**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**


**______________________**





**FORM
      10-Q**


(Mark
      One)


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





**For
      the quarterly period ended September 30, 2006**





**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****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. Yes x No  ̈




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.




Large
                Accelerated Filerx
            Accelerated
                Filer ̈
            Non-accelerated
                Filer ̈





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





As
      of
      October 27, 2006, 292,397,727 ordinary shares, par value $0.01 per share, were
      outstanding.













**TRANSOCEAN
      INC.**





**INDEX
      TO FORM 10-Q**





**QUARTER
      ENDED** **SEPTEMBER
      30, 2006**


Page**PART
                  I - FINANCIAL INFORMATION****Item
                  1.**
              Financial
                  Statements (Unaudited)Condensed
                  Consolidated Statements of
                  OperationsThree
                  and Nine Months Ended September 30, 2006 and 2005
              
              1Condensed
                  Consolidated Statements of Comprehensive
                  IncomeThree
                  and Nine Months Ended September 30, 2006 and 2005
              
              2Condensed
                  Consolidated Balance SheetsSeptember
                  30, 2006 and December 31, 2005
              
              3Condensed
                  Consolidated Statements of Cash
                  FlowsThree
                  and Nine Months Ended September 30, 2006 and 2005
              
              4Notes
                  to Condensed Consolidated Financial
                  Statements
              
              5**Item
                  2.**
              Management’s
                  Discussion and Analysis of Financial Condition and
                  Results of Operations
              
              26**Item
                  3.**
              Quantitative
                  and Qualitative Disclosures about Market
                  Risk
              
              45**Item
                  4.**
              Controls
                  and Procedures
              
              45**PART
                  II - OTHER INFORMATION****Item
                  1.**
              Legal
                  Proceedings
              
              46**Item
                  1A.**
              Risk
                  Factors
              
              46**Item
                  2.**
              Unregistered
                  Sales of Equity Securities and Use of
                  Proceeds
              
              47**Item
                  6.**
              Exhibits
              
              48





*Index*





**PART
      I - FINANCIAL INFORMATION**





**Item
      1. Financial Statements**





**TRANSOCEAN
      INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


(In
      millions, except per share data)


(Unaudited)





Three
                Months Ended
              September
                30,
            
            Nine
                Months Ended
              September
                30,2006
            
            2005
            
            2006
            
            2005Operating
                RevenuesContract
                drilling revenues
            
            $
            991.3
            
            $
            735.6
            
            $
            2,598.3
            
            $
            2,018.3Other
                revenues
            
            
            34.4
            
            
            27.0
            
            
            98.0
            
            
            102.21,025.7
            
            
            762.6
            
            
            2,696.3
            
            
            2,120.5Costs
                and ExpensesOperating
                and maintenance
            
            
            560.9
            
            
            438.3
            
            
            1,585.2
            
            
            1,263.6Depreciation
            
            
            99.2
            
            
            102.1
            
            
            302.8
            
            
            304.0General
                and administrative
            
            
            22.5
            
            
            19.4
            
            
            67.3
            
            
            55.5682.6
            
            
            559.8
            
            
            1,955.3
            
            
            1,623.1Gain
                from disposal of assets, net
            
            
            47.6
            
            
            0.7
            
            
            222.3
            
            
            34.2Operating
                Income
            
            
            390.7
            
            
            203.5
            
            
            963.3
            
            
            531.6Other
                Income (Expense), netEquity
                in earnings of unconsolidated affiliates
            
            
            4.6
            
            
            1.8
            
            
            7.5
            
            
            8.3Interest
                income
            
            
            3.3
            
            
            5.2
            
            
            13.8
            
            
            14.0Interest
                expense, net of amounts capitalized
            
            
            (27.2
            )
            
            (24.5
            )
            
            (71.5
            )
            
            (87.4
            )Gain
                from TODCO stock sales
            
            
            -
            
            
            -
            
            
            -
            
            
            165.0Loss
                on retirement of debt
            
            
            -
            
            
            (0.6
            )
            
            -
            
            
            (7.3
            )Other,
                net
            
            
            1.4
            
            
            9.7
            
            
            1.2
            
            
            5.6(17.9
            )
            
            (8.4
            )
            
            (49.0
            )
            
            98.2Income
                Before Income Taxes and Minority Interest
            
            
            372.8
            
            
            195.1
            
            
            914.3
            
            
            629.8Income
                Tax Expense
            
            
            63.8
            
            
            24.7
            
            
            150.1
            
            
            65.8Minority
                Interest
            
            
            -
            
            
            -
            
            
            -
            
            
            -Net
                Income
            
            $
            309.0
            
            $
            170.4
            
            $
            764.2
            
            $
            564.0Earnings
                Per ShareBasic
            
            $
            0.99
            
            $
            0.52
            
            $
            2.39
            
            $
            1.73Diluted
            
            $
            0.96
            
            $
            0.50
            
            $
            2.31
            
            $
            1.68Weighted
                Average Shares OutstandingBasic
            
            
            312.0
            
            
            328.9
            
            
            320.3
            
            
            326.2Diluted
            
            
            323.4
            
            
            340.8
            
            
            332.3
            
            
            338.5


See
        accompanying notes.




1
 *Index*


**TRANSOCEAN
        INC. AND SUBSIDIARIES**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME**
 (In
        millions)
 (Unaudited)


Three
                Months Ended
              September
                30,
            
            Nine
                Months Ended
              September
                30,2006
            
            2005
            
            2006
            
            2005Net
                Income
            
            $
            309.0
            
            $
            170.4
            
            $
            764.2
            
            $
            564.0Other
                Comprehensive Income (Loss), net of taxAmortization
                of gain on terminated interest rate swaps
            
            
            (0.1
            )
            
            (0.1
            )
            
            (0.2
            )
            
            (0.3
            )Change
                in unrealized loss on securities available for sale
            
            
            −
            
            
            −
            
            
            −
            
            
            0.3Minimum
                pension liability adjustments (net of tax expense of $0.7 for the
                nine
                months ended September 30, 2005)
            
            
            −
            
            
            −
            
            
            −
            
            
            1.4Other
                Comprehensive Income (Loss)
            
            
            (0.1
            )
            
            (0.1
            )
            
            (0.2
            )
            
            1.4Total
                Comprehensive Income
            
            $
            308.9
            
            $
            170.3
            
            $
            764.0
            
            $
            565.4




See
        accompanying notes.


2
 *Index*


**TRANSOCEAN
        INC. AND SUBSIDIARIES**
 **CONDENSED
        CONSOLIDATED BALANCE SHEETS**
 (In
millions,
        except share data)




September
                  30,
                2006
              
              December
                  31,
                2005(Unaudited)**ASSETS**Cash
                  and Cash Equivalents
              
              $
              407.1
              
              $
              445.4Accounts
                  Receivable, net of allowance for doubtful accounts of $34.8 and
                  $15.3 at
                  September 30, 2006 and December 31, 2005, respectively
              
              
              872.2
              
              
              599.7Materials
                  and Supplies, net of allowance for obsolescence of $16.2 and $19.1
                  at
                  September 30, 2006 and December 31, 2005, respectively
              
              
              161.0
              
              
              156.2Deferred
                  Income Taxes, net
              
              
              27.0
              
              
              23.4Other
                  Current Assets
              
              
              79.4
              
              
              54.4Total
                  Current Assets
              
              
              1,546.7
              
              
              1,279.1Property
                  and Equipment
              
              
              10,270.9
              
              
              9,791.0Less
                  Accumulated Depreciation
              
              
              3,138.0
              
              
              3,042.8Property
                  and Equipment, net
              
              
              7,132.9
              
              
              6,748.2Goodwill
              
              
              2,209.0
              
              
              2,208.9Investments
                  in and Advances to Unconsolidated Affiliates
              
              
              11.6
              
              
              8.1Other
                  Assets
              
              
              278.1
              
              
              212.9Total
                  Assets
              
              $
              11,178.3
              
              $
              10,457.2**LIABILITIES
                  AND SHAREHOLDERS’ EQUITY**Accounts
                  Payable
              
              $
              351.2
              
              $
              254.0Accrued
                  Income Taxes
              
              
              45.1
              
              
              27.5Debt
                  Due Within One Year
              
              
              95.4
              
              
              400.0Other
                  Current Liabilities
              
              
              379.6
              
              
              242.1Total
                  Current Liabilities
              
              
              871.3
              
              
              923.6Long-Term
                  Debt
              
              
              3,400.0
              
              
              1,197.1Deferred
                  Income Taxes, net
              
              
              104.5
              
              
              65.0Other
                  Long-Term Liabilities
              
              
              332.6
              
              
              286.2Total
                  Long-Term Liabilities
              
              
              3,837.1
              
              
              1,548.3Commitments
                  and ContingenciesMinority
                  Interest
              
              
              3.8
              
              
              3.6Preference
                  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, 295,871,463
                  and
                  324,750,166 shares issued and outstanding at September 30, 2006
                  and
                  December 31, 2005, respectively
              
              
              3.0
              
              
              3.2Additional
                  Paid-in Capital
              
              
              8,285.9
              
              
              10,565.3Accumulated
                  Other Comprehensive Loss
              
              
              (20.6
              )
              
              (20.4
              )Retained
                  Deficit
              
              
              (1,802.2
              )
              
              (2,566.4
              )Total
                  Shareholders’ Equity
              
              
              6,466.1
              
              
              7,981.7Total
                  Liabilities and Shareholders’ Equity
              
              $
              11,178.3
              
              $
              10,457.2




See
        accompanying notes.


3
 *Index*


**TRANSOCEAN
        INC. AND SUBSIDIARIES**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF CASH FLOWS**
 (In
        millions)
 (Unaudited)




Three
                Months Ended
              September
                30,
            
            Nine
                Months Ended
              September
                30,2006
            
            2005
            
            2006
            
            2005**Cash
                Flows from Operating Activities**Net
                income
            
            $
            309.0
            
            $
            170.4
            
            $
            764.2
            
            $
            564.0Adjustments
                to reconcile net income to net cash provided by operating
                activitiesDepreciation
            
            
            99.2
            
            
            102.1
            
            
            302.8
            
            
            304.0Stock-based
                compensation expense
            
            
            4.8
            
            
            6.2
            
            
            12.8
            
            
            12.1Deferred
                income taxes
            
            
            (7.1
            )
            
            (8.8
            )
            
            18.3
            
            
            (6.6
            )Equity
                in earnings of unconsolidated affiliates
            
            
            (4.6
            )
            
            (1.8
            )
            
            (7.5
            )
            
            (8.3
            )Net
                gain from disposal of assets
            
            
            (47.6
            )
            
            (0.7
            )
            
            (222.3
            )
            
            (34.2
            )Gain
                from TODCO stock sales
            
            
            -
            
            
            -
            
            
            -
            
            
            (165.0
            )Loss
                on retirement of debt
            
            
            -
            
            
            0.6
            
            
            -
            
            
            7.3Amortization
                of debt-related discounts/premiums, fair value adjustments and issue
                costs, net
            
            
            (0.1
            )
            
            (0.8
            )
            
            (0.7
            )
            
            (6.3
            )Deferred
                income, net
            
            
            11.5
            
            
            (22.0
            )
            
            31.5
            
            
            (9.9
            )Deferred
                expenses, net
            
            
            (40.2
            )
            
            18.0
            
            
            (94.7
            )
            
            27.1Tax
                benefit from exercise of stock options to purchase and vesting of
                ordinary
                shares under stock-based compensation plans
            
            
            (2.0
            )
            
            15.2
            
            
            (9.9
            )
            
            20.1Other
                long-term liabilities
            
            
            (4.0
            )
            
            5.5
            
            
            16.7
            
            
            18.0Other,
                net
            
            
            0.2
            
            
            (15.6
            )
            
            4.5
            
            
            (14.4
            )Changes
                in operating assets and liabilitiesAccounts
                receivable
            
            
            (168.6
            )
            
            (27.1
            )
            
            (272.5
            )
            
            (146.7
            )Accounts
                payable and other current liabilities
            
            
            76.0
            
            
            14.5
            
            
            166.5
            
            
            85.6Income
                taxes receivable/payable, net
            
            
            47.3
            
            
            (20.1
            )
            
            58.9
            
            
            (13.0
            )Other
                current assets
            
            
            14.6
            
            
            2.0
            
            
            (36.4
            )
            
            (18.1
            )Net
                Cash Provided by Operating Activities
            
            
            288.4
            
            
            237.6
            
            
            732.2
            
            
            615.7**Cash
                Flows from Investing Activities**Capital
                expenditures
            
            
            (434.2
            )
            
            (35.3
            )
            
            (709.8
            )
            
            (144.9
            )Proceeds
                from disposal of assets, net
            
            
            94.7
            
            
            2.3
            
            
            297.7
            
            
            60.3Proceeds
                from TODCO stock sales, net
            
            
            -
            
            
            -
            
            
            -
            
            
            271.9Joint
                ventures and other investments, net
            
            
            0.5
            
            
            -
            
            
            0.5
            
            
            4.5Net
                Cash Provided by (Used in) Investing Activities
            
            
            (339.0
            )
            
            (33.0
            )
            
            (411.6
            )
            
            191.8**Cash
                Flows from Financing Activities**Net
                proceeds from issuance of debt and borrowings under credit
                facilities
            
            
            1,900.0
            
            
            -
            
            
            1,900.0
            
            
            -Repayments
                of debt
            
            
            -
            
            
            (592.4
            )
            
            -
            
            
            (880.2
            )Net
                proceeds from issuance of ordinary shares under stock-based compensation
                plans
            
            
            0.7
            
            
            36.7
            
            
            66.8
            
            
            196.1Proceeds
                from issuance of ordinary shares upon exercise of warrants
            
            
            -
            
            
            6.0
            
            
            -
            
            
            10.6Repurchase
                of ordinary shares
            
            
            (1,750.4
            )
            
            -
            
            
            (2,350.5
            )
            
            -Release
                of escrow funds - Nautilus lease financing
            
            
            29.6
            
            
            -
            
            
            29.6
            
            
            -Decrease
                in cash dedicated to debt service
            
            
            -
            
            
            -
            
            
            -
            
            
            12.0Other,
                net
            
            
            (4.4
            )
            
            (0.6
            )
            
            (4.8
            )
            
            (0.5
            )Net
                Cash Provided by (Used in) Financing Activities
            
            
            175.5
            
            
            (550.3
            )
            
            (358.9
            )
            
            (662.0
            )Net
                Increase (Decrease) in Cash and Cash Equivalents
            
            
            124.9
            
            
            (345.7
            )
            
            (38.3
            )
            
            145.5Cash
                and Cash Equivalents at Beginning of Period
            
            
            282.2
            
            
            942.5
            
            
            445.4
            
            
            451.3Cash
                and Cash Equivalents at End of Period
            
            $
            407.1
            
            $
            596.8
            
            $
            407.1
            
            $
            596.8




See
        accompanying notes.


4
 *Index*





**TRANSOCEAN
      INC. AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


(Unaudited)





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





Transocean
      Inc. (together with its 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 services. At September 30, 2006, we owned, had
      partial ownership interests in or operated 82 mobile offshore and barge drilling
      units. As of this date, our fleet consisted of 33 High-Specification
      semisubmersibles and drillships (“floaters”), 20 Other Floaters, 25 Jackup Rigs
      and four Other Rigs.





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 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.





**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 and nine months ended September
      30,
      2006 are not necessarily indicative of the results that may be expected for
      the
      year ending December 31, 2006 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,
      2005.





*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.





5
 *Index*





**TRANSOCEAN
      INC. AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)**


(Unaudited)





*Capitalized
      Interest* —We
      capitalize interest costs for qualifying construction and upgrade projects.
      We
      capitalized interest costs on construction work in progress of $5.0 million
      and
      $7.4 million for the three and nine months ended September 30, 2006,
      respectively. There was no capitalized interest for the three and nine months
      ended September 30, 2005.





*Segments* —We
      operate in one business segment which consists of floaters, jackups and other
      rigs used in support of offshore drilling activities and offshore support
      services. Our fleet operates in a single, global market for the provision of
      contract drilling services. The location of our rigs and the allocation of
      resources to build or upgrade rigs are determined by the activities and needs
      of
      our customers.





*Stock-Based
      Compensation* — On
      January 1, 2006, we adopted the Financial Accounting Standards Board (“FASB”)
      Statement of Financial Accounting Standards (“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 Accounting Principles Board Opinion (“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. In March
      2005,
      the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”), *Stock-Based
      Payment* ,
      relating to SFAS 123(R). We have applied the provisions of SAB 107 in our
      adoption of SFAS 123(R).





We
      adopted SFAS 123(R) using the modified prospective method (“Prospective
      Method”), which requires the application of SFAS 123(R) as of January 1, 2006.
      Our consolidated financial statements as of and for the three and nine months
      ended September
      30 ,
      2006
      reflect the application of SFAS 123(R). In accordance with the Prospective
      Method, our consolidated financial statements for prior periods have not been
      restated to reflect, and do not include, the application of SFAS 123(R).
      Share-based compensation expense for the three and nine months ended September
      30, 2006 was $4.8 million ($4.6 million, net of tax) and $12.8 million ($12.0
      million, net of tax), respectively, while the expense for the three and nine
      months ended September 30, 2005 was $6.2 million ($4.5 million, net of tax)
      and
      $12.1 million ($9.8 million, net of tax), respectively.





