During 2007, demand declined and day rates softened in the Gulf of Mexico compared to prior levels as a result of competition for work among drilling contractors, particularly related to smaller premium jackup rigs. Oil and gas companies continued to shift their focus to more economically attractive prospects in the deeper waters of the Gulf of Mexico and elsewhere. Drilling contractors continued to pursue international opportunities and, despite relocation of several jackup rigs from the region in 2007, rig demand decreased at a faster pace than supply.
During the first quarter of 2008, demand for jackup rigs in the Gulf of Mexico increased. However, first quarter 2008 jackup rig day rates remained generally consistent with the prior year fourth quarter. Several oil and gas companies have confirmed new jackup rig programs slated to begin in the second and third quarters of 2008 while others recently extended their current commitments in the Gulf of Mexico. It is currently unclear whether hurricane season will have an offsetting negative impact on demand in this region.
Demand for deepwater semisubmersible rigs in the Gulf of Mexico continued to outpace supply resulting in high day rates and utilization during the first quarter of 2008. In addition to the ENSCO 7500 deepwater semisubmersible rig currently operating in the Gulf of Mexico, we have four ultra-deepwater semisubmersible rigs under construction with scheduled delivery dates in the third quarter of 2008, the first and fourth quarters of 2009 and the third quarter of 2010. The first three rigs to be delivered have secured long-term drilling contracts in the Gulf of Mexico and we entered into a letter of intent with a customer for a drilling contract on ENSCO 8503 during the first quarter of 2008. The contemplated contract will be for a two-year term, with an option for the customer to extend the contract at mutually agreed rates and term. The base operating rate is $510,000 per day, and the day rate will be subject to adjustment for variances in operating costs from current levels. The letter of intent is subject to negotiation and execution of a definitive drilling contract.
As oil and gas companies continue to increase their investment in deepwater projects, it is anticipated that the deepwater semisubmersible rigs in the Gulf of Mexico, as well as other geographical regions of the world, will remain near full utilization for the next several years.

RESULTS OF OPERATIONS
    The following table highlights our condensed consolidated operating results
for the three-month periods ended March 31, 2008 and 2007 (in millions):



                                      2008          2007

  Revenues                          $580.3        $514.1
  Operating expenses
    Contract drilling                190.7         162.8
    Depreciation                      47.5          45.1
    General and administrative        12.7          16.0
---------------------------------------------------------
  Operating income                   329.4         290.2
  Other income (expense)               4.5           9.6
  Provision for income taxes          61.9          67.5
---------------------------------------------------------
  Net income                         $272.0       $232.3
---------------------------------------------------------


         17
---------------------

For the three-month period ended March 31, 2008, revenues increased by $66.2 million, or 13%, and operating income increased by $39.2 million, or 14%, as compared to the prior year first quarter. These increases were primarily due to improved average day rates earned by our jackup rigs in the Europe/Africa and Asia Pacific regions as compared to the prior year first quarter, partially offset by lower average day rates earned by our jackup rigs in the Gulf of Mexico as compared to the prior year first quarter. Detailed explanations of our operating results for the three-month periods ended March 31, 2008 and 2007, including discussions of revenues and contract drilling expense based on geographical region and type of rig, are set forth below. Revenue and Contract Drilling Expense
The following analysis summarizes our revenues, contract drilling expense, rig utilization and average day rates for the three-month periods ended March 31, 2008 and 2007 (in millions except utilization and day rates):

                                             2008         2007

  Revenues
    Jackup rigs:
       Asia Pacific                        $250.1       $198.8
        Europe/Africa                       191.8        148.2
       North and South America              108.7        144.2
----------------------------------------------------------------
          Total jackup rigs                 550.6        491.2

     Semisubmersible rig - North America     24.6         17.7
     Barge rig - Asia Pacific                 5.1          5.2
----------------------------------------------------------------
            Total                          $580.3       $514.1
----------------------------------------------------------------




  Contract Drilling Expense
    Jackup rigs:
       Asia Pacific                         $ 74.0       $ 60.9
        Europe/Africa                         57.9         47.7
       North and South America                47.8         44.8
-----------------------------------------------------------------
          Total jackup rigs                  179.7        153.4

     Semisubmersible rigs - North America      8.5          6.1
     Barge rig - Asia Pacific                  2.5          3.3
-----------------------------------------------------------------
            Total                           $190.7       $162.8
-----------------------------------------------------------------


