**UNITED
STATES**


**SECURITIES
AND EXCHANGE COMMISSION**


**Washington,
D.C. 20549**





****





**FORM
10-Q**


(Mark
One)


**x******
    **QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934**





**For
the quarterly period ended March 31, 2005**





**OR**





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





**For
the transition period from ______________ to
______________.**





**Commission
file number 333-75899**


****








**TRANSOCEAN
INC**.


(Exact
name of registrant as specified in its charter)





****





**Cayman****Islands**
    
    **66-0582307**(State
      or other jurisdiction of incorporation or organization)
    
    (I.R.S.
      Employer Identification No.)





**4
      Greenway Plaza**
    
    **1****Houston,
      Texas**
    
    **77046**(Address
      of principal executive offices)
    
    (Zip
      Code)





Registrant’s
telephone number, including area code: **(713)
232-7500**


**______________________**





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. x No  ̈





Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act).  Yes x No  ̈





As of
April 29, 2005, 326,102,656 ordinary shares, par value $0.01 per share,
were outstanding.













**TRANSOCEAN
INC.**





**INDEX TO FORM 10-Q**





**QUARTER
ENDED** **MARCH
31, 2005**





Page**PART
      I - FINANCIAL INFORMATION****Item
      1.**Financial Statements (Unaudited)Condensed Consolidated Statements of
      OperationsThree
      Months Ended March 31, 2005 and 2004
    1Condensed Consolidated Statements of
      Comprehensive IncomeThree
      Months Ended March 31, 2005 and 2004
    2Condensed Consolidated Balance
    SheetsMarch
      31, 2005 and December 31, 2004
    3Condensed Consolidated Statements of Cash
      FlowsThree
      Months Ended March 31, 2005 and 2004
    4Notes to Condensed Consolidated Financial
      Statements
    5**Item
      2.**Management’s Discussion and Analysis of
      Financial Condition and Results of Operations
    18**Item
      3.**Quantitative and Qualitative
      Disclosures About Market Risk
    33**Item
      4.**Controls and Procedures
    34**PART
      II - OTHER INFORMATION****Item
      1.**Legal Proceedings
    34**Item
      2.**Unregistered Sales of Equity Securities
      and Use of Proceeds
    34**Item
      6.**Exhibits
    35




*Index to Form 10-Q*







**Item
1. Financial Statements**





**TRANSOCEAN
INC. AND SUBSIDIARIES**


**CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS**


(In
millions, except per share data)


(Unaudited)





Three
      Months Ended March 31,<B>
    
    2005
    
    2004Operating
      RevenuesContract
      drilling revenues
    
    $
    600.6
    
    $
    597.5Other
      revenues
    
    
    29.9
    
    
    54.5630.5
    
    
    652.0Costs
      and ExpensesOperating
      and maintenance
    
    
    388.6
    
    
    412.4Depreciation
    
    
    100.7
    
    
    131.5General
      and administrative
    
    
    18.1
    
    
    15.1Gain
      from sale of assets, net
    
    
    (20.2
    )
    
    (3.8
    )487.2
    
    
    555.2Operating
      Income
    
    
    143.3
    
    
    96.8Other
      Income (Expense), netEquity
      in earnings of unconsolidated affiliates
    
    
    3.1
    
    
    2.3Interest
      income
    
    
    4.0
    
    
    2.1Interest
      expense
    
    
    (33.1
    )
    
    (47.4
    )Gain
      from TODCO Offerings
    
    
    -
    
    
    39.4Loss
      on retirement of debt
    
    
    (6.7
    )
    
    (28.1
    )Other,
      net
    
    
    (1.1
    )
    
    1.4(33.8
    )
    
    (30.3
    )Income
      Before Income Taxes and Minority Interest
    
    
    109.5
    
    
    66.5Income
      Tax Expense
    
    
    17.5
    
    
    48.0Minority
      Interest
    
    
    0.2
    
    
    (4.2
    )Net
      Income
    
    $
    91.8
    
    $
    22.7Earnings
      Per ShareBasic
      and Diluted
    
    $
    0.28
    
    $
    0.07Weighted
      Average Shares OutstandingBasic
    
    
    323.6
    
    
    320.6Diluted
    
    
    331.0
    
    
    324.1




See
accompanying notes.





1
 *Index to Form 10-Q*





**TRANSOCEAN
INC. AND SUBSIDIARIES**


**CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME**


(In
millions)


(Unaudited)





Three
      Months Ended March 31,2005
    
    2004Net
      Income
    
    $
    91.8
    
    $
    22.7Other
      Comprehensive Income (Loss), net of taxAmortization
      of gain on terminated interest rate swaps
    
    
    (0.1
    )
    
    (0.1
    )Change
      in unrealized loss on securities available for sale
    
    
    0.3
    
    
    −Minimum
      pension liability adjustments (net of tax expense of $0.7 for the three
      months ended March 31, 2005)
    
    
    1.4
    
    
    −Other
      Comprehensive Income (Loss)
    
    
    1.6
    
    
    (0.1
    )Total
      Comprehensive Income
    
    $
    93.4
    
    $
    22.6




See
accompanying notes.





2
 *Index to Form 10-Q*





**TRANSOCEAN
INC. AND SUBSIDIARIES**


**CONDENSED CONSOLIDATED BALANCE
SHEETS**


(In
millions, except share data)





March
      31,
    
    December
      31,<B>
    
    2005
    
    2004(Unaudited)**ASSETS**<S>Cash
      and Cash Equivalents
    
    $420.7
    
    $451.3Accounts
      Receivable, net of allowance for doubtful accounts of $16.5 and $16.8 at
      March 31, 2005 and December 31, 2004, respectively
    
    
    484.5
    
    
    442.0Materials
      and Supplies, net of allowance for obsolescence of $20.2 and $20.3 at
      March 31, 2005 and December 31, 2004, respectively
    
    
    148.5
    
    
    144.7Deferred
      Income Taxes, net
    
    
    15.3
    
    
    19.0Other
      Current Assets
    
    
    33.9
    
    
    52.1Total
      Current Assets
    
    
    1,102.9
    
    
    1,109.1Property
      and Equipment
    
    
    9,740.7
    
    
    9,732.9Less
      Accumulated Depreciation
    
    
    2,817.1
    
    
    2,727.7Property
      and Equipment, net
    
    
    6,923.6
    
    
    7,005.2Goodwill
    
    
    2,251.9
    
    
    2,251.9Investments
      in and Advances to Unconsolidated Affiliates
    
    
    110.7
    
    
    109.2Deferred
      Income Taxes
    
    
    39.4
    
    
    43.8Other
      Assets
    
    
    263.0
    
    
    239.1Total
      Assets
    
    $
    10,691.5
    
    $
    10,758.3**LIABILITIES
      AND SHAREHOLDERS’ EQUITY**Accounts
      Payable
    
    $
    165.6
    
    $
    180.8Accrued
      Income Taxes
    
    
    10.4
    
    
    17.1Debt
      Due Within One Year
    
    
    7.9
    
    
    19.4Other
      Current Liabilities
    
    
    248.4
    
    
    213.0Total
      Current Liabilities
    
    
    432.3
    
    
    430.3Long-Term
      Debt
    
    
    2,196.3
    
    
    2,462.1Deferred
      Income Taxes, net
    
    
    147.6
    
    
    124.1Other
      Long-Term Liabilities
    
    
    349.6
    
    
    345.2Total
      Long-Term Liabilities
    
    
    2,693.5
    
    
    2,931.4Commitments
      and ContingenciesMinority
      Interest
    
    
    4.2
    
    
    4.0Preference
      Shares, $0.10 par value; 50,000,000 shares authorized, none issued and
      outstanding
    
    
    −
    
    
    −Ordinary
      Shares, $0.01 par value; 800,000,000 shares authorized, 324,824,322 and
      321,533,998 shares issued and outstanding at March 31, 2005 and December
      31, 2004, respectively
    
    
    3.2
    
    
    3.2Additional
      Paid-in Capital
    
    
    10,771.3
    
    
    10,695.8Accumulated
      Other Comprehensive Loss
    
    
    (22.8
    )
    
    (24.4
    )Retained
      Deficit
    
    
    (3,190.2
    )
    
    (3,282.0
    )Total
      Shareholders’ Equity
    
    
    7,561.5
    
    
    7,392.6Total
      Liabilities and Shareholders’ Equity
    
    $
    10,691.5
    
    $
    10,758.3




See
accompanying notes.





3
 *Index to Form 10-Q*





**TRANSOCEAN
INC. AND SUBSIDIARIES**


**CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS**


(In
millions)


(Unaudited)





<table><caption>
    
    Three
      Months Ended March 31,<B>
    
    2005
    
    2004**Cash
      Flows from Operating Activities**Net
      income
    
    $91.8
    
    $22.7Adjustments
      to reconcile net income to net
      cash provided by operating activitiesDepreciation
    
    
    100.7
    
    
    131.5Stock-based
      compensation expense
    
    
    3.1
    
    
    10.0Deferred
      income taxes
    
    
    4.6
    
    
    31.3Equity
      in earnings of unconsolidated affiliates
    
    
    (3.1
    )
    
    (2.3
    )Net
      gain from disposal of assets
    
    
    (19.9
    )
    
    (1.9
    )Gain
      from TODCO Offerings
    
    
    -
    
    
    (39.4
    )Loss
      on retirement of debt
    
    
    6.7
    
    
    28.1Amortization
      of debt-related discounts/premiums, fair value adjustments and issue
      costs, net
    
    
    (3.2
    )
    
    (7.6
    )Deferred
      income, net
    
    
    10.0
    
    
    (3.3
    )Deferred
      expenses, net
    
    
    (1.2
    )
    
    (1.9
    )Tax
      benefit from exercise of stock options
    
    
    (0.8
    )
    
    -Other
      long-term liabilities
    
    
    5.2
    
    
    2.3Other,
      net
    
    
    1.1
    
    
    (4.8
    )Changes
      in operating assets and liabilitiesAccounts
      receivable
    
    
    (40.0
    )
    
    29.8Accounts
      payable and other current liabilities
    
    
    22.9
    
    
    23.6Income
      taxes receivable/payable, net
    
    
    (5.1
    )
    
    (2.4
    )Other
      current assets
    
    
    4.1
    
    
    (24.5
    )Net
      Cash Provided by Operating Activities
    
    
    176.9
    
    
    191.2**Cash
      Flows from Investing Activities**Capital
      expenditures
    
    
    (31.2
    )
    
    (17.4
    )Proceeds
      from disposal of assets, net
    
    
    35.5
    
    
    10.5Proceeds
      from TODCO Offerings
    
    
    -
    
    
    155.7Joint
      ventures and other investments, net
    
    
    3.1
    
    
    1.5Net
      Cash Provided by Investing Activities
    
    
    7.4
    
    
    150.3**Cash
      Flows from Financing Activities**Repayments
      on revolving credit agreement
    
    
    -
    
    
    (50.0
    )Repayments
      on other debt instruments
    
    
    (287.4
    )
    
    (381.6
    )Net
      proceeds from issuance of ordinary shares under stock-based compensation
      plans
    
    
    72.4
    
    
    14.0Other,
      net
    
    
    0.1
    
    
    -Net
      Cash Used in Financing Activities
    
    
    (214.9
    )
    
    (417.6
    )Net
      Decrease in Cash and Cash Equivalents
    
    
    (30.6
    )
    
    (76.1
    )Cash
      and Cash Equivalents at Beginning of Period
    
    
    451.3
    
    
    474.0Cash
      and Cash Equivalents at End of Period
    
    $
    420.7
    
    $
    397.9




See
accompanying notes.





4
 *Index to Form 10-Q*


**TRANSOCEAN
INC. AND SUBSIDIARIES**
 **NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(unaudited)**


**Note
1**―**Nature
of Business and Principles of Consolidation**





Transocean
Inc. (together with our subsidiaries and predecessors, unless the context
requires otherwise, “Transocean,” “we,” “us” or “our”) is a leading
international provider of offshore contract drilling services for oil and gas
wells. We contract our drilling rigs, related equipment and work crews primarily
on a dayrate basis to drill oil and gas wells. We also provide additional
services, including integrated well services. At March 31, 2005, we owned, had
partial ownership interests in or operated 93 mobile offshore and barge drilling
units. As of this date, our assets consisted of 32 High-Specification
semisubmersibles and drillships (“floaters”), 24 Other Floaters, 26 Jackup Rigs
and 11 Other Rigs.





On
January 31, 2001, we completed a merger transaction (the “R&B Falcon
merger”) with R&B Falcon Corporation (“R&B Falcon”). At the time of the
merger, R&B Falcon operated a diverse global drilling rig fleet consisting
of drillships, semisubmersibles, jackup rigs and other units including the Gulf
of Mexico Shallow and Inland Water segment fleet. R&B Falcon and the Gulf of
Mexico Shallow and Inland Water segment later became known as TODCO (together
with its subsidiaries and predecessors, unless the context requires otherwise,
“TODCO”) and the TODCO segment, respectively. In preparation for the initial
public offering discussed below, we transferred all assets and businesses out of
R&B Falcon that were unrelated to the Gulf of Mexico Shallow and Inland
Water business.





In
February 2004, we completed an initial public offering (the “TODCO IPO”) of
common stock of TODCO in which we sold 13.8 million shares of TODCO class A
common stock, representing 23 percent of TODCO’s total outstanding shares. In
September 2004 and December 2004, respectively, we completed additional public
offerings of TODCO common stock (respectively referred to as the “September
TODCO Offering” and “December TODCO Offering” and, together with the TODCO IPO,
the “TODCO Offerings”). We sold 17.9 million shares of TODCO’s class A common
stock (30 percent of TODCO’s total outstanding shares) in the September TODCO
Offering and 15.0 million shares of TODCO’s class A common stock (25 percent of
TODCO’s total outstanding shares) in the December TODCO Offering. Prior to the
December TODCO Offering, we held TODCO class B common stock, which was entitled
to five votes per share (compared to one vote per share of TODCO class A common
stock) and converted automatically into class A common stock upon any sale by us
to a third party. In connection with the December TODCO Offering, we converted
all of our remaining TODCO class B common stock not sold in the TODCO Offerings
into shares of class A common stock. After the TODCO Offerings, we hold a 22
percent ownership and voting interest in TODCO, represented by 13.3 million
shares of class A common stock.





