GLOBALSANTAFE CORP - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)

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

For the quarterly period ended September 30, 2003

OR

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

Commission File Number 1-14634

GLOBALSANTAFE CORPORATION
(Exact name of registrant as specified in its charter)

CAYMAN ISLANDS 98-0108989
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)

15375 MEMORIAL DRIVE, HOUSTON, TEXAS 77079-4101
(Address of principal executive offices) (Zip Code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (281) 925-6000

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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]

The number of shares of the registrant's ordinary shares, par value $.01 per
share, outstanding as of October 31, 2003, was 233,443,044.

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1

GLOBALSANTAFE CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS TO FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 2003

2

FORWARD-LOOKING STATEMENTS

Under the Private Securities Litigation Reform Act of 1995, companies are
provided a "safe harbor" for discussing their expectations regarding future
performance. We believe it is in the best interests of our shareholders and the
investment community to use these provisions and provide such forward-looking
information. We do so in this report and in other communications.
Forward-looking statements are often but not always identifiable by the use of
words such as "anticipate," "believe," "budget," "could," "estimate," "expect,"
"forecast," "intend," "may," "might," "plan," "predict," "project," and
"should."

Our forward-looking statements include statements about the following subjects:

o our funding and financing plans;

o the dates drilling rigs will become available following completion of
current contracts;

o the dates our rigs that are under construction are expected to be
delivered;

o projected cash outlays, the timing of such outlays and expected
sources of funding in connection with the rigs that are under
construction;

o our expectations regarding commencement of certain contracts;

o our contract drilling and drilling management services revenue
backlogs and the amounts expected to be realized in 2003;

o our expectations regarding the length of time mobile assets will be
operating in given locations and our resulting conclusions regarding
the future tax consequences of operating in those locations;

o the expected outcomes of a legal proceeding, its materiality, and its
expected effects on our financial position and results of operations;

o our expectation that our effective tax rate will continue to fluctuate
from year to year as our operations are conducted in different taxing
jurisdictions;

o our expectations regarding future conditions in various geographic
markets in which we operate and the prospects for future work and
dayrates in those markets;

o the fact that we do not anticipate using ordinary shares to satisfy
future purchase obligations in connection with our Zero Coupon
Convertible Debentures;

o the fact that we currently do not intend to offer any securities under
the S-3 registration statement;

o our estimated capital expenditures in 2003;

o our expectation that we will fund various commitments, primarily
related to our debt and capital lease obligations, leases for office
space and other property and equipment as well as

3

commitments for construction of drilling rigs, with existing cash and
cash equivalents, and cash generated from operations;

o our ability to service indebtedness;

o our ability to meet all of our current obligations, including working
capital requirements, capital expenditures and debt service, from our
existing cash and marketable securities balances, and future cash flow
from operations;

o the anticipated effect of the required adoption of SFAS No. 148; and

any other statements that are not historical facts.

Our forward-looking statements speak only as of the date of this report and are
based on available industry, financial and economic data and our operating and
financing plans as of that date. They are also inherently uncertain, and
investors must recognize that events could turn out to be materially different
from what we expect.

Factors that could cause or contribute to such differences include, but are not
limited to (a) the cyclical nature of the drilling business; (b) the impact of
war or other armed hostilities in the Middle East or elsewhere; (c) presently
unknown rig repair needs and/or additional opportunities to accelerate planned
maintenance expenditures due to presently unanticipated rig downtime; (d) delays
in rig construction projects due to such things as cost over-runs, supply
shortages, natural disasters and work stoppages by shipyard workers; and (e)
such other risk factors as may be discussed in the "Risk Factors" section under
Items 1 and 2 and elsewhere in our Annual Report on Form 10-K for the year ended
December 31, 2002 and subsequent reports filed with the U.S. Securities and
Exchange Commission.

YOU SHOULD NOT PLACE UNDUE RELIANCE ON FORWARD-LOOKING STATEMENTS. EACH
FORWARD-LOOKING STATEMENT SPEAKS ONLY AS OF THE DATE OF THE PARTICULAR
STATEMENT, AND WE DISCLAIM ANY OBLIGATION OR UNDERTAKING TO DISSEMINATE ANY
UPDATES OR REVISIONS TO OUR STATEMENTS, FORWARD-LOOKING OR OTHERWISE, TO REFLECT
CHANGES IN OUR EXPECTATIONS OR ANY CHANGE IN EVENTS, CONDITIONS OR CIRCUMSTANCES
ON WHICH ANY SUCH STATEMENTS ARE BASED.

4

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Shareholders
of GlobalSantaFe Corporation

We have reviewed the accompanying condensed consolidated balance sheet of
GlobalSantaFe Corporation and subsidiaries as of September 30, 2003, and the
related condensed consolidated statements of income for each of the three- and
nine-month periods ended September 30, 2003 and 2002 and the condensed
consolidated statements of cash flows for the nine-month periods ended September
30, 2003 and 2002. These interim financial statements are the responsibility of
the Company's management.

We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with generally
accepted auditing standards, the objective of which is the expression of an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.

Based on our review, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated interim financial statements
for them to be in conformity with accounting principles generally accepted in
the United States of America.

We previously audited, in accordance with auditing standards generally accepted
in the United States of America, the consolidated balance sheet as of December
31, 2002, and the related consolidated statements of income, shareholders'
equity, and of cash flows for the year then ended (not presented herein); and in
our report dated March 21, 2003, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of December 31, 2002,
is fairly stated in all material respects in relation to the consolidated
balance sheet from which it has been derived.

/s/ PricewaterhouseCoopers LLP

Houston, Texas
November 7, 2003

5

GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
($ in millions, except per share amounts)

See notes to condensed consolidated financial statements.

6

GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
($ in millions)

See notes to condensed consolidated financial statements.

7

GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
($ in millions)

See notes to condensed consolidated financial statements.

8

GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in millions)

See notes to condensed consolidated financial statements.

9

GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS

GlobalSantaFe Corporation (the "Company" or "GlobalSantaFe") is an oil and gas
drilling contractor, owning or operating a fleet of over 90 marine and land
drilling rigs. The Company's fleet currently includes 13 floating rigs, 45
cantilevered jackup rigs (including the GSF Constellation I, which was delivered
in June 2003), 31 land rigs and one platform rig. The Company has two
ultra-deepwater semisubmersibles and one high-performance cantilevered jackup
under construction, and it operates two semisubmersible rigs for third parties
under a joint venture agreement. As of September 30, 2003, the Company or its
affiliates also operated 11 platform rigs in the North Sea for third parties.
Effective November 1, 2003, however, the Company discontinued its operations
related to nine of these platform rigs and now continues to operate only two of
these platform rigs for third parties. The Company provides oil and gas contract
drilling services to the oil and gas industry worldwide on a daily rate
("dayrate") basis. The Company also provides oil and gas drilling management
services on either a dayrate or completed-project, fixed-price ("turnkey")
basis, as well as drilling engineering and drilling project management services,
and it participates in oil and gas exploration and production activities.

BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements include
the accounts of GlobalSantaFe Corporation and its consolidated subsidiaries.
Intercompany accounts and transactions have been eliminated. Unless the context
otherwise requires, the term "Company" refers to GlobalSantaFe Corporation and
its consolidated subsidiaries. The condensed consolidated financial statements
and related footnotes are presented in U.S. dollars and in accordance with
accounting principles generally accepted in the United States of America.

The financial statements reflect all adjustments, which are, in the opinion of
management, necessary for a fair statement of the results for the interim
periods. Such adjustments are considered to be of a normal recurring nature
unless otherwise identified. Interim-period results may not be indicative of
results expected for the full year. The year-end condensed consolidated balance
sheet was derived from audited financial statements but does not include all
disclosures required by accounting principles generally accepted in the United
States of America. These interim financial statements should be read in
conjunction with the Company's audited financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2002.

The Company's independent auditors have performed a review of, and issued a
report on, these consolidated interim financial statements in accordance with
standards established by the American Institute of Certified Public Accountants.
Pursuant to Rule 436(c) under the U.S. Securities Act of 1933, this report
should not be considered a part of any registration statement prepared or
certified within the meanings of Sections 7 and 11 of the Securities Act.

STOCK-BASED COMPENSATION PLANS

The Company accounts for its stock-based compensation plans using the
intrinsic-value method prescribed by Accounting Principles Board ("APB") Opinion
No. 25. Accordingly, the Company computes compensation cost for these plans as
the amount by which the quoted market price of the Company's ordinary shares on
the date of grant exceeds the amount the employee must pay to acquire the
shares. The amount of compensation cost, if any, is charged to income over the
vesting period. No

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GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

compensation cost has been recognized for any of the Company's outstanding stock
options, all of which have exercise prices equal to or greater than the market
price of the Company's ordinary shares on the date of grant, or for options
granted under the Company's employee share purchase plan. The Company does,
however, recognize compensation cost for all grants of performance-based stock
awards.

Had compensation cost for the Company's stock-based compensation plans been
determined based on fair values as of the dates of grant in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," the Company's net income and earnings per ordinary
share would have been reported as follows:

Estimates of fair values for stock options granted under the Company's
stock-based compensation plans for purposes of calculating the pro forma data in
the preceding table are computed using the Black-Scholes option-pricing model.
Fair values for performance-based stock awards are determined by the market
price of the Company's ordinary shares at the date of grant. The pro forma
figures in the preceding table may not be representative of pro forma amounts in
future years.

