**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, 2007**





**OR**





**o**
            **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 Filer  x
            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 26, 2007, 291,860,905 ordinary shares, par value $0.01 per share, were
      outstanding.










**TRANSOCEAN
      INC.**





**INDEX
      TO FORM 10-Q**





**QUARTER
      ENDED SEPTEMBER 30, 2007**








Page**PART
                I - FINANCIAL INFORMATION****Item
                1.**
            Financial
                Statements (Unaudited)Condensed
                Consolidated Statements of
                OperationsThree
                Months and Nine Months Ended September 30, 2007 and
                2006
            1Condensed
                Consolidated Balance SheetsSeptember
                30, 2007 and December 31,
                2006
            2Condensed
                Consolidated Statements of Cash
                FlowsThree
                Months and Nine Months Ended September 30, 2007 and
                2006
            3Notes
                to Condensed Consolidated Financial
                Statements
            4**Item
                2.**
            Management’s
                Discussion and Analysis of Financial Condition
                and Results of Operations
            19**Item
                3.**
            Quantitative
                and Qualitative Disclosures About Market
                Risk
            38**Item
                4.**
            Controls
                and Procedures
            38**PART
                II - OTHER INFORMATION****Item
                1.**
            Legal
                Proceedings
            39**Item
                1A.**
            Risk
                Factors
            40**Item
                2.**
            Unregistered
                Sales of Equity Securities and Use of
                Proceeds
            43**Item
                6.**
            Exhibits
            44




***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
                30,2007
            
            
            2006
            
            
            2007
            
            
            2006Operating
                revenuesContract
                drilling revenues
            
            $
            1,455
            
            
            $
            991
            
            
            $
            4,088
            
            
            $
            2,598Other
                revenues
            
            
            83
            
            
            
            34
            
            
            
            212
            
            
            
            981,538
            
            
            
            1,025
            
            
            
            4,300
            
            
            
            2,696Costs
                and expensesOperating
                and maintenance
            
            
            663
            
            
            
            561
            
            
            
            1,858
            
            
            
            1,585Depreciation
            
            
            103
            
            
            
            99
            
            
            
            304
            
            
            
            303General
                and administrative
            
            
            27
            
            
            
            22
            
            
            
            82
            
            
            
            67793
            
            
            
            682
            
            
            
            2,244
            
            
            
            1,955Gain
                from disposal of assets, net
            
            
            8
            
            
            
            47
            
            
            
            30
            
            
            
            222Operating
                income
            
            
            753
            
            
            
            390
            
            
            
            2,086
            
            
            
            963Other
                income (expense), netInterest
                income
            
            
            7
            
            
            
            4
            
            
            
            17
            
            
            
            14Interest
                expense, net of amounts capitalized
            
            
            (23
            )
            
            
            (28
            )
            
            
            (93
            )
            
            
            (72
            )Other,
                net
            
            
            287
            
            
            
            7
            
            
            
            295
            
            
            
            9271
            
            
            
            (17
            )
            
            
            219
            
            
            
            (49
            )Income
                before income taxes and minority interest
            
            
            1,024
            
            
            
            373
            
            
            
            2,305
            
            
            
            914Income
                tax expense
            
            
            52
            
            
            
            64
            
            
            
            230
            
            
            
            150Minority
                interest
            
            
            (1
            )
            
            
            –
            
            
            
            –
            
            
            
            –Net
                income
            
            $
            973
            
            
            $
            309
            
            
            $
            2,075
            
            
            $
            764Earnings
                per shareBasic
            
            $
            3.36
            
            
            $
            0.99
            
            
            $
            7.17
            
            
            $
            2.39Diluted
            
            $
            3.24
            
            
            $
            0.96
            
            
            $
            6.91
            
            
            $
            2.31Weighted
                average shares outstandingBasic
            
            
            290
            
            
            
            312
            
            
            
            289
            
            
            
            320Diluted
            
            
            300
            
            
            
            323
            
            
            
            301
            
            
            
            332








See
      accompanying notes.


1
 ***Index***


**TRANSOCEAN
      INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**


(In
      millions, except share data)








September
                30,
            
            
            December
                31,2007
            
            
            2006(Unaudited)**ASSETS**Cash
                and cash equivalents
            
            $
            618
            
            
            $
            467Accounts
                receivable, net of allowance for doubtful accounts of $41and
                $26 at September 30, 2007 and December 31, 2006,
                respectively
            
            
            1,266
            
            
            
            946Materials
                and supplies, net of allowance for obsolescence of $21 and $19at
                September 30, 2007 and December 31, 2006, respectively
            
            
            179
            
            
            
            160Deferred
                income taxes, net
            
            
            28
            
            
            
            16Other
                current assets
            
            
            132
            
            
            
            67Total
                current assets
            
            
            2,223
            
            
            
            1,656Property
                and equipment
            
            
            11,460
            
            
            
            10,539Less
                accumulated depreciation
            
            
            3,489
            
            
            
            3,213Property
                and equipment, net
            
            
            7,971
            
            
            
            7,326Goodwill
            
            
            2,187
            
            
            
            2,195Other
                assets
            
            
            319
            
            
            
            299Total
                assets
            
            $
            12,700
            
            
            $
            11,476





**LIABILITIES
      AND SHAREHOLDERS’ EQUITY**





Accounts
                payable
            
            $
            406
            
            
            $
            477Accrued
                income taxes
            
            
            156
            
            
            
            98Debt
                due within one year
            
            
            1,018
            
            
            
            95Other
                current liabilities
            
            
            419
            
            
            
            369Total
                current liabilities
            
            
            1,999
            
            
            
            1,039Long-term
                debt
            
            
            1,575
            
            
            
            3,200Deferred
                income taxes, net
            
            
            57
            
            
            
            54Other
                long-term liabilities
            
            
            566
            
            
            
            343Total
                long-term liabilities
            
            
            2,198
            
            
            
            3,597Commitments
                and contingenciesMinority
                interest
            
            
            1
            
            
            
            4Preference
                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,290,802,699
                and 292,454,457 shares issued and outstandingat
                September 30, 2007 and December 31, 2006, respectively
            
            
            3
            
            
            
            3Additional
                paid-in capital
            
            
            7,780
            
            
            
            8,044Accumulated
                other comprehensive loss
            
            
            (31
            )
            
            
            (30
            )Retained
                earnings (accumulated deficit)
            
            
            750
            
            
            
            (1,181
            )Total
                shareholders’ equity
            
            
            8,502
            
            
            
            6,836Total
                liabilities and shareholders’ equity
            
            $
            12,700
            
            
            $
            11,476








See
      accompanying notes.


2
 ***Index***


**TRANSOCEAN
      INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


(In
      millions)


(Unaudited)








Three
                months ended
              September
                30,
            
            
            Nine
                months ended
              September
                30,2007
            
            
            2006
            
            
            2007
            
            
            2006**Cash
                flows from operating activities**Net
                income
            
            $
            973
            
            
            $
            309
            
            
            $
            2,075
            
            
            $
            764Adjustments
                to reconcile net income to net cash provided by operating
                activitiesDepreciation
            
            
            103
            
            
            
            99
            
            
            
            304
            
            
            
            303Share-based
                compensation expense
            
            
            11
            
            
            
            5
            
            
            
            30
            
            
            
            13Gain
                from disposal of assets, net
            
            
            (8
            )
            
            
            (47
            )
            
            
            (30
            )
            
            
            (222
            )Deferred
                income taxes
            
            
            9
            
            
            
            (7
            )
            
            
            2
            
            
            
            18Deferred
                expenses, net
            
            
            (4
            )
            
            
            (40
            )
            
            
            (17
            )
            
            
            (95
            )Deferred
                revenues, net
            
            
            (20
            )
            
            
            12
            
            
            
            18
            
            
            
            32Other
                long-term liabilities
            
            
            19
            
            
            
            (4
            )
            
            
            31
            
            
            
            17Other,
                net
            
            
            (7
            )
            
            
            (7
            )
            
            
            (3
            )
            
            
            (14
            )Changes
                in operating assets and liabilitiesAccounts
                receivable
            
            
            (82
            )
            
            
            (169
            )
            
            
            (320
            )
            
            
            (273
            )Other
                current assets
            
            
            3
            
            
            
            15
            
            
            
            (29
            )
            
            
            (36
            )Accounts
                payable and other current liabilities
            
            
            (75
            )
            
            
            76
            
            
            
            65
            
            
            
            167Income
                taxes receivable/payable, net
            
            
            (25
            )
            
            
            47
            
            
            
            32
            
            
            
            59Net
                cash provided by operating activities
            
            
            897
            
            
            
            289
            
            
            
            2,158
            
            
            
            733**Cash
                flows from investing activities**Capital
                expenditures
            
            
            (305
            )
            
            
            (434
            )
            
            
            (1,060
            )
            
            
            (710
            )Proceeds
                from disposal of assets, net
            
            
            21
            
            
            
            95
            
            
            
            62
            
            
            
            298Joint
                ventures and other investments, net
            
            
            –
            
            
            
            –
            
            
            
            (3
            )
            
            
            –Net
                cash used in investing activities
            
            
            (284
            )
            
            
            (339
            )
            
            
            (1,001
            )
            
            
            (412
            )**Cash
                flows from financing activities**Borrowings
                under the Revolving Credit Facility, net
            
            
            –
            
            
            
            900
            
            
            
            –
            
            
            
            900Proceeds
                from issuance of debt, net
            
            
            –
            
            
            
            1,000
            
            
            
            –
            
            
            
            1,000Repayment
                of borrowings under Term Credit Facility
            
            
            (470
            )
            
            
            –
            
            
            
            (700
            )
            
            
            –Release
                of escrow funds – Nautilus lease financing
            
            
            –
            
            
            
            30
            
            
            
            –
            
            
            
            30Repurchase
                of ordinary shares
            
            
            –
            
            
            
            (1,751
            )
            
            
            (400
            )
            
            
            (2,351
            )Proceeds
                from issuance of ordinary shares under share-based compensation plans,
                net
            
            
            1
            
            
            
            1
            
            
            
            56
            
            
            
            67Tax
                benefit from issuance of ordinary shares under share-based compensation
                plans
            
            
            23
            
            
            
            –
            
            
            
            33
            
            
            
            –Other,
                net
            
            
            6
            
            
            
            (5
            )
            
            
            5
            
            
            
            (5
            )Net
                cash provided by (used in) financing activities
            
            
            (440
            )
            
            
            175
            
            
            
            (1,006
            )
            
            
            (359
            )Net
                increase (decrease) in cash and cash equivalents
            
            
            173
            
            
            
            125
            
            
            
            151
            
            
            
            (38
            )Cash
                and cash equivalents at beginning of period
            
            
            445
            
            
            
            282
            
            
            
            467
            
            
            
            445Cash
                and cash equivalents at end of period
            
            $
            618
            
            
            $
            407
            
            
            $
            618
            
            
            $
            407






See
        accompanying notes.
  3
 ***Index***


**TRANSOCEAN
      INC. AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED 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, 2007, we owned, had
      partial ownership interests in or operated 82 mobile offshore drilling units.
      As
      of this date, our fleet consisted of 33 High-Specification semisubmersibles
      and
      drillships (“High-Specification Floaters”), 20 Other Floaters, 25 Jackups
      and four Other Rigs. We also have four High-Specification Floaters under
      construction. See Note 4—Drilling Fleet Expansion and Upgrades.





On
      July
      21, 2007, we entered into an Agreement and Plan of Merger (the “Merger
      Agreement”) with GlobalSantaFe Corporation (“GlobalSantaFe”) and Transocean
      Worldwide Inc., a direct wholly owned subsidiary of Transocean (“Merger Sub”).
      We estimate that the closing of the transactions contemplated by the Merger
      Agreement will take place on or before December 31, 2007. See Note 3—Merger with
      GlobalSantaFe Corporation.





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”). 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, 2007 are
      not
      necessarily indicative of the results that may be expected for the year ending
      December 31, 2007 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,
      2006.





*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, share-based compensation, 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.


4
 ***Index***


**TRANSOCEAN
      INC. AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED STATEMENTS**


(Unaudited)





*Total
      Comprehensive Income*—Total comprehensive income for the three and nine
      months ended September 30, 2007 was $971 million and $2,074 million,
      respectively, while the total comprehensive income for the three and nine months
      ended September 30, 2006 was $309 million and $764 million, respectively. There
      were no other comprehensive income items that were material for any of the
      periods presented.





*Capitalized
      Interest*—We capitalize interest costs for qualifying construction and
      upgrade projects. We capitalized interest costs on construction work in progress
      of $19 million and $46 million for the three and nine months ended September
      30,
      2007, respectively. Capitalized interest for the three and nine months ended
      September 30, 2006 was $5 million and $7 million, respectively.





*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.





*Share-Based
      Compensation*—On January 1, 2006, we adopted the Financial Accounting
      Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”)
      No. 123 (revised 2004), *Share-Based Payment*(“SFAS 123R”) using the
      modified prospective method. Share-based compensation expense for the three
      and
      nine months ended September 30, 2007 was $11 million ($10 million, or $0.03
      per
      diluted share, net of tax) and $30 million ($27 million, or $0.09 per diluted
      share, net of tax), respectively. Share-based compensation expense for the
      three
      and nine months ended September 30, 2006 was $5 million or $0.02 per diluted
      share, which had an immaterial tax effect, and $13 million ($12 million, or
      $0.04 per diluted share, net of tax), respectively.





*Income
      Taxes—*On January 1,
      2007, we adopted the 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 No. 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. The cumulative effect adjustment upon
      adoption of FIN 48 resulted in a $146 million increase in our other long-term
      liabilities and a corresponding increase in the beginning balance of our
      accumulated deficit, primarily related to the ongoing dispute with Norway
      regarding certain restructuring transactions undertaken in 2001 and 2002. See
      Note 7―Income
      Taxes.





On
      January 1, 2007, we adopted the Emerging Issues Task Force (“EITF”) Issue No.
      06-3, “How Taxes Collected From Customers and Remitted to Governmental
      Authorities Should Be Presented in the Income Statement” (“EITF 06-3”). The
      scope of EITF 06-3 includes any tax assessed by a governmental authority that
      is
      directly imposed on a revenue-producing transaction between a seller and a
      customer, including sales, use, value added and excise taxes. EITF 06-3 provides
      that a company may adopt a policy of presenting taxes in the consolidated
      statement of operations on either a gross or net basis. If such taxes are
      significant, and are presented on a gross basis, the amounts of those taxes
      should be disclosed. We record taxes collected from our customers and remitted
      to governmental authorities on a net basis in our consolidated statement of
      operations and our adoption had no effect on our consolidated balance sheet,
      statement of operations or cash flows.





*New
      Accounting
      Pronouncements—*In September 2006, the FASB issued SFAS No. 157, *Fair
      Value Measurements* (“SFAS 157”). SFAS 157 defines fair value, establishes a
      framework for measuring fair value in generally accepted accounting principles,
      and expands disclosures about fair value measurements. SFAS 157 applies under
      other accounting pronouncements that require or permit fair value measurements
      because the FASB previously concluded in those accounting pronouncements that
      fair value is the relevant measurement attribute. Accordingly, SFAS 157 does
      not
      require any new fair value measurements. SFAS 157 is effective for fiscal years
      beginning after November 15, 2007. We will be required to adopt SFAS 157 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.


5
 ***Index***


**TRANSOCEAN
      INC. AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED STATEMENTS**


(Unaudited)





In
      February 2007, the FASB issued SFAS
      No. 159, *The Fair Value Option for Financial Assets and Financial
      Liabilities*(“SFAS 159”). SFAS 159 provides companies with an option to
      report selected financial assets and liabilities at fair value. It also
      establishes presentation and disclosure requirements designed to facilitate
      comparisons between companies that choose different measurement attributes
      for
      similar types of assets and liabilities. SFAS 159 is effective as of the
      beginning of the first fiscal year beginning after November 15, 2007. We
      will be required to adopt SFAS 159 in the first quarter of fiscal year 2008.
      Management is currently evaluating the requirements of SFAS 159 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 our condensed consolidated financial statements.





