<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 June 30, 1997

                                       OR

/ /      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:  0-26388

                         FALCON DRILLING COMPANY, INC.
             ------------------------------------------------------
             (Exact name of registrant as specified in its charter)


             Delaware                                   76-0351754
-------------------------------                    -------------------
(State or other jurisdiction of                      (I.R.S. Employer
incorporation or organization)                     Identification No.)


         1900 W. Loop South
         Suite 1800
         Houston, Texas                                  77027
-------------------------------                    -------------------
       (Address of Principal                           (Zip Code)
        Executive offices)

Registrant's telephone number, including area code:     (713) 623-8984
                                                        --------------

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    / /

The number of shares outstanding of the issuer's common stock, as of July 31,
1997: 79,224,944



                                      -1-
<PAGE>   2


                         FALCON DRILLING COMPANY, INC.


                               INDEX TO FORM 10-Q

                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997



<TABLE>
<CAPTION>
   Item Number                                     Description                                        Page Number
   -----------                                     -----------                                        -----------
<S>                <C>                                                                                    <C>
                   Part I-
        1             Financial Statements-

                        Condensed Consolidated Balance Sheets as of June 30, 1997 (unaudited),
                          and December 31, 1996                                                            3

                        Unaudited Condensed Consolidated Statements of Operations for the
                          Three Months and Six Months Ended June 30, 1997 and 1996
                                                                                                           4

                        Unaudited Condensed Consolidated Statements of Cash Flows for the Six
                          Months Ended June 30, 1997 and 1996                                              5

                      Notes to Unaudited Condensed Consolidated Financial Statements                       6

        2             Management's Discussion and Analysis of Financial Condition and Results
                        of Operations                                                                     17

                   Part II-
        2             Changes in Securities                                                               21

        4             Submission of Matters to a Vote of Security Holders                                 22

        6             Exhibits and Reports on Form 8-K                                                    23
</TABLE>




                                      -2-

<PAGE>   3




                         PART I - FINANCIAL INFORMATION

                         ITEM 1 - FINANCIAL STATEMENTS

                 FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES


                     CONDENSED CONSOLIDATED BALANCE SHEETS

                      (IN THOUSANDS EXCEPT SHARE AMOUNTS)


<TABLE>
<CAPTION>
                                                                                               JUNE 30,      DECEMBER 31,
                                                                                                 1997           1996
                                                                                               ---------      ---------
                                                                                              (UNAUDITED)
<S>                                                                                            <C>            <C>      
                                        ASSETS
CURRENT ASSETS:
   Cash and cash equivalents                                                                   $  23,631      $  85,050
   Accounts receivable, net of allowance for doubtful accounts of $1,471 and
     $1,495 at December 31, 1996 and June 30, 1997, respectively
                                                                                                  85,649         71,591
   Other current assets                                                                           16,663          9,933
                                                                                               ---------      ---------

                     Total current assets                                                        125,943        166,574

EQUIPMENT AND PROPERTY:
   Drilling rigs and equipment                                                                   613,479        520,025
   Vessels and other equipment                                                                    41,078          6,803
                                                                                               ---------      ---------
                                                                                                 654,557        526,828
   Less- Accumulated depreciation                                                                (75,482)       (58,866)
                                                                                               ---------      ---------
                                                                                                 579,075        467,962

OTHER ASSETS                                                                                      15,118         17,506
                                                                                               ---------      ---------

                     Total assets                                                              $ 720,136      $ 652,042
                                                                                               =========      =========

                         LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
   Accounts payable and accrued liabilities                                                    $  46,533      $  53,903
   Income tax payable                                                                                560            413
   Debt due within one year                                                                        3,071          2,746
                                                                                               ---------      ---------

                     Total current liabilities                                                    50,164         57,062

LONG-TERM DEBT, less current portion                                                             300,822        292,305

DEFERRED INCOME TAXES                                                                             51,491         28,927

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
   Common stock, $.01 par value, 100,000,000 shares authorized; 79,151,612 and
     78,570,946 shares issued and outstanding at June 30, 1997, and
     December 31, 1996, respectively                                                                 792            786
   Additional paid-in capital                                                                    241,365        238,172
   Accumulated earnings                                                                           75,502         34,790
                                                                                               ---------      ---------

                     Total stockholders' equity                                                  317,659        273,748
                                                                                               ---------      ---------

                     Total liabilities and stockholders' equity                                $ 720,136      $ 652,042
                                                                                               =========      =========
</TABLE>


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



                                      -3-
<PAGE>   4

                 FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES


           UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)


<TABLE>
<CAPTION>
                                                            THREE MONTHS                        SIX MONTHS
                                                           ENDED JUNE 30,                      ENDED JUNE 30,
                                                  ------------------------------      ------------------------------
                                                      1997              1996              1997              1996
                                                  ------------      ------------      ------------      ------------
                                                            (UNAUDITED)                        (UNAUDITED)
<S>                                               <C>               <C>               <C>               <C>         
OPERATING REVENUES                                $    120,690      $     73,946      $    230,635      $    130,080

COSTS AND EXPENSES:
   Operating costs                                      62,954            47,634           125,901            85,778
   General and administrative expenses                   6,463             4,313            13,449             8,881
   Depreciation                                          8,687             7,045            16,922            13,078
                                                  ------------      ------------      ------------      ------------

OPERATING INCOME                                        42,586            14,954            74,363            22,343

OTHER (INCOME) EXPENSE:
   Interest expense                                      5,118             6,387            10,286            12,097
   Amortization of deferred costs                          616               706             1,229             1,301
   Other (income) expense, net                            (843)           (1,553)           (1,774)           (2,184)
                                                  ------------      ------------      ------------      ------------

INCOME BEFORE INCOME TAXES                              37,695             9,414            64,622            11,129

INCOME TAX PROVISION                                    13,947             3,398            23,910             4,118
                                                  ------------      ------------      ------------      ------------

NET INCOME APPLICABLE TO COMMON SHARES
                                                  $     23,748      $      6,016      $     40,712      $      7,011
                                                  ============      ============      ============      ============

NUMBER OF COMMON AND
   COMMON EQUIVALENT SHARES
   USED IN COMPUTING EARNINGS
   PER SHARE                                        79,866,208        72,072,124        79,779,138        71,932,776
                                                  ============      ============      ============      ============

NET INCOME PER COMMON SHARE                       $        .30      $        .08      $        .51      $        .10
                                                  ============      ============      ============      ============
</TABLE>



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



                                      -4-
<PAGE>   5


                 FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

                 FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES


           UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                                                 SIX MONTHS
                                                                                               ENDED JUNE 30,
                                                                                          ------------------------
                                                                                            1997            1996
                                                                                          ---------      ---------
                                                                                                (UNAUDITED)
<S>                                                                                       <C>            <C>      
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income                                                                             $  40,712      $   7,011
   Adjustments to reconcile net income to net cash provided by operating
     activities-
       Depreciation and amortization                                                         18,151         14,378
       Realized gain on sale of assets                                                       (1,027)          (227)
       Provision for deferred income taxes                                                   22,564          3,679
       Changes in assets and liabilities-
         Accounts receivable, trade                                                         (14,059)       (27,325)
         Other assets                                                                        (5,570)         3,198
         Accounts payable and accrued liabilities                                            (7,224)        10,120
                                                                                          ---------      ---------

