**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
 Draft  #4
 to
          Audit
          Committee
 
 
 **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 June 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**o**
 
 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**o**
                Non-accelerated
                    Filer **o**
  Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act). Yes  **o******No  **x**
 
 As
        of
        July 27, 2007, 290,199,014 ordinary shares, par value $0.01 per share, were
        outstanding.
  
  **TRANSOCEAN
        INC.**
 
 **INDEX
        TO FORM 10-Q**
 
 **QUARTER
        ENDED JUNE 30, 2007**
 
 Page**PART
                  I - FINANCIAL INFORMATION****Item
                  1.**
              Financial
                  Statements (Unaudited)Condensed
                  Consolidated Statements of OperationsThree
                  Months and Six Months Ended June 30, 2007 and
                  2006
              1Condensed
                  Consolidated Balance SheetsJune
                  30, 2007 and December 31, 2006
              2Condensed
                  Consolidated Statements of Cash FlowsThree
                  Months and Six Months Ended June 30, 2007 and
                  2006
              3Notes
                  to Condensed Consolidated Financial
                  Statements
              4**Item
                  2.**
              Management’s
                  Discussion and Analysis of FinancialCondition
                  and Results of Operations
              16**Item
                  3.**
              Quantitative
                  and Qualitative Disclosures About Market
                  Risk
              32**Item
                  4.**
              Controls
                  and Procedures
              32**PART
                  II - OTHER INFORMATION****Item
                  1.**
              Legal
                  Proceedings
              33**Item
                  1A.**
              Risk
                  Factors
              34**Item
                  2.**
              Unregistered
                  Sales of Equity Securities and Use of
                  Proceeds
              36**Item
                  4.**
              Submission
                  of Matters to a Vote of Security
                  Holders
              36**Item
                  6.**
              Exhibits
              37
  ***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 June 30,
              
              
              Six
                  months ended June 30,2007
              
              
              2006
              
              
              2007
              
              
              2006Operating
                  revenuesContract
                  drilling revenues
              
              $
              1,360
              
              
              $
              828
              
              
              $
              2,633
              
              
              $
              1,607Other
                  revenues
              
              
              74
              
              
              
              26
              
              
              
              129
              
              
              
              641,434
              
              
              
              854
              
              
              
              2,762
              
              
              
              1,671Costs
                  and expensesOperating
                  and maintenance
              
              
              627
              
              
              
              549
              
              
              
              1,195
              
              
              
              1,024Depreciation
              
              
              101
              
              
              
              102
              
              
              
              201
              
              
              
              204General
                  and administrative
              
              
              29
              
              
              
              25
              
              
              
              55
              
              
              
              45757
              
              
              
              676
              
              
              
              1,451
              
              
              
              1,273Gain
                  (loss) from disposal of assets, net
              
              
              (1
              )
              
              
              111
              
              
              
              22
              
              
              
              175Operating
                  income
              
              
              676
              
              
              
              289
              
              
              
              1,333
              
              
              
              573Other
                  income (expense), netInterest
                  income
              
              
              5
              
              
              
              5
              
              
              
              10
              
              
              
              10Interest
                  expense, net of amounts capitalized
              
              
              (33
              )
              
              
              (20
              )
              
              
              (70
              )
              
              
              (44
              )Other,
                  net
              
              
              (5
              )
              
              
              1
              
              
              
              8
              
              
              
              2(33
              )
              
              
              (14
              )
              
              
              (52
              )
              
              
              (32
              )Income
                  before income taxes and minority interest
              
              
              643
              
              
              
              275
              
              
              
              1,281
              
              
              
              541Income
                  tax expense
              
              
              93
              
              
              
              26
              
              
              
              178
              
              
              
              86Minority
                  interest
              
              
              1
              
              
              
              −
              
              
              
              1
              
              
              
              −Net
                  income
              
              $
              549
              
              
              $
              249
              
              
              $
              1,102
              
              
              $
              455Earnings
                  per shareBasic
              
              $
              1.91
              
              
              $
              0.77
              
              
              $
              3.81
              
              
              $
              1.40Diluted
              
              $
              1.84
              
              
              $
              0.75
              
              
              $
              3.67
              
              
              $
              1.36Weighted
                  average shares outstandingBasic
              
              
              288
              
              
              
              324
              
              
              
              289
              
              
              
              325Diluted
              
              
              300
              
              
              
              336
              
              
              
              301
              
              
              
              337
   See
        accompanying notes.
  1
 ***Index***




**TRANSOCEAN
      INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**


(In
      millions, except share data)


June
                30,
            
            
            December
                31,2007
            
            
            2006(Unaudited)**ASSETS**Cash
                and cash equivalents
            
            $
            445
            
            
            $
            467Accounts
                receivable, net of allowance for doubtful accounts of $30and $26
                at June
                30, 2007 and December 31, 2006, respectively
            
            
            1,184
            
            
            
            946Materials
                and supplies, net of allowance for obsolescence of $21 and $19 at
                June 30,
                2007 and December 31, 2006, respectively
            
            
            177
            
            
            
            160Deferred
                income taxes, net
            
            
            20
            
            
            
            16Other
                current assets
            
            
            67
            
            
            
            67Total
                current assets
            
            
            1,893
            
            
            
            1,656Property
                and equipment
            
            
            11,152
            
            
            
            10,539Less
                accumulated depreciation
            
            
            3,392
            
            
            
            3,213Property
                and equipment, net
            
            
            7,760
            
            
            
            7,326Goodwill
            
            
            2,195
            
            
            
            2,195Other
                assets
            
            
            301
            
            
            
            299Total
                assets
            
            $
            12,149
            
            
            $
            11,476**LIABILITIES
                AND SHAREHOLDERS’ EQUITY**Accounts
                payable
            
            $
            369
            
            
            $
            477Accrued
                income taxes
            
            
            132
            
            
            
            98Debt
                due within one year
            
            
            18
            
            
            
            95Other
                current liabilities
            
            
            475
            
            
            
            369Total
                current liabilities
            
            
            994
            
            
            
            1,039Long-term
                debt
            
            
            3,046
            
            
            
            3,200Deferred
                income taxes, net
            
            
            51
            
            
            
            54Other
                long-term liabilities
            
            
            579
            
            
            
            343Total
                long-term liabilities
            
            
            3,676
            
            
            
            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, 289,280,582
                and
                292,454,457 shares issued and outstanding at June 30, 2007 and December
                31, 2006, respectively
            
            
            3
            
            
            
            3Additional
                paid-in capital
            
            
            7,728
            
            
            
            8,044Accumulated
                other comprehensive loss
            
            
            (30
            )
            
            
            (30
            )Accumulated
                deficit
            
            
            (223
            )
            
            
            (1,181
            )Total
                shareholders’ equity
            
            
            7,478
            
            
            
            6,836Total
                liabilities and shareholders’ equity
            
            $
            12,149
            
            
            $
            11,476






See
        accompanying notes.




2
 ***Index***





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


Three
                months ended June 30,
            
            
            Six
                months ended June 30,2007
            
            
            2006
            
            
            2007
            
            
            2006**Cash
                flows from operating activities**Net
                income
            
            $
            549
            
            
            $
            249
            
            
            $
            1,102
            
            
            $
            455Adjustments
                to reconcile net income to net cash provided by operating
                activitiesDepreciation
            
            
            101
            
            
            
            102
            
            
            
            201
            
            
            
            204Share-based
                compensation expense
            
            
            9
            
            
            
            5
            
            
            
            19
            
            
            
            8Deferred
                income taxes
            
            
            (5
            )
            
            
            (9
            )
            
            
            (7
            )
            
            
            25Equity
                in (earnings) losses of unconsolidated affiliates
            
            
            2
            
            
            
            (3
            )
            
            
            3
            
            
            
            (3
            )(Gain)
                loss from disposal of assets, net
            
            
            1
            
            
            
            (111
            )
            
            
            (22
            )
            
            
            (175
            )Deferred
                revenues, net
            
            
            4
            
            
            
            11
            
            
            
            38
            
            
            
            20Deferred
                expenses, net
            
            
            (6
            )
            
            
            (47
            )
            
            
            (13
            )
            
            
            (55
            )Tax
                benefit from exercise of stock options to purchase and vesting of
                ordinary
                shares under share-based compensation plans
            
            
            –
            
            
            
            (8
            )
            
            
            –
            
            
            
            (8
            )Other
                long-term liabilities
            
            
            5
            
            
            
            14
            
            
            
            12
            
            
            
            21Other,
                net
            
            
            3
            
            
            
            3
            
            
            
            1
            
            
            
            4Changes
                in operating assets and liabilitiesAccounts
                receivable
            
            
            (99
            )
            
            
            (33
            )
            
            
            (238
            )
            
