<PAGE>   1
================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                       ----------------------------------
                                 1999 FORM 10-K
(MARK ONE)

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934. (NO FEE REQUIRED)

     FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999

                                       OR

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934. (NO FEE REQUIRED)

     FOR THE TRANSITION PERIOD FROM ___________ TO ____________.

                         COMMISSION FILE NUMBER: 1-14389

                         MARINE DRILLING COMPANIES, INC.
             (Exact name of registrant as specified in its charter)

             TEXAS                                           74-2558926
  (State or other jurisdiction of                         (I.R.S. Employer
  incorporation or organization)                        Identification Number)

ONE SUGAR CREEK CENTER BLVD., SUITE 600, SUGAR LAND, TEXAS        77478-3556
       (Address of principal executive offices)                   (Zip Code)

       Registrant's telephone number, including area code: (281) 243-3000


Securities registered pursuant to Section 12(b) of the Act:

                                                     Name of each exchange
        Title of each class                            on which registered
        -------------------                        -------------------------
   COMMON STOCK, $.01 PAR VALUE                     NEW YORK STOCK EXCHANGE
PREFERRED SHARE PURCHASE RIGHTS                     NEW YORK STOCK EXCHANGE

Securities registered pursuant to Section 12(g) of the Act:

                                      NONE

     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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

               AGGREGATE MARKET VALUE OF THE COMMON STOCK HELD BY
                NONAFFILIATES ON MARCH 14, 2000 -- $1,374,246,500

                  NUMBER OF SHARES OF COMMON STOCK OUTSTANDING
                         ON MARCH 14, 2000 - 58,254,142

                       DOCUMENTS INCORPORATED BY REFERENCE


(1)  Certain portions of the Proxy Statement for Annual Meeting of Shareholders
     to be held May 11, 2000 - Part III

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




<PAGE>   2





                         MARINE DRILLING COMPANIES, INC.

                                 1999 FORM 10-K

                                TABLE OF CONTENTS


<TABLE>
<CAPTION>
                                                                                                                     Page
                                                                                                                     ----
                                                           PART I
<S>        <C>                                                                                                       <C>
Item 1.    Business................................................................................................     1
Item 2.    Properties..............................................................................................     8
Item 3.    Legal Proceedings.......................................................................................    11
Item 4.    Submission of Matters to a Vote of Security Holders.....................................................    11


                                                           PART II

Item 5.    Market for Registrant's Common Stock and Related Shareholder Matters....................................    12
Item 6.    Selected Consolidated Financial Data....................................................................    13
Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations...................    14
Item 7A.   Quantitative and Qualitative Disclosures about Market Risk..............................................    19
Item 8.    Financial Statements and Supplementary Data.............................................................    20
Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................    39


                                                           PART III

Item 10.   Directors and Executive Officers of the Registrant......................................................    39
Item 11.   Executive Compensation..................................................................................    39
Item 12.   Security Ownership of Certain Beneficial Owners and Management..........................................    39
Item 13.   Certain Relationships and Related Transactions..........................................................    39


                                                           PART IV

Item 14.   Exhibits and Reports on Form 8-K........................................................................    39

Signatures.........................................................................................................    42
</TABLE>




                                      (i)

<PAGE>   3




                                     PART 1

ITEM 1. BUSINESS

GENERAL

         Marine Drilling Companies, Inc. (collectively with its subsidiaries,
the "Company") was incorporated in Texas in January 1990. Since 1966, the
Company or its predecessors have been engaged in offshore contract drilling of
oil and gas wells for independent and major oil and gas companies. Operations
are conducted in the U.S. Gulf of Mexico and internationally. The Company's
principal office is located at One Sugar Creek Center Blvd., Suite 600, Sugar
Land, Texas 77478 and its telephone number is (281) 243-3000.

         The Company owns and operates a fleet of 17 offshore drilling rigs
consisting of five independent leg jack-up units, four of which have a
cantilever feature, ten mat supported jack-up units, five of which have a
cantilever feature, and two semi-submersible units. Additionally, the Company
owns one independent leg jack-up rig configured as an accommodation unit.
Currently, thirteen of the Company's rigs are located in the U.S. Gulf of
Mexico, and the Company intends to bring two of its international rigs to the
U.S. Gulf of Mexico during the second quarter of 2000. The three remaining rigs
are in Southeast Asia, the North Sea and Western Australia.

BUSINESS STRATEGY

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

          o    U.S. Gulf of Mexico Jack-up Rig Fleet Focus. The Company is
               committed to remaining a leading operator of jack-up rigs in the
               U.S. Gulf of Mexico. The Company believes that its significant
               presence in the region offers logistical advantages, including
               reduced mobilization costs and flexibility of crew deployment,
               both of which reduce operating costs. The Company also believes
               that there is significant upside potential for dayrates in the
               U.S. Gulf of Mexico jack-up rig market due to both a worldwide
               supply of jack-up rigs that is not growing and an increasing rate
               of oil and natural gas reserve depletion in the region, which
               could increase drilling activity. The Company will increase its
               U.S. Gulf of Mexico presence in the second quarter of 2000 when
               it brings the MARINE 201 and MARINE 202 to the U.S. Gulf of
               Mexico from the United Arab Emirates and Southeast Asia.

          o    Balanced Long-Term and Short-Term Contract Portfolio. The Company
               seeks to appropriately balance its contract portfolio between
               long-term and short-term contracts. The Company believes that a
               balanced contract portfolio will help mitigate the cyclical
               nature of the drilling industry and will provide for a component
               of longer-term, more predictable cash flow, while maintaining the
               opportunity to capitalize on potential increases in drilling rig
               dayrates worldwide. In the current market environment,
               availability of long-term contracts has been primarily limited to
               semi-submersible rigs used for offshore drilling in deepwater
               markets. The MARINE 500 and MARINE 700 have provided the Company
               an opportunity to capitalize on the long-term contracts available
               in this market. Both of these rigs continue to operate under
               long-term contracts which are expected to generate contract
               revenues in excess of $300 million over the remaining life of the
               contracts. The Company believes that these two contracts help to
               counterbalance the short-term and spot market contracts in its
               rig portfolio.

          o    Growth Through Acquisitions and Upgrades. The Company actively
               seeks attractive opportunities for acquisitions to increase the
               size and capabilities of its fleet. The Company believes that
               during prolonged periods of depressed industry fundamentals
               assets become available at attractive prices. In January 2000,
               the Company purchased the MARINE 202 (formerly known as the
               Baruna V), a mat cantilever jack-up drilling rig for $13.5
               million. Additionally, when market conditions warrant, the
               Company may elect to perform upgrades on its existing rig fleet.





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<PAGE>   4

          o    Maintain an Appropriate Capital Structure. Because the offshore
               drilling business is subject to substantial fluctuations in
               demand, pricing and profitability, the Company seeks to maintain
               a level of debt that can be adequately supported by its working
               capital and long-term contract revenues. The Company believes
               this approach will enable it to better withstand the volatility
               associated with industry cycles.


RECENT MARKET CONDITIONS

         During 1996 and early 1997, oil and gas prices rose to a level that
stimulated significant oil and gas drilling activity resulting in improved
utilization and dayrates for the drilling industry. However, oil and gas prices
declined significantly beginning in October 1997, and reached multi-year lows in
various markets in early 1999. As a result of oil price declines in 1998 and
early 1999, oil and gas companies made significant cutbacks in their drilling
programs. This reduced industry-wide rig utilization including the U.S. Gulf of
Mexico, where the Company operates most of its rigs, which not only sharply
reduced dayrates, but also shortened the average length of drilling contracts
primarily to a well-by-well basis. Oil and gas prices improved during 1999,
resulting in recent increases in rig utilization and dayrates in the Gulf of
Mexico jack-up market.

         The following table sets forth rig utilization rates according to
Offshore Data Services:

<TABLE>
<CAPTION>
                                                                                    ANNUAL AVERAGE
                                                    AS OF          -------------------------------------------------
                                                MARCH 14, 2000          1999            1998             1997
                                                --------------     -----------      -----------      ---------------

<S>                                             <C>                <C>              <C>              <C>
     Gulf of Mexico jack-up rigs                     80%                67%              81%              90%
     Worldwide jack-up rigs                          71%                66%              83%              89%
     Gulf of Mexico semi-submersible rigs            56%                62%              78%              79%
     Worldwide semi-submersible rigs                 60%                64%              78%              81%
</TABLE>

         As of March 14, 2000, eleven of the Company's 16 jackup rigs are
working under short-term contracts that will expire in the first or second
quarter of 2000, one rig is under contract through the third quarter of 2000,
and four rigs are currently idle. All four idle rigs are located outside the
U.S. Gulf of Mexico, including the MARINE 201 and the MARINE 202, which will be
transported back to the U.S. Gulf of Mexico during the second quarter of 2000.
The Company's two semi-submersible rigs, the MARINE 500 and the MARINE 700, are
currently operating under long-term contracts.

RECENT DEVELOPMENTS

         On March 22, 2000, a blowout occurred on a Gulf of Mexico well in which
one of the Company's jack-up rigs, MARINE 4, was working. All personnel were
safely evacuated from the rig and there was no apparent damage to the rig or the
rig equipment. The Company and its customer are currently in the process of
regaining control of the well. The Company is currently unaware of any material
financial exposure related to this blowout, but due to the recentness of the
event, the Company is unable to assess the likelihood or amount of any
liabilities that may result from the blowout.

CUSTOMERS AND CONTRACTS

         General. The Company's drilling contracts generally provide for
compensation on a "daywork" basis. Under daywork contracts, the Company receives
a fixed amount per day for providing drilling services using the rigs it
operates. Under most daywork contracts, the Company pays virtually all costs
associated with operating the rig such as labor, operating supplies and repair
and maintenance. The Company typically negotiates with the customer the cost of
moving the rigs and related equipment to the job site and the customer pays all
other costs of drilling the well such as mud, casing, logging and completion
services. Daywork contracts may provide for lower rates during periods when
drilling operations are interrupted or restricted by equipment breakdowns,
adverse weather or water conditions or other





                                       2
<PAGE>   5
conditions beyond the Company's control. Historically, the Company has not
marketed its rigs under fixed price or turnkey contracts.

         A daywork contract generally extends over a period of time covering
either the drilling of a single well, a group of wells or a stated term. The
customer may terminate the contract if the drilling rig is destroyed or lost, or
if drilling operations are suspended for a specified period of time as a result
of breakdown of major equipment or other specific events. The duration of
drilling contracts is generally determined by market demand and competitive
conditions. Historically, domestic jack-up rig drilling contracts are typically
on a well-by-well basis, while contracts in the deepwater and international
jack-up markets have been on a term basis. The Company's experience during
recent years has been consistent with this general rule, with its rigs operating
in the shallow water Gulf of Mexico generally having been contracted on a
well-to-well basis and its deepwater and international rigs operating under term
contracts. Due to the highly cyclical nature of the offshore drilling business,
the Company seeks to appropriately balance its contract portfolio between
long-term and short-term contracts.

         The Company obtains most of its contracts through competitive bidding
against other contractors in response to oil and gas companies' solicitations of
bids. The Company's current drilling contracts, both foreign and domestic,
provide for payment in U.S. Dollars.

         The Company provides drilling services to a customer base that includes
independent and major foreign and domestic oil and gas companies. As is typical
in the industry, the Company does business with a relatively small number of
customers at any given time. For the year ended December 31, 1999, the Company
performed services for approximately 33 different customers. During 1999,
Applied Drilling Technology, Inc., a subsidiary of Global Marine Inc., accounted
for approximately 22% of the Company's total consolidated revenues, Western
Australian Petroleum Pty., Ltd. accounted for approximately 17% of revenues and
Esso Exploration, Inc. accounted for approximately 16% of revenues. The loss of
any one of the Company's customers could, at least on a short-term basis, have a
material adverse effect on the Company's profitability. See Note 11 of Notes to
Consolidated Financial Statements for further information regarding the
Company's major customers.

         MARINE 700 Drilling Contract. In January 1998, the Company signed a
long-term drilling contract with Esso Exploration Inc. ("Esso"), an affiliate of
Exxon Corporation, for the MARINE 700. The contract had an initial term of three
years and gave Esso the option to extend the contract to a five-year term. In
June 1998, Esso exercised the option to extend the contract to five years, with
a normal operating dayrate of $165,410 per day. In addition to the normal
operating dayrate, the Company would be entitled to obtain approximately $4,300
per day for certain construction and equipment changes requested by Esso during
the construction process. The dayrates were also subject to adjustments for
changes in indexed operating cost elements, changes in costs arising from moving
the rig outside the U.S. Gulf of Mexico, or changes in personnel requirements.
The Esso contract was expected to generate aggregate dayrate revenues of
approximately $302 million at full utilization, not including the additional
construction cost recoveries. The contract also entitled Esso to elect up to
five additional one-year extensions of the primary term at mutually agreeable
dayrates. Under the terms of the contract the rig was to be delivered to Esso by
July 15, 1999.

         On July 23, 1999, the Company signed an amendment to the MARINE 700
drilling contract with Esso providing an extension of the delivery deadline and
a reduction in the initial dayrate. The reduced initial dayrate is $130,000 per
day plus approximately $4,300 per day for the cost of Esso change orders and is
subject to an annual adjustment in years two through five of the contract to the
dayrate based on market conditions for comparable rigs (not below $130,000 per
day and not above $165,000 per day in years two and three) such that total
revenue from the contract could range from $237 million to $302 million
depending on drilling market conditions. Dayrates are still subject to
adjustments for changes in indexed operating cost elements as discussed above.
On August 5, 1999, the rig was accepted by Esso and began operating under the
parties' amended five-year drilling contract.

