ITEMS 1. AND 2. BUSINESS AND PROPERTIES

GlobalSantaFe Corporation is an offshore oil and gas drilling contractor, owning or operating a fleet of 60 marine drilling rigs, including the ultra-deepwater semisubmersible GSF Development Driller II , which was delivered in February 2005. As of February 28, 2005, our fleet included 45 cantilevered jackup rigs, 10 semisubmersibles and three drillships. We currently have an additional ultra-deepwater semisubmersible under construction, and we also operate two semisubmersible rigs for third parties under a joint venture agreement (see “Joint Venture, Agency and Sponsorship Relationships and Other Investments”).

We provide oil and gas contract drilling services to the oil and gas industry worldwide on a daily rate (“dayrate”) basis. We also provide 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 we participate in oil and gas exploration and production activities. Business segment and geographic information is set forth in Note 13 of Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K. We are a Cayman Islands company, with our executive offices in Houston, Texas.

On May 21, 2004, we completed the sale of our land drilling fleet and related support equipment to Precision Drilling Corporation for a total sales price of $316.5 million in an all-cash transaction. Our land drilling fleet consisted of 31 rigs, 12 of which were located in Kuwait, eight in Venezuela, four in Saudi Arabia, four in Egypt and three in Oman. For further information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Operating Results—Sale of Land Drilling Fleet (Discontinued Operations).”

Unless the context otherwise requires, the terms “we,” “us” and “our” refer to GlobalSantaFe Corporation and its consolidated subsidiaries. Substantially all of our businesses are conducted by subsidiaries of GlobalSantaFe Corporation.

M ERGER OF S ANTA F E I NTERNATIONAL C ORPORATION AND G LOBAL M ARINE I NC .

On November 20, 2001, Santa Fe International Corporation (“Santa Fe International”) and Global Marine Inc. (“Global Marine”) consummated their business combination with the merger (the “Merger”) of an indirect wholly owned subsidiary of Santa Fe International with and into Global Marine, with Global Marine surviving the Merger as a wholly owned subsidiary of Santa Fe International. In connection with the Merger, Santa Fe International was renamed GlobalSantaFe Corporation. 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 stockholders of Global Marine owned slightly over 50% of GlobalSantaFe Corporation after the Merger and filled the majority of senior management positions, Global Marine was considered the acquiring entity for accounting purposes.

C ONTRACT DRILLING

Substantially all of our domestic offshore contract drilling operations are conducted by GlobalSantaFe Drilling Company, a wholly owned subsidiary headquartered in Houston, Texas. International offshore contract drilling operations are conducted by a number of our subsidiaries and joint venture companies with operations in 21 countries throughout the world.

Rig Fleet. We own or operate a modern, diversified fleet of 60 mobile offshore drilling rigs as of February 28, 2005, including six cantilevered heavy-duty harsh environment (“HDHE”) jackups, 39 cantilevered jackups, 10 semisubmersibles, including one ultra-deepwater semisubmersible, and three ultra-deepwater, dynamically positioned drillships, and we also operate two semisubmersible rigs for third parties under a joint venture agreement. All of our owned rigs, with the exception of the GSF Britannia jackup, were placed into service in 1974 or later, and, as of February 28, 2005, the average age of the rigs in our fleet was approximately 20 years.

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Our fleet is deployed in major offshore oil and gas operating areas worldwide. The principal areas in which the fleet is currently deployed are the U.S. Gulf of Mexico, the North Sea, West Africa, Southeast Asia, the Middle East, the Mediterranean Sea, South America and eastern Canada.

The following table lists the rigs in our drilling fleet as of February 28, 2005, indicating the year each rig was placed in service, each rig’s maximum water and drilling depth capabilities, current location, customer, and the date each rig is estimated to become available.

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Rig Types. Jackup rigs have elevating legs which extend to the sea bottom, providing a stable platform for drilling, and are generally preferred in water depths of 400 feet or less. All of our jackup rigs have drilling equipment mounted on cantilevers, which allow the equipment to extend outward from the rigs’ hulls over fixed drilling platforms and enable operators to drill both exploratory and development wells. In addition, 10 of our jackups have been equipped with skid-off packages, which allow the drilling equipment to be transferred to fixed production platforms.