SFAS
      123(R) requires forfeitures to be estimated at the time of grant and revised,
      if
      necessary, in subsequent periods if actual forfeitures differ from those
      estimates. Additionally, SFAS 123(R) requires the estimated forfeiture rate
      be
      applied and the cumulative effect determined for all prior periods in which
      stock-based compensation costs have been recorded. Prior to our adoption of
      SFAS
      123(R), we accounted for forfeitures as they occurred. Upon adopting SFAS
      123(R), we estimated expected forfeitures over the life of each individual
      award
      and have included the impact of these expected forfeitures in our stock-based
      compensation expense for the three and nine months ended September 30, 2006
      in
      addition to all prior periods on a cumulative basis. The effect of this change
      is to reverse compensation cost recognized in prior period financial statements
      for awards that are not expected to vest based upon the expected forfeiture
      rate. The cumulative effect of applying the expected forfeiture rate has been
      included in operating and maintenance expense and general and administrative
      expense, the impact of which had no material effect on our consolidated
      financial position, results of operations or cash flows.





We
      adopted SFAS 123 effective January 1, 2003 and have accounted for stock-based
      compensation prospectively for all stock-based awards granted or modified on
      or
      subsequent to that date. As such, adoption of SFAS 123(R) using the Prospective
      Method had no material impact on our consolidated financial position, results
      of
      operations or cash flows. 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 to be reported as a financing cash
      flow rather than as an operating cash flow, which was required under SFAS 95.
      We
      reported operating cash flows related to tax deduction benefits of $15.2 million
      and $20.1 million for the three and nine months ended September 30, 2005,
      respectively.





6
 *Index*





**TRANSOCEAN
      INC. AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)**


(Unaudited)





Under
      SFAS 123, we recognized compensation cost over the vesting period up to the
      date
      of actual retirement. We will continue this practice for awards granted prior
      to
      adoption of SFAS 123(R). As a result of the adoption of SFAS 123(R), we now
      recognize compensation cost for awards granted or modified after January 1,
      2006
      through the date the employee is no longer required to provide service to earn
      the award (“service period”). If we had amortized compensation cost over the
      service period prior to adoption of SFAS 123(R), stock-based compensation
      expense would not have been materially different for any of the periods
      presented.





Prior
      to
      January 1, 2003, we accounted for share-based awards to employees under the
      provisions of SFAS 123 using the intrinsic value method prescribed by APB 25
      and
      related interpretations. If compensation expense for grants to employees under
      our long-term incentive plan prior to January 1, 2003 had been recognized using
      the fair value method of accounting under SFAS 123, net income and earnings
      per
      share for the three and nine months ended September 30, 2005 would have been
      reduced to the pro forma amounts indicated below (in millions, except per share
      data):





Three
                Months Ended
              September
                30, 2005
            
            Nine
                Months Ended
              September
                30, 2005Net
                Income as Reported
            
            $
            170.4
            
            $
            564.0Add
                back: Stock-based compensation expense included in reported net income,
                net of related tax effects
            
            
            4.5
            
            
            9.8Deduct:
                Total stock-based compensation expense determined under the fair
                value
                method for all awards, net of related tax effectsLong-Term
                Incentive Plan
            
            
            (2.5
            )
            
            (9.9
            )Employee
                Stock Purchase Plan
            
            
            (1.1
            )
            
            (2.7
            )Pro
                Forma Net Income
            
            $
            171.3
            
            $
            561.2Basic
                Earnings Per ShareAs
                Reported
            
            $
            0.52
            
            $
            1.73Pro
                Forma
            
            
            0.52
            
            
            1.72Diluted
                Earnings Per ShareAs
                Reported
            
            $
            0.50
            
            $
            1.68Pro
                Forma
            
            
            0.51
            
            
            1.67




The
      above
      pro forma amounts are not indicative of future pro forma results. The fair
      value
      of each option grant under our long-term incentive plan was estimated on the
      date of grant using the Black-Scholes-Merton option pricing model with the
      following weighted-average assumptions used:





Three
                Months Ended
              September
                30, 2005
            
            Nine
                Months Ended
              September
                30, 2005Dividend
                yield
            
            -
            
            -Expected
                price volatility range
            
            
            36
            %
            
            26%-51
            %Risk-free
                interest rate range
            
            
            3.92
            %
            
            2.86%-4.07
            %Expected
                life of options (in years)
            
            
            4.67
            
            
            4.40Weighted-average
                fair value of options granted
            
            $
            20.79
            
            $
            22.01




7
 *Index*





**TRANSOCEAN
      INC. AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)**


(Unaudited)





*New
      Accounting Pronouncements* —In
      July
      2006, the FASB issued FASB Interpretation No. 48, *Accounting
      for Uncertainty in Income Taxes—an interpretation of FASB Statement No.
      109* (“FIN
      48”). ** FIN
      48
      clarifies the accounting for income taxes recognized in an entity’s financial
      statements in accordance with SFAS 109, *Accounting
      for Income Taxes* .
      It
      prescribes a minimum recognition threshold and measurement attribute for
      recognizing and measuring the benefit of tax positions taken or expected to
      be
      taken in a tax return. FIN 48 also provides guidance on derecognition,
      classification, interest and penalties, accounting in interim periods,
      disclosure and transition. FIN 48 is effective for fiscal years beginning after
      December 15, 2006. We will be required to adopt this interpretation in the
      first
      quarter of fiscal year 2007. Management is currently evaluating the requirements
      of FIN 48 and has not yet determined the impact on the consolidated financial
      statements.





In
      September 2006, the FASB issued SFAS 157, *Fair
      Value Measurements* .
      This
      statement defines fair value, establishes a framework for measuring fair value
      in generally accepted accounting principles, and expands disclosures about
      fair
      value measurements. This statement applies under other accounting pronouncements
      that require or permit fair value measurements, the FASB having previously
      concluded in those accounting pronouncements that fair value is the relevant
      measurement attribute. Accordingly, this statement does not require any new
      fair
      value measurements. This statement is effective for fiscal years beginning
      after
      November 15, 2007. We will be required to adopt this statement in the first
      quarter of fiscal year 2008.  Management is currently evaluating the
      requirements of SFAS 157 and has not yet determined the impact on the
      consolidated financial statements.





In
      September 2006, the FASB issued SFAS 158, *Employers’
      Accounting for Defined Benefit Pension and Other Postretirement
      Plans* — *an
      amendment of FASB Statements No. 87, 88, 106 and 132-R.* This
      statement requires an entity to recognize in its balance sheet the funded status
      of its defined benefit postretirement plans, measured as the difference between
      the fair value of the plan assets and the benefit obligation. It also requires
      an entity to recognize changes in the funded status of a defined benefit
      postretirement plan within accumulated other comprehensive income, net of tax,
      to the extent such changes are not recognized in earnings as components of
      periodic net benefit cost. This statement is effective for fiscal years
      beginning after December 15, 2006.  We will be required to adopt this
      statement in the first quarter of fiscal year 2007.  Management is
      currently evaluating the requirements of SFAS 158 and has not yet determined
      the
      impact on the consolidated financial statements.





*Reclassifications* —Certain
      reclassifications have been made to prior period amounts to conform with the
      current period’s presentation. These
      reclassifications did not have a material effect on the consolidated financial
      statements.





**Note
      3―Drilling Fleet Expansion, Upgrades and Acquisition**





*Expansion
      and Upgrades* —Capital
      expenditures, including capitalized interest, totaled $709.8 million during
      the
      nine months ended September 30, 2006 and include $422.1 million spent on the
      construction of three enhanced Enterprise-class drillships ** and
      $95.1
      million spent on two *Sedco
      700* -series
      rig upgrades.





In
      June
      2006, we were awarded a contract for the construction of our second enhanced
      Enterprise-class drillship with an estimated total capital expenditure of
      approximately $615 million, excluding capitalized interest. Construction is
      expected to begin in 2007 and continue into 2009.





In
      August
      2006, we were awarded a contract for the construction of our third enhanced
      Enterprise-class drillship with an estimated total capital expenditure of
      approximately $670 million, excluding capitalized interest. This includes
      approximately $40 million for a second blow out preventer and other equipment
      not included in the original costs of the other two enhanced Enterprise-class
      drillships. Construction is expected to begin in 2008 and continue into
      2009.





*Acquisition* —In
      May
      2005, we purchased for $42.5 million the semisubmersible rig *M.G.
      Hulme, Jr.,* which
      we
      had previously operated under a lease arrangement.





8
 *Index*





**TRANSOCEAN
      INC. AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)**


(Unaudited)





**Note
      4** ― **Asset
      Dispositions**





In
      September 2006, we completed the sale of the tender rig *Searex
      X* for
      net
      proceeds of $33.5 million and recognized a gain on the sale of $28.4 million
      ($0.09 per diluted share), which had no tax effect.





In
      August
      2006, we completed the sale of the tender rig *W.D.
      Kent* for
      net
      proceeds of $18.0 million and recognized a gain on the sale of $15.3 million
      ($14.0 million, or $0.04 per diluted share, net of tax).





In
      June
      2006, we completed the sale of the semisubmersible rig *Transocean
      Explorer* for net
      proceeds of $101.0 million and recognized a gain on the sale of $97.0 million
      ($0.29 per diluted share), which had no tax effect.





In
      May
      2006, we completed the sale of the drilling barge *Searex
      XII* for
      net
      proceeds of $19.1 million and recognized a gain on the sale of $13.7 million
      ($0.04 per diluted share), which had no tax effect.





In
      March
      2006, we completed the sale of a platform rig for net proceeds of $10.1 million
      and recognized a gain on the sale of $2.7 million ($1.1 million, net of
      tax).





In
      February 2006, we completed the sale of the drillship *Peregrine
      III* for
      net
      proceeds of $78.7 million and recognized a gain on the sale of $61.8 million
      ($40.2 million, or $0.12 per diluted share, net of tax).





During
      the nine months ended September 30, 2006, we sold and disposed of certain other
      assets for net proceeds of approximately $37.3 million. We recognized a net
      gain
      on such sales and disposals of $3.4 million ($2.1 million, net of
      tax).





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
      ($0.06 per diluted share), which had no tax effect.





In
      June
      2005, we completed the sale of the jackup rig *Transocean
      Jupiter* and a
      land rig for net proceeds of $23.5 million and recognized a gain on the sale
      of
      $14.0 million ($9.1 million, or $0.03 per diluted share, net of tax). During
      the
      nine months ended September 30, 2005, we sold and disposed of certain other
      assets for net proceeds of approximately $11.9 million. We recognized a net
      gain
      on such sales and disposals of $1.4 million ($1.2 million, net of
      tax).





**Note
      5** ― **TODCO
      Stock Sales**





In
      May
      2005, we sold 12.0 million shares of TODCO’s class A common stock, representing
      20 percent of TODCO’s total outstanding shares, at $20.50 per share. In June
      2005, we sold our remaining 1.3 million shares of TODCO’s class A common stock,
      representing two percent of TODCO’s total outstanding shares, at $23.57 per
      share. We received net proceeds of $271.9 million from the two sales and
      recognized a gain in the second quarter of 2005 of $165.0 million ($0.49 per
      diluted share), which had no tax effect. As a result of the sale in June 2005,
      we no longer own any shares of TODCO’s common stock.





**Note
      6** ― **Repurchase
      of Ordinary Shares**





In
      the
      third quarter of 2006, we repurchased and retired $1.75 billion of our ordinary
      shares, which amounted to approximately 24.4 million ordinary shares at an
      average purchase price of $71.67 per share.





In
      the
      second quarter of 2006, we repurchased and retired $400 million of our ordinary
      shares, which amounted to approximately 5.2 million ordinary shares at an
      average purchase price of $76.23 per share.





9
 *Index*





**TRANSOCEAN
      INC. AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)**


(Unaudited)





In
      the
      first quarter of 2006, we repurchased and retired $200 million of our ordinary
      shares, which amounted to approximately 2.6 million ordinary shares at an
      average purchase price of $77.54 per share.





Total
      consideration paid to repurchase the shares was recorded in shareholders’ equity
      as a reduction in ordinary shares and additional paid-in capital. Such
      consideration was funded with existing cash balances, borrowings under our
      Revolving Credit Facility and our Term Credit Facility and proceeds from the
      issuance of our Floating Rate Notes (see Note 8—Debt).





In
      May
      2006, our board of directors authorized an increase in the overall amount of
      ordinary shares which may be repurchased under our share repurchase program
      from
      $2.0 billion to $4.0 billion. At September 30, 2006, we had authority to
      repurchase an additional $1.25 billion of our ordinary shares under the program
      (see Note 15 — Subsequent
      Events).





**Note
      7** ― **Income
      Taxes**





We
      are a
      Cayman Islands company, and we are not subject to income tax in the Cayman
      Islands. We operate through our various subsidiaries in a number of countries
      throughout the world. 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 when income earned and taxed in a
      particular country or countries fluctuates from year to year.





The
      estimated annual effective tax rate for the nine months ended September 30,
      2006
      was based on estimated 2006 annual income before income taxes and minority
      interest, after adjusting for certain items such as gains on rig sales. The
      estimated annual effective tax rate for the nine months ended September 30,
      2005
      was based on estimated 2005 annual income before income taxes and minority
      interest, after adjusting for certain items such as a portion of net gains
      on
      sales of assets, items related to the disposition of TODCO and losses on
      retirements of debt.





Our
      income tax returns are subject to review and examination in the various
      jurisdictions in which we operate. We are currently contesting various tax
      assessments. We accrue for income tax contingencies that we believe are probable
      exposures.





Our
      2002,
      2003, 2004 and 2005 U.S. federal income tax returns are currently under
      examination by the U.S. Internal Revenue Service (“IRS”) and our 2001 U.S.
      federal income tax return remains open for examination. In April 2006, we
      received from the IRS examination reports setting forth proposed increases
      to
      the U.S. federal taxable income reported for the period 2001-2003 which would
      reduce our net operating losses by approximately $99 million and result in
      a
      cash tax payment of approximately $0.3 million of alternative minimum tax.
      In
      September 2006, the IRS formally withdrew certain of the proposed adjustments.
      The remaining adjustments would reduce our net operating losses by approximately
      $44 million and result in no cash tax payment. We believe our returns are
      materially correct as filed, and we intend to vigorously defend against any
      proposed changes. While we cannot predict or provide assurance as to the final
      outcome, we do not expect the ultimate settlement of any liability resulting
      from any examination to have a material adverse effect on our consolidated
      financial position, results of operations or cash flows.





In
      April
      2006, we received notice from the Norwegian tax authorities regarding their
      intent to propose adjustments to taxable income for the tax years 1999, 2001
      and
      2002. These proposed assessments could result in an increase in tax of
      approximately $260 million, plus interest and the authorities further indicated
      they intend to impose penalties, which could range from 15 to 60 percent of
      the
      assessments. The anticipated assessments relate to restructuring transactions
      undertaken in 2001 and 2002. The Norwegian tax authorities initiated inquiries
      in September 2004 related to the restructuring transactions and a separate
      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. We have continued to respond to information requests from the
      Norwegian authorities and filed a formal protest to the proposed assessment
      in
      June 2006. We also believe the Norwegian authorities are contemplating a tax
      assessment of approximately $100 million on the dividend, plus interest and
      a
      penalty, which could range from 15 to 60 percent of the assessment. Norwegian
      civil tax and criminal authorities continue to investigate the restructuring
      transactions and dividend. We plan to vigorously contest any assertions by
      the
      Norwegian authorities in connection with the restructuring transactions or
      dividend. While we cannot predict or provide assurance as to the final outcome
      of these proceedings, we do not expect it to have a material adverse effect
      on
      our consolidated financial position, results of operations or cash
      flows.





10
 *Index*





**TRANSOCEAN
      INC. AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)**


(Unaudited)





In
      addition, other tax authorities are examining our tax returns in various
      jurisdictions. While we cannot predict or provide assurance as to the final
      outcome, we do not expect the ultimate settlement of any liability resulting
      from these existing or future assessments to have a material adverse effect
      on
      our consolidated financial position, results of operations or cash flows.





**Note
      8** ― **Debt**





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





September
                30,
              2006
            
            December
                31,
              2005Term
                Credit Facility, due August 2008
            
            $
            900.0
            
            $
            -Floating
                Rate Notes, due September 2008
            
            
            1,000.0
            
            
            -6.625%
                Notes, due April 2011
            
            
            180.8
            
            
            183.07.375%
                Senior Notes, due April 2018
            
            
            246.9
            
            
            246.9Zero
                Coupon Convertible Debentures, due May 2020 (put options exercisable
                May 2008 and May 2013)
            
            
            17.9
            
            
            17.51.5%
                Convertible Debentures, due May 2021 (put options exercisable May
                2011 and
                May 2016) (a)
            
            
            399.9
            
            
            400.08%
                Debentures, due April 2027
            
            
            56.8
            
            
            56.87.45%
                Notes, due April 2027 (put options exercisable April 2007)
                (b)
            
            
            95.4
            
            
            95.37.5%
                Notes, due April 2031
            
            
            597.7
            
            
            597.6Total
                Debt
            
            
            3,495.4
            
            
            1,597.1Less
                Debt Due Within One Year (a) (b)
            
            
            95.4
            
            
            400.0Total
                Long-Term Debt
            
            $
            3,400.0
            
            $
            1,197.1


_________________


(a)
            The
                1.5% Convertible Debentures were classified as debt due within one
                year at
                December 31, 2005 since the holders had the option to require us
                to
                repurchase the debentures in May
                2006.