         MARINE 500 Drilling Contract. In July 1997, the Company entered into a
drilling contract with a drilling consortium led by West Australian Petroleum
Pty., Ltd. ("WAPET") for the MARINE 500. The consortium consists of WAPET,
Indonesia Petroleum, Ltd. ("INPEX") and Mobil Exploration and Producing
Australia ("MEPA"). Certain other oil companies have an option to participate in
the consortium. The contract required the Company, prior to delivery of the rig,
to upgrade the rig to work in water depths up to 5,000 feet with 15,000 psi
drilling equipment, as described below. The contract was originally scheduled
for a three-year term beginning in January 1999. However, because the rig was
delayed in arriving to the shipyard for the upgrade work as a result of work
extensions for its





                                       3
<PAGE>   6
previous customer, the rig was not delivered until July 5, 1999. This delay,
however, did not extend the term of the contract, consequently the contract will
still expire on December 31, 2001. During the term of this contract, the MARINE
500 will work predominately in Western Australia, although the consortium
members may use the rig in Southeast Asia, the Pacific Rim, and/or New Zealand.

         The consortium drilling contract is a master agreement that
contemplates separate drilling contracts with the individual consortium members
at a base dayrate of $127,500, which is adjusted for each contract based on
operating costs in the area in which the rig is to be used. Two of the
consortium members, WAPET and INPEX, have committed drilling contracts under the
consortium agreement and have agreed under the consortium agreement to be liable
for the conract minimum payments to the Company for the initial contract term
ending December 31, 2001. The optional consortium members have made no
commitments under the agreement, and are not liable for any payments under the
consortium contract until they commit to a drilling contract. The INPEX drilling
contract was a two-well contract with up to three option wells to be drilled at
an operating dayrate of $150,000 per day and was completed on January 5, 2000.
The WAPET drilling contract provides for a dayrate of $168,600 for an
unspecified number of wells. When the rig departed the shipyard in Singapore on
July 5, 1999, the Company, in accordance with the consortium drilling contract,
received a fee of $6 million. This $6 million fee is being recognized as revenue
over the term of the drilling contract. The contract provides that the
consortium can terminate the contract at any time after January 1, 2001 in
exchange for a termination payment of $95,890 for each day remaining in the term
of the contract, subject to offset if the rig is otherwise employed. In
addition, either party can terminate the WAPET drilling contract after 20 days
of certain force majeure events and in the event of certain breaches.

         MARINE 510 Charter. In July 1997, the Company entered into a Charter
Agreement with Shanghai Bureau of Marine Geological Survey ("SBMGS") to charter
the KANTAN 3 (referred to as the MARINE 510), a semi-submersible rig, for a
period of five years. The MARINE 510 is a 600-foot water depth rig based upon
the Pacesetter design and was built in China in 1984. The Charter Agreement
began in mid-May 1998. The Charter Agreement and related agreements required the
Company to pay approximately $26,000 per day during the first year, $23,000 per
day during the second year and $24,500 per day for the last three years of the
charter for each day that the MARINE 510 is working. The rig did not work from
November 1998 until July 21, 1999, when the Company terminated the Charter
Agreement for the MARINE 510. The termination agreement provides that if market
conditions improve and the rig becomes available to work outside of Chinese
waters, the Company and SBMGS anticipate entering into another Charter Agreement
upon mutually agreeable terms or upon the same terms as the original Charter
Agreement.

         Marketing Agreement for NANHAI VI. In August 1998, the Company entered
into an agreement effective through October 1, 1999, with the Peoples Republic
of China's Southern Drilling Company to market the 1,500-foot water depth rated
semi-submersible NANHAI VI. The Company recently extended the agreement through
December 31, 2000. The NANHAI VI is a self-propelled, semi-submersible drilling
rig, which was built in 1982 and modified and refurbished in 1995. The rig is
technically and economically suitable to be upgraded to 5,000-foot water depth
capability. Estimated total lead time required to secure the equipment needed
for the upgrade, complete the project and move the rig to first drilling
location is one year. Pursuant to the marketing agreement, if the rig is
required to be upgraded, the cost of the upgrade will be funded by the owner.
Under the agreement, the Company is to receive $3,000 per day in management fees
while the rig is operating and 50% of all rig-level profits after management
fees and amortization over a 36-month period of the costs of any upgrades to the
vessel. The Company is actively marketing the rig, which will be made available
by Southern Drilling Company upon consummation of a mutually agreeable drilling
contract.

ENVIRONMENTAL MATTERS

         General. The Company is subject to numerous domestic and foreign
governmental laws and regulations that relate directly or indirectly to its
operations, including certain laws and regulations (a) controlling the discharge
of materials into the environment, (b) requiring removal and cleanup under
certain circumstances, (c) requiring the proper handling and disposal of waste
materials, or (d) otherwise relating to the protection of the environment. For
example, the Company, as an operator of mobile offshore drilling rigs in waters
of the United States and certain foreign offshore areas, may be liable for
damages and for the cost of removing oil spills for which it is held
responsible, subject to certain limitations. Laws and regulations protecting the
environment have become more stringent in recent years and may, in certain
circumstances, assess administrative, civil and criminal penalties and impose
"strict liability," rendering a company liable for environmental damage without
regard to negligence or fault on the part of such company. Such


                                       4
<PAGE>   7
laws and regulations may expose the Company to liability for the conduct of or
conditions caused by others or for acts of the Company that were in compliance
with all applicable laws and regulations at the time such acts were performed.
The application of these requirements or the adoption of new requirements could
have a material adverse effect on the Company. The Company believes that it has
conducted its operations in substantial compliance with all applicable
environmental laws and regulations.

         The Company has generally been able to obtain contractual
indemnification in its drilling contracts against pollution and environmental
damages that are not caused by the gross negligence or willful misconduct of the
Company, but there can be no assurance that such indemnification will be
enforceable in all instances, that the customer will be financially able in all
cases to comply with its indemnity obligations, or that the Company will be able
to obtain such indemnification agreements in the future.

         The Company maintains insurance coverage against certain environmental
liabilities, but there can be no assurance that such insurance will continue to
be available or carried by the Company or, if available and carried, will be
adequate to cover the Company's liability in the event of a catastrophic
occurrence.

         U.S. Oil Pollution Act of 1990. The U.S. Oil Pollution Act of 1990
("OPA '90") and regulations promulgated pursuant thereto impose a variety of
regulations on "responsible parties" related to the prevention of oil spills and
liability for damages resulting from such spills. A "responsible party" includes
the owner or operator of an onshore facility, a pipeline or a vessel, or the
lessee or permittee of the area in which an offshore facility is located. OPA
'90 assigns liability to each responsible party for oil removal costs and a
variety of public and private damages. While liability limits apply in some
circumstances, a responsible party for an Outer Continental Shelf ("OCS")
facility must pay all spill removal costs incurred by a federal, state or local
government. OPA '90 establishes liability limits (subject to indexing) for
mobile offshore drilling rigs. If functioning as an offshore facility, the
mobile offshore drilling rigs are considered "tank vessels" for spills of oil on
or above the water surface, with liability limits of the greater of $1,200 per
gross ton or $10 million. To the extent damages and removal costs exceed this
amount, the mobile offshore drilling rigs will be treated as an offshore
facility and the offshore lessee will be responsible up to higher liability
limits of all removal costs plus $75 million. A party cannot take advantage of
liability limits if the spill was caused by gross negligence or willful
misconduct or resulted from violation of a federal safety, construction, or
operating regulation. If the party fails to report a spill or to cooperate fully
in the cleanup, liability limits likewise do not apply. Few defenses exist to
the liability imposed by OPA '90.

         OPA '90 also imposes ongoing requirements on a responsible party. A
failure to comply with ongoing requirements or inadequate cooperation in a spill
event may subject a responsible party to civil or criminal enforcement action.
In short, OPA '90 places a burden on drilling rig owners or operators to conduct
safe operations and take other measures to prevent oil spills. If a spill
occurs, OPA '90 then imposes liability for resulting damages.

         The ongoing requirements of OPA '90 include proof of financial
responsibility (to cover at least some costs in a potential spill), and
preparation of an oil spill contingency plan. OPA requires owners and operators
of vessels over 300 gross tons to provide the U.S. Coast Guard with evidence of
financial responsibility to cover the costs of cleaning up oil spills from such
vessels. Moreover, certain amendments to OPA '90, that were enacted in 1996,
requires owners and operators of offshore facilities that have a worst case oil
spill potential of more than 1,000 barrels to demonstrate financial
responsibility in amounts ranging from $10 million in specified state waters to
$35 million in federal OCS waters, with higher amounts, up to $150 million, in
certain limited circumstances where the Minerals Management Service ("MMS")
believes such a level is justified by the risks posed by the quantity or quality
of oil that is handled by the facility. On August 11, 1998, the MMS promulgated
a final rule implementing the OPA '90 financial responsibility requirements for
offshore facilities. The MMS final rule applies to those facilities used for
exploring for, drilling for, or producing oil (including wells drilled from
mobile offshore drilling rigs) as well as facilities (e.g., pipelines) used to
transport oil from such exploration, drilling or production facilities. Vessels,
including mobile offshore drilling rigs functioning as vessels rather than
drilling platforms, are not subject to the MMS final rule but rather remain
subject to regulations administered by the U.S. Coast Guard. The Company
believes that it currently has established adequate proof of financial
responsibility for its mobile offshore drilling rigs functioning as offshore
facilities. However, the Company cannot predict whether financial responsibility
requirements under any subsequent amendments to OPA '90, if any, will result in
the imposition of substantial additional annual costs to the Company in the
future or otherwise materially adversely affect the Company. The impact of any
such future financial responsibility requirement should be




                                       5
<PAGE>   8
no more burdensome on the Company than on similarly situated or less capitalized
drilling contractors operating in U.S. waters.

         Outer Continental Shelf Lands Act (U.S.). The Outer Continental Shelf
Lands Act authorizes regulations relating to safety and environmental protection
applicable to lessees and permittees operating on the Outer Continental Shelf.
Specific design and operational standards may apply to Outer Continental Shelf
vessels, rigs, platforms, vehicles and structures. Violations of lease terms
relating to environmental matters or regulations issued pursuant to the Outer
Continental Shelf Lands Act can result in substantial civil and criminal
penalties as well as potential court injunctions curtailing operations and the
cancellation of leases. Such enforcement liabilities can result from either
governmental or citizen prosecution.

         CERCLA and RCRA (U.S.). The Comprehensive Environmental Response,
Compensation, and Liability Act of 1980 ("CERCLA"), as amended, currently
exempts crude oil, and the Resource Conservation and Recovery Act ("RCRA"), as
amended, currently exempts certain drilling materials, such as drilling fluids
and produced water, from the definitions of hazardous substances and hazardous
wastes for purposes of these statutes. The Company's operations, however, may
involve the use or handling of other material that may be classified as
environmentally hazardous substances or wastes. There can be no assurances that
these exemptions will be preserved in future amendments of such acts, if any, or
that more stringent federal or state laws and regulations protecting the
environment will not be adopted. CERCLA assigns strict liability to each
responsible party for all response and re-mediation costs, as well as natural
resource damage. Few defenses exist to the liability imposed by CERCLA.

GOVERNMENTAL REGULATION

         The Company's business is affected by political developments and by
federal, state, foreign and local laws and regulations that relate directly to
the oil and gas industry. The adoption of laws and regulations curtailing
exploration and developmental drilling for oil and gas for economic,
environmental or other policy reasons would and have adversely affected the
operations of the Company by limiting available drilling opportunities for its
customers and/or increasing the costs of such activities to the Company or its
customers. The Company believes that it has conducted its operations in
substantial compliance with applicable governmental laws and regulations.

OPERATIONAL RISKS AND INSURANCE

         Contract drilling operations are subject to various risks including
blowouts, cratering, fires and explosions, each of which could result in damage
to or destruction of drilling rigs and oil and gas wells, damage to life and
property, suspension of operations, and environmental damage through oil
spillage and extensive uncontrolled fires. The Company insures its drilling rigs
and plant assets for amounts approximating used equipment replacement cost and
also insures against catastrophic losses resulting from employer's liability and
other risks customary in the energy service industry. The Company currently
maintains insurance coverage it believes to be customary in the industry against
certain general and marine public liabilities, including liabilities for
personal injuries. Except in limited circumstances, this insurance does not
cover liability for pollution or environmental damage that originates below the
water surface, although the Company is generally indemnified against such
pollution and environmental liabilities by its customers. There is no assurance
that such insurance or indemnification will be adequate to protect the Company
against liability from all consequences of well disasters, extensive fire damage
or damage to the environment. Recognizing these risks, the Company has programs
that are designed to promote a safe environment for its personnel and equipment.

COMPETITION

         The contract drilling industry is highly competitive, and the Company
competes with many drilling contractors, which are substantially larger than the
Company with greater financial and other resources. Customers often award
contracts on a competitive bid basis, and although a customer selecting a rig
may consider, among other things, a contractor's safety record, crew quality and
quality of service and equipment, the historical oversupply of rigs has created
an intensely competitive market in which price is the primary factor in
determining the selection of a drilling contractor. The Company believes that
competition for drilling contracts will continue to be intense in the
foreseeable future. Contractors are also able to adjust localized supply and
demand imbalances by moving rigs from areas of low utilization and day rates to
areas of greater activity and relatively higher day rates. In addition, there
are inactive non-marketed rigs that could be reactivated to meet an increase in
demand for drilling rigs in any given market. Such


                                       6
<PAGE>   9
movements or reactivations or a decrease in drilling activity in any major
market could depress day rates and could adversely affect utilization of the
Company's rigs.

