deferred income taxes.... -- 3,481 -- 3,481
Foreign currency translation gain...... (857) (166) -- -- (1,023)
Changes in current assets and current
liabilities and intercompany
balances............................. (88,637) 85,339 346 -- (2,952)
-------- -------- ----- -------- --------
Net cash provided by (used in)
operating activities............ (96,519) 119,737 339 0 23,557
-------- -------- ----- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and property...... (5,939) (98,199) -- -- (104,138)
Deposits on drillpipe, rigs and
equipment.............................. (11,155) -- -- -- (11,155)
Distribution for minority owner's
interest in Blake Workover............. (1,804) -- -- (1,804)
Proceeds from sale of equipment and
property............................... -- 3,201 -- -- 3,201
Deferred costs of Venezuelan
operations............................. -- -- -- --
-------- -------- ----- -------- --------
Net cash used in investing
activities...................... (17,094) (96,802) -- -- (113,896)
-------- -------- ----- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of debt......................... 50,000 -- -- -- 50,000
Payments of outstanding debt............. (18,732) (339) -- (19,071)
Borrowings pursuant to revolving credit
facility............................... 28,000 28,000
Payments of amounts borrowed pursuant to
revolving credit facility.............. (28,000) (28,000)
Issuance of common stock................. 70,423 -- -- -- 70,423
Debt issuance costs...................... (2,125) -- -- -- (2,125)
Redemption of preferred stock............ (3,500) -- -- -- (3,500)
Dividends on preferred stock............. (1,019) -- -- -- (1,019)
-------- -------- ----- -------- --------
Net cash provided by (used in)
financing activities............ 113,779 (18,732) (339) -- 94,708
-------- -------- ----- -------- --------
EFFECT OF EXCHANGE RATES ON CASH........... (25) (196) (221)
NET INCREASE IN CASH AND CASH
EQUIVALENTS.............................. 141 4,007 0 -- 4,148
CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR..................................... -- 4,868 -- -- 4,868
-------- -------- ----- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR... $ 141 $ 8,875 $ 0 $ -- $ 9,016
======== ======== ===== ======== ========
</TABLE>

F-38
<PAGE> 76

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS)

<TABLE>
<CAPTION>
FALCON
DRILLING GUARANTOR NONGUARANTOR
COMPANY, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................ $ 4,430 $ 9,580 $ 131 (9,711) $ 4,430
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities --
Equity in unconsolidated
subsidiaries......................... (9,711) -- -- 9,711 --
Depreciation and amortization.......... 4,394 5,371 370 -- 10,135
Realized gain on the sale of assets.... (1,097) (240) -- -- (1,337)
Minority interest in earnings of
subsidiary........................... 3,486 -- -- -- 3,486
Provision for deferred income taxes.... -- 1,643 -- -- 1,643
Changes in current assets and current
liabilities and intercompany
balances............................. 12,247 (11,783) (190) -- 274
-------- -------- ----- -------- ---------
Net cash provided by (used in)
operating activities............ 13,749 4,571 311 -- 18,631
-------- -------- ----- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment................... (45,955) (4,313) (80) -- (50,348)
Purchase of FALRIG Corporation........... (25,389) -- -- -- (25,389)
Purchase of FALRIG USA................... (28,015) -- -- -- (28,015)
Proceeds from sale of equipment.......... 1,098 1,452 -- -- 2,550
-------- -------- ----- -------- ---------
Net cash provided by (used in)
investing activities............ (98,261) (2,861) (80) -- (101,202)
-------- -------- ----- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of debt......................... 125,000 -- -- -- 125,000
Payments of outstanding debt............. (34,225) (832) (231) -- (35,288)
Retirement of preferred stock............ (3,500) -- -- -- (3,500)
Debt issuance costs...................... (5,130) -- -- -- (5,130)
Dividends on preferred stock............. (351) -- -- -- (351)
-------- -------- ----- -------- ---------
Net cash provided by (used in)
financing activities............ 81,794 (832) (231) -- 80,731
-------- -------- ----- -------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.............................. (2,718) 878 -- -- (1,840)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR..................................... 2,718 3,990 -- -- 6,708
-------- -------- ----- -------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR... $ -- $ 4,868 $ -- $ -- $ 4,868
======== ======== ===== ======== =========
</TABLE>

F-39
<PAGE> 77
RIG 40 -- BARGE RIG
FOR LAKE MARACAIBO
SERVICE

The Company operates three barge rigs in Lake Maracaibo for
Maraven pursuant to five-year contracts. The Company also
owns an interest in a venture which has been operating two
units since 1992 for Maraven in Lake Maracaibo. A Lake
Maracaibo barge rig is specially designed to perform
[PHOTO OF exploration, development and workover activities in water
DRILLING RIG] depths of up to 150 feet. These rigs are towed to each
well site, where they work in a floating mode anchored to
the lakebed with an eight point mooring system. These
barge rigs were developed by modifying existing posted
barge units, including the drill floor to allow work over
an existing platform structure.

RIG 17 -- POSTED BARGE
DRILLING RIG

A barge rig is designed to perform exploration, development
and workover activities in transition zone areas,
principally in water depths of up to 20 feet in shallow
offshore areas and inland waters such as lakes, bays,
rivers and marshes. The barge rig is towed to the well
site and submerged to the bottom using a ballast system.
The rig features several deck levels which contain the
[PHOTO OF drilling equipment and crew quarters. There are two main
DRILLING RIG] types of barge configuration, posted and conventional, the
principal difference being that the posted unit features a
section of 10 to 14 foot posts between the bottom hull and
the machinery deck which elevates the rig floor and provides
the capability to work in deeper water. All but one of the
Company's 40 domestically based barge drilling rigs have a
drilling capacity of 20,000 feet or greater. The Company
also operates ten smaller barge units which are used for
workover and shallow drilling activity.
<PAGE> 78

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

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDERS OR ANY
UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................... 3
Risk Factors........................... 7
Use of Proceeds........................ 10
Price Range of Common Stock............ 11
Capitalization......................... 12
Selected Historical Financial and Other
Data................................. 13
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 15
Business............................... 20
Management............................. 28
Selling Stockholders................... 30
Underwriting........................... 31
Notice to Canadian Residents........... 33
Certain United States Tax Consequences
to Non-United States Holders......... 34
Legal Matters.......................... 36
Experts................................ 36
Available Information.................. 37
Incorporation of Certain Documents by
Reference............................ 37
Index to Financial Statements.......... F-1
- --------------------------------------------
</TABLE>

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

Falcon Drilling
[FALCON Company, Inc.
DRILLING
COMPANY, INC.
LOGO]

7,000,000 Shares
Common Stock
($.01 par value)

PROSPECTUS
CS First Boston

Donaldson, Lufkin & Jenrette
Securities Corporation

Salomon Brothers Inc

Schroder Wertheim & Co.

Simmons & Company
International

- ------------------------------------------------------
<PAGE> 79

*******************************************************************************
* INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A *
* REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED *
* WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT *
* BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE *
* REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT *
* CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR *
* SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH *
* OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR *
* QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. *
*******************************************************************************

FILED PURSUANT TO RULE 424(a)
REGISTRATION NO. 333-15707

SUBJECT TO COMPLETION, DATED NOVEMBER 13, 1996
7,000,000 Shares

[FALCON DRILLING COMPANY, INC. LOGO]Falcon Drilling Company, Inc.
Common Stock
($.01 par value)
------------------

Of the 7,000,000 shares of Common Stock, $0.01 par value ("Common Stock"), of
Falcon Drilling Company, Inc. ("Falcon" or the "Company") being offered
hereby, 3,000,000 shares are being sold by the Company and 4,000,000
shares are being sold by the Selling Stockholders. The Company will not
receive any of the proceeds from the sale of shares by the Selling
Stockholders. See "Selling Stockholders." Of the 7,000,000 shares of
Common Stock being offered, 1,050,000 shares are initially being
offered outside the United States and Canada (the "International
Shares") by the Managers (the "International Offering") and
5,950,000 shares are initially being concurrently offered in the
United States and Canada (the "U.S. Shares") by the U.S.
Underwriters (the "U.S. Offering" and, together with the
International Offering, the "Offering"). The offering
price and underwriting discounts and commissions of the
U.S. Offering and the International Offering are
identical. The Common Stock is traded on The Nasdaq
Stock Market's National Market ("NNM") under the
symbol "FLCN." On November 12, 1996 the last
reported sale price of the Common Stock on the
NNM was $32 1/8 per share. See "Price
Range of Common
Stock."
------------------

FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH
AN INVESTMENT IN THE COMMON STOCK, SEE "RISK FACTORS" ON PAGE 8.
------------------
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 AD-
EQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions Company(1) Stockholders
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share................................... $ $ $ $
Total (2)................................... $ $ $ $
</TABLE>

(1) Before deduction of expenses payable by the Company, estimated at
$ .
(2) The Company and certain of the Selling Stockholders have granted the
Managers and the U.S. Underwriters an option, exercisable by CS First Boston
Corporation for 30 days from the date of this Prospectus, to purchase a
maximum of 250,000 additional shares of Common Stock from the Company and a
maximum of 800,000 shares of additional outstanding shares from such Selling
Stockholders to cover over-allotments of shares. If the option is exercised
in full, the total Price to Public will be $ , Underwriting
Discounts and Commissions will be $ , Proceeds to Company will be
$ , and Proceeds to Selling Stockholders will be $ .

The International Shares are offered by the several Managers when, as and
if delivered to and accepted by the Managers and subject to their right to
reject orders in whole or in part. It is expected that the International Shares
will be ready for delivery on or about , 1996 against payment in
immediately available funds.