We
consolidated TODCO in our financial statements as a business segment through
December 16, 2004 and that portion of TODCO that we did not own was reported as
minority interest in our consolidated statements of operations and balance
sheet. As a result of the conversion of the TODCO class B common stock into
class A common stock, we no longer have a majority voting interest in TODCO and
no longer consolidate TODCO in our financial statements but account for our
remaining investment using the equity method of accounting. Our current
intention is to dispose of our remaining interest in TODCO, which could be
achieved through a number of possible transactions including additional public
offerings, open market sales, sales to one or more third parties, a spin-off to
our shareholders, split-off offerings to our shareholders that would allow for
the opportunity to exchange our ordinary shares for shares of TODCO’s class A
common stock or a combination of these transactions.





For
investments in joint ventures and other entities that do not meet the criteria
of a variable interest entity or where we are not deemed to be the primary
beneficiary for accounting purposes of those entities that meet the variable
interest entity criteria, we use the equity method of accounting where our
ownership is between 20 percent and 50 percent or where our ownership is more
than 50 percent and we do not have significant influence or control over the
unconsolidated affiliate. We use the cost method of accounting for investments
in unconsolidated affiliates where our ownership is less than 20 percent and
where we do not have significant influence over the unconsolidated affiliate. We
consolidate those investments that meet the criteria of a variable interest
entity where we are deemed to be the primary beneficiary for accounting purposes
and for entities in which we have a majority voting interest. Intercompany
transactions and accounts are eliminated.





5
 *Index to Form 10-Q*


**TRANSOCEAN
INC. AND SUBSIDIARIES**
 **NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)**
 **(unaudited)**


**Note
2** **―** **Summary
of Significant Accounting Policies**





*Basis
of Presentation* —Our
accompanying condensed consolidated financial statements have been prepared
without audit in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange
Commission (“SEC”). Accordingly, pursuant to such rules and regulations, these
financial statements do not include all disclosures required by accounting
principles generally accepted in the U.S. for complete financial statements. The
condensed consolidated financial statements reflect all adjustments, which are,
in the opinion of management, necessary for a fair presentation of financial
position, results of operations and cash flows for the interim periods. Such
adjustments are considered to be of a normal recurring nature unless otherwise
identified. Operating results for the three months ended March 31, 2005 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2005 or for any future period. The accompanying condensed
consolidated financial statements and notes thereto should be read in
conjunction with the audited consolidated financial statements and notes thereto
included in our Annual Report on Form 10-K for the year ended December 31,
2004.





*Accounting
Estimates* —The
preparation of financial statements in conformity with accounting principles
generally accepted in the U.S. requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues,
expenses and disclosure of contingent assets and liabilities. On an ongoing
basis, we evaluate our estimates, including those related to bad debts,
materials and supplies obsolescence, investments, intangible assets and
goodwill, property and equipment and other long-lived assets, income taxes,
workers’ insurance, pensions and other postretirement benefits, other employment
benefits and contingent liabilities. We base our estimates on historical
experience and on various other assumptions we believe are reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results could differ from such estimates.





*Change
in Estimate* —During
the fourth quarter of 2004, we extended the useful life of four rigs, which had
estimated useful lives ranging from 30 to 32 years, to 35 years. We determined
35 years was appropriate for each of these rigs based on the current contracts
these rigs are operating under as well as the additional life-extending work,
upgrades and inspections we have performed on these rigs. In the first quarter
of 2005, the impact of the life extension of these four rigs was a reduction in
depreciation expense of $4.8 million ($0.01 per diluted share), which had no tax
effect, and such reduction is expected to be approximately $16 million before
tax in 2005.





*Stock-Based
Compensation* —Effective
January 1, 2003, we account for stock-based compensation using the fair value
recognition provisions of the Financial Accounting Standards Board’s (“FASB”)
Statement of Financial Accounting Standard (“SFAS”) 123, *Accounting
for Stock-Based Compensation* , for all
awards granted or modified on or subsequent to January 1, 2003. We account for
awards granted prior to January 1, 2003 using the intrinsic value method under
Accounting Principles Board Opinion (“APB”) 25, *Accounting
for Stock Issued to Employees,* and
related interpretations (see “ ― New
Accounting Pronouncements”).





6
 *Index to Form 10-Q*


**TRANSOCEAN
INC. AND SUBSIDIARIES**
 **NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)**
 **(unaudited)**


If
compensation expense for grants to employees under our long-term incentive plan
and employee stock purchase plan (“ESPP”) prior to January 1, 2003 was
recognized using the fair value method of accounting under SFAS 123 rather than
the intrinsic value method under APB 25, net income and earnings per share would
have been reduced to the pro forma amounts indicated below (in millions, except
per share data):





Three
      Months Ended
      March
      31,2005
    
    2004Net
      Income as Reported
    
    $
    91.8
    
    $
    22.7Add
      back: Stock-based compensation expense included in reported net income,
      net of related tax effects
    
    
    2.8
    
    
    7.3Deduct:
      Total stock-based compensation expense determined under the fair value
      method for all awards, net of related tax effectsLong-Term
      Incentive Plan
    
    
    (4.6
    )
    
    (9.7
    )ESPP
    
    
    (0.8
    )
    
    (0.6
    )Pro
      Forma Net Income
    
    $
    89.2
    
    $
    19.7Basic
      Earnings Per ShareAs
      Reported
    
    $
    0.28
    
    $
    0.07Pro
      Forma
    
    
    0.28
    
    
    0.06Diluted
      Earnings Per ShareAs
      Reported
    
    $
    0.28
    
    $
    0.07Pro
      Forma
    
    
    0.27
    
    
    0.06





*New
Accounting Pronouncement* — In
December 2004, the FASB issued SFAS 123 (revised 2004) (“SFAS
123(R)”), *Share-Based
Payment* ,
which is a revision of SFAS 123, *Accounting
for Stock-Based Compensation* .
SFAS 123(R) supersedes APB 25, *Accounting
for Stock Issued to Employees* ,
and amends SFAS 95, *Statement
of Cash Flows* .
While the approach in SFAS 123(R) is similar to the approach described in SFAS
123, SFAS 123(R) requires recognition in the income statement of all share-based
payments to employees, including grants of employee stock options, based on
their fair values, and pro forma disclosure is no longer an alternative. The SEC
has deferred the implementation date, and we are now required to adopt SFAS
123(R) no later than January 1, 2006.





SFAS
123(R) permits adoption using one of two methods, a modified prospective method
(“Prospective Method”) or a modified retrospective method (“Retrospective
Method”). With the Prospective Method, costs are recognized beginning with the
effective date based on the requirements of SFAS 123(R) for (i) all share-based
payments granted after the effective date of SFAS 123(R), and (ii) all awards
granted to employees prior to the effective date of SFAS 123(R) that remain
unvested on the effective date. The Retrospective Method applies the
requirements of the Prospective Method but further permits entities to restate
all prior periods presented based on the amounts previously recognized under
SFAS 123 for purposes of pro forma disclosures.





7
 *Index to Form 10-Q*


**TRANSOCEAN
INC. AND SUBSIDIARIES**
 **NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)**
 **(unaudited)**


Although
we will adopt SFAS 123(R) effective January 1, 2006, we have not yet determined
which method we will use. We adopted the fair-value-based method of accounting
for share-based payments effective January 1, 2003 using the modified
prospective method as described in SFAS 148, *Accounting
for Stock-Based Compensation-Transition and Disclosure* .
While we currently use the Black-Scholes formula to estimate the value of stock
options granted to employees, which is an acceptable share-based award valuation
model, we may choose some other model that is also acceptable in determining
fair value of stock awards upon adoption of SFAS 123(R). Because SFAS 123(R)
must be applied to unvested awards granted and accounted for under APB 25, any
additional compensation costs not previously recognized under SFAS 123 will be
recognized under SFAS 123(R). Our unvested APB 25 options will vest in the third
quarter of 2005. If we adopt SFAS 123(R) using the Prospective Method, there
would be no impact on our consolidated financial position, results of operations
or cash flows. If we adopt using the Retrospective Method, the impact of those
amounts would approximate the amounts described in our pro forma net income and
earnings per share disclosure (see “ ― Stock-Based
Compensation”). In addition to the compensation cost recognition requirements,
SFAS 123(R) also requires the tax deduction benefits for an award in excess of
recognized compensation cost be reported as a financing cash flow rather than as
an operating cash flow, which is currently required under SFAS 95. While we
cannot estimate what these amounts will be in the future (because they depend
on, among other things, when employees exercise stock options), we recognized
operating cash flows related to the tax deduction benefits of $5.9 million for
the year ended December 31, 2004.





*Reclassifications* —Certain
reclassifications have been made to prior period amounts to conform with the
current period’s presentation.





**Note
3** ― **TODCO
IPO**





In
February 2004, we completed the TODCO IPO in which we sold 13.8 million shares
of TODCO’s class A common stock, representing 23 percent of TODCO’s total
outstanding shares, at $12.00 per share. We received net proceeds of $155.7
million from the TODCO IPO and recognized a gain of $39.4 million ($0.12 per
diluted share), which had no tax effect, in the first quarter of 2004 and
represented the excess of net proceeds received over the net book value of the
shares sold in the TODCO IPO.





In
conjunction with the closing of the TODCO IPO, TODCO granted restricted stock
and stock options to some of its employees under its long-term incentive plan
and some of these awards vested at the time of grant. In accordance with the
provisions of SFAS 123, TODCO recognized compensation expense of $5.6 million
($0.02 per Transocean’s diluted share), which had no tax effect, in the first
quarter of 2004 as a result of the immediate vesting of these awards. In
addition, certain of TODCO’s employees held options that were granted prior to
the TODCO IPO to acquire our ordinary shares. In accordance with the employee
matters agreement, these options were modified at the TODCO IPO date, which
resulted in the accelerated vesting of the options and the extension of the term
of the options through the original contractual life. In connection with the
modification of these options, TODCO recognized additional compensation expense
of $1.5 million, which had no tax effect, in the first quarter of 2004. See also
Note 1 for discussion of TODCO Offerings.





**Note
4** ― **Asset
Dispositions and Retirements**





In
January 2005, we completed the sale of the semisubmersible rig *Sedco
600* for net
proceeds of $24.9 million and recognized a gain of $18.8 million ($0.06 per
diluted share), which had no tax effect, in the first quarter of 2005. At
December 31, 2004, this asset was held for sale in the amount of $5.6 million
and was included in other current assets in our condensed consolidated balance
sheet. During the three months ended March 31, 2005, we sold certain other
assets for net proceeds of approximately $10.6 million. We recorded net gains of
$1.4 million ($0.9 million, net of tax).





During
the three months ended March 31, 2004, we settled insurance claims and sold a
marine support vessel and certain other assets for net proceeds of approximately
$10.5 million. We recorded net gains of $1.1 million ($0.7 million, net of tax)
and $2.7 million ($0.01 per diluted share), which had no tax effect, in our
Transocean Drilling and TODCO segments, respectively.





8
 *Index to Form 10-Q*


**TRANSOCEAN
INC. AND SUBSIDIARIES**
 **NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)**
 **(unaudited)**


**Note
5** ― **Income
Taxes**





We are a
Cayman Islands company registered in Barbados, and we are not subject to income
tax in the Cayman Islands. Income taxes have been provided based upon the tax
laws and rates in the countries in which operations are conducted and income is
earned. There is no expected relationship between the provision for or benefit
from income taxes and income or loss before income taxes because the countries
in which we operate have taxation regimes that vary not only with respect to
nominal rate, but also in terms of the availability of deductions, credits and
other benefits. Variations also arise because income earned and taxed in any
particular country or countries may fluctuate from year to year.





The
effective tax rate for the three months ended March 31, 2005 was based on
estimated 2005 annual income before income taxes and minority interest, which
included items that had no tax expense. These items included portions of the net
gains on sale of assets and loss on retirement of debt.





The
effective tax rate for the three months ended March 31, 2004 was based on income
before income taxes and minority interest, which included items that had no tax
expense. These items included TODCO IPO-related items and loss on retirement of
debt. See Note 3.





Under the
tax sharing agreement entered into between us and TODCO at the time of the TODCO
IPO, we are entitled to receive from TODCO payment for most of the tax benefits
TODCO generated prior to the TODCO IPO that they utilize subsequent to the TODCO
IPO. While TODCO was included in our consolidated statements of operations and
balance sheet as a consolidated subsidiary until the fourth quarter of 2004, we
followed the provisions of SFAS 109, *Accounting
for Income Taxes,* which
allowed us to evaluate the recoverability of the deferred tax assets associated
with the tax sharing agreement considering TODCO’s deferred tax liabilities.
Because we no longer have a majority ownership or voting interest, TODCO is no
longer included as a consolidated subsidiary in our financial statements. Future
payments we receive from TODCO’s utilization of the pre-TODCO IPO deferred tax
assets will be recognized in other income as those amounts are realized based on
the filing of TODCO’s tax returns. We received $6.6 million in estimated
payments from TODCO in the first quarter of 2005 related to TODCO’s expected
utilization of such tax benefits for the year ended December 31, 2004. This
amount was recorded as a current liability in our consolidated balance sheet. We
will recognize these estimated payments as other income when TODCO finalizes and
files its 2004 tax return.





As a
result of the deconsolidation of TODCO from our other U.S. subsidiaries for U.S.
federal income tax purposes in conjunction with the TODCO IPO (see Note 3), we
established an initial valuation allowance in the first quarter of 2004 of $31.0
million ($0.9 per diluted share) against the estimated deferred tax assets of
TODCO in excess of its deferred tax liabilities, taking into account prudent and
feasible tax planning strategies as required by SFAS 109. We adjusted the
initial valuation allowance during the year to reflect changes in our estimate
of the ultimate amount of TODCO’s deferred tax assets. The ultimate allocation
of tax benefits between TODCO and our other U.S. subsidiaries will occur in 2005
upon the filing of our 2004 U.S. consolidated federal income tax return. This
final allocation of tax benefits could impact our effective tax rate for
2005.





