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

The Company is a major oil and gas drilling contractor, owning or operating a high quality, technologically advanced fleet of over 100 drilling rigs. The Company's owned fleet currently includes 13 floating rigs, 44 jackups, 31 land rigs and one platform rig, and the Company or its affiliates also operate 11 platform rigs and two semisubmersibles owned by others. The Company provides offshore oil and gas contract drilling services to the oil and gas industry worldwide on a daily-rate ("dayrate") basis. The Company also provides offshore 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. There have been no significant changes in the Company's critical accounting policies since December 31, 2001. 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, 2001.

MERGER WITH SANTA FE INTERNATIONAL

On November 20, 2001, Global Marine Inc. ("Global Marine") merged with a subsidiary of Santa Fe International Corporation ("Santa Fe International" or "Santa Fe") and became a wholly-owned subsidiary of Santa Fe International, which was renamed GlobalSantaFe Corporation at the time of the Merger.

The Merger was accounted for as a purchase business combination in accordance with accounting principles generally accepted in the United States of America. As the former stockholders of Global Marine owned slightly more than 50% of the Company after the Merger, Global Marine was considered the acquiring entity for accounting purposes. The Company's results of operations for the three and nine months ended September 30, 2002, reflect the operations of the combined company. The Company's results of operations for the comparable periods of 2001 reflect the operations of Global Marine only.

RESTRUCTURING COSTS

In connection with the Merger, the Company implemented a restructuring program that included the consolidation of Santa Fe International's administrative office in Dallas, Global Marine's administrative office in Lafayette and Global Marine's administrative office in Houston into a single administrative office in Houston, the consolidation of Santa Fe International's and Global Marine's North Sea administrative offices in Aberdeen, Scotland and the separation of 162 employees from the Company. The employee functions affected were primarily corporate support in nature and included accounting, information technology, and employee benefits, among others. Approximately 60% of the affected positions were located in Dallas, 24% were located in Houston and Lafayette, and the remaining 16% were located in Aberdeen.

Estimated restructuring costs associated with Global Marine were recorded as a pretax charge in the fourth quarter of 2001. Payments related to these restructuring costs for the nine months ended September 30, 2002 are summarized as follows:

                                                        Office Closures       Directors'
                                         Employee      and Consolidation    Separation and
Restructuring Costs:                  Severance Costs    of Facilities      Other Costs (1)    Total
--------------------                  ---------------  -----------------    ---------------   --------
                                                                 ($ in millions)
Houston and Lafayette Offices:
Number of employees - 38
Liability at 12/31/01                  $    8.2          $       4.1        $      2.5        $   14.8
Payments                                   (1.9)                (1.0)               --            (2.9)
                                       --------          -----------        ----------        --------
Liability at 9/30/02                        6.3                  3.1               2.5            11.9
                                       --------          -----------        ----------        --------
Aberdeen Office:
Number of employees - 13
Liability at 12/31/01                       0.9                  0.2               0.1             1.2
Payments                                   (0.7)                (0.2)             (0.1)           (1.0)
                                       --------          -----------        ----------        --------
Liability at 9/30/02                        0.2                   --                --             0.2
                                       --------          -----------        ----------        --------
Total:
Number of employees - 51
Liability at 12/31/01                       9.1                  4.3               2.6            16.0
Payments                                   (2.6)                (1.2)             (0.1)           (3.9)
                                       --------          -----------        ----------        --------
Liability at 9/30/02                   $    6.5          $       3.1        $      2.5        $   12.1
                                       ========          ===========        ==========        ========

Estimated costs associated with Santa Fe International's employee severance and closure of its Dallas and Aberdeen offices were recognized as a liability assumed in the purchase business combination and included in the cost of acquisition in accordance with the provisions of SFAS No. 141, "Business Combinations." Changes in estimated costs and payments related to this liability for the nine months ended September 30, 2002, are summarized as follows:

                                                                       Office Closures      Directors'
                                      Employee          Employee      and Consolidation   Separation and
Purchase Price:                   Severance Costs   Relocation Costs    of Facilities       Other Costs      Total
--------------                    ---------------   ----------------  -----------------   --------------     ------
                                                                       ($ in millions)
Number of employees - 111
Liability at 12/31/01               $       9.5       $      5.4         $      11.5         $     0.9       $ 27.3
Changes in estimated costs                  4.6               --                  --                --          4.6
Payments                                   (9.8)            (5.3)               (0.6)             (0.1)       (15.8)
                                    -----------       ----------         -----------         ---------       ------
Liability at 9/30/02                $       4.3       $      0.1         $      10.9         $     0.8       $ 16.1
                                    ===========       ==========         ===========         =========       ======

All accrued estimated restructuring costs associated with Global Marine and costs associated with Santa Fe International's employee severance and closure of its Dallas and Aberdeen offices are included in "Other accrued liabilities" on the accompanying Condensed Consolidated Balance Sheets, except for the special termination costs related to certain retirement plans noted above.

