DIAMOND OFFSHORE DRILLING INC, 10-Q, 1998-11-03

DIAMOND OFFSHORE DRILLING INC
10-Q, 1998-11-03
DRILLING OIL & GAS WELLS

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<PAGE> 1

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

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

For the quarterly period ended September 30, 1998

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

For the transition period from __________ to __________

Commission file number 1-13926

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

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

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

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

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

<TABLE>
<S> <C> <C>
As of October 30, 1998 Common stock, $0.01 par value per share 135,815,535 shares
</TABLE>

<PAGE> 2

DIAMOND OFFSHORE DRILLING, INC.

TABLE OF CONTENTS FOR FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 1998

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

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

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

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

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS......................................................10

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....................19

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

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

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS......................................20

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

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

ITEM 5. OTHER INFORMATION..............................................................20

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...............................................20

SIGNATURES.......................................................................................21

EXHIBIT INDEX....................................................................................22
</TABLE>

2
<PAGE> 3

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES

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

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
---------------- --------------
1998 1997
---------------- --------------
ASSETS (Unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents.................................................. $ 122,647 $ 102,958
Short-term investments..................................................... 443,187 363,137
Accounts receivable ....................................................... 235,881 205,589
Rig inventory and supplies................................................. 35,257 33,714
Prepaid expenses and other ................................................ 28,915 13,377
---------------- ------------
Total current assets..................................... 865,887 718,775

DRILLING AND OTHER PROPERTY AND EQUIPMENT, LESS
ACCUMULATED DEPRECIATION................................................. 1,490,549 1,451,741
GOODWILL, NET OF ACCUMULATED AMORTIZATION ...................................... 113,770 118,623
LONG-TERM INVESTMENTS .......................................................... 25,275 --
OTHER ASSETS ................................................................... 9,989 9,422
---------------- ------------
Total assets............................................. $ 2,505,470 $ 2,298,561
================ ============

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................................................... $ 53,092 $ 57,557
Accrued liabilities ....................................................... 53,838 48,935
Taxes payable ............................................................. 35,548 24,653
---------------- ------------
Total current liabilities................................ 142,478 131,145

LONG-TERM DEBT.................................................................. 400,000 400,000
DEFERRED TAX LIABILITY.......................................................... 240,795 209,513
OTHER LIABILITIES .............................................................. 29,893 22,376
---------------- ------------
Total liabilities ....................................... 813,166 763,034
---------------- ------------
COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
Preferred stock (par value $0.01, 25,000,000 shares authorized, none
issued and outstanding) ............................................... -- --
Common stock (par value $0.01, 500,000,000 shares authorized, 139,333,635
issued, 135,815,535 outstanding at September 30, 1998 and 139,309,948
shares issued and outstanding at December 31, 1997) ................... 1,393 1,393
Additional paid-in capital ................................................ 1,302,806 1,302,712
Retained earnings ......................................................... 482,190 233,350
Accumulated other comprehensive losses .................................... (5,359) (1,928)
Treasury stock, at cost (3,518,100 shares) ................................ (88,726) --
---------------- ------------
Total stockholders' equity............................... 1,692,304 1,535,527
---------------- ------------
Total liabilities and stockholders' equity............... $ 2,505,470 $ 2,298,561
================ ============

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>

3
<PAGE> 4

DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES

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

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES ............................................................... $ 315,786 $ 250,497 $ 925,372 $ 683,764

OPERATING EXPENSES:
Contract drilling ............................................... 116,503 99,907 357,939 287,867
Depreciation and amortization ................................... 33,305 28,546 98,051 81,588
General and administrative ...................................... 5,984 5,045 18,975 14,845
Gain on sale of assets .......................................... (255) (14) (337) (84)
----------- ----------- ----------- -----------
Total operating expenses ................................. 155,537 133,484 474,628 384,216
----------- ----------- ----------- -----------

OPERATING INCOME ....................................................... 160,249 117,013 450,744 299,548

OTHER INCOME (EXPENSE):
Interest income ................................................. 8,207 5,245 22,234 13,637
Interest expense ................................................ (3,615) (3,591) (11,239) (6,940)
Other, net .................................................. 2,379 671 2,559 496
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAX EXPENSE ....................................... 167,220 119,338 464,298 306,741

INCOME TAX EXPENSE ..................................................... (58,518) (41,507) (163,209) (107,446)
----------- ----------- ----------- -----------

NET INCOME ............................................................. $ 108,702 $ 77,831 $ 301,089 $ 199,295
=========== =========== =========== ===========

EARNINGS PER SHARE:
Basic ........................................................... $ 0.79 $ 0.56 $ 2.17 $ 1.44
=========== =========== =========== ===========
Diluted ......................................................... $ 0.75 $ 0.54 $ 2.07 $ 1.39
=========== =========== =========== ===========

WEIGHTED AVERAGE SHARES OUTSTANDING:
Common shares ................................................... 137,652 139,303 138,762 138,308
Dilutive potential common shares ................................ 9,876 9,876 9,876 8,610
----------- ----------- ----------- -----------
Total weighted average shares outstanding.................. 147,528 149,179 148,638 146,918
=========== =========== =========== ===========

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>

4
<PAGE> 5

DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>

NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ................................................... $ 301,089 $ 199,295
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization .............................. 98,051 81,588
Gain on sale of assets ..................................... (337) (84)
Gain on sale of investment securities ...................... (2,342) (1,362)
Deferred tax provision ..................................... 37,778 33,739
Accretion of discounts on investment securities ............ (11,051) (9,421)
Amortization of debt issuance costs ........................ 389 330
Changes in operating assets and liabilities:
Accounts receivable ........................................ (28,930) (44,606)
Rig inventory and supplies and other current assets ........ (17,081) (11,461)
Other assets, non-current .................................. (956) 813
Accounts payable and accrued liabilities ................... 243 4,051
Taxes payable .............................................. 10,992 (11,560)
Other liabilities, non-current ............................. 2,242 3,114
Other, net ................................................... (981) (744)
------------ ------------
Net cash provided by operating activities .............. 389,106 243,692
------------ ------------

INVESTING ACTIVITIES:
Capital expenditures ......................................... (132,600) (214,496)
Acquisition of drilling rigs and related equipment ........... -- (80,952)
Proceeds from sale of assets ................................. 930 2,360
Net change in short-term investment securities ............... (392,798) (302,889)
Net change in investments through repurchase agreements ...... 350,000 --
Purchases of long-term investment securities ................. (556,123) (124,242)
Proceeds from sales of long-term investment securities ....... 501,860 125,082
------------ ------------
Net cash used in investing activities .................. (228,731) (595,137)
------------ ------------

FINANCING ACTIVITIES:
Reacquisition of common stock ................................ (88,726) --
Payment of dividends.......................................... (52,249) (9,751)
Issuance of common stock ..................................... -- 82,282
Debt repayments .............................................. -- (73,000)
Issuance of convertible subordinated notes ................... -- 400,000
Debt issuance costs .......................................... -- (6,062)
Proceeds from stock options exercised ........................ 289 656
------------ ------------
Net cash (used in) provided by financing activities .... (140,686) 394,125
------------ ------------

NET CHANGE IN CASH AND CASH EQUIVALENTS ............................ 19,689 42,680
Cash and cash equivalents, beginning of period ............... 102,958 28,180
------------ ------------
Cash and cash equivalents, end of period ..................... $ 122,647 $ 70,860
============ ============

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>

5
<PAGE> 6

DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. GENERAL

The consolidated financial statements of Diamond Offshore Drilling,
Inc. and subsidiaries (the "Company") should be read in conjunction with the
Annual Report on Form 10-K for the year ended December 31, 1997 (File No.
1-13926).

Interim Financial Information

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

Cash and Cash Equivalents

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

Investments

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

Supplementary Cash Flow Information

Cash payments made for interest on long-term debt, including
commitment fees, during the nine months ended September 30, 1998 and 1997
totaled $15.0 million and $8.7 million, respectively. Cash payments made for
income taxes during the nine months ended September 30, 1998 and 1997 totaled
$114.4 million and $92.0 million, respectively.

Capitalized Interest

Interest cost for construction and upgrade of qualifying assets is
capitalized. During the quarter and nine months ended September 30, 1998, the
Company incurred interest cost, including amortization of debt issuance costs,
of $3.8 million and $11.6 million, respectively. Interest cost capitalized
during the quarter and nine months ended September 30, 1998 was $0.3 million
and $0.4 million, respectively. Interest cost of $3.9 million and $10.7 million
was incurred during the quarter and nine months ended September 30, 1997,
respectively. Interest cost capitalized during the quarter and nine months
ended September 30, 1997 was $0.4 million and $3.8 million, respectively.

6
<PAGE> 7

Goodwill

Goodwill from the merger with Arethusa (Off-Shore) Limited
("Arethusa") is amortized on a straight-line basis over 20 years. Amortization
expense totaled $1.6 million and $4.8 million for the quarter and nine months
ended September 30, 1998, respectively. For the quarter and nine months ended
September 30, 1997, amortization expense totaled $1.7 million and $4.9 million,
respectively.

Debt Issuance Costs

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

Treasury Stock

In July 1998, the Board of Directors authorized the purchase of shares
of the Company's common stock in the open market, from time to time, depending
on market conditions. The purchase of treasury stock is accounted for using the
cost method which reports the cost of the shares acquired in "Treasury stock" as
a deduction from stockholders' equity on the Consolidated Balance Sheets. During
the quarter and nine months ended September 30, 1998, the Company purchased 3.5
million shares of its common stock at an aggregate cost of $88.7 million, or
$25.22 per share. The effect on the calculations of net income per share was not
material.

Comprehensive Income

In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income." Comprehensive income is the
change in equity of a business enterprise during a period from transactions and
other events and circumstances from nonowner sources. It includes all changes
in equity during a period except those resulting from investments by owners and
distributions to owners. For the quarter and nine months ended September 30,
1998, comprehensive income totaled $104.9 million and $296.1 million,
respectively. For the quarter and nine months ended September 30, 1997
comprehensive income totaled $75.3 million and $197.0 million, respectively.
Comprehensive income includes net income, foreign currency translation losses,
and unrealized holding gains and losses on investments.