We own one of the world’s largest fleets of HDHE jackup rigs in service in the industry. Three of our rigs, the GSF Galaxy I , GSF Galaxy II and GSF Galaxy III , are Universe class rig designs capable of operating in water depths of up to 400 feet and are currently qualified to operate year-round in the harsh environment of the central North Sea in water depths of up to 360 feet. Our three other HDHE jackup rigs, the GSF Monarch , GSF Monitor and GSF Magellan , are Monarch class rig designs capable of operating in water depths of up to 350 feet. These rigs are capable of operating year-round in the central North Sea in water depths of up to 300 feet.

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Semisubmersible rigs are floating offshore drilling units with pontoons and columns that, when flooded with water, cause the unit to partially submerge to a predetermined depth. Most semisubmersibles are anchored to the sea bottom, but some use dynamic positioning (“DP”), which allows the vessels to be held in position by computer-controlled propellers, known as thrusters. Semisubmersibles are classified into five generations, distinguished mainly by their age, environmental rating, variable deck load and water-depth capability. The GSF Aleutian Key is a second-generation semisubmersible capable of drilling in water depths up to 2,300 feet. The GSF Arctic I , GSF Arctic II, GSF Arctic III, GSF Arctic IV, GSF Grand Banks, GSF Rig 135 and GSF Rig 140 semisubmersibles are third-generation, conventionally moored rigs suitable for drilling in water depths ranging from 1,200 to 3,400 feet. The GSF Celtic Sea is a fourth-generation semisubmersible capable of drilling in water depths of up to 5,750 feet, utilizing a DP-assisted mooring system. The GSF Development Driller II , a fifth-generation ultra-deepwater semisubmersible, is capable of drilling in water depths of up to 7,500 feet, in either full DP mode or conventionally moored.

Drillships are generally preferred for deepwater drilling in remote locations with moderate weather environments because of their mobility and large load carrying capability. The GSF C.R. Luigs, GSF Jack Ryan and GSF Explorer are dynamically positioned, ultra-deepwater drillships capable of drilling in water depths up to 10,000 feet, 10,000 feet and 7,800 feet, respectively, as currently equipped. With modifications, maximum water depth capabilities would be 12,000 feet for the GSF C.R. Luigs and GSF Jack Ryan , and 10,000 feet for the GSF Explorer .

Our “deepwater” rigs consist of our semisubmersibles and drillships. We consider rigs with a maximum water-depth capability of 7,000 feet or more, such as the semisubmersible GSF Development Driller II and the drillships GSF C.R. Luigs, GSF Jack Ryan and GSF Explorer, to be “ultra-deepwater” rigs.

We own all of the drilling rigs in the table above (excluding those specifically described as being operated for third parties) with the exception of the GSF Explorer , which is subject to a capital lease with a remaining term of 22 years, and the GSF C.R. Luigs and GSF Jack Ryan , which are subject to fully defeased capital leases, each with a remaining term of 16 years. None of our offshore drilling rigs is currently subject to any outstanding liens or mortgages.

In January 2003, in order to take advantage of an attractive financing structure, we entered into a lease-leaseback arrangement with a European bank related to the GSF Britannia cantilevered jackup. Pursuant to this arrangement, we leased the GSF Britannia to the bank, which then leased the rig back to us, each lease being for a five-year term. We have classified this arrangement as a capital lease.

In February 2005, we took delivery of one of our two ultra-deepwater semisubmersibles ordered from PPL Shipyard PTE, Ltd. of Singapore (“PPL”), the GSF Development Driller II . Construction costs for the GSF Development Driller II are expected to total approximately $311 million, excluding $46 million of capital spares, startup expenses, customer-required modifications and mobilization costs and $38 million of capitalized interest.

Capital expenditures in connection with the construction of the GSF Development Driller I , the other ultra-deepwater semisubmersible ordered from PPL are expected to total approximately $308 million, excluding $53 million of capital spares, startup expenses, customer-required modifications and mobilization costs, including additional startup costs that we expect to incur as a result of the derrick failure discussed below, and $54 million of capitalized interest. We currently expect that the delivery of the GSF Development Driller I will occur in March 2005.