RESTRUCTURING COSTS

Estimated costs related to the closure of Global Marine Inc.'s former Houston,
Texas, office were accrued as part of Restructuring costs in the Company's
consolidated financial statements for the year ended December 31, 2001. These
estimated costs were based on the assumption that this office space would be
subleased to a third party. The Company was unsuccessful in subleasing this
office space in 2002, and, based on management's best estimates at the time,
increased its remaining liability at December 31, 2002, by $2.9 million. Based
on current Houston commercial real estate market conditions, the Company now
believes it is probable that it will not be able to sublease this office space
before the end of the lease term. As a result, the Company accrued an additional
$2.9 million in Restructuring costs during the second quarter of 2003, and has
now accrued the entire liability under the lease.

As of September 30, 2003, the Company's remaining liability related to its
merger-related restructuring activities totaled $19.5 million, consisting of the
following: $14.8 million related to office closures and

11

GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

consolidation of facilities, which will be relieved over the remaining terms of
the various office leases ranging up to 5 1/2 years; $2.7 million related to
employee separation costs, which will be paid out pursuant to the terms of
various severance agreements, over terms ranging up to three years from the date
of separation; and $2.0 million related to special retirement termination costs,
which will be satisfied pursuant to the payment terms of the retirement plans
affected.

NOTE 2 - EARNINGS PER ORDINARY SHARE

A reconciliation of the numerators and denominators of the basic and diluted
per-share computations for net income follows:

The computation of diluted earnings per ordinary share for all periods presented
excludes outstanding options to purchase GlobalSantaFe ordinary shares with
exercise prices greater than the average market price of GlobalSantaFe ordinary
shares for the period, because the inclusion of such options would have the
effect of increasing diluted earnings per ordinary share (i.e., their effect
would be "antidilutive"). Options to purchase a total of 19,239,037 ordinary
shares and 16,133,906 ordinary shares were excluded from the computation of
diluted earnings per ordinary share for the three and nine months ended
September 30, 2003, respectively. Options to purchase a total of 14,700,741
ordinary shares and 8,718,677 ordinary shares were excluded from the computation
of diluted earnings per ordinary share for the three and nine months ended
September 30, 2002, respectively.

Diluted earnings per ordinary share for all periods presented also excludes
4,875,062 potentially dilutive shares issuable upon conversion of the Company's
Zero Coupon Convertible Debentures because the inclusion of such shares would be
antidilutive given the level of net income for these periods.

Holders of the Zero Coupon Convertible Debentures have the right to require the
Company to repurchase the debentures as early as June 25, 2005. The Company may
pay the repurchase price with either cash or stock or a combination thereof. The
Company does not anticipate using stock to satisfy any such future purchase
obligation.

12

GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 - SEGMENT INFORMATION

Information by operating segment, together with reconciliations to the
consolidated totals, is presented in the following table:

Drilling management services operating results for the three and nine months
ended September 30, 2003 and 2002, were favorably affected by downward revisions
to cost estimates for certain wells completed in prior periods. Such revisions
increased segment operating income by $3.2 million and $3.4 million,
respectively, for the three and nine months ended September 30, 2003, and by
$2.7 million and $3.3 million, respectively, for the three and nine months ended
September 30, 2002. The effect of these revisions, however, was offset by the
deferral of turnkey drilling profit totaling $0.5 million and $6.2 million,
respectively for the three and nine months ended September 30, 2003 and by $3.5
million and $10.2 million, respectively, for the three and nine months ended
September 30, 2002, on wells in which

13

GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Challenger Minerals Inc. ("CMI"), a wholly-owned subsidiary of the Company, was
either the operator or held a working interest. This deferred turnkey profit has
been credited to the Company's full cost pool of oil and gas properties and will
be recognized through a lower depletion rate as reserves are produced.

NOTE 4 - COMMITMENTS AND CONTINGENCIES

CAPITAL COMMITMENTS

The Company currently has definitive contracts with PPL Shipyard PTE, Ltd. of
Singapore ("PPL") for construction of two ultra-deepwater semisubmersibles and
one high-performance cantilevered jackup, with options for two additional
similarly priced semisubmersibles. In June 2003, the Company took delivery of
the GSF Constellation I, the first of two high-performance cantilevered jackups
ordered from PPL, at a total cost of $133 million, excluding capitalized
interest, capital spares, startup expenses and mobilization costs. Contractual
obligations in connection with the remaining high-performance cantilevered
jackup, the GSF Constellation II, excluding capitalized interest, capital
spares, startup expenses and mobilization costs, are also expected to total
approximately $133 million, of which $94 million had been incurred as of
September 30, 2003. Contractual obligations in connection with the two
ultra-deepwater semisubmersibles, excluding capitalized interest, capital
spares, startup expenses and mobilization costs, are expected to total
approximately $570 million, or an average of $285 million per rig. Of the $570
million, $386 million had been incurred as of September 30, 2003.

In January 2003, in order to take advantage of an attractive financing
structure, the Company entered into a lease-leaseback arrangement with a
European bank related to the Company's Britannia cantilevered jackup. Pursuant
to this arrangement, the Company leased the Britannia to the bank for a
five-year term for a lump-sum payment of approximately $37 million, net of
origination fees of approximately $1.5 million. The bank then leased the rig
back to the Company for a five-year term with an effective annual interest rate
based on the 3-month British Pound Sterling LIBOR plus a margin of 0.625%, under
which the Company will make annual lease payments of approximately $8.0 million,
payable in advance. The Company has classified this arrangement as a capital
lease.

CMI currently holds a 16% working interest in a development project in the North
Sea. CMI's portion of the development costs of this project is expected to total
approximately Pound Sterling 14.7 million ($23.4 million). Of the $23.4 million,
approximately $1.9 million had been incurred as September 30,2003.

LEGAL PROCEEDINGS

The Company filed a claim in 1993 in the amount of $40.6 million with the United
Nations Compensation Commission ("UNCC") for losses suffered as a result of the
Iraqi invasion of Kuwait in 1990. The claim was for the loss of four rigs and
associated equipment, lost revenue, and miscellaneous expenditures. During the
first quarter of 2003, the Governing Council of the UNCC awarded the Company
compensation in the amount of $22.1 million in a final, non-appealable,
adjudication of the claim. The Company recognized $22.1 million in "Other
income" on the Condensed Consolidated Statement of Income in the first quarter
of 2003. The Company received an additional $0.2 million award from the UNCC
during the second quarter of 2003 as settlement for an additional claim for lost
revenue filed by one of its subsidiaries.

14

GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company and two of its subsidiaries are defendants in a lawsuit filed on
July 28, 2003, by Transocean Inc. ("Transocean") in the United States District
Court for the Southern District of Texas, Houston Division. The lawsuit alleges
that the dual drilling structure and method utilized by the Company's two
ultra-deepwater semisubmersibles under construction in Singapore infringe on
United States patents granted to Transocean. The lawsuit seeks damages,
royalties and attorney's fees, together with an injunction that would prevent
the use of the dual drilling capabilities of the rigs. The Company believes that
the lawsuit is without merit and intends to vigorously defend it. The Company
does not expect that the matter will have a material adverse effect on the
Company's business or financial position, results of operations or cash flows.

ENVIRONMENTAL MATTERS

The Company has certain potential liabilities under the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA") and similar
state acts regulating cleanup of various hazardous waste disposal sites,
including those described below. CERCLA is intended to expedite the remediation
of hazardous substances without regard to fault. Potentially responsible parties
("PRPs") for each site include present and former owners and operators of,
transporters to and generators of the substances at the site. Liability is
strict and can be joint and several.

The Company has been named as a PRP in connection with a site located in Santa
Fe Springs, California known as the Waste Disposal, Inc. site. The Company and
other PRPs have agreed with the U.S. Environmental Protection Agency ("EPA") and
the U.S. Department of Justice ("DOJ") to settle their potential liabilities for
this site by agreeing to perform the remaining remediation required by the EPA.
The form of the agreement is a consent decree, which has not yet been entered by
the court. Although the settlement is not final until the decree is entered by
the court, it is likely that it will be. The parties to the settlement have
entered into a participation agreement, which makes the Company liable for an
estimated 7.7% of the remediation costs. Although the remediation costs cannot
be determined with certainty until the remediation is complete, the consultant
advising the group with respect to remediation thinks that the remediation costs
will be such that the Company's share of the remaining remediation costs will be
less than $800,000. There are additional potential liabilities related to the
site, but these cannot be quantified, and the Company has no reason at this time
to believe that they will be material.

The Company has also been named as a PRP in connection with a site in California
known as the Casmalia Resources Site. The Company and other PRPs have entered
into an agreement with the EPA and the DOJ to resolve their potential
liabilities. This agreement is also not final until the agreed-upon consent
decree is entered by the court, but it is likely that it will be. Under the
settlement, the Company is not likely to owe any substantial additional amounts
for this site beyond what the Company has already paid. There are additional
potential liabilities related to this site, but these cannot be quantified at
this time, and the Company has no reason at this time to believe that they will
be material.

The Company has been named as one of many PRPs in connection with a site located
in Carson, California formerly maintained by Cal Compact Landfill. On February
15, 2002, the Company was served with a required 90-day notification that eight
California cities, on behalf of themselves and other PRPs, intend to commence an
action against the Company under the Resource Conservation and Recovery Act
("RCRA"). On April 1, 2002, a complaint was filed by the cities against the
Company and others alleging that they have liabilities in connection with the
site. However, the complaint has not been served. The site was closed in or
around 1965, and the Company does not have sufficient information to enable it
to assess its potential liability, if any, for this site.