Net Income Per Share

In February 1997, the FASB issued SFAS No. 128, "Earnings per Share,"
which requires dual presentation of basic and diluted earnings per share for
entities with complex capital structures. Basic earnings per share excludes
dilution and is computed by dividing net income by the weighted average number
of shares of common stock outstanding for the period. Diluted earnings per
share reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
Diluted earnings per share was calculated by dividing net income, adjusted to
eliminate the after-tax effect of interest expense, by the weighted average
number of shares of common stock outstanding and the weighted average number of
shares issuable assuming full conversion of the convertible subordinated notes
as of the issuance date, February 4, 1997.

Weighted average shares outstanding and all per share amounts included
herein for all periods presented have been restated to include the retroactive
effect of the July 1997 two-for-one stock split in the form of a stock
dividend.

Use of Estimates in the Preparation of Financial Statements

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

<PAGE> 8

Reclassifications

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

2. INVESTMENTS

Investments classified as available for sale at September 30, 1998
were as follows:

<TABLE>
<CAPTION>
-------------------------------------
UNREALIZED MARKET
COST GAIN (LOSS) VALUE
-------------------------------------
(in thousands)
<S> <C> <C> <C>
Debt securities issued by the U.S. Treasury
Due within one year ....................... $ 435,299 $ 688 $ 435,987
Due after one year through five years ..... 24,977 298 25,275

Equity securities .............................. 12,117 (4,917) 7,200
---------- ---------- ----------

Total ..................................... $ 472,393 $ (3,931) $ 468,462
========== ========== ==========
</TABLE>

During the nine months ended September 30, 1998, certain equity and
debt securities due within one year were sold for proceeds of $2.4 million and
$208.8 million, respectively. The resulting realized gain was not material.
Certain debt securities due after one year were sold for proceeds of $501.9
million during the nine months ended September 30, 1998, with a resulting
realized gain of $2.0 million. Also during the nine months ended September 30,
1998, investments through repurchase agreements with third parties were sold
for their contracted amounts totaling $350.0 million.

3. DRILLING AND OTHER PROPERTY AND EQUIPMENT

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

SEPTEMBER 30, DECEMBER 31,
------------------------------
1998 1997
------------- -------------
(in thousands)
<S> <C> <C>
Drilling rigs and
equipment ................. $ 1,883,072 $ 1,781,107
Construction work in
progress .................. 44,154 17,696
Land and buildings .......... 13,574 12,552
Office equipment and
other ..................... 13,106 10,551
------------- -------------
Cost ................... 1,953,906 1,821,906
Less accumulated
depreciation .............. (463,357) (370,165)
------------- -------------
Total ............. $ 1,490,549 $ 1,451,741
============= =============
</TABLE>

4. GOODWILL

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

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
----------------------------
1998 1997
----------------------------
(in thousands)
<S> <C> <C>

Goodwill........................ $ 129,746 $ 129,746
Less accumulated amortization... (15,976) (11,123)
--------- ---------
Total...................... $ 113,770 $ 118,623
========= =========

</TABLE>
8
<PAGE> 9

5. ACCRUED LIABILITIES

Accrued liabilities consist of the following:
<TABLE>
<CAPTION>

SEPTEMBER 30, DECEMBER 31,
----------------------------------
1998 1997
----------------------------------
(in thousands)
<S> <C> <C>
Personal injury and other claims.... $ 21,441 $ 23,960
Payroll and benefits................ 20,551 15,951
Interest payable.................... 1,917 5,684
Other............................... 9,929 3,340
--------- ---------
Total..................... $ 53,838 $ 48,935
========= =========
</TABLE>

6. COMMITMENTS AND CONTINGENCIES

The survivors of a deceased employee of a subsidiary of the Company,
Diamond M Onshore, Inc., sued such subsidiary in Duval County, Texas, for
damages as a result of the death of the employee. The plaintiffs obtained a
judgment in the trial court for $15.7 million plus post-judgment interest. The
Company appealed the judgment. In July 1998, the Texas Fourth Court of Appeals
in San Antonio reversed the judgment of the trial court and rendered that the
plaintiffs take nothing. A motion for reconsideration filed by the plaintiffs
is currently pending with the appellate court. No provision for any liability
had been established by the Company for this claim.

A former subsidiary of Arethusa, which is now a subsidiary of the
Company, defended and indemnified Zapata Off-Shore Company and Zapata
Corporation (the "Zapata Defendants"), pursuant to a contractual defense and
indemnification agreement, in a suit for tortious interference with contract
and conspiracy to tortiously interfere with contract. The plaintiffs sought
$14.0 million in actual damages and unspecified punitive damages, plus costs of
court, interest and attorneys' fees. In November 1997, the jury awarded a
take-nothing judgment in favor of the Zapata Defendants. The plaintiffs
appealed the judgment and the appellate court ordered the parties to mediation.
The case went to mediation in July 1998 with no resolution. No provision for
any liability has been established at this time.

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

9
<PAGE> 10

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

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

The Company is a leader in deep water drilling with a fleet of 46
offshore drilling rigs. The fleet consists of 30 semisubmersibles, 15 jack-ups
and one drillship and operates in the waters of six of the world's seven
continents.

RESULTS OF OPERATIONS

General

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

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

10
<PAGE> 11

THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997

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

THREE MONTHS ENDED
SEPTEMBER 30,
------------------------- INCREASE/
1998 1997 (DECREASE)
---------------------------------------
(in thousands)
REVENUES
<S> <C> <C> <C>
Fourth-Generation Semisubmersibles .............. $ 78,229 $ 54,270 $ 23,959
Other Semisubmersibles .......................... 184,183 145,516 38,667
Jack-ups ........................................ 52,985 47,133 5,852
Integrated Services ............................. 389 9,645 (9,256)
Other ........................................... -- 1,380 (1,380)
Eliminations .................................... -- (7,447) 7,447
---------- ---------- ----------
Total Revenues .......................... $ 315,786 $ 250,497 $ 65,289
========== ========== ==========
CONTRACT DRILLING EXPENSE
Fourth-Generation Semisubmersibles .............. $ 21,250 $ 18,797 $ 2,453
Other Semisubmersibles .......................... 65,049 55,001 10,048
Jack-ups ........................................ 27,764 23,998 3,766
Integrated Services ............................. 489 9,182 (8,693)
Other ........................................... 1,951 947 1,004
Eliminations .................................... -- (8,018) 8,018
---------- ---------- ----------
Total Contract Drilling Expense $ 116,503 $ 99,907 $ 16,596
========== ========== ==========
OPERATING INCOME
Fourth-Generation Semisubmersibles .............. $ 56,979 $ 35,473 $ 21,506
Other Semisubmersibles .......................... 119,134 90,515 28,619
Jack-ups ........................................ 25,221 23,135 2,086
Integrated Services ............................. (100) 463 (563)
Other ........................................... (1,951) 433 (2,384)
Eliminations .................................... -- 571 (571)
Depreciation and Amortization Expense ........... (33,305) (28,546) (4,759)
General and Administrative Expense .............. (5,984) (5,045) (939)
Gain on Sale of Assets .......................... 255 14 241
---------- ---------- ----------
Total Operating Income .................. $ 160,249 $ 17,013 $ 43,236
========== ========== ==========
</TABLE>

Fourth-Generation Semisubmersibles. The $24.0 million increase in
revenues for fourth-generation semisubmersibles resulted primarily from $12.2
million in revenues generated by the Ocean Victory which began operations after
completion of its major upgrade project in November 1997 and $5.0 million from
the Ocean Clipper I which experienced improved operations over the same period
in 1997 when the drillship incurred considerable downtime due to equipment
difficulties. In addition, $8.3 million in revenues were generated by increased
operating dayrates as compared to the same period of 1997. The $2.5 million
increase in contract drilling expense resulted primarily from operating costs
generated by the Ocean Victory.

Other Semisubmersibles. The $38.7 million increase in revenues from
other semisubmersibles resulted primarily from $43.2 million in revenues
generated by increased operating dayrates. However, revenues were reduced
approximately $5.3 million due to rig downtime for mandatory inspections and
repairs. The $10.0 million increase in contract drilling expense as compared to
the quarter ended September 30, 1997 was primarily due to an overall increase
in operating costs, including labor and drilling supplies. Also contributing to
this increase were costs associated with the mandatory inspection and repairs
on the Ocean Prospector which began in July 1998.

Jack-Ups. The $5.9 million increase in revenues from jack-ups resulted
primarily from $10.8 million of additional revenues generated by increased
operating dayrates and $3.1 million in revenues generated by the Ocean Warwick,
which returned to work in March 1998 upon completion of its cantilever
conversion project. These

11
<PAGE> 12

increases were partially offset by reductions in revenues of $2.5 million due
to the relinquishment of the Miss Kitty (a bareboat chartered rig) to the owner
in late 1997 and approximately $4.4 million resulting from decreased
utilization in the Gulf of Mexico. The $3.8 million increase in contract
drilling expense for the quarter ended September 30, 1998 was primarily due to
operating costs for the Ocean Warwick and an overall increase in operating
costs, including labor and drilling supplies. Contract drilling expenses for
the current quarter were reduced by $1.8 million due to the relinquishment of
the Miss Kitty.

Integrated Services and Other. Revenues and contract drilling expenses
for integrated services decreased as a result of fewer projects as compared to
the same period in 1997.

Depreciation and Amortization Expense. Depreciation and amortization
expense for the three months ended September 30, 1998 of $33.3 million
increased $4.8 million from $28.5 million for the three months ended
September 30, 1997 primarily due to 1998 budgeted capital additions. Additional
depreciation expense for the Ocean Victory upon completion of its upgrade also
contributed to this increase.

General and Administrative Expense. General and administrative expense
for the three months ended September 30, 1998 of $6.0 million increased
approximately $1.0 million from $5.0 million for the three months ended
September 30, 1997 primarily due to additional personnel and increased accruals
for the Company's management bonus and retention plan.

Interest Income. Interest income of $8.2 million for the three months
ended September 30, 1998 increased $3.0 million from $5.2 million for the same
period in 1997. This increase resulted primarily from the investment of
additional excess cash in 1998. See "-Liquidity."

Other Income. Other income of $2.4 million for the three months ended
September 30, 1998 increased $1.7 million from $0.7 million for the same period
of 1997. This increase resulted primarily from realized gains on sales of
marketable debt securities in 1998.