OPERATING RESULTS

The Company's results of operations for the three and nine months ended September 30, 2002, represent the operations of the combined company. The Company's results of operations for the comparable periods of 2001 represent the historical operations of Global Marine only. As a result, comparisons to prior year data may not be meaningful.

In April 2002, the Emerging Issues Task Force ("EITF") of the Financial Accounting Standards Board reached a consensus on Issue 01-14, "Income Statement Characterization of Reimbursement Received for 'Out-of-Pocket' Expenses Incurred." The EITF consensus requires that all reimbursements received for out-of-pocket expenses incurred be characterized as revenue in the income statement. The Company previously recorded certain reimbursements received from customers as a reduction of the related expenses incurred. As part of the implementation of the consensus in this issue, the Company has reclassified certain reimbursements received from customers for the three and nine months ended September 30, 2001, as revenues and related operating expenses to conform to the current presentation. Operating income and net income for all periods presented were not affected by this reclassification. The amounts of revenues and expenses reclassified by segment for each period presented are as follows (in millions):

                                 Three Months Ended       Nine Months Ended
                                    September 30,           September 30,
                                --------------------    ---------------------
                                  2002      2001 (1)      2002       2001 (1)
                                --------    --------    --------    --------
Contract drilling               $   16.9    $    5.9    $   56.9    $   15.0
Drilling management services         0.5         2.9        10.8         6.2
                                --------    --------    --------    --------
                                $   17.4    $    8.8    $   67.7    $   21.2
                                ========    ========    ========    ========

                                    Three Months Ended                  Nine Months Ended
                                       September 30,                       September 30,
                                    -------------------    Increase /   ------------------     Increase /
                                     2002       2001 (1)   (Decrease)    2002       2001 (1)   (Decrease)
                                    -------     -------    ----------   -------     -------    ----------
Revenues:
  Contract drilling                 $ 402.9     $ 230.8       75%       $1,215.5    $ 652.8        86%
  Drilling management services        117.6        92.9       27%          299.9      338.2       (11)%
  Oil and gas                           2.8         2.7        4%            7.0       12.0       (42)%
  Less: Intersegment revenues          (8.9)       (3.8)     134%          (17.6)    (16.8)         5%
                                    --------    -------                 --------    -------
                                    $ 514.4     $ 322.6       59%       $1,504.8    $ 986.2        53%
                                    =======     =======                 =======     =======
Operating income:
  Contract drilling                 $  97.2     $  85.3       14%       $  292.6    $ 240.4        22%
  Drilling management services          7.3         9.8      (26)%          18.5       20.6       (10)%
  Oil and gas                           1.6         1.4       14%            2.9        8.2       (65)%
  Corporate expenses                  (15.4)       (6.0)     157%          (41.8)     (18.7)      124%
                                    --------    -------                 --------    -------
                                    $  90.7     $  90.5       --%       $  272.2    $ 250.5         9%
                                    =======     =======                 =======     =======

Operating income for the three and nine months ended September 30, 2002, increased to $90.7 million and $272.2 million, respectively, from $90.5 million and $250.5 million, respectively, for the same periods in 2001, due primarily to the operations of the Santa Fe drilling fleet, offset by lower dayrates and utilization in the U.S. Gulf of Mexico, reduced turnkey drilling activity and an increase in corporate expenses.

In August 2002, the existing drilling contract for the Glomar Jack Ryan ultra-deepwater drillship was assigned by the customer to an Australian subsidiary of the customer to drill a series of deepwater wells on the western and southern coasts of Australia. To facilitate the assignment of this contract, the Company was paid $21.7 million, which is being amortized over the remaining contract term expiring August 1, 2003.

In February 2002, the Company sold the Key Bermuda jackup drilling rig to Nabors Drilling International Limited for approximately $29 million, less selling costs of approximately $5 million. The carrying value of the Key Bermuda was adjusted to its estimated market value in the consolidated financial statements of the Company at the time of the Merger and, therefore, no gain or loss was recorded as a result of this sale.

In June 2001, the Company completed the sale of the Glomar Beaufort Sea I concrete island drilling system to Exxon Neftegas Limited for $45.0 million, resulting in a pretax gain in the amount of $35.1 million.

The Company's contract drilling backlog at September 30, 2002, totaled approximately $1.2 billion, of which approximately $315 million is expected to be realized in the remainder of 2002. Contract drilling backlog at December 31, 2001 was $1.4 billion.

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 cycles are highly volatile and are 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. Rig markets which appear to have stabilized at a certain level of utilization and dayrates can change swiftly and dramatically, making it difficult to predict trends or conditions in the market. A summary of current market conditions in the Company's areas of operations follows:

North Sea. The Company currently operates five semisubmersibles, five heavy-duty harsh environment jackups, three cantilevered jackups and a platform rig in the North Sea market. Utilization and dayrates for both jackups and semisubmersibles have declined in this market following the announcement of tax law changes in the United Kingdom. The Company expects continued weakness in this market and anticipates that several of its rigs currently under contract in this area will either receive lower dayrates or be idle when their current contracts expire. Of the Company's semisubmersibles in this market, one is undergoing a major paint project, after which it will be cold-stacked, and another is expected to depart the North Sea in December 2002 for a commitment in Equatorial Guinea. One of the cantilevered jackups obtained a commitment in Nigeria and departed the North Sea in early November 2002.