15

GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Resolutions of other claims by the EPA, the involved state agency and/or PRPs
are at various stages of investigation. These investigations involve
determinations of:

- the actual responsibility attributed to the Company and the other PRPs
at the site;

- appropriate investigatory and/or remedial actions; and

- allocation of the costs of such activities among the PRPs and other
site users.

The Company's ultimate financial responsibility in connection with those sites
may depend on many factors, including:

- the volume and nature of material, if any, contributed to the site for
which the Company is responsible;

- the numbers of other PRPs and their financial viability; and

- the remediation methods and technology to be used.

It is difficult to quantify with certainty the potential cost of these
environmental matters, particularly in respect of remediation obligations.
Nevertheless, based upon the information currently available, the Company
believes that its ultimate liability arising from all environmental matters,
including the liability for all other related pending legal proceedings,
asserted legal claims and known potential legal claims which are likely to be
asserted, is adequately accrued and should not have a material effect on the
Company's financial position or ongoing results of operations. Estimated costs
of future expenditures for environmental remediation obligations are not
discounted to their present value.

CONTINGENCIES AND OTHER LEGAL MATTERS

In 1998, the Company entered into fixed-price contracts for the construction of
two dynamically positioned, ultra-deepwater drillships, the Glomar C.R. Luigs
and the Glomar Jack Ryan, which began operating in April and December 2000,
respectively. Pursuant to two 20-year capital lease agreements, the Company
subsequently novated the construction contracts for the drillships to two
financial institutions (the "Lessors"), which now own the drillships and lease
them to the Company. The Company has deposited with three large foreign banks
(the "Payment Banks") amounts equal to the progress payments that the Lessors
were required to make under the construction contracts, less a lease benefit of
approximately $62 million (the "Defeasance Payment"). In exchange for the
deposits, the Payment Banks have assumed liability for making rental payments
required under the leases and the Lessors have legally released the Company as
the primary obligor of such rental payments. Accordingly, the Company has
recorded no capital lease obligations on its balance sheet with respect to the
two drillships.

The Company has interest rate risk in connection with these fully defeased
financing leases for the Glomar Jack Ryan and Glomar C. R. Luigs. The Defeasance
Payment earns interest based on the British Pound Sterling three-month LIBOR,
which approximated 8.00% at the time of the agreement. Should the Defeasance
Payment earn less than the assumed 8.00% rate of interest, the Company will be
required to

16

GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

make additional payments as necessary to augment the annual payments made by the
Payment Banks pursuant to the agreements. If the September 30, 2003, LIBOR rate
of 3.72% were to continue over the next ten years, the Company would be required
to fund an additional estimated $56.6 million during that period. Any additional
payments made by the Company pursuant to the financing leases would increase the
carrying value of its leasehold interest in the rigs and therefore be reflected
in higher depreciation expense over their then-remaining useful lives. The
Company does not expect that, if required, any additional payments made under
these leases would be material to its financial position, results of operations
or cash flows in any given year.

There are no other material pending legal proceedings, other than ordinary
routine litigation incidental to the business of the Company, to which the
Company is a party or of which any of its property is the subject.

NOTE 5 - DEBT OFFERING

On February 11, 2003, the Company issued $250 million of 5% Notes due 2013 (the
"5% Notes") and received cash proceeds of approximately $247.4 million after
deduction for discount, underwriting fees and other related expenses. Interest
on the 5% Notes is payable on February 15 and August 15 of each year beginning
on August 15, 2003. No principal payments are required with respect to the 5%
Notes prior to their final maturity date. The Company has exchanged the 5% Notes
for registered notes having substantially identical terms.

NOTE 6 - DERIVATIVE INSTRUMENTS AND FAIR VALUE

The Company manages its fair value risk related to its long-term debt by using
interest rate swaps to convert a portion of its fixed-rate debt into
variable-rate debt. Under these interest rate swaps, the Company agrees with
other parties to exchange, at specified intervals, the difference between the
fixed-rate and floating-rate amounts, calculated by reference to an agreed upon
notional amount.

In August 2003, the Company entered into fixed-for-floating interest rate swaps
with an aggregate notional amount of $100 million, effective August 2003 through
February 2013. These interest rate swaps are intended to manage a portion of the
fair value risk related to the Company's 5% Notes discussed in Note 5 above.
Under the terms of these swaps, the Company has agreed to pay the counterparties
an interest rate equal to the six-month LIBOR rate less 0.247% to 0.40% on the
notional amounts and the Company will receive the fixed 5.00% rate. The
estimated aggregate fair value of these swaps at September 30, 2003, was an
asset of $6.3 million. The Company has designated these swaps as fair-value
hedges of the 5% Notes.

At September 30, 2003, the net fair value of the Company's 5% Notes due 2013 was
$254.8 million compared to their carrying value of $255.7 million (net of
discount), $338.6 million for the Company's 7-1/8% Notes due 2007 compared to
their carrying value of $301.7 million (net of discount), $343.1 million for the
Company's Zero Coupon Convertible Debentures due 2020 compared to their carrying
value of $335.8 million (net of discount) and $336.3 million for the Company's
7% Notes due 2028 compared to their carrying value of $296.8 million (net of
discount).

17

GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 - SUPPLEMENTAL CASH FLOW INFORMATION

In September 2003, the Company's Board of Directors increased the regular
quarterly cash dividend for the third quarter of 2003 to $0.05 per ordinary
share from $0.0375 per ordinary share, payable to shareholders of record as of
the close of business on September 30, 2003. This third quarter dividend in the
amount of $11.7 million was paid on October 15, 2003.

NOTE 8 - RECENT ACCOUNTING PRONOUNCEMENTS

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," which amends SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 148 provides three
alternative methods of transition and disclosure requirements for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. The three alternative methods available are: (1) the prospective
method, (2) the modified prospective method, and (3) the retroactive restatement
method. Under the prospective method, which is available only for companies
adopting SFAS No. 123 prior to December 16, 2003, compensation cost is
recognized for awards granted, modified or settled after the beginning of the
year of adoption. The modified prospective method recognizes compensation costs
from the beginning of the year of adoption as if the fair value method had been
used for all grants awarded, modified or settled in fiscal years beginning after
December 15, 1994. The retroactive restatement method provides that all periods
presented are restated to reflect compensation costs as if the fair value method
had been used for all grants awarded, modified or settled in fiscal years
beginning after December 15, 1994. In addition to providing compensation cost
recognition methods, SFAS No. 148 also requires certain disclosures, including
the accounting method used for each period presented, a description of the
method used to report the change in accounting principle and continuing tabular
presentation of proforma net income and earnings per share effects for any
awards outstanding under the intrinsic value method of Accounting Principles
Board Opinion No. 25. SFAS No. 148 is effective for fiscal years ending after
December 15, 2002. The Company has reflected the disclosure provisions of SFAS
No. 148 in Note 1, and is currently evaluating the recognition provisions of
SFAS No. 148 together with an overall reconsideration of its stock-based
compensation plans.

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51" ("FIN 46"). This
interpretation provides guidance on the identification of, and financial
reporting for, entities over which control is achieved through means other than
voting rights, or variable-interest entities ("VIEs"). FIN 46 originally became
effective for public entities with VIEs created before February 1, 2003, at the
beginning of the first interim or annual reporting period starting after June
15, 2003. This effective date has now been deferred to the first interim or
annual period ending after December 15, 2003. For VIEs created after January 31,
2003, FIN 46 was effective immediately. FIN 46 is now the guidance that
determines whether consolidation is required and whether the variable-interest
accounting model must be used to account for existing and new entities. The
Company does not currently have any material VIEs within the scope of FIN 46.

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This statement amends and
clarifies accounting for derivative instruments embedded in other contracts, and
for hedging activities under SFAS No. 133. This statement is effective

18

GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

for contracts entered into or modified after June 30, 2003, with certain
exceptions, and for hedging relationships designated after June 30, 2003. The
adoption of SFAS No. 149 did not have a material effect on the Company's results
of operations, financial position or cash flows.

In May 2003 the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This statement
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. In accordance with the standard, financial instruments
that embody obligations for the issuer are required to be classified as
liabilities. SFAS 150 is effective for such financial instruments, except for
those that apply to mandatorily redeemable noncontrolling interests, entered
into or modified after May 31, 2003, and otherwise was effective for such
financial instruments, except for those that apply to mandatorily redeemable
noncontrolling interests, at the beginning of the first interim period beginning
after June 15, 2003. The adoption of SFAS 150 did not have a material effect on
the Company's financial position, results of operations or cash flows.

19

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

The Company is a leading oil and gas drilling contractor, owning or operating a
high quality, technologically advanced fleet of over 90 marine and land drilling
rigs. The Company's fleet currently includes 13 floating rigs, 45 cantilevered
jackup rigs (including the high-performance jackup, GSF Constellation I, which
was delivered in June 2003), 31 land rigs and one platform rig. The Company has
two ultra-deepwater semisubmersibles and one high-performance jackup under
construction. The Company also operates two semisubmersible rigs for third
parties under a joint venture agreement. As of September 30, 2003, the Company
or its affiliates operated 11 platform rigs in the North Sea for third parties.
Effective November 1, 2003, however, the Company discontinued its operations
related to nine of these platform rigs and the Company will continue to operate
only two of these platform rigs for third parties. The Company intends to exit
its platform rig operations, which have historically not had a material effect
on the Company's consolidated operating results. The Company provides oil and
gas contract drilling services to the oil and gas industry worldwide on a daily
rate ("dayrate") basis. The Company also provides oil and gas drilling
management services on either a dayrate or completed-project, fixed-price
("turnkey") basis, as well as drilling engineering and drilling project
management services, and it participates in oil and gas exploration and
production activities.

CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES

The Company's consolidated financial statements are impacted by the accounting
policies used and the estimates and assumptions made by management during their
preparation. These policies, estimates and assumptions affect the carrying
values of assets and liabilities and disclosures of contingent assets and
liabilities at the balance sheet date and the amounts of revenues and expenses
recognized during the period. Actual results could differ from such estimates
and assumptions. For a discussion of the critical accounting policies and
estimates that the Company uses in the preparation of its condensed consolidated
financial statements, see "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Company's Annual Report on
Form 10-K for the year ended December 31, 2002. There have been no material
changes to these policies during the nine months ended September 30, 2003.

OPERATING RESULTS

SUMMARY

Data relating to the Company's operations by business segment follows (dollars
in millions):

20

Operating income for the third quarter of 2003 decreased by $66.1 million to
$24.6 million from $90.7 million for the third quarter of 2002, due primarily to
lower utilization and dayrates for the Company's drilling fleet. Operating
income was also lower due to lower turnkey drilling activity within the
Company's drilling management services segment, along with lower margins
realized on certain of the Company's North Sea turnkey projects. These factors
were partially offset by higher average natural gas prices and production and
lower corporate expenses.

Operating income for the nine months ended September 30, 2003, decreased by
$163.1 million to $109.1 million from $272.2 million for the comparable period
in 2002 due primarily to lower utilization and dayrates for the Company's
drilling fleet, a lower contribution from the drilling management services
segment and an increase in the Company's restructuring liability as described
below. These factors were partially offset by higher average natural gas prices
and production and lower corporate expenses.

Estimated costs related to the closure of Global Marine Inc.'s former Houston,
Texas, office were accrued as part of Restructuring costs in the Company's
consolidated financial statements for the year ended December 31, 2001. These
estimated costs were based on the assumption that this office space would be
subleased to a third party. Based on current Houston commercial real estate
market conditions, the Company now believes it is probable that it will not be
able to sublease this office space before the end of the lease term. As a
result, the Company accrued an additional $2.9 million in Restructuring costs
during the second quarter of 2003, and has now accrued its entire liability
under the lease.

The Company's contract drilling backlog at September 30, 2003, totaled
approximately $824 million, of which approximately $244 million is expected to
be realized during the remainder of 2003. Contract drilling backlog at December
31, 2002, was $1.2 billion.

CURRENT MARKET CONDITIONS

The drilling business has historically been cyclical, marked by periods of low
demand, excess rig supply and low dayrates, followed by periods of high demand,
short rig supply and increasing dayrates. These

21

cycles are highly volatile and are traditionally influenced by a number of
factors, including oil and gas prices, the spending plans of the Company's
customers and the highly competitive nature of the offshore drilling industry.
Even when rig markets appear to have stabilized at a certain level of
utilization and dayrates, these markets can change swiftly, making it difficult
to predict trends or conditions in the market. The relocation of rigs from weak
markets to stable or strong markets may also have a significant impact on
utilization and dayrates in the affected markets. A summary of current market
conditions in the Company's areas of operations follows:

North Sea. The Company's North Sea fleet currently includes four
semisubmersibles, four cantilevered heavy-duty harsh environment ("HDHE")
jackups, three cantilevered jackups and a platform rig. As of September 30,
2003, the Company or its affiliates also operated 11 platform rigs in the North
Sea for third parties. Effective November 1, 2003, however, the Company
discontinued its operations related to nine of these rigs and the Company will
continue to operate only two of these platform rigs for third parties. The
Company intends to exit its platform rig operations, which have historically not
had a material effect on the Company's consolidated operating results.

The North Sea semisubmersible rig market continues to be impacted by significant
overcapacity. Industry utilization rates for semisubmersibles have dropped in
2003 from 71% in the second quarter to 49% in the third quarter. Two of the
Company's four semisubmersibles in this market are contracted into the fourth
quarter of 2003, and two semisubmersibles are cold-stacked (i.e., the rig is
removed from service and the crew is released, in anticipation of a prolonged
period before the rig reenters service). The Company expects utilization rates
for semisubmersible rigs in the North Sea to remain weak or deteriorate over the
fall and winter months.

The medium-term prospects for the HDHE jackup rig market in the North Sea show
signs of improvement. Several programs have been announced to commence in the
fourth quarter of this year and the first quarter of 2004, with some possibility
for additional work beginning in the middle of 2004, which could result in
strengthening of this market sector. The Company recently was successful in
securing a term contract for an HDHE unit which will extend into the fourth
quarter 2004. The work is scheduled to commence in November 2003 with the GSF
Galaxy I, pending availability of the GSF Galaxy III, which will replace the GSF
Galaxy I and complete the program. The GSF Magellan completed its current
contract assignment in September 2003 and is undergoing scheduled repair and the
remaining HDHE jackup, GSF Monarch, continues under a long-term contract into
late 2004.

The standard specification jackups, GSF Labrador and GSF Adriatic XI, continue
under contract into the fourth quarter of 2003, and the Britannia continues
under a long-term contract into late 2004. The Company's platform rig is under
contract through the end June of 2004.

U.S. Gulf of Mexico. The Company currently operates ten cantilevered jackups and
two semisubmersibles in the U.S. Gulf of Mexico rig market. With the
mobilization of a number of jackups to other markets, the supply and demand
outlook for jackups is improving, although this market continues to be
characterized by short-term contracts. During the third quarter of 2003, the
Company experienced increased utilization of its jackup rig fleet in the U.S.
Gulf of Mexico with the exception of one of its jackups which was undergoing
planned maintenance. The industry utilization rate for all jackups in the area
increased from 75% to 77.5% for the same period. Dayrates for the Company's
jackups are expected to continue to increase during the fourth quarter from
third quarter levels.

Although the current industry utilization rate for semisubmersibles in the U.S.
Gulf of Mexico has

22

decreased from 63% in the second quarter to 57.5% in the third quarter, the
Company was successful in securing contracts for its two semisubmersibles.
Following an approximate 35 day idle period during the third quarter, the GSF
Arctic I commenced a one well commitment with an option which will expire late
in the fourth quarter of 2003 or early in the first quarter of 2004 followed by
another commitment that begins in the first quarter of 2004. The GSF Celtic Sea
experienced full utilization during the third quarter of 2003 and is expected to
complete its current contract during the fourth quarter of 2003 or the first
quarter of 2004. The unit is being marketed for other work in the Gulf of Mexico
and West Africa. The U.S. Gulf of Mexico market for semisubmersibles is expected
to remain weak through the first half of 2004.

Ultra-deepwater drillship market. The Company currently operates three
drillships in the ultra-deepwater market. Two are under contract in the U.S.
Gulf of Mexico and one is under contract offshore Mauritania, Africa. The
worldwide ultra-deepwater market is oversupplied and numerous units in this
class have contracts expiring in 2003 and 2004. Most of the original contracts
for these units were for terms of three to five years, and the Company believes
that as these contracts expire, the market for these rigs will shift to
shorter-term contracts, sometimes for a single well. This shift will likely
expose these rigs to lower average dayrates and periods of idle time between
contracts and could result in the stacking of one or more of these rigs.

During the second quarter of 2003, the Company was successful in securing an
extension to the contract for the Glomar C.R. Luigs until the first quarter of
2004. The Glomar Jack Ryan contract in Mauritania is expected to be completed in
the fourth quarter of 2003. The Company is pursuing several prospects for this
unit commencing late in the fourth quarter of 2003 in West Africa and the U.S.
Gulf of Mexico. During the third quarter of 2003 the contract for the Glomar
Explorer was extended to late into the fourth quarter of 2003. The Company is
currently pursuing prospects for this unit commencing in the first quarter of
2004, in the U.S. Gulf of Mexico and elsewhere. If the Company believes that it
is facing extended idle time on any of its ultra-deepwater units, it will
consider cold-stacking the unit.

West Africa. The Company currently operates two semisubmersibles and nine
cantilevered jackup rigs in this market. The West Africa jackup market continues
to be heavily influenced by the level of rig demand in Nigeria, traditionally
the area with the largest concentration of rigs in this market. Utilization
continued to decrease during the third quarter of 2003 mainly due to rigs coming
off contracts in Nigeria due to operators experiencing funding difficulties with
their partner, the Nigerian national oil company. The Company currently expects
that the jackup market in West Africa will remain flat until the supply and
demand return to a more balanced condition in Nigeria. The Company's utilization
rate for its nine cantilevered jackup rigs declined from 93% during the second
quarter of 2003 to 69% during the third quarter, while industry utilization
rates for jackups in West Africa decreased from 87% during the second quarter of
2003 to 73% during the third quarter. Both of the Company's semisubmersibles in
this market are contracted through 2003.

Middle East and Mediterranean. The Company currently operates six cantilevered
jackups in the Middle East region, three cantilevered jackups in the
Mediterranean region offshore North Africa and has a moored drillship
cold-stacked in Malta. All nine of the Company's jackups in the Middle East and
Mediterranean regions are contracted for the balance of 2003, and six of the
nine jackups are contracted through the first quarter of 2004.

Southeast Asia. The Company currently operates seven cantilevered jackups in
this market. The recently constructed GSF Constellation I commenced a multi-well
contract in August and has encountered difficulty in positioning near a platform
due to seabed conditions. The client has given notice of termination of the
contract and may contest its obligation to pay what it owes the Company. The

23

Company is owed approximately $7 million, including approximately $3.5 million
accrued as of September 30, 2003, and believes that it has a strong contractual
position. Of the remaining six jackups, two completed upgrades during the third
quarter of 2003 and have returned to work, three are contracted into 2004 and
the remaining jackup is currently working on a multi-well program that is
anticipated to be extended into 2004. Although utilization in this region has
remained high, the Company has observed a reduction in dayrates with recent
contracts. The Company anticipates that utilization will remain constant in the
region into 2004.

