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                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                             ---------------------
 
                                   FORM 20-F
                             ---------------------
 
(MARK ONE)
   [ ]      REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                                       OR
 
   [X]        ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
 
                      FOR THE YEAR ENDED DECEMBER 31, 1998
                                       OR
 
   [ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
 
                         COMMISSION FILE NUMBER 1-14634
                             ---------------------
                       SANTA FE INTERNATIONAL CORPORATION
             (Exact name of Registrant as specified in its charter)
 
                                 CAYMAN ISLANDS
                (Jurisdiction of incorporation or organization)
 
                         TWO LINCOLN CENTRE, SUITE 1100
                                5420 LBJ FREEWAY
                            DALLAS, TEXAS 75240-2648
                    (Address of principal executive offices)
 
Securities registered or to be registered pursuant to Section 12(b) of the Act.
 
<TABLE>
<CAPTION>
               TITLE OF EACH                                  NAME OF EACH EXCHANGE
                   CLASS                                       ON WHICH REGISTERED
               -------------                                  ---------------------
<S>                                                <C>
 Ordinary Shares, par value $0.01 per share                  New York Stock Exchange
</TABLE>
 
Securities registered or to be registered pursuant to Section 12(g) of the Act.
 
                                      NONE
                                (Title of Class)
 
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
 
                                      NONE
                                (Title of Class)
 
     Indicate the number of outstanding shares of each of the issuer's classes
of capital or common stock as of the close of the period covered by the annual
report: 114,762,469 Ordinary Shares, par value $0.01 per share
 
     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
                             Yes  [X]       No  [ ]
 
     Indicate by check mark which financial statement item the registrant has
elected to follow.
 
                        Item 17  [ ]       Item 18  [X]
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                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
                                                                                    PAGE
                                                                                    ----
<S>                  <C>                                                            <C>
PART I...........................................................................     1
  Item 1.            Description of Business.....................................     1
  Item 2.            Description of Property.....................................    18
  Item 3.            Legal Proceedings...........................................    19
  Item 4.            Control of Registrant.......................................    19
  Item 5.            Nature of Trading Market....................................    20
  Item 6.            Exchange Controls and Other Limitations Affecting Security
                       Holders...................................................    20
  Item 7.            Taxation....................................................    20
  Item 8.            Selected Consolidated Financial Data........................    21
  Item 9.            Management's Discussion and Analysis of Financial Condition
                       and Results of Operations.................................    23
  Item 9A.           Quantitative and Qualitative Disclosures about Market
                       Risk......................................................    34
  Item 10.           Directors and Officers of Registrant........................    35
  Item 11.           Compensation of Directors and Officers......................    37
  Item 12.           Options to Purchase Securities from Registrant or
                       Subsidiaries..............................................    42
  Item 13.           Interest of Management in Certain Transactions..............    42
PART II..........................................................................    45
  Item 14.           Description of Securities to Be Registered..................    45
PART III.........................................................................    45
  Item 15.           Defaults Upon Senior Securities.............................    45
  Item 16.           Changes in Securities and Changes in Security for Registered
                       Securities................................................    45
PART IV..........................................................................    46
  Item 17.           Financial Statements........................................    46
  Item 18.           Financial Statements........................................    46
  Item 19.           Financial Statements and Exhibits...........................    46
</TABLE>
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FORWARD-LOOKING STATEMENTS
 
     This Annual Report on Form 20-F contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934, including without limitation statements
containing the words "believes," "anticipates," "expects" and words of similar
import. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, financial
condition, performance or achievements of the Company (defined below), or
industry results, to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Such factors include, among others, the following: adverse changes
in contract drilling industry conditions, oil and natural gas prices, customer
drilling budgets, competition from other drilling contractors, increase in
industry fleet capacity, the impact of present or future environmental
legislation and compliance with environmental laws, the ongoing need for capital
improvements, refurbishing and fabrication costs for drilling rigs, the
availability and replacement costs for rig related equipment, spare parts and
supplies, financing costs, changes in operating expenses, attraction and
retention of skilled employees, uncertainties arising out of the Company's
operations outside the United States, adverse changes in applicable tax laws,
adverse changes in governmental rules and fiscal policies, civil unrest, acts of
God, acts of war, and other factors referenced in this Annual Report on Form
20-F. Certain of these factors are discussed in more detail elsewhere in this
Annual Report on Form 20-F, including without limitation "Item 1. Description of
Business" and "Item 9. Management's Discussion and Analysis of Financial
Condition and Results of Operations." Given these uncertainties, readers are
cautioned not to place undue reliance on such forward-looking statements. The
Company disclaims any obligation to update any such forward-looking statements
to reflect future events or developments.
 
                                     PART I
 
ITEM 1. DESCRIPTION OF BUSINESS.
 
GENERAL
 
     Santa Fe International Corporation (herein referred to individually and,
where the context so requires, collectively with its subsidiaries and
predecessors as "Santa Fe" or the "Company") is a leading international offshore
and land contract driller that was incorporated in its current form under the
laws of the Cayman Islands in 1990. As of February 28, 1999, the Company owns
and operates a high quality, technologically advanced fleet of 26 marine
drilling rigs and 32 land drilling rigs. Santa Fe also provides drilling related
services to the petroleum industry worldwide, including third party rig
operations, incentive drilling and drilling engineering and project management
services. The Company is currently operating in 16 countries throughout the
world. The Company's predecessor began U.S. land drilling operations in 1947,
commenced international land operations in 1948, expanded into offshore platform
drilling in 1956 and initiated mobile offshore rig operations in 1964.
 
     At the core of Santa Fe's drilling rig fleet is its fleet of heavy duty
harsh environment jackup rigs (five of the 16 currently in service in the
industry), which are capable of operating in water depths of up to 350-400 feet.
The Company's current heavy duty harsh environment jackup fleet includes the
Galaxy II, which was placed in service on November 9, 1998. Further, the Company
has an additional heavy duty harsh environment rig under construction, the
Galaxy III, which is expected to be delivered by the shipyard during the third
quarter of 1999 and mobilized to its initial work area in the North Sea during
the fourth quarter of 1999. Additionally, Santa Fe has three deep water
semisubmersible rigs which are capable of operating in water depths of up to
2,000-2,400 feet; eight premium cantilever jackup rigs which are capable of
operating in water depths of up to 300-350 feet; nine jackup rigs which are
capable of operating in water depths of up to 200-250 feet, seven of which are
cantilevered and two of which are specially designed to operate in shallow
water; one platform rig; and 32 land rigs, all of which are specially equipped
to operate in remote areas. See Note 11 of the Notes to Consolidated Financial
Statements for certain financial data pertaining to the Company's business in
various regions.
 
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INDUSTRY CONDITIONS
 
     The contract drilling industry is and historically has been highly
volatile, competitive and cyclical, with periods of high demand and rig
utilization resulting in high rig dayrates followed by periods of low demand,
excess rig supply and depressed rig dayrates. The contract drilling business is
influenced by many factors beyond the control of the Company, including the
current and anticipated prices of oil and natural gas. During 1998, the industry
witnessed a substantial decline in oil prices with resulting adverse impact upon
rig utilization and rig dayrates.
 
     During industry down cycles, drilling companies compete aggressively for
contracts at depressed rates and often are compelled to accept contract terms
which are less favorable than those which normally prevail, especially in areas
such as liability and indemnity provisions, rate structure, termination and term
extension options. Low rig utilization in weak markets causes drilling companies
to lay-up or "stack" idle rigs, which often results in termination of employment
of all or part of the associated rig crews.
 
     The contract drilling industry currently is in a down cycle resulting in
reduced worldwide rig utilization and depressed rig rates. This situation may be
exacerbated as newly built rigs enter the market and drilling companies
aggressively compete for the limited available opportunities to contract rigs.
The extent and duration of the current industry downturn will be influenced by
many factors, including future fluctuations in the price of oil and natural gas
and the resulting impact upon the drilling budgets of companies engaged in oil
and gas exploration and production. See "-- Business Considerations and Risk
Factors -- Contract Drilling Industry Volatility and Competition."
 
BUSINESS STRATEGY
 
     The Company's business strategy is to provide premium quality,
cost-effective services to its customers in order to maximize the utilization of
its rig fleet at relatively attractive dayrates, with the goal of enhancing
shareholder value and establishing long term relationships with its customers.
The Company's understanding of its customers' future needs guides strategic
decisions regarding investment in equipment, selection of geographic markets and
development of Company skills. The following are the principal components of the
Company's business strategy:
 
  Modern Rig Fleet
 
     The Company continually invests in its drilling fleet through the
acquisition and construction of new rigs and the upgrading, modernization and
enhancement of existing rigs to increase drilling productivity and prolong rig
life. Santa Fe rigorously evaluates each of its investments based on expected
long term return on capital and profitability. Between 1988 and 1993 the Company
made significant counter-cyclical investments in six new jackup rigs, including
four heavy duty harsh environment jackup rigs and two 300 foot cantilever jackup
rigs. The Company also placed the newly constructed Galaxy II heavy duty harsh
environment rig in service on November 9, 1998, and has an additional rig of
this class, the Galaxy III, currently under construction. The Galaxy III is
expected to be delivered by the shipyard during the third quarter of 1999 and
mobilized to its initial work area in the North Sea during the fourth quarter of
1999. During the period 1996 through 1998, the Company expanded its land rig
fleet through the addition of six specialized, highly mobile rigs and, further,
two medium duty 2,000 horsepower and four heavy duty 3,000 horsepower rigs, each
of which are equipped with top drives. Also, in late 1998, the Company began
assembly of an additional 3,000 horsepower high specification land rig for work
in the Middle East in the second quarter of 1999. Over the past several years,
the Company's rig fleet upgrade, modernization and enhancement program has
included installation of top drive systems, improvements in mud processing and
liquid storage capacity, jackup leg extensions, cantilever and skid-off
capability. See "Item 9. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
 
  International Focus
 
     The Company operates outside the U.S., with its entire rig fleet currently
deployed in seven major market areas around the world. The Company first
operated in each of these markets more than 28 years ago. Santa
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Fe believes the operational expertise, international workforce and business
relationships it has established through its longstanding presence in its major
international markets provide it with a competitive advantage in securing work
on attractive terms. The Company favors markets where there is an opportunity to
establish a significant presence and benefit from efficiencies associated with
market concentration, but also seeks selected opportunities in niche and
emerging markets.
 
     The Company believes that international markets generally require more
specialized equipment and value added technical expertise than the U.S. market,
providing Santa Fe with greater opportunities to secure attractive contracts.
Furthermore, the Company believes that international markets for drilling
services are somewhat less influenced by volatility in the prices of oil and
natural gas than the U.S. market, thus increasing the relative stability of its
operations. The Company's international focus enables it to minimize the level
of worldwide taxation on its revenues, income and assets through various
tax-efficient business structures.
 
     The Company seeks international contracts payable in local currency in
amounts equal to the Company's estimated operating costs payable in local
currency and in dollars for the balance of the contract. Accordingly, the
Company has not historically entered into financial hedging arrangements to
manage risks relating to fluctuations in currency exchange rates. However, the
Company may enter into such contracts in the future in the event that the
Company assumes significant foreign currency risks.
 
  High Quality Multinational Workforce
 
     The Company distinguishes itself with its high quality, well-trained and
cost-effective rig crew and supervisory workforce. The breadth and depth of the
Company's workforce enable it to efficiently staff its own rigs and profitably
provide labor and management services for the operation and maintenance of third
party rigs. The Company's rig crew and supervisory personnel are drawn largely
from the countries in which the Company has longstanding operations. The quality
of Santa Fe's workforce and training program is reflected in its safety
performance record, which has consistently exceeded the industry norm over the
past decade, as compiled by the International Association of Drilling
Contractors.
 
  Specialized Drilling Services
 
     The Company provides drilling services requiring special expertise and
technical innovation, such as high pressure, high temperature drilling and
jackup rig skid-off drilling. The Company's ability to deliver such services is
enhanced by the operational expertise and efficiencies it has developed from its
long term presence in selected markets. By taking advantage of innovative
contracting opportunities, including incentive contracts, the Company strives to
enhance the profitability of its drilling services.
 
BUSINESS CONSIDERATIONS AND RISK FACTORS
 
  Contract Drilling Industry Volatility and Competition
 
     The contract drilling industry is and historically has been highly
volatile, competitive and cyclical, with periods of high demand and rig
utilization with resulting high rig dayrates followed by periods of low demand,
excess rig supply and depressed rig dayrates. The contract drilling business is
influenced by many factors beyond the control of the Company, including the
worldwide demand for, and the current and anticipated prices of, oil and natural
gas, the level of exploration and production drilling expenditures by oil and
gas companies, the ability of the Organization of Petroleum Exporting Countries
("OPEC") to influence production levels and pricing, the level of production of
non-OPEC countries, the policies of various governments regarding exploration
and development of their oil and natural gas resources and the availability of
drilling rigs.
 
     Oil and natural gas prices fluctuate in response to relatively minor
changes in the supply of and demand for oil and natural gas, market uncertainty
and a variety of additional factors. It is impossible to predict future oil and
natural gas price movements with any certainty. Such fluctuations impact
drilling budgets of companies engaged in exploration and development of oil and
natural gas. Drilling expenditure budget fluctuations have a direct impact upon
the demand and dayrates for drilling rigs.
 
                                        3
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     During 1998, oil prices declined substantially resulting in a significant
decline in worldwide land and offshore drilling utilization and dayrates. These
conditions prevail today and are expected to continue into the foreseeable
future as drilling contractors aggressively compete for the declining number of
rig contract opportunities which are available.
 
     In the drilling industry, contracts generally are awarded on a competitive
bid basis wherein price often is the determining factor in the selection of a
drilling contractor. A customer selecting a rig may consider other factors such
as a contractor's safety record, productivity and specialized skills and
capabilities and condition of equipment. During industry down cycles, drilling
companies compete aggressively for contracts and often are compelled to accept
contract terms which are less favorable than those which normally prevail,
especially in areas such as liability and indemnity provisions, rate structure,
termination and term extension options. The Company believes that competition
for drilling contracts will continue to be intense for the foreseeable future.
 
     Additional rig construction, movement or reactivation could further depress
rig dayrates and adversely affect utilization of the Company's rigs. In
addition, labor availability and cost and vendor prices and delivery fluctuate
in response to overall drilling industry conditions.
 
  Operational Risks, Insurance and Indemnification
 
     Oil and natural gas drilling operations are subject to many risks,
including blowouts, cratering, oil or natural gas well fires, explosions, oil
spills and other disasters, each of which could result in substantial losses to
the Company due to injury or loss of life and damage to or destruction of rigs,
oil and natural gas wells, reservoirs, production facilities or other
properties. In addition, the Company's offshore and marine equipment is subject
to hazards peculiar to marine operations, such as sinking, capsizing, grounding,
collision and damage from heavy weather or hurricanes. Loss of or serious damage
to certain of the Company's equipment, even if adequately covered by insurance,
might materially reduce the Company's revenues and operating profit for an
extended period of time.
 
     The Company evaluates its exposure to certain risks when participating in
any project and, to the extent permitted by market conditions, contracts with
its customers or joint venture partners to provide the Company with
indemnification or other protection against certain risks, including those not
generally covered by insurance and losses in excess of applicable insurance
limits. There can be no assurance that the Company can obtain effective
indemnification in its contracts, that the level of indemnification that can be
obtained will be meaningful, that such indemnification agreements will be
enforceable or that the customer will be financially able to comply with its
indemnity obligations. See "-- Risks, Insurance and Indemnification" for a
discussion of the Company's insurance coverage.
 
  Governmental Regulation
 
     Many aspects of the Company's operations are affected periodically by
political developments and by both domestic and foreign governmental
regulations, including those relating to the construction, equipment and
operation of drilling rigs, drilling practices and methods and levels of
taxation, as well as additional hazards and uncertainties, such as the risk of
expropriation, foreign exchange restrictions, fluctuations in currency exchange
rates, foreign and domestic monetary, economic and trade policies, and
environmental regulation. The energy service industry is dependent on demand for
its services from the oil and gas industry and, accordingly, is affected by
changing taxes, price controls and other laws relating to the energy business
generally. Governments may, from time to time, suspend or curtail drilling
operations or leasing activities when such operations are considered to be
detrimental to the environment or to jeopardize public safety. Many
jurisdictions have at various times imposed limitations on the production of oil
and natural gas by restricting the rate of flow for oil and natural gas wells
below their natural capacity. There can be no assurance that present or future
regulation will not adversely affect the operations of the Company.
 
     As of February 28, 1999, all of the Company's rigs were engaged in
operations or activities outside the United States and its territorial waters.
The Company's worldwide operations are also subject to a variety of laws and
regulations designed to improve safety in the businesses in which the Company
operates. International conventions, including Safety of Life at Sea (SOLAS),
the Convention For Prevention of Oil
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Pollution by Ships at Sea (MARPOL) and the Code for Construction of Mobile
Offshore Drilling Units (MODU CODE), generally are applicable to the Company's
offshore operations. The Company's operations in the U.K. sector of the North
Sea are also subject to strict regulatory requirements, including the Mineral
Workings Act (MWA) 1971 and the Health and Safety at Work Act (HASAWA) 1974.
Historically, the Company has made significant capital expenditures and incurred
additional expenses to ensure that its marine rigs comply with applicable local
and international health and safety regulations. Future efforts by the Company
to comply with these regulations and standards may increase the Company's costs
and may affect the demand for the Company's services by influencing energy
prices or limiting the areas in which drilling may be performed.
 
  Taxation Risks
 
     As a Cayman Islands company primarily doing business outside the U.S., the
Company is taxed at rates substantially lower than if it were engaged in a U.S.
trade or business. Although almost all of its operations are outside the U.S.,
the Company has an office in Texas from which a number of senior management
personnel generally oversee, supervise and control the policies of the Company.
The Company reports only income attributable to the functions performed in the
U.S. as income effectively connected with a U.S. business. If income earned from
its worldwide operations were deemed by the Internal Revenue Service to be
effectively connected with a U.S. business, the Company could be subjected to
U.S. income tax on such effectively connected income, and its operating results
could be materially adversely affected. The Company's international focus
enables it to reduce the level of worldwide taxation on its revenues, income and
assets through various tax-efficient business structures. The Company could
suffer substantial additional tax expense in the event any of its existing
business structures were successfully challenged or in the event of an adverse
change in the treaties, laws, rules or regulations (or the interpretation
thereof) upon which the Company has relied in relation to its business
strategies and structures. See "Item 7. Taxation," "Item 9. Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Note 5 of the Notes to Consolidated Financial Statements. In addition, demand
for services in the drilling industry is dependent on the oil and gas
exploration industry and accordingly is affected by changes in tax and other
laws relating to the energy business generally.
 
  Environmental and Regulatory Risks
 
     The Company's worldwide operations are subject to numerous environmental
laws and regulations that relate directly or indirectly to its operations,
including certain regulations controlling the discharge of materials into the
environment, requiring removal and clean-up under certain circumstances, or
otherwise relating to the protection of the environment. For example, the
Company may be liable for damages and costs incurred in connection with oil
spills for which it is held responsible. Laws and regulations protecting the
environment have become increasingly stringent in recent years and may in
certain circumstances impose "strict liability" and render a company liable for
environmental damage without regard to negligence or fault on the part of such
company. Such laws and regulations may expose the Company to liability for the
conduct of or conditions caused by others, or for acts of the Company that were
in compliance with all applicable laws at the time such acts were performed. The
Company believes its operations are in compliance in all material respects with
all such laws and regulations. The application of these requirements or the
adoption of new requirements could have a material adverse effect on the
Company. See "-- Governmental Regulation" for a discussion of the Company's
regulatory operating requirements.
 
     Governments may, from time to time, suspend or curtail drilling operations
or leasing activities when such operations are considered to be detrimental to
the environment or to jeopardize public safety. Many jurisdictions have at
various times imposed limitations on the production of oil and natural gas by
restricting the rate of flow for oil and natural gas wells below their natural
capacity. There can be no assurance that present or future regulation will not
adversely affect the operations of the Company.
 
     The Company may be required to make significant capital expenditures in the
future to comply with laws and regulations that become applicable to the Company
and such compliance could materially adversely affect the earnings or
competitive position of the Company. It is possible that such regulations may in
the future add
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significantly to the cost of operating drilling equipment or may significantly
limit drilling activity. See "-- Governmental Regulation" and "Item 3. Legal
Proceedings."
 
  Contract Termination and Performance Risks
 
     The Company's contracts with its customers often are cancelable upon
specified notice at the option of the customer, and some, but not all, contracts
provide for the customer to pay a specified early termination payment in the
event of such cancellation. Such termination payments may not be sufficient to
fully compensate the Company for the loss of the contract. Early termination of
a contract may result in a rig being idle for an extended period of time.
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
force majeure or excessive rig downtime for repairs, or upon other specified
conditions. In periods of rapid market downturn, the Company's customers may not
honor the terms of existing contracts and may terminate contracts or prevail
upon the Company to renegotiate contract rates and terms to conform with
depressed market conditions, reducing the Company's rig utilization and
revenues.
 
     The Company selectively engages in drilling services pursuant to turnkey
drilling contracts under which the Company agrees to drill a well for a customer
to a specified depth, and to provide the associated services and well
consumables for a fixed price. Generally, the Company is not entitled to payment
unless the well is successfully drilled to the specified depth, and
profitability of the contract depends upon an ability to keep expenses within
the estimates used by the Company in determining the contract price. Drilling a
well under a turnkey contract therefore typically requires a cash commitment by
the Company in excess of that required under a conventional dayrate contract and
exposes the Company to risks of potential financial losses. These losses could
be substantially greater than those that would ordinarily exist under a
conventional dayrate contract and may include losses resulting from delays in
drilling progress or loss of a well or portion thereof. Although the Company
carefully evaluates the associated risks, the financial results of a turnkey
contract depend upon the performance of the drilling unit, drilling conditions
and other factors, some of which are beyond the control of the Company.
Additionally, the Company undertakes certain risks when entering into footage
and other incentive contracts, alliances and drilling project management
contracts where a portion of the remuneration is dependent upon achieving
specified performance goals. A failure to meet the performance criteria may
result in lower revenue to the Company and, in certain circumstances, also may
cause the Company to incur a monetary penalty, often in the form of reduced or
suspended remuneration. See "-- Contracts."
 
  Dependence on Workforce
 
     The Company's high quality, well-trained and cost-effective rig crew and
supervisory workforce contribute significantly to its ability to deliver premium
quality services. If the Company were unable to retain its current workforce or
to hire comparable personnel, it could have a material adverse effect on the
success of the Company. The Company does not maintain key-person insurance for
any of its senior management personnel.
 
  Uncertainties and Risks of Non-U.S. Operations
 
     Operations outside the U.S. account for substantially all of the Company's
consolidated revenues. The Company's non-U.S. operations are subject to certain
political, economic and other uncertainties not generally encountered in the
U.S., including hazards incident to war and civil disturbances (or other hazards
that may limit or disrupt markets) and the general hazards associated with the
assertion of national sovereignty over certain areas in which operations are
conducted. These risks are mitigated by the Company's ability to relocate its
rigs. The Company's operations outside the U.S. are also subject to foreign
customs and business practices, to changes in political conditions, such as
confiscatory taxation, unreasonable regulation, unrealistic pricing or royalty
terms, export sales restrictions, embargoes and expropriation or nationalization
with or without compensation, to the additional risks of fluctuating currency
values and hard currency shortages, to the possibility of realizing economic
currency exchange losses when transactions are completed in currencies other
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than dollars and to the Company's ability to freely repatriate its earnings
under existing exchange control laws. Additionally, export restrictions or trade
sanctions imposed by the U.S. Government under the Export Administration Act,
the Trading With the Enemy Act or similar legislation or regulation may impede
the Company's ability, or the ability of its customers, to operate or continue
to operate in certain countries. No prediction can be made as to what
governmental regulations may be enacted in the future that could adversely
affect the international drilling industry.
 
  Control by Holdings and Potential Conflicts of Interest
 
     As of February 28, 1999, SFIC Holdings (Cayman), Inc. ("Holdings"), a
wholly owned subsidiary of Kuwait Petroleum Corporation ("KPC"), beneficially
owned approximately 64.9% of the outstanding ordinary shares, par value $0.01
per share, of the Company ("Ordinary Shares"). KPC is wholly owned by the
Government of Kuwait. Accordingly, KPC through Holdings is able to effectively
control the election of the Board of Directors of the Company and effectively
control the outcome of the vote on certain matters submitted to a vote of the
Company's shareholders. The Company, Holdings and KPC have entered into
agreements with respect to the approval by Holdings of certain future corporate
actions by the Company, the management and allocation of certain liabilities
relating to former non-drilling activities of the Company, registration rights
for the Ordinary Shares owned by Holdings, and various other matters. See "Item
10. Directors and Officers of the Registrant" and "Item 13. Interest of
Management in Certain Transactions."
 
DRILLING RIG FLEET AND DRILLING RELATED SERVICES
 
  Marine Rigs
 
     A marine rig consists of a suite of drilling equipment mounted on a hull or
offshore platform. The drilling equipment generally is comprised of a derrick or
mast, hoisting equipment, a rotary system, well control equipment, systems for
storing, treating and pumping drilling fluids, and a power plant. The
specifications of this drilling equipment will determine the drilling
capabilities of the rig. Offshore rigs also generally include living quarters,
cranes, heliports, and storage areas for drill pipe and drill collars and other
materials. The design of the rig and its hull determines the marine areas in
which it can operate. The Company's marine fleet consists of 22 jackup rigs,
three semisubmersible rigs, and one platform rig. The Company's marine rigs are
documented as vessels and are registered outside the U.S. During the fourth
quarter of 1998, the Company's inland lake barge that formerly operated in
Venezuela was retired from service. For financial reporting purposes, the
Company's inland barge rig and platform rig have historically been combined
under the heading "Other Marine Rigs." Effective January 1, 1999, the Company
will classify the remaining platform rig as company-owned equipment within the
Drilling Related Services segment.
 
     Jackup Rigs. The Company classifies its jackup rigs in three categories:
heavy duty harsh environment rigs, 300-350 foot premium cantilever rigs, and
200-250 foot rigs. A jackup is a mobile rig that jacks down its legs to stand on
the sea floor with its hull elevated above the water surface during drilling
operations. For transportation between locations, the legs are raised and the
hull is floated. The legs are raised and lowered by multiple jacking units
attached to the legs. The water depth limit for each rig is a function of
several factors, including leg length, sea floor conditions and the anticipated
wind, wave and current severity. Jackup rigs can be used to drill exploration
wells or to drill multiple production wells at the same location. Several
features are important for this latter capability. A cantilever, on which is
mounted the derrick, drill floor and substructure, enables the rig to drill
alongside and over an adjacent platform or subsea template and to drill multiple
wells at the same location without repositioning the rig. Twenty of the
Company's 22 jackup rigs are cantilevered and five of them also have skid-off
capability which enables the drilling system to be skidded onto a production
platform for development drilling while the rig serves in a tender-assist mode.
All of the Company's jackup rigs are equipped with top-drives. A top-drive
enables the rig to drill long, highly deviated wells both more efficiently and
more safely than conventional rotary equipment.
 
     The Company owns one of the world's largest fleets of heavy duty harsh
environment jackup rigs (five of the 16 currently in service in the industry).
Two of these rigs, the Galaxy I and the Galaxy II, are Universe class rig
designs capable of operating in water depths of up to 400 feet. The Galaxy I is
currently operating
 
                                        7
<PAGE>   10
 
year-round in the harsh environment of the central North Sea in water depths of
up to 360 feet, while the Galaxy II was placed in service offshore Nova Scotia
on November 9, 1998. The Company is currently constructing an additional rig of
this class, the Galaxy III, which is expected to be delivered by the shipyard
during the third quarter of 1999 and mobilized to its initial work area in the
North Sea during the fourth quarter of 1999. The Galaxy III is contracted to
work in the U.K. sector of the North Sea for an initial term of three years. The
Company's three other heavy duty harsh environment jackup rigs, the Monarch,
Monitor and Magellan, are Monarch class rig designs capable of operating in
water depths of up to 350 feet and are currently operating year-round in the
central North Sea in water depths of up to 310 feet.
 
     Two of the Company's 300-350 foot cantilever jackup rigs are capable of
operating in water depths up to 350 feet and six are capable of operating in
water depths of up to 300 feet. Seven of the Company's 200-250 foot jackup rigs
are capable of operating in water depths of up to 250 feet, one in water depths
of up to 230 feet and one in water depths of up to 200 feet. Two of these rigs
are specially designed with eight-foot drafts to permit them to work in shallow
water depths and are equipped with large cranes which enable them to perform
certain construction activities as well as drilling work.
 
     Jackup rigs often compete with semisubmersible rigs in water depths ranging
from 200 to 360 feet, especially in the North Sea. Within this water depth range
in the North Sea, the industry's general preference is to utilize heavy duty
harsh environment jackup rigs for a number of reasons, including cost
effectiveness resulting from operating efficiencies, greater hull stability and
more accessible well control equipment when compared to semisubmersible rigs.
 
     Semisubmersible Rigs. The Company's three semisubmersible rigs are designed
to work in deeper water than jackup rigs. These semisubmersible rigs operate
afloat and include the machinery, quarters and drilling equipment on a deck
structure which is supported by the buoyancy of two submerged barge-shaped
hulls. The Company's semisubmersible rigs are moved between drill sites by
pumping saltwater ballast out of the hulls until the rig is raised to its
transit draft. Once the rig is positioned on location by tugs, saltwater ballast
is pumped into the hulls until the water level is approximately midway between
hulls and upper deck structure. The Company's semisubmersible rigs are
maintained on station by an eight point mooring system. Two of the Company's
semisubmersible rigs use combination wire rope/chain anchor lines which allow
the rigs to operate in deeper water than would be the case if the anchor lines
were all wire rope. The third rig uses all wire anchor lines. The mooring
systems on the Company's semisubmersible rigs are often preferred for production
drilling to minimize the risk of damaging existing pipelines on the seabed.
 
     All of the Company's semisubmersible rigs are deep water rigs equipped with
top drives. The Company's semisubmersible rig in Equatorial Guinea, the Aleutian
Key, is capable of operating in water depths of up to 2,300 feet of water. The
Company's semisubmersible rigs in the North Sea (Rig 135 and Rig 140) are
capable of operating in water depths of up to 2,400 feet and, with only minor
structural modifications, can be upgraded to operate in water depths of up to
3,000 feet.
 
     Other Marine Rig. The Company currently owns and operates one platform rig
in the North Sea that consists of a number of self-contained drilling equipment
packages which, when assembled on a customer's offshore production platform,
make a complete drilling rig. During the fourth quarter of 1998, the Company's
lake barge in Venezuela was retired from service. Effective January 1, 1999, the
Company classified its platform rig as a component of Drilling Related Services.
 