Gulf of Mexico. The Company currently operates eleven cantilevered jackups and two semisubmersibles in this market. The Gulf of Mexico market for cantilevered jackups is characterized by short-term contracts, and dayrates during 2002 have generally been improving marginally as rigs roll over to new contracts. One of the Company's semisubmersibles in this market is currently committed through the second quarter of 2003, while the other is operating under a contract that expires in the fourth quarter of 2002 and currently does not have another commitment.

Ultra-deepwater drillship market. The Company currently operates three drillships in the ultra-deepwater (water depths greater than 7,000 ft.) market. The ultra-deepwater market appears to be somewhat oversupplied for at least the short term. There are presently fewer oil companies pursuing operations in ultra-deepwater, and several oil companies with deepwater rigs under contract have offered them to other oil companies on a subcontract basis. During 2003 and 2004, a significant percentage of the world's deepwater rig fleet faces contract expirations. While the Company's ultra-deepwater drillships have been operating under long-term contracts, one contract will expire in March 2003 and the other two contracts will expire in the third quarter of 2003.

West Africa. The Company currently operates one semisubmersible and eight cantilevered jackups in this market with an additional semisubmersible and a cantilevered jackup moving to the region from the North Sea during the fourth quarter of 2002. Jackup utilization and dayrates remained stable in this market during the third quarter. The softer market in the North Sea, however, may result in downward pressure on the West Africa market. While the semisubmersible market in this area has softened, the Company's two semisubmersibles are contracted through a substantial portion of 2003. The Company also has a substantial contract backlog during 2003 for its 300 ft. jackups in this market, but is facing the potential for lower dayrates and utilization for its 250 ft. jackups. The Company's moored drillship, which had previously been operated in this market, will be cold-stacked and the Company does not intend to reactivate this rig until the market for mid-range floating drilling rigs improves substantially.

Middle East and Mediterranean. The Company operates six cantilevered jackups in the Middle East region and two cantilevered jackups in the Mediterranean region offshore North Africa. Both markets appear to be stable and all of the cantilevered jackups in these regions are currently under contract.

Southeast Asia. The Company operates six cantilevered jackups in Southeast Asia. Five of these jackups are operating under long-term contracts and the remaining jackup is committed through December 2002. Although the market is generally balanced in this region, the Company has observed a reduction in dayrates in recent contract placements.

Other. In Northeast Canada, the Company operates one semisubmersible and one heavy-duty harsh environment jackup. The jackup is under contract until the fourth quarter of 2003, and the outlook for additional work for the semisubmersible following expiration of its current contract appears favorable following a four-month period of idle time and upgrades. In Trinidad, the Company operates one cantilevered jackup under a long-term contract expiring in the second quarter of 2003.

Land drilling fleet. The Company owns 31 land drilling rigs (GSF Rig 159, located in the Middle East, is held for sale), with 19 of these located in the Middle East, four in North Africa and eight in Venezuela. Three of the active rigs in the Middle East are idle, while utilization and dayrates for the remainder of the Middle Eastern and North African rigs remain stable for the remainder of 2002. In January 2003, the Company expects three land rigs to be released in Kuwait. The eight land rigs located in Venezuela are currently idle.

FUTURE MARKET FOR NEWBUILDS

The first of the Company's two high-performance jackups currently under construction is scheduled for delivery around the end of the first quarter of 2003, while the first of two ultra-deepwater semisubmersibles, also under construction, is scheduled for delivery around the end of the fourth quarter of 2003. The Company's ability to obtain contracts for its newbuild rigs and the terms of such contracts will be dependent on market conditions at the time these rigs are available for contract. While the Company believes that its newbuild rigs will have substantial advantages in efficiency and capability over competitive equipment in the industry, it can provide no assurance that it will be able to obtain contracts for all of its new rigs or that the contract terms will be similar to those for similar equipment in current market conditions.

RECENT TERRORIST ACTS AND THREATS OF ARMED CONFLICTS

In addition to those risks brought about by the terrorist attacks on September 11, 2001, recent acts of terrorism and threats of armed conflicts in or around various areas in which the Company operates, such as Indonesia and the Middle East, could limit or disrupt the Company's markets and operations. In particular, the Company currently operates six cantilevered jackups and 18 land rigs in the Middle East and six cantilevered jackups in Southeast Asia. An outbreak of hostilities or additional acts of terrorism in these regions could result in the evacuation of personnel, cancellation of drilling contracts or the loss of personnel or assets. These recent developments will subject the Company's worldwide operations to increased risks and, depending on their magnitude, could have a material adverse effect on the business of the Company. See "Risk Factors - Recent Terrorist Attacks Could Result in a Material Adverse Effect on the Business of the Company" and "- The Company's International Operations Involve Additional Risks

Not Associated with Domestic Operations" in the Company's Annual Report on Form 10-K for the year ended December 31, 2001.