Other. The Company currently operates one semisubmersible and one HDHE jackup
offshore eastern Canada. The semisubmersible commenced a two-year contract in
July 2003. The jackup is under contract until the fourth quarter of 2003 and is
being marketed in Canada as well as outside Canada. In Trinidad and Tobago, the
Company recently commenced a new contract for the GSF Adriatic VII after
completion of an upgrade project. The GSF Monitor was mobilized to Trinidad and
Tobago from the North Sea and will commence a six well (estimated 330 days)
contract in the fourth quarter of 2003.

Land drilling fleet. The Company owns 31 land drilling rigs, with 19 of these
located in the Middle East (12 rigs in Kuwait, four in Saudi Arabia and three in
Oman), four in Egypt and eight in Venezuela. Seven of the Company's 12 land rigs
in Kuwait are currently operating and five are idle. Of the seven that are
operating, five are contracted into the third quarter of 2004. The Company was
recently successful in securing new contracts for three of the four land rigs in
Saudi Arabia, all of which operated throughout the third quarter of 2003. The
new contracts will expire in the fourth quarter of 2004 and first quarter of
2005. The Company expects its four land rigs in Egypt to be fully utilized for
the balance of 2003. In Oman, the Company secured new four year term contracts
for two of its three land rigs. Although the Company is currently negotiating
future prospects for work for certain of its rigs in the Venezuelan market, all
of its eight land rigs located in Venezuela are currently idle.

FUTURE MARKET FOR NEWBUILDS

The second high-performance jackup, GSF Constellation II, and the GSF
Development Driller I, the first of two ultra-deepwater semisubmersibles under
construction, are scheduled for delivery near the end of the first quarter of
2004 and in the second quarter of 2004, respectively. The GSF Development
Driller II, the second of the two ultra-deepwater semisubmersibles, is scheduled
for delivery near the end of the first quarter of 2005. Although the Company has
options for construction of additional ultra-deepwater semisubmersible units
beyond the two under construction, it does not intend to exercise these options.
The Company's ability to obtain contracts for its newbuild rigs and the terms of
such contracts will depend on market conditions.

24

CONTRACT DRILLING OPERATIONS

Data with respect to the Company's contract drilling operations follows (dollars
in millions, except average revenues per day):

- ----------

(1) Includes revenue earned from affiliates.

(2) Average revenues per day is the ratio of rig-related contract drilling
revenues divided by the aggregate contract days, adjusted to exclude days
under contract at zero dayrate. The calculation of average revenues per day
excludes non-rig related revenues, consisting mainly of platform operations
and reimbursed expenses, of $19.3 million and $70.7 million, respectively,
for the three and nine months ended September 30, 2003, and $31.4 million
and $97.8 million, respectively, for the comparable prior year periods.

25

Three Months Ended September 30, 2003, Compared to Three Months Ended September
30, 2002

Contract drilling revenues decreased $78.3 million to $324.6 million for the
third quarter of 2003 compared to $402.9 million for the 2002 third quarter.
Lower dayrates for the Company's marine drilling fleet accounted for
approximately $35.8 million of this decrease and lower marine utilization
accounted for approximately $29.9 million. These decreases were due primarily to
lower utilization and dayrates for the Company's North Sea drilling fleet, lower
utilization in West Africa, lower dayrates and utilization for the drillship
Glomar Jack Ryan, which completed its drilling contract in Australia in July
2003, lower dayrates for the Company's drillship Glomar C R Luigs operating in
the U.S. Gulf of Mexico, and lower utilization for the jackup GSF Key Singapore,
which was idle during most of the third quarter of 2003 for planned upgrades.
These decreases were offset in part by increases in utilization and dayrates for
the Company's jackup fleet in the U.S. Gulf of Mexico and higher utilization for
the jackup GSF Rig 136 and the semisubmersible GSF Arctic I, which were idle for
substantially all of the third quarter of 2002.

Lower utilization of the Company's land drilling fleet accounted for an
additional $9.5 million of the decrease in contract drilling revenues.
Approximately $5.6 million of this decrease was due to three of the Company's
land rigs in the Middle East, Rig 174, Rig 171 and Rig 146, which were idle
through substantially all of the third quarter of 2003.

The mobilization of marine rigs between the geographic areas shown below also
affected each area's revenues and utilization noted in the table above. These
mobilizations were as follows:

Contract drilling operating expenses before intersegment eliminations decreased
by $14.8 million, or 6.0%, in the third quarter of 2003 as compared to the third
quarter of 2002 due primarily to lower insurance expense and lower reimbursable
expenses. Insurance expense decreased primarily as a result of a premium rebate
recognized in the third quarter of 2003 related to the Company's 2002 - 2003
policy year, along with lower premiums incurred as part of the renewal of the
Company's insurance program. The Company renewed its insurance program in July
2003 with significantly higher deductibles which resulted in lower premiums (see
"Liquidity and Capital Resources - Risk Factors."). Contract drilling
depreciation expense increased by $5.2 million due primarily to upgrades on
several marine rigs during 2002 and the addition of the GSF Constellation I,
which was placed in service in August 2003.

26

Contract drilling operating income and margin decreased to $28.8 million and 9%,
respectively, for the third quarter of 2003 from $97.2 million and 24%,
respectively, for the third quarter of 2002, due primarily to lower rig
utilization and dayrates as discussed above.

Nine Months Ended September 30, 2003, Compared to Nine Months Ended September
30, 2002

Contract drilling revenues decreased by $173.3 million to $1,042.2 million for
the nine months ended September 30, 2003, compared to $1,215.5 million for the
nine months ended September 30, 2002. Lower dayrates and utilization for the
Company's marine drilling fleet accounted for $68.7 million and $63.1 million,
respectively, of this decrease and lower utilization for the Company's land rigs
accounted for $31.5 million. The decreases attributable to the marine drilling
fleet were due primarily to lower dayrates and utilization in the North Sea,
West Africa and the Middle East, lower dayrates for the semisubmersible GSF
Arctic I in the U.S. Gulf of Mexico and lower utilization of the Glomar Grand
Banks, which was idle for a substantial portion of 2003. These decreases in
marine drilling revenues were offset in part by increases in utilization and
dayrates for the Southeast Asia and U.S. Gulf of Mexico jackup fleets.

Contract drilling operating expenses before intersegment eliminations decreased
by $18.4 million, or 2.5%, for the nine months ended September 30, 2003,
compared to the nine months ended September 30, 2002, due primarily to decreases
in reimbursable expenses and repair and maintenance expense. The decrease in
repairs and maintenance expense was due to repair projects performed on several
of the Company's marine rigs in 2002, offset in part by repair projects on the
Glomar Grand Banks and the GSF Arctic II (formerly the Maersk Jutlander) in
2003. Contract drilling depreciation expense increased by $9.8 million due
primarily to upgrades on several of the Company's marine rigs during 2002 and
the addition of the GSF Constellation I, which was placed into service in August
2003.

The Company's operating income and margin for contract drilling operations
decreased to $130.0 million and 12.5%, respectively, for the nine months ended
September 30, 2003, from $292.6 million and 24.1%, respectively, for the
comparable period of 2002, due primarily to lower rig utilization and dayrates
as discussed above.

As of November 1, 2003, 14 of the Company's marine rigs were located in the U.S.
Gulf of Mexico, 12 were located in the North Sea, 12 were offshore West Africa,
seven were in Southeast Asia, six were in the Middle East, three were offshore
North Africa, two were off the east coast of Canada, two were offshore Trinidad
and Tobago and one was cold-stacked in Malta.

As of November 1, 2003, 19 of the Company's 31 land rigs were located in the
Middle East, eight were in South America and four were in North Africa.

As of November 1, 2003, 52 of the Company's 59 marine rigs and 16 of the
Company's 31 land rigs were either committed or under contract.

DRILLING MANAGEMENT SERVICES

Three Months Ended September 30, 2003, Compared to Three Months September 30,
2002

Drilling management services revenues increased by $11.2 million to $128.8
million in the third quarter of 2003 from $117.6 million in the comparable 2002
quarter. The increase in revenues consisted primarily of $25.2 million
attributable to a net increase in reimbursable and other revenues and $6.0

27

million attributable to higher average revenues per turnkey project, partly
offset by a $20.0 million decrease attributable to a decrease in the number of
turnkey projects performed. The Company completed 20 turnkey projects in the
third quarter of 2003 (16 wells drilled and four well completions) as compared
to 26 turnkey projects in the third quarter of 2002 (21 wells drilled and five
well completions).

Drilling management services operating income and margin, however, decreased to
$5.5 million and 4.3%, respectively, in the third quarter of 2003 from $7.3
million and 6.2%, respectively, in the third quarter of 2002, due primarily to
lower margins achieved on turnkey projects in the North Sea, along with a
decrease in the total number of turnkey projects performed. The increase in
reimbursable revenues discussed above represents reimbursements received from
customers for certain "out of pocket" expenses incurred by the Company and,
therefore, had no effect on operating income.

Results for the third quarters of 2003 and 2002 were favorably affected by
downward revisions to cost estimates for certain wells completed in prior
periods. Such revisions increased segment operating income by $3.2 million and
$2.7 million, respectively, for the three months ended September 30, 2003 and
2002. The effect of these revisions, however, was offset by the deferral of
turnkey drilling profit totaling $0.5 million and $3.5 million, respectively for
the quarters ended September 30, 2003 and 2002, on wells in which Challenger
Minerals Inc. ("CMI"), a wholly-owned subsidiary of the Company, was either the
operator or held a working interest. This deferred turnkey profit has been
credited to the Company's full cost pool of oil and gas properties and will be
recognized through a lower depletion rate as reserves are produced.