CS First Boston Donaldson, Lufkin & Jenrette
Securities Corporation

Salomon Brothers International Limited Schroders

The date of this Prospectus is November , 1996.
<PAGE> 80
PEREGRINE I --

DYNAMICALLY

POSITIONED DRILLSHIP

FOR DEEPWATER SERVICE

PHOENIX III --

CANTILEVERED MAT-

SUPPORTED JACKUP RIG

NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDERS OR ANY
UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE.

IN THIS PROSPECTUS REFERENCES TO "DOLLARS" AND "$" ARE TO UNITED STATES DOLLARS.

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

TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY..................... 4
RISK FACTORS........................... 8
USE OF PROCEEDS........................ 11
PRICE RANGE OF COMMON STOCK............ 12
CAPITALIZATION......................... 13
SELECTED HISTORICAL FINANCIAL AND OTHER
DATA................................. 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS........................... 16
BUSINESS............................... 21
MANAGEMENT............................. 29

<CAPTION>
PAGE
----
<S> <C>
SELLING STOCKHOLDERS................... 31
SUBSCRIPTION AND SALE.................. 32
CERTAIN UNITED STATES TAX CONSEQUENCES
TO NON-UNITED
STATES HOLDERS....................... 34
LEGAL MATTERS.......................... 36
EXPERTS................................ 36
AVAILABLE INFORMATION.................. 37
INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE............................ 37
INDEX TO FINANCIAL STATEMENTS.......... F-1
</TABLE>

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

3
<PAGE> 82

PROSPECTUS SUMMARY

THE COMPANY

OPERATIONS

4
<PAGE> 83

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered:
By the Company............................. 3,000,000 shares
By the Selling Stockholders................ 4,000,000 shares
Total.............................. 7,000,000 shares
Common Stock offered for sale in:
U.S. Offering.............................. 5,950,000 shares
International Offering..................... 1,050,000 shares
Total.............................. 7,000,000 shares
Common Stock to be outstanding after the 38,546,650 shares
Offering...................................
Use of proceeds.............................. To expand the Company's deepwater operations
through the acquisition of additional rigs
and the refurbishment and upgrade of certain
of its existing rigs, and to repay amounts
outstanding under the Company's working
capital facility.
Nasdaq Stock Market symbol................... "FLCN"
</TABLE>

5
<PAGE> 84

SUMMARY HISTORICAL FINANCIAL AND OTHER DATA

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
YEAR ENDED DECEMBER 31, (UNAUDITED)
--------------------------------- ---------------------
1993 1994 1995 1995 1996
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Revenues(1)........................ $61,840 $138,503 $177,505 $128,613 $220,965
Operating costs.................... 46,126 95,256 120,992 86,934 141,311
General and administrative
expenses........................ 5,520 11,887 13,871 10,327 13,191
Depreciation....................... 2,990 9,445 16,527 11,703 20,839
------- -------- -------- ------- -------
Operating income................... 7,204 21,915 26,115 19,649 45,624
Interest expense................... 2,743 12,046 18,021 13,277 18,158
Amortization of deferred costs..... 538 690 2,140 1,642 2,108
Foreign currency translation loss
(gain).......................... -- -- (1,023) -- --
Other expense (income)............. (927) (1,969) (2,850) (2,359) (3,283)
------- -------- -------- ------- -------
Income before taxes and minority
interest........................ 4,850 11,148 9,827 7,089 28,641
Income tax provision............... 952 3,232 3,481 2,319 10,597
------- -------- -------- ------- -------
Income before minority interest.... 3,898 7,916 6,346 4,770 18,044
Minority interest.................. -- 3,486 1,291 1,291 --
------- -------- -------- ------- -------
Net income......................... 3,898 4,430 5,055 3,479 18,044
Preferred stock dividends and
accretion....................... 743 565 374 304 --
------- -------- -------- ------- -------
Net income applicable to common
shares.......................... $ 3,155 $ 3,865 $ 4,681 $ 3,175 $ 18,044
======= ======== ======== ======= =======
Net income per common share........ $ 0.14 $ 0.14 $ 0.16 $ 0.11 $ 0.50
======= ======== ======== ======= =======
Shares used to compute net income
per common share................ 21,899 26,880 29,593 28,243 35,991
======= ======== ======== ======= =======
OTHER FINANCIAL DATA:
EBITDA(2).......................... $11,121 $ 33,329 $ 45,492 $ 33,711 $ 69,746
</TABLE>

<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30,
1996
--------------
<S> <C>
(IN THOUSANDS)
(UNAUDITED)
BALANCE SHEET DATA:
Cash and cash equivalents.................................................... $ 6,309
Equipment and property, net.................................................. 417,456
Total assets................................................................. 513,724
Debt due within one year..................................................... 3,124
Long-term debt............................................................... 312,405
Total stockholders' equity................................................... 134,615
</TABLE>

6
<PAGE> 85

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------- ------------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
RIG ACTIVITY DATA -- AVERAGE FOR PERIOD:
Domestic barge drilling rigs(3) --
Rigs available for service................ 14.5 17.0 18.4 18.3 21.5
Utilization rate of rigs available for
service................................ 84% 69% 77% 81% 88%
Average day rate(4)....................... $ 9,076 $11,974 $12,667 $12,635 $13,304
Domestic barge workover rigs(5) --
Rigs available for service................ -- 6.4 7.0 7.0 8.4
Utilization rate of rigs available for
service................................ -- 58% 59% 58% 59%
Average date rate(4)...................... -- $ 8,768 $ 8,858 $ 8,967 $ 8,921
Domestic offshore rigs --
Rigs available for service(6)(7).......... -- 12.0 12.5 11.6 15.4
Utilization rate of rigs available for
service................................ -- 85% 79% 78% 96%
Average day rate(4)....................... -- $17,015 $15,060 $14,484 $19,144
International shallow-water rigs --
Rigs available for service(6)(8).......... 1.0 0.7 4.0 4.0 4.7
Utilization rate of rigs available for
service................................ 99% 99% 96% 99% 87%
Average day rate(4)....................... $17,600 $21,162 $19,553 $19,550 $20,223
Deepwater rigs --
Rigs available for service................ -- -- -- -- 1.3
Utilization rate of rigs available for
service................................ -- -- -- -- 94%
Average day rate(4)....................... -- -- -- -- $52,666
</TABLE>

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

(3) Includes three rigs purchased in September 1994, which Falcon previously
operated under a charter arrangement. Includes one rig leased to Falcon
commencing in March 1996.

(4) Rates reflected are base day rates which do not include additional charges
for marine and other equipment commonly furnished in connection with certain
of the drilling contracts.

(6) Rig 203, a submersible rig that was mobilized to Venezuela in November 1995,
is included in domestic offshore rigs until that time and in international
shallow-water rigs thereafter.

(7) Includes one rig operated under charter to Falcon through June 1995 and one
rig operated under charter to Falcon since August 1996.

(8) Excludes two rigs operated in Venezuela by a joint venture in which Falcon
has a 37.5% interest.

7
<PAGE> 86

RISK FACTORS

Prospective investors should consider carefully the following factors, in
addition to the other information contained or incorporated by reference in this
Prospectus.

FORWARD-LOOKING INFORMATION

DEPENDENCE ON OIL AND GAS INDUSTRY; INDUSTRY CONDITIONS

LEVERAGE AND LIQUIDITY

ENTRY INTO DEEPWATER DRILLING MARKET

8
<PAGE> 87

RISK OF UPGRADE AND REFURBISHMENT PROJECTS

FOREIGN OPERATIONS

RIG FLEET AGE

OPERATIONAL RISKS AND INSURANCE

9
<PAGE> 88

GOVERNMENT REGULATION

RELIANCE ON MANAGEMENT

COMPETITION

CONTROL BY CERTAIN STOCKHOLDERS

10
<PAGE> 89

RESTRICTIONS ON FOREIGN OWNERSHIP

CERTAIN PROVISIONS RELATING TO CHANGES IN CONTROL

USE OF PROCEEDS

The Company will not receive any of the proceeds from the sale of the
Common Stock being sold by Selling Stockholders.

11
<PAGE> 90

PRICE RANGE OF COMMON STOCK

12
<PAGE> 91

CAPITALIZATION

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

13
<PAGE> 92

SELECTED HISTORICAL FINANCIAL AND OTHER DATA

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
YEAR ENDED DECEMBER 31, (UNAUDITED)
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Revenues(1)..................... $ 9,085 $ 9,673 $61,840 $138,503 $177,505 $128,613 $220,965
Operating costs................. 10,224 9,674 46,126 95,256 120,992 86,934 141,311
General and administrative
expenses..................... 1,385 1,625 5,520 11,887 13,871 10,327 13,191
Depreciation.................... 1,263 1,696 2,990 9,445 16,527 11,703 20,839
------- ------- ------- -------- -------- ------- -------
Operating income (loss)......... (3,787) (3,322) 7,204 21,915 26,115 19,649 45,624
Interest expense................ 986 1,880 2,743 12,046 18,021 13,277 18,158
Amortization of deferred
costs........................ 1,124 158 538 690 2,140 1,642 2,108
Foreign currency translation
loss (gain).................. -- -- -- -- (1,023) -- --
Other expense (income).......... 62 -- (927) (1,969) (2,850) (2,359) (3,283)
------- ------- ------- -------- -------- ------- -------
Income (loss) before taxes...... (5,959) (5,360) 4,850 11,148 9,827 7,089 28,641
Income tax provision............ -- -- 952 3,232 3,481 2,319 10,587
------- ------- ------- -------- -------- ------- -------
Income (loss) before minority
interest..................... (5,959) (5,360) 3,898 7,916 6,346 4,770 18,044
Minority interest............... -- -- -- 3,486 1,291 1,291 --
------- ------- ------- -------- -------- ------- -------
Net income (loss)............... (5,959) (5,360) 3,898 4,430 5,055 3,479 18,044
Preferred stock dividends and
accretion.................... -- -- 743 565 374 304 --
------- ------- ------- -------- -------- ------- -------
Net income (loss) applicable to
common shares................ $(5,959) $(5,360) $ 3,155 $ 3,865 $ 4,681 $ 3,175 $ 18,044
======= ======= ======= ======== ======== ======= =======
Net income (loss) per common
share(2)..................... -- $ (0.46) $ 0.14 $ 0.14 $ 0.16 $ 0.11 $ 0.50
======= ======= ======= ======== ======== ======= =======
Shares used to compute net
income (loss) per common
share........................ -- 11,695 21,899 26,880 29,593 28,243 35,991
======= ======= ======= ======== ======== ======= =======
OTHER FINANCIAL DATA:
EBITDA(3)....................... $(2,586) $(1,626) $11,121 $ 33,329 $ 45,492 $ 33,711 $ 69,746
</TABLE>