INSURANCE

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 incurred significant premium and deductible increases in its insurance coverage upon renewal of its insurance program in June 2002.

The Company maintains insurance coverage against certain general and marine liabilities, including liability for personal injury, in the amount of $500 million. This general and marine liability coverage now includes a $250,000 per occurrence deductible with an additional aggregate deductible for protection and indemnity coverage for the period from July 2002 to December 2003 of $2.8 million for amounts exceeding the per occurrence deductibles. The Company also continues to separately insure its rigs and related equipment against certain marine and other perils resulting in property damages under hull and machinery policies. The Company's hull and machinery policy deductible has increased from approximately $300,000 per occurrence to one percent of the insured value of the drilling rig covered, subject to a minimum of $1.0 million and a maximum of $2.5 million. The Company continues with its practice of insuring each active rig for its market value, which does not necessarily cover all costs required to replace each rig with a newly constructed one.

With respect to turnkey drilling operations, the Company purchases insurance to cover well control expense, pollution liability and re-drill expense in an amount normally not less than $50 million per occurrence. The Company's deductible for well-control insurance has increased from $200,000 per occurrence to $1.0 million per occurrence with an additional annual aggregate deductible of $5.0 million for amounts exceeding the per occurrence deductibles.

The Company believes that its policy of purchasing insurance coverage is consistent with its industry peers for the types, amounts and limits of insurance maintained. The occurrence of a significant event, however, that is not fully insured against could materially and adversely affect the Company's operations, cash flows and financial condition. For a discussion of this and other risk factors affecting the Company's operations, see "Risk Factors - The Company's Business Involves Numerous Operating Hazards and It is Not Fully Insured against All of Them" in the Company's Annual Report on Form 10-K for the year ended December 31, 2001.

CONTRACT DRILLING OPERATIONS

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

                                    Three Months Ended                  Nine Months Ended
                                       September 30,                       September 30,
                                    -------------------    Increase /   ------------------     Increase /
                                     2002      2001 (1)   (Decrease)     2002       2001 (1)   (Decrease)
                                    --------   --------    ----------   --------   --------    ----------
Contract drilling revenues
  by area (1):
  North Sea                         $  116.0   $   32.5       257%      $  358.8   $   82.5        335%
  U.S. Gulf of Mexico                   72.2      132.4       (45)%        260.3      345.5        (25)%
  West Africa                           54.7       49.1        11%         151.9      115.2         32%
  Middle East                           51.3         --       N/A          158.2         --        N/A
  Far East                              32.1         --       N/A           80.5         --        N/A
  South America                         21.3       16.8        27%          81.8       99.9        (18)%
  Other                                 55.3         --       N/A          124.0        9.7        N/A
                                    --------   --------                 --------   --------
                                    $  402.9   $  230.8        75%      $1,215.5   $  652.8         86%
                                    ========   ========                 ========   ========

Average rig utilization:
  Marine rigs                             88%        95%                      88%        94%
  Land rigs                               63%       N/A                       71%       N/A

Average revenues per day:
  Marine rigs                       $ 72,700   $ 78,000                  $ 72,600  $ 75,000
  Land rigs                         $ 15,800        N/A                  $ 16,700       N/A

Three Months Ended September 30, 2002, Compared to Three Months Ended September 30, 2001

Contract drilling revenues increased $172.1 million to $402.9 million for the third quarter of 2002 compared to $230.8 million for the 2001 third quarter due primarily to the addition of the Santa Fe International rigs to the Company's drilling fleet, partially offset by lower dayrates and utilization in the U.S. Gulf of Mexico.

The Company's offshore utilization rates for the third quarter of 2002 averaged 83% for its rigs in the U.S. Gulf of Mexico, 89% in West Africa, 87% in the North Sea, 84% in the Far East, 100% in South America and 100% in the Middle East. This compares with Global Marine's third quarter 2001 average utilization of 100% in West Africa, 99% in the U.S. Gulf of Mexico, 89% in the North Sea and 77% in South America. Global Marine's offshore fleet did not operate in the Middle East or the Far East during the third quarter of 2001. The Company's land drilling fleet averaged 63% utilization in the third quarter of 2002. Global Marine had no land drilling operations in 2001.

The Company's results for the quarter ended September 30, 2002, reflect downtime on six of the Company's offshore rigs at various times during the quarter for planned maintenance and upgrades as part of the Company's continuing program to upgrade its drilling rigs. All of these rigs have since returned to work.