            
            (104
            )Other
                current assets
            
            
            (28
            )
            
            
            (50
            )
            
            
            (32
            )
            
            
            (51
            )Accounts
                payable and other current liabilities
            
            
            57
            
            
            
            47
            
            
            
            140
            
            
            
            91Income
                taxes receivable/payable, net
            
            
            14
            
            
            
            6
            
            
            
            57
            
            
            
            12Net
                cash provided by operating activities
            
            
            607
            
            
            
            176
            
            
            
            1,261
            
            
            
            444**Cash
                flows from investing activities**Capital
                expenditures
            
            
            (290
            )
            
            
            (98
            )
            
            
            (755
            )
            
            
            (276
            )Proceeds
                from disposal of assets, net
            
            
            2
            
            
            
            121
            
            
            
            41
            
            
            
            203Joint
                ventures and other investments, net
            
            ****
            **–**
            
            
            
            –
            
            
            
            (3
            )
            
            ****
            **–**Net
                cash provided by (used in) investing activities
            
            
            (288
            )
            
            
            23
            
            
            
            (717
            )
            
            
            (73
            )**Cash
                flows from financing activities**Revolving
                Credit Facility, net
            
            
            (190
            )
            
            ****
            **–**
            
            
            ****
            **–**
            
            
            ****
            **–**Repayments
                on the Term Credit Facility
            
            
            (230
            )
            
            ****
            **–**
            
            
            
            (230
            )
            
            ****
            **–**Proceeds
                from issuance of ordinary shares under share-based compensation plans,
                net
            
            
            40
            
            
            
            21
            
            
            
            55
            
            
            
            66Repurchase
                of ordinary shares
            
            ****
            **–**
            
            
            
            (400
            )
            
            
            (400
            )
            
            
            (600
            )Other,
                net
            
            
            4
            
            
            ****
            **–**
            
            
            
            9
            
            
            ****
            **–**Net
                cash used in financing activities
            
            
            (376
            )
            
            
            (379
            )
            
            
            (566
            )
            
            
            (534
            )Net
                decrease in cash and cash equivalents
            
            
            (57
            )
            
            
            (180
            )
            
            
            (22
            )
            
            
            (163
            )Cash
                and cash equivalents at beginning of period
            
            
            502
            
            
            
            462
            
            
            
            467
            
            
            
            445Cash
                and cash equivalents at end of period
            
            $
            445
            
            
            $
            282
            
            
            $
            445
            
            
            $
            282






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 June 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 3—Drilling Fleet Expansion and Upgrades.





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





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





*Basis
      of Presentation*—Our
      accompanying condensed consolidated financial statements have been prepared
      without audit in accordance with accounting principles generally accepted in
      the
      United States for interim financial information and with the instructions to
      Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange
      Commission (“SEC”). Accordingly, pursuant to such rules and regulations, these
      financial statements do not include all disclosures required by accounting
      principles generally accepted in the U.S. for complete financial statements.
      The
      condensed consolidated financial statements reflect all adjustments, which
      are,
      in the opinion of management, necessary for a fair presentation of financial
      position, results of operations and cash flows for the interim periods. Such
      adjustments are considered to be of a normal recurring nature unless otherwise
      identified. Operating results for the three and six months ended June 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.





*Total
      Comprehensive Income*—Total comprehensive income for the three and six
      months ended June 30, 2007 was $549 million and $1,102 million, respectively,
      while the total comprehensive income for the three and six months ended June
      30,
      2006 was $249 million and $455 million, respectively. There were no other
      comprehensive income items that were material for any of the periods
      presented.





4
 ***Index***





**TRANSOCEAN
      INC. AND SUBSIDIARIES**


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


(Unaudited)





*Capitalized
      Interest*—We capitalize interest costs for qualifying construction and
      upgrade projects. We capitalized interest costs on construction work in progress
      of $15 million and $28 million for the three and six months ended June 30,
      2007,
      respectively. Capitalized interest for the three and six months ended June
      30,
      2006 was $2 million for each period.





*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 six months ended June 30, 2007 was $9 million ($7 million, or
      $0.02 per diluted share, net of tax) and $19 million ($16 million, or $0.05
      per
      diluted share, net of tax), respectively. Share-based compensation expense
      for the three and six months ended June 30, 2006 was $5 million or $0.01
      per diluted share, which had an immaterial tax effect, and $8 million ($7
      million, or $0.02 per diluted share, net of tax), respectively. In addition
      to
      the compensation cost recognition requirements, SFAS 123R requires tax deduction
      benefits in excess of recognized compensation cost to be reported as a financing
      cash flow. We reported financing cash flows related to tax deduction benefits
      of
      $5 million and $9 million for the three and six months ended June 30, 2007,
      with
      no comparable cash flows for the three and six months ended June 30,
      2006.





*Income
      Taxes—*In June 2006, the
      FASB issued FASB Interpretation No. 48, *Accounting for Uncertainty in Income
      Taxes—an interpretation of FASB Statement No. 109* (“FIN 48”). FIN 48
      clarifies the accounting for income taxes recognized in an entity’s financial
      statements in accordance with SFAS 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. FIN 48 is effective for fiscal years
      beginning after December 15, 2006. We adopted this interpretation on January
      1,
      2007. 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 6―Income
      Taxes.





In
      June 2006, the FASB reached consensus on 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. The consensus on EITF 06-3 is effective for the
      interim and annual reporting periods beginning after December 15, 2006. We
      adopted EITF 06-3 on January 1, 2007. 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 (Continued)**
 (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―Drilling Fleet Expansionand
      Upgrades**





Capital
      expenditures, including capitalized interest, totaled $755 million during the
      six months ended June 30, 2007 and included $443 million spent on the
      construction of four enhanced Enterprise-class drillships and $102 million
      on
      two *Sedco 700*-series rig upgrades. Construction work in progress,
      recorded in property and equipment, was $1.5 billion and $1.0 billion at June
      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.





Capital
      expenditures, including capitalized interest, totaled $276 million during the
      six months ended June 30, 2006 and included $96 million spent on the
      construction of an enhanced Enterprise-class drillship and $59 million on two
      *Sedco 700*-series rig upgrades.





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





During
      the six months ended June 30,
      2007, we completed the sale of the tender rig *Charley Graves* for net
      proceeds of $33 million and recognized a gain on the sale of $23 million ($20
      million, or $0.07 per diluted share, net of tax).





During
      the six months ended June 30,
      2006, we sold two of our Other Floaters (*Peregrine III*and
*Transocean Explorer)*, a swamp barge (*Searex XII*) and a
      platform rig. We received net proceeds from these sales of $209 million and
      recognized gains on the sales of $175 million ($153 million, or $0.46 per
      diluted share, net of tax).





**Note
      5**―**Repurchase
      of Ordinary Shares**





In
      October 2005, our board of directors authorized the repurchase of up to $2.0
      billion of our ordinary shares. 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.





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 from $2.0 billion to $4.0
      billion.





6
 ***Index***





**TRANSOCEAN
      INC. AND SUBSIDIARIES**


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


(Unaudited)





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





Three
                months ended June 30,
            
            
            Six
                months ended
              June
                30,2007
            
            
            2006
            
            
            2007
            
            
            2006Value
                of shares
            
            $
            –
            
            
            $
            400
            
            
            $
            400
            
            
            $
            600Number
                of shares
            
            
            –
            
            
            
            5.2
            
            
            
            5.2
            
            
            
            7.8Average
                purchase price per share
            
            $
            –
            
            
            $
            76.23
            
            
            $
            77.39
            
            
            $
            76.66





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
      June 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 Corporation pursuant to the Merger
      Agreement (see Note 13—Subsequent Events–Merger with GlobalSantaFe
      Corporation).





**Note
      6**―**Income
      Taxes**





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





The
      estimated annual effective tax rate for the six months ended June 30, 2007
      and
      June 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 will continue to recognize 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 June 30, 2007,
      the total unrecognized tax benefits increased by $16 million, including $7
      million of interest and penalties. The total unrecognized tax benefit at June
      30, 2007 was $328 million, of which $319 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”). Our 2006 income tax return 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. 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.





7
 ***Index***





**TRANSOCEAN
      INC. AND SUBSIDIARIES**


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


(Unaudited)





Norwegian
      civil tax and criminal authorities are investigating certain transactions
      undertaken in 2001 and 2002. Further, in the second quarter of 2007, the
      Norwegian authorities expanded the investigation and are seeking 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 $265 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 $110 million related
      to
      the 2001 dividend, 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 $152 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.





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.