The GSF Development Driller I suffered a failure of a portion of its derrick while undergoing testing in May 2004. The investigation into the cause of the loss revealed a design defect in the derrick, which is identical to the derrick installed aboard the GSF Development Driller II . Both derricks required modifications, which are now complete. We expect that the direct costs for repair of the derrick and damaged equipment will be borne by the equipment supplier.

In July 2004, PPL presented us with a claim for additional costs in respect of the construction of the GSF Development Driller I . The claim totaled approximately $32 million, with approximately $10 million of that

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amount attributable to change order claims. The balance of the claim alleged delay and disruption to the construction schedule caused by us, resulting in loss of productivity and additional costs to the shipyard. In September 2004, PPL presented a claim for additional costs in respect of the construction of the GSF Development Driller II. That claim totaled approximately $33 million, and was comprised of approximately $24 million for delay and disruption to the construction schedule allegedly caused by us and for the cost of additional labor employed to meet the revised delivery schedule, with the balance for change order claims advanced by the shipyard. We previously paid $7.6 million, which is included in the capitalized cost of the rig, for additional labor costs concerning the GSF Development Driller II. The balance of the claims for both rigs has now been settled for a total additional payment of $19.9 million, of which $15.0 million relates to the claim for the GSF Development Driller I and $4.9 million relates to the GSF Development Driller II . The amounts for each rig are included in their capitalized costs discussed above.

We expect to fund all remaining construction and startup costs for the GSF Development Driller I and GSF Development Driller II from our existing cash, cash equivalents and marketable securities balances, and future cash flow from operations.

In March 2004, we took delivery of the GSF Constellation II, the second of our two high-performance cantilevered jackups ordered from PPL. Construction costs for this jackup totaled approximately $131 million, excluding $20 million of capitalized interest, capital spares, startup expenses and mobilization costs.

Backlog. Our contract drilling backlog at December 31, 2004, was $1.7 billion, consisting of $1.4 billion related to executed contracts and $0.3 billion related to customer commitments for which contracts had not yet been executed as of December 31, 2004. Approximately $1.0 billion of the backlog is expected to be realized in 2005. Our contract drilling backlog at December 31, 2003, was $996.6 million, including $65.8 million related to customer commitments for which contracts had not yet been executed as of that date.

Drilling Contracts. Contracts to employ our crewed drilling rigs extend over a specified period of time or the time required to drill a specified well or number of wells. While the final contract for employment of a rig is the result of negotiations between us and the customer, most contracts are awarded based upon competitive bidding. The rates specified in drilling contracts are generally on a dayrate basis and vary depending upon the type of rig employed, equipment and services supplied, geographic location, term of the contract, competitive conditions and other variables. Each contract provides for a basic dayrate during drilling operations, and may include performance premiums or lower rates or no payment for periods of equipment breakdown, adverse weather or other conditions which may be beyond our control. When a rig mobilizes to or demobilizes from an operating area, a contract may provide for different dayrates, specified fixed amounts or no payment during the mobilization or demobilization. In some cases, a contract may be terminated by the customer if drilling operations are suspended for a specified period of time due to a breakdown of major equipment, in the event of poor operational, safety or environmental performance not remedied by us within a specified period, or if other events occur that are beyond either party’s control. A contract may also be terminated by the customer if the rig is destroyed. In addition, certain contracts are cancellable upon specified notice at the option of the customer.

Major Customers. Our business is subject to the usual risks associated with having a limited number of customers for our services. One customer accounted for more than 10% of consolidated revenues in 2004: Total S.A. (“Total”) provided $186.0 million of contract drilling revenues. Two customers each accounted for more than 10% of consolidated revenues in 2003: Total provided $234.2 million of contract drilling revenues, and ExxonMobil provided $231.6 million of contract drilling revenues. One customer accounted for more than 10% of consolidated revenues in 2002: ExxonMobil provided $267.7 million of contract drilling revenues and $0.1 million of drilling management services revenues. Our results of operations could suffer a material adverse effect if any of our major customers terminates its contracts with us, fails to renew our existing contracts or refuses to award new contracts to us. See “Risk Factors—We Rely Heavily on a Small Number of Customers and the Loss of a Significant Customer Could Have a Material Adverse Impact on Our Financial Results.”