(b)
            The
                7.45% Notes are classified as debt due within one year at September
                30,
                2006 since the holders can exercise their right to require us to
                repurchase the notes in April 2007.





11
 *Index*





**TRANSOCEAN
      INC. AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)**


(Unaudited)





The
      scheduled maturity of our debt assumes the bondholders exercise their options
      to
      require us to repurchase the 7.45% Notes, Zero Coupon Convertible Debentures
      and
      1.5% Convertible Debentures in April 2007, May 2008 and May 2011, respectively.
      All amounts are at face value except for the Zero Coupon Convertible Debentures,
      which are included at the price we would be required to pay should the
      bondholders exercise their right to require us to repurchase the debentures
      in
      May 2008. The scheduled maturities are as follows (in millions):





Twelve
                Months Ending
              September
                30,2007
            
            $
            100.02008
            
            
            1,919.02009
            
            
            -2010
            
            
            -2011
            
            
            565.5Thereafter
            
            
            903.8Total
            
            $
            3,488.3





*Revolving
      Credit Facility* —In
      May
      2006, we increased the credit limit on the facility under our existing Revolving
      Credit Agreement dated July 8, 2005 (“Revolving Credit Facility”) from $500.0
      million to $1.0 billion and extended the maturity date by one year from July
      2010 to July 2011. At September 30, 2006, we had no amounts outstanding under
      this credit line and $1.0 billion remained available under this
      facility.





*Term
      Credit Facility* —In
      August 2006, we entered into a two-year term credit facility under the Term
      Credit Agreement dated August 30, 2006 (“Term Credit Facility”). Under the terms
      of the Term Credit Facility, we may request borrowings up to $1.0 billion over
      the first six months of the term. At that time, any unused capacity is
      cancelled. Once repaid, the funds cannot be reborrowed. At our election,
      borrowings may be made under the Term Credit Facility at either (i)  the
      base rate, determined as the greater of (a) the prime loan rate and
      (b) the sum of the weighted average overnight federal funds rate plus 50
      basis points, or (ii)  the London Interbank Offered Rate (“LIBOR”) plus 30
      basis points, based on current credit ratings. We pay, based on current credit
      ratings, and as applicable, a fee of 6.5 basis points per annum on the daily
      amount of the unused commitments under the Term Credit Facility. At September
      30, 2006, we had $900 million drawn at an interest rate of 5.66 percent, and
      $100 million remained available under this facility.





*Floating
      Rate Notes* —In
      September 2006, we issued $1.0 billion aggregate principal amount of floating
      rate notes, due September 2008 (“Floating Rate Notes”). We are required to pay
      interest on the Floating Rate Notes on March 5, June 5, September 5 and December
      5 of each year, beginning on December 5, 2006. The per annum interest rate
      on
      the Floating Rate Notes is equal to the three month LIBOR, reset on each payment
      date, plus 20 basis points. We may redeem some or all of the notes at any time
      after September 2007 at a price equal to 100 percent of the principal amount
      plus accrued and unpaid interest, if any. At September 30, 2006, $1.0 billion
      principal amount of these notes was outstanding at an interest rate of 5.59
      percent.





*Debt
      Redemptions and Repayments* —Holders
      of our 1.5% Convertible Debentures, due May 15, 2021 had the option to require
      us to repurchase their debentures in May 2006; however, no holders exercised
      such right. In May 2006, holders of $101,000 aggregate principal amount
      converted their debentures into ordinary shares at a conversion rate of 13.8627
      ordinary shares per $1,000 debenture, resulting in the issuance of 1,399
      ordinary shares.





In
      July
      2005, we acquired, pursuant to a tender offer, a total of $534.4 million, or
      approximately 76.3 percent, of the aggregate principal amount of our 6.625%
      Notes due April 2011 at 110.578 percent of face value, or $590.9 million, plus
      accrued and unpaid interest. In the third quarter of 2005, we recognized a
      gain
      on the redemption of debt of $0.2 million, which had no tax effect and reflected
      adjustments for the unamortized fair value adjustment on a previously terminated
      interest rate swap. We funded the repurchase with existing cash
      balances.





12
 *Index*





**TRANSOCEAN
      INC. AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)**


(Unaudited)





In
      July
      2005 and in conjunction with entering into the Revolving Credit Facility, we
      terminated our then existing $800.0 million, five-year revolving credit
      agreement and recognized a loss on the termination of this agreement of $0.8
      million in the third quarter of 2005.





In
      May
      2005, we repaid the remaining principal amount outstanding for the 7.31%
      Nautilus Class A1 amortizing note, plus accrued and unpaid interest, in
      accordance with its scheduled maturity. We funded the repayment with existing
      cash balances.





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 merger transaction with R&B Falcon
      Corporation (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.





**Note
      9** — **Interest
      Rate Swaps**





In
      2003,
      we terminated all our outstanding interest rate swaps, which were designated
      as
      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 and nine months ended September 30, 2006,
      such
      reduction amounted to $0.8 million and $2.3 million ($0.01 per diluted share),
      respectively. ** During
      the three and nine months ended September 30, 2005, such reduction amounted
      to
      $1.3 million and $8.3 million ($0.02 per diluted share), respectively. As a
      result of the redemption of our 6.95% Senior Notes in March 2005, we recognized
      $13.2 million ($0.08 per diluted share) of the unamortized fair value
      adjustment, which had no tax effect, as a reduction to our loss on redemption
      of
      debt (see Note 8—Debt). At September 30, 2006 and December 31, 2005, the
      remaining balance to be amortized was $15.6 million and $17.9 million,
      respectively, and related to the 6.625% Notes, due April 2011.





At
      September 30, 2006, we had no outstanding interest rate swaps.





13
 *Index*





**TRANSOCEAN
      INC. AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)**


(Unaudited)





**Note
      10** ― **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
              September
                30,
            
            Nine
                Months Ended
              September
                30,2006
            
            2005
            
            2006
            
            2005**Numerator
                for Basic Earnings per Share**Net
                Income for basic earnings per share
            
            $
            309.0
            
            $
            170.4
            
            $
            764.2
            
            $
            564.0**Numerator
                for Diluted Earnings per Share**Net
                Income
            
            $
            309.0
            
            $
            170.4
            
            $
            764.2
            
            $
            564.0Add
                back interest expense on the 1.5% convertible debentures
            
            
            1.6
            
            
            1.6
            
            
            4.7
            
            
            4.7Net
                Income for diluted earnings per share
            
            $
            310.6
            
            $
            172.0
            
            $
            768.9
            
            $
            568.7**Denominator
                for Diluted Earnings per Share**Weighted-average
                shares outstanding for basic earnings per share
            
            
            312.0
            
            
            328.9
            
            
            320.3
            
            
            326.2Effect
                of dilutive securities:Employee
                stock options and unvested stock grants
            
            
            3.3
            
            
            3.6
            
            
            3.7
            
            
            4.0Warrants
                to purchase ordinary shares
            
            
            2.6
            
            
            2.8
            
            
            2.8
            
            
            2.81.5%
                convertible debentures
            
            
            5.5
            
            
            5.5
            
            
            5.5
            
            
            5.5Adjusted
                weighted-average shares and assumed conversions for diluted earnings
                per
                share
            
            
            323.4
            
            
            340.8
            
            
            332.3
            
            
            338.5**Basic
                Earnings Per Share**Net
                Income
            
            $
            0.99
            
            $
            0.52
            
            $
            2.39
            
            $
            1.73**Diluted
                Earnings Per Share**Net
                Income
            
            $
            0.96
            
            $
            0.50
            
            $
            2.31
            
            $
            1.68





Ordinary
      shares subject to issuance pursuant to the conversion features of the Zero
      Coupon 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
      11** ― **Contingencies**





*Legal
      Proceedings* —Several
      of our subsidiaries have been named, along with numerous unaffiliated
      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. Further, the
      complaints name other unaffiliated defendant companies, including companies
      that
      allegedly manufactured drilling related products containing asbestos. 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 generally
      seek awards of unspecified compensatory and punitive damages. The trial court
      has ordered that the plaintiffs provide additional information regarding their
      employment histories. We have not yet had an opportunity to conduct extensive
      discovery nor have we been able to determine the number of plaintiffs 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 or cash
      flows.





14
 *Index*





**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 $10 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 $9 million. We are continuing to challenge the
      assessment and filed a writ of mandamus to stay execution of a related tax
      foreclosure proceeding. The government is currently attempting to enforce the
      judgment on this assessment and the amount claimed is approximately $24 million,
      which exceeds the amount we believe is at issue. We received a favorable
      ruling in connection with a disputed August 1990 assessment, and the government
      has lost what is expected to be its final appeal with respect to 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. 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 or 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”)
      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 dismissed the Customs
      Department appeal and affirmed the CESTAT order but the Customs Department
      has
      not agreed with our interpretation of that order. We are contesting their
      interpretation. 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
      or
      cash flows.





15
 *Index*





**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 or 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
      $71
      million. We believe that the amount of the assessment, even if it were
      appropriate, should only be approximately $7 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 or cash
      flows.





We
      have a
      dispute with TODCO concerning payment to us under our tax sharing agreement
      with
      TODCO for the tax benefit that TODCO derives from exercises of options to
      purchase our ordinary shares held by employees of TODCO. An arbitration
      proceeding that was initiated in January 2006 continues and is expected to
      be
      concluded during the fourth quarter of 2006. We are seeking payment of the
      amount of tax benefits derived from exercises of options to purchase our
      ordinary shares by employees of TODCO who were not on the payroll of TODCO
      at
      the time of exercise and a declaration that TODCO pay us for the benefit derived
      from such exercises in the future. TODCO is seeking to avoid such payment and
      is
      asking that the entire tax sharing agreement be voided. TODCO filed suit in
      January 2006 in state district court in Houston seeking to set aside the
      arbitration provision and to void the entire tax sharing agreement. The state
      district court denied TODCO’s claim that the arbitration clause is
      unenforceable, compelled arbitration of the remaining claims asserted in the
      lawsuit, and stayed the lawsuit until the arbitration proceeding is concluded.
      We believe TODCO owes us approximately $22.3 million, exclusive of interest,
      based on options exercised through September 30, 2006 and $2.8 million in
      payments already made by TODCO through September 30, 2006. We do not believe
      TODCO’s attempts to void the tax sharing agreement have merit. We do not expect
      the outcome of this matter to have a material adverse effect on our consolidated
      financial position, results of operations or 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 or cash flows. We are also involved in various
      tax matters (see Note 7—Income Taxes).





16
 *Index*





**TRANSOCEAN
      INC. AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)**


(Unaudited)





*Other
      Legal Matters* —In
      the
      third quarter of 2006, we received tax assessments of approximately $100 million
      from the state tax authorities of Rio de Janeiro in Brazil against one of our
      Brazilian subsidiaries for customs taxes on equipment imported into the state
      in
      connection with our operations. The assessments resulted from a preliminary
      finding by these authorities that our subsidiary’s record keeping practices were
      deficient. We continue to review documents related to the assessments, and
      while
      our review is not complete, we currently believe that the substantial majority
      of these assessments are without merit. We filed an initial response with the
      Rio de Janeiro tax authorities on September 9, 2006 refuting these
      additional tax assessments. While we cannot predict or provide assurance as
      to
      the final outcome of these proceedings, we do not expect it to have a material
      adverse effect on our consolidated financial position, results of operations
      or
      cash flows.





*Retained
      Risk* —We
      retain the risk through self-insurance and our wholly-owned captive insurance
      company for the deductible portion of our insurance coverage as well as losses
      due to hurricanes in the U.S. Gulf of Mexico in excess of $250 million in
      aggregate annually, except in the case of a total loss of a rig where the annual
      limit is approximately $300 million in aggregate. 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.





*Letters
      of Credit and Surety Bonds* —We
      had
      letters of credit outstanding totaling $401.7 million and $313.8 million at
      September 30, 2006 and December 31, 2005, 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
      $6.4 million and $8.0 million at September 30, 2006 and December 31, 2005,
      respectively.





**Note
      12** ― **Stock-Based
      Compensation**





We
      have a
      long-term incentive plan for executives, key employees and outside directors
      (the “Incentive Plan”). Under the Incentive Plan, awards can be granted in the
      form of stock options, restricted shares, deferred units, stock appreciation
      rights (“SARs”) and cash performance awards. Such awards include traditional
      time-vesting awards (“time-based vesting awards”) and awards that are earned
      based on the achievement of certain performance criteria (“performance-based
      awards”). Our executive compensation committee of our board of directors
      determines the terms and conditions of the awards under the Incentive Plan.
      Options issued to date under the Incentive Plan have a 10-year term. Time-based
      vesting awards typically vest in three equal annual installments beginning
      on
      the first anniversary date of the grant. Performance-based awards issued to
      date
      under the Incentive Plan have a two-year performance period with the number
      of
      options, shares or deferred units earned being determined following the
      completion of the performance period (the “determination date”) at which time
      one-third of the options, shares or deferred units vest. Additional vesting
      occurs on January 1 of the two subsequent years following the determination
      date. As of September 30, 2006, we were authorized under the Incentive Plan
      to
      grant awards covered by up to (i) 22.9 million ordinary shares, which includes
      up to 6.0 million restricted shares, to employees and (ii) 0.6 million
      ordinary shares to outside directors.





Prior
      to
      adoption of SFAS 123(R), we used the Black-Scholes-Merton model to value stock
      options granted or modified under SFAS 123 and have elected to continue using
      this model to value stock options granted or modified under SFAS 123(R). We
      determine the fair value of options granted or modified based on the expected
      term, risk-free interest rate, dividend yield and expected volatility. The
      expected term is based on historical information of past employee behavior
      regarding exercises and forfeiture of options. The
      risk-free interest rate assumption is based upon the published U.S. Treasury
      yield curve in effect at the time of grant for instruments with a similar life.
      The dividend yield assumption is based on our history and expectation of
      dividend payouts.





17
 *Index*





**TRANSOCEAN
      INC. AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)**


(Unaudited)





Under
      SFAS 123, we based expected volatility solely on historical data. Upon the
      adoption of SFAS 123(R), we began using a blended volatility for the volatility
      assumption. We changed the calculation of our volatility to better reflect
      our
      expectation of how our stock will react to the future cyclicality of our
      industry. The blended volatility is calculated using two components. The first
      component is derived from volatility computed from historical data for a period
      of time approximately equal to the expected term of the stock option, starting
      from the date of grant. The second component is the implied volatility derived
      from our ‘at-the-money’ long dated call options with a term of six months or
      longer. The two components are equally weighted creating a blended volatility.
      This change in estimate did not have a material effect on our consolidated
      financial statements.




The
      fair
      value for restricted ordinary shares and deferred units is based on the market
      price of our ordinary shares on the date of grant.





As
      of
      September 30, 2006, total unrecognized compensation costs related to all
      unvested share-based awards totaled $41.1 million, which is expected to be
      recognized over a weighted average period of 2.5 years.





*Time-Based
      Vesting Awards*





*Stock
      Options* **—** The
      following table summarizes vested and unvested time-based vesting stock option
      (“time-based options”) activity under the Incentive Plan during the period ended
      September 30, 2006:





Number
                of Shares Under Option
            
            Weighted-Average
                Exercise Price per Share
            
            Weighted-Average
                Remaining Contractual Term
              (years)
            
            Aggregate
                Intrinsic Value
              (in
                millions)Outstanding
                at January 1, 2006
            
            
            6,312,707
            
            $
            29.43Exercised
            
            
            (1,248,079
            )
            
            29.85Forfeited
            
            
            (480
            )
            
            55.98Outstanding
                at March 31, 2006
            
            
            5,064,148
            
            
            29.32
            
            
            4.23
            
            $
            259.7Granted
            
            
            2,270
            
            
            81.45Exercised
            
            
            (683,863
            )
            
            34.97Forfeited
            
            
            (12
            )
            
            29.61Outstanding
                at June 30, 2006
            
            
            4,382,543
            
            
            28.46
            
            
            4.06
            
            $
            224.9Exercised
            
            
            (27,743
            )
            
            33.10Forfeited
            
            
            (322
            )
            
            46.80Outstanding
                at September 30, 2006
            
            
            4,354,478
            
            $
            28.43
            
            
            3.81
            
            $
            193.1Vested
                or expected to vest as of September 30, 2006
            
            
            4,347,867
            
            $
            28.43
            
            
            3.81
            
            $
            192.8Exercisable
                at September 30, 2006
            
            
            4,268,694
            
            $
            28.51
            
            
            3.79
            
            $
            189.0





Time-based
      options expected to vest in the table above include options that have not time
      vested, where the amount is net of a discount for our estimated termination
      related forfeitures. No time-based options were granted during the three and
      nine months ended September 30, 2005. The total pretax intrinsic value of
      time-based options exercised during the three and nine months ended September
      30, 2006 was $1.1 million and $95.5 million, respectively. The total pretax
      intrinsic value of time-based options exercised during the three and nine months
      ended September 30, 2005 was $37.0 million and $169.1 million,
      respectively.