**Note
      7**―**Debt**





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





June
                30,
              2007
            
            
            December
                31,
              2006Term
                Credit Facility due August 2008
            
            $
            470
            
            
            $
            700Floating
                Rate Notes due September 2008
            
            
            1,000
            
            
            
            1,0006.625%
                Notes due April 2011
            
            
            179
            
            
            
            1807.375%
                Senior Notes due April 2018
            
            
            247
            
            
            
            247Zero
                Coupon Convertible Debentures due May 2020 (put options
                exercisable May 2008 and May 2013) (a)
            
            
            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 (b)
            
            
            95
            
            
            
            957.5%
                Notes due April 2031
            
            
            598
            
            
            
            598Total
                debt
            
            
            3,064
            
            
            
            3,295Less
                debt due within one year (a)(b)
            
            
            18
            
            
            
            95Total
                long-term debt
            
            $
            3,046
            
            
            $
            3,200





8
 ***Index***




**TRANSOCEAN
      INC. AND SUBSIDIARIES**


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


(Unaudited)







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


(b)
            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 June 30,2008
            
            $
            192009
            
            
            1,4702010
            
            
            –2011
            
            
            5652012
            
            
            –Thereafter
            
            
            1,004Total
            
            $
            3,058





*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 9―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 June 30, 2007, the applicable
      margin, facility fee and utilization fee were 0.225 percent, 0.075 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 June 30, 2007,
      we
      had no borrowings outstanding and $1 billion remained available under this
      facility.





*Debt
      Conversion—*Holders of our Zero Coupon Convertible Debentures have the
      option to require us to convert their debentures into our ordinary shares at
      any
      time prior to maturity. In May 2007, we issued 1,223 ordinary shares in exchange
      for $150,000 aggregate principal amount of debentures that were converted at
      a
      conversion rate of 8.1566 ordinary shares per $1,000 debenture.





9
 ***Index***





**TRANSOCEAN
      INC. AND SUBSIDIARIES**


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


(Unaudited)





**Note
      8**―**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 June 30,
            
            
            Six
                months ended June 30,2007
            
            
            2006
            
            
            2007
            
            
            2006**Numerator
                for basic earnings per share**Net
                income for basic earnings per share
            
            $
            549
            
            
            $
            249
            
            
            $
            1,102
            
            
            $
            455**Numerator
                for diluted earnings per share**Net
                income
            
            $
            549
            
            
            $
            249
            
            
            $
            1,102
            
            
            $
            455Add
                back interest expense on the 1.5% convertible debentures
            
            
            2
            
            
            
            2
            
            
            
            4
            
            
            
            3Net
                income for diluted earnings per share
            
            $
            551
            
            
            $
            251
            
            
            $
            1,106
            
            
            $
            458**Denominator
                for diluted earnings per share**Weighted-average
                shares outstanding for basic earnings per share
            
            
            288
            
            
            
            324
            
            
            
            289
            
            
            
            325Effect
                of dilutive securities:Employee
                stock options and unvested stock grants
            
            
            3
            
            
            
            4
            
            
            
            3
            
            
            
            4Warrants
                to purchase ordinary shares
            
            
            3
            
            
            
            3
            
            
            
            3
            
            
            
            31.5%
                convertible debentures
            
            
            6
            
            
            
            5
            
            
            
            6
            
            
            
            5Adjusted
                weighted-average shares and assumed conversions for diluted earnings
                per
                share
            
            
            300
            
            
            
            336
            
            
            
            301
            
            
            
            337**Basic
                earnings per share**Net
                income
            
            $
            1.91
            
            
            $
            0.77
            
            
            $
            3.81
            
            
            $
            1.40**Diluted
                earnings per share**Net
                income
            
            $
            1.84
            
            
            $
            0.75
            
            
            $
            3.67
            
            
            $
            1.36





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 are not presented because
      it
      is not material for any of the periods presented.





**Note
      9**―**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.





10
 ***Index***





**TRANSOCEAN
      INC. AND SUBSIDIARIES**


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


(Unaudited)





In
      1990
      and 1991, two of our subsidiaries were served with various assessments
      collectively valued at approximately $12 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 $11 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
      $28
      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 $28
      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.





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 $117 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 July 30, 2007, the U.S. dollar
      equivalent of this assessment was approximately $185 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. 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.





11
 ***Index***





**TRANSOCEAN
      INC. AND SUBSIDIARIES**


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


(Unaudited)





In
      the third quarter of 2006, we
      received tax assessments of approximately $114 million from the state tax
      authorities of Rio de Janeiro in Brazil against one of our Brazilian
      subsidiaries for customs taxes on equipment imported into the state in
      connection with our operations. The assessments resulted from a preliminary
      finding by these authorities that our subsidiary’s record keeping practices were
      deficient. We continue to review documents related to the assessments, and
      while
      our review is not complete, we currently believe that the substantial majority
      of these assessments are without merit. We filed an initial response with the
      Rio de Janeiro tax authorities on September 9, 2006 refuting these
      additional tax assessments. While we cannot predict or provide assurance as
      to
      the final outcome of these proceedings, we do not expect it to have a material
      adverse effect on our consolidated financial position, results of operations
      or
      cash flows.





We
      are
      involved in a number of other lawsuits, all of which have arisen in the ordinary
      course of our business. We do not expect the liability, if any, resulting from
      these 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
      6―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
      $410 million and $405 million at June 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.





12
 ***Index***





**TRANSOCEAN
      INC. AND SUBSIDIARIES**


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


(Unaudited)





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 June 30, 2007 and December 31, 2006,
      respectively.





**Note
      10**―**Stock
      Warrants**





At
      June 30, 2007, there were 203,900
      warrants outstanding to purchase 3,568,250 ordinary shares at an exercise price
      of $19.00 per share. The warrants expire on May 1, 2009. On March 1, 2006,
      we
      issued 333,039 ordinary shares related to a cashless exercise of 25,100
      warrants. See Note 13—Subsequent Events–Stock Warrants.





**Note
      1****1**―**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. Net
      periodic benefit cost for these defined benefit pension plans includes the
      following components (in millions):





Three
                months ended
              June
                30,
            
            
            Six months
                ended
              June
                30,2007
            
            
            2006
            
            
            2007
            
            
            2006**Components
                of net periodic benefit cost (a)**Service
                cost
            
            $
            6
            
            
            $
            5
            
            
            $
            11
            
            
            $
            10Interest
                cost
            
            
            5
            
            
            
            5
            
            
            
            10
            
            
            
            10Expected
                return on plan assets
            
            
            (6
            )
            
            
            (5
            )
            
            
            (11
            )
            
            
            (10
            )Amortization
                of prior period service cost
            
            
            1
            
            
            
            1
            
            
            
            1
            
            
            
            –Recognized
                net actuarial losses
            
            
            1
            
            
            
            1
            
            
            
            2
            
            
            
            3Net
                periodic benefit cost
            
            $
            7
            
            
            $
            7
            
            
            $
            13
            
            
            $
            13


______________


(a)
            Amounts
                are before income tax effect.





We
      contributed approximately $5 million to the defined benefit pension plans during
      the six months ended June 30, 2007. We expect to make an additional contribution
      of approximately $18 million to our defined benefit pension plans in the
      remaining six 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 for each of the
      three
      and six months ended June 30, 2007 and 2006.





We
      contributed approximately $1 million to the other postretirement benefit plans
      during the six months ended June 30, 2007. We expect to make an additional
      contribution of approximately $1 million to the other postretirement benefit
      plans in the remaining six months of 2007, which we expect will be funded from
      cash flow from operations.





**Note
      12**—**Supplementary Cash Flow Information**





Non-cash
      investing activities for the six months ended June 30, 2007 and 2006 included
      $70 million and $44 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 accounts payable.





13
 ***Index***





**TRANSOCEAN
      INC. AND SUBSIDIARIES**


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


(Unaudited)





Cash
      payments for interest were $95 million and $47 million for the six months ended
      June 30, 2007 and 2006, respectively. Cash payments for income taxes, net,
      were
      $118 million, and $50 million for the six months ended June 30, 2007 and 2006,
      respectively.





**Note
      13**―**Subsequent****Events**





*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 pre-IPO tax benefits. The amount of
      the accelerated payment owing to Transocean Holdings is calculated by
      multiplying 80 percent by the then remaining pre-IPO tax benefits at the
      effective date of the TODCO Acquisition. The accelerated payment is estimated
      to
      be approximately $129 million, or 80 percent of the estimated remaining unused
      pre-IPO tax benefits as of July 11, 2007. Additionally, the TSA 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 June 30, 2007, assuming a Transocean share price of $105.98
      per
      share at the time of exercise of the compensatory options (the actual price
      of
      our ordinary shares at the close of trading on June 29, 2007), will be
      approximately $22 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 expect to recognize
      approximately $290 million related to the TSA as other income in the third
      quarter of 2007.





*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., a direct wholly
      owned subsidiary of Transocean (“Merger Sub”). 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
      Reclassification and the Merger 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 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
      estimate that the closing of the Merger will take place on or before December
      31, 2007.





