Document:

<PAGE>

                                                                     EXHIBIT 4.6

THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION. IF YOU ARE IN
ANY DOUBT AS TO THE ACTION TO BE TAKEN, YOU SHOULD IMMEDIATELY CONSULT YOUR
BROKER, BANK MANAGER, LAWYER, ACCOUNTANT, INVESTMENT ADVISOR OR OTHER
PROFESSIONAL.

         This document relates to an exchange offer (the "EXCHANGE OFFER") made
by Berkshire Hathaway Finance Corporation ("BHFC"). The Exchange Offer is
described in the Prospectus, dated [_____], 2004 (the "PROSPECTUS"), and in this
Letter of Transmittal (this "LETTER OF TRANSMITTAL"). All terms and conditions
contained or otherwise referred to in the Prospectus are deemed to be
incorporated in and form a part of this Letter of Transmittal. Therefore, you
are urged to read the Prospectus and the items referred to therein carefully.
The terms and conditions contained in the Prospectus, together with the terms
and conditions governing this Letter of Transmittal and the instructions herein,
are collectively referred to below as the "TERMS AND CONDITIONS."

                              LETTER OF TRANSMITTAL
                                   RELATING TO
               THE OFFER BY BERKSHIRE HATHAWAY FINANCE CORPORATION
                    TO EXCHANGE 4.625% SENIOR NOTES DUE 2013,
              UNCONDITIONALLY GUARANTEED BY BERKSHIRE HATHAWAY INC.

                              ("REGISTERED NOTES")

                                       FOR

                          4.625% SENIOR NOTES DUE 2013,
UNCONDITIONALLY GUARANTEED BY BERKSHIRE HATHAWAY INC., ISSUED ON MARCH 16, 2004

                              ("OUTSTANDING NOTES")

         THE EXCHANGE OFFER FOR THE OUTSTANDING NOTES WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON [______], 2004, UNLESS EXTENDED BY BHFC (THE "EXPIRATION
DATE").

<PAGE>

         Each holder of Outstanding Notes wishing to accept the Exchange Offer,
except holders of Outstanding Notes executing their tenders through the
Automated Tender Offer Program ("ATOP") procedures of The Depository Trust
Company ("DTC"), should complete, sign and submit this Letter of Transmittal to
the exchange agent, J.P. Morgan Trust Company, National Association (as
successor to Bank One Trust Company, N.A.) (the "EXCHANGE AGENT"), on or prior
to the Expiration Date.

                 J.P. MORGAN TRUST COMPANY, NATIONAL ASSOCIATION
                      Institutional Trust Services OH1-0184
                         1111 Polaris Parkway, Suite 1N
                               Columbus, OH 43240
                                 Attn: Exchanges

         DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS, OR TRANSMISSION
OF INSTRUCTIONS VIA A FACSIMILE NUMBER, OTHER THAN AS SET FORTH ABOVE OR IN
ACCORDANCE WITH THE INSTRUCTIONS HEREIN, WILL NOT CONSTITUTE VALID DELIVERY. THE
INSTRUCTIONS ACCOMPANYING THIS LETTER OF TRANSMITTAL SHOULD BE READ CAREFULLY
BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED.

         Questions regarding the Exchange Offer or the completion of this Letter
of Transmittal should be directed to the Exchange Agent, at: 1-800-346-5153.

         This Letter of Transmittal may be used to accept the Exchange Offer if
Outstanding Notes are to be tendered by effecting a book-entry transfer into the
Exchange Agent's account at DTC and instructions are not being transmitted
through DTC's ATOP procedures. Unless you intend to tender Outstanding Notes
through ATOP, you should complete, execute and deliver this Letter of
Transmittal, along with the physical certificates for the Outstanding Notes
specified herein, to indicate the action you desire to take with respect to the
Exchange Offer.

         Holders of Outstanding Notes tendering by book-entry transfer to the
Exchange Agent's account at DTC may execute the tender through ATOP, for which
the Exchange Offer is eligible. Financial institutions that are DTC participants
may execute tenders through ATOP by transmitting acceptance of the Exchange
Offer to DTC on or prior to the Expiration Date. DTC will verify acceptance of
the Exchange Offer, execute a book-entry transfer of the tendered Outstanding
Notes into the account of the Exchange Agent at DTC and send to the Exchange
Agent a "book-entry confirmation," which shall include an agent's message. An
"agent's message" is a message, transmitted by DTC to, and received by, the
Exchange Agent and forming part of a book-entry confirmation, which states that
DTC has received an express acknowledgement from a DTC participant tendering
Outstanding Notes that the participant has received and agrees to be bound by
the terms of the Letter of Transmittal as an undersigned thereof and BHFC may
enforce such agreement against the participant. Delivery of the agent's message
by DTC will satisfy the terms of the Exchange Offer as to execution and delivery
of a Letter of Transmittal by the DTC participant identified in the agent's
message. ACCORDINGLY, HOLDERS WHO TENDER THEIR OUTSTANDING NOTES THROUGH DTC'S
ATOP PROCEDURES SHALL BE BOUND BY, BUT NEED NOT COMPLETE, THIS LETTER OF
TRANSMITTAL.

         Subject to the terms and conditions and applicable law, BHFC will
issue: for each $1,000 principal amount of Outstanding Notes, $1,000 principal
amount of Registered Notes.

         Outstanding Notes may be exchanged in minimum denominations of $1,000
and integral multiples of $1,000 in excess thereof. Registered Notes will be
issued in minimum denominations of $1,000 and integral multiples of $1,000 in
excess thereof.

         Holders that anticipate tendering other than through DTC are urged to
promptly contact a bank, broker or other intermediary (that has the capability
to hold cash and securities custodially through DTC) to arrange for receipt of
any Registered Notes to be delivered pursuant to the Exchange Offer and to
obtain the information necessary to provide the required DTC participant and
account information in this Letter of Transmittal.

         Registered Notes will be issued in exchange for Outstanding Notes in
the Exchange Offer, if consummated, as soon as practicable after the Expiration
Date of the Exchange Offer (the "SETTLEMENT DATE").

                                       2
<PAGE>

                           TENDER OF OUTSTANDING NOTES

         To effect a valid tender of Outstanding Notes through the completion,
execution and delivery of this Letter of Transmittal, the undersigned must
complete the table below entitled "Description of Outstanding Notes Tendered"
and sign the Letter of Transmittal where indicated.

         Registered Notes will be delivered in book-entry form to holders
through DTC and only to the DTC account of the undersigned or the undersigned's
custodian, as specified below, on the Settlement Date, or as soon as practicable
thereafter.

         Failure to provide the information necessary to effect delivery of
Registered Notes will render such holder's tender defective, and BHFC will have
the right, which it may waive, to reject such tender without notice.

                    DESCRIPTION OF OUTSTANDING NOTES TENDERED
                           (SEE INSTRUCTIONS 2 AND 3)

                    NOTE: SIGNATURES MUST BE PROVIDED BELOW.

              PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY.

<TABLE>
<CAPTION>
 OUTSTANDING NOTES     NAME OF DTC PARTICIPANT AND PARTICIPANT'S      AGGREGATE PRINCIPAL
  BEING TENDERED       ACCOUNT NUMBER IN WHICH OUTSTANDING NOTES     AMOUNT OF OUTSTANDING
                      ARE HELD AND/OR THE CORRESPONDING REGISTERED           NOTES*
                               NOTES ARE TO BE DELIVERED.
-------------------   --------------------------------------------   ---------------------
<S>                   <C>                                            <C>
4.625% SENIOR NOTES
                      --------------------------------------------   ---------------------
DUE 2013
                      --------------------------------------------   ---------------------

(CUSIP:            )
(CUSIP:           )
</TABLE>

*        THE PRINCIPAL AMOUNT OF OUTSTANDING NOTES TENDERED HEREBY MUST BE IN
         DENOMINATIONS OF U.S.$1,000 AND INTEGRAL MULTIPLES OF U.S.$1,000 IN
         EXCESS THEREOF WITH A MINIMUM TENDER REQUIREMENT OF U.S.$1,000. SEE
         INSTRUCTION 3.

                                       3
<PAGE>

         If the aggregate principal amount of the Outstanding Notes specified
was held as of the date of tender by more than one beneficial owner, you may
specify below the break-down of this aggregate principal amount by beneficial
owner, and, in doing so, hereby instruct the Exchange Agent to treat each such
beneficial owner as a separate holder. If the space below is inadequate, attach
a separate signed schedule using the same format.

<TABLE>
<CAPTION>
BENEFICIAL OWNER NAME OR ACCOUNT     PRINCIPAL AMOUNT OF OUTSTANDING NOTES
           NUMBER
-------------------------------      -------------------------------------
<S>                                  <C>
-------------------------------      -------------------------------------

-------------------------------      -------------------------------------

-------------------------------      -------------------------------------

-------------------------------      -------------------------------------
          TOTAL:
-------------------------------      -------------------------------------
</TABLE>

                           SPECIAL RETURN INSTRUCTIONS

 TO BE COMPLETED ONLY IF OUTSTANDING NOTES NOT ACCEPTED FOR EXCHANGE ARE TO BE
 SENT TO SOMEONE OTHER THAN THE PERSON OR PERSONS WHOSE SIGNATURE(S) APPEAR(S)
                       WITHIN THIS LETTER OF TRANSMITTAL.

                               (SEE INSTRUCTION 5)

<TABLE>
<CAPTION>
             NAME OF DTC PARTICIPANT AND PARTICIPANT'S      *
             ACCOUNT NUMBER TO WHICH OUTSTANDING NOTES
             NOT ACCEPTED FOR EXCHANGE ARE TO BE
             DELIVERED.
----------   -----------------------------------------  --------
<S>          <C>                                        <C>
</TABLE>

                                       4
<PAGE>

                    NOTE: SIGNATURES MUST BE PROVIDED BELOW.
              PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY.

LADIES AND GENTLEMEN:

         The undersigned hereby tenders to BHFC the aggregate principal amount
of Outstanding Notes indicated in the table above entitled "Description of
Outstanding Notes Tendered."

         The undersigned understands that validly tendered Outstanding Notes (or
defectively tendered Outstanding Notes with respect to which BHFC has, or has
caused to be, waived such defect) will be deemed to have been accepted by BHFC
if, as and when BHFC gives oral or written notice thereof to the Exchange Agent.
The undersigned understands that subject to the terms and conditions,
Outstanding Notes properly tendered and accepted (and not validly withdrawn) in
accordance with the terms and conditions will be exchanged for Registered Notes.
The undersigned understands that Outstanding Notes delivered hereby may be
withdrawn at any time on or prior to the Expiration Date. The undersigned
understands that Outstanding Notes delivered hereby may not be withdrawn at any
time after the Expiration Date unless the Exchange Offer is extended with
changes in the terms of the Exchange Offer that are, in the reasonable judgment
of BHFC, materially adverse to the tendering holder. The undersigned understands
that, under certain circumstances, BHFC may not be required to accept any of the
Outstanding Notes tendered (including any Outstanding Notes tendered after the
Expiration Date). If any Outstanding Notes are not accepted for exchange for any
reason (or if Outstanding Notes are validly withdrawn), such unexchanged (or
validly withdrawn) Outstanding Notes will be returned without expense to the
undersigned's account at DTC or such other account as designated herein pursuant
to the book-entry transfer procedures described in the Prospectus, as promptly
as practicable after the expiration or termination of the Exchange Offer.