The Company's operating profit margin for contract drilling operations decreased to 24% for the third quarter of 2002 from Global Marine's 37% for the third quarter of 2001 due primarily to the addition of land drilling operations as a result of the Merger and lower dayrates in the U.S. Gulf of Mexico, along with

an increase in depreciation expense due to the adjustment of the carrying values of the Santa Fe International rigs to their estimated market value in connection with the Merger. Land operations have historically operated at substantially lower margins than the Company's offshore fleet.

The Company recorded approximately $2.1 million of "transition expenses" related to its contract drilling operations during the third quarter of 2002, which represent costs incurred as part of the integration of the operations of Global Marine and Santa Fe International. Such costs are not considered to be indicative of the Company's ongoing operations.

Nine Months Ended September 30, 2002, Compared to Nine Months Ended September 30, 2001

Contract drilling revenues increased by $562.7 million to $1,215.5 million for the nine months ended September 30, 2002, compared to $652.8 million for the nine months ended September 30, 2001, due primarily to the addition of the Santa Fe International rigs to the Company's drilling fleet, partially offset by lower dayrates and utilization in the U.S. Gulf of Mexico and lower utilization in West Africa.

The Company's offshore utilization rates for the nine months ended September 30, 2002, averaged 90% for its rigs in the U.S. Gulf of Mexico, 85% in West Africa, 90% in the North Sea, 76% in the Far East, 87% in South America and 97% in the Middle East. This compares with Global Marine's 2001 average utilization of 98% in the U.S. Gulf of Mexico, 95% in West Africa, 88% in the North Sea and 92% in South America. Global Marine's offshore fleet did not operate in the Middle East or the Far East during 2001. The Company's land drilling fleet averaged 71% utilization for the nine months ended September 30, 2002. Global Marine had no land drilling operations in 2001.

The Company's operating profit margin for contract drilling operations decreased to 24% for the nine months ended September 30, 2002, from Global Marine's 37% for the comparable period of 2001 due primarily to the addition of land drilling operations and lower dayrates in the U.S. Gulf of Mexico, along with the increase in depreciation expense noted in the discussion of the third quarter results above.

The Company recorded approximately $13.2 million of "transition expenses" related to its contract drilling operations during the nine months ended September 30, 2002, which represent costs incurred as part of the integration of the operations of Global Marine and Santa Fe International. Such costs are not considered to be indicative of the Company's ongoing operations. The Company expects to incur a total of approximately $15 million of transition expenses related to its contract drilling operations, all of which is expected to be incurred in 2002.

Along with the addition of the Santa Fe International drilling fleet, the mobilization of rigs between geographic areas also affected each area's revenues over the periods indicated. Specifically, Global Marine mobilized one jackup from West Africa to the U.S. Gulf of Mexico in February 2001, one drillship from Trinidad to the U.S. Gulf of Mexico in May 2001, one semisubmersible from Canada to the North Sea in May 2001, one jackup from the U.S. Gulf of Mexico to West Africa in July 2001 and one jackup from the U.S. Gulf of Mexico to Trinidad in September 2001. Subsequent to the Merger, the Company's mobilization of rigs was as follows: one jackup from the U.S. Gulf of Mexico to Trinidad in December 2001 and back to the Gulf of Mexico in August 2002; one drillship from the U.S. Gulf of Mexico to Trinidad in March 2002, back to the Gulf of Mexico in May 2002 and to Australia in September 2002; one jackup from Trinidad to West Africa in July 2002; and one semisubmersible from the North Sea to the east coast of Canada in July 2002.

As of November 8, 2002, 14 of the Company's offshore drilling rigs, including its platform rig, were located in the North Sea, 15 were located in the U.S. Gulf of Mexico, 10 were offshore West Africa, with one rig currently en route, six were in the Middle East, six were in Southeast Asia, two were offshore North Africa, two were off the northeast coast of Canada, one was offshore Trinidad and one was off the western coast of Australia.

As of November 8, 2002, 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 8, 2002, 53 of the Company's 58 offshore rigs were either committed or under contract and 19 of the Company's 31 land rigs were under contract.

DRILLING MANAGEMENT SERVICES

Three Months Ended September 30, 2002, Compared to Three Months Ended September 30, 2001

Drilling management services revenues increased by $24.7 million to $117.6 million in the third quarter of 2002 from $92.9 million in the comparable 2001 quarter due to higher average revenues per turnkey project along with higher reimbursable revenues primarily related to well management projects in the North Sea. These increases were partially offset by a decrease in the number of turnkey projects completed. The Company completed 26 turnkey projects in the third quarter of 2002 (21 wells drilled and five well completions) as compared to 29 turnkey projects in the third quarter of 2001 (24 wells drilled and five well completions).