18
 *Index*





**TRANSOCEAN
      INC. AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)**


(Unaudited)





The
      following table summarizes unvested time-based option activity under the
      Incentive Plan during the period ended September 30, 2006:





Number
                of Shares Under Option
            
            Weighted-Average
                Grant-Date Fair Value per ShareUnvested
                at January 1, 2006
            
            
            184,998
            
            $
            8.16Vested
            
            
            (79,143
            )
            
            8.55Unvested
                at March 31, 2006
            
            
            105,855
            
            
            7.87Granted
            
            
            2,270
            
            
            32.01Vested
            
            
            (14,000
            )
            
            7.32Forfeited
            
            
            (7
            )
            
            14.12Unvested
                at June 30, 2006
            
            
            94,118
            
            
            9.62Vested
            
            
            (8,334
            )
            
            7.72Unvested
                at September 30, 2006
            
            
            85,784
            
            $
            9.81





The
      total
      grant-date fair value of time-based options vested during the three and nine
      months ended September 30, 2006 was $0.1 million and $0.9 million, respectively.
      There were 435,657 and 542,576 time-based options that vested during the three
      and nine months ended September 30, 2005, respectively. The total grant-date
      fair value of time-based options that vested during the three and nine months
      ended September 30, 2005 was $5.3 million and $6.2 million,
      respectively.





*Restricted
      Ordinary Shares* **—** The
      following table summarizes unvested share activity for time-based vesting
      restricted ordinary shares (“time-based shares”) granted under the Incentive
      Plan during the period ended September 30, 2006:





Number
                of Shares
            
            Weighted-Average
                Grant-Date Fair Value per ShareUnvested
                at January 1, 2006
            
            
            46,940
            
            $
            42.36Granted
            
            
            8,400
            
            
            69.39Vested
                and distributed
            
            
            (6,719
            )
            
            43.51Unvested
                at March 31, 2006
            
            
            48,621
            
            
            47.13Granted
            
            
            1,575
            
            
            82.36Forfeited
            
            
            (433
            )
            
            28.12Unvested
                at June 30, 2006
            
            
            49,763
            
            
            48.42Granted
            
            
            359,254
            
            
            78.60Vested
                and distributed
            
            
            (11,370
            )
            
            34.98Forfeited
            
            
            (2,914
            )
            
            75.54Unvested
                at September 30, 2006
            
            
            394,733
            
            $
            76.07





There
      were 12,866 and 33,016 time-based shares granted during the three and nine
      months ended September 30, 2005, with a weighted-average grant-date fair value
      of $56.34 and $48.51 per share, respectively. The total grant-date fair value
      of
      time-based shares that vested during the three and nine months ended September
      30, 2006 was $0.4 million and $0.7 million, respectively. There were 12,359
      time-based shares that vested during the three and nine months ended September
      30, 2005 with a total grant-date fair value of $0.3 million.





19
 *Index*





**TRANSOCEAN
      INC. AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)**


(Unaudited)





*Deferred
      Units* **—** A
      deferred unit is a unit that is equal to one ordinary share but has no voting
      rights until the underlying ordinary shares are issued. The following table
      summarizes unvested activity for time-based vesting deferred units (“time-based
      units”) granted under the Incentive Plan during the period ended September 30,
      2006:





Number
                of Units
            
            Weighted-Average
                Grant-Date Fair Value per ShareUnvested
                at January 1 and March 31, 2006
            
            
            30,776
            
            $
            37.48Granted
            
            
            13,527
            
            
            88.83Vested
            
            
            (12,288
            )
            
            35.57Unvested
                at June 30, 2006
            
            
            32,015
            
            
            59.90Granted
            
            
            27,440
            
            
            78.61Vested
                and distributed
            
            
            (2,001
            )
            
            37.77Unvested
                at September 30, 2006
            
            
            57,454
            
            $
            69.61





No
      time-based units were granted during the three months ended September 30, 2005.
      There were 18,600 time-based units granted during the nine months ended
      September 30, 2005, with a weighted-average grant-date fair value of $45.02
      per
      share. The total grant-date fair value of the time-based units vested during
      the
      three and nine months ended September 30, 2006 was $0.1 million and $0.5
      million, respectively. No time-based units vested during the three months
      ended September 30, 2005.  There were 6,080 time-based units vested during
      the nine months ended September 30, 2005. The total grant-date fair value of
      the
      time-based units vested was $0.2 million for the nine months ended September
      30,
      2005.





*SARs* **—** The
      following table summarizes time-based vesting SARs activity under the Incentive
      Plan during the period ended September 30, 2006:





Number
                of SARs
            
            Weighted-Average
                Exercise Price per Share
            
            Weighted-Average
                Remaining Contractual Term
              (years)
            
            Aggregate
                Intrinsic Value
              (in
                millions)Outstanding
                at January 1, 2006
            
            
            50,976
            
            $
            35.43Exercised
            
            
            (12,690
            )
            
            33.18Outstanding
                at March 31, 2006
            
            
            38,286
            
            
            36.18
            
            
            2.79
            
            $
            1.7Exercised
            
            
            (3,700
            )
            
            38.46Outstanding
                at June 30, 2006
            
            
            34,586
            
            
            35.94
            
            
            2.50
            
            $
            1.5Cancelled
            
            
            (2,000
            )
            
            28.00Outstanding
                at September 30, 2006
            
            
            32,586
            
            $
            36.43
            
            
            2.39
            
            $
            1.2Exercisable
                at September 30, 2006
            
            
            32,586
            
            $
            36.43
            
            
            2.39
            
            $
            1.2





No
      SARs
      were granted during the three and nine months ended September 30, 2006 and
      2005.
      The total pretax intrinsic value of SARs exercised during the nine months ended
      September 30, 2006 was $0.8 million. There were 23,955 and 76,517 SARs exercised
      during the three and nine months ended September 30, 2005, respectively. The
      total pretax intrinsic value of SARs exercised during the three and nine months
      ended September 30, 2005 was $0.6 million and $1.3 million, respectively. As
      of
      September 30, 2006, all SARs granted under the Incentive Plan are fully vested.
      During the three and nine months ended September 30, 2005, 5,636 and 6,053
      SARs
      vested, respectively. The total grant-date fair value of SARs vested during
      the
      three and nine months ended September 30, 2005 was $0.2 million.





20
 *Index*





**TRANSOCEAN
      INC. AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)**


(Unaudited)





*Performance-Based
      Awards*





*Stock
      Options* **—** We
      granted performance-based stock options (“performance-based options”) that can
      be earned depending on the achievement of certain performance targets. The
      number of options earned is quantified upon completion of the performance period
      at the determination date. The following table summarizes vested and unvested
      performance-based option activity under the Incentive Plan during the period
      ended September 30, 2006:





Number
                of Shares Under Option
            
            Weighted-Average
                Exercise Price per Share
            
            Weighted-Average
                Remaining Contractual Term
              (years)
            
            Aggregate
                Intrinsic Value
              (in
                millions)Outstanding
                at January 1, 2006
            
            
            1,253,125
            
            $
            33.19Exercised
            
            
            (84,704
            )
            
            21.20Outstanding
                at March 31, 2006
            
            
            1,168,421
            
            
            34.06
            
            
            8.28
            
            $
            54.4Exercised
            
            
            (81,950
            )
            
            24.41Forfeited
                or cancelled
            
            
            (151,314
            )
            
            28.12Outstanding
                at June 30, 2006
            
            
            935,157
            
            
            35.86
            
            
            8.08
            
            $
            41.1Granted
            
            
            322,613
            
            
            78.61Exercised
            
            
            (132
            )
            
            21.20Outstanding
                at September 30, 2006
            
            
            1,257,638
            
            $
            46.83
            
            
            8.33
            
            $
            32.6Vested
                or expected to vest at September 30, 2006
            
            
            804,264
            
            $
            36.22
            
            
            7.84
            
            $
            29.4Exercisable
                at September 30, 2006
            
            
            197,305
            
            $
            24.20
            
            
            7.21
            
            $
            9.6





The
      number of performance-based options expected to vest in the table above includes
      both (i) options that have reached their determination date but have not time
      vested, in which case the amount is net of a discount for our estimated
      termination-related forfeitures, and (ii) option grants that have not reached
      their determination date, in which case the amount is net of a discount for
      expected forfeitures based upon our current estimate of the number of options
      expected to be earned using the performance criteria at the determination date.
      There were 324,714 performance-based options granted during the three and nine
      months ended September 30, 2005, with a weighted-average grant-date fair value
      of $56.34 per share. The total pretax intrinsic value of performance-based
      options exercised during the three months ended September 30, 2006 was less
      than
      $0.1 million. The total pretax intrinsic value of performance-based options
      exercised during the nine months ended September 30, 2006 was $9.5 million.
      There were 3,278 and 88,473 performance-based options exercised during the
      three
      and nine months ended September 30, 2005, respectively. The total pretax
      intrinsic value of performance-based options exercised during the three and
      nine
      months ended September 30, 2005 was $0.1 million and $2.7 million,
      respectively.





21
 *Index*





**TRANSOCEAN
      INC. AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)**


(Unaudited)





The
      following table summarizes unvested performance-based option activity under
      the
      Incentive Plan during the period ended September 30, 2006:





Number
                of Shares Under Option
            
            Weighted-Average
                Grant-Date Fair Value per ShareUnvested
                at January 1, 2006
            
            
            1,178,535
            
            $
            13.12Vested
            
            
            (166,016
            )
            
            8.55Unvested
                at March 31, 2006
            
            
            1,012,519
            
            
            13.87Vested
            
            
            (123,485
            )
            
            11.26Forfeited
                or cancelled
            
            
            (151,314
            )
            
            11.26Unvested
                at June 30, 2006
            
            
            737,720
            
            
            14.84Granted
            
            
            322,613
            
            
            30.47Unvested
                at September 30, 2006
            
            
            1,060,333
            
            $
            19.60





Unvested
      options include options that have not reached their determination date and
      thus
      the number of such options could be reduced due to the performance criteria
      applied at the determination date. Options forfeited or cancelled include the
      adjustment of options at the determination date due to the application of the
      performance criteria. The total grant-date fair value of performance-based
      options vested during the nine months ended September 30, 2006 was $2.8 million.
      No performance-based options vested during the three months ended September
      30,
      2005. During the nine months ended September 30, 2005, 166,013 performance-based
      options vested, with a total grant-date fair value of $1.4 million.





*Restricted
      Ordinary Shares* **—** We
      grant
      performance-based restricted ordinary shares (“performance-based shares”) that
      can be earned depending on the achievement of certain performance targets.
      The
      number of shares earned is quantified upon completion of the performance period
      at the determination date. The following table summarizes unvested share
      activity for performance-based shares granted under the Incentive Plan during
      the period ended September 30, 2006:





Number
                of Shares
            
            Weighted-Average
                Grant-Date Fair Value per ShareUnvested
                at January 1, 2006
            
            
            1,242,829
            
            $
            35.562004
                Performance-based shares converted to deferred units
            
            
            (133,932
            )
            
            28.122005
                Performance-based shares converted to deferred units
            
            
            (103,152
            )
            
            56.34Vested
                and distributed
            
            
            (130,030
            )
            
            21.20Forfeited
            
            
            (2,364
            )
            
            21.20Unvested
                at March 31, 2006
            
            
            873,351
            
            
            36.42Vested
                and distributed
            
            
            (118,139
            )
            
            28.12Forfeited
                or cancelled
            
            
            (149,851
            )
            
            28.74Unvested
                at June 30, 2006
            
            
            605,361
            
            
            39.79Granted
            
            
            70,935
            
            
            78.61Vested
                and distributed
            
            
            (869
            )
            
            22.60Forfeited
            
            
            (4,607
            )
            
            40.65Unvested
                at September 30, 2006
            
            
            670,820
            
            $
            43.91




22
 *Index*





**TRANSOCEAN
      INC. AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)**


(Unaudited)





Unvested
      shares include shares that have not reached their determination date and thus
      the number of such shares could be reduced due to the performance criteria
      applied at the determination date. Shares forfeited or cancelled include the
      adjustment of shares at the determination date due to the application of the
      performance criteria. There were 406,251 performance-based shares granted during
      the three and nine months ended September 30, 2005, with a weighted-average
      grant-date fair value of $56.34 per share. The total grant-date fair value
      of
      performance-based shares that vested during the three months ended September
      30,
      2006 was less than $0.1 million. The total grant-date fair value of
      performance-based shares that vested during the nine months ended September
      30,
      2006 was $6.1 million. No performance-based shares vested during the three
      months ended September 30, 2005. There were 195,670 performance-based shares
      that vested during the nine months ended September 30, 2005 with a total
      grant-date fair value of $4.1 million.





*Deferred
      Units* **—** We
      grant
      performance-based deferred units (“performance-based units”) that can be earned
      depending on the achievement of certain performance targets. The number of
      units
      earned is quantified upon completion of the performance period at the
      determination date. The following table summarizes unvested unit activity for
      performance-based units granted under the Incentive Plan during the period
      ended
      September 30, 2006:





Number
                of Units
            
            Weighted-Average
                Grant-Date Fair Value per ShareUnvested
                at January 1, 2006
            
            
            91,338
            
            $
            29.152004
                Performance-based shares converted to deferred units
            
            
            133,932
            
            
            28.122005
                Performance-based shares converted to deferred units
            
            
            103,152
            
            
            56.34Vested
                and distributed
            
            
            (13,790
            )
            
            21.20Forfeited
            
            
            (593
            )
            
            21.20Unvested
                at March 31, 2006
            
            
            314,039
            
            
            38.01Vested
                and distributed
            
            
            (45,152
            )
            
            28.12Forfeited
                or cancelled
            
            
            (64,282
            )
            
            28.90Unvested
                at June 30, 2006
            
            
            204,605
            
            
            42.46Granted
            
            
            108,215
            
            
            78.61Forfeited
            
            
            (299
            )
            
            21.20Unvested
                at September 30, 2006
            
            
            312,521
            
            $
            55.00





Unvested
      units include units that have not reached their determination date and thus
      the
      number of such units could be reduced due to the performance criteria applied
      at
      the determination date. Units forfeited or cancelled include the adjustment
      of
      units at the determination date due to the application of the performance
      criteria. There were 109,599 performance-based units granted during the three
      and nine months ended September 30, 2005, with a weighted-average grant-date
      fair value of $56.34 per share. The total grant-date fair value of
      performance-based units that vested during the nine months ended September
      30,
      2006 was $1.6 million. There were 390 and 15,444 performance-based units
      that vested during the three and nine months ended September 30, 2005,
      respectively.  The
      total
      grant-date fair value of the performance-based units that vested during the
      nine
      months ended September 30, 2005 was $0.3 million. The total grant-date fair
      value of the performance-based units that vested during the three months ended
      September 30, 2005 was less than $0.1 million.





**Note
      13** ― **Stock
      Warrants**





At September
      30 ,
      2006,
      there were 203,900 warrants outstanding to purchase 3,568,250 ordinary shares
      at
      an exercise price of $19.00 per share. The warrants expire on May 1, 2009.
      On March
      1 ,
      2006,
      we issued 333,039 ordinary shares related to a cashless exercise of 25,100
      warrants.





23
 *Index*





**TRANSOCEAN
      INC. AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)**


(Unaudited)





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





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





Three
                Months Ended
              September
                30,
            
            Nine
                Months Ended
              September
                30,2006
            
            2005
            
            2006
            
            2005**Components
                of Net Periodic Benefit Cost (a)**Service
                cost
            
            $
            5.1
            
            $
            4.5
            
            $
            15.3
            
            $
            13.6Interest
                cost
            
            
            4.8
            
            
            4.4
            
            
            14.4
            
            
            13.3Expected
                return on plan assets
            
            
            (5.0
            )
            
            (5.1
            )
            
            (15.1
            )
            
            (15.4
            )Amortization
                of transition obligation
            
            
            (0.1
            )
            
            0.1
            
            
            0.2
            
            
            0.2Amortization
                of prior service cost
            
            
            0.1
            
            
            (1.0
            )
            
            0.5
            
            
            (0.6
            )Recognized
                net actuarial losses
            
            
            0.7
            
            
            2.1
            
            
            3.5
            
            
            4.0SFAS
                88 settlements/curtailments
            
            
            -
            
            
            -
            
            
            -
            
            
            2.1Benefit
                cost
            
            $
            5.6
            
            $
            5.0
            
            $
            18.8
            
            $
            17.2


______________


(a)
            Amounts
                are before income tax effect.





