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.

As of October 30, 1998 Common stock, $0.01 par value per share 135,815,535 shares

DIAMOND OFFSHORE DRILLING, INC.

TABLE OF CONTENTS FOR FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 1998

PAGE NO.

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

2
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)

SEPTEMBER 30, DECEMBER 31,
---------------- --------------
1998 1997
---------------- --------------
ASSETS (Unaudited)
CURRENT ASSETS:

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.

3
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
----------- ----------- ----------- -----------

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.

4
5

DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES

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

NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1998 1997
------------ ------------

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.

5
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
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.

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:

-------------------------------------
UNREALIZED MARKET
COST GAIN (LOSS) VALUE
-------------------------------------
(in thousands)

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

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)

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

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:

SEPTEMBER 30, DECEMBER 31,
----------------------------
1998 1997
----------------------------
(in thousands)

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

8
9

5. ACCRUED LIABILITIES

Accrued liabilities consist of the following:

SEPTEMBER 30, DECEMBER 31,
----------------------------------
1998 1997
----------------------------------
(in thousands)

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

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.

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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.

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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

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

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
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
13

NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997

NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------- INCREASE/
1998 1997 (DECREASE)
---------------------------------------
(in thousands)
REVENUES

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

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
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
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.

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
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
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
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
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
21

EXHIBIT INDEX

Exhibit No Description
- ---------- -----------

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.

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