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D RILLING MANAGEMENT SERVICES

We provide drilling management services primarily on a turnkey basis through a wholly owned subsidiary, Applied Drilling Technology Inc. (“ADTI”), and through ADT International, a division of one of our U.K. subsidiaries. ADTI operates primarily in the U.S. Gulf of Mexico, and ADT International operates primarily in the North Sea. Under a typical turnkey arrangement, we will assume responsibility for the design and execution of a well and deliver a logged or cased hole to an agreed depth for a guaranteed price. Compensation is contingent upon satisfactory completion of the drilling program. As part of our turnkey drilling services, we provide planning, engineering and management services beyond the scope of our traditional contract drilling business and thereby assume greater risk. In our project management operations, we provide certain planning, management and engineering services, purchase equipment and provide personnel and other logistical services to customers. Project management services differ from turnkey drilling services in that the customer retains control of the drilling operations and thus retains the risk associated with the project.

Our drilling management services business is also subject to the usual risks associated with having a limited number of customers for its services. Two customers each accounted for more than 10% of drilling management services revenues in 2004: William G. Helis Company, LLC provided $60.6 million, or 11.4%, of drilling management services revenues, and Lundin Britain Limited provided $56.6 million, or 10.7%, of drilling management services revenues. In 2003, one customer, BG Group, accounted for $98.9 million, or 18.7%, of drilling management services revenues. These revenues were for project management operations in the North Sea in 2003, substantially all of which were reimbursable revenues. Reimbursable revenues represent reimbursements received from the client for certain out-of-pocket expenses and have little or no effect on operating income. No turnkey drilling customer accounted for more than 10% of drilling management services revenues for 2003. One customer, Encana (U.K.) Ltd., accounted for $44.3 million, or 10.6%, of drilling management services revenues in 2002. These revenues were for project management operations in the North Sea, substantially all of which were reimbursable revenues. No turnkey drilling customer accounted for more than 10% of drilling management services revenues for 2002. See “Risk Factors—We Rely Heavily on a Small Number of Customers and the Loss of a Significant Customer Could Have a Material Adverse Impact on Our Financial Results.”

As of December 31, 2004, our drilling management services revenue backlog was an estimated $29 million, all of which is expected to be realized in 2005. Our drilling management services backlog was an estimated $42 million at December 31, 2003.

O IL AND GAS OPERATIONS

We conduct oil and gas exploration, development and production activities through our wholly owned subsidiary, Challenger Minerals Inc. (“CMI”). CMI acquires interests in oil and gas properties principally in order to facilitate the acquisition of turnkey contracts for our drilling management services operations. In this capacity, CMI facilitated the acquisition of 44 projects (27 turnkey wells and 17 completions) in 2004. CMI participated in 26 of these turnkey wells, of which 13 were successful. Our oil and gas activities are conducted primarily in the United States offshore Louisiana and Texas and in the U.K. sector of the North Sea.

In December 2003, CMI participated in a drilling project in West Africa off the coast of Mauritania. We sold our interest in this project for approximately $6.1 million and recorded a gain of $2.7 million ($2.0 million, net of taxes) in connection with this sale in the first quarter of 2004. In September 2004, CMI completed the sale of 50% of its interest in the Broom Field, a development project in the North Sea. We received net proceeds of $35.9 million and recorded a gain of $25.1 million ($13.3 million, net of taxes) in connection with this sale. CMI retains an eight percent working interest in this project.

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Data with respect to our oil and gas exploration, development and production activities follows:

Productive Wells. The following table summarizes our gross and net wells as of December 31, 2004, including producing wells and those that are shut-in but capable of producing:

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Developed and Undeveloped Acreage. The following table summarizes our developed and undeveloped acreage as of December 31, 2004:

For purposes of the tables included in this report, a gross well or a gross acre is a well or acre in which we own a working interest. A net well or acre represents the cumulative total of our fractional working interests in one or more wells or acres.

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Drilling Activities. The following table shows our gross and net exploratory and development wells drilled during the years indicated:

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CMI was not engaged in any drilling activities or other operations of material importance as of December 31, 2004.