         In addition, the improvement the offshore contract drilling industry as
a whole experienced during 1997 led to increased rig construction and
enhancement programs by the Company and its competitors. A significant increase
in the supply of new or enhanced rigs may have an adverse effect on the average
operating day rates for the Company's rigs, particularly its semi-submersible
units, and on the overall utilization level of the Company's fleet. The
availability of other suitable rigs could cause customers to attempt to
re-negotiate their long-term contracts with the Company or even attempt to
cancel their contracts. In such cases, the Company's results of operations would
be adversely affected.

INTERNATIONAL OPERATIONS

         The Company's international operations are also subject to certain
political, economic and other uncertainties including, among others, risks of
war and civil disturbances, expropriation, nationalization, renegotiation or
nullification of existing contracts, taxation policies, environmental
regulation, foreign exchange restrictions, changing political conditions,
international monetary fluctuations and other hazards arising out of foreign
governmental sovereignty over certain areas in which the Company conducts
operations. To date the Company has experienced no material loss as a result of
any of these factors.

EMPLOYEES

         As of March 14, 2000, the Company had 1,028 employees. The number of
employees varies throughout the year depending on the level of drilling
activity. The Company considers relations with its employees to be good. None of
the Company's employees is presently represented by labor unions.

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





                                       7
<PAGE>   10




ITEM 2. PROPERTIES

DRILLING RIG FLEET

         Jack-up Rigs. The Company owns 16 jack-up rigs, one of which is
currently configured as an accommodation unit. Jack-up rigs are mobile
self-elevating drilling platforms equipped with legs that can be lowered to the
ocean floor until a foundation is established to support the drilling platform.
An offshore jack-up rig consists of a hull, which supports the drilling
equipment, jacking system, crew quarters, loading and unloading facilities,
storage areas for bulk and liquid materials, helicopter landing deck and other
related equipment. The rig legs may operate independently or have a lower hull
or mat attached to the lower portion of the legs in order to provide a more
stable foundation in soft bottom areas.

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

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

         The Company has top drive drilling systems installed on 9 of its
jack-up rigs. A top drive drilling system allows drilling with 90-foot lengths
of drill pipe rather than 30-foot lengths, thus reducing the number of required
connections. A top drive drilling system also permits rotation of the drill
string while tripping in or out of the hole. These characteristics increase
drilling speed, personnel safety and drilling efficiency and reduce the risk of
the drill string sticking during operations.

         Currently, the Company has four jack-up rigs located in international
markets, two of which will be brought to the U.S. Gulf of Mexico during the
second quarter of 2000. The Company's jack-ups, except for the MARINE 306, are
not suitable for those areas that require hostile environment capabilities, such
as the North Sea, or in deep waters in excess of 200 to 300 feet.

         Semi-submersible Rigs. Semi-submersibles rigs operate worldwide and are
usually deployed in water depths that exceed the water depth range that jack-up
rigs are capable of working in. A semi-submersible rig is a column stabilized
drilling platform, with a ship or barge type displacement hull of single or
multiple configuration, with a main deck connected to the underwater hull or
footings by columns, intended for operations in the floating condition. Such
rigs operate in a "semi-submerged" position, remaining afloat, off bottom, in a
position in which the lower hull is about 40 to 80 feet below the water line and
the upper deck protrudes well above the surface. The conventionally moored
semi-submersible rig is typically anchored on location. There are three types of
mooring configurations, all wire, all chain, or a combination of wire and chain.
The water depth that semi-submersible rigs operate in will range from 200 to
7,500 feet. Multiple deck structures provide the space necessary for machinery,
drilling package, office and crew accommodations, open and closed storage, and
helideck. Semi-submersible rigs have drilling depth capability of 25,000 feet.
Variable deck load capacities range from 2,000 to 7,000 short tons, liquid mud
storage capacity range from 2,000 to 7,000 barrels, bulk mud storage capacity
ranges from 5,000 to 12,000 cu. ft. and bulk cement storage capacity ranges from
5,000 to 12,000 cu. ft. These units are equipped with blowout prevention
equipment rated at either 10,000 or 15,000 psi.




                                       8
<PAGE>   11

         The Company owns two conventionally moored semi-submersible rigs,
the MARINE 500 and the MARINE 700. The MARINE 500 has a combination wire/chain
mooring system rated for 5,000 foot water depth and drilling depth capability of
25,000 feet. The rig has a variable deck load capacity of 5,780 short tons. The
rig has a liquid mud storage capacity of 5,441 barrels, sack storage capacity
of 6,000 sacks, bulk mud storage capacity of 10,500 cu. ft. and bulk cement
storage capacity of 10,500 cu. ft. The rig is equipped with 15,000 psi rated
blowout prevention equipment. The MARINE 700 has a combination wire/chain
mooring system rated for 7,500 foot water depth and drilling depth capability of
25,000 feet. The rig has a variable deck load capacity of 8,375 short tons. The
rig has a liquid mud storage capacity of 10,260 barrels, multi-purpose liquid
storage capacity of 14,760 barrels, sack storage capacity of 700 metric ton,
bulk mud storage capacity of 14,100 cu. ft. and bulk cement storage capacity of
8,475 cu. ft. The rig is equipped with a 15,000 psi rated blowout prevention
equipment.

         The following table describes the Company's drilling rigs as of March
14, 2000:


<TABLE>
<CAPTION>
                                                             YEARBUILT/   RATED WATER  RATED DRILLING
   NAME OF RIG         MAKE/DESIGN            TYPE           UPGRADED       DEPTH          DEPTH           LOCATION
   -----------         -----------            ----           ----------   -----------  --------------      --------
<S>                    <C>                   <C>             <C>          <C>            <C>           <C>
Independent Leg Jack-up Rigs:

MARINE 300 T(a)(b)     F&G*/L780 MOD II     Cantilever           1981         250'        30,000'      U.S. Gulf of Mexico

MARINE 301 T           F&G*/L780 MOD II     Cantilever           1981         300'        25,000'      U.S. Gulf of Mexico

MARINE 303 T           F&G*/L780 MOD II     Cantilever           1982         300'        30,000'      U.S. Gulf of Mexico

MARINE 304 T           MLT**/84S            Slot              1976/1993       300'        30,000'      U.S. Gulf of Mexico

MARINE 305 T           Levingston III-S     Cantilever        1975/1997       300'        30,000'      Southeast Asia

MARINE 306             Gusto Engineering    Accommodation     1975/1992       205'         N/A         North Sea
                                            Unit

Mat Supported Jack-up Rigs:

MARINE 3               Bethlehem/262        Slot                 1974         262'        25,000'      U.S. Gulf of Mexico

MARINE 4               Bethlehem/250        Slot                 1975         250'        25,000'      U.S. Gulf of Mexico

MARINE 15 T            Baker Marine/250     Slot              1981/1996       250'        25,000'      U.S. Gulf of Mexico

MARINE 16 T            Bethlehem/250        Slot              1981/1995       250'        20,000'      U.S. Gulf of Mexico

MARINE 17              Bethlehem/200        Cantilever           1981         200'        20,000'      U.S. Gulf of Mexico

MARINE 18              Bethlehem/250        Cantilever           1982         250'        20,000'      U.S. Gulf of Mexico

MARINE 200 T           Bethlehem/200        Cantilever           1981         200'        20,000'      U.S. Gulf of Mexico

MARINE 201 T           Bethlehem/200        Cantilever        1981/1995       200'        20,000'      Middle East (c)

MARINE 202             Bethlehem/250        Cantilever           1980         200'        20,000'      Southeast Asia (c)

MARINE 225             Bethlehem/225        Slot              1969/1993       225'        20,000'      U.S. Gulf of Mexico

Semi-Submersible Rigs:

MARINE 500 T           Offshore Co.         Semi-Submersible  1975/1999     5,000'        25,000'      Western Australia

MARINE 700 T           Bingo 8000           Semi-Submersible     1999       7,500'        25,000'      U.S. Gulf of Mexico
</TABLE>


----------

(a)  Currently configured for 250-foot water depth, can be modified to provide
     for 300-foot water depth capability with Company owned leg extensions.

(b)  Designed to operate in environmentally sensitive areas such as Mobile Bay.

(c)  Rigs will be mobilized to the U.S. Gulf of Mexico during the second quarter
     of 2000.

T    Equipped with top drive drilling system.

*    Friede & Goldman.

**   Marathon LeTourneau.

         In addition to the drilling rigs described above, in August 1998 we
entered into an agreement with the owner of the NANHAI VI, a 1,500-foot water
depth semi-submersible, to market that rig on an exclusive basis. See "--
Customers and Contracts - Marketing Agreement for NANHAI VI".




                                       9
<PAGE>   12





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

                                    [PHOTO]

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

                                    [PHOTO]

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

                                    [PHOTO]


                                       10
<PAGE>   13



FACILITIES

         The Company's principal executive offices are located in Sugar Land,
Texas, a suburb of Houston, and consist of approximately 26,000 square feet of
leased space. The Company also leases a warehouse, storage and repair facility,
including approximately 31 acres of land and 60,000 square feet of buildings, in
Rosharon, Texas (near Houston). In connection with the Company's foreign
operations, the Company leases offices, warehouse space and/or employee living
quarters in Australia, Indonesia and Singapore.


ITEM 3. LEGAL PROCEEDINGS

LITIGATION

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

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


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

         There were no matters submitted to a vote of security holders during
the fourth quarter of the fiscal year covered by this report.





                                       11
<PAGE>   14




                                     PART II


ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS

         The Company's common stock, par value $.01 per share (the "Common
Stock"), trades on the New York Stock Exchange ("NYSE") under the symbol "MRL."
The following table sets forth the range of high and low sale prices per share
of the Common Stock as reported by the NYSE and the NASDAQ National Market
System (prior to August 14, 1998) for the periods indicated.

<TABLE>
<CAPTION>
        2000                                                                             HIGH                  LOW
                                                                                      ----------            ----------
<S>                                                                                   <C>                   <C>
        First Quarter (through March 14, 2000).................................       $ 25 3/8              $ 17 9/16

        1999

        First Quarter .........................................................       $ 11 3/4              $  5 15/16
        Second Quarter.........................................................         17 3/4                 9 11/16
        Third Quarter..........................................................         18 11/16              12 5/8
        Fourth Quarter.........................................................         22 1/2                12 5/8

        1998

        First Quarter..........................................................       $ 24 1/8              $ 13 1/8
        Second Quarter.........................................................         26 11/16              14 3/4
        Third Quarter..........................................................         16 5/16                8
        Fourth Quarter.........................................................         12 3/4                 7

        1997

        First Quarter..........................................................       $ 24                  $ 12 7/8
        Second Quarter.........................................................         21 1/4                13 3/4
        Third Quarter..........................................................         31 13/16              19 3/4
        Fourth Quarter.........................................................         36 1/16               17
</TABLE>



         The last sale price of the Common Stock as reported by the NYSE on
March 14, 2000 was 23 5/8 per share and there were approximately 624 holders of
record.

         The Company has not paid cash dividends on its Common Stock in the past
and does not intend to pay dividends on the Common Stock in the foreseeable
future. The Company's Credit Facility limits the ability of the Company to pay
dividends. See Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
and Notes thereto included in Item 8 of this report.




                                       12
<PAGE>   15




ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

         The following table sets forth selected consolidated financial data of
the Company as of and for each of the periods indicated. The selected financial
data as of and for the five year period ended December 31, 1999 are derived from
the Company's audited consolidated financial statements. The information
presented below should be read in conjunction with Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and Notes thereto included in Item 8 of
this report.


<TABLE>
<CAPTION>
                                                                      AS OF OR FOR THE YEAR ENDED DECEMBER 31,
                                                       --------------------------------------------------------------------
                                                          1999           1998          1997          1996          1995
                                                       -----------    -----------   -----------   -----------   -----------
                                                                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                    <C>            <C>           <C>           <C>           <C>
STATEMENT OF OPERATIONS DATA:
   Drilling revenues                                   $   115,406    $   228,015   $   190,257   $   110,329   $    63,067
   Contract drilling expenses                               77,591        102,166        77,847        59,770        55,091
   Depreciation and amortization expense                    29,569         20,191        16,995        11,576         9,377
   General and administrative expense                       12,575         12,287         7,807         7,498         5,460
   Operating income (loss)                                  (4,329)        93,371        87,608        31,485        (6,861)
   Interest income (expense), net                           (5,298)         1,202         1,823           366           639
   Income (loss) before income taxes                        (8,482)        95,541        89,836        32,256        (6,102)
   Income tax expense (benefit)                             (2,352)        34,720        31,456        11,586        (2,080)
   Net income (loss)                                   $    (6,130)   $    60,821   $    58,380   $    20,670   $    (4,022)
   Basic average common shares outstanding                  55,275         52,217        51,572        44,918        43,812
   Diluted average common shares outstanding                55,275         52,726        52,452        45,748        43,812

EARNINGS (LOSS) PER SHARE DATA:
   Basic                                               $     (0.11)   $      1.16   $      1.13   $      0.46   $     (0.09)
   Diluted                                             $     (0.11)   $      1.15   $      1.11   $      0.45   $     (0.09)

BALANCE SHEET DATA:
   Cash and cash equivalents                           $     4,664    $    12,576   $    20,619   $    71,961   $    12,260
   Short-term investments                                       --             --            --         9,990            --
   Working capital                                          30,816          6,699        55,472        96,671        23,316
   Total assets                                            666,142        475,684       334,182       254,947       134,545
   Long-term debt, non-current                             180,000         50,000            --         9,000         9,000
   Deferred income taxes                                    44,414         29,128        18,090        13,729         6,144
   Shareholders' equity                                    412,745        361,588       295,742       221,733       107,572
</TABLE>


                                       13
<PAGE>   16


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

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

         The rates that the industry can charge for drilling services is a
function of not only demand for services but the supply of drilling rigs
available in the market to provide service. During the early 1980's when oil and
gas prices were high and significant demand for drilling services existed, the
industry built a significant number of offshore drilling rigs. In the mid-1980's
when oil and gas prices declined significantly and the corresponding demand for
drilling services declined, the supply of drilling rigs was significantly
greater than the industry needed. This resulted in an imbalance of supply and
demand causing low utilization with dayrates declining to virtually cash
operating costs.