Income Tax Expense. Income tax expense of $58.5 million for the three
months ended September 30, 1998 increased $17.0 million from $41.5 million for
the three months ended September 30, 1997. This increase resulted primarily
from the $47.9 million increase in income before income tax expense as compared
to the three months ended September 30, 1997.

12
<PAGE> 13

NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997

NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------- INCREASE/
1998 1997 (DECREASE)
---------------------------------------
(in thousands)
REVENUES
<S> <C> <C> <C>
Fourth-Generation Semisubmersibles.... $ 217,204 $ 146,127 $ 71,077
Other Semisubmersibles................ 528,835 393,265 135,570
Jack-ups.............................. 176,307 137,511 38,796
Integrated Services................... 21,538 15,241 6,297
Other................................. -- 2,062 (2,062)
Eliminations.......................... (18,512) (10,442) (8,070)
----------- --------- ---------
Total Revenues.................... $ 925,372 $ 683,764 $ 241,608
=========== ========= =========
CONTRACT DRILLING EXPENSE
Fourth-Generation Semisubmersibles.... $ 61,826 $ 44,349 $ 17,477
Other Semisubmersibles................ 209,948 167,142 42,806
Jack-ups.............................. 76,804 69,971 6,833
Integrated Services................... 21,444 14,858 6,586
Other................................. 6,429 3,133 3,296
Eliminations.......................... (18,512) (11,586) (6,926)
----------- --------- ---------
Total Contract Drilling Expense... $ 357,939 $ 287,867 $ 70,072
=========== ========= ==========
OPERATING INCOME
Fourth-Generation Semisubmersibles.... $ 155,378 $ 101,778 $ 53,600
Other Semisubmersibles................ 318,887 226,123 92,764
Jack-ups.............................. 99,503 67,540 31,963
Integrated Services................... 94 383 (289)
Other................................. (6,429) (1,071) (5,358)
Eliminations.......................... -- 1,144 (1,144)
Depreciation and Amortization
Expense............................. (98,051) (81,588) (16,463)
General and Administrative Expense.... (18,975) (14,845) (4,130)
Gain on Sale of Assets................ 337 84 253
----------- --------- ---------
Total Operating Income....... $ 450,744 $ 299,548 $ 151,196
=========== ========= =========
</TABLE>

Fourth-Generation Semisubmersibles. The $71.1 million increase in
revenues for fourth-generation semisubmersibles resulted primarily from $29.4
million in revenues generated by increased operating dayrates and from $42.7
million in revenues generated by the Ocean Victory, the Ocean Clipper I, and
the Ocean Star, which completed their upgrade projects in November 1997, July
1997, and March 1997, respectively. The $17.5 million increase in contract
drilling expense resulted primarily from operating costs generated by the Ocean
Victory, the Ocean Clipper I, and the Ocean Star and costs associated with the
mandatory inspection of the Ocean Valiant, which was completed in June 1998.

Other Semisubmersibles. The $135.6 million increase in revenues from
other semisubmersibles resulted, in part, from $147.5 million in revenues
generated by increased operating dayrates and $14.9 million in revenues from
the Ocean Century, which was employed through July 1998 after reactivation in
the fourth quarter of 1997. These increases were partially offset by reductions
in revenues of approximately $30.4 million from rig downtime for mandatory
inspections and repairs and the 1997 sale of the Ocean Zephyr. The $42.8
million increase in contract drilling expense as compared to the nine months
ended September 30, 1997 was primarily due to an overall increase in operating
costs, including labor and drilling supplies. Also contributing to this
increase were costs of approximately $10.1 million associated with eight
mandatory inspections and repairs completed during the nine

13
<PAGE> 14

months ended September 30, 1998. Contract drilling expense for the current year
was reduced by the 1997 sale of the Ocean Zephyr.

Jack-Ups. The $38.8 million increase in revenues from jack-ups
resulted primarily from $48.3 million of additional revenues generated by
increased operating dayrates and $9.6 million in revenues generated by the
Ocean Warwick, which returned to work in March 1998 upon completion of its
cantilever conversion project. These increases were partially offset by
reductions in revenues due to the relinquishment of the Miss Kitty (a bareboat
chartered rig) to the owner in late 1997 and from the Ocean Tower, which was in
the shipyard for upgrades and repairs through May 1998. In addition, decreased
utilization in the Gulf of Mexico during the nine months ended September 30,
1998 reduced revenues by approximately $4.3 million. The $6.8 million increase
in contract drilling expense resulted primarily from operating costs for the
Ocean Warwick, an overall increase in operating costs, including labor and
drilling supplies, and costs associated with the mandatory inspection and
repairs of the Ocean Drake, which was completed in June 1998. Contract drilling
expense was reduced in the current year by the reliquishment of the Miss Kitty
and the capital upgrade of the Ocean Tower.

Integrated Services and Other. Revenues and contract drilling expenses
for integrated services increased primarily from additional projects and
increased rates during the first half of 1998 as compared to the same period in
1997. Other contract drilling expense increased primarily due to additional
expenses for maintenance and repairs to spare equipment and crew training
programs for new employees.

Depreciation and Amortization Expense. Depreciation and amortization
expense of $98.1 million for the nine months ended September 30, 1998 increased
primarily due to 1998 budgeted capital additions and additional depreciation
expense for the Ocean Victory, the Ocean Clipper I, and the Ocean Star, which
completed their upgrades in November 1997, July 1997, and March 1997,
respectively.

General and Administrative Expense. General and administrative expense
of $19.0 million for the nine months ended September 30, 1998 increased
primarily due to accruals for the Company's bonus and retention plan, costs
associated with ongoing litigation, and additional personnel. Also, general and
administrative costs capitalized to fourth-generation upgrade projects
decreased as compared to the same period in the prior year.

Interest Income. Interest income of $22.2 million for the nine months
ended September 30, 1998 increased $8.6 million from $13.6 million for the same
period in 1997. This increase resulted primarily from the investment of
additional excess cash in 1998. See "-Liquidity."

Interest Expense. Interest expense of $11.2 million for the nine
months ended September 30, 1998 consists of interest accrued on the $400.0
million of convertible subordinated notes (the "Notes") that were issued in
February 1997. Interest cost capitalized during the nine months ended
September 30, 1998 was $0.4 million as compared to $3.8 million during the same
period in 1997.

Other Income. Other income of $2.6 million for the nine months ended
September 30, 1998 increased $2.1 million from $0.5 million for the same period
of 1997. This increase resulted primarily from realized gains on sales of
marketable debt securities in 1998.

Income Tax Expense. Income tax expense for the nine months ended
September 30, 1998 was $163.2 million as compared to $107.4 million for the
comparable period of the prior year. This change resulted primarily from the
increase of $157.6 million in the Company's income before income tax expense.

14
<PAGE> 15

OUTLOOK

Depressed product prices in the oil and gas industry have resulted in
declining dayrates and decreased utilization, primarily in the shallow waters
of the Gulf of Mexico. As a result, the Company has cold stacked and suspended
marketing efforts on two of its low-end specification semisubmersible rigs
located in the Gulf of Mexico, the Ocean Century and the Ocean Prospector. In
addition, due to the excess supply in the current jack-up market several of the
Company's jack-up rigs are idle in the Gulf of Mexico. To date, the Company has
been able to mitigate the effect of these conditions on its results of
operations primarily with existing term contract commitments and the diversity
of the Company's fleet. However, the offshore contract drilling industry
historically has been and is expected to continue to be highly competitive and
cyclical. The current trends in market conditions could have a material adverse
effect on the Company's future results of operations, although the extent of
such effect cannot be accurately predicted.

The Company continues to enhance its fleet to meet customer demand for
diverse drilling capabilities, including those required for deep water and
harsh environment operations. The conversion of the Ocean Confidence from an
accommodation vessel to a semisubmersible drilling unit capable of operating in
harsh environments and ultra-deep water is in progress. The upgrade is
anticipated to be completed in late 1999, when the rig will begin a five-year
commitment in the Gulf of Mexico. See " - Capital Resources." Increased rig
construction and enhancement programs are also ongoing by the Company's
competitors. Because the new construction of drilling units to date has been
largely in conjunction with term contracts, the Company does not believe the
resulting increase in supply will have a material adverse effect on the average
operating dayrates and the overall utilization level of the Company's existing
rigs in the short term.

The Company's results of operations have also been impacted by the
loss of revenues and associated costs incurred during required regulatory
inspections of its drilling rigs. At September 30, 1998, eight of these
inspections had been completed with four anticipated to occur in the fourth
quarter of 1998. The Company intends to focus on returning these rigs to
operations as soon as reasonably possible, in order to minimize the downtime
and associated loss of revenues.

LIQUIDITY

As of September 30, 1998, cash and investments totaled $591.1 million,
up from $466.1 million at December 31, 1997. Cash provided by operating
activities for the nine months ended September 30, 1998 increased by $145.4
million to $389.1 million, as compared to $243.7 million for the comparable
period of the prior year. This increase in operating cash flow was primarily
attributable to a $101.8 million increase in net income for the first nine
months of 1998, a $16.5 million increase in depreciation and amortization
expense, and various changes in operating assets and liabilities.

Investing activities used $228.7 million in cash during the nine
months ended September 30, 1998, compared to $595.1 million during the same
period in 1997. The decrease resulted primarily from the initial investment in
1997 of excess cash generated by the issuance of the Notes.

Cash used in financing activities for the nine months ended September
30, 1998 of $140.7 million resulted primarily from the repurchase of the
Company's outstanding common stock, par value $0.01 per share ("Common Stock"),
and dividends paid to stockholders. Depending on market conditions the Company
may from time to time purchase shares of its Common Stock in the open market. As
of September 30, 1998, the Company had so purchased 3.5 million shares of its
Common Stock at a cost of $88.7 million. Cash provided by financing activities
for the nine months ended September 30, 1997 of $394.1 million resulted
primarily from the issuance of the Notes.

The Company has the ability to issue an aggregate of approximately
$117.5 million in debt, equity and other securities under a "shelf"
registration statement. In addition, the Company may issue, from time to time,
up to eight million shares of Common Stock, which shares are registered under
an "acquisition shelf" registration statement, in connection with one or more
acquisitions by the Company of securities or assets of other businesses.