**Note
      3―Merger with GlobalSantaFe Corporation**





On
      July
      21, 2007, we entered into the Merger Agreement with GlobalSantaFe. Under the
      terms of the Merger Agreement, GlobalSantaFe will merge with Merger Sub by
      way
      of a scheme of arrangement qualifying as an amalgamation under Cayman Islands
      law, with Merger Sub continuing as the surviving corporation (the “Merger”).
      Immediately prior to the effective time of the Merger, each of our outstanding
      ordinary shares (the “Transocean Ordinary Shares”) will be reclassified by way
      of a scheme of arrangement under Cayman Islands law into (1) 0.6996 Transocean
      Ordinary Shares and (2) $33.03 in cash (the “Reclassification” and, together
      with the Merger, the “Transactions”). At the effective time of the Merger, each
      outstanding ordinary share of GlobalSantaFe (the “GlobalSantaFe Ordinary
      Shares”) will be exchanged for (1) 0.4757 Transocean Ordinary Shares (after
      giving effect to the Reclassification) and (2) $22.46 in cash.





The
      Transactions have been approved by
      our board of directors and the Merger has been approved by GlobalSantaFe’s board
      of directors. Consummation of the Transactions is subject to various conditions,
      including, among others, (1) approval by the shareholders of GlobalSantaFe
      of
      the Merger and approval by our shareholders of the Reclassification, the
      issuance of our ordinary shares in the Merger and certain amendments to our
      charter documents, in each case pursuant to the requirements specified in the
      Merger Agreement, (2) the receipt of required regulatory clearances,
      including the expiration of the Hart-Scott-Rodino waiting period and foreign
      competition clearances, (3) the receipt of financing sufficient to enable us
      to
      deliver the cash consideration in connection with the Transactions, (4) the
      accuracy of representations and warranties as of the closing date, including
      the
      absence of any material adverse effect with respect to our or GlobalSantaFe’s
      business, as applicable, and (5) other customary closing conditions. The closing
      of the Transactions will occur on the first business day immediately following
      the day on which all of the conditions to the Transactions contained in the
      Merger Agreement have been fulfilled or waived or on such other date as we
      and
      GlobalSantaFe may agree. We intend to complete the Transactions on or before
      December 31, 2007.





On
      September 19, 2007, the Premerger
      Notification Office of the Federal Trade Commission and the Department of
      Justice granted early termination of the Hart-Scott Rodino waiting period.
      On
      September 18, 2007, we made an informal submission to the Office of Fair
      Trading for the United Kingdom (the “OFT”). Although there is no statutorily
      prescribed deadline for a decision, we currently expect the OFT to announce
      its
      decision in November 2007 as to whether the proposed Merger will be referred
      to
      the Competition Commission of the United Kingdom (the “Competition Commission”)
      for further review. The Merger Agreement provides that, in the event the
      proposed Merger is referred to the Competition Commission for further review,
      the receipt of indications reasonably satisfactory to each of us and
      GlobalSantaFe that the proposed Merger can proceed is a condition to the
      obligation of each such party to complete the Transactions. A review by the
      Competition Commission may take up to six months to complete although we may
      request and receive permission to close under certain conditions pending the
      completion of such review.


6
 ***Index***


**TRANSOCEAN
      INC. AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED STATEMENTS**


(Unaudited)





In
      connection with the Transactions, on July 21, 2007, we and GlobalSantaFe entered
      into a commitment letter (the “Commitment Letter”), pursuant to which Goldman
      Sachs Credit Partners L.P. (“GSCP”), Lehman Commercial Paper Inc., Lehman
      Brothers Commercial Bank, Lehman Brothers Inc. and Lehman Brothers Holdings
      Inc.
      (collectively, the “Lehman Lenders”) committed to provide financing for the
      Transactions. The Commitment Letter provides for a $15 billion senior unsecured
      bridge loan facility due one year after closing, $10 billion of which is to
      be
      provided by GSCP and $5 billion of which is to be provided by the Lehman
      Lenders.




On
      September 28, 2007, we, GSCP, the Lehman Lenders and other lenders entered
      into
      a $15.0 billion, one-year senior unsecured bridge loan facility (the
“Bridge Loan Facility”). See Note 8—Debt.




Upon
      exercise following the Reclassification, we currently intend to allow warrant
      holders (see Note 11—Stock Warrants) to receive 0.6996 of our ordinary
      shares and $33.03 (i.e., the same consideration that a warrant holder would
      have
      owned immediately after the Reclassification if the warrant holder had exercised
      its warrant immediately before the Reclassification) for each ordinary share
      for
      which the warrants were previously exercisable, at an exercise price of $19
      per
      ordinary share for which the warrants were exercisable prior to the
      Reclassification.




**Note
      4―Drilling Fleet Expansion and Upgrades**





Capital
      expenditures, including capitalized interest, totaled $1.1 billion during the
      nine months ended September 30, 2007. The following table summarizes actual
      capital expenditures, including capitalized interest, for our major construction
      and conversion projects (in millions):





Total
                costs
              through
              December 31,
              2006
            
            
            Nine
                months
              ended
              September 30,
              2007
            
            
            Total
                costs
              through
              September 30,
              2007*Discoverer
                Americas*
            
            $
            108
            
            
            $
            193
            
            
            $
            301*Discoverer
                Clear Leader*
            
            
            221
            
            
            
            176
            
            
            
            397*Discoverer
                Inspiration*
            
            
            130
            
            
            
            128
            
            
            
            258Newbuild
                IV
            
            
            –
            
            
            
            104
            
            
            
            104*Sedco
                700*-series upgrades
            
            
            149
            
            
            
            152
            
            
            
            301Total
            
            $
            608
            
            
            $
            753
            
            
            $
            1,361





Construction
      work in progress, recorded in property and equipment, was $1.8 billion and
      $1.0
      billion at September 30, 2007 and December 31, 2006, respectively.





In
      June
      2007, we were awarded a drilling contract for a fourth enhanced Enterprise-class
      drillship. We estimate total capital expenditure for the construction of this
      rig to be approximately $640 million, excluding capitalized interest. We expect
      the rig to be contributed to a joint venture in which we will retain a
      65 percent ownership interest. This rig is expected to be operational in
      the third quarter of 2010.


7
 ***Index***


**TRANSOCEAN
      INC. AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED STATEMENTS**


(Unaudited)





Capital
      expenditures, including capitalized interest, totaled $710 million during the
      nine months ended September 30, 2006 and included $422 million spent on the
      construction of three enhanced Enterprise-class drillships and $95 million
      on
      two *Sedco 700*-series rig upgrades. See Note 14―Subsequent
      Events.





**Note
      5**―**Asset
      Dispositions**





During
      the nine months ended September
      30, 2007, we completed the sales of the tender rig *Charley Graves* and
      the swamp barge *Searex VI* for net proceeds of $44 million and
      recognized a gain on the sales of $31 million ($28 million, or $0.09 per
      diluted share, net of tax).





During
      the nine months ended September
      30, 2006, we sold two of our Other Floaters (*Peregrine III*and
*Transocean Explorer)*, two of our tender rigs (*Searex X* and
*W.D. Kent*), a swamp barge (*Searex XII*) and a platform rig. We
      received net proceeds from these sales of $260 million and recognized a gain
      on
      the sales of $219 million ($194 million, or $0.58 per diluted share, net of
      tax).





Any
      sale,
      lease or other disposal of assets which is material individually or in the
      aggregate to us except for sales of surplus equipment, sales of other assets
      in
      the ordinary course of business, or sales, leases or other transfers between
      us
      and our wholly owned subsidiaries or between those subsidiaries would require
      the consent of GlobalSantaFe pursuant to the Merger Agreement (see Note 3―Merger
      with
      GlobalSantaFe Corporation).





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





In
      May
      2006, our board of directors authorized an increase in the overall amount of
      ordinary shares that may be repurchased under our share repurchase program
      to
      $4.0 billion from $2.0 billion, which was previously authorized and announced
      in
      October 2005. 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 constructively retired and returned to unissued
      status.





A
      summary of the aggregate ordinary
      shares repurchased and retired for the three and nine months ended September
      30,
      2007 and 2006 is as follows (in millions, except per share data):





Three
                months ended
              September 30,
            
            
            Nine months ended
              September 30,2007
            
            
            2006
            
            
            2007
            
            
            2006Value
                of shares
            
            $
            –
            
            
            $
            1,750
            
            
            $
            400
            
            
            $
            2,350Number
                of shares
            
            
            –
            
            
            
            24.4
            
            
            
            5.2
            
            
            
            32.2Average
                purchase price per share
            
            $
            –
            
            
            $
            71.67
            
            
            $
            77.39
            
            
            $
            72.88





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 and borrowings under our Revolving Credit Facility.
      At
      September 30, 2007, we still had authority to repurchase $600 million of
      our ordinary shares under our share repurchase program; however, any such
      repurchases would require the consent of GlobalSantaFe pursuant to the Merger
      Agreement (see Note 3**―**Merger
      with GlobalSantaFe Corporation).





**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.


8
 ***Index***


**TRANSOCEAN
      INC. AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED STATEMENTS**


(Unaudited)





The
      estimated annual effective tax rate for the nine months ended September 30,
      2007 and September 30, 2006 was based on estimated annual income before
      income taxes for each period after adjusting for certain items such as net
      gains
      on rig sales and discrete items. The company recognizes interest and penalties
      related to unrecognized tax benefits as income tax expense.





At
      January 1, 2007, the total unrecognized tax benefit related to uncertain tax
      positions was $303 million, of which $294 million would affect the
      effective tax rate if recognized. These amounts included $84 million and
      $83 million of interest and penalties, respectively. During the quarter
      ended September 30, 2007, the total unrecognized tax benefit resulting from
      positions taken during the period increased by $11 million, including
      $4 million of interest and penalties. As a result of tax positions taken
      during a prior period, the total unrecognized tax benefit increased by
      $21 million and decreased by $7 million resulting in a net increase of
      $14 million. The increase was primarily related to exchange losses. The
      total unrecognized tax benefit at September 30, 2007 was $353 million, of
      which $344 million would affect the effective tax rate if
      recognized.





Our
      income tax returns are subject to review and examination in the many various
      jurisdictions in which we operate. It is reasonably possible that the
      unrecognized tax benefits related to uncertain tax positions will materially
      change within the next 12 months although it is not possible to estimate the
      impact of such a change.





Our
      2004
      and 2005 U.S. federal income tax returns are currently under examination by
      the
      U.S. Internal Revenue Service (“IRS”). In October 2007, we received from the IRS
      examination reports setting forth proposed changes to the U.S. federal taxable
      income reported for the years 2004 and 2005. The proposed changes are primarily
      related to intercompany pricing and certain 2004 restructuring transactions,
      and
      would result in a cash tax payment of approximately $413 million, exclusive
      of
      interest. We believe our returns are materially correct as filed, and we intend
      to vigorously defend against these proposed changes.





Our
      2006
      U.S. federal income tax returns and certain net operating losses generated
      in
      2000 through 2003 are subject to examination. We believe our returns are
      materially correct as filed, and we intend to vigorously defend against any
      proposed changes.




Certain
      of our Brazilian income tax returns for the years 2000 through 2003 are
      currently under examination.  The Brazil tax authorities have issued
      tax assessments totaling $40 million, plus a 75 percent penalty and
      $32 million of interest through September 30, 2007.  We believe
      our returns are materially correct as filed, and we intend to vigorously contest
      these assessments.




While
      we
      cannot predict or provide assurance as to the final outcome, we do not expect
      the ultimate liability resulting from any examination to have a material adverse
      effect on our consolidated financial position, results of operations or cash
      flows.





A
      valuation allowance for deferred tax assets is recorded when it is more likely
      than not that some or all of the benefit from the deferred tax asset will not
      be
      realized. We provide a valuation allowance to offset deferred tax assets where,
      in the opinion of management, it is more likely than not that the financial
      statement benefit of these losses will not be realized, including the possible
      expiration of these benefits prior to their utilization. During the three months
      ended September 30, 2007, the valuation allowance for non-current deferred
      tax
      assets decreased $58 million, which resulted from a change in estimate related
      to the expected utilization of our U.S. foreign tax credits.




Norwegian
      civil tax and criminal authorities are investigating certain transactions
      undertaken in 2001 and 2002. In the second quarter of 2007, the Norwegian
      authorities expanded the investigation and during the third quarter of 2007
      secured certain records located in the United Kingdom related to a separate
      Norway subsidiary that was previously subject to tax in Norway. In June 2006,
      we
      filed a formal protest with respect to a notification from the Norwegian tax
      authorities regarding their intent to propose adjustments to taxable income
      related to the 2001 and 2002 restructuring. These proposed assessments would
      result in an increase in tax of approximately $290 million, plus interest,
      and
      the authorities further indicated they intend to impose penalties, which could
      range from 15 to 60 percent of the assessments. We believe the Norwegian
      authorities are contemplating a separate tax assessment of approximately $121
      million related to a 2001 dividend payment, plus interest and a penalty, which
      could range from 15 to 60 percent of the assessment. The Norwegian tax
      authorities initiated inquiries in September 2004 and in March 2005 took action
      to obtain additional information regarding these transactions pursuant to a
      Norwegian court order. We have continued to respond to information requests
      from
      the authorities. We plan to vigorously contest any assertions by the Norwegian
      authorities in connection with the restructuring transactions or dividend and
      any increase in the scope of the current investigation. On January 1, 2007,
      as
      part of our implementation of FIN 48, we recorded a long-term liability of
      $142
      million related to these issues. Since January 1, 2007, the long-term liability
      has increased to $168 million due to the accrual of interest and exchange rate
      fluctuations. While we cannot predict or provide assurance as to the final
      outcome of these proceedings, we do not expect the ultimate resolution of these
      matters to have a material adverse effect on our consolidated financial position
      or results of operations although it may have a material adverse effect on
      our
      consolidated cash flows.


9
 ***Index***


**TRANSOCEAN
      INC. AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED STATEMENTS**


(Unaudited)





Our
      tax
      returns in the other major jurisdictions in which we operate are generally
      subject to examination for periods ranging from three to six years. We have
      agreed to extensions beyond the statute of limitations in two jurisdictions
      for
      up to 12 years. Tax authorities in certain jurisdictions are examining our
      tax
      returns and in some cases have issued assessments. We are defending our tax
      positions in those jurisdictions. While we cannot predict or provide assurance
      as to the final outcome of these proceedings, we do not expect the ultimate
      liability to have a material adverse effect on our consolidated financial
      position, results of operations or cash flows.





*TODCO
      Tax Sharing Agreement (“TSA”)*—On July 11, 2007, Hercules Offshore, Inc.
      (“Hercules”) completed the acquisition of TODCO (the “TODCO Acquisition”). The
      TSA requires Hercules to make an accelerated change of control payment to our
      wholly owned subsidiary, Transocean Holdings Inc. (“Transocean Holdings”),
      within 30 days of the date of the acquisition as a result of the deemed
      utilization of TODCO’s remaining pre-IPO tax benefits. The amount of the
      accelerated payment owed to Transocean Holdings is calculated by multiplying
      80
      percent by the then remaining pre-IPO tax benefits at the July 11, 2007
      effective date of the TODCO Acquisition. In August 2007, Hercules made a change
      of control payment of approximately $118 million to Transocean Holdings. We
      believe Hercules owes an additional amount of approximately $10 million
      related to the change of control of TODCO.





The
      TSA
      also requires Hercules to make additional payments to Transocean Holdings based
      on a portion of the tax benefit from the exercise of certain compensatory stock
      options to acquire our ordinary shares by TODCO’s current and former employees
      and directors, when and if those options are exercised. We estimate that the
      amount of payments to Transocean Holdings related to compensatory options that
      remain outstanding at September 30, 2007, assuming a Transocean share price
      of
      $113.05 per share at the time of exercise of the compensatory options (the
      actual price of our ordinary shares at the close of trading on September 28,
      2007), will be approximately $23 million. However, there can be no assurance
      as
      to the amount and timing of any payment which Transocean Holdings may receive.
      In addition, any future reduction of the pre-IPO tax benefits by the U.S. taxing
      authorities upon examination of the TODCO tax returns may require Transocean
      Holdings to reimburse TODCO for some of the amounts previously paid. We
      recognized $276 million  as other income in the third quarter of 2007 for
      the change of control payment discussed above and payments received in prior
      periods related to TODCO's 2006 and 2007 tax years.