         During 1996 and early 1997, oil and gas prices rose to a level that
stimulated significant oil and gas drilling activity resulting in improved
utilization and dayrates for the drilling industry. However, oil and gas prices
declined significantly beginning in October 1997, and reached multi-year lows in
various markets in early 1999. As a result of oil price declines in 1998 and
early 1999, oil and gas companies made significant cutbacks in their drilling
programs. This reduced industry-wide rig utilization including the U.S. Gulf of
Mexico, where the Company operates most of its rigs, which not only sharply
reduced dayrates, but also shortened the average length of drilling contracts
primarily to a well-by-well basis. Oil and gas prices improved during 1999,
resulting in recent increases in rig utilization and dayrates in the Gulf of
Mexico jack-up market.

         The following table sets forth rig utilization rates according to
Offshore Data Services:

<TABLE>
<CAPTION>
                                                                                    ANNUAL AVERAGE
                                                    AS OF          -------------------------------------------------
                                                MARCH 14, 2000          1999            1998             1997
                                             --------------------- --------------- ---------------- ----------------
<S>                                          <C>                   <C>             <C>              <C>
     Gulf of Mexico jack-up rigs                     80%                67%              81%              90%
     Worldwide jack-up rigs                          71%                66%              83%              89%
     Gulf of  Mexico semi-submersible rigs           56%                62%              78%              79%
     Worldwide semi-submersible rigs                 60%                64%              78%              81%
</TABLE>

         As of March 14, 2000, twelve of the Company's 16 jack-up rigs were
working, all twelve are located in the Gulf of Mexico. The four international
jack-up rigs are idle. The MARINE 500 semi-submersible rig began operating in
July 1999 in Western Australia under a long-term drilling contract that expires
December 31, 2001. In early August 1999, the MARINE 700 began working under a
five-year contract in the deep-water U.S. Gulf of Mexico.

RESULTS OF OPERATIONS

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


                                       14
<PAGE>   17


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

         The following table sets forth the average rig utilization rates,
operating days, average dayrates, revenues and operating expenses of the Company
by operating segments for the periods indicated:

<TABLE>
<CAPTION>
                                                   FOR THE YEARS ENDED DECEMBER 31,
                                              ------------------------------------------
                                                 1999            1998           1997
                                              -----------     -----------    -----------
                                              (dollars in thousands except per day data)
<S>                                           <C>             <C>            <C>
JACK-UPS:
     Operating days                                 3,712           4,732          4,739
     Utilization (1)                                   69%             93%           100%
     Average revenue per day                  $    18,429     $    40,719    $    36,324
     Revenues                                      68,427         192,667        172,143
     Contract drilling expense(2)                  62,777          81,030         67,607
     Depreciation                                  15,606          13,923         11,260
     Operating income (loss)                       (9,956)         97,714         93,276
SEMI-SUBMERSIBLES:
     Operating days                                   328             460            294
     Utilization (1)                                   62%             90%            93%
     Average revenue per day                  $   143,229     $    76,864    $    61,714
     Revenue                                       46,979          35,348         18,114
     Contract drilling expense(2)                  14,814          21,136         10,240
     Depreciation                                  10,718           3,272          3,242
     Operating income                              21,447          10,940          4,632
TOTAL COMPANY:
     Operating days                                 4,040           5,192          5,033
     Utilization (1)                                   69%             92%            99%
     Average revenue per day                  $    28,566     $    43,917    $    37,805
     Revenues                                     115,406         228,015        190,257
     Contract drilling expense(2)                  77,591         102,166         77,847
     Depreciation and amortization                 29,569          20,191         16,995
     General and administrative expense            12,575          12,287          7,807
     Operating income (loss)                       (4,329)         93,371         87,608
</TABLE>

--------------
(1)  Based on the number of actively marketed rigs. Excluding rigs under
     construction or in the process of substantial upgrading, the Company had an
     average of 0, 0.1, and 1.1 non-marketed rigs during 1999, 1998 and 1997,
     respectively.

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


                                       15
<PAGE>   18


Years Ended December 31, 1999 and 1998

         Revenues. The Company's drilling revenues decreased $112,609,000 or 49%
during the year ended December 31, 1999 as compared to 1998. The decrease in
revenues for 1999 was primarily due to decreased dayrates and rig utilization.
Average daily revenue and rig utilization declined to $28,566 and 69% for the
year ended December 31, 1999 as compared to $43,917 and 92% for 1998.

         Contract Drilling Expense. Contract drilling expenses in 1999 decreased
$24,575,000 or 24% compared to 1998. The decrease was primarily a result of
lower labor costs and repairs and maintenance expense, due to lower utilization
rates and less international operating activity in 1999 compared to 1998. The
number of operating days for international rigs decreased from 1,117 days in
1998 to 262 days in 1999. International rig operations typically have higher
average operating costs than domestic rig operations.

         Depreciation and Amortization Expense. Depreciation and amortization
expense for the year ended December 31, 1999 increased $9,378,000 compared to
1998. The increase was due to depreciation associated with expenditures for (i)
the acquisition of the MARINE 306 in December 1998, (ii) the upgrade of the
MARINE 500 which was out of service October 13, 1998 to July 5, 1999 and (iii)
the construction of the MARINE 700, which was placed in service in early August
1999.

         General and Administrative Expense. General and administrative expenses
for the year ended December 31, 1999, compared to 1998, increased $288,000 or 2%
primarily due to increased employee benefits cost, non-recurring severance costs
and professional service fees incurred in 1999 partially offset by no bonus
expense in 1999. The Company's bonus plan provides for no bonuses in a year in
which the Company does not generate net income. General and administrative
expenses in 1998 included $1,754,000 of bonus expense.

         Interest Expense. Interest expense in 1999 was $6,184,000 compared to
$481,000 for 1998. The increase was primarily the result of increased borrowings
under the Credit Facility, net of capitalized interest associated with
construction of the MARINE 500 and MARINE 700.

         Interest Income. Interest income decreased $797,000 or 47% for 1999
from $1,683,000 in 1998. The decrease was related primarily to decreased cash
balances as a result of expenditures related to the Company's two major
construction and upgrade projects.

         Income Taxes. Income tax expense decreased in 1999 as compared to 1998,
primarily due to a decrease in the Company's pretax income. The Company's
effective tax benefit rate for 1999 is less than the U.S. federal statutory rate
of 35% because of foreign tax payments for which the Company did not receive
U.S. federal tax benefit.

Years Ended December 31, 1998 and 1997

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

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

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


                                       16
<PAGE>   19


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

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

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

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


FINANCIAL CONDITION -- LIQUIDITY AND CAPITAL RESOURCES

         Liquidity. At December 31, 1999, the Company had working capital of
$30,816,000 as compared to working capital of $6,699,000 at December 31, 1998.

         Net cash provided by operating activities for the year ended December
31, 1999 decreased by $120,788,000 to $12,320,000 compared to $133,108,000 for
the same period in the prior year. The decrease is primarily attributable to the
decreased dayrates and rig operating activity. Cash used in investing activities
increased $13,205,000 during 1999 to $205,097,000 from $191,892,000 in 1998 due
primarily to capital expenditures related to the completion of the MARINE 700
and upgrade of the MARINE 500. Net cash provided by financing activities during
1999 consisted primarily of $130,000,000 in proceeds from long-term debt
borrowings and $54,417,000 in net proceeds from the sale of 4,600,000 shares of
common stock in May 1999.

         On August 12, 1998, the Company entered into a credit agreement (the
"Credit Facility") with a consortium of domestic and international banks
providing financing of up to $200,000,000 to be used for rig acquisitions and
upgrades, as well as for general corporate purposes. The Credit Facility is a
five-year revolving credit facility and is secured by substantially all of the
Company's assets, including its rig fleet. The Company and its subsidiaries are
required to comply with various covenants and restrictions, including, but not
limited to, the maintenance of financial ratios and the restriction on payments
of dividends. Interest accrues at a rate of (i) London Interbank Offered Rate
("LIBOR") plus a margin determined pursuant to a debt to EBITDA calculation or
(ii) prime if a Base Rate Loan. As of December 31, 1999, $180,000,000 was
outstanding under the Credit Facility. Subsequent to year-end, the Company has
made $25,000,000 in principal payments, reducing the outstanding debt balance
under the Credit Facility to $155,000,000 as of March 14, 2000.

         On September 21, 1999, the Company amended the Credit Facility. The
significant elements of the amendment include (i) an increase in the maximum
permitted ratio of debt to EBITDA to 4 to 1 compared to the original 3 to 1,
(ii) a modification to the definition of EBITDA to give pro forma effect to
certain newly acquired assets or long-term contracts, and (iii) a change to the
definition of working capital to include any available commitments under the
Credit Facility for purposes of satisfying the positive working capital
requirement. Also, the margin over LIBOR that the Company pays under the Credit
Facility was increased from a range of 75 to 125 basis points to 100 to 250
basis points. As of December 31, 1999, the Company was in compliance with the
covenants of its amended Credit Facility.

         During 1997, the improvement in the offshore drilling market allowed
the Company to place some of its offshore rigs under longer-term contracts. The
MARINE 500 and MARINE 700 are both operating under long-term contracts that will
generate contract revenues in excess of $300,000,000 over the remaining life of
the contracts. The MARINE 500 contract expires on December 31, 2001 and the
MARINE 700 is under contract until August 5, 2004.


                                       17
<PAGE>   20


         Capital Resources. During the year ended December 31, 1999 the Company
expended $205,897,000 in capital expenditures consisting primarily of
disbursements for (i) the completion of the MARINE 700, (ii) the upgrade of the
MARINE 500, and to a lesser extent (iii) the purchase of other rig machinery.
Capital expenditures for the year 2000 are expected to be approximately $30 to
$35 million, which includes the acquisition, upgrade and mobilization of the
Marine 202 (formerly Baruna V) in January 2000. On January 10, 2000, the Company
completed an offering of 1,000,000 shares of its Common Stock in an underwritten
offering at a net price of $18.50 per share, or $18.5 million. The proceeds of
the offering were used to acquire, upgrade and mobilize the Baruna V drilling
rig.

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

         The Company anticipates that its available funds, together with cash
generated from operations and amounts that may be borrowed under the Credit
Facility and other potential funding sources, such as increased credit
facilities and private or public debt or equity offerings, will be sufficient to
fund its required capital expenditures, working capital and debt service
requirements for the foreseeable future. Future cash flows and the availability
of other funding sources, however, are subject to a number of uncertainties,
especially the condition of the oil and gas industry. Accordingly, there can be
no assurance that these resources will be sufficient to fund the Company's cash
requirements.

YEAR 2000 ISSUE

         As of March 1, 2000, the year 2000 date change has not posed any
significant problems for the Company. Based upon the system upgrades performed
and experiences to date, the Company believes that the year 2000 will not pose
any significant operational problems for the Company that could have a material
adverse affect on the Company. However, there can be no assurances that the
Company or its key vendors and suppliers will not encounter any year 2000
related problems that could result in a disruption of normal business activities
and operations.

         To date, the Company has spent approximately $114,000 to ensure year
2000 compliance, including hardware and software expenditures. This does not
include internal labor costs for the Company's information technology personnel
who spend a portion of their time working on year 2000 compliance issues.

STATEMENT OF FINANCIAL ACCOUNTING STANDARDS

         In June 1998, the Financial Accounting Standards Board issued Statement
of Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which establishes standards for accounting for and
disclosure of derivative instruments and hedging activities. SFAS No. 133, as
amended by SFAS No. 137, is effective for fiscal years beginning after June 15,
2000. The Company does not expect SFAS No. 133 to have a material effect on its
reported results.

FORWARD-LOOKING STATEMENTS

         This Form 10-K, particularly the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations",
contains certain forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, that are not historical facts concerning,
among other things, market conditions, the demand for offshore drilling
services, future acquisitions and fleet expansion, future financings, future rig
contracts, future capital expenditures including rig construction, upgrades and
refurbishments, and future results of operations. Actual results may differ
materially from those included in the forward-looking statements, and no
assurance can be given that the Company's expectations will be realized or
achieved. Important factors and risks that could cause actual results to differ
materially from those referred to in the forward-looking statements include (i)
a prolonged period of low oil or gas prices; (ii) the inadequacy


                                       18
<PAGE>   21


of insurance and indemnification to protect the Company against liability from
all consequences of well disasters, fire damage or environmental damage; (iii)
the inability of the Company to obtain insurance at reasonable rates; (iv) a
decrease in the demand for offshore drilling rigs especially in the U.S. Gulf of
Mexico; (v) the risks attendant with operations in foreign countries including
actions that may be taken by foreign countries and actions that may be taken by
the United States against foreign countries; (vi) the failure of the Company to
successfully compete with the Company's competitors that are larger and have a
greater diversity of rigs and greater financial resources than the Company;
(vii) a decrease in rig utilization resulting from reactivation of currently
inactive non-marketed rigs or new construction of rigs; (viii) the continuation
of market and other conditions similar to those in which the Company incurred
net losses for the six months ended June 30, 1999; (ix) the loss of key
management personnel or the inability of the Company to attract and retain
sufficient qualified personnel to operate its rigs; (x) the re-negotiation or
cancellation of the long-term contracts for the MARINE 700 or the MARINE 500,
whether as a result of rig performance or because of some other reason; (xi) the
adoption of additional laws or regulations that limit or reduce drilling
opportunities or that increase the cost of drilling or increase the potential
liability of the Company; (xii) the occurrence of risks attendant to contract
drilling operations including blowouts, cratering, fires and explosions,
capsizing, grounding or collision involving rigs while in operation,
mobilization or otherwise or damage to rigs from weather, sea conditions or
unsound location; (xiii) adverse uninsured litigation results; (xiv) adverse tax
consequences with respect to operations; and (xv) adequacy of the Company's cash
resources in the future. These forward-looking statements speak only as of the
date of this Report. The Company expressly disclaims any obligation or
undertaking to release publicly any updates or revisions to any forward-looking
statement contained herein to reflect any change in the Company's expectations
with regard thereto or any change in events, conditions or circumstances on
which any statement is based.

ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         Interest Rate Risk. The Company is subject to market risk exposure
related to changes in interest rates on its Credit Facility. Interest on
borrowings under the Credit Facility is at either the prime interest rate or
LIBOR plus a pre-agreed upon percentage point spread. The Company may, at its
option, fix the interest rate for certain borrowings based on a spread over
LIBOR for 30 days to 6 months, with longer periods requiring bank approval. On
May 28, 1999, the Company elected to lock in $100 million of outstanding debt at
a fixed LIBOR rate of 5.5% plus a margin for one year. On November 24, 1999, the
Company locked in $50 million of outstanding debt at a fixed LIBOR rate of 6.1%
plus a margin for six months. The margin on these borrowings can range from 1.0%
to 2.5% determined pursuant to a quarterly debt to EBITDA calculation. As of
December 31, 1999, the margin for all borrowings was 1.75% and the Company had
$180 million outstanding under its Credit Facility. On the remaining $30 million
balance, an immediate change of one percent in the interest rate would cause a
change in interest expense of approximately $0.3 million on an annual basis. The
Company's objective in fixing the interest rate on these borrowings was to
protect itself against rising interest rates.

         Foreign Currency Exchange Rate Risk. The Company conducts business in
several foreign countries. Predominately all of its foreign operations are
denominated in U.S. dollars. The Company structures its drilling contracts in
U.S. dollars to mitigate its exposure to fluctuations in foreign currencies.
Other than some limited trade payables the Company does not currently have
financial instruments that are sensitive to foreign currency exchange rates.


                                       19
<PAGE>   22


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


                          INDEPENDENT AUDITORS' REPORT



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


         We have audited the consolidated balance sheets of Marine Drilling
Companies, Inc. and subsidiaries as of December 31, 1999 and 1998 and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1999.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

         We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Marine
Drilling Companies, Inc. and subsidiaries as of December 31, 1999 and 1998, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1999, in conformity with generally
accepted accounting principles.




                                           KPMG LLP


Houston, Texas
January 25, 2000


                                       20
<PAGE>   23



                MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                        (In thousands, except share data)


<TABLE>
<CAPTION>
                                                                               DECEMBER 31,
                                                                        --------------------------
                                                                           1999           1998
                                                                        -----------    -----------
<S>                                                                     <C>            <C>
                                     ASSETS
Current Assets:
   Cash and cash equivalents                                            $     4,664    $    12,576
   Accounts receivable - trade and other, net                                29,332         23,176
   Income tax receivable                                                     18,904             --
   Prepaid expenses and other                                                 2,091          3,290
   Inventory                                                                    402            579
                                                                        -----------    -----------

       Total current assets                                                  55,393         39,621

Property and equipment                                                      705,351        500,510
   Less accumulated depreciation                                             97,511         68,881
                                                                        -----------    -----------

       Property and equipment, net                                          607,840        431,629
Other                                                                         2,909          4,434
                                                                        -----------    -----------

                                                                        $   666,142    $   475,684
                                                                        ===========    ===========

                      LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities:
   Accounts payable                                                     $    13,919    $     8,927
   Accrued expenses                                                           9,998         20,667
   Current tax liability                                                         --          2,558
   Employer's liability claims, current                                         660            770
                                                                        -----------    -----------

       Total current liabilities                                             24,577         32,922

Long-term debt                                                              180,000         50,000

Other non-current liabilities                                                 4,406          2,046

Deferred income taxes                                                        44,414         29,128

Shareholders' equity:
   Common stock, par value $.01.  Authorized 200,000,000 shares;
     issued and outstanding 57,199,489 and 52,365,537 shares,
     as of December 31, 1999 and December 31, 1998, respectively                572            524
   Common stock restricted                                                   (1,073)        (1,596)
   Additional paid-in capital                                               263,319        206,603
   Retained earnings from January 1, 1993                                   149,927        156,057
                                                                        -----------    -----------

       Total shareholders' equity                                           412,745        361,588
                                                                        -----------    -----------

Commitments and contingencies                                                    --             --
                                                                        -----------    -----------

                                                                        $   666,142    $   475,684
                                                                        ===========    ===========
</TABLE>

                See notes to consolidated financial statements.


                                       21
<PAGE>   24


                MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)


<TABLE>
<CAPTION>
                                       FOR THE YEARS ENDED DECEMBER 31,
                                     -----------------------------------
                                        1999         1998         1997
                                     ---------    ---------    ---------
<S>                                  <C>          <C>          <C>
Revenues                             $ 115,406    $ 228,015    $ 190,257

Costs and Expenses:
     Contract drilling                  77,591      102,166       77,847
     Depreciation and amortization      29,569       20,191       16,995
     General and administrative         12,575       12,287        7,807
                                     ---------    ---------    ---------
                                       119,735      134,644      102,649
                                     ---------    ---------    ---------
       Operating income (loss)          (4,329)      93,371       87,608
                                     ---------    ---------    ---------

Other Income (expense):
     Interest expense                   (6,184)        (481)        (575)
     Interest income                       886        1,683        2,398
     Other income                        1,145          968          405
                                     ---------    ---------    ---------
                                        (4,153)       2,170        2,228
                                     ---------    ---------    ---------

Income (loss) before income taxes       (8,482)      95,541       89,836

Income tax expense (benefit)            (2,352)      34,720       31,456
                                     ---------    ---------    ---------

Net income (loss)                    $  (6,130)   $  60,821    $  58,380
                                     =========    =========    =========

Earnings (loss) per share:
     Basic                           $   (0.11)   $    1.16    $    1.13
     Diluted                         $   (0.11)   $    1.15    $    1.11

Average common shares:
     Basic                              55,275       52,217       51,572
     Diluted                            55,275       52,726       52,452
</TABLE>



                See notes to consolidated financial statements.


                                       22
<PAGE>   25


                MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
                  YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
                        (IN THOUSANDS, EXCEPT SHARE DATA)


<TABLE>
<CAPTION>
                                                              COMMON STOCK           ADDITIONAL
                                                        --------------------------     PAID-IN      RESTRICTED      RETAINED
                                                          SHARES         AMOUNT        CAPITAL         STOCK        EARNINGS
                                                        -----------    -----------   -----------    -----------    -----------
<S>                                                     <C>            <C>           <C>            <C>            <C>
Balances at December 31, 1996                            51,262,519    $       513   $   184,992    $      (628)   $    36,856

   Net income                                                    --             --            --             --         58,380
   Issuance of restricted common stock                       76,500             --         1,323         (1,323)            --
   Accrual of compensation expense                               --             --            --            590             --
   Forfeitures of restricted common stock                   (12,000)            --          (112)           112             --
   Common stock options exercised                           494,333              5         1,370             --             --
   Issuance of common stock for 401(k) plan                  66,277              1         1,285             --             --
   Pre-quasi-reorganization net operating
     loss carryforwards                                          --             --         8,310             --             --
   Tax benefits related to common stock
     issued pursuant to long term incentive plan                 --             --         3,993             --             --
   Issuance of stock for Non-Employee Directors' Plan         2,815             --            60             --             --
   Other                                                         --             --            15             --             --
                                                        -----------    -----------   -----------    -----------    -----------
Balances at December 31, 1997                            51,890,444            519       201,236         (1,249)        95,236

   Net income                                                    --             --            --             --         60,821
   Issuance of restricted common stock                       76,900              1         1,176         (1,177)            --
   Accrual of compensation expense                               --             --            --            659             --
   Forfeitures of restricted common stock                   (10,000)            --          (171)           171             --
   Common stock options exercised                           272,675              3           748             --             --
   Issuance of common stock for 401(k) plan                 130,890              1         1,670             --             --
   Tax benefits related to common stock
     issued pursuant to long term incentive plan                 --             --         1,892             --             --
   Issuance of stock for Non-Employee Directors' Plan         4,628             --            62             --             --
   Other                                                         --             --           (10)            --             --
                                                        -----------    -----------   -----------    -----------    -----------
Balances at December 31, 1998                            52,365,537            524       206,603         (1,596)       156,057

   Net loss                                                      --             --            --             --         (6,130)
   Issuance of stock for stock offering                   4,600,000             46        54,371             --             --
   Issuance of restricted common stock                       15,350             --           215           (215)            --
   Accrual of compensation expense                               --             --            --            643             --
   Forfeitures of restricted common stock                    (7,850)            --           (95)            95             --
   Common stock options exercised                            76,733              1           447             --             --
   Issuance of common stock for 401(k) plan                 145,321              1         1,564             --             --
   Tax benefits related to common stock
     issued pursuant to long term incentive plan                 --             --           152             --             --
   Issuance of stock for Non-Employee Directors' Plan         4,398             --            62             --             --
                                                        -----------    -----------   -----------    -----------    -----------
Balances at December 31, 1999                            57,199,489    $       572   $   263,319    $    (1,073)   $   149,927
                                                        ===========    ===========   ===========    ===========    ===========
</TABLE>

                See notes to consolidated financial statements.


                                       23
<PAGE>   26


                MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                     FOR THE YEARS ENDED DECEMBER 31,
                                                                    -----------------------------------
                                                                       1999         1998         1997
                                                                    ---------    ---------    ---------
<S>                                                                 <C>          <C>          <C>
Cash Flows From Operating Activities:
  Net income (loss)                                                 $  (6,130)   $  60,821    $  58,380

  Adjustments to reconcile net income (loss) to net cash provided
   by operating activities:
     Deferred income taxes                                             15,285       11,038        4,361
     Pre-quasi-reorganization net operating loss carryforwards             --           --        8,310
     Tax benefits related to common stock issued pursuant to
       long-term incentive plan                                           152        1,892        3,993
     Depreciation and amortization                                     29,569       20,191       16,995
     Gain on disposition of equipment                                    (683)        (884)        (156)
     Accrual of compensation expense, net                                 772          817          741
     Issuance of common stock to the employee
       retirement plan and the Non-Employee Directors' Plan             1,627        1,733        1,345
     (Increase) decrease in receivables                                (6,156)      23,504      (25,286)
     (Increase) in income tax receivable                              (18,904)          --           --
     (Increase) decrease in prepaid expenses, other and inventory       1,376        1,179       (2,690)
     Increase (decrease) in payables, accrued
       expenses and employer's liability claims                        (5,985)      16,317        8,384
     Other                                                              1,397       (3,500)      (1,792)
                                                                    ---------    ---------    ---------

         Net cash provided by operating activities                     12,320      133,108       72,585
                                                                    ---------    ---------    ---------

Cash Flows From Investing Activities:
  Purchase of short-term investments                                       --           --      (19,514)
  Maturity of short-term investments                                       --           --       29,967
  Purchase of equipment                                              (205,897)    (190,896)     (73,490)
  Acquisition of company, net of cash acquired                             --       (2,519)     (52,531)
  Proceeds from disposition of equipment                                  800        1,523          251
                                                                    ---------    ---------    ---------

         Net cash used in investing activities                       (205,097)    (191,892)    (115,317)
                                                                    ---------    ---------    ---------

Cash Flows From Financing Activities:
  Proceeds from long-term debt                                        130,000       50,000           --
  Proceeds from sale of common stock                                   54,417           --           --
  Proceeds from exercise of stock options                                 448          751        1,375
  Issuance cost of sale of common stock                                    --          (10)          15
  Payments of debt                                                         --           --      (10,000)
                                                                    ---------    ---------    ---------

         Net cash provided by (used in) financing activities          184,865       50,741       (8,610)
                                                                    ---------    ---------    ---------

         Net decrease in cash and cash equivalents                     (7,912)      (8,043)     (51,342)

Cash and cash equivalents at beginning of period                       12,576       20,619       71,961
                                                                    ---------    ---------    ---------

Cash and cash equivalents at end of period                          $   4,664    $  12,576    $  20,619
                                                                    =========    =========    =========
</TABLE>

                See notes to consolidated financial statements.


                                       24
<PAGE>   27


                MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
               CONSOLIDATED STATEMENT OF CASH FLOWS - (CONTINUED)
                        (IN THOUSANDS, EXCEPT SHARE DATA)


<TABLE>
<CAPTION>
                                                                          FOR THE YEARS ENDED DECEMBER 31,
                                                                          --------------------------------
                                                                            1999        1998        1997
                                                                          --------    --------    --------
<S>                                                                       <C>         <C>         <C>
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
    Cash paid during the period for:
       Interest                                                           $  8,472    $    553    $    620
       Income taxes                                                          5,347      21,345      11,835

    Noncash investing and financing activities:
       Issuance of 15,350, 76,900 and 76,500 shares in 1999, 1998
           and 1997 respectively, of restricted common stock              $    215    $  1,177    $  1,323
       Forfeitures of 7,850, 10,000 and 12,000 shares in 1999, 1998 and
           1997 respectively, of restricted common stock                       (95)       (171)       (112)

    Business acquisition, net of cash acquired:
       Working capital, other than cash                                   $     --    $     --    $    766
       Plant and equipment                                                      --          --     (54,186)
       Purchase price in excess of the net assets acquired                      --          --        (828)
       Minority interest                                                        --      (2,519)      1,717
                                                                          --------    --------    --------

           Net cash used for acquisition                                  $     --    $ (2,519)   $(52,531)
                                                                          ========    ========    ========
</TABLE>


                See notes to consolidated financial statements.