         Following the later of the Expiration Date or the date upon which
Outstanding Notes are tendered hereby, and subject to and effective upon BHFC's
acceptance for exchange of the principal amount of the Outstanding Notes
tendered hereby, upon the terms and conditions, the undersigned hereby:

         (1)      irrevocably sells, assigns and transfers to or upon the order
                  of BHFC or its nominees, all right, title and interest in and
                  to, and any and all claims in respect of or arising or having
                  arisen as a result of the undersigned's status as a holder of,
                  all Outstanding Notes tendered hereby, such that thereafter it
                  shall have no contractual or other rights or claims in law or
                  equity against BHFC or any fiduciary, trustee, fiscal agent or
                  other person connected with the Outstanding Notes arising
                  under, from or in connection with such Outstanding Notes;

         (2)      waives any and all rights with respect to the Outstanding
                  Notes tendered hereby (including, without limitation, any
                  existing or past defaults and their consequences in respect of
                  such Outstanding Notes); and

         (3)      releases and discharges BHFC and J.P. Morgan Trust Company,
                  National Association (as successor to Bank One Trust Company,
                  N.A.), as trustee (THE "TRUSTEE") from any and all claims the
                  undersigned may have, now or in the future, arising out of or
                  related to the Outstanding Notes tendered hereby, including,
                  without limitation, any and all claims that the undersigned is
                  entitled to receive additional principal or interest payments
                  with respect to the Outstanding Notes tendered hereby (other
                  than accrued and unpaid interest on the Outstanding Notes) or
                  to participate in any redemption or defeasance of the
                  Outstanding Notes tendered hereby.

         The undersigned understands that tenders of Outstanding Notes pursuant
to any of the procedures described in the Prospectus and in the instructions in
this Letter of Transmittal and acceptance of such Outstanding Notes by BHFC
will, following such acceptance, constitute a binding agreement between the
undersigned and BHFC upon the terms and conditions.

         All authority conferred or agreed to be conferred by this Letter of
Transmittal shall not be affected by, and shall survive, the death or incapacity
of the undersigned, and any obligation of the undersigned hereunder shall be
binding

                                       5
<PAGE>

upon the heirs, executors, administrators, trustees in bankruptcy, personal and
legal representatives, successors and assigns of the undersigned.

         The undersigned hereby represents, warrants and agrees that:

         (1)      it has received and reviewed the Prospectus;

         (2)      it is the beneficial owner (as defined below) of, or a duly
                  authorized representative of one or more such beneficial
                  owners of, the Outstanding Notes tendered hereby and it has
                  full power and authority to execute this Letter of
                  Transmittal;

         (3)      the Outstanding Notes being tendered hereby were owned as of
                  the date of tender, free and clear of any liens, charges,
                  claims, encumbrances, interests and restrictions of any kind,
                  and BHFC will acquire good, indefeasible and unencumbered
                  title to such Outstanding Notes, free and clear of all liens,
                  charges, claims, encumbrances, interests and restrictions of
                  any kind, when the same are accepted by BHFC;

         (4)      it will not sell, pledge, hypothecate or otherwise encumber or
                  transfer any Outstanding Notes tendered hereby from the date
                  of this Letter of Transmittal and agrees that any purported
                  sale, pledge, hypothecation or other encumbrance or transfer
                  will be void and of no effect;

         (5)      in evaluating the Exchange Offer and in making its decision
                  whether to participate therein by submitting this Letter of
                  Transmittal and tendering its Outstanding Notes, the
                  undersigned has made its own independent appraisal of the
                  matters referred to in the Prospectus and in any related
                  communications and is not relying on any statement,
                  representation or warranty, express or implied, made to such
                  holder by BHFC or the Exchange Agent other than those
                  contained in the Prospectus (as amended or supplemented to the
                  Expiration Date);

         (6)      the execution and delivery of this Letter of Transmittal shall
                  constitute an undertaking to execute any further documents and
                  give any further assurances that may be required in connection
                  with any of the foregoing, in each case on and subject to the
                  terms and conditions;

         (7)      the submission of this Letter of Transmittal to the Exchange
                  Agent shall, subject to a holder's ability to withdraw its
                  tender prior to the Expiration Date, and subject to terms and
                  conditions of the Exchange Offer generally, constitute the
                  irrevocable appointment of the Exchange Agent as its attorney
                  and agent, and an irrevocable instruction to such attorney and
                  agent to complete and execute all or any form(s) of transfer
                  and other document(s) at the discretion of such attorney and
                  agent in relation to the Outstanding Notes tendered hereby in
                  favor of BHFC or such other person or persons as they may
                  direct and to deliver such form(s) of transfer and other
                  document(s) in the attorney's and/or agent's discretion and
                  the certificate(s) and other document(s) of title relating to
                  such Outstanding Notes' registration and to execute all such
                  other documents and to do all such other acts and things as
                  may be in the opinion of such attorney or agent necessary or
                  expedient for the purpose of, or in connection with, the
                  acceptance of the Exchange Offer, and to vest in BHFC or its
                  nominees such Outstanding Notes;

         (8)      it is acquiring the Registered Notes in its ordinary course of
                  business and has no arrangement or understanding with any
                  person to participate in the distribution of the Registered
                  Securities to be received in the Exchange Offer;

         (9)      if it is a broker-dealer holding Outstanding Notes acquired
                  for its own account as a result of market-making or other
                  trading activities, it will deliver a prospectus meeting the
                  requirements of the Securities Act of 1933 in connection with
                  any resale of the Registered Notes received pursuant to the
                  Exchange Offer (provided, that, by so agreeing and by
                  delivering a prospectus, any such broker-dealer will not be
                  deemed to admit that it is an "underwriter" within the meaning
                  of the Securities Act of 1933); and

        (10)      the terms and conditions shall be deemed to be incorporated
                  in, and form a part of, this Letter of Transmittal, and the
                  terms and conditions shall be read and construed accordingly.

         BHFC hereby informs any holder of Outstanding Notes using the Exchange
Offer to participate in a distribution of the Registered Notes to be acquired in
the Exchange Offer that any such holder (1) can not rely on the position of the
SEC's staff enunciated in Exxon Capital Holdings Corporation (pub. avail. May
13, 1988) or similar letters and (2) must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with a
secondary resale transaction of the Exchange Notes.

         The representations and warranties and agreements of a holder tendering
Outstanding Notes shall be deemed to be repeated and reconfirmed on and as of
the Expiration Date and the Settlement Date. For purposes of this Letter of
Transmittal, the "BENEFICIAL OWNER" of any Outstanding Notes shall mean any
holder that exercises sole investment discretion with respect to such
Outstanding Notes.

         The undersigned understands that tenders may not be withdrawn at any
time after the Expiration Date except as set forth in the Prospectus, unless the
Exchange Offer is extended with changes to the terms and conditions that are, in
the reasonable judgement of BHFC, materially adverse to the undersigned, in
which case tenders may be withdrawn under the conditions described in the
extension.

                                       6
<PAGE>

         If the Exchange Offer is amended in a manner determined by BHFC to be
materially adverse to tendering holders, BHFC will extend the Exchange Offer for
a period of two to ten business days, depending on the significance of the
amendment and the manner of disclosure to such holders, if the Exchange Offer
would otherwise have expired during such two- to ten-business day period. Any
change in the consideration offered to holders of Outstanding Notes in the
Exchange Offer shall be paid to all holders of Outstanding Notes whose
securities have previously been tendered and not withdrawn pursuant to the
Exchange Offer.

         If the "Special Return Instructions" box (found above) is completed,
please credit the indicated DTC account for any book-entry transfers of
Outstanding Notes not accepted for exchange.

         The undersigned recognizes that BHFC has no obligation under the
"Special Return Instructions" provision of this Letter of Transmittal to effect
the transfer of any Outstanding Notes from the holder(s) of such Outstanding
Notes if BHFC does not accept for exchange any of the principal amount of the
Outstanding Notes tendered pursuant to this Letter of Transmittal.

                                       7
<PAGE>

                                    SIGN HERE

         By completing, executing and delivering this Letter of Transmittal, the
undersigned hereby tenders to BHFC the principal amount of the Outstanding Notes
listed in the table set forth above labeled "Description of Outstanding Notes
Tendered."

_________________________________________________________   ____________________
Signature of Registered Holder(s) or Authorized Signatory          Date
           (see guarantee requirement below)

_________________________________________________________   ____________________
Signature of Registered Holder(s) or Authorized Signatory          Date
           (see guarantee requirement below)

_________________________________________________________   ____________________
Signature of Registered Holder(s) or Authorized Signatory          Date
           (see guarantee requirement below)

Area Code and Telephone Number: ________________________________________________

         If a holder of Outstanding Notes is tendering any Outstanding Notes,
this Letter of Transmittal must be signed by the Registered Holder(s) exactly as
the name(s) appear(s) on a securities position listing of DTC or by any
person(s) authorized to become the Registered Holder(s) by endorsements and
documents transmitted herewith. If the signature is by a trustee, executor,
administrator, guardian, attorney-in-fact, officer or other person, acting in a
fiduciary or representative capacity, please set forth at the line entitled
"Capacity (full title)" and submit evidence satisfactory to the Exchange Agent
and BHFC of such person's authority to so act. See Instruction 4.

Name(s): _______________________________________________________________________

________________________________________________________________________________
                             (Please Type or Print)

Capacity (full title): _________________________________________________________

Address: _______________________________________________________________________
                              (Including Zip Code)

                          MEDALLION SIGNATURE GUARANTEE
                        (If required--See Instruction 4)

Signature(s) Guaranteed by
an Eligible Institution: _______________________________________________________
                             (Authorized Signature)

________________________________________________________________________________
                                     (Title)

________________________________________________________________________________
                                 (Name of Firm)

________________________________________________________________________________
                                    (Address)

Dated: ______________, 2004

                                       8
<PAGE>

                   INSTRUCTIONS FORMING PART OF THE TERMS AND
                        CONDITIONS OF THE EXCHANGE OFFER

         1.       DELIVERY OF LETTER OF TRANSMITTAL. This Letter of Transmittal
is to be completed by tendering holders of Outstanding Notes if tender of such
Outstanding Notes is to be made by book-entry transfer to the Exchange Agent's
account at DTC and instructions are not being transmitted through ATOP. HOLDERS
WHO TENDER THEIR OUTSTANDING NOTES THROUGH DTC'S ATOP PROCEDURES SHALL BE BOUND
BY, BUT NEED NOT COMPLETE, THIS LETTER OF TRANSMITTAL; THUS, A LETTER OF
TRANSMITTAL NEED NOT ACCOMPANY TENDERS EFFECTED THROUGH ATOP.