10
 ***Index***


**TRANSOCEAN
      INC. AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED STATEMENTS**


(Unaudited)





**Note
      8**―**Debt**





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





September 30,
            
            
            December 31,2007
            
            
            2006Term
                Credit Facility due August 2008
            
            $
            –
            
            
            $
            700Floating
                Rate Notes due September 2008 (a)
            
            
            1,000
            
            
            
            1,0006.625%
                Notes due April 2011
            
            
            178
            
            
            
            1807.375%
                Senior Notes due April 2018
            
            
            247
            
            
            
            247Zero
                Coupon Convertible Debentures due May 2020 (put options exercisable
                May 2008 and May 2013) (b)
            
            
            18
            
            
            
            181.5%
                Convertible Debentures due May 2021 (put options exercisable May 2011
                and May 2016)
            
            
            400
            
            
            
            4008%
                Debentures due April 2027
            
            
            57
            
            
            
            577.45%
                Notes due April 2027 (c)
            
            
            95
            
            
            
            957.5%
                Notes due April 2031
            
            
            598
            
            
            
            598Total
                debt
            
            
            2,593
            
            
            
            3,295Less
                debt due within one year (a)(b)(c)
            
            
            1,018
            
            
            
            95Total
                long-term debt
            
            $
            1,575
            
            
            $
            3,200


______________________




(a)
            The
                Floating Rate Notes due September 2008 were classified as debt due
                within
                one year at September 30, 2007.




(b)
            The
                Zero Coupon Convertible Debentures were classified as debt due within
                one
                year at September 30, 2007 since the bondholders have the right to
                require us to repurchase the debentures in May
                2008.




(c)
            The
                7.45% Notes were classified as debt due within one year at
                December 31, 2006 since holders had the option to require us to
                repurchase the notes in April 2007. As of March 31, 2007, we
                reclassified these notes as long-term debt, as no holders had notified
                us
                of their intent to exercise their option by the required notification
                date
                of March 15, 2007.





The
      scheduled maturity of our debt assumes the bondholders exercise their options
      to
      require us to repurchase the Zero Coupon Convertible Debentures and 1.5%
      Convertible Debentures in May 2008 and May 2011, respectively. All
      amounts are stated 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 30,2008
            
            $
            1,0192009
            
            
            –2010
            
            
            –2011
            
            
            5652012
            
            
            –Thereafter
            
            
            1,004Total
            
            $
            2,588





*Revolving
      Credit Facility*—In July 2005, we entered into a $500 million, five-year
      revolving credit agreement (“Revolving Credit Facility”). In May 2006, we
      increased the credit limit on the facility from $500 million to $1.0
      billion and extended the maturity date by one year from July 2010 to July 2011.
      In June 2007, we extended the maturity on the facility by one year from
      July 2011 to July 2012 and clarified the method pursuant to which we may insure
      our fleet (see Note 10―Contingencies–Retained
      Risk). The Revolving Credit Facility bears interest, at our option, at a base
      rate or at the London Interbank Offered Rate (“LIBOR”) plus a margin that can
      vary from 0.19 percent to 0.58 percent depending on our non-credit enhanced
      senior unsecured public debt rating (“Debt Rating”). A facility fee, varying
      from 0.06 percent to 0.17 percent depending on our Debt Rating, is incurred
      on
      the daily amount of the underlying commitment, whether used or unused,
      throughout the term of the facility. A utilization fee, varying from 0.05
      percent to 0.10 percent depending on our Debt Rating, is payable if amounts
      outstanding under the Revolving Credit Facility are greater than or equal to
      50 percent of the total underlying commitment. At September 30, 2007, the
      applicable margin, facility fee and utilization fee were 0.26 percent, 0.09
      percent and 0.100 percent, respectively. The Revolving Credit Facility requires
      compliance with various covenants and provisions customary for agreements of
      this nature, including a debt to total tangible capitalization ratio, as defined
      by the Revolving Credit Facility, of not greater than 60 percent. At
      September 30, 2007, we had no borrowings outstanding and $1.0 billion remained
      available under this facility.


11
 ***Index***


**TRANSOCEAN
      INC. AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED STATEMENTS**


(Unaudited)





*Bridge
      Loan Facility*—In
      September 2007, we entered into the Bridge Loan Facility. The terms of the
      Bridge Loan Facility contemplate a one-time loan of up to $15 billion at either
      (1) a base rate, determined as the greater of (A) the prime loan rate
      quoted in The Wall Street Journal Money Rates Section as the prime rate or
      (B) the federal funds effective rate plus 0.5 percent, or (2) the reserve
      adjusted LIBOR plus the applicable margin, which is based upon our Debt Rating.
      As of October 30, 2007, the applicable margin was 0.4 percent.





The
      obligation of each lender to make a loan under the Bridge Loan Facility is
      subject to the satisfaction of certain conditions, including the execution
      of
      satisfactory documentation and the consummation, or substantially concurrent
      consummation, of the Transactions.





We
      may
      prepay the Bridge Loan Facility in whole or in part without premium or penalty.
      In addition, this facility requires mandatory prepayments of outstanding
      borrowings in an amount equal to 100 percent of the net cash proceeds
      resulting from any of the following (in each case subject to certain agreed
      exceptions): (1) the sale or other disposition of any of our property or
      assets above a predetermined threshold; (2) the receipt of certain net
      insurance or condemnation proceeds; (3) certain issuances of our equity
      securities; and (4) the incurrence of indebtedness for borrowed money by
      us.





The
      Bridge Loan Facility also contains certain covenants that are applicable during
      the period in which any borrowings are outstanding, including a maximum leverage
      ratio and covenants restricting our ability to pay dividends. Borrowings under
      the Bridge Loan Facility are subject to acceleration upon the occurrence of
      events of default.





*Debt
      Repayments—*On
      August****13, 2007, we terminated our existing $1.0 billion,
      two-year term credit facility that we originally entered into on August 30,
      2006
      with 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 (the “Term
      Credit Facility”) and recognized a loss on the termination of this agreement of
      approximately $1 million, in the third quarter of 2007. Under the terms of
      the
      Term Credit Facility, we were able to request borrowings up to $1.0 billion
      over
      the first six months of the term. After six months, any unused capacity was
      cancelled. Once repaid, the funds could not be reborrowed. At our election,
      borrowings could be made under the Term Credit Facility at either (1) 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 0.50
      percent, or (2) LIBOR plus 0.30 percent, based on current credit ratings.
      We paid a fee of 0.065 percent per annum on the daily amount of the unused
      commitments under the Term Credit Facility through October 3, 2006. In
      October 2006, we borrowed the full $1.0 billion in capacity. In
      connection with the termination, we repaid $70 million of the outstanding
      borrowings on August 6, 2007 and the remaining $400 million on August
      13, 2007.


12
 ***Index***


**TRANSOCEAN
      INC. AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED STATEMENTS**


(Unaudited)





The
      Term
      Credit Facility contained specified covenants, including a debt to total
      tangible capitalization covenant. Borrowings under the Term Credit Facility
      were
      subject to acceleration upon the occurrence of events of default.




*Debt
      Conversions*—Holders of our Zero Coupon Convertible Debentures have the
      option to require us to convert their debentures into our ordinary shares at
      a
      rate of 8.1566 ordinary shares per $1,000 debenture any time prior to maturity.
      During the three and nine months ended September 30, 2007, we issued 203 and
      1,426 ordinary shares in exchange for $25,000 and $175,000 aggregate principal
      amount of debentures, respectively. See Note 14—Subsequent Events.





Holders
      of our 1.5% Convertible Debentures have the option to require us to convert
      their debentures into our ordinary shares at a rate of 13.8627 ordinary shares
      per $1,000 debenture any time prior to maturity. During the three and nine
      months ended September 30, 2007, we issued 623 ordinary shares in exchange
      for
      $45,000 aggregate principal amount of debentures. See Note 14—Subsequent
      Events.





**Note
      9**―**Earnings
      Per Share**





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





Three months ended
              September 30,
            
            
            Nine months ended
              September 30,2007
            
            
            2006
            
            
            2007
            
            
            2006**Numerator
                for basic earnings per share**Net
                income for basic earnings per share
            
            $
            973
            
            
            $
            309
            
            
            $
            2,075
            
            
            $
            764**Numerator
                for diluted earnings per share**Net
                income
            
            $
            973
            
            
            $
            309
            
            
            $
            2,075
            
            
            $
            764Add
                back interest expense on the 1.5% convertible debentures
            
            
            1
            
            
            
            2
            
            
            
            5
            
            
            
            5Net
                income for diluted earnings per share
            
            $
            974
            
            
            $
            311
            
            
            $
            2,080
            
            
            $
            769**Denominator
                for diluted earnings per share**Weighted-average
                shares outstanding for basic earnings per share
            
            
            289
            
            
            
            312
            
            
            
            289
            
            
            
            320Effect
                of dilutive securities:Employee
                stock options and unvested stock grants
            
            
            3
            
            
            
            3
            
            
            
            3
            
            
            
            4Warrants
                to purchase ordinary shares
            
            
            2
            
            
            
            3
            
            
            
            3
            
            
            
            31.5%
                convertible debentures
            
            
            6
            
            
            
            5
            
            
            
            6
            
            
            
            5Adjusted
                weighted-average shares and assumed conversions for diluted earnings
                per
                share
            
            
            300
            
            
            
            323
            
            
            
            301
            
            
            
            332**Basic
                earnings per share**Net
                income
            
            $
            3.36
            
            
            $
            0.99
            
            
            $
            7.17
            
            
            $
            2.39**Diluted
                earnings per share**Net
                income
            
            $
            3.24
            
            
            $
            0.96
            
            
            $
            6.91
            
            
            $
            2.31





The
      effect of the Zero Coupon Convertible Debentures on the calculation of net
      income for diluted earnings per share and adjusted weighted-average shares
      and
      assumed conversions for diluted earnings per share is not presented, as it
      is
      not material for any of the periods presented.


13
 ***Index***


**TRANSOCEAN
      INC. AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED STATEMENTS**


(Unaudited)





**Note
      10**―**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. We have not yet been able to conduct extensive discovery
      nor
      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.





In
      1990
      and 1991, two of our subsidiaries were served with various assessments
      collectively valued at approximately $14 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 $13 million. We initially tried to challenge the
      assessment by means of a writ of mandamus. However, we did not receive an
      injunction in the above-mentioned writ and the government is attempting to
      enforce the judgment on this assessment (the amount claimed is approximately
      $27
      million, which exceeds the amount we believe is at issue). In response, we
      have
      presented a specific motion to stay the execution based on a $27 million
      guarantee in the form of oil barrels provided on our behalf by the Brazilian
      government-controlled oil company, Petrobras. 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
      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 alleged in July 1999 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 found that we had imported the rig improperly and
      intentionally concealed the import from the authorities, and directed us to
      pay
      certain other fees and penalties in addition to the amount of customs duties
      owed. We appealed the Customs Department ruling and an appellate tribunal
      granted our request that the confiscation be stayed pending the appeal. The
      appellate tribunal also found that the rig was imported without proper
      documentation or payment of duties and 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, thus
      limiting our exposure as to custom duties to approximately $6 million. The
      Mumbai High Court’s decision in 2006, together with the Supreme Court of India’s
      decision in February 2007 to dismiss the leave to appeal petition filed by
      the
      Customs Department, have effectively affirmed the appellate ruling. 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.


14
 ***Index***


**TRANSOCEAN
      INC. AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED STATEMENTS**


(Unaudited)





One
      of
      our subsidiaries is involved in an action with respect to a customs matter
      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 with Petrobras was transferred from the
      Schlumberger entity to an entity that would become one of our subsidiaries,
      but
      Schlumberger did not transfer the temporary import permit to any 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
      temporary 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 of the temporary admission from Schlumberger to our subsidiary
      but
      did not rule on whether the temporary admission could be extended without the
      payment of a financial penalty. During the first quarter of 2004, the Brazilian
      customs authorities issued an assessment totaling approximately
      $125 million at that time against our subsidiary.





The
      first
      level Brazilian court ruled in April 2007 that the temporary admission granted
      to our subsidiary had expired which allowed the Brazilian customs authorities
      to
      execute on their assessment. Following this ruling, the Brazilian customs
      authorities issued a revised assessment against our subsidiary. As of
      October 30, 2007, the U.S. dollar equivalent of this assessment was
      approximately $210 million in aggregate, including interest, which we contest.
      We are not certain as to the basis for the increase in the amount of the
      assessment, and in September 2007, we received a temporary ruling in our favor
      from a Brazilian federal court that the valuation method used by the Brazilian
      customs authorities was incorrect. We intend to continue to aggressively contest
      this matter and we have appealed the first level Brazilian court’s ruling to a
      higher level court in Brazil. There may be further judicial or administrative
      proceedings that result from this matter. While the court has granted us the
      right to continue our appeal without the posting of a bond, it is possible
      that
      we may be required to post a bond for up to the full amount of the assessment
      in
      connection with these proceedings. We have also put Schlumberger on notice
      that
      we consider any assessment to be solely the responsibility of Schlumberger,
      not
      our subsidiary. Nevertheless, we expect that the Brazilian customs authorities
      will continue to seek to recover the assessment solely from our subsidiary,
      not
      Schlumberger. Schlumberger has denied any responsibility for this matter, but
      remains a party to the proceedings. 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.





In
      the third quarter of 2006, we
      received tax assessments of approximately $122 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. In September 2007, we received confirmation
      from the state tax authorities that they believe the additional tax assessments
      are valid, and then we filed an appeal on September 27, 2007 to the state
      taxpayers council contesting these 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.


15
 ***Index***


**TRANSOCEAN
      INC. AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED STATEMENTS**


(Unaudited)





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).





*Retained
      Risk*—We have renewed our insurance coverages for the 12-month period
      beginning May 1, 2007. Under the new program, we generally maintain a $125
      million per occurrence deductible on our hull and machinery, which is subject
      to
      an aggregate deductible of $250 million. In addition, we maintain a $10 million
      per occurrence deductible on crew personal injury liability and $5 million
      per
      occurrence deductible on third-party property claims, which together are subject
      to an aggregate deductible of $50 million that is applied to any occurrence
      in
      excess of the per occurrence deductible until the aggregate deductible is
      exhausted.





At
      present, the insured value of our drilling rig fleet is approximately $22
      billion in aggregate. We also carry $950 million of third-party liability
      coverage exclusive of the personal injury liability deductibles, third-party
      property liability deductibles and retention amounts described above. We retain
      the risk through self-insurance for any losses in excess of the $950 million
      limit. We do not generally have commercial market insurance coverage for
      physical damage losses to the Transocean fleet due to hurricanes in the U.S.
      Gulf of Mexico and war perils worldwide. We do not carry insurance for loss
      of
      revenue. In the opinion of management, adequate accruals have been made based
      on
      known and estimated losses related to such exposures.





*Letters
      of Credit and Surety Bonds*—We had letters of credit outstanding totaling
      $404 million and $405 million at September 30, 2007 and December 31, 2006,
      respectively. These letters of credit guarantee various contract bidding and
      performance activities under various uncommitted lines provided by several
      banks.





As
      is
      customary in the contract drilling business, we also have various surety bonds
      in place that secure customs obligations relating to the importation of our
      rigs
      and certain performance and other obligations. Surety bonds outstanding totaled
      $8 million and $6 million at September 30, 2007 and December 31, 2006,
      respectively.





**Note
      11**―**Stock
      Warrants**





On
      July 26, 2007, we issued 861,700
      ordinary shares and we received $16 million in cash related to the exercise
      of
      49,240 warrants. At September 30, 2007, 154,660 warrants were outstanding to
      purchase 2,706,550 ordinary shares at an exercise price of $19.00 per share.
      The
      warrants expire on May 1, 2009. See Note 3—Merger with GlobalSantaFe
      Corporation.





**Note
      1****2**―**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 in 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.