Drilling management services operating income, however, decreased by $2.5 million to $7.3 million in the third quarter of 2002 from $9.8 million in the third quarter of 2001, due primarily to lower margins achieved on turnkey wells drilled in the third quarter of 2002. Operating margin declined to 6.2% for the third quarter of 2002 from 10.5% for the comparable prior year quarter due primarily to the lower margins on turnkey wells drilled noted above, along with the effect of reimbursable revenues, which represent expenses billed to the customer. The Company incurred losses totaling $1.6 million on three of the 26 turnkey projects completed in the third quarter of 2002 compared to losses totaling $1.3 million on two of the 29 turnkey projects completed in the third quarter of 2001. Results for the third quarters of 2002 and 2001 were also affected by the deferral of turnkey drilling profit totaling $3.5 million and $1.8 million, respectively, on wells in which Challenger Minerals, Inc. ("CMI"), a wholly-owned subsidiary of the Company, was either the operator or held a working interest. The deferral of this profit is required under the "full-cost" method of accounting for oil and gas properties. The Company will recognize this profit through lower depletion expense over the productive lives of these wells.

Nine Months Ended September 30, 2002, Compared to Nine Months Ended September 30, 2001

Drilling management services revenues decreased by $38.3 million to $299.9 million for the nine months ended September 30, 2002, from $338.2 million in the comparable 2001 period due primarily to a decrease in the number of turnkey projects completed, partly offset by an increase in reimbursable revenues. The Company completed 72 turnkey projects for the nine months ended September 30, 2002, (59 wells drilled and 13 well completions) as compared to 101 turnkey projects in the comparable period of 2001 (83 wells drilled and 18 well completions).

Drilling management services operating income decreased by $2.1 million to $18.5 million for the nine months ended September 30, 2002, from $20.6 million for the comparable prior year period due primarily to the deferral of turnkey drilling profit totaling $10.2 million and $6.6 million for the nine months ended September 2002 and 2001, respectively, related to wells in which CMI was either the operator or held a working interest. Excluding the deferral of this profit, drilling management services operating income increased by $1.5 million to $28.7 million for the nine months ended September 30, 2002, from $27.2 million for the same period in 2001, due primarily to improved turnkey drilling performance in 2002 as compared to the same period in 2001. The Company incurred losses totaling $3.0 million on six of the 72 turnkey projects completed in the nine months ended September 30, 2002, compared to losses totaling $13.5 million on ten of the 101 turnkey projects completed in the comparable period of 2001

OTHER INCOME AND EXPENSE

General and administrative expenses increased to $14.4 million and $39.3 million for the quarter and nine months ended September 30, 2002, respectively, compared to $5.4 million and $17.3 million, respectively, for the comparable periods of 2001 due primarily to increases in personnel from the inclusion of Santa Fe International operations as a result of the Merger and an increase in pension expenses. Pension expense included in general and administrative expenses increased to $3.9 million and $5.8 million, respectively, for the quarter and nine months ended September 30, 2002, compared to $0.4 million and $1.3 million, respectively, for the same periods in 2001 due primarily to the inclusion of expenses related to legacy Santa Fe International plans, lower returns on plan assets and plan changes to conform benefits under the legacy pension plans as a result of the Merger.

Also included in general and administrative expenses for the 2002 periods are "transition expenses," which represent costs incurred as part of the integration of the operations of Global Marine and Santa Fe International. General and administrative transition expenses were approximately $2.0 million and $5.8 million for the three and nine months ended September 30, 2002, respectively. Such costs are not considered to be indicative of the Company's ongoing operations. The Company expects to incur a total of approximately $7 million of general and administrative transition expense, all of which is expected to be incurred in 2002.

Interest expense, net of capitalized interest, decreased to $8.7 million and $29.8 million, respectively, for the three and nine months ended September 30, 2002 compared to $14.4 million and $42.6 million, respectively for the same periods in 2001, due primarily to the capitalization of approximately $5.6 million and $13.1 million, respectively, of interest costs in the three and nine months ended September 30, 2002, in connection with the Company's rig expansion program discussed in "Liquidity and Capital Resources - Financing and Investing Activities." Global Marine had no construction program in progress in 2001 and, therefore, did not capitalize any interest costs in 2001.

Interest income increased to $3.8 million and $12.0 million for the three and nine months ended September 30, 2002, respectively, from $3.7 million and $9.7 million for the comparable 2001 periods due to increased average cash, cash equivalents and marketable securities balances primarily as a result of the Merger and cash generated from operations, offset in part by lower interest rates earned in 2002 on the Company's cash, cash equivalents and marketable securities balances.

Other income totaled $1.7 million and $1.3 million for the three and nine months ended September 30, 2002, respectively, due primarily to a $1.7 million net gain recorded on embedded derivative financial

instruments associated with a two-year variable-dayrate contract for one of the Company's cantilevered jackups. An additional cantilevered jackup began work under a similar two-year contract in October 2002. See discussion in "Item 3 - Quantitative and Qualitative Disclosures About Market Risk."