14
 ***Index***





**TRANSOCEAN
      INC. AND SUBSIDIARIES**


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


(Unaudited)





We
      have
      obtained financing commitments for the Transactions, the aggregate proceeds
      of
      which will be sufficient for us upon closing to pay the aggregate cash
      consideration to the holders of currently outstanding ordinary shares of our
      company and GlobalSantaFe 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”) have 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.




GSCP’s
      and the Lehman Lenders’ commitments are subject to the satisfaction of certain
      conditions, including the execution of satisfactory documentation and the
      absence of a Material Adverse Effect (as defined in the Agreement).




We
      currently intend to allow warrant holders to receive, upon exercise following
      the Reclassification, 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.




Prior
      to
      consummation of the Transactions, we currently expect to call for redemption
      our
      Zero Coupon Convertible Debentures due May 2020 and our 1.5% Convertible
      Debentures due 2021.




*Stock
      Warrants*—During July 2007, we issued 861,700 ordinary shares and we
      received approximately $16 million in cash related to the exercise of 49,240
      warrants.





15
 ***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,
                ·contract
                  option
                  exercises,
                ·revenues,
                ·expenses,
                ·results
                  of
                  operations,
                ·commodity
                  prices,
                ·customer
                  drilling
                  programs,
                ·supply
                  and
                  demand,
                ·utilization
                  rates,
                ·dayrates,
                ·contract
                  backlog,
                ·the
                  timing and
                  closing of the GlobalSantaFe merger and related transactions,
                ·consideration
                  payable in connection with the GlobalSantaFe merger and related
                  transactions,
                ·effects
                  and results
                  of the GlobalSantaFe merger and related transactions,
                ·planned
                  shipyard
                  projects and rig mobilizations and their effects,
                ·newbuild
                  projects
                  and opportunities,
                ·the
                  upgrade projects
                  for the *Sedco 700*–series semisubmersible rigs,
                ·other
                  major
                  upgrades,
                ·the
                  potential purchase of
                  an ownership interest in a joint venture that will own the
                  fourth   Enterprise-class drillship,
                ·the
                  potential
                  purchase of an interest in a joint venture with Pacific Drilling
                  and joint
                  venture terms,
                ·contract
                  awards,
                ·drillship
                  delivery
                  dates,
                ·expected
                  downtime,
                ·insurance
                  proceeds,
                ·cash
                  investments of
                  our wholly-owned captive insurance company,
                ·future
                  activity in
                  the deepwater, mid-water and the jackup market sectors,
                ·market
                  outlook for
                  our various geographical operating sectors,
                ·capacity
                  constraints
                  for ultra-deepwater rigs and other rig classes,
              
              ·effects
                  of new rigs
                  on the market,
                ·income
                  related to
                  and any payments to be received under the TODCO tax sharing
                  agreement,
                ·uses
                  of excess cash,
                  including ordinary share repurchases,
                ·the
                  timing and
                  funding of share repurchases,
                ·issuance
                  of new
                  debt,
                ·debt
                  reduction,
                ·planned
                  asset
                  sales,
                ·timing
                  of asset
                  sales,
                ·proceeds
                  from asset
                  sales,
                ·our
                  effective tax
                  rate,
                ·changes
                  in tax laws,
                  treaties and regulations,
                ·tax
                  assessments,
                ·our
                  other
                  expectations with regard to market outlook,
                ·operations
                  in
                  international markets,
                ·the
                  level of
                  expected capital expenditures,
                ·results
                  and effects
                  of legal proceedings and governmental audits and assessments,
                ·adequacy
                  of
                  insurance,
                ·liabilities
                  for tax
                  issues, including those associated with our activities in Brazil,
                  Norway
                  and the United States,
                ·liquidity,
                ·cash
                  flow from
                  operations,
                ·adequacy
                  of cash
                  flow for our obligations,
                ·effects
                  of
                  accounting changes,
                ·adoption
                  of
                  accounting policies,
                ·pension
                  plan and
                  other postretirement benefit plan contributions,
                ·benefit
                  payments,
                  and
                ·the
                  timing and cost
                  of completion of capital projects.




16
 ***Index***





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





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





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 and our Quarterly
                  Report on Form 10-Q for the quarterly period ended March 31,
                  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 contracts for the drillships we are marketing
                  under
                  our marketing and purchase option agreement with Pacific Drilling,
                  negotiate definitive agreements and satisfy closing
                  conditions,
 ·
              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 July 31, 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.





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.





17
 ***Index***





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
              June
                30,
            
            
            
            
            
            Six months
                ended
              June
                30,2007
            
            
            2006
            
            
            Change
            
            
            2007
            
            
            2006
            
            
            Change**Average
                daily revenue (a)(b)**
            
            $
            202,400
            
            
            $
            129,000
            
            
            $
            73,400
            
            
            $
            200,200
            
            
            $
            124,300
            
            
            $
            75,900**Utilization
                (b)(c)**
            
            
            91
            %
            
            
            81
            %
            
            N/A
            
            
            
            90
            %
            
            
            81
            %
            
            N/A**Statement
                of Operations**Operating
                revenues
            
            $
            1,434
            
            
            $
            854
            
            
            $
            580
            
            
            $
            2,762
            
            
            $
            1,671
            
            
            $
            1,091Operating
                and maintenance expense
            
            
            627
            
            
            
            549
            
            
            
            78
            
            
            
            1,195
            
            
            
            1,024
            
            
            
            171Operating
                income
            
            
            676
            
            
            
            289
            
            
            
            387
            
            
            
            1,333
            
            
            
            573
            
            
            
            760Net
                income
            
            
            549
            
            
            
            249
            
            
            
            300
            
            
            
            1,102
            
            
            
            455
            
            
            
            647





June
                30,
              2007
            
            
            December
                31,
              2006
            
            
            Change**Balance
                Sheet (at end of period)**Cash
                and cash equivalents
            
            $
            445
            
            
            $
            467
            
            
            $
            (22
            )Total
                assets
            
            
            12,149
            
            
            
            11,476
            
            
            
            673Total
                debt
            
            
            3,064
            
            
            
            3,295
            
            
            
            (231
            )


_____________________


“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 for 2007 and beyond.





Our
      revenues for the six months ended June 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 six months ended June 30, 2007 included the recognition of
      gains
      on the sale of the tender rig *Charley Graves* (see “—Significant
      Events”). Cash decreased during the six months ended June 30, 2007 primarily as
      a result of repayments on our Term Credit Facility, increased capital
      expenditures and repurchases of our ordinary shares, partially offset by
      proceeds received from the sale of assets, exercises of stock options and cash
      provided by operating activities.





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.





18
 ***Index***





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*,
*C**ajun 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**





*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 expect to recognize approximately $290 million
      related to the accelerated payment and the previously mentioned 2006 and 2007
      tax year payments as other income in the third quarter of 2007. See Notes to
      Condensed Consolidated Statements Note 13—Subsequent Events–TODCO Tax Sharing
      Agreement.





*Merger
      with GlobalSantaFe Corporation*—On July 21, 2007, we entered into an
      Agreement and Plan of Merger with GlobalSantaFe Corporation 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
      estimate that the closing of the merger will take place on or before December
      31, 2007. See Notes to Condensed Consolidated Statements Note 13—Subsequent
      Events–Merger with GlobalSantaFe Corporation.





*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.”





*Repurchase
      of Ordinary Shares*—During the six months ended June 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.”





**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. We have only one rig
      remaining in the Other Floater fleet that has any available uncommitted time
      in
      2007 and six rigs remaining in this fleet that have any available
      uncommitted time in 2008. We have two jackup rigs that have uncommitted time
      in
      2007, and 12 jackup rigs that have uncommitted time in 2008.





We
      have been successful in building contract backlog within our High-Specification
      Floater fleet with 27 of our 38 current and future High-Specification Floaters,
      including the four newbuilds and the two *Sedco 700*-series deepwater
      upgrades, contracted into or beyond 2010 as of July 31, 2007. These 27 units
      include 10 of our 13 current Ultra-Deepwater Floaters and our four new rigs
      currently under construction with long term contracts upon delivery. Our total
      contract backlog of approximately $21 billion as of July 31, 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.