         18
---------------------

                                              2008           2007

  Rig Utilization(1)
    Jackup rigs:
       Asia Pacific                             97%            99%
       Europe/Africa                            99%            95%
        North and South America                 92%            85%
--------------------------------------------------------------------
         Total jackup rigs                      95%            93%

    Semisubmersible rig - North America         96%            97%
    Barge rig - Asia Pacific                    92%           100%
--------------------------------------------------------------------
            Total                               95%            93%
--------------------------------------------------------------------

  Average Day Rates(2)
    Jackup rigs:
       Asia Pacific                        $143,303       $120,728
        Europe/Africa                       213,123        182,536
       North and South America               89,361        117,858
--------------------------------------------------------------------
          Total jackup rigs                 142,524        133,238

     Semisubmersible rig - North America    279,962        195,740
     Barge rig - Asia Pacific                72,800         56,509
--------------------------------------------------------------------
            Total                          $144,407       $132,843
--------------------------------------------------------------------

(1) Utilization is derived by dividing the number of days under contract, including days associated with compensated mobilizations, by the number of days in the period.

(2) Average day rates are derived by dividing contract drilling revenue by the aggregate number of contract days, adjusted to exclude certain types of non-recurring reimbursable revenue and lump sum revenue and contract days associated with certain mobilizations, demobilizations, shipyard contracts and standby contracts.

The following table summarizes our offshore drilling rigs by geographic region and type as of March 31, 2008 and 2007:

                                               Number of Rigs
                                            2008         2007
      Jackup rigs:
         Asia Pacific                        19           19
          Europe/Africa(1)                   10            9
          North and South America(1)         15           16
-----------------------------------------------------------------
           Total jackup rigs                 44           44

      Semisubmersible rigs:
         North America                        1            1
          Under construction(2)               4            3
-----------------------------------------------------------------
           Total semisubmersible rigs         5            4

      Barge rig - Asia Pacific                1            1
-----------------------------------------------------------------
           Total                             50           49
-----------------------------------------------------------------

(1) During the second quarter of 2007, we mobilized ENSCO 105 from the Gulf of Mexico to Tunisia.

(2) During the second quarter of 2007, we entered into an agreement to construct ENSCO 8503 with delivery expected in the third quarter of 2010.

Asia Pacific Jackup Rigs
First quarter 2008 revenues for the Asia Pacific jackup rigs increased by $51.3 million, or 26%, as compared to the prior year first quarter. The increase in revenues was primarily due to a 19% increase in average day rates and the increased size of the Asia Pacific jackup fleet. The increase in average day rates resulted from an increase in demand due to higher levels of spending by oil and gas companies and relatively limited rig availability in the region. We accepted delivery of ENSCO 108 late in the first quarter of 2007 upon completion of its construction, with drilling operations commencing in the second quarter of 2007. The addition of ENSCO 108 to the fleet contributed $18.5 million to the increase in Asia Pacific jackup rig revenue over the comparable prior year quarter. First quarter 2008 contract drilling expense increased by $13.1 million, or 22%, as compared to the prior year first quarter primarily due to the addition of ENSCO 108 to the fleet, which resulted in an additional $4.1 million of contract drilling expense, as well as increased personnel costs and repair and maintenance expense as compared to the prior year first quarter.