                    Net cash provided by operating activities                                53,547         10,834
                                                                                          ---------      ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchases of equipment and property                                                     (117,614)      (140,129)
   Refunds (deposits) made for drill pipe, rigs and equipment                                    --          8,826
   Purchase of Double Eagle Marine, net of cash acquired                                     (2,410)            --
   Proceeds from the sale of equipment and property                                           1,056            413
                                                                                          ---------      ---------

                    Net cash used in investing activities                                  (118,968)      (130,890)
                                                                                          ---------      ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Issuance of debt                                                                           5,000        164,000
   Payments of outstanding debt                                                              (2,547)       (39,425)
   Issuance of common stock                                                                   1,549            437
   Debt issuance costs                                                                           --         (4,019)
                                                                                          ---------      ---------

                    Net cash provided by financing activities                                 4,002        120,993
                                                                                          ---------      ---------

NET INCREASE IN CASH AND CASH EQUIVALENTS                                                   (61,419)           937

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                             85,050          9,016
                                                                                          ---------      ---------

CASH AND CASH EQUIVALENTS AT END OF PERIOD                                                $  23,631      $   9,953
                                                                                          =========      =========

SUPPLEMENTAL CASH FLOW DISCLOSURES:
   Interest paid                                                                          $  14,726      $  10,156
   Income taxes paid                                                                          1,817             30

NONCASH INVESTING AND FINANCING ACTIVITIES:
   Issuance of common stock for purchase of equipment                                         1,650             --
   Debt issuance for rig acquisition                                                          6,390             --
</TABLE>


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

                                      -5-
<PAGE>   6



                 FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                 JUNE 30, 1997



1.       BASIS OF PRESENTATION
         AND SIGNIFICANT ACTIVITIES:

         The accompanying unaudited condensed consolidated financial statements
of the Company for the three months and six months ended June 30, 1997 and
1996, have been prepared without an audit pursuant to the rules and regulations
of the Securities and Exchange Commission. In the opinion of management, all
adjustments, which consist of normal recurring adjustments, necessary to
present fairly the financial position, results of operations and cash flows for
all periods presented have been made. Operating results for the interim periods
are not necessarily indicative of the results that can be expected for a full
year. It is suggested that these interim condensed consolidated financial
statements be read in conjunction with the audited financial statements and the
notes thereto included in the Company's latest annual report filed on Form
10-K.

SIGNIFICANT EVENTS

         During June 1997, the Company declared a dividend of one share of
Falcon's common stock for each share of Falcon common stock issued and
outstanding at the close of business on July 9, 1997. Accordingly, all share
amounts for all periods presented have been restated to reflect this stock
split effected in the form of a stock dividend.

         On July 10, 1997 the Company entered into an agreement and plan of
merger with Reading & Bates Corporation (the Merger Agreement). This agreement
and plan of merger is subject to certain regulatory approvals and the approval
of the shareholders of both companies. The Company anticipates that the
agreement and plan of merger will be submitted to a shareholder vote during the
fourth quarter of this year. If approved by the shareholders of both companies,
the plan of merger provides that the shareholders of both companies would
exchange their shares of common stock for shares of common stock of a new
company, R&B Falcon Corporation. Under the terms of the agreement, the
Company's shareholders would receive one share of R&B Falcon Corporation for
each of their existing shares while Reading & Bates Corporation shareholders
would receive 1.18 shares of R&B Falcon Corporation for each of their existing
shares.

         Immediately after consummation of the merger, management estimates
that the current shareholders of the Company would hold approximately 48% of
the common stock of R&B Falcon Corporation. As such, consummation of the merger
would cause a change of control of the Company as defined in the Company's bond
indenture agreements. Accordingly, the Company would be required to make a
change of control cash purchase offer to each bondholder at a price equal to
101% of the aggregate principal outstanding or approximately $293 million.
Based on current credit market conditions and the recent trading history of its
bonds, management does not believe that a significant portion of the bonds
would be tendered pursuant to a change of control purchase offer by the
Company. However, should a significant portion of or all of its outstanding
bonds be tendered pursuant to such a change of control purchase offer, the
Company has received a $300 million short-term tender facility financing
commitment from a financial institution that would be used to fund such a bond
repurchase obligation. Borrowings under the short-term tender facility would
mature three months from the date of initial funding and bear interest at the
eurodollar loan rate plus 1.25%. Should a significant portion of its
outstanding bonds be repurchased and funded via the short-term tender facility,
management anticipates that substantially all of any such debt obligation would
be refinanced on a long-term basis prior to maturity.


                                      -6-
<PAGE>   7
                 FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

   NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


         The Merger Agreement provides that each of the Company and R&B (each,
a "Payor") is obligated to pay to the other (each, a "Payee") a termination fee
of $100 million upon the occurrence of certain events, including (i) the Payee
terminates the Merger Agreement because the Payor breaches its obligation not
to solicit the acquisition of the Payor by a third party, and the Payor
consummates such acquisition within 18 months after termination, (ii) either
party terminates the Merger Agreement because the Merger has not closed by
January 31, 1998, the Payor had received a proposal to acquire it, and the
Payor is acquired within 18 months after the termination, or (iii) the Payor
elects to terminate the Merger Agreement because it has received a proposal to
acquire it which it deems superior to the Merger, and the Payor's Board
determines that it is unlikely that shareholder approval of the Merger will be
obtained.

         In connection with the Merger Agreement, Falcon granted R&B an option
to purchase 15,753,823 shares of Falcon Common Stock at an exercise price of
$27.78 per share. The R&B Option may only be exercised upon the occurrence of
certain events (none of which has occurred) generally relating to an attempt by
a third party to acquire all of or a significant interest in Falcon. In
addition, R&B granted Falcon an option to purchase 14,340,154 shares of R&B
Common Stock at an exercise price of $34.00 per share, subject to the terms and
conditions set forth therein. The Falcon Option may only be exercised upon the
occurrence of certain events (none of which has occurred) generally relating to
an attempt by a third party to acquire all or a significant interest in R&B.

2.       EARNINGS PER COMMON SHARE:

         Net income per share of common stock has been computed on the basis of
the weighted average number of common shares outstanding during the period and,
where dilutive, the effect of common stock contingently issuable, which arises
primarily from the exercise of stock options. The number of shares outstanding
have been restated for all periods presented to reflect the effect of the stock
split effected as a one-for-one stock dividend declared in June of 1997 and
distributed July 9, 1997. Fully diluted earnings per share are considered to be
equal to primary earnings per share because the effects of potentially dilutive
securities that are not common stock equivalents were either antidilutive or
immaterial.