J OINT VENTURE , AGENCY AND SPONSORSHIP RELATIONSHIPS AND OTHER INVESTMENTS

In some areas of the world, local customs and practice or governmental requirements necessitate the formation of joint ventures with local participation, which we may or may not control. We are an active participant in several joint venture drilling companies, principally in Azerbaijan, Indonesia, Malaysia, Angola and Nigeria.

In Azerbaijan, the semisubmersibles Istiglal and Dada Gorgud operate under long-term bareboat charters. The Istiglal is bareboat chartered to and operated by the joint venture Caspian Drilling Company Limited, in which we hold a 45% ownership interest, until October 2006. The Dada Gorgud is bareboat chartered to us until October 2006 or the later termination of our current drilling contract with the Azerbaijan International Operating Company. We have subcontracted operations of the Dada Gorgud to Caspian Drilling Company Limited.

We also participate in a joint venture that operates a petroleum supply base in Indonesia. The Indonesian supply base, in which we hold a 42% ownership interest, is located at Merak Point on the western portion of the island of Java. It provides both open and covered storage and bulk chemical trans-shipment facilities. The land lease for this supply base extends through 2030. The joint venture is currently offering this supply base for sale.

Local laws or customs in some areas of the world also effectively mandate establishment of a relationship with a local agent or sponsor. When appropriate in these areas, we enter into agency or sponsorship agreements.

Risk Factors

A M ATERIAL OR E XTENDED D ECLINE IN E XPENDITURES BY THE O IL AND G AS I NDUSTRY , D UE TO A D ECLINE OR V OLATILITY IN O IL AND G AS P RICES , A D ECREASE IN D EMAND FOR O IL AND G AS OR O THER F ACTORS , C OULD S IGNIFICANTLY R EDUCE O UR R EVENUE AND I NCOME .

Our business depends on the level of offshore and onshore oil and natural gas exploration, development and production activity in markets worldwide. Prices and demand for oil and natural gas, and market expectations of potential changes in demand and prices, significantly affect this level of activity. Worldwide military, political and economic events have contributed to oil and natural gas price volatility and are likely to continue to do so in the future. Numerous factors may affect oil and natural gas prices and, accordingly, the level of demand for our services, including:

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Depending on the market prices of oil and natural gas, companies exploring for oil and gas may cancel or curtail their drilling programs, thereby reducing demand for drilling services. Even during periods of high prices for oil and natural gas, companies exploring for oil and gas may cancel or curtail programs, or reduce their levels of capital expenditures for exploration and production for a variety of reasons. Any reduction in the demand for drilling services may materially erode dayrates and utilization rates for our rigs and adversely affect our financial results.

T HE I NTENSE P RICE C OMPETITION AND C YCLICALITY OF T HE D RILLING I NDUSTRY , W HICH IS M ARKED BY P ERIODS OF L OW D EMAND , E XCESS R IG A VAILABILITY AND L OW D AYRATES , C OULD H AVE A M ATERIAL A DVERSE E FFECT ON OUR R EVENUES AND P ROFITABILITY .

The contract drilling business is highly competitive with numerous industry participants. The industry has experienced consolidation in recent years and may experience additional consolidation. Mergers among oil and natural gas exploration and production companies have reduced the number of available customers.

Drilling contracts are, for the most part, awarded on a competitive bid basis. Price competition is often the primary factor in determining which qualified contractor is awarded a job, although rig availability and the quality and technical capability of service and equipment are also factors. We compete with numerous offshore drilling contractors, one of which is larger and has greater resources than us. Further, our business is subject to the risks associated with having a limited number of customers for our services.