         A confirmation of a book-entry transfer into the Exchange Agent's
account at DTC of all Outstanding Notes delivered electronically, as well as a
properly completed and duly executed Letter of Transmittal (or a manually signed
facsimile thereof) or properly transmitted agent's message, and any other
documents required by this Letter of Transmittal, must be received by the
Exchange Agent at its address set forth herein on or prior to the Expiration
Date.

         Any financial institution that is a participant in DTC may
electronically transmit its acceptance of the Exchange Offer by causing DTC to
transfer Outstanding Notes to the Exchange Agent in accordance with DTC's ATOP
procedures for such transfer on or prior to the Expiration Date. The Exchange
Agent will make available its general participant account at DTC for the
Outstanding Notes for purposes of the Exchange Offer.

         DELIVERY OF A LETTER OF TRANSMITTAL TO DTC WILL NOT CONSTITUTE VALID
DELIVERY TO THE EXCHANGE AGENT. No Letter of Transmittal should be sent to BHFC
or DTC.

         The method of delivery of this Letter of Transmittal and all other
required documents, including delivery through DTC and any acceptance or agent's
message delivered through ATOP, is at the option and risk of the tendering
holder. If delivery is by mail, registered mail, with return receipt requested
and properly insured, is recommended. Instead of delivery by mail, it is
recommended that the holder use an overnight or hand-delivery service. In all
cases, sufficient time should be allowed to ensure timely delivery.

         Neither BHFC nor the Exchange Agent is under any obligation to notify
any tendering holder of Outstanding Notes of BHFC's acceptance of tendered
Outstanding Notes prior to the Expiration Date.

         2.       DELIVERY OF THE REGISTERED NOTES. Registered Notes to be
issued according to the terms of the Exchange Offer, if consummated, will be
delivered in book-entry form to holders of Outstanding Notes tendered in the
Exchange Offer. In order to permit such delivery, the appropriate DTC
participant name and number (along with any other required account information)
must be provided in the table entitled "Description of the Outstanding Notes."
Failure to do so will render a tender of the Outstanding Notes defective, and
BHFC will have the right, which it may waive, to reject such delivery. Holders
that anticipate participating in the Exchange Offer other than through DTC are
urged to promptly contact a bank, broker or other intermediary (that has the
capability to hold securities custodially through DTC) to arrange for receipt of
any Registered Notes delivered pursuant to the Exchange Offer and to obtain the
information necessary to complete the table.

         3.       AMOUNT OF TENDERS. Tenders of Outstanding Notes will be
accepted in denominations of U.S. $1,000 and integral multiples of U.S.$1,000 in
excess thereof. Book-entry transfers to the Exchange Agent should be made in the
exact principal amount of Outstanding Notes tendered.

         4.       SIGNATURES ON LETTER OF TRANSMITTAL; INSTRUMENTS OF TRANSFER;
GUARANTEE OF SIGNATURES. For purposes of this Letter of Transmittal, the term
"REGISTERED HOLDER" means an owner of record as well as any DTC participant that
has Outstanding Notes credited to its DTC account. Except as otherwise provided
below, all signatures on this Letter of Transmittal must be guaranteed by a
recognized participant in the Securities Transfer Agents Medallion Program, the
NYSE Medallion Signature Program or the Stock Exchange Medallion Program (each,
a "MEDALLION SIGNATURE CO-OBLIGOR"). Signatures on the Letter of Transmittal
need not be guaranteed if:

                                       9
<PAGE>

         -        the Letter of Transmittal is signed by a participant in DTC
                  whose name appears on a security position listing as the owner
                  of the Outstanding Notes and the holder(s) has not completed
                  the box entitled "Special Return Instructions" on the Letter
                  of Transmittal; or

         -        the Outstanding Notes are tendered for the account of an
                  "eligible institution."

         An "eligible institution" is one of the following firms or other
entities identified in Rule 17Ad-15 under the Securities Exchange Act of 1934
(as the terms are used in Rule 17Ad-15):

                  (a)      a bank;

                  (b)      a broker, dealer, municipal securities dealer,
         municipal securities broker, government securities dealer or government
         securities broker;

                  (c)      a credit union;

                  (d)      a national securities exchange, registered securities
         association or clearing agency; or

                  (e)      a savings institution that is a participant in a
         Securities Transfer Association recognized program.

         If any of the Outstanding Notes tendered are held by two or more
Registered Holders, all of the Registered Holders must sign the Letter of
Transmittal.

         BHFC will not accept any alternative, conditional, irregular or
contingent tenders. By executing the Letter of Transmittal (or facsimile
thereof) or directing DTC to transmit an agent's message, you waive any right to
receive any notice of the acceptance of your Outstanding Notes for exchange.

         If this Letter of Transmittal or instruments of transfer are signed by
trustees, executors, administrators, guardians or attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing and, unless waived by BHFC, evidence
satisfactory to BHFC of their authority to so act must be submitted with this
Letter of Transmittal.

         Beneficial owners whose tendered Outstanding Notes are registered in
the name of a broker, dealer, commercial bank, trust company or other nominee
must contact such broker, dealer, commercial bank, trust company or other
nominee if they desire to tender such Outstanding Notes.

         5.       SPECIAL RETURN INSTRUCTIONS. All Outstanding Notes
tendered hereby and not accepted for exchange will be returned to the
undersigned according to the information provided in the table entitled
"Description of the Outstanding Notes Tendered" or, if completed, according to
the "Special Return Instructions" box in this Letter of Transmittal.

         6.       TRANSFER TAXES. Except as set forth in this Instruction 6,
BHFC will pay or cause to be paid any transfer taxes with respect to the
transfer and sale of Outstanding Notes to it, or to its order, pursuant to the
Exchange Offer. If payment is to be made to, or if Outstanding Notes not
tendered or purchased are to be registered in the name of any persons other than
the Registered Holder, or if tendered Outstanding Notes are registered in the
name of any persons other than the persons signing this Letter of Transmittal,
the amount of any transfer taxes (whether imposed on the Registered Holder or
such other person) payable on account of the transfer to such other person will
be deducted from the payment unless satisfactory evidence of the payment of such
taxes or exemption therefrom is submitted.

         7.       VALIDITY OF TENDERS. All questions concerning the validity,
form, eligibility (including time of receipt), acceptance and withdrawal of
tendered Outstanding Notes will be determined by BHFC in its sole discretion,
which determination will be final and binding. BHFC reserves the absolute right
to reject any and all tenders of Outstanding Notes not in proper form or any
Outstanding Notes the acceptance for exchange of which may, in the opinion of
its counsel, be unlawful. BHFC also reserves the absolute right to waive any
defect or irregularity in

                                       10
<PAGE>

tenders of Outstanding Notes, whether or not similar defects or irregularities
are waived in the case of other tendered securities. The interpretation of the
terms and conditions by BHFC shall be final and binding on all parties. Unless
waived, any defects or irregularities in connection with tenders of Outstanding
Notes must be cured within such time as BHFC shall determine. None of BHFC, the
Exchange Agent or any other person will be under any duty to give notification
of defects or irregularities with respect to tenders of Outstanding Notes, nor
shall any of them incur any liability for failure to give such notification.

         Tenders of Outstanding Notes will not be deemed to have been made until
such defects or irregularities have been cured or waived. Any Outstanding Notes
received by the Exchange Agent that are not validly tendered and as to which the
defects or irregularities have not been cured or waived will be returned by the
Exchange Agent to the holders of Outstanding Notes, unless otherwise provided in
this Letter of Transmittal, as soon as practicable following the Expiration Date
or the withdrawal or termination of the Exchange Offer.

         8.       WAIVER OF CONDITIONS. BHFC reserves the absolute right to
amend or waive any of the conditions in the Exchange Offer concerning any
Outstanding Notes at any time.

         9.       WITHDRAWAL. Tenders may be withdrawn only pursuant to the
procedures and subject to the terms set forth in the Prospectus under the
caption "The Exchange Offer--Withdrawal of Tenders."

         10.      REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions and
requests for assistance and requests for additional copies of the Prospectus and
this Letter of Transmittal may be directed to the Exchange Agent at the address
and telephone number indicated herein.

         11.      TAX IDENTIFICATION NUMBER. Federal income tax law requires
that a U.S. Holder (defined below) whose Outstanding Notes are accepted for
exchange must provide the Exchange Agent with his, her or its correct Taxpayer
Identification Number ("TIN"), which, in the case of an exchanging U.S. Holder
who is an individual, is his or her social security number. If the Exchange
Agent is not provided with the correct TIN or an adequate basis for exemption,
such holder may be subject to a $50 penalty imposed by the Internal Revenue
Service (the "IRS"), and payments made with respect to the Registered Notes or
the Exchange Offer may be subject to backup withholding at a rate of 30%
(subject to periodic reductions through 2010, at which time the rate is
currently scheduled to be increased to 31%). If withholding results in an
overpayment of taxes, a refund may be obtained.

         To prevent backup withholding, each exchanging U.S. Holder must provide
his, her or its correct TIN by completing the copy of the IRS Form W-9 attached
to this Letter of Transmittal, certifying that the TIN provided is correct (or
that such U.S. Holder is awaiting a TIN) and that the U.S. Holder is exempt from
backup withholding because (i) the holder has been notified by the IRS that he,
she or it is subject to backup withholding as a result of a failure to report
all interests or dividends, or (ii) the IRS has notified the U.S. Holder that
he, she or it is no longer subject to backup withholding. If the Outstanding
Notes are in more than one name or are not in the name of the actual owner,
consult the Form W-9 Instructions for information on which TIN to report. If you
do not provide your TIN to the Exchange Agent within 60 days, backup withholding
may begin and continue until you furnish your TIN.

         Exempt holders (including, among others, all corporations and certain
foreign individuals) are not subject to these withholding and reporting
requirements. See the enclosed copy of the IRS Form W-9. In order to satisfy
BHFC that a foreign individual qualifies as an exempt recipient, such holder
must submit a properly completed IRS Form W-8BEN (or other applicable form)
certifying, under penalty of perjury, to such holder's foreign status in order
establish an exemption from backup withholding. A copy of the Form W-8BEN is
attached to this Letter of Transmittal. Other applicable forms may be obtained
from the Exchange Agent.

         For the purposes of these instructions, a "U.S. HOLDER" is (i) a
citizen or resident of the United States, (ii) a corporation, or other entity
taxable as a corporation for U.S. federal income tax purposes, created or
organized in or under the laws of the United States or of any political
subdivision thereof, or (iii) an estate or trust the income of which is subject
to United States federal income taxation regardless of its source.