         The following table presents the computation of common and common
equivalent shares used in computing primary earnings per share:

<TABLE>
<CAPTION>
                                                                         THREE MONTHS                    SIX MONTHS
                                                                          ENDED JUNE 30,                 ENDED JUNE 30,
                                                                 ----------------------------      ----------------------------
                                                                     1997           1996              1997              1996
                                                                 -----------      -----------      -----------      -----------
                                                                          (UNAUDITED)                    (UNAUDITED)
<S>                                                               <C>              <C>              <C>              <C>       
Weighted average shares of common stock
    outstanding                                                   78,875,686       70,623,296       78,776,636       70,601,188
Weighted average of common stock equivalents                       1,411,816        2,135,256        1,434,618        2,060,054
Effect of shares issuable pursuant to stock option plans
    using the treasury stock method                                 (421,294)        (686,428)        (432,116)        (728,466)
                                                                 -----------      -----------      -----------      -----------

Shares used in computing earnings per share                       79,866,208       72,072,124       79,779,138       71,932,776
                                                                 ===========      ===========      ===========      ===========
</TABLE>


         In February 1997, the Financial Accounting Standards Board issued
Statement of Accounting Standards No. 128, Earnings Per Share (SFAS No. 128).
For the Company, SFAS No. 128 will be effective for the year ended December 31,
1997. SFAS No. 128 simplifies the standards required under current accounting
rules for computing earnings per share and replaces the presentation of primary
earnings per share and fully diluted earnings per share with a presentation of
basic earnings per share (basic EPS) and diluted earnings per share (diluted
EPS). Basic EPS excludes dilution and is determined by dividing income
available to common stockholders by the weighted average number of common
shares outstanding during the period. Diluted EPS reflects the potential
dilution that could occur if contracts to issue common stock were exercised or
converted into common stock. Diluted EPS is computed similarly to fully diluted
earnings per share under current accounting rules.



                                      -7-

<PAGE>   8

                 FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

   NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

         The implementation of SFAS No. 128 is not expected to have a material
effect on the Company's earnings per share as determined under current
accounting rules.

3.       LONG-TERM DEBT:

         The Company had the following debt outstanding as of June 30, 1997,
and December 31, 1996 (in thousands):

<TABLE>
<CAPTION>
                                                                                           JUNE 30,      DECEMBER 31,
                                                                                            1997            1996
                                                                                          ---------      ---------
                                                                                         (UNAUDITED)
<S>                                                                                       <C>            <C>      
8-7/8% Senior Notes, due 2003                                                             $ 120,000      $ 120,000
9-3/4% Senior Notes, due 2001                                                               110,000        110,000
Floating Rate Notes, bearing interest at LIBOR plus 3.5%, redeemable in
   varying amounts beginning in 1998                                                         10,000         10,000
12-1/2% Senior Subordinated Notes, due 2005                                                  50,000         50,000
Borrowings pursuant to revolving loan facilities                                              5,000             --
Note payable to a bank, at LIBOR plus 1.5%                                                       --            689
Notes payable by affiliates, secured by certain rigs, at 7.0%, due in varying
   amounts commencing July 1994 with final payment due June 30, 1999
                                                                                                836          1,029
Secured promissory note payable to Grace Offshore Company at 8.7%, secured by
   certain FALRIG Partnership jackup rigs, final payment due March 31, 1998
                                                                                              1,667          3,333
Secured promissory note payable to Coastal Capital Corporation at 7.5%, secured
   by the vessel Peregrine VI, due January 17, 1999
                                                                                              6,390             --
                                                                                          ---------      ---------
                                                                                            303,893        295,051
Less- Amounts due within one year                                                            (3,071)        (2,746)
                                                                                          ---------      ---------

                                                                                          $ 300,822      $ 292,305
                                                                                          =========      =========
</TABLE>


         The 8-7/8% Senior Notes mature on March 15, 2003, and bear interest at
a rate of 8.875%, payable semiannually on March 15 and September 15. The 9-3/4%
Senior Notes mature on January 15, 2001, and bear interest at a rate of 9.75%,
payable semiannually on January 15 and July 15. The Floating Rate Notes bear
interest at LIBOR plus 3.5%. Principal amounts of the Floating Rate Notes are
due in payments of $1.0 million, $2.0 and $2.0 million in January 1998, 1999
and 2000, respectively, with the balance due January 24, 2001. The 12-1/2%
Senior Subordinated Notes mature on March 15, 2005, and bear interest at a rate
of 12.5% payable semiannually on March 15 and September 15.

         In order to provide an additional source of funds, the Company has a
revolving credit facility with three banks providing for borrowings of up to
$65.0 million, which consists of (I) a $25.0 million revolving loan facility
secured by accounts receivable, maturing in November 1999, and (ii) a $40.0
million revolving loan facility secured by certain drilling rigs and
receivables, maturing in November 1998.

         The $25.0 million facility provides for interest at LIBOR plus 1% to
1-1/2% (depending on outstanding borrowings) or the greater of prime or 1/2%
over the federal funds rate. The $40.0 million facility provides for interest
at LIBOR plus 2% or the greater of prime plus 1/2% or the federal funds rate
plus 1%. The Company had no borrowings outstanding under either facility as of
December 31, 1996 and $5.0 million outstanding under the $25.0 million facility
as of June 30, 1997.


                                      -8-

<PAGE>   9
                 FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

   NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



4.       COMMITMENTS AND CONTINGENCIES:

         The Company is currently involved in various lawsuits and other
contingencies arising out of operations in the normal course of business. In
the opinion of management, uninsured losses, if any, in excess of those accrued
will not have a material adverse effect on the Company's consolidated financial
position or results of operations. The Company is self-insured for the
deductible portion of its insurance coverage and participates in an insurance
cooperative for most of its coverage. Most of its insurance provides for
premium adjustments based on claims experience. Future events, claims or
assessments may increase the Company's costs for such coverage. In the opinion
of management, adequate accruals have been made based on known and estimated
exposures.

         The Company has multiyear employment agreements with several of its
officers. The employment agreements provide for annual salaries and
discretionary bonuses to be determined by the board of directors.

         The Company entered into contingent profits interest agreements during
1992 associated with certain acquisitions. The agreements require annual
payments of 15 percent of an agreed-upon amount to be paid to the previous rig
owners and a former mortgage holder. This agreed-upon amount can be generally
described as domestic barge net income less overhead, depreciation and interest
attributable to these operations. At June 30, 1997, payments of approximately
$1.5 million have been made pursuant to these agreements. These payments have
been recorded as an addition to rigs and equipment. The agreements remain in
effect through 1997, and payments are not to exceed $5.0 million in the
aggregate.

COMMITMENTS RELATING TO CERTAIN RIGS

         Falcon has entered into an agreement to purchase three barge drilling
rigs for an approximate cost of $5.25 million. At June 30, 1997, Falcon had
made deposits of approximately $500,000 which have been included in other
assets. The Company has commenced a legal action to enforce its rights under
that contract. Management of Falcon believes the deposit on these rigs is
refundable should the delivery of these rigs not be accomplished.

         During 1996, the Company entered into several leasing arrangements
with various parties for the use of one drillship, one jackup rig, one barge
drilling rig and two barge workover rigs. At December 31, 1996, future minimum
lease payments relating to these agreements are $9.7 million in 1997, $9.7
million in 1998, $8.6 million in 1999 and $855,000 in 2000. The lease
agreements for the barge drilling rig and one of the barge workover rigs
provides for additional rental payments based upon revenues of certain of the
Company's barge rigs. The Company has the option to purchase the leased
drillship and jackup, and the purchase of either such rig by the Company would
terminate its obligation to make further lease payments with respect to such
rig.