We
operate through our various subsidiaries in a number of countries throughout the
world. Consequently, we are subject to changes in tax laws, treaties and
regulations in and between the countries in which we operate, including treaties
that the U.S. has with other nations.  A material change in these tax laws,
treaties or regulations, including those in and involving the U.S., could result
in a higher effective tax rate on our worldwide earnings.





Our
income tax returns are subject to review and examination in the various
jurisdictions in which we operate. In October 2004, we received from the U.S.
Internal Revenue Service (“IRS”) examination reports setting forth proposed
changes to the U.S. federal income tax reported for the period 1999-2000. The
proposed changes total approximately $195 million, exclusive of interest. While
we have agreed to certain non-material adjustments, we believe our returns are
materially correct as filed and intend to defend ourselves vigorously. The IRS
is currently auditing our 2002 and 2003 tax years. No examination report has
been received at this time. While we cannot predict or provide assurance as to
the final outcome, we do not expect the liability, if any, resulting from the
proposed changes to have a material adverse effect on our consolidated financial
position and results of operations although it could have such an effect on cash
flows.





9
 *Index to Form 10-Q*


**TRANSOCEAN
INC. AND SUBSIDIARIES**
 **NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)**
 **(unaudited)**


In
September 2004, the Norwegian tax authorities initiated inquiries related to a
restructuring transaction undertaken in 2001 and 2002 and a dividend payment
made during 2001. In February 2005, we filed a response to these inquiries. In
March 2005, pursuant to court orders, the Norwegian tax authorities took action
to obtain additional information regarding these transactions. Based on these
inquiries, we believe the Norwegian authorities are contemplating a tax
assessment on the dividend of approximately $106 million, plus penalty and
interest. No assessment has been made, and we believe such an assessment
would be without merit. While we cannot predict or provide assurance as to the
final outcome, we do not expect the liability, if any, resulting from the
inquiry to have a material adverse effect on our consolidated financial
position, results of operations and cash flows.





In
addition, other tax authorities have examined the amounts of income and expense
subject to tax in their jurisdiction for prior periods. We are currently
contesting various non-U.S. assessments that have been asserted and would expect
to contest any future U.S. or non-U.S. assessments. While we cannot predict or
provide assurance as to the final outcome, we do not expect the liability, if
any, resulting from existing or future assessments to have a material adverse
effect on our consolidated financial position and results of operations although
it may have such an effect on our consolidated cash flows.





**Note
6** ― **Debt**





Debt, net
of unamortized discounts, premiums and fair value adjustments, is comprised of
the following (in millions):





March
      31, 2005
    
    December
      31, 20047.31%
      Nautilus Class A1 Amortizing Notes - final maturity May
    2005
    
    $
    7.9
    
    $
    19.46.95%
      Senior Notes, due April 2008
    
    
    -
    
    
    263.16.625%
      Notes, due April 2011
    
    
    782.8
    
    
    785.77.375%
      Senior Notes, due April 2018
    
    
    246.9
    
    
    246.9Zero
      Coupon Convertible Debentures, due May 2020 (put options exercisable
      May 2008 and May 2013)
    
    
    17.1
    
    
    17.01.5%
      Convertible Debentures, due May 2021 (put options exercisable May 2006,
      May 2011 and May 2016)
    
    
    400.0
    
    
    400.08%
      Debentures, due April 2027
    
    
    56.8
    
    
    56.87.45%
      Notes, due April 2027 (put options exercisable April 2007)
    
    
    95.1
    
    
    95.07.5%
      Notes, due April 2031
    
    
    597.6
    
    
    597.6Total
      Debt
    
    
    2,204.2
    
    
    2,481.5Less
      Debt Due Within One Year
    
    
    7.9
    
    
    19.4Total
      Long-Term Debt
    
    $
    2,196.3
    
    $
    2,462.1




10
 *Index to Form 10-Q*


**TRANSOCEAN
INC. AND SUBSIDIARIES**
 **NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)**
 **(unaudited)**


The
scheduled maturity of our debt, at face value, assumes the bondholders exercise
their options to require us to repurchase the 1.5% Convertible Debentures, 7.45%
Notes and Zero Coupon Convertible Debentures in May 2006, April 2007 and May
2008, respectively, and is as follows (in millions):





Twelve
      Months Ending March 31,2006
    
    $
    7.92007
    
    
    400.02008
    
    
    100.02009
    
    
    19.02010
    
    
    -Thereafter
    
    
    1,603.8Total
    
    $
    2,130.7





*Debt
Redemption* —In March
2005, we redeemed our $247.8 million aggregate principal amount outstanding
6.95% Senior Notes due April 2008 at the make-whole premium price provided in
the indenture. We redeemed these notes at 108.259 percent of face value or
$268.2 million, plus accrued and unpaid interest. In the first quarter of 2005,
we recognized a loss on the redemption of debt of $6.7 million ($0.02 per
diluted share), which had no tax effect and reflected adjustments for fair value
of the debt at the date of the R&B Falcon merger and the unamortized fair
value adjustment on a previously terminated interest rate swap. We funded the
redemption with existing cash balances.





In March
2004, we redeemed our $289.8 million aggregate principal amount outstanding 9.5%
Senior Notes due December 2008 at the make-whole premium price provided in the
indenture. We redeemed these notes at 127.796 percent of face value or $370.3
million, plus accrued and unpaid interest. In the first quarter of 2004, we
recognized a loss on the redemption of debt of $28.1 million ($0.09 per diluted
share), which had no tax effect and reflected adjustments for fair value of the
debt at the date of the R&B Falcon merger and the unamortized fair value
adjustment on a previously terminated interest rate swap. We funded the
redemption with existing cash balances, which included proceeds from the TODCO
IPO.





**Note
7** — **Interest
Rate Swaps**





In 2003,
we terminated all our outstanding interest rate swaps and associated fair value
hedges and recognized $173.5 million as a fair value adjustment to the
underlying long-term debt in our consolidated balance sheet. We amortize this
amount as a reduction to interest expense over the remaining life of the
underlying debt. During the three months ended March 31, 2005 and 2004, such
reduction amounted to $3.9 million ($0.01 per diluted share) and $6.7 million
($0.02 per diluted share), respectively. As a result of the redemption of our
6.95% Senior Notes in March 2005 and 9.5% Senior Notes in March 2004, we
recognized $13.2 million and $22.0 million, respectively, of the unamortized
fair value adjustment as a reduction to our loss on redemption of debt (see Note
6). There were no tax effects related to these reductions.





At March
31, 2005 and December 31, 2004, we had no outstanding interest rate
swaps.





**Note
8** ― **Segments**





Through
December 16, 2004, our operations were aggregated into two reportable segments:
(i) Transocean Drilling and (ii) TODCO. The Transocean Drilling segment consists
of floaters, jackups and other rigs used in support of offshore drilling
activities and offshore support services. The TODCO segment consisted of our
interest in TODCO, which conducts jackup, drilling barge, land rig, submersible
and other operations located in the U.S. Gulf of Mexico and inland waters,
Mexico, Trinidad and Venezuela. As a result of the deconsolidation of TODCO, we
now operate in one industry segment, the Transocean Drilling segment. We provide
services with different types of drilling equipment in several geographic
regions. The location of our rigs and the allocation of resources to build or
upgrade rigs is determined by the activities and needs of customers. Accounting
policies of the segments are the same as those described in Note 2 within “Item
8. Financial Statements and Supplementary Data” included in our Annual Report on
Form 10-K for the year ended December 31, 2004. We account for intersegment
revenue and expenses, if any, as if the revenue or expenses were to third
parties at current market prices.





11
 *Index to Form 10-Q*


**TRANSOCEAN
INC. AND SUBSIDIARIES**
 **NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)**
 **(unaudited)**


Operating
revenues and income before income taxes and minority interest by segment were as
follows (in millions):





Three
      Months Ended March 31,2005
    
    2004Operating
      RevenuesTransocean
      Drilling
    
    $
    630.5
    
    $
    578.2TODCO
    
    
    -
    
    
    73.8Total
      Operating Revenues
    
    $
    630.5
    
    $
    652.0Operating
      Income (Loss) Before General and Administrative ExpenseTransocean
      Drilling
    
    $
    161.4
    
    $
    138.8TODCO
      (a)
    
    
    -
    
    
    (26.9
    )161.4
    
    
    111.9Unallocated
      general and administrative expense
    
    
    (18.1
    )
    
    (15.1
    )Unallocated
      other expense, net
    
    
    (33.8
    )
    
    (30.3
    )Income
      Before Income Taxes and Minority Interest
    
    $
    109.5
    
    $
    66.5


______________


(a)
    The
      three months ended March 31, 2004 includes $12.4 million of operating and
      maintenance expense that TODCO classified as general and administrative
      expense.





Depreciation
expense by segment was as follows (in millions):





Three
      Months Ended March 31,2005
    
    2004Transocean
      Drilling
    
    $
    100.7
    
    $
    107.3TODCO
    
    
    -
    
    
    24.2Total
      Depreciation Expense
    
    $
    100.7
    
    $
    131.5





Total
capital expenditures by segment were as follows (in millions):





Three
      Months Ended March 31,2005
    
    2004Transocean
      Drilling
    
    $
    31.2
    
    $
    15.5TODCO
    
    
    -
    
    
    1.9Total
      Capital Expenditures
    
    $
    31.2
    
    $
    17.4




12
 *Index to Form 10-Q*


**TRANSOCEAN
INC. AND SUBSIDIARIES**
 **NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)**
 **(unaudited)**


**Note
9** ― **Earnings
Per Share**





The
reconciliation of the numerator and denominator used for the computation of
basic and diluted earnings per share is as follows (in millions, except per
share data):





Three
      Months Ended March 31,2005
    
    2004**Numerator
      for Basic and Diluted Earnings per Share**Net
      Income for basic and diluted earnings per share
    
    $
    91.8
    
    $
    22.7**Denominator
      for Diluted Earnings per Share**Weighted-average
      shares outstanding for basic earnings per share
    
    
    323.6
    
    
    320.6Effect
      of dilutive securities:Employee
      stock options and unvested stock grants
    
    
    4.7
    
    
    2.1Warrants
      to purchase ordinary shares
    
    
    2.7
    
    
    1.4Adjusted
      weighted-average shares and assumed conversions for diluted earnings per
      share
    
    
    331.0
    
    
    324.1**Basic
      and Diluted Earnings Per Share**Net
      Income
    
    $
    0.28
    
    $
    0.07





Ordinary
shares subject to issuance pursuant to the conversion features of the Zero
Coupon Convertible Debentures and the 1.5% Convertible Debentures are not
included in the calculation of adjusted weighted-average shares and assumed
conversions for diluted earnings per share because the effect of including those
shares is anti-dilutive for all periods presented.





**Note
10** ― **Contingencies**





*Legal
Proceedings* —Several
of our subsidiaries have been named, along with other defendants, in several
complaints that have been filed in the Circuit Courts of the State of
Mississippi involving over 700 persons that allege personal injury arising out
of asbestos exposure in the course of their employment by some of these
defendants between 1965 and 1986. The complaints also name as defendants certain
of TODCO's subsidiaries to whom we may owe indemnity and other unaffiliated
defendant companies, including companies that allegedly manufactured drilling
related products containing asbestos that are the subject of the complaints. The
number of unaffiliated defendant companies involved in each complaint ranges
from approximately 20 to 70. The complaints allege that the defendant drilling
contractors used those asbestos-containing products in offshore drilling
operations, land based drilling operations and in drilling structures, drilling
rigs, vessels and other equipment and assert claims based on, among other
things, negligence and strict liability, and claims authorized under the Jones
Act. The plaintiffs seek, among other things, awards of unspecified compensatory
and punitive damages. Based on a recent decision of the Mississippi Supreme
Court, we anticipate that the trial courts may grant motions requiring each
plaintiff to name the specific defendant or defendants against whom such
plaintiff makes a claim and the time period and location of asbestos exposure so
that the cases may be properly severed. We have not yet had an opportunity to
conduct any discovery nor have we been able to determine the number of
plaintiffs, if any, that were employed by our subsidiaries or otherwise have any
connection with our drilling operations. We intend to defend ourselves
vigorously and, based on the limited information available to us at this time,
we do not expect the liability, if any, resulting from these matters to have a
material adverse effect on our consolidated financial position, results of
operations and cash flows.





13
 *Index to Form 10-Q*


**TRANSOCEAN
INC. AND SUBSIDIARIES**
 **NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)**
 **(unaudited)**


In 1990
and 1991, two of our subsidiaries were served with various assessments
collectively valued at approximately $6.8 million from the municipality of Rio
de Janeiro, Brazil to collect a municipal tax on services. We believe that
neither subsidiary is liable for the taxes and have contested the assessments in
the Brazilian administrative and court systems. We have received several adverse
rulings by various courts with respect to a June 1991 assessment, which is
valued at approximately $5.9 million. We are continuing to challenge the
assessment, however, and have an action to stay execution of a related tax
foreclosure proceeding. We have received a favorable ruling in connection with a
disputed August 1990 assessment but the government has appealed that ruling. We
also are awaiting a ruling from the Taxpayer's Council in connection with an
October 1990 assessment. If our defenses are ultimately unsuccessful, we believe
that the Brazilian government-controlled oil company, Petrobras, has a
contractual obligation to reimburse us for municipal tax payments required to be
paid by them. We do not expect the liability, if any, resulting from these
assessments to have a material adverse effect on our consolidated financial
position, results of operations and cash flows.