                                       11
<PAGE>

         12.      The exchange of Outstanding Notes for Registered Notes will
not be a taxable event for U.S. federal income tax purposes. See "Material
United States Federal Income Tax Consequences" in the Prospectus.

                                       12
<PAGE>

        In order to tender, a holder of Outstanding Notes should send or
  deliver a properly completed and signed Letter of Transmittal and any other
   required documents to the Exchange Agent at its address set forth below or
            tender pursuant to DTC's Automated Tender Offer Program.

                  The Exchange Agent for the Exchange Offer is:

                 J.P. MORGAN TRUST COMPANY, NATIONAL ASSOCIATION

                      Institutional Trust Services OH1-0184
                         1111 Polaris Parkway, Suite 1N
                               Columbus, OH 43240
                                 Attn: Exchanges

         Any questions or requests for assistance or for additional copies of
the Prospectus, this Letter of Transmittal, or related documents may be directed
to the Exchange Agent at: 1-800-346-5153. A holder of Outstanding Notes may also
contact such holder's custodian bank, depositary, broker, trust company or other
nominee for assistance concerning the Exchange Offer.exv10w3

 

Exhibit 10.3

CERTAIN RELATIONSHIPS AND RELATED PARTY
TRANSACTIONS

Merger with Transocean

     
We were incorporated in Delaware on July 7,
1997. On January 31, 2001, we completed a merger
transaction with Transocean in which an indirect subsidiary of
Transocean, TSF Delaware Inc., merged with and into our company,
which was then named R&B Falcon Corporation. On
December 13, 2002, R&B Falcon changed its name
to TODCO.

Asset Transfers to Transocean

     
For a description of the risks related to the
transactions with Transocean described below, see “Risk
Factors— Risks Related to Our Principal Stockholder
Transocean.” The terms of our separation from Transocean,
the related agreements and other transactions with Transocean
were determined in the context of a parent-subsidiary
relationship and thus may be less favorable to us than the terms
we could have obtained from an unaffiliated third party.

     
The following describes transfers of our assets
to Transocean between the date of our acquisition by Transocean
and the closing of the IPO. None of the drilling rigs
transferred to Transocean are currently involved in the business
activities that fall within the TODCO business as defined in the
master separation agreement. See “—Relationship
Between Us and Transocean— Master Separation
Agreement.”

     
In August 2001, we sold, in separate
transactions, the drilling units Jack Bates, Deepwater
Millennium, Deepwater Expedition, Peregrine I, Deepwater
Horizon, C. Kirk Rhein, Falcon 100, Deepwater
Navigator and Deepwater Discovery to Transocean for
net proceeds of $1,615.0 million. The sale prices for these
units were determined by Transocean based on appraisals by
R.S. Platou (U.S.A.) Inc., a third party valuation firm. In
consideration for the sales of these drilling units,
$1,190.0 million of debt we owed to Transocean was
cancelled. We incurred this debt in connection with the
retirement of some of our then-outstanding public debt. In
addition, Transocean delivered to us promissory notes due
August 17, 2011 bearing interest at 5.72% payable annually
in an aggregate principal amount of $425.0 million. In
December 2002, Transocean repaid to us the $425.0 million
aggregate principal amount of promissory notes plus accrued and
unpaid interest. At the time of the sales, each of the drilling
units was being utilized under a drilling contract between one
of our subsidiaries and a customer. These contracts were not
transferred and we secured the continued use of the drilling
units for the purpose of performing these contracts through
charters or other arrangements. These charters or other
arrangements were terminated or transferred to Transocean prior
to the closing of the IPO.

     
In April 2002, we sold, in separate transactions,
the drilling units Harvey H. Ward and Roger W. Mowell
to Transocean for an aggregate net price of
$93.0 million. The sale prices for these units were
determined by Transocean based on appraisals by R.S. Platou
(U.S.A.) Inc., a third party valuation firm. In consideration
for the sales of these drilling units, Transocean delivered to
us promissory notes due April 3, 2012 bearing interest at
5.5% payable annually in an aggregate principal amount of
$93.0 million. The notes can be prepaid at any time at
Transocean’s option, without penalty. In December 2002,
Transocean repaid to us the $93.0 million aggregate
principal amount of promissory notes plus accrued and unpaid
interest.

     
In July 2002, we distributed as an in-kind
dividend for no consideration, in separate transactions, the
drilling units W.D. Kent, Charley Graves and
J.W. McLean to Transocean. Simultaneous with the
distributions, we entered into a demise party charter agreement
with Transocean for each rig whereby Transocean chartered the
drilling units to us at a fixed daily rate aggregating $49,800.
Additionally, we entered into a master brokerage agreement with
Transocean for each drilling unit whereby we marketed that
drilling unit in exchange for a fee equal to 2% of the payment
due Transocean under the demise charter. Both the master
brokerage agreements and the demise party charters were
terminated on September 30, 2002.

     
Also in July 2002, we sold, in separate
transactions, the following subsidiaries to Transocean, in
exchange for total cash consideration of approximately
$1.1 million: (1) RB Mediterranean Ltd., which holds
oil and gas interests outside the United States, (2) RB
Anton Ltd., which holds oil and gas interests outside the United
States, (3) RB Astrid Ltd., which holds oil and gas
interests outside the United States, and (4) PT

82

 

RBF Offshore Drilling, which has drilling
operations in Indonesia. The sale prices for RB Mediterranean
Ltd. and PT RBF Offshore Drilling were determined by Transocean
based on internal valuations. The sale prices for RB Anton
Ltd. and RB Astrid Ltd. were determined by Transocean based
on recommendations by Argonauta Exploration &
Production Services, a third party consulting firm that manages
the assets held by those entities.

     
Effective August 1, 2002, Transocean assumed
sponsorship of specified employee benefits plans, as more fully
described in “—Relationship Between Us and
Transocean— Employee Matters Agreement.”

     
In September 2002, we distributed as an in-kind
dividend for no consideration, in separate transactions, the
stock of the following subsidiaries to Transocean:
(1) R&B Falcon Canada Co., which has drilling
operations in Canada, (2) Shore Services, LLC, which has
shore base operations in Italy, (3) R&B Falcon Inc.,
LLC, which has a branch in Saudi Arabia, (4) R&B Falcon
(M) Sdn. Bhd., which has drilling operations in Malaysia,
(5) R&B Falcon International Energy Services BV, which
has drilling operations outside the United States,
(6) R&B Falcon BV, which has operations outside the
United States, (7) Transocean Offshore Drilling Services
LLC, which owns the drilling unit J.T. Angel, and
(8) RBF Rig Corporation LLC, which owns the drilling unit
C.E. Thornton. Additionally, in September 2002, we
distributed as an in-kind dividend for no consideration, in
separate transactions, the drilling units
F.G. McClintock, Peregrine III and Land
Rig 34 as well as certain surplus equipment to
Transocean.

     
Also in September 2002, we sold the stock of
R&B Falcon (Ireland) Limited, which has drilling operations
outside the United States, to Transocean for cash consideration
of approximately $1.4 million. The sale price was
determined by Transocean based on internal valuations.

     
In October 2002, we assigned our leasehold
interest in the drilling unit M.G. Hulme, Jr.
to Transocean for no consideration. Additionally, we assigned
the drilling contract for the drilling unit Deepwater Horizon
to Transocean for no consideration in the same month.

     
In November 2002, we distributed as an in-kind
dividend for no consideration the drilling unit Randolph Yost
to Transocean. Additionally, we assigned the drilling
contract for the drilling unit Deepwater Discovery to
Transocean for no consideration in the same month.

     
In December 2002, we distributed to Transocean as
an in-kind dividend for no consideration the stock of the
following subsidiaries: (1) Falcon Atlantic Ltd., which has
operations outside the United States; and (2) R&B
Falcon Drilling do Brasil, Ltda., which has shore base
operations in Brazil. Also in December 2002, we transferred the
drilling units D.R. Stewart and George H.
Galloway to Transocean for no consideration and we assigned
our rights and obligations under a rig sharing agreement for the
drilling unit Deepwater Millenium to Transocean for no
consideration.

     
Also in December 2002, we assigned the drilling
contracts for the drilling units Deepwater Navigator and
Peregrine I to Transocean for no consideration.

     
In January 2003, we assigned to Transocean for no
consideration a 12.5% undivided interest in an aircraft at net
book value of $1.0 million. The transaction was recorded as
a decrease to additional paid-in capital.

     
Also in January 2003, we distributed to
Transocean as an in-kind dividend for no consideration some
accounts receivable balances from related parties in the amount
of $200.9 million. The transaction was recorded as a
decrease to additional paid-in capital.

     
In February 2003, we distributed to Transocean
for no consideration the stock of our subsidiaries R&B
Falcon (A) Pty. Ltd., which owns the drilling unit Ron
Tappmeyer and Cliffs Drilling do Brasil Servicos de Petroleo
S/C Ltda., a dormant Brazilian entity. The aggregate net book
value of $44.6 million for these transfers was recorded as
a decrease to additional paid-in capital.

     
In March 2003, we sold to Transocean the stock of
Arcade Drilling AS, a subsidiary that owns and operates the
Paul B. Loyd, Jr. and owns the Henry Goodrich,
for net proceeds of $264.1 million and recorded a net
pre-tax loss of $11.0 million. The sales price was
determined based on an appraisal by Professor Terje Hansen of
the Norwegian School of Economics and Business Administration,
taking into account the values

83

 

of the drilling units provided by
R.S. Platou (U.S.A.) Inc. In consideration for the sale of
the subsidiary, Transocean cancelled $233.3 million
principal amount of our 6.95% notes due April 2008. The
market value attributed to the notes, 113.21% of the principal
amount, was determined by Transocean based on available market
information.

     
In March 2003, we assigned the drilling contract
for the Deepwater Frontier to Transocean for no
consideration. Additionally, in March 2003, we distributed to
Transocean miscellaneous deepwater assets with a value of
$1.4 million for no consideration. The transactions were
recorded as a decrease to additional paid-in capital.

     
In May 2003, we sold to Transocean Cliffs
Platform Rig 1 in consideration for the cancellation of
$13.9 million principal amount of the 6.95% Senior
Notes held by Transocean. The sales price was determined based
on an appraisal by R.S. Platou (U.S.A.) Inc. We recorded
the excess of the sales price over the net book value of the rig
of $1.6 million as an increase to additional paid-in
capital and a pre-tax loss on the retirement of debt of
$1.5 million.

     
In May 2003, we sold to Transocean our 50%
interest in Deepwater Drilling L.L.C. (“DD LLC”),
which leases the drilling unit Deepwater Pathfinder, and
our 60% interest in Deepwater Drilling II L.L.C.
(“DDII LLC”), which leases the Deepwater Frontier,
in consideration for the cancellation of $43.7 million
principal amount of our debt held by Transocean. The value of
our interests in DD LLC and DDII LLC was determined by
Transocean based on a similar third party transaction. We
recorded the excess of the sales price over the net book value
of the membership interests of $21.6 million as an increase
to additional paid-in capital paid the year ended
December 31, 2003.