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

<PAGE> 16

CAPITAL RESOURCES

Cash requirements for capital commitments result from rig upgrades to
meet specific customer requirements and from the Company's continuing rig
enhancement program, including water depth and drilling capability upgrades. It
is management's opinion that operating cash flows and the Company's cash
reserves will be sufficient to meet these capital commitments; however,
periodic assessments will be made based on industry conditions. In addition,
the Company may, from time to time, issue debt or equity securities, or a
combination thereof, to finance capital expenditures, the acquisition of assets
and businesses, or for general corporate purposes. The Company's ability to
effect any such issuance will be dependent on the Company's results of
operations, its current financial condition, current market conditions, and
other factors beyond its control.

The Company has a revised budget of $125.2 million for capital
expenditures on rig upgrades during 1998. During the nine months ended
September 30, 1998, the Company expended $66.5 million, including capitalized
interest expense, for significant rig upgrades. Such upgrade projects include
the conversion of the Ocean Confidence from an accommodation vessel to a
semisubmersible drilling unit capable of operating in harsh environments and
ultra-deep waters. The conversion includes the following enhancements which
will provide capabilities greater than existing fourth-generation equipment:
capability for operation in 7,500 foot water depths; approximately 6,000 tons
variable deck load; a 15,000 psi blow-out prevention system; and four mud pumps
to complement the existing Class III dynamic-positioning system. The Company's
estimated cost of conversion for this rig is approximately $210.0 million. Upon
completion of the conversion, the rig will begin a five-year drilling program
in the Gulf of Mexico, which is anticipated to commence in late 1999. Other
upgrade projects include the installation of new engines and other equipment on
the Ocean King, which is expected to be completed in November 1998, the
cantilever conversion project on the Ocean Warwick completed in March 1998, and
leg strengthening and other modifications on the Ocean Tower completed in May
1998.

The Company has also budgeted $126.7 million for 1998 capital
expenditures associated with its continuing rig enhancement program, spare
equipment and other corporate requirements. These expenditures include
purchases of anchor chain, drill pipe, riser, and other drilling equipment.
During the nine months ended September 30, 1998, the Company expended $66.1
million on this program.

The Company is continually considering potential transactions
including, but not limited to, enhancement of existing rigs, the purchase of
existing rigs, construction of new rigs and the acquisition of other companies
engaged in contract drilling or related businesses. Certain of the potential
transactions reviewed by the Company would, if completed, result in its
entering new lines of business, although, in general, these opportunities have
been related in some manner to the Company's existing operations. Although the
Company does not, as of the date hereof, have any commitment with respect to a
material acquisition, it could enter into such an agreement in the future and
such acquisition could result in a material expansion of its existing
operations or result in its entering a new line of business. Some of the
potential acquisitions considered by the Company could, if completed, result in
the expenditure of a material amount of funds or the issuance of a material
amount of debt or equity securities.

YEAR 2000 ISSUES

Introduction

The Company began to address Year 2000 ("Y2K") compliance issues in
1997 when it formed a committee (the "Y2K Committee") to develop the Company's
Y2K compliance initiative. The Company is continuing to take steps to determine
the potential effect of the change to calendar Year 2000 on its computer
hardware, software and embedded technology systems and any impact it may have on
the Company's business.

State of Readiness

The Company manages its Y2K compliance initiative through the Y2K
Committee. The Y2K Committee has focused its efforts on both information
technology ("IT") systems (e.g., computer software and hardware) and
non-information technology ("Non-IT") systems (e.g., embedded technology such as
micro-controllers) in the Company's domestic and international onshore
locations, aboard the Company's drilling rigs and among its key suppliers and
major customers. The Y2K Committee is paying particular attention to critical
safety, production, and operational systems on-board the Company's fleet of
drilling rigs.

The Company's Y2K initiative is being approached in the following five
phases:

Phase 1 Awareness of Y2K Issues (appointment of the Y2K
Committee, initial research on Y2K compliance
issues);

Phase 2 Identification and Investigation of the Company's
Systems (inventory of systems and investigation
of readiness);

Phase 3 Communications with Customers and Suppliers
(discussions and requests for information
regarding Y2K initiatives and compliance status);

Phase 4 Development and Implementation of Corrective
Measures (coordination with the Company's
software and hardware vendors); and

Phase 5 Risk Assessment and Contingency Planning
(evaluation of risk of business interruptions and
development of contingency plans).

As of September 30, 1998, the Company had completed Phases 1 and 2 for
IT and Non-IT systems utilized in the Company's onshore and offshore operations.
The Company currently expects to complete the final three phases of its Y2K
initiative by mid-1999. As of the date of this report, the Company has completed
over half of Phase 3, communications with major customers and key suppliers, and
Phase 4, development and implementation of corrective measures. Phase 5, risk
assessment and contingency planning for worst-case business interruptions, is in
progress.

Cost to Address the Company's Y2K Issues

Although the total cost to implement the Company's Y2K initiative is
not known at this time, it is not expected to be material because the Company
has utilized existing personnel resources to assist in the implementation of its
Y2K compliance initiative.

Y2K Risks and Contingency Planning

The Company is continuing to monitor, on an ongoing basis, the problems
and uncertainties associated with its Y2K issues and their potential
consequences on the Company's onshore locations, drilling operations, suppliers
and customers as well as the legal risks associated with interruption in the
provision of drilling services and/or the delivery of supplies and equipment.
The Company is in the process of developing contingency plans which are intended
to address worst-case business interruptions, such as the interruption of
drilling services aboard the Company's drilling rigs or interruptions in the
delivery of equipment and materials utilized in the Company's drilling
operations. Such a contingency plan would take into account the existence of
certain redundant systems on some of the Company's drilling rigs and may, in
part, involve manual operation of certain systems for a period of time in the
event of Y2K related disruptions. The Company anticipates its contingency
planning phase will be completed by mid-1999.

The Company's failure to fully implement its Y2K initiative or the
occurrence of an unexpected Y2K problem could result in the disruption of normal
business activities or operations and have a material adverse effect on the
Company's results of operations, liquidity or financial condition. However,
based upon the work performed to date and the anticipated completion of the
Company's Y2K initiative by mid-1999, the Company does not believe that such
matters will have a material adverse effect on its results of operations. With
respect to third parties, there can be no assurance that their systems will be
rendered Y2K compliant on a timely basis or that any resulting Y2K issues would
not have a material adverse effect on the results of operations of the Company.

16
<PAGE> 17

NEW ACCOUNTING PRONOUNCEMENTS

In February 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits." This Statement
revises employers' disclosures about pension and other postretirement benefit
plans in annual financial statements. SFAS No. 132 is effective for fiscal
years beginning after December 15, 1997.

In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This Statement establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and hedging
activities. SFAS No. 133 will be effective for all fiscal quarters of all
fiscal years beginning after June 15, 1999.

FORWARD-LOOKING STATEMENTS

Certain written and oral statements made or incorporated by reference
from time to time by the Company or its representatives are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Forward-looking statements include, without limitation, any statement
that may project, indicate or imply future results, performance or
achievements, and may contain the words "expect," "intend," "plan,"
"anticipate," "estimate," "believe," "will be," "will continue," "will likely
result," and similar expressions. Such statements inherently are subject to a
variety of risks and uncertainties that could cause actual results to differ
materially from those projected. Such risks and uncertainties include, among
others, general economic and business conditions, operating difficulties
arising from shortages of equipment or qualified personnel or as a result of
other causes, casualty losses, industry fleet capacity, changes in foreign and
domestic oil and gas exploration and production activity, competition, changes
in foreign political, social and economic conditions, regulatory initiatives
and compliance with governmental regulations, the ability to attract and retain
qualified personnel, customer preferences and various other matters, many of
which are beyond the Company's control. The list of risks included here is not
exhaustive. Other sections of this Report and the Company's other filings with
the Securities and Exchange Commission include additional factors that could
adversely impact the Company's business and financial performance. Given these
risks and uncertainties, investors should not place undue reliance on
forward-looking statements. The Company expressly disclaims any obligation or
undertaking to release publicly any updates or revisions to any forward-looking
statement to reflect any change in the Company's expectations with regard
thereto or any change in events, conditions or circumstances on which any
forward-looking statement is based.

17
<PAGE> 18

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Interest Rate and Equity Price Sensitivity

The Company's financial instruments that are potentially sensitive to
changes in interest rates include the Notes and investments in debt securities.
In addition, the Company's investment in equity securities is sensitive to
equity price risk. The Notes, which are due February 15, 2007, have a stated
interest rate of 3.75 percent and an effective interest rate of 3.93 percent.
At September 30, 1998, the fair value of the Company's investment in debt
securities issued by the U.S. Treasury was approximately $461.3 million, which
includes an unrealized holding gain of $1.0 million. The fair value of the
Company's investment in equity securities at September 30, 1998 was
approximately $7.2 million, which includes an unrealized holding loss of $4.9
million. Based on the nature of these financial instruments and in
consideration of past market movements and reasonably possible near-term market
movements, the Company does not believe that potential near-term losses in
future earnings, fair values, or cash flows are likely to be material.

Exchange Rate Sensitivity

Other than trade accounts receivable and trade accounts payable, the
Company does not currently have financial instruments that are sensitive to
foreign currency exchange rates.

18
<PAGE> 19

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

Brown Services, Inc. and KOS Industries, Inc. v. Michael D. Brown, BSI
International, Inc., Robert Brown, Robert Furlough, Power House International,
Inc., Zapata Off-Shore Company and Zapata Corporation; No. 92-05691 in the
334th Judicial District Court of Harris County, Texas, filed February 7, 1992.
Plaintiffs sued Zapata Off-Shore Company and Zapata Corporation (the "Zapata
Defendants") for tortious interference with contract and conspiracy to
tortiously interfere with contract seeking $14.0 million in actual damages and
unspecified punitive damages, plus costs of court, interest and attorneys'
fees. A former subsidiary of Arethusa (Off-Shore) Limited, which is now a
subsidiary of the Company, defended and indemnified the Zapata Defendants
pursuant to a contractual defense and indemnification agreement. In November
1997, the jury awarded a take-nothing judgment in favor of the Zapata
Defendants. The plaintiffs appealed the judgment and the appellate court
ordered the parties to mediation. The case went to mediation in July 1998 with
no resolution.