19
 ***Index***





In
      April
      2007, we entered into a marketing and purchase option agreement with Pacific
      Drilling Limited that provides us with the exclusive marketing right for two
      newbuild Ultra-Deepwater Floaters with expected delivery dates in 2009 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. We anticipate
      providing construction advisory services during the period of the option,
      construction management services upon exercise of the option and operating
      management services once the drillships begin operations.  The
      exclusive marketing right and purchase option granted to us by Pacific Drilling
      will terminate on November 30, 2007 but can be extended by four
      months.  We may elect to exercise the option in our sole discretion
      and anticipate exercising the option once we have secured a drilling contract
      or
      contracts of sufficient value. The purchase price for the 50 percent joint
      venture interest is 50 percent of the documented costs at the time of exercise.
      The closing of the transaction is conditioned on the satisfaction of customary
      closing conditions and the negotiation of definitive joint venture documents.
      The agreement with Pacific Drilling contemplates that, beginning three years
      after the closing, Pacific Drilling will have the right to exchange its interest
      in the joint venture for our ordinary shares or cash.





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 July 31, 2007, none of our
      High-Specification Floater fleet contract days are uncommitted for the remainder
      of 2007 and 2008, while approximately 11 percent and 40 percent are uncommitted
      in 2009 and 2010, respectively.





Our
      Other Floater fleet, comprised of 20 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 July 31,
      2007, three percent of our Other Floater fleet contract days are
      uncommitted for the remainder of 2007, while approximately 17
      percent, 53 percent and 78 percent are uncommitted in 2008, 2009 and
      2010, respectively.





We
      expect
      to remain at or near full utilization for our Jackup fleet in 2007. 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. While our near term outlook for the jackup
      market sector remains strong, we do not know what impact, if any, that
      this increase in supply will have on this market sector in the intermediate
      and long term. As of July 31, 2007, four percent of our Jackup fleet contract
      days are uncommitted for the remainder of 2007, while approximately 28
      percent, 54 percent and 84 percent are uncommitted in 2008, 2009 and
      2010, respectively.





We
      expect
      our out-of-service time for the second half of 2007 to be in line with the
      out-of-service time we incurred during the first half of 2007.





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





·
            the
                commencement of new contracts with higher dayrates, primarily on
                our
                High-Specification Floaters and Other
                Floaters;





20
 ***Index***





·
            the
                scheduled return to operations of the *Sedco 702* in November 2007
                after completion of its upgrade that began in April 2006;
                and


·
            the
                completion of two full quarters of operations related to the five
                integrated services contracts in India and the *Jack Bates* in
                Australia.





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





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


·
              an
                  anticipated increase in activity due to the completion of two full
                  quarters of operations by the *Jack Bates* in Australia and
                  the five integrated services contracts in India and the commencement
                  of
                  operations of the upgraded *Sedco 702* in Nigeria;
                  and


·
            our
                investments in a number of recruitment, retention and personnel
                development initiatives related to the manning of the crews of the
                two
                deepwater upgrades, the four newbuild rigs under construction and
                our
                efforts to mitigate expected personnel
                attrition.





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 four
      of
      these fixed-price contract options will be exercised by our customers in the
      second half of 2007 and 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 9―Contingencies–Retained
      Risk.





*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.





21
 ***Index***


Norwegian
        civil tax and criminal authorities are investigating certain transactions
        undertaken in 2001 and 2002.  Further, in the second quarter of 2007,
        the Norwegian authorities expanded the investigation and are seeking 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 $265 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 $110 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 $152 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 6—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.  As of July 31, 2007, Transocean Holdings had received $118
      million and $55 million in payments with respect to estimated pre-IPO tax
      benefits (including tax benefits from the exercise of certain compensatory
      stock
      options to acquire Transocean ordinary shares by TODCO’s current and former
      employees and directors) that TODCO estimated that it had used for the 2006
      and
      2007 tax years, respectively.





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. We expect to recognize approximately $290 million related
      to the accelerated payment and the previously mentioned 2006 and 2007 tax year
      payments as other income in the third quarter of 2007. See Notes to Condensed
      Consolidated Statements Note 13—Subsequent Events–TODCO Tax Sharing
      Agreement.




*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 violations by oil service companies who used Panalpina Inc.
        and
        other brokers in Nigeria and other parts of the world. We are developing an
        investigative plan which will allow us to promptly review and produce relevant
        and responsive information requested by the DOJ.


22
 ***Index***





**Performance
      and Other Key Indicators**





*Contract
      Backlog*—The following table reflects our contract backlog as of June 30,
      2007, March 31, 2007 and June 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.





June
                30,
              2007
            
            
            March
                31,
              2007
            
            
            June
                30,
              2006(In
                millions)**Contract
                Backlog**High-Specification
                Floaters
            
            $
            15,296
            
            
            $
            14,911
            
            
            $
            13,516Other
                Floaters
            
            
            4,000
            
            
            
            4,335
            
            
            
            2,607Jackups
            
            
            1,834
            
            
            
            2,049
            
            
            
            2,237Other
                Rigs
            
            
            57
            
            
            
            72
            
            
            
            101Total
            
            $
            21,187
            
            
            $
            21,367
            
            
            $
            18,461





*Fleet
      Utilization and Average Daily Revenue*—The following table shows our average
      daily revenue and utilization for each of the three months ended on June 30,
      2007, March 31, 2007 and June 30, 2006. See “—Overview” for a definition of
      average daily revenue, revenue earning day and utilization.





Three
                months endedJune
                30,
              2007
            
            
            March
                31,
              2007
            
            
            June
                30,
              2006**Average
                Daily Revenue**High-Specification
                FloatersUltra-Deepwater
                Floaters
            
            $
            288,900
            
            
            $
            301,400
            
            
            $
            216,500Other
                Deepwater Floaters
            
            $
            228,400
            
            
            $
            235,800
            
            
            $
            190,200Other
                High-Specification Floaters
            
            $
            286,900
            
            
            $
            238,800
            
            
            $
            174,700Total
                High-Specification Floaters
            
            $
            262,100
            
            
            $
            264,800
            
            
            $
            199,300Other
                Floaters
            
            $
            226,300
            
            
            $
            223,700
            
            
            $
            118,200Jackups
            
            $
            117,900
            
            
            $
            104,600
            
            
            $
            73,000Other
                Rigs
            
            $
            57,200
            
            
            $
            50,300
            
            
            $
            47,500Total
                Drilling Fleet
            
            $
            202,400
            
            
            $
            198,000
            
            
            $
            129,000**Utilization**High-Specification
                FloatersUltra-Deepwater
                Floaters
            
            
            98
            %
            
            
            97
            %
            
            
            89
            %Other
                Deepwater Floaters
            
            
            82
            %
            
            
            77
            %
            
            
            70
            %Other
                High-Specification Floaters
            
            
            99
            %
            
            
            99
            %
            
            
            98
            %Total
                High-Specification Floaters
            
            
            90
            %
            
            
            87
            %
            
            
            81
            %Other
                Floaters
            
            
            98
            %
            
            
            94
            %
            
            
            74
            %Jackups
            
            
            86
            %
            
            
            83
            %
            
            
            93
            %Other
                Rigs
            
            
            100
            %
            
            
            100
            %
            
            
            62
            %Total
                Drilling Fleet
            
            
            91
            %
            
            
            88
            %
            
            
            81
            %





23
 ***Index***





**Liquidity
      and Capital Resources**





**Sources
      and Uses of Cash**





Our
      primary source of cash during the first six months of 2007 was our cash flows
      from operations. Our primary uses of cash were repurchases of our ordinary
      shares, capital expenditures and repayments of borrowings under our Term Credit
      Facility. At June 30, 2007, we had $445 million in cash and cash
      equivalents.





Six
                months ended
              June
                30,2007
            
            
            2006
            
            
            Change(In
                millions)**Net
                cash from operating activities**Net
                income
            
            $
            1,102
            
            
            $
            455
            
            
            $
            647Depreciation
            
            
            201
            
            
            
            204
            
            
            
            (3
            )Other
                non-cash items
            
            
            31
            
            
            
            (163
            )
            
            
            194Working
                capital
            
            
            (73
            )
            
            
            (52
            )
            
            
            (21
            )$
            1,261
            
            
            $
            444
            
            
            $
            817





Net
      cash
      provided by operating activities increased by $817 million due to more cash
      generated from net income.





Six
                months ended
              June
                30,2007
            
            
            2006
            
            
            Change(In
                millions)**Net
                cash from investing activities**Capital
                expenditures
            
            $
            (755
            )
            
            $
            (276
            )
            
            $
            (479
            )Proceeds
                from disposal of assets, net
            
            
            41
            
            
            
            203
            
            
            
            (162
            )Joint
                ventures and other investments, net
            
            
            (3
            )
            
            
            –
            
            
            
            (3
            )$
            (717
            )
            
            $
            (73
            )
            
            $
            (644
            )





Capital
      expenditures increased by $479 million over the corresponding prior year period,
      primarily due to the construction of four enhanced Enterprise-class drillships,
      the two *Sedco 700*-series deepwater upgrades and other equipment
      replaced and upgraded on our existing rigs. In addition, proceeds from asset
      sales were lower in the first six months of 2007 during which only one drilling
      unit was sold as compared to the same period in 2006 during which four drilling
      units were sold.