                                        8
<PAGE>   11
 
     More detailed information concerning the Company's marine fleet, as of
February 28, 1999, is set forth in the table below:
 
<TABLE>
<CAPTION>
                                                                                         MAXIMUM   MAXIMUM
                                  SERVICE DATE/                                           WATER    DRILLING    BLOWOUT
                                 YEAR-OF-LATEST                                           DEPTH     DEPTH     PREVENTER
         TYPE AND NAME           ENHANCEMENT(1)      RIG DESIGN       ATTRIBUTES(2)       (FT)       (FT)       (PSI)
         -------------           --------------      ----------       -------------      -------   --------   ---------
<S>                              <C>              <C>               <C>                  <C>       <C>        <C>
HEAVY DUTY HARSH ENVIRONMENT JACKUP RIGS
  Galaxy III...................  1999             F&G Universe      IC; SO: ATDS: SCR       400     30,000     15,000
                                 (Scheduled)
  Galaxy II....................  1998             F&G Universe      IC; SO; ATDS; SCR       400     30,000     15,000
  Magellan.....................  1992/1993        F&G Monarch       IC; SO; ATDS; SCR       350     30,000     15,000
  Galaxy I.....................  1991             F&G Universe      IC; SO; ATDS; SCR       400     30,000     15,000
  Monitor......................  1989             F&G Monarch       IC; ATDS; SCR           350     30,000     15,000
  Monarch......................  1988/1996        F&G Monarch       IC; ATDS: SCR           350     30,000     10,000
SEMISUBMERSIBLE RIGS
  Rig 135......................  1983/1989        F&G L-907         PA; ATDS; 3G; SCR     2,400     25,000     15,000
  Rig 140......................  1983/1998        F&G L-907         PA; ATDS: 3G; SCR     2,400     25,000     15,000
  Aleutian Key.................  1976/1995        F&G 9500          ATDS: 2G; SCR         2,300     25,000     10,000
300-350 FOOT CANTILEVER JACKUP RIGS
  Compact Driller..............  1993             MLT 116C          IC; TDS; SCR            300     25,000     10,000
  Parameswara..................  1993             BMC 300IC         IC; SO; TDS; SCR        300     25,000     10,000
  Key Hawaii...................  1983             MODEC JC-300      IC; ATDS: SCR           300     25,000     10,000
  Key Singapore................  1982/1994        MLT 116C          IC; TDS; SCR            350     25,000     10,000
  Rig 136......................  1982             F&G 780 Mod. II   IC; TDS; SCR            300     20,000     10,000
  Key Manhattan................  1980/1996        MLT 116C          IC; TDS; SCR            350     25,000     10,000
  Galveston Key(3).............  1978/1988        MLT 84/116C       IC; TDS; SCR            300     25,000     10,000
  Key Gibraltar................  1976/1996        MLT 84/116C       IC; SO; TDS; SCR        300     25,000     10,000
200-250 FOOT JACKUP RIGS
  Rig 134(3)...................  1982             F&G L-780         IC; TDS; SCR            250     20,000     10,000
  Rig 141......................  1982             MLT 82SDC         IC; TDS; SCR            250     20,000     10,000
  Rig 124......................  1980             Mitsui 200C-45    IC; TDS; SCR            250     20,000     10,000
  Key Bermuda..................  1980             Mitsui            IS; SD; TDS; SCR        200     20,000     10,000
  Rig 127......................  1981,1995        F&G L-780         IC; TDS; SCR            250     20,000     10,000
  Rig 105......................  1975             MLT 52C           IC; TDS; SCR            250     20,000      5,000
  Key Victoria.................  1974/1996        MLT 80            IS; SD; TDS; DC/DC      250     20,000     10,000
  Rig 103......................  1974/1994        MLT 52C           IC; TDS; SCR            250     20,000     10,000
  Britannia....................  1968/1987        Breit & Garcia    IC; TDS; SCR            230     20,000     10,000
OTHER MARINE RIG
  PLATFORM RIG
  Rig 82.......................  1968/1995        National 1320 UE  TDS; DC/DC              N/A     20,000      5,000
</TABLE>
 
---------------
 
(1) Indicates year rigs were placed in service by the Company and corresponds to
    the year built, except the Parameswara, Monarch and Compact Driller, which
    were built in 1983, 1986 and 1992, respectively. The second date, if given,
    is the most recent year in which the rig underwent a major upgrade in
    capacity and/or a refurbishment which extended its useful working life. In
    some cases, such upgrade or refurbishment took place over an extended
    period; in those instances, the year given is the year in which the work was
    completed.
 
(2) Attributes are abbreviated as follows: "ATDS" means an advanced top drive
    system (Varco TDS 4 and above); "DC/DC" means a power transmission system in
    which DC electricity is generated by diesel engines and supplied directly to
    DC motors driving the principal components of drilling equipment (mud pumps,
    drawworks, and rotary table); "IC" means independent leg cantilever; "IS"
    means independent leg slot rig; "PA" means propulsion assist; "SCR" means a
    highly efficient power transmission system which rectifies AC power to DC
    power using a silicon controlled rectifier; "SD" means shallow draft; "SO"
    means skid-off capability; "TDS" means top drive drilling system; "2G" means
    2nd generation semisubmersible; and "3G" means 3rd generation
    semisubmersible.
 
(3) The Galveston Key and Rig 134 are owned by P.T. Santa Fe Supraco Indonesia,
    a limited liability company of which the Company is a 95% shareholder.
 
                                        9
<PAGE>   12
 
     As of December 31, 1998, the average age of the Company's marine fleet,
measured from the date first placed in service by the Company, was 16.4 years.
The average age for heavy duty harsh environment jackup rigs, semisubmersible
rigs, 300-350 foot cantilever jackup rigs, 200 to 250 foot jackup rigs and other
marine rig was 6.7 years, 17.5 years, 15.1 years, 20.9 years and 30.8 years,
respectively.
 
  Land Rigs
 
     The Company had its origins as a U.S. land drilling contractor and was a
pioneer in international land rig operations, especially in the Middle East and
Latin America. Although the Company has emphasized the development of its marine
fleet, it has maintained a substantial presence in selected international land
rig markets and has continuously upgraded, modernized and enhanced its land
rigs. Since the beginning of 1996, the Company has selectively expanded its land
rig fleet. During the period 1996 through 1998, the Company expanded its land
rig fleet through the addition of six specialized, highly mobile rigs and,
further, two medium duty 2,000 horsepower and four heavy duty 3,000 horsepower
rigs, each of which are equipped with top drives. Also, in late 1998, the
Company began assembly of an additional 3,000 horsepower high specification land
rig for work in the Middle East in the second quarter of 1999.
 
     Many of the Company's land rigs are designed for use in remote desert
environments and generally include all necessary facilities to support living
and working in harsh and remote environments, including accommodation camps and
inventories of repair parts and materials. Each of the rigs is designed for
efficient disassembly, transport and reassembly. Eleven of the newer rigs are
specially designed as wheel-mounted units that can be moved quickly between well
locations. The Company's land rig operations in Egypt, Kuwait, the Kuwait-Saudi
Arabia Partitioned Neutral Zone and Qatar are supported by an extensive fleet of
specialized rig transport equipment, comprised primarily of heavy duty trucks
equipped for desert service. Additionally, these operations are supported by a
fleet of heavy equipment, such as bulldozers, cranes and forklifts which prepare
access roads and drill site locations and facilitate the assembly and tear down
of the Company's land rigs.
 
     The Company historically has concentrated its land rig operations in the
Middle East, South America and North Africa. The Company has a longstanding
operational history in these areas, having operated in each of them for over 28
years. As of December 31, 1998, the Company was operating 31 land rigs in
Kuwait, Venezuela, Egypt, Oman, Qatar, the Kuwait-Saudi Arabia Partitioned
Neutral Zone and Saudi Arabia. As of December 31, 1998, the average age of the
Company's land rig fleet, measured from the date first placed in service by the
Company, was 10.4 years.
 
     Information concerning the Company's fleet of land drilling rigs as of
February 28, 1999 is set forth in the table below:
 
<TABLE>
<CAPTION>
                                                            MAXIMUM
                                                            DRILLING    BLOWOUT
                                                             DEPTH     PREVENTER
            NAME               RIG TYPE        HORSEPOWER    (FT.)       (PSI)     POWER(1)
            ----               --------        ----------   --------   ---------   --------
<S>  <C>                  <C>                  <C>          <C>        <C>         <C>
COMPANY OWNED LAND RIGS
     Rig 144............  EMSCO C3               3,000       30,000     10,000     DC/DC
     Rig 155............  Oilwell E-3000         3,000       30,000     15,000     SCR
     Rig 173............  Gardner Denver 3000    3,000       30,000     10,000     SCR
     Rig 174............  EMSCO C3               3,000       30,000     10,000     SCR
     Rig 176............  Ideco 3000E            3,000       30,000     10,000     SCR
     Rig 177............  Oilwell E-3000         3,000       30,000     10,000     SCR
     Rig 180(3).........  National 1625          3,000       30,000     15,000     SCR
     Rig 94.............  National 110 UE        2,000       20,000     10,000     DC/DC
     Rig 97.............  Oilwell E-2000         2,000       20,000     10,000     SCR
     Rig 104............  National 1320 UE       2,000       20,000     10,000     DC/DC
     Rig 110............  Oilwell E-2000         2,000       20,000      5,000     DC/DC
</TABLE>
 
                                       10
<PAGE>   13
 
<TABLE>
<CAPTION>
                                                            MAXIMUM
                                                            DRILLING    BLOWOUT
                                                             DEPTH     PREVENTER
            NAME               RIG TYPE        HORSEPOWER    (FT.)       (PSI)     POWER(1)
            ----               --------        ----------   --------   ---------   --------
<S>  <C>                  <C>                  <C>          <C>        <C>         <C>
     Rig 115............  National 1320 UE       2,000       20,000     10,000     DC/DC
     Rig 119............  Oilwell E-2000         2,000       20,000     10,000     DC/DC
     Rig 158............  Oilwell E-2000         2,000       25,000     10,000     SCR
     Rig 178............  National 1320          2,000       20,000      5,000     SCR
     Rig 179............  National 1320          2,000       20,000      5,000     SCR
     Rig 157............  Ideco 1700 UE          1,700       17,000      5,000     SCR
     Rig 92.............  National 110 UE        1,500       16,000      5,000     DC/DC
     Rig 102............  National 110 UE        1,500       16,000      5,000     DC/DC
     Rig 147............  National 110 UE        1,500       16,000      5,000     DC/DC
     Rig 170............  National 110 UE        1,500       16,000      5,000     SCR
     Rig 169............  National 110 UE        1,500       16,000      5,000     SCR
     Rig 160............  Dreco 1250 E           1,250       12,000      5,000     SCR
     Rig 161............  Dreco 1250 E           1,250       12,000      5,000     SCR
     Rig 150............  National 80 UE         1,000       12,000      5,000     SCR
     Rig 151............  National 80 UE         1,000       12,000      5,000     SCR
     Rig 166............  Wilson 75                900        7,000      5,000     Mech
     Rig 167............  Wilson 75                900        7,000      5,000     Mech
     Rig 146............  Kremco 750               750       10,000      5,000     SCR
     Rig 159............  Cooper 750               750        8,000      5,000     Mech
     Rig 171............  Oilwell 660-E            750       10,000      5,000     SCR
     Rig 172............  Oilwell 660-E            750       10,000      5,000     SCR
     Rig 143............  Ideco H37 ED             420        6,500      3,000     Mech
JOINT VENTURE OWNED LAND RIGS(2)
     Rig 89.............  National 110 UE        1,500       16,000     10,000     DC/DC
     QDC 3..............  Cooper 650               650        8,000      3,000     Mech
     Rig 131............  Portadril                330        1,000       None     Mech
</TABLE>
 
---------------
 
(1) For purposes of this table, "DC/DC" refers to a power transmission system in
    which DC electricity is generated by diesel engines and supplied directly to
    DC motors driving the principal components of drilling equipment (mud pumps,
    drawworks, and rotary table); "Mech" is a power transmission system in which
    power to the principal components of drilling equipment (mud pumps,
    drawworks and rotary table) is supplied by direct mechanical linkage; and
    "SCR" means a highly efficient power transmission system which rectifies AC
    power to DC power using a silicon controlled rectifier.
 
(2) For purposes of this table, joint ventures refer only to joint ventures
    which the Company accounts for on the equity method. The rigs listed are
    owned by Qatar Drilling Company W.L.L., of which the Company is a 49%
    shareholder.
 
(3) Under assembly.
 
  Rig Fleet Utilization
 
     At the direction of its Board of Directors, the Company implemented a
change from a June 30 fiscal year end to a December 31 fiscal year end effective
January 1, 1998.
 
                                       11
<PAGE>   14
 
     The following table sets forth certain information for the Company's rig
fleet during the calendar years ended December 31, 1998 and 1997, six months
ended December 31, 1997 and 1996 and each of fiscal 1997 and 1996. Results for
the calendar year ended December 31, 1997 and the six months ended December 31,
1996 are presented for comparative purposes.
 
<TABLE>
<CAPTION>
                                                AVERAGE FOR THE    AVERAGE FOR THE    AVERAGE FOR THE
                                                 CALENDAR YEAR        SIX MONTHS        FISCAL YEAR
                                                     ENDED              ENDED              ENDED
                                                  DECEMBER 31,       DECEMBER 31,        JUNE 30,
                                                ----------------   ----------------   ---------------
                                                 1998      1997     1997      1996     1997     1996
                                                ------    ------   ------    ------   ------    -----
<S>                                             <C>       <C>      <C>       <C>      <C>       <C>
HEAVY DUTY HARSH ENVIRONMENT JACKUP RIGS
  Total rigs(1)...............................    4.1       4.0      4.0       4.0      4.0      4.0
  Rigs under contract.........................    4.1       4.0      4.0       4.0      4.0      3.9
  Utilization rate(2).........................   98.3%     99.0%    99.2%    100.0%    99.5%    97.5%
SEMISUBMERSIBLE RIGS
  Total rigs..................................    3.0       3.0      3.0       3.0      3.0      3.0
  Rigs under contract.........................    2.7       2.9      2.8       3.0      3.0      2.3
  Utilization rate(2).........................   91.1%     97.2%    94.4%    100.0%   100.0%    75.3%
300-350 FOOT CANTILEVER JACKUP RIGS(3)
  Total rigs..................................    8.0       8.0      8.0       7.0      7.5      7.0
  Rigs under contract.........................    7.6       7.8      7.8       6.5      7.2      6.7
  Utilization rate(2).........................   94.7%     97.2%    97.0%     93.5%    95.5%    95.7%
200-250 FOOT JACKUP RIGS(3)
  Total rigs..................................    9.0       9.0      9.0      10.0      9.5     10.0
  Rigs under contract.........................    8.0       8.9      9.0       8.6      8.8      8.8
  Utilization rate(2).........................   88.4%     99.3%   100.0%     86.4%    92.1%    88.4%
OTHER MARINE RIGS(4)
  Total rigs..................................    1.8       2.0      2.0       2.0      2.0      2.0
  Rigs under contract.........................    1.8       2.0      2.0       1.9      1.9      1.4
  Utilization rate(2).........................  100.0%    100.0%   100.0%     93.5%    96.7%    69.3%
LAND RIGS
  Total rigs..................................   29.2      25.9     27.5      23.3     23.8     21.5
  Rigs under contract.........................   25.9      23.5     25.4      21.4     21.5     20.5
  Utilization rate(2).........................   88.8%     90.8%    92.3%     92.1%    90.6%    95.3%
</TABLE>
 
---------------
 
(1) There are 16 heavy duty harsh environment jackup rigs currently in service
    in the industry: Galaxy I, Galaxy II, Maersk Endurer, Maersk Gallant, Maersk
    Giant, Maersk Guardian, Magellan, Monarch, Monitor, Rowan-Gorilla II,
    Rowan-Gorilla III, Rowan-Gorilla IV, Rowan-Gorilla V, Transocean Nordic,
    West Epsilon and Ensco 100.
 
(2) "Utilization" means the percentage of the number of days a drilling rig is
    earning a normal daily margin under a customer contract compared to the
    total number of days within a specified period.
 
(3) For the fiscal year ended June 30, 1996, "200-250 foot jackup rigs" means
    the Company's nine jackup rigs capable of operating in water depths of up to
    200-250 feet and the Key Gibraltar. During the fiscal year ended June 30,
    1997, the Key Gibraltar was converted to a cantilever rig and extensively
    upgraded and was reclassified as a 300-350 foot cantilever jackup rig
    effective January 1, 1997.
 
(4) During the fourth quarter of calendar 1998, the Company's lake barge rig,
    the Rey del Lago, was retired from service. Effective January 1, 1999, the
    Company will classify its platform rig as a component of Drilling Related
    Services.
 
  Drilling Related Services
 
     The Company is a leading provider of drilling related services to the
petroleum industry worldwide, including third party rig operations, incentive
drilling, and drilling engineering and project management. These
                                       12
<PAGE>   15
 
activities complement the Company's contract drilling business by enabling the
Company to provide an expanded suite of services, thus responding to customer
requirements, and to enhance the utilization and financial performance of its
rig fleet. The Company is able to provide these services with its existing
workforce and infrastructure without investing significant additional capital.
 
     Third Party Rig Operations. The Company's third party rig operations
historically have been concentrated in the North Sea and Venezuela, areas where
the Company also maintains substantial contract drilling operations. This
enables the Company to meet the needs of its customers and to make more
efficient use of its workforce and infrastructure. In September 1996, the
Company expanded its third party rig operations into the emerging market of the
Caspian Sea when it commenced operation and management of the semisubmersible
rig, Dada Gorgud. A second semisubmersible, the Istiglal (formerly known as the
Shelf 5) initiated operations in December 1998. As of December 31, 1998, the
Company operated and maintained 13 platform, land and offshore rigs for third
parties.
 
     The following table lists the location of third party rigs in which the
Company was participating as of February 28, 1999.
 
<TABLE>
<CAPTION>
              TYPE AND NAME                      RIG TYPE         CUSTOMER(1)      LOCATION
              -------------                      --------         -----------      --------
<S>                                         <C>                   <C>           <C>
PLATFORM RIGS
  Andrew..................................  EMSCO                 BP Amoco      U.K. North Sea
  Beatrice................................  National 1320         Talisman      U.K. North Sea
  Buchan..................................  EMSCO C3              Talisman      U.K. North Sea
  Clyde...................................  Oilwell E-3000        Talisman      U.K. North Sea
  Fulmar..................................  National 1320 UE      Shell         U.K. North Sea
  Kittiwake...............................  National E-2000 VDB   Shell         U.K. North Sea
  Magnus..................................  National 1625         BP Amoco      U.K. North Sea
  Miller..................................  EMSCO C3              BP Amoco      U.K. North Sea
  Nelson..................................  EMSCO CE2             Enterprise    U.K. North Sea
  Tiffany.................................  EMSCO C2              Agip          U.K. North Sea
LAND RIGS
  CV15....................................  EMSCO 2000            Corpoven      Venezuela
SEMISUBMERSIBLE RIGS
  Dada Gorgud(2)..........................  F&G Pacesetter        AIOC          Azerbaijan
  Istiglal(2).............................  F&G Pacesetter        BP Amoco      Azerbaijan
</TABLE>
 
---------------
 
(1) Generic designation including affiliates, joint ventures and consortia.
    "AIOC" means Azerbaijan International Operating Company.
 
(2) Rig is operated by Caspian Drilling Company Limited of which the Company is
    a 45% shareholder. See "-- Joint Venture, Agency and Sponsorship
    Relationships and Other Investments" for a further discussion of Caspian
    Drilling Company Limited.
 
     Incentive Drilling Services and Alliances. The Company selectively pursues
incentive drilling contracts and innovative contracting opportunities. In doing
so, the Company seeks markets which enable it to enhance its profitability by
undertaking work that rewards superior performance and drilling productivity.
Types of incentive contracts include:
 
          Turnkey. The Company generally provides all services, drill bits,
     casings, well consumables and logistical support to drill a well to a
     specified depth for a fixed price.
 
          Footage. The Company receives a predetermined lump sum per foot
     drilled in a well or a specified portion thereof.
 
          Well Target Time. The contract provides that the drilling of a
     specified well (or portion thereof) is subject to an agreed target time. If
     the well is drilled ahead of schedule, then a bonus is paid in accordance
     with a specified formula. If the well is drilled behind schedule, a penalty
     may be imposed.
 
                                       13
<PAGE>   16
 
          Lump Sum or Bonus Arrangement. This arrangement provides for the
     Company to perform a specific task either for a lump sum payment or for a
     day rate with a bonus payable for time saved.
 
          Alliances. An agreement under which the Company works in conjunction
     with the customer and selected parties, such as service companies,
     fabricators, designers and engineers, to provide and coordinate their
     resources, facilities and expertise to maximize efficiency on a specified
     drilling project. Alliances often involve common goals and targets, with an
     incentive for execution of a project in an efficient manner as measured
     against specific time and economic goals. The Company has participated in
     alliances involving execution of specified drilling programs as well as an
     alliance involving various aspects of engineering, design and procurement
     of platform rig equipment for a specific development drilling project.
 
     Drilling Engineering and Drilling Project Management. The Company's
drilling engineers and other engineering personnel provide drilling management
services for its own operations and on a contract basis for customer projects.
Additionally, the Company provides drilling rig project management, including
rig design, engineering, procurement and commissioning activities as well as
management of all phases of offshore rig new construction or upgrade projects.
 
COMPETITION
 
     The contract drilling industry is characterized by intense competition.
Competition is usually restricted to a particular region, although drilling rigs
are mobile and can be moved from one region to another in response to changes in
demand. While price is the most important competitive determinant in the
drilling industry, the availability and location of suitable equipment, the
design and technical capability of drilling rigs, and the reputation and
experience of the drilling contractor may also play a significant role in
obtaining a contract and may, in certain cases, warrant a contractor receiving
greater compensation than a competitor. Other competitive factors include the
ability to provide specialized services, such as well drilling engineering, the
technical and financial flexibility to perform turnkey and other incentive
contracts, and the contractor's reputation and safety record. The Company
believes that it competes favorably with respect to all of these factors.
 
CONTRACTS
 
     Drilling contracts are most often awarded through competitive bidding;
however, some contracts are a result of direct negotiations between the drilling
contractor and the customer. In many cases, the specifications of the bid
contain certain requirements not met by any of the Company's available rigs. As
a result, if the Company is awarded the contract, the Company may incur
considerable expense to upgrade and outfit a rig in the specified manner.
 
     The Company operates each of its rigs under a contract either to drill a
specified well or number of wells or for a stated period of time, which
generally is automatically extended to include the period required to complete
the well in progress on the scheduled contract expiration date. Contracts often
are cancelable upon specified notice at the option of the customer, and some,
but not all, contracts provide for the customer to pay a specified early
termination payment in the event of such cancellation. The 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 by reason of force majeure or
excessive rig downtime for repairs. The contracts also contain provisions
addressing automatic termination or termination at the option of the customer in
certain circumstances and may be dishonored or subject to renegotiation in
depressed market conditions. See "-- Business Considerations and Risk Factors,
Contract Termination and Performance Risks."
 
     Many of the Company's contracts provide for compensation on a dayrate
basis, under which the Company receives a fixed amount per day that the rig is
operating under contract. Under a dayrate contract, the Company provides the
drilling rig and personnel to operate the rig and to conduct the drilling
operations. Operating expenses, such as crew wages and incidental supplies, with
respect to the contracted rig are paid by
 
                                       14
<PAGE>   17
 
the Company. Many of the Company's dayrate contracts also contain incentive
terms which provide for additional remuneration if specified performance goals
are met and sometimes provide for penalties in the form of reduced or suspended
compensation if the specified goals are not achieved. The Company also provides
turnkey, footage and other services on an incentive contract basis. See
"-- Drilling Rig Fleet and Drilling Related Services -- Incentive Drilling
Services and Alliances" above.
 
     The Company's contracts generally provide for payment in dollars except for
amounts required to meet local expenses. The rate of compensation specified in
each contract depends on the type of equipment required, its availability and
location, the location and nature of the operation to be performed, the duration
of the work, market conditions and other variables. The contracts may provide
for no dayrate, a reduced dayrate or lump sum payment when the rig is being
transported to the first and from the last drill site. Generally, a reduced
dayrate or no payment is applicable when operations are suspended because of
force majeure or extended mechanical breakdown. Reduced dayrates often also
apply while a rig is on standby awaiting a customer's directions or
customer-furnished materials or services or while moving between well locations
under the same contract. When drilling rigs are being relocated a substantial
distance, the Company attempts to obtain either a lump sum payment or a dayrate
plus transport costs as compensation for mobilization and demobilization
expenses and the rig time incurred during the period of transit. In a depressed
market, such compensation is difficult to obtain and the Company may incur the
full costs of transportation and/or rig time during rig relocations.
 
     Contracts commonly contain renewal or extension provisions exercisable at
the option of the customer which address extension for a number of wells or
specified period of time. These options may provide that the compensation for
the extension period must be agreed upon before commencement of the extension or
the parties may have negotiated the extension period compensation at the time of
the initial contract. The Company prefers either to negotiate provisions which
require mutual agreement upon compensation for the option term (to obtain
then-prevailing market rates) or establish a means of increasing compensation
for the option term to reflect cost escalation and anticipated market
conditions. During industry down cycles, drilling companies compete aggressively
for contracts and often are compelled to accept contract terms which are less
favorable than those which normally prevail, especially in areas such as
liability and indemnity provisions, rate structure, termination and term
extension options. In periods of rapid market downturn, the Company's customers
may not honor the terms of existing contracts and may terminate contracts or
prevail upon the Company to renegotiate contract rates and terms to conform with
depressed market conditions.
 
     Contract information concerning the Company's marine and land drilling
fleet, as of December 31, 1998, is set forth in the table below:
 
<TABLE>
<CAPTION>
                                                                                 CURRENT
                                                                                CONTRACT
          TYPE AND NAME                  LOCATION            CUSTOMER(1)      EXPIRATION(2)
          -------------                  --------            -----------      -------------
<S>                                <C>                    <C>                 <C>
HEAVY DUTY HARSH ENVIRONMENT
  JACKUP RIGS
  Galaxy III.....................  (Under construction)   BP Amoco            4th Qtr 02
  Galaxy II......................  Canada                 Mobil               Nov 03
  Magellan.......................  U.K. North Sea         Elf                 Jul 00(3)
  Galaxy I.......................  U.K. North Sea         Elf                 Mar 01
  Monitor........................  U.K. North Sea         BP Amoco            Nov 99
  Monarch........................  U.K. North Sea         BP Amoco            Mar 00(3)
SEMISUBMERSIBLE RIGS
  Rig 135........................  U.K. North Sea         BG                  Mar 00
  Rig 140........................  U.K. North Sea         Phillips            Jan 99(4)
  Aleutian Key...................  Equatorial Guinea      Mobil               Aug 99(3)
300-350 FOOT CANTILEVER JACKUP
  RIGS
  Compact Driller................  Thailand               Thaipo              Jun 99(3)
</TABLE>
 
                                       15
<PAGE>   18
 
<TABLE>
<CAPTION>
                                                                                 CURRENT
                                                                                CONTRACT
          TYPE AND NAME                  LOCATION            CUSTOMER(1)      EXPIRATION(2)
          -------------                  --------            -----------      -------------
<S>                                <C>                    <C>                 <C>
  Parameswara....................  Vietnam                Petronas Carigali   Jul 99(3)
  Key Hawaii.....................  Egypt                  Agiba               Feb 99(3)
  Key Singapore..................  Egypt                  Deminex             Feb 99
  Rig 136........................  Egypt                  Petrobel            Feb 99
  Key Manhattan..................  Eritrea                Anadarko            Mar 99
  Galveston Key..................  Indonesia              Unocal              Jan 99
  Key Gibraltar..................  Malaysia               Shell               Apr 99
200-250 FOOT JACKUP RIGS
  Rig 134........................  Indonesia              Maxus               Jan 99
  Rig 141........................  Egypt                  Idle
  Rig 124........................  Egypt                  Idle                (5)
  Key Bermuda....................  Nigeria                Chevron             Oct 00
  Rig 127........................  Sharja                 Shipyard            (6)
  Rig 105........................  Egypt                  Petrobel            Jan 99
  Key Victoria...................  Venezuela              Idle
  Rig 103........................  Qatar                  QGPC                Jul 99
  Britannia......................  U.K. North Sea         Shell               Jun 01
OTHER MARINE RIG PLATFORM RIG
  Rig 82.........................  U.K. North Sea         Shell               Evergreen
COMPANY OWNED LAND RIGS
  Rig 92.........................  Egypt                  Khalda              Oct 99
  Rig 94.........................  Egypt                  HBS                 Feb 99(3)
  Rig 104........................  Egypt                  Eshpetco            Mar 99
  Rig 143........................  Egypt                  Petrobel            Sep 99
  Rig 147........................  Egypt                  Tullow              Jan 99
  Rig 170........................  Egypt                  Idle
  Rig 146........................  Kuwait                 KOC                 Mar 01
  Rig 155........................  Kuwait                 KOC                 Mar 01
  Rig 158........................  Kuwait                 KOC                 Mar 01
  Rig 160........................  Kuwait                 KOC                 Mar 01
  Rig 161........................  Kuwait                 KOC                 Mar 01
  Rig 169........................  Kuwait                 Mobilizing          (7)
  Rig 172........................  Kuwait                 KOC                 Jun 00
  Rig 102........................  Kuwait-Saudi PNZ       SAT                 Aug 99
  Rig 171........................  Kuwait-Saudi PNZ       SAT                 Aug 99
  Rig 173........................  Saudi Arabia           Aramco              May 00
  Rig 174........................  Saudi Arabia           Aramco              May 00
  Rig 144........................  Oman                   Idle
  Rig 150........................  Oman                   PDO                 Oct 01
  Rig 151........................  Oman                   PDO                 Apr 99(3)
  Rig 159........................  Oman                   PDO                 Jan 99
  Rig 157........................  Qatar                  Idle
  Rig 97.........................  Venezuela              Perez Companc       Oct 99
  Rig 110........................  Venezuela              PDVSA               Jan 99
  Rig 115........................  Venezuela              PDVSA               Mar 99
  Rig 119........................  Venezuela              Idle
  Rig 166........................  Venezuela              Mobil               Sep 99
</TABLE>
 
                                       16
<PAGE>   19
 
<TABLE>
<CAPTION>
                                                                                 CURRENT
                                                                                CONTRACT
          TYPE AND NAME                  LOCATION            CUSTOMER(1)      EXPIRATION(2)
          -------------                  --------            -----------      -------------
<S>                                <C>                    <C>                 <C>
  Rig 167........................  Venezuela              Idle
  Rig 176........................  Venezuela              Mobilizing          (8)
  Rig 177........................  Venezuela              Arco                Oct 00
  Rig 178........................  Venezuela              Mobil               Jul 00
  Rig 179........................  Venezuela              Mobil               Sep 99
  Rig 180........................  (Under assembly)       KOC                 Apr 02
JOINT VENTURE OWNED LAND RIGS
  Rig 89.........................  Qatar                  QGPC                May 99(3)
  QDC 3..........................  Qatar                  Idle
  Rig 131........................  Qatar                  QGPC                May 99
</TABLE>
 
---------------
 
(1) Generic designation including affiliates, joint ventures and consortia.
    "QGPC" means Qatar General Petroleum Company; "KOC" means Kuwait Oil
    Company; "SAT" means Saudi Arabia Texaco; "PDO" means Petroleum Development
    Oman; "PDVSA" means Petroleos de Venezuela; "PNZ" means Kuwait -- Saudi
    Arabian Partitioned Neutral Zone.
 
(2) Indicates date of scheduled expiration of current contract term, or, if the
    contract is for a fixed number of wells, date of estimated completion of
    those wells at December 31, 1998. Many contracts are subject to early
    termination.
 
(3) Contract is subject to customer term extension options(s).
 
(4) Rig 140 next to Shell UK for 3 years.
 
(5) Rig 124 next to Bapetco for 1 firm well plus 1 option well.
 
(6) Rig 127 contracted to Oxy Qatar at December 31; subsequently cancelled.
 
(7) Rig 169 next to KOC Kuwait for 3 years.
 
(8) Rig 176 next to Arco Venezuela for 2 years from January 1, 1999.
 
CUSTOMERS
 
     The Company's customers consist primarily of major international, state
owned and large independent oil companies and their affiliates. Several major
international oil companies have recently consolidated, and the Company is
currently unable to predict the impact, if any, of such consolidation on its
business. During the calendar year ended December 31, 1998, Royal Dutch/Shell
Group of Companies and its affiliates, joint ventures and consortia and Elf
Aquitaine accounted for 13.2% and 10.5% of the Company's consolidated revenues,
respectively. See Note 11 of the Notes to Consolidated Financial Statements.
 
EMPLOYEES
 
     As of December 31, 1998, the Company had approximately 5,800 full time
employees from more than 45 nations, over 95% of whom work outside the United
States. Approximately two-thirds of the Company's employees are citizens of
countries outside North America and Europe. Approximately 565 and 110 of the
Company's employees in Venezuela and Nigeria, respectively, are represented by
labor unions. In response to the recent market downturn, the Company's workforce
had been reduced to approximately 5,500 full time employees at February 28,
1999.
 
JOINT VENTURE, AGENCY AND SPONSORSHIP RELATIONSHIPS AND OTHER INVESTMENTS
 
     In some areas of the world, local custom and practice or governmental
requirements are such as to necessitate the formation of joint ventures with
local participation. The Company is an active participant in several joint
venture drilling companies, principally in Azerbaijan, Indonesia, Malaysia,
Nigeria, Oman, Qatar and Saudi Arabia. The Istiglal commenced operations in the
Caspian Sea in December 1998. The Istiglal and
 
                                       17
<PAGE>   20
 
the Dada Gorgud are being operated under long term bareboat charters through the
joint venture Caspian Drilling Company Limited, of which the Company owns 45%.
 
     The Company participates in a joint venture which operates a petroleum
supply base in Indonesia. The Indonesian supply base, 42% owned by the Company,
is located at Merak Point on West Java. It provides open and covered storage and
bulk chemical trans-shipment facilities. The Company has managed this supply
base for over 25 years. The land lease for the supply base, scheduled to expire
in 2000, is subject to a pending renewal application and there is no assurance
that the lease will be renewed on terms acceptable to the Company. The Company
also has a passive minority investment in a Libyan drilling company which is
accounted for on the cost basis.
 
     Local law or custom in some areas of the world also effectively mandates
establishment of a relationship with a local agent or sponsor. When necessary in
these areas, the Company enters into agency or sponsorship agreements.
 