The
Indian Customs Department, Mumbai, filed a “show cause notice” against one of
our subsidiaries and various third parties in July 1999. The show cause notice
alleged that the initial entry into India in 1988 and other subsequent movements
of the *Trident
II* jackup
rig operated by the subsidiary constituted imports and exports for which proper
customs procedures were not followed and sought payment of customs duties of
approximately $31 million based on an alleged 1998 rig value of $49 million,
plus interest and penalties, and confiscation of the rig. In January 2000, the
Customs Department issued its order, which found that we had imported the rig
improperly and intentionally concealed the import from the authorities, and
directed us to pay a redemption fee of approximately $3 million for the rig in
lieu of confiscation and to pay penalties of approximately $1 million in
addition to the amount of customs duties owed. In February 2000, we filed an
appeal with the Customs, Excise and Service Tax Appellate Tribunal (“CESTAT”)
(formerly known as the Customs, Excise and Gold (Control) Appellate Tribunal or
“CEGAT”), together with an application to have the confiscation of the rig
stayed pending the outcome of the appeal. In March 2000, the CESTAT ruled on the
stay application, directing that the confiscation be stayed pending the appeal.
The CESTAT issued its order on our appeal on February 2, 2001, and while it
found that the rig was imported in 1988 without proper documentation or payment
of duties, the redemption fee and penalties were reduced to less than $0.1
million in view of the ambiguity surrounding the import practice at the time and
the lack of intentional concealment by us. The CESTAT further sustained our
position regarding the value of the rig at the time of import as $13 million and
ruled that subsequent movements of the rig were not liable to import
documentation or duties in view of the prevailing practice of the Customs
Department, thus limiting our exposure as to custom duties to approximately $6
million. Although CESTAT did not grant us the benefit of a customs duty
exemption due to the absence of the required documentation, CESTAT left it open
for our subsidiary to seek such documentation from the Ministry of Petroleum.
Following the CESTAT order, we tendered payment of redemption, penalty and duty
in the amount specified by the order by offset against a $0.6 million deposit
and $10.7 million guarantee previously made by us. The Customs Department
attempted to draw the entire guarantee, alleging the actual duty payable is
approximately $22 million based on an interpretation of the CESTAT order that we
believe is incorrect. This action was stopped by an interim ruling of the High
Court, Mumbai on writ petition filed by us. We and the Customs Department both
filed appeals with the Supreme Court of India against the order of the CESTAT,
and both appeals were admitted. The Supreme Court has recently dismissed the
Customs Department appeal and affirmed the CESTAT order but the Customs
Department has not agreed with our interpretation of that order. We and our
customer agreed to pursue and obtained the issuance of the required
documentation from the Ministry of Petroleum that, if accepted by the Customs
Department, would reduce the duty to nil. The Customs Department did not accept
the documentation or agree to refund the duties already paid. We are pursuing
our remedies against the Customs Department and our customer. We do not expect
the liability, if any, resulting from this matter to have a material adverse
effect on our consolidated financial position, results of operations and cash
flows.





In
October 2001, TODCO was notified by the U.S. Environmental Protection Agency
("EPA") that the EPA had identified a subsidiary as a potentially responsible
party in connection with the Palmer Barge Line superfund site located in Port
Arthur, Texas. Based upon the information provided by the EPA and a review of
TODCO's internal records to date, TODCO disputes its designation as a
potentially responsible party. Pursuant to the master separation agreement with
TODCO, we are responsible and will indemnify TODCO for any losses TODCO incurs
in connection with this action. We do not expect the liability, if any,
resulting from this matter to have a material adverse effect on our consolidated
financial position, results of operations and cash flows.





14
 *Index to Form 10-Q*


**TRANSOCEAN
INC. AND SUBSIDIARIES**
 **NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)**
 **(unaudited)**


In August
2003, a judgment of approximately $9.5 million was entered by the Labor Division
of the Provincial Court of Luanda, Angola, against us and one of our labor
contractors, Hull Blyth, in favor of certain former workers on several of our
drilling rigs. The workers were employed by Hull Blyth to work on several
drilling rigs while the rigs were located in Angola. When the drilling contracts
concluded and the rigs left Angola, the workers' employment ended. The workers
brought suit claiming that they were not properly compensated when their
employment ended. In addition to the monetary judgment, the Labor Division
ordered the workers to be hired by us. We believe that this judgment is without
sufficient legal foundation and have appealed the matter to the Angola Supreme
Court. We further believe that Hull Blyth has an obligation to protect us from
any judgment. We do not expect the liability, if any, resulting from this matter
to have a material adverse effect on our consolidated financial position,
results of operations and cash flows.





One of
our subsidiaries is involved in an action with respect to customs penalties
relating to the *Sedco
710* semisubmersible drilling rig. Prior to our merger with Sedco Forex, this
drilling rig, which was working for Petrobras in Brazil at the time, had been
admitted into the country on a temporary basis under authority granted to a
Schlumberger entity. Prior to the Sedco Forex merger, the drilling contract was
moved to an entity that would become one of our subsidiaries. In early 2000, the
drilling contract was extended for another year. On January 10, 2000, the
temporary import permit granted to the Schlumberger entity expired, and renewal
filings were not made until later that January. In April 2000, the Brazilian
customs authorities cancelled the import permit. The Schlumberger entity filed
an action in the Brazilian federal court of Campos for the purpose of extending
the temporary admission. Other proceedings were also initiated in order to
secure the transfer of the temporary admission to our subsidiary. Ultimately,
the court permitted the transfer to our entity but has not ruled that the
temporary admission could be extended without the payment of a financial
penalty. During the first quarter of 2004, the customs office renewed its
efforts to collect a penalty and issued a second assessment for this penalty but
has now done so against our subsidiary. The assessment is for approximately $61
million. We believe that the amount of the assessment, even if it were
appropriate, should only be approximately $6 million and should in any event be
assessed against the Schlumberger entity. We and Schlumberger are contesting our
respective assessments. We have put Schlumberger on notice that we consider any
assessment to be the responsibility of Schlumberger. We do not expect the
liability, if any, resulting from this matter to have a material adverse effect
on our consolidated financial position, results of operations and cash
flows.





We are
involved in a number of other lawsuits, all of which have arisen in the ordinary
course of our business. We do not expect the liability, if any, resulting from
these matters to have a material adverse effect on our consolidated financial
position, results of operations and cash flows.





*Self
Insurance* —We are
self-insured for the deductible portion of our insurance coverage. In the
opinion of management, adequate accruals have been made based on known and
estimated exposures up to the deductible portion of our insurance coverages.
Management believes that claims and liabilities in excess of the amounts accrued
are adequately insured.





*Letters
of Credit and Surety Bonds* —We had
letters of credit outstanding totaling $195.7 million and $182.2 million at
March 31, 2005 and December 31, 2004, respectively. These letters of credit
guarantee various contract bidding and performance activities under various
uncommitted lines provided by several banks.





As is
customary in the contract drilling business, we also have various surety bonds
in place that secure customs obligations relating to the importation of our rigs
and certain performance and other obligations. Surety bonds outstanding totaled
$8.4 million and $7.6 million at March 31, 2005 and December 31, 2004,
respectively. See Note 12.





15
 *Index to Form 10-Q*


**TRANSOCEAN
INC. AND SUBSIDIARIES**
 **NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)**
 **(unaudited)**


**Note
11** ― **Off-Balance
Sheet Arrangement**





We lease
the semisubmersible rig *M. G.
Hulme, Jr.* from
Deep Sea Investors, L.L.C., (“Deep Sea Investors”) a special purpose entity
formed by several leasing companies to acquire the rig from one of our
subsidiaries in November 1995 in a sale/leaseback transaction. We are obligated
to pay rent of $11.9 million in 2005, and we recorded $3.2 million of such rent
expense in each of the periods ended March 31, 2005 and 2004. In November 2004,
we gave notice to Deep Sea Investors of our intent to purchase the rig under the
lease purchase option at the end of the lease term in November 2005. Based on
this notice, we are now obligated to purchase the rig and we have agreed to a
purchase price of $35.7 million. The lease does not require that collateral be
maintained or contain any credit rating triggers.





Effective
December 31, 2003, we adopted and applied the provisions of FASB Interpretation
(“FIN”) 46, *Consolidation
of Variable Interest Entities* , as
revised December 31, 2003, for all variable interest entities. FIN 46 requires
the consolidation of variable interest entities in which an enterprise absorbs a
majority of the entity’s expected losses, receives a majority of the entity’s
expected residual returns, or both, as a result of ownership, contractual or
other financial interests in the entity. Because the sale/leaseback agreement is
with an entity in which we have no direct investment, we are not entitled to
receive the financial information of the leasing entity and the equity holders
of the leasing company will not release the financial statements or other
financial information to us in order for us to make the determination of whether
the entity is a variable interest entity. In addition, without the financial
statements or other financial information, we are unable to determine if we are
the primary beneficiary of the entity and, if so, what we would consolidate. We
have no exposure to loss as a result of the sale/leaseback agreement. We
currently account for the lease of this semisubmersible drilling rig as an
operating lease.





**Note
12** ― **Related
Party Transactions**





*TODCO* —Through
March 31, 2005, we agreed to guarantee $11.9 million of surety bonds issued on
behalf of TODCO, which TODCO fully collateralized. The guarantee expired April
1, 2005.





**Note
13** ― **Retirement
Plans and Other Postemployment Benefits**





*Defined
Benefit Pension Plans* —We have
several defined benefit pension plans, both funded and unfunded, covering
substantially all U.S. employees. We also have various defined benefit plans
that cover Norway and Nigeria employees and various current and former employees
covered under certain frozen plans acquired in the connection with the R&B
Falcon merger. Net periodic benefit cost for these defined benefit pension plans
included the following components (in millions):





Three
      Months Ended March 31,2005
    
    2004**Components
      of Net Periodic Benefit Cost (a)**Service
      cost
    
    $
    4.6
    
    $
    3.9Interest
      cost
    
    
    4.4
    
    
    4.2Expected
      return on plan assets
    
    
    (5.1
    )
    
    (4.8
    )Amortization
      of transition obligation
    
    
    0.1
    
    
    0.1Amortization
      of prior service cost
    
    
    (0.2
    )
    
    0.1Recognized
      net actuarial losses
    
    
    1.4
    
    
    0.6SFAS
      88 settlements/curtailments
    
    
    2.1
    
    
    -Benefit
      cost
    
    $
    7.3
    
    $
    4.1


______________


(a)
    Amounts
      are before income tax effect.





We expect
to contribute approximately $2.3 million to our defined benefit pension plans in
2005, which will be funded from cash flow from operations. We contributed $0.6
million to the defined benefit pension plans in the first quarter of
2005.





16
 *Index to Form 10-Q*


**TRANSOCEAN
INC. AND SUBSIDIARIES**
 **NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)**
 **(unaudited)**


*Postretirement
Benefits Other Than Pensions (“OPEB”)* —We have
several unfunded contributory and noncontributory OPEB plans covering
substantially all of our U.S. employees. Net periodic benefit cost for these
other postretirement plans included the following components (in
millions):





Three
      Months Ended March 31,2005
    
    2004**Components
      of Net Periodic Benefit Cost (a)**Service
      cost
    
    $
    0.3
    
    $
    0.3Interest
      cost
    
    
    0.6
    
    
    0.5Amortization
      of prior service cost
    
    
    (0.6
    )
    
    (0.6
    )Recognized
      net actuarial losses
    
    
    0.4
    
    
    0.4Benefit
      cost
    
    $
    0.7
    
    $
    0.6


______________


(a)
    Amounts
      are before income tax effect.





In
December 2003, the Medicare Prescription Drug, Improvement and Modernization Act
of 2003 (the “Medicare Act”) was signed into law. The Medicare Act introduced
two new features to Medicare that employers must consider in determining the
effect of the Medicare Act on their accumulated postretirement benefit
obligation (‘‘APBO’’) and net periodic post retirement benefit cost: (i) a
subsidy based on 28 percent of an individual beneficiary’s annual prescription
drug costs between $250 and $5,000, and (ii) the opportunity for a retiree to
obtain a prescription drug benefit under Medicare that is at least actuarially
equivalent to Medicare Part D.





In May
2004, the FASB staff issued FSP 106-2, *Accounting
and Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003* . We
adopted FSP 106-2 effective July 1, 2004, and account for these new features in
the Medicare Act prospectively as an actuarial gain to be amortized into income
over the average remaining service period of the plan participants.





17
 *Index to Form 10-Q*




**Item
2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations**





The
following information should be read in conjunction with the unaudited condensed
consolidated financial statements included under “Item 1. Financial Statements”
herein and the audited consolidated financial statements and the notes thereto
and “Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations” included in our Annual Report on Form 10-K for the year
ended December 31, 2004.





**Overview**





Transocean
Inc. (together with our subsidiaries and predecessors, unless the context
requires otherwise, “Transocean,” “we,” “us” or “our”) is a leading
international provider of offshore contract drilling services for oil and gas
wells. As of May 3, 2005, we owned, had partial ownership interests in or
operated 93 mobile offshore and barge drilling units. As of this date, our fleet
included 32 High-Specification semisubmersibles and drillships (“floaters”), 24
Other Floaters, 26 Jackup Rigs and 11 Other Rigs.





Our
mobile offshore drilling fleet is considered one of the most modern and
versatile fleets in the world. Our primary business is to contract these
drilling rigs, related equipment and work crews primarily on a dayrate basis to
drill oil and gas wells. We specialize in technically demanding segments of the
offshore drilling business with a particular focus on deepwater and harsh
environment drilling services. We also provide additional services, including
integrated services.





Key
measures of our total company results of operations and financial condition are
as follows:





Three
      Months Ended March 31,2005
    
    2004
    
    Change(In
      millions, except dayrates and percentages)**Average
      dayrate (a)(c)**
    
    $
    96,600
    
    $
    71,600
    
    $
    25,000**Utilization
      (b)(c)**
    
    
    75
    %
    
    56
    %
    
    N/A**Statement
      of Operations (c)**Operating
      revenues
    
    $
    630.5
    
    $
    652.0
    
    $
    (21.5
    )Operating
      and maintenance expense
    
    
    388.6
    
    
    412.4
    
    
    (23.8
    )Operating
      income
    
    
    143.3
    
    
    96.8
    
    
    46.5Net
      income
    
    
    91.8
    
    
    22.7
    
    
    69.1March
      31,2005
    
    
    December
      31,2004
    
    
    Change(In
      millions)**Balance
      Sheet Data (at end of period)(c)**Cash
    
    $
    420.7
    
    $
    451.3
    
    $
    (30.6
    )Total
      Assets
    
    
    10,691.5
    
    
    10,758.3
    
    
    (66.8
    )Total
      Debt
    
    
    2,204.2
    
    
    2,481.5
    
    
    (277.3
    )


_____________________


“N/A”
means not applicable.