Six
                months ended
              June
                30,2007
            
            
            2006
            
            
            Change(In
                millions)**Net
                cash from financing activities**Repayments
                on the Term Credit Facility
            
            $
            (230
            )
            
            $
            –
            
            
            $
            (230
            )Repurchase
                of ordinary shares
            
            
            (400
            )
            
            
            (600
            )
            
            
            200Net
                proceeds from issuance of ordinary shares under share-based compensation
                plans
            
            
            55
            
            
            
            66
            
            
            
            (11
            )Other,
                net
            
            
            9
            
            
            
            –
            
            
            
            9$
            (566
            )
            
            $
            (534
            )
            
            $
            (32
            )





24
 ***Index***





Net
      cash
      used in financing activities increased due to repayments on our Term Credit
      Facility in the first six months of 2007, partially offset by a decrease in
      repurchases of ordinary shares in the first six months of 2007 compared to
      the
      same period in 2006. See
“―Sources
      and Uses of Liquidity.”





**Capital
      Expenditures and Dispositions**





From
      time
      to time, we review possible acquisitions of businesses and drilling rigs and
      may
      in the future make significant capital commitments for such purposes. We may
      also consider investments related to major rig upgrades or new rig construction
      if generally supported by firm contracts. Any such acquisition, upgrade or
      new
      rig construction could involve the payment by us of a substantial amount of
      cash
      or the issuance of a substantial number of additional ordinary shares or other
      securities. In July 2007, we entered into an Agreement and Plan of Merger with
      GlobalSantaFe Corporation. During 2006 and the first six 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 $28
      million, totaled $755 million during the six months ended June 30, 2007,
      including $443 million for the construction of four enhanced Enterprise-class
      drillships and $102 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 $895 million for the construction of four deepwater drillships
      and
      approximately $285 million for the deepwater upgrade 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 merger with
      GlobalSantaFe Corporation.





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 six months ended June 30, 2007, we completed the sale of the tender
      rig *Charley Graves* for net proceeds of $33 million and
      recognized a gain on the sale of $23 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 repurchase our ordinary
      shares. We may also continue to consider allowing cash balances to increase
      and
      the reduction of debt prior to scheduled maturities.





In
      May 2006, our board of directors
      authorized an increase in the amount of ordinary shares which we may repurchase
      pursuant to our share repurchase program from $2.0 billion, which was previously
      authorized and announced in October 2005, to $4.0 billion. The ordinary shares
      may be repurchased from time to time in open market or private transactions.
      Decisions to repurchase shares are based upon our ongoing capital requirements,
      the price of our shares, regulatory considerations, cash flow generation,
      general market conditions and other factors. We plan to fund any future share
      repurchases under the program from current and future cash balances and we
      could
      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. The Merger Agreement with GlobalSantaFe
      restricts our repurchase of our ordinary shares without the consent of
      GlobalSantaFe.





25
 ***Index***





During
      the six months ended June 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 July 31, 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.





*Debt
      Conversion*—Holders of our Zero Coupon Convertible Debentures have the
      option to require us to convert their debentures into our ordinary shares at
      any
      time prior to maturity. In May 2007, we issued 1,223 ordinary shares in exchange
      for $150,000 aggregate principal amount of debentures that were converted at
      a
      conversion rate of 8.1566 ordinary shares per $1,000 debenture. Prior to
      consummation of the Transactions, we currently expect to call for redemption
      our
      Zero Coupon Convertible Debentures due May 2020 and our 1.5% Convertible
      Debentures due 2021.





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 July 31, 2007
      we had no amounts outstanding under this facility.





The
      Revolving Credit Facility and Term
      Credit Facility require compliance with various covenants and provisions
      customary for agreements of this nature, including a debt to total tangible
      capitalization ratio, as defined by the credit agreements, not greater than
      60
      percent. Other provisions of the credit agreements include limitations on
      creating liens, incurring subsidiary debt, transactions with affiliates,
      sale/leaseback transactions and mergers and sale of substantially all assets.
      Should we fail to comply with these covenants, we would be in default and may
      lose access to these facilities. We are also subject to various covenants under
      the indentures pursuant to which our public debt was issued, including
      restrictions on creating liens, engaging in sale/leaseback transactions and
      engaging in certain merger, consolidation or reorganization transactions. A
      default under our public debt could trigger a default under our credit
      agreements and, if not waived by the lenders, could cause us to lose access
      to
      these facilities.





In
      April
      2001, the SEC declared effective our shelf registration statement on Form S–3
      for the proposed offering from time to time of up to $2.0 billion in gross
      proceeds of senior or subordinated debt securities, preference shares, ordinary
      shares and warrants to purchase debt securities, preference shares, ordinary
      shares or other securities. At July 31, 2007, $600 million in gross proceeds
      of
      securities remained unissued under the shelf registration
      statement.





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





As
      is
      customary in the contract drilling business, we also have various surety bonds
      in place that secure customs obligations relating to the importation of our
      rigs
      and certain performance and other obligations.





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.





26
 ***Index***





**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.




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
              
              $
              2,249
              
              
              $
              871
              
              
              $
              1,256
              
              
              $
              122
              
              
              $
              –


As
      of
      June 30, 2007, the total unrecognized tax benefit related to uncertain tax
      positions, net of prepayments was $292 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.





**Operating
      Results**





***Quarter
      ended June 30, 2007 compared to
      quarter ended June 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 endedJune
                30,2007
            
            
            2006
            
            
            Change
            
            
            %
                Change(In
                millions, except day amounts and percentages)Revenue
                earning days
            
            
            6,719
            
            
            
            6,420
            
            
            
            299
            
            
            
            5
            %Utilization
            
            
            91
            %
            
            
            81
            %
            
            N/A
            
            
            
            10
            %Average
                daily revenue
            
            $
            202,400
            
            
            $
            129,000
            
            
            $
            73,400
            
            
            
            57
            %Contract
                drilling revenues
            
            $
            1,360
            
            
            $
            828
            
            
            $
            532
            
            
            
            64
            %Other
                revenues
            
            
            74
            
            
            
            26
            
            
            
            48
            
            
            N/M1,434
            
            
            
            854
            
            
            
            580
            
            
            
            68
            %Operating
                and maintenance expense
            
            
            (627
            )
            
            
            (549
            )
            
            
            (78
            )
            
            
            (14
            )%Depreciation
            
            
            (101
            )
            
            
            (102
            )
            
            
            1
            
            
            
            1
            %General
                and administrative expense
            
            
            (29
            )
            
            
            (25
            )
            
            
            (4
            )
            
            
            (16
            )%Gain
                (loss) from disposal of assets, net
            
            
            (1
            )
            
            
            111
            
            
            
            (112
            )
            
            N/MOperating
                income
            
            
            676
            
            
            
            289
            
            
            
            387
            
            
            N/MOther
                income (expense), netInterest
                income
            
            
            5
            
            
            
            5
            
            
            
            −
            
            
            
            −Interest
                expense, net of amounts capitalized
            
            
            (33
            )
            
            
            (20
            )
            
            
            (13
            )
            
            
            (65
            )%Other,
                net
            
            
            (5
            )
            
            
            1
            
            
            
            (6
            )
            
            N/MIncome
                tax expense
            
            
            (93
            )
            
            
            (26
            )
            
            
            (67
            )
            
            N/MMinority
                interest
            
            
            (1
            )
            
            
            −
            
            
            
            (1
            )
            
            
            (100
            )%Net
                income
            
            $
            549
            
            
            $
            249
            
            
            $
            300
            
            
            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 eight rigs that were out of service in 2006 contributed $130 million and
      the reactivation of three Other Floaters during 2006 contributed to higher
      utilization in those asset classes and increased revenue by $82 million.
      Partially offsetting these increases were lower revenues of $29 million due
      to four rigs that were out of service for a portion of 2007
      for shipyard, mobilization or maintenance projects and lower revenues
      of $8 million resulting from two rigs that were operating at the time of their
      sale in the third quarter of 2006 and first quarter of 2007.





27
 ***Index***





Other
      revenues for the three months ended June 30, 2007 increased $48 million
      primarily due to a $41 million increase in integrated services revenue and
      a $7
      million increase in client reimbursable revenue.





Operating
      and maintenance expenses increased by $78 million primarily from expenses
      related to reactivated rigs, higher labor costs, vendor price increases,
      increased integrated service activity and higher client reimbursable costs.
      These increases were partially offset by $38 million of reactivation costs
      in
      the second quarter of 2006, with no comparable amounts in the second quarter
      of
      2007.





The
      increase in general and administrative expense was primarily attributable to
      increased personnel-related expenses of $4 million.