16
 ***Index***


**TRANSOCEAN
      INC. AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED STATEMENTS**


(Unaudited)





Net
      periodic benefit cost for these defined benefit pension plans includes the
      following components (in millions):





Three months ended
              September 30,
            
            
            Nine months ended
              September 30,2007
            
            
            2006
            
            
            2007
            
            
            2006**Components
                of net periodic benefit cost (a)**Service
                cost
            
            $
            5
            
            
            $
            5
            
            
            $
            16
            
            
            $
            15Interest
                cost
            
            
            6
            
            
            
            5
            
            
            
            16
            
            
            
            15Expected
                return on plan assets
            
            
            (5
            )
            
            
            (5
            )
            
            
            (16
            )
            
            
            (15
            )Amortization
                of prior period service cost
            
            
            –
            
            
            
            –
            
            
            
            1
            
            
            
            1Recognized
                net actuarial losses
            
            
            1
            
            
            
            1
            
            
            
            3
            
            
            
            3Net
                periodic benefit cost
            
            $
            7
            
            
            $
            6
            
            
            $
            20
            
            
            $
            19


______________


(a)
            Amounts
                are before income tax effect.





We
      contributed approximately $17 million to the defined benefit pension plans
      during the nine months ended September 30, 2007. We expect to make an additional
      contribution of approximately $6 million to our defined benefit pension plans
      in
      the remaining three months of 2007, which we expect will be funded from cash
      flow from operations.





*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 costs for these other postretirement plans and their components,
      including service cost, interest cost, amortization of prior service cost and
      recognized net actuarial losses, were less than $1 million and $2 million for
      each of the three and nine months ended September 30, 2007 and 2006,
      respectively.





We
      contributed approximately $2 million to the other postretirement benefit plans
      during the nine months ended September 30, 2007. We expect to make less than
      $1
      million in additional contributions to other postretirement benefit plans in
      the
      remaining three months of 2007, which we expect to fund using cash flows from
      operations.





**Note
      13**—**Supplementary Cash Flow Information**





Non-cash
      investing activities for the nine months ended September 30, 2007 and 2006
      included $80 million and $51 million, respectively, related to
      accruals of capital expenditures. The accruals have been reflected in the
      consolidated balance sheet as an increase in property and equipment, net and
      in
      accounts payable.





Cash
      payments for interest were $116 million and $52 million for the nine months
      ended September 30, 2007 and 2006, respectively. Cash payments for income
      taxes, net, were $163 million and $74 million for the nine months ended
      September 30, 2007 and 2006, respectively.





**Note
      14**―**Subsequent****Events**





*Pacific
      Drilling*— In April 2007, we entered into a marketing and purchase option
      agreement with Pacific Drilling Limited that provided us with the exclusive
      marketing right for two newbuild Ultra-Deepwater Floaters as well as an option
      to purchase a 50 percent interest in a joint venture company through which
      we
      and Pacific Drilling would own the drillships. In October 2007, we obtained
      a firm commitment for one of the drillships, and we exercised the
      option to acquire a 50 percent interest in the joint venture in exchange for
      approximately $238 million, representing 50 percent of the documented costs
      of
      the drillships at the time of exercise. We are providing construction management
      services and have agreed to provide operating management services once the
      drillships begin operations. Beginning in October 2010, Pacific Drilling will
      have the right to exchange its interest in the joint venture for our ordinary
      shares or cash.


17
 ***Index***


**TRANSOCEAN
      INC. AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED STATEMENTS**


(Unaudited)





We
      have
      evaluated our interest in the joint venture company and have determined that
      the
      joint venture company meets the definition of a variable interest entity. We
      have identified our company as the primary beneficiary under FASB Interpretation
      No. 46 (revised December 2003), *Consolidation of Variable Interest
      Entities*. As a result, we will consolidate the joint venture company in our
      financial statements and the interest that is not owned by us will be reflected
      as minority interest on our consolidated balance sheets.





*Debt
      Conversion—*As of October 26, 2007, we issued 146,818 ordinary shares
      subsequent to September 30, 2007 upon conversion of $18,000,000 aggregate
      principal amount of our Zero Convertible Debentures at a rate of 8.1566 ordinary
      shares per $1,000 debenture.


As
        of
 October 26, 2007, we issued 886,684 ordinary shares subsequent to
        September 30, 2007 upon conversion of $63,962,000 aggregate principal amount
        of
        our 1.5% Convertible Debentures at a rate of 13.8627 ordinary shares per
        $1,000
        debenture.


On
      October 19, 2007, we called for redemption our Zero Coupon Convertible
      Debentures due May 2020 and our 1.5% Convertible Debentures due 2021 that
      were outstanding on that date.


18
 ***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.
      Forward-looking statements in this quarterly report include, but are not limited
      to, statements about the following subjects:





·
            contract
                commencements,
            
            ·
            income
                related to and any payments to·
            contract
              option exercises,
            
            
            be
              received under the TODCO
              tax·
            revenues,
            
            
            sharing
              agreement,·
            expenses,
            
            ·
            uses
                of excess cash, including ordinary·
            results
              of operations,
            
            
            share
              repurchases,·
            commodity
                  prices,
            
            ·
            the
                timing and funding of share·
            customer
              drilling programs,
            
            
            repurchases,·
            supply
                  and demand,
            
            ·
            issuance
                of new debt,·
            utilization
                  rates,
            
            ·
            debt
                reduction,·
            dayrates,
            
            ·
            planned
                asset sales,·
            contract
                  backlog,
            
            ·
            timing
                of asset sales,·
            the
                timing and closing of the
            
            ·
            proceeds
                from asset sales,GlobalSantaFe
                merger and related
            
            ·
            our
                effective tax rate,transactions,
            
            ·
            changes
                in tax laws, treaties and·
            consideration
              payable in connection
            
            
            regulations,with
                the GlobalSantaFe merger
                and
            
            ·
            tax
                assessments,related
                  transactions,
            
            ·
            our
                other expectations with regard to·
            effects
              and results of the GlobalSantaFe
            
            
            market
              outlook,merger
                and related transactions,
            
            ·
            operations
                in international markets,·
            planned
                shipyard projects and rig
            
            ·
            the
                level of expected capitalmobilizations
              and their effects,
            
            
            expenditures,·
            newbuild
                projects and opportunities,
            
            ·
            results
                and effects of legal proceedings·
            the
              upgrade projects for the *Sedco 700*–
            
            
            and
              governmental audits andseries
              semisubmersible rigs,
            
            
            assessments,·
            other
                  major upgrades,
            
            ·
            adequacy
                of insurance,·
            the
                potential purchase of an ownership
            
            ·
            liabilities
                for tax issues, including thoseinterest
              in a joint venture that will own
            
            
            associated
              with our activities in Brazil,the
              fourth Enterprise-class drillship,
            
            
            Norway
              and the United States,·
            contract
                  awards,
            
            ·
            liquidity,·
            drillship
                  delivery dates,
            
            ·
            cash
                flow from operations,·
            expected
                  downtime,
            
            ·
            adequacy
                of cash flow for our·
            insurance
              proceeds,
            
            
            obligations,·
            cash
                investments of our wholly-owned
            
            ·
            effects
                of accounting changes,captive
                  insurance company,
            
            ·
            adoption
                of accounting policies,·
            future
                activity in the deepwater, mid-
            
            ·
            pension
                plan and other postretirementwater
              and the jackup market sectors,
            
            
            benefit
              plan contributions,·
            market
                outlook for our various
            
            ·
            benefit
                payments, andgeographical
                  operating sectors,
            
            ·
            the
                timing and cost of completion of·
            capacity
                constraints for ultra-deepwater
            
            
            capital
              projects.rigs
                and other rig classes,·
            effects
                of new rigs on the market,


19
 ***Index***


Forward-looking
      statements in this
      quarterly report are identifiable by use of the following words and other
      similar expressions among others:





·
            “anticipates”
            
            ·
            “may”·
            “believes”
            
            ·
            “might”·
            “budgets”
            
            ·
            “plans”·
            “could”
            
            ·
            “predicts”·
            “estimates”
            
            ·
            “projects”·
            “expects”
            
            ·
            “scheduled”·
            “forecasts”
            
            ·
            “should”·
            “intends”





Such
      statements are subject to numerous risks, uncertainties and assumptions,
      including, but not limited to:




·
            those
                described under “Item 1A. Risk Factors” included herein and in our Annual
                Report on Form 10–K for the year ended December 31, 2006, our Quarterly
                Reports on Form 10-Q for the quarterly periods ended March 31, 2007
                and
                June 30, 2007, and the definitive joint proxy statement filed by
                GlobalSantaFe and us on October 3,
                2007,


·
            the
                adequacy of sources of liquidity,


·
            costs,
                delays and other difficulties related to the proposed merger and
                related
                transactions with GlobalSantaFe (including the satisfaction of closing
                conditions),


·
            our
                inability to obtain regulatory clearances and shareholder approval
                and
                satisfy closing conditions for the GlobalSantaFe merger and related
                transactions,


·
            our
                inability to obtain a drilling contract for the second drillship
                acquired
                through our purchase of a 50 percent interest in our joint venture
                with
                Pacific Drilling


·
            the
                effect and results of litigation, tax audits and contingencies,
                and


·
            other
                factors discussed in this quarterly report and in our other filings
                with
                the SEC, which are available free of charge on the SEC’s website at
                *www.sec.gov*.





Should
      one or more of these risks or
      uncertainties materialize, or should underlying assumptions prove incorrect,
      actual results may vary materially from those indicated.





All
      subsequent written and oral
      forward-looking statements attributable to us or to persons acting on our behalf
      are expressly qualified in their entirety by reference to these risks and
      uncertainties. You should not place undue reliance on forward-looking
      statements. Each forward-looking statement speaks only as of the date of the
      particular statement, and we undertake no obligation to publicly update or
      revise any forward-looking statements.





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, 2006.





**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 30, 2007, we owned, had partial ownership interests in
      or
      operated 82 mobile offshore drilling units. As of this date, our fleet
      consisted of 34 High-Specification semisubmersibles and drillships
      (“High-Specification Floaters”), 19 Other Floaters, 25 Jackups and four
      Other Rigs. We also have six High-Specification Floaters under
      construction.


20
 ***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 (in millions, except average daily revenue and
      percentages):





Three
                months ended
              September
                30,
            
            
            
            
            
            Nine
                months ended September 30,2007
            
            
            2006
            
            
            Change
            
            
            2007
            
            
            2006
            
            
            Change**Average
                daily revenue (a)(b)**
            
            $
            219,710
            
            
            $
            146,900
            
            
            $
            72,810
            
            
            $
            206,760
            
            
            $
            132,000
            
            
            $
            74,760**Utilization
                (b)(c)**
            
            
            89
            %
            
            
            87
            %
            
            
            n/a
            
            
            
            89
            %
            
            
            83
            %
            
            
            n/a**Statement
                of Operations**Operating
                revenues
            
            $
            1,538
            
            
            $
            1,025
            
            
            $
            513
            
            
            $
            4,300
            
            
            $
            2,696
            
            
            $
            1,604Operating
                and maintenance expense
            
            
            663
            
            
            
            561
            
            
            
            102
            
            
            
            1,858
            
            
            
            1,585
            
            
            
            273Operating
                income
            
            
            753
            
            
            
            390
            
            
            
            363
            
            
            
            2,086
            
            
            
            963
            
            
            
            1,123Net
                income
            
            
            973
            
            
            
            309
            
            
            
            664
            
            
            
            2,075
            
            
            
            764
            
            
            
            1,311





September
                30,
              2007
            
            
            December 31,
              2006
            
            
            Change**Balance
                Sheet (at end of period)**Cash
                and cash equivalents
            
            $
            618
            
            
            $
            467
            
            
            $
            151Total
                assets
            
            
            12,700
            
            
            
            11,476
            
            
            
            1,224Total
                debt
            
            
            2,593
            
            
            
            3,295
            
            
            
            (702
            )


_____________________


“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)
            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.




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





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 in 2007 and beyond.





Our
      revenues for the nine months ended September 30, 2007 increased from the prior
      year period primarily 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 (see “—Operating Results”). In addition, our financial
      results for the nine months ended September 30, 2007 included the recognition
      of
      gains on the sales of the tender rig *Charley Graves*and a swamp barge
*Searex VI*. Cash increased during the nine months ended September
      30,
      2007 primarily as a result of cash provided by operating activities, proceeds
      received from the sale of assets and exercises of stock options, partially
      offset by increased capital expenditures, repayments on our Term Credit Facility
      and repurchases of our ordinary shares.


21
 ***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: (1) “High-Specification Floaters,”
consisting of our “Ultra-Deepwater Floaters,” “Other Deepwater Floaters” and
“Other High-Specification Floaters,” (2) “Other Floaters,”
(3) “Jackups” and (4) “Other Rigs.” Within our High-Specification
      Floaters category, we consider our Ultra-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 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 1980s, 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**





*Merger
      with GlobalSantaFe Corporation*—On July 21, 2007, we entered into an
      Agreement and Plan of Merger (the “Merger Agreement”) with GlobalSantaFe
      Corporation (“GlobalSantaFe”) and Transocean Worldwide Inc., our direct wholly
      owned subsidiary. Subject to obtaining regulatory clearances, shareholder
      approval and satisfying or waiving all other closing conditions, we intend
      to
      complete the transactions contemplated by the Merger Agreement (the
“Transactions”) on or before December 31, 2007. See Notes to Condensed
      Consolidated Statements Note 3—Merger with GlobalSantaFe
      Corporation.





*TODCO
      Tax Sharing Agreement (“TSA”)*—On July 11, 2007, Hercules Offshore, Inc.
      (“Hercules”) completed the acquisition of TODCO. The TSA requires Hercules to
      make an accelerated change of control payment to Transocean Holdings within
      30
      days of the date of the acquisition as a result of the deemed utilization of
      TODCO’s pre-IPO tax benefits. We received a $118 million change of control
      payment from Hercules in August 2007. We recognized $276 million as other income
      in the third quarter of 2007 for this accelerated payment and payments received
      in prior periods related to TODCO's 2006 and 2007 tax years. See Notes to
      Condensed Consolidated Statements Note 7—Income Taxes.





*Construction
      Program*—In June 2007, we were awarded a drilling contract requiring the
      construction of a fourth enhanced Enterprise-class drillship. We expect the
      rig
      to be contributed to a joint venture in which we expect to retain a 65 percent
      ownership interest. The newbuild is expected to commence operations during
      the
      third quarter of 2010. See “—Outlook–Drilling Market.”





*Pacific
      Drilling*— In April 2007, we entered into a marketing and purchase option
      agreement with Pacific Drilling Limited that provided us with the exclusive
      marketing right for two newbuild Ultra-Deepwater Floaters as well as an option
      to purchase a 50 percent interest in a joint venture company through which
      we
      and Pacific Drilling would own the drillships. In October 2007, we obtained
      a firm commitment for one of the drillships, and we exercised the
      option to acquire a 50 percent interest in the joint venture in
      exchange for approximately $238 million, representing 50 percent of the
      documented costs of the drillships at the time of exercise. We are providing
      construction management services and have agreed to provide operating management
      services once the drillships begin operations. Beginning on October 18, 2010,
      Pacific Drilling will have the right to exchange its interest in the joint
      venture for our ordinary shares or cash.


22
 ***Index***


*Repurchase
      of Ordinary Shares*—During the nine months ended September 30, 2007, we
      repurchased and retired 5.2 million of our ordinary shares at a total cost
      of
      $400 million. See “—Liquidity and Capital Resources–Sources and Uses of
      Liquidity.”





*Debt
      Repayments—*On August 13**,**2007, we terminated our existing
      $1.0 billion, two-year term credit facility, having repaid the
      $470 million balance which was outstanding at June 30, 2007 and recognized
      a loss on the termination of approximately $1 million in the third quarter
      of 2007.





**Outlook**





For
      purposes of the following discussion, we have focused solely on our outlook
      for
      Transocean on a consolidated basis and have not included the impact, if any,
      that the completion of our proposed merger with GlobalSantaFe would have on
      our
      outlook.





*Drilling
      Market*—Demand for offshore drilling capacity continues to be strong,
      particularly for rigs capable of drilling in deepwater. Our High-Specification
      Floater fleet is fully committed in 2007 and 2008. None of our Other
      Floater rigs have uncommitted time for the remainder of 2007, and there are
      only five rigs remaining in this fleet that have any available uncommitted
      time
      in 2008. We have one jackup rig that has uncommitted time in 2007,
      and 9 jackup rigs that have uncommitted time in 2008.