We may be required to idle rigs or to enter into lower dayrate contracts in response to market conditions in the future. The industry in which we operate historically has 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. During prior periods of high utilization and dayrates, industry participants have increased the supply of rigs by ordering the construction of new units. This has often created an oversupply of drilling units and has caused a decline in utilization and dayrates when the rigs enter the market, sometimes for extended periods of time. There are currently twenty jackup rigs under contract for construction with delivery dates ranging from 2005 to 2007. Most of these are cantilevered units capable of drilling in water depths in the 350 to 400 foot range, and are considered to be premium units. There are no semisubmersibles, other than ours, or drillships under construction, although a small number of units are being upgraded to a greater operating capability. The entry into service of units that are currently cold-stacked or under construction will increase supply and could curtail a further strengthening of dayrates, or reduce them, in the affected markets or result in a softening of the affected markets as rigs are absorbed into the active fleet. Any further increase in construction of new drilling units would likely exacerbate the negative impacts on utilization and dayrates. Lower utilization and dayrates in one or more of the regions in which we operate could adversely affect our revenues and profitability. Prolonged periods of low utilization and dayrates could also result in the recognition of impairment charges on certain of our drilling rigs if future cash flow estimates, based upon information available to management at the time, indicate that the carrying value of these rigs may not be recoverable.

W AR , O THER A RMED C ONFLICTS OR T ERRORIST A TTACKS C OULD R ESULT IN A M ATERIAL A DVERSE E FFECT ON OUR B USINESS .

The continuing unrest in Iraq, tension with regard to North Korea and Iran, as well as the terrorist attacks of September 11, 2001, and subsequent terrorist attacks and unrest have significantly increased political and economic instability in some of the geographic areas in which we operate and could spread to other such areas, and have caused instability in the world’s financial and insurance markets. Our operations in the Middle East could be adversely affected by post-war conditions in Iraq if armed hostilities, acts of terrorism or other unrest

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persist. Acts of terrorism and threats of armed conflicts elsewhere in the Middle East and in or around various other areas in which we operate, such as Southeast Asia and West Africa, could also limit or disrupt our markets and operations. Further 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. In addition, the attacks of September 11, 2001, led to war in Afghanistan and Iraq and may lead to armed hostilities or to further acts of terrorism in the United States or elsewhere, and such acts of terrorism could be directed against companies such as ours. Armed conflicts, terrorism and their effects on us or our markets could significantly affect our business in the future.

United States government regulations effectively preclude us from actively engaging in business activities in certain countries, including oil-producing countries such as Iran. These regulations could be amended to cover countries where we currently operate or where we may wish to operate in the future.

Immediately following the events of September 11, 2001, our war risk and terrorist insurance underwriters cancelled those coverages in accordance with the terms of the policies and would only reinstate them for significantly higher premiums. We have reinstated and currently maintain war and terrorism coverage for physical damage to our entire fleet. Such war and terrorism coverage is generally cancelable by underwriters on forty-eight hours’ notice, and, accordingly, underwriters could cancel this coverage completely or cancel and then offer to reinstate on terms that may not be acceptable to us following any future acts of terrorism or armed conflicts in and around the various areas in which we operate. We may not have insurance to cover any or all of our liabilities to our personnel for death or injury caused by terrorist acts. These developments will subject our worldwide operations to increased risks and, depending on their magnitude, could have a material adverse effect on our business.

A C OMPETITOR H OLDS P ATENTS THAT C OULD P REVENT THE U SE OF THE D UAL -D RILLING C APABILITY OF O UR U LTRA -D EEPWATER S EMISUBMERSIBLES , W HICH C OULD R ESTRICT OUR A BILITY TO M ARKET T HESE R IGS OR R EDUCE THE L EVEL OF R EVENUES THAT T HESE R IGS C OULD G ENERATE .

A competitor holds patents in the U.S. and many other jurisdictions regarding the drilling structure and the dual drilling activity method associated with dual drilling activity. We are a defendant in an action in the U.S. which seeks an injunction preventing the use by us of the dual drilling activity structure and method in the U.S. (see “Item 3. Legal Proceedings”). If granted, this injunction would preclude the use of the dual drilling capabilities in U.S. waters of the GSF Development Driller I and the GSF Development Driller II , which could reduce the marketability of the rigs, reduce the dayrate under their current contracts and restrict the dayrate they might otherwise earn in the future. The competitor has patents in most other jurisdictions in which we might choose to market the two semisubmersibles and, if it brought and was successful in similar actions in those jurisdictions, it could restrict our ability to use the dual drilling activity structure and method in those jurisdictions as well.