                                       25
<PAGE>   28


                MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997



(1)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION

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

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

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

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

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

         Major renewals and improvements are capitalized and depreciated over
the respective asset's useful life. Expenditures for normal maintenance and
repairs are charged to expense as incurred. Maintenance and repairs amounted to
$10,307,000, $12,345,000 and $12,066,000 in 1999, 1998 and 1997, respectively.
When property or equipment is retired, the related assets and accumulated
depreciation are removed from the accounts and a gain or loss is reflected in
other income (expense). The Company continues to depreciate idle drilling
equipment using the same rates as while operating. The Company capitalizes
interest expense related to certain capital expenditure projects. Capitalized
interest was approximately $3,610,000, $193,000 and $49,000 for 1999, 1998 and
1997, respectively.

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

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

         Deferred Financing Costs -- Deferred financing costs are amortized over
the life of the related debt. Deferred financing costs, net of accumulated
amortization were $1,422,000, $1,472,000 and $783,000 at December 31, 1999, 1998
and 1997, respectively.


                                       26
<PAGE>   29


                MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


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

         Revenue Recognition -- Drilling revenues are recorded pursuant to day
rate contracts, under which the Company receives a fixed amount per day for
providing drilling services with its rigs. Revenues are recognized as earned. In
connection with drilling contracts, the Company may receive lump sum fees for
mobilization of equipment and personnel or for capital improvements to rigs.
Significant mobilization and reimbursements are deferred and amortized over the
term of the drilling contract. As of December 31, 1999, there was $4,800,000 of
unamortized mobilization revenue. There were no unamortized mobilization and
reimbursements as of December 31, 1998.

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

         Stock-Based Compensation -- The Company accounts for stock-based
compensation using the intrinsic value method. Accordingly, compensation cost
for stock options is measured as the excess, if any, of the quoted market price
of the Company's stock at the date of grant over the amount the employee must
pay to acquire the stock.

         Cash and Cash Equivalents -- The Company generally considers all highly
liquid investments purchased with an original maturity of three months or less
to be cash equivalents. At December 31, 1999 and 1998 none of the Company's cash
on hand was restricted. As of December 31, 1999 and 1998, letters of credit
totaling $791,000 and $908,000, respectively, were outstanding.

         Capital Structure -- The Company has one class of common stock, par
value $0.01. The stock is traded on the NYSE Stock Market under the symbol MRL.
There are 200,000,000 authorized shares of which 57,199,489 were issued and
outstanding as of December 31, 1999. Each share of common stock is allowed one
voting right.

         Earnings Per Share -- Basic earnings per share, represents net income
divided by the weighted average common shares outstanding - without the dilutive
effects of common stock equivalents (options, warrants, etc). Diluted earnings
per share is determined based on the assumption that common stock equivalents
have been converted using the average price for the period. Common stock
equivalents with a weighted average of 509,000 and 880,000 are reflected in the
calculation of diluted earnings per share for the years ended December 31, 1998
and 1997, respectively. For the year ended December 31, 1999, there were
2,693,000 stock options outstanding that were not included in the computation of
diluted earnings per share. There were 849,000 stock options outstanding for the
year ended December 31, 1998, which were not included in the computation of
diluted earnings per share because the exercise price of these options was
greater than the average market price of the common shares. For the year ended
December 31, 1997, there were no stock options outstanding that were not
included in the computation of diluted earnings per share. No adjustment to net
income was made in calculating diluted earnings per share for the years ended
December 31, 1999, 1998 and 1997.

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

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


                                       27
<PAGE>   30
                MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


with strong credit ratings, and such securities are held until maturity. The
Company believes that credit and market risk in such instruments is minimal.

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

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

(2)      ACCOUNTS RECEIVABLE - TRADE AND OTHER, NET

         Accounts receivables are summarized as follows (in thousands):

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              ------------------
                                                                1999       1998
                                                              -------    -------
<S>                                                           <C>        <C>
Trade receivables ........................................    $28,809    $22,714
Other receivables ........................................        523        462
                                                              -------    -------

                                                              $29,332    $23,176
                                                              =======    =======
</TABLE>

(3)      PROPERTY AND EQUIPMENT

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

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                             -------------------
                                                               1999       1998
                                                             --------   --------
<S>                                                          <C>        <C>
Drilling rigs ............................................   $682,985   $292,003
Drill string .............................................      8,505      8,622
Other equipment ..........................................     12,368      6,611
Construction in progress .................................      1,493    193,274
                                                             --------   --------

                                                             $705,351   $500,510
                                                             ========   ========
</TABLE>

         Depreciation expense was $29,569,000, $19,984,000 and $16,631,000 for
the years ended December 31, 1999, 1998 and 1997, respectively.




                                       28
<PAGE>   31

                MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


(4)      ACCRUED EXPENSES

         Accrued expenses are summarized as follows (in thousands):

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                             -------------------
                                                               1999       1998
                                                             --------    -------
<S>                                                          <C>         <C>
         Construction in progress ........................   $  1,214    $11,320
         Accrued payroll and related taxes ...............      1,919      3,491
         Accrued health benefit plan claims ..............        788        740
         Accrued interest ................................      1,096        120
         Foreign tax liability ...........................        318      1,963
         Other accrued expenses ..........................      4,663      3,033
                                                             --------    -------

                                                             $  9,998    $20,667
                                                             ========    =======
</TABLE>

(5)      LONG-TERM DEBT

         On August 12, 1998, the Company entered into a credit agreement (the
"Credit Facility") with a consortium of domestic and international banks
providing financing of up to $200 million to be used for rig acquisitions and
upgrades as well as for general corporate purposes. The Credit Facility is a
five-year revolver and is secured by substantially all of the Company's assets,
including its rig fleet. The Company and its subsidiaries are required to comply
with various covenants and restrictions, including, but not limited to, the
maintenance of financial ratios and the restriction on payments of dividends.
Interest accrues at a rate of (i) London Interbank Offered Rate ("LIBOR") plus a
margin determined pursuant to a debt to EBITDA calculation or (ii) prime if a
Base Rate Loan. As of December 31, 1999, $180 million was outstanding under the
Credit Facility. Subsequent to year-end, the Company has made $25 million in
principal payments, reducing the outstanding debt balance under the Credit
Facility to $155 million as of March 14, 2000.

         On September 21, 1999, the Company amended the Credit Facility. The
significant elements of the amendment include (i) an increase in the maximum
permitted ratio of debt to EBITDA to 4 to 1 compared to the original 3 to 1,
(ii) a modification to the definition of EBITDA to give pro forma effect to
certain newly acquired assets or long-term contracts, and (iii) a change to the
definition of working capital to include any available commitments under the
Credit Facility for purposes of satisfying the positive working capital
requirement. Also, the margin over LIBOR that the Company pays under the Credit
Facility was increased from a range of 75 to 125 basis points to 100 to 250
basis points. As of December 31, 1999, the Company was in compliance with the
covenants of its amended Credit Facility.

         During 1999, the Company incurred $6.2 million of interest expense,
including amortization of deferred financing costs related to the Credit
Facility. Interest expense for the construction and refurbishment of qualifying
assets is capitalized. Accordingly, $3.6 million, $0.2 million and $0 of
interest expense was capitalized during the years ended December 31, 1999, 1998
and 1997 respectively.



                                       29
<PAGE>   32

                MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


         (6)      INCOME TAXES

         Income taxes consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                   YEARS ENDED DECEMBER 31,
                                                                -----------------------------
                                                                  1999       1998      1997
                                                                --------    -------   -------
<S>                                                             <C>         <C>       <C>
Current:
      U.S. federal ..........................................   $(18,577)   $17,876   $12,197
      State .................................................        153         48        44
      Foreign ...............................................        612      3,866     2,551
                                                                --------    -------   -------
                                                                 (17,812)    21,790    14,792
                                                                --------    -------   -------
Other:
      U.S. federal - deferred ...............................     15,285     11,038     4,361
      Pre-quasi-reorganization net operating loss
          carryforwards .....................................       --         --       8,310
      Tax benefits related to common stock issued
          pursuant to long-term incentive plan and other ....        175      1,892     3,993
                                                                --------    -------   -------

                                                                  15,460     12,930    16,664

                                                                --------    -------   -------
Total tax expense (benefit) .................................   $ (2,352)   $34,720   $31,456
                                                                ========    =======   =======
</TABLE>

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

         For the years ended December 31, 1999, 1998 and 1997, the effective tax
rates for financial reporting purposes were 28%, 36%, and 35%, respectively. The
effective tax benefit rate of 28% in 1999 was less than U.S. federal statutory
rate of 35% and the 1998 effective tax rate was higher than the statutory rate
due to the effects of foreign tax payments for which the Company did not receive
U.S. federal tax benefits in 1999 and 1998.

         The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1999 and 1998 are presented below (in thousands):

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                              --------------------
                                                                1999        1998
                                                              --------    --------
<S>                                                           <C>         <C>
Deferred tax assets:
     Net operating loss carryforwards .....................   $  3,775    $  3,775
     Alternative minimum tax carryforward .................      3,059        --
     Investment tax, general business and foreign tax
         credit carryforwards .............................      1,972         291
     Deferred revenue .....................................      1,680        --
     Employer's liability claims ..........................        781         863
     Deferred compensation ................................        134         119
     Other ................................................         14         456
                                                              --------    --------

     Total gross deferred tax assets ......................     11,415       5,504
     Less valuation allowance .............................     (4,066)     (4,066)
                                                              --------    --------

     Net deferred tax assets ..............................      7,349       1,438
                                                              --------    --------
Deferred tax liabilities:
     Property and equipment, principally due to differences
         in depreciation ..................................     51,564      30,001
     Other ................................................        199         565
                                                              --------    --------

     Total gross deferred tax liabilities .................     51,763      30,566
                                                              --------    --------
Net deferred tax liability ................................   $ 44,414    $ 29,128
                                                              ========    ========
</TABLE>



                                       30
<PAGE>   33

                MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


         The valuation allowance for deferred tax assets as of December 31, 1999
and 1998 was $4,066,000. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Based upon projections
for future taxable income over the periods which the deferred tax assets are
deductible and the Section 382 limitation as discussed below, management
believes it is more likely than not that the Company will realize the benefits
of these deductible differences, net of the existing valuation allowances at
December 31, 1999.

         At December 31, 1999, the Company had the following carryforwards for
federal income tax purposes (in thousands):

<TABLE>
<CAPTION>
       CARRYFORWARD               AMOUNT    EXPIRE IN YEARS
       ------------               -------   ---------------
<S>                               <C>       <C>
Net operating loss                $10,787      2006-2011
Foreign tax credit                  1,681      2002-2003
Investment tax credit and
    general business tax credit       290        2000
</TABLE>

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

(7)      BENEFIT PLANS

         1992 LONG TERM INCENTIVE PLAN -- In late 1992, the Company adopted the
Marine Drilling 1992 Long Term Incentive Plan ("1992 Plan") which was amended in
1997. Pursuant to the terms of the 1992 Plan, an aggregate of 10,000,000 shares
(subject to the restrictions described herein) of common stock are available for
distribution pursuant to stock options, SARs and restricted stock. The number of
shares of common stock available for distribution is further limited in that no
stock options, SARs or restricted stock may be issued if, immediately after such
issuance, the number of shares subject to outstanding stock options, SARs and
restricted stock awards would exceed 7% of the common stock then outstanding.
The shares of common stock subject to any stock option or SAR that terminates
without a payment being made in the form of common stock would again become
available for distribution pursuant to the 1992 Plan.

         Restricted Common Stock. During 1999, 1998 and 1997, the Company issued
restricted stock grants consisting of 15,350, 76,900 and 76,500 shares,
respectively, of common stock. These grants generally lapse over four-year
periods and the values of the grants are based on the respective closing prices
on the day preceding each grant and are recognized as compensation expense over
the periods during which the restrictions lapse. Compensation expense related to
the issuance of restricted common stock for the years ended December 31, 1999,
1998 and 1997 was $606,000, $648,000 and $590,000, respectively. During 1999,
1998 and 1997, 7,850, 10,000 and 12,000 shares, respectively, of restricted
common stock were forfeited.