We
      have been successful in building contract backlog within our High-Specification
      Floater fleet with 30 of our 40 current and future High-Specification
      Floaters, including the six newbuilds and the two *Sedco 700*-series
      upgrades, contracted into or beyond 2010 as of October 30, 2007. These 30
      units include 11 of our 13 current Ultra-Deepwater Floaters and five of
      our six new rigs currently under construction with long term contracts upon
      delivery. Our total contract backlog of approximately $23 billion as of October
      30, 2007 includes approximately $16 billion of backlog represented by our
      High-Specification Floaters. We believe the long-term outlook for deepwater
      capable rigs continues to be strong.





On
      October 18, 2007, the *Deepwater Pacific 1* was awarded a firm commitment
      for a four-year contract which may be converted on or prior to October 31,
      2008
      to a five-year drilling contract. The *Deepwater Pacific 1* is under
      construction and will be owned 50 percent by us through our joint venture with
      Pacific Drilling. The drilling contract is expected to commence in the third
      quarter of 2009 following shipyard construction, sea trials, mobilization to
      location and customer acceptance. The joint venture is also constructing a
      second deepwater newbuild rig, the *Deepwater Pacific 2*, which is
      expected to be completed in the fourth quarter of 2009.  We are
      currently in active discussions with several customers regarding the award
      of a
      long-term contract for the rig. We estimate total capital expenditures for
      the
      construction of these rigs to be approximately $685 million and
      $665 million, excluding capitalized interest, respectively. As of October
      18, 2007, we and Pacific Drilling had each paid $238 million in documented
      costs for the**two rigs.





In
      June 2007, we were awarded a
      five-year drilling contract for a fourth enhanced Enterprise-class drillship.
      The enhanced Enterprise-class drillship is expected to be owned and operated
      by
      a joint venture which is expected to be 65 percent owned by us and 35 percent
      owned by an Angolan partner. We estimate total capital expenditure for the
      construction of this rig to be approximately $640 million, excluding
      capitalized interest. We currently expect this rig to begin operations in Angola
      during the third quarter of 2010, after construction in South Korea followed
      by
      sea trials, mobilization to Angola and customer acceptance.





Future
      demand for deepwater capable rigs should benefit from successful drilling
      efforts in the lower tertiary trend of the U.S. Gulf of Mexico; the discovery
      of
      light oil and non-associated gas in the deepwaters of Brazil; continued
      exploration success in the deepwaters offshore India; the recent discovery
      in
      the deepwaters of the South China Sea; and the exploration activity in the
      Orphan Basin offshore Eastern Canada. Additionally, the continued exploration
      success in the deepwaters of West Africa, the opening of additional deepwater
      acreage in the U.S. Gulf of Mexico and the announced plans by Pemex for ultra
      deepwater drilling in Mexican waters of the Gulf of Mexico support our
      optimistic outlook for long term contracts and favorable dayrates in the
      deepwater drilling market sector. As of October 30, 2007, none of our
      High-Specification Floater fleet contract days are uncommitted for the remainder
      of 2007 and 2008, while approximately 10 percent and 36 percent are
      uncommitted in2009 and 2010, respectively.


23
 ***Index***


Our
      Other
      Floater fleet, comprised of 19 semisubmersible rigs, is largely committed
      to contracts that extend through 2007, and we continue to see customer demand
      for both short term and multi-year contracts for these units. As of October
      30,
      2007, none of our Other Floater fleet contract days are uncommitted for the
      remainder of 2007, while approximately 12 percent, 48 percent and 74 percent
      are
      uncommitted in 2008, 2009 and 2010, respectively.





We
      expect
      to remain at or above current utilization for our Jackup fleet for the remainder
      of 2007. While we have one Jackup rig that is currently idle, we are
      in advanced discussions with several customers regarding the award of drilling
      contracts for this rig. We believe that Asia, India and the Middle East will
      remain the primary sources of incremental demand for jackup rigs in the near
      to
      intermediate term, but there are a large number of new jackup rigs under
      construction without drilling contracts that are scheduled to be delivered
      in
      2008 and 2009. We expect to remain at or near full utilization with dayrates
      remaining relatively flat through the first half of 2008; beyond that, we do
      not
      know what impact, if any, that this increase in supply will have on this market
      sector. As of October 30, 2007, four percent of our Jackup fleet contract
      days are uncommitted for the remainder of 2007, while approximately 22 percent,
      46 percent and 73 percent are uncommitted in 2008, 2009 and 2010,
      respectively.





We
      expect
      our out-of-service time for the fourth quarter of 2007 to be in line with the
      out-of-service time we incurred during the third quarter of 2007.





We
      expect
      each of the following items to contribute to a continued increase in our
      revenues for the fourth quarter of 2007:





·
            a
                continuing improvement of dayrates primarily on our High-Specification
                Floaters and Other Floaters; and


·
              the
                  return to operations of certain of our High-Specification Floaters
                  and
                  Other Floaters that had been out of service during the third
                  quarter.


We
      expect
      each of the following items to contribute to a continued increase in our
      operating and maintenance costs for the fourth quarter of 2007:





·
            ongoing
                industry inflation with respect to our shipyard projects, maintenance
                programs and labor costs; and


·
              the
                  return to operations of certain of our High-Specification Floaters
                  and
                  Other Floaters that had been out of service during the third
                  quarter.


We
      have seven existing contracts with fixed-priced or capped options for dayrates
      that we believe are less than current market dayrates. We expect that three
      of
      these fixed-price contract options will be exercised by our customers either
      in
      the fourth quarter of 2007 or during 2008, which would preclude us from taking
      full advantage of any increased market rates for rigs subject to these contract
      options. 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.





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.





*Insurance
      Matters*—We periodically evaluate our hull and machinery and third-party
      liability insurance limits and self-insured retentions. Effective May 1, 2007,
      we renewed our hull and machinery and third-party liability insurance coverages.
      Subject to large self-insured retentions, we carry hull and machinery insurance
      covering physical damage to the rigs for operational risks worldwide, and we
      carry liability insurance covering damage to third parties. However, we do
      not
      generally have commercial market insurance coverage for physical damage losses
      to the Transocean fleet due to hurricanes in the U.S. Gulf of Mexico and war
      perils worldwide. Additionally, we do not carry insurance for loss of revenue.
      In the opinion of management, adequate accruals have been made based on known
      and estimated losses related to such exposures. See Notes to Condensed
      Consolidated Statements Note 10―Contingencies–Retained
      Risk.


24
 ***Index***


*Tax
      Matters*—We are a Cayman Islands company and 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.





Our
      tax
      returns in the major jurisdictions in which we operate worldwide are generally
      subject to examination for periods ranging from three to six years. We have
      agreed to extensions beyond the statute of limitations in two jurisdictions
      for
      up to 12 years. Tax authorities in certain jurisdictions are examining our
      tax
      returns and in some cases have issued assessments. We are defending our tax
      positions in those jurisdictions. While we cannot predict or provide assurance
      as to the final outcome of these proceedings, we do not expect the ultimate
      liability to have a material adverse effect on our consolidated financial
      position, results of operations or cash flows.





Our
      2004
      and 2005 U.S. federal income tax returns are currently under examination by
      the
      U.S. Internal Revenue Service (“IRS”). In October 2007, we received from the IRS
      examination reports setting forth proposed changes to the U.S. federal taxable
      income reported for the years 2004 and 2005. The proposed changes would result
      in a cash tax payment of approximately $413 million, exclusive of interest.
      We
      believe our returns are materially correct as filed, and we intend to vigorously
      defend against these proposed changes.





Certain
      of our Brazilian income tax returns for the years 2000 through 2003 are
      currently under examination.  The Brazil tax authorities have issued
      tax assessments totaling $40 million, plus a 75 percent penalty and $32 million
      of interest through September 30, 2007.  We believe our returns are
      materially correct as filed, and we intend to vigorously contest these
      assessments.





Norwegian
      civil tax and criminal authorities are investigating certain transactions
      undertaken in 2001 and 2002. In the second quarter of 2007, the Norwegian
      authorities expanded the investigation and during the third quarter of 2007
      secured certain records located in the United Kingdom related to a separate
      Norway subsidiary that was previously subject to tax in Norway. In June 2006,
      we
      filed a formal protest with respect to a notification by the Norwegian tax
      authorities of their intent to propose assessments that would result in an
      increase in tax of approximately $290 million, plus interest related to the
      2001
      and 2002 restructuring transactions. The authorities also indicated they intend
      to impose penalties which could range from 15 to 60 percent of the assessment.
      We believe the authorities are contemplating a separate assessment of
      approximately $121 million related to a 2001 dividend payment, plus interest
      and
      a penalty, which could range from 15 to 60 percent of the assessment. The
      authorities initiated inquiries in September 2004 and in March 2005 obtained
      additional information pursuant to a Norwegian court order. We have continued
      to
      respond to information requests from the authorities. We plan to vigorously
      contest any assertions by the Norwegian authorities in connection with the
      restructuring transactions or dividend and any increase in the scope of the
      current investigation. On January 1, 2007, as part of our implementation of
      FIN
      48, we recorded a long-term liability of $142 million related to these issues.
      Since January 1, 2007, the long-term liability has increased to $168
      million due to the accrual of interest and exchange rate fluctuations. While
      we
      cannot predict or provide assurance as to the final outcome of these
      proceedings, we do not expect the ultimate resolution of these matters to have
      a
      material adverse effect on our consolidated financial position or results of
      operations although it may have a material adverse effect on our consolidated
      cash flows. See Notes to Condensed Consolidated Statements Note 7—Income
      Taxes.





*TODCO
      Tax Sharing Agreement*—Our wholly owned subsidiary, Transocean Holdings Inc.
      (“Transocean Holdings”), entered into a tax sharing agreement with TODCO dated
      February 4, 2004 in connection with the initial public offering of TODCO’s
      ordinary shares on February 10, 2004 (the “TODCO IPO”). The tax sharing
      agreement was amended and restated on November 27, 2006 (the “TSA”) as part of a
      negotiated settlement of disputes between Transocean Holdings and TODCO over
      the
      terms of the original tax sharing agreement. The TSA governs Transocean
      Holdings’ and TODCO’s respective rights, responsibilities and obligations with
      respect to taxes and tax benefits, the filing of tax returns, the control of
      tax
      audits and other tax matters. Under the TSA, most U.S. federal, state, local
      and
      foreign income taxes and income tax benefits that accrued on or before the
      closing of the TODCO IPO (including income taxes and income tax benefits
      attributable to the TODCO business) are for the account of Transocean Holdings.
      Accordingly, Transocean Holdings generally is liable for any income taxes that
      accrued on or before the closing of the TODCO IPO, but TODCO generally must
      pay
      Transocean Holdings for the amount of any income tax benefits created on or
      before the closing of the TODCO IPO (“pre-IPO tax benefits”) that it uses or
      absorbs on a return with respect to a period after the closing of the TODCO
      IPO.


25
 ***Index***


Pursuant
      to the terms of the TSA, if there is a change of control of TODCO, as described
      in the TSA, all remaining unused pre-IPO tax benefits are deemed to have been
      utilized immediately before the change of control. As a result, an accelerated
      payment for the value of such tax benefits, less a specified discount, would
      become due from TODCO or the surviving company to Transocean Holdings 30 days
      after the change of control. However, payments relating to the tax benefit
      from
      exercises by current and former TODCO employees and directors of options to
      acquire Transocean shares are excluded from the change of control provisions
      and
      continue to be due under the terms of the TSA without regard to the change
      of
      control.





On
      July
      11, 2007, Hercules Offshore, Inc. (“Hercules”) completed the acquisition of
      TODCO (the “TODCO Acquisition”). The TSA requires Hercules to make an
      accelerated change of control payment to Transocean Holdings within 30 days
      of
      the date of the acquisition as a result of the deemed utilization of TODCO’s
      pre-IPO tax benefits. In August 2007, Hercules made a change of control payment
      of approximately $118 million to Transocean Holdings. We believe Hercules
      owes an additional amount of approximately $10 million related to the
      change of control of TODCO. We recognized $276 million as other income in the
      third quarter of 2007 for this change of control payment and payments received
      in prior periods related to TODCO's 2006 and 2007 tax years.





*Regulatory
      Matters*—On July 25, 2007, our legal representatives met with the U.S.
      Department of Justice (the “DOJ”) in response to a notice we received requesting
      such a meeting regarding our engagement of Panalpina Inc. for freight forwarding
      and other services in the United States and abroad. The DOJ has informed us
      that
      it is conducting an investigation of alleged Foreign Corrupt Practices Act
      (“FCPA”) violations by oil service companies who used Panalpina Inc. and other
      brokers in Nigeria and other parts of the world. We began developing an
      investigative plan which would allow us to promptly review and produce relevant
      and responsive information requested by the DOJ. Subsequently, we expanded
      the
      investigation to include one of our agents for Nigeria. The investigation is
      being conducted by outside counsel who reports directly to the audit committee
      of our board of directors. The investigation has focused on whether the customs
      brokers and agent have fully complied with the terms of their respective
      agreements, the FCPA and local laws. We prepared and presented an investigative
      plan to the DOJ and have informed the SEC of the ongoing investigation. We
      have
      begun implementing the investigative plan, but we cannot predict the ultimate
      outcome of the investigation, the effect of implementing any further measures
      that may be necessary to ensure full compliance with applicable laws or to
      what
      extent, if at all, we could be subject to fines, sanctions or other
      penalties.




**Performance
      and Other Key Indicators**





*Contract
      Backlog*—The following table reflects our contract backlog as of September
      30, 2007, June 30, 2007 and September 30, 2006 and reflects firm
      commitments only, typically represented by signed drilling contracts. Backlog
      is
      indicative of the full contractual dayrate. The amount of actual revenue earned
      and the actual periods during which revenues are earned will be different than
      the amounts and periods shown in the tables 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, as well as the ability of our customers to terminate contracts under
      certain circumstances. Our contract backlog is calculated by multiplying the
      contracted operating dayrate by the number of days remaining in the firm
      contract period, excluding revenues for mobilization, demobilization, client
      recharges and contract preparation and such amounts are not expected to be
      significant to our contract drilling revenues.


26
 ***Index***





September
                30,
              2007
            
            
            June
                30,
              2007
            
            
            September
                30,
              2006(In
                millions)**Contract
                Backlog**High-Specification
                Floaters
            
            $
            15,174
            
            
            $
            15,296
            
            
            $
            14,869Other
                Floaters
            
            
            4,108
            
            
            
            4,000
            
            
            
            2,938Jackups
            
            
            2,272
            
            
            
            1,834
            
            
            
            2,067Other
                Rigs
            
            
            171
            
            
            
            57
            
            
            
            79Total
            
            $
            21,725
            
            
            $
            21,187
            
            
            $
            19,953








*Fleet
      Utilization and Average Daily Revenue*—The following table shows our average
      daily revenue and utilization for each of the three months ended on September
      30, 2007, June 30, 2007 and September 30, 2006. See “—Overview” for a definition
      of average daily revenue, revenue earning day and utilization.





Three
                months endedSeptember
                30,
              2007
            
            
            June
                30,
              2007
            
            
            September
                30,
              2006**Average
                Daily Revenue**High-Specification
                FloatersUltra-Deepwater
                Floaters
            
            $
            323,200
            
            
            $
            288,900
            
            
            $
            246,000Other
                Deepwater Floaters
            
            $
            257,700
            
            
            $
            228,400
            
            
            $
            222,300Other
                High-Specification Floaters
            
            $
            316,400
            
            
            $
            286,900
            
            
            $
            181,500Total
                High-Specification Floaters
            
            $
            293,900
            
            
            $
            262,100
            
            
            $
            226,700Other
                Floaters
            
            $
            251,400
            
            
            $
            226,300
            
            
            $
            136,800Jackups
            
            $
            120,500
            
            
            $
            117,900
            
            
            $
            83,400Other
                Rigs
            
            $
            54,900
            
            
            $
            57,200
            
            
            $
            52,400Weighted
                Average - Drilling Fleet
            
            $
            219,700
            
            
            $
            202,400
            
            
            $
            146,900**Utilization**High-Specification
                FloatersUltra-Deepwater
                Floaters
            
            
            99
            %
            
            
            98
            %
            
            
            88
            %Other
                Deepwater Floaters
            
            
            79
            %
            
            
            82
            %
            
            
            75
            %Other
                High-Specification Floaters
            
            
            87
            %
            
            
            99
            %
            
            
            93
            %Total
                High-Specification Floaters
            
            
            87
            %
            
            
            90
            %
            
            
            82
            %Other
                Floaters
            
            
            89
            %
            
            
            98
            %
            
            
            86
            %Jackups
            
            
            90
            %
            
            
            86
            %
            
            
            96
            %Other
                Rigs
            
            
            98
            %
            
            
            100
            %
            
            
            76
            %Weighted
                Average - Drilling Fleet
            
            
            89
            %
            
            
            91
            %
            
            
            87
            %




27
 ***Index***


**Liquidity
      and Capital Resources**





**Sources
      and Uses of Cash**





Our
      primary source of cash during the first nine months of 2007 was our cash flows
      from operations. Our primary uses of cash were capital expenditures, repayments
      of borrowings under our Term Credit Facility and repurchases of our ordinary
      shares. At September 30, 2007, we had $618 million in cash and cash
      equivalents.