         In April 1997, Falcon entered into letters of intent with two
customers to provide, under long term contracts, two dynamically-positioned
drillships to be designated the Peregrine IV and Peregrine VI. The Company
plans to complete and deliver these two vessels prior to year end 1998. The
Peregrine IV will be completed at an estimated cost of $140.0 million utilizing
the drillship hull and engine package that the Company acquired in late 1996
from the Kherson shipyard for approximately $8.0 million. Upon completion, this
vessel will mobilize to Brazil where it will commence operations under a
six-year drilling contract. The Peregrine VI will be completed at an estimated
cost of $150.0 million by conversion of the 135,000 ton bulk carrier formerly
known as the Coastal Golden which Falcon purchased in January 1997 for
approximately $7.5 million. Following completion, this vessel will mobilize to
the U.S. Gulf of Mexico where it will commence operations under a three-year
drilling contract.

         In June, 1997 Falcon purchased a purpose-built dynamically-positioned
drillship, the Deepsea Worker, for approximately $33.8 million. This vessel has
been designated the Peregrine VII. The Peregrine VII will be converted to the
drilling mode at an estimated cost of $110.0 million. Upon completion, the
vessel will begin a three-year drilling contract in West Africa.


                                      -9-
<PAGE>   10
                 FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

   NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



         The Company is in the process of finalizing negotiations for a
shipyard and third party construction manager for the work on the Peregrine IV,
Peregrine VI and Peregrine VII. The Company anticipates that these contracts
will be "time and materials" type contracts rather than fixed price or turnkey
contracts with on-site construction management provided by Falcon and its third
party construction manager. Without expanding its short-term credit
availability, the Company's available funds, together with cash generated from
operations would likely not be sufficient to fund the Company's capital
expenditure program, working capital and debt service requirements. Were such
circumstances to occur, the Company would postpone or otherwise externally
finance one or more of the Peregrine IV, Peregrine VI and Peregrine VII
projects.

5.       SUPPLEMENTAL GUARANTOR INFORMATION:

         Falcon's obligations under the 9-3/4% Notes and Floating Rates Notes
are fully and unconditionally guaranteed by Falcon and each of Falcon's
directly held subsidiaries and certain of Falcon's indirectly held subsidiaries
on a joint and several basis. The indenture and note purchase agreement under
which the 9-3/4% Noes and Floating Rates Notes were issued provides for
acquired subsidiaries subsequent to the issuance of the 9-3/4% Notes and
Floating Rates Notes to be designated as guarantors of the 9-3/4% Notes and
Floating Rates Notes.

         The following condensed consolidating financial statements are
presented for purposes of complying with the reporting requirements of the
parent company and the subsidiaries which are guarantors under the 9-3/4% Notes
and Floating Rates Notes. Falcon believes that separate financial statements
and other disclosures of the guarantors are not material.




                                     -10-

<PAGE>   11
                 FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

   NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

              CONDENSED CONSOLIDATING BALANCE SHEET--JUNE 30, 1997

                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                         FALCON DRILLING      GUARANTOR       NONGUARANTOR
                                          COMPANY, INC.     SUBSIDIARIES      SUBSIDIARIES        ELIMINATIONS        CONSOLIDATED
                                         --------------    --------------     --------------     --------------     --------------
<S>                                      <C>               <C>                <C>                <C>                <C>           
              ASSETS
CURRENT ASSETS:
   Cash and cash equivalents             $       16,437    $        7,194     $           --     $           --     $       23,631
   Accounts receivable, net                      32,715            52,934                 --                 --             85,649
   Other current assets                              89            16,574                 --                 --             16,663
                                         --------------    --------------     --------------     --------------     --------------

     Total current assets                        49,241            76,702                 --                 --            125,943

EQUIPMENT AND PROPERTY, net                       9,122           567,540              2,413                 --            579,075

OTHER NONCURRENT ASSETS                              --            15,118                 --                 --             15,118

INTERCOMPANY AND INVESTMENT IN
   SUBSIDIARIES AND JOINT
   VENTURES, net                                584,177                --                 --           (584,177)                --
                                         --------------    --------------     --------------     --------------     --------------

     Total assets                        $      642,540    $      659,360     $        2,413     $     (584,177)    $      720,136
                                         ==============    ==============     ==============     ==============     ==============

          LIABILITIES AND
       STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
   Accounts payable and accrued
     liabilities                         $       23,492    $       23,601     $           --     $           --     $       47,093
   Current maturities of
     long-term debt                               1,000             1,667                404                 --              3,071
                                         --------------    --------------     --------------     --------------     --------------

     Total current liabilities                   24,492            25,268                404                 --             50,164

LONG-TERM DEBT, net                             300,389                 0                433                 --            300,822

DEFERRED INCOME TAXES                                --            51,491                 --                 --             51,491

PREFERRED STOCK                                      --                --                 --                 --                 --

STOCKHOLDERS' EQUITY:
   Partnership capital                               --            56,672                 --            (56,672)                --
   Common stock                                     792                --                 --                 --                792
    Preferred stock, Series A                        --                --                 --                 --                 --
   Additional paid-in capital                   241,365           415,056              2,132           (417,188)           241,365
   Accumulated earnings (deficit)
                                                 75,502           110,873               (556)          (110,317)            75,502
                                         --------------    --------------     --------------     --------------     --------------

     Total stockholders' equity                 317,659           582,601              1,576           (584,177)           317,659
                                         --------------    --------------     --------------     --------------     --------------

     Total liabilities and
       stockholders' equity              $      642,540    $      659,360     $        2,413     $     (584,177)    $      720,136
                                         ==============    ==============     ==============     ==============     ==============
</TABLE>



                                     -11-

<PAGE>   12
                 FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

   NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

            CONDENSED CONSOLIDATING BALANCE SHEET--DECEMBER 31, 1996

                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                        FALCON DRILLING     GUARANTOR         NONGUARANTOR
              ASSETS                     COMPANY, INC.     SUBSIDIARIES       SUBSIDIARIES       ELIMINATIONS        CONSOLIDATED
                                        ---------------   ---------------    ---------------    ---------------    ---------------
<S>                                     <C>               <C>                             <C>   <C>                <C>            
CURRENT ASSETS:
   Cash and cash equivalents            $        82,559   $         2,491    $            --    $            --    $        85,050
   Accounts receivable, net                      27,510            44,081                 --                 --             71,591
   Other current assets                             130             9,803                 --                 --              9,933
                                        ---------------   ---------------    ---------------    ---------------    ---------------

     Total current assets                       110,199            56,375                 --                 --            166,574

EQUIPMENT AND PROPERTY, net                       9,503           455,951              2,508                 --            467,962

OTHER ASSETS                                         --            17,506                 --                 --             17,506

INTERCOMPANY AND INVESTMENT IN
   SUBSIDIARIES                                 463,932                --                 --           (463,932)                --
                                        ---------------   ---------------    ---------------    ---------------    ---------------

     Total assets                       $       583,634   $       529,832    $         2,508    $      (463,932)   $       652,042
                                        ===============   ===============    ===============    ===============    ===============

          LIABILITIES AND
       STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
   Accounts payable and accrued
     liabilities                        $        19,196   $        35,120    $            --    $            --    $        54,316
   Debt due within one year                         689             1,667                390                 --              2,746
                                        ---------------   ---------------    ---------------    ---------------    ---------------