We
      expect
      to contribute approximately $9.7 million to our defined benefit pension plans
      in
      2006, which will be funded from cash flow from operations. During the nine
      months ended September 30, 2006, we contributed $7.7 million to the defined
      benefit pension plans.





*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
              September
                30,
            
            Nine
                Months Ended
              September
                30,2006
            
            2005
            
            2006
            
            2005**Components
                of Net Periodic Benefit Cost (a)**Service
                cost
            
            $
            0.3
            
            $
            0.4
            
            $
            0.8
            
            $
            1.0Interest
                cost
            
            
            0.5
            
            
            0.5
            
            
            1.6
            
            
            1.6Amortization
                of prior service cost
            
            
            (0.6
            )
            
            (0.6
            )
            
            (1.7
            )
            
            (1.7
            )Recognized
                net actuarial losses
            
            
            0.4
            
            
            0.4
            
            
            1.1
            
            
            1.2Benefit
                cost
            
            $
            0.6
            
            $
            0.7
            
            $
            1.8
            
            $
            2.1


______________


(a)
            Amounts
                are before income tax effect.





We
      expect
      to contribute approximately $2.3 million to the other postretirement benefit
      plans in 2006, which will be funded from cash flow from operations. During
      the
      nine months ended September 30, 2006, we contributed $1.9 million to the other
      postretirement benefit plans.





24
 *Index*





**TRANSOCEAN
      INC. AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)**


(Unaudited)





**Note
      15** **―Subsequent
      Events**




*Repurchase
      of Ordinary Shares* —In
      October 2006, we repurchased and retired $250 million of our ordinary shares,
      which amounted to approximately 3.5 million ordinary shares at an average
      purchase price of $71.79 per share. Total consideration was funded with existing
      cash balances, proceeds from the issuance of the Floating Rate Notes and
      borrowings under the Term Credit Facility.





*Asset
      Dispositions—* In
      October 2006, we completed the sale of the tender rig *Searex
      IX* for net
      proceeds of approximately $16.0 million and expect to recognize a pre-tax gain
      on the sale of approximately $14.0 million.




25
 *Index*





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





**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, results of operations, commodity prices, customer
      drilling programs, supply and demand, utilization rates, dayrates, contract
      backlog, planned shipyard projects and rig mobilizations and their effects,
      newbuild projects and opportunities, the upgrade projects for the *Sedco
      700* -series
      semisubmersible rigs, other major upgrades, rig reactivations, expected
      downtime ,
      capital
      expenditures and insurance proceeds, 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, effects of new rigs on the market, income
      related to the TODCO tax sharing agreement, the TODCO tax sharing agreement
      dispute, uses of excess cash, including ordinary share repurchases, the timing
      and funding of share repurchases, debt reduction, planned asset sales, including
      the disposition of the *Transocean Wildcat,* timing of asset sales,
      proceeds from asset sales, our effective tax rate, changes in tax laws, treaties
      and regulations, tax assessments, 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, adoption of accounting policies, pension plan and other
      postretirement benefit plan contributions and benefit payments 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 1A. Risk Factors” included herein and in our Annual
      Report on Form 10-K for the year ended December 31, 2005, the adequacy of
      sources of liquidity, the effect and results of litigation, audits,
      contingencies and
      other
      factors discussed in this quarterly report and in our other filings with the
      Securities and Exchange Commission (“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 the Company 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.





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, 2005.





**Overview**





Transocean
      Inc. (together with its 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 October 31, 2006, we owned, had partial ownership interests in
      or
      operated 82 mobile offshore and barge drilling units. As of this date, our
      fleet
      included 33 High-Specification semisubmersibles and drillships (“floaters”), 20
      Other Floaters, 25 Jackup Rigs and four Other Rigs.





26
 *Index*





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
              September
                30,
            
            
            
            Nine
                Months Ended
              September
                30,2006
            
            2005
            
            Change
            
            2006
            
            2005
            
            Change(In
                millions, except average daily revenue and percentages)**Average
                daily revenue (a)(c)**
            
            $
            146,900
            
            $
            107,100
            
            $
            39,800
            
            $
            132,000
            
            $
            102,400
            
            $
            29,600**Utilization
                (b)(c)**
            
            
            87
            %
            
            82
            %
            
            N/A
            
            
            83
            %
            
            79
            %
            
            N/A**Statement
                of Operations**Operating
                revenues
            
            $
            1,025.7
            
            $
            762.6
            
            $
            263.1
            
            $
            2,696.3
            
            $
            2,120.5
            
            $
            575.8Operating
                and maintenance expense
            
            
            560.9
            
            
            438.3
            
            
            122.6
            
            
            1,585.2
            
            
            1,263.6
            
            
            321.6Operating
                income
            
            
            390.7
            
            
            203.5
            
            
            187.2
            
            
            963.3
            
            
            531.6
            
            
            431.7Net
                income
            
            
            309.0
            
            
            170.4
            
            
            138.6
            
            
            764.2
            
            
            564.0
            
            
            200.2





September
                30,
              2006
            
            December
                31,
              2005
            
            Change(In
                millions)**Balance
                Sheet Data (at end of period)**Cash
                and Cash Equivalents
            
            $
            407.1
            
            $
            445.4
            
            $
            (38.3
            )Total
                Assets
            
            
            11,178.3
            
            
            10,457.2
            
            
            721.1Total
                Debt
            
            
            3,495.4
            
            
            1,597.1
            
            
            1,898.3


_____________________


“N/A”
      means not applicable.





(a)
            Average
                daily revenue 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)
            Excludes
                a drillship engaged in scientific geological coring activities, the*Joides
                Resolution*,
                that is owned by a joint venture in which we have a 50 percent interest
                and is accounted for under the equity method of
                accounting.





Even
      with
      the recent decrease in oil and natural gas prices, we continue to experience
      strong demand for all of our asset classes, which has resulted in high
      utilization and historically high dayrates. We are seeing leading dayrates
      at or
      near record levels for most rig classes and customer interest for multi-year
      contracts. Interest in high-specification floaters remains particularly
      strong.





A
      shortage of qualified personnel in our industry is driving up compensation
      costs
      and suppliers are increasing prices as their backlogs grow. These labor and
      vendor cost increases, while meaningful, are not expected to be significant
      in
      comparison with our expected increase in revenue for 2006 and beyond.





Our
      revenues for the nine months ended September 30, 2006 increased from the prior
      year period as a result of increased activity and higher dayrates. Our operating
      and maintenance expenses for the same period increased primarily as a result
      of
      higher labor and rig maintenance costs in connection with such increased
      activity as well as inflationary cost increases (see “—Operating Results”). In
      addition, our financial results for the nine months ended September 30, 2006
      included the recognition of gains from the sale of six rigs (see “—Liquidity and
      Capital Resources-Capital Expenditures and Dispositions”). Our financial results
      for the nine months ended September ** 30,
      2005 ** included
      the gain from the disposition of our then remaining investment in TODCO as
      well
      as gains from the sale of three rigs, partially offset by a non-cash charge
      pertaining to a loss on retirement of debt (see “—Operating Results”). Cash
      decreased during the nine months ended September 30, 2006 primarily as a result
      of repurchases of our ordinary shares.





27
 *Index*





We
      operate in one business segment which consists of floaters, jackups and other
      rigs used in support of offshore drilling activities and offshore support
      services on a worldwide basis. Our fleet operates in a single, global market
      for
      the provision of contract drilling services. The location of our rigs and the
      allocation of resources to build or upgrade rigs are 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 construction cycle that occurred from approximately
      1996
      to 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.




**Significant
      Events**





*Discoverer
      534 Operational Incident* —In
      August 2006, an operational incident occurred on our deepwater drillship *Discoverer
      534* during a
      tropical storm in the South China Sea, which resulted in the loss of
      approximately 3,900 feet of marine riser and the blowout preventer (“BOP”). No
      personnel were injured in the incident. The rig had successfully completed
      a
      well and was retrieving its marine riser and BOP when operations were suspended
      due to deteriorating weather conditions. We have since recovered the BOP. The
      rig is currently undergoing an unrelated planned repair and general maintenance
      shipyard project and is scheduled to be back in service in April 2007.  The
      loss of the riser and other costs related to the incident did not have a
      material effect on our consolidated statement of operations.





*Hurricane
      Damage* —In
      the
      third quarter of 2005, two of our semisubmersible rigs, the *Deepwater
      Nautilus* and the *Transocean
      Marianas* ,
      sustained damage during hurricanes Katrina and Rita. During hurricane Katrina,
      the *Deepwater
      Nautilus* sustained damage to its mooring system and lost approximately 3,200 feet of
      marine riser and a portion of its subsea well control system. The rig was
      undergoing repairs during hurricane Rita and was set adrift following the
      failure of a tow line utilized by a towing vessel. Also during hurricane Rita,
      the *Transocean
      Marianas* sustained damage to its mooring system, was forced off its drilling location
      and
      was grounded in shallow water.  The *Deepwater
      Nautilus* was out
      of service for 24 days in 2005 and 70 days in the first nine months of 2006.
      The *Transocean
      Marianas* was out
      of service for 95 days in 2005 and 72 days in the first nine months of 2006.
      Both rigs returned to service in the third quarter of 2006. Operating income
      for
      the first nine months of 2006 was negatively impacted by approximately $40
      million due to lost revenue and higher operating and maintenance costs on the *Deepwater
      Nautilus* and the *Transocean
      Marianas* .
      In
      addition, we spent approximately $25 million on capital expenditures during
      the
      first nine months of 2006 to replace damaged equipment.





*Asset
      Dispositions* —In
      February 2006, we completed the sale of the drillship *Peregrine
      III* for
      net
      proceeds of $78.7 million and recognized a gain on the sale of $61.8 million. See
      “—Liquidity and Capital Resources-Capital Expenditures and
      Dispositions.”





28
 *Index*





In
      May
      2006, we completed the sale of the drilling barge *Searex
      XII* for net
      proceeds of $19.1 million and recognized a gain on the sale of $13.7 million.
      See “—Liquidity and Capital Resources-Capital Expenditures and
      Dispositions.”





In
      June
      2006, we completed the sale of the semisubmersible rig *Transocean
      Explorer* for net
      proceeds of $101.0 million and recognized a gain on the sale of $97.0 million.
      See “ —Liquidity
      and Capital Resources-Capital Expenditures and Dispositions.”





In
      August
      2006, we completed the sale of the tender rig *W.D.
      Kent* for
      net
      proceeds of $18.0 million and recognized a gain on the sale of $15.3 million.
      See “—Liquidity and Capital Resources-Capital Expenditures and Dispositions.”





In
      September 2006, we completed the sale of the tender rig *Searex
      X* for
      net
      proceeds of $33.5 million and recognized a gain on the sale of $28.4 million. See
      “ —Liquidity
      and Capital Resources-Capital Expenditures and Dispositions.”





In
      October 2006, we completed the sale of the tender rig *Searex
      IX* for net
      proceeds of approximately $16.0 million and expect to recognize a pre-tax gain
      on the sale of approximately $14.0 million. See
      “ —Liquidity
      and Capital Resources-Capital Expenditures and Dispositions.”




*Repurchase
      of Ordinary Shares* — In
      the
      first quarter of 2006, we repurchased and retired $200 million of our ordinary
      shares. In the second quarter of 2006, we repurchased and retired $400 million
      of our ordinary shares. In the third quarter of 2006, we repurchased and retired
      $1.75 billion of our ordinary shares. In October 2006, we repurchased and
      retired $250 million of our ordinary shares. See “—Liquidity and Capital
      Resources−Sources and Uses of Liquidity.”





*Term
      Credit Facility* —In
      August 2006, we entered into a two-year, $1.0 billion term credit facility
      under
      the Term Credit Agreement dated August 30, 2006 (“Term Credit Facility”). See
      “ —Liquidity
      and Capital Resources-Sources and Uses of Cash.”





*Floating
      Rate Notes* —In
      September 2006, we issued $1.0 billion aggregate principal amount of floating
      rate notes, due September 2008 ( “Floating Rate Notes”). See
      “ —Liquidity
      and Capital Resources-Sources and Uses of Cash.”





*Tax
      Matters* —In
      April
      2006, we received notice from the Norwegian tax authorities regarding their
      intent to propose adjustments to taxable income for the tax years 1999, 2001
      and
      2002. These proposed assessments could result in an increase in tax of
      approximately $260 million plus interest, and the authorities further indicated
      they intend to impose penalties, which could range from 15 to 60 percent of
      the
      assessments. The anticipated assessments relate to restructuring transactions
      undertaken in 2001 and 2002. See “—Outlook−Tax Matters.”





**Outlook**





*Drilling
      Market* —We
      continue to experience strong demand for our fleet. We are experiencing
      historically high dayrates and generally longer contract durations across all
      categories of our fleet, resulting in a contract backlog at October 31,
      2006 of approximately $20.2 billion, up from approximately $19.4 billion at
      July
      31, 2006. While oil prices historically have been a key driver for offshore
      drilling demand, the recent decline in oil prices during the third quarter
      of
      2006 does not appear to have had a negative effect on demand for our rigs.
      Rig
      demand continues to outpace supply, particularly in the deepwater sector.





So
      far
      this year we have been awarded three newbuild construction contracts for
      deepwater rigs with durations ranging from three to five years and we continue
      to pursue other potential newbuild opportunities with multi-year contract
      durations. In March 2006, we were awarded a five-year contract for the
      construction of an enhanced Enterprise-class drillship, to be named the *Discoverer
      Clear Leader* ,
      with an
      estimated total capital expenditure of approximately $600 million, excluding
      capitalized interest. We currently expect this rig to begin operations in the
      U.S. Gulf of Mexico in approximately the second quarter of 2009, after
      construction in South Korea followed by sea trials, mobilization to the U.S.
      Gulf of Mexico and customer acceptance.





29
 *Index*





In
      June
      2006, we were awarded a four-year contract for the construction of another
      enhanced Enterprise-class drillship, with an estimated total capital expenditure
      of approximately $615 million, excluding capitalized interest. We currently
      expect this rig to begin operations in the U.S. Gulf of Mexico in approximately
      mid-2009, after construction in South Korea followed by sea trials, mobilization
      to the U.S. Gulf of Mexico and customer acceptance.





In
      August
      2006, we were awarded a contract for the construction of a third enhanced
      Enterprise-class drillship with an estimated total capital expenditure of
      approximately $670 million, excluding capitalized interest. This
      includes approximately $40 million for a second blow out preventer and other
      equipment not included in the original costs of the other two enhanced
      Enterprise-class drillships. The
      client may elect by September 2007 to convert the term of the contract from
      five
      years to three years. We currently expect this rig to begin operations in the
      U.S. Gulf of Mexico in approximately the first quarter of 2010, after
      construction in South Korea followed by sea trials, mobilization to the U.S.
      Gulf of Mexico and customer acceptance.





We have
      been successful in building contract backlog within our High-Specification
      Floaters fleet with 22 of our
      37 current and future High-Specification Floaters, including the three newbuilds
      and the two *Sedco
      700* -series
      rig upgrades, contracted into or beyond 2010 as of October 31, 2006. These
      22
      units also include 12 of our 16 current and future Fifth-Generation Deepwater
      Floaters. Our
      total
      contract backlog of approximately $20.2 billion as of October 31, 2006 includes
      an estimated $14.7 billion of backlog represented by our High-Specification
      Floaters. We
      continue to believe that the long-term outlook for deepwater capable rigs is
      favorable and expect to see strong demand in the Gulf of Mexico, West Africa
      and
      India. Successful drilling efforts in the lower tertiary trend of the U.S.
      Gulf
      of Mexico and emerging locations like the South China Sea and southern Gulf
      of
      Mexico support the prospects for an extended deepwater drilling cycle. As of
      October 31, 2006, none of our High-Specification Floater fleet contract days
      are
      uncommitted for the remainder of 2006, while approximately one
      percent, six percent and 21 percent are uncommitted in 2007, 2008 and
      2009, respectively.





Our
      Other
      Floaters fleet, comprised of 19 semisubmersible rigs, is largely committed
      to
      contracts that extend into 2007, and we are seeing some customer demand for
      these units for 2008. This fleet continues to benefit from improving activity
      levels in all regions. We are seeing dayrates that are higher than those seen
      at
      the beginning of the year. This is evidenced by new contracts with dayrates
      for
      the *Sedco
      601* at
      $406,000 and *Transocean
      Legend* at
      $435,000. In the U.K. sector of the North Sea, we completed the reactivation
      of
      the previously idle *Transocean
      Winner* and *Transocean Prospect* in
      August 2006 and September 2006, respectively, both of which are supported by
      multi-year contracts. We have also commenced the reactivation of the *C.
      Kirk Rhein, Jr.* ,
      which
      has been awarded a two-year contract in India at a $340,000 dayrate and is
      now
      expected to commence operations in the first quarter of 2007. The sale of the *Transocean
      Explorer* was
      completed in the second quarter of 2006 and the sale of the *Transocean
      Wildcat* is
      scheduled to be completed in the fourth quarter of 2006.  As
      of
      October 31, 2006, none of our Other Floater fleet contract days are
      uncommitted for the remainder of 2006, while approximately 13
      percent, 44 percent and 80 percent are uncommitted in 2007, 2008 and
      2009, respectively.