Nine Months Ended September 30, 2003, Compared to Nine Months Ended September
30, 2002

Drilling management services revenues increased by $55.5 million to $355.4
million for the nine months ended September 30, 2003, from $299.9 million in the
comparable 2002 period. This increase in revenues consisted primarily of $42.6
million attributable to a net increase in reimbursable and other revenues and
$22.2 million attributable to an increase in the number of turnkey projects
performed, partly offset by a $9.3 million decrease attributable to lower
average revenues per turnkey project. The Company completed 81 turnkey projects
in the nine months ended September 30, 2003, (61 wells drilled and 20 well
completions) as compared to 72 turnkey projects in the comparable period of 2002
(59 wells drilled and 13 well completions).

Drilling management services operating income and margin, however, decreased to
$11.4 million and 3.2%, respectively, for the nine months ended September 30,
2003, from $18.5 million and 6.2%, respectively, in the same period in 2002, due
primarily to lower margins achieved on turnkey wells drilled in 2003. The lower
margins in 2003 resulted from losses totaling $7.6 million on seven of the 81
turnkey projects completed in the nine months ended September 30, 2003, compared
to losses totaling $3.0 million on six of the 72 turnkey projects completed in
the comparable period of 2002. Operating income for the 2002 period also
includes $1.5 million of revenue earned in the first quarter of 2002 related to
a turnkey well drilled in the North Sea in December 2000, in which the Company
was entitled to additional payments based on cumulative production from the
well.

Results for the nine months ended September 30, 2003 and 2002 were also
favorably affected by downward revisions to cost estimates of wells completed in
prior periods totaling $3.4 million and $3.3 million, respectively, offset by
the deferral of turnkey drilling profit totaling $6.2 million and $10.2 million,
respectively, related to wells in which CMI was either the operator or held a
working interest.

28

OTHER INCOME AND EXPENSE

General and administrative expenses decreased to $11.5 million for the third
quarter of 2003 from $14.4 million for the third quarter of 2002 due primarily
to lower management bonus accruals and professional fees, which also accounted
for the comparable decrease in general and administrative expenses for the nine
months ended September 30, 2003, compared to the same period in 2002.

Interest expense increased to $17.0 million and $50.8 million, respectively, for
the three and nine months ended September 30, 2003, compared to $14.3 million
and $42.9 million, respectively for the same periods in 2002, due primarily to
the issuance of the 5% Notes on February 11, 2003, as discussed in "Liquidity
and Capital Resources - Financing and Investing Activities," offset in part by
the effects of fixed-for-floating interest rate swaps on a portion of the
Company's long-term debt.

The Company capitalized $7.4 million and $26.6 million, respectively, of
interest costs for the three and nine months ended September 30, 2003, compared
to $5.6 million and $13.1 million, respectively, for the comparable prior year
periods in connection with the Company's rig expansion program as discussed in
"Liquidity and Capital Resources - Financing and Investing Activities."

Interest income decreased to $2.7 million and $8.5 million for the three and
nine months ended September 30, 2003, respectively, from $3.8 million and $12.0
million for the comparable 2002 periods, as a result of lower interest rates
earned in 2003 on the Company's cash, cash equivalents and marketable securities
balances, offset in part by an increase in cash and cash equivalents balances in
connection with the issuance of the 5% Notes noted above.

Other income totaled $25.0 million for the nine months ended September 30, 2003,
due primarily to $22.3 million awarded to the Company in 2003 as a result of the
settlement of claims filed in 1993 with the United Nations Compensation
Commission ("UNCC") for losses suffered as a result of the Iraqi invasion of
Kuwait in 1990. The claims were for the loss of four rigs and associated
equipment, lost revenue and miscellaneous expenditures.

INCOME TAXES

The Company's effective income tax rates for financial reporting purposes were
approximately 18.4% and 11.4%, respectively, for the three and nine months ended
September 30, 2003, as compared to 14.3% and 11.8%, respectively, for the same
periods in 2002. The rate for the nine months ended September 30, 2003, was
reduced by the effect of the $22.3 million UNCC settlements discussed above,
partially offset by a $3.0 million additional tax provision resulting from
adjustments to estimated taxes previously accrued to actual taxes assessed.

The Company is domiciled in the Cayman Islands, and the Cayman Islands does not
impose a corporate income tax. Consequently, income taxes have been provided
based upon the tax laws and rates in effect in the countries in which operations
are conducted and income is earned. The income taxes imposed in these
jurisdictions vary substantially. The Company's effective tax rate for financial
statement purposes will continue to fluctuate from quarter to quarter and year
to year as the Company's operations are conducted in different taxing
jurisdictions.

29

LIQUIDITY AND CAPITAL RESOURCES

SOURCES OF LIQUIDITY

The Company's primary sources of liquidity are its cash and cash equivalents,
marketable securities and cash generated from operations. As of September 30,
2003, the Company had $864.0 million of cash, cash equivalents and marketable
securities, all of which was unrestricted. The Company had $736.5 million in
cash, cash equivalents and marketable securities at December 31, 2002, all of
which was unrestricted. Cash generated from operating activities totaled $247.6
million and $387.0 million for the nine months ended September 30, 2003 and
2002, respectively.

In September 2003, the Company filed a registration statement on Form S-3 with
the U. S. Securities and Exchange Commission under which the Company may offer
to sell from time to time any combination of the following securities: (i)
unsecured debt securities consisting of notes, debentures or other evidences of
indebtedness, (ii) ordinary shares, par value $0.01 per share, (iii) preference
shares, (iv) depositary shares, (v) warrants and (vi) securities purchase
contracts and units, for an aggregate initial public offering price not to
exceed $1.0 billion. The Company intends to use the net proceeds from any
offerings under this registration statement for general corporate purposes,
including repayment or refinancing of debt, acquisitions, working capital,
capital expenditures and repurchases and redemptions of securities. The Company
does not have any current plans to offer any securities under this registration
statement.

FINANCING AND INVESTING ACTIVITIES

The Company has definitive contracts with PPL Shipyard PTE, Ltd. of Singapore
("PPL") for construction of two ultra-deepwater semisubmersibles and one
high-performance jackup, with options for up to two additional similarly priced
semisubmersibles. The Company does not intend to exercise these options. In June
2003, the Company took delivery of the GSF Constellation I, the first of two
high-performance jackups ordered from PPL, at a total cost of $133 million,
excluding an estimated $19 million of capitalized interest, capital spares,
startup expenses and mobilization costs. Estimated cash outlays in connection
with the construction of the remaining high-performance jackup, the GSF
Constellation II, excluding capitalized interest, startup costs, capital spares
and mobilization costs, are also expected to total approximately $133 million.
Of the $133 million for the GSF Constellation II, $94 million had been incurred
as of September 30, 2003. A total of approximately $64 million is expected to be
incurred in 2003, including approximately $49 million incurred during the nine
months ended September 30, 2003, and an additional $24 million is expected to be
incurred in 2004. Estimated cash outlays in connection with construction of the
two ultra-deepwater semisubmersibles, excluding capitalized interest, startup
costs, capital spares and mobilization costs, are expected to total
approximately $570 million, or an average of $285 million per rig. Of the $570
million, $386 million had been incurred as of September 30, 2003. A total of
approximately $169 million is expected to be incurred in 2003, including $89
million incurred during the nine months ended September 30, 2003, and an
additional $104 million is expected to be incurred in 2004. The GSF
Constellation II and the first of two ultra-deepwater semisubmersibles, the GSF
Development Driller I, are expected to be delivered around the end of the first
quarter of 2004 and in the second quarter of 2004, respectively. The second
ultra-deepwater semisubmersible, the GSF Development Driller II, is expected to
be delivered near the end of the first quarter of 2005. The Company expects to
fund the construction and startup of these rigs from its existing cash, cash
equivalents and marketable securities balances, and future cash flow from
operations.

None of the three vessels that the Company currently has under construction has
secured a contract for deployment upon completion. The Company's ability to
obtain contracts for its newbuild rigs and the

30

terms of such contracts will depend on market conditions. The Company is
actively marketing the GSF Development Driller I, the GSF Development Driller II
and the GSF Constellation II.

In January 2003, in order to take advantage of an attractive financing
structure, the Company entered into a lease-leaseback arrangement with a
European bank related to the Company's Britannia cantilevered jackup. Pursuant
to this arrangement, the Company leased the Britannia to the bank for a
five-year term for a lump-sum payment of approximately $37 million, net of
origination fees of approximately $1.5 million. The bank then leased the rig
back to the Company for a five-year term with an effective annual interest rate
based on the 3-month British Pound Sterling LIBOR plus a margin of 0.625%, under
which the Company will make annual lease payments of approximately $8.0 million,
payable in advance. The Company has classified this arrangement as a capital
lease.

On February 11, 2003, the Company issued $250 million of 5% Notes due 2013 (the
"5% Notes") and received cash proceeds of approximately $247.4 million after
deduction for discount, underwriting fees and other related expenses. The
Company currently has no specific application for the funds other than for
general corporate purposes, and, pending their use, the net proceeds are
invested in short-term investments. Interest on the 5% Notes is payable on
February 15 and August 15 of each year beginning on August 15, 2003. No
principal payments are required with respect to the 5% Notes prior to their
final maturity date. The Company has exchanged the 5% Notes for registered notes
having substantially identical terms.