T URNKEY D RILLING O PERATIONS ARE C ONTINGENT ON OUR A BILITY TO W IN B IDS AND ON R IG A VAILABILITY , AND THE F AILURE TO W IN B IDS OR O BTAIN R IGS FOR ANY R EASON M AY H AVE AN A DVERSE E FFECT ON O UR F INANCIAL R ESULTS .

Our results of operations from our drilling management services may be limited by our ability to obtain and successfully perform turnkey drilling contracts based on competitive bids, as well as other factors. Our ability to obtain turnkey drilling contracts will largely depend on the number of these contracts available for bid, which in turn will be influenced by market prices for oil and natural gas, among other factors. Furthermore, our ability to enter into turnkey drilling contracts may be constrained from time to time by the availability of GlobalSantaFe or third-party drilling rigs, the ability to hire rigs at acceptable rates and our ability to find and retain qualified personnel. Accordingly, results of our drilling management service operations may vary widely from quarter to quarter and from year to year.

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T URNKEY D RILLING O PERATIONS E XPOSE U S TO A DDITIONAL R ISKS , W HICH C OULD A DVERSELY A FFECT O UR P ROFITABILITY , B ECAUSE W E A SSUME THE R ISK FOR O PERATIONAL P ROBLEMS AND THE C ONTRACTS ARE ON A F IXED -P RICE B ASIS .

We enter into a significant number of turnkey contracts each year. Our compensation under turnkey contracts depends on whether we successfully drill to a specified depth or, under some of our contracts, complete the well. Unlike dayrate contracts, where ultimate control is exercised by the operator, we are exposed to additional risks when serving as a turnkey drilling contractor because we make all critical decisions. Under a turnkey contract, the amount of our compensation is fixed at the amount we bid to drill the well. Thus, we are not paid if operational problems prevent performance unless we choose to drill a new well at our own expense. Further, we must absorb the loss if unforeseen problems arise that cause the cost of performance to exceed the turnkey price. By contrast, in a dayrate contract, the customer generally retains these risks. The cost of contingencies could exceed budgeted amounts. We are not insured against all of these risks associated with turnkey drilling operations.

F AILURE TO O BTAIN AND R ETAIN K EY P ERSONNEL C OULD I MPEDE O PERATIONS .

We require highly skilled personnel to operate and provide technical services and support for our business. Competition for the skilled and other labor required for deepwater and other drilling operations intensifies as the number of rigs activated or added to worldwide fleets or under construction increases. In periods of high utilization we have found it more difficult to find qualified individuals, and the possibility exists that competition for skilled and other labor for deepwater and other operations could limit our results of operations.

W E R ELY H EAVILY ON A S MALL N UMBER OF C USTOMERS , AND THE L OSS OF A S IGNIFICANT C USTOMER C OULD H AVE AN A DVERSE I MPACT ON O UR F INANCIAL R ESULTS .

Our contract drilling business is subject to the usual risks associated with having a limited number of customers for its services. Total and its affiliated companies provided approximately 11% of our consolidated revenues in 2004. Our five next largest customers for 2004 (ExxonMobil, ChevronTexaco, BP, BHP and AGIP), none of whom individually represented more than 10% of revenues, accounted in the aggregate for approximately 31% of our 2004 consolidated revenues. Total and ExxonMobil each provided approximately 12% of our consolidated revenues in 2003. Our five next largest customers for 2003 (ChevronTexaco, BP, BG, BHP and AGIP), none of whom individually represented more than 10% of revenues, accounted in the aggregate for approximately 27% of our 2003 consolidated revenues. Our results of operations could be materially adversely affected if any of our major customers terminates its contracts with us, fails to renew its existing contracts or refuses to award new contracts to us.

Our drilling management services business is also subject to the usual risks associated with having a limited number of customers for its services. Two customers each accounted for more than 10% of drilling management services revenues in 2004: William G. Helis Company, LLC provided $60.6 million, or 11.4%, of drilling management services revenues, and Lundin Britain Limited provided $56.6 million, or 10.7%, of drilling management services revenues. Our five next largest drilling management services customers, none of whom individually represented more than 10% of drilling management services revenues, accounted in the aggregate for approximately 26% of drilling management services revenues for 2004. One customer, BG Group, accounted for $98.9 million, or 18.7%, of drilling management services revenues in 2003, substantially all of which were reimbursable revenues, for project management operations in the North Sea. Reimbursable revenues represent reimbursements received from the client for certain out-of-pocket expenses and have little or no effect on operating income. Our five next largest drilling management services customers, none of whom individually represented more than 10% of drilling management services revenues, accounted in the aggregate for approximately 27% of drilling management services revenues for 2003.