Nine
                months ended
              September
                30,2007
            
            
            2006
            
            
            Change(In
                millions)**Net
                cash from operating activities**Net
                income
            
            $
            2,075
            
            
            $
            764
            
            
            $
            1,311Depreciation
            
            
            304
            
            
            
            303
            
            
            
            1Other
                non-cash items
            
            
            31
            
            
            
            (251
            )
            
            
            282Working
                capital
            
            
            (252
            )
            
            
            (83
            )
            
            
            (169
            )$
            2,158
            
            
            $
            733
            
            
            $
            1,425





Net
      cash
      provided by operating activities increased due to more cash generated from
      net
      income, partially offset by higher use of cash for working capital
      items.





Nine
                months ended
              September
                30,2007
            
            
            2006
            
            
            Change(In
                millions)**Net
                cash from investing activities**Capital
                expenditures
            
            $
            (1,060
            )
            
            $
            (710
            )
            
            $
            (350
            )Proceeds
                from disposal of assets, net
            
            
            62
            
            
            
            298
            
            
            
            (236
            )Joint
                ventures and other investments, net
            
            
            (3
            )
            
            
            –
            
            
            
            (3
            )$
            (1,001
            )
            
            $
            (412
            )
            
            $
            (589
            )





Capital
      expenditures increased by $350 million over the corresponding prior year period,
      primarily due to the construction of four enhanced Enterprise-class drillships,
      the two *Sedco 700*-series upgrades and other equipment replaced and
      upgraded on our existing rigs. In addition, proceeds from asset sales were
      lower
      in the first nine months of 2007 during which only one drilling unit was sold
      as
      compared to the same period in 2006 during which six drilling units were
      sold.





28
 ***Index***





Nine
                months ended
              September
                30,2007
            
            
            2006
            
            
            Change(In
                millions)**Net
                cash from financing activities**Net
                proceeds from issuance of debt and borrowings under credit
                facilities
            
            $
            –
            
            
            $
            1,900
            
            
            $
            (1,900
            )Repayment
                of borrowings under Term Credit Facility
            
            
            (700
            )
            
            
            –
            
            
            
            (700
            )Release
                of escrow funds – Nautilus lease financing
            
            
            –
            
            
            
            30
            
            
            
            (30
            )Repurchase
                of ordinary shares
            
            
            (400
            )
            
            
            (2,351
            )
            
            
            1,951Net
                proceeds from issuance of ordinary shares under share-based compensation
                plans
            
            
            56
            
            
            
            67
            
            
            
            (11
            )Tax
                benefit from issuance of ordinary shares under share-based compensation
                plans
            
            
            33
            
            
            
            –
            
            
            
            33Other,
                net
            
            
            5
            
            
            
            (5
            )
            
            
            10$
            (1,006
            )
            
            $
            (359
            )
            
            $
            (647
            )





Net
      cash
      used in financing activities increased primarily due to the repayment of
      borrowings under our Term Credit Facility in the first nine months of 2007
      compared to the borrowing under our Term Credit Facility and the issuance of
      our
      Floating Rate Notes in the first nine months of 2006. Additionally, we used
      less
      cash to purchase our ordinary shares during the nine months ended September
      30,
      2007 compared to the same period in 2006. See “—Sources and Uses of
      Liquidity.”





**Capital
      Expenditures, Acquisitions 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.
      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.





On
      October 18, 2007, the *Deepwater Pacific 1* was awarded a firm commitment
      for a four-year contract which may be converted on or prior to October 31,
      2008
      to a five-year drilling contract. The *Deepwater Pacific 1* is under
      construction and will be owned 50 percent by us through our joint venture with
      Pacific Drilling. The drilling contract is expected to commence in the third
      quarter of 2009 following shipyard construction, sea trials, mobilization to
      location and customer acceptance. The joint venture is also constructing a
      second deepwater newbuild rig, the *Deepwater Pacific 2*, which is
      expected to be completed in the fourth quarter of 2009. We estimate total
      capital expenditures for the construction of these rigs to be approximately
      $685 million and $665 million, excluding capitalized interest,
      respectively. As of October 18, 2007, we and Pacific Drilling had each paid
      $238 million in documented costs for the**two
      rigs.





In
      July
      2007, we entered into the Merger Agreement with GlobalSantaFe. During 2006
      and
      the first nine months of 2007, wewere awarded drilling
      contracts for four newbuild deepwater drilling rigs and are currently in
      discussions with various clients for potential other deepwater drilling
      contracts related to 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
      $46 million, totaled $1.1 billion during the nine months ended
      September 30, 2007, including $601 million for the construction of
      four enhanced Enterprise-class drillships and $152 million for the upgrade
      of two of our *Sedco 700*-series rigs.





During
      2007, we expect capital expenditures to be approximately $1.5 billion, including
      approximately $770 million for the construction of six deepwater
      drillships, and approximately $365 million for the deepwater upgrades of two
      of
      our *Sedco 700*-series rigs. The level of our capital expenditures is
      partly dependent upon the actual level of operational and contracting activity.
      These expected capital expenditures do not include amounts that would be
      incurred in connection with any of our other possible newbuild opportunities,
      or
      the proposed merger with GlobalSantaFe.


29
 ***Index***


As
      with
      any major shipyard project that takes place over an extended period of time,
      the
      actual costs, timing of expenditures and project completion date may vary from
      our 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
      existing 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*—During
      the nine months ended September 30, 2007, we completed the sales of the tender
      rig *Charley Graves*and the swamp barge *Searex VI* for net
      proceeds of $44 million and recognized a gain on the sales of $31
      million.





**Sources
      and Uses of Liquidity**





We
      expect
      to use existing cash balances, cash flows from operations, proceeds from the
      issuance of debt 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
      asset acquisitions, we may use a portion of such cash to reduce debt prior
      to
      scheduled maturities.





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.


After
        the
        completion of the Transactions, we expect to focus on the repayment of debt.
        Nevertheless, we could consider the acquisition of additional rigs, depending
        on
        price, market conditions, available cash and other factors.




*Bank
      Credit Agreements*—We have access to a bank line of credit under a $1.0
      billion, five-year revolving credit agreement expiring July 2012 (the “Revolving
      Credit Facility”). At October 30, 2007, we had no outstanding borrowings under
      this facility.





The
      Revolving Credit Facility requires
      compliance with various covenants and provisions customary for agreements of
      this nature, including a debt to total tangible capitalization ratio, as defined
      by the Revolving Credit Facility, not greater than 60 percent. Other provisions
      of the Revolving Credit Facility 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
      this
      facility. We are also subject to various covenants under the indentures pursuant
      to which our public debt was issued, including restrictions on creating liens,
      engaging in sale/leaseback transactions and engaging in certain merger,
      consolidation or reorganization transactions. A default under our public debt
      could trigger a default under the Revolving Credit Facility and, if not waived
      by the lenders, could cause us to lose access to this facility.





In
      September 2007, we entered into a
      credit agreement for a $15.0 billion one-year, senior unsecured bridge loan
      facility (the “Bridge Loan Facility”) with several lenders. Under the terms of
      the Bridge Loan Facility, we may make borrowings under the Bridge Loan Facility
      at either (1) a base rate, determined as the greater of (A) the prime loan
      rate quoted in The Wall Street Journal Money Rates Section as the prime rate
      or
      (B) the federal funds effective rate plus 0.5 percent, or (2) the reserve
      adjusted LIBOR plus the applicable margin, which is based upon our non-credit
      enhanced senior unsecured long-term debt rating. As of October 30, 2007, the
      applicable margin was 0.4 percent.


30
 ***Index***


The
      obligation of each lender to make loans under the Bridge Loan Facility is
      subject to the satisfaction of certain conditions, including the execution
      of
      satisfactory documentation, and the consummation, or substantially concurrent
      consummation, of the Transactions.




We
      may
      prepay the Bridge Loan Facility in whole or in part without premium or penalty.
      In addition, the Bridge Loan Facility requires mandatory prepayments of
      outstanding borrowings in an amount equal to 100 percent of the net cash
      proceeds resulting from any of the following (in each case subject to certain
      exceptions): (1) the sale or other disposition of any of our property or assets
      above a predetermined threshold; (2) the receipt of certain net insurance
      or condemnation proceeds; (3) certain issuances of our equity securities; and
      (4) the incurrence of indebtedness for borrowed money by us.




The
      Bridge Loan Facility contains certain covenants that are applicable during
      the
      period in which any borrowings are outstanding, including a maximum leverage
      ratio. The Bridge Loan Facility does not have a covenant restricting our ability
      to pay dividends, although the maximum leverage ratio could have implications
      for the payment of dividends. Borrowings under the facility are subject to
      acceleration upon the occurrence of events of default.




On
      completion of the Transactions, we expect to terminate the existing Revolving
      Credit Facility and enter into a new $2.0 billion 5-year revolving credit
      facility. Shortly after the completion of the Transactions, we also expect
      to
      enter into a separate $1.5 billion 364-day credit facility. The revolving
      credit facilities are expected to have covenants similar to the covenants in
      the
      Bridge Loan Facility. We may not be able to enter into the proposed 5-year
      revolving credit facility or the proposed 364-day credit facility on the terms
      described, or at all.




We
      will
      likely seek to refinance the Bridge Loan Facility in whole or in part prior
      to
      the expiration of its one-year term. Such refinancing may be effected through
      borrowings under new bank credit facilities, issuance of debt securities,
      including convertible debt securities, or through other financing transactions.
      We currently expect that such effort could begin soon after closing of the
      Transactions, subject to market conditions and other factors.





*Shelf
      Registration*—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
      30, 2007, $600 million in gross proceeds of securities remained unissued under
      the shelf registration statement.





*Debt
      Repayments—*On August 13, 2007, we terminated our existing $1.0 billion,
      two-year term credit facility that we originally entered into on August 30,
      2006
      with 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 (the “Term
      Credit Facility”) and recognized a loss on the termination of approximately $1
      million in the third quarter of 2007. Under the terms of the Term Credit
      Facility, we were able to request borrowings up to $1.0 billion over the first
      six months of the term. After six months, any unused capacity was cancelled.
      Once repaid, the funds could not be reborrowed. At our election, borrowings
      could be made under the Term Credit Facility at either (1) 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 0.50 percent, or
      (2) LIBOR plus 0.30 percent, based on current credit ratings. We paid a fee
      of 0.065 percent per annum on the daily amount of the unused commitments under
      the Term Credit Facility through October 3, 2006. In October 2006, we borrowed
      the full $1.0 billion in capacity. In connection with the termination, we repaid
      $70 million of the outstanding borrowings on August 6, 2007 and the
      remaining $400 million on August 13, 2007.




The
      Term
      Credit Facility contained specified covenants, including a debt to total
      tangible capitalization covenant. Borrowings under the Term Credit Facility
      were
      subject to acceleration upon the occurrence of events of default.




31
 ***Index***


*Debt
      Conversions*—Holders of our Zero Coupon Convertible Debentures have the
      option to require us to convert their debentures into our ordinary shares at
      a
      rate of 8.1566 ordinary shares per $1,000 debenture any time prior to maturity.
      During the three and nine months ended September 30, 2007, we issued 203 and
      1,426 ordinary shares upon conversion of $25,000 and $175,000 aggregate
      principal amount of debentures, respectively. As of October 26, 2007,
      we issued 146,818 ordinary shares subsequent to September 30, 2007 upon
      conversion of $18,000,000 aggregate principal amount of debentures.





Holders
      of our 1.5% Convertible Debentures have the option to require us to convert
      their debentures into our ordinary shares at a rate of 13.8627 ordinary shares
      per $1,000 debenture any time prior to maturity. During the three and nine
      months ended September 30, 2007, we issued 623 ordinary shares upon conversion
      of $45,000 aggregate principal amount of debentures. As of October 26,
      2007, we issued 886,684 ordinary shares subsequent to September 30, 2007
      upon conversion of $63,962,000 aggregate principal amount of
      debentures.





On
        October 19, 2007, we called our Zero Coupon Convertible Debentures due
        May 2020 and our 1.5% Convertible Debentures due 2021 for redemption
        on November 15, 2007. As of September 30, 2007, the aggregate face
        value of the debentures was $426 million. Because the current conversion
        prices of both series of debentures are below the current market price of
        our
        ordinary shares, we currently expect that the holders will convert substantially
        all of the debentures into ordinary shares prior to the redemption date.
        If all
        holders convert before the redemption date, we expect to issue 5,756,702
        ordinary shares upon conversion based on the debentures outstanding as of
        September 30, 2007. Assuming none of the debentures are converted before
        the
        redemption date, we expect the aggregate cost to redeem the debentures will
        be
        approximately $421 million, including accrued and unpaid interest, and we
        expect to recognize a loss on retirement of the notes during the fourth quarter
        of 2007 of approximately $5 million. We plan to use existing cash balances
        and borrowings under our existing Revolving Credit Facility to fund the
        redemption.





*Repurchase
      of Ordinary
      Shares*—In May 2006, our board of directors authorized an increase in the
      amount of ordinary shares which we may repurchase pursuant to our share
      repurchase program to $4.0 billion from $2.0 billion, which was
      previously authorized and announced in October 2005. 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 also 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.





During
      the nine months ended September
      30, 2007, 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 $77.39 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 and borrowings under our Revolving Credit Facility. At October 30,
      2007, after prior repurchases, we had authority to repurchase an additional
      $600
      million of our ordinary shares under the program; however, any such repurchases
      would require the prior written consent of GlobalSantaFe Corporation pursuant
      to
      the Merger Agreement. We do not currently expect to make any additional share
      repurchases under the program in the near future if we complete the
      Transactions.





*Contractual
      Obligations*—Other than with respect to the contractual obligations set
      forth below, there have been no material changes from the contractual
      obligations as previously disclosed in “Item 7. Management’s Discussion and
      Analysis of Financial Condition and Results of Operations” of our Annual Report
      on Form 10-K for the year ended December 31, 2006.


32
 ***Index***


Our
      contractual obligations included in the table below are at face value (in
      millions).





For
                the years ending December 31,Total
            
            
            2007
            
            
            
            2008-2009
            
            
            
            2010-2011
            
            
            ThereafterPurchase
                obligations
            
            $
            2,255
            
            
            $
            839
            
            
            $
            1,294
            
            
            $
            122
            
            
            $
            –





As
      of
      September 30, 2007, the total unrecognized tax benefit related to uncertain
      tax
      positions, net of prepayments was $316 million. Due to the high degree of
      uncertainty regarding the timing of future cash outflows associated with the
      liabilities recognized in this balance, we are unable to make reasonably
      reliable estimates of the period of cash settlement with the respective taxing
      authorities.





*Commercial
      Commitments*—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.





We
      have
      established a wholly-owned captive insurance company which insures various
      risks
      of our operating subsidiaries. Access to the cash investments of the captive
      insurance company may be limited due to local regulatory restrictions. These
      cash investments are expected to rise to approximately $45 million by the
      end of 2007 as the level of premiums paid to the captive insurance company
      continues to increase.