     Total current liabilities                   19,885            36,787                390                 --             57,062

LONG-TERM DEBT, net                             290,000             1,667                638                 --            292,305

DEFERRED INCOME TAXES                                --            28,927                 --                 --             28,927

STOCKHOLDERS' EQUITY:
   Partnership capital                               --            56,672                 --            (56,672)                --
   Common stock                                     786                --                 --                 --                786
   Additional paid-in capital                   238,172           341,807              1,954           (343,761)           238,172
   Accumulated earnings (deficit)
                                                 34,790            63,973               (474)           (63,499)            34,790
                                        ---------------   ---------------    ---------------    ---------------    ---------------

     Total stockholders' equity                 273,748           462,452              1,480           (463,932)           273,748
                                        ---------------   ---------------    ---------------    ---------------    ---------------

     Total liabilities and
       stockholders' equity             $       583,633   $       529,833    $         2,508    $      (463,932)   $       652,042
                                        ===============   ===============    ===============    ===============    ===============
</TABLE>



                                     -12-

<PAGE>   13

                 FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

   NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

                     FOR THE SIX MONTHS ENDED JUNE 30, 1997

                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                              FALCON DRILLING    GUARANTOR      NONGUARANTOR
                                                COMPANY, INC.   SUBSIDIARIES    SUBSIDIARIES    ELIMINATIONS    CONSOLIDATED
                                                ------------    ------------    ------------    ------------    ------------
<S>                                             <C>             <C>             <C>             <C>             <C>         
OPERATING REVENUES                              $      5,096    $    225,539    $         --    $         --    $    230,635

COSTS AND EXPENSES:
   Operating costs                                     3,752         122,149              --              --         125,901
   General and administrative                            334          13,115              --              --          13,449
   Depreciation                                          381          16,446              95              --          16,922
                                                ------------    ------------    ------------    ------------    ------------

OPERATING INCOME                                         629          73,829             (95)             --          74,363

OTHER (INCOME) EXPENSE:
   Interest expense                                   10,320             (69)             35              --          10,286
   Other (income) expense, net                             1            (546)             --              --            (545)
   Equity in income of subsidiaries                  (46,818)             --              --          46,818              --
                                                ------------    ------------    ------------    ------------    ------------

INCOME (LOSS) BEFORE INCOME TAXES
                                                      37,126          74,444            (130)        (46,818)         64,622

INCOME TAX PROVISION (BENEFIT)
                                                      (3,586)         27,544             (48)             --          23,910
                                                ------------    ------------    ------------    ------------    ------------

INCOME (LOSS)                                   $     40,712    $     46,900    $        (82)   $    (46,818)   $     40,712
                                                ============    ============    ============    ============    ============
</TABLE>





                                     -13-
<PAGE>   14
                 FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

   NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

                     FOR THE SIX MONTHS ENDED JUNE 30, 1996

                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                               FALCON DRILLING   GUARANTOR      NONGUARANTOR
                                                COMPANY, INC.   SUBSIDIARIES    SUBSIDIARIES    ELIMINATIONS    CONSOLIDATED
                                                ------------    ------------    ------------    ------------    ------------
<S>                                             <C>             <C>             <C>             <C>             <C>         
OPERATING REVENUES                              $      7,164    $    122,916    $         --    $         --    $    130,080

COSTS AND EXPENSES:
   Operating costs                                     4,749          81,029              --              --          85,778
   General and administrative expenses                   264           8,617              --              --           8,881
   Depreciation                                          647          12,336              95              --          13,078
                                                ------------    ------------    ------------    ------------    ------------

OPERATING INCOME                                       1,504          20,934             (95)             --          22,343

OTHER (INCOME) EXPENSE:
   Interest expense                                   11,870             178              49              --          12,097
   Other (income) expense, net                           144          (1,027)             --              --            (883)
   Equity in income of subsidiaries                  (13,632)             --              --          13,632              --
                                                ------------    ------------    ------------    ------------    ------------

INCOME (LOSS) BEFORE INCOME TAXES                      3,122          21,783            (144)        (13,632)         11,129

INCOME TAX PROVISION (BENEFIT)                        (3,889)          8,060             (53)             --           4,118
                                                ------------    ------------    ------------    ------------    ------------

NET INCOME (LOSS)                               $      7,011    $     13,723    $        (91)   $    (13,632)   $      7,011
                                                ============    ============    ============    ============    ============
</TABLE>



                                     -14-

<PAGE>   15

                 FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

   NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

                     FOR THE SIX MONTHS ENDED JUNE 30, 1997
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                              FALCON DRILLING    GUARANTOR      NONGUARANTOR
                                                COMPANY, INC.   SUBSIDIARIES    SUBSIDIARIES    ELIMINATIONS    CONSOLIDATED
                                                ------------    ------------    ------------    ------------    ------------
<S>                                             <C>             <C>             <C>             <C>             <C>         
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net income (loss)                          $     40,712    $     46,900    $        (82)   $    (46,818)   $     40,712
     Adjustments to reconcile net
       income to net cash provided
       by (used in) operating
       activities-
         Equity in unconsolidated
           subsidiaries                              (46,818)             --              --          46,818              --
         Depreciation and
           amortization                                  381          17,675              95              --          18,151
         Realized gain on the sale
           of assets                                      --          (1,027)             --              --          (1,027)
         Deferred income tax
           provision                                      --          22,564              --              --          22,564
         Changes in current assets
           and current liabilities
           and intercompany balance                  (72,648)         45,616             179              --         (26,853)
                                                ------------    ------------    ------------    ------------    ------------

   Net cash provided by (used in)
     operating activities                            (78,373)        131,728             192              --          53,547
                                                ------------    ------------    ------------    ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Purchases of equipment and
       property                                           --        (120,024)             --              --        (120,024)
     Refunds on drill pipe, rigs and
       equipment, net of deposits                         --              --              --              --              --
     Sale of equipment and property                       --           1,056              --              --           1,056
                                                ------------    ------------    ------------    ------------    ------------

   Net cash provided by (used
     in) investing activities                             --        (118,968)             --              --        (118,968)
                                                ------------    ------------    ------------    ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
     Issuance of debt                                  5,000              --              --              --           5,000
     Proceeds from sale of stock                       1,549              --              --              --           1,549
     Payments of outstanding debt                       (688)         (1,667)           (192)             --          (2,547)
     Stock issuance costs                                 --              --              --              --              --
        Debt issuance costs                               --              --              --              --              --

   Net cash provided by (used in)
     financing activities                              5,861          (1,667)           (192)             --           4,002
                                                ------------    ------------    ------------    ------------    ------------

NET INCREASE (DECREASE) IN CASH AND
   CASH EQUIVALENTS                                  (72,512)         11,093              --              --         (61,419)

CASH AND CASH EQUIVALENTS AT
   BEGINNING OF YEAR                                  82,559           2,491              --              --          85,050
                                                ------------    ------------    ------------    ------------    ------------

CASH AND CASH EQUIVALENTS AT END OF
   YEAR                                         $     10,047    $     13,584    $         --    $         --    $     23,631
                                                ============    ============    ============    ============    ============
</TABLE>