W E M AY S UFFER L OSSES IF OUR C USTOMERS T ERMINATE OR S EEK TO R ENEGOTIATE T HEIR C ONTRACTS .

Certain of our contracts with customers may be cancellable upon specified notice at the option of the customer. Other contracts require the customer to pay a specified early termination payment upon cancellation,

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which payments may not fully compensate us for the loss of the contract. Contracts customarily provide for either automatic termination or termination at the option of the customer in the event of total loss of the drilling rig or if drilling operations are suspended for extended periods of time by reason of acts of God or excessive rig downtime for repairs, or other specified conditions. Early termination of a contract may result in a rig being idle for an extended period of time. Our revenues, results of operations and cash flow may be adversely affected by customers’ early termination of contracts, especially if we are unable to recontract the affected rig within a short period of time. During depressed market conditions, a customer may no longer need a rig that is currently under contract or may be able to obtain a comparable rig at a lower daily rate. As a result, customers may seek to renegotiate the terms of their existing drilling contracts or avoid their obligations under those contracts. The renegotiation of a number of our drilling contracts could adversely affect our financial position, results of operations and cash flows.

R IG U PGRADE , R EFURBISHMENT AND C ONSTRUCTION P ROJECTS , I NCLUDING O UR C URRENT S EMISUBMERSIBLE C ONSTRUCTION P ROJECT , ARE S UBJECT TO R ISKS I NCLUDING D ELAYS AND C OST O VERRUNS , W HICH C OULD H AVE A M ATERIAL A DVERSE I MPACT ON O UR R ESULTS OF O PERATIONS .

We currently have an ultra-deepwater semisubmersible rig, the GSF Development Driller I , nearing completion of construction. In addition, we may make major upgrade and refurbishment expenditures for our fleet. Rig upgrade, refurbishment and construction projects are subject to the risks of delay or cost overruns inherent in any large construction project, including the following:

Significant cost overruns or delays could materially and adversely affect our financial condition and results of operations. In addition, the GSF Development Driller I and our other ultra-deepwater semisubmersible, the GSF Development Driller II, will employ advancements in technology that may lead to certain difficulties, both operational and legal, as to our use of this technology. Our inability to use this technology, or to use it efficiently, could result in additional downtime or could render these rigs less competitive in the marketplace.

O UR B USINESS I NVOLVES N UMEROUS O PERATING H AZARDS AND W E ARE N OT F ULLY I NSURED A GAINST A LL O F T HEM ; T HE O CCURRENCE OF A N U NINSURED O R U NIDENTIFIED E VENT C OULD H AVE A M ATERIAL A DVERSE E FFECT ON O UR R ESULTS OF O PERATIONS AND F INANCIAL C ONDITION .

Our operations are subject to the usual hazards incident to the drilling of oil and natural gas wells, including blowouts, explosions, oil spills and fires. Our 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. We insure against, or have indemnification from customers for some, but not all, of these risks. We do not generally insure against loss of revenue for rigs that are damaged or destroyed. Our 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, we may elect to change our 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 we are not insured.

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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, we have been faced with the prospect of paying significantly higher insurance premiums and/or significantly increasing our deductibles in order to offset or mitigate premium increases. Our current deductible for insurance for rig physical damage is $10 million per occurrence, subject to a $20 million aggregate deductible and, since July 2004, $10 million per occurrence for liability claims. We 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 our operations and financial condition. We may not be able to maintain adequate insurance in the future at rates we consider reasonable or be able to obtain insurance against certain risks.

O UR I NTERNATIONAL O PERATIONS I NVOLVE A DDITIONAL R ISKS N OT G ENERALLY A SSOCIATED WITH D OMESTIC O PERATIONS , W HICH C OULD H AVE A M ATERIAL A DVERSE E FFECT ON O UR O PERATIONS OR F INANCIAL R ESULTS .