                                       31
<PAGE>   34

                MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


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

<TABLE>
<CAPTION>
                                                 1999                         1998                       1997
                                       -------------------------    -------------------------   -------------------------
                                                      WEIGHTED                     WEIGHTED                     WEIGHTED
                                                       AVERAGE                     AVERAGE                      AVERAGE
                                                      EXERCISE                     EXERCISE                     EXERCISE
         FIXED OPTIONS                   SHARES         PRICE         SHARES        PRICE         SHARES         PRICE
--------------------------------       ----------    -----------    ----------    -----------   ----------    -----------
<S>                                     <C>          <C>             <C>          <C>            <C>          <C>
Outstanding at beginning of year        1,777,538    $     12.64     1,299,547    $      7.80    1,721,380    $      5.63
Granted                                   983,775           9.40       831,500          17.63      117,500          16.38
Exercised                                 (76,733)          5.83      (245,175)          2.56     (489,333)          2.77
Forfeited                                 (78,780)         15.27      (108,334)         15.74      (50,000)          2.50
                                       ----------    -----------    ----------    -----------   ----------    -----------
Outstanding at end of year              2,605,800    $     11.53     1,777,538    $     12.64    1,299,547    $      7.80
                                       ==========    ===========    ==========    ===========   ==========    ===========

Options exercisable at year-end         1,058,900                      662,079                     473,714
Weighted-average fair value
  of options granted during the year   $     5.35                   $    10.94                  $     9.55
</TABLE>


         The following table summarizes information about fixed-price stock
options outstanding and exercisable at December 31, 1999:

<TABLE>
<CAPTION>
                                 OPTIONS OUTSTANDING                      OPTIONS EXERCISABLE
                  ------------------------------------------------   -------------------------------
                                    WEIGHTED-AVG.
                      NUMBER         REMAINING                          NUMBER
                    OUTSTANDING      CONTRACTUAL     WEIGHTED-AVG.    EXERCISABLE      WEIGHTED-AVG.
EXERCISE PRICES     AT 12/31/99        LIFE         EXERCISE PRICE    AT 12/31/99     EXERCISE PRICE
---------------   --------------   --------------   --------------   --------------   --------------
<S>               <C>              <C>              <C>              <C>             <C>
$1.25 to 2.50            149,025              4.6   $         2.16          149,025   $         2.16
$6.00 to 9.44          1,262,000              8.0             7.70          583,125             8.96
$10.00 to 18.13        1,019,775              8.3            15.61          283,000            14.95
$22.56 to 24.63          175,000              8.3            23.42           43,750            23.42
                  --------------   --------------   --------------   --------------   --------------
                       2,605,800              7.9   $        11.53        1,058,900   $        10.20
                  ==============   ==============   ==============   ==============   ==============
</TABLE>



         Based upon common stock outstanding as of December 31, 1999 and shares
reserved for issuance as set forth above, the number of shares then available
for future stock options, SARs and restricted stock grants was 7,133,476. The
number of shares available due to the 7% limitation was 1,491,998 and 809,279
shares, respectively.

         No compensation costs were recognized as expense for 1999, 1998 and
1997 because the Company has elected to continue accounting for such
transactions under APB 25.

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

                                       32
<PAGE>   35
                MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


         The following table summarizes stock option transactions under the
Director's Plan as of December 31, 1999:

<TABLE>
<CAPTION>

                                                1999                            1998                               1997
                                    ------------------------------   ------------------------------   ------------------------------
                                                       WEIGHTED                        WEIGHTED                         WEIGHTED
                                                       AVERAGE                         AVERAGE                          AVERAGE
                                                       EXERCISE                        EXERCISE                         EXERCISE
          FIXED OPTIONS                 SHARES          PRICE            SHARES         PRICE            SHARES          PRICE
----------------------------------  -------------    -------------   -------------    -------------   -------------    -------------

<S>                                 <C>              <C>             <C>             <C>              <C>              <C>
  Outstanding at beginning of year         72,500    $       15.31          67,500    $        6.99          60,000    $        4.94
  Granted                                  15,000            15.50          40,000            21.63          12,500            15.63
  Exercised                                     -                -         (27,500)            4.51          (5,000)            4.00
  Forfeited                                     -                -          (7,500)           13.63               -                -
                                    -------------    -------------   -------------    -------------   -------------    -------------
  Outstanding at year end                  87,500    $       15.35          72,500    $       15.31          67,500    $        6.99
                                    =============    =============   =============    =============   =============    =============

  Options exercisable at year-end          72,500                           32,500                           55,000
  Weighted-average fair value
    of options granted during the   $        9.07                    $       13.37                    $        9.08
    year
</TABLE>

         The following table summarizes information about fixed-price stock
options outstanding and exercisable at December 31, 1999 under the Director's
Plan.

<TABLE>
<CAPTION>

                                 OPTIONS OUTSTANDING                       OPTIONS EXERCISABLE
                   ------------------------------------------------   -------------------------------
                       NUMBER       WEIGHTED-AVG.                         NUMBER
                     OUTSTANDING      REMAINING       WEIGHTED-AVG.    EXERCISABLE      WEIGHTED-AVG.
EXERCISE PRICES      AT 12/31/99   CONTRACTUAL LIFE  EXERCISE PRICE    AT 12/31/99      EXERCISE PRICE
----------------   --------------   --------------   --------------   --------------   --------------
<S>               <C>              <C>              <C>               <C>             <C>
$ 4.00 to  9.63            25,000              5.6   $         5.13           25,000   $         5.13
$15.50 to 17.88            32,500              8.4            16.26           17,500            16.91
$    22.88                 30,000              8.4            22.88           30,000            22.88
                   --------------   --------------   --------------   --------------   --------------
                           87,500              7.1   $        15.35           72,500   $        15.31
                   ==============   ==============   ==============   ==============   ==============
</TABLE>

         During 1999, 1998 and 1997, 4,398, 4,628 and 2,815 shares were issued
as stock awards and related compensation expense of $166,000, $169,000 and
$151,000 was recognized in 1999, 1998 and 1997, respectively.

         EMPLOYEE 401(K) PROFIT SHARING PLAN -- The Company has a 401(k) Profit
Sharing Plan (the "401(k) Plan") covering substantially all of its employees who
have been employed at least three months. The Company matches employees'
contributions to the Plan on a dollar-for-dollar basis, in the form of Company
common stock, up to 6% of their eligible compensation. During 1999, 1998 and
1997, the Company made matching contributions with the Company's common stock
totaling $1,505,000, $1,704,000 and $1,303,000, respectively.

         EXECUTIVE DEFERRED COMPENSATION PLAN -- The Company adopted the
Executive Deferred Compensation Plan (the "Executive Plan") effective December
31, 1994. Employees who participate in the Executive Plan are selected by an
Administrative Committee. Under the Executive Plan, the participating executives
may elect (i) to defer up to 80% of compensation after reaching the limitations
applicable to the Company's 401(k) Plan and (ii) to defer any excess
contributions refunded by the 401(k) Plan. The Company matches executives'
contributions to the Executive Plan on a dollar-for-dollar basis, in cash up to
5% of their eligible compensation. As of December 31, 1999 and 1998 the amount
deferred under the Executive Plan was $434,000 and $338,000, respectively.


                                       33
<PAGE>   36

                MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


(8)      ACCOUNTING FOR STOCK-BASED COMPENSATION

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

<TABLE>
<CAPTION>

                                           1999           1998           1997
                                       -----------     ----------     ----------
<S>                                    <C>             <C>            <C>
Net income (loss):
     As reported .................     $   (6,130)     $   60,821     $   58,380
     Pro forma ...................         (8,735)         57,677         56,988
Basic earnings (loss) per share:
     As reported .................          (0.11)           1.16           1.13
     Pro forma ...................          (0.16)           1.10           1.11
Diluted earnings (loss) per share:
     As reported .................          (0.11)           1.15           1.11
     Pro forma ...................          (0.16)           1.09           1.09
</TABLE>

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

<TABLE>
<CAPTION>

                                          1999            1998           1997
                                       ----------      ----------     ----------
<S>                                    <C>             <C>             <C>
Expected dividend yield ..........             -              -             -
Expected price volatility ........          67.9%          70.0%         63.2%
Risk-free interest rate ..........           6.2%           5.3%          5.4%
Expected life of option ..........       5 years        5 years       5 years
</TABLE>

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

(9)      SHAREHOLDERS RIGHTS PLAN

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



                                       34
<PAGE>   37
                MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)



on November 19, 2006 (the "Final Expiration Date"), unless the Final Expiration
Date is extended or the Rights are earlier redeemed or exchanged by the Company.

(10)     COMMITMENTS AND CONTINGENCIES

         India Lawsuit -- Jagson International Limited ("Jagson"), an Indian
entity, has brought suit against Marine Drilling Companies, Inc. and one of its
subsidiaries, Marine 300 Series, Inc. The plaintiff has alleged that the Company
agreed to charter two jack-up rigs to the plaintiff during 1992 and that it
breached the agreement by failing to charter the rigs resulting in damages in
excess of $14.5 million. In August 1995, Jagson filed a suit against the Company
in New Delhi, India that was subsequently withdrawn and filed a second suit in
New Delhi against the Company in October 1995 that was dismissed by the court.
In May 1996, Jagson filed a third suit against the Company in Bombay, India for
the same claim and attempted to attach the MARINE 201, located in India at the
time, to the claim. In March 1998, the court dismissed the motion for
attachment. Although the third suit is still on file with the court, the MARINE
201 is no longer in India and there have been no further proceedings in the
lawsuit. The Company disputes the existence of the agreement and intends to
vigorously defend the suit. The Company does not believe this dispute will have
a material adverse effect on its results of operations or financial condition.

         Shipyard Contract Dispute -- In December 1997, the company entered into
an agreement whereby HAM Marine, Inc., now Friede Goldman International, Inc.
("FGI"), would complete construction of the MARINE 700 semi-submersible drilling
rig in their shipyard in Pascagoula, Mississippi for $87 million. As a result
of, among other things, delays and cost overruns, the Company incurred $122
million ($87 million contract plus $35 million in change orders) for completion
of the construction of the MARINE 700.

         FGI asserted an $18.2 million claim for additional costs allegedly
incurred by FGI as a result of alleged changes in scope of work associated with
construction of the MARINE 700. The Company believed that it was not obligated
under its contract with FGI to pay any costs over and above the $122 million
invoiced by FGI. Additionally, the Company asserted a $3.8 million claim against
FGI and offset the $3.8 million against the $122 million invoiced by FGI. The
$3.8 million claim consisted of $3.5 million for work performed by the Company
that the Company believes was contractually the responsibility of FGI plus $0.3
million for late delivery damages. The Company and FGI settled the claim in
February 2000, for $3.8 million, the amount previously withheld by the Company.

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

         Operating Leases -- The Company rents certain equipment and other
property under operating leases. Rental expense was $1,507,000, $1,722,000 and
$1,836,000 in 1999, 1998 and 1997, respectively. Aggregate future minimum rental
payments relating to operating leases not including the charter fee for the
MARINE 510, are as follows (in thousands):

<TABLE>
<CAPTION>

                                                                2000        2001        2002        2003       2004
                                                             ----------- ----------- ----------- ----------- -----------
<S>                                                          <C>         <C>         <C>         <C>        <C>
           Office and equipment leases....................      $755        $449        $394        $393       $395
                                                             =========== =========== =========== =========== ===========
</TABLE>

         Charter Agreement -- In July 1997, the Company entered into a Charter
Agreement with Shanghai Bureau of Marine Geological Survey ("SBMGS") to charter
the KANTAN 3 (referred to as the MARINE 510), a semi-submersible rig, for a
period of five years. The MARINE 510 is a 600-foot water depth rig based upon
the Pacesetter design and was built in China in 1984. The Charter Agreement
began in mid-May 1998. The Charter Agreement and related agreements required the
Company to pay approximately $26,000 per day during the first year, $23,000 per
day during the second year and $24,500 per day for the last three years of the
charter for each day that the MARINE 510 worked. The rig did not work from
November 1998 until July 21, 1999, when the Company terminated the Charter
Agreement for the MARINE 510. The termination agreement provides that if market
conditions improve and the rig becomes available to work outside of Chinese
waters, the Company and SBMGS anticipate entering into another charter agreement
upon mutually agreeable terms or upon the same terms as the original Charter
Agreement.



                                       35
<PAGE>   38
                MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


         Marketing Agreement for NANHAI VI -- In August 1998, the Company
entered into an agreement effective through October 1, 1999, with China's
Southern Drilling Company to market and manage the 1,500-foot water depth rated
semi-submersible NANHAI VI. The Company recently extended the agreement through
December 31, 2000. The NANHAI VI is a self-propelled, semi-submersible drilling
rig, which was built in 1982 and modified and refurbished in 1995. The rig is
technically and economically suitable to be upgraded to 4,000-foot water depth
capability. Estimated total lead time required to secure the equipment needed
for the upgrade, complete the project and move the rig to first drilling
location is one year. Pursuant to the marketing agreement, if the rig is
required to be upgraded, the cost of the upgrade will be funded by the owner.
The Company is actively marketing the rig, which will be made available by
Southern Drilling Company upon consummation of a mutually agreeable drilling
contract.

(11)     SEGMENT AND RELATED INFORMATION

         For reporting purposes the Company defines its segments as shallow
water drilling (jack-up rigs) and deepwater drilling (semi-submersibles). The
accounting policies of the reportable segments are the same as those described
in Note 1 of Notes to Consolidated Financial Statements. The Company evaluates
the performance of its operating segments based on income before taxes and
non-recurring items. Operating income consists of revenues less the related
operating costs and expenses, including depreciation and allocated operation
support, excluding interest and unallocated corporate expenses. Identifiable
assets by operating segment include assets directly identified with those
operations.