(a)
    Average
      dayrate is defined as contract drilling revenue earned per revenue earning
      day.A
      revenue earning day is defined as a day for which a rig earns dayrate
      after commencement of operations.


(b)
    Utilization
      is the total actual number of revenue earning days as a percentage of the
      total number of calendar days in the
period.


(c)
    We
      consolidated TODCO’s (together with its subsidiaries and predecessors,
      unless the context requires otherwise, “TODCO,” a publicly traded company
      and a former wholly-owned subsidiary) results of operations and financial
      condition in our consolidated financial statements through December 16,
      2004. We deconsolidated TODCO effective December 17, 2004 and subsequently
      account for our investment in TODCO under the equity method of accounting.





18
 *Index to Form 10-Q*





2005
began with our industry experiencing a strong demand for all major rig types
resulting in high utilization and increasing dayrates. As a result, we see an
improvement in the outlook
for our fleet, especially among our 13 Fifth-Generation Deepwater Floaters,
where demand is likely to exceed supply for the next 12 to 24 months. We expect
our industry to experience higher costs in 2005 relative to levels seen in the
recent past, due in part to higher personnel costs required to support the
increased level of offshore drilling activity, although we anticipate revenue
increases to outpace these increased costs.





Our
revenues and operating and maintenance expenses for the three months ended March
31, 2005 decreased from the prior year period primarily as a result of the
deconsolidation of TODCO effective December 17, 2004 (see “—Operating Results”)
and decreased integrated services provided to our clients in the first quarter
of 2005, offset by increased activity and dayrates within our Transocean
Drilling fleet. In addition, the three months ended March 31, 2004 included the
resolution and insurance settlement of the *Discoverer
Enterprise* riser
incident with no comparable activity in the three months ended March 31, 2005.
Our first quarter 2005 financial results included a non-cash charge pertaining
to a loss on retirement of debt, partially offset by the recognition of a gain
on the sale of a semisubmersible rig (see “—Significant Events”). Our first
quarter 2004 financial results included a gain recognized on the TODCO initial
public offering (“TODCO IPO”), partially offset by a tax valuation allowance
adjustment and stock option expense recorded in connection with the TODCO IPO as
well as a non-cash charge pertaining to a loss on retirement of debt (see
“—Operating Results”). Cash decreased during the three months ended March 31,
2005 primarily as a result of increased capital expenditures and the early
retirement of debt, partially offset by proceeds received from the sale of a
semisubmersible rig and exercises of stock options, as well as cash provided by
operating activities.





Through
December 16, 2004, our operations were aggregated into two reportable segments:
(i) Transocean Drilling and (ii) TODCO. The Transocean Drilling segment consists
of floaters, jackups and other rigs used in support of offshore drilling
activities and offshore support services. The TODCO segment consisted of our
interest in TODCO, which conducts jackup, drilling barge, land rig, submersible
and other operations in the U.S. Gulf of Mexico and inland waters, Mexico,
Trinidad and Venezuela. As a result of the deconsolidation of TODCO (see
“—Operating Results”), we now operate in one business segment, the Transocean
Drilling segment. We provide services with different types of drilling equipment
in several geographic regions. The location of our rigs and the allocation of
resources to build or upgrade rigs is determined by the activities and needs of
our customers.





We
categorize our fleet as follows: (i) “High-Specification Floaters”, consisting
of our “Fifth-Generation Deepwater Floaters,” “Other Deepwater Floaters” and
“Other High-Specification Floaters,” (ii) “Other Floaters,” (iii) “Jackups,” and
(iv) “Other Rigs.” Within our High-Specification Floaters category, we consider
our Fifth-Generation Deepwater Floaters to be the semisubmersibles *Deepwater
Horizon* , *Cajun
Express* , *Deepwater
Nautilus* , *Sedco
Energy* and *Sedco
Express* and the drillships *Deepwater
Discovery* , *Deepwater
Expedition* , *Deepwater
Frontier* , *Deepwater
Millennium* , *Deepwater
Pathfinder* , *Discoverer
Deep Seas* , *Discoverer
Enterprise* and *Discoverer
Spirit* .
These rigs were built in the last construction cycle (approximately 1996-2001)
and have high-pressure mud pumps and a water depth capability of 7,500 feet or
greater. The Other Deepwater Floaters are generally those other semisubmersible
rigs and drillships that have a water depth capacity of at least 4,500 feet. The
Other High-Specification Floaters, built as fourth-generation rigs in the mid to
late 1980’s, are capable of drilling in harsh environments and have greater
displacement than previously constructed rigs resulting in larger variable load
capacity, more useable deck space and better motion characteristics. The Other
Floaters category is generally comprised of those non-high-specification
floaters with a water depth capacity of less than 4,500 feet. The Jackups
category consists of our jackup fleet, and the Other Rigs category consists of
other rigs that are of a different type or use. These categories reflect how we
view, and how we believe our investors and the industry generally view, our
fleet, and reflect our strategic focus on the ownership and operation of premium
high-specification floating rigs and jackups.




19
 *Index to Form 10-Q*







Significant Events




*Asset
Disposition* —In
January 2005, we completed the sale of the semisubmersible rig *Sedco
600* for net
proceeds of $24.9 million and recognized a gain on the sale of $18.8
million.





*Debt
Redemption* —In March
2005, we redeemed our $247.8 million aggregate principal amount outstanding
6.95% Senior Notes due April 2008 at the make-whole premium price provided in
the indenture. We redeemed these notes at 108.259 percent of face value or
$268.2 million, plus accrued and unpaid interest. In the first quarter of 2005,
we recognized a loss on the redemption of debt of $6.7 million, which reflected
adjustments for fair value of the debt at the date of the merger (“R&B
Falcon merger”) with R&B Falcon Corporation (“R&B Falcon”) and the
unamortized fair value adjustment on a previously terminated interest rate swap.
We funded the redemption with existing cash balances.





**Outlook**





*Drilling
Market* —Oil
prices have remained strong, and we expect prices to remain relatively high in
historical terms. Future price expectations have historically been a key driver
for offshore drilling demand. However, the availability of quality drilling
prospects, exploration success, relative production costs, the stage of
reservoir development and political and regulatory environments also affect our
customers’ drilling programs.





Prospects
for our 32 High-Specification Floaters continue to improve, with new and
expected contracts resulting in declining rig availability among this fleet
during 2005. We expect most of the available time in 2005 for this part of our
fleet to be contracted, although some intermittent idle time remains a
possibility, especially for some of our Other Deepwater Floaters. We have signed
a number of new contracts or extensions for our High-Specification Floaters that
reflect the increased activity in this sector. Awards in 2005 include 12
month programs for the *Transocean
Leader* and *Transocean Marianas,*a program for the *Transocean Legend*covering 2005 to 2007 spring and summer drillng periods, a five year
program for the *Deepwater Horizon*and ** a
number of short-term contracts on the *Discoverer
534* , *Deepwater
Discovery and*  *Sedco
Energy.* We also
entered into contracts for the *Discoverer
Spirit* and *Deepwater
Nautilus* for 18
month and 12 month programs, respectively, to begin at the conclusion of their
current contracts in approximately September 2005. We also signed the *Sedco
Energy* to a two
year development drilling program in Nigeria. We
continue to believe that, over the long term, deepwater exploration and
development drilling opportunities in the Gulf of Mexico, West Africa, India and
other market sectors represent a significant source of future deepwater rig
demand, although the risk of project delays remains, especially in West Africa.
We continue to see a strong customer preference for using fifth-generation
equipment in these deepwater areas, which we believe is leading to a near term
shortage of these highest specification rigs.





The
outlook for activity for the non-U.S. Jackup market sector is expected to remain
strong, particularly in Asia and the Middle East. We expect to remain at or near
full utilization for our Jackups in the near term, and at the present time we do
not anticipate any inter-regional relocations of these units.





The
outlook for our Other Floaters that operate in the mid-water sector has improved
substantially with higher dayrates and utilization across this part of our
fleet. North Sea market sector activity has strengthened significantly in 2005,
as has demand in the Gulf of Mexico. As a result, Transocean has reactivated, or
is in the process of reactivating, six Other Floaters that were idle for some or
all of 2004.





We expect
downtime during the second quarter of 2005 to result from planned shipyard
projects and/or mobilizations for the *Sedco
Express,*  *Sedco
Energy* and *Deepwater Navigator* . These
rig mobilizations and shipyard projects are expected to have a negative impact
on revenues and operating income. We also expect to incur higher
maintenance costs in the second and third quarters of 2005 due to planned
shipyards and major maintenance projects, including some originally scheduled in
the first quarter of 2005. In addition, the increase in activity and a further
decline in the U.S. dollar are expected to lead to higher operating and
maintenance costs in 2005, including among other items labor costs.





20
 *Index to Form 10-Q*





We also
expect that a number of pre-existing, fixed-price contract options will be
exercised by our customers, which will preclude us from taking full advantage of
increased market rates for those rigs subject to these contract options. We have
18 existing contracts with fixed-priced or capped options for dayrates that we
believe are or could reasonably be less than current market
dayrates.





The
offshore contract drilling market remains highly competitive and cyclical, and
it has been historically difficult to forecast future market conditions.
Declines in oil and/or gas prices and other risks may reduce rig demand and
adversely affect utilization and dayrates. Major operator and national oil
company capital budgets are key drivers of the overall business climate, and
these may change within a fiscal year depending on exploration results and other
factors. Additionally, increased competition for our customers’ drilling budgets
could come from, among other areas, land-based energy markets in Africa, Russia,
other former Soviet Union States, the Middle East and Alaska.





Our
operations are geographically dispersed in oil and gas exploration and
development areas throughout the world. Rigs can be moved from one region to
another, but the cost of moving a rig and the availability of rig-moving vessels
may cause the supply and demand balance to vary somewhat between regions.
However, significant variations between regions do not tend to persist long-term
because of rig mobility. Consequently, we operate in a single, global offshore
drilling market.





As of May
3, 2005, approximately 71 percent of our fleet days were committed for the
remainder of 2005 and approximately 36 percent for the year 2006.





*Insurance* —We have
renewed our insurance policy for 12 months effective May 1, 2005, with terms
similar to those under our prior policy. We have maintained a per occurrence
insurance deductible of $10 million on our hull and machinery and our protection
and indemnity policies. We also have an additional aggregate deductible of $20
million that is applied to each hull and machinery occurrence until it has been
exhausted over one or more occurrences. After the $20 million aggregate
deductible is fully exhausted, the hull and machinery deductible reverts to $10
million per occurrence.





*TODCO* —In
February 2004, we completed an initial public offering (the “TODCO IPO”) of
common stock of TODCO in which we sold 13.8 million shares of TODCO class A
common stock, representing 23 percent of TODCO’s total outstanding shares. In
September 2004 and December 2004, respectively, we completed additional public
offerings of TODCO common stock (respectively referred to as the “September
TODCO Offering” and “December TODCO Offering” and, together with the TODCO IPO,
the “TODCO Offerings”). We sold 17.9 million shares of TODCO’s class A common
stock (30 percent of TODCO’s total outstanding shares) in the September TODCO
Offering and 15.0 million shares of TODCO’s class A common stock (25 percent of
TODCO’s total outstanding shares) in the December TODCO Offering. Prior to the
December TODCO Offering, we held TODCO class B common stock, which was entitled
to five votes per share (compared to one vote per share of TODCO class A common
stock) and converted automatically into class A common stock upon any sale by us
to a third party. In connection with the December TODCO Offering, we converted
all of our remaining TODCO class B common stock not sold in the TODCO Offerings
into shares of class A common stock. After the TODCO Offerings, we hold a 22
percent ownership and voting interest in TODCO, represented by 13.3 million
shares of class A common stock.





Our
current intention is to dispose of our remaining interest in TODCO, which could
be achieved through a number of possible transactions including additional
public offerings, open market sales, sales to one or more third parties, a
spin-off to our shareholders, split-off offerings to our shareholders that would
allow for the opportunity to exchange our ordinary shares for shares of TODCO’s
class A common stock or a combination of these transactions. TODCO has filed a
shelf registration statement on Form S-3 that registered our remaining TODCO
common stock for sale in one or more possible public offerings.




*Tax
Matters* —We are a
Cayman Islands company registered in Barbados. We operate through our various
subsidiaries in a number of countries throughout the world. Consequently, we are
subject to changes in tax laws, treaties and regulations in and between the
countries in which we operate, including treaties that the U.S. has with other
nations. A material change in these tax laws, treaties or regulations, including
those in and involving the U.S., could result in a higher effective tax rate on
our worldwide earnings.




21
 *Index to Form 10-Q*




Our
income tax returns are subject to review and examination in the various
jurisdictions in which we operate. In October 2004, we received from the U.S.
Internal Revenue Service (“IRS”) examination reports setting forth proposed
changes to the U.S. federal income tax reported for the period 1999-2000. The
maximum amount of additional tax based on the proposed changes would be
approximately $195 million, exclusive of interest. While we have agreed to
certain non-material adjustments, we believe our returns are materially correct
as filed and intend to defend ourselves vigorously. The IRS is currently
auditing our 2002 and 2003 tax years. No examination report has been received at
this time. While we cannot predict or provide assurance as to the final outcome,
we do not expect the liability, if any, resulting from the proposed changes to
have a material adverse effect on our consolidated financial position or
results of operations although it may have such an effect on our consolidated
cash flows.





In
September 2004, the Norwegian tax authorities initiated inquiries related to a
restructuring transaction undertaken in 2001 and 2002 and a dividend payment
made during 2001. In February 2005, we filed a response to these inquiries. In
March 2005, pursuant to court orders, the Norwegian tax authorities took action
to obtain additional information regarding these transactions. Based on these
inquiries, we believe the Norwegian authorities are contemplating a tax
assessment on the dividend of approximately $106 million, plus penalty and
interest. No assessment has been made, and we believe such an assessment
would be without merit. While we cannot predict or provide assurance as to the
final outcome, we do not expect the liability, if any, resulting from the
inquiry to have a material adverse effect on our consolidated financial
position, results of operations and cash flows.