<TABLE>
<CAPTION>
AS OF
AS OF DECEMBER 31, SEPTEMBER
--------------------------------------------------------- 30,
1991 1992 1993 1994 1995 1996
------- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS) (UNAUDITED)
BALANCE SHEET DATA:
Cash and cash equivalents............ $ 563 $ 572 $ 6,708 $ 4,868 $ 9,016 $ 6,309
Equipment and property, net.......... 21,310 36,124 72,655 170,823 265,608 417,456
Total assets......................... 24,801 42,515 109,994 224,146 341,023 513,724
Long-term debt and other
obligations....................... 16,299 35,536 46,438 145,524 179,362 312,405
Total stockholders' equity........... 6,334 974 31,011 34,087 115,516 134,615
</TABLE>

14
<PAGE> 93

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------- ------------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
RIG ACTIVITY DATA -- AVERAGE FOR PERIOD:
Domestic barge drilling rigs(4) --
Rigs available for service................. 14.5 17.0 18.4 18.3 21.5
Utilization rate of rigs available for
service................................. 84% 69% 77% 81% 88%
Average day rate(5)........................ $ 9,076 $11,974 $12,667 $12,635 $13,304
Domestic barge workover rigs(6) --
Rigs available for service................. -- 6.4 7.0 7.0 8.4
Utilization rate of rigs available for
service................................. -- 58% 59% 58% 59%
Average date rate(5)....................... -- $ 8,768 $ 8,858 $ 8,967 $ 8,921
Domestic offshore rigs --
Rigs available for service(7)(8)........... -- 12.0 12.5 11.6 15.4
Utilization rate of rigs available for
service................................. -- 85% 79% 78% 96%
Average day rate(5)........................ -- $17,015 $15,060 $14,484 $19,144
International shallow-water rigs --
Rigs available for service(7)(9)........... 1.0 0.7 4.0 4.0 4.7
Utilization rate of rigs available for
service................................. 99% 99% 96% 99% 87%
Average day rate(5)........................ $17,600 $21,162 $19,553 $19,550 $20,223
Deepwater rigs --
Rigs available for service................. -- -- -- -- 1.3
Utilization rate of rigs available for
service................................. -- -- -- -- 94%
Average day rate(5)........................ -- -- -- -- $52,666
</TABLE>

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

(4) Includes three barge rigs purchased in September 1994, which Falcon
previously operated under a charter arrangement. Includes one rig leased to
Falcon commencing in March 1996.

(5) Rates reflected are base day rates which do not include additional charges
for marine and other equipment commonly furnished in connection with
certain of the drilling contracts.

(7) Rig 203, a submersible rig that was mobilized to Venezuela in November 1995,
is included in domestic offshore rigs until that time and in international
shallow-water rigs thereafter.

(8) Includes one rig operated under charter to Falcon through June 1995 and one
rig operated under charter to Falcon since August 1996.

(9) Excludes two rigs operated in Venezuela by a joint venture in which Falcon
has a 37.5% interest.

15
<PAGE> 94

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

GENERAL

CHANGES IN FINANCIAL CONDITION

1) The purchase of two dynamically positioned drillships, the upgrade of a
third drillship and the acquisition of spares for approximately $119
million.

16
<PAGE> 95

2) The purchase of one jackup drilling rig, one barge drilling rig and one
submersible drilling rig for approximately $28 million.

3) The upgrade and activation of eight barge drilling and workover rigs for
approximately $11 million.

4) The charter to the Company of one jackup drilling rig and three barge
drilling and workover rigs.

5) The placement of $120 million of senior unsecured notes in March 1996.

RESULTS OF OPERATIONS

Comparative data relating to the Company's revenues and operating expenses
by major areas of operations are listed below.

For the Nine-Month Periods Ended September 30, 1995 and 1996

17
<PAGE> 96

Interest Expense. Interest expense increased by $4.9 million due to higher
levels of debt, including the issuance of $120 million in senior notes in March
1996.

Amortization of Deferred Costs. Amortization of deferred costs increased by
approximately $500,000 as a result of costs associated with the Company's senior
debt placement in March 1996.

Other Income and Expenses. Other income for both periods was approximately
the same.

For the Years Ended December 31, 1993, 1994 and 1995

18
<PAGE> 97

LIQUIDITY AND CAPITAL RESOURCES

19
<PAGE> 98

20
<PAGE> 99

BUSINESS

Falcon provides contract drilling and workover services for the domestic
and international oil and gas industry. Falcon owns and operates the largest
fleet of barge drilling rigs in the world and the largest fleet of mat-supported
offshore drilling rigs in the U.S. Gulf of Mexico. Falcon also owns and operates
three dynamically positioned drillships and has contracted to acquire two
conventionally moored drillships for use in the deepwater drilling market.

STRATEGY

DOMESTIC BARGE DRILLING OPERATIONS

21
<PAGE> 100

The following tables provide certain information as of October 31, 1996,
regarding Falcon's domestic barge drilling fleet:

<TABLE>
<CAPTION>
MAXIMUM
DRILLING
HORSEPOWER YEAR DEPTH
RIG DRILLING EQUIPMENT/MAIN POWER RATING BUILT (FEET) CUSTOMER(1)
- --- ----------------------------------------------- ----- ---- ------ ----------------
<C> <S> <C> <C> <C> <C>
CONVENTIONAL BARGE RIGS FOR DEEP DRILLING
1 Skytop Brewster/Caterpillar.................... 2,000 1980 20,000 LLOG
3 Mid-Continent/Caterpillar(2)................... 3,000 1981 25,000 Shell
4 Oilwell/Caterpillar............................ 3,000 1981 25,000 Cold Stacked
6 Mid-Continent/Caterpillar...................... 3,000 1981 25,000 Cold Stacked
15 National/EMD................................... 2,000 1981 25,000 Goodrich
21 Oilwell/Caterpillar............................ 1,500 1982.. 15,000 Unocal
25 Continental Emsco/Caterpillar.................. 3,000 1976 25,000 Cold Stacked
28 Continental Emsco/Caterpillar.................. 3,000 1979 30,000 Plains
29 Continental Emsco/Caterpillar.................. 3,000 1980 30,000 Shell
30 Continental Emsco/Caterpillar.................. 3,000 1981 30,000 Texaco
31 Continental Emsco/Caterpillar.................. 3,000 1981 30,000 Texaco
32 Continental Emsco/Caterpillar.................. 3,000 1982 30,000 Stone
37 National/EMD................................... 3,000 1965 20,000 Cold Stacked
38 National/EMD................................... 3,000 1965 20,000 Cold Stacked
POSTED BARGE RIGS FOR DEEP DRILLING
2 Skytop Brewster/Caterpillar.................... 2,000 1980 20,000 Cold Stacked
5 National/Caterpillar........................... 3,000 1981 25,000 Cold Stacked
7 Oilwell/Caterpillar............................ 2,000 1978 25,000 Flores & Rucks
8 Oilwell/Caterpillar............................ 2,000 1978 25,000 Cold Stacked
9 Oilwell/Caterpillar............................ 2,000 1981 25,000 Shell
10 Oilwell/Caterpillar............................ 2,000 1981 25,000 Exxon
16 National/EMD................................... 3,000 1981 30,000 Texaco
17 National/EMD................................... 3,000 1982 30,000 Shell
27 Continental Emsco/Caterpillar.................. 3,000 1978 30,000 Cold Stacked
39 National/EMD................................... 3,000 1970 30,000 Cold Stacked
41 National/EMD................................... 3,000 1981 30,000 Cold Stacked
44 Oilwell/Superior............................... 3,000 1979 30,000 Cold Stacked
45 Oilwell/Superior............................... 3,000 1979 30,000 Cold Stacked
46 Oilwell/EMD.................................... 3,000 1981 30,000 Cold Stacked
47 Oilwell/EMD.................................... 3,000 1982 30,000 OTV
48 Gardner Denver/Caterpillar..................... 3,000 1982 30,000 UPRC
49 Oilwell/Caterpillar............................ 3,000 1980 30,000 Hunt
52 Oilwell/Caterpillar............................ 2,000 1981 25,000 Available(3)
54 National/EMD................................... 3,000 1970 30,000 Fina
55 Ideco/EMD...................................... 3,000 1981 30,000 Mobil
56 National/Caterpillar........................... 2,000 1973 25,000 Enserch
57 National/Caterpillar........................... 2,000 1975 25,000 Cold Stacked
61 Mid-Continent/EMD.............................. 3,000 1978 30,000 Cliffs Oil & Gas
62 Mid-Continent/EMD.............................. 3,000 1978 30,000 Amerada Hess
63 Mid-Continent/EMD.............................. 3,000 1978 30,000 Shell
64 Mid-Continent/EMD.............................. 3,000 1979 30,000 Phillips
</TABLE>

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

(2) This rig is leased to Falcon.