                                     -15-


<PAGE>   16

                 FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES

   NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

                     FOR THE SIX MONTHS ENDED JUNE 30, 1996
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                              FALCON DRILLING    GUARANTOR      NONGUARANTOR
                                                COMPANY, INC.   SUBSIDIARIES    SUBSIDIARIES    ELIMINATIONS    CONSOLIDATED
                                                ------------    ------------    ------------    ------------    ------------
<S>                                             <C>             <C>             <C>             <C>             <C>         
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net income                                 $      7,011    $     13,723    $        (91)   $    (13,632)   $      7,011
     Adjustments to reconcile net
       income to net cash provided
       by (used in) operating
       activities-
         Equity in unconsolidated
           subsidiaries                              (13,632)             --              --          13,632              --
         Depreciation and
           amortization                                  791          13,493              95              --          14,379
         Realized gain on the sale
           of assets                                      --            (227)             --              --            (227)
         Provision for deferred
           income taxes                                   --           3,679              --              --           3,679
         Changes in current assets
           and current liabilities
           and intercompany balances                 (60,009)         45,827             175              --         (14,007)
                                                ------------    ------------    ------------    ------------    ------------

   Net cash provided by (used in)
     operating activities                            (65,839)         76,495             179              --          10,835
                                                ------------    ------------    ------------    ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Purchases of equipment and
       property                                      (57,769)        (82,360)             --              --        (140,129)
     Refunds on drill pipe, rigs and
       equipment, net of deposits                      8,826              --              --              --           8,826
     Sale of equipment and property                       --             413              --              --             413
                                                ------------    ------------    ------------    ------------    ------------
   Net cash provided by
     (used in)  investing
     activities                                      (48,943)        (81,947)             --              --        (130,890)
                                                ------------    ------------    ------------    ------------    ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
     Issuance of debt                                164,000              --              --              --         164,000
     Issuance of common stock                            437              --              --              --             437
        Payments of outstanding debt                 (37,000)         (2,246)           (179)             --         (39,425)
   Debt issuance costs                                (4,019)             --              --              --          (4,019)
                                                ------------    ------------    ------------    ------------    ------------
    Net cash provided by (used in)
     financing activities                            123,418          (2,246)           (179)        120,993
                                                                ------------    ------------    ------------    ------------
NET INCREASE  IN CASH AND CASH
   EQUIVALENTS                                         8,635          (7,698)             --              --             937
CASH AND CASH EQUIVALENTS AT
   BEGINNING OF YEAR                                     141           8,875              --              --           9,016
                                                ------------    ------------    ------------    ------------    ------------

CASH AND CASH EQUIVALENTS AT END OF
   YEAR                                         $      8,776    $      1,177    $         --    $         --    $      9,953
                                                ============    ============    ============    ============    ============
</TABLE>





                                     -16-


<PAGE>   17

      ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

                           AND RESULTS OF OPERATIONS

GENERAL

         The Company's financial condition and historical results of operations
have been significantly affected by a series of acquisitions that have resulted
in the Company's current fleet of rigs and vessels. As of July 31, 1997, the
Company's active rig fleet was composed of 63 rigs, including 29 barge drilling
rigs, ten barge workover rigs, 16 jackup drilling rigs, three submersible
drilling rigs and five drillships. Included in these totals are one drillship,
one jackup drilling rig, one barge drilling rig and two barge workover rigs
leased from third parties. The Company also owned and operated 47 inland tugs
and 36 utility barges as of July 31, 1997.

         Revenues. The Company's revenues are determined primarily by (a) the
number of rigs it has available for service and (b) demand for contract
drilling and workover services, which affects the utilization rate and the
number of rigs actively marketed by the Company.

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

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

CHANGES IN FINANCIAL CONDITION

         The increase in active units and cash flow generated from operations
were responsible for the significant changes in the Company's financial
position between December 31, 1996, and June 30, 1997. The following are the
most significant of the acquisitions and rig upgrades completed since December
31, 1996:

1)   The acquisition, through six transactions, of 47 tugs and 36 utility
     barges for approximately $30.0 million.

2)   The purchase for $7.5 million of a bulk carrier to be converted to a
     dynamically-positioned drillship.

3)   The upgrades of two submersible and two jackup rigs for approximately $8.0
     million.

4)   The upgrade of two drillships for approximately $16.1 million.

5)   The purchase for $33.8 million of a purpose-built dynamically-positioned
     drillship.




                                     -17-


<PAGE>   18


      ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

                    AND RESULTS OF OPERATIONS - (CONTINUED)


RESULTS OF OPERATIONS - FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1997
AND 1996

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

<TABLE>
<CAPTION>
                                                                   THREE MONTHS                 SIX MONTHS
                                                                      ENDED                        ENDED
                                                                     JUNE 30,                     JUNE 30,
                                                           ---------------------------   ---------------------------
                                                               1997           1996           1997           1996
                                                           ------------   ------------   ------------   ------------
                                                                  (IN THOUSANDS)                (IN THOUSANDS)
<S>                                                        <C>            <C>            <C>            <C>         
Revenues-
   Domestic barge drilling                                 $     40,978   $     26,459   $     79,547   $     44,548
   Domestic barge workover                                        8,090          4,192         14,298          8,214
   Domestic offshore drilling                                    39,624         27,868         73,900         49,412
   International shallow-water drilling                           9,408          8,571         19,524         18,572
   Deepwater operations                                          14,793          6,856         31,225          9,334
   Marine operations                                              7,797             --         12,141             --
                                                           ------------   ------------   ------------   ------------

                                                           $    120,690   $     73,946   $    230,635   $    130,080
                                                           ============   ============   ============   ============

Operating costs-
   Domestic barge drilling                                 $     21,386   $     17,090   $     44,689   $     30,326
   Domestic barge workover                                        4,743          3,742          9,941          6,521
   Domestic offshore drilling                                    19,254         18,245         36,239         33,350
   International shallow-water drilling                           5,549          4,079         10,369          9,685
   Deepwater operations                                           6,708          4,478         16,878          5,896
   Marine operations                                              5,314             --          7,785             --
                                                           ------------   ------------   ------------   ------------

                                                           $     62,954   $     47,634   $    125,901   $     85,778
                                                           ============   ============   ============   ============

Rig operating income-
   Domestic barge drilling                                 $     19,592   $      9,369   $     34,858   $     14,222
   Domestic barge workover                                        3,347            450          4,357          1,693
   Domestic offshore drilling                                    20,370          9,623         37,661         16,062
   International shallow-water drilling                           3,859          4,492          9,155          8,887
   Deepwater operations                                           8,085          2,378         14,347          3,438
   Marine operations                                              2,483             --          4,356             --
                                                           ------------   ------------   ------------   ------------
                                                                 57,736         26,312        104,734         44,302
   General and administrative expenses                            6,463          4,313         13,449          8,881
   Depreciation expense                                           8,687          7,045         16,922         13,078
                                                           ------------   ------------   ------------   ------------

                                   Operating income        $     42,586   $     14,954   $     74,363   $     22,343
                                                           ============   ============   ============   ============
</TABLE>







                                     -18-

<PAGE>   19


      ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

                    AND RESULTS OF OPERATIONS - (CONTINUED)


         Revenues. Revenues increased $46.7 million and $100.6 million during
the three and six month periods ended June 30, 1997, respectively, as compared
to the corresponding periods in 1996. The increase in revenues reflects: (i) an
increase in the number of units marketed and the overall utility of the
domestic barge drilling rigs for both periods; (ii) higher utilization and day
rates during both periods for the offshore drilling rigs; and (iii) the
acquisitions of the drillships Falcon Ice and Falcon Duchess, which began
operations in December, 1996 and February, 1997, respectively; and (iv) the
first quarter acquisition of the inland marine vessel operations.