In
addition, other tax authorities have examined the amounts of income and expense
subject to tax in their jurisdiction for prior periods. We are currently
contesting various non-U.S. assessments that have been asserted and would expect
to contest any future U.S. or non-U.S. assessments. We do not expect the
liability, if any, resulting from existing or future assessments to have a
material adverse effect on our current consolidated financial position, results
of operations and cash flows. We
cannot predict with certainty the outcome or effect of any of the tax
assessments described herein. There can be no assurance that our beliefs or
expectations as to the outcome or effect of any tax assessment we are contesting
will prove correct and the eventual outcome of these matters could materially
differ from management's current estimates.





As a
result of the deconsolidation of TODCO from our other U.S. subsidiaries for U.S.
federal income tax purposes in conjunction with the TODCO IPO, we established an
initial valuation allowance in the first quarter of 2004 of approximately $31.0
million against the estimated deferred tax assets of TODCO in excess of its
deferred tax liabilities, taking into account prudent and feasible tax planning
strategies as required by SFAS 109. We adjusted the initial valuation
allowance during the year to reflect changes in our estimate of the ultimate
amount of TODCO’s deferred tax assets. The ultimate allocation of tax benefits
between TODCO and our other U.S. subsidiaries will occur in 2005 upon the filing
of our 2004 U.S. consolidated federal income tax return. This final allocation
of tax benefits could impact our effective tax rate for 2005.





Under the
tax sharing agreement entered into between us and TODCO in connection with the
TODCO IPO, we are entitled to receive from TODCO payment for most of the tax
benefits generated prior to the TODCO IPO that TODCO utilizes subsequent to the
TODCO IPO. As long as TODCO was our consolidated subsidiary, we followed the
provisions of SFAS 109, which allowed us to evaluate the recoverability of the
deferred tax assets associated with the tax sharing agreement considering the
deferred tax liabilities of TODCO. We recorded a valuation allowance for the
excess of these deferred tax assets over the deferred tax liabilities of TODCO,
also taking into account prudent and feasible tax planning strategies as
required by SFAS 109. Because we no longer have a majority ownership or voting
interest in TODCO, we no longer include TODCO as a consolidated subsidiary in
our financial statements and we are no longer able to apply the provisions of
SFAS 109 in accounting for the utilization of these deferred tax assets. As a
result, we recorded a non-cash charge of $167.1 million, which had no tax
effect, in the fourth quarter of 2004 related to contingent amounts due from
TODCO under the tax sharing agreement. In future years, as TODCO generates
income and utilizes its pre-TODCO IPO tax assets, TODCO is required to pay us
for the benefits received in accordance with the provisions of the tax sharing
agreement. We will recognize those amounts as other income as those amounts are
realized, which is based on when TODCO files its annual tax returns. We received
$8.4 million, of which $6.6 million was received in the first quarter of 2005,
in estimated payments from TODCO related to TODCO’s expected utilization of such
tax benefits for the year ended December 31, 2004. This amount was recorded as a
current liability in our consolidated balance sheets. We will recognize these
estimated payments as other income when TODCO finalizes and files its 2004
tax return.




22
 *Index to Form 10-Q*





**Performance
and Other Key Indicators**





*Fleet
Utilization and Dayrates* —The
following table shows our average dayrates and utilization for the quarterly
periods ended on or prior to March 31, 2005. We consolidated TODCO’s results of
operations and financial condition in our condensed consolidated financial
statements through December 16, 2004 (see “—Outlook”). See “—Overview” for a
definition of average dayrate, revenue earning day and utilization.





Three
      Months EndedMarch
      31, 2005
    
    December
      31, 2004
    
    March
      31, 2004Average
      Dayrates*Transocean
      Drilling Segment:*High-Specification
      FloatersFifth-Generation
      Deepwater Floaters
    
    $
    182,300
    
    $
    180,100
    
    $
    191,800Other
      Deepwater Floaters
    
    $
    124,500
    
    $
    119,400
    
    $
    101,300Other
      High-Specification Floaters
    
    $
    153,000
    
    $
    135,700
    
    $
    115,200Total
      High-Specification Floaters
    
    $
    153,900
    
    $
    149,000
    
    $
    143,500Other
      Floaters
    
    $
    71,200
    
    $
    64,000
    
    $
    62,800Jackups
    
    $
    57,600
    
    $
    55,800
    
    $
    51,400Other
      Rigs
    
    $
    45,800
    
    $
    48,100
    
    $
    44,200Segment
      Total
    
    $
    96,600
    
    $
    93,900
    
    $
    90,200*TODCO
      Segment (a)*
    
    $
    -
    
    $
    28,600
    
    $
    25,700Total
      Drilling Fleet
    
    $
    96,600
    
    $
    74,200
    
    $
    71,600Utilization*Transocean
      Drilling Segment:*High-Specification
      FloatersFifth-Generation
      Deepwater Floaters
    
    
    90
    %
    
    89
    %
    
    92
    %Other
      Deepwater Floaters
    
    
    75
    %
    
    69
    %
    
    78
    %Other
      High-Specification Floaters
    
    
    91
    %
    
    92
    %
    
    73
    %Total
      High-Specification Floaters
    
    
    83
    %
    
    80
    %
    
    83
    %Other
      Floaters
    
    
    57
    %
    
    50
    %
    
    42
    %Jackups
    
    
    94
    %
    
    81
    %
    
    83
    %Other
      Rigs
    
    
    44
    %
    
    54
    %
    
    54
    %Segment
      Total
    
    
    75
    %
    
    69
    %
    
    69
    %*TODCO
      Segment (a)*
    
    
    -
    
    
    47
    %
    
    38
    %Total
      Drilling Fleet
    
    
    75
    %
    
    61
    %
    
    56
    %


__________________________


(a)
    TODCO
      was deconsolidated effective December 17, 2004. Statistics for the TODCO
      segment are through December 16, 2004 for the three months ended December
      31, 2004 (see “—Operating
      Results”).




23
 *Index to Form 10-Q*





**Financial
Condition**





***March
31, 2005 compared to December 31, 2004***





March
      31, 2005
    
    December
      31, 2004
    
    Change
    
    %
      Change(In
      millions, except % change)**Total
      Assets**Transocean
      Drilling
    
    $
    10,691.5
    
    $
    10,758.3
    
    $
    (66.8
    )
    
    (1
    )%




The
decrease in assets was mainly due to decreases in property and equipment and in
cash and cash equivalents of $81.6 million and $30.6 million, respectively,
partially offset by an increase in accounts receivable of $42.5 million. The
decrease in property and equipment primarily related to depreciation and asset
disposals, partially offset by capital expenditures. The decrease in cash and
cash equivalents related primarily to the repayment of debt of approximately
$287.4 million, partially offset by net proceeds received from the exercise of
stock options ($72.4 million), the sale of assets ($35.5 million) and cash from
operations during the first quarter of 2005.





**Liquidity
and Capital Resources**





**Sources
and Uses of Cash**





Three
      Months Ended March 31,2005
    
    2004
    
    Change(In
      millions)**Net
      Cash Provided by Operating Activities**Net
      income
    
    $
    91.8
    
    $
    22.7
    
    $
    69.1Depreciation
    
    
    100.7
    
    
    131.5
    
    
    (30.8
    )Other
      non-cash items
    
    
    2.5
    
    
    10.5
    
    
    (8.0
    )Working
      capital
    
    
    (18.1
    )
    
    26.5
    
    
    (44.6
    )$
    176.9
    
    $
    191.2
    
    $
    (14.3
    )





Net cash
provided by operating activities decreased due to a decrease in cash related to
working capital items of $44.6 million, partially offset by an increase in cash
generated from net income adjusted for non-cash activity of $30.3 million during
the quarter ended March 31, 2005 as compared to the corresponding prior year
period.




Three
      Months Ended March 31,2005
    
    2004
    
    Change(In
      millions)**Net
      Cash Provided by Investing Activities**Capital
      expenditures
    
    $
    (31.2
    )
    $
    (17.4
    )
    $
    (13.8
    )Proceeds
      from disposal of assets, net
    
    
    35.5
    
    
    10.5
    
    
    25.0Proceeds
      from TODCO Offerings
    
    
    -
    
    
    155.7
    
    
    (155.7
    )Other,
      net
    
    
    3.1
    
    
    1.5
    
    
    1.6$
    7.4
    
    $
    150.3
    
    $
    (142.9
    )


24
 *Index to Form 10-Q*




Net cash
provided by investing activities for the three months ended March 31, 2005
decreased $142.9 million over the corresponding prior year period. The decrease
in cash provided by investing activities is primarily the result of proceeds
from the TODCO IPO of $155.7 million during the three months ended March 31,
2004 with no comparable activity for the corresponding period in 2005, coupled
with an increase in current period capital expenditures, partially offset by an
increase in proceeds from asset sales of $25.0 million.




Three
      Months EndedMarch
      31,2005
    
    2004
    
    Change(In
      millions)**Net
      Cash Used in Financing Activities**Repayments
      on revolving credit agreement
    
    $
    -
    
    $
    (50.0
    )
    $
    50.0Repayments
      on other debt instruments
    
    
    (287.4
    )
    
    (381.6
    )
    
    94.2Net
      proceeds from issuance of ordinary shares under stock-based compensation
      plans
    
    
    72.4
    
    
    14.0
    
    
    58.4Other,
      net
    
    
    0.1
    
    
    -
    
    
    0.1$
    (214.9
    )
    $
    (417.6
    )
    $
    202.7


The
decrease in net cash used in financing activities is primarily attributable to
the early redemption of our 9.5% Senior Notes and payments made on our $800
million revolving credit agreement during the first quarter of 2004 compared to
the early redemption of our 6.95% Senior Notes during the first quarter of 2005.
In addition, we received higher proceeds from stock option exercises in the
first quarter of 2005 compared to the same period in 2004.





**Capital
Expenditures**





Capital
expenditures totaled $31.2 million during the three months ended March 31, 2005.
During 2005, we expect to spend approximately $150 million on our existing
fleet, corporate infrastructure and major upgrades. These amounts are dependent
upon the actual level of operational and contracting activity. In addition, we
expect to spend another $30 million for upgrades required and funded by our
drilling contracts, and another $35.7 million for the purchase of the
semisubmersible rig *M.G.
Hulme, Jr* . (see
“—Acquisition and Dispositions”). We intend to fund the cash requirements
relating to our capital expenditures through available cash balances, cash
generated from operations and asset sales. We also have available credit under
our revolving credit agreement (see “—Sources of Liquidity”) and may utilize
other commercial bank or capital market financings.





**Acquisitions
and Dispositions**





From time
to time, we review possible acquisitions of businesses and drilling units and
may in the future make significant capital commitments for such purposes. Any
such acquisition could involve the payment by us of a substantial amount of cash
or the issuance of a substantial number of additional ordinary shares or other
securities. We would likely fund the cash portion of any such acquisition
through cash balances on hand, the incurrence of additional debt, sales of
assets, issuance of ordinary shares or other securities or a combination
thereof. In addition, from time to time, we review possible dispositions of
drilling units.





*Acquisition* —In
November 2004, we gave notice to Deep Sea Investors, L.L.C. (“Deep Sea
Investors”) of our intent to purchase the semisubmersible *M.G.
Hulme, Jr.* for
approximately $35.7 million. See “—Off-Balance Sheet Arrangement.”





*Dispositions* —In
January 2005, we completed the sale of the semisubmersible rig *Sedco
600* for net
proceeds of $24.9 million and recognized a gain of $18.8 million in the first
quarter of 2005.





During
the three months ended March 31, 2005, we sold certain other assets for net
proceeds of approximately $10.6 million and we recorded net gains of $1.4
million.





25
 *Index to Form 10-Q*




**Sources
of Liquidity**





Our
primary sources of liquidity in the first quarter of 2005 were our cash flows
from operations, proceeds from asset sales, proceeds from issuance of ordinary
shares under stock-based compensation plans and existing cash balances. Our
primary uses of cash were debt repayments and capital expenditures. At March 31,
2005, we had $420.7 million in cash and cash equivalents.





We expect
to use existing cash balances, internally generated cash flows and proceeds from
asset sales, including potential sales of our interest in TODCO, to fulfill
anticipated obligations such as scheduled debt maturities, capital expenditures
and working capital needs. From time to time, we may also use bank lines of
credit to maintain liquidity for short-term cash needs.





When cash
on hand, cash flows from operations, proceeds from asset sales, including
potential sales of our interest in TODCO, and committed bank facility
availability exceed our expected liquidity needs, we may use a portion of such
cash to reduce debt prior to scheduled maturities through repurchases,
redemptions or tender offers, or make repayments on any outstanding bank
borrowings. We expect to continue this focus on debt reduction through the third
quarter of 2005, at which time we will consider alternative uses of our excess
cash. Such possible uses could include allowing cash balances to increase,
continued debt reduction, extraordinary dividends, share repurchases, resumption
of periodic dividends and/or opportunistic asset acquisitions.





At March
31, 2005 and December 31, 2004, our total debt was $2,204.2 million and $2,481.5
million, respectively. Net debt, a non-GAAP financial measure defined as total
debt less cash and cash equivalents, at such dates was $1,783.5 million and
$2,030.2 million, respectively. During the first quarter of 2005, we reduced net
debt by $246.7 million. The reconciliation of total debt to net debt at carrying
value is as follows (in millions):





March
      31, 2005
    
    December
      31, 2004Total
      Debt
    
    $
    2,204.2
    
    $
    2,481.5Less:
      Cash and cash equivalents
    
    
    (420.7
    )
    
    (451.3
    )Net
      Debt
    
    $
    1,783.5
    
    $
    2,030.2





We
believe net debt provides useful information regarding the level of our
indebtedness by reflecting the amount of indebtedness assuming cash and
investments are used to repay debt. Net debt declined each year since 2001
because cash flows, primarily from operations and asset sales, have exceeded
capital expenditures.





Our
internally generated cash flow is directly related to our business and the
market sectors in which we operate. Should the drilling market deteriorate, or
should we experience poor results in our operations, cash flow from operations
may be reduced. We have, however, continued to generate positive cash flow from
operating activities over recent years and expect cash flow will continue to be
positive over the next year.





We have
access to a bank line of credit under an $800 million five-year revolving credit
agreement expiring in December 2008. At April 29, 2005, $800 million remained
available under this credit line.