(3) This rig was recently demobilized from Venezuela and is expected to resume
working in the fourth quarter of 1996.

22
<PAGE> 101

DOMESTIC BARGE WORKOVER AND SHALLOW DRILLING OPERATIONS

The following table provides certain information regarding Falcon's fleet
of barge workover and shallow drilling rigs as of October 31, 1996:

<TABLE>
<CAPTION>
MAST MAXIMUM
CAPACITY YEAR DRILLING/WORKOVER
RIG DRAWWORKS (POUNDS) BUILT DEPTH (FEET) CUSTOMER
- ---- --------- --------- ----- ----------------- --------
<C> <S> <C> <C> <C> <C>
SDI Ideco H-30.......................... 250,000 1990(1) NA/15,000 Equinox
6 Ideco H-35.......................... 450,000 1978 NA/20,000 Badger
7 Gardner Denver 800.................. 800,000 1972 10,000/25,000 Apache
14 Skytop Brewster N95(2).............. 1,000,000 1978 18,000/30,000 Forman
16 Mid-Continent U36A.................. 550,000 1979 10,000/25,000 LL&E
18 Skytop Brewster N75................. 530,000 1980 12,000/25,000 Badger
19 National 80B........................ 750,000 1996(1) 14,000/25,000 Yuma
22 Wilson 75........................... 369,000 1991(1) NA/20,000 Texoil
23 Mid-Continent U-914(3).............. 1,000,000 1995(1) 14,000/25,000 Vintage
24 National 110M(4).................... 760,000 1978 14,000/25,000 Apache
</TABLE>

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

(1) These rigs were reconstructed on the date indicated using the existing hull,
existing equipment, or both.

(2) This rig is a posted barge capable of deep drilling operations, but is
currently marketed for workover activity in areas requiring a posted barge.

(3) This rig is leased to Falcon through December 1998.

(4) This rig is leased to Falcon through March 2000.

23
<PAGE> 102

Falcon's workover fleet averaged 4.2 working rigs at an average day rate of
$8,858 during 1995 and 4.9 working rigs at an average day rate of $8,921 during
the nine months ended September 30, 1996.

INTERNATIONAL SHALLOW-WATER OPERATIONS

DOMESTIC OFFSHORE OPERATIONS

24
<PAGE> 103

The following table provides certain information regarding Falcon's
domestic offshore rigs as of October 31, 1996:

<TABLE>
<CAPTION>
MAXIMUM MAXIMUM
WATER DRILLING YEAR
RIG RIG DESCRIPTION DEPTH (FEET) DEPTH (FEET) BUILT CUSTOMER
--- --------------- ------------ ------------ ----- --------
<S> <C> <C> <C> <C> <C>
SLOT-TYPE MAT-SUPPORTED JACKUP RIGS

CANTILEVERED MAT-SUPPORTED JACKUP RIGS(2)

CANTILEVERED SUBMERSIBLE RIGS

FALRIG 77 Donhaiser Marine 85 30,000 1983 Flores & Rucks
FALRIG 78 Donhaiser Marine 85 30,000 1984 Seneca Resources
</TABLE>

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

(1) This rig is leased to Falcon.

(2) All of these rigs are equipped with top drive systems.

25
<PAGE> 104

<TABLE>
<CAPTION>
MAT-SUPPORTED
RIGS WITH
MINIMUM 200
BOTTOM-SUPPORTED FOOT WATER
RIGS(L) DEPTH
----------------- ------------------
CONTRACTOR TOTAL IN-SERVICE TOTAL IN-SERVICE
---------- --- ---------- ----- ----------
<S> <C> <C> <C> <C>
Noble Drilling.................................... 23 18 10 9
Ensco............................................. 21 20 -- --
Falcon............................................ 17 17 15 15
Rowan Companies................................... 14 14 -- --
Diamond Offshore.................................. 12 11 3 3
Global Marine..................................... 11 11 -- --
Marine Drilling................................... 12 12 8 8
Cliffs Drilling................................... 8 7 1 1
Other contractors................................. 10 10 1 1
--- --- -- --
Total................................... 128 120 38 37
=== === == ==
</TABLE>

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

(1) Excludes bottom-supported units rated strictly for workover.

DEEPWATER OPERATIONS

At October 31, 1996, Falcon's active fleet of deepwater rigs consisted of
three dynamically positioned drillships.

The Peregrine II was acquired in February 1996. Falcon assumed operation of
the rig, which has been working in offshore Brazilian waters pursuant to a
contract with Petrobras that runs through August 1998. This unit has been
working in Brazil since 1986. The rig is a Gusto design Pelican class drillship
built in 1979 and rated to drill in up to 3,300 feet of water.

26
<PAGE> 105

CONTRACTS AND CUSTOMERS

27
<PAGE> 106

that do not own rig equipment but who assume the risks associated with
operations conducted on a fixed price basis. Historically, most domestic
drilling contracts have been on a well-by-well basis, while contracts in the
international markets typically are offered on a term basis. Workover contracts
are also typically on a well-by-well basis and are shorter in duration than
drilling contracts.

28
<PAGE> 107

MANAGEMENT

The following table sets forth certain information with respect to the
directors and principal executive officers of Falcon:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Steven A. Webster............. 45 Chairman of the Board and Chief Executive
Officer
Bernie W. Stewart............. 52 Chief Operating Officer
Robert H. Reeves, Jr. ........ 59 Executive Vice President
Robert F. Fulton.............. 45 Executive Vice President and Chief Financial
Officer
Leighton E. Moss.............. 45 Vice President and General Counsel
Steven R. Meheen.............. 40 Vice President -- Deepwater Operations
Michael E. Blake.............. 38 President of Falcon Workover
Rodney W. Meisetschlaeger..... 43 Vice President -- Offshore Operations
Lloyd M. Pellegrin............ 49 Vice President -- Administration
Don P. Rodney................. 49 Vice President -- Finance
Purnendu Chatterjee........... 45 Director
Douglas A. P. Hamilton........ 50 Director
Kenneth H. Hannan, Jr. ....... 55 Director
James R. Latimer, III......... 50 Director
William R. Ziegler............ 54 Director
</TABLE>

29
<PAGE> 108

30
<PAGE> 109

SELLING STOCKHOLDERS

The following table sets forth information regarding beneficial ownership
of Common Stock by the Selling Stockholders before and after the Offering:

<TABLE>
<CAPTION>
NUMBER OF AFTER OFFERING
SHARES NUMBER OF -------------------------
OWNED PRIOR SHARES NUMBER OF
TO THE BEING SHARES
SELLING STOCKHOLDER OFFERING OFFERED OWNED PERCENT(1)
------------------- ----------- --------- --------- ----------
<S> <C> <C> <C> <C>
Open Society Institute.................. 2,000,000 2,000,000 -- --
Douglas A. P. Hamilton.................. 1,282,570(2) 1,113,500 169,070 *
Furzedown Trading Limited............... 700,000(3) 700,000 -- --
Roberto Marsella........................ 45,000 45,000 -- --
Roger B. Vincent........................ 48,000 45,000 3,000 *
Stephen M. Dearholt..................... 60,000 30,000 30,000 *
Donald Taylor........................... 30,000 30,000 -- --
Michael Keehner......................... 15,000 15,000 -- --
Kenneth C. Huff......................... 12,000 12,000 -- --
Michael E. Porter....................... 15,000 2,500 12,500 *
Katherine K. Stickney................... 3,000 2,000 1,000 *
Anna N. Stickney........................ 3,000 2,000 1,000 *
Albert Stickney III..................... 3,000 1,500 1,500 *
Susan K. Stickney....................... 3,000 1,500 1,500 *
---------
Total......................... 4,000,000
=========
</TABLE>

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

* Less than one percent.

(1) Based upon a total of 38,546,650 shares of Common Stock outstanding.

(2) Includes 82,500 shares of Common Stock issuable upon exercise of stock
options under the 1992 Stock Option Plan held by Mr. Hamilton. Mr. Hamilton
is a director of Falcon.

31
<PAGE> 110

SUBSCRIPTION AND SALE

The institutions named below (the "Managers") have, pursuant to a
Subscription Agreement dated , 1996 (the "Subscription
Agreement"), severally and not jointly, agreed with the Company and the Selling
Stockholders to subscribe and pay for the following respective numbers of
International Shares as set forth opposite their names:

<TABLE>
<CAPTION>
NUMBER OF
INTERNATIONAL
MANAGERS SHARES
-------- ---------
<S> <C>
CS First Boston Limited...................................................
Donaldson, Lufkin & Jenrette Securities Corporation.......................
Salomon Brothers International Limited....................................
J. Henry Schroder & Co. Limited...........................................

---------
Total........................................................... 1,050,000
=========
</TABLE>

The Subscription Agreement provides that the obligations of the Managers
are such that, subject to certain conditions precedent, the Managers will be
obligated to purchase all the International Shares offered hereby (other than
those shares covered by the over-allotment option described below) if any are
purchased. The Subscription Agreement provides that, in the event of a default
by a Manager, in certain circumstances the purchase commitments of the
non-defaulting Managers may be increased or the Subscription Agreement may be
terminated.