RISKS, INSURANCE AND INDEMNIFICATION
 
     The Company emphasizes ongoing safety and training programs and has
installed significant safety equipment, all designed to promote a safe working
environment. Nevertheless, the operations of the Company are subject to the many
hazards inherent in the drilling business.
 
     While the Company maintains broad insurance coverage, such insurance
generally does not cover all types of losses (e.g., loss of charter hire/dayrate
revenue, war, internal disturbances, expropriation, nationalization or business
interruption). Losses and liabilities arising from uninsured or underinsured
events would reduce revenues and increase costs to the Company. In addition,
pollution and similar environmental risks generally are not fully insurable. As
a consequence, the existing insurance may not be sufficient to protect the
Company from all of its operational risks or against liability from all
consequences of well disasters, maritime casualties or damage to the
environment. It is also not sufficient to protect the Company for the full
market or replacement value of assets that are rendered actual or constructive
total losses. The Company may be liable for oil spills, costs of controlling a
wild well, well loss or damage and similar matters if not indemnified by its
customers or insured. When appropriate, the Company may separately insure
well-related risks (well loss or damage, wild well control and pollution).
 
     The Company believes its policy with regard to the purchase of insurance
coverage is consistent with industry practice with regard to the types, amounts
and limits of insurance maintained. The Company has and will, from time to time,
review its coverage levels and adjust them commensurate with industry conditions
and perceived rig values. Further, no assurances can be given that the desired
insurance coverages will continue to be available at rates considered reasonable
or that certain types of coverage will be available at any cost.
 
     In the event insurance is determined to be inadequate or unavailable, the
Company evaluates its exposure to uninsurable risks before participating in any
projects. To the extent permitted by market conditions, the Company contracts
with its customers to provide the Company with indemnification or other
protection against risks not generally covered by insurance and against losses
in excess of applicable insurance limits. The Company generally has been able to
obtain contractual indemnification from its customers which protects and
indemnifies the Company to some degree from liability arising out of damages to
customer property and injuries to certain personnel, reservoir, pollution and
environmental damages and wild well control. However, there can be no assurance
that the Company can obtain such indemnification in all of its contracts.
 
ITEM 2. DESCRIPTION OF PROPERTY.
 
     See "Item 1. Description of Business -- Drilling Rig Fleet and Drilling
Related Services" for a description of the Company's principal assets. The
Company leases and, in some cases, owns various operating and administrative
facilities, generally consisting of office, maintenance and storage space,
around the world.
 
                                       18
<PAGE>   21
 
ITEM 3. LEGAL PROCEEDINGS.
 
     The Company is involved in various legal proceedings incidental to its
business. In the opinion of the management of the Company, based upon
information presently available, the ultimate resolution of these legal
proceedings will not have a material adverse effect on the financial condition
or results of operations of the Company.
 
     The Company has been named as a Potentially Responsible Party ("PRP") in
connection with a Superfund site located adjacent to the city of Whittier,
California in Santa Fe Springs and maintained by Waste Disposal, Inc. ("WDI").
On August 18, 1994 the U.S. Environmental Protection Agency (the "EPA") issued
an Administrative Order for Remedial Design ("ORD") against eight PRPs, not
including the Company, alleging that they are responsible for costs associated
with the cleanup of the WDI site and requesting that these parties consent to
undertake certain specific investigative and remedial measures with respect to
the site. On March 31, 1997 the ORD was amended to modify the scope of remedial
work to be performed at the site and to add thirteen additional parties,
including the Company. On April 29, 1997 the Company advised the EPA of its
intention to comply with the ORD. In an effort to minimize costs associated with
its involvement in the site, the Company has entered into a Participation
Agreement with the other named PRPs, by which the PRPs will provide monetary
credit to certain PRPs for previously incurred costs, cooperate in common
response to any claims arising out of the ORD, and allocate among themselves
costs associated with their involvement with the site. The PRP's have agreed to
an allocation arrangement, which, subject to resolution of pending appeals by
certain PRP's, will result in the Company assuming responsibility for
approximately 7.7% of costs related to site remediation. Under the allocation
arrangement, this amount is reduced by recoveries from other parties, including
landowners, non-participating PRP's and any contributions from the Environmental
Protection Agency under its orphan share program. Ultimate liability will be
dependent upon the results of continuing testing, evaluation and agreement
between the EPA and the PRP's concerning the most cost effective and appropriate
remediation of the site.
 
     Based on information presently available, the Company does not believe that
any liability imposed in connection with the WDI site will have a material
adverse effect on the Company's financial condition or ongoing results or
operations given the nature and extent of its involvement at the site and
available resources.
 
ITEM 4. CONTROL OF REGISTRANT.
 
     (a) As of February 28, 1999, Holdings, a wholly-owned subsidiary of KPC,
beneficially owned approximately 64.9% of the outstanding Ordinary Shares. KPC
is wholly-owned by the Government of Kuwait.
 
     So long as Holdings owns a majority of the outstanding Ordinary Shares, KPC
through Holdings will be able to elect the Board of Directors of the Company and
effectively control the outcome of the vote on certain matters submitted to a
vote of the Company's shareholders. It is anticipated that Mr. Nader Hamad
Sultan, a Director of the Company who also serves as Chairman and a member of
the Board of Holdings, will be authorized by the Holdings Board to cast votes
for Holdings' Ordinary Shares of the Company at the Company's 1999 Annual
General Meeting of Shareholders, in person or by proxy. So long as KPC remains a
significant indirect shareholder of the Company, it intends to oversee its
investment in the Company, including exercise of its and Holdings' rights under
the Intercompany Agreement and the Company's Articles. See "Item 13. Interest of
Management in Certain Transactions."
 
     (b) The following table is furnished as of February 28, 1999 to indicate
beneficial ownership of the Company's Ordinary Shares by (i) each person who is
known by the Company to be a beneficial owner of more than 5% of the Company's
Ordinary Shares and (ii) all executive officers and Directors of the Company as
a group. The information in the following table was provided by such persons.
 
<TABLE>
<CAPTION>
        TITLE OF CLASS             IDENTITY OF PERSON OR GROUP     AMOUNT OWNED   PERCENT OF CLASS
        --------------             ---------------------------     ------------   ----------------
<S>                              <C>                               <C>            <C>
Ordinary Shares................  SFIC Holdings (Cayman), Inc.       74,500,000          64.9%
Ordinary Shares................  Directors and Executive               182,840(1)        0.2%
                                 Officers as a group (17
                                   persons)
</TABLE>
 
                                       19
<PAGE>   22
 
---------------
 
(1) Does not include 67,100 restricted shares or 788,025 options that are not
    exercisable within 60 days. Includes 13,945 shares held in the Company's
    Investment Savings and Profit Sharing Plan and 250 shares held by a spouse
    in a custodial account for the benefit of a minor child. Does not include
    800 shares held of record by the spouse of Mr. Ferdinand A. Berger, a
    Director of the Company. Mr. Berger disclaims beneficial ownership of such
    800 shares. Does not include 74,500,000 shares over which Mr. Nader Hamad
    Sultan has the authority to cast votes on behalf of Holdings at the
    Company's 1999 Annual General Meeting of Shareholders. Mr. Sultan disclaims
    beneficial ownership of such 74,500,000 shares.
 
ITEM 5. NATURE OF TRADING MARKET.
 
     There is no non-U.S. trading market for the Ordinary Shares of the Company.
 
     Within the United States, effective June 10, 1997 the Company's Ordinary
Shares commenced trading on The New York Stock Exchange ("NYSE") under the
symbol "SDC."
 
     The following table sets forth the high and low sales price per Ordinary
Share for each quarterly fiscal period since trading of the Ordinary Shares on
the NYSE commenced.
 
<TABLE>
<CAPTION>
                                                               HIGH      LOW
                                                              ------    ------
<S>                                                           <C>       <C>
FISCAL YEAR ENDED JUNE 30, 1997:
  Fourth Quarter (commencing June 10, 1997).................  $34.63    $31.00
TRANSITION PERIOD FROM JULY 1, 1997 TO DECEMBER 31, 1997:
  First Quarter.............................................  $48.75    $33.50
  Second Quarter............................................  $57.00    $35.00
CALENDAR YEAR 1998
  First Quarter.............................................  $41.50    $29.75
  Second Quarter............................................  $42.94    $28.44
  Third Quarter.............................................  $31.44    $12.25
  Fourth Quarter............................................  $21.19    $11.19
CALENDAR YEAR 1999
  First Quarter (through February 28, 1999).................  $17.50    $13.00
</TABLE>
 
     Based upon records maintained by its transfer agent, as of February 28,
1999, there were approximately 309 shareholders of record in the United States
and 230 shareholders of record outside of the United States holding
approximately 40,335,290 and 74,618,208 Ordinary Shares, respectively. These
numbers include persons or entities holding shares as nominees for beneficial
owners.
 
     On March 5, 1999, the Company's Board of Directors declared a quarterly
dividend of $0.0325 per Ordinary Share payable on April 15, 1999 to holders of
record at the close of business March 31, 1999. The Company's current dividend
policy contemplates the payment of quarterly dividends of $0.0325 per Ordinary
Share.
 
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS.
 
     The Company is not subject to any governmental laws, decrees or regulations
in the Cayman Islands which restrict the export or import of capital, including
any foreign exchange controls, or which affect the remittance of dividends,
interest or other payments to non-resident holders of the Company's Ordinary
Shares.
 
     Additionally, neither the laws of the Cayman Islands nor the Company's
charter impose any limitations on the right of non-resident foreign owners to
hold or vote the Ordinary Shares of the Company.
 
ITEM 7. TAXATION.
 
     At the present time there is no Cayman Islands income or profits tax,
withholding tax, capital gains tax, capital transfer tax, estate duty or
inheritance tax payable by a Cayman Islands company or its shareholders.
 
                                       20
<PAGE>   23
 
The Company has obtained an assurance from the Cayman Islands Government under
the Tax Concessions Law (Revised) that, in the event that any legislation is
enacted in the Cayman Islands imposing tax computed on profits or income, or
computed on any capital assets, gain or appreciation, or any tax in the nature
of estate duty or inheritance tax, such tax shall not until February 13, 2010 be
applicable to the Company or to any of its operations or to the shares,
debentures or other obligations of the Company. Therefore, under present law
there will be no Cayman Islands tax consequences with respect to distributions
in respect to the Ordinary Shares. The United States does not have a tax treaty
with the Cayman Islands. See "Item 1. Description of Business -- Business
Considerations and Risk Factors -- Taxation Risks."
 
ITEM 8. SELECTED CONSOLIDATED FINANCIAL DATA.
 
     At the direction of its Board of Directors, the Company implemented a
change from a June 30 fiscal year end to a December 31 fiscal year end effective
January 1, 1998.
 
     The following table sets forth selected consolidated financial data for the
Company as of and for the calendar years ended December 31, 1998 and 1997, the
six months ended December 31, 1997 and 1996 and for each of the four fiscal
years in the period ended June 30, 1997, which has been derived from audited
financial statements of the Company. Audited financial statements for the
calendar year ended December 31, 1998, the six months ended December 31, 1997
and the two years in the period ended June 30, 1997 and 1996 are included
elsewhere in this Annual Report on Form 20-F. The information set forth below
should be read in conjunction with "Item 9. Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Consolidated Financial
Statements and notes thereto.
 
<TABLE>
<CAPTION>
                                    CALENDAR YEAR ENDED       SIX MONTHS ENDED                    FISCAL YEAR ENDED
                                       DECEMBER 31,             DECEMBER 31,                          JUNE 30,
                                  -----------------------   ---------------------   ---------------------------------------------
                                     1998       1997(1)        1997      1996(1)       1997         1996        1995       1994
                                  ----------   ----------   ----------   --------   ----------   ----------   --------   --------
                                                               (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                               <C>          <C>          <C>          <C>        <C>          <C>          <C>        <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues..............  $  811,346   $  688,957   $  375,185   $264,791   $  578,563   $  470,882   $466,262   $391,752
Operating costs.................     414,022      373,833      195,678    161,510      339,665      308,513    320,317    271,951
                                  ----------   ----------   ----------   --------   ----------   ----------   --------   --------
Operating margin................     397,324      315,124      179,507    103,281      238,898      162,369    145,945    119,801
Other operating costs and
  expenses:
  Depreciation and
    amortization(2).............      55,807       46,197       24,876     22,039       43,360       77,128     86,916     87,460
  General and administrative....      22,161       20,149       10,781      7,563       16,931       17,168     16,225     14,676
  Gain on sale of assets........      (5,988)        (626)        (374)      (789)      (1,041)        (754)    (1,355)    (2,176)
                                  ----------   ----------   ----------   --------   ----------   ----------   --------   --------
Operating income (loss).........     325,344      249,404      144,224     74,468      179,648       68,827     44,159     19,841
Other income (expense), net.....       1,320        2,868          804      4,529        6,593        9,016      5,094     (1,336)
                                  ----------   ----------   ----------   --------   ----------   ----------   --------   --------
Income before provision for
  taxes on income...............     326,664      252,272      145,028     78,997      186,241       77,843     49,253     18,505
Provision for taxes on income...      39,520       27,486       16,500     10,339       21,325       15,867      4,955      8,007
                                  ----------   ----------   ----------   --------   ----------   ----------   --------   --------
Net income......................  $  287,144   $  224,786   $  128,528   $ 68,658   $  164,916   $   61,976   $ 44,298   $ 10,498
                                  ==========   ==========   ==========   ========   ==========   ==========   ========   ========
Net income per ordinary
  share(3):
  Basic.........................  $     2.51   $     1.96   $     1.12              $     1.44
  Diluted.......................  $     2.50   $     1.96   $     1.12              $     1.44
Pro forma net income per
  ordinary share(2):
  Basic.........................                                         $   0.60                $     0.54
  Diluted.......................                                         $   0.60                $     0.54
Cash dividends per ordinary
  share(4)......................  $     0.13   $    0.065   $    0.065   $     --   $       --   $       --
                                  ==========   ==========   ==========   ========   ==========   ==========
OTHER FINANCIAL DATA:
Capital expenditures............  $  277,400   $  229,192   $  127,133   $ 44,537   $  146,596   $   64,810   $ 36,443   $ 44,527
Cash flows provided by (used
  in):
  Operating activities..........     343,221      297,794      164,669     74,053      207,178      113,118    131,685     82,326
  Investing activities..........    (272,475)    (235,648)    (131,428)   (38,977)    (143,197)       5,012    (14,643)   (17,781)
  Financing activities..........     (14,885)     (66,785)      (3,721)    (3,829)     (66,893)    (108,391)   (98,373)   (69,756)
EBITDA(5).......................     381,151      295,601      169,100     96,507      223,008      145,955    131,075    107,301
</TABLE>
 
                                       21
<PAGE>   24
 
<TABLE>
<CAPTION>
                                    CALENDAR YEAR ENDED       SIX MONTHS ENDED                    FISCAL YEAR ENDED
                                       DECEMBER 31,             DECEMBER 31,                          JUNE 30,
                                  -----------------------   ---------------------   ---------------------------------------------
                                     1998       1997(1)        1997      1996(1)       1997         1996        1995       1994
                                  ----------   ----------   ----------   --------   ----------   ----------   --------   --------
                                                               (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                               <C>          <C>          <C>          <C>        <C>          <C>          <C>        <C>
BALANCE SHEET DATA:
Working capital.................  $  170,776   $  122,700   $  122,700   $172,627   $  125,730   $  124,333   $ 89,033   $ 73,466
Property and equipment, net.....   1,049,201      801,970      801,970    610,216      691,300      587,420    599,680    652,202
Total assets....................   1,453,736    1,161,453    1,161,453    948,232    1,000,446      884,998    924,983    938,206
Total debt(6)...................          --           --           --         --           --           --     58,364     84,254
Shareholders' equity............   1,227,224      953,017      953,017    797,921      831,115      733,092    728,089    755,253
</TABLE>
 
---------------
 
(1) Calendar 1997 results were derived from audited financial information found
    elsewhere in this Annual Report on Form 20-F and are provided for
    comparative purposes, as are results for the six months ended December 31,
    1996.
 
(2) During 1996, the Company's management undertook engineering and economic
    studies to evaluate the economic useful lives of its drilling rigs. The
    study results indicated that the estimated useful lives should be extended
    by 12 years from 18 to 30 years for marine rigs and by four years from 12 to
    16 years for land rigs. The Company's Board of Directors approved
    application of the change in estimated useful lives effective July 1, 1996
    which reduced depreciation expense, and increased net income, by
    approximately $34.5 million for the fiscal year ended June 30, 1997. See
    Note 3 of the Notes to Consolidated Financial Statements.
 
(3) The basic income per Ordinary Share data for the calendar years ended
    December 31, 1998 and 1997, the six months ended December 31, 1997 and the
    fiscal year ended June 30, 1997 is calculated based on weighted average
    shares outstanding for the periods of 114,500,000. The dilutive impact of
    Ordinary Share equivalents related to stock awards and options outstanding
    under the Company's share award plans was not significant for the periods
    presented, increasing the weighted average shares outstanding used in the
    computation for the calendar year ended December 31, 1998, the calendar year
    and six months ended December 31, 1997 and the fiscal year ended June 30,
    1997 to 114,812,000, 114,608,000 and 114,502,000, respectively. The pro
    forma net income per Ordinary Share data for the six months ended December
    31, 1996 and the fiscal year ended June 30, 1996 is calculated as though
    114,500,000 shares issued were outstanding. See Note 2 of the Notes to
    Consolidated Financial Statements.
 
(4) Prior to becoming a public company, the Company made certain distributions
    to its sole shareholder.
 
(5) EBITDA (Operating Income before depreciation) is a supplemental financial
    measure used by the Company in evaluating its business and should be read in
    conjunction with all the information in the Consolidated Financial
    Statements and notes thereto included elsewhere herein. The Company believes
    that EBITDA is a measure commonly used by analysts, investors and others
    interested in the contract drilling industry. Accordingly, this information
    has been disclosed herein to permit a more complete analysis of the
    Company's operating performance. The difference between cash flows provided
    by operating activities and EBITDA relates to interest, taxes, depreciation
    and changes in operating assets and liabilities. EBITDA should not be
    considered as an alternative to net income or cash flow from operating
    activities or as an indication of the Company's performance or as a measure
    of liquidity. The Company's definition of EBITDA may not be comparable with
    similarly titled measures disclosed by other companies.
 
(6) Total debt related to rigs held under leveraged capitalized lease
    obligations. During 1996 and 1994 the Company acquired the equity owner's
    interest in such rigs and extinguished the related obligations during 1996
    and 1995.
 
                                       22
<PAGE>   25
 
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
 
     The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements and notes thereto, included elsewhere in this
Annual Report on Form 20-F.
 
RESULTS OF OPERATIONS
 
  General
 
     Overview. The Company is subject to many risks which could impair liquidity
and operating results because of decreased revenues, increased expenses or both.
The contract drilling industry is a highly competitive and cyclical industry
which is influenced by customer drilling budgets and expenditures and oil and
natural gas pricing, consumption and demand. The industry has and may encounter
periods of rapid downturn which result in substantially reduced dayrates and low
utilization. A further reduction in industry utilization could idle more of the
Company's drilling rigs, in which event the Company must bear idle rig expenses
without any offsetting revenue. Should the industry engage in a more extensive
rig building program, the resulting increase in rig supply could cause a further
deterioration of the market for the Company's rigs. Any of these events could
have a materially adverse effect on the Company's revenues, gross margins and
net income and the Company's liquidity in future periods.
 
     The Company's contract drilling revenues vary based upon demand, which
affects the number of days the rig fleet is utilized and the dayrates received.
Revenue can also increase or decrease as a result of the acquisition or disposal
of rigs. In order to improve utilization, realize higher dayrates or retain
market share, the Company may mobilize its rigs from one market to another.
During periods of mobilization, however, revenues generally are adversely
affected. As a response to changes in demand and dayrate conditions, the Company
may withdraw a rig from the market by "stacking" it in an idle mode or may
reactivate a rig which was previously stacked, which may decrease or increase
revenues, respectively. See "Item 1. Description of Business -- Industry
Conditions." See "-- Liquidity and Capital Resources -- Industry Risks" for a
description of certain factors that may affect the Company's results of
operations in the future.
 
     Operating revenues. Santa Fe derives its revenues from dayrates under
drilling contracts and the provision of drilling related services. A drilling
contract may provide both dayrate and drilling related service revenues. Changes
in or renewals of contracts may alter the composition of the Company's revenues.
Revenues from dayrate drilling contracts are recognized as work is performed.
When mobilization or rig enhancement is required for a contract, the Company may
receive a lump-sum payment to offset all or a portion of the cost. When an
offshore rig is mobilized from one market to another under contract,
mobilization revenues less costs incurred are recognized over the term of the
related drilling contract. If a rig is moved without a contract, all costs
incurred are immediately charged against income. Payments received for rig
enhancements are recognized as revenues over the term of the related drilling
contract. In addition to the impact of dayrates, which increase and decrease
with demand, revenues from contract drilling may fluctuate from quarter to
quarter due to the timing of contract completions, mobilizations, scheduled
maintenance, and the weather.
 
     The Company also earns revenue by providing drilling related services to
the petroleum industry worldwide, including third party rig operations,
incentive drilling, drilling engineering and project management. Revenues from
third party rig operations and drilling engineering services are recognized as
the services are performed. Revenues from incentive drilling are derived from
performance based contracts, including turnkey and footage contracts, in which
the Company has negotiated the opportunity to earn incremental revenue by
meeting or exceeding certain preset job performance criteria. Incremental
revenues from incentive drilling contracts are recognized as terms and
conditions of each contract are fulfilled. The Company uses the percentage of
completion method to account for project management contracts. Revenues from
drilling services fluctuate from quarter to quarter as a result of the amount of
services being performed during the quarter and the timing of achievement of
performance objectives under incentive based and project management contracts.
 
                                       23
<PAGE>   26
 
     In reviewing the Company's results of operations, it should be noted that
current industry conditions are considerably less positive than those reflected
in recent results. During 1998, oil prices declined substantially resulting in a
significant decrease in the worldwide demand for drilling services. The Company
has recently witnessed significant industry declines in offshore drilling rig
and land rig utilization and dayrates. The impact on the Company through
December 31, 1998 was relatively minor; however, the Company is currently
experiencing similar declines and expects 1999 rig utilization and dayrates to
be considerably lower than those experienced in 1998. Other revenues, including
those associated with mobilization, incentive programs, drilling related
services and project management, are expected to be adversely impacted as well.
 
     Operating costs. Operating costs are not affected by changes in dayrates,
nor are they necessarily significantly affected by fluctuations in utilization.
For instance, if a rig is idle for a short period of time, the Company realizes
few decreases in operating expenses since the rig typically is maintained in a
ready-to-operate state with a full crew. However, if a rig were expected to be
idle for more than a brief period of time, the Company may reduce the size of
the rig's crew and take steps to maintain the rig in an idle "stacked" mode,
which lowers expenses and partially offsets the negative impact on operating
income associated with loss of revenues. Operating costs also may be impacted by
the Company's ability to successfully hire and train sufficient numbers of
employees to operate the Company's drilling equipment. The Company recognizes as
an operating cost repair and maintenance activities, such as painting,
inspections and routine overhauls that maintain rather than upgrade the rigs.
These expenses include the purchase of parts and materials from third parties,
the prices of which vary from period to period and are, in part, impacted by
influences outside the control of the Company. While the Company has experienced
significant increases in the cost of rig related equipment and spare parts due
to manufacturer/supplier price increases over the past few years, prices have
recently stabilized or declined. The Company's financial results could be
negatively affected in the future by these or similar cost increases.
 
     Current drilling industry conditions have resulted in a significant decline
in demand for drilling rigs which, in turn, has resulted in an increase in the
number of idle rigs. The Company presently has a number of rigs idle and expects
to experience overall lower fleet utilization. The previously mentioned expected
lower revenues combined with lower rig utilization has caused the Company to
take certain actions such as reduce personnel employment as rigs become idle,
defer certain non-essential operating expenses, reduce land based support
personnel, defer compensation actions and apply other similar cost conservation
measures. The Company will continue to evaluate market conditions and make
further adjustments as appropriate.
 
     Operating income. In addition to operating revenues and costs, operating
income is also affected by the level of general and administrative expense,
depreciation and amortization expense and any gains or losses from the sale or
retirement of assets. Costs of rig enhancements are capitalized and depreciated
over the expected useful lives of the enhancements. Increased depreciation
expense subsequent to a capital upgrade decreases operating income.
 
     Provision for taxes on income. The Company is not subject to income taxes
in the Cayman Islands. The Company's provision for taxes on income for the
calendar years ended December 31, 1998 and 1997, the six months ended December
31, 1997 and 1996 and the fiscal years ended June 30, 1997 and 1996 was $39.5
million, $27.5 million, $16.5 million, $10.3 million, $21.3 million and $15.9
million, respectively. The Company's effective tax rate for the calendar years
ended December 31, 1998 and 1997, the six months ended December 31, 1997 and
1996 and the fiscal years ended June 30, 1997 and 1996 was 12.1%, 10.9%, 11.4%,
13.1%, 11.5% and 20.4%, respectively. The effective tax rate varies from period
to period because each country in which the Company operates has its own tax
system and because the amounts earned in, and subject to tax by, each
jurisdiction change from period to period. Since 1996, the Company's
consolidated pre-tax income has increased while the effective tax rate has
remained relatively constant within a low range because a substantial portion of
the Company's pre-tax income is either not subject to taxation or is subject to
taxation at rates lower than the Company's average worldwide rates. See Note 5
of Notes to Consolidated Financial Statements.
 
                                       24
<PAGE>   27
 
     The following table presents data relating to the Company's operating
revenues, operating costs, operating income, utilization and average dayrates by
equipment type and for drilling services.
 
<TABLE>
<CAPTION>
                                       CALENDAR YEAR ENDED    SIX MONTHS ENDED    FISCAL YEAR ENDED
                                          DECEMBER 31,          DECEMBER 31,           JUNE 30,
                                       -------------------   ------------------   ------------------
                                         1998     1997(1)      1997     1996(1)     1997      1996
                                       --------   --------   --------   -------   --------   -------
                                                              (IN THOUSANDS)
<S>                                    <C>        <C>        <C>        <C>       <C>        <C>
OPERATING REVENUES
Heavy duty harsh environment jackup
  rigs...............................  $148,997   $135,931   $ 71,813   $55,623   $119,741   $92,939
Semisubmersible rigs.................   114,952     87,787     49,483    26,447     64,751    37,510
300-350 foot cantilever jackup
  rigs(2)............................   150,602    121,854     66,867    38,786     93,773    65,308
200-250 foot jackup rigs(2)..........   143,164    122,817     69,272    42,651     97,141    73,716
Other marine rigs(3).................    11,836     11,984      5,669     5,639     11,009     4,666
                                       --------   --------   --------   -------   --------   -------
          Total marine rigs..........   569,551    480,373    263,104   169,146    386,415   274,139
                                       --------   --------   --------   -------   --------   -------
Land rigs............................   147,880    125,527     71,626    49,257    103,158    91,859
Drilling related services............    92,746     81,472     39,596    45,028     86,904   101,581
Other................................     1,169      1,585        859     1,360      2,086     3,303
                                       --------   --------   --------   -------   --------   -------
          Total operating revenues...   811,346    688,957    375,185   264,791    578,563   470,882
                                       --------   --------   --------   -------   --------   -------
OPERATING COSTS(4)
Heavy duty harsh environment jackup
  rigs...............................    49,549     47,091     25,224    23,351     45,218    40,528
Semisubmersible rigs.................    63,712     41,694     22,767    18,042     36,969    30,979
300-350 foot cantilever jackup
  rigs(2)............................    58,373     59,645     30,125    19,380     48,900    39,130
200-250 foot jackup rigs(2)..........    66,982     59,260     31,491    31,182     59,552    53,947
Other marine rigs(3).................     8,659      8,477      4,219     3,151      6,808     3,252
                                       --------   --------   --------   -------   --------   -------
          Total marine rigs..........   247,275    216,167    113,826    95,106    197,447   167,836
                                       --------   --------   --------   -------   --------   -------
Land rigs............................    97,966     86,547     48,345    35,485     73,687    63,689
Drilling related services............    65,665     61,641     30,537    30,305     61,408    75,775
Other................................     3,116      9,478      2,970       614      7,123     1,213
                                       --------   --------   --------   -------   --------   -------
          Total operating costs......   414,022    373,833    195,678   161,510    339,665   308,513
                                       --------   --------   --------   -------   --------   -------
          OPERATING MARGIN...........   397,324    315,124    179,507   103,281    238,898   162,369
                                       --------   --------   --------   -------   --------   -------
Depreciation and amortization........   (55,807)   (46,197)   (24,876)  (22,039)   (43,360)  (77,128)
General and administrative...........   (22,161)   (20,149)   (10,781)   (7,563)   (16,931)  (17,168)
Gain on sale of assets...............     5,988        626        374       789      1,041       754
                                       --------   --------   --------   -------   --------   -------
          OPERATING INCOME...........  $325,344   $249,404   $144,224   $74,468   $179,648   $68,827
                                       ========   ========   ========   =======   ========   =======
OPERATING INCOME AS A PERCENTAGE OF
  REVENUES...........................      40.1%      36.2%      38.4%     28.1%      31.1%     14.6%
                                       ========   ========   ========   =======   ========   =======
AVERAGE RIG FLEET UTILIZATION
Heavy duty harsh environment jackup
  rigs...............................      98.3%      99.0%      99.2%    100.0%      99.5%     97.5%
Semisubmersible rigs.................      91.1       97.2       94.4     100.0      100.0      75.3
300-350 foot cantilever jackup
  rigs(2)............................      94.7       97.2       97.0      93.5       95.5      95.7
200-250 foot jackup rigs(2)..........      88.4       99.3      100.0      86.4       92.1      88.4
Other marine rigs....................     100.0      100.0      100.0      93.5       96.7      69.3
          Total marine rigs..........      93.0       98.4       98.3      92.5       95.5      88.8
Land rigs............................      88.8       90.8       92.3      92.1       90.6      95.3
</TABLE>
 
                                       25
<PAGE>   28
 
<TABLE>
<CAPTION>
                                       CALENDAR YEAR ENDED    SIX MONTHS ENDED    FISCAL YEAR ENDED
                                          DECEMBER 31,          DECEMBER 31,           JUNE 30,
                                       -------------------   ------------------   ------------------
                                         1998     1997(1)      1997     1996(1)     1997      1996
                                       --------   --------   --------   -------   --------   -------
<S>                                    <C>        <C>        <C>        <C>       <C>        <C>
AVERAGE DAYRATES
Heavy duty harsh environment jackup
  rigs...............................  $100,132   $ 94,005   $ 98,374   $75,575   $ 82,466   $65,129
Semisubmersible rigs.................   115,298     82,507     94,977    47,911     59,133    45,357
300-350 foot cantilever jackup
  rigs(2)............................    54,487     42,952     46,826    32,214     35,887    26,645
200-250 foot jackup rigs(2)..........    49,299     37,662     41,831    26,825     30,404    22,773
Other marine rigs....................    18,237     16,416     15,405    16,392     15,593     9,203
          Total marine rigs..........    64,707     51,443     55,944    38,216     42,646    32,446
Land rigs............................    15,642     14,611     15,331    12,486     13,118    12,264
</TABLE>
 
---------------
 
(1) Calendar 1997 results were derived from audited financial information found
    elsewhere in this Annual Report on Form 20-F and are provided for
    comparative purposes, as are results for the six months ended December 31,
    1996.
 
(2) For the fiscal years ended June 30, 1996 and 1995, "200-250 jackup rigs"
    means the Company's nine jackup rigs capable of operating in water depths of
    up to 200-250 feet and the Key Gibraltar. During the fiscal year ended June
    30, 1997, the Key Gibraltar was converted to a cantilever rig and
    extensively upgraded and was reclassified as a 300-350 foot cantilever
    jackup rig effective January 1, 1997.
 
(3) During the fourth quarter of calendar 1998, the Company's lake barge rig,
    the Rey del Lago, was retired from service. Effective January 1, 1999, the
    Company will classify its platform rig as a component of Drilling Related
    Services.
 
(4) Exclusive of depreciation which is presented separately below.
 