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

<TABLE>
<CAPTION>

                                                         JACK-UP           SEMI        CORPORATE &
                                                        OPERATIONS      OPERATIONS        OTHER            TOTAL
                                                      --------------- --------------- ---------------  ---------------
<S>                                                    <C>             <C>             <C>              <C>
             1999
                 Revenues                              $    68,427     $    46,979     $         -      $   115,406
                 Operating Income (Loss)                    (9,956)         21,447         (15,820)          (4,329)
                 Identifiable Assets                       148,659         481,116          36,368          666,142
                 Capital Expenditures                        4,833         199,207           1,857          205,897
                 Depreciation & Amortization                15,606          10,718           3,245           29,569

             1998
                 Revenues                              $   192,667     $    35,348     $         -      $   228,015
                 Operating Income (Loss)                    97,714          10,940         (15,283)          93,371
                 Identifiable Assets                       166,622         280,684          28,378          475,684
                 Capital Expenditures                       27,368         158,267           5,261          190,896
                 Depreciation & Amortization                13,923           3,272           2,996           20,191

             1997
                 Revenues                              $   172,143     $    18,114     $         -      $   190,257
                 Operating Income (Loss)                    93,276           4,632         (10,300)          87,608
                 Identifiable Assets                       179,584         123,280          31,318          334,182
                 Capital Expenditures                       39,574          84,366           3,736          127,676
                 Depreciation & Amortization                11,260           3,242           2,493           16,995
</TABLE>


                                       36
<PAGE>   39
                MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)



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

<TABLE>
<CAPTION>

                                                                           1999            1998            1997
                                                                       ------------    ------------    ------------
<S>                                                                     <C>             <C>             <C>
         Revenues:
              United States                                             $  83,176       $ 161,974       $ 157,349
              India                                                             -           4,585           5,381
              Southeast Asia                                               11,369          61,456          27,527
              Australia                                                    15,956               -               -
              Other Foreign                                                 4,905               -               -

         Long-Lived Assets:
              United States                                               363,843         264,550         158,432
              India                                                             -               -          13,214
              Southeast Asia                                              170,389         131,959          88,841
              Australia                                                         -               -               -
              Other Foreign                                                73,608          35,120               -
</TABLE>

         The Company negotiates drilling contracts with a number of customers
for varying terms, and management believes it is not dependent upon any single
customer. For the years 1999, 1998 and 1997, sales to customers that represented
10% or more of consolidated drilling revenues were as follows (in thousands):

<TABLE>
<CAPTION>

                                                  1999                       1998                       1997
                                         -----------------------    -----------------------    -----------------------
                                                     % OF TOTAL                  % OF TOTAL                 % OF TOTAL
                                          REVENUE      REVENUE       REVENUE       REVENUE      REVENUE      REVENUE
                                         ----------   ----------    ----------   ----------    ----------   ----------
<S>                                      <C>          <C>           <C>          <C>          <C>           <C>
Applied Drilling Technology, Inc.
 - Jack-up Operations                    $   25,719           22%   $   54,381           24%   $   48,235           25%
Western Australian Petroleum Pty., Ltd
 - Semi Operations                           19,083           17%            -            -             -            -
Esso Exploration, Inc.
 - Semi Operations                           18,626           16%            -            -             -            -
</TABLE>

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

(12)     RELATED PARTY TRANSACTIONS

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


                                       37
<PAGE>   40
                MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

(13)     UNAUDITED QUARTERLY FINANCIAL DATA

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

<TABLE>
<CAPTION>

                                           FIRST        SECOND        THIRD        FOURTH
                  1999                    QUARTER       QUARTER      QUARTER       QUARTER
-------------------------------------    ---------     ---------    ---------     ---------
<S>                                      <C>           <C>           <C>          <C>
Revenues                                 $  19,827     $  15,503     $  35,263    $  44,813
Operating income (loss)                     (5,948)       (8,404)        3,526        6,497
Income (loss) before income taxes           (5,963)       (8,426)        2,083        3,824
Income tax expense (benefit)                (1,195)       (1,683)         (813)       1,339
Net income (loss)                           (4,768)       (6,743)        2,896        2,485
Basic earnings (loss)per share (1)       $   (0.09)    $   (0.12)   $     0.05    $    0.04
Diluted earnings (loss) per share (1)    $   (0.09)    $   (0.12)   $     0.05    $    0.04
Basic average common shares                 52,402        54,313        57,133       57,180
Diluted average common shares               52,402        54,313        57,708       57,790
</TABLE>

<TABLE>
<CAPTION>

                                    FIRST       SECOND        THIRD       FOURTH
            1998                   QUARTER     QUARTER       QUARTER      QUARTER
------------------------------    ---------    ---------    ---------    ---------
<S>                               <C>          <C>          <C>          <C>
Revenues                          $  57,464    $  64,141    $  63,452    $  42,958
Operating income                     25,478       30,864       26,199       10,830
Income before income taxes           26,199       31,469       26,809       11,064
Income tax expense                    9,441       11,360        9,884        4,035
Net income                           16,758       20,109       16,925        7,029
Basic earnings per share (1)      $    0.32    $    0.38    $    0.32    $    0.13
Diluted earnings per share (1)    $    0.32    $    0.38    $    0.32    $    0.13
Basic average common shares          52,987       52,240       52,289       52,334
Diluted average common shares        52,608       52,932       52,623       52,542
</TABLE>

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


(14)     SUBSEQUENT EVENTS

         On January 10, 2000, the Company completed an offering of 1,000,000
shares of its Common Stock in an underwritten offering at a net price of $18.50
per share, or $18,500,000. The proceeds of the offering were used to acquire,
upgrade and mobilize the Baruna V drilling rig.

         On January 20, 2000, the Company acquired a jack-up rig, the Baruna V,
for $13.5 million. The rig is a Bethlehem mat cantilever capable of working in
up to 200 feet of water. The rig was built in 1980 and is currently located in
Southeast Asia. The rig was renamed the MARINE 202 and will be mobilized to the
Gulf of Mexico during the second quarter of 2000, along with the MARINE 201,
currently located in the United Arab Emirates.



                                       38
<PAGE>   41



ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

         Not applicable.

                                    PART III

         The information called for by Part III, Items 10 through 13, of Form
10-K is incorporated by reference from the Registrant's Proxy Statements
relating to its annual meeting of Shareholders to be held May 11, 2000, which
will be filed by the Registrant with the Securities and Exchange Commission no
later than 120 days after the close of the fiscal year. Also reference is made
to the information contained under the captioned "Executive Officers of
Registrant" contained in Part I hereof.


                                     PART IV

ITEM 14.  EXHIBITS AND REPORTS ON FORM 8-K

(a)      The following documents are included in Part II, Item 8:

         (1)      Consolidated Financial Statements

<TABLE>
<CAPTION>

                                                                                                                 Page
                                                                                                                 ----

<S>                                                                                                                <C>
                   Independent Auditors' Report..................................................                  20

                   Consolidated Balance Sheets at December 31, 1999 and 1998.....................                  21

                   Consolidated Statements of Operations for each of the years
                       in the three-year period ended December 31, 1999..........................                  22

                   Consolidated Statements of Shareholders' Equity for each of
                       the years in the three-year period ended December 31, 1999................                  23

                   Consolidated Statements of Cash Flows for each of the years
                       in the three-year period ended December 31, 1999..........................                  24

                   Notes to Consolidated Financial Statements....................................                  26
</TABLE>

All other schedules are omitted as the information is not required or is not
applicable.


                                       39
<PAGE>   42




(2)      Exhibits
   Exhibit No.

         3.1      Restated Articles of Incorporation of Marine Drilling
                  Companies, Inc. (incorporated by reference to Exhibit 28.17 to
                  the Current Report on Form 8-K of the Registrant dated October
                  30, 1992).

         3.2      Amended and Restated Bylaws of Marine Drilling Companies, Inc.
                  (incorporated by reference to Exhibit 28.18 to the Current
                  Report on Form 8-K of the Registrant dated October 30, 1992).

++       10.1     First Amended and Restated Employment Agreement between Marine
                  Drilling Companies, Inc. and Jan Rask dated September 1, 1999
                  (incorporated by reference to Exhibit 10.1 in Form 10-Q for
                  quarter ended September 30, 1999).

++       10.2     First Amended and Restated Severance Agreement between Marine
                  Drilling Companies, Inc. and George H. Gentry, III dated
                  September 1, 1999 (incorporated by reference to Exhibit 10.2
                  in Form 10-Q for quarter ended September 30, 1999).

++       10.3     First Amended and Restated Severance Agreement between Marine
                  Drilling Companies, Inc. and H. Larry Adkins dated September
                  1, 1999 (incorporated by reference to Exhibit 10.3 in Form
                  10-Q for quarter ended September 30, 1999).

++       10.4     Severance Agreement between Marine Drilling Companies, Inc.
                  and O. Peter Blom dated September 1, 1999 (incorporated by
                  reference to Exhibit 10.4 in Form 10-Q for quarter ended
                  September 30, 1999).


++       10.5     First Amended and Restated Employment Agreement between Marine
                  Drilling Companies, Inc. and Bobby E. Benton dated September
                  1, 1999 (incorporated by reference to Exhibit 10.5 in Form
                  10-Q for quarter ended September 30, 1999).

++       10.6     Marine Drilling Companies, Inc. 1995 Non-Employee Directors'
                  Plan (incorporated by reference to Annex A of the Company's
                  Proxy Statement dated July 17, 1995) (incorporated by
                  reference to Exhibit 10.6 in Form 10-Q for quarter ended
                  September 30, 1999).

++       10.7     First Amended and Restated Employment Agreement between Marine
                  Drilling Companies, Inc. and T. Scott O'Keefe dated September
                  1, 1999 (incorporated by reference to Exhibit 10.7 in Form
                  10-Q for quarter ended September 30, 1999).

++       10.9     First Amended and Restated Severance Agreement between Marine
                  Drilling Companies, Inc. and Vincent G. Bounds dated September
                  1, 1999 (incorporated by reference to Exhibit 10.9 in Form
                  10-Q for quarter ended September 30, 1999).

++       10.10    First Amended and Restated Severance Agreement between Marine
                  Drilling Companies, Inc. and Dale W. Wilhelm dated September
                  1, 1999 (incorporated by reference to Exhibit 10.10 in Form
                  10-Q for quarter ended September 30, 1999).

         10.11    Amendment No. 1 and Waiver Agreement dated September 21, 1999
                  among Marine Drilling Companies and ABN AMRO Bank N.V.,
                  Christiania Bank Og Kreditkasse, Credit Agricole Indosuez,
                  Bankers Trust Company, Skandinaviska Enskilda Banken AB
                  (Publ.), Bank Austria, Bank of Nova Scotia, Banque Nationale
                  Paris, Natexis Banque BFCE, and Nederlandse
                  Scheepshypotheekbank N.V. (incorporated by reference to
                  Exhibit 10.11 in Form 10-Q for quarter ended September 30,
                  1999).

++       10.18    The Marine Drilling 1992 Long-Term Incentive Plan
                  (incorporated by reference to Exhibit 10.18 of the Company's
                  Registration Statement No. 33-52470 on Form S-1).

++       10.25    Marine Drilling Companies, Inc. Amended and Restated Executive
                  Deferred Compensation Plan effective July 1, 1996
                  (incorporated by reference to Exhibit 10.25 on Form 10-K for
                  the year ended December 31, 1996).

         10.26    Marine Drilling Companies, Inc. Shareholders Rights Agreement
                  (incorporated by reference to Exhibits 1 - 5 to the Current
                  Report on Form 8-K of the Registrant dated November 15, 1996).



                                       40
<PAGE>   43




         *          21.1    Subsidiaries of the Registrant.

         *          23.1    Consent of KPMG LLP.

         *          27      Financial Data Schedule.

*                           Filed herewith.

++                          Management contract or compensation plan or
                            arrangement required to be filed as an exhibit to
                            this report.


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

(b)      Reports on Form 8-K:
         No reports were filed on Form 8-K during the fourth quarter of 1999.


                                       41
<PAGE>   44



                                   SIGNATURES

         PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) 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, IN THE CITY OF SUGAR
LAND, STATE OF TEXAS, ON MARCH 24, 2000.

                                                 MARINE DRILLING COMPANIES, INC.

                                                 By /s/ Jan Rask
                                                   -----------------------------
                                                        Jan Rask
                                                        President

         PURSUANT TO THE REQUIREMENT OF THE SECURITIES EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATE INDICATED:

<TABLE>
<CAPTION>

               SIGNATURE                                        TITLE                                        DATE

<S>                                               <C>                                                  <C>
  /s/    Robert L. Barbanell                            Chairman of the Board                          March 24, 2000
----------------------------------------
         Robert L. Barbanell

  /s/         Jan Rask                            President Chief Executive Officer                    March 24, 2000
----------------------------------------                    And Director
              Jan Rask

  /s/     T. Scott O'Keefe                              Senior Vice President                          March 24, 2000
----------------------------------------               Chief Financial Officer
          T. Scott O'Keefe                           (Principal Financial Officer)


  /s/      Dale W. Wilhelm                          Vice President and Controller                      March 24, 2000
----------------------------------------           (Principal Accounting Officer)
           Dale W. Wilhelm

  /s/    Robert L. Barbanell                                   Director                                March 24, 2000
----------------------------------------
         Robert L. Barbanell

  /s/     David A. B. Brown                                    Director                                March 24, 2000
----------------------------------------
          David A. B. Brown

  /s/      Howard I. Bull                                      Director                                March 24, 2000
----------------------------------------
           Howard I. Bull

  /s/       J. C. Burton                                       Director                                March 24, 2000
----------------------------------------
            J. C. Burton

  /s/      David B. Robson                                     Director                                March 24, 2000
----------------------------------------
           David B. Robson

  /s/     Robert C. Thomas                                     Director                                March 24, 2000
----------------------------------------
          Robert C. Thomas
</TABLE>



                                       42

<PAGE>   45




                                INDEX TO EXHIBITS

<TABLE>
<CAPTION>

          EXHIBIT
          NUMBER                      EXHIBITS
          ------                      --------
<S>                          <C>
         21.1                Subsidiaries of the Registrant.

         23.1                Consent of KPMG LLP.

         27                  Financial Data Schedule
</TABLE>