     
In June 2003, we sold to Transocean our
membership interests in our wholly owned subsidiary, R&B
Falcon Drilling (International & Deepwater) Inc. LLC,
which owns the following assets: (1) the drilling unit
Jim Cunningham, (2) all of the stock of R&B
Falcon Deepwater (UK) Ltd., which has specified charter
rights with respect to the drilling unit Deepwater Nautilus,
(3) all of the stock of RBF Exploration LLC, which is
the issuer of the Class A1 Notes due May 2005 and the
Class A2 Notes, repurchased and retired in May 2003,
related to the drilling unit Deepwater Nautilus,
(4) several dormant or near dormant subsidiaries, and
(5) other miscellaneous assets. As consideration for the
stock sold, Transocean cancelled $238.8 million of our
outstanding debt held by Transocean. The sales transaction was
based on a valuation by Transocean which takes into account the
valuations of the drilling units provided by R.S. Platou
(U.S.A.) Inc. We recorded the excess of the net book value over
the sales price of our membership interests of
$60.9 million as a loss on sale of assets and a pre-tax
loss on the retirement of debt of $48.0 million for the
year ended December 31, 2003.

     
At the time of the transactions, some of the
drilling units discussed above were being utilized in connection
with drilling contracts between our subsidiaries and customers.
These contracts were not transferred and we secured the use of
the drilling units for the purpose of performing these contracts
through charters or other arrangements. The costs of these
charters or other arrangements are included in discontinued
operations and totaled $0.8 million, $233.8 million
and $96.8 million for the years ended December 31,
2003 and 2002 and the eleven months ended December 31,
2001, respectively.

     
In August 2003, Transocean made a payment to us
of $11.4 million in order for us to have the amount of cash
and cash equivalents agreed to between us and Transocean, as
more fully described in “—Relationship Between Us and
Transocean— Master Separation Agreement— Transfer of
Assets and Assignment of Liabilities.”

     
In December 2003, Transocean made an equity
contribution to us of $84.7 million in return for
intercompany payable balances we owed to Transocean.

     
In February 2004, prior to the IPO, the Company
exchanged $45,784,000, $152,463,000 and $289,793,000 in
principal amount of its outstanding 7.375%, 6.750% and
9.500% notes, respectively, held by Transocean for
3,940,406 shares of the Company’s Class B common
stock. Immediately following this exchange, the Company declared
a dividend of 11.1447508 shares of its Class B common
stock with respect to each share of its Class B common
stock outstanding immediately following the exchange. As a
result,

84

 

60,000,000 shares of the Company’s
Class B common stock were issued and outstanding
immediately prior to the IPO. Transocean currently holds
46,200,000 shares of the Company’s Class B common
stock. The Class B common stock is convertible at any time
into shares of the Company’s Class A common stock on a
share per share basis at the sole option of Transocean. The
stock for debt exchange was exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933.

     
Prior to the closing of the IPO, we completed the
following transactions:

			
	 	 •	
    We assigned to Transocean for no consideration
    any other agreements relating to drilling units and other assets
    not owned by us or our subsidiaries upon the closing of the IPO.
    
	 
	 	 •	
    We assigned to Transocean the rights to any
    receivables outstanding upon the closing of the IPO which were
    not related to the “TODCO business” as that term is
    used in the master separation agreement. We will remit the
    proceeds from those receivables as they are collected.
    
	 
	 	 •	
    We transferred to Transocean any remaining
    miscellaneous equipment and other assets that did not relate to
    our business following the closing of the IPO.
    

     
To the extent the transfer of legal title to any
of the above assets could not be completed prior to the closing
of the IPO, beneficial ownership of such assets was transferred
to Transocean, and we or our applicable subsidiary held such
assets as agent for the other party until such time as legal
title could be transferred. See “—Relationship Between
Us and Transocean— Master Separation Agreement—
Transfer of Assets and Assignment of Liabilities.”

Debt Retirement and Debt Exchange
Offers

     
In March 2002, in conjunction with Transocean, we
completed exchange offers and consent solicitations for our
6.50% notes due 2003, 6.75% notes due 2005,
6.95% notes due 2008, 7.375% notes due 2018,
9.125% notes due 2003 and 9.50% notes due 2008. As a
result of these exchange offers and consent solicitations,
Transocean exchanged approximately $234.5 million,
$342.3 million, $247.8 million, $246.5 million,
$76.9 million and $289.8 million principal amount of
our outstanding 6.50%, 6.75%, 6.95%, 7.375%, 9.125% and
9.50% notes, respectively, for newly issued 6.50%, 6.75%,
6.95%, 7.375%, 9.125% and 9.50% notes of Transocean having
the same principal amount, interest rate, redemption terms and
payment and maturity dates. Approximately $38.8 million
principal amount of notes were not exchanged in the exchange
offers and $33.8 million principal amount of the notes
remains outstanding. Because the holders of a majority in
principal amount of each of these series of notes consented to
amendments to the indentures under which the notes were issued,
some covenants, restrictions and events of default were
eliminated from the indentures with respect to these series of
notes. In connection with the exchange offers, we made an
aggregate of $8.3 million in consent payments to holders of
our notes. At December 31, 2003 and December 31, 2002,
$488.1 million and $936.6 million principal amount of
the notes, respectively, was outstanding to Transocean. Interest
expense related to these notes was $3.1 million for the
six months ended June 30, 2004, $42.7 million for
the year ended December 31, 2003 and $77.9 million for
the year ended December 31, 2002.

     
In December 2002, we repurchased all of the
approximately $234.5 million and $76.9 million
principal amount of the 6.50% and 9.125% notes payable to
Transocean, respectively, and approximately $189.8 million
of the principal amount of the 6.75% notes payable to
Transocean plus accrued and unpaid interest. We recorded a net
after-tax loss of $12.2 million in conjunction with the
repurchase of these notes. We funded the repurchase from cash
received from Transocean’s repurchase of approximately
$518.0 million aggregate principal amount of the notes
receivable plus accrued and unpaid interest.

     
In March 2003, we acquired approximately
$233.3 million principal amount of the 6.95% notes due
April 2008 in exchange for the stock of Arcade. See
“—Asset Transfers to Transocean.”

     
In April 2003, we repaid all of the
$5.0 million principal amount of the 6.50% notes, plus
accrued and unpaid interest, in accordance with their scheduled
maturities. We funded the repayment from a capital contribution
received from Transocean.

85

 

     
In May 2003, we repurchased and retired the
entire $50.0 million principal amount of the 9.41% Nautilus
Class A2 Notes due May 2005. We recorded a pre-tax loss on
retirement of debt of approximately $5.5 million. We funded
the repurchases from a capital contribution received from
Transocean as well as cash on hand.

     
In May 2003, we acquired $13.9 million
principal amount of the 6.95% notes in exchange for the
sale of Cliffs Platform Rig 1 to Transocean. We recorded
a pre-tax loss on retirement of debt of approximately
$1.5 million. See “—Asset Transfers to
Transocean.”

     
In May 2003, we acquired $43.7 million
principal amount of the 2.76% fixed rate promissory note issued
by us to Transocean, scheduled to mature on April 6, 2005
in exchange for the sale of our 50% interest in DD LLC and our
60% interest in DDII LLC to Transocean. See “—Asset
Transfers to Transocean.”

     
In June 2003, we acquired $200.7 million
principal amount of the 7.375% notes, the remaining
$37.5 million principal amount of the 2.76% fixed rate
promissory note and $0.6 million principal amount of the
6.95% notes in exchange for the sale to Transocean of our
wholly owned subsidiary R&B Falcon Drilling
(International & Deepwater) Inc. LLC, which owns the
following assets: (1) the drilling unit Jim Cunningham,
(2) all of the stock of R&B Falcon Deepwater
(UK) Ltd., which has specified charter rights with respect
to the drilling unit Deepwater Nautilus, (3) all of
the stock of RBF Exploration LLC, which is the issuer of the
Class A1 Notes due May 2005 and the Class A2 Notes
repurchased and retired in May 2003, related to the drilling
unit Deepwater Nautilus, (4) several dormant or near
dormant subsidiaries, and (5) other miscellaneous assets.
We recorded a pre-tax loss on retirement of debt of
approximately $48.0 million. See “—Asset
Transfers to Transocean.”

     
As described above, Transocean exchanged a
portion of the notes it acquired in the exchange offer as
consideration for the asset transfers described in
“—Asset Transfers to Transocean.” Prior to the
closing of the IPO, Transocean exchanged the balance of the
notes for newly issued shares of our Class B common stock.
The determination of the number of shares issued was based on a
method that took into account the initial public offering price.
Prior to these retirement transactions, our outstanding common
stock was reclassified into shares of Class B common stock.
Following the reclassification, the retirement transactions and
a stock split, Transocean held an aggregate of
60,000,000 shares of Class B common stock prior to the
closing of the IPO. A portion of these shares of Class B
common stock was sold and converted into shares of Class A
common stock in the IPO.

Revolving Credit Agreement

     
We were a party to a $1.8 billion two-year
revolving credit agreement with Transocean, dated April 6,
2001. Amounts outstanding under the revolver bore interest
payable quarterly at LIBOR plus 0.575% to 1.300% depending on
our senior unsecured public debt rating. In April 2001 we
borrowed approximately $1.3 billion under this credit
agreement to retire some of our then-outstanding public debt.
For a description of the debt retirements, see “Third Party
Debt— Redeemed and Repurchased Debt” in Note 6 to
our consolidated financial statements for the year ended
December 31, 2003 included elsewhere in this prospectus.
This line of credit expired April 6, 2003 and, as of that
date, the approximately $81.2 million then outstanding
under the line was converted into the 2.76% fixed rate
promissory note. This note was cancelled in connection with the
sale of some of the Transocean Assets to Transocean, as
described in “—Asset Transfers to Transocean”
above.

Administrative Support Services

     
Prior to June 30, 2003, Transocean provided
administrative support services to us. Transocean charged us a
proportional share of its administrative costs based on
estimates of the percentage of work the relevant Transocean
departments performed for us. This arrangement was terminated
prior to June 30, 2003. Specified administrative support
services are now provided by Transocean to us under the
transition services agreement. See “—Relationship
Between Us and Transocean— Transition Services
Agreement.”

86

 

Purchase of Minority Interests in
Reading & Bates Development Co.

     
In January 2001, prior to our merger transaction
with Transocean, we purchased for $34.7 million the
minority interest of approximately 13.6% in Reading &
Bates Development Co. (“Devco”), which was owned by
our former directors and employees and directors and employees
of Devco (including our former directors Paul B. Loyd, Jr.,
a current director of Transocean, and Charles A. Donabedian, a
former director of Transocean). In connection with the purchase,
a $300,000 bonus was paid to our former director Richard A.
Pattarozzi, a current director of Transocean. The purchase price
was based on a valuation by a third party advisor.