CALENDAR YEARS ENDED DECEMBER 31, 1998 AND 1997
 
     Operating revenues. Total operating revenues increased $122.4 million
(17.8%). Revenues from the Company's heavy duty harsh environment jackup rig
fleet increased $13.1 million (9.6%). Average dayrates increased 6.5% ($8.4
million), the new rig Galaxy II began operations on November 9, 1998 ($6.0
million) and the Galaxy I worked an additional eight days ($0.8 million).
Partially offsetting these increases, the Magellan was idle while completing
certification inspections and preparing for a new contract ($2.1 million).
Operating revenues for the Company's three semisubmersibles increased $27.2
million (30.9%), mainly due to a 39.7% increase in average dayrates ($30.5
million) and 31 days increased Rig 135 utilization in the North Sea ($3.0
million). These increases were partially offset by 98 days lower utilization of
Rig 140 ($6.3 million) as it was relocated from the Gulf of Mexico to the North
Sea, undergoing a planned shipyard maintenance and capital upgrade program prior
to the commencement of its new contract. Revenues from 300-350 foot cantilever
jackups increased $28.7 million (23.6%) primarily because of a 26.9% increase in
average dayrates ($33.7 million), partially offset by lower utilization ($5.0
million), mainly for the Paramesawa and Compact Driller as they were mobilized
from Australia and Gabon to Malaysia and Thailand, respectively. Revenues from
200-250 foot jackup rigs increased $20.3 million (16.6%), mainly due to a 30.9%
increase in average dayrates ($33.3 million), partially offset by 357 days lower
utilization ($12.9 million), primarily on Rig 134 in Indonesia, Rig 127 in
Qatar, the Key Victoria in Venezuela and Rig 141 in Oman. Revenues from land
rigs increased by $22.4 million (17.8%). Four new rigs, three in South America
and one in North Africa, operated in the calendar year ended December 31, 1998
as compared with the same period of 1997, increasing revenues by $10.7 million.
Higher utilization of four rigs that were placed in service in the Middle East
during 1997 contributed higher revenues of $14.5 million. Revenues from the
remaining land rigs decreased $2.8 million due to 475 days decreased utilization
($6.5 million) partially offset by increased average dayrates ($3.7 million).
Revenues from drilling related services increased $11.3 million (13.8%)
primarily because of a $14.0 million increase in revenues from incentive
contracts, partially offset by a $2.7 million decrease in third party rig
operations revenues. Incentive drilling revenues increased because of an
increase in the number of contracts containing incentive based provisions,
primarily in the North Sea. Third party operations revenues decreased mainly due
to the August 1997 implementation of a joint venture company that operates a
third
 
                                       26
<PAGE>   29
 
party semisubmersible in the Caspian Sea. Prior to that date, the rig was
operated solely by the Company. Decreased well engineering services in the North
Sea were partially offset by increased activity in the Middle East.
 
     Operating costs. Total operating costs increased $40.2 million (10.8%).
Operating costs for the heavy duty harsh environment jackup rigs increased $2.5
million (5.2%), primarily due to increased costs associated with a new contract
for the Magellan and the startup of the Galaxy II in November, 1998.
Semisubmersible rig operating costs increased $22.0 million (52.8%) primarily
due to the relocation of Rig 140 from the Gulf of Mexico and costs incurred for
its planned shipyard maintenance program prior to commencing new work in the
North Sea. Operating costs for 200-250 foot jackup rigs increased $7.7 million
(13.0%) mainly due to increased costs associated with a new contract for the Key
Victoria in South America, increased costs associated with maintenance and
support on the Key Bermuda in Nigeria and increased maintenance costs for Rig
127 in Qatar. Operating costs associated with land rigs increased $11.4 million
(13.2%) primarily due to the staged deployment of eight additional rigs during
the calendar years ended December 31, 1998 and 1997. In 1998, three rigs were
deployed in South America and one in North Africa, increasing operating costs by
$7.5 million. Increased utilization of rigs deployed in 1997, two to Saudi
Arabia and two to the Kuwait-Saudi Partitioned Neutral Zone, resulted in
increased expense of $7.2 million. The remaining decrease of $3.3 million in
land rig operating costs stemmed mainly from decreased utilization. Operating
costs from drilling related services increased $4.0 million (6.5%). Incentive
drilling expense increased $7.5 million mainly due to an increase in the number
of contracts containing incentive based provisions in the North Sea. Third party
rig operations expenses decreased $3.5 million mainly due to the August 1997
implementation of a joint venture company that operates a third party
semisubmersible in the Caspian Sea and decreased well engineering services in
the North Sea, partially offset by increased activity in the Middle East. The
$6.4 million (67.1%) decrease in other operating costs was primarily due to
reduced provision for inventory obsolescence.
 
     General and administrative. General and administrative expense increased
$2.0 million (10.0%) primarily due to increased costs associated with becoming a
public company in June 1997 ($1.0 million), increased employee benefit plan
costs ($0.5 million) and increased costs associated with higher staff levels
($0.5 million).
 
     Depreciation and amortization. Depreciation and amortization expense
increased $9.6 million (20.8%) for the calendar year ended December 31, 1998 as
compared with the same period in the prior year. Depreciation of eight new land
rigs placed in service during 1998 and 1997 and the Galaxy II resulted in
increased expense of $3.9 million and $1.1 million, respectively, with the
remainder of the increase due to depreciation of general capital additions to
all other rigs and equipment.
 
     Gain on sale of assets. Gain on sale of assets increased $5.4 million for
the calendar year ended December 31, 1998 as compared with the same period in
the prior year. On July 10, 1998, Rig 162, one of the Company's land rigs
operating in Saudi Arabia, was severely damaged following a blowout and
subsequent fire. As provided for in the drilling contract, the customer elected
to cancel the remaining term of the contract and the Company determined that the
rig would not be rebuilt. An unrepaired partial loss settlement was negotiated
with the Company's insurance carriers under which total proceeds of $13.8
million were received, resulting in recognition of a $4.8 million gain during
the fourth calendar quarter of 1998. The remaining increase of $0.6 million
resulted from increased sales and dispositions of miscellaneous equipment.
 
     Other income (expense), net. This category experienced a $1.5 million
decrease for the calendar year ended December 31, 1998. Foreign exchange losses
increased $1.7 million, primarily resulting from unfavorable movements of the
dollar in relation to the Indonesian rupiah and the Venezuelan bolivar. Other
charges increased $0.9 million, primarily due to increased provision for
contingencies. Investment income increased by $1.1 million, primarily due to
higher invested balances.
 
     Provision for taxes on income. The provision for taxes on income increased
$12.0 million (43.8%) primarily due to increased earnings in North Africa, South
America, Southeast Asia and the U.K., leading to an increase in the Company's
effective tax rate to 12.1% from 10.9% for the same period in 1997.
 
                                       27
<PAGE>   30
 
     Net income. Net income for the calendar year ended December 31, 1998
increased $62.3 million (27.7%) to $287.1 million as compared to $224.8 million
for the same period in the prior year. This increase resulted primarily from the
increase of $122.4 million in the Company's operating revenues and $5.4 million
increased gain on sales of assets, partially offset by increased operating
expense of $40.2 million, increased general and administrative expense of $2.0
million, $9.6 million higher depreciation expense, lower other income (expense),
net of $1.5 million and an increased provision for income taxes of $12.0
million.
 
SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996
 
     Operating revenues. Total operating revenues increased $110.4 million
(41.7%) principally because of increased revenues from heavy duty harsh
environment jackups, semisubmersibles, 300-350 foot cantilever jackups, 200-250
foot jackups and land rigs, partly offset by reduced revenue from drilling
related services. Revenues from the Company's heavy duty harsh environment
jackup rig fleet, which operated entirely in the North Sea for both six month
periods, increased $16.2 million (29.1%) principally because of a 30.2% increase
in average dayrates. Operating revenues for the Company's three semisubmersibles
increased $23.0 million (87.1%) because of a 98.2% increase in average dayrates,
which increased revenues $24.8 million, partially offset by a 5.6% decrease in
utilization stemming from 31 days idle time for Rig 135 in the North Sea between
contracts, which contributed decreased revenues of $1.8 million. The
semisubmersible rigs were continuously located in the North Sea, Gulf of Mexico
and West Africa during the six months ended December 31, 1997 and 1996. Revenues
from 300-350 foot cantilever jackups increased $28.1 million (72.4%). Nine
million dollars of additional revenue were attributable to the Key Gibraltar
which was fully utilized during the 1997 reporting period. During the comparable
1996 reporting period, the rig was idle in the shipyard undergoing modernization
and addition of a cantilever. Substantially all of the remaining $17.8 million
revenue increase was attributable to increased dayrates. Revenues from 200-250
foot jackup rigs increased $26.6 million (62.4%). The increase was primarily
attributable to a 55.9% increase in average dayrates providing $25.0 million in
increased revenues. A 13.6% increase in 200-250 foot jackup rigs utilization
contributed increased revenues of $1.6 million. Revenues from land rigs
increased by $22.4 million (45.4%). Four new rigs operated in the Middle East in
the six months ended December 31, 1997 as compared with the same period of 1996,
increasing revenues by $13.1 million. The remaining increase of $9.3 million was
primarily attributable to a 16.4% increase in dayrates earned by rigs in service
during both periods. Revenues from drilling related services decreased by $5.4
million (12.1%) primarily because of a $4.7 million (100.0%) decrease in project
management revenues and a $1.7 million (6.9%) decrease in third party rig
operations revenues, partially offset by a $1.0 million (6.9%) increase in
revenues from incentive drilling contracts. Revenues from drilling project
management services decreased primarily due to the completion of a platform rig
construction project in the North Sea. Third party rig operations revenues
decreased mainly due to the inception of a rig sharing agreement in Azerbaijan
for a third party semisubmersible rig, which was operated solely by the Company
during the six months ended December 31, 1996, partially offset by increased
activity in South America. Incentive drilling revenues increased because of an
increase in the number of contracts containing incentive based provisions,
primarily in the North Sea.
 
     Operating costs. Total operating costs increased $37.4 million (22.1%) due
principally to increased costs related to the operations of the Company's marine
fleet and land rigs. The increases in operating costs related to the Company's
heavy duty harsh environment jackup rigs ($1.9 million or 8.0%) resulted
primarily from increased costs of preparing the Magellan and the Galaxy I for
new contracts in the North Sea. Semisubmersibles operating costs increased $4.7
million (26.2%) primarily due to increased mobilization cost associated with Rig
135's new contract in the North Sea and increased repair and maintenance costs
for both Rig 140, operating in the Gulf of Mexico, and Rig 135. Increased costs
of $10.7 million (55.4%) for the 300-350 foot cantilever jackup rigs were
primarily due to increased costs associated with operation of the Key Gibraltar
in Malaysia following its extensive upgrade and reclassification to the 300-350
foot cantilever class of rigs and the Parameswara's and Compact Driller's
deployment to and operations in Australia and West Africa, respectively.
Increased operating costs of $1.1 million (33.9%) for other marine rigs stemmed
mainly from increased costs for the lake barge working in South America
associated with a new collective bargaining agreement which was implemented in
the six months ended December 31, 1997. Operating costs associated with land
rigs increased $12.9 million (36.2%), primarily due to the deployment of four
additional rigs in the Middle East
                                       28
<PAGE>   31
 
($8.1 million), increased utilization of rigs in service during both periods
($1.9 million) and increased costs for rigs working in South America. During the
quarter ended December 31, 1997, the Company experienced increased pressure on
operating costs in the form of competition for skilled employees resulting in
increased salary and wages and significantly increased prices and delivery
delays for vendor equipment and materials.
 
     General and administrative. General and administrative expense increased
$3.2 million (42.5%) primarily due to increased awards under the Company's
performance based management incentive compensation programs ($1.1 million), a
6% increase in staff levels ($0.6 million) and increased outside Director,
investor relations, legal and other costs associated with becoming a public
company in June 1997.
 
     Depreciation and amortization. Depreciation and amortization expense
increased $2.8 million (12.9%) for the six months ended December 31, 1997 as
compared with the same period in the prior year. Depreciation of four land rigs
placed in service during 1997 yielded increased expense of $2.0 million, with
the remainder of the increase due to depreciation of capital additions to other
rigs and equipment, primarily major upgrades to the Key Gibraltar ($0.9
million).
 
     Other income (expense), net. Total other income (expense), net decreased
$3.7 million for the six months ended December 31, 1997. Investment income
decreased $1.2 million during the six months ended December 31, 1997 due to the
sale of marketable securities, the proceeds of which were invested in capital
and other programs. Foreign exchange gains decreased $2.2 million for the six
months ended December 31, 1997 primarily resulting from unfavorable movements of
the dollar in relation to the pound sterling. Costs related to services provided
under the provisions of the Intercompany Agreement was $0.3 million for the six
months ended December 31, 1997. See "Item 13. Interest of Management in Certain
Transactions -- Related Party Agreements."
 
     Provision for taxes on income. The provision for taxes on income increased
by $6.2 million, primarily due to significantly increased earnings in the U.K.,
Egypt, West Africa and the U.S. For the six months ended December 31, 1997, the
Company's effective tax rate decreased to 11.4% from 13.1% for the six months
ended December 31, 1996 primarily because a substantial portion of the Company's
pre-tax income was either not subject to taxation or was subject to taxation at
rates lower than the Company's average worldwide rates. See Note 5 of Notes to
Consolidated Financial Statements.
 
     Net income. Net income for the six months ended December 31, 1997 increased
$59.8 million (87.2%) to $128.5 million as compared to $68.7 million for the
same period in the prior year. This increase resulted primarily from the
increase of $110.4 million in the Company's operating revenues, partially offset
by increased operating expense of $37.4 million, increased general and
administrative expense of $3.2 million, $2.8 million higher depreciation
expense, lower other income (expense), net of $3.7 million and an increased
provision for income taxes of $6.2 million.
 
YEARS ENDED JUNE 30, 1997 AND 1996
 
     Operating revenues. Total operating revenues increased $107.7 million
(22.9%) principally because of increased revenues from heavy duty harsh
environment jackups, semisubmersibles, 300-350 foot cantilever jackups, 200-250
foot jackups, other marine, and land rigs, partly offset by reduced revenue from
drilling related services. Revenues from the Company's heavy duty harsh
environment jackup rig fleet increased $26.8 million (28.8%) principally because
of continued high demand (99.5% utilization) for high quality jackup equipment
in the North Sea and a 26.6% increase in average dayrates. All of the Company's
heavy duty harsh environment jackup rigs were located in the North Sea during
fiscal year 1997. Operating revenues for the Company's three semisubmersibles
increased $27.2 million (72.6%) because of a 30.4% increase in average dayrates,
which increased revenues $15.1 million, and a 32.8% increase in utilization
contributing increased revenues of $12.1 million. The rigs were continuously
located in the North Sea, Gulf of Mexico and West Africa during fiscal year
1997. Revenues from 300-350 foot cantilever jackups increased $28.5 million
(43.6%) because of a 32.2% increase in average dayrates, excluding the Key
Gibraltar, which provided $21.2 million in increased revenues. The remaining
$7.3 million incremental revenue was primarily due to the reclassification of
the Key Gibraltar from other marine rigs in January 1997 following extensive
upgrade. Revenues from 200-250 foot jackup rigs increased $23.4 million (31.8%)
primarily due to a 33.5% increase in
                                       29
<PAGE>   32
 
average dayrates. Revenues from other marine rigs increased $6.4 million due to
a 69.4% increase in average dayrates, which was primarily attributable to the
North Sea platform rig working in operating mode approximately seven months more
in 1997 than 1996 and increased dayrates on the lake barge working in Venezuela
on a new contract, along with a 39.5% increase in utilization. Revenues from
land rigs increased by $11.3 million (12.3%). Three new rigs were deployed in
1997, two for work in the Middle East and one in South America, increasing
revenues by $1.9 million. The remaining increase of $9.4 million was primarily
due to a 6.7% increase in dayrates earned by rigs in service at June 30, 1996.
Revenues from drilling related services decreased by $14.7 million (14.4%)
primarily because of a $23.6 million (83.2%) decrease in project management
revenues and a $7.9 million (21.9%) decrease in incentive drilling contract
revenues, partially offset by a $16.8 million (45.1%) increase in revenues from
third party rig operations. Revenues from drilling project management services
decreased with the completion of a contract awarded in late 1995 pursuant to
which the Company extensively upgraded a third party semisubmersible in the
Caspian Sea offshore Azerbaijan and the completion of a platform rig
construction project in the North Sea. Incentive drilling revenues decreased
because of a reduction in the number of contracts containing incentive based
provisions primarily in the North Sea. Revenues from third party rig operations
increased primarily due to the operation of a third party semisubmersible in the
Caspian Sea offshore Azerbaijan and increased activity in the North Sea.
 
     Operating costs. Total operating costs increased $31.2 million (10.1%) due
principally to increased costs related to the operations of the Company's marine
fleet and land rigs, partially offset by lower expenses for drilling related
services. The increases in operating costs related to the Company's heavy duty
harsh environment jackup rigs ($4.7 million or 11.6%) resulted primarily from
increased costs of preparing the Monarch and the Monitor for new contracts in
the North Sea. Semisubmersibles operating costs increased $6.0 million (19.3%)
primarily due to an increase in the utilization of the Aleutian Key in West
Africa in excess of 100% compared with 1996 and higher Aleutian Key maintenance
costs. Increased costs of $9.8 million (25.0%) for the 300-350 foot cantilever
jackup rigs were primarily due to increased costs associated with the
Parameswara's and Compact Driller's deployment to and operations in Australia
and West Africa, respectively, and operation of the Key Gibraltar in Malaysia
following its extensive upgrade and reclassification to the 300-350 foot
cantilever class of rigs. The $5.6 million (10.4%) increase in costs associated
with 200-250 foot jackup rigs was primarily a result of extensive maintenance
and upgrades undertaken on the Key Gibraltar ($7.3 million) while it was being
converted to a cantilever rig, partially offset by reduced costs on rigs working
in the Middle East. The increase of $3.6 million (109.3%) in other marine rig
costs was primarily attributable to a 39.5% increase in utilization and
increased days in operating, rather than idle, mode for the North Sea platform
rig. Operating costs associated with land rigs increased $10.0 million (15.7%),
primarily due to the deployment of three new rigs, two in the Middle East and
one in South America, full year operations of two rigs deployed in 1996 and
increased costs for rigs working in South America. The decrease of $14.4 million
(19.0%) in operating costs associated with drilling related services resulted
from lower project management services expense of $19.3 million (100.0%) and
reduced incentive drilling expense of $2.8 million (10.6%), partially offset by
increased costs from third party rig operations of $7.7 million (25.0%). The
reduction in project management services expense was due to the completion of a
contract to construct a third party platform drilling rig for use in the North
Sea during the first quarter of fiscal year 1997 and from completion in
September 1996 of the extensive upgrade of a third party semisubmersible for use
in the Caspian Sea offshore Azerbaijan. Third party rig operations costs
increased due to the commencement of a contract to operate the same third party
semisubmersible in the Caspian Sea for approximately one year.
 
     General and administrative. General and administrative expense was
effectively flat showing a modest decrease of $0.2 million (1.4%) from the
previous year.
 
     Depreciation and amortization. Depreciation and amortization expense
decreased $33.8 million (43.8%) for the year ended June 30, 1997 as compared
with the same period in the prior year. During 1996, the Company's management
undertook engineering and economic studies to evaluate the economic useful lives
of its drilling rigs. The study results indicated that the estimated useful
lives should be extended from 18 to
 
                                       30
<PAGE>   33
 
30 years for marine rigs and from 12 to 16 years for land rigs. The change in
accounting estimate was applied effective July 1, 1996, with the consequence of
reduced depreciation expense and increased operating income of approximately
$34.5 million for fiscal year 1997. See Note 3 of the Notes to Consolidated
Financial Statements.
 
     Other income (expense), net. Total other income (expense), net decreased
$2.4 million for the year ended June 30, 1997. Investment income, net of
interest expense, decreased $4.0 million during the year ended June 30, 1997 due
to the sale of marketable securities during 1996, the proceeds of which were
used to acquire a rig previously operated under capital lease obligation.
Foreign exchange gains increased $2.7 million for the year ended June 30, 1997
primarily resulting from favorable movements of the dollar in relation to the
pound sterling. The annual costs related to services provided under the
provisions of the Intercompany Agreement was $1.1 million for the year ended
June 30, 1997. See "Item 13. Interest of Management in Certain
Transactions -- Related Party Agreements."
 
     Provision for taxes on income. The provision for taxes on income increased
by $5.4 million, primarily due to significantly increased earnings in the U.K.,
Egypt, Venezuela and West Africa, partially offset by a reduction in the
provision for taxes in the U.S. The Company's effective tax rate decreased to
11.5% from 20.4% for the fiscal year ended June 30, 1996 primarily because a
substantial portion of the Company's pre-tax income was either not subject to
taxation or was subject to taxation at rates lower than the Company's average
worldwide rates. See Note 5 of Notes to Consolidated Financial Statements.
 
     Net income. Net income for the year ended June 30, 1997 increased $102.9
million (166.0%) to $164.9 million as compared to $62.0 million for the same
period in the prior year. This increase resulted primarily from the increase of
$107.7 million in the Company's operating revenues, $33.8 million lower
depreciation expense and higher other income (expense), net of $1.6 million,
partially offset by increased operating expense of $31.2 million, an increased
provision for income taxes of $5.4 million and lower net investment income and
interest expense of $4.0 million.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     Net cash provided by operating activities was $343.2 million and $297.8
million for the calendar years ended December 31, 1998 and 1997, respectively.
The increase in cash flows from operations was primarily attributable to
increased net income adjusted for non-cash charges, partially offset by
increased working capital requirements. Investing activities used cash of $272.5
million and $235.7 million for the calendar years ended December 31, 1998 and
1997, respectively. The increased usage in investing activities of $36.8 million
was primarily due to $48.2 million increased capital spending, partially offset
by $13.8 million increased proceeds from the insurance settlement associated
with the loss of Rig 162. Capital expenditures totaled $277.4 million and $229.2
million for the calendar years ended December 31, 1998 and 1997, respectively,
principally related to rig expansion, upgrades and modernization. For the
calendar year periods, capital expenditures on the heavy duty harsh environment
jackup rig Galaxy III and new land rig and related expenditures increased $89.5
million and $28.0 million, respectively, while spending on the Galaxy II
decreased $56.6 million. Construction of the Galaxy II is now complete and the
rig was mobilized to its initial work location offshore Nova Scotia, Canada and
began work under its five year contract on November 9, 1998. Cash used in
financing activities was $14.9 million for the calendar year ended December 31,
1998 and consisted solely of dividends paid. For the calendar year ended
December 31, 1997, the total cash used in financing activities was $66.8 million
and consisted of $59.4 million cash distributions to Holdings pursuant to the
initial public offering of Ordinary Shares and $7.4 million dividends paid
subsequent to the initial public offering.
 
     The Company has budgeted approximately $167 million for capital
expenditures during the year ending December 31, 1999. Capital spending to meet
contractual obligations for customers and for rig upgrade, modernization and
enhancement projects is budgeted to require approximately $64 million and
represent numerous individual transactions spread over the course of the year.
Progress payments on the Galaxy III heavy duty harsh environment jackup rig
presently under construction are estimated to require approximately $60 million
with initial mobilization expected to require an additional $8 million. The
Company believes it has
 
                                       31
<PAGE>   34
 
minimal exposure to significant cost increases in completing the Galaxy III
construction during the second half of 1999 as the construction contract with
the shipyard is a fixed price agreement, and the Company has to date been, and
expects through the completion of this construction project to be, successful in
purchasing the Company provided drilling equipment at price and delivery terms
within the Company's initial project estimates. The Company currently has one
high specification 3,000 horsepower land rig under assembly for work in the
Middle East that is expected to require approximately $10 million to complete
for initial work in the second quarter of 1999. In addition, the Company
identified $25 million intended for use in either constructing or acquiring new
rig(s) as indicated based upon market conditions. It is expected that the entire
1999 capital program will be funded from internally generated funds. Future
capital spending, particularly rig fleet additions, is subject to the Company's
prospects for securing appropriate drilling contract opportunities and the
availability of suitable rigs, rig components, construction facilities and
supplies.
 
     As noted throughout this Annual Report on Form 20-F, drilling industry
activity has declined sharply in recent months. This decline and other factors
have caused the Company to initiate a program whereby 1999 capital spending
requirements will be continuously reviewed with the objective of reducing
commitments to only those needed to meet essential rig maintenance requirements,
certain capital upgrades, client contract requirements and potential
counter-cyclical rig acquisitions.
 
     From time to time, the Company reviews opportunities for rig acquisition,
construction or upgrade. Once a capital project is undertaken by the Company,
factors outside the Company's control, such as changes in market demand, may
alter the project economics and the Company may be unable to fully recoup the
cost of such expenditures through future drilling contracts. Should current
plans for rig acquisition, construction or upgrade not be completed, the Company
will not have those rigs available to compete in its markets.
 
     On March 5, 1999, the Company's Board of Directors declared a quarterly
dividend of $0.0325 per Ordinary Share payable on April 15, 1999 to holders of
record at the close of business March 31, 1999. The Company's current dividend
policy contemplates payment of future quarterly dividends of $0.0325 per
Ordinary Share.
 
     The Company's principal source of funds has been cash flow from operations.
The Company believes available cash resources and cash flows from operations
will be sufficient to meet its capital requirements during 1999.
 
     The Company currently has a $35 million uncommitted credit facility for
advances and letter of credit with a major bank, $1.4 million of which is
subject to standby letters of credit at December 31, 1998.
 
CURRENCY RISK AND INFLATION
 
     The Company conducts material business operations in foreign currency
environments, including the U.K., Venezuela, Indonesia and Egypt. The Company
generally attempts to minimize its currency exchange risk by seeking
international contracts payable in local currency in amounts equal to the
Company's estimated operating costs payable in local currency and in dollars for
the balance of the contract. Because of this strategy, the Company has minimized
its net asset or liability positions denominated in local currencies and has not
experienced significant gains or losses associated with changes in currency
exchange rates. Accordingly, the Company has not historically entered into
financial hedging arrangements to manage risks relating to fluctuations in
currency exchange rates. However, the Company may enter into such contracts in
the future in the event that the Company assumes significant foreign currency
risks.
 
     Although inflation has not had a significant impact on the Company's
results of operations during the past several years, labor availability and cost
and vendor prices and delivery fluctuate in response to overall drilling
industry conditions.
 
CREDIT RISK
 
     The Company's customers consist primarily of major international, state
owned and large independent oil companies and their affiliates. The Company has
not incurred any charges for credit losses during the last five
 
                                       32
<PAGE>   35
 
years. There is no assurance that in the future such charges will not occur.
Such charges may adversely affect the Company's profitability.
 
OTHER
 
     Operational risks and hazards may result in extensive damage to or total
loss of drilling rigs, with associated personal injuries and loss of life,
pollution, well loss, well control expenses and/or wreck removal or other
requirements. Such losses, liabilities or obligations may be uninsured or
underinsured. In the event of a major incident or incidents resulting from
operational risks and hazards, the Company will sustain a loss of revenue by
reason of the rig loss or damage and may be subject to extraordinary expenses in
respect of uninsured or underinsured losses, liabilities or obligations.
 
     The Company's worldwide operations are subject to numerous environmental
laws and regulations that relate directly or indirectly to its operations,
including certain regulations controlling the discharge of materials into the
environment, requiring removal and clean-up under certain circumstances, or
otherwise relating to the protection of the environment. Laws and regulations
protecting the environment have become increasingly stringent in recent years
and may in certain circumstances impose "strict liability" and render a company
liable for environmental damage without regard to negligence or fault on the
part of such company. Such laws and regulations may expose the Company to
liability for the conduct of or conditions caused by others, or for acts of the
Company that were in compliance with all applicable laws at the time such acts
were performed. See "Item 1. Description of Business -- Business Considerations
and Risk Factors -- Environmental and Regulatory Risks."
 
     The Company's liquidity also may be adversely impacted by reason of war,
political turmoil, revolution, insurrection or similar events which could, inter
alia, result in damage to or loss of the Company's rigs, either physically or by
reason of nationalization, expropriation or deprivation of use, or could impair
the concessionary rights of the Company's customers, thus jeopardizing the
Company's drilling contracts. The Company does not normally insure against these
risks, and such events could result in an actual or constructive loss of
substantial assets and the associated loss of revenues and/or receivables.
 
IMPACT OF YEAR 2000
 
     The Company has actively been pursuing solutions to the Millennium Date
Change Problem ("Y2K") for approximately two years with initial activities
concentrating on Information Technology ("IT") issues. A Company-wide initiative
was launched in January 1998 with the formation of the Y2K Office responsible
for coordinating the Y2K efforts and reporting directly to the Company's Chief
Executive Officer. A Company policy was issued in April 1998 stating a goal of
'business as usual' and further specifying that the Company intended to be
prepared for Y2K by July 1999 with the responsibility for the preparation
allocated to operating and administrative management. Guidance as to minimum
requirements included development of a 'Quality Plan' document that organized
local initiatives complete with milestones and reporting requirements,
definitions of conformity and operational significance and an outline of a basic
program of awareness, inventory, impact analysis, mitigation, implementation and
testing.
 
     A Company-wide awareness campaign was initiated, with all operational
centers visited. At these meetings, Y2K policy and guidance was presented, and
the responsibilities of local management were discussed. Eighteen centers are
now working towards the solutions of their Y2K issues with the support of the
Y2K Office in Dallas, Texas.
 
     Due to the diverse geographic location and nature of the Company business
activities ranging from the operation of drilling rigs through the procurement
and supply of materials, the potential Y2K problems are being considered in
three categories: IT; Field Equipment; and Third Party Relationships. To these
three categories, a common set of analyses is applied in order to evaluate the
potential for the disruption of business. Evaluation of operational significance
of all potentially Y2K sensitive functions or components is critical to
subsequent mitigation and remedial action.
 
                                       33
<PAGE>   36
 
     IT issues include remediation of corporate supported software including
materials management, accounting and payroll systems and the upgrade of
non-compliant hardware and communication systems. Major software applications
have been modified and are presently in the testing phase. The remaining
applications are due to be tested in the first quarter of 1999. Final deployment
of IT solutions is scheduled to be ongoing through July 1999. Analysis of
hardware (primarily computer) compliance is scheduled for completion in the
first quarter of 1999, with 90% of this effort complete at February 1, 1999. All
hardware will be deployed by July 1999.
 
     As to field equipment issues, a considerable amount of electrical equipment
is used on drilling rigs for control, monitoring and data acquisition. This
equipment contains imbedded microprocessors and is potentially Y2K sensitive. A
comprehensive inventory of all such equipment has been compiled and assessed as
to potential risk and appropriate remedial action. Analysis to date has shown
that many items of equipment are Y2K compliant. Verification of operation of
critical items is now taking place and includes independent validation. Known
non-compliant equipment is in the process of being upgraded or replaced with
implementation and testing targeted for completion in April 1999.
 
     In the area of third party relationships, the Company's business relies
heavily on the supply of goods and services from outside suppliers and failure
of any provider as a result of Y2K issues could cause serious business
disruption. In order to minimize potential disruption, all suppliers of goods
and services are being surveyed and critical suppliers are being audited to
determine their preparedness for Y2K. As of February 28, 1999, this effort was
70% complete. Where doubt exists, alternative sources are being secured if
available. Contingency plans are being developed to accommodate such failure.
 
     In the event that Y2K compliance is not timely met in certain critical
areas, operating and administrative management are in the process of developing
and testing contingency plans covering a wide range of issues that could
adversely impact business. These include failure of systems that effect safety
and the environment, supply of equipment and materials and provision of
utilities, particularly in third world countries. All major contingency plans
are targeted for completion in April 1999. It must, however, be clearly
recognized that contingency planning will continue to the millennium rollover
date as circumstances dictate.
 
     Costs for the Company-wide Y2K initiative are estimated at $5.1 million.
Expenditures for the calendar year ended December 31, 1998 amounted to
approximately $1.4 million, with an estimated $3.7 million to be spent in 1999.
Since full verification of Y2K compliance of field equipment is not yet
complete, unforeseen expenses that must be incurred to insure Y2K success may be
encountered. Y2K remediation costs are charged to operations on a current basis
as incurred.
 
     The Company has determined that its insurance does not cover costs incurred
to remedy Y2K related problems. The Company's insurance may provide
reimbursement for physical loss or damage to the Company's insured property
which results from a Y2K related incident.
 
     Company management believes that an effective program is in place to
resolve the Y2K issue in a timely manner. Since it is not possible to anticipate
all eventualities, particularly where third world countries are concerned,
circumstances which impact or interrupt normal business operations could occur.
The resulting cost, potential liability and loss of revenue under such
circumstances is not subject to quantification and has not been included in
estimates as detailed herein.
 
ITEM 9A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
     Not applicable.
 
                                       34
<PAGE>   37
 
ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT.
 