The Company and its subsidiaries are named defendants in certain other
lawsuits and are involved from time to time as parties to governmental
proceedings, all arising in the ordinary course of business. Although the
outcome of lawsuits or other proceedings involving the Company and its
subsidiaries cannot be predicted with certainty and the amount of any liability
that could arise with respect to such lawsuits or other proceedings cannot be
predicted accurately, management does not expect these matters to have a
material adverse effect on the financial position, results of operations, or
cash flows of the Company.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

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

None.

ITEM 5. OTHER INFORMATION.

None.

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

(a) Exhibits

See Exhibit Index for a list of those exhibits filed herewith.

(b) There were no reports on Form 8-K filed during the third quarter of
1998.

19
<PAGE> 20

SIGNATURES

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

DIAMOND OFFSHORE DRILLING, INC.
(Registrant)

Date 03-Nov-1998 By: /s/ Gary T. Krenek
----------- -----------------------------------
Gary T. Krenek
Vice President and Chief Financial Officer

Date 03-Nov-1998 /s/ Leslie C. Knowlton
----------- -----------------------------------
Leslie C. Knowlton
Controller and Principal Accounting Officer

20
<PAGE> 21

EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No Description
- ---------- -----------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation of the
Company (incorporated by reference to Exhibit 3.1 of the
Company's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1998).

3.2* Amended and Restated By-laws of the Company.

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

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

11.1* Statement Re Computation of Per Share Earnings.

27.1* Financial Data Schedule.
</TABLE>
- ---------------------
* Filed herewith.

<PAGE> 1
EXHIBIT 3.2

AMENDED AND RESTATED BY-LAWS

DIAMOND OFFSHORE DRILLING, INC.
(a Delaware corporation)

ARTICLE I

Stockholders

SECTION 1. Annual Meetings. The annual meeting (the "Annual
Meeting of Stockholders") of the holders of such classes or series of capital
stock as are entitled to notice thereof and to vote thereat pursuant to the
provisions of the Restated Certificate of Incorporation (the "Certificate of
Incorporation") of Diamond Offshore Drilling, Inc. (the "Company") for the
election of directors and for the transaction of such other business as may
properly come before the meeting shall be held on such date as may be designated
by resolution of the Board of Directors or, in the event that no such date is so
designated, on the second Tuesday in May of each year, at such hour (within
ordinary business hours) as shall be stated in the notice of the meeting. If the
day so designated shall be a legal holiday, then such meeting shall be held on
the next succeeding business day. Each such annual meeting shall be held at such
place, within or without the State of Delaware, as shall be determined by the
Board of Directors.

The Annual Meeting of Stockholders may be adjourned by the
presiding officer of the meeting for any reason (including, if the presiding
officer determines that it would be in the best interests of the Company, to
extend the period of time for the solicitation of proxies) from time to time and
place to place until such presiding officer shall determine that the business to
be conducted at the meeting is completed, which determination shall be
conclusive.

At the Annual Meeting of Stockholders, the only business which
shall be conducted thereat shall be that which shall have been properly brought
before the meeting. To be properly brought before an annual meeting, business
must be (a) specified in the notice of meeting (or any supplement or addendum
thereto) given by or at the direction of the Board of Directors, (b) brought
before the meeting by or at the direction of the Board of Directors or (c)
otherwise brought before the meeting by a stockholder in the manner prescribed
immediately below. For business to be properly brought before an annual meeting
by a stockholder, the stockholder must have delivered timely notice thereof in
writing to the Secretary of the Company. To be timely, a stockholder's notice
must be delivered to or mailed and received by the Secretary at the principal
executive offices of the Company, not less than 90 calendar days in advance of
the anniversary date of the previous year's annual meeting of stockholders (or
if there was no such prior annual meeting, not less than 90 calendar days prior
to the date which represents the second Tuesday in May of the current year);
provided, however, that in the event that the date of the annual meeting is
advanced by more than 20 days, or delayed by more than 60 days, from such
anniversary date, then, to be considered timely, notice by the

<PAGE> 2

stockholders must be received not later than the close of business on the later
of (x) the 90th day prior to such annual meeting or (y) the seventh day
following the date on which notice of the date of the annual meeting was mailed
to stockholders or public disclosure thereof was otherwise made.

A stockholder's notice to the Secretary shall set forth as to
each matter the stockholder proposes to bring before the annual meeting (a) a
brief description of the business desired to be transacted, (b) the name and
address, as they appear on the Company's most recent stockholder lists, of the
stockholder proposing such proposal, (c) the class and number of shares of
capital stock of the Company that are beneficially owned by the stockholder, and
(d) any material interest of the stockholder in such business. Any stockholder
who desires to propose any matter at an annual meeting shall, in addition to the
aforementioned requirements described in clauses (a) through (d), comply in all
material respects with the content and procedural requirements of Rule 14a-8 of
Regulation 14A under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), irrespective of whether the Company is then subject to such
Rule or said Exchange Act. In addition, if the stockholder's ownership of shares
of the Company, as set forth in the notice, is solely beneficial (and not of
record) documentary evidence satisfactory to the Company of such ownership must
accompany the notice in order for such notice to be considered validly and
timely received.

Notwithstanding anything in these By-laws to the contrary, no
business shall be conducted at an annual meeting except in accordance with the
procedures set forth in this Section 1. The presiding officer at an annual
meeting shall, if the facts warrant, determine and declare to the meeting that
any business which was not properly brought before the meeting is out of order
and shall not be transacted at the meeting.

SECTION 2. Special Meetings. Special meetings of stockholders
for the transaction of such business as may properly come before the meeting
shall only be called by order of a majority of the entire Board of Directors or
by the Chairman of the Board of Directors or by the President of the Company,
and shall be held at such date and time, within or without the State of
Delaware, as may be specified by such order.

SECTION 3. Notice of Meetings. Written notice of all meetings
of the stockholders, stating the place, date and hour of the meeting and the
place within the city or other municipality or community at which the list of
stockholders may be examined, shall be mailed or delivered to each stockholder
not less than 10 nor more than 60 days prior to the meeting. Notice of any
special meeting shall state with reasonable specificity the purpose or purposes
for which the meeting is to be held and the business proposed to be transacted
thereat.

SECTION 4. Stockholder Lists. The Secretary shall prepare and
make, or cause to be prepared and made, at least 10 calendar days before every
meeting of stockholders, a true and complete list of the stockholders entitled
to vote at the meeting, arranged in alphabetical order, and showing the address
of each stockholder and the number of shares registered in the name of each
stockholder. Such list shall be open to the examination of any stockholder, for
any purpose germane to the meeting, during

<PAGE> 3

ordinary business hours, for a period of at least 10 calendar days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present in person
thereat.

SECTION 5. Quorum. Except as otherwise provided by law or the
Certificate of Incorporation, a quorum for the transaction of business at any
meeting of stockholders shall consist of the holders of record of a majority in
voting power of the then issued and outstanding shares of all classes and series
of stock of the Company entitled to vote at the meeting, present in person or by
proxy. At all meetings of the stockholders at which a quorum is present, all
matters, except as otherwise provided by law, the Certificate of Incorporation
or these By-laws, shall be decided by the vote of the holders of a majority in
voting power of the shares entitled to vote thereat present in person or by
proxy. If there be no such quorum, the holders of a majority in voting power of
such shares so present or represented may adjourn the meeting from time to time,
without further notice, until a quorum shall have been obtained. When a quorum
is once present it is not broken by the subsequent withdrawal from the meeting
by any stockholder.

SECTION 6. Organization. Meetings of stockholders shall be
presided over by the Chairman, if any, or if none or in the Chairman's absence
the Vice-Chairman, if any, or if none or in the Vice-Chairman's absence the
President, if any, or if none or in the President's absence any Vice President,
or, if none of the foregoing is present, by a chairman to be chosen by the
holders of a majority in voting power of the shares entitled to vote thereat
present in person or by proxy at the meeting. The Secretary of the Company, or
in the Secretary's absence an Assistant Secretary, shall act as secretary of
every meeting, but if neither the Secretary nor an Assistant Secretary is
present, the presiding officer of the meeting shall appoint an appropriate
person present at the meeting to act as secretary.

SECTION 7. Voting; Proxies; Required Vote. Except as otherwise
provided in the Certificate of Incorporation, at each meeting of stockholders,
every stockholder shall be entitled to vote in person or by proxy (but no such
proxy shall be voted or acted upon after three years from its date, unless the
proxy provides for a longer period), and shall have one vote for each share of
stock entitled to vote registered in the name of such stockholder on the books
of the Company on the applicable record date fixed by applicable law or pursuant
to these By-laws in respect of each matter properly presented to the meeting. At
all elections of directors the voting may (but need not) be by ballot and a
plurality of the votes cast there shall be sufficient to elect directors. Except
as otherwise required by law or the Certificate of Incorporation, any other
action shall be authorized by the vote of the holders of a majority in voting
power of the shares entitled to vote thereat present in person or by proxy.

SECTION 8. Inspectors. The Board of Directors shall, in
advance of any meeting of stockholders, appoint one or more inspectors of
election to act at the meeting

<PAGE> 4

and make a written report thereof. If an inspector or inspectors are not so
appointed, the person presiding at the meeting shall appoint one or more
inspectors. In case any person who may be appointed as an inspector fails to
appear or act, the vacancy may be filled by appointment made by the directors in
advance of the meeting or at the meeting by the person presiding thereat. Each
inspector, before entering upon the discharge of his or her duties, shall take
and sign an oath faithfully to execute the duties of inspector at such meeting
with strict impartiality and according to the best of his ability. The
inspectors shall (i) ascertain the number of shares outstanding and the voting
power of each, (ii) determine the shares represented at a meeting and the
validity of proxies and ballots, (iii) count all votes and ballots, (iv)
determine and retain for a reasonable period a record of the disposition of any
challenges made to any determination by the inspectors, and (v) certify their
determination of the number of shares represented at the meeting, and their
count of all votes and ballots. The inspectors may appoint or retain other
persons or entities to assist the inspectors in the performance of the duties of
the inspectors.

ARTICLE II

Board of Directors

SECTION 1. General Powers. The business, property and affairs
of the Company shall be managed by, or under the direction of, the Board of
Directors.