Other significant financing and investing activities during the nine months
ended September 30, 2003, were as follows:

o Paid quarterly dividends of $7.6 million ($0.0325 per ordinary share)
in January 2003 for the fourth quarter of 2002, $8.7 million ($0.0375
per ordinary share) in April 2003 for the first quarter of 2003, and
$8.8 million ($0.0375 per ordinary share) in July 2003 for the second
quarter of 2003.

o Announced in September 2003 that the Company's Board of Directors
increased the regular quarterly cash dividend for the third quarter of
2003 to $0.05 per ordinary share from $0.0375 per ordinary share. The
dividend in the amount of $11.7 million was paid on October 15, 2003,
to shareholders of record as of the close of business on September 30,
2003.

During the third quarter of 2003, the Company also funded $38.0 million of
accrued pension liabilities related to the Company's various pension plans.

The Company's debt to capitalization ratio, calculated as the ratio of total
debt, including undefeased capitalized lease obligations, to the sum of total
shareholders' equity and total debt, was 22.3% at September 30, 2003, compared
to 18.2% at December 31, 2002. The Company's total debt includes the current
portion of its capitalized lease obligations, which totaled $9.8 million and
$1.8 million at September 30, 2003, and December 31, 2002, respectively.

31

CASH FLOWS

For the nine months ended September 30, 2003, cash flow provided by operating
activities totaled $247.6 million. An additional $249.4 million was provided
from the issuance of the 5% Notes, net of discount, $30.5 million was received
in connection with the lease-leaseback of the Britannia jackup (net of the
initial lease payment), $8.5 million was provided from the issuance of ordinary
shares in connection with the Company's stock-based compensation plans, and $5.8
million was provided from the sales of properties and equipment. From the $541.8
million sum of cash inflows, $349.0 million was used for capital expenditures,
$100.1 million was used to purchase marketable securities (net of maturities),
$25.1 million was used for dividend payments, $3.5 million was used to pay
financing costs in connection with the 5% Notes and the Britannia jackup
lease-leaseback and $1.8 million was paid pursuant to the Company's capitalized
lease obligation related to the Glomar Explorer drillship.

For the nine months ended September 30, 2002, cash flow provided by operating
activities totaled $387.0 million. An additional $70.3 million was provided from
the sales of properties and equipment, including $35.0 million of funds received
in the first quarter of 2002 in connection with the sale of the Glomar Beaufort
Sea I in 2001, $25.1 million was provided from the issuance of ordinary shares
in connection with the Company's stock-based compensation plans, and $51.4
million was provided from maturities of marketable securities (net of
purchases). From the $533.8 million sum of cash inflows, $358.0 million was used
for capital expenditures, $51.4 million was used to repurchase and retire the
Company's ordinary shares in connection with the Company's share repurchase
program discussed below in "Future Cash Requirements," $22.8 million was used
for dividend payments and $1.8 million was paid pursuant to the Company's
capitalized lease obligation related to the Glomar Explorer drillship.

FUTURE CASH REQUIREMENTS

As of September 30, 2003, the Company had total long-term debt and capital lease
obligations, including the current portion of its capital lease obligations, of
$1,238.7 million and shareholders' equity of $4,321.7 million. Long-term debt
consisted of $335.8 million (net of discount) Zero Coupon Convertible Debentures
due 2020, $301.7 million (net of discount) 7 1/8% Notes due 2007, $296.8 million
(net of discount) 7% Notes due 2028, $255.7 (net of discount) 5% Notes due 2013
and capitalized lease obligations, including the current portion, totaling $48.7
million. The Company was in compliance with its debt covenants at September 30,
2003.

Annual interest on the 7 1/8% Notes is $21.4 million, payable semiannually each
March and September. Annual interest on the 7% Notes is $21.0 million, payable
semiannually each June and December. Annual interest on the 5% Notes issued in
February 2003 is $12.5 million, payable semiannually each February and August,
beginning August 15, 2003. No principal payments are due under any of the three
issues until the maturity date.

The Company may redeem the 7 1/8% Notes, the 7% Notes and the 5% Notes in whole
at any time, or in part from time to time, at a price equal to 100% of the
principal amount thereof plus accrued interest, if any, to the date of
redemption, plus a premium, if any, relating to the then-prevailing Treasury
Yield and the remaining life of the notes. The indentures relating to the 5%
Notes, the Zero Coupon Convertible Debentures, 7 1/8% Notes and 7% Notes contain
limitations on the Company's ability to incur indebtedness for borrowed money
secured by certain liens and on its ability to engage in certain sale/leaseback
transactions. The Zero Coupon Convertible Debentures, 7 1/8% Notes and 7% Notes
continue to be obligations of Global Marine Inc., and GlobalSantaFe Corporation
has not guaranteed any of these obligations. GlobalSantaFe Corporation is the
sole obligor under the 5% Notes.

32

The Zero Coupon Convertible Debentures were issued at a price of $499.60 per
debenture, which represents a yield to maturity of 3.5% per annum to reach an
accreted value at maturity of $1,000 per debenture. The Company has the right to
redeem the debentures in whole or in part on or after June 23, 2005, at a price
equal to the issuance price plus accrued original issue discount through the
date of redemption. Each debenture is convertible into 8.125103 GlobalSantaFe
Ordinary Shares (4,875,062 total shares) at the option of the holder at any time
prior to maturity, unless previously redeemed. Holders have the right to require
the Company to repurchase the debentures on June 23, 2005, June 23, 2010, and
June 23, 2015, at a price per debenture of $594.25 on June 23, 2005, $706.82 per
debenture on June 23, 2010, and $840.73 per debenture on June 23, 2015. These
prices represent the accreted value through the date of repurchase. The Company
may pay the repurchase price with either cash or stock or a combination thereof.
The Company does not anticipate using stock to satisfy any such future purchase
obligation.

In August 2002, the Company's Board of Directors authorized the Company to
repurchase up to $150 million of its ordinary shares from time to time depending
on market conditions, the share price and other factors. No repurchases were
made in the nine months ended September 30, 2003. At September 30, 2003, $98.6
million of this authorized amount remained available for future purchases.

CMI currently holds a 16% working interest in a development project in the North
Sea. CMI's portion of the development costs of this project is expected to total
approximately Pound Sterling14.7 million ($23.4 million). A total of
approximately $13.5 million is expected to be incurred in 2003, including $1.9
million incurred during the nine months ended September 30, 2003, and an
additional $9.9 million is expected to be incurred in 2004.

Total capital expenditures for 2003 are currently estimated to be approximately
$515 million, including $266 million in connection with the construction of the
four newbuild marine rigs, $114 million for major upgrades to the marine fleet,
$81 million for expenditures required to maintain the Company's fleet in
accordance with its operating standards, $35 million for capitalized interest
and $19 million for other capital expenditures.

The Company has various commitments primarily related to its debt and capital
lease obligations, leases for office space and other property and equipment as
well as commitments for construction of drilling rigs. The Company expects to
fund these commitments from its existing cash and cash equivalents and future
cash flow from operations.

As part of the Company's goal of enhancing long-term shareholder value, the
Company has from time to time considered and actively pursued business
combinations and the acquisition or construction of suitable additional drilling
rigs and other assets. If the Company decides to undertake a business
combination or an acquisition or additional construction projects, the issuance
of additional debt or additional shares could be required.

The Company believes it will be able to meet all of its current obligations,
including working capital requirements, capital expenditures and debt service,
from its existing cash, cash equivalents and marketable securities balances and
future cash flow from operations.

33

RISK FACTORS

Severe Acute Respiratory Syndrome.

SARS is a highly communicable disease, outbreaks of which occurred earlier in
2003 in Southeast Asia and other parts of the world in which the Company
operates. Travel restrictions and quarantines imposed primarily in Southeast
Asia posed some interference with the Company's operations during 2003.
Scientists are predicting that SARS may reappear during the flu season. The
reappearance of SARS could adversely impact the global economy, the worldwide
demand for oil and natural gas and the level of demand for the Company's
services. SARS or other public health threats could also bring about quarantines
of personnel, the inability to access the Company's offices or rigs, or
restrictions on travel to or through countries in which the Company operates.
These restrictions could curtail the Company's ability to operate its rigs. The
SARS outbreak earlier in 2003 was most severe in Southeast Asia where the
Company currently operates seven jackup rigs and maintains offices (in
Indonesia, Malaysia, Thailand, Vietnam and Myanmar). The Company also has two
deepwater semisubmersible rigs and a premium jackup rig under construction in
Singapore. Any quarantine of personnel or inability to access the Company's
offices or rigs could adversely affect the Company's operations, including
delaying the delivery of the three rigs under construction. Travel restrictions
or operational problems in any part of the world in which the Company operates,
or any reduction in the demand for drilling services caused by SARS or other
public health threats in the future, may materially impact operations and
adversely affect the Company's financial results.

The Company's business involves numerous operating hazards and it is not fully
insured against all of them; the occurrence of an uninsured or unidentified
event could have an adverse effect on its results of operations, financial
position, and cash flows.

The Company's operations are subject to the usual hazards incident to the
drilling of oil and natural gas wells, including blowouts, explosions, oil
spills and fires. The Company's activities are also subject to hazards peculiar
to marine operations, such as collision, grounding, and damage or loss from
severe weather.