     The Board of Directors of the Company currently has nine members. The
Company's Articles of Association (the "Articles") divide the Board of Directors
into three classes having staggered terms of three years each, with Classes II,
III and I having initial terms expiring at the annual general meeting of
shareholders in 1999, 2000 and 2001, respectively. The Articles also require the
number of Directors to be not less than nine nor more than 15 and provide that
the Board is to determine, from time to time, the number of Directors to be on
the Board. Officers are elected by the Board of Directors for one year terms of
office expiring at the next Annual General Meeting of Shareholders. Information
with respect to the current Directors and executive officers of the Company is
set forth below.
 
DIRECTORS AND EXECUTIVE OFFICERS
 
     The following is a list of the Directors and executive officers of the
Company as of February 28, 1999.
 
<TABLE>
<CAPTION>
                   NAME                     AGE                    POSITION
                   ----                     ---                    --------
<S>                                         <C>   <C>
Gordon M. Anderson........................  66    Chairman of the Board and Class I Director
C. Stedman Garber, Jr.....................  55    President, Chief Executive Officer and
                                                  Class III Director
Richard N. Haass..........................  47    Class I Director
Khaled R. Al-Haroon.......................  49    Class I Director
Ferdinand Anton Berger....................  60    Class II Director
Stephen J. Solarz.........................  58    Class II Director
Nader Hamad Sultan........................  50    Class II Director
Sami Fahed Al-Rushaid.....................  44    Class III Director
Robert E. Wycoff..........................  68    Class III Director
Donald G. Barber..........................  64    Senior Vice President and Chief Financial
                                                    Officer
Gordon W. McCullough......................  64    Senior Vice President, Drilling Operations
Roger B. Hunt.............................  49    Senior Vice President, Commercial Manager
Ali Awad..................................  58    Vice President and Area Manager
James A. Blue.............................  53    Vice President and Regional Manager
Seals M. McCarty..........................  52    Vice President and Controller
Cary A. Moomjian, Jr......................  51    Vice President, General Counsel and
                                                  Secretary
Tom L. Seeliger...........................  55    Vice President and Area Manager
</TABLE>
 
     Gordon M. Anderson has served as a Director of the Company since 1969. Mr.
Anderson was appointed President and Chief Executive Officer in 1991 and became
Chairman of the Board of Directors in 1993. Mr. Anderson has worked with the
Company since June 1954. Following several international assignments, he was
appointed President of Santa Fe Drilling Company in 1972. Mr. Anderson retired
as Chief Executive Officer in December 1997 and currently serves as a
non-employee Director and Chairman of the Board. Mr. Anderson also serves as a
Trustee of the American University in Cairo.
 
     C. Stedman Garber, Jr. has served as a Director of the Company since 1989.
Mr. Garber was employed by Getty Oil Company between 1977 and 1984. Mr. Garber
joined the Company in 1984 as Vice President of Planning and Acquisition and in
1989 was appointed President of Santa Fe Minerals, Inc., a former subsidiary of
the Company. Mr. Garber was named Executive Vice President and Chief Operating
Officer of the Company in 1991, was appointed President and Chief Operating
Officer in December 1995 and was appointed Chief Executive Officer effective
January 1, 1998. Mr. Garber also serves as a Director of the American Petroleum
Institute.
 
     Richard N. Haass has served as a Director of the Company since November
1998. Dr. Haass is Director of Foreign Policy Studies at the Brookings
Institution. A widely quoted expert on contemporary American foreign policy, Dr.
Haass also consults for NBC News, is a frequent contributor to foreign affairs
journals and major newspapers and is an author of several books. Dr. Haass has
extensive government experience and
 
                                       35
<PAGE>   38
 
served as Special Assistant to President George Bush and Senior Director on the
staff of the National Security Council. He was awarded the Presidential Citizens
Medal for his contribution to the development of U.S. policy during Operations
Desert Shield and Desert Storm, has held various posts in the Departments of
State and Defense, and was a legislative aide in the U.S. Senate.
 
     Khaled R. Al-Haroon has served as a Director of the Company since November
1998. Mr. Al-Haroon serves on the Board of Kuwait Petroleum Corporation and as
Managing Director of International Operations. He also serves as the
Chairman-Oils Sector Loss Assessment Committee and is the Deputy Chairman of
Kuwait Petroleum Corporation's Higher Tender Committee. His career began in 1974
with the International Marketing Group of the Kuwait National Petroleum Company.
Since 1980, Mr. Al-Haroon has held various management positions at Kuwait
Petroleum Corporation. Mr. Al-Haroon also serves as a Director of Holdings.
 
     Ferdinand A. Berger has served as a Director of the Company since September
1997. Mr. Berger retired from the Shell Group of Companies at the end of 1996,
having served in various management positions in South America, the Middle East
and Europe since 1965. He was appointed Senior Vice President of Shell
International Trading Company in 1987 and served as a Director of Shell
International Petroleum Company Limited, with responsibility for overall Shell
Group activities in the Middle East, Africa and South Asia from 1992 until his
retirement. He is also a Director of Xpronet Inc., a privately owned oil and gas
exploration and production company.
 
     Stephen J. Solarz has served as a Director of the Company since November
1998. Mr. Solarz is President of Solarz Associates, an international consulting
firm. He also is a Director of the George Washington University Foreign Policy
Forum, Vice Chairman of the International Crisis Group, and a Senior Counselor
at APCO Associates. Mr. Solarz serves on the Board of several corporations
including Samsonite, IRI International and the First Philippine Fund, and is a
Director of the National Endowment for Democracy, the International Rescue
Committee, the National Democratic Institute and the Balkan Action Council
Steering Committee. Mr. Solarz has served in public office for twenty-four
years, both in the New York Assembly and in the U.S. House of Representatives.
As a Congressman, Mr. Solarz served on various committees, including the House
Foreign Affairs Committee where he chaired the Subcommittee on Africa and the
Subcommittee on Asian and Pacific Affairs. He was appointed by President Clinton
as Chairman of the Board of the Central Asian-American Enterprise Fund, served
as President Clinton's special envoy to Cambodia and co-chaired the National
Democratic Institute's election observer delegation.
 
     Nader Hamad Sultan has served as a Director of the Company since January
1995. Since 1993, he has served as Deputy Chairman and Managing Director,
Planning and International Operations, of KPC and was appointed Chief Executive
Officer of KPC in 1998. Mr. Sultan also serves as a Director of KPC and
Holdings.
 
     Sami Fahed Al-Rushaid has served as a Director of the Company since
September 1997. Mr. Al-Rushaid joined the Kuwait National Petroleum Company
("KNPC"), a subsidiary of KPC, in 1978. He held various positions in the KNPC
Corporate Planning Department until 1995, when he assumed his current position
as KNPC's Executive Assistant Managing Director of Planning and Finance. Mr.
Al-Rushaid also serves as a Director of Holdings.
 
     Robert E. Wycoff has served as a Director of the Company since September
1997. Mr. Wycoff retired from the Atlantic Richfield Company ("ARCO") in 1993,
having served with ARCO since 1953. After holding various engineering and
management positions, he was named Vice President and Resident Manager of ARCO's
Alaska Region in 1973. Mr. Wycoff served as a Director, President and Chief
Operations Officer of ARCO from 1986 until his retirement. He is also a Director
of MagneTek, Inc., a publicly traded company engaged in electronic equipment and
controls.
 
     Donald G. Barber joined the Company in 1985 as Senior Vice President of
Santa Fe Minerals, Inc., a former subsidiary of the Company, and has served as
Senior Vice President and Chief Financial Officer of the Company since December
1986. Mr. Barber previously served as Chief Financial Officer of Aminoil, Inc.
and in senior financial positions with Exxon U.S.A.
 
                                       36
<PAGE>   39
 
     Gordon W. McCullough joined the Company in 1962. He has worked in
progressively more senior management positions, primarily internationally,
including assignments in the United Kingdom, Holland, Norway, Nigeria, Brazil,
Libya and Angola. In 1982, Mr. McCullough was appointed Managing Director of the
Company's North Sea operations. In January 1994, Mr. McCullough was named the
Company's Senior Vice President, Drilling Operations.
 
     Roger B. Hunt joined the Company in 1970. During the period 1977 through
1982, he was assigned to Venezuela as Assistant Zone Manager. In 1983, he was
named Vice President and Manager of International Sales and in 1988 was assigned
regional operations responsibilities as Vice President and Regional Manager for
Asia, Australia, Venezuela, Azerbaijan, West Africa and the Gulf of Mexico. He
assumed his current responsibilities as Senior Vice President, Commercial
Manager, during September 1997.
 
     Ali Awad joined the Company in 1974 following a distinguished career with
major oil companies operating locally in Egypt. He has held several managerial
positions in Egypt, including Zone Manager from 1979 to 1993. In 1993, he was
promoted to his current position of Vice President and Area Manager responsible
for all offshore and land operations in Egypt as well as other operations in the
Mediterranean area.
 
     James A. Blue joined the Company in 1965. He initially served in various
assignments in England, Egypt, Libya, Scotland and Venezuela. He was named Vice
President and Regional Operations Manager in 1989. In 1997, he assumed his
current position of Vice President and Regional Manager with responsibility for
operations in Azerbaijan, the Gulf of Mexico, Venezuela and West Africa.
 
     Seals M. McCarty joined the Company in 1985 concurrently with the purchase
of Keydril Company from Gulf/Chevron. He had served as Vice President of Finance
for Keydril since 1982. Mr. McCarty has held various financial positions with
the Company including his present position as Vice President and Controller.
 
     Cary A. Moomjian, Jr. joined the Company in 1976. After two years as
Corporate Marine Counsel, Mr. Moomjian served as Santa Fe Drilling Company's
Senior Counsel and then Vice President, General Counsel. In 1983, Mr. Moomjian
was named Vice President, Contracts for Santa Fe Drilling Company. In January
1994, Mr. Moomjian was named Vice President, General Counsel and Secretary.
 
     Tom L. Seeliger joined the Company in 1965. He has worked in progressively
more senior management positions, primarily internationally, including
assignments in Nigeria, the North Sea, Libya, Argentina, Trinidad, Venezuela and
London. In 1993, Mr. Seeliger assumed his current position as Vice President and
Area Manager for North Sea operations.
 
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS.
 
COMPENSATION OF DIRECTORS AND OFFICERS
 
     For the calendar year ended December 31, 1998, the aggregate remuneration
paid by the Company (which includes salary and other cash payments under the
Company's benefit plans and policies) to all Directors and executive officers of
the Company as a group (21 persons, including three former Directors and a
deceased executive officer) for services in all capacities was $9,811,481.
 
     The Company and Gordon M. Anderson, a Director of the Company, entered into
a Consulting Agreement dated December 10, 1997 pursuant to which Mr. Anderson
receives certain compensation. See "Item 13. Interest of Management in Certain
Transactions -- Consulting Agreement."
 
DIRECTOR FEES AND STOCK OPTIONS
 
     Effective July 1, 1997, the Board adopted a policy whereby each
non-employee Director is paid an annual retainer fee of $20,000 plus meeting
fees of $2,000 for each Board and committee meeting (other than telephonic
meetings) attended by that Director. Each non-employee Director also is paid a
meeting fee of $500 for any Board or committee telephonic meeting of one hour or
longer and an additional $1,000 for each Board meeting such Director attends
outside his or her country of residence. Each non-employee Director who serves
as a committee chairman receives an additional meeting fee of $1,000. The
Company also reimburses its Directors for travel, lodging and related expenses
they may incur attending Board and committee meetings.
 
                                       37
<PAGE>   40
 
The Company has also adopted a stock option plan for non-employee Directors. See
"-- Long Term Incentive Plans -- 1997 Non-Employee Director Stock Option Plan."
Effective January 1, 1999, non-employee Directors are permitted to defer receipt
of cash compensation for Director service pursuant to a Deferred Compensation
Plan adopted by the Company in December 1998.
 
INVESTMENT SAVINGS AND PROFIT SHARING (401(k)) PLAN
 
     The Company maintains an Investment Savings and Profit Sharing Plan, a
defined contribution 401(k) plan that allows dollar payroll employees to make
both pre-tax and after-tax employee contributions. The Company matches these
employee contributions up to a maximum of 5% of a participant's base salary
subject to the limitations of eligible salary. Employees are vested in all
contributions made. Additionally, although it has not done so since 1984 and
does not currently expect to do so in the future, the Company has the option to
make additional employer contributions any year out of profits.
 
ANNUAL INCENTIVE COMPENSATION PLAN
 
     The Company also maintains an Annual Incentive Compensation Plan ("AIP").
The AIP provides for payment of additional compensation to participating
employees, including executive officers, based on individual contributions and
overall performance of the Company and its key operating business units during
the fiscal year. The AIP is administered by the Compensation Committee.
Employees of the Company and its subsidiaries eligible for awards under the AIP
are executive officers, officers and other key management personnel of the
Company and its subsidiaries, whose performance, in the judgment of the
Compensation Committee, can have a significant effect on the success of the
Company. During the term of the AIP, an aggregate of 286,250 Ordinary Shares
will be available for awards granted wholly or partly in Ordinary Shares under
the AIP.
 
     In general, the Compensation Committee will establish a target incentive
award for each participant based on performance measures (and performance scales
for the measures) and individual objectives. The maximum target incentive award
shall not exceed 100% of the participant's base salary in effect at the
beginning of the plan year. The current performance measures are (i) cash flow
from operations and (ii) return on average capital employed as compared to
certain peer group companies set forth in the AIP. In general, except for
"covered employees," as defined in Section 162(m) of the Internal Revenue Code
of 1986, as amended (the "Code") (relating to deduction limits for compensation
over $1 million), the Compensation Committee has discretion to vary these
measures and the relative weight to assign to the various objectives. With
respect to covered employees, the individual objectives must be capable of
determination by a third party and all of the objectives must be established
during the first 90 days of the plan year.
 
     In the event of a Change in Control (as defined below), (i) if the various
objectives have not yet been determined during the plan year, then the
objectives and participants shall generally be based on the same rules as set
forth in the preceding plan year and (ii) in general, participants are eligible
for full unprorated target incentives for that year.
 
PENSION PLANS
 
     The Company maintains a tax-qualified pension plan for employees of the
Company and participating subsidiaries who are residing in or are citizens of
the United States and who have completed one year of service, and a "mirror"
non-qualified pension plan for selected non-U.S. management and other employees
of the Company and participating subsidiaries which provides substantially
similar benefits (hereafter referred to collectively as the "Pension Plans"). In
addition, the Company maintains two non-qualified pension plans that provide
certain additional pension benefits.
 
     The Pension Plans provide for monthly retirement benefits upon normal
retirement at age 62 based on the number of credited years of service and the
average of the highest 60 months of salary covered by the Pension Plans. The
Pension Plans permit retirement as early as age 55 with reduced benefits. The
Equity Restoration Plan restores to Pension Plan participants any benefits
otherwise lost as a result of the benefit limitations contained in Section 415
of the Code and limitations contained in Section 401(a)(17) of the Code on the
                                       38
<PAGE>   41
 
amount of compensation includable in determining benefits provided by
tax-qualified trusts. The Company's Supplemental Executive Retirement Plan
("SERP") provides additional benefits for a select group of management employees
as a means to attract and retain employees of exceptional ability who are
critical to the Company's success.
 
     For employees who participate only in the Pension Plans and the Company's
Equity Restoration Plan, the annual retirement income benefit is equal to 1.525%
of the participant's average annual base salary in the highest 60 consecutive
months during the final 10 years of service multiplied by years of credited
service, plus 0.475% of this same base salary amount less the participant's
Social Security Covered Compensation (as defined), multiplied by years of
credited service not exceeding 35 years. For employees who also participate in
the SERP, the benefit so calculated will not be less than 60% of the
participant's average annual salary and bonus in the highest consecutive 36
months during the final five years of service, reduced ratably for service under
15 years.
 
LONG TERM INCENTIVE PLANS
 
  Performance Unit Plan
 
     On June 28, 1995, the Company adopted the Santa Fe International
Corporation Performance Unit Plan ("Performance Unit Plan") to provide incentive
via performance share units to foster and promote the long-term financial
success of the Company and materially increase the value of the equity interests
of the shareholder.
 
     Each unit awarded under the Performance Unit Plan represents the right to
receive an amount in cash on the date of payout, the amount of which depends
upon the Company's targeted three-year total cash flow from operations and a
return on fixed assets (three-year average of the annual cash flow from
operations divided by fixed assets) compared to a comparative group of peer
companies. The minimum (threshold) is $20 per unit, which is payable if the
Company's cash flow from operations equals 80% of targeted cash flow from
operations and the Company's return on fixed assets equals the 40th percentile
of its peer companies. If the results are less than threshold for any of the two
performance criteria, no awards are earned. The target amount of $100 per unit
is payable if the Company meets targeted total cash flow from operations and
return on fixed assets equals the 60th percentile of its peer companies. The
maximum amount of $300 per unit is payable if the Company's cash flow from
operations equals or exceeds 150% of targeted cash flow from operations and
return on fixed assets equals or exceeds the 90th percentile of peer companies.
As of December 31, 1998, there were 14 participants in the Performance Unit
Plan.
 
     The last awards under the Performance Unit Plan were granted in December
1996. No further awards will be made under the Performance Unit Plan. The
Performance Unit Plan will remain in existence until the last performance cycle
has elapsed and payouts, if any, have been made to participants. It is expected
that the Performance Unit Plan will terminate shortly after the results have
been finalized for the third plan year ending June 30, 1999. In the event of a
Change in Control (as defined below) the performance share units granted would
become fully vested.
 
  1997 Long Term Incentive Plan
 
     The Company has adopted the 1997 Long Term Incentive Plan (the "LTIP"),
which is designed to retain key executives and other selected employees by
rewarding them for making major contributions to the success of the Company and
to provide participants with a proprietary interest in the growth and
performance of the Company.
 
     Employees of the Company eligible for awards under the LTIP are executive
officers, other officers and key management personnel selected by the
Compensation Committee (including employees who are Directors), and whose
performance, in the judgment of the Compensation Committee, can have a
significant effect on the success of the Company. As of December 31, 1998, there
were 427 persons who participated in the LTIP. Awards under the LTIP may consist
of the grant of stock options, share appreciation rights, restricted and/or
performance-based share awards and/or restricted and/or performance-based cash
awards,
 
                                       39
<PAGE>   42
 
granted singly, in combination or in tandem. The exercise price for stock
options shall not be less than 85% of the fair market value of the stock on the
date of the option grant (100% in the case of incentive stock options). The
Compensation Committee can also award supplemental payments up to the amount
necessary to pay the federal income tax payable with respect to exercise of
non-qualified stock options, share appreciation rights, restricted shares and
performance units. If approved by the Compensation Committee, the Company may
also make loans to participants to purchase shares pursuant to the exercise of
an award. During the term of the LTIP, an aggregate of 5,725,000 Ordinary Shares
will be available for awards granted wholly or partly in Ordinary Shares under
the LTIP. No participant may receive during a fiscal year incentive awards
covering an aggregate of more than 150,000 Ordinary Shares.
 
     The Compensation Committee is responsible for administration and
interpretation of the LTIP. When a participant's employment with the Company is
terminated, any unexercised, deferred or unpaid awards will be treated as
provided in the specific agreement evidencing the award. If a participant
terminates for "good reason" (as defined in the LTIP) within two years after a
Change in Control (as defined below), all outstanding stock options shall become
vested and immediately exercisable and will remain exercisable until the earlier
of the expiration of their term or the first anniversary of the termination of
employment, all shares of restricted stock will immediately cease to be
forfeitable and all conditions relating to realization of any other stock-based
or non-stock award will immediately terminate. In addition, upon a Change in
Control (as defined below), the Company will have the right to cash out all
incentive awards (and all non-vested awards will vest) based on their fair
market value; for this purpose, their market value will be the average fair
market value per share on each of the five trading days immediately following a
Change in Control or the highest price per share, if any, offered in connection
with a Change in Control, whichever is higher. This cash out is automatic if the
stock of the surviving entity in a Change in Control is not publicly traded.
 
     As of February 28, 1999, an aggregate of 810,325 options to purchase the
Company's Ordinary Shares (net of canceled or expired options) had been granted
under the LTIP to all Directors and executive officers as a group (17 persons).
Such options were granted at exercise prices ranging from $12.25 to $45.00 per
Ordinary Share and expire ten years from date of grant or earlier. In addition,
the Company has granted restricted share awards for an aggregate of 107,600
Ordinary Shares to all Directors and executive officers as a group (17 persons).
 
  1997 Non-Employee Director Stock Option Plan
 
     The 1997 Non-Employee Director Stock Option Plan (the "Director Plan") has
been adopted by the Company. The Director Plan is designed to attract and retain
the services of experienced and knowledgeable non-employee Directors and to
provide non-employee Directors with a proprietary interest in the growth and
performance of the Company. Awards under the Director Plan consist of a grant of
stock options. The purchase price for the shares as to which the option is
exercised will be payable in full upon exercise, in cash or, if permitted by the
Compensation Committee, by tender of Ordinary Shares, valued at "fair market
value." During the term of the Director Plan, an aggregate of 286,250 Ordinary
Shares will be available for awards granted wholly or partly in Ordinary Shares.
No option will be granted under the Director Plan after 10 years following
consummation of the Company's initial public offering of Ordinary Shares in June
1997 (the "Offering"). The Compensation Committee is responsible for
administration and interpretation of the Director Plan.
 
     As of February 28, 1999, an aggregate of 58,000 options to purchase the
Company's Ordinary Shares (net of canceled or expired options) had been granted
under the Director Plan to eight non-employee Directors who participated in the
Director Plan. Such options were granted at exercise prices ranging from $12.25
to $45.50 per Ordinary Share. Any new non-employee Director will be granted a
one-time award of a right to purchase 10,000 Ordinary Shares (increased from
4,000 by amendment of the Director Plan in March 1999) upon their election to
the Board at the fair market stock price/value on the date of their election.
Each non-employee Director who continues in office immediately following the
Annual General Meeting of Shareholders in any year (commencing in 1998) will
automatically be granted an option to acquire 5,000 shares of Ordinary Shares
(increased from 2,000 by amendment of the Director Plan in March 1999). The
Board may increase the number of options granted, provided that a non-employee
Director cannot receive
                                       40
<PAGE>   43
 
more than 22,000 options (increased from 10,000 by amendment of the Director
Plan in December 1998) in any year. The price of shares that may be purchased
upon exercise of an option is the fair market value of the Ordinary Shares on
the date of the grant. Options granted pursuant to the Director Plan are
exercisable in installments of 33 1/3% upon each anniversary of the date of
grant. The term of each option is for a period not exceeding 10 years from the
date of grant.
 
     In the event of a Change in Control of the Company (as defined below), all
outstanding stock options will become vested and immediately exercisable and
will remain exercisable until the earlier of the expiration of their term or the
first anniversary of the Change in Control. In addition, the Company may cash
out options upon a Change in Control; these provisions are substantially the
same as set forth in the LTIP.
 
  1997 Employee Share Purchase Plan
 
     The Company has adopted the 1997 Employee Share Purchase Plan (the "Share
Purchase Plan"), which is designed to furnish eligible employees of the Company
and designated subsidiaries of the Company an incentive to advance the best
interests of the Company by providing a formal program whereby they may
voluntarily purchase Ordinary Shares of the Company at a favorable price and
upon favorable terms. Generally speaking, all covered employees of a
participating company who are scheduled to work an average of at least 20 hours
per week are eligible to participate in the Plan.
 
     Once a year, participants in the Share Purchase Plan are granted options to
purchase Ordinary Shares with a fair market value equal to the lesser of 10% of
the participant's eligible compensation (as defined in the Share Purchase Plan)
and the amount specified in Section 423(b) of the Code (currently $25,000). The
exercise price of the options is 85% of the fair market value of the Ordinary
Shares on the date of grant or the date of exercise, whichever is less. Options
granted under the Share Purchase Plan are exercisable on the date one year after
the date of grant. Generally speaking, participants pay option exercise prices
through payroll deductions. An aggregate of 572,500 Ordinary Shares are
available for grants of options under the Share Purchase Plan. The Share
Purchase Plan, which became effective January 1, 1998, is administered by the
Compensation Committee.
 
  1997 Employee Severance Protection Plan
 
     The Company maintains the 1997 Employee Severance Protection Plan (the
"Severance Protection Plan") to retain the services of its employees in the
event of an unsolicited takeover of the Company or in the event of a threat of a
Change in Control of the Company. The Severance Protection Plan is intended to
ensure the continued dedication and efforts of the Company's employees in such
events without undue concern for their personal financial and employment
security. The Severance Protection Plan covers all full-time U.S.-based payroll
employees as defined therein. Severance is only payable in the event of a
termination of employment by the Company other than for "cause" or voluntary
termination by the Employee for "good reason," each as defined in the Severance
Protection Plan, within a specified period following a Change in Control. A
participant will also receive severance if the employee is terminated by the
Company without "cause" or for "good reason" at the request or direction of the
third party involved in the Change in Control or otherwise in connection with or
in anticipation of a Change in Control.
 
DEFINITION OF CHANGE IN CONTROL
 
     A "Change in Control" for all of the Company's benefit plans described
above is generally deemed to occur (a) if any person (as such term is used in
Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act")) is or becomes the beneficial owner (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of securities of the
Company representing 20% or more of the combined voting power of the Company's
then outstanding securities; (b) if, during any period of two consecutive years,
individuals who at the beginning of such period constitute the Board of
Directors of the Company cease for any reason to constitute at least a majority
thereof, unless the election or nomination for the election by the Company's
shareholders of each new Director was approved by a vote of at least two-thirds
of the Directors then still in office who were Directors at the beginning of the
period; or (c) upon
 
                                       41
<PAGE>   44
 
consummation of a merger, consolidation or similar event, if the equity holders
of the Company prior to the transaction have beneficial ownership of less than
50% of the combined voting power of the surviving entity; (d) upon any sale,
disposition or similar transaction of 50% or more of the assets or earning power
of the Company or business operations which generate a majority of the
consolidated revenues; or (e) upon a liquidation of the Company.
 
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES.
 
     See "Item 11. Compensation of Directors and Officers."
 
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS.
 
     This section describes certain transactions among KPC, Holdings and the
Company that occurred prior to the Company's Offering and certain arrangements
that will be in effect after the Offering. Because the Company is controlled by
KPC, these transactions and arrangements were not the result of arms-length
negotiations. See Note 12 of the Notes to Consolidated Financial Statements.
 
CONTRACT DRILLING SERVICES
 
     The Company provides contract drilling and associated services in Kuwait to
the Kuwait Oil Company K.S.C. ("KOC"), a subsidiary of KPC, and also provides
contract drilling services to a partially owned affiliate of the Kuwait Oil
Company in the Kuwait-Saudi Arabia Partitioned Neutral Zone. Such services are
performed pursuant to drilling contracts which contain terms and conditions and
rates of compensation which materially approximate those which are customarily
included in the Company's arms-length contracts of a similar nature. In
connection therewith, KOC provides the Company rent-free use of certain land and
maintenance facilities and has committed to continue providing same, subject to
availability of the maintenance facilities, through the current February 2001
term of the drilling contracts. In relation to its drilling business in Kuwait,
the Company has an agency agreement with a subsidiary of KPC which obligates the
Company to pay an agency fee based upon a percentage of revenues. The Company
believes the terms of this agreement are more favorable than those which could
be obtained with an unrelated third party in an arms-length negotiation, but the
value of such terms is currently immaterial to the Company's results of
operations.
 
     The Company earned revenues from KPC affiliated companies in the ordinary
course of business of $44.8 million for the calendar year ended December 31,
1998. The Company paid agency fees to a subsidiary of KPC of $0.6 million during
the calendar year ended December 31, 1998. The Company had accounts receivable
from KPC affiliated companies of $6.1 million at December 31, 1998.
 
RELATED PARTY AGREEMENTS
 
     The following summary description of the agreements among the Company,
Holdings and KPC and of the Articles is qualified in its entirety by reference
to the forms of Intercompany Agreement and Management Services Agreement and the
Articles filed as exhibits to this Annual Report on Form 20-F.
 
  Intercompany Agreement
 
     In connection with the Offering, the Company, Holdings and KPC have entered
into an Intercompany Agreement (the "Intercompany Agreement"), certain
provisions of which are summarized below. As used herein, "KPC Affiliated Group"
means KPC and its affiliates, including Holdings, other than the Company and its
subsidiaries.
 
     Indemnification. As of December 31, 1998, the consolidated financial
statements of Holdings contained liabilities to third parties, including tax
liabilities, aggregating approximately $61 million incurred by certain
subsidiaries which conducted the Company's former non-drilling operations and
services (the "Non-Drilling Subsidiaries") on or before March 31, 1997. Holdings
maintains cash and cash equivalents (the "Liability Payment Fund") which will be
used to satisfy those liabilities remaining after such date. The Company,
 
                                       42
<PAGE>   45
 
Holdings and KPC have agreed in the Intercompany Agreement that all amounts paid
to claimants to satisfy those liabilities, whether by settlement, judgment or
award (including claimants' attorneys' fees), will be paid by Holdings from the
Liability Payment Fund. The Company will pay all internal and external costs and
fees (including the Company's and Holdings' attorneys' fees) associated with
management and resolution of those liabilities, and believes such costs and fees
will not be material. If any amount remains in the Liability Payment Fund at
March 31, 2002, Holdings will pay the Company the first $10 million of such
amount and 50% of any amount in excess of $10 million. Thereafter, or if the
resolution of those liabilities earlier exhausts the Liability Payment Fund,
Holdings will have no further responsibility for those liabilities, and the
Company will be responsible for all costs, fees and amounts paid to resolve
those liabilities and will indemnify the KPC Affiliated Group in respect of such
costs and fees and those liabilities. The Company believes that the Liability
Payment Fund is adequate to provide for such costs and fees and those
liabilities. Accordingly, the Company believes that the indemnification costs,
if any, will not be material and no additional reserves have been established by
the Company in respect of such costs and fees and those liabilities or the
Company's obligation under the Intercompany Agreement relating to such costs and
fees and those liabilities. See "-- Management Services Agreement."
 
     The Intercompany Agreement also provides that, except as may be provided in
a separate agreement, the Company will indemnify the KPC Affiliated Group
against losses based on, or taxes arising from, the following: (i) the ownership
of the assets or the operation of the business of the Company or its
subsidiaries, (ii) any other activities of the Company or its subsidiaries,
(iii) any guaranty or similar agreement by the KPC Affiliated Group provided to
any person with respect to any obligation of the Company or its subsidiaries,
and (iv) certain other matters. In addition, the Company has agreed to indemnify
the KPC Affiliated Group against certain civil liabilities, including
liabilities under the Securities Act of 1933, as amended (the "Securities Act"),
relating to misstatements in or omissions from the Registration Statement filed
in respect of the Offering and any other registration statement or report that
the Company files under the Securities Act. Holdings has also agreed to
indemnify the Company and its subsidiaries against losses based on the ownership
or operation of the assets or properties or the operation or conduct of the
business of Holdings and its subsidiaries on or after March 31, 1997.
 
     Consent of Holdings to Certain Events. The Intercompany Agreement provides
that until members of the KPC Affiliated Group cease to own the lesser of at
least 25% of the outstanding Ordinary Shares or 25% of the Company's outstanding
voting shares, the prior consent of Holdings generally will be required for: (i)
any disposition by the Company of assets involving consideration in excess of
$50 million; (ii) any issuance by the Company or any subsidiary of the Company
of any equity securities; (iii) the incurrence of any indebtedness or guaranty
in a consolidated amount in excess of $250 million at any time outstanding; and
(iv) a change in corporate domicile of the Company or any of its subsidiaries.
Analogous provisions are contained in the Articles. Under this arrangement,
consents may be requested from time to time. In the event Holdings does not
respond within 30 days after receipt of written notice from the Company
requesting consent to a proposed action, then the consent will be deemed to have
been given by Holdings to the Company.
 
     Registration Rights. The Company has granted to the KPC Affiliated Group
certain demand and "piggyback" registration rights with respect to equity
securities owned by it. Pursuant to the demand registration rights, the KPC
Affiliated Group may, at any time, request the Company to register under the
Securities Act any or all Ordinary Shares held by the KPC Affiliated Group
whenever it wishes to sell Ordinary Shares in a transaction it reasonably
expects will yield gross proceeds of at least $250 million. The Company has
agreed to use its best efforts to effect any demand registrations requested by
the KPC Affiliated Group and has also agreed to register under the Securities
Act a certain amount of Ordinary Shares held by the KPC Affiliated Group when
the Company initiates certain other registrations of equity securities of the
Company on its own behalf or on behalf of any shareholder of the Company. Such
registration rights are transferable by the KPC Affiliated Group. The Company
has agreed to pay all costs and expenses in connection with each such
registration, except underwriting discounts and commissions applicable to the
equity securities sold by the KPC Affiliated Group and its transferees. The
Intercompany Agreement also contains specified restrictions on the ability of
the KPC Affiliated Group to exercise its demand and piggyback registration
rights and also contains customary terms and provisions with respect to, among
other things,
 
                                       43
<PAGE>   46
 
registration procedures and certain rights to indemnification granted by parties
thereunder in connection with the registration of Ordinary Shares on behalf of
the KPC Affiliated Group under the Securities Act and otherwise.
 