The bank
credit line requires compliance with various covenants and provisions customary
for agreements of this nature, including an earnings before interest, taxes,
depreciation and amortization (“EBITDA”) to interest coverage ratio and debt to
tangible capital ratio, both as defined by the credit agreement, of not less
than three to one and not greater than 50 percent, respectively. Other
provisions of the credit agreement include limitations on creating liens,
incurring debt, transactions with affiliates, sale/leaseback transactions and
mergers and sale of substantially all assets. Should we fail to comply with
these covenants, we would be in default and may lose access to this facility. We
are also subject to various covenants under the indentures pursuant to which our
public debt was issued, including restrictions on creating liens, engaging in
sale/leaseback transactions and engaging in merger, consolidation or
reorganization transactions. A default under our public debt could trigger a
default under our credit line and cause us to lose access to this facility.





26
 *Index to Form 10-Q*




In April
2001, the Securities and Exchange Commission (“SEC”) declared effective our
shelf registration statement on Form S-3 for the proposed offering from time to
time of up to $2.0 billion in gross proceeds of senior or subordinated debt
securities, preference shares, ordinary shares and warrants to purchase debt
securities, preference shares, ordinary shares or other securities. At March 31,
2005, $1.6 billion in gross proceeds of securities remained unissued under the
shelf registration statement.





Our
access to debt and equity markets may be reduced or closed to us due to a
variety of events, including, among others, downgrades of our debt ratings,
industry conditions, general economic conditions, market conditions and market
perceptions of us and our industry.








As is
customary in the contract drilling business, we also have various surety bonds
in place that secure customs obligations relating to the importation of our rigs
and certain performance and other obligations. Surety bonds outstanding totaled
$8.4 million and $7.6 million at March 31, 2005 and December 31, 2004,
respectively. See “ ― Related
Party Transactions.”





**Derivative
Instruments**





In 2003,
we terminated all our outstanding interest rate swaps and associated fair value
hedges and recognized a $173.5 million fair value adjustment to long-term debt
in our consolidated balance sheet. We amortize this amount as a reduction to
interest expense over the life of the underlying debt. As a result of the
redemption of our 6.95% Senior Notes in March 2005, we recognized unamortized
premium of $13.2 million from the 2003 termination of the related interest rate
swap as a reduction to our loss on retirement of debt (see “—Significant
Events”). Based on the unamortized premiums remaining on the terminated interest
rate swaps, we expect our interest expense to be reduced by $13.3 million in
2005.





**Operating
Results**








***Three
months ended March 31, 2005 compared to three months ended March 31,
2004***





Following
is an analysis of our Transocean Drilling segment and TODCO segment operating
results, as well as an analysis of income and expense categories that we have
not allocated to our segments. See “—Overview” for a definition of average
dayrate, revenue earnings day and utilization.




27
 *Index to Form 10-Q*





*Transocean
Drilling Segment*





Three
      Months Ended March 31,2005
    
    2004
    
    Change
    
    %
      Change(In
      millions, except day amounts and percentages)Revenue
      earning days
    
    
    6,218
    
    
    5,937
    
    
    281
    
    
    5
    %Utilization
    
    
    75
    %
    
    69
    %
    
    N/A
    
    
    9
    %Average
      dayrate
    
    $
    96,600
    
    $
    90,200
    
    $
    6,400
    
    
    7
    %Contract
      drilling revenues
    
    $
    600.6
    
    $
    535.5
    
    $
    65.1
    
    
    12
    %Other
      revenues
    
    
    29.9
    
    
    42.7
    
    
    (12.8
    )
    
    (30
    )%630.5
    
    
    578.2
    
    
    52.3
    
    
    9
    %Operating
      and maintenance expense
    
    
    388.6
    
    
    333.2
    
    
    55.4
    
    
    17
    %Depreciation
    
    
    100.7
    
    
    107.3
    
    
    (6.6
    )
    
    (6
    )%Gain
      from sale of assets, net
    
    
    (20.2
    )
    
    (1.1
    )
    
    (19.1
    )
    
    N/MOperating
      income before general and administrative expense
    
    $
    161.4
    
    $
    138.8
    
    $
    22.6
    
    
    16
    %


_________________


“N/A”
means not applicable


“N/M”
means not meaningful





This
segment’s contract drilling revenues increased by $65.1 million primarily due to
increased activity resulting in higher average dayrates and utilization and $3.5
million related to equipment rentals on the *Jim
Cunningham* following its well control incident that resulted in a fire while operating
offshore Egypt in August 2004. Partially offsetting these increases was a
decrease of approximately $13.7 million resulting from the 2004 favorable
settlement of the *Discoverer
Enterprise* riser
separation incident.





Other
revenues for the three months ended March 31, 2005 decreased $12.8 million
primarily due to a $16.9 million decrease in integrated services revenue,
partially offset by compensation received in 2005 relating to a 2004 labor
strike of $2.6 million and an increase of $2.3 million from client reimbursable
revenue.





This
segment’s operating and maintenance expenses increased by $55.4 million
primarily from increased activity and from additional costs related to the *Jim
Cunningham* well
control incident. Operating and maintenance expenses also increased as a result
of the favorable settlement in 2004 of a prior year turnkey dispute with no
comparable activity for the same period in 2005. Partially offsetting these
increases were decreased operating and maintenance expenses of approximately
$25.5 million primarily related to costs incurred in 2004 from the *Discoverer
Enterprise* May 2003
riser separation incident and decreased integrated services activity during
2005.





The
decrease in this segment’s depreciation expense was due primarily to the $4.0
million positive impact from extending the useful lives of four rigs, which had
original useful lives of 30 to 32 years, to 35 years in the fourth quarter of
2004 and the reduction in depreciation on two rigs that were substantially
depreciated during 2004.





During
2005, this segment recognized net gains of $20.2 million related to the sale of
the semisubmersible rig *Sedco
600* and the
sale of other assets. During the quarter ended March 31, 2004, this segment
recognized net gains of $1.1 million related to the settlement of an insurance
claim and the sale of other assets.





*TODCO
Segment*





During
2004, we completed several TODCO offerings in which we sold our shares of TODCO
common stock. As of March 31, 2005, we held a 22 percent interest in TODCO,
represented by 13.3 million shares of class A common stock. We consolidated
TODCO in our financial statements as a business segment through December 16,
2004, and that portion of TODCO that we did not own was reflected as minority
interest in our consolidated statements of operations and balance sheets. We
deconsolidated TODCO from our consolidated statements of operations and balance
sheets effective December 17, 2004 and subsequently accounted for our investment
in TODCO under the equity method of accounting.





28
 *Index to Form 10-Q*




Three
      Months Ended March 31,2005
    
    2004
    
    Change
    
    %
      Change(In
      millions, except day amounts and percentages)Revenue
      earning days
    
    
    -
    
    
    2,414
    
    
    (2,414
    )
    
    N/MUtilization
    
    
    -
    
    
    38
    %
    
    N/A
    
    
    N/MAverage
      dayrate
    
    $
    -
    
    $
    25,700
    
    $
    (25,700
    )
    
    N/MContract
      drilling revenues
    
    $
    -
    
    $
    62.0
    
    $
    (62.0
    )
    
    N/MOther
      revenues
    
    
    -
    
    
    11.8
    
    
    (11.8
    )
    
    N/M-
    
    
    73.8
    
    
    (73.8
    )
    
    N/MOperating
      and maintenance expense
    
    
    -
    
    
    79.2
    
    
    (79.2
    )
    
    N/MDepreciation
    
    
    -
    
    
    24.2
    
    
    (24.2
    )
    
    N/MGain
      from sale of assets, net
    
    
    -
    
    
    (2.7
    )
    
    2.7
    
    
    N/MOperating
      income before general and administrative expense
    
    $
    -
    
    $
    (26.9
    )
    $
    26.9
    
    
    N/M
 “N/A”
means not applicable
 “N/M”
means not meaningful
 
 *Total
Company Results of Operations*
 
 Three
      Months Ended March 31,2005
    
    2004
    
    Change
    
    %
      Change(In
      millions, except % change)General
      and Administrative Expense
    
    $
    18.1
    
    $
    15.1
    
    $
    3.0
    
    
    20
    %Other
      (Income) Expense, netEquity
      in earnings of unconsolidated affiliates
    
    
    (3.1
    )
    
    (2.3
    )
    
    (0.8
    )
    
    35
    %Interest
      income
    
    
    (4.0
    )
    
    (2.1
    )
    
    (1.9
    )
    
    90
    %Interest
      expense
    
    
    33.1
    
    
    47.4
    
    
    (14.3
    )
    
    (30
    )%Gain
      from TODCO IPO
    
    
    -
    
    
    (39.4
    )
    
    39.4
    
    
    N/MLoss
      on retirement of debt
    
    
    6.7
    
    
    28.1
    
    
    (21.4
    )
    
    (76
    )%Other,
      net
    
    
    1.1
    
    
    (1.4
    )
    
    2.5
    
    
    N/MIncome
      Tax Expense
    
    
    17.5
    
    
    48.0
    
    
    (30.5
    )
    
    64
    %Minority
      Interest
    
    
    0.2
    
    
    (4.2
    )
    
    4.4
    
    
    N/M
 _________________________
 “N/M”
means not meaningful
 
 The
increase in general and administrative expense was primarily attributable to
increases of approximately $2.6 million in public accounting and professional
fees primarily related to compliance with the Sarbanes Oxley Act of
2002.
 
 Equity in
earnings of unconsolidated affiliates increased approximately $1.5 million
primarily related to our 22 percent interest in TODCO following the
deconsolidation of the entity from our results in December 2004. Partially
offsetting this increase was a decrease of $0.8 million related to our 50
percent share of earnings from Overseas Drilling Limited (“ODL”), which owns the
drillship *Joides
Resolution* .


29
 *Index to Form 10-Q*





The
increase in interest income was primarily related to an increase in average cash
balances for 2005 compared to 2004 which resulted in an increase of interest
income of $0.9 million. Additional increases resulted from $0.6 million related
to various tax refunds received in the first quarter of 2005.





The
decrease in interest expense was primarily attributable to reductions of $12.2
million associated with debt that was redeemed, retired or repurchased during or
subsequent to the first quarter of 2004. Additional decreases resulted from $2.9
million of interest expense in the first quarter of 2004 on TODCO’s debt with no
comparable activity for the same period in 2005.





During
the first quarter of 2004, we recognized a $39.4 million gain from the TODCO
IPO.





During
the three months ended March 31, 2005, we recognized a $6.7 million loss related
to the early redemption of $247.8 million aggregate principal amount of our debt
(see “—Significant Events”). During the three months ended March 31, 2004, we
recognized a $28.1 million loss related to the early redemption of $289.8
million aggregate principal amount of our debt.





The $2.5
million unfavorable change in other, net primarily relates to the effect of
foreign currency exchange rate changes on our monetary assets and liabilities
denominated in non-U.S. currencies.





We
operate internationally and provide for income taxes based on the tax laws and
rates in the countries in which we operate and earn income. There is no expected
relationship between the provision for income taxes and income before income
taxes. During the three months ended March 31, 2004, we recorded a valuation
allowance of approximately $31.0 million related to the TODCO IPO (see
“—Outlook”).





The
decrease in minority interest was attributable to the deconsolidation of
TODCO.





**Critical
Accounting Policies and Estimates**





Our
discussion and analysis of our financial condition and results of operations are
based upon our condensed consolidated financial statements. This discussion
should be read in conjunction with disclosures included in the notes to our
condensed consolidated financial statements related to estimates, contingencies
and new accounting pronouncements. Significant accounting policies are discussed
in Note 2 to our condensed consolidated financial statements included elsewhere
and in Note 2 to our consolidated financial statements in our Annual Report on
Form 10-K for the year ended December 31, 2004. The preparation of these
financial statements requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues, expenses and related
disclosure of contingent assets and liabilities. On an on-going basis, we
evaluate our estimates, including those related to bad debts, materials and
supplies obsolescence, investments, property and equipment, intangible assets
and goodwill, income taxes, workers’ insurance, pensions and other
post-retirement and employment benefits and contingent liabilities. We base our
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.





For a
discussion of the critical accounting policies and estimates that we use in the
preparation of our condensed consolidated financial statements, see "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" in our Annual Report on Form 10-K for the year ended December 31,
2004. There have been no material changes to these policies during the three
months ended March 31, 2005. These policies require significant judgments and
estimates used in the preparation of our consolidated financial statements.
Management has discussed each of these critical accounting policies and
estimates with the audit committee of the board of directors.




30
 *Index to Form 10-Q*





**Retirement
Plans and Other Postemployment Benefits**





*Defined
Benefit Pension Plans* − We
have several defined benefit pension plans, both funded and unfunded, covering
substantially all U.S. employees. We also have various defined benefit plans
that cover Norway and Nigeria employees and various current and former employees
covered under certain frozen plans acquired in connection with the R&B
Falcon merger.





For the
funded plans, our funding policy consists of reviewing the funded status of
these plans annually and contributing an amount at least equal to the minimum
contribution required under the Employee Retirement Income Security Act of 1974
(ERISA) or other applicable funding regulations. Employer contributions to the
funded plans are based on actuarial computations that establish the minimum
contribution required under ERISA and the maximum deductible contribution for
income tax purposes.





We expect
to contribute approximately $2.3 million to our defined benefit pension plans in
2005 and that the required contributions will be funded from cash flow from
operations. We contributed $0.6 million to the defined benefit pension plans in
the first quarter of 2005.





*Postretirement
Benefits Other Than Pensions* −
We **** have
several unfunded contributory and noncontributory postretirement benefit plans
covering substantially all of our U.S. employees. Funding for these plans is to
cover benefit payments of plan participants as they are incurred.





We
contributed $0.5 million to the other postretirement benefit plans in the first
quarter of 2005.





**Off-Balance
Sheet Arrangement**





We lease
the semisubmersible rig *M. G.
Hulme, Jr.* from
Deep Sea Investors, a special purpose entity formed by several leasing companies
to acquire the rig from one of our subsidiaries in November 1995 in a
sale/leaseback transaction. We are obligated to pay rent of approximately $11.9
million in 2005, and we recorded $3.2 million of such rent expense in the first
quarter of 2005. In November 2004, we gave notice to Deep Sea Investors of our
intent to purchase the rig under the lease purchase option at the end of the
lease term in November 2005. Based on this notice, we are now obligated to
purchase the rig and we have agreed to a purchase price of $35.7 million. The
lease does not require that collateral be maintained or contain any credit
rating triggers.