         Operating Costs. Rig operating costs increased $15.3 million and $40.1
million during the three and six month periods, respectively, primarily as a
result of increased rig activity and fleet size.

         Operating Income. Operating income increased $27.6 million and $52.0
million during the three and six month periods, respectively, due primarily to
increases in rig operating income. The increases in rig operating income were
partially offset in both periods by: (i) increases in general and
administrative expenses due primarily to increased shorebase activity in Brazil
and the Far East and employee bonuses paid in 1997; and (ii) increases in
depreciation expense attributable to additional assets being placed in service.

         Interest Expense. Interest expense decreased $1.3 million and $1.8
million during the three and six month periods primarily due to the
capitalization of interest associated with the drillship Peregrine I upgrade
project.

         Other Income, net. Other income decreased $.7million and $.4 million
during the three and six month periods primarily as a result of increased
miscellaneous expenses.

         Net Income. Net income applicable to common shares increased $17.7
million and $33.7 million in the three and six month periods ended June 30,
1997, as compared to the corresponding periods in 1996 as a result of improved
operating results and the addition of the inland marine vessel operations, all
of which more than offset increases in depreciation and general and
administrative expenses.

LIQUIDITY AND CAPITAL RESOURCES

         Net cash provided by operating activities was $53.5 million for the
six months ended June 30, 1997, compared to $10.8 million for the comparable
prior period. The $42.7 million increase in net cash provided by operating
activities was the result of improved operating results, partially offset by an
increase in the other assets and decrease in the accounts payable components of
working capital at June 30, 1997. Operating results improved primarily as a
result of a significant expansion of the Company's operations.

         Net cash used in  investing  activities  for the six months ended
June 30, 1997, was $119.0 million compared to $130.9 million for the comparable
prior period.

         Net cash provided by financing activities was $4.0 million for the six
months ended June 30, 1997, compared to $121.0 million for the comparable prior
period. The significantly higher figure for the 1996 period primarily reflects
the Company's issuance of $120.0 million of Senior Notes in March, 1996.

         As of June 30, 1997, the Company had cash and credit availability
under its lines of credit totaling approximately $83.6 million. In anticipation
of the construction of the dynamically-positioned drillships, Peregrine IV,
Peregrine VI and Peregrine VII during 1997 and 1998 at a combined currently
estimated construction cost of approximately $400 million, the Company has
initiated discussions with various financial institutions to seek a $300 - $400
million increase in its short-term credit availability. As of July 31, 1997,
the Company had not committed nor has any lender agreed to provide any such new
credit facility or facilities. The Company believes that it can successfully
conclude negotiations with potential lenders regarding new credit facilities
prior to commencement of the construction phase of the Peregrine IV, Peregrine
VI and Peregrine VII projects. Without expanding its short-term credit
availability, the Company's



                                     -19-
<PAGE>   20


      ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

                    AND RESULTS OF OPERATIONS - (CONTINUED)


available funds, together with cash generated from operations would likely not
be sufficient to fund its capital expenditure program, working capital and debt
service requirements. Were such circumstances to occur, the Company would
postpone or otherwise externally finance one or more of the Peregrine IV,
Peregrine VI and Peregrine VII projects.

         As discussed in Note 1 of the Notes to Unaudited Condensed
Consolidated Financial Statements, the Company has entered into an agreement
with Reading & Bates Corporation. Should the merger be consummated as
contemplated by the agreement and plan of merger, management estimates that the
current shareholders of the Company would hold approximately 48% of the common
stock of R&B Falcon Corporation. As such, consummation of the merger would
cause a change of control of the Company as defined in the Company's bond
indenture agreements. Accordingly, the Company would be required to make a
change of control cash purchase offer to each bondholder at a price equal to
101% of the aggregate principal amount outstanding or approximately $293
million. Based on current credit market conditions and the recent trading
history of its bonds, management does not believe that a significant portion of
the bonds would be tendered pursuant to a change of control purchase offer by
the Company. However, should a significant portion of or all of its outstanding
bonds be tendered pursuant to such a change of control purchase offer, the
Company has received a $300 million short-term tender facility financing
commitment from a financial institution that would be used to fund such a bond
repurchase obligation. Borrowings under the short-term tender facility would
mature three months from the date of initial funding and bear interest at the
eurodollar loan rate plus 1.25%. Should a significant portion of its
outstanding bonds be repurchased and funded via the short term tender facility,
management anticipates that substantially all of any such debt obligation would
be refinanced on a long-term basis prior to maturity.

         The Merger Agreement provides that each of the Company and R&B (each,
a "Payor") is obligated to pay to the other (each, a "Payee") a termination fee
of $100 million upon the occurrence of certain events, including (i) the Payee
terminates the Merger Agreement because the Payor breaches its obligation not
to solicit the acquisition of the Payor by a third party, and the Payor
consummates such acquisition within 18 months after termination, (ii) either
party terminates the Merger Agreement because the Merger has not closed by
January 31, 1998, the Payor had received a proposal to acquire it, and the
Payor is acquired within 18 months after the termination, or (iii) the Payor
elects to terminate the Merger Agreement because it has received a proposal to
acquire it which it deems superior to the Merger, and the Payor's Board
determines that it is unlikely that shareholder approval of the Merger will be
obtained.

         In connection with the Merger Agreement, Falcon granted R&B an option
to purchase 15,753,823 shares of Falcon Common Stock at an exercise price of
$27.78 per share. The R&B Option may only be exercised upon the occurrence of
certain events (none of which has occurred) generally relating to an attempt by
a third party to acquire all of or a significant interest in Falcon. In
addition, R&B granted Falcon an option to purchase 14,340,154 shares of R&B
Common Stock at an exercise price of $34.00 per share, subject to the terms and
conditions set forth therein. The Falcon Option may only be exercised upon the
occurrence of certain events (none of which has occurred) generally relating to
an attempt by a third party to acquire all or a significant interest in R&B.

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



                                     -20-


<PAGE>   21


                          PART II - OTHER INFORMATION


ITEM 2 - CHANGES IN SECURITIES

         (b) On June 25, 1997, the Board of Directors of the Company declared a
dividend of one preferred share purchase right (a "Right") for each outstanding
Common Share of the Company. The dividend was payable on July 16, 1997 (the
"Record Date"), to the stockholders of record on that date. Each Right entitles
the registered holder to purchase from the Company one one-thousandth of a
share of Series C Junior Participating Preferred Stock, no par value (the
"Preferred Shares"), of the Company at a price of $125.00 per one
one-thousandth of a preferred Share (the "Purchase Price"), subject to
adjustment. The description and terms of the Rights are set forth in a Rights
Agreement dated as of June 25, 1997, as the same may be amended from time to
time (the "Rights Agreement"), between the Company and American Stock Transfer
& Trust Company, as Rights Agent (the "Rights Agent").