During
      the three months ended June 30, 2007, we recognized an immaterial net loss
      related to the disposal of other assets. During the three months ended June
      30,
      2006, we recognized net gains of $111 million related to the sale of two rigs
      and the disposal of other assets.





The
      increase in interest expense included $24 million that was primarily
      attributable to higher debt levels arising from the issuance of debt and
      borrowings under credit facilities subsequent to the second quarter of 2006.
      Partially offsetting this increase was a reduction of $13 million related to
      an
      increase in capitalized interest in the second quarter of 2007 compared to
      the
      same period in 2006.





We
      operate internationally and provide for income taxes based on the tax laws
      and
      rates in the countries in which we operate and earn income. There is no expected
      relationship between the provision for income taxes and income before income
      taxes. The estimated annual effective tax rates at June 30, 2007 and 2006 were
      14.9 percent and 17.7 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 June 30, 2007, the impact of the various discrete
      period tax items was a net benefit of $11 million, related to changes in prior
      year estimates, resulting in a tax rate of 14.4 percent on earnings before
      income taxes. For the three months ended June 30, 2006, the impact of the
      various discrete items was a net benefit of $3 million, related to changes
      in
      prior year estimates, resulting in a tax rate of 9.4 percent on earnings before
      income taxes.





28
 ***Index***





***Six
      months ended June 30, 2007 compared
      to six months ended June 30, 2006***





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





Six
                months endedJune
                30,2007
            
            
            2006
            
            
            Change
            
            
            %
                Change(In
                millions, except day amounts and percentages)Revenue
                earning days
            
            
            13,149
            
            
            
            12,931
            
            
            
            218
            
            
            
            2
            %Utilization
            
            
            90
            %
            
            
            81
            %
            
            N/A
            
            
            
            9
            %Average
                daily revenue
            
            $
            200,200
            
            
            $
            124,300
            
            
            $
            75,900
            
            
            
            61
            %Contract
                drilling revenues
            
            $
            2,633
            
            
            $
            1,607
            
            
            $
            1,026
            
            
            
            64
            %Other
                revenues
            
            
            129
            
            
            
            64
            
            
            
            65
            
            
            N/M2,762
            
            
            
            1,671
            
            
            
            1,091
            
            
            
            65
            %Operating
                and maintenance expense
            
            
            (1,195
            )
            
            
            (1,024
            )
            
            
            (171
            )
            
            
            (17
            )%Depreciation
            
            
            (201
            )
            
            
            (204
            )
            
            
            3
            
            
            
            1
            %General
                and administrative expense
            
            
            (55
            )
            
            
            (45
            )
            
            
            (10
            )
            
            
            (22
            )%Gain
                (loss) from disposal of assets, net
            
            
            22
            
            
            
            175
            
            
            
            (153
            )
            
            
            (87
            )%Operating
                income
            
            
            1,333
            
            
            
            573
            
            
            
            760
            
            
            N/MOther
                income (expense), netInterest
                income
            
            
            10
            
            
            
            10
            
            
            
            −
            
            
            
            −Interest
                expense, net of amounts capitalized
            
            
            (70
            )
            
            
            (44
            )
            
            
            (26
            )
            
            
            (59
            )%Other,
                net
            
            
            8
            
            
            
            2
            
            
            
            6
            
            
            N/MIncome
                tax expense
            
            
            (178
            )
            
            
            (86
            )
            
            
            (92
            )
            
            N/MMinority
                interest
            
            
            (1
            )
            
            
            −
            
            
            
            (1
            )
            
            
            (100
            )%Net
                income
            
            $
            1,102
            
            
            $
            455
            
            
            $
            647
            
            
            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
      seven rigs that were out of service in 2006 contributed $233 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 $161 million. Partially offsetting these increases were lower
      revenues of $49 million on five rigs that were out of service for a portion
      of
      2007 for shipyard, mobilization or maintenance projects and lower revenues
      of
      $16 million from rigs sold in 2006 and 2007.





Other
      revenues for the six months ended June 30, 2007 increased $65 million primarily
      due to a $54 million increase in integrated services revenue and a $11 million
      increase in client reimbursable revenue.





Operating
      and maintenance expenses increased by $171 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 $46 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 $57 million and $12 million, respectively, for
      the
      reactivation of four of our rigs and the repair of two of our rigs that incurred
      hurricane damage.





The
      increase in general and administrative expense was primarily attributable to
      increased personnel-related expenses of $10 million.





29
 ***Index***





During
      the six months ended June 30, 2007, we recognized a net gain of $22 million
      related to a rig sale and disposal of other assets. During the six months ended
      June 30, 2006, we recognized net gains of $175 million related to the sale
      of
      four rigs and disposal of other assets.





The
      increase in interest expense included $50 million that was primarily
      attributable to higher debt levels arising from the issuance of debt and
      borrowings under credit facilities subsequent to the six months ended June
      30,
      2006. Partially offsetting this increase was a reduction of $25 million related
      to an increase in capitalized interest during the six months ended June 30,
      2007
      compared to the same period in 2006.





The
      increase in other, net was primarily due to $16 million of income recognized
      in
      connection with the settlement of our patent litigation with GlobalSantaFe
      Corporation, partially offset by a $4 million foreign exchange loss and $3
      million equity in the losses of unconsolidated affiliates during the six months
      ended June 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 June 30, 2007 and 2006 were
      14.9 percent and 17.7 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 six months ended June 30, 2007, the impact of the various discrete
      period tax items was a net benefit of $10 million, related to the net gains
      on
      rig sales and changes in prior year estimates, resulting in a tax rate of 13.9
      percent on earnings before income taxes. For the six months ended June 30,
      2006,
      the impact of the various discrete items was a net expense of $21 million,
      related to the net gains on rig sales and changes in prior year estimates,
      resulting in a tax rate of 15.9 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 six months ended June 30,
      2007. These estimates require significant judgments and estimates used in the
      preparation of our consolidated financial statements. Management has discussed
      each of these critical accounting estimates with the audit committee of the
      board of directors.





30
 ***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.





31
 ***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 June 30
      relating to debt obligations as of June 30, 2007. Weighted-average variable
      rates are based on London Interbank Offered Rate (“LIBOR”) rates at June 30,
      2007, plus applicable margins.





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





**Scheduled
                Maturity Date (a) (b)**
            
            
            **Fair**
              **Value****2008**
            
            
            **2009**
            
            
            **2010**
            
            
            **2011**
            
            
            **2012**
            
            
            **Thereafter**
            
            
            **Total**
            
            
            **6/30/07**Total
                debtFixed
                rate
            
            $
            19
            
            
            $
            −
            
            
            $
            −
            
            
            $
            565
            
            
            $
            −
            
            
            $
            1,004
            
            
            $
            1,588
            
            
            $
            1,880Average
                interest rate
            
            
            2.8
            %
            
            
            −
            %
            
            
            −
            %
            
            
            3.0
            %
            
            
            −
            %
            
            
            7.5
            %
            
            
            5.8
            %Variable
                rate
            
            $
            −
            
            
            $
            1,470
            
            
            $
            −
            
            
            $
            −
            
            
            $
            −
            
            
            $
            −
            
            
            $
            1,470
            
            
            $
            1,470Average
                interest rate
            
            
            −
            %
            
            
            5.6
            %
            
            
            −
            %
            
            
            −
            %
            
            
            −
            %
            
            
            −
            %
            
            
            5.6
            %


__________________________


(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
      June 30, 2007, we had approximately
      $1.5 billion of variable rate debt at face value (48 percent of total debt
      at
      face value). This variable rate debt represented the Term Credit Facility and
      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
      June 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 $15 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 June
      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 $2 million and $3 million, respectively.





**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 six months ended June 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 June 30, 2007 to provide reasonable assurance
      that information required to be disclosed in our reports filed or submitted
      under the Exchange Act was (i) accumulated and communicated to our management,
      including our Chief Executive Officer and our Chief Financial Officer, to allow
      timely decisions regarding required disclosure and(ii) recorded, processed,
      summarized and reported within the time periods specified in the Securities
      and
      Exchange Commission’s rules and forms.





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








32
 ***Index***





**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 $117 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 July 30, 2007, the U.S. dollar
      equivalent of this assessment was approximately $185 million in aggregate.
      We
      are not certain as to the basis for the increase in the amount of the
      assessment. 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 $114 million from the state tax
      authorities of Rio de Janeiro in Brazil against one of our Brazilian
      subsidiaries for customs taxes on equipment imported into the state in
      connection with our operations. The assessments resulted from a preliminary
      finding by these authorities that our subsidiary’s record keeping practices were
      deficient. We continue to review documents related to the assessments, and
      while
      our review is not complete, we currently believe that the substantial majority
      of these assessments are without merit. We filed an initial response with the
      Rio de Janeiro tax authorities on September 9, 2006 refuting these
      additional tax assessments. While we cannot predict or provide assurance as
      to
      the final outcome of these proceedings, we do not expect it to have a material
      adverse effect on our consolidated financial position, results of operations
      or
      cash flows.