The
      outlook for activity for the Jackup market sector remains strong. We were
      recently awarded a minimum 400-day contract extension for the *Trident
      VI* at
      a
      dayrate of $193,100 and a one-year contract extension for the *Trident
      IX* at
      a
      dayrate of $210,000. We expect to remain at or near full utilization for our
      Jackup fleet in the near term. We believe
      that Asia, the Middle East and West Africa will remain sources of strong demand
      for jackup rigs in the near-to-intermediate-term. As of October 31, 2006, none
      of our Jackup fleet contract days are uncommitted for the remainder of 2006,
      while approximately six percent, 43 percent and 68 percent are
      uncommitted in 2007, 2008 and 2009, respectively.





We
      anticipate continued revenue growth during the fourth quarter of 2006, supported
      by higher average dayrates and improving fleet activity. Quarterly operating
      and
      maintenance expenses for the final quarter of 2006 are expected to be marginally
      less than those of the third quarter. However such quarterly expenses are
      subject to variability depending on the timing of shipyard programs and major
      maintenance projects, performance of the U.S. dollar, inflationary costs and
      other factors.





30
 *Index*





Out
      of
      service time in the fourth quarter of 2006 is expected to be in line with the
      level incurred in the third quarter of 2006. The decrease in the expected out
      of
      service time related to the recent reactivation of the *Transocean
      Winner* and *Transocean
      Prospect* is
      likely to be offset by the expected increase in out of service time in the
      fourth quarter of 2006 related to the mobilization of the *Deepwater
      Expedition* from
      Brazil to Egypt, the mobilization of the *Jack
      Bates* from
      Australia to the Gulf of Mexico and the commencement of shipyard projects for
      four of our jackups in India.





We
      expect
      a continued increase in revenue in 2007 due largely to commencement of new
      contracts with higher dayrates. The scheduled commencement of the *Sedco
      702* contract
      at the end of the rig’s deepwater upgrade shipyard project is also expected to
      contribute to higher revenue in 2007. We also expect an increase in integrated
      services revenue following the anticipated commencement of five integrated
      services contracts in the fourth quarter of 2006 and early part of 2007.





We
      expect
      industry inflation in 2007 to continue to affect operating and maintenance
      costs, resulting in increased operating costs as well as increased shipyard
      and
      major maintenance program expenditures. Costs in 2007 are also expected to
      further increase as a result of the five integrated services contracts discussed
      above. This increase is expected to be partially offset by lower shipyard and
      mobilization expenses, as our 2007 out of service time is currently expected
      to
      decrease by approximately 20 percent compared to 2006, chiefly due to the
      completed reactivations of the *Transocean
      Prospect* , *Transocean
      Winner* and the
      expected completion of the reactivation of the *C.
      Kirk Rhein, Jr.* in 2006.
      Finally, we plan to invest in a number of recruitment and personnel development
      initiatives with a view to preparing the manning of the crews of the two
      deepwater upgrades and three newbuild rigs.





We
      expect
      that a number of fixed-price contract options will be exercised by our
      customers, which will preclude us from taking full advantage of increased market
      rates for rigs subject to these contract options. We have eight existing
      contracts with fixed-priced or capped options for dayrates that we believe
      are
      less than current market dayrates. Well-in-progress or similar provisions in
      our
      existing contracts may delay the start of higher dayrates in subsequent
      contracts and some of the delays have been and could be
      significant.





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. 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. 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 campaigns. Additionally, there are a significant
      number of both floaters and jackups currently being built and additional orders
      for more rigs to be built could be placed. The addition of rig capacity could
      have an adverse impact on utilization and/or dayrates.





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.





31
 *Index*





*Insurance* —We
      renewed our insurance coverages for 12 months effective May 1, 2006. We
      currently maintain a $10 million per occurrence insurance deductible on hull
      and
      machinery, a $10 million per occurrence deductible on personal injury liability
      and a $5 million per occurrence deductible on third party property damage.
      In
      addition to the per occurrence deductibles described above, we also have
      aggregate deductibles that are applied to any occurrence in excess of the per
      occurrence deductible until the aggregate deductible is exhausted. After the
      aggregate deductible is fully exhausted, the per occurrence deductible continues
      to apply. Such aggregate deductibles are $20 million in the case of our hull
      and
      machinery coverage and $25 million in the case of our personal injury liability
      and third party property damage coverage. We do not carry insurance for loss
      of
      revenue.





Our
      coverage includes an annual aggregate limit on losses due to hurricanes in
      the
      U.S Gulf of Mexico of $250 million, except in the case of a total loss of a
      rig,
      where the annual limit is approximately $300 million in aggregate. As a result
      of these limits, we retain the risk through self-insurance and our wholly-owned
      captive insurance company for any losses due to hurricanes in excess of these
      amounts.





*Tax
      Matters—* We
      are a
      Cayman Islands company. 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. A material change in these tax laws, treaties or regulations in any
      of
      the countries in which we operate could result in a higher or lower effective
      tax rate on our worldwide earnings. We currently expect the effective tax rate
      for the remainder of 2006 to be approximately 18 percent, excluding the effects
      on income before tax related to gains from rig sales and excluding various
      discrete tax items.





Our
      income tax returns are subject to review and examination in the various
      jurisdictions in which we operate. We are currently contesting various tax
      assessments. We accrue for income tax contingencies that we believe are probable
      exposures.





Our
      2002,
      2003, 2004 and 2005 U.S. federal income tax returns are currently under
      examination by the U.S. Internal Revenue Service (“IRS”) and our 2001 U.S.
      federal income tax return remains open for examination. In April 2006, we
      received from the IRS, examination reports setting forth proposed increases
      to
      the U.S. federal taxable income reported for the period 2001-2003 which would
      reduce our net operating losses by approximately $99 million and result in
      a
      cash tax payment of approximately $0.3 million of alternative minimum tax.
      In
      September 2006, the IRS formally withdrew certain of the proposed adjustments.
      The remaining adjustments would reduce our net operating losses by approximately
      $44 million and result in no cash tax payment. We believe our returns are
      materially correct as filed. We intend to vigorously defend against any proposed
      changes. While we cannot predict or provide assurance as to the final outcome,
      we do not expect the ultimate settlement of any liability resulting from the
      examination to have a material adverse effect on our consolidated financial
      position, results of operations or cash flows.





In
      April
      2006, we received notice from the Norwegian tax authorities regarding their
      intent to propose adjustments to taxable income for the tax years 1999, 2001
      and
      2002. These proposed assessments could result in an increase in tax of
      approximately $260 million plus interest, and the authorities further indicated
      they intend to impose penalties, which could range from 15 to 60 percent of
      the
      assessments. The anticipated assessments relate to restructuring transactions
      undertaken in 2001 and 2002. The Norwegian tax authorities initiated inquiries
      in September 2004 related to the restructuring transactions and a separate
      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. We have continued to respond to information requests from the
      Norwegian authorities and filed a formal protest to the proposed assessment
      in
      June 2006. We also believe the Norwegian authorities are contemplating a tax
      assessment of approximately $100 million on the dividend, plus interest and
      a
      penalty, which could range from 15 to 60 percent of the assessment. Norwegian
      civil tax and criminal authorities continue to investigate the restructuring
      transactions and dividend. We plan to vigorously contest any assertions by
      the
      Norwegian authorities in connection with the restructuring transactions or
      dividend. While we cannot predict or provide assurance as to the final outcome
      of these proceedings, we do not expect it to have a material adverse effect
      on
      our consolidated financial position, results of operations or cash
      flows.





32
 *Index*





In
      addition, other tax authorities are examining our tax returns in various
      jurisdictions. While we cannot predict or provide assurance as to the final
      outcome of these other existing or future assessments, we do not expect the
      ultimate settlement of any liability resulting from these existing or future
      assessments to have a material adverse effect on our consolidated financial
      position, results of operations or cash flows.





**Performance
      and Other Key Indicators**





*Contract
      Backlog* —The
      following table reflects our contract backlog as of September 30, 2006, June
      30,
      2006, and September 23, 2005 and reflects firm commitments only, typically
      represented by signed contracts.  Backlog
      is indicative of the full contractual dayrate. The amount of actual revenue
      earned will be different than the amounts shown in the table below due to
      various factors including shipyard and maintenance projects, other downtime
      and
      other factors that result in lower applicable dayrates than the full contractual
      operating dayrate. Our contract backlog is calculated by multiplying the
      contracted operating dayrate by the firm contract period, excluding revenues
      for
      mobilization, demobilization, contract preparation and customer reimbursables
      and such amounts are not expected to be significant to our contract drilling
      revenues.





September
                30,
              2006
            
            June
                30,
              2006
            
            September
                23,
              2005(In
                millions)**Contract
                Backlog**High-Specification
                Floaters
            
            $
            14,868.5
            
            $
            13,516.5
            
            $
            5,093.3Other
                Floaters
            
            
            2,938.1
            
            
            2,606.8
            
            
            1,062.6Jackups
            
            
            2,066.9
            
            
            2,237.0
            
            
            531.8Other
                Rigs
            
            
            79.3
            
            
            101.0
            
            
            148.0Total
            
            $
            19,952.8
            
            $
            18,461.3
            
            $
            6,835.7




33
 *Index*





*Fleet
      Utilization and Dayrates* —The
      following table shows our average daily revenue and utilization for each of
      the
      three months ended September 30, 2006, June 30, 2006 and September 30, 2005.
      See
“—Overview” for a definition of average daily revenue, revenue earning day and
      utilization.





Three
                Months EndedSeptember
                30,
              2006
            
            June
                30,
              2006
            
            September
                30,
              2005**Average
                Daily Revenue**High-Specification
                FloatersFifth-Generation
                Deepwater Floaters
            
            $
            246,000
            
            $
            216,500
            
            $
            197,100Other
                Deepwater Floaters
            
            $
            222,300
            
            $
            190,200
            
            $
            141,700Other
                High-Specification Floaters
            
            $
            181,500
            
            $
            174,700
            
            $
            166,300Total
                High-Specification Floaters
            
            $
            226,700
            
            $
            199,300
            
            $
            168,800Other
                Floaters
            
            $
            136,800
            
            $
            118,200
            
            $
            90,400Jackups
            
            $
            83,400
            
            $
            73,000
            
            $
            58,900Other
                Rigs
            
            $
            52,400
            
            $
            47,500
            
            $
            48,000Total
                Drilling Fleet
            
            $
            146,900
            
            $
            129,000
            
            $
            107,100**Utilization**High-Specification
                FloatersFifth-Generation
                Deepwater Floaters
            
            
            88
            %
            
            89
            %
            
            94
            %Other
                Deepwater Floaters
            
            
            75
            %
            
            70
            %
            
            83
            %Other
                High-Specification Floaters
            
            
            93
            %
            
            98
            %
            
            99
            %Total
                High-Specification Floaters
            
            
            82
            %
            
            81
            %
            
            89
            %Other
                Floaters
            
            
            86
            %
            
            74
            %
            
            68
            %Jackups
            
            
            96
            %
            
            93
            %
            
            98
            %Other
                Rigs
            
            
            76
            %
            
            62
            %
            
            51
            %Total
                Drilling Fleet
            
            
            87
            %
            
            81
            %
            
            82
            %





**Liquidity
      and Capital Resources**





**Sources
      and Uses of Cash**





Our
      primary sources of cash during the ** first
      nine months of 2006 were our cash flows from operations, proceeds from asset
      sales, proceeds from the issuance of the Floating Rate Notes, borrowings under
      our credit facilities and proceeds from the issuance of ordinary shares upon
      the
      exercise of stock options. Our primary uses of cash were repurchases of our
      ordinary shares and capital expenditures. At September 30, 2006, we had $407.1
      million in cash and cash equivalents.





Nine
                Months Ended
              September
                30,2006
            
            2005
            
            Change(In
                millions)**Net
                Cash from Operating Activities**Net
                income
            
            $
            764.2
            
            $
            564.0
            
            $
            200.2Depreciation
            
            
            302.8
            
            
            304.0
            
            
            (1.2
            )Other
                non-cash items
            
            
            (251.3
            )
            
            (160.1
            )
            
            (91.2
            )Working
                capital
            
            
            (83.5
            )
            
            (92.2
            )
            
            8.7$
            732.2
            
            $
            615.7
            
            $
            116.5




34
 *Index*





Net
      cash
      provided by operating activities increased by $116.5 million due to more cash
      generated from net income ($107.8 million) and less cash used for working
      capital items ($8.7 million).





Nine
                Months Ended
              September
                30,2006
            
            2005
            
            Change(In
                millions)**Net
                Cash from Investing Activities**Capital
                expenditures
            
            $
            (709.8
            )
            $
            (144.9
            )
            $
            (564.9
            )Proceeds
                from disposal of assets, net
            
            
            297.7
            
            
            60.3
            
            
            237.4Proceeds
                from TODCO stock sales, net
            
            
            -
            
            
            271.9
            
            
            (271.9
            )Other,
                net
            
            
            0.5
            
            
            4.5
            
            
            (4.0
            )$
            (411.6
            )
            $
            191.8
            
            $
            (603.4
            )





During
      the nine months ended September 30, 2006, capital expenditures increased $564.9
      million over the corresponding prior year period, primarily due to the
      construction in progress of three deepwater drillships, the two *Sedco
      700* -series
      deepwater upgrades and other equipment replaced and upgraded on our existing
      rigs. The increase in capital expenditures was partially offset by an
      increase in proceeds from asset sales of $237.4 million. In addition, net
      cash provided by investing activities decreased as a result of proceeds from
      TODCO stock sales of $271.9 million for the nine months ended September 30,
      2005, with no comparable activity for the corresponding period in
      2006.





Nine
                Months Ended
              September
                30,2006
            
            2005
            
            Change(In
                millions)**Net
                Cash from Financing Activities**Net
                proceeds from issuance of debt and borrowings under credit
                facilities
            
            $
            1,900.0
            
            $
            -
            
            $
            1,900.0Repayments
                of debt
            
            
            -
            
            
            (880.2
            )
            
            880.2Net
                proceeds from issuance of ordinary shares under stock-based compensation
                plans
            
            
            66.8
            
            
            196.1
            
            
            (129.3
            )Proceeds
                from issuance of ordinary shares upon exercise of warrants
            
            
            -
            
            
            10.6
            
            
            (10.6
            )Repurchase
                of ordinary shares
            
            
            (2,350.5
            )
            
            -
            
            
            (2,350.5
            )Release
                of escrow funds - Nautilus lease financing
            
            
            29.6
            
            
            -
            
            
            29.6Decrease
                in cash dedicated to debt service
            
            
            -
            
            
            12.0
            
            
            (12.0
            )Other,
                net
            
            
            (4.8
            )
            
            (0.5
            )
            
            (4.3
            )$
            (358.9
            )
            $
            (662.0
            )
            $
            303.1





Net
      cash
      used in financing activities decreased during the nine months ended September
      30, 2006, as the repurchase and retirement of $2.35 billion of our ordinary
      shares was partially offset by the issuance of $1.0 billion aggregate principal
      amount of Floating Rate Notes and a draw of $900 million on our Term Credit
      Facility. See “—Sources and Uses of Liquidity.” During the nine months ended
      September 30, 2005, we repaid the 7.31% Nautilus Class A1 Notes and the 6.95%
      Senior Notes. In 2006, we received lower proceeds from stock option and warrant
      exercises compared to the same period in 2005. The payment of the 7.31% Nautilus
      Class A1 Notes in 2005 resulted in the release of the restrictions on
      approximately $12.0 million of cash dedicated to debt service, with no
      comparable activity for the corresponding period in 2006.





35
 *Index*





**Capital
      Expenditures and Dispositions**





From
      time
      to time, we review possible acquisitions of businesses and drilling rigs and
      may
      in the future make significant capital commitments for such purposes. We may
      also consider investments related to major rig upgrades or new rig construction
      if generally supported by firm contracts. Any such acquisition, upgrade or
      new
      rig construction 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 have been awarded drilling contracts for the construction of
      three new deepwater drilling rigs. In addition, from time to time, we review
      possible dispositions of drilling units.





*Capital
      Expenditures* —Capital
      expenditures, including capitalized interest of $7.4 million, totaled $709.8
      million during the nine months ended September 30, 2006. During 2006, we expect
      capital expenditures to be between $900 million and $950 million, including
      approximately $220 million on the construction of the drillship *Discoverer
      Clear Leader* ,
      approximately $115 million on the construction of the second deepwater
      drillship, approximately $120 million on the construction of the third deepwater
      drillship, approximately $230 million for the upgrade of two of our *Sedco
      700* -series
      rigs, approximately $40 million to replace and upgrade equipment damaged during
      hurricanes Katrina and Rita on the *Deepwater
      Nautilus* and
      the *Transocean
      Marianas* and
      approximately $45 million to reactivate three of our Other Floaters. During
      2007, we expect capital expenditures to be approximately $1.2 billion, including
      approximately $600 million for the construction of the three deepwater
      drillships and approximately $200 million for the continued upgrade of two
      of
      our *Sedco
      700* -series
      rigs. The level of our capital expenditures is dependent upon the actual level
      of operational and contracting activity. These expected capital expenditures
      do
      not include amounts that would be incurred as a result of any of the other
      newbuild opportunities which may be obtained (see “—Outlook”).