         Until the earlier to occur of (i) 10 days following a public
announcement that a person or group of affiliated or associated persons (an
"Acquiring Person") have acquired beneficial ownership of 10% or more of the
outstanding Common Shares (except that S-C Rig Investments, L.P., currently a
principal shareholder of the Company, shall not be deemed to be an Acquiring
Person unless it and its affiliates acquire 40% or more) or (ii) 10 business
days (or such later date as may be determined by action of the Board of
Directors prior to such time as any person or group of affiliated persons
becomes an Acquiring Person) following the commencement of, or announcement of
an intention to make, a tender offer or exchange offer the consummation of
which would result in the beneficial ownership by a person or group of 10% or
more of the outstanding Common Shares (the earlier of such dates being called
the "Distribution Date"), the Rights will be evidenced, with respect to any of
the Common Share certificates outstanding as of the Record Date, by such Common
Share certificates. Until the Distribution Date (or earlier redemption or
expiration of the Rights), the Rights will be transferred with and only with
the Common Shares.

         The Rights are not exercisable until the Distribution Date. Under the
Rights Agreement as initially adopted, the Rights would expire on the date
sixty days after the next annual meeting of stockholders of the Company, unless
the expiration is delayed by the Board of directors, which it may be in each
successive year, but in no event beyond July 16, 2007 (the "Final Expiration
Date"), unless the Final Expiration Date is extended or unless the Rights are
earlier redeemed or exchanged by the Company.

         In the event that any person or group of affiliated or associated
persons becomes an Acquiring Person, each holder of a Right, other than Rights
beneficially owned by the Acquiring Person (which will thereafter be void),
will thereafter have the right to receive upon exercise that number of Common
Shares having a market value of two times the exercise price of the Right. At
any time after any person or group becomes an Acquiring Person and prior to the
acquisition by such person or group of 50% or more of the outstanding Common
Shares, the Board of Directors of the Company may exchange the Rights (other
than Rights owned by such person or group, which will have become void), in
whole or in part, at an exchange ratio of the Common Share, or one
one-thousandth of a Preferred Share (or of a share of a class or series of the
Company's preferred stock having equivalent rights, preferences and
privileges), per Right (subject to adjustment).

         In the event that the Company is acquired in a merger or other
business combination transaction or 50% or more of its consolidated assets or
earning power are sold after any person or group becomes an Acquiring Person,
proper provision will be made so that each holder of a Right will thereafter
have the right to receive, upon the exercise thereof at the then current
exercise price of the Right, that number of shares of common stock of the
acquiring company which at the time of such transaction will have a market
value of two times the exercise price of the Right.

         At any time prior to such time as any person or group of affiliated or
associated persons becomes an Acquiring Person, the Board of Directors of the
Company may redeem the Rights in whole, but not in part, at a price of $.001
per Right (the "Redemption Price"). The redemption of the Rights may be made
effective at such time on such basis with such conditions as the Board of
Directors in its sole discretion may establish. Immediately upon any redemption
of the Rights, the right to exercise the Rights will terminate and the only
right of the holders of Rights will be to receive the Redemption Price.




                                     -21-
<PAGE>   22



                   PART II - OTHER INFORMATION - (CONTINUED)


         A more detailed description of the Rights is set forth in the
Company's Current Report on Form 8-K dated June 25, 1997, which is incorporated
herein by reference.

         On August 8, 1997, the Board of Directors of the Company amended the
Rights Agreement to provide that the Final Expiration Date of the Rights is
August 8, 1997. This effectively terminated the Rights on that date. A more
detailed description of such amendment is contained in the Company's Current
Report on Form 8-K dated August 8, 1997.


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

         On May 29, 1997, the annual meeting of shareholders of the Company
was held in Houston, Texas. At the meeting Kenneth H. Hannan, Jr. and Michael
C. Porter were re-elected as directors. Purnendu Chatterjee, Douglas A.P.
Hamilton, James R. Latimer, Steven A. Webster and William R. Ziegler, the other
directors of the Company, continued as directors of the Company. In addition to
the election of directors, the shareholders approved the 1997 Stock Option Plan
of the Company and ratified the appointment of Arthur Andersen L.L.P. as
independent auditors for the Company for the 1997 fiscal year.

The results of the vote on the matters described above are as follows:

(a)  The following number of votes were cast or withheld in the election of the
     persons named below as directors of the Company:

<TABLE>
<CAPTION>
                                         For          Abstain
                                      ----------      -------
<S>                                   <C>             <C>    
       Kenneth H. Hannan, Jr.         27,965,864      518,739
                                      ----------      -------

       Michael C. Porter              27,965,864      518,739
                                      ----------      -------
</TABLE>

(b)  The following number of votes were cast or withheld with respect to the
     approval of the 1997 Stock Option Plan of the Company:

<TABLE>
<CAPTION>
                           For         Against        Abstain
                       ----------     ---------       -------
<S>                    <C>            <C>              <C>  
                       26,704,584     1,774,868        5,151
                       ----------     ---------        -----
</TABLE>

(c)  The following number of votes were cast or withheld with respect to the
     ratification of the appointment of Arthur Andersen & Co. as independent
     auditors of the Company for the current fiscal year:

<TABLE>
<CAPTION>
                           For         Against        Abstain
                       ----------      -------        -------
<S>                    <C>               <C>           <C>  
                       28,482,836        700           1,067
                       ----------        ---           -----
</TABLE>

                                     -22-

<PAGE>   23



                   PART II - OTHER INFORMATION - (CONTINUED)


ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K

         (a)  Exhibits:

EXHIBIT NO.                DESCRIPTION

      4        Rights Agreement dated as of June 25, 1997, including Exhibit A,
               "Form of Certificate of Designation"; Exhibit B, "Form of Right
               Certificate"; Exhibit C, "Summary of Rights to Purchase
               Preferred Shares" (incorporated by reference to the Company's
               Current Report on Form 8-K dated June 25, 1997).

     27        Falcon Drilling Company, Inc. and Subsidiaries Financial Data
               Schedule.



----------

         (b) One report, dated June 25, 1997, was filed during the quarter
ending June 30, 1997.



                                     -23-


<PAGE>   24
                                   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.


                                           Falcon Drilling Company, Inc.




Date:  August 13, 1997                     /s/ Robert F. Fulton
                                           ---------------------------------
                                           Robert F. Fulton
                                           Principal Financial Officer





                                     -24-
<PAGE>   25

                                 INDEX EXHIBIT


<TABLE>
<CAPTION>
EXHIBIT NUMBER              DESCRIPTION
--------------              -----------
     <S>       <C> 
      4        Rights Agreement dated as of June 25, 1997, including Exhibit A,
               "Form of Certificate of Designation"; Exhibit B, "Form of Right
               Certificate"; Exhibit C, "Summary of Rights to Purchase
               Preferred Shares" (incorporated by reference to the Company's
               Current Report on Form 8-K dated June 25, 1997).

     27        Falcon Drilling Company, Inc. and Subsidiaries Financial Data
               Schedule.
</TABLE>