INCOME TAXES

The Company's effective income tax rates for financial reporting purposes were approximately 14.3% and 11.8%, respectively, for the three and nine months ended September 30, 2002 as compared to 22.2% and 26.0% for the same periods in 2001. The lower effective tax rates for the 2002 periods are due in part to the addition of the Santa Fe International operations, which increased earnings in international jurisdictions that are taxed at generally lower rates. The effective tax rate was further lowered by approximately $27 million of reduced annual tax costs related to interest expense on intercompany debt incurred in the Merger.

The Company is a Cayman Islands company 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. Based on current market conditions and expectations of rig employment, the Company believes that its effective tax rate will be higher in 2003 than in 2002.

Earlier this year, several members of Congress introduced various pieces of legislation that, if enacted, could adversely affect the Company's United States federal income tax position. Much of the proposed legislation targets United States corporations that have expatriated to a foreign jurisdiction and would in certain cases treat such corporations as United States corporations for United States federal income tax purposes. Several of the proposals would have retroactive application and would treat the Company as a United States corporation. Some of the proposed legislation would impose additional limitations on the deductibility for United States federal income tax purposes of certain intercompany transactions, including intercompany interest expense.

At this time, it is impossible to predict what legislation, if any, may be enacted, and if enacted, what effect it may have on the Company. However, there is a risk that new legislation could substantially increase the income tax costs of the Company. If this were to occur, such changes could have a material adverse effect on the Company's financial position and future results of operations.

LIQUIDITY AND CAPITAL RESOURCES

FINANCING AND INVESTING ACTIVITIES

The Company has definitive contracts with PPL Shipyard PTE, Ltd. of Singapore for construction of two ultra-deepwater semisubmersibles and two high-performance jackups, with options for two additional similarly priced semisubmersibles, and up to four additional jackups, the first two of which are similarly priced. 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 $285 million per rig. Of the $570 million, $222 million had been incurred as of September 30, 2002. A total of approximately $186 million is expected to be incurred in 2002, including approximately $119 million incurred during the nine months ended September 30, 2002, and an additional $281 million is expected to be

incurred through 2004. Estimated cash outlays in connection with the construction of two high-performance jackups, excluding capitalized interest, startup costs, capital spares and mobilization costs, are expected to total approximately $260 million, or $130 million per rig. Of the $260 million, $128 million had been incurred as of September 30, 2002. A total of approximately $96 million is expected to be incurred in 2002, including approximately $76 million incurred during the nine months ended September 30, 2002, and an additional $112 million is expected to be incurred through 2004. The first of two high-performance jackups, the GSF Constellation I, is scheduled for delivery around the end of the first quarter of 2003, and the first of two ultra-deepwater semisubmersibles, the GSF Development Driller I, is scheduled for delivery around the end of the fourth quarter of 2003. The Company expects to fund the construction and startup of the rigs from its cash and short-term investments and future cash flow from operations; however, the Company may borrow a portion of the required funds if conditions warrant. None of the four vessels that the Company has under construction or has firm commitments to build has secured a contract for deployment upon completion. While the Company believes that its newbuild rigs will have substantial advantages in efficiency and capability over competitive equipment in the industry, it can provide no assurance that it will be able to obtain contracts for all of its new rigs or that the contract terms will be similar to those for similar equipment in current market conditions.

Other significant financing and investing activities during the nine months ended September 30, 2002 were as follows:

o Completed the sale of the Key Bermuda jackup drilling rig in the first quarter of 2002 to Nabors Drilling International Limited for $29 million, less selling costs of approximately $5 million.

o Received approximately $42 million, including interest, in the first quarter of 2002, related to the sale of the Glomar Beaufort Sea I concrete island drilling system, which was sold to Exxon Neftegas Limited in June 2001. The Company sold the Glomar Beaufort Sea I for $45 million and received $5 million at closing. The remaining amount, plus interest, was recorded as a receivable, which was classified in "Other assets" in the Consolidated Balance Sheet at December 31, 2001.

o Repurchased and retired 2,374,600 Ordinary Shares pursuant to the Company's share repurchase program at an aggregate purchase price, including commissions, of $51.4 million.

o Paid quarterly dividends of $0.0325 per ordinary share for the fourth quarter of 2001 and the first two quarters of 2002. These dividend payments totaled $22.8 million for the nine months ended September 30, 2002.

o Announced in September 2002 that the Company's Board of Directors declared a regular quarterly cash dividend in the amount of $0.0325 per ordinary share. The dividend in the amount of $7.6 million was paid on October 15, 2002, to shareholders of record as of the close of business on September 30, 2002.

During the third quarter of 2002, the Company funded a total of approximately $30.7 million of accrued pension liabilities related to its various pension plans. As a result of, and at the time of, this payment, the Company was approximately 100% funded with respect to its actuarially determined pension liabilities as of January 1, 2002.

The Company's debt to capitalization ratio, including its capitalized lease obligation, was 18.2% at September 30, 2002 compared to 18.8% at December 31, 2001. The Company's total debt includes the current portion of its capitalized lease obligation, which totaled $1.8 million at both September 30, 2002 and December 31, 2001.