     Other Provisions. Until the end of the first fiscal year of KPC in which
the KPC Affiliated Group owns the lesser of at least 25% of the outstanding
Ordinary Shares or 25% of the Company's outstanding voting shares, the Company
has agreed to furnish extensive financial information to Holdings, including
certain information before it becomes publicly available. So long as the KPC
Affiliated Group owns at least 10% of the outstanding Ordinary Shares or 10% of
the Company's outstanding voting shares, the Company has agreed to discuss its
affairs, finances and accounts with Holdings and to permit Holdings to inspect
its properties, corporate books, and financial and other records.
 
  Management Services Agreement
 
     The Company has also entered into a Management Services Agreement with
Holdings (the "Management Services Agreement") for the purpose of providing
asset (primarily real estate) management services, general and administrative
services and liability management and resolution services to Holdings, the Non-
Drilling Subsidiaries and inactive subsidiaries of Holdings. The Management
Services Agreement authorizes the Company to resolve the liabilities of the
Non-Drilling Subsidiaries described under "Intercompany Agreement" using the
Liability Payment Fund. Although Holdings retains the right to reduce or expand
the scope of services to be performed by the Company pursuant to the Management
Services Agreement, the Company's liability management and resolution services
may not be reduced or terminated. The Management Services Agreement also
provides for payment of an initial asset management fee to the Company of
$173,000 per year as well as reimbursement of out-of-pocket costs in respect of
asset management services, and stipulates that the fees are subject to
negotiation on an annual basis and upon any reduction in or expansion of the
scope of services provided by the Company. The Company will pay all internal and
external costs and fees (including the Company's and Holdings' attorneys' fees)
associated with the Company's liability management and resolution services and
all internal and external costs and fees associated with the provision of
general and administrative services pursuant to the Management Services
Agreement. The Company believes such costs and fees will not be material.
 
  Charter Provisions Relating to Corporate Opportunities and Interested
Directors
 
     The Company's Board of Directors currently includes persons who are also
Directors or officers of Holdings or KPC. As a consequence, Directors of the
Company who are also Directors or officers of KPC or Holdings charged with
granting or withholding consent for certain of the Company's actions may be
faced with conflicts of interest. In addition, potential conflicts of interest
exist or could arise in the future for such Directors with respect to a number
of areas, including the Company's contract drilling activities in Kuwait and its
other business relationships with KPC subsidiaries.
 
     In order to address certain potential conflicts of interest between the
Company and the KPC Affiliated Group, the Articles contain provisions regulating
and defining the conduct of certain affairs of the Company as they may involve
the KPC Affiliated Group and their Directors and officers, and the powers,
rights, duties and liabilities of the Company and its officers, Directors and
shareholders in connection therewith. In general, these provisions recognize
that the Company and the KPC Affiliated Group may engage in the same line of
business and have an interest in the same areas of corporate opportunities and
that the Company and the KPC Affiliated Group will continue to have certain
contractual and business relations with each other (including service of
Directors and officers of the KPC Affiliated Group as Directors of the Company).
 
     The Articles provide that the KPC Affiliated Group shall have no duty to
refrain from (i) engaging in the same line of business as the Company, (ii)
doing business with any customer of the Company or (iii) employing any employee
of the Company. The Articles also provide that the KPC Affiliated Group is not
under any duty to present any corporate opportunity to the Company which may be
a corporate opportunity for both the KPC Affiliated Group and the Company.
 
                                       44
<PAGE>   47
 
     When corporate opportunities are offered to persons who are Directors or
officers of the Company and the KPC Affiliated Group, the Articles provide that
such Directors or officers of the Company shall not be liable to the Company or
its shareholders by reason of the fact that such members of the KPC Affiliated
Group pursue such corporate opportunities for themselves or do not present such
corporate opportunities to the Company, except in the case of wilful default or
fraud of such Directors or officers, if such Directors or officers act in a
manner consistent with a policy that provides for allocation based principally
on the capacities in which the individual Director or officer is offered the
opportunity.
 
     The Articles also provide that no arrangement between the Company and the
KPC Affiliated Group or another related party shall be voidable, and no
liability shall be imposed, solely because a member of the KPC Affiliated Group
is a party thereto, or solely because any Directors or officers who are related
parties are present at, participate in or vote with respect to, the
authorization of the arrangement, except in the case of wilful default or fraud
on the part of the Directors or officers, if the material facts as to the
arrangement are disclosed to the Company's Board of Directors or the holders of
the Ordinary Shares who approve the arrangement.
 
     The affirmative vote of a two-thirds majority of the shares entitled to
vote thereon and voting at a meeting of shareholders is required to amend the
Articles, including the provisions concerning corporate opportunity and
interested Directors described above and the provisions requiring the consent of
Holdings to certain actions described in "-- Intercompany Agreement -- Consent
of Holdings to Certain Events." Accordingly, so long as the KPC Affiliated Group
controls more than one third of such voting power, it can prevent any such
amendment.
 
CONSULTING AGREEMENT
 
     On December 10, 1997, Gordon M. Anderson, a Director of the Company, and
the Company entered into a Consulting Agreement pursuant to which Mr. Anderson
shall serve as an independent consultant to the Company with respect to matters
relating to or affecting the operations of the Company. The term of the
Consulting Agreement was one year, terminating on January 1, 1999. Pursuant to
the Consulting Agreement, the Company has compensated Mr. Anderson by issuing to
Mr. Anderson 4,000 restricted Ordinary Shares under the Company's LTIP. In
addition, on the 25th month anniversary from the date of the grant of restricted
Ordinary Shares, the Company will further compensate Mr. Anderson under the
Consulting Agreement by paying Mr. Anderson cash in an amount equal to the
federal income tax payable with respect to the vesting of the 4,000 Ordinary
Shares and the federal income tax payable with respect to the cash payment to
Mr. Anderson. The Consulting Agreement also provides that Mr. Anderson will be
entitled to the standard Directors' cash and noncash compensation that all other
non-employee Directors are entitled to receive. Mr. Anderson has fulfilled his
obligations under the Consulting Agreement, which was not renewed for 1999.
 
                                    PART II
 
ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED.
 
     Not applicable.
 
                                    PART III
 
ITEM 15. DEFAULTS UPON SENIOR SECURITIES.
 
     None.
 
ITEM 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED
SECURITIES.
 
     None.
 
                                       45
<PAGE>   48
 
                                    PART IV
 
ITEM 17. FINANCIAL STATEMENTS.
 
     Not applicable.
 
ITEM 18. FINANCIAL STATEMENTS.
 
     See Item 19(a).
 
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS
 
     (a) Financial Statements
 
     See Index to Consolidated Financial Statements on page F-1.
 
     (b) Exhibits
 
<TABLE>
<CAPTION>
      EXHIBIT NO.                            EXHIBIT DESCRIPTION
      -----------                            -------------------
<C>                      <S>
        **3.1            -- Amended and Restated Memorandum of Association of the
                            Registrant.
        **3.2            -- Amended and Restated Articles of Association of the
                            Registrant.
         *4              -- Specimen of Ordinary Shares Certificate.
       **10.1            -- Registrant's Investment Savings and Profit Sharing Plan.
       **10.2            -- Registrant's Pension Plan (U.S. employees).
       **10.3            -- Registrant's Special Pension Plan (non-U.S. employees).
       **10.4            -- Registrant's Equity Restoration Plan.
        *10.5            -- Registrant's Supplemental Executive Retirement Plan.
        *10.6            -- Registrant's Performance Unit Plan.
      ***10.7            -- Registrant's Annual Incentive Compensation Plan.
      ***10.8            -- Registrant's 1997 Long Term Incentive Plan.
      ***10.9            -- Registrant's 1997 Non-Employee Director Stock Option
                            Plan.
      ***10.10           -- Registrant's 1997 Employee Share Purchase Plan.
        *10.11           -- Registrant's Employee Severance Protection Plan.
        *10.12           -- Registrant's Directors and Officers Indemnity Agreement.
        *10.13           -- Intercompany Agreement by and among Kuwait Petroleum
                            Corporation, SFIC Holdings (Cayman), Inc. and the
                            Registrant, dated June 9, 1997.
        *10.14           -- Management Services Agreement by and between SFIC
                            Holdings (Cayman), Inc. and the Registrant, dated June 9,
                            1997.
       **10.15           -- Agency Agreement between Kuwait Santa Fe Braun for
                            Engineering and Petroleum Enterprises( K.S.B.) Company
                            K.S.C. and the Registrant, dated April 1, 1992.
       **10.16           -- Contract for the Construction and Sale of a Jackup
                            Drilling Unit by and between Far East Levingston
                            Shipbuilding Ltd. and the Registrant, dated as of
                            December 16, 1996.
       **10.17           -- Drilling Contract by and between Mobil Oil Canada
                            Properties and Santa Fe Drilling Company (Canada)
                            Limited, dated as of December 16, 1996.
        *10.18           -- Share Purchase Agreement between SFIC Holdings (Cayman)
                            Inc. and the Registrant, dated as of June 9, 1997.
        *10.19           -- Contract for the Construction and Sale of Jackup Drilling
                            Unit Galaxy III by and between Keppel FELS Limited and
                            the Registrant, dated as of September 17, 1997.
</TABLE>
 
                                       46
<PAGE>   49
 
<TABLE>
<CAPTION>
      EXHIBIT NO.                            EXHIBIT DESCRIPTION
      -----------                            -------------------
<C>                      <S>
        *10.20           -- Letter of Interim Agreement for Provision of Jackup
                            Drilling Unit by and between Amoco (U.K.) Exploration
                            Company and the Registrant, dated as of September 3,
                            1997.
     ****10.21           -- Consulting Agreement dated December 10, 1997 between
                            Registrant and Gordon M. Anderson.
     ****10.22           -- AMOCO (U.K.) Exploration Company Form of Contract Ref:
                            AD3300 for The Provision of the Jack-Up Drilling Unit
                            Santa Fe "Galaxy III" for Drilling Operations on the
                            U.K.C.S. with Santa Fe Drilling Company (North Sea)
                            Limited, dated September 3, 1997 (with Appendix 5 only).
        +10.23           -- Registrant's Non-Employee Director Deferred Compensation
                            Plan.
        +10.24           -- Amendment to Registrant's 1997 Non-Employee Director
                            Stock Option Plan.
        +10.25           -- Amendment to Registrant's 1997 Long-Term Incentive
                            Compensation Plan.
        +10.26           -- Amendment to Registrant's Supplemental Executive
                            Retirement Plan.
        +10.27           -- Amendment to Registrant's Supplemental Executive
                            Retirement Plan.
        +10.28           -- Amendment to Registrant's 1997 Non-Employee Director
                            Stock Option Plan.
        +21              -- List of Subsidiaries.
        +23.1            -- Consent of Ernst & Young LLP, independent auditors
</TABLE>
 
---------------
 
*    Incorporated by reference to the Company's Annual Report on Form 20-F for
     the fiscal year ended June 30, 1997.
 
**   Incorporated by reference to the Company's Registration Statement on Form
     F-1 (No. 333-6912) filed May 14, 1997.
 
***  Incorporated by reference to the Company's Registration Statement on Form
     S-8 (No. 333-7070) filed June 13, 1997.
 
**** Incorporated by reference to the Company's Report on Form 6-K filed March
     3, 1998.
 
+    Filed herewith.
 
                                       47
<PAGE>   50
 
                       SANTA FE INTERNATIONAL CORPORATION
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                               PAGE
                                                               ----
<S>                                                            <C>
Report of Independent Auditors..............................   F-1
Consolidated Statements of Operations for the calendar year
  ended December 31, 1998, the six months ended December 31,
  1997 and the fiscal years ended June 30, 1997 and 1996....   F-2
Consolidated Balance Sheets as of December 31, 1998 and
  1997......................................................   F-3
Consolidated Statements of Shareholders' Equity for the
  calendar year ended December 31, 1998, the six months
  ended December 31, 1997 and the fiscal years ended June
  30, 1997 and 1996.........................................   F-4
Consolidated Statements of Cash Flows for the calendar year
  ended December 31, 1998, the six months ended December 31,
  1997 and the fiscal years ended June 30, 1997 and 1996....   F-5
Notes to the Consolidated Financial Statements..............   F-6
</TABLE>
<PAGE>   51
 
                         REPORT OF INDEPENDENT AUDITORS
 
Board of Directors and Shareholders
Santa Fe International Corporation
 
     We have audited the accompanying consolidated balance sheets of Santa Fe
International Corporation and subsidiary companies (the Company) as of December
31, 1998 and 1997, and the related consolidated statements of operations,
shareholders' equity and cash flows for the calendar year ended December 31,
1998, the six months ended December 31, 1997 and the fiscal years ended June 30,
1997 and 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Santa Fe
International Corporation and subsidiary companies at December 31, 1998 and
1997, and the consolidated results of their operations and their cash flows for
the calendar year ended December 31, 1998, the six months ended December 31,
1997 and the fiscal years ended June 30, 1997 and 1996, in conformity with
generally accepted accounting principles in the United States.
 
                                            ERNST & YOUNG LLP
 
Dallas, Texas
January 27, 1999
 
                                       F-1
<PAGE>   52
 
          SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
         (U.S. DOLLARS, IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                           CALENDAR YEAR    SIX MONTHS
                                               ENDED          ENDED       FISCAL YEAR ENDED JUNE 30,
                                           DECEMBER 31,    DECEMBER 31,   ---------------------------
                                               1998            1997           1997           1996
                                           -------------   ------------   ------------   ------------
<S>                                        <C>             <C>            <C>            <C>
Operating revenues (Notes 11 and 12).....  $    811,346    $    375,185   $    578,563   $    470,882
Operating costs..........................       414,022         195,678        339,665        308,513
                                           ------------    ------------   ------------   ------------
          Operating margin...............       397,324         179,507        238,898        162,369
Other operating costs and expenses:
  Depreciation and amortization (Note
     3)..................................        55,807          24,876         43,360         77,128
  General and administrative.............        22,161          10,781         16,931         17,168
  Gain on sale of assets.................        (5,988)           (374)        (1,041)          (754)
                                           ------------    ------------   ------------   ------------
Operating income.........................       325,344         144,224        179,648         68,827
Other income (expense):
  Investment income......................         5,583           1,364          5,702         10,071
  Interest expense.......................            --              --             --           (386)
  Other, net.............................        (4,263)           (560)           891           (669)
                                           ------------    ------------   ------------   ------------
Income before provision for taxes on
  income.................................       326,664         145,028        186,241         77,843
Provision for taxes on income (Note 5)...        39,520          16,500         21,325         15,867
                                           ------------    ------------   ------------   ------------
Net income...............................  $    287,144    $    128,528   $    164,916   $     61,976
                                           ============    ============   ============   ============
Net income per Ordinary Share:
  Basic..................................  $       2.51    $       1.12   $       1.44
                                           ============    ============   ============
  Diluted................................  $       2.50    $       1.12   $       1.44
                                           ============    ============   ============
Pro forma net income per Ordinary Share:
  Basic and diluted......................                                                $       0.54
                                                                                         ============
Weighted average ordinary and ordinary
  equivalent shares used in Ordinary
  Share computations:
  Basic..................................   114,500,249     114,500,000    114,500,000    114,500,000
                                           ============    ============   ============   ============
  Diluted................................   114,812,234     114,608,000    114,502,000    114,500,000
                                           ============    ============   ============   ============
</TABLE>
 
                See notes to consolidated financial statements.
 
                                       F-2
<PAGE>   53
 
          SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
 
                          CONSOLIDATED BALANCE SHEETS
                (U.S. DOLLARS, IN THOUSANDS, EXCEPT SHARE DATA)
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                              -----------------------
                                                                 1998         1997
                                                              ----------   ----------
<S>                                                           <C>          <C>
Current assets:
  Cash and cash equivalents.................................  $  124,314   $   68,453
  Marketable securities.....................................          --        8,093
  Accounts receivable (Note 12).............................     161,728      149,268
  Inventories...............................................      51,481       51,182
  Prepaid expenses and other current assets.................      14,913       17,459
                                                              ----------   ----------
          Total current assets..............................     352,436      294,455
                                                              ----------   ----------
Property and equipment, at cost (Note 3)....................   2,030,756    1,737,285
  Less accumulated depreciation and amortization............    (981,555)    (935,315)
                                                              ----------   ----------
  Property and equipment, net...............................   1,049,201      801,970
Prepaid deposits............................................          --       14,861
Other noncurrent assets (Notes 5 and 7).....................      52,099       50,167
                                                              ----------   ----------
          Total assets......................................  $1,453,736   $1,161,453
                                                              ==========   ==========
 
                        LIABILITIES AND SHAREHOLDERS' EQUITY
 
Current liabilities:
  Accounts payable..........................................  $   74,603   $   92,014
  Accrued liabilities (Note 4)..............................     107,057       79,741
                                                              ----------   ----------
          Total current liabilities.........................     181,660      171,755
Other noncurrent liabilities (Note 6).......................      44,852       36,681
                                                              ----------   ----------
          Total liabilities.................................     226,512      208,436
Commitments and contingencies (Note 10)
Shareholders' equity (Notes 1 and 8):
  Ordinary Shares par value $.01; 600,000,000 shares
     authorized, 114,762,469 and 114,746,550 shares issued
     and outstanding at December 31, 1998 and 1997,
     respectively...........................................       1,148        1,147
  Additional paid-in capital................................     667,816      665,869
  Retained earnings.........................................     558,260      286,001
                                                              ----------   ----------
          Total shareholders' equity........................   1,227,224      953,017
                                                              ----------   ----------
          Total liabilities and shareholders' equity........  $1,453,736   $1,161,453
                                                              ==========   ==========
</TABLE>
 
                See notes to consolidated financial statements.
 
                                       F-3
<PAGE>   54
 
          SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
 
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                (U.S. DOLLARS, IN THOUSANDS, EXCEPT SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                                                     ACCUMULATED
                                      ORDINARY SHARES       ADDITIONAL              SHAREHOLDERS'       OTHER           TOTAL
                                  -----------------------    PAID-IN     RETAINED        NET        COMPREHENSIVE   SHAREHOLDERS'
                                    SHARES      PAR VALUE    CAPITAL     EARNINGS    INVESTMENT        INCOME          EQUITY
                                  -----------   ---------   ----------   --------   -------------   -------------   -------------
<S>                               <C>           <C>         <C>          <C>        <C>             <C>             <C>
BALANCE AT JUNE 30, 1995........           --    $   --     $       --   $    --      $ 721,143        $ 6,946       $  728,089
  Distributions to parent.......           --        --             --        --        (50,027)            --          (50,027)
  Net income....................           --        --             --        --         61,976             --           61,976
  Other comprehensive income:
    Unrealized gains on
    available-for-sale
    securities..................           --        --             --        --             --         (6,946)          (6,946)
                                  -----------    ------     ----------   --------     ---------        -------       ----------
  Comprehensive income..........           --        --             --        --         61,976         (6,946)          55,030
  Reclassification of
    shareholder's net investment
    (Note 1)....................   84,500,000       845        732,247        --       (733,092)            --               --
                                  -----------    ------     ----------   --------     ---------        -------       ----------
BALANCE AT JUNE 30, 1996........   84,500,000       845        732,247        --             --             --          733,092
  Ordinary Shares issued for
    cash, net (Note 1)..........   40,000,000       400      1,080,320        --             --             --        1,080,720
  Purchase of Ordinary Shares
    from Holdings (Note 1)......  (10,000,000)     (100)      (272,080)       --             --             --         (272,180)
  Distributions to parent.......           --        --       (875,433)       --             --             --         (875,433)
  Net income....................           --        --             --   164,916             --             --          164,916
                                  -----------    ------     ----------   --------     ---------        -------       ----------
BALANCE AT JUNE 30, 1997........  114,500,000     1,145        665,054   164,916             --             --          831,115
  Ordinary Shares issued
    pursuant to employee benefit
    plans, net of forfeitures...      246,550         2            815        --             --             --              817
  Dividends.....................           --        --             --    (7,443)            --             --           (7,443)
  Net Income....................           --        --             --   128,528             --             --          128,528
                                  -----------    ------     ----------   --------     ---------        -------       ----------
BALANCE AT DECEMBER 31, 1997....  114,746,550     1,147        665,869   286,001             --             --          953,017
  Ordinary Shares issued
    pursuant to employee benefit
    plans, net of forfeitures...       15,919         1          1,947        --             --             --            1,948
  Dividends.....................           --        --             --   (14,885)            --             --          (14,885)
  Net Income....................           --        --             --   287,144             --             --          287,144
                                  -----------    ------     ----------   --------     ---------        -------       ----------
BALANCE AT DECEMBER 31, 1998....  114,762,469    $1,148     $  667,816   $558,260     $      --        $    --       $1,227,224
                                  ===========    ======     ==========   ========     =========        =======       ==========
</TABLE>
 
                See notes to consolidated financial statements.
 
                                       F-4
<PAGE>   55
 
          SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                          (U.S. DOLLARS, IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                            CALENDAR      SIX MONTHS      FISCAL YEAR ENDED
                                                           YEAR ENDED       ENDED              JUNE 30,
                                                          DECEMBER 31,   DECEMBER 31,   ----------------------
                                                              1998           1997          1997        1996
                                                          ------------   ------------   ----------   ---------
<S>                                                       <C>            <C>            <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income............................................   $ 287,144      $ 128,528     $  164,916   $  61,976
  Adjustments to reconcile net income to net cash
    provided by operating activities:
    Depreciation and amortization.......................      55,807         24,876         43,360      77,128
    Gain on sale of assets..............................      (5,988)          (374)        (1,041)       (754)
    Accretion of interest income and gains on sales of
      marketable securities.............................        (127)          (508)        (4,643)     (9,866)
    Deferred provision (benefit) for taxes on income....        (785)         2,545          2,381       4,452
  Changes in operating assets and liabilities:
    Accounts receivable.................................     (12,460)       (15,638)        (3,592)    (27,066)
    Inventories.........................................        (299)        (4,727)        (3,766)     (5,274)
    Prepaid expenses and other current assets...........       2,546         (3,691)          (685)      1,440
    Accounts payable....................................     (17,411)        30,359         (4,457)     23,204
    Accrued liabilities.................................      27,316          4,825         15,906      (9,704)
  Other, net............................................       7,478         (1,526)        (1,201)     (2,418)
                                                           ---------      ---------     ----------   ---------
         Net cash provided by operating activities......     343,221        164,669        207,178     113,118
CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital expenditures..................................    (277,400)      (127,133)      (146,596)    (64,810)
  Advance payments for drilling rigs....................     (18,532)       (23,111)            --          --
  Proceeds from sales of property and equipment.........       1,406            608          1,191       1,490
  Maturities of marketable securities...................       8,220         44,050         44,986          --
  Sales of marketable securities........................          --             --             --      91,881
  Purchases of marketable securities....................          --        (25,842)       (42,778)    (23,549)
  Proceeds from insurance settlement....................      13,831             --             --          --
                                                           ---------      ---------     ----------   ---------
         Net cash provided by (used for) investing
           activities...................................    (272,475)      (131,428)      (143,197)      5,012
CASH FLOWS FROM FINANCING ACTIVITIES:
  Sale of Ordinary Shares, net..........................          --             --      1,080,720          --
  Purchase of Ordinary Shares from Holdings.............          --             --       (272,180)         --
  Distributions to parent, net..........................          --             --       (875,433)    (50,027)
  Dividends paid........................................     (14,885)        (3,721)            --          --
  Repayments of capital lease obligations...............          --             --             --     (58,364)
                                                           ---------      ---------     ----------   ---------
         Net cash used for financing activities.........     (14,885)        (3,721)       (66,893)   (108,391)
                                                           ---------      ---------     ----------   ---------
  Net change in cash and cash equivalents...............      55,861         29,520         (2,912)      9,739
  Cash and cash equivalents at beginning of period......      68,453         38,933         41,845      32,106
                                                           ---------      ---------     ----------   ---------
  Cash and cash equivalents at end of period............   $ 124,314      $  68,453     $   38,933   $  41,845
                                                           =========      =========     ==========   =========
  Supplemental disclosures of cash flows information:
    Interest paid.......................................   $      --      $      --     $       --   $   1,947
                                                           =========      =========     ==========   =========
    Income taxes paid...................................   $  28,005      $   7,587     $   11,819   $   9,440
                                                           =========      =========     ==========   =========
</TABLE>
 
                See notes to consolidated financial statements.
 
                                       F-5
<PAGE>   56
 
          SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 31, 1998
 
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
 
     Santa Fe International Corporation (the "Company"), a Cayman Islands
corporation, is a majority-owned subsidiary of SFIC Holdings (Cayman), Inc.
("Holdings"), which in turn is a wholly-owned subsidiary of Kuwait Petroleum
Corporation ("KPC"). KPC is wholly owned by the Government of Kuwait. In a
series of transactions during the four years ended December 31, 1996, Holdings
and its subsidiaries were reorganized in a manner which resulted in the Company
owning all of the drilling assets and the direct and indirect subsidiaries of
Holdings and KPC engaged in providing contract drilling and drilling related
services (the "Reorganization"). The actions taken in connection with the
Reorganization have been accounted for as a reorganization of entities under
common control in a manner similar to a pooling of interests. For financial
reporting purposes the historical equity accounts of the Company, its
subsidiaries and its predecessors for dates prior to June 30, 1996 (the date at
which the Reorganization was substantially complete) have been combined into a
single disclosure caption entitled "Shareholder's Net Investment."
 
     On May 27, 1997, the Company was recapitalized, resulting in the Company's
900,000 authorized ordinary shares, par value $1.00 per share, with 1,003
ordinary shares issued and outstanding, being recapitalized into 600,000,000
authorized ordinary shares, par value $0.01 per share ("Ordinary Shares"), with
84,500,000 Ordinary Shares issued and outstanding. The accompanying consolidated
financial statements have been adjusted to reflect this recapitalization
retroactively.
 
     On June 9 and 13, 1997, respectively, the Company commenced and completed
an initial public offering (the "Offering") of Ordinary Shares. Upon the
issuance of 40,000,000 Ordinary Shares in the Offering and consummation of the
purchase described below of Ordinary Shares from Holdings, the Company had
114,500,000 Ordinary Shares outstanding. Immediately following the Offering,
Holdings held 65.1% of the outstanding Ordinary Shares of the Company. The
Offering price was $28.50 per share, resulting in net proceeds of approximately
$1,088,720,000 after deducting underwriting discounts and commissions. The
Company also incurred approximately $8 million of expenses in connection with
the Offering which has been charged to additional paid-in-capital. Upon receipt
of proceeds from the sale of the first 30,000,000 Ordinary Shares sold in the
Offering, the Company paid a cash dividend to Holdings in an amount equal to
those proceeds. All of the proceeds the Company received from the sale in the
Offering of Ordinary Shares in excess of that amount were used to purchase a
like number of Ordinary Shares from Holdings.
 
     Holders of Ordinary Shares are entitled to participate in the payment of
dividends in proportion to their holdings. Under Cayman Island law, the Company
may pay dividends or make other distributions to its shareholders, in such
amounts as the Board of Directors deems appropriate, from the profits of the
Company or out of the Company's share premium account (equivalent to additional
paid-in capital) if the Company thereafter has the ability to pay its debts as
they come due. Cash dividends, if any, will be declared and paid in U.S.
dollars. At December 31, 1998, the Company had declared dividends which had not
been paid amounting to $3,722,000.
 
     At the direction of the Board of Directors, the Company has implemented a
change from a June 30 fiscal year end to a December 31 fiscal year end effective
January 1, 1998.
 
     The accompanying consolidated financial statements are presented in U.S.
dollars and in accordance with U.S. generally accepted accounting principles.
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
  Basis of Consolidation
 
     The Company consolidates all of its majority-owned subsidiaries. The
Company also consolidates joint ventures over which the Company exercises
control through the joint venture agreement or related operating
 
                                       F-6
<PAGE>   57
          SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               DECEMBER 31, 1998
 
and financing agreements. The Company accounts for its interest in other joint
ventures using the equity method. All material intercompany accounts and
transactions are eliminated in consolidation.
 
  Accounting Estimates
 
     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
 
  Cash Equivalents and Marketable Securities
 
     Cash equivalents consist of highly liquid short-term investments that are
readily convertible into cash and which at the date of purchase were so near
their maturity that they expose the Company to an insignificant risk from
changes in interest rates. Cash equivalents are carried at cost plus accrued
interest, which approximates fair value. The interest method is used to account
for any premium or discount on cash equivalents. The Company's policy is to
place its temporary cash investments with high credit quality financial
institutions and by policy limit the amount of credit exposure to any one
financial institution.
 
     The Company's marketable securities and long-term investments are
classified as available-for-sale securities. Unrealized holding gains and losses
on securities available-for-sale are recorded as a component of shareholder's
equity, net of tax effect. The fair values for marketable securities are based
on quoted market prices. The amortized cost of debt securities in this category
is adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization is included in investment income. Realized gains and losses
and declines in value judged to be other-than-temporary on available-for-sale
securities are included in investment income. The Company does not believe that
it is exposed to any significant risks on its investments.
 
     At December 31, 1997, marketable securities consisted only of Eurodollar
debt securities.
 
     Investment income included realized gains on sales of marketable securities
of $3,863,000 for the fiscal year ended June 30, 1996.
 
  Inventories
 
     Inventories consist primarily of materials and supplies which are used in
operations and are stated at the lower of cost (determined principally by the
average cost or specific identification method) or estimated net realizable
value.
 
  Concentrations of Credit Risk
 
     The Company's customers consist primarily of major international, state
owned and large independent oil companies and their affiliates. The Company
provides allowances for potential credit losses when necessary. The Company did
not incur any charges for credit losses during the periods presented.
 
  Property and Equipment
 
     Property and equipment is carried at cost. Maintenance and repairs are
charged to expense currently while major replacements and upgrades are
capitalized. Upon retirement or other disposal of fixed assets, the cost and
related accumulated depreciation and amortization are removed from the
respective accounts and any gains or losses are included in the results of
operations. Property and equipment is depreciated on the straight-
 
                                       F-7
<PAGE>   58
          SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               DECEMBER 31, 1998
 
line method, after allowing for salvage values, over the remaining estimated
useful lives from the date the asset is placed into service.
 
     The Company reviews its long-term assets for impairment when changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. In 1996, the Company adopted Statement of Financial Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of". SFAS No. 121 requires that long-lived
assets and certain identifiable intangibles to be held and used be reported at
the lower of carrying amount or fair value. Assets to be disposed of and assets
not expected to provide any future service potential to the Company are recorded
at the lower of carrying amount or fair value less cost to sell. The Company has
made no adjustments for impairment.
 
  Operating Revenues and Costs
 
     The majority of the Company's drilling contracts are performed on a dayrate
basis, with revenues and expenses recognized as work is performed. The Company
also operates under incentive-based contracts, such as turnkey drilling and
footage contracts, under the terms of which the Company may earn additional
revenues by exceeding preset conditions of job performance. The Company
recognizes incremental revenues from these incentive-based contracts when such
conditions of the contract have been achieved. Under certain incentive-based
contracts, the Company may incur penalties or reduced remuneration if preset
conditions are not achieved. The Company recognizes the effect of such penalties
or reduced remuneration, which historically has been immaterial, as an
adjustment to incentive revenues when the amount reasonably can be estimated.
 
     In connection with drilling contracts, the Company may receive lump sum
fees for the mobilization of equipment and personnel or for capital improvements
to rigs. In connection with mobilization reimbursements, the net of mobilization
fees received and expenses incurred is recognized over the term of the drilling
contract. Costs of relocating drilling units without contracts are expensed as
incurred. Demobilization fees received are reflected in income, net of any
related expense. Capital upgrade fees received from the client are deferred and
recognized as revenue over the period of the drilling contract. The actual cost
incurred for the capital upgrade is capitalized and depreciated over the
estimated useful life of the asset.
 
     The Company also earns revenue by providing drilling related services.
Revenues from third party rig operations, drilling engineering and integrated
well services are recognized as the services are performed. Revenues from
drilling project management contracts are recognized using the percentage of
completion method based on the ratio of costs incurred to total estimated
contract costs. Provisions for losses are recorded for contracts in progress
when losses are anticipated.
 
  Income Taxes
 
     The Company is not subject to income taxes in the Cayman Islands. The
current provision for taxes on income consists primarily of income taxes based
on the tax laws and rates of the countries in which operations were conducted
during the periods presented. Certain of the Company's operations were included
in consolidated income tax returns of affiliates during the periods presented.
Under tax sharing agreements, the Company provides for income taxes payable to
such affiliates as if it filed separate income tax returns.
 