**Operating
      Results**





***Quarter
      ended September 30, 2007
      compared to quarter ended September 30, 2006***





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





Three months endedSeptember 30,2007
            
            
            2006
            
            
            Change
            
            
            %
                Change(In
                millions, except day amounts and percentages)Revenue
                earning days
            
            
            6,620
            
            
            
            6,750
            
            
            
            (130
            )
            
            
            (2
            )%Utilization
            
            
            89
            %
            
            
            87
            %
            
            
            n/a
            
            
            
            2
            %Average
                daily revenue
            
            $
            219,700
            
            
            $
            146,900
            
            
            $
            72,800
            
            
            
            50
            %Contract
                drilling revenues
            
            $
            1,455
            
            
            $
            991
            
            
            $
            464
            
            
            
            47
            %Other
                revenues
            
            
            83
            
            
            
            34
            
            
            
            49
            
            
            
            n/m1,538
            
            
            
            1,025
            
            
            
            513
            
            
            
            50
            %Operating
                and maintenance expense
            
            
            (663
            )
            
            
            (561
            )
            
            
            (102
            )
            
            
            (18
            )%Depreciation
            
            
            (103
            )
            
            
            (99
            )
            
            
            (4
            )
            
            
            (4
            )%General
                and administrative expense
            
            
            (27
            )
            
            
            (22
            )
            
            
            (5
            )
            
            
            (23
            )%Gain
                from disposal of assets, net
            
            
            8
            
            
            
            47
            
            
            
            (39
            )
            
            
            (83
            )%Operating
                income
            
            
            753
            
            
            
            390
            
            
            
            363
            
            
            
            93
            %Other
                income (expense), netInterest
                income
            
            
            7
            
            
            
            4
            
            
            
            3
            
            
            
            75
            %Interest
                expense, net of amounts capitalized
            
            
            (23
            )
            
            
            (28
            )
            
            
            5
            
            
            
            18
            %Other,
                net
            
            
            287
            
            
            
            7
            
            
            
            280
            
            
            
            n/mIncome
                tax expense
            
            
            (52
            )
            
            
            (64
            )
            
            
            12
            
            
            
            19
            %Minority
                interest
            
            
            1
            
            
            
            −
            
            
            
            1
            
            
            
            100
            %Net
                income
            
            $
            973
            
            
            $
            309
            
            
            $
            664
            
            
            
            n/m


_________________


“n/a”
      means not applicable


“n/m”
      means not meaningful


33
 ***Index***


Contract
      drilling revenues increased primarily due to higher average daily revenue across
      the fleet. Revenues from nine rigs that were out of service for all or part
      of
      the period in 2006 contributed $135 million and the reactivation of three Other
      Floaters during or subsequent to the third quarter of 2006 contributed to higher
      utilization in those asset classes and increased revenue by $59 million.
      Partially offsetting these increases were lower revenues of $43 million due
      to six rigs that were out of service for a portion of 2007 for shipyard,
      mobilization or maintenance projects.





Other
      revenues for the three months ended September 30, 2007 increased
      $49 million primarily due to a $47 million increase in integrated
      services revenue offshore India.





Operating
      and maintenance expenses increased by $102 million primarily from expenses
      related to higher labor costs, vendor price increases, reactivated rigs and
      increased integrated service activity. These increases were partially offset
      by
      $31 million of reactivation costs in the third quarter of 2006, with no
      comparable amounts in the third quarter of 2007.





During
      the three months ended September 30, 2007, we recognized a net gain of
      $8 million related to the sale of one rig and the disposal of other assets.
      During the three months ended September 30, 2006, we recognized a net gain
      of
      $47 million related to the sale of two rigs and the disposal of other
      assets.





The
      increase in interest expense included $11 million that was primarily
      attributable to higher debt levels arising from the issuance of the Floating
      Rate Notes and additional borrowings under credit facilities subsequent to
      the
      third quarter of 2006. Partially offsetting the effect of the higher debt levels
      was a reduction of $14 million related to increased interest capitalized in
      the third quarter of 2007 compared to the same period in 2006.





The
      increase in other, net was primarily due to $276 million of income recognized
      in
      connection with the TODCO Tax Sharing Agreement and $11 million related to
      settlements of patent litigation and royalties earned on our dual-activity
      patents during the three months ended September 30, 2007.





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 estimated annual effective tax rates at September 30, 2007 and 2006
      were 14.6 percent and 17.5 percent, respectively, based on estimated
      2007 and 2006 annual income before income taxes after adjusting for certain
      items such as a portion of net gains on sales of assets. 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, 2007, the impact
      of the various discrete period tax items was a net benefit of $52 million,
      consisting of changes in prior year estimates of $72 million primarily related
      to the expected utilization of U.S. foreign tax credits, partially offset by
      a
      foreign exchange loss of $20 million related to unrecognized foreign tax
      benefits, resulting in a tax rate of 5.1 percent on earnings before income
      taxes. For the three months ended September 30, 2006, the impact of the various
      discrete period tax items was a net expense of $7 million related to a net
      gain
      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.


34
 ***Index***


***Nine
      months ended September 30, 2007 compared to nine months ended September 30,
      2006***





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





Nine
                months endedSeptember
                30,2007
            
            
            2006
            
            
            Change
            
            
            %
                Change(In
                millions, except day amounts and percentages)Revenue
                earning days
            
            
            19,769
            
            
            
            19,681
            
            
            
            88
            
            
            
            n/mUtilization
            
            
            89
            %
            
            
            83
            %
            
            
            n/a
            
            
            
            6
            %Average
                daily revenue
            
            $
            206,800
            
            
            $
            132,000
            
            
            $
            74,800
            
            
            
            57
            %Contract
                drilling revenues
            
            $
            4,088
            
            
            $
            2,598
            
            
            $
            1,490
            
            
            
            57
            %Other
                revenues
            
            
            212
            
            
            
            98
            
            
            
            114
            
            
            
            n/m4,300
            
            
            
            2,696
            
            
            
            1,604
            
            
            
            59
            %Operating
                and maintenance expense
            
            
            (1,858
            )
            
            
            (1,585
            )
            
            
            (273
            )
            
            
            (17
            )%Depreciation
            
            
            (304
            )
            
            
            (303
            )
            
            
            (1
            )
            
            
            –General
                and administrative expense
            
            
            (82
            )
            
            
            (67
            )
            
            
            (15
            )
            
            
            (22
            )%Gain
                from disposal of assets, net
            
            
            30
            
            
            
            222
            
            
            
            (192
            )
            
            
            (86
            )%Operating
                income
            
            
            2,086
            
            
            
            963
            
            
            
            1,123
            
            
            
            n/mOther
                income (expense), netInterest
                income
            
            
            17
            
            
            
            14
            
            
            
            3
            
            
            
            21
            %Interest
                expense, net of amounts capitalized
            
            
            (93
            )
            
            
            (72
            )
            
            
            (21
            )
            
            
            (29
            )%Other,
                net
            
            
            295
            
            
            
            9
            
            
            
            286
            
            
            
            n/mIncome
                tax expense
            
            
            (230
            )
            
            
            (150
            )
            
            
            (80
            )
            
            
            53
            %Net
                income
            
            $
            2,075
            
            
            $
            764
            
            
            $
            1,311
            
            
            
            n/m


_________________


“n/a”
      means not applicable


“n/m”
      means not meaningful





Contract
      drilling revenues increased
      primarily due to higher average daily revenue across the fleet. Revenues from
      ten rigs that were out of service for a portion of 2006 contributed $473 million
      and reactivation of one Other Deepwater Floater and three Other Floaters during
      2006 contributed to higher utilization in those asset classes and increased
      revenue by $219 million. Partially offsetting these increases were lower
      revenues of $80 million on seven rigs that were out of service for a
      portion of 2007 for shipyard, mobilization or maintenance projects and lower
      revenues of $26 million from two rigs sold in 2006 and 2007.





Other
      revenues for the nine months ended September 30, 2007 increased $114 million
      primarily due to a $99 million increase in integrated services revenue and
      a $15 million increase in client reimbursable revenue.





Operating
      and maintenance expenses increased by $273 million. This increase was
      primarily driven by expenses related to reactivated rigs, higher labor costs
      and
      vendor price increases. Also contributing to the increase were higher integrated
      services costs of $95 million and higher reimbursable expenses, in line with
      the
      higher level of reimbursable revenue. These increases were partially offset
      by
      the costs incurred in 2006 of $88 million and $12 million, respectively,
      for the reactivation of three of our rigs and the repair of two of our rigs
      that
      incurred hurricane damage.





The
      increase of $15 million in general and administrative expense was primarily
      attributable to increased personnel-related expenses.


35
 ***Index***


During
      the nine months ended September 30, 2007, we recognized a net gain of $30
      million related to the sale of two rigs and disposal of other assets. During
      the
      nine months ended September 30, 2006, we recognized a net gain of $222 million
      related to the sale of six rigs and disposal of other assets.





The
      increase in interest expense included $61 million that was primarily
      attributable to higher debt levels arising from the issuance of the Floating
      Rate Notes and additional borrowings under credit facilities subsequent to
      the
      nine months ended September 30, 2006. Partially offsetting the effect of the
      higher debt levels was a reduction of $39 million related to increased interest
      capitalized during the nine months ended September 30, 2007 compared to the
      same period in 2006.





The
      increase in other, net was primarily due to $276 million of income recognized
      in
      connection with the TODCO Tax Sharing Agreement and $26 million related to
      settlements of patent litigation and royalties earned on our dual-activity
      patents during the nine months ended September 30, 2007.





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 estimated annual effective tax rates at September 30, 2007 and 2006
      were 14.6 percent and 17.5 percent, respectively, based on estimated
      2007 and 2006 annual income before income taxes after adjusting for certain
      items such as a portion of net gains on sales of assets. 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, 2007, the impact
      of the various discrete period tax items was a net benefit of $62 million,
      related to the net gains on rig sales and changes in prior year estimates of
      $82
      million primarily related to the expected utilization of U.S. foreign tax
      credits and partially offset by a foreign exchange loss of $20 million
      related to unrecognized foreign tax benefits, resulting in a tax rate of
      10.0 percent on earnings before income taxes. For the nine months ended
      September 30, 2006, the impact of the various discrete period tax items was
      a net expense of $28 million, related to the net gains on rig sales and changes
      in prior year estimates, resulting in a tax rate of 16.4 percent on earnings
      before income taxes.





**Critical
      Accounting 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, 2006.





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 disclosure of contingent assets and liabilities. On an
      on-going basis, we evaluate our estimates, including those related to bad debts,
      materials and supplies obsolescence, investments, property and equipment,
      intangible assets and goodwill, income taxes, workers’ insurance, share-based
      compensation, 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 condensed consolidated financial statements, see "Item 7. Management's
      Discussion and Analysis of Financial Condition and Results of Operations" in
      our
      Annual Report on Form 10-K for the year ended December 31, 2006. There have
      been
      no material changes to these estimates during the nine months ended September
      30, 2007. These estimates require significant judgment 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.


36
 ***Index***


**Share-Based
      Compensation**





On
      January 1, 2006, we adopted FASB Statement of Financial Accounting Standards
      (“SFAS”) 123 (revised 2004), *Share-Based Payment* (“SFAS 123R”) using
      the modified prospective method. Adoption of the new standards did not have
      a
      material effect on our consolidated financial position, results of operations or
      cash flows.





**New
      Accounting Pronouncements**





In
      September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
      No. 157, *Fair Value Measurements* (“SFAS 157”). SFAS 157 defines fair
      value, establishes a framework for measuring fair value in generally accepted
      accounting principles, and expands disclosures about fair value measurements.
      SFAS 157 applies under other accounting pronouncements that require or
      permit fair value measurements because the FASB previously concluded in those
      accounting pronouncements that fair value is the relevant measurement attribute.
      Accordingly, SFAS 157 does not require any new fair value measurements. SFAS
      157
      is effective for fiscal years beginning after November 15, 2007. We will be
      required to adopt SFAS 157 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
      February 2007, the FASB issued SFAS
      No. 159, *The Fair Value Option for Financial Assets and Financial
      Liabilities*(“SFAS 159”). SFAS 159 provides companies with an option to
      report selected financial assets and liabilities at fair value. It also
      establishes presentation and disclosure requirements designed to facilitate
      comparisons between companies that choose different measurement attributes
      for
      similar types of assets and liabilities. SFAS 159 is effective as of the
      beginning of the first fiscal year beginning after November 15, 2007. We will
      be
      required to adopt SFAS 159 in the first quarter of fiscal year 2008. Management
      is currently evaluating the requirements of SFAS 159 and has not yet determined
      the impact on the consolidated financial statements.


37
 ***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-months ending September
      30
      relating to debt obligations as of September 30, 2007. Weighted-average variable
      rates are based on London Interbank Offered Rate (“LIBOR”) rates at September
      30, 2007, plus applicable margins.





At
      September 30, 2007 (in millions,
      except interest rate percentages):





**Scheduled
                Maturity Date (a) (b)**
            
            
            **Fair**
              **Value****2008**
            
            
            **2009**
            
            
            **2010**
            
            
            **2011**
            
            
            **2012**
            
            
            **Thereafter**
            
            
            **Total**
            
            
            **9/30/07**Total
                debtFixed
                rate
            
            $
            19
            
            
            $
            –
            
            
            $
            –
            
            
            $
            565
            
            
            $
            –
            
            
            $
            1,004
            
            
            $
            1,588
            
            
            $
            1,931Average
                interest rate
            
            
            2.8
            %
            
            
            –
            %
            
            
            –
            %
            
            
            3.0
            %
            
            
            –
            %
            
            
            7.5
            %
            
            
            5.8
            %Variable
                rate
            
            $
            1,000
            
            
            $
            –
            
            
            $
            –
            
            
            $
            –
            
            
            $
            –
            
            
            $
            –
            
            
            $
            1,000
            
            
            $
            1,000Average
                interest rate
            
            
            5.9
            %
            
            
            –
            %
            
            
            –
            %
            
            
            –
            %
            
            
            –
            %
            
            
            –
            %
            
            
            5.9
            %


__________________________


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




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





At
      September 30, 2007, we had
      approximately $1.0 billion of variable rate debt at face value
      (38.6 percent of total debt at face value). This variable rate debt
      represented the Floating Rate Notes issued during 2006. At December 31, 2006,
      we
      had approximately $1.7 billion of variable rate debt outstanding. Based upon
      the
      September 30, 2007 and December 31, 2006 variable rate debt outstanding amounts,
      a one percentage point change in interest rates would result in a corresponding
      change in interest expense of approximately $10 million and $17 million per
      year, respectively. In addition, a large part of our cash investments would
      earn
      commensurately higher rates of return if interest rates increase. Using
      September 30, 2007 and December 31, 2006 cash investment levels, a one
      percentage point change in interest rates would result in a corresponding change
      in interest income of approximately $3 million per year in each
      case.





**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, 2006. There have been no material changes to these
      previously reported matters during the nine months ended September 30,
      2007.





**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, 2007 to provide reasonable
      assurance that information required to be disclosed in our reports filed or
      submitted under the Exchange Act was (1) accumulated and communicated to
      our management, including our Chief Executive Officer and our Chief Financial
      Officer, to allow timely decisions regarding required disclosure and(2) recorded, processed,
      summarized and reported within the time periods specified in the Securities
      and
      Exchange Commission’s rules and forms.


38
 ***Index***


There
      were no changes to our internal
      controls during the three months ended September 30, 2007 that have materially
      affected, or are reasonably likely to materially affect, our internal control
      over financial reporting.








**PART
      II - OTHER INFORMATION**





**Item
      1. Legal Proceedings**





One
      of
      our subsidiaries is involved in an action with respect to a customs matter
      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 with Petrobras was transferred from the
      Schlumberger entity to an entity that would become one of our subsidiaries,
      but
      Schlumberger did not transfer the temporary import permit to any 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
      temporary 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 of the temporary admission from Schlumberger to our subsidiary
      but
      did not rule on whether the temporary admission could be extended without the
      payment of a financial penalty. During the first quarter of 2004, the Brazilian
      customs authorities issued an assessment totaling approximately $125 million
      at
      that time against our subsidiary.