As
      with
      any major shipyard project that takes place over an extended period of time,
      the
      actual costs, the timing of expenditures and the project completion date may
      vary from estimates based on numerous factors, including actual contract terms,
      weather, exchange rates, shipyard labor conditions and the market demand for
      components and resources required for drilling unit construction.





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 Facility (see “—Sources and
      Uses of Liquidity”) and may utilize other commercial bank or capital market
      financings.





*Dispositions* —In
      February 2006, we completed the sale of the drillship *Peregrine
      III* for
      net
      proceeds of $78.7 million and recognized a gain on the sale of $61.8
      million.





In
      March
      2006, we completed the sale of a platform rig for net proceeds of $10.1 million
      and recognized a gain on the sale of $2.7 million.





In
      May
      2006, we sold the drilling barge *Searex
      XII* for
      net
      proceeds of $19.1 million and recognized a gain on the sale of $13.7
      million.





In
      June
      2006, we completed the sale of the semisubmersible rig *Transocean
      Explorer* for net
      proceeds of $101.0 million and recognized a gain on the sale of $97.0
      million.





In
      August
      2006, we completed the sale of the tender rig *W.D.
      Kent* for net
      proceeds of $18.0 million and recognized a gain on the sale of $15.3 million.





In
      September 2006, we completed the sale of the tender rig *Searex
      X* for net
      proceeds of $33.5 million and recognized a gain on the sale of $28.4
      million.





In
      October 2006, we completed the sale of the tender rig *Searex
      IX* for net
      proceeds of approximately $16.0 million and expect to recognize a pre-tax gain
      on the sale of approximately $14.0 million.




36
 *Index*





**Sources
      and Uses of Liquidity**





We
      expect
      to use existing cash balances, internally generated cash flows, proceeds from
      debt issuance and proceeds from asset sales 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 and proceeds from asset sales exceed our
      expected liquidity needs, including major upgrades, new rig construction and/or
      drilling rig acquisitions, we may use a portion of such cash to repurchase
      our
      ordinary shares. We may also use our bank line of credit or issue new debt
      to
      repurchase our ordinary shares. We will continue to consider allowing our cash
      balances to increase and will continue to consider the reduction of debt prior
      to scheduled maturities.





In
      May
      2006, our board of directors authorized an increase in the amount of ordinary
      shares which may be repurchased pursuant to our share repurchase program from
      $2.0 billion, which was previously authorized and announced in October 2005,
      to
      $4.0 billion.  The
      ordinary shares may be repurchased from time to time in open market or private
      transactions. Decisions to repurchase shares are based upon our ongoing
      capital requirements, the price
      of
      our shares, regulatory considerations, cash flow generation, general market
      conditions and other factors. We plan to fund any future share repurchases
      under
      the program from current and future cash balances and we could use debt to
      fund
      those share repurchases. The repurchase program does not have an
      established expiration date and may
      be suspended or discontinued at any time. There can be no assurance regarding
      the number of shares that will be repurchased under the program. Under the
      program, repurchased shares are retired and returned to unissued status.





In
      the
      first quarter of 2006, we repurchased and retired $200 million of our ordinary
      shares, which amounted to approximately 2.6 million ordinary shares at an
      average purchase price of $77.54 per share. In the second quarter of 2006,
      we
      repurchased and retired $400 million of our ordinary shares, which amounted
      to
      approximately 5.2 million ordinary shares at an average purchase price of $76.23
      per share. In the third quarter of 2006, we repurchased and retired $1.75
      billion of our ordinary shares, which amounted to approximately 24.4 million
      ordinary shares at an average purchase price of $71.67 per share. In October
      2006, we repurchased and retired $250 million of our ordinary shares, which
      amounted to approximately 3.5 million ordinary shares at an average purchase
      price of $71.79 per share. Total consideration paid to repurchase the shares
      was
      recorded in shareholders’ equity as a reduction in ordinary shares and
      additional paid-in capital. Such consideration was funded with existing cash
      balances, borrowings under our Revolving Credit Facility and our Term Credit
      Facility and proceeds from the issuance of our Floating Rate Notes. At October
      31, 2006, after prior repurchases, we had authority to repurchase an additional
      $1.0 billion of our ordinary shares under the program.





Holders
      of our 1.5% Convertible Debentures, due May 15, 2021 had the option to require
      us to repurchase their debentures in May 2006; however, no holders exercised
      such right. In May 2006, holders of $101,000 aggregate principal amount
      converted their debentures into ordinary shares at a conversion rate of 13.8627
      ordinary shares per $1,000 debenture, resulting in the issuance of 1,399
      ordinary shares.





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.





37
 *Index*





Under
      the
      terms of the Term Credit Facility, we may request borrowings up to $1.0 billion
      over the first six months of the term. At that time, any unused capacity is
      cancelled. Once repaid, the funds cannot be reborrowed. At our election,
      borrowings may be made under the Term Credit Facility at either (i) the base
      rate, determined as the greater of (a) the prime loan rate and (b) the
      sum of the weighted average overnight federal funds rate plus 50 basis points,
      or (ii) the London Interbank Offered Rate (“LIBOR”) plus 30 basis points,
      based on current credit ratings. We pay, based on current credit ratings, and
      as
      applicable, a fee of 6.5 basis points per annum on the daily amount of the
      unused commitments under the credit agreement. At October 31, 2006, $1.0 billion
      was outstanding under this facility at a weighted-average interest rate of
      5.66
      percent.





In
      September 2006, we issued $1.0 billion aggregate principal amount of the
      Floating Rate Notes. We are required to pay interest on the Floating Rate Notes
      on March 5, June 5, September 5 and December 5 of each year, beginning on
      December 5, 2006. The per annum interest rate on the Floating Rate Notes is
      equal to the three month LIBOR, reset on each payment date, plus 20 basis
      points. We may redeem some or all of the notes at any time after September
      2007
      at a price equal to 100 percent of the principal amount plus accrued and unpaid
      interest, if any. At October 31, 2006, $1.0 billion principal amount of these
      notes was outstanding at an interest rate of 5.59 percent.





We
      have
      access to a bank line of credit under a $1.0 billion, five-year revolving
      credit facility (“Revolving Credit Facility”). At October 31, 2006, we had no
      amounts outstanding under this facility.





The
      Revolving Credit Facility and Term Credit Facility require compliance with
      various covenants and provisions customary for agreements of this nature,
      including a debt to total tangible capitalization ratio, as defined by the
      credit agreements, not greater than 60 percent. There is no interest coverage
      covenant associated with these facilities. Other provisions of the credit
      agreements include limitations on creating liens, incurring subsidiary 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 these facilities. 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 certain merger, consolidation or reorganization
      transactions. A default under our public debt could trigger a default under
      our
      credit agreements and, if not waived by the lenders, could cause us to lose
      access to these facilities.





In
      April
      2001, the 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 October 31, 2006, $600 million 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, credit rating agency downgrades
      of
      our debt, 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.





**Derivative
      Instruments**





In
      2003,
      we terminated all our outstanding interest rate swaps, which were designated
      as
      fair value hedges, and we recorded $173.5 million as a 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. The
      remaining balance as of September 30, 2006 of $15.6 million relates to the
      6.625% Notes, due April 2011.





38
 *Index*





**Operating
      Results**




***Quarter
      ended September 30, 2006 compared to quarter ended September 30,
      2005***





Following
      is an analysis of our operating results. See “—Overview” for a definition of
      average daily revenue, revenue earning days and utilization.





*Operating
      Revenue and Expenses*





Three
                Months Ended
              September
                30,2006
            
            2005
            
            Change
            
            %
                Change(In
                millions, except day amounts and percentages)Revenue
                earning days
            
            
            6,750
            
            
            6,870
            
            
            (120
            )
            
            (2
            )%Utilization
            
            
            87
            %
            
            82
            %
            
            N/A
            
            
            5
            %Average
                daily revenue
            
            $
            146,900
            
            $
            107,100
            
            $
            39,800
            
            
            37
            %Contract
                drilling revenues
            
            $
            991.3
            
            $
            735.6
            
            $
            255.7
            
            
            35
            %Other
                revenues
            
            
            34.4
            
            
            27.0
            
            
            7.4
            
            
            27
            %1,025.7
            
            
            762.6
            
            
            263.1
            
            
            35
            %Operating
                and maintenance expense
            
            
            (560.9
            )
            
            (438.3
            )
            
            (122.6
            )
            
            28
            %Depreciation
            
            
            (99.2
            )
            
            (102.1
            )
            
            2.9
            
            
            (3
            )%Gain
                from disposal of assets, net
            
            
            47.6
            
            
            0.7
            
            
            46.9
            
            
            N/MOperating
                income before general and administrative expense
            
            $
            413.2
            
            $
            222.9
            
            $
            190.3
            
            
            85
            %


_________________


“N/A”
      means not applicable


“N/M”
      means not meaningful





Contract
      drilling revenues increased by $255.7 million primarily due to generally higher
      average daily revenue and utilization in all asset classes, partially offset
      by
      lower revenues for three rigs out of service for shipyard projects in 2006.





Other
      revenues for the three months ended September 30, 2006 increased by $7.4 million
      primarily due to an increase of $10.2 million in client reimbursable revenue
      partially offset by a $3.1 million decrease in integrated services
      revenue.





Operating
      and maintenance expenses increased by $122.6 million primarily from shipyard
      projects, rig reactivations, pay
      increases to employees and vendor price increases resulting in higher labor and rig maintenance costs. The higher cost of our
      rig
      insurance coverage and the weakening of the U.S. dollar against the currencies
      of certain countries where we have a significant presence also contributed
      to
      the increase in costs. Operating and maintenance expenses in the three months
      ended September 30, 2006 included $30.5 million for reactivation costs
      associated with the *Transocean
      Prospect, Transocean Winner* and *C.
      Kirk Rhein, Jr.*





During
      the three months ended September 30, 2006, we recognized net gains of $47.6
      million primarily related to the sales of the tender rigs *W.D.
      Kent* and *Searex
      X* .





39
 *Index*





*Other
      Income and Expenses*





Three
                Months Ended
              September
                30,2006
            
            2005
            
            Change
            
            %
                Change(In
                millions, except percentages)General
                and Administrative Expense
            
            $
            22.5
            
            $
            19.4
            
            $
            3.1
            
            
            16
            %Other
                (Income) Expense, netEquity
                in earnings of unconsolidated affiliates
            
            
            (4.6
            )
            
            (1.8
            )
            
            (2.8
            )
            
            N/MInterest
                income
            
            
            (3.3
            )
            
            (5.2
            )
            
            1.9
            
            
            (37
            )%Interest
                expense, net of capitalized interest
            
            
            27.2
            
            
            24.5
            
            
            2.7
            
            
            11
            %Loss
                on retirement of debt
            
            
            --
            
            
            0.6
            
            
            (0.6
            )
            
            (100
            )%Other,
                net
            
            
            (1.4
            )
            
            (9.7
            )
            
            8.3
            
            
            (86
            )%Income
                Tax Expense
            
            
            63.8
            
            
            24.7
            
            
            39.1
            
            
            N/M


_________________________


“N/M”
      means not meaningful





The
      increase in general and administrative expense was due primarily to $1.4 million
      higher personnel related expenses and $2.0 million higher legal fees, including
      costs related to the TODCO dispute and patent litigation with GlobalSantaFe
      Corporation.





Equity
      in
      earnings from unconsolidated affiliates increased approximately $2.8 million
      primarily related to our 50 percent share of earnings from Overseas Drilling
      Limited (“ODL”), owner of the drillship *Joides
      Resolution* .





The
      increase in interest expense included $9.4 million that was primarily
      attributable to higher debt levels arising from the issuance of new debt,
      partially offset by $1.8 million of reductions associated with debt that was
      redeemed, retired or repurchased during or subsequent to the third quarter
      of
      2005 and $5.0 million related to capitalized interest during the third quarter
      of 2006.





The
      decrease in other, net was primarily due to $10.1 million of income recognized
      under the tax sharing agreement with TODCO in 2005 with no comparable activity
      in 2006.





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. The effective tax rate for the nine month periods ended September 30,
      2006 and 2005 was 17.5 percent, based on estimated 2006 and 2005 annual income
      before income taxes and minority interest after adjusting for certain items
      such
      as a portion of net gains on sales of assets, gain of TODCO stock sales and
      losses on retirements of debt. The tax effect, if any, of the excluded items
      as
      well as settlements of prior year tax liabilities and changes in prior year
      tax
      estimates are all treated as discrete period tax expenses or benefits. For
      the
      three months ended September 30, 2006, the impact of the various discrete period
      tax items was a net expense of $6.7 million, related to the net gains on rig
      sales and changes in prior year estimates, resulting in a tax rate of 17.1
      percent on earnings before income taxes and minority interest. For the three
      months ended September 30, 2005, the impact of the various discrete items was
      a
      net benefit of $8.5 million. The benefit resulted primarily from the reduction
      in a valuation allowance related to certain U.K. net operating losses to record
      the expected realization of these losses based on improved market conditions
      and
      a benefit for the resolution of non-U.S. audits, partially offset by an expense
      to record a change in estimate related to the deferred tax assets retained
      by us
      after the disposition of TODCO, resulting in a tax rate of 12.7 percent on
      earnings before income taxes and minority interest.





40
 *Index*





***Nine
      months ended September 30, 2006 compared to nine months ended September 30,
      2005***





Following
      is an analysis of our operating results:





*Operating
      Revenues and Expenses*





Nine
                Months Ended
              September
                30,2006
            
            2005
            
            Change
            
            %
                Change(In
                millions, except day amounts and percentages)Revenue
                earning days
            
            
            19,681
            
            
            19,705
            
            
            (24
            )
            
            N/MUtilization
            
            
            83
            %
            
            79
            %
            
            N/A
            
            
            4
            %Average
                daily revenue
            
            $
            132,000
            
            $
            102,400
            
            $
            29,600
            
            
            29
            %Contract
                drilling revenues
            
            $
            2,598.3
            
            $
            2,018.3
            
            $
            580.0
            
            
            29
            %Other
                revenues
            
            
            98.0
            
            
            102.2
            
            
            (4.2
            )
            
            (4
            )%2,696.3
            
            
            2,120.5
            
            
            575.8
            
            
            27
            %Operating
                and maintenance expense
            
            
            (1,585.2
            )
            
            (1,263.6
            )
            
            (321.6
            )
            
            25
            %Depreciation
            
            
            (302.8
            )
            
            (304.0
            )
            
            1.2
            
            
            N/MGain
                from disposal of assets, net
            
            
            222.3
            
            
            34.2
            
            
            188.1
            
            
            N/MOperating
                income before general and administrative expense
            
            $
            1,030.6
            
            $
            587.1
            
            $
            443.5
            
            
            76
            %


_________________


“N/A”
      means not applicable


“N/M”
      means not meaningful





Contract
      drilling revenues increased primarily due to generally higher average daily
      revenue and utilization in all asset classes. Partially offsetting this increase
      were lower revenues in 2006 for the *Deepwater
      Nautilus,* which
      was idle for a portion of 2006 undergoing repairs for hurricane damage, lower
      revenue for two rigs which were out of service for shipyard projects during
      2006
      and one rig which was sold in 2006.





Other
      revenues for the nine months ended September 30, 2006 decreased by $4.2 million
      primarily due to decreased integrated services revenue of $13.8 million,
      partially offset by an increase of $12.8 million in client reimbursable revenue.





Operating
      and maintenance expenses increased by $321.6 million primarily from shipyard
      projects, rig reactivations, pay increases to employees and vendor price
      increases resulting in higher labor and rig maintenance costs. Operating and
      maintenance expenses in the nine months ended September 30, 2006 included $87.8
      million for reactivation costs associated with the *Transocean
      Prospect, Transocean Winner* and *C.
      Kirk Rhein, Jr.* and
      $12.4 million of
      costs
      incurred to repair damages sustained during hurricanes Katrina and Rita on
      the *Transocean
      Marianas* and the *Deepwater
      Nautilus* .





During
      the nine months ended September 30, 2006, we recognized net gains of $222.3
      million primarily related to the sales of the drillship *Peregrine
      III,* a
      platform drilling rig, the drilling barge *Searex
      XII,* the
      semisubmersible rig *Transocean
      Explorer* and the
      tender rigs *W.D.
      Kent* and *Searex
      X* .
      During
      the nine months ended September 30, 2005, we recognized net gains of $34.2
      million primarily related to the sales of the semisubmersible rig *Sedco
      600* ,
      the
      jackup rig *Transocean
      Jupiter* and a
      land rig.