Relationship Between Us and
Transocean

     
We have provided below a summary description of
the material terms and conditions of a master separation
agreement and several other important related agreements between
Transocean and us. We encourage you to read the full text of
these agreements which have been filed with the SEC as exhibits
to the registration statement of which this prospectus is a part.

 

		
		
    Master Separation Agreement

     
The master separation agreement between
Transocean and us provides for the completion of the separation
of our assets and businesses from those of Transocean. In
addition, it contains several agreements governing the
relationship between us and Transocean following the IPO and
specifies the ancillary agreements that we and Transocean signed.

 

		
		
    TODCO Business

     
The master separation agreement defines the TODCO
business to mean the following businesses and activities:

			
	 	 •	
    contract drilling, workover, production and
    similar services for oil and gas wells using jackup,
    submersible, barge (including workover) and platform drilling
    rigs in the U.S. Gulf of Mexico and U.S. inland
    waters, including maintenance and mobilization activities to the
    extent related to rigs providing these services,
    
	 
	 	 •	
    contract drilling, workover, production and
    similar services for oil and gas wells in and offshore Mexico,
    Trinidad, Colombia and Venezuela (including the turnkey drilling
    services formerly provided by our subsidiaries in Venezuela),
    including maintenance and mobilization activities to the extent
    related to rigs providing these services,
    
	 
	 	 •	
    construction activities (including construction
    activities involving an upgrade to, or modification of, a rig)
    in connection with rigs owned by us or our subsidiaries after
    the closing of the IPO,
    
	 
	 	 •	
    office or yard facilities owned or used by us and
    our subsidiaries to the extent related to the services and
    activities described in this definition,
    
	 
	 	 •	
    our joint venture interest in Delta Towing
    Holdings, LLC, the operation of the business transferred to
    Delta Towing prior to that transfer and the notes issued in
    connection with that transfer,
    
	 
	 	 •	
    our investment in Energy Virtual Partners, Inc.
    and Energy Virtual Partners, LP (which have been liquidated),
    
	 
	 	 •	
    activities that were related primarily to the
    above activities at the time those activities ceased, and
    
	 
	 	 •	
    any business conducted by TODCO or any of its
    subsidiaries after the closing of the IPO.
    

87

 

     
The following businesses and activities are
excluded from the definition of the TODCO business to the extent
they were conducted prior to the closing of the IPO:

			
	 	 •	
    contract drilling, workover, production or
    similar services for oil and gas wells using semisubmersibles
    and drillships in the U.S. Gulf of Mexico, including
    maintenance and mobilization activities to the extent related to
    rigs providing these services,
    
	 
	 	 •	
    contract drilling, workover, production or
    similar services for oil and gas wells in geographic regions
    outside of the U.S. Gulf of Mexico, U.S. inland
    waters, Mexico, Colombia, Trinidad and Venezuela, including
    maintenance and mobilization activities to the extent related to
    rigs providing these services and such services using land rigs,
    
	 
	 	 •	
    construction activities (including construction
    activities involving an upgrade to, or modification of, a rig)
    in connection with rigs or other assets owned by
    (1) Transocean or its subsidiaries (excluding us) after the
    closing of the IPO or (2) neither Transocean nor us after
    the closing of the IPO,
    
	 
	 	 •	
    oil and gas exploration and production activities
    (but not including our ownership interest in Energy Virtual
    Partners),
    
	 
	 	 •	
    coal production activities, and
    
	 
	 	 •	
    the turnkey drilling business that we formerly
    operated in the U.S. Gulf of Mexico and offshore Mexico,
    except that contract drilling services provided to that business
    which otherwise fall within the definition of TODCO business are
    not excluded.
    

 

		
		
    Transfer of Assets and Assignment of
    Liabilities

     
We have transferred the stock of various
subsidiaries and other assets to Transocean and Transocean has
assumed liabilities associated with the transferred assets and
businesses. See “—Asset Transfers to Transocean.”
The master separation agreement provides for any additional
transfers of assets and assumptions of liabilities necessary to
effect the separation of the TODCO business from the business of
Transocean. The master separation agreement provides that assets
or liabilities that could not legally be transferred or assumed
prior to the closing of the IPO would be transferred or assumed
as soon as practicable following receipt of all necessary
consents of third parties and regulatory approvals. In any such
case, the master separation agreement provides that the party
retaining the assets or liabilities will hold the assets in
trust for the use and benefit of, or retain the liabilities for
the account of, the party entitled to the assets or liabilities
(at the expense of that party), until the transfer or assumption
can be completed. The party retaining these assets or
liabilities will also take any action reasonably requested by
the other party in order to place the other party in the same
position as would have existed if the transfer or assumption had
been completed. We refer to all of these transfers of assets and
assumptions of liabilities together as the
“separation.”

     
Except as set forth in the master separation
agreement, no party is making any representation or warranty as
to the assets or liabilities transferred or assumed as a part of
the separation and all assets were and will be transferred on an
“as is, where is” basis. As a result, we and
Transocean each have agreed to bear the economic and legal risks
that any conveyances of assets are insufficient to vest good and
marketable title to such assets in the party who should have
title under the master separation agreement.

     
The parties also agreed that for a period of one
year following the IPO, if Transocean determines in its good
faith judgment that:

			
	 	 •	
    any assets owned by us or our subsidiaries were
    used primarily during the prior 12 months in
    Transocean’s business, we will transfer those assets to
    Transocean without additional consideration, or
    
	 
	 	 •	
    any assets owned by Transocean were used
    primarily during the prior 12 months in our business,
    Transocean will transfer those assets to us without additional
    consideration.
    

     
All of the rigs listed in “Business—
Drilling Rig Fleet” are deemed to have been used primarily
in our business during the 12 months prior to the closing
of the IPO.

88

 

 

		
		
    Working Capital

     
The master separation agreement contains an
acknowledgement that our cash and cash equivalents as of
June 30, 2003 were $25.0 million after giving effect
to a subsequent payment by Transocean to us of
$11.4 million. The amount paid to us by Transocean equals
the difference between $25.0 million and the amount of our
cash and cash equivalents as of June 30, 2003 prior to
giving effect to the payment by Transocean. The master
separation agreement provides that we will retain all cash and
cash equivalents generated by our business following
June 30, 2003. Transocean will not be required to make any
additional payments to us for our working capital needs under
the master separation agreement.

 

		
		
    Letters of Credit and
    Guarantees

     
The master separation agreement requires that we
and Transocean use our reasonable best efforts to terminate (or
have us or one of our subsidiaries substituted for Transocean,
or Transocean or one of its subsidiaries substituted for us, as
applicable) all existing guarantees by one party of obligations
relating to the business of the other party, including
financial, performance and other guarantee obligations. We have
also agreed with Transocean that each party will use its
reasonable best efforts to have the other party substituted
under letters of credit or other surety instruments issued by
third parties for the account of either party or any of its
subsidiaries issued on behalf of the other party’s business.

 

		
		
    Indemnification and Release

     
The master separation agreement provides for
cross-indemnities that will generally place financial
responsibility on us and our subsidiaries for all liabilities
associated with the businesses and operations falling within the
definition of TODCO business, and that will generally place
financial responsibility for liabilities associated with all of
Transocean’s businesses and operations with Transocean and
its subsidiaries, regardless of the time those liabilities
arise. The master separation agreement also contains
indemnification provisions under which we and Transocean each
indemnify the other with respect to breaches of the master
separation agreement or any ancillary agreements. We have also
agreed to indemnify Transocean against liabilities arising from
misstatements or omissions in this prospectus or the
registration statement of which it is a part, except for
misstatements or omissions relating to information regarding
Transocean provided by Transocean in writing for inclusion in
this prospectus or the registration statement.

     
In connection with our separation from
Transocean, the allocation of liabilities related to taxes and
employment matters will be governed separately in a tax sharing
agreement and an employee matters agreement. See “—Tax
Sharing Agreement” and “—Employee Matters
Agreement.”

     
Under the master separation agreement, we
generally released Transocean and its affiliates, agents,
successors and assigns, and Transocean generally released us and
our affiliates, agents, successors and assigns, from any
liabilities between us or our subsidiaries on the one hand, and
Transocean or its subsidiaries on the other hand, arising from
acts or events occurring on or before the closing of the IPO,
including acts or events occurring in connection with the
separation or the IPO. The general release does not apply to
obligations under the master separation agreement or any
ancillary agreement or to specified debt and other ongoing
contractual arrangements.

     
Under the master separation agreement, we will be
strictly liable to Transocean for any misstatements or omissions
in information supplied to Transocean in connection with SEC
filings and other public disclosures.

 

		
		
    Noncompetition and Other
    Covenants

     
The master separation agreement includes
provisions that restrict us from competing with Transocean in
specified business activities. These provisions do not restrict
us from engaging in any contract drilling, workover, production
or similar services for oil and gas wells using jackup, barge,
platform or land rigs in the following geographic locations:
U.S. onshore, U.S. inland water, U.S. Gulf of
Mexico and offshore or onshore Mexico, Trinidad, Venezuela or
Colombia. However, except for the activities described in the
foregoing sentence, we are restricted from engaging in any
contract drilling, workover, production or similar services for

89

 

oil and gas wells using any type of drilling unit
in the following geographic locations: offshore North America,
offshore South America, offshore Europe, offshore Africa,
offshore Middle East, offshore India, offshore Southeast Asia,
offshore Asia, offshore Australia, the Gulf of Mexico, the North
Sea, the Mediterranean Sea, the Red Sea, the Persian Gulf and
the Caspian Sea. These provisions remain in effect so long as
Transocean beneficially owns at least a majority of the voting
power of our outstanding voting stock.

     
The master separation agreement required us to
use reasonable commercial efforts to satisfy the conditions
precedent for the closing of the IPO. The master separation
agreement also includes provisions relating to a tax-free
distribution by Transocean of the remainder of our common stock
it owns, but does not obligate Transocean to effect such a
distribution. If Transocean chooses to conduct a tax-free
distribution, we have agreed to take all action reasonably
requested by Transocean to facilitate that transaction at our
own expense. See “Description of Capital Stock—Common
Stock—Conversion.”

     
The master separation agreement also contains
provisions relating to the exchange of information, provision of
information for financial reporting purposes, the preservation
of legal privileges, dispute resolution, and provision of
corporate records.

     
Some of the rights granted to Transocean in the
master separation agreement would apply to and be binding upon
any entity that acquires control of us.