All of these hazards can cause personal injury and loss of life, severe damage
to and destruction of property and equipment, pollution or environmental damage
and suspension of operations. The Company insures against, or will have
indemnification from customers for some, but not all, of these risks. The
Company does not generally insure against loss of revenue for rigs that are
damaged or destroyed. The Company's insurance contains various deductibles and
limitations on coverage and deductibles. In light of the current volatility in
the insurance markets and recent significant increases in rates, the Company may
elect to change its insurance coverage, including by increasing deductibles,
retentions and other limitations on coverage. Changes in coverage such as those
would effectively increase the amount of risk against which the Company is not
insured.

As a result of poor underwriting results suffered by the insurance industry over
the past few years and the catastrophic events of September 11, 2001, the
Company has been faced with the prospect of paying significantly higher
insurance premiums and/or significantly increasing its deductibles in order to
offset or mitigate premium increases. As compared with the Company's insurance
obtained in the summer of 2001, its current insurance has a similar annual
premium, but is subject to significantly higher deductibles. Most notably, the
Company's deductible for insurance for rig physical damage increased from less
than $500,000 to $10 million per occurrence, subject to a $20 million aggregate
deductible. The Company may face increases in premiums or deductibles or both in
the future.

The occurrence of a significant event, including terrorist acts, war, civil
disturbances, pollution or environmental damage, not fully insured or
indemnified against or the failure of a customer to meet its indemnification
obligations, could materially and adversely affect the Company's operations and

34

financial condition. The Company may not be able to maintain adequate insurance
in the future at rates it considers reasonable or be able to obtain insurance
against certain risks, particularly in light of the instability and developments
in the insurance markets following the recent terrorist attacks.

There are additional risk factors inherent in the Company's business and in the
oil and gas industry as a whole, many of which are beyond the Company's control.
For a discussion of these risk factors, see "Risk Factors" under Items 1 and 2
in the Company's Annual Report on Form 10-K for the year ended December 31,
2002.

RECENT ACCOUNTING PRONOUNCEMENTS

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," which amends SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 148 provides three
alternative methods of transition and disclosure requirements for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. The three alternative methods available are: (1) the prospective
method, (2) the modified prospective method, and (3) the retroactive restatement
method. Under the prospective method, which is available only for companies
adopting SFAS No. 123 prior to December 16, 2003, compensation cost is
recognized for awards granted, modified or settled after the beginning of the
year of adoption. The modified prospective method recognizes compensation costs
from the beginning of the year of adoption as if the fair value method had been
used for all grants awarded, modified or settled in fiscal years beginning after
December 15, 1994. The retroactive restatement method provides that all periods
presented are restated to reflect compensation costs as if the fair value method
had been used for all grants awarded, modified or settled in fiscal years
beginning after December 15, 1994. In addition to providing compensation cost
recognition methods, SFAS No. 148 also requires certain disclosures, including
the accounting method used for each period presented, a description of the
method used to report the change in accounting principle and continuing tabular
presentation of proforma net income and earnings per share effects for any
awards outstanding under the intrinsic value method of Accounting Principles
Board Opinion No. 25. SFAS No. 148 is effective for fiscal years ending after
December 15, 2002. The Company has reflected the disclosure provisions of SFAS
No. 148 in Note 1 of Notes to the Condensed Consolidated Financial Statements,
and is currently evaluating the recognition provisions of SFAS No. 148 together
with an overall reconsideration of its stock-based compensation plans.

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51" ("FIN 46"). This
interpretation provides guidance on the identification of, and financial
reporting for, entities over which control is achieved through means other than
voting rights, or variable-interest entities ("VIEs"). FIN 46 originally became
effective for public entities with VIEs created before February 1, 2003, at the
beginning of the first interim or annual reporting period starting after June
15, 2003. This effective date has now been deferred to the first interim or
annual period ending after December 15, 2003. For VIEs created after January 31,
2003, FIN 46 is effective immediately. Upon the applicable effective date, FIN
46 will become the guidance that determines whether consolidation is required
and whether the variable-interest accounting model must be used to account for
existing and new entities. The Company does not believe that it currently has
any VIEs within the scope of FIN 46.

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This statement amends and
clarifies accounting for derivative instruments embedded in other contracts, and
for hedging activities under SFAS No. 133. This statement is effective

35

for contracts entered into or modified after June 30, 2003, with certain
exceptions, and for hedging relationships designated after June 30, 2003. The
Company does not expect the adoption of SFAS No. 149 to have a material effect
on its results of operations, financial position or cash flows.

In May 2003 the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This statement
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. In accordance with the standard, financial instruments
that embody obligations for the issuer are required to be classified as
liabilities. SFAS 150 is effective for such financial instruments, except for
those that apply to mandatorily redeemable noncontrolling interests, entered
into or modified after May 31, 2003, and otherwise was effective for such
financial instruments, except for those that apply to mandatorily redeemable
noncontrolling interests, at the beginning of the first interim period beginning
after June 15, 2003. The adoption of SFAS 150 did not have a material effect on
the Company's financial position, results of operations or cash flows.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in circumstances affecting the Company's
exposure to commodity price, interest rate, fair value, foreign currency or
credit risks since December 31, 2002, other than fair-value risk due to changes
in market interest rates in connection with the issuance of the 5% Notes and the
related fixed-for-floating interest rate swaps that have been designated as
fair-value hedges of the 5% Notes, as discussed in Notes 5 and 6 of Notes to
Condensed Consolidated Financial Statements. At September 30, 2003, the net fair
value of the Company's 5% Notes due 2013 was $254.8 million compared to their
carrying value of $255.7 million (net of discount) and the estimated aggregate
fair value of the related fixed-for-floating interest rate swaps was an asset of
$6.3 million.

The Company has performed sensitivity analyses to assess the impact of changes
in market interest rates on the fair values of the 5% Notes and the related
fixed-for-floating swaps based on a hypothetical ten-percent increase in market
interest rates. The Company estimates that if prevailing market interest rates
had been ten percent higher at September 30, 2003, and all other factors
affecting the 5% Notes had remained the same, the fair value of the 5% Notes, as
determined on a present-value basis using prevailing market interest rates,
would have decreased by $8.9 million or 3.5%. With respect to the
fixed-for-floating interest rate swaps, if prevailing market interest rates had
been ten percent higher at September 30, 2003, and all other factors affecting
these swaps had remained the same, the aggregate fair value of the
fixed-for-floating interest rate swaps, as determined on a present-value basis
using prevailing market interest rates, would have decreased by $3.5 million or
55%.

For further discussion of the Company's exposure to commodity price, interest
rate, fair value, foreign currency and credit risks, see "Item 7A. Quantitative
and Qualitative Disclosures About Market Risk" in the Company's Annual Report on
Form 10-K for the year ended December 31, 2002.

ITEM 4. CONTROLS AND PROCEDURES

The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
Company's disclosure controls and procedures as of September 30, 2003, pursuant
to Rule 13a-15(b) of the Securities Exchange Act of 1934. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures are effective in timely
alerting them to material information relating to the Company (including its
consolidated subsidiaries) required to be included in the Company's periodic
Securities and

36

Exchange Commission filings. There have been no changes in the Company's
internal control over financial reporting that occurred during the Company's
last fiscal quarter that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.

37

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company and two of its subsidiaries are defendants in a lawsuit filed on
July 28, 2003, by Transocean Inc. ("Transocean") in the United States District
Court for the Southern District of Texas, Houston Division. The lawsuit alleges
that the dual drilling structure and method utilized by the Company's two
ultra-deepwater semisubmersibles under construction in Singapore infringe on
United States patents granted to Transocean. The lawsuit seeks damages,
royalties and attorney's fees, together with an injunction that would prevent
the use of the dual drilling capabilities of the rigs. The Company believes that
the lawsuit is without merit and intends to vigorously defend it. The Company
does not expect that the matter will have a material adverse effect on the
Company's business or financial position, results of operations or cash flows.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

10.1 Second Amendment dated July 29, 2003, to Amended and Restated
Employment Agreement between the Company and Robert E. Rose.

10.2 Form of Severance agreement dated July 29, 2003, between the Company
and three executive officers, respectively.

12.1 Statement setting forth detail of Computation of Ratios of Earnings to
Fixed Charges.

15.1 Letter of Independent Accountants regarding Awareness of Incorporation
by Reference.

31.1 Chief Executive Officer's Certification pursuant to Rule 13a - 14(a)
of the Securities Exchange Act of 1934.

31.2 Chief Financial Officer's Certification pursuant to Rule 13a - 14(a)
of the Securities Exchange Act of 1934.

32.1 Chief Executive Officer's Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.

32.2 Chief Financial Officer's Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.

38

(b) Reports on Form 8-K

The Company submitted the following reports on Form 8-K during the quarter
ended September 30, 2003:

39

SIGNATURE

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

GLOBALSANTAFE CORPORATION
(Registrant)

Dated: November 7, 2003 /s/ W. Matt Ralls
-------------------------------------------------
W. Matt Ralls
Senior Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial
Officer of the Registrant)

40

EXHIBIT INDEX

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

10.1 Second Amendment dated July 29, 2003, to Amended and Restated
Employment Agreement between the Company and Robert E. Rose.

10.2 Form of Severance agreement dated July 29, 2003, between the Company
and three executive officers, respectively.

12.1 Statement setting forth detail of Computation of Ratios of Earnings to
Fixed Charges.

15.1 Letter of Independent Accountants regarding Awareness of Incorporation
by Reference.

31.1 Chief Executive Officer's Certification pursuant to Rule 13a - 14(a)
of the Securities Exchange Act of 1934.

31.2 Chief Financial Officer's Certification pursuant to Rule 13a - 14(a)
of the Securities Exchange Act of 1934.

32.1 Chief Executive Officer's Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.

32.2 Chief Financial Officer's Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.