The Company and the Selling Stockholders have entered into an Underwriting
Agreement with the U.S. Underwriters of the U.S. Offering (the "U.S.
Underwriters") providing for the concurrent offer and sale of the U.S. Shares
outside the United States and Canada. The closing of the U.S. Offering is a
condition to the closing of the International Offering and vice versa.

The Company and certain Selling Stockholders have granted to the Managers
and the U.S. Underwriters an option, exercisable by CS First Boston Corporation,
expiring at the close of business on the 30th day after the date of this
Prospectus, to purchase up to 1,050,000 additional shares at the initial public
offering price, less the underwriting discounts and commissions, all as set
forth on the cover page of this Prospectus. Such option may be exercised only to
cover over-allotments in the sale of the shares of Common Stock offered hereby.
To the extent that this option to purchase is exercised, each Manager and each
U.S. Underwriter will become obligated, subject to certain conditions, to
purchase approximately the same percentage of additional shares being sold to
the Managers and the U.S. Underwriters as the number of International Shares set
forth next to such Manager's name in the preceding table and as the number set
forth next to such U.S. Underwriter's name in the corresponding table in the
Prospectus relating to the U.S. Offering bears to the sum of the total number of
shares of Common Stock in such tables.

32
<PAGE> 111

The Company and the Selling Stockholders have been advised by CS First
Boston Limited, on behalf of the Managers, that the Managers propose to offer
the International Shares outside the United States and Canada to the public
initially at the public offering price set forth on the cover page of this
Prospectus and, through the Managers, to certain dealers at such price less a
concession of $ per share, and that the Managers and such dealers may
allow a discount of $ per share on sales to certain other dealers. After
the initial public offering, the public offering price and concession and
discount to dealers may be changed by the Managers.

The offering price and the aggregate underwriting discounts and commissions
per share and per share commission and re-allowance to dealers for the
International Offering and the concurrent U.S. Offering will be identical.
Pursuant to an Agreement between the U.S. Underwriters and Managers (the
"Intersyndicate Agreement") relating to the Common Stock Offering, changes in
the offering price, the aggregate underwriting discounts and commissions per
share and per share commission and reallowance to dealers will be made only upon
the mutual agreement of CS First Boston Limited, on behalf of the Managers, and
CS First Boston Corporation, as representative of the U.S. Underwriters.

Pursuant to the Intersyndicate Agreement, each of the Managers has agreed
that, as part of the distribution of the International Shares and subject to
certain exceptions, it has not offered or sold, and will not offer or sell,
directly or indirectly, any shares of Common Stock or distribute any prospectus
relating to the Common Stock in the United States or Canada or to any other
dealer who does not so agree. Each of the U.S. Underwriters has agreed, as part
of the distribution of the U.S. Shares and subject to certain exceptions, it has
not offered or sold, and will not offer or sell, directly or indirectly, any
shares of Common Stock or distribute any prospectus relating to the Common Stock
to any person outside the United States or Canada or to any other dealer who
does not so agree. The foregoing limitations do not apply to stabilization
transactions or to transactions between the Managers and the U.S. Underwriters
pursuant to the Intersyndicate Agreement. As used herein, "United States" means
the United States of America (including the States and the District of
Columbia), its territories, possessions and other areas subject to its
jurisdiction. "Canada" means Canada, its provinces, territories, possessions and
other areas subject to its jurisdiction, and an offer or sale shall be in the
United States or Canada if it is made to (i) any individual resident in the
United States or Canada or (ii) any corporation, partnership, pension,
profit-sharing or other trust or other entity (including any such entity acting
as an investment adviser with discretionary authority) whose office most
directly involved with the purchase is located in the United States or Canada.

Pursuant to the Intersyndicate Agreement, sales may be made between the
Managers and the U.S. Underwriters of such number of shares of Common Stock as
may be mutually agreed upon. The price of any shares so sold will be the public
offering price less such amount agreed upon by CS First Boston Limited, on
behalf of the Managers, and CS First Boston Corporation, as representative of
the U.S. Underwriters, but not exceeding the selling concession applicable to
such shares. To the extent there are sales between the Managers and the U.S.
Underwriters pursuant to the Intersyndicate Agreement, the number of shares of
Common Stock initially available for sale by the Managers or by the U.S.
Underwriters may be more or less than the amount appearing on the cover page of
the Prospectus. Neither the Managers nor the U.S. Underwriters are obligated to
purchase from the other any unsold shares of Common Stock.

Each of the Managers and the U.S. Underwriters severally represents and
agrees that: (i) it has not offered or sold and prior to the date six months
after the date of issue of the Common Stock will not offer or sell any Common
Stock to persons in the United Kingdom except to persons whose ordinary
activities involve them in acquiring, holding, managing or disposing of
investments (as principal or agent) for the purposes of their businesses or
otherwise in circumstances which have not resulted and will not result in an
offer to the public in the United Kingdom within the meaning of the Public
Offers of Securities Regulations 1995; (ii) it has complied and will comply with
all applicable provisions of the Financial Services Act 1986 with respect to
anything done by it in relation to the Common Stock in, from or otherwise
involving the United Kingdom; and (iii) it has only issued or passed on and will
only issue or pass on in the United Kingdom any document received by it in
connection with the issue of the Common Stock to a person who is of a kind
described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996 or is a person to whom such document may
otherwise lawfully be issued or passed on.

33
<PAGE> 112

The Company and the Selling Stockholders have agreed to indemnify the
Managers and the U.S. Underwriters against certain liabilities, including civil
liabilities under the Securities Act, or to contribute to payments that the
Managers and the U.S. Underwriters may be required to make in respect thereof.

Donaldson, Lufkin & Jenrette Securities Corporation received customary fees
in connection with the placement of the Company's senior fixed rate notes and
senior subordinated notes, and in connection with the Company's two prior public
offerings of Common Stock. Salomon Brothers Inc received customary fees in
connection with two placements of the Company's senior fixed rate notes, and in
connection with the Company's two prior public offerings of Common Stock.
Simmons & Company International received customary fees in connection with the
Company's two prior public offerings of Common Stock.

CERTAIN UNITED STATES TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS

34
<PAGE> 113

CONSEQUENCES THAT MAY ARISE UNDER THE LAWS OF ANY U.S. STATE, LOCAL OR OTHER
U.S. OR NON-U.S. TAXING JURISDICTION.

DIVIDENDS

Under current U.S. Treasury regulations, dividends paid to an address in a
foreign country are presumed, absent actual knowledge to the contrary, to be
paid to a resident of such country for purposes of the withholding discussed
above and for purposes of determining the applicability of a tax treaty rate.
Under proposed U.S. Treasury regulations, not currently in effect, however, a
Non-U.S. Holder of Common Stock who wishes to claim the benefit of an applicable
treaty rate would be required to satisfy applicable certification and other
requirements, which would include the requirement that the Non-U.S. Holder file
a form which contains the holder's name and address and an official statement by
the competent authority in the foreign country (as designated in the applicable
tax treaty) attesting to the holder's status as a resident thereof.

DISPOSITION OF COMMON STOCK

FEDERAL ESTATE TAXES

U.S. INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX

35
<PAGE> 114

to the tax authorities in the country in which the Non-U.S. Holder resides. The
United States backup withholding tax (which generally is a withholding tax
imposed at the rate of 31% on certain payments to persons that fail to furnish
the information required under the United States information reporting
requirements) generally will not apply to dividends paid on the Common Stock to
a Non-U.S. Holder at an address outside the United States.

LEGAL MATTERS

The legality of the shares of Common Stock offered hereby is being passed
upon for Falcon by Parson & Brown, New York, New York. William R. Ziegler, a
partner of Parson & Brown, is a member of the board of directors of Falcon and
owns beneficially an aggregate of 2,221,300 shares of Common Stock. See
"Management." In addition, an associate of Parson & Brown is the Secretary of
Falcon and holds options granted pursuant to Falcon's 1992 Stock Option Plan to
acquire an aggregate of 15,000 shares of Common Stock. Certain legal matters in
connection with the sale of the shares of Common Stock offered hereby will be
passed upon for the Managers and U.S. Underwriters by Andrews & Kurth L.L.P.,
Houston, Texas.