SECTION 2. Qualification; Number; Term; Remuneration. (a) Each
director shall be at least 18 years of age. A director need not be a
stockholder, a citizen of the United States, or a resident of the State of
Delaware. The number of directors constituting the entire Board shall be no less
than three nor more than eleven, as may be fixed from time to time by action of
a majority of the entire Board of Directors. The use of the phrase "entire
Board" herein refers to the total number of directors which the Company would
have if there were no vacancies.

(b) Directors who are elected at an annual meeting of
stockholders, and directors who are elected to fill vacancies and newly created
directorships, shall hold office until the next annual meeting of stockholders
and until their successors are elected and qualified or until their earlier
resignation or removal.

(c) Directors who are not officers or other employees of the
Company may be paid their expenses, if any, of attendance at each meeting of the
Board of Directors and may be paid a fixed sum for attendance at each meeting of
the Board of Directors or a stated salary as director. No such payment shall
preclude any director from serving the Company in any other capacity and
receiving compensation therefor. Members of special or standing committees may
be allowed like compensation for attending committee meetings.

SECTION 3. Nomination of Directors. Nominations for the
election of directors may be made by the Board of Directors or a committee
appointed by the Board of Directors or, to the extent permitted by this Section
3, by any holder of record of capital stock of the Company entitled to vote
generally in the election of directors. Any

<PAGE> 5

stockholder entitled to vote generally in the election of directors may nominate
one or more persons for election as directors only in accordance with the
procedures specified in the next sentence, and only if written notice of such
stockholder's intent to make such nomination or nominations has been received,
either by hand delivery or by United States mail, postage prepaid, by the
Secretary of the Company not later than (i) with respect to an election to be
held at the Annual Meeting of Stockholders, not less than 90 calendar days prior
to the anniversary date of the date of the immediately preceding annual meeting
(or if there was no such prior annual meeting, not less than 90 calendar days
prior to the date which represents the second Tuesday in May of the current
year), and (ii) with respect to an election to be held at a special meeting of
stockholders for the election of directors, the close of business on the fifth
calendar day following the date on which notice of such meeting is first
delivered to stockholders. Each such notice from a stockholder shall set forth:
(a) the name and address of the stockholder who intends to make the nomination
and of the person or persons to be nominated; (b) a representation that the
stockholder is a holder of record of capital stock of the Company entitled to
vote at such meeting and intends to appear in person or by proxy at the meeting
to nominate the person or persons specified in the notice; (c) a description of
all contracts, arrangements or understandings between the stockholder and each
nominee and any other person or persons (naming such person or persons) pursuant
to which the nomination or nominations are to be made by the stockholder; (d)
such other information regarding each nominee proposed by such stockholder as
would be required to be included in a proxy or information statement filed
pursuant to the Exchange Act and the rules and regulations promulgated
thereunder (or any subsequent provisions replacing such Act, rules or
regulations); and (e) the consent of each nominee to serve as a director of the
Company if so elected. The presiding officer of the meeting may refuse to
acknowledge the nomination of any person not made in compliance with the
foregoing procedure.

SECTION 4. Quorum and Manner of Voting. Except as otherwise
provided by law or the Certificate of Incorporation, a majority of the entire
Board of Directors shall constitute a quorum. A majority of the directors
present, whether or not a quorum is present, may adjourn a meeting from time to
time to another time and place without notice. The vote of the majority of the
directors present at a meeting at which a quorum is present shall be the act of
the Board of Directors.

SECTION 5. Places of Meetings. Meetings of the Board of
Directors may be held at any place within or without the State of Delaware, as
may from time to time be fixed by resolution of the Board of Directors, or as
may be specified in the notice of meeting.

SECTION 6. Annual Meeting. Following the Annual Meeting of
Stockholders, the newly elected Board of Directors shall meet for the purpose of
the election of officers and the transaction of such other business as may
properly come before the meeting. Such meeting may be held without notice
immediately after the Annual Meeting of Stockholders at the same place at which
such stockholders' meeting is held.

5
<PAGE> 6

SECTION 7. Regular Meetings. Regular meetings of the Board of
Directors shall be held each January, April, July and October at such date,
place and time as the Board of Directors shall from time to time by resolution
determine. Notice need not be given of regular meetings of the Board of
Directors held at dates, times and places fixed by resolution of the Board of
Directors.

SECTION 8. Special Meetings. Special meetings of the Board of
Directors shall be held whenever called by the Chairman of the Board, President,
or by a majority of the directors then in office.

SECTION 9. Notice of Meetings. A notice of the place, date and
time and the purpose or purposes of each meeting of the Board of Directors shall
be given to each director by mailing the same at least five days before the
meeting, or by telefaxing or telephoning the same or by delivering the same
personally not later than the day before the day of the meeting.

SECTION 10. Organization. At all meetings of the Board of
Directors, the Chairman, if any, or if none or in the Chairman's absence or
inability to act the President, or in the President's absence or inability to
act any Vice President who is a member of the Board of Directors, or in such
Vice-President's absence or inability to act a chairman chosen by the directors,
shall preside. The Secretary of the Company shall act as secretary at all
meetings of the Board of Directors when present, and, in the Secretary's
absence, the presiding officer may appoint any person to act as secretary.

SECTION 11. Resignation and Removal. Any director may
voluntarily resign at any time upon written notice to the Company and such
resignation shall take effect upon receipt thereof by the President or
Secretary, unless otherwise specified in the resignation. Subject to the rights
of the holders of any series of Preferred Stock or any other class of capital
stock of the Company (other than the Common Stock) then outstanding, any
director may be removed from office at any time, with or without cause, by the
affirmative vote of a majority in voting power of the outstanding shares
entitled to vote at an election of directors.

SECTION 12. Vacancies. Vacancies on the Board of Directors,
whether caused by resignation, death, disqualification, removal, an increase in
the authorized number of directors or otherwise, may be filled only by the
affirmative vote of a majority of the directors then in office, although less
than a quorum, or by a sole remaining director, and any directors so chosen
shall hold office until their successors are elected and qualified.

SECTION 13. Board Action by Written Consent. Any action
required or permitted to be taken at any meeting of the Board of Directors may
be taken without a meeting if all the directors consent thereto in writing, and
the writing or writings are filed with the minutes of proceedings of the Board
of Directors.

<PAGE> 7

ARTICLE III

Indemnification

SECTION 1. Indemnification. (a) The Company shall indemnify,
to the fullest extent permitted by Section 145 of the General Corporation Law of
Delaware, as amended from time to time, all persons who it may indemnify
pursuant thereto and in the manner prescribed thereby.

(b) The Company shall pay the expenses (including attorneys'
fees) incurred by an indemnitee in defending any proceeding in advance of its
final disposition, provided, however, that the payment of expenses incurred by a
director or officer in advance of the final disposition of the proceeding shall
be made only upon receipt of an undertaking by the director or officer to repay
all amounts advanced if it should be ultimately determined that the director or
officer is not entitled to be indemnified under this Article or otherwise.

ARTICLE IV

Committees

SECTION 1. Appointment. From time to time the Board of
Directors by a resolution adopted by a majority of the entire Board may appoint
any committee or committees which, to the extent lawful, shall have powers as
shall be determined and specified by the Board of Directors in the resolution of
appointment.

SECTION 2. Procedures, Quorum and Manner of Acting. Each
committee shall fix its own rules of procedure, and shall meet where and as
provided by such rules or by resolution of the Board of Directors. Except as
otherwise provided by law, the presence of a majority of the then appointed
members of a committee shall constitute a quorum for the transaction of business
by that committee, and in every case where a quorum is present the affirmative
vote of a majority of the members of the committee present shall be the act of
the committee; provided, however, that in the event a committee is comprised of
two members, the presence of any one of the then appointed members of such
committee shall constitute a quorum for the transaction of business by that
committee. Each committee shall keep minutes of its proceedings, and actions
taken by a committee shall be reported to the Board of Directors.

SECTION 3. Committee Action by Written Consent. Any action
required or permitted to be taken at any meeting of any committee of the Board
of Directors may be taken without a meeting if all the members of the committee
consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the committee.

SECTION 4. Executive Committee. (a) The Board of Directors, by
resolution, shall appoint from its members an Executive Committee consisting of
the Chairman of the Board and the President and such other directors as it may
choose to appoint. Each member of the Executive Committee shall continue to be a
member

<PAGE> 8

thereof only so long as he remains a director and at the pleasure of the
Board of Directors. Any vacancies on the Executive Committee may be filled by
the Board of Directors.

(b) The Executive Committee, between meetings of the Board of
Directors, shall have and may exercise, except as otherwise provided by law, all
the powers of the Board of Directors in the management of the property, business
and affairs of the Company and may authorize the seal of the Company to be
affixed to all papers which may require it. Without limiting the foregoing, the
Executive Committee shall have the express power and authority to declare a
dividend, to authorize the issuance of stock and to adopt a certificate of
ownership and merger pursuant to Section 253 of the General Corporation Law of
the State of Delaware, as amended.

(c) At each meeting of the Executive Committee, one of the
following shall act as chairman of the meeting and preside thereat in the
following order of precedence:

(i) the Chairman of the Executive Committee,
who shall be appointed from the members of the Executive
Committee by the Board of Directors;

(ii) the Chairman of the Board; or

(iii) the President.

The Secretary of the Company shall act as secretary at all
meetings of the Executive Committee when present, and, in the Secretary's
absence, the presiding officer may appoint any person to act as secretary.

(d) Regular meetings of the Executive Committee, of which no
notice shall be necessary, shall be held on such days and at such places, within
or without the State of Delaware, as shall be fixed by resolution adopted by a
majority of the Executive Committee. Special meetings of the Executive Committee
shall be held whenever called by the Chairman of the Board, the President or the
Chairman of the Executive Committee and shall be called by the Secretary of the
Corporation on the request of a majority of the Executive Committee. Notice of
each special meeting of the Executive Committee shall be given to each member
thereof by depositing such notice in the United States mail, in a postage
prepaid envelope, directed to him at his residence or usual place of business at
least two days before the day on which such meeting is to be held or shall be
sent addressed to him at such place by telecopy, telegraph, cable, wireless or
other form of recorded communication or be delivered personally or by telephone
a reasonable time in advance of the time at which such meeting is to be held.
Notice of any such meeting need not, however, be given to any member of the
Executive Committee if he shall be present at such meeting. Any meeting of the
Executive Committee shall be a legal meeting without any notice thereof having
been given if all the members of the Executive Committee shall be present
thereat. Such notice shall specify the time and place of the meeting, but,
except as otherwise expressly provided by law, the purposes thereof need

8
<PAGE> 9

not be stated in such notice. Subject to the provisions of these By-laws, the
Executive Committee may fix its own rules of procedure, and it shall keep a
record of its proceedings and report them to the Board at the next regular or
special meeting thereof after such proceedings shall have been taken. All such
proceedings shall be subject to revision or alteration by the Board; provided,
however, that third parties shall not be prejudiced by any such revision or
alteration.