The
      first
      level Brazilian court ruled in April 2007 that the temporary admission granted
      to our subsidiary had expired which allowed the Brazilian customs authorities
      to
      execute on their assessment. Following this ruling, the Brazilian customs
      authorities issued a revised assessment against our subsidiary. As of October
      30, 2007, the U.S. dollar equivalent of this assessment was approximately $210
      million in aggregate. We are not certain as to the basis for the increase in
      the
      amount of the assessment, and in September 2007, we received a temporary ruling
      in our favor from a Brazilian federal court that the valuation method used
      by
      the Brazilian customs authorities was incorrect. We intend to continue to
      aggressively contest this matter and we have appealed the first level Brazilian
      court’s ruling to a higher level court in Brazil. There may be further judicial
      or administrative proceedings that result from this matter. While the court
      has
      granted us the right to continue our appeal without the posting of a bond,
      it is
      possible that we may be required to post a bond for up to the full amount of
      the
      assessment in connection with these proceedings. We have also put Schlumberger
      on notice that we consider any assessment to be solely the responsibility of
      Schlumberger, not our subsidiary. Nevertheless, we expect that the Brazilian
      customs authorities will continue to seek to recover the assessment solely
      from
      our subsidiary, not Schlumberger. Schlumberger has denied any responsibility
      for
      this matter, but remains a party to the proceedings. 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.





In
      the third quarter of 2006, we
      received tax assessments of approximately $122 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. In September 2007, we received confirmation from
      the
      state tax authorities that they believe the additional tax assessments are
      valid, and then we filed an appeal on September 27, 2007 to the state
      taxpayers council contesting these 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.


39
 ***Index***


We
      have certain other actions or claims
      pending that have been previously discussed and reported in our Annual Report
      on
      Form 10-K for the year ended December 31, 2006 and our other reports filed
      with
      the Securities and Exchange Commission. There have been no material developments
      in these previously reported matters. We are involved in a number of other
      lawsuits, all of which have arisen in the ordinary course of our business.
      We do
      not expect the liability, if any, resulting from these other lawsuits to have
      a
      material adverse effect on our current consolidated financial position, results
      of operations 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
      Operations
―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**




Other
        than with respect to the risk
        factors set forth below, 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, 2006, as updated by “Item 1A. Risk
        Factors” of our Quarterly Reports on Form 10-Q for the quarterly periods ended
        March 31, 2007 and June 30, 2007.See “Risk Factors” in the joint proxy statement
        we and GlobalSantaFe filed with the Securities and Exchange Commission on
        October 3, 2007 for more information regarding risk factors relating to the
        Transactions and the combined business after giving effect to the
        Transactions.
 
 **Risks
        Relating to the Transactions**
 
 ***Failure
        to complete, or delays in completing, the Transactions could negatively impact
        the market price of our ordinary shares and financial
        results.***
 
 Completion
        of the proposed Transactions
        is subject to various conditions, including, among others, approval by our
        shareholders and GlobalSantaFe’s shareholders and obtaining regulatory
        clearances and financing sufficient to enable us to deliver the cash
        consideration to our shareholders and GlobalSantaFe’s shareholders payable by
        virtue of the Transactions. If these or other conditions are not satisfied
        or if
        there is a delay in the satisfaction of such conditions, then we and
        GlobalSantaFe may not be able to complete the Transactions timely or at all,
        and
        such failure or delay may have other adverse consequences. If the Transactions
        are not completed or are delayed, we and GlobalSantaFe will be subject to
        a
        number of risks, including:
 
 ·
              we
                  will not realize the expected benefits of the combined
                  company;
 
 ·
              the
                  market price of our ordinary shares may decline to the extent that
                  the
                  current market price of our shares reflects a market assumption
                  that the
                  Transactions will be completed;
 
 ·
              some
                  costs relating to the Transactions, such as certain financial advisor,
                  legal and financing fees, must be paid even if the Transactions
                  are not
                  completed; and
 
 ·
              in
                  specified circumstances, if the Transactions are not completed,
                  we must
                  pay GlobalSantaFe either a termination fee of $300 million or up to
                  $30 million in expense reimbursement instead of the termination
                  fee.
 
 ***While
        the Transactions are pending, we may experience diminished productivity due
        to
        the impact of the Transactions on our current and prospective employees,
        key
        management, customers, suppliers and business
        partners.***
 
 Our
        management may be required to
        devote substantial time to activities related to the Transactions, which
        could
        otherwise be devoted to pursuing other beneficial business opportunities.
        Furthermore, our current and prospective employees may be uncertain about
        their
        future roles and relationships with us following the completion of the
        Transactions. This focus of management on the Transactions and employee
        uncertainty may also affect our productivity and this may adversely affect
        our
        ability to attract and retain key management and employees.
 
 Our
        customers and business partners may
        not be as willing to continue to do business with us on the same or similar
        terms or may delay or defer decisions relating to their business relationships
        with us pending the completion of the Transactions, which could materially
        and
        adversely affect our business and results of operations.
 
 ***Until
        the Transactions are completed or
        the Merger Agreement is terminated, under certain circumstances, we may not
        be
        able to enter into a merger or business combination with another party on
        favorable terms because of restrictions in the Merger
        Agreement.***
 
 Unless
        and until the Merger Agreement
        is terminated, subject to specified exceptions, we are restricted from
        soliciting, initiating or knowingly encouraging any inquiry, proposal or
        offer
        for an alternative transaction with any person. We may terminate the Merger
        Agreement and enter into an agreement with respect to a superior proposal
        only
        if specified conditions have been satisfied, including our compliance in
        all
        material respects with these non-solicitation provisions, allowing GlobalSantaFe
        seven days (or five days with respect to any material revision) to propose
        an
        adjustment to the terms and conditions of the Merger Agreement and paying
        a
        $300 million termination fee. These restrictions could affect the
        structure, pricing and other terms proposed by other parties seeking to enter
        into an alternate transaction with us and, as a result of these restrictions,
        we
        may not be ableto enter into
        an agreement with
        respect to an alternative transaction on more favorable terms without incurring
        potentially significant liability to GlobalSantaFe.




***As
      a result of the Transactions, our
      overall debt level will increase, and we may lose the ability to obtain future
      financing and lose our competitive advantage.***





As
      a result of the Transactions, our
      overall debt level will increase from approximately $2.6 billion at September
      30, 2007, to approximately $18.8 billion at such date on a pro forma basis
      after
      giving effect to the Transactions. After the completion of the Transactions,
      our
      level of debt and other obligations could have significant adverse consequences
      on our business and future prospects, including the following:





·
            we
                may not be able to obtain financing in the future for working capital,
                capital expenditures, acquisitions, debt service requirements or
                other
                purposes;


·
            less
                levered competitors could have a competitive advantage because they
                have
                lower debt service requirements;
                and


·
            we
                may be less able to take advantage of significant business opportunities
                and to react to changes in market or industry conditions than our
                competitors.





***We
      may not be successful in refinancing
      the Bridge Loan Facility, and the terms of any refinancing may not be favorable
      to us.***





The
      Bridge Loan Facility has a maturity
      of one year. Although we expect to refinance this debt on more favorable terms
      after the Transactions, such refinancing is subject to conditions in the credit
      markets, which are currently volatile, and there can be no assurance that we
      will be successful in refinancing the debt or that the terms of the refinancing
      will be favorable to us, which could adversely affect our results of operations
      or financial condition.





***Our
      overall debt level following the
      Transactions and/or our inability to refinance the Bridge Loan Facility on
      favorable terms could lead the credit rating agencies to lower our corporate
      credit ratings following the Transactions below currently expected levels and
      possibly below investment grade.***





Market
      conditions could prohibit us
      from refinancing the Bridge Loan Facility at favorable rates and terms, which
      could limit our ability to efficiently repay debt and could cause us to maintain
      a high level of leverage or issue debt with unfavorable terms and conditions.
      This leverage level could lead the credit rating agencies to downgrade our
      credit ratings following the Transactions below currently expected levels and
      possibly to non-investment grade levels. Such ratings levels could negatively
      impact current and prospective customers’ willingness to transact business with
      us. Suppliers may lower or eliminate the level of credit provided through
      payment terms when dealing with us thereby increasing the need for higher levels
      of cash on hand, which would decrease our ability to repay the debt balances
      as
      we currently anticipate.


40
 ***Index***




**Risks
      Relating to Our Business**




***Shipyard
      projects and other operations are subject to delays and cost
      overruns.***




We
      have
      committed to four deepwater newbuild rig projects and two
*Sedco 700*-series rig upgrades. In addition, we own a 50 percent
      interest in a joint venture that is constructing two deepwater newbuild rigs.
      We
      also are discussing other potential newbuild opportunities with several of
      our
      oil and gas company clients. We also have a variety of other more limited
      shipyard projects at any given time. These shipyard projects are subject to
      the
      risks of delay or cost overruns inherent in any such construction project
      resulting from numerous factors, including the following:




•
            shipyard
                unavailability;




•
            shortages
                of equipment, materials or skilled
                labor;




•
            unscheduled
                delays in the delivery of ordered materials and
                equipment;




•
            engineering
                problems, including those relating to the commissioning of newly
                designed
                equipment;




•
            work
                stoppages;




•
            client
                acceptance delays;




•
            weather
                interference or storm damage;




•
            unanticipated
                cost increases; and




•
            difficulty
                in obtaining necessary permits or
                approvals.




These
      factors may contribute to cost variations and delays in the delivery of our
      upgraded and newbuild units and other rigs undergoing shipyard projects. Delays
      in the delivery of these units would result in delay in contract commencement,
      resulting in a loss of revenue to us, and may also cause customers to terminate
      or shorten the term of the drilling contract for the rig pursuant to applicable
      late delivery clauses. In the event of termination of one of these contracts,
      we
      may not be able to secure a replacement contract on as favorable
      terms.




Our
      operations also rely on a significant supply of capital and consumable spare
      parts and equipment to maintain and repair our fleet. We also rely on the supply
      of ancillary services, including supply boats and helicopters. Recently, we
      have
      experienced increased delivery times from vendors due to increased drilling
      activity worldwide and the increase in construction and upgrade projects, and
      have also experienced a tightening in the availability of ancillary services.
      We
      are in the process of replacing our primary global logistics provider, which
      may
      result in delays and disruptions, and potentially increased costs, in some
      operations. Shortages in materials, delays in the delivery of necessary spare
      parts, equipment or other materials, or the unavailability of ancillary services
      could negatively impact our future operations and result in increases in rig
      downtime, and delays in the repair and maintenance of our fleet.




***Failure
      to secure a drilling contract prior to deployment of the second newbuild
      drillship under construction in which we own an interest through
      our joint venture with Pacific Drilling could adversely affect our results
      of
      operations.***




The
      drillship *Deepwater Pacific 2* that is being constructed by our joint
      venture with Pacific Drilling is scheduled for delivery in the fourth quarter
      of
      2009. We have not yet secured a drilling contract for this drillship.
      Historically, the industry has experienced prolonged periods of overcapacity,
      during which many rigs were idle for long periods of time. Our failure to secure
      a drilling contract for the rig prior to its deployment could adversely affect
      our results of operations.




41
 ***Index***




***Failure
      to comply with the U.S. Foreign Corrupt Practices Act could result in fines,
      criminal penalties, drilling contract terminations and an adverse effect on
      our
      business.***




On
      July
      25, 2007, our legal representatives met with the U.S. Department of Justice
      (the
“DOJ”) in response to a notice we received requesting such a meeting regarding
      our engagement of Panalpina Inc. for freight forwarding and other services
      in
      the United States and abroad. The DOJ has informed us that it is conducting
      an
      investigation of alleged U.S. Foreign Corrupt Practices Act (“FCPA”) violations
      by oil service companies who used Panalpina Inc. and other brokers in Nigeria
      and other parts of the world. We began developing an investigative plan which
      would allow us to promptly review and produce relevant and responsive
      information requested by the DOJ.




Subsequently,
      we expanded the investigation to include one of our agents for Nigeria. The
      investigation is being conducted by outside counsel who reports directly to the
      audit committee of our board of directors. The investigation has focused on
      whether the customs brokers and agent have fully complied with the terms of
      their respective agreements, the FCPA and local laws. We prepared and presented
      an investigative plan to the DOJ and have informed the SEC of the ongoing
      investigation. We have begun implementing the investigative plan, but we cannot
      predict the ultimate outcome of the investigation, the effect of implementing
      any further measures that may be necessary to ensure full compliance with
      applicable laws or to what extent, if at all, we could be subject to fines,
      sanctions or other penalties.




Our
      investigation includes a review of amounts paid to and by customs brokers in
      connection with the obtaining of permits for the temporary importation of
      vessels and the clearance of goods and materials. These permits and clearances
      are necessary in order for us to operate our vessels in certain jurisdictions.
      There is a risk that we may not be able to obtain import permits or renew
      temporary importation permits in West African countries, including Nigeria,
      in a
      manner that complies with the FCPA. As a result, we may not have the means
      to
      renew temporary importation permits for rigs located in the relevant
      jurisdictions as they expire or to send goods and equipment into those
      jurisdictions, in which event we may be forced to terminate the pending drilling
      contracts and relocate the rigs or leave the rigs in these countries and risk
      permanent importation issues, either of which could have an adverse effect
      on
      our financial results. In addition, termination of drilling contracts could
      result in damage claims by customers.


42
 ***Index***


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





**Issuer
      Purchases of Equity Securities**




**Period**
            
            **(a) Total Number**
              **of Shares**
              **Purchased (1)**
            
            
            **(b) Average Price**
              **Paid Per Share**
            
            
            **(c) Total Number**
              **of Shares**
              **Purchased as**
              **Part of Publicly**
              **Announced Plans**
              **or Programs**
            
            
            **(d) Maximum Number**
              **(or Approximate
                Dollar Value) of Shares that May Yet
                Be Purchased Under the Plans or
                Programs (2)**
              **(in millions)**July
                2007
            
            
            30,359
            
            
            $
            109.23
            
            
            
            –
            
            
            $
            600August
                2007
            
            
            119
            
            
            $
            103.82
            
            
            
            –
            
            
            $
            600September
                2007
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            $
            600Total
            
            
            30,478
            
            
            $
            109.21
            
            
            
            –
            
            
            $
            600


_________________




(1)
            Total
                number of shares purchased in the third quarter of 2007 consists
                of 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 to $4.0 billion from $2.0 billion, which was previously authorized
                and announced in October 2005. 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, 2007, we have repurchased a total of 46.9 million of our ordinary
                shares at an aggregate cost of $3.4
                billion.







**Unregistered
      Sales of Equity Securities**




During
      the three months ended September 30, 2007, we issued 203 ordinary shares upon
      conversion of $25,000 aggregate principal amount of our Zero Coupon Convertible
      Debentures and 623 ordinary shares upon conversion of $45,000 aggregate
      principal amount of our 1.5% Convertible Debentures. Subsequent to September
      30,
      2007, we issued 146,818 ordinary shares upon conversion of $18,000,000
      aggregate principal amount of our Zero Convertible Debentures, and we
      issued 886,684 ordinary shares upon conversion of $63,962,000 aggregate
      principal amount of our 1.5% Convertible Debentures through October 26, 2007.
      All of these transactions were exempt from the registration requirements of
      the
      Securities Act of 1933, as amended, by virtue of Section 4(2) as transactions
      not involving any public offering and by virtue of Section
      3(a)(9).


43
 ***Index***


**Item
      6. Exhibits**


(a)
            Exhibits





The
      following exhibits are filed in connection with this Report:


**Number                      Description**





*2.1
            Agreement
                and Plan of Merger, dated as of July 21, 2007, among Transocean Inc.,
                GlobalSantaFe Corporation and Transocean Worldwide Inc. (incorporated
                by
                reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed
                on July 23, 2007)*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
            Credit
                Agreement dated as of September 28, 2007 among Transocean Inc., the
                lenders party thereto and Goldman Sachs Credit Partners, L.P. as
                Administrative Agent, Lehman Commercial Paper Inc. as Syndication
                Agent,
                Citibank, N.A., Calyon Corporate and Investment Bank and JPMorgan
                Chase
                Bank, N.A., as Co-Documentation Agents, and Goldman Sachs Credit
                Partners,
                L.P. and Lehman Brothers Inc. as Joint Lead Arrangers and Joint
                Bookrunners (incorporated by reference to Exhibit 4.1 to the Company’s
                Current Report on Form 8-K filed on October 1, 2007)*10.1
            Put
                Option and Registration Rights Agreement, dated as of October 18,
                2007,
                among Pacific Drilling Limited, Transocean Pacific Drilling Inc.,
                Transocean Inc. and Transocean Offshore International Ventures Limited
                (incorporated by reference to Exhibit 10.1 to the Company’s Current Report
                on Form 8-K filed on October 24, 2007)†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.


44
 ***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 October 31, 2007.





TRANSOCEAN
      INC.







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







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