EXPERTS

36
<PAGE> 115

AVAILABLE INFORMATION

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

37
<PAGE> 116

INDEX TO FINANCIAL STATEMENTS

F-1
<PAGE> 117

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Falcon Drilling Company, Inc.:

ARTHUR ANDERSEN LLP

Houston, Texas
March 19, 1996

F-2
<PAGE> 118

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 1994 AND 1995
AND SEPTEMBER 30, 1996 (UNAUDITED)

<TABLE>
<CAPTION>
SEPTEMBER
DECEMBER 31, 30,
------------------- 1996
1994 1995 (UNAUDITED)
-------- -------- -----------
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 4,868 $ 9,016 $ 6,309
Accounts receivable, net of allowance for doubtful
accounts of $463, $375 and $625 at December 31, 1994
and 1995 and September 30, 1996, respectively.......... 31,795 38,000 68,834
Other current assets...................................... 5,577 4,888 3,080
-------- -------- -----------
Total current assets.............................. 42,240 51,904 78,223
EQUIPMENT AND PROPERTY:
Drilling rigs and equipment............................... 185,818 295,004 464,635
Vessels and other equipment............................... 2,197 3,903 6,106
-------- -------- -----------
188,015 298,907 470,741
Less -- Accumulated depreciation.......................... (17,192) (33,299) (53,285)
-------- -------- -----------
170,823 265,608 417,456
OTHER ASSETS................................................ 10,483 23,511 18,045
INVESTMENT IN UNCONSOLIDATED JOINT VENTURES................. 600 -- --
-------- -------- -----------
Total assets...................................... $224,146 $341,023 $ 513,724
======== ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities.................. $ 22,747 $ 31,326 $ 42,576
Income tax payable........................................ 95 141 166
Debt and other obligations due within one year............ 17,021 3,999 3,124
-------- -------- -----------
Total current liabilities......................... 39,863 35,466 45,866
LONG-TERM DEBT AND OTHER OBLIGATIONS, less current
portion................................................... 141,379 179,362 312,405
DEFERRED INCOME TAXES....................................... 3,315 10,679 20,838
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST IN CONSOLIDATED
SUBSIDIARIES.............................................. 1,357 -- --
PREFERRED STOCK, Series B redeemable, no par value, 500, 0,
and 0 shares designated, issued and outstanding on
December 31, 1994 and 1995 and September 30, 1996,
respectively.............................................. 4,145 -- --
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 100,000,000 shares
authorized, 15,922,500, 35,244,384 and 35,465,317
shares issued and outstanding at December 31, 1994 and
1995 and September 30, 1996, respectively.............. 159 352 355
Preferred stock, no par value, 526,489 shares of all
Series authorized, 25,989 shares of Series A
designated. Each of the 25,989 shares outstanding was
converted into 300 shares of common stock on August 2,
1995................................................... 14,328 -- --
Additional paid-in capital................................ 21,970 112,853 113,905
Accumulated earnings (deficit)............................ (2,370) 2,311 20,355
-------- -------- -----------
Total stockholders' equity........................ 34,087 115,516 134,615
-------- -------- -----------
Total liabilities and stockholders' equity........ $224,146 $341,023 $ 513,724
======== ======== =========
</TABLE>

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

F-3
<PAGE> 119

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1995 (UNAUDITED)
AND SEPTEMBER 30, 1996 (UNAUDITED)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
YEAR ENDED DECEMBER 31, (UNAUDITED)
------------------------------- --------------------
1993 1994 1995 1995 1996
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
OPERATING REVENUES....................... $58,853 $138,411 $177,505 $128,613 $220,965
MANAGEMENT FEES FROM RELATED PARTIES..... 2,987 92 -- -- --
COSTS AND EXPENSES:
Operating costs........................ 46,126 95,256 120,992 86,934 141,311
General and administrative expenses.... 5,520 11,887 13,871 10,327 13,191
Depreciation........................... 2,990 9,445 16,527 11,703 20,839
------- -------- -------- ------- -------
OPERATING INCOME......................... 7,204 21,915 26,115 19,649 45,624
OTHER (INCOME) EXPENSE:
Interest expense....................... 2,743 12,046 18,021 13,277 18,158
Amortization of deferred costs......... 538 690 2,140 1,642 2,108
Foreign currency translation gain...... -- -- (1,023) -- --
Other income, net...................... (927) (1,969) (2,850) (2,359) (3,283)
------- -------- -------- ------- -------
INCOME BEFORE INCOME TAXES AND MINORITY
INTEREST............................... 4,850 11,148 9,827 7,089 28,641
INCOME TAX PROVISION..................... 952 3,232 3,481 2,319 10,597
------- -------- -------- ------- -------
INCOME BEFORE MINORITY
INTEREST............................... 3,898 7,916 6,346 4,770 18,044
MINORITY INTEREST........................ -- 3,486 1,291 1,291 --
------- -------- -------- ------- -------
NET INCOME............................... 3,898 4,430 5,055 3,479 18,044
PREFERRED STOCK DIVIDENDS AND
ACCRETION.............................. 743 565 374 304 --
------- -------- -------- ------- -------
NET INCOME APPLICABLE TO COMMON SHARES... $ 3,155 $ 3,865 $ 4,681 $ 3,175 $ 18,044
======= ======== ======== ======= =======
NET INCOME PER COMMON SHARE.............. $ 0.14 $ 0.14 $ 0.16 $ 0.11 $ 0.50
======= ======== ======== ======= =======
</TABLE>

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

F-4
<PAGE> 120

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 (UNAUDITED)
AND SEPTEMBER 30, 1996 (UNAUDITED)

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

F-5
<PAGE> 121

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 (UNAUDITED)
AND SEPTEMBER 30, 1996 (UNAUDITED)

<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
YEAR ENDED DECEMBER 31, (UNAUDITED)
---------------------------------- --------------------
1993 1994 1995 1995 1996
-------- --------- --------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid............................................... $ 2,378 $ 6,925 $ 17,488 $ 16,607 $ 24,760
Income taxes paid........................................... -- 2,125 -- 593 30
Purchase of FALRIG Offshore, Inc., net of cash acquired --
Equipment and property.................................... -- (36,005) -- -- --
Accounts receivable, net.................................. -- (3,850) -- -- --
Other current assets...................................... -- (85) -- -- --
Accounts payable and accrued liabilities.................. -- 1,247 -- -- --
Income taxes payable...................................... -- 1,584 -- -- --
Deferred income taxes..................................... -- 11,720 -- -- --
-------- --------- --------- -------- --------
Net cash used for acquisition......................... -- (25,389) -- -- --
Noncash investing and financing activities --
Warrants exercised for shares of common stock and debt
cancellation.............................................. 145 4 -- -- --
Issuance of Series A and B preferred stock in satisfaction
of advance from a stockholder (Chatterjee Interests)...... 15,000 -- -- -- --
Issuance of common stock for debt cancellation.............. -- 605 -- -- --
Issuance of common stock for 49% interest in FALRIG Offshore
(USA), L.P. .............................................. 12,409 -- -- -- --
Debt issuance for acquisition of partnership interest....... 2,200 -- -- -- --
Obligation for rig acquisition recorded for financial
statement purposes........................................ 5,000 -- -- -- --
Debt issuance for rig acquisition........................... -- 11,700 -- -- --
Issuance of common stock for purchase of 50% of Blake
Workover and one barge rig................................ -- -- 6,325 -- --
</TABLE>

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

F-6
<PAGE> 122

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED)

<TABLE>
<CAPTION>
SERIES A
CONVERTIBLE
COMMON STOCK PREFERRED STOCK ADDITIONAL ACCUMULATED
-------------------- ------------------- PAID-IN EARNINGS
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT)
---------- ------ ------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
BALANCE, January 1, 1993........................ 11,695,200 $117 -- $ -- $ 7,421 $(6,564)
NET INCOME...................................... -- -- -- -- -- 3,898
ISSUANCE OF PREFERRED STOCK, net of offering
expenses of $672.............................. -- -- 25,989 14,328 -- --
ISSUANCE OF COMMON STOCK FOR PARTNERSHIP
INTEREST...................................... 3,600,000 36 -- -- 12,373 --
ISSUANCE OF COMMON STOCK FOR EXTENSION OF
PURCHASE OPTION............................... 150,000 2 -- -- 1,426 (1,428)
WARRANTS EXERCISED FOR SHARES OF COMMON STOCK
AND DEBT CANCELLATION......................... 99,900 -- -- -- 145 --
DIVIDENDS AND ACCRETION OF REDEEMABLE PREFERRED
STOCK......................................... -- -- -- -- -- (743)
---------- ---- ------- -------- -------- -------
BALANCE, December 31, 1993...................... 15,545,100 155 25,989 14,328 21,365 (4,837)
NET INCOME...................................... -- -- -- -- -- 4,430
ISSUANCE OF COMMON STOCK FOR CONVERSION OF
SUBORDINATED DEBT............................. 212,700 2 -- -- 603 --
WARRANTS EXERCISED FOR SHARES OF COMMON STOCK... 164,700 2 -- -- 2 --
EXCESS OF COST OF ASSETS ACQUIRED FROM
SHAREHOLDERS IN EXCESS OF SHAREHOLDER'S
HISTORICAL NET BOOK VALUE..................... -- -- -- -- -- (1,398)
DIVIDENDS AND ACCRETION OF REDEEMABLE PREFERRED
STOCK......................................... -- -- -- -- -- (565)
---------- ---- ------- -------- -------- -------
BALANCE, December 31, 1994...................... 15,922,500 159 25,989 14,328 21,970 (2,370)
NET INCOME...................................... -- -- -- -- -- 5,055
CONVERSION OF SERIES A CONVERTIBLE PREFERRED
STOCK......................................... 7,796,700 78 (25,989) (14,328) 14,250 --
ISSUANCE OF COMMON STOCK........................ 7,425,000 75 -- -- 65,225 --
ISSUANCE OF COMMON STOCK FOR PURCHASE OF
BUSINESS AND ASSETS........................... 702,778 7 -- -- 6,318 --
ISSUANCE OF COMMON STOCK FOR EXERCISE OF
WARRANTS AND OPTIONS.......................... 3,397,406 33 -- -- 5,090 --
DIVIDENDS AND ACCRETION OF PREFERRED STOCK...... -- -- -- -- -- (374)
---------- ---- ------- -------- -------- -------
BALANCE, December 31, 1995...................... 35,244,384 $352 -- $ -- $112,853 $ 2,311
NET INCOME (unaudited).......................... -- -- -- -- -- 18,044
ISSUANCE OF COMMON STOCK FOR EXERCISE OF
WARRANTS AND OPTIONS (unaudited).............. 220,933 3 -- -- 1,052 --
---------- ---- ------- -------- -------- -------
BALANCE, September 30, 1996 (unaudited)......... 35,465,317 $355 -- -- $113,905 $20,355
========== ==== ======= ======== ======== =======
</TABLE>

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

F-7
<PAGE> 123

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1995
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)

1. BUSINESS, FORMATION OF COMPANY AND ACQUISITIONS AND SIGNIFICANT
ACCOUNTING POLICIES:

BUSINESS

FORMATION OF FALCON AND ACQUISITIONS

Falcon Rig Investment Corporation

The FALRIG Partnership

F-8
<PAGE> 124

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The FALRIG Corporation

Condor

F-9
<PAGE> 125

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Blake Workover

F-10
<PAGE> 126

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

remaining 50% in Blake Workover and certain crewboats and tugboats used in the
business of Blake Workover had occurred on January 1, 1994 (in thousands, except
per share amounts):

FOI and Turnstone

Dynamically positioned drillships, the Peregrine I, II and III

F-11
<PAGE> 127

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Additional Expansion of Rig Fleets

In June 1995, Falcon sold a stacked jackup rig resulting in a gain of
approximately $751,000.