(e) Except as otherwise provided by law, a majority of the
Executive Committee then in office shall constitute a quorum for the transaction
of business, and the act of a majority of those present at a meeting thereof
shall be the act of the Executive Committee. In the absence of a quorum, a
majority of the members of the Executive Committee present thereat may adjourn
such meeting from time to time until a quorum shall be present thereat. Notice
of any adjourned meeting need not be given. The Executive Committee shall act
only as a committee and the individual members shall have no power as such.

(f) Any member of the Executive Committee may resign therefrom
at any time by giving written notice of his resignation to the Chairman of the
Board, the President or the Secretary. Any such resignation shall take effect at
the time specified therein or, if the time when it shall become effective shall
not be specified therein, it shall take effect immediately upon its receipt;
and, except as specified therein, the acceptance of such resignation shall not
be necessary to make it effective.

(g) In addition to the foregoing, in the absence or
disqualification of a member of the Executive Committee, the member or members
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in the place of any such absent or disqualified
member.

SECTION 5. Audit Committee. The Board of Directors, by
resolution, shall appoint from its members an Audit Committee consisting of at
least two directors, each of which shall be independent of management and free
from any relationship that, in the opinion of the Board of Directors, would
interfere with the exercise of independent judgment as a committee member. The
Audit Committee shall:

(a) Prior to each Annual Meeting of Stockholders, submit a
recommendation in writing to the Board of Directors for the selection of
independent public accountants to be appointed by the Board of Directors in
advance of the Annual Meeting of Stockholders, subject to ratification or
rejection by the stockholders at such meeting;

(b) Consult, at least annually, with the independent public
accountants with regard to the proposed plan of audit and from time to time
consult privately with them and also with the internal auditor and the
Controller with regard to the adequacy of internal controls;

9
<PAGE> 10

(c) Upon completion of the report of audit by the independent
public accountants and before the date of the Annual Meeting of Stockholders,
(i) review the financial statements of the Company, and (ii) meet with the
independent public accountants and review with them the results of their audit
and any recommendations made to the management; and

(d) Periodically, but at least annually, review the terms of
all material transactions and arrangements entered into between the Company and
its affiliates and subsidiaries.

SECTION 6. Term; Termination. In the event any person shall
cease to be a director of the Company, such person shall simultaneously
therewith cease to be a member of any committee appointed by the Board of
Directors.

ARTICLE V

Officers

SECTION 1. Election and Qualifications. The Board of Directors
shall elect the officers of the Company, which shall include a Chief Executive
Officer, a Chief Financial Officer, a President and a Secretary, and may
include, by election or appointment, a Chief Operating Officer, one or more
Vice-Presidents (any one or more of whom may be given an additional designation
of rank or function), a Controller, a Treasurer and such Assistant Treasurers,
Assistant Controllers, Assistant Secretaries, and such other officers as the
Board may from time to time deem proper. Each officer shall have such powers and
duties as may be prescribed by these By-laws and as may be assigned by the Board
of Directors or (except in the case of the Chief Executive Officer) the
President. Any two or more offices may be held by the same person except the
offices of President and Secretary.

SECTION 2. Term of Office and Remuneration. The term of office
of all officers shall be one year and until their respective successors have
been elected and qualified or until their earlier resignation or removal. Any
vacancy in any office arising from any cause may be filled for the unexpired
portion of the term by the Board of Directors. The remuneration of all officers
of the Company may be fixed by the Board of Directors or in such manner as the
Board of Directors shall otherwise provide.

SECTION 3. Resignation; Removal. Any officer may resign at any
time upon written notice to the Company and such resignation shall take effect
upon receipt thereof by the President or Secretary, unless otherwise specified
in the resignation. Any officer shall be subject to removal, with or without
cause, at any time by an affirmative vote of a majority of the Board of
Directors.

SECTION 4. Chairman of the Board of Directors. The Chairman of
the Board of Directors shall preside at all meetings of the stockholders and at
all meetings of the directors and shall have such other authority as from time
to time may be assigned by the Board of Directors. The Chairman of the Board of
Directors shall not, as such, be an officer of the Company.

<PAGE> 11

SECTION 5. (a) Chief Executive Officer. The Chief Executive
Officer of the Company shall have such duties as customarily pertain to that
office; may appoint and remove assistant officers and other agents and
employees, other than officers referred to in Section 1 of this Article V; and
may execute and deliver in the name of the Company powers of attorney,
contracts, bonds and other obligations and instruments.

(b) President. The President of the Company shall have general
management and supervision of the property, business and affairs of the Company
and over its other officers (other than the Chief Executive Officer); may
appoint and remove assistant officers and other agents and employees, other than
officers referred to in Section 1 of this Article V; and may execute and deliver
in the name of the Company powers of attorney, contracts, bonds and other
obligations and instruments.

(c) Chief Operating Officer. The Chief Operating Officer of
the Company shall in general have all duties incident to such position,
including, without limitation, general management and supervision of the
operational affairs of the Company and the supervision and assignment of the
duties of all other operational officers and personnel employed by the Company,
and shall have such other duties as may be assigned by the Board of Directors or
the President.

SECTION 6. Chief Financial Officer. The Chief Financial
Officer shall in general have all duties incident to such position, including,
without limitation, the organization and review of all accounting, tax and
related financial matters involving the Company, the implementation of
appropriate Company financial controls and procedures, and the supervision and
assignment of the duties of all other financial officers and personnel employed
by the Company, and shall have such other duties as may be assigned by the Board
of Directors or the President.

SECTION 7. Vice-President. A Vice-President may execute and
deliver in the name of the Company contracts and other obligations and
instruments pertaining to the regular course of the duties of said office, and
shall have such other authority as from time to time may be assigned by the
Board of Directors or the President.

SECTION 8. Treasurer. The Treasurer shall in general have all
duties incident to the position of Treasurer and such other duties as may be
assigned by the Board of Directors or the Chief Financial Officer.

SECTION 9. Secretary. The Secretary shall in general have all
the duties incident to the office of Secretary and such other duties as may be
assigned by the Board of Directors, the President or any Vice President.

SECTION 10. Controller. The Controller shall in general have
all the duties incident to the office of Controller and such other duties as may
be assigned by the Board of Directors or the Chief Financial Officer.

SECTION 11. Assistant Officers. Any assistant officer shall
have such powers and duties of the officer such assistant officer assists as
such officer or the Board of Directors shall from time to time prescribe.

<PAGE> 12

ARTICLE VI

Books and Records

SECTION 1. Location. The books and records of the Company may
be kept at such place or places within or outside the State of Delaware as the
Board of Directors or the respective officers in charge thereof may from time to
time determine. The record books containing the names and addresses of all
stockholders, the number and class of shares of stock held by each and the dates
when they respectively became the owners of record thereof shall be kept by the
Secretary or by the transfer agent or registrar as shall be designated by the
Board of Directors.

SECTION 2. Addresses of Stockholders. Notices of meetings and
all other corporate notices may be delivered personally or mailed to each
stockholder at the stockholder's address as it appears on the records of the
Company.

SECTION 3. Fixing Date for Determination of Stockholders of
Record. In order that the Company may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof,
or to express consent to corporate action in writing without a meeting, or
entitled to receive payment of any dividend or other distribution or allotment
of any rights, or entitled to exercise any rights in respect of any change,
conversion or exchange of stock or for the purpose of any other lawful action,
the Board of Directors may fix a record date, which record date shall not
precede the date upon which the resolution fixing the record date is adopted by
the Board of Directors, and which record date: (1) in the case of determination
of stockholders entitled to notice of or to vote at any meeting of stockholders
or adjournment thereof, shall, unless otherwise required by law, not be more
than sixty nor less than ten days before the date of such meeting; (2) in the
case of determination of stockholders entitled to express consent to corporate
action in writing without a meeting, shall not be more than ten days from the
date upon which the resolution fixing the record date is adopted by the Board of
Directors; and (3) in the case of any other action, shall not be more than sixty
days prior to such other action. If no record date is fixed: (1) the record date
for determining stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business on the day next preceding the day
on which notice is given, or, if notice is waived, at the close of business on
the day next preceding the day on which the meeting is held; (2) the record date
for determining stockholders entitled to express consent to corporate action in
writing without a meeting, when no prior action of the Board of Directors is
required by law, shall be the first date on which a signed written consent
setting forth the action taken or proposed to be taken is delivered to the
Company in accordance with applicable law, or, if prior action by the Board of
Directors is required by law, shall be at the close of business on the day on
which the Board of Directors adopts the resolution taking such prior action; and
(3) the record date for determining stockholders for any other purpose shall be
at the close of business on the day on which the Board of Directors adopts the
resolution relating thereto. A determination of stockholders of record entitled
to notice of or to vote at a meeting of stockholders shall apply to any
adjournment of the meeting; provided, however, that the Board of Directors may
fix a new record date for the adjourned meeting.

<PAGE> 13

ARTICLE VII

Certificates Representing Stock

SECTION 1. Certificates; Signatures. The shares of the Company
shall be represented by certificates, and every holder of stock shall be
entitled to have a certificate, signed by or in the name of the Company by the
Chairman or Vice-Chairman of the Board of Directors, or the President or
Vice-President, and by the Treasurer or an Assistant Treasurer, or the Secretary
or an Assistant Secretary of the Company, representing the number of shares
registered in certificate form. Any and all signatures on any such certificate
may be facsimiles. In case any officer, transfer agent or registrar who has
signed or whose facsimile signature has been placed upon a certificate shall
have ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the Company with the same effect as
if he were such officer, transfer agent or registrar at the date of issue. The
name of the holder of record of the shares represented thereby, with the number
of such shares and the date of issue, shall be entered on the books of the
Company.