Effective
December 31, 2003, we adopted and applied the provisions of FASB Interpretation
(“FIN”) 46, *Consolidation
of Variable Interest Entities* , as
revised December 31, 2003, for all variable interest entities. FIN 46 requires
the consolidation of variable interest entities in which an enterprise absorbs a
majority of the entity’s expected losses, receives a majority of the entity’s
expected residual returns, or both, as a result of ownership, contractual or
other financial interests in the entity. Because the sale/leaseback agreement is
with an entity in which we have no direct investment, we are not entitled to
receive the financial information of the leasing entity and the equity holders
of the leasing company will not release the financial statements or other
financial information to us in order for us to make the determination of whether
the entity is a variable interest entity. In addition, without the financial
statements or other financial information, we are unable to determine if we are
the primary beneficiary of the entity and, if so, what we would consolidate. We
have no exposure to loss as a result of the sale/leaseback agreement. We
currently account for the lease of this semisubmersible drilling rig as an
operating lease.





**Related
Party Transactions**





*TODCO* —Through
March 31, 2005, we agreed to guarantee $11.9 million of surety bonds issued on
behalf of TODCO, which TODCO fully collateralized. The guarantee expired April
1, 2005.




31
 *Index to Form 10-Q*





**New
Accounting Pronouncements**





In
December 2004, the FASB issued SFAS 123 (revised 2004) (“SFAS
123(R)”), *Share-Based
Payment* ,
which is a revision of SFAS 123, *Accounting
for Stock-Based Compensation* .
SFAS 123(R) supersedes APB 25, *Accounting
for Stock Issued to Employees* ,
and amends SFAS 95, *Statement
of Cash Flows* .
While the approach in SFAS 123(R) is similar to the approach described in SFAS
123, SFAS 123(R) requires recognition in the income statement of all share-based
payments to employees, including grants of employee stock options, based on
their fair values, and pro forma disclosure is no longer an alternative. The SEC
has deferred the implementation date, and we are now required to adopt SFAS
123(R) no later than January 1, 2006.





SFAS
123(R) permits adoption using one of two methods, a modified prospective method
(“Prospective Method”) or a modified retrospective method (“Retrospective
Method”). With the Prospective Method, costs are recognized beginning with the
effective date based on the requirements of SFAS 123(R) for (i) all share-based
payments granted after the effective date of SFAS 123(R), and (ii) all awards
granted to employees prior to the effective date of SFAS 123(R) that remain
unvested on the effective date. The Retrospective Method applies the
requirements of the Prospective Method but further permits entities to restate
all prior periods presented based on the amounts previously recognized under
SFAS 123 for purposes of pro forma disclosures.





Although
we will adopt SFAS 123(R) effective January 1, 2006, we have not yet determined
which method we will use. We adopted the fair-value-based method of accounting
for share-based payments effective January 1, 2003 using the Prospective Method
as described in SFAS 148, *Accounting
for Stock-Based Compensation-Transition and Disclosure* .
While we currently use the Black-Scholes formula to estimate the value of stock
options granted to employees, which is an acceptable share-based award valuation
model, we may choose some other model that is also acceptable in determining
fair value of stock awards upon adoption of SFAS 123(R). Because SFAS 123(R)
must be applied to unvested awards granted and accounted for under APB 25, any
additional compensation costs not previously recognized under SFAS 123 will be
recognized under SFAS 123(R). Our unvested APB 25 options will vest in the third
quarter of 2005. If we adopt SFAS 123(R) using the Prospective Method, there
would be no impact on our consolidated financial position, results of operations
or cash flows. If we adopt using the Retrospective Method, the impact of those
amounts would approximate the amounts described in our pro forma net income and
earnings per share disclosure in Note 2 to our condensed consolidated financial
statements under “Item 1. Financial Statements” included elsewhere in this
quarterly report. In addition to the compensation cost recognition requirements,
SFAS 123(R) also requires the tax deduction benefits for an award in excess of
recognized compensation cost be reported as a financing cash flow rather than as
an operating cash flow, which is currently required under SFAS 95. While we
cannot estimate what these amounts will be in the future (because they depend
on, among other things, when employees exercise stock options), we recognized
operating cash flows related to the tax deduction benefits of $5.9 million for
the year ended December 31, 2004.





**Forward-Looking
Information**





The
statements included in this quarterly report regarding future financial
performance and results of operations and other statements that are not
historical facts are 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. Statements to the effect that we or management “anticipates,”
“believes,” “budgets,” “estimates,” “expects,” “forecasts,” “intends,” “plans,”
“predicts,” or “projects” a particular result or course of events, or that such
result or course of events “could,” “might,” “may,” “scheduled” or “should”
occur, and similar expressions, are also intended to identify forward-looking
statements. Forward-looking statements in this quarterly report include, but are
not limited to, statements involving contract commencements, contract option
exercises, revenues, expenses, commodity prices, customer drilling programs,
supply and demand, utilization rates, dayrates, planned shipyard projects and
rig mobilizations and their effects, rig relocations, expected downtime, future
activity in the deepwater, mid-water and the shallow and inland water market
sectors, market outlook for our various geographical operating sectors, capacity
constraints for fifth-generation rigs, rig classes and business segments, plans
to dispose of our remaining interest in TODCO, the valuation allowance for
deferred net tax assets of TODCO, intended reduction of debt, planned asset
sales, timing of asset sales, proceeds from asset sales, our effective tax rate,
the purchase of the *M.G.
Hulme, Jr.* , changes
in tax laws, treaties and regulations, our Sarbanes-Oxley Section 404 process,
implementation of a financial integrated system, changes in our internal control
structure and the impact of these changes on the overall effectiveness of our
controls, our other expectations with regard to market outlook, operations in
international markets, expected capital expenditures, results and effects of
legal proceedings and governmental audits and assessments, adequacy of
insurance, liabilities for tax issues, liquidity, cash flow from operations,
adequacy of cash flow for our obligations, effects of accounting changes,
pension plan contributions and the timing and cost of completion of capital
projects. Such statements are subject to numerous risks, uncertainties and
assumptions, including, but not limited to, those described in “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations ― Risk
Factors” included in our Annual Report on Form 10-K for the year ended December
31, 2004, the adequacy of sources of liquidity, the effect and results of
litigation, audits and contingencies and other factors discussed in this
quarterly report and in our other filings with the SEC, which are available free
of charge on the SEC's website at www.sec.gov. Should one or more of these risks
or uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those indicated. All subsequent written
and oral forward-looking statements attributable to us or to persons acting on
our behalf are expressly qualified in their entirety by reference to these risks
and uncertainties. You should not place undue reliance on forward-looking
statements. Each forward-looking statement speaks only as of the date of the
particular statement, and we undertake no obligation to publicly update or
revise any forward-looking statements.




32
 *Index to Form 10-Q*





**ITEM 3. Quantitative and Qualitative Disclosures
About Market Risk**





**Interest
Rate Risk**





Our
exposure to market risk for changes in interest rates relates primarily to our
long-term and short-term debt. The table below presents scheduled debt
maturities and related weighted-average interest rates for each of the 12-month
periods ending March 31 relating to debt obligations as of March 31, 2005.





At March
31, 2005 (in millions, except interest rate percentages):





Scheduled
      Maturity Date (a) (b)
    
    Fair
      Value2006
    
    2007
    
    2008
    
    2009
    
    2010
    
    Thereafter
    
    Total
    
    03/31/05Total
      debtFixed
      Rate
    
    $
    7.9
    
    $
    400.0
    
    $
    100.0
    
    $
    19.0
    
    $
    -
    
    $
    1,603.8
    
    $
    2,130.7
    
    $
    2,404.0Average
      interest rate
    
    
    7.3
    %
    
    1.5
    %
    
    7.5
    %
    
    2.8
    %
    
    -
    %
    
    7.1
    %
    
    6.0
    %


__________________________


(a)
    Maturity
      dates of the face value of our debt assume the put options on 1.5%
      Convertible Debentures, 7.45% Notes and the Zero Coupon Convertible
      Debentures will be exercised in May 2006, April 2007 and May 2008,
      respectively.


(b)
    Expected
      maturity amounts are based on the face value of
debt.





At March
31, 2005, we had no variable rate debt and as such interest expense had no
exposure to changes in interest rates. However, a large part of our cash
investments would earn commensurately higher rates of return if interest rates
increase. Using March 31, 2005 cash investment levels, a one percent increase in
interest rates would result in approximately $3.4 million of additional interest
income per year.





**Foreign
Exchange Risk**





Our
international operations expose us to foreign exchange risk. We use a variety of
techniques to minimize the exposure to foreign exchange risk. Our primary
foreign exchange risk management strategy involves structuring customer
contracts to provide for payment in both U.S. dollars, which is our functional
currency, and local currency. The payment portion denominated in local currency
is based on anticipated local currency requirements over the contract term. Due
to various factors, including customer acceptance, local banking laws, other
statutory requirements, local currency convertibility and the impact of
inflation on local costs, actual foreign exchange needs may vary from those
anticipated in the customer contracts, resulting in partial exposure to foreign
exchange risk. Fluctuations in foreign currencies typically have not had a
material impact on overall results. In situations where payments of local
currency do not equal local currency requirements, foreign exchange derivative
instruments, specifically foreign exchange forward contracts or spot purchases,
may be used to mitigate foreign currency risk. A foreign exchange forward
contract obligates us to exchange predetermined amounts of specified foreign
currencies at specified exchange rates on specified dates or to make an
equivalent U.S. dollar payment equal to the value of such exchange. We do not
enter into derivative transactions for speculative purposes. At March 31, 2005,
we had no open foreign exchange derivative contracts.




33
 *Index to Form 10-Q*





**ITEM 4. Controls and
Procedures**





In
accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an
evaluation, under the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report. Based on that evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures were effective as of March 31, 2005 to provide reasonable assurance
that information required to be disclosed in our reports filed or submitted
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission’s rules and
forms.





Pursuant
to our efforts relating to Section 404 of the Sarbanes-Oxley Act, we continued
to make certain changes to our internal controls over financial reporting during
the quarter ended March 31, 2005 that we believe better align these controls
with the Section 404 requirements. However, there were no changes in these
internal controls during that quarter that have materially affected, or are
reasonably likely to materially affect, our internal controls over financial
reporting.





We
currently expect to implement a financial integrated system in the second
quarter of 2005. We expect to make a variety of changes in our internal control
structure but do not expect these changes to impact the overall effectiveness of
our controls.





**PART
II - OTHER INFORMATION**





**Item 1. Legal Proceedings**





We have
certain other actions or claims pending that have been previously discussed and
reported in our Annual Report on Form 10-K for the year ended December 31, 2004
and our other reports filed with the Securities and Exchange Commission. There
have been no material developments in these previously reported matters. We are
involved in a number of other lawsuits, all of which have arisen in the ordinary
course of our business. We do not expect the liability, if any, resulting from
these other lawsuits to have a material adverse effect on our current
consolidated financial position, results of operations and cash flows. We cannot
predict with certainty the outcome or effect of any of the litigation matters
specifically described above or of any such other pending or threatened
litigation. There can be no assurance that our beliefs or expectations as to the
outcome or effect of any lawsuit or other litigation matter will prove correct
and the eventual outcome of these matters could materially differ from
management’s current estimates.





**Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds**





**Issuer
Purchases of Equity Securities**


**Period**
    
    **(a)
      Total Number of Shares Purchased (1)**
    
    **(b)
      Average Price Paid Per Share**
    
    **(c)
      Total Number of Shares Purchased as Part of Publicly Announced Plans or
      Programs (2)**
    
    **(d)
      Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be
      Purchased Under the Plans or Programs (2)**January
      2005
    
    
    265
    
    $
    41.40
    
    
    N/A
    
    
    N/AFebruary
      2005
    
    
    -
    
    
    -
    
    
    N/A
    
    
    N/AMarch
      2005
    
    
    -
    
    
    -
    
    
    N/A
    
    
    N/ATotal
    
    
    265
    
    $
    41.40
    
    
    N/A
    
    
    N/A


__________


(1)
    The
      issuer purchase during the period covered by this report represents shares
      withheld by us in satisfaction of withholding taxes due upon the vesting
      of restricted shares granted to our employees under our Long-Term
      Incentive Plan to pay withholding taxes due upon vesting of a restricted
      stock award.





(2)
    In
      connection with the vesting of restricted share awards under our Long-Term
      Incentive Plan, we generally withhold shares to satisfy withholding taxes
      upon vesting.





34
 *Index to Form 10-Q*





**Item 6. Exhibits**





(a)
    Exhibits





The
following exhibits are filed in connection with this Report:




**Number**
    
    **Description***3.1
    
    Memorandum
      of Association of Transocean Inc., as amended (incorporated by reference
      to Annex E to the Joint Proxy Statement/Prospectus dated October 30, 2000
      included in a 424(b)(3) prospectus filed by us on November 1,
      2000)*3.2
    
    Articles
      of Association of Transocean Inc., as amended (incorporated by reference
      to Annex F to the Joint Proxy Statement/Prospectus dated October 30, 2000
      included in a 424(b)(3) prospectus filed by us on November 1,
      2000)*3.3
    
    Certificate
      of Incorporation on Change of Name to Transocean Inc. (incorporated by
      reference to Exhibit 3.3 to our Form 10-Q for the quarter ended June 30,
      2002)†31.1
    
    CEO
      Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002†31.2
    
    CFO
      Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002†32.1
    
    CEO
      Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002†32.2
    
    CFO
      Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002


_________________________


*
Incorporated by reference as indicated.


† Filed
herewith.





35
 *Index to Form 10-Q*




**SIGNATURES**





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, hereunto duly authorized, on May 3, 2005.





TRANSOCEAN
INC.






By: 
      /s/ Gregory L. CauthenGregory L. CauthenSenior Vice President and Chief Financial Officer(Principal
      Financial Officer)











By:/s/
      David A. TonnelDavid A. TonnelVice President and Controller(Principal Accounting Officer)