F-12
<PAGE> 128

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In November 1995, Falcon purchased the semi-submersible rig Pacesetter III
for a purchase price of $2 million.

In January 1996, Falcon purchased the barge drilling rig Gus Androes for a
purchase price of $6 million.

In March 1996, Falcon purchased the submersible rig Real Explorer (renamed
FALRIG 78) for a purchase price of $8 million.

SIGNIFICANT ACCOUNTING POLICIES

Interim Financial Information

Use of Estimates

Cash and Cash Equivalents

For purposes of reporting cash flows, all liquid investments with
maturities at date of purchase of three months or less are considered cash
equivalents.

Equipment and Property

F-13
<PAGE> 129

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Deferred Costs

Revenue Recognition

Net Income Per Common Share

Foreign Currency Translation

F-14
<PAGE> 130

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Reclassification

Certain prior year amounts have been reclassified to conform to the current
year presentation.

New Accounting Standards

2. INVESTMENT IN FOREIGN JOINT VENTURE:

3. SEGMENT, CONCENTRATION OF CREDIT RISKS AND MAJOR CUSTOMERS:

F-15
<PAGE> 131

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

$33 million, including $647,000 in capitalized interest, were incurred in
connection with the deployment of these rigs to Venezuela.

In November 1995, Falcon completed a refurbishment project at a cost of
approximately $5.9 million on Rig 203 and mobilized this rig to Venezuela to
begin service under a well-to-well contract.

Revenues, operating income and identifiable assets of the United States,
Tunisian and Venezuelan operations are as follows (in thousands):

4. INCOME TAXES:

F-16
<PAGE> 132

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The components of the net deferred tax liability are as follows (in
thousands):

The components of the income tax provision are as follows (in thousands):

F-17
<PAGE> 133

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A reconciliation of federal statutory and effective income tax rates for
each of the three years ended December 31, 1995, is shown below.

F-18
<PAGE> 134

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. LONG-TERM DEBT AND OTHER OBLIGATIONS:

Falcon had the following debt outstanding as of December 31, 1994 and 1995
and at September 30, 1996 (in thousands):

F-19
<PAGE> 135

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Fixed Rate Notes and Floating Rate Notes are collectively referred to
as the Senior Notes. The Senior Notes are guaranteed by certain of Falcon's
subsidiaries (see Note 11).

F-20
<PAGE> 136

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

F-21
<PAGE> 137

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The annual maturities of the debt outstanding at December 31, 1995 are
$3,999,000 in 1996, $7,057,000 in 1997, $3,085,000 in 1998, $2,220,000 in 1999,
$2,000,000 in 2000, and $165,000,000 thereafter.

Falcon estimates the fair value of its debt obligations to be $190,033,000
compared to a historical value of $183,361,000, both as of December 31, 1995.

6. STOCKHOLDERS' EQUITY:

COMMON STOCK

PREFERRED STOCK

F-22
<PAGE> 138

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

WARRANTS

F-23
<PAGE> 139

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

STOCK OPTION PLANS

F-24
<PAGE> 140

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

STOCKHOLDERS' AGREEMENT

7. COMMITMENTS AND CONTINGENCIES:

SELF INSURANCE

EMPLOYMENT AGREEMENTS

401(K) PLAN

OPERATING LEASES

F-25
<PAGE> 141

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

under unaffiliated noncancelable operating leases with lease terms in excess of
one year as of December 31, 1995, are as follows:

COMMITMENTS RELATING TO CERTAIN RIGS

F-26
<PAGE> 142

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

OIL AND GAS EXPLORATION JOINT VENTURE

PROPOSED EQUITY OFFERING

LIQUIDITY

F-27
<PAGE> 143

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Falcon's markets. There can therefore be no assurance that these resources will
continue to be sufficient to fund Falcon's cash requirements.

8. QUARTERLY FINANCIAL DATA (UNAUDITED):

Summarized quarterly financial data for the four quarters ended, December
31, 1994 and 1995, is as follows (in thousands, except per share amounts):

9. ADDITIONAL BALANCE SHEET AND STATEMENT OF OPERATIONS INFORMATION:

Other current assets include the following (in thousands):

Other assets include the following (in thousands):

F-28
<PAGE> 144

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Accounts payable and accrued liabilities include the following (in
thousands):

Other income (expense) includes the following items (in thousands):

10. RELATED PARTY TRANSACTIONS:

11. SUPPLEMENTAL GUARANTOR INFORMATION:

F-29
<PAGE> 145

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

F-30
<PAGE> 146

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CONDENSED CONSOLIDATING BALANCE SHEET

SEPTEMBER 30, 1996
(UNAUDITED) (IN THOUSANDS)

F-31
<PAGE> 147

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CONDENSED CONSOLIDATING BALANCE SHEET

DECEMBER 31, 1995
(IN THOUSANDS)

<TABLE>
<CAPTION>
FALCON DRILLING GUARANTOR NONGUARANTOR
ASSETS COMPANY, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents....... $ 141 $ 8,875 $ -- $ -- $ 9,016
Accounts receivable, net........ 11,953 26,047 -- -- 38,000
Other current assets............ 2,524 2,364 -- -- 4,888
-------- -------- ------ --------- --------
Total current assets.... 14,618 37,286 -- -- 51,904
EQUIPMENT AND PROPERTY, net....... 18,598 244,313 2,697 -- 265,608
OTHER NONCURRENT
ASSETS.......................... 137 23,374 -- 23,511
INVESTMENT IN SUBSIDIARIES AND
JOINT VENTURES, net............. 268,118 -- -- (268,118) --
-------- -------- ------ --------- --------
Total assets............ $ 301,471 $304,973 $2,697 $ (268,118) $341,023
======== ======== ====== ========= ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued
liabilities.................. $ 8,985 $ 22,482 $ -- $ -- $ 31,467
Debt and other obligations due
within one year.............. 1,969 1,666 364 -- 3,999
-------- -------- ------ --------- --------
Total current
liabilities........... 10,954 24,148 364 -- 35,466
LONG-TERM DEBT, net............... 175,000 3,334 1,028 -- 179,362
DEFERRED INCOME TAXES............. 10,679 10,679
MINORITY INTEREST.................
PREFERRED STOCK...................
STOCKHOLDERS' EQUITY:
Partnership capital............. -- 56,672 -- (56,672) --
Common stock.................... 352 -- -- -- 352
Additional paid-in capital...... 112,854 191,921 1,603 (193,525) 112,853
Accumulated earnings
(deficit).................... 2,311 18,219 (298) (17,921) 2,311
-------- -------- ------ --------- --------
Total stockholders'
equity................ 115,517 266,812 1,305 (268,118) 115,516
-------- -------- ------ --------- --------
Total liabilities and
stockholders'
equity................ $ 301,471 $304,973 $2,697 $ (268,118) $341,023
======== ======== ====== ========= ========
</TABLE>

F-32
<PAGE> 148

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1994
(IN THOUSANDS)

F-33
<PAGE> 149

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED) (IN THOUSANDS)

<TABLE>
<CAPTION>
FALCON DRILLING GUARANTOR NONGUARANTOR
COMPANY, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES............... $ 10,217 $210,748 $ -- $ -- $220,965
COSTS AND EXPENSES:
Operating costs................ 6,877 134,434 -- -- 141,311
General and administrative
expenses.................... 404 12,787 -- -- 13,191
Depreciation................... 565 20,132 142 -- 20,839
-------- -------- ----- -------- --------
OPERATING INCOME................. 2,371 43,395 (142) -- 45,624
OTHER (INCOME) EXPENSE:
Interest expense............... 17,842 245 71 -- 18,158
Other (income) expense, net.... 146 (1,321) -- -- (1,175)
Equity in income of
subsidiaries................ (27,883) -- -- 27,883 --
-------- -------- ----- -------- --------
INCOME (LOSS) BEFORE INCOME
TAXES.......................... 12,266 44,471 (213) (27,883) 28,641
INCOME TAX PROVISION (BENEFIT)... (5,778) 16,454 (79) -- 10,597
-------- -------- ----- -------- --------
NET INCOME (LOSS)................ $ 18,044 $ 28,017 $ (134) $(27,883) $ 18,044
======== ======== ===== ======== ========
</TABLE>

F-34
<PAGE> 150

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)