41
 *Index*





*Other
      Income and Expenses*





Nine
                Months Ended
              September
                30,2006
            
            2005
            
            Change
            
            %
                Change(In
                millions, except percentages)General
                and Administrative Expense
            
            $
            67.3
            
            $
            55.5
            
            $
            11.8
            
            
            21
            %Other
                (Income) Expense, netEquity
                in earnings of unconsolidated affiliates
            
            
            (7.5
            )
            
            (8.3
            )
            
            0.8
            
            
            (10
            )%Interest
                income
            
            
            (13.8
            )
            
            (14.0
            )
            
            0.2
            
            
            (1
            )%Interest
                expense, net of capitalized interest
            
            
            71.5
            
            
            87.4
            
            
            (15.9
            )
            
            (18
            )%Gain
                from TODCO stock sales
            
            
            -
            
            
            (165.0
            )
            
            165.0
            
            
            (100
            )%Loss
                on retirement of debt
            
            
            -
            
            
            7.3
            
            
            (7.3
            )
            
            (100
            )%Other,
                net
            
            
            (1.2
            )
            
            (5.6
            )
            
            4.4
            
            
            (79
            )%Income
                Tax Expense
            
            
            150.1
            
            
            65.8
            
            
            84.3
            
            
            N/M


_________________________


“N/M”
      means not meaningful





The
      increase in general and administrative expenses was due primarily to $8.6
      million higher personnel related expenses and $4.5 million higher legal fees,
      including costs related to the TODCO dispute and patent litigation with
      GlobalSantaFe Corporation.





The
      decrease in interest expense was primarily attributable to reductions of $18.4
      million associated with debt that was redeemed, retired or repurchased during
      or
      subsequent to the nine months ended September 30, 2005 and $7.4 million related
      to capitalized interest during the nine months ended September 30, 2006,
      partially offset by a $9.9 million increase as a result of higher debt levels
      arising from the issuance of debt and borrowings under credit facilities during
      or subsequent to the nine months ended September 30, 2005.





During
      the nine months ended September 30, 2005, we recognized gains of $165.0 million
      from the disposition of our then remaining investment in TODCO.





During
      the nine months ended September 30, 2005, we recognized a $7.3 million loss
      related to the early redemption and repurchase of $782.2 million aggregate
      principal amount of our debt.





The
      decrease in other, net was primarily due to $10.1 million of income recognized
      under the tax sharing agreement with TODCO in 2005 with no comparable activity
      in 2006 partially offset by $3.1 million of lower gains in 2006 related 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. The effective tax rate for the nine month periods ended September 30,
      2006 and 2005 was 17.5 percent, based on estimated 2006 and 2005 annual income
      before income taxes and minority interest after adjusting for certain items
      such
      as a portion of net gains on sales of assets, gain from TODCO stock sales and
      losses on retirements of debt. The tax effect, if any, of the excluded items
      as
      well as settlements of prior year tax liabilities and changes in prior year
      tax
      estimates are all treated as discrete period tax expenses or benefits. For
      the
      nine months ended September 30, 2006, the impact of the various discrete period
      tax items was a net expense of $28.1 million, related to the net gains on rig
      sales and changes in prior year estimates. For the nine months ended September
      30, 2005, the impact of the various discrete items was a net benefit of $9.3
      million related to the reduction in a valuation allowance related to U.K. net
      operating losses to record the expected realization of those losses based on
      improved market conditions and a benefit for the resolution of non-U.S. audits,
      partially offset by expenses related to asset dispositions and changes in
      estimates related to deferred tax assets retained by us after the disposition
      of
      TODCO, resulting in a tax rate of 10 percent on earnings before income taxes
      and
      minority interest.





42
 *Index*





**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, 2005.





The
      preparation of our financial statements requires us to make estimates and
      judgments that affect the reported amounts of assets, liabilities, revenues,
      expenses and related disclosures 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 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
      may
      differ from these estimates under different assumptions or
      conditions.





For
      a
      discussion of the critical accounting estimates that we use in the preparation
      of our 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, 2005. There have been no
      material changes to these estimates during the nine months ended September
      30,
      2006. These estimates require significant judgments and estimates used in the
      preparation of our consolidated financial statements. Management has discussed
      each of these critical accounting estimates with the audit committee of the
      board of directors.





**Stock-Based
      Compensation**





On
      January 1, 2006, we adopted the Financial Accounting Standards Board (“FASB”)
      Statement of Financial Accounting Standards (“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 Accounting Principles Board Opinion (“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. In March
      2005,
      the SEC issued Staff Accounting Bulletin No. 107 (“SAB
      107”), *Stock-Based
      Payment* ,
      relating to SFAS 123(R). We have applied the provisions of SAB 107 in our
      adoption of SFAS 123(R).





We
      adopted SFAS 123(R) using the modified prospective method (“Prospective
      Method”), which requires the application of SFAS 123(R) as of January 1, 2006,
      the first day of our fiscal year 2006. Our consolidated financial statements
      as
      of and for the three and nine months ended September 30, 2006 reflect the
      application of SFAS 123(R). In accordance with the Prospective Method, our
      consolidated financial statements for prior periods have not been restated
      to
      reflect, and do not include, the application of SFAS 123(R). Share-based
      compensation expense for the three and nine months ended September 30, 2006
      was
      $4.8 million and $12.8 million, respectively. Share-based compensation expense
      for the three and nine months ended September 30, 2005 was $6.2 million and
      $12.1 million, respectively.





SFAS
      123(R) requires forfeitures to be estimated at the time of grant and revised,
      if
      necessary, in subsequent periods if actual forfeitures differ from those
      estimates. Additionally, SFAS 123(R) requires the estimated forfeiture rate
      be
      applied and the cumulative effect determined for all prior periods in which
      stock-based compensation costs have been recorded. Prior to our adoption of
      SFAS
      123(R), we accounted for forfeitures as they occurred. Upon adopting SFAS
      123(R), we estimated expected forfeitures over the life of each individual
      award
      and have included the impact of these expected forfeitures in our stock-based
      compensation expense for the three and nine months ended September 30, 2006
      in
      addition to all prior periods on a cumulative basis. The effect of this change
      is to reverse compensation cost recognized in prior period financial statements
      for awards that are not expected to vest based upon the expected forfeiture
      rate. The cumulative effect of applying the expected forfeiture rate has been
      included in operating and maintenance expense and general and administrative
      expense, the impact of which had no material effect on our consolidated
      financial position, results of operations or cash flows.





43
 *Index*





We
      adopted SFAS 123 effective January 1, 2003 and have accounted for stock-based
      compensation prospectively for all stock based awards granted or modified on
      or
      subsequent to that date. As such, adoption of SFAS 123(R) using the Prospective
      Method had no material impact on our consolidated financial position, results
      of
      operations or cash flows. 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 to be reported as a financing cash
      flow rather than as an operating cash flow, which was required under SFAS 95.
      We
      reported operating cash flows related to tax deduction benefits of $15.2 million
      and $20.1 million for the three and nine months ended September 30, 2005,
      respectively.





Under
      SFAS 123, we recognized compensation cost over the vesting period up to the
      date
      of actual retirement. We will continue this practice for awards granted prior
      to
      adoption of SFAS 123(R). As a result of the adoption of SFAS 123(R), we now
      recognize compensation cost for awards granted or modified after January 1,
      2006
      through the date the employee is no longer required to provide service to earn
      the award (“service period”). If we had amortized compensation cost over the
      service period prior to adoption of SFAS 123(R), stock-based compensation
      expense would not have been materially different for any of the periods
      presented.





**New
      Accounting Pronouncements**





In
      July
      2006, the FASB issued FASB Interpretation No. 48, *Accounting
      for Uncertainty in Income Taxes—an interpretation of FASB Statement No.
      109* (“FIN
      48”). ** FIN
      48
      clarifies the accounting for income taxes recognized in an entity’s financial
      statements in accordance with SFAS 109, *Accounting
      for Income Taxes* .
      It
      prescribes a minimum recognition threshold and measurement attribute for
      recognizing and measuring the benefit of tax positions taken or expected to
      be
      taken in a tax return. FIN 48 also provides guidance on derecognition,
      classification, interest and penalties, accounting in interim periods,
      disclosure and transition. FIN 48 is effective for fiscal years beginning after
      December 15, 2006. We will be required to adopt this interpretation in the
      first
      quarter of fiscal year 2007. Management is currently evaluating the requirements
      of FIN 48 and has not yet determined the impact on the consolidated financial
      statements.





In
      September 2006, the FASB issued SFAS 157, *Fair
      Value Measurements* .
      This
      statement defines fair value, establishes a framework for measuring fair value
      in generally accepted accounting principles, and expands disclosures about
      fair
      value measurements. This statement applies under other accounting pronouncements
      that require or permit fair value measurements, the FASB having previously
      concluded in those accounting pronouncements that fair value is the relevant
      measurement attribute. Accordingly, this statement does not require any new
      fair
      value measurements. This statement is effective for fiscal years beginning
      after
      November 15, 2007. We will be required to adopt this statement in the first
      quarter of fiscal year 2008.  Management is currently evaluating the
      requirements of SFAS 157 and has not yet determined the impact on the
      consolidated financial statements.





In
      September 2006, the FASB issued SFAS 158, *Employers’
      Accounting for Defined Benefit Pension and Other Postretirement
      Plans* — *an
      amendment of FASB Statements No. 87, 88, 106 and 132-R.* This
      statement requires an entity to recognize in its balance sheet the funded status
      of its defined benefit postretirement plans, measured as the difference between
      the fair value of the plan assets and the benefit obligation. It also requires
      an entity to recognize changes in the funded status of a defined benefit
      postretirement plan within accumulated other comprehensive income, net of tax,
      to the extent such changes are not recognized in earnings as components of
      periodic net benefit cost. This statement is effective for fiscal years
      beginning after December 15, 2006.  We will be required to adopt this
      statement in the first quarter of fiscal year 2007.  Management is
      currently evaluating the requirements of SFAS 158 and has not yet determined
      the
      impact on the consolidated financial statements.





44
 *Index*





**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 in U.S. dollars and related weighted-average interest rates for
      each
      of the 12-month periods ending September 30 relating to debt obligations as
      of
      September 30, 2006. Weighted-average variable rates are based on London
      Interbank Offered Rate (“LIBOR”) rates at September 30, 2006, plus applicable
      margins.





At
      September 30, 2006 (in millions, except interest rate percentages):




Scheduled
                Maturity Date (a) (b)
            
            Fair
                Value2007
            
            2008
            
            2009
            
            2010
            
            2011
            
            Thereafter
            
            Total
            
            09/30/06Total
                debtFixed
                rate
            
            $
            100.0
            
            $
            19.0
            
            $
            -
            
            $
            -
            
            $
            565.5
            
            $
            903.8
            
            $
            1,588.3
            
            $
            1,787.7Average
                interest rate
            
            
            7.5
            %
            
            2.8
            %
            
            -
            %
            
            -
            %
            
            3.0
            %
            
            7.5
            %
            
            5.8
            %Variable
                rate
            
            $
            -
            
            $
            1,900.0
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            1,900.0
            
            $
            1,900.0Average
                interest rate
            
            
            -
            %
            
            5.6
            %
            
            -
            %
            
            -
            %
            
            -
            %
            
            -
            %
            
            5.6
            %


__________________________


(a)
            Maturity
                dates of the face value of our debt assume the put options on the
                7.45%
                Notes, Zero Coupon Convertible Debentures and 1.5% Convertible Debentures
                will be exercised in April 2007, May 2008 and May 2011,
                respectively.


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





At
      September 30, 2006, we had approximately $1.9 billion of variable rate debt
      at
      face value (54 percent of total debt at face value). This variable rate debt
      represented the Term Credit Facility and the Floating Rate Notes. Given
      outstanding amounts as of that date, a one percentage point change in interest
      rates would result in a corresponding change in interest expense of
      approximately $19.0 million per year. In addition, a large part of our cash
      investments would earn commensurately higher rates of return if interest rates
      increase. Using September 30, 2006 cash investment levels, a one percentage
      point change in interest rates would result in a corresponding change in
      interest income of approximately $2.9 million per year.





**Foreign
      Exchange Risk**





Our
      international operations expose us to foreign exchange risk. These matters
      have
      been previously discussed and reported in our Annual Report on Form 10-K for
      the
      year ended December 31, 2005. There have been no material changes to these
      previously reported matters during the nine months ended September 30,
      2006.




**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 September 30, 2006 to provide reasonable
      assurance that information required to be disclosed in our reports filed or
      submitted under the Exchange Act was (i) accumulated and communicated to our
      management, including our Chief Executive Officer and our Chief Financial
      Officer, to allow timely decisions regarding required disclosure and (ii)
      recorded, processed, summarized and reported within the time periods specified
      in the Securities and Exchange Commission’s rules and forms.





45
 *Index*





There
      were no changes to our internal controls over financial reporting during the
      quarter ended September 30, 2006 that have materially affected, or are
      reasonably likely to materially affect, our internal controls over financial
      reporting.





**PART
      II - OTHER INFORMATION**





**Item
      1. Legal Proceedings**





*Legal
      Proceedings* —In
      the
      third quarter of 2006, we received tax assessments of approximately $100 million
      from the state tax authorities of Rio de Janeiro in Brazil against one of our
      Brazilian subsidiaries for customs taxes on equipment imported into the state
      in
      connection with our operations. The assessments resulted from a preliminary
      finding by these authorities that our subsidiary’s record keeping practices were
      deficient. We continue to review documents related to the assessments, and
      while
      our review is not complete, we currently believe that the substantial majority
      of these assessments are without merit. We filed an initial response with the
      Rio de Janeiro tax authorities on September 9, 2006 refuting these
      additional tax assessments. While we cannot predict or provide assurance as
      to
      the final outcome of these proceedings, we do not expect it to have a material
      adverse effect on our consolidated financial position, results of operations
      or
      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 other lawsuits to have a material adverse effect on our current
      consolidated financial position, results of operations or cash flows. We are
      also involved in various tax matters as described in “Item 2. Management’s
      Discussion and Analysis of Financial Condition and Results of Opera tions
      ―Outlook-Tax Matters.” We cannot predict with certainty the outcome or effect of
      any of the matters specifically described above or of any such other pending
      or
      threatened litigation or legal proceedings. There can be no assurance that
      our
      beliefs or expectations as to the outcome or effect of any lawsuit or other matters will
      prove correct and the eventual outcome of these matters could materially differ
      from management’s current estimates.





**Item
      1A. Risk Factors**





There
      have been no material changes from the risk factors as previously disclosed
      in
“Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended
      December 31, 2005, as updated by “Item 1A. Risk Factors” of our Quarterly Report
      on Form 10-Q for the quarterly period ended June 30, 2006 **.**





46
 *Index*





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





**Issuer
      Purchases of Equity Securities**




**Period**
            
            **Total
                Number of Shares Purchased (1)**
            
            **Average
                Price Paid Per Share**
            
            **Total
                Number of Shares Purchased as****Part
                of Publicly Announced Plans or Programs (2)**
            
            **Maximum
                Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased
                Under the Plans or Programs (2) (in millions)**July
                2006
            
            
            5,197,316
            
            $
            77.02
            
            
            5,194,678
            
            $
            2,600August
                2006
            
            
            2,947,300
            
            
            67.86
            
            
            2,947,300
            
            
            2,400September
                2006
            
            
            16,274,211
            
            
            70.68
            
            
            16,274,211
            
            
            1,250Total
            
            
            24,418,827
            
            $
            71.69
            
            
            24,416,189
            
            $
            1,250


__________


(1)
            Total
                number of shares purchased in the third quarter of 2006 includes
                2,638
                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
                share award.





(2)
            In
                May 2006, our board of directors authorized an increase in the amount
                of
                ordinary shares which may be repurchased pursuant to our share repurchase
                program from $2.0 billion, which was previously authorized and announced
                in October 2005, to $4.0 billion. The shares may be repurchased from
                time
                to time in open market or private transactions. The repurchase program
                does not have an established expiration date and may be suspended
                or
                discontinued at any time. Under the program, repurchased shares are
                retired and returned to unissued status. From inception through September
                30, 2006, we have repurchased a total of38,256,902of
                our ordinary shares at a total cost of $2.75 billion.





47
 *Index*





**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)





*4.1
            Term
                Credit Agreement dated August 30, 2006 among Transocean Inc., the
                lenders
                party thereto and JPMorgan Chase Bank, N.A. as Administrative Agent,
                Citibank, N.A. as Syndication Agent, and The Bank of Tokyo-Mitsubishi
                UFJ,
                Ltd., Calyon New York Branch and The Royal Bank of Scotland plc
                (incorporated by reference to Exhibit 4.1 to our Current Report on
                Form
                8-K filed on August 31, 2006)





*4.2
            Form
                of Officers’ Certificate of Transocean Inc. establishing the form and
                terms of the Floating Rate Notes due 2008(incorporated by reference to Exhibit 4.2 to our Current Report on
                Form
                8-K filed on September 1, 2006)





†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.





48
 *Index*





**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, thereunto duly authorized, on November 2, 2006.





TRANSOCEAN
      INC.








By: /s/
      Gregory L. Cauthen


Gregory
      L. Cauthen


Senior
      Vice President and Chief Financial Officer


(Principal
      Financial Officer)








By: /s/
      David A. Tonnel


David
      A.
      Tonnel


Vice
      President and Controller


(Principal
      Accounting Officer)