     The Company computes its provision for deferred income taxes using the
liability method. Under the liability method, deferred income tax assets and
liabilities are determined based on differences between financial reporting and
income tax bases of assets and liabilities and are measured using the enacted
tax rates and laws. The measurement of deferred tax assets is adjusted by a
valuation allowance, if necessary, to recognize the future tax benefits to the
extent, based on available evidence, it is more likely than not they will be
realized.
 
                                       F-8
<PAGE>   59
          SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               DECEMBER 31, 1998
 
  Foreign Currency Translation
 
     The functional currency of the primary economic environments in which the
Company operates is the U.S. dollar. Gains and losses resulting from the
remeasurement of local currencies into U.S. dollars are included in the
consolidated results of operations of the current period. The Company
periodically reviews the operations of its entities to ensure the functional
currency of each entity is the currency of the primary economic environment in
which it operates.
 
  Share Options and Awards
 
     The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) in accounting for its
employee share options. Under APB 25, if the exercise price of an employee's
share option equals or exceeds the market price of the underlying share on the
date of grant, no compensation expense is recognized.
 
  Net Income Per Ordinary Share
 
     The basic and diluted net income per Ordinary Share data for the calendar
year ended December 31, 1998, the six months ended December 31, 1997 and for the
fiscal year ended June 30, 1997 is calculated based on the weighted average
shares outstanding for the periods. The pro forma net income per Ordinary Share
data for the fiscal year ended June 30, 1996 is calculated as though the
114,500,000 shares issued in connection with the recapitalization and the
Offering were outstanding for the period then ended. At December 31, 1997, the
Company adopted SFAS No. 128, "Earnings Per Share". Accordingly, the financial
statements have been restated as applicable. The effect of the adoption of this
statement was not material.
 
  Comprehensive Income
 
     Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". SFAS No. 130 established standards for reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. Comprehensive income is defined as the
change in equity of a business enterprise during a period from transactions and
other events and circumstances from nonowner sources. For the calendar year
ended December 31, 1998, the six months ended December 31, 1997 and the fiscal
year ended June 30, 1997, the Company realized no such transactions other than
those reported as net income. For the fiscal year ended June 30, 1996, an
unrealized holding gain was recorded in comprehensive income.
 
  Segment Reporting and Related Information
 
     Effective December 31, 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information". SFAS No. 131
superceded the Financial Accounting Standards Board Statement No. 14, "Financial
Reporting for Segments of a Business Enterprise". SFAS No. 131 establishes
standards for the way in which companies report information about operating
segments and establishes standards for related disclosures about products and
services, geographic areas and major customers. The adoption of SFAS No. 131 did
not affect results of operations or financial position, but did affect the
disclosure of segment information.
 
  Pension and Other Postretirement Benefits
 
     Effective December 31, 1998, the Company adopted SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits". SFAS No. 132
revised employers' disclosures about pension and other postretirement benefit
plans through standardization and suggested combined formats for presentation of
pension and other postretirement benefits.
                                       F-9
<PAGE>   60
          SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               DECEMBER 31, 1998
 
  Derivative Instruments and Hedging Activities
 
     Effective December 31, 1998, the Company adopted SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities". SFAS No. 133 established
accounting and reporting standards for derivative instruments, including certain
of those imbedded in other contracts, and for hedging activities by requiring
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. At
December 31, 1998 and 1997, the Company had no material derivative instruments
or hedging activities that would require disclosure or measurement under SFAS
No. 133.
 
3. PROPERTY AND EQUIPMENT
 
     Property and equipment is summarized as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                                      DECEMBER 31,
                                                   ESTIMATED     -----------------------
                                                 USEFUL LIVES       1998         1997
                                                 -------------   ----------   ----------
<S>                                              <C>             <C>          <C>
Drilling rigs and equipment....................  3 to 30 years   $1,764,359   $1,493,888
Buildings, facilities, and camps...............  4 to 10 years       52,094       48,763
Transportation equipment.......................   3 to 5 years       18,421       14,107
Land...........................................                         316          204
Construction in progress.......................                     195,566      180,323
                                                                 ----------   ----------
                                                                 $2,030,756   $1,737,285
                                                                 ==========   ==========
</TABLE>
 
     Following several years of strengthened demand for drilling rigs and
improving market conditions, during 1996 the Company's management undertook
engineering and economic studies to evaluate the economic useful lives of its
drilling rigs. Such studies included evaluation of current and future new rig
building costs, technological enhancements, rig maintenance and repair costs,
and market demand factors. The study results indicated that, given the current
condition of the rigs, the lack of new entrants into the market, and overall
market improvements at that time, the estimated useful lives should be extended
by 12 years from 18 to 30 years for marine rigs and by four years from 12 to 16
years for land rigs. The Company's Board of Directors approved application of
the change in useful lives effective July 1, 1996, which reduced depreciation
and amortization expense and increased net income, by approximately $34.5
million for the fiscal year ended June 30, 1997. The reduction in depreciation
and amortization expense did not result in an increase in the provision for
taxes on income. See Note 5.
 
4. ACCRUED LIABILITIES
 
     Accrued liabilities consist of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              ------------------
                                                                1998      1997
                                                              --------   -------
<S>                                                           <C>        <C>
Compensation and benefits...................................  $ 29,182   $26,604
Deferred revenue............................................    14,409     3,840
Income taxes (Note 5).......................................    54,323    41,364
Accrued insurance...........................................     1,656     2,263
Other.......................................................     7,487     5,670
                                                              --------   -------
                                                              $107,057   $79,741
                                                              ========   =======
</TABLE>
 
                                      F-10
<PAGE>   61
          SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               DECEMBER 31, 1998
 
5. INCOME TAXES
 
     The Company is not subject to income taxes in the Cayman Islands. All of
the Company's income before provision for taxes on income and the related
provision for taxes on income relates to operations in jurisdictions other than
the Cayman Islands. The relationship between income before provision for taxes
on income and the provision for taxes on income varies from period to period
because each jurisdiction in which the Company operates has its own system of
taxation (not only with respect to the nominal rate, but also with respect to
the allowability of deductions, credits and other benefits) and because the
amounts earned in, and subject to tax by, each jurisdiction changes from period
to period. The reconciliation of income taxes computed at the applicable
statutory rates of the jurisdictions in which the Company's operations are
located and the provision for taxes on income is as follows (in thousands):
 
<TABLE>
<CAPTION>
                                              CALENDAR      SIX MONTHS     FISCAL YEAR ENDED
                                             YEAR ENDED       ENDED            JUNE 30,
                                            DECEMBER 31,   DECEMBER 31,   -------------------
                                                1998           1997         1997       1996
                                            ------------   ------------   --------   --------
<S>                                         <C>            <C>            <C>        <C>
Provision for taxes on income at the
  applicable statutory rates of the
  jurisdictions in which the Company's
  operations are located..................    $108,708       $ 52,704     $ 65,459   $ 26,487
Effect of income taxed at rates other than
  the statutory rates of jurisdictions in
  which the Company's operations are
  located.................................     (66,336)       (31,538)     (40,024)   (10,790)
Benefit of additional tax depreciation....     (10,114)        (8,411)      (8,050)        --
Taxes on income resulting from
  indexation..............................         720            436        2,193         --
Benefit of net operating loss
  carryforwards...........................      (2,827)          (298)         (13)      (505)
Net operating losses not recognized.......       8,743          3,607        1,760        675
Other.....................................         626             --           --         --
                                              --------       --------     --------   --------
Provision for taxes on income.............    $ 39,520       $ 16,500     $ 21,325   $ 15,867
                                              ========       ========     ========   ========
</TABLE>
 
     The components of the provision for taxes on income are as follows (in
thousands):
 
<TABLE>
<CAPTION>
                                              CALENDAR      SIX MONTHS     FISCAL YEAR ENDED
                                             YEAR ENDED       ENDED            JUNE 30,
                                            DECEMBER 31,   DECEMBER 31,   -------------------
                                                1998           1997         1997       1996
                                            ------------   ------------   --------   --------
<S>                                         <C>            <C>            <C>        <C>
Current provision.........................    $ 40,305       $ 13,955     $ 18,944   $ 11,415
Deferred provision (benefit)..............        (785)         2,545        2,381      4,452
                                              --------       --------     --------   --------
Provision for taxes on income.............    $ 39,520       $ 16,500     $ 21,325   $ 15,867
                                              ========       ========     ========   ========
</TABLE>
 
                                      F-11
<PAGE>   62
          SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               DECEMBER 31, 1998
 
     The Company's net deferred tax liabilities and assets consist of the
following (in thousands):
 
<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              ------------------
                                                                1998      1997
                                                              --------   -------
<S>                                                           <C>        <C>
Deferred tax liabilities:
  Property and equipment....................................  $ (8,739)  $(4,838)
  Other.....................................................     2,216      (714)
                                                              --------   -------
                                                                (6,523)   (5,552)
Net operating loss carryforwards:
  Australia.................................................     4,016     3,602
  Venezuela.................................................     3,902     1,041
  Oman......................................................     1,741       196
  Qatar.....................................................     2,448        --
  Indonesia.................................................       420     4,648
  Tunisia...................................................     3,305     1,188
  Ireland...................................................        81        --
  U.S.......................................................     2,031       584
  U.S. credit carryover.....................................       240        --
                                                              --------   -------
          Total deferred income tax assets..................    18,184    11,259
Valuation allowance.........................................   (12,852)   (6,935)
                                                              --------   -------
                                                                 5,332     4,324
                                                              --------   -------
Net deferred income tax liabilities.........................  $ (1,191)  $(1,228)
                                                              ========   =======
</TABLE>
 
     The Company's net operating loss carryforwards include tax effected losses
of $13,847,000 that expire between 1999 and 2013. The remaining $4,097,000 of
net operating losses do not expire.
 
     The Company's income tax returns are subject to review and examination in
the various jurisdictions in which the Company operates. At December 31, 1998
and 1997, accrued income taxes include $24,613,000 and $24,798,000,
respectively, representing estimated liabilities which will result from final
settlements of such reviews and examinations. The Company believes that all
income tax issues which have been or may be raised as a result of such reviews
and examinations will be resolved with no additional material impact on the
Company's financial position or results of operations.
 
6. OTHER NONCURRENT LIABILITIES
 
     Other noncurrent liabilities consist of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                              -----------------
                                                               1998      1997
                                                              -------   -------
<S>                                                           <C>       <C>
Pension benefits (Note 7)...................................  $10,214   $ 7,281
Postretirement health and insurance benefits (Note 7).......   14,054    14,882
Deferred Taxes..............................................    1,191     1,228
Other.......................................................   19,393    13,290
                                                              -------   -------
                                                              $44,852   $36,681
                                                              =======   =======
</TABLE>
 
                                      F-12
<PAGE>   63
          SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               DECEMBER 31, 1998
 
7. EMPLOYEE BENEFIT PLANS
 
     The Company sponsors several qualified and non-qualified benefit plans and
other postretirement benefit plans for its employees. The following tables
provide a reconciliation of the changes in the plans' benefit obligations and
fair value of assets at December 31, 1998 and 1997 (in thousands):
 
<TABLE>
<CAPTION>
                                               PENSION BENEFITS      OTHER BENEFITS
                                              ------------------   -------------------
                                                1998      1997       1998       1997
                                              --------   -------   --------   --------
<S>                                           <C>        <C>       <C>        <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of period...  $ 88,631   $78,968   $  8,855   $  9,083
Service cost................................     5,137     2,216         65         29
Interest cost...............................     6,967     3,012        621        324
Plan participants' contributions............       958       384        354        173
Actuarial (gains) losses....................     5,667     5,272        468       (212)
Benefits paid...............................    (2,903)   (1,221)    (1,355)      (542)
Settlements.................................    (3,241)       --         --         --
                                              --------   -------   --------   --------
Benefit obligation at end of period.........   101,216    88,631      9,008      8,855
                                              ========   =======   ========   ========
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of
  period....................................    94,942    83,602         --         --
Actual return on plan assets................    13,723    10,892         --         --
Company contributions.......................     6,260     1,285      1,001        369
Plan participants' contributions............       958       384        354        173
Benefits paid...............................    (2,903)   (1,221)    (1,355)      (542)
Settlements.................................    (3,241)       --         --         --
                                              --------   -------   --------   --------
Fair value of plan assets at end of
  period....................................   109,739    94,942         --         --
                                              ========   =======   ========   ========
FUNDED STATUS
Funded status of the plan (underfunded).....     8,523     6,311     (9,008)    (8,855)
Unrecognized net actuarial loss.............    (9,894)   (6,715)    (4,990)    (5,966)
Unrecognized prior service cost.............     1,655      (125)       (56)       (61)
Unrecognized net transition liability.......      (290)     (273)        --         --
                                              --------   -------   --------   --------
Aggregate accrued benefit cost..............  $     (6)  $  (802)  $(14,054)  $(14,882)
                                              ========   =======   ========   ========
</TABLE>
 
     The following table provides the amounts recognized in the statement of
financial position as of December 31, 1998 and 1997 (in thousands):
 
<TABLE>
<CAPTION>
                                               PENSION BENEFITS      OTHER BENEFITS
                                               -----------------   -------------------
                                                1998      1997       1998       1997
                                               -------   -------   --------   --------
<S>                                            <C>       <C>       <C>        <C>
Prepaid benefit cost.........................  $ 8,929   $ 8,969   $     --   $     --
Accrued benefit liability....................   (8,935)   (9,771)   (14,054)   (14,882)
Additional minimum liability.................   (1,279)     (676)        --         --
Intangible asset.............................    1,279       676         --         --
                                               -------   -------   --------   --------
          Net amount recognized..............  $    (6)  $  (802)  $(14,054)  $(14,882)
                                               =======   =======   ========   ========
</TABLE>
 
     Certain of the Company's nonqualified supplemental retirement plans had
accumulated benefit obligations in excess of plan assets. These plans'
accumulated and projected benefit obligations were $10,214,000 and $14,198,000
at December 31, 1998 and $9,088,000 and $12,050,000 at December 31, 1997,
 
                                      F-13
<PAGE>   64
          SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               DECEMBER 31, 1998
 
respectively. There are no plan assets in these plans due to their nature. All
of the Company's plans for postretirement benefits other than pensions also have
no plan assets. The aggregate benefit obligation for these plans is $14,054,000
at December 31, 1998 and $14,882,000 at December 31, 1997.
 
     The following table provides the components of net periodic benefit costs
for the plans for the periods presented (in thousands):
 
<TABLE>
<CAPTION>
                                         PENSION BENEFITS                                   OTHER BENEFITS
                          -----------------------------------------------   -----------------------------------------------
                            CALENDAR      SIX MONTHS    FISCAL YEAR ENDED     CALENDAR      SIX MONTHS    FISCAL YEAR ENDED
                           YEAR ENDED       ENDED           JUNE 30,         YEAR ENDED       ENDED           JUNE 30,
                          DECEMBER 31,   DECEMBER 31,   -----------------   DECEMBER 31,   DECEMBER 31,   -----------------
                              1998           1997        1997      1996         1998           1997        1997      1996
                          ------------   ------------   -------   -------   ------------   ------------   -------   -------
<S>                       <C>            <C>            <C>       <C>       <C>            <C>            <C>       <C>
Service cost............    $ 5,127        $ 2,202      $ 4,012   $ 3,670      $  65          $  29        $  53     $  57
Interest cost...........      6,957          3,004        5,674     5,180        621            324          691       738
Expected return on plan
  assets................     (7,856)        (3,287)      (5,646)   (4,598)        --             --           --        --
Amortization of
  transition
  obligation............         19              9           20        21         --             --           --        --
Amortization of prior
  service cost..........         26           (171)         113       111         (5)            (3)          (6)       --
Amortization of net
  (gain) loss...........        204            101          (79)       (7)      (508)          (300)        (576)     (595)
Settlement charge.......        971             --           --        --         --             --           --        --
                            -------        -------      -------   -------      -----          -----        -----     -----
          Net periodic
            benefit
            cost........    $ 5,448        $ 1,858      $ 4,094   $ 4,377      $ 173          $  50        $ 162     $ 200
                            =======        =======      =======   =======      =====          =====        =====     =====
</TABLE>
 
     The prior service costs are amortized on a straight-line basis over the
average remaining service period of active participants. Gains and losses in
excess of 10% of the greater of the benefit obligation and the market value of
assets are amortized over the remaining service period of active participants.
 
     The assumptions used in the measurement of the Company's benefit obligation
are shown in the following table:
<TABLE>
<CAPTION>
                                               PENSION BENEFITS                              OTHER BENEFITS
                           ---------------------------------------------------------   ---------------------------
                             CALENDAR      SIX MONTHS                                    CALENDAR      SIX MONTHS
                            YEAR ENDED       ENDED       FISCAL YEAR ENDED JUNE 30,     YEAR ENDED       ENDED
                           DECEMBER 31,   DECEMBER 31,   ---------------------------   DECEMBER 31,   DECEMBER 31,
                               1998           1997           1997           1996           1998           1997
                           ------------   ------------   ------------   ------------   ------------   ------------
<S>                        <C>            <C>            <C>            <C>            <C>            <C>
WEIGHTED-AVERAGE
  ASSUMPTIONS
  Discount rate..........   7.0%-9.0%      8.0%-9.0%     8.0%-9.0%      8.0%-9.0%         7.0%           8.0%
  Increase in future
    compensation
    levels...............   4.5%-7.0%      4.5%-7.0%     4.5%-7.0%      4.5%-7.0%          N/A            N/A
  Expected long-term rate
    of return on
    assets...............   8.0%-9.0%      8.0%-9.0%     8.0%-9.0%      8.0%-9.0%          N/A            N/A
 
<CAPTION>
                           OTHER BENEFITS
                           ---------------
                             FISCAL YEAR
                           ENDED JUNE 30,
                           ---------------
                            1997     1996
                           ------   ------
<S>                        <C>      <C>
WEIGHTED-AVERAGE
  ASSUMPTIONS
  Discount rate..........   8.0%     8.0%
  Increase in future
    compensation
    levels...............    N/A      N/A
  Expected long-term rate
    of return on
    assets...............    N/A      N/A
</TABLE>
 
     The Company provides postretirement medical and life insurance benefits to
all its employees who are U.S. citizens and certain non-U.S. citizens. The
Company's policy is to fund the cost of these benefits as claims are incurred.
The Company allocates benefit costs to affiliates based on the ratio of active
employees of affiliates to total employees.
 
                                      F-14
<PAGE>   65
          SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               DECEMBER 31, 1998
 
     The weighted-average annual assumed rate of increase in the per capita cost
of covered medical benefits is 8% for the calendar year ended December 31, 1998,
the six months ended December 31, 1997 and the fiscal years ended June 30, 1997
and 1996, respectively. This rate is assumed to decrease to 7% in 2000, then to
6% in 2005 and remain at that level thereafter. The health care cost trend rate
assumption has a significant effect on the amounts reported. For example, as of
and for the calendar year ended December 31, 1998, increasing or decreasing the
assumed health care cost trend rates by one percentage point each year would
change the accumulated postretirement benefit obligation by approximately
$474,000 and $450,000, respectively, and the aggregate of the service and
interest cost components of net periodic postretirement benefit by approximately
$33,000 and $32,000, respectively.
 
  Annual Incentive Compensation Plan
 
     The Company also maintains an Annual Incentive Compensation Plan ("AIP").
The AIP provides for payment of additional compensation to participating
employees, including executive officers, based on individual contributions and
performance measures of the Company as defined in the plan. During the term of
the AIP, an aggregate amount of 286,250 Ordinary Shares will be available for
awards granted wholly or partly in Ordinary Shares under the AIP. Amounts
charged to expense related to awards under the Annual Incentive Compensation
Plan aggregated $2,100,000, $1,070,000, $2,350,000 and $2,600,000 for the
calendar year ended December 31, 1998, the six months ended December 31, 1997
and the fiscal years ended June 30, 1997 and 1996, respectively.
 
  Performance Unit Plan
 
     The Company's Performance Unit Plan provides incentives to certain members
of management through performance share units to foster and promote the
long-term financial success of the Company. The performance share units vest,
and the related compensation expense is accrued, over a three year performance
period based on performance measures of the Company as defined in the plan.
Amounts charged to expense related to awards under the Performance Unit Plan
aggregated $2,090,000, $1,738,000, $3,370,000 and $1,587,000 for the calendar
year ended December 31, 1998, the six months ended December 31, 1997 and the
fiscal years ended June 30, 1997 and 1996, respectively. The last awards under
the Performance Unit Plan were granted in December 1996, and no further awards
will be made under the Plan.
 
  Investment Savings and Profit Sharing Plan
 
     The Company maintains the Investment Savings and Profit Sharing Plan, a
defined contribution 401(k) plan that allows dollar payroll employees to make
both pre-tax and after-tax employee contributions. The Company matches these
employee contributions up to a maximum of 5% of a participant's base salary
subject to the limitations of eligible salary. Employees are vested in all
contributions made. Additionally, although it has not done so since 1984 and
currently does not expect to do so in the future, the Company may also make
additional employer contributions any year out of profits. Matching
contributions totaled $1,756,000, $843,000, $1,556,000 and $1,529,000 for the
calendar year ended December 31, 1998, the six months ended December 31, 1997
and the fiscal years ended June 30, 1997 and 1996, respectively.
 
  1997 Employee Severance Protection Plan
 
     The Company maintains the 1997 Employee Severance Protection Plan (the
"Severance Protection Plan") to retain the services of its employees in the
event of an unsolicited takeover of the Company or in the event of a threat of a
Change of Control, as defined, of the Company. The Severance Protection Plan is
intended to ensure the continued dedication and efforts of the Company's
employees in such events without undue concern for their personal financial and
employment security. The Severance Protection Plan covers all
 
                                      F-15
<PAGE>   66
          SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               DECEMBER 31, 1998
 
full-time U.S.-based payroll employees. Severance is only payable in the event
of a termination of employment by the Company other than for "cause" or
voluntary termination by the Employee for "good reason", each as defined in the
Severance Protection Plan, within a specific period following a Change in
Control. A participant will also receive severance if the employee is terminated
by the Company without "cause" or for "good reason" at the request or direction
of the third party involved in the Change in Control or otherwise in connection
with or in anticipation of a Change in Control.
 
8. SHARE AWARDS AND OPTIONS
 
  1997 Long-term Incentive Plan
 
     The Company has adopted the 1997 Long Term Incentive Plan (the "LTIP"),
which is designed to retain key executives and other selected employees by
rewarding them for making major contributions to the success of the Company and
to provide participants with a proprietary interest in the growth and
performance of the Company.
 
     Employees of the Company eligible for awards under the LTIP are executive
officers, other officers and key management personnel selected by the
Compensation Committee (including employees who are Directors), and whose
performance, in the judgment of the Compensation Committee, can have a
significant effect on the success of the Company. Awards under the LTIP may
consist of the grant of stock options, share appreciation rights, restricted
and/or performance-based share awards and/or restricted and/or performance-
based cash awards, granted singly, in combination or in tandem. The exercise
price for stock options shall not be less than 85% of the fair market value of
the stock on the date of the option grant (100% in the case of incentive stock
options). The Compensation Committee can also award supplemental payments up to
the amount necessary to pay the federal income tax payable with respect to
exercise of non-qualified stock options, share appreciation rights, restricted
shares and performance units. If approved by the Compensation Committee, the
Company may also make loans to participants to purchase shares pursuant to the
exercise of an award. During the term of the LTIP, an aggregate of 5,725,000
Ordinary Shares will be available for awards granted wholly or partly in
Ordinary Shares under the LTIP. No participant may receive during a fiscal year
incentive awards covering an aggregate of more than 150,000 Ordinary Shares.
 
     An aggregate of 2,318,000 options to purchase the Company's Ordinary Shares
(net of cancelled or expired options) had been granted under the LTIP at prices
ranging between $12.25 to $45.00 per Ordinary Share. In addition, the Company
had granted restricted share awards for an aggregate of 262,469 Ordinary Shares
(net of forfeited shares) under the LTIP. The options will vest over periods
ranging from two to four years and expire seven to ten years from the date of
grant. The restricted share awards will vest over periods ranging from two to
five years from the date of grant.
 
  1997 Employee Share Purchase Plan
 
     The Company has also adopted the 1997 Employee Share Purchase Plan (the
"Share Purchase Plan"), which is designed to furnish eligible employees of the
Company and designated subsidiaries of the Company an incentive to advance the
best interests of the Company by providing a formal program whereby they may
voluntarily purchase Ordinary Shares of the Company at a favorable price and
upon favorable terms. Generally speaking, all covered employees of a
participating company who are scheduled to work an average of at least 20 hours
per week are eligible to participate in the Share Purchase Plan.
 
     Once a year, participants in the Share Purchase Plan will be granted
options to purchase Ordinary Shares with a fair market value equal to the lesser
of 10% of the participant's eligible compensation (as defined in the Share
Purchase Plan) and the amount specified in Section 423(b) of the Code (currently
$25,000). The exercise price of the options is 85% of the fair market value of
the Ordinary Shares on the date of grant or the
 
                                      F-16
<PAGE>   67
          SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               DECEMBER 31, 1998
 
date of exercise, whichever is less. Options granted under the Share Purchase
Plan are exercisable on the date one year after the date of grant. Generally
speaking, participants pay option exercise prices through payroll deductions. An
aggregate of 572,500 Ordinary Shares are available for grants of options under
the Share Purchase Plan. The Share Purchase Plan, which became effective January
1, 1998, is administered by the Compensation Committee. An aggregate of 191,029
Ordinary Shares were issued in January 1999 to participating employees for the
year ended December 31, 1998 at an exercise price of $10.9969 per Ordinary
Share.
 
  1997 Non-Employee Director Stock Option Plan
 
     The Company has also adopted the 1997 Non-Employee Director Stock Option
Plan (the "Director Plan"). The Director Plan is designed to attract and retain
the services of experienced and knowledgeable non-employee Directors and to
provide non-employee Directors with a proprietary interest in the growth and
performance of the Company. Awards under the Director Plan consist of a grant of
stock options. The purchase price for the shares as to which the option is
exercised will be payable in full upon exercise, in cash or, if permitted by the
Compensation Committee, by tender of Ordinary Shares, valued at "fair market
value." During the term of the Director Plan, an aggregate of 286,250 Ordinary
Shares will be available for awards granted wholly or partly in Ordinary Shares.
No option will be granted under the Director Plan after 10 years following
consummation of the Offering. The Compensation Committee is responsible for
administration and interpretation of the Director Plan.
 
     An aggregate of 58,000 options to purchase the Company's Ordinary Shares
(net of cancelled or expired options) had been granted under the Director Plan
to eight non-employee Directors who participated in the Director Plan. Such
options were granted at exercise prices ranging from $12.25 to $45.50 per
Ordinary Share. Any new non-employee Director will be granted a one-time award
of a right to purchase 10,000 Ordinary Shares (anticipated to be increased from
4,000 by amendment of the Director Plan in March 1999). Each non-employee
Director who continues in office immediately following the Annual General
Meeting of Shareholders in any year (commencing in 1998) will automatically be
granted an option to purchase 5,000 shares of Ordinary Shares (anticipated to be
increased from 2,000 by amendment of the Director Plan in March 1999). The Board
may increase the number of options granted, provided that a non-employee
Director cannot receive more than 22,000 options (increased from 10,000 by
amendment of the Director Plan in December 1998) in any year. The price of
shares that may be purchased upon exercise of an option is the fair market value
of the Ordinary Shares on the date of the grant. Options granted pursuant to the
Director Plan are exercisable in installments of 33 1/3% upon each anniversary
of the date of grant. The term of each option is for a period not exceeding 10
years from the date of grant.
 
     The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees", in accounting for its plans. Compensation cost charged against
income in connection with stock plans totaled $1,947,000 and $815,000 for the
calendar year ended December 31, 1998 and the six months ended December 31,
1997, respectively. The difference between the quoted market price as of the
date of the grant and the purchase price of shares is being charged to
operations over the vesting period. No compensation cost has been recognized for
stock options because the exercise prices of the options equal the market prices
of the underlying stock on the date of the grants.
 
                                      F-17
<PAGE>   68
          SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               DECEMBER 31, 1998
 
     The following is a summary of all of the Company's share option activity,
and related information for the above plans for the calendar year ended December
31, 1998, the six months ended December 31, 1997 and the fiscal year ended June
30, 1997:
 
<TABLE>
<CAPTION>
                                                                        WEIGHTED AVERAGE
                                                             OPTIONS     EXERCISE PRICE
                                                            ---------   ----------------
<S>                                                         <C>         <C>
Outstanding at June 30, 1997..............................    291,850        $28.50
  Granted.................................................    658,550        $45.01
  Cancelled...............................................     (7,800)       $41.19
                                                            ---------        ------
Outstanding at December 31, 1997..........................    942,600        $39.93
  Granted.................................................  1,483,125        $12.55
  Cancelled...............................................    (49,725)       $39.18
                                                            ---------        ------
Outstanding at December 31, 1998..........................  2,376,000        $22.85
                                                            =========        ======
</TABLE>
 
     There were 29,708 options exercisable at December 31, 1998 and none
exercisable at December 31, 1997.
 
     The following table summarizes information about options outstanding at
December 31, 1998:
 
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------------------------------------------------------------------
                                                WEIGHTED AVERAGE REMAINING
EXERCISE PRICE                                   CONTRACTUAL LIFE (YEARS)    NUMBER OF SHARES
--------------                                  --------------------------   ----------------
<S>                                             <C>                          <C>
$28.50........................................             8.44                   274,425
$45.50........................................             8.69                    12,000
$45.00........................................             8.94                   612,450
$39.75........................................             9.35                    10,000
$12.25........................................             9.95                 1,467,125
                                                                                ---------
          Total...............................             9.22                 2,376,000
                                                                                =========
</TABLE>
 
     Statement of Financial Accounting Standards No. 123, "Accounting for Stock
Based Compensation", ("SFAS 123") requires the disclosure of pro forma net
income and net income per Ordinary Share information computed as if the Company
had accounted for its employee share options under the fair value method set
forth in SFAS 123. The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions:
 
<TABLE>
<CAPTION>
                                                                CALENDAR      SIX MONTHS
                                                               YEAR ENDED       ENDED
                                                              DECEMBER 31,   DECEMBER 31,
                                                                  1998           1997
                                                              ------------   ------------
<S>                                                           <C>            <C>
Expected life (in years)....................................      3.74           3.74
Risk-free interest rate.....................................       5.0%           6.0%
Volatility..................................................      0.55           0.40
Dividend yield..............................................      0.46%          0.46%
</TABLE>
 
     The weighted average estimated fair value of options granted during the
calendar year ended December 31, 1998, the six months ended December 31, 1997
and the fiscal year ended June 30, 1997 was $5.65, $16.31 and $10.38,
respectively. The fair value of these options was estimated based on an expected
life of one year from the vesting date. For purposes of pro forma disclosures,
the estimated fair value of stock based compensation plans and other options is
amortized to expense over the vesting period. The Company's
 
                                      F-18
<PAGE>   69
          SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               DECEMBER 31, 1998
 
pro forma net income and net income per Ordinary Share is as follows (in
thousands except per share amounts):
 
<TABLE>
<CAPTION>
                                               CALENDAR      SIX MONTHS    FISCAL YEAR ENDED
                                              YEAR ENDED       ENDED            JUNE 30,
                                             DECEMBER 31,   DECEMBER 31,   ------------------
                                                 1998           1997         1997      1996
                                             ------------   ------------   --------   -------
<S>                                          <C>            <C>            <C>        <C>
Net income
  As reported..............................    $287,144       $128,528     $164,916   $61,976
  Pro forma................................    $281,658       $127,916     $164,842   $61,976
Basic net income per Ordinary Share
  As reported..............................    $   2.51       $   1.12     $   1.44   $  0.54
  Pro forma................................    $   2.46       $   1.11     $   1.44   $  0.54
Diluted net income per Ordinary Share
  As reported..............................    $   2.50       $   1.12     $   1.44   $  0.54
  Pro forma................................    $   2.45       $   1.11     $   1.44   $  0.54
</TABLE>
 
     The effects of applying SFAS 123 for providing pro forma disclosures during
the initial phase-in period may not be representative of the effects on reported
net income for future years.
 
     The Black-Scholes option valuation was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected share price volatility. Because
the Company's employee share options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee share options.
 