SECTION 2. Transfers of Stock. Upon compliance with any
provisions restricting the transfer or registration of transfer of shares of
stock, including, without limitation, the restrictions set forth in the
Certificate of Incorporation, shares of capital stock shall be transferable on
the books of the Company only by the holder of record thereof in person, or by
duly authorized attorney or legal representative, upon surrender and
cancellation of certificates for a like number of shares (or upon compliance
with the provisions of Section 5 of this Article VII, if applicable), properly
endorsed, and the payment of all taxes due thereon. Upon such surrender to the
Company or a transfer agent of the Company of a certificate for shares duly
endorsed or accompanied by proper evidence of succession, assignment or
authority to transfer (or upon compliance with the provisions of Section 5 of
this Article VII, if applicable) and of compliance with any transfer
restrictions applicable thereto contained in an agreement to which the Company
is a party or of which the Company has knowledge by reason of legend with
respect thereto placed on any such surrendered stock certificate, it shall be
the duty of the Company to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.

SECTION 3. Ownership of Shares. The Company shall be entitled
to treat the holder of record of any shares or shares of capital stock of the
Company as the holder in fact thereof and, accordingly, shall not be bound to
recognize any equitable or other claim to or interest in such share or shares on
the part of any other person, whether or not it shall have express or other
notice thereof, except as otherwise provided by law.

SECTION 4. Fractional Shares. The Company may, but shall not
be required to, issue certificates for fractions of a share where necessary to
effect authorized transactions, or the Company may pay in cash the fair value of
fractions of a share as of the time when those entitled to receive such
fractions are determined, or it may issue scrip in registered or bearer form
over the manual or facsimile signature of an officer of

13
<PAGE> 14

the Company or of its agent, exchangeable as therein provided for full shares,
but such scrip shall not entitle the holder to any rights of a stockholder
except as therein provided.

The Board of Directors shall have power and authority to make
all such rules and regulations as it may deem expedient concerning the issue,
transfer and registration of certificates representing shares of capital stock
of the Company.

SECTION 5. Lost, Stolen or Destroyed Certificates. The Company
may issue a new certificate of stock in place of any certificate, theretofore
issued by it, alleged to have been lost, stolen or destroyed, and the Board of
Directors may require the owner of any lost, stolen or destroyed certificate, or
his legal representative, to furnish an affidavit as to such loss, theft, or
destruction and to give the Company a bond sufficient to indemnify the Company
and each transfer agent and registrar against any and all claims that may be
made against it on account of the alleged loss, theft or destruction of any such
certificate or the issuance of any such new certificate.

ARTICLE VIII

Dividends

Subject always to provisions of applicable law and the
Certificate of Incorporation, the Board of Directors shall have full power to
determine whether any, and, if any, what part of any, funds or other property
legally available for the payment of dividends shall be declared as dividends
and paid to holders of the capital stock of the Company; the division of the
whole or any part of such funds or other property of the Company shall rest
wholly within the lawful discretion of the Board of Directors, and it shall not
be required at any time, against such discretion, to divide or pay any part of
such funds or other property among or to the stockholders as dividends or
otherwise; and before payment of any dividend, there may be set aside out of any
funds of the Company available for dividends such sum or sums as the Board of
Directors from time to time, in its absolute discretion, thinks proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the Company, or for such other purpose
as the Board of Directors shall think conducive to the interest of the Company,
and the Board of Directors may modify or abolish any such reserve in the manner
in which it was created.

ARTICLE IX

Corporate Seal

The corporate seal shall have inscribed thereon the name of
the Company and the year of its incorporation, and shall be in such form and
contain such other words and/or figures as the Board of Directors shall
determine. The corporate seal may be used by printing, engraving, lithographing,
stamping or otherwise making, placing or affixing, or causing to be printed,
engraved, lithographed, stamped or otherwise made, placed or affixed, upon any
paper or document, by any process whatsoever, an impression, facsimile or other
reproduction of said corporate seal.

<PAGE> 15

ARTICLE X

Fiscal Year

The fiscal year of the Company shall be fixed, and shall be
subject to change, by the Board of Directors. Unless otherwise fixed by the
Board of Directors, the fiscal year of the Company shall commence on January 1,
and end on December 31, of each and every calendar year.

ARTICLE XI

Waiver of Notice

Whenever notice is required to be given by the Certificate of
Incorporation or by these By-laws, a written waiver thereof, signed by the
person or persons entitled to said notice, whether before or after the time
stated therein, shall be deemed equivalent to notice.

ARTICLE XII

Bank Accounts, Drafts, Contracts, Etc.

SECTION 1. Bank Accounts and Drafts. In addition to such bank
accounts as may be authorized by the Board of Directors, the Chief Financial
Officer, the Treasurer or any other person designated by said Chief Financial
Officer, whether or not an employee of the Company, may authorize such bank
accounts to be opened or maintained in the name and on behalf of the Company as
he may deem necessary or appropriate, payments from such bank accounts to be
made upon and according to the check of the Company in accordance with the
written instructions of said Chief Financial Officer, Treasurer, or other person
so designated by said Chief Financial Officer.

SECTION 2. Contracts. The Board of Directors may authorize any
person or persons, in the name and on behalf of the Company, to enter into or
execute and deliver any and all deeds, bonds, mortgages, contracts and other
obligations or instruments, and such authority may be general or confined to
specific instances.

SECTION 3. Proxies; Powers of Attorney; Other Instruments. The
Chairman, the President or any other person designated by either of them shall
have the power and authority to execute and deliver proxies, powers of attorney
and other instruments in the name and on behalf of the Company in connection
with the rights and powers incident to the ownership of stock by the Company.
The Chairman, the President or any other person authorized by proxy or power of
attorney executed and delivered by either of them on behalf of the Company may
attend and vote at any meeting of stockholders of any company in which the
Company may hold stock, and may exercise on behalf of the Company any and all of
the rights and powers incident to the ownership of such stock at any such
meeting, or otherwise as specified in the proxy or power of attorney so
authorizing any such person. The Board of Directors, from time to time, may
confer like powers upon any other person.

<PAGE> 16

SECTION 4. Financial Reports. The Board of Directors may
appoint the primary financial officer or other fiscal officer and/or the
Secretary or any other officer to cause to be prepared and furnished to
stockholders entitled thereto any special financial notice and/or financial
statement, as the case may be, which may be required by any provision of law.

ARTICLE XIII

Amendments

SECTION 1. Except as otherwise set forth in Section 2 of this
Article XIII, these By-laws may be altered or repealed at the Annual Meeting of
Stockholders or at any special meeting of the stockholders, in each case, at
which a quorum is present or represented, provided in the case of a special
meeting that notice of the proposed alteration or repeal is contained in the
notice of such special meeting, by the affirmative vote of the holders of a
majority in voting power of the outstanding capital stock entitled to vote at
such meeting and present or represented thereat (in person or by proxy), or by
the affirmative vote of a majority of the Board of Directors, at any regular
meeting or any special meeting of the board.

SECTION 2. Notwithstanding any other provisions of these
By-laws (including Section 1 of this Article XIII), the adoption by stockholders
of any alteration, amendment, change, addition to or repeal of all or any part
of Sections 1, 2, 3, 5, and 7 of Article I, Sections 2, 3, 4, 11 and 12 of
Article II or Section 2 of this Article XIII of these By-laws, or the adoption
by stockholders of any other provision of these By-laws which is inconsistent
with or in addition to such Sections of these By-laws shall require the
affirmative vote of the holders of not less than 66 2/3% of the votes entitled
to be cast by the holders of all then outstanding capital stock of the Company
entitled to vote thereon.

<PAGE> 1
EXHIBIT 11.1

DIAMOND OFFSHORE DRILLING, INC.
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------------------------
1998 1997
-------------------------------------- -------------------------------------
WEIGHTED WEIGHTED (1)
AVERAGE AVERAGE
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
-------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Net income.............................. $ 108,702 137,652 $ 0.79 $ 77,831 139,303 $ 0.56

EFFECT OF DILUTIVE POTENTIAL SHARES
Convertible notes issued 2/4/97 ........ 2,350 9,876 2,306 9,876
-------------------------------------- -------------------------------------
DILUTED EPS
Net income + assumed conversions ....... $ 111,052 147,528 $ 0.75 $ 80,137 149,179 $ 0.54
====================================== =====================================
</TABLE>

<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------------
1998 1997
-------------------------------------- -------------------------------------
WEIGHTED WEIGHTED (1)
AVERAGE AVERAGE
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
-------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Net income.............................. $ 301,089 138,762 $ 2.17 $ 199,295 138,308 $ 1.44

EFFECT OF DILUTIVE POTENTIAL SHARES
Convertible notes issued 2/4/97 ........ 7,305 9,876 4,418 8,610
-------------------------------------- -------------------------------------
DILUTED EPS
Net income + assumed conversions ....... $ 308,394 148,638 $ 2.07 $ 203,713 146,918 $ 1.39
====================================== =====================================
</TABLE>

- ----------

(1) Weighted average shares outstanding have been restated to include
the retroactive effect of the July 1997 two-for-one stock split in
the form of a stock dividend.

<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's financial statements and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 122,647
<SECURITIES> 443,187
<RECEIVABLES> 235,881
<ALLOWANCES> 0
<INVENTORY> 35,257
<CURRENT-ASSETS> 865,887
<PP&E> 1,953,906
<DEPRECIATION> 463,357
<TOTAL-ASSETS> 2,505,470
<CURRENT-LIABILITIES> 142,478
<BONDS> 400,000
0
0
<COMMON> 1,393
<OTHER-SE> 1,690,911
<TOTAL-LIABILITY-AND-EQUITY> 2,505,470
<SALES> 0
<TOTAL-REVENUES> 925,372
<CGS> 0
<TOTAL-COSTS> 357,939<F1>
<OTHER-EXPENSES> 116,689<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,239
<INCOME-PRETAX> 464,298
<INCOME-TAX> 163,209
<INCOME-CONTINUING> 301,089
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 301,089
<EPS-PRIMARY> 2.17
<EPS-DILUTED> 2.07
<FN>
<F1>Includes contract drilling expenses only.
<F2>Includes other operating expenses.
</FN>

</TABLE>