 

		
		
    Insurance

     
The master separation agreement provides that we
will continue to be covered under substantially all current
insurance policies of Transocean (other than employee welfare or
benefit plan policies, which are addressed in the employee
matters agreement) and future insurance policies determined
jointly by us and Transocean. We have agreed to reimburse
Transocean for premium expenses related to those insurance
policies. Transocean has agreed not to terminate our coverage
under the insurance policies unless it provides us prior notice.
However, we will cease to have coverage under Transocean’s
insurance policies when Transocean ceases to own at least a
majority of the voting power of our outstanding voting stock,
and no prior notice will be required in that case. In no event
will Transocean be liable to us in the event of the termination
of any insurance policy (unless in the case of termination by
Transocean, Transocean failed to provide us the notice required
by the master separation agreement), the failure of insurance
policies to cover our liabilities or the nonrenewal of insurance
policies beyond their expiration dates as of the date of the
master separation agreement.

 

		
		
    Corporate Governance

     
The master separation agreement also contains
several provisions regarding our corporate governance that apply
as long as Transocean owns specified percentages of our common
stock. As long as Transocean owns shares representing a majority
of the voting power of our outstanding voting stock, Transocean
will have the right to:

			
	 	 •	
    nominate for designation by our board of
    directors, or a nominating committee of the board, a majority of
    the members of the board, as well as the chairman of the
    board, and
    
	 
	 	 •	
    designate at least a majority of the members of
    any committee of our board of directors.
    

     
If Transocean’s beneficial ownership of our
common stock is reduced to a level of at least 10% but less than
a majority of the voting power of our outstanding voting stock,
Transocean will have the right to:

			
	 	 •	
    designate for nomination a number of directors
    proportionate to its voting power, and
    
	 
	 	 •	
    designate one member of any committee of our
    board of directors.
    

     
In the master separation agreement, we have also
agreed to use our best efforts to cause Transocean’s
nominees to be elected.

     
The master separation agreement specified the
form of our amended and restated certificate of incorporation
and bylaws to be in effect at the time of the IPO. It also
provides that for so long as Transocean

90

 

beneficially owns shares representing at least
15% of the voting power of our outstanding voting stock, we will
not, without the prior consent of Transocean, adopt any
amendments to our amended and restated certificate of
incorporation or bylaws or take any action to recommend to our
stockholders certain actions which would, among other things,
limit the legal rights of Transocean, or deny any benefit to
Transocean or any of its subsidiaries as our stockholders in a
manner not applicable to our stockholders generally.

     
We have also agreed that for so long as
Transocean and its subsidiaries own 50% or more of the voting
power of our outstanding voting stock, we will maintain the same
accounting principles and practices as Transocean, and we will
not select a different accounting firm than Transocean’s,
which is currently Ernst & Young LLP, to serve as our
independent certified public accountants.

     
We have also agreed that for so long as
Transocean owns at least a majority of the voting power of all
the outstanding shares of voting stock, we will not take any
action or enter into any commitment or agreement that could
result in a contravention or default by us or any of our
affiliates, of or under any provisions of applicable law, any
provision of Transocean’s memorandum of association or
articles of association or any credit agreement or other
material agreement by which Transocean is bound. Also, for so
long as Transocean owns at least a majority of the voting power
of our outstanding voting stock, we will not enter into any
commitment or agreement that contains provisions triggering a
default or material payment when Transocean exercises its right
to convert its shares of our Class B common stock into
shares of our Class A common stock or otherwise disposes of
its shares of our Class B common stock.

     
We have agreed to grant to Transocean a
continuing right to purchase from us, at the times set forth in
the master separation agreement,

			
	 	 •	
    such number of shares of our voting stock as is
    necessary to allow Transocean to maintain its then-current
    percentage following the IPO, and
    
	 
	 	 •	
    80% of the shares of each other class of capital
    stock that we issue.
    

     
These rights terminate if at any time Transocean
owns less than 80% of the voting power of our outstanding voting
stock.

 

		
		
    Expenses

     
Transocean has agreed to pay all out-of-pocket
costs and expenses incurred in connection with the separation,
the IPO, the master separation agreement and the ancillary
agreements, except as otherwise provided in the master
separation agreement, the ancillary agreements or any other
agreement between us and Transocean relating to the separation
and the IPO. Transocean has also agreed to pay out-of-pocket
costs and expenses incurred in connection with this offering.

 

		
		
    Tax Sharing Agreement

     
Until the closing of our IPO, we were included in
Transocean Holdings’ consolidated group for
U.S. federal income tax purposes. As of the closing of the
IPO, we are not included in Transocean Holdings’
U.S. federal consolidated group because no
U.S. subsidiary of Transocean owns at least 80% of the
aggregate voting power and value of our outstanding stock.

     
We have entered into a tax sharing agreement with
Transocean Holdings which governs Transocean Holdings’ and
our respective rights, responsibilities and obligations with
respect to taxes and tax benefits. References in this summary
description of the tax sharing agreement to the terms
“tax” or “taxes” mean taxes and any
interest, penalties, additions to tax or additional amounts in
respect of such taxes. The general principles of the tax sharing
agreement include the following:

			
	 	 •	
    Except for special tax items discussed in the
    bullet below, all U.S. federal, state, local and foreign
    income taxes and income tax benefits (including income taxes and
    income tax benefits attributable to the TODCO business) that
    accrued on or before the closing of the IPO generally will be
    for the account of Transocean Holdings. Accordingly, we
    generally will not be liable for any income taxes accruing on or
    before the closing of the IPO, but we generally must pay
    Transocean Holdings for the
    

91

 

			
	 		
    amount of any income tax benefits, calculated as
    described below, created on or before the closing of the IPO
    (“pre-closing tax benefits”) that we use or absorb on
    a return with respect to a period after the closing of the IPO.
    We will have no obligation to pay Transocean Holdings for any
    pre-closing tax benefits arising out of or relating to the
    alternative minimum tax provisions of Sections 55 through
    59 of the U.S. Internal Revenue Code, but we will be
    required to pay Transocean Holdings for any pre-closing tax
    benefits we use that are alternative minimum tax credits
    described in Section 53 of the Internal Revenue Code. Our
    obligation to pay Transocean Holdings for the use of pre-closing
    tax benefits and our potential obligation to pay alternative
    minimum tax to the Internal Revenue Service may result in our
    paying more, in the aggregate, to the Internal Revenue Service
    and to Transocean Holdings than we would otherwise have paid if
    we had utilized no pre-closing tax benefits. For purposes of the
    tax sharing agreement, deferred tax liabilities reflected in our
    financial statements, which represent the anticipated future tax
    effects of temporary differences between the financial statement
    basis and the tax basis of our assets and liabilities, are not
    considered to constitute income tax liabilities accrued on or
    before the closing of the IPO. As of June 30, 2004, we had
    approximately $485 million of income tax benefits subject
    to our obligation to reimburse Transocean Holdings. See
    Note 10 to our condensed consolidated financial statements
    for the period ended June 30, 2004 included in this
    prospectus. The amount of these tax benefits will be calculated
    as follows:
    

		
	 	      
    (1) in the case of a deduction used or
    absorbed, by multiplying the deduction by the highest applicable
    statutory tax rate in effect, and
    
	 
	 	      
    (2) in the case of a credit used or
    absorbed, by allowing 100% of the credit.
    

		
	 	
    However, if the use or absorption of a
    pre-closing tax benefit defers or precludes our use or
    absorption of any income tax benefit created after the closing
    of the IPO (“post-closing tax benefit”), our payment
    obligation with respect to the pre-closing tax benefit generally
    will be deferred until we actually use or absorb such
    post-closing tax benefit. This payment deferral will not apply
    with respect to, and we will have to pay currently for the use
    or absorption of pre-closing tax benefits to the extent of:
    

		
	 	      
    (1) up to 20% of any deferred or precluded
    post-closing tax benefit arising out of our payment of foreign
    income taxes, and
    
	 
	 	      
    (2) 100% of any deferred or precluded
    post-closing tax benefit arising out of a carryback from a
    subsequent year.
    

		
	 	
    If any person other than Transocean or its
    subsidiaries becomes the beneficial owner of greater than 50% of
    the aggregate voting power of our outstanding voting stock, we
    will be deemed to have used or absorbed all pre-closing tax
    benefits, and we generally will be required to pay Transocean
    Holdings an amount for the deemed use or absorption of these
    pre-closing tax benefits. The amount paid for the deemed use of
    these tax benefits will be calculated by:
    

		
	 	      
    (1) in the case of a deduction (including,
    for these purposes, all pre-closing income taxes, whether
    claimed as a deduction or credit), multiplying the deduction by
    the highest applicable statutory tax rate in effect,
    
	 
	 	      
    (2) in the case of a credit other than a
    pre-closing foreign tax credit, allowing 100% of such
    credit, and
    
	 
	 	      
    (3) multiplying the amounts by a specified
    discount factor.
    

		
	 	
    The specified discount factor will vary depending
    on the year in which another person becomes the beneficial owner
    of greater than 50% of the voting power of our stock: if in
    2004, 2007 or 2008, then the factor is 0.80; if in 2005 or 2006,
    then the factor is 0.70; if in 2009, then the factor is 0.85; if
    in 2010, then the factor is 0.90; if in 2011 or 2012, then the
    factor is 0.95; and if in 2013 or a later year, then the factor
    is 1.00). Moreover, if any of our subsidiaries that join with us
    in the filing of consolidated returns ceases to join in the
    filing of such returns, we will be deemed to have used that
    portion of the pre-closing tax benefits attributable to that
    subsidiary following the cessation, and we generally will be
    required to pay Transocean Holdings the amount of this deemed
    tax benefit,
    

92

 

		
	 	
    calculated as described above with regard to an
    acquisition of beneficial ownership, at the time such subsidiary
    ceases to join in the filing of such returns. In the case of any
    of our payments to Transocean Holdings resulting from another
    person becoming the owner of greater than 50% of our voting
    stock or a subsidiary ceasing to join in the filing of a
    consolidated return with us, the payment will in no case be
    deferred, regardless of whether the existence of the related
    pre-closing tax benefit would or could defer or preclude our use
    or absorption of any post-closing tax benefit. Moreover, the
    payment will not be subsequently adjusted for any difference
    between the tax benefits that we are deemed to use or absorb in
    such case and the tax benefits that we actually use or absorb,
    and the difference between those amounts could be substantial.
    Among other considerations, applicable tax laws may, as a result
    of another person becoming the owner of greater than 50% of our
    voting power, significantly limit our use of such tax benefits,
    and these limitations are not taken into account in determining
    the amount of the payment to Transocean Holdings. A substantial
    portion of the pre-closing tax benefits are net operating
    losses, most or all of which should be eligible to be carried
    forward at least fourteen more years.
    

			
	 	 •	
    We are responsible for all special tax items
    accruing on or after the date on which we issued shares of our
    common stock to Transocean in repayment of our notes, as
    described in “—Debt Retirement and Debt Exchange
    Offers.” For this purpose, special tax items means taxes
    with respect to items specified in U.S. Treasury regulation
    section 1.1502-76(b)(2)(ii)(C) (generally referring to
    transactions outside the ordinary course of our business).
    However, special tax items do not include taxes with respect to
    transactions to effect the separation of the TODCO business from
    the business of Transocean. See “—Master Separation
    Agreement.” Moreover, there were no special tax items that
    accrued during the period beginning on the date of issuance of
    such shares to Transocean and ending on the date of the closing
    of the IPO.
    