We
      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.





33
 ***Index***





**Item
      1A. Risk Factors**





Other
      than with respect to the risk factors set forth below, which
      include risk factors related to
      our proposed merger with GlobalSantaFe andthe Reclassification(see Notesto
      Condensed Consolidated Statements
      Note 13—Subsequent
      Events–Merger with
      GlobalSantaFe Corporation),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 Report on Form 10-Q for the quarterly
      period ended March 31, 2007.





**Risks
      Relating to the Merger with GlobalSantaFe and the Reclassification (the “Transactions”)**




***Failure
      to complete 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 the shareholders of GlobalSantaFe
      payable by virtue of the Transactions. If these or other conditions are not
      satisfied, we may not be able to complete the Transactions, and such failure
      may
      have other adverse consequences. If the Transactions are not completed, we
      will
      be subject to a number of risks, including the following:




·
            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; 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.




***Whether
      or not we complete the Transactions, 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.





Our
      current and prospective employees may, furthermore, be uncertain about their
      future roles and relationships with us following the completion of the
      Transactions. This uncertainty may also affect our productivity or 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 pending the completion of the Transactions,
      which would 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 Transactions are completed or the Merger Agreement is terminated,
      subject to specified exceptions (which are discussed in more detail in the
      Merger Agreement), we are restricted from soliciting, initiating or knowingly
      encouraging any inquiry, proposal or offer for an alternative transaction with
      any person or entity other than GlobalSantaFe. Subject to specified conditions,
      including the requirement that we have complied in all material respects with
      these non-solicitation provisions, we may enter into an agreement with respect
      to a superior proposal.  However, in that event, we are required to pay
      GlobalSantaFe a termination fee of $300 million. As a result of these
      restrictions, we may not be able to enter into an agreement with respect to
      an
      alternative transaction on more favorable terms without incurring a potentially
      significant liability to GlobalSantaFe.




34
 ***Index***





***While
      the Transactions are pending we may be subject to restrictions on the conduct
      of
      our business.***





The
      Merger Agreement restricts us from taking specified actions without
      GlobalSantaFe’s prior approval, including, among other things, making certain
      significant acquisitions, dispositions or investments, making certain
      significant capital expenditures, declaring dividends, and repurchasing
      shares.




**Risks
      Relating to Our Business**




***A
      loss of a major tax dispute or a successful challenge to our tax structure
      could
      result in a significant loss or in a higher tax rate on our worldwide earnings
      or both.***





We
      are a
      Cayman Islands company and also operate through various subsidiaries around
      the
      world. Our income tax returns are subject to review and examination in the
      various jurisdictions in which we operate. We accrue for income tax
      contingencies that we believe are probable exposures and our income taxes are
      based upon how we are structured in countries around the world. If any tax
      authority successfully challenges our operational structure, intercompany
      pricing policies, the tax presence of key Transocean entities in certain
      countries, or if the terms of certain income tax treaties are changed in a
      manner that is adverse to our structure, or if we lose a material dispute in
      any
      country, including the U.S. and Norway, our effective tax rate on our worldwide
      earnings could increase substantially and our financial results could be
      materially adversely affected.





***A
      change in tax laws, treaties or regulations, or their interpretation, of any
      country in which we operate could result in a higher or lower tax rate on our
      worldwide earnings.***





We
      operate worldwide through our various subsidiaries in a number of countries
      throughout the world. Consequently, we are subject to tax laws, treaties and
      regulations in and between the countries in which we operate.  A
      change in those tax laws, treaties or regulations could result in a higher
      or
      lower effective tax rate on our worldwide earnings.





One
      such
      treaty is currently being renegotiated.  If this renegotiation follows what
      we believe is a recent trend, this likely would result in a change in the terms
      of the treaty that is adverse to our structure which in turn would increase
      our
      effective tax rate and such increase could be material.  We are studying
      the effect of the treaty renegotiation with a view to determining what, if
      any,
      additional steps are appropriate to mitigate any potential impact of such
      changes. We may not be able to fully, or partially, mitigate the impact of
      this
      or future changes in treaties.





35
 ***Index***





Various
      proposals have been made in recent years that, if enacted into law, could have
      an adverse impact on the Company.  Examples include, but are not limited
      to, proposals which would broaden the circumstances in which a non-U.S. company
      would be considered U.S. resident and a proposal which could limit treaty
      benefits on certain payments by U.S. subsidiaries to non-U.S. affiliates. 
Such legislation, if enacted, could cause a material increase in our tax
      liability and effective tax rate.





**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)**April 2007
            
            
            453
            
            
            $
            82.19
            
            
            
            –
            
            
            $
            600May 2007
            
            
            1,290
            
            
            $
            89.71
            
            
            
            –
            
            
            $
            600June 2007
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            $
            600Total
            
            
            1,743
            
            
            $
            87.75
            
            
            
            –
            
            
            $
            600





(1)
            Total
                number of shares purchased in the second quarter of 2007
                includes 1,743 shares withheld by us in satisfaction of
                withholding taxes due upon the vesting of restricted shares granted
                to our
                employees under our Long-Term Incentive Plan to pay withholding taxes
                due
                upon vesting of a restricted share
                award.





(2)
            In
                May 2006, our board of directors authorized an increase in the amount
                of
                ordinary shares which may be repurchased pursuant to our share repurchase
                program from $2.0 billion, which was previously authorized and announced
                in October 2005, to $4.0 billion. The shares may be repurchased from
                time
                to time in open market or private transactions. The repurchase program
                does not have an established expiration date and may be suspended
                or
                discontinued at any time. Under the program, repurchased shares are
                retired and returned to unissued status. From inception through June
                30,
                2007, we have repurchased a total of 46.9 million of our ordinary
                shares
                at an aggregate cost of $3.4 billion. The Merger Agreement with
                GlobalSantaFe restricts our repurchase of our ordinary shares without
                the
                consent of GlobalSantaFe.





**Item
      4. Submission of Matters to a Vote of Security
      Holders**





At
      the
      Annual General Meeting of Transocean Inc. held on May 10, 2007, 247,182,533
      shares were represented in person or by proxy out of 287,850,111 shares
      outstanding and entitled to vote as of the record date, constituting a quorum.
      The matters submitted to a vote of shareholders, as set forth in our proxy
      statement relating to the meeting, and the corresponding voting results were
      as
      follows:





(i)  With
                respect to the election of Class II Director nominees as set forth
                in our
                proxy statement relating to the meeting, the following number of
                votes
                were cast:





**Name
                of Nominee for**
              **Class
                I Director**
            **For**
            **Against**
            **Withheld/**
              **Abstain**Robert
                L. Long
            244,643,663
            484,449
            2,054,421Martin
                B. McNamara
            243,949,891
            1,139,616
            2,093,025Robert
                M. Sprague
            244,547,156
            576,220
            2,059,157J.
                Michael Talbert
            244,047,419
            1,076,237
            2,058,877




36
 ***Index***





(ii)
                With respect to the approval of our appointment of Ernst & Young LLP
                as independent registered public accounting firm for 2007, the following
                number of votes were cast:





**For**
            **Against/**
              **Authority
                Withheld**
            **Exceptions/**
              **Abstain**
            **Broker**
              **Non-Votes**244,012,412
            1,322,531
            1,847,590
            −





**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
            Amendment
                No. 2 to Revolving Credit Agreement, dated as of June 1, 2007, among
                Transocean Inc., the lenders from time to time parties thereto, Citibank,
                N.A., Bank of America, N.A., JPMorgan Chase Bank, N.A., The Royal
                Bank of
                Scotland plc and SunTrust Bank (incorporated by reference to Exhibit
                4.1
                to the Company’s Current Report on Form 8-K filed on June 4,
                2007)*4.2
            Commitment
                Letter, dated July 21, 2007, among Transocean Inc., GlobalSantaFe
                Corporation, Goldman Sachs Credit Partners L.P., Lehman Brothers
                Commercial Bank, Lehman Commercial Paper Inc. and Lehman Brothers
                Inc.
                (incorporated by reference to Exhibit 10.1 to the Company’s Current Report
                on Form 8-K filed on July 23, 2007)*10.1
            Amendment
                to Amended and Restated Long-Term Incentive Plan of Transocean Inc.
                (incorporated by reference to Exhibit 10.2 to the Company’s Current Report
                on Form 8-K filed on July 23, 2007)†10.2
            Terms
                of July 2007 Employee Restricted Stock Awards†10.3
            Terms
                of July 2007 Employee Deferred Unit Awards†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.





37
 ***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 August 1, 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)