FUTURE CASH REQUIREMENTS

As of September 30, 2002, the Company had total long-term debt, including the current portion of its capital lease obligation, of $938.9 million and shareholders' equity of $4.2 billion. Long-term debt consisted of $324.4 million (net of discount) Zero Coupon Convertible Debentures due 2020, $299.7 million (net of discount) 7-1/8% Notes due 2007, $296.7 million (net of discount) 7% Notes due 2028, and a capital lease obligation, including the current portion, totaling $18.1 million.

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. No principal payments are due under either issue until the maturity date.

The Company may redeem the 7-1/8% Notes and the 7% 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 indenture relating to the Zero Coupon Convertible Debentures, 7-1/8% Notes, and 7% Notes contains limitations on Global Marine's ability to incur indebtedness for borrowed money secured by certain liens and to engage in certain sale/leaseback transactions. After the Merger, the Zero Coupon Convertible Debentures, 7-1/8% Notes, and 7% Notes continue to be obligations of Global Marine. The Company has not guaranteed any of these obligations.

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.

Capital expenditures for 2002 are currently estimated to be approximately $534 million, including $282 million in connection with the construction of the two new high-performance jackups and two new ultra-deepwater semisubmersibles, $131 million for major upgrades to the marine fleet, $99 million for maintenance capital expenditures, $20 million for capitalized interest and $2 million for other capital expenditures.

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. At September 30, 2002, $98.6 million of this authorized amount remained available for future purchases.

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 of stock could be required.

SOURCES OF LIQUIDITY

As of September 30, 2002, the Company had $737.6 million of cash, cash equivalents and marketable securities, all of which was unrestricted. The Company had $707.9 million in cash, cash equivalents and marketable securities at December 31, 2001, all of which was unrestricted.

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 cash and short-term investments and future cash flow from operations. In 2002, the Company estimates that it will use approximately $150 million in excess of cash flow generated from operations, primarily due to increased capital expenditures related to the drilling rig expansion program and the retirement plan contributions discussed above in "Financing and Investing Activities" and its share repurchase program discussed above in "Future Cash Requirements."

RISK FACTORS

The preceding discussion should be read in light of certain 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, 2001, as supplemented by the disclosures in this Quarterly Report on Form 10-Q.

RECENT ACCOUNTING PRONOUNCEMENTS

In 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 142, "Goodwill and Other Intangible Assets," SFAS No. 143, "Accounting for Asset Retirement Obligations" and SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." In May 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain Financial Institutions," the provisions of which are not applicable to the Company's operations. The Company adopted the provisions of SFAS No. 142 and SFAS No. 144 effective January 1, 2002. The Company adopted SFAS No. 145 in the second quarter of 2002.

SFAS No. 142 primarily addresses the accounting for goodwill and intangible assets subsequent to their initial recognition. The provisions of SFAS No. 142:

o Eliminate the amortization of goodwill and indefinite-lived intangible assets;

o Require that goodwill and indefinite-lived intangible assets be tested at least annually for impairment (and in interim periods if certain events occur indicating that the carrying value of goodwill and/or indefinite-lived intangible assets may be impaired); and

o Require that reporting units be identified for the purpose of assessing potential future impairments of goodwill.

At September 30, 2002, Goodwill in the Company's Condensed Consolidated Balance Sheet totaled approximately $385.9 million, substantially all of which was recorded in connection with the Merger. All of the goodwill recorded in connection with the Merger has been allocated to the Company's contract

drilling segment. The Company has completed its goodwill impairment testing for 2002 and is not required to record a goodwill impairment loss for 2002. The amortization of goodwill existing before the Merger was immaterial.

SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144, among other things:

o Establishes criteria to determine when a long-lived asset is held for sale, including a group of assets and liabilities that represents the unit of accounting for a long-lived asset classified as held for sale;

o Provides guidance on the accounting for a long-lived asset if the criteria for classification as held for sale are met after the balance sheet date but before the issuance of the financial statements; and

o Provides guidance on the accounting for a long-lived asset classified as held for sale.

The adoption of SFAS No. 144 did not have a material impact on the Company's results of operations, financial position or cash flows.

SFAS No. 145, among other things, addresses the criteria for the classification of extinguishment of debt as an extraordinary item and addresses the accounting treatment of certain sale-leaseback transactions. The adoption of SFAS No. 145 did not have a material impact on the Company's results of operations, financial position or cash flows.

SFAS No. 143 establishes accounting standards for the recognition and measurement of liabilities in connection with asset retirement obligations, and is effective for fiscal years beginning after June 15, 2002. The Company does not anticipate that the required adoption of SFAS No. 143 in 2003 will have a material effect on its results of operations, financial position or cash flows.

SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, rather than the date of an entity's commitment to an exit plan. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002. The Company does not anticipate that the required adoption of SFAS No. 146 will have a material effect on its results of operations, financial position or cash flows.