	 
	 	 •	
    We and Transocean Holdings are not currently
    members of a U.S. federal consolidated group or state, local or
    foreign combined group. If we and Transocean Holdings (or any
    affiliate of Transocean Holdings other than us) were to become
    members of a U.S. federal consolidated group or state,
    local or foreign combined group for any period after the closing
    of the IPO, we would be responsible for all income taxes
    attributable to us for that period, determined as if we had
    filed separate U.S. federal, state, local or foreign income
    tax returns. We would be entitled to reimbursement by Transocean
    Holdings for any income tax benefits realized by Transocean
    Holdings or any of its affiliates as a result of our being a
    member of any such consolidated or combined group.
    
	 
	 	 •	
    We must pay Transocean Holdings for any tax
    benefits attributable to us resulting from (1) the payment
    by Transocean Holdings, after the closing of the IPO, of any
    additional taxes of the TODCO business that are not
    U.S. federal income taxes or (2) the delivery by
    Transocean or its subsidiaries, after the closing of the IPO, of
    stock of Transocean to an employee of ours in connection with
    the exercise of an employee stock option. We will generally be
    required to pay the deemed value of these tax benefits within
    30 days of the payment of such additional taxes or the
    delivery of Transocean stock, whether or not we ever actually
    use or absorb such tax benefits. However, items in excess of
    $1.0 million will be subject to the same rules as discussed
    above for pre-closing tax benefits, and therefore the payment of
    these items may be deferred in some circumstances.
    
	 
	 	 •  	
    Apart from (1) income taxes and income tax
    benefits that accrued on or before the closing of the IPO and
    (2) tax benefits resulting from Transocean Holdings’
    payment of our taxes that are not U.S. federal income taxes
    or delivery of stock to our employees, described above,
    Transocean Holdings will be responsible for all income taxes,
    and will be entitled to all income tax benefits, attributable to
    Transocean Holdings or its affiliates (other than us), and we
    will be responsible for all income taxes, and will be entitled
    to all income tax benefits, attributable to us.
    
	 
	 	 •	
    Our ability to obtain a refund from a carryback
    to a year in which we and Transocean Holdings joined in a
    consolidated or combined return will be at the discretion of
    Transocean Holdings. Moreover, any refund that we may obtain
    will be net of any increase in taxes resulting from the
    carryback that are otherwise for the account of Transocean
    Holdings.
    

93

 

			
	 	 •	
    We will have the right to be notified of tax
    matters for which we are responsible under the terms of the tax
    sharing agreement, although Transocean Holdings will have sole
    authority to respond to and conduct all tax proceedings,
    including tax audits, relating to any Transocean Holdings
    consolidated, or Transocean combined, income tax returns in
    which we are included.
    
	 
	 	 •	
    Transocean Holdings will have substantial control
    over our filing of tax returns with respect to (1) any
    period in which Transocean or Transocean Holdings possess
    greater than 50% of the voting power of all of our outstanding
    stock or (2) any period after the closing of the IPO so
    long as there remains a present or potential obligation for us
    to pay Transocean Holdings for pre-closing tax benefits.
    
	 
	 	 •	
    We will also be responsible for all taxes, other
    than income taxes, attributable to the TODCO business, whether
    accruing before, on or after the closing of the IPO.
    
	 
	 	 •	
    We generally will be required to pay Transocean
    Holdings for the amount of pre-closing tax benefits that we use
    in determining the amount of any installment of estimated taxes
    we pay to Transocean Holdings or any tax authority within thirty
    days after the installment of estimated taxes is or would have
    been paid. If, after any installment payment of estimated taxes
    or after the relevant return is due (with or without any
    extensions), the estimated amount of pre-closing tax benefits
    for which we have previously paid differs from the most recent
    estimate or actual amount of pre-closing tax benefits that we
    use or absorb on that return, we and Transocean Holdings must
    make appropriate true-up payments between us. However, under
    some circumstances, payments by us for the use of pre-closing
    tax benefits, whether estimated or actual, may be deferred
    (subject to an interest charge) under a subordination agreement
    between us and Transocean in favor of our third-party lenders.
    

     
The tax sharing agreement further provides for
cooperation between Transocean Holdings and us with respect to
tax matters, the exchange of information and the retention of
records that may affect the income tax liability of the parties
to the agreement. However, if we fail to cooperate with
Transocean Holdings in any tax contest with respect to taxes
that are otherwise for the account of Transocean Holdings, any
additional taxes resulting from such tax contest will be for our
account, notwithstanding any other provision in the tax sharing
agreement.

     
Notwithstanding the tax sharing agreement, under
U.S. treasury regulations, each member of a consolidated
group is severally liable for the U.S. federal income tax
liability of each other member of the consolidated group.
Accordingly, with respect to periods in which we have been
included in Transocean Holdings’ consolidated group, we
could be liable to the U.S. government for any
U.S. federal income tax liability incurred, but not
discharged, by any other member of Transocean Holdings’
consolidated group. However, if any such liability were imposed,
we would generally be entitled to be indemnified by Transocean
Holdings for tax liabilities allocated to Transocean Holdings
under the tax sharing agreement.

 

		
		
    Registration Rights Agreement

     
Because our shares of common stock held by
Transocean are deemed “restricted securities” as
defined in Rule 144, Transocean may only sell a limited
number of shares of our common stock into the public markets
without registration under the Securities Act. We entered into a
registration rights agreement with Transocean under which, at
the request of Transocean, we would use our best efforts to
register shares of our common stock that were held by Transocean
after the closing of the IPO, or were subsequently acquired, for
public sale under the Securities Act. As long as Transocean owns
a majority of the voting power of our outstanding common stock,
there is no limit to the number of registrations that it may
request. Once Transocean owns less than a majority of the voting
power of our outstanding common stock, it can request a total of
three additional registrations. If Transocean sells more than
10% of our outstanding shares of common stock to a transferee,
Transocean may transfer all or a portion of its rights under the
agreement, except that a transferee that acquires a majority of
our outstanding common stock can only request two additional
registrations after it owns less than a majority of our
outstanding common stock, and a transferee of less than a
majority of our outstanding common stock can only request either
one or two registrations, depending on the percentage of our
outstanding common stock it acquires. The transfer of rights
under the agreement to a transferee does not limit the number of
registrations Transocean may request. We also provide Transocean
and its permitted

94

 

transferees with “piggy-back” rights to
include its shares in future registrations of our common stock
under the Securities Act. There is no limit on the number of
these “piggy-back” registrations in which Transocean
may request its shares be included. These rights will terminate
once Transocean or a permitted transferee is able to dispose of
all of its shares of our common stock within a three-month
period pursuant to the exemption from registration provided
under Rule 144 of the Securities Act. We have agreed to
cooperate in these registrations and related offerings. We and
Transocean have agreed to restrictions on the ability of each
party to sell securities following registrations requested by
either party.

     
The registration rights agreement provides that
we will pay all out-of-pocket expenses incurred in connection
with any registration pursuant to the agreement. However,
Transocean has agreed to pay such expenses in connection with
this offering.

 

		
		
    Transition Services Agreement

     
We entered into a transition services agreement
with Transocean under which Transocean provides specified
administrative support during the transitional period following
the closing of the IPO. Transocean may provide specified
information technology and systems, financial reporting,
accounting, human resources, treasury and claims administration
services to us in exchange for agreed fees based on
Transocean’s actual costs. We are required to use specific
services so long as Transocean owns at least 50% of the voting
power of our outstanding shares of voting stock. However, we
expect to replace the computerized accounting system provided by
Transocean with our own system by January 1, 2005. Only in
limited circumstances will Transocean be liable to us with
respect to the provision of services under the transition
services agreement.

 

		
		
    Employee Matters Agreement

     
We entered into an agreement with Transocean and
Transocean Holdings to allocate specified assets, liabilities,
and responsibilities relating to our current and former
employees and their participation in Transocean’s benefit
plans.

     
Benefits under our U.S. pension plan ceased
to accrue as of July 1, 1999. As of August 1, 2001,
our employees’ existing accrued benefits under that plan
were fully vested. Sponsorship of that plan has been assumed by
Transocean Holdings effective August 1, 2002. Effective as
of the date that we no longer are a part of a controlled group
of companies with Transocean for U.S. federal income tax
purposes, affected employees will be entitled to take a
distribution from that plan, subject to the provisions of the
plan and to taxation and possible early withdrawal penalties. We
do not expect to establish a new pension plan for our employees.

     
Our employees became eligible to participate in
our U.S. savings plan effective November 1, 2002. Our
employees may make pre-tax contributions to that plan. Employees
who are not considered highly compensated for tax purposes may
also make post-tax contributions. We provide matching
contributions of up to 100% of the first 3% of participant
contributions, plus 50% of the next 3% of participant
contributions for a total 4.5% in matching contributions.
Additionally, the plan allows for a discretionary annual
contribution allocable to all eligible employees, subject to a
two-year vesting requirement. We have agreed that we will make
an annual contribution of 1.5% of compensation for all eligible
employees (as defined in the plan) for so long as we are part of
a controlled group of companies with Transocean for
U.S. federal income tax purposes. Annual contributions were
made in 2002 and 2003. On or about January 1, 2003,
liabilities for our employees’ accounts under the
Transocean U.S. Savings Plan, and assets associated with
those liabilities, were transferred to our U.S. savings
plan. Our employees who have invested in Transocean ordinary
shares under the Transocean U.S. Savings Plan may retain
that investment, if they choose to do so, until
December 31, 2005, but will not be eligible to acquire
additional Transocean ordinary shares under our
U.S. savings plan.

     
Under the terms of the Transocean stock option
awards granted prior to the closing of the IPO, our employees
will continue to retain outstanding options to acquire
Transocean ordinary shares for the duration of their original
term.

95

 

     
With some exceptions, we have agreed to indemnify
Transocean for employment liabilities arising from any acts of
our employees or from claims by our employees against Transocean
and for liabilities relating to benefits for our employees.
Transocean has agreed to similarly indemnify us.

 

		
		
    Service and Secondment
    Agreement

     
We have entered into an agreement with Transocean
under which we provide to Transocean specified administrative
services and seconded personnel in connection with a drilling
contract Transocean has for drilling oil and gas wells offshore
Trinidad and Tobago for a fee of $2,750 per day for an expected
duration of 60 days. In connection with the provision of
these services, we have agreed to indemnify Transocean for
liabilities pertaining to our employees (excluding the seconded
personnel), and Transocean has agreed to indemnify us for
liabilities pertaining to its employees (including the seconded
personnel).

96

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