<TABLE>
<CAPTION>
FALCON DRILLING GUARANTOR NONGUARANTOR
COMPANY, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES............... $ 11,726 $165,779 $ -- $ -- $177,505
COSTS AND EXPENSES:
Operating costs................ 8,495 112,497 -- -- 120,992
General and administrative
expenses.................... 471 13,400 -- -- 13,871
Depreciation................... 837 15,548 142 -- 16,527
-------- ------- ---- -------- --------
OPERATING INCOME................. 1,923 24,334 (142) -- 26,115
OTHER (INCOME) EXPENSE:
Interest expense............... 17,103 8,191 110 (7,383) 18,021
Other (income) expense, net.... (612) (8,504) -- 7,383 (1,733)
Equity in income of
subsidiaries................ (14,446) -- -- 14,446 --
-------- ------- ---- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES
AND MINORITY INTEREST.......... (122) 24,647 (252) (14,446) 9,827
INCOME TAX PROVISION (BENEFIT)... (6,468) 10,052 (103) -- 3,481
-------- ------- ---- -------- --------
INCOME (LOSS) BEFORE MINORITY
INTEREST....................... 6,346 14,595 (149) (14,446) 6,346
MINORITY INTEREST................ 1,291 -- -- -- 1,291
-------- ------- ---- -------- --------
NET INCOME (LOSS)................ $ 5,055 $ 14,595 $ (149) $(14,446) $ 5,055
======== ======= ==== ======== ========
</TABLE>

F-35
<PAGE> 151

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS)

<TABLE>
<CAPTION>
FALCON DRILLING GUARANTOR NONGUARANTOR
COMPANY, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES............... $65,876 $ 68,553 $3,982 $ -- $138,411
MANAGEMENT FEES FROM RELATED
PARTIES........................ 92 -- -- -- 92
COSTS AND EXPENSES:
Operating costs................ 47,712 44,215 3,329 -- 95,256
General and administrative
expenses.................... 10,853 1,027 7 -- 11,887
Depreciation................... 3,704 5,371 370 -- 9,445
--------------- ------------ ------------ ------------ ------------
OPERATING INCOME................. 3,699 17,940 276 -- 21,915
OTHER (INCOME) EXPENSE:
Interest expense............... 11,377 735 50 (116) 12,046
Other (income) expense, net.... (2,083) 688 -- 116 (1,279)
Equity in income of
subsidiaries................ (9,711) -- -- 9,711 --
--------------- ------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES
AND MINORITY INTEREST.......... 4,116 16,517 226 (9,711) 11,148
INCOME TAX PROVISION (BENEFIT)... (3,800) 6,937 95 -- 3,232
--------------- ------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE MINORITY
INTEREST....................... 7,916 9,580 131 (9,711) 7,916
MINORITY INTEREST................ (3,486) -- -- -- (3,486)
--------------- ------------ ------------ ------------ ------------
NET INCOME (LOSS)................ $ 4,430 $ 9,580 $ 131 $ (9,711) $ 4,430
=========== ========= ========== ========= =========
</TABLE>

F-36
<PAGE> 152

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED) (IN THOUSANDS)

<TABLE>
<CAPTION>
FALCON
DRILLING GUARANTOR NONGUARANTOR
COMPANY, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................ $ 18,044 $ 28,017 $ (134) $(27,883) $ 18,044
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities --
Equity in unconsolidated subsidiaries..... (27,883) -- -- 27,883 --
Depreciation and amortization............. 2,528 20,277 142 -- 22,947
Realized gain on the sale of assets....... -- (775) -- -- (775)
Provision for deferred income taxes....... -- 10,159 -- -- 10,159
Changes in current assets and
liabilities............................. (69,037) 52,237 262 -- (16,538)
------------- ------------ ------------ ------------ ------------
Net cash provided by (used in)
operating activities............... (76,348) 109,915 270 -- 33,837
------------- ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and property.......... (57,769) (115,451) -- -- (173,220)
Refunds on drillpipe, rigs and equipment, net
of deposits............................... 6,174 -- -- -- 6,174
Sale of equipment and property............... -- 1,307 -- -- 1,307
Intercompany advances........................ -- -- -- -- --
------------- ------------ ------------ ------------ ------------
Net cash used in investing
activities......................... (51,595) (114,144) -- -- (165,739)
------------- ------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of debt............................. 172,000 -- -- -- 172,000
Proceeds from sale of stock.................. 1,078 -- -- -- 1,078
Payments of outstanding debt................. (37,000) (2,561) (270) -- (39,831)
Stock issuance costs......................... (24) -- -- -- (24)
Debt issuance costs.......................... (4,028) -- -- -- (4,028)
------------- ------------ ------------ ------------ ------------
Net cash provided by (used in)
financing activities............... 132,026 (2,561) (270) -- 129,195
------------- ------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................. 4,083 (6,790) -- -- (2,707)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR......................................... 141 8,875 -- -- 9,016
------------- ------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR....... $ 4,224 $ 2,085 $ -- $ -- $ 6,309
========== ========= ========== ========= =========
</TABLE>

F-37
<PAGE> 153

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)

<TABLE>
<CAPTION>
FALCON
DRILLING GUARANTOR NONGUARANTOR
COMPANY, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................ $ 5,055 $ 14,595 $ (149) $(14,446) $ 5,055
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities --
Equity in unconsolidated
subsidiaries......................... (14,446) -- -- 14,446 --
Depreciation and amortization.......... 1,075 17,450 142 -- 18,667
Realized gain on the sale of assets.... -- (962) -- -- (962)
Minority interest in earnings of
subsidiary........................... 1,291 -- -- -- 1,291
Provision for deferred income taxes.... -- 3,481 -- 3,481
Foreign currency translation gain...... (857) (166) -- -- (1,023)
Changes in current assets and current
liabilities and intercompany
balances............................. (88,637) 85,339 346 -- (2,952)
-------- -------- ----- -------- --------
Net cash provided by (used in)
operating activities............ (96,519) 119,737 339 0 23,557
-------- -------- ----- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and property...... (5,939) (98,199) -- -- (104,138)
Deposits on drillpipe, rigs and
equipment.............................. (11,155) -- -- -- (11,155)
Distribution for minority owner's
interest in Blake Workover............. (1,804) -- -- (1,804)
Proceeds from sale of equipment and
property............................... -- 3,201 -- -- 3,201
Deferred costs of Venezuelan
operations............................. -- -- -- --
-------- -------- ----- -------- --------
Net cash used in investing
activities...................... (17,094) (96,802) -- -- (113,896)
-------- -------- ----- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of debt......................... 50,000 -- -- -- 50,000
Payments of outstanding debt............. (18,732) (339) -- (19,071)
Borrowings pursuant to revolving credit
facility............................... 28,000 28,000
Payments of amounts borrowed pursuant to
revolving credit facility.............. (28,000) (28,000)
Issuance of common stock................. 70,423 -- -- -- 70,423
Debt issuance costs...................... (2,125) -- -- -- (2,125)
Redemption of preferred stock............ (3,500) -- -- -- (3,500)
Dividends on preferred stock............. (1,019) -- -- -- (1,019)
-------- -------- ----- -------- --------
Net cash provided by (used in)
financing activities............ 113,779 (18,732) (339) -- 94,708
-------- -------- ----- -------- --------
EFFECT OF EXCHANGE RATES ON CASH........... (25) (196) (221)
NET INCREASE IN CASH AND CASH
EQUIVALENTS.............................. 141 4,007 0 -- 4,148
CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR..................................... -- 4,868 -- -- 4,868
-------- -------- ----- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR... $ 141 $ 8,875 $ 0 $ -- $ 9,016
======== ======== ===== ======== ========
</TABLE>

F-38
<PAGE> 154

FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS)

<TABLE>
<CAPTION>
FALCON
DRILLING GUARANTOR NONGUARANTOR
COMPANY, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................ $ 4,430 $ 9,580 $ 131 (9,711) $ 4,430
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities --
Equity in unconsolidated
subsidiaries......................... (9,711) -- -- 9,711 --
Depreciation and amortization.......... 4,394 5,371 370 -- 10,135
Realized gain on the sale of assets.... (1,097) (240) -- -- (1,337)
Minority interest in earnings of
subsidiary........................... 3,486 -- -- -- 3,486
Provision for deferred income taxes.... -- 1,643 -- -- 1,643
Changes in current assets and current
liabilities and intercompany
balances............................. 12,247 (11,783) (190) -- 274
-------- -------- ----- -------- ---------
Net cash provided by (used in)
operating activities............ 13,749 4,571 311 -- 18,631
-------- -------- ----- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment................... (45,955) (4,313) (80) -- (50,348)
Purchase of FALRIG Corporation........... (25,389) -- -- -- (25,389)
Purchase of FALRIG USA................... (28,015) -- -- -- (28,015)
Proceeds from sale of equipment.......... 1,098 1,452 -- -- 2,550
-------- -------- ----- -------- ---------
Net cash provided by (used in)
investing activities............ (98,261) (2,861) (80) -- (101,202)
-------- -------- ----- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of debt......................... 125,000 -- -- -- 125,000
Payments of outstanding debt............. (34,225) (832) (231) -- (35,288)
Retirement of preferred stock............ (3,500) -- -- -- (3,500)
Debt issuance costs...................... (5,130) -- -- -- (5,130)
Dividends on preferred stock............. (351) -- -- -- (351)
-------- -------- ----- -------- ---------
Net cash provided by (used in)
financing activities............ 81,794 (832) (231) -- 80,731
-------- -------- ----- -------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.............................. (2,718) 878 -- -- (1,840)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR..................................... 2,718 3,990 -- -- 6,708
-------- -------- ----- -------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR... $ -- $ 4,868 $ -- $ -- $ 4,868
======== ======== ===== ======== =========
</TABLE>

F-39
<PAGE> 155
RIG 40 -- BARGE RIG
FOR LAKE MARACAIBO
SERVICE

RIG 17 -- POSTED BARGE
DRILLING RIG