9. NET INCOME PER ORDINARY SHARE
 
     The following table sets forth the computation of basic and diluted net
income per ordinary share (in thousands except share and per share amounts):
 
<TABLE>
<CAPTION>
                                  CALENDAR YEAR    SIX MONTHS
                                      ENDED          ENDED       FISCAL YEAR ENDED JUNE 30,
                                  DECEMBER 31,    DECEMBER 31,   ---------------------------
                                      1998            1997           1997           1996
                                  -------------   ------------   ------------   ------------
<S>                               <C>             <C>            <C>            <C>
Numerator:
  Net income....................  $    287,144    $    128,528   $    164,916   $     61,976
  Numerator for basic and
     diluted net income per
     Ordinary Share -- income
     available to common
     shareholders...............  $    287,144    $    128,528   $    164,916   $     61,976
</TABLE>
 
                                      F-19
<PAGE>   70
          SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               DECEMBER 31, 1998
 
<TABLE>
<CAPTION>
                                  CALENDAR YEAR    SIX MONTHS
                                      ENDED          ENDED       FISCAL YEAR ENDED JUNE 30,
                                  DECEMBER 31,    DECEMBER 31,   ---------------------------
                                      1998            1997           1997           1996
                                  -------------   ------------   ------------   ------------
<S>                               <C>             <C>            <C>            <C>
Denominator:
  Denominator for basic net
     income per Ordinary
     Share -- weighted-average
     shares.....................   114,500,249     114,500,000    114,500,000    114,500,000
  Effect of dilutive securities
     Employee stock options.....       311,985         108,000          2,000             --
                                  ------------    ------------   ------------   ------------
Dilutive potential common
  shares........................       311,985         108,000          2,000             --
  Denominator for diluted net
     income per Ordinary
     Share -- adjusted
     weighted-average shares and
     assumed conversions........   114,812,234     114,608,000    114,502,000    114,500,000
                                  ============    ============   ============   ============
Basic net income per Ordinary
  Share.........................  $       2.51    $       1.12   $       1.44   $       0.54
Diluted net income per Ordinary
  Share.........................  $       2.50    $       1.12   $       1.44   $       0.54
</TABLE>
 
     For additional disclosures regarding the employee stock options, see Note
8.
 
10. COMMITMENTS AND CONTINGENCIES
 
     In the normal course of business, the Company is involved in various
lawsuits, claims and related matters. In the opinion of management, the ultimate
resolution of such matters will not have a material adverse effect on the
consolidated financial position or results of operations of the Company.
 
     In January 1997, the Company entered into a contract for the construction
of the Galaxy II, a heavy duty harsh environment jackup drilling rig. The rig
was delivered timely from the shipyard on August 24, 1998 at a total cost of
approximately $156 million excluding initial mobilization. The Galaxy II was
transported from Singapore to Nova Scotia during the period August 26 to October
27 and, following completion of import formalities, was moved to its first
drilling location where final commissioning activity was completed. The rig
began work under a five year drilling contract on November 9, 1998.
 
     In September 1997, the Company entered into a contract for the construction
of the Galaxy III, a heavy duty harsh environment jackup drilling rig. The cost
of the rig, excluding initial mobilization is expected to be approximately $175
million. The rig is expected be delivered by the shipyard during the third
quarter of 1999 and mobilized to its initial work area in the North Sea during
the fourth quarter of 1999. The Company has entered into a three year drilling
contract with a customer to operate the rig in the U.K. sector of the North Sea.
 
     On July 10, 1998, Rig 162, one of the Company's land rigs operating in
Saudi Arabia, was severely damaged following a blowout and subsequent fire.
There were no personnel injuries. As provided for in the drilling contract, the
customer elected to cancel the remaining term of the contract and the Company
determined that the rig would not be rebuilt. An unrepaired partial loss
settlement of $13.8 million was negotiated with the Company's insurance
carriers. All proceeds from this settlement had been received at December 31,
1998. The Company recognized a gain of $4.8 million in connection with this
loss.
 
                                      F-20
<PAGE>   71
          SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               DECEMBER 31, 1998
 
     The Company has an uncommitted credit facility with a major bank which
provides for advances and letters of credit up to a maximum of $35,000,000,
denominated in U.S. dollars. This credit facility expires on July 1, 1999. At
the Company's election, advances under this credit facility bear interest at the
higher of (a) 0.50% per annum above the latest Federal Funds Rate and (b) the
bank's publicly announced Reference Rate, or at the LIBOR rate plus 0.25%. The
fee for letters of credit is 0.375% per annum. At December 31, 1998, $1,365,000
of the credit facility was used for standby letters of credit.
 
11. SEGMENT INFORMATION AND RELATED DISCLOSURES
 
     The Company has seven reportable segments, defined as different equipment
classifications, or by contract terms in the case of drilling related services,
as follows: heavy duty harsh environment jackup rigs, semisubmersible rigs, 300
to 350 foot cantilever jackup rigs, 200 to 250 foot jackup rigs, other marine
rigs, land rigs and drilling related services. The Company's heavy duty harsh
environment jackup rig fleet consists of five rigs capable of operating in water
depths of 350-400 feet. The Company currently has one additional heavy duty
harsh environment jackup rig under construction (Note 10). The semisubmersible
segment is comprised of three rigs capable of operating in water depths of
2,000-2,400 feet. Eight rigs capable of operating in water depths of 300-350
feet make up the 300 to 350 foot cantilever jackup rig segment. The 200 to 250
foot jackup rig segment consists of nine rigs capable of operating in water
depths of 200-250 feet, seven of which are cantilevered and two of which are
specially designed to operate in shallow water. Other marine rigs consist of one
platform rig and one lake barge that was disposed of in the fourth quarter of
1998. The land rig segment includes 31 rigs, all of which are specially designed
to operate in remote areas. Through its drilling related services segment, the
Company provides third party rig operations, incentive drilling and drilling
engineering and project management services.
 
     The Company evaluates performance and allocates resources based upon the
operating margin (operating revenues less operating expenses) generated by the
segment. The accounting policies of the segments are the same as those described
in the summary of significant policies (Note 2). There are no intersegment sales
and transfers due to the nature of the business of the segments.
 
     Santa Fe's reportable segments are managed separately due to the distinct
capabilities of each of the underlying equipment classifications or the
particular contract requirements in the case of drilling related services. The
following table sets forth the operating margin for each of the reportable
segments and reconciles total operating revenues and operating expenses (in
thousands):
 
<TABLE>
<CAPTION>
                                                      CALENDAR      SIX MONTHS     FISCAL YEAR ENDED
                                                     YEAR ENDED       ENDED            JUNE 30,
                                                    DECEMBER 31,   DECEMBER 31,   -------------------
                                                        1998           1997         1997       1996
                                                    ------------   ------------   --------   --------
<S>                                                 <C>            <C>            <C>        <C>
Operating revenues
  Heavy duty harsh environment jackup rigs........    $148,997       $ 71,813     $119,741   $ 92,939
  Semisubmersibles................................     114,952         49,483       64,751     37,510
  300-350 foot cantilever jackup rigs.............     150,602         66,867       93,773     65,308
  200-250 foot jackup rigs........................     143,164         69,272       97,141     73,716
  Other marine rigs...............................      11,836          5,669       11,009      4,666
                                                      --------       --------     --------   --------
          Total marine rigs.......................     569,551        263,104      386,415    274,139
  Land rigs.......................................     147,880         71,626      103,158     91,859
  Drilling related services.......................      92,746         39,596       86,904    101,581
  Other...........................................       1,169            859        2,086      3,303
                                                      --------       --------     --------   --------
          Total operating revenues................     811,346        375,185      578,563    470,882
</TABLE>
 
                                      F-21
<PAGE>   72
          SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               DECEMBER 31, 1998
 
<TABLE>
<CAPTION>
                                                      CALENDAR      SIX MONTHS     FISCAL YEAR ENDED
                                                     YEAR ENDED       ENDED            JUNE 30,
                                                    DECEMBER 31,   DECEMBER 31,   -------------------
                                                        1998           1997         1997       1996
                                                    ------------   ------------   --------   --------
<S>                                                 <C>            <C>            <C>        <C>
Operating costs
  Heavy duty harsh environment jackup rigs........      49,549         25,224       45,218     40,528
  Semisubmersibles................................      63,712         22,767       36,969     30,979
  300-350 foot cantilever jackup rigs.............      58,373         30,125       48,900     39,130
  200-250 foot jackup rigs........................      66,982         31,491       59,552     53,947
  Other marine rigs...............................       8,659          4,219        6,808      3,252
                                                      --------       --------     --------   --------
          Total marine rigs.......................     247,275        113,826      197,447    167,836
  Land rigs.......................................      97,966         48,345       73,687     63,689
  Drilling related services.......................      65,665         30,537       61,408     75,775
  Other...........................................       3,116          2,970        7,123      1,213
                                                      --------       --------     --------   --------
          Total operating costs...................     414,022        195,678      339,665    308,513
Operating margin
  Heavy duty harsh environment jackup rigs........      99,448         46,589       74,523     52,411
  Semisubmersibles................................      51,240         26,716       27,782      6,531
  300-350 foot cantilever jackup rigs.............      92,229         36,742       44,873     26,178
  200-250 foot jackup rigs........................      76,182         37,781       37,589     19,769
  Other marine rigs...............................       3,177          1,450        4,201      1,414
                                                      --------       --------     --------   --------
          Total marine rigs.......................     322,276        149,278      188,968    106,303
  Land rigs.......................................      49,914         23,281       29,471     28,170
  Drilling related services.......................      27,081          9,059       25,496     25,806
  Other...........................................      (1,947)        (2,111)      (5,037)     2,090
                                                      --------       --------     --------   --------
          Total operating margin..................    $397,324       $179,507     $238,898   $162,369
                                                      ========       ========     ========   ========
</TABLE>
 
     The following table reconciles operating margin for each of the reportable
segments to consolidated income before provision for taxes on income and
presents capital spending for each reportable segment (in thousands):
 
<TABLE>
<CAPTION>
                                                 CALENDAR      SIX MONTHS     FISCAL YEAR ENDED
                                                YEAR ENDED       ENDED            JUNE 30,
                                               DECEMBER 31,   DECEMBER 31,   -------------------
                                                   1998           1997         1997       1996
                                               ------------   ------------   --------   --------
<S>                                            <C>            <C>            <C>        <C>
Operating margin.............................    $397,324       $179,507     $238,898   $162,369
                                                 --------       --------     --------   --------
Depreciation/(gain) loss on sale of assets
  Heavy duty harsh environment jackup rigs...      12,423          5,367       11,361     19,051
  Semisubmersibles...........................       4,975          1,904        3,869      9,092
  300-350 foot cantilever jackup rigs........       9,836          4,874        8,678     17,009
  200-250 foot jackup rigs...................       9,011          4,004        6,588     13,619
  Other marine rigs..........................         231            104          164        127
                                                 --------       --------     --------   --------
          Total marine rigs..................      36,476         16,253       30,660     58,898
  Land rigs..................................      10,387          7,194       10,280     13,924
  Drilling related services..................       1,102            150          269      1,017
  Other......................................       1,854            905        1,110      2,535
                                                 --------       --------     --------   --------
          Total depreciation/(gain) loss on
            sale of assets...................      49,819         24,502       42,319     76,374
</TABLE>
 
                                      F-22
<PAGE>   73
          SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               DECEMBER 31, 1998
 
<TABLE>
<CAPTION>
                                                 CALENDAR      SIX MONTHS     FISCAL YEAR ENDED
                                                YEAR ENDED       ENDED            JUNE 30,
                                               DECEMBER 31,   DECEMBER 31,   -------------------
                                                   1998           1997         1997       1996
                                               ------------   ------------   --------   --------
<S>                                            <C>            <C>            <C>        <C>
Unallocated amount:
  General and administrative.................      22,161         10,781       16,931     17,168
                                                 --------       --------     --------   --------
          Operating income...................     325,344        144,224      179,648     68,827
                                                 --------       --------     --------   --------
  Other income (expense).....................       1,320            804        6,593      9,016
                                                 --------       --------     --------   --------
Income before provision for taxes on
  income.....................................    $326,664       $145,028     $186,241   $ 77,843
                                                 ========       ========     ========   ========
Capital spending by segment
  Heavy duty harsh environment jackup rigs...    $145,411       $ 83,502     $ 27,972   $  7,153
  Semisubmersibles...........................      14,329          5,003        6,805     13,995
  300-350 foot cantilever jackup rigs........       5,223          5,085       29,632      8,919
  200-250 foot jackup rigs...................      19,615          6,121       12,145     10,221
  Other marine rigs..........................         293             --          158         77
                                                 --------       --------     --------   --------
          Total marine rigs..................     184,871         99,711       76,712     40,365
  Land rigs..................................      88,906         29,526       47,560     13,924
  Drilling related services..................          79             --           82        368
  Other......................................       3,544         (2,104)      22,242     10,153
                                                 --------       --------     --------   --------
          Total capital spending by
            segment..........................    $277,400       $127,133     $146,596   $ 64,810
                                                 ========       ========     ========   ========
</TABLE>
 
     Segment assets for each of the reportable segments is defined as the net
book value of the property and equipment for each classification. The following
table presents assets for each of the Company's reportable segments and
reconciles such segment assets to total consolidated assets (in thousands):
 
<TABLE>
<CAPTION>
                                                                     DECEMBER 31,
                                                              ---------------------------
                                                                  1998           1997
                                                              ------------   ------------
<S>                                                           <C>            <C>
Property and equipment, net
  Heavy duty harsh environment jackup rigs..................   $  538,207     $  372,154
  Semisubmersibles..........................................       65,745         56,481
  300-350 foot cantilever jackup rigs.......................      147,041        152,276
  200-250 foot jackup rigs..................................       75,069         64,404
  Other marine rigs.........................................          340            333
                                                               ----------     ----------
          Total marine rigs.................................      826,402        645,648
  Land rigs.................................................      200,216        131,531
  Drilling related services.................................        3,103             65
  Other.....................................................       19,480         24,726
                                                               ----------     ----------
          Total property and equipment, net.................    1,049,201        801,970
                                                               ----------     ----------
Unallocated amounts:
  Total current assets......................................      352,436        294,455
  Prepaid deposits..........................................           --         14,861
  Other noncurrent assets...................................       52,099         50,167
                                                               ==========     ==========
          Total assets......................................   $1,453,736     $1,161,453
                                                               ==========     ==========
</TABLE>
 
                                      F-23
<PAGE>   74
          SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               DECEMBER 31, 1998
 
     All of the Company's operations are located outside of the Cayman Islands.
The following table summarizes, by geographical area, the identifiable assets of
the Company (in thousands):
 
<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                              -----------------------
                                                                 1998         1997
                                                              ----------   ----------
<S>                                                           <C>          <C>
North Sea...................................................  $  401,243   $  359,411
North Africa................................................     121,717      136,760
West Africa.................................................      38,902       66,830
Southeast Asia and Pacific..................................     131,234       62,876
Middle East and Azerbaijan..................................     163,704      153,095
South America...............................................     110,597       42,471
North America...............................................     201,525      108,011
Corporate assets(1).........................................     284,814      231,999
                                                              ----------   ----------
          Total assets......................................  $1,453,736   $1,161,453
                                                              ==========   ==========
</TABLE>
 
---------------
 
(1) Consists primarily of cash equivalents, marketable securities, construction
    in progress, and other corporate assets.
 
     The following table summarizes, by geographical area, operating revenues
(in thousands):
 
<TABLE>
<CAPTION>
                                              CALENDAR      SIX MONTHS     FISCAL YEAR ENDED
                                             YEAR ENDED       ENDED            JUNE 30,
                                            DECEMBER 31,   DECEMBER 31,   -------------------
                                                1998           1997         1997       1996
                                            ------------   ------------   --------   --------
<S>                                         <C>            <C>            <C>        <C>
Operating revenues
North Sea.................................    $308,802       $135,201     $219,466   $196,784
North Africa..............................     142,468         62,191      107,979     98,423
West Africa...............................      71,480         35,476       48,263     16,520
Southeast Asia and Pacific................      84,760         36,131       49,585     37,347
Middle East and Azerbaijan................     132,003         66,160       93,988     89,786
South America.............................      58,366         24,446       43,098     20,647
North America.............................      13,467         15,580       16,184     11,375
                                              --------       --------     --------   --------
          Total operating revenues........    $811,346       $375,185     $578,563   $470,882
                                              ========       ========     ========   ========
</TABLE>
 
     The Company's operations in the North Sea are presently all conducted
within the U.K. sector of the North Sea. The Company's operations in North
Africa consist principally of operations in Egypt. The Company's operations in
the Middle East include significant operations in Kuwait. See Note 12.
 
     A substantial portion of the Company's assets are mobile. Asset locations
at the end of the period are not necessarily indicative of the geographic
distribution of the earnings generated by such assets during the periods.
General corporate assets are principally cash and cash equivalents and other
nonoperating assets.
 
     The Company's operations are geographically dispersed and are therefore
subject to certain political and other uncertainties not encountered in domestic
operations, including risks of war, expropriation of equipment, renegotiation or
modification of existing contracts, taxation policies, and the general hazards
associated with foreign sovereignty over certain areas in which operations are
conducted.
 
     Operational risks and hazards may result in extensive damage to or total
loss of drilling rigs, with associated personal injuries and loss of life,
pollution, well loss, well control expenses and/or wreck removal or other
requirements. Such losses, liabilities or obligations may be uninsured or
underinsured. In the event of a major incident or incidents resulting from
operational risks and hazards, the Company will sustain a loss of
                                      F-24
<PAGE>   75
          SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               DECEMBER 31, 1998
 
revenue by reason of the rig loss or damage and may be subject to significant
additional expenses in respect of uninsured or underinsured losses, liabilities
or obligations.
 
     The following table summarizes revenues from major customers of the Company
as a percentage of total operating revenues for the period indicated.
 
<TABLE>
<CAPTION>
                                                  CALENDAR      SIX MONTHS     FISCAL YEAR
                                                 YEAR ENDED       ENDED       ENDED JUNE 30,
                                                DECEMBER 31,   DECEMBER 31,   --------------
                                                    1998           1997       1997     1996
                                                ------------   ------------   -----    -----
<S>                                             <C>            <C>            <C>      <C>
Shell.........................................      13.2%          13.9%       9.3%    18.3%
Elf Aquitaine.................................      10.5%           5.5%       1.9%     0.0%
BP Amoco......................................       9.9%           9.7%      19.2%    15.2%
Mobil Oil Company.............................       7.4%           4.7%       4.0%     1.5%
AGIP..........................................       5.7%           6.4%       7.0%     9.5%
Kuwait Oil Company (Note 12)..................       5.5%           4.6%       4.4%     7.6%
Phillips Petroleum Company....................       4.4%           0.0%       3.9%    10.3%
Petroleo Y Gas................................       3.8%           4.0%       5.3%     3.5%
Texaco........................................       2.7%           5.3%       6.4%     2.2%
British Gas...................................       0.5%           7.5%       7.6%     6.0%
</TABLE>
 
12. TRANSACTIONS WITH AFFILIATES
 
     The Company provides contract drilling services in Kuwait to the Kuwait Oil
Company, K.S.C. ("KOC"), a subsidiary of KPC, and also provides contract
drilling services to a partially owned affiliate of KOC in the Kuwait-Saudi
Arabian Partitioned Neutral Zone. Such services are performed pursuant to
drilling contracts which contain terms and conditions and rates of compensation
which materially approximate those which are customarily included in
arm's-length contracts of a similar nature. In connection therewith, KOC
provides the Company rent free use of certain land and maintenance facilities
and has committed to continue providing same, subject to availability of the
maintenance facilities, through the current February 2001 term of the drilling
contracts. In relation to its drilling business in Kuwait, the Company has an
agency agreement with a subsidiary of KPC which obligates the Company to pay an
agency fee based on a percentage of revenues. The Company believes the terms of
this agreement are more favorable than those which could be obtained with an
unrelated third party in an arm's-length negotiation, but the value of such
terms is currently immaterial to the Company's results of operations.
 
     The Company earned revenues from KPC affiliated companies in the ordinary
course of business of $44,800,000, $17,315,000, $25,268,000 and $35,925,000 for
the calendar year ended December 31, 1998, the six months ended December 31,
1997, and the fiscal years ended June 30, 1997 and 1996, respectively. The
Company paid agency fees to a subsidiary of KPC of $563,028, $175,038, $259,827
and $356,851 during the calendar year ended December 31, 1998, the six months
ended December 31, 1997 and the fiscal years ended June 30, 1997 and 1996,
respectively. The Company had accounts receivable from KPC affiliated companies
of $6,072,000 and $5,597,000 at December 31, 1998 and 1997, respectively.
 
     In connection with the Reorganization, the Company made distributions to
Holdings during the three years ended June 30, 1997 comprised principally of
certain subsidiaries which conducted the Company's former non-drilling
operations and services (the "Non-Drilling Subsidiaries") and certain additional
non-drilling assets, including real estate, cash and cash equivalents.
 
     The Company, Holdings and KPC entered into an Intercompany Agreement before
the consummation of the Offering (the "Intercompany Agreement"), certain
provisions of which are summarized below. As used
 
                                      F-25
<PAGE>   76
          SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               DECEMBER 31, 1998
 
herein, "KPC Affiliated Group" means KPC and its affiliates, including Holdings,
other than the Company and its subsidiaries.
 
     As of December 31, 1998, the consolidated financial statements of Holdings
contained liabilities to third parties, including tax liabilities, aggregating
approximately $61 million incurred by the Non-Drilling Subsidiaries on or before
March 31, 1997. As of December 31, 1998, Holdings maintained cash and cash
equivalents (the "Liability Payment Fund") sufficient to satisfy those
liabilities remaining after such date. The Company, Holdings and KPC have agreed
in the Intercompany Agreement that all amounts paid to claimants to satisfy
those liabilities, whether by settlement, judgment or award (including
claimants' attorneys' fees), will be paid by Holdings from the Liability Payment
Fund. The Company will pay all internal and external costs and fees (including
the Company's and Holdings' attorneys' fees) associated with management and
resolution of those liabilities, and believes such costs and fees will not be
material. If any amount remains in the Liability Payment Fund at March 31, 2002,
Holdings will pay the Company the first $10 million of such amount and 50% of
any amount in excess of $10 million. Thereafter, or if the resolution of those
liabilities earlier exhausts the Liability Payment Fund, Holdings will have no
further responsibility for those liabilities, and the Company will be
responsible for all costs, fees and amounts paid to resolve those liabilities
and will indemnify the KPC Affiliated Group in respect of such costs and fees
and those liabilities. The Company believes that the Liability Payment Fund is
adequate to provide for such costs and fees and those liabilities. Accordingly,
the Company believes that the indemnification costs, if any, will not be
material and no additional reserves have been established by the Company in
respect of such costs and fees and those liabilities or the Company's obligation
under the Intercompany Agreement relating to such costs and fees and those
liabilities.
 
     The Intercompany Agreement also provides that, except as may be provided in
a separate agreement, the Company will indemnify the KPC Affiliated Group
against losses based on, or taxes arising from, the following: (i) the ownership
of the assets or the operation of the business of the Company or its
subsidiaries, (ii) any other activities of the Company or its subsidiaries,
(iii) any guaranty or similar agreement by the KPC Affiliated Group provided to
any person with respect to any obligation of the Company or its subsidiaries,
and (iv) certain other matters. In addition, the Company has agreed to indemnify
the KPC Affiliated Group against certain civil liabilities, including
liabilities under the Securities Act of 1933, as amended ("the Securities Act"),
relating to misstatements in or omissions from any registration statement or
report that the Company files under the Securities Act. Holdings has also agreed
to indemnify the Company and its subsidiaries against losses based on the
ownership or operation of the assets or properties or the operation or conduct
of the business of Holdings and its subsidiaries on or after March 31, 1997.
 
     The Company also entered into a Management Services Agreement with Holdings
(the "Management Services Agreement"), for the purpose of providing asset
(primarily real estate) management services, general and administrative services
and liability management and resolution services to Holdings, the Non-Drilling
Subsidiaries and inactive subsidiaries of Holdings. The Management Services
Agreement authorizes the Company to resolve the liabilities of the Non-Drilling
Subsidiaries under the Intercompany Agreement using the Liability Payment Fund.
Although Holdings retains the right to reduce or expand the scope of services to
be performed by the Company pursuant to the Management Services Agreement, the
Company's liability management and resolution service may not be reduced or
terminated. The Management Services Agreement also provides for payment of an
initial asset management fee to the Company of $173,000 per year as well as
reimbursement of out-of-pocket costs in respect of asset management services,
and stipulates that the fees are subject to negotiation on an annual basis and
upon any reduction in or expansion of the scope of services provided by the
Company. The Company will pay all internal and external costs and fees
(including the Company's and Holdings' attorneys' fees) associated with the
Company's liability management and resolution services and all internal and
external costs and fees associated with the provision of general and
administrative
 
                                      F-26
<PAGE>   77
          SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               DECEMBER 31, 1998
 
services pursuant to the Management Services Agreement. The Company believes
such costs and fees will not be material.
 
13. QUARTERLY RESULTS (UNAUDITED)
 
     Shown below are selected unaudited quarterly data (in thousands), except
per share data:
 
<TABLE>
<CAPTION>
                                                                THREE MONTHS ENDED
                                              -------------------------------------------------------
                                                MARCH 31       JUNE 30     SEPTEMBER 30   DECEMBER 31
                                              ------------   -----------   ------------   -----------
<S>                                           <C>            <C>           <C>            <C>
CALENDAR YEAR ENDED DECEMBER 31, 1998
Operating revenues..........................    $196,281      $202,646       $201,085      $211,334
                                                ========      ========       ========      ========
Operating income............................    $ 78,103      $ 72,596       $ 81,565      $ 93,080
                                                ========      ========       ========      ========
Net income..................................    $ 67,759      $ 63,980       $ 72,734      $ 82,671
                                                ========      ========       ========      ========
Basic net income per Ordinary Share.........    $   0.59      $   0.56       $   0.64      $   0.72
                                                ========      ========       ========      ========
Diluted net income per Ordinary Share.......    $   0.59      $   0.56       $   0.64      $   0.72
                                                ========      ========       ========      ========
</TABLE>
 
<TABLE>
<CAPTION>
                                                                THREE MONTHS ENDED
                                              -------------------------------------------------------
                                              SEPTEMBER 30   DECEMBER 31     MARCH 31       JUNE 30
                                              ------------   -----------   ------------   -----------
<S>                                           <C>            <C>           <C>            <C>
SIX MONTHS ENDED DECEMBER 31, 1997
Operating revenues..........................    $176,787      $198,398
                                                ========      ========
Operating income............................    $ 67,058      $ 77,166
                                                ========      ========
Net income..................................    $ 59,322      $ 69,206
                                                ========      ========
Basic and diluted net income per Ordinary
  Share.....................................    $   0.52      $   0.60
                                                ========      ========
FISCAL YEAR ENDED JUNE 30, 1997
Operating revenues..........................    $126,080      $138,711       $149,253      $164,519
                                                ========      ========       ========      ========
Operating income............................    $ 34,782      $ 39,686       $ 47,134      $ 58,046
                                                ========      ========       ========      ========
Net income..................................    $ 30,994      $ 37,664       $ 42,923      $ 53,335
                                                ========      ========       ========      ========
Basic and diluted net income per Ordinary
  Share.....................................    $   0.27      $   0.33       $   0.37      $   0.47
                                                ========      ========       ========      ========
FISCAL YEAR ENDED JUNE 30, 1996
Operating revenues..........................    $111,255      $114,529       $118,417      $126,681
                                                ========      ========       ========      ========
Operating income............................    $  9,489      $ 15,925       $ 21,722      $ 21,691
                                                ========      ========       ========      ========
Net income..................................    $  9,012      $ 14,067       $ 17,393      $ 21,504
                                                ========      ========       ========      ========
Pro forma basic and diluted net income per
  Ordinary Share............................    $   0.08      $   0.12       $   0.15      $   0.19
                                                ========      ========       ========      ========
</TABLE>
 
                                      F-27
<PAGE>   78
 
                                   SIGNATURES
 
     Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the Registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form 20-F and has duly caused
this annual report to be signed on its behalf by the undersigned, thereunto duly
authorized.
 
                                            SANTA FE INTERNATIONAL
                                            CORPORATION
 
                                            By:       /s/ D.G. BARBER
                                              ----------------------------------
                                              D.G. Barber, Senior Vice President
                                                 and Chief Financial Officer
 
Date: March 29, 1999
<PAGE>   79
 
                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
      EXHIBIT NO.                            EXHIBIT DESCRIPTION
      -----------                            -------------------
<C>                      <S>
        **3.1            -- Amended and Restated Memorandum of Association of the
                            Registrant.
        **3.2            -- Amended and Restated Articles of Association of the
                            Registrant.
         *4              -- Specimen of Ordinary Shares Certificate.
       **10.1            -- Registrant's Investment Savings and Profit Sharing Plan.
       **10.2            -- Registrant's Pension Plan (U.S. employees).
       **10.3            -- Registrant's Special Pension Plan (non-U.S. employees).
       **10.4            -- Registrant's Equity Restoration Plan.
        *10.5            -- Registrant's Supplemental Executive Retirement Plan.
        *10.6            -- Registrant's Performance Unit Plan.
      ***10.7            -- Registrant's Annual Incentive Compensation Plan.
      ***10.8            -- Registrant's 1997 Long Term Incentive Plan.
      ***10.9            -- Registrant's 1997 Non-Employee Director Stock Option
                            Plan.
      ***10.10           -- Registrant's 1997 Employee Share Purchase Plan.
        *10.11           -- Registrant's Employee Severance Protection Plan.
        *10.12           -- Registrant's Directors and Officers Indemnity Agreement.
        *10.13           -- Intercompany Agreement by and among Kuwait Petroleum
                            Corporation, SFIC Holdings (Cayman), Inc. and the
                            Registrant, dated June 9, 1997.
        *10.14           -- Management Services Agreement by and between SFIC
                            Holdings (Cayman), Inc. and the Registrant, dated June 9,
                            1997.
       **10.15           -- Agency Agreement between Kuwait Santa Fe Braun for
                            Engineering and Petroleum Enterprises( K.S.B.) Company
                            K.S.C. and the Registrant, dated April 1, 1992.
       **10.16           -- Contract for the Construction and Sale of a Jackup
                            Drilling Unit by and between Far East Levingston
                            Shipbuilding Ltd. and the Registrant, dated as of
                            December 16, 1996.
       **10.17           -- Drilling Contract by and between Mobil Oil Canada
                            Properties and Santa Fe Drilling Company (Canada)
                            Limited, dated as of December 16, 1996.
        *10.18           -- Share Purchase Agreement between SFIC Holdings (Cayman)
                            Inc. and the Registrant, dated as of June 9, 1997.
        *10.19           -- Contract for the Construction and Sale of Jackup Drilling
                            Unit Galaxy III by and between Keppel FELS Limited and
                            the Registrant, dated as of September 17, 1997.
        *10.20           -- Letter of Interim Agreement for Provision of Jackup
                            Drilling Unit by and between Amoco (U.K.) Exploration
                            Company and the Registrant, dated as of September 3,
                            1997.
     ****10.21           -- Consulting Agreement dated December 10, 1997 between
                            Registrant and Gordon M. Anderson.
     ****10.22           -- AMOCO (U.K.) Exploration Company Form of Contract Ref:
                            AD3300 for The Provision of the Jack-Up Drilling Unit
                            Santa Fe "Galaxy III" for Drilling Operations on the
                            U.K.C.S. with Santa Fe Drilling Company (North Sea)
                            Limited, dated September 3, 1997 (with Appendix 5 only).
        +10.23           -- Registrant's Non-Employee Director Deferred Compensation
                            Plan.
        +10.24           -- Amendment to Registrant's 1997 Non-Employee Director
                            Stock Option Plan.
        +10.25           -- Amendment to Registrant's 1997 Long-Term Incentive
                            Compensation Plan.
        +10.26           -- Amendment to Registrant's Supplemental Executive
                            Retirement Plan.
        +10.27           -- Amendment to Registrant's Supplemental Executive
                            Retirement Plan.
</TABLE>
<PAGE>   80
 
<TABLE>
<CAPTION>
      EXHIBIT NO.                            EXHIBIT DESCRIPTION
      -----------                            -------------------
<C>                      <S>
        +10.28           --Amendment to Registrant's 1997 Non-Employee Director Stock
                            Option Plan
        +21              -- List of Subsidiaries.
        +23.1            -- Consent of Ernst & Young LLP, independent auditors
</TABLE>
 
---------------
 
   * Incorporated by reference to the Company's Annual Report on Form 20-F for
     the fiscal year ended June 30, 1997.
 
  ** Incorporated by reference to the Company's Registration Statement on Form
     F-1 (No. 333-6912) filed May 14, 1997.
 
 *** Incorporated by reference to the Company's Registration Statement on Form
     S-8 (No. 333-7070) filed June 13, 1997.
 
**** Incorporated by reference to the Company's Report on Form 6-K filed March
     3, 1998.
 
   + Filed herewith.