Europe/Africa Jackup Rigs
First quarter 2008 revenues for the Europe/Africa jackup rigs increased by $43.6 million, or 29%, compared to the prior year first quarter. The increase was primarily attributable to the addition of ENSCO 105 to the Europe/Africa fleet, which provided an additional $22.6 million in revenue as compared to the prior year first quarter, as well as a 17% increase in average day rates and an increase in utilization to 99% from 95% in the comparable prior year quarter. The increase in average day rates and rig utilization resulted from an increase in demand due to higher levels of spending by oil and gas companies and limited rig availability in the region. First quarter 2008 contract drilling expense for the Europe/Africa jackup rigs increased by $10.2 million, or 21%, compared to the prior year first quarter. The increase in contract drilling expense was primarily due to the addition of ENSCO 105 to the fleet, which resulted in an additional $6.2 million of contract drilling expense, as well as increased repair and maintenance expense and personnel costs, partially offset by reduced reimbursable expenses, as compared to the prior year first quarter.
North and South America Jackup Rigs
First quarter 2008 revenues for the North and South America jackup rigs decreased by $35.5 million, or 25%, compared to the prior year first quarter. The decrease in revenues was due primarily to a 24% decrease in average day rates and the reduced size of the North and South America jackup rig fleet, partially offset by an increase in utilization to 92% from 85% in the comparable prior year quarter. The decrease in average day rates was primarily attributable to a decrease in demand by oil and gas companies who reduced shallow water spending in this region. First quarter 2008 contract drilling expense for the North and South America jackup rigs increased by $3.0 million, or 7%, compared to the prior year first quarter. The increase in contract drilling expense was primarily due to increased personnel costs, partially offset by decreased mobilization and reimbursable expenses and the reduced size of the fleet as compared to the prior year first quarter.
North America Semisubmersible Rig
First quarter 2008 revenues for ENSCO 7500 increased by $6.9 million, or 39%, and contract drilling expense increased by $2.4 million, or 39%, as compared to the prior year first quarter. The increase in revenues was due to an increase in the average day rate to $279,962 from $195,740 in the comparable prior year quarter, as the ENSCO 7500 began earning a significantly higher day rate during February 2008. The increase in contract drilling expense was primarily due to increased personnel costs, as we have increased staffing levels on the rig in preparation for delivery of our ENSCO 8500 Series® rigs, the first of which is scheduled for the third quarter of 2008. Depreciation
Depreciation expense for the first quarter of 2008 increased by $2.4 million, or 5%, as compared to the prior year first quarter. The increase was primarily attributable to depreciation associated with capital enhancement projects completed subsequent to the first quarter of 2007 and depreciation on ENSCO 108, which was placed into service in the second quarter of 2007. General and Administrative
General and administrative expense for the first quarter of 2008 decreased by $3.3 million, or 21%, as compared to the prior year first quarter. The decrease was attributable to a $3.9 million expense incurred during the prior year first quarter in connection with a retirement agreement with our former Chairman and Chief Executive Officer.

Other Income (Expense)
    Other income (expense) for the three-month periods ended March 31, 2008 and
2007 was as follows (in millions):


                                 2008           2007

    Interest income                  $ 5.0     $ 6.2
    Interest expense, net:
         Interest expense             (5.7 )    (8.6 )
         Capitalized interest          5.7       7.5
------------------------------------------------------
                                        --      (1.1 )
    Other, net                         (.5 )     4.5
------------------------------------------------------
                                     $ 4.5     $ 9.6
------------------------------------------------------

The decrease in interest income in the first quarter of 2008, as compared to the prior year first quarter, was due to lower average interest rates, partially offset by an increase in cash balances invested. The decrease in interest expense during the first quarter of 2008, as compared to the prior year first quarter, was primarily due to a decline in outstanding debt.
Other, net, in the three-month period ended March 31, 2008 primarily consisted of a $3.1 million unrealized loss associated with the valuation of our auction rate securities and net foreign currency exchange gains of $2.5 million. Our fair value measurements are discussed in Note 5 to the condensed consolidated financial statements.
Other, net, in the three-month period ended March 31, 2007 primarily consisted of a $3.1 million net gain resulting from the settlement of litigation we initiated in relation to a non-operational dispute with a third party service provider and net foreign currency exchange gains of $1.1 million. Provision for Income Taxes
The provision for income taxes for the three-month period ended March 31, 2008 decreased by $5.6 million in comparison to the prior year first quarter. The decrease was primarily attributable to a reduction in our effective income tax rate from 22.5% for the three-month period ended March 31, 2007 to 18.5% for the three-month period ended March 31, 2008, partially offset by increased profitability. The decrease in our effective tax rate was primarily due to an increase in the portion of our earnings from tax jurisdictions with lower tax rates.
Fair Value Measurements
All of our assets measured at fair value using significant Level 3 inputs as of March 31, 2008 were auction rate securities. See Note 3 to our condensed consolidated financial statements for additional information on our auction rate securities, including a description of the securities and underlying collateral, a discussion of the uncertainties relating to their liquidity and our accounting treatment under SFAS 115. As a result of continued auction failures, quoted prices for our auction rate securities did not exist as of March 31, 2008 and, accordingly, we concluded that Level 1 inputs were not available.

We determined that use of a valuation model was the best available technique for measuring the fair value of our auction rate securities and we engaged an independent third party valuation firm to assist in the measurement process. We used an income approach valuation model to estimate the price that would be received to sell our securities in an orderly transaction between market participants ("exit price") as of March 31, 2008. The exit price was derived as the weighted average present value of expected cash flows over various periods of illiquidity, using a risk adjusted discount rate that was based on the credit risk and liquidity risk of the securities.
While our valuation model was based on both Level 2 (credit quality and interest rates) and Level 3 inputs, we determined that the Level 3 inputs were the most significant to the overall fair value measurement, particularly the estimates of risk adjusted discount rates and ranges of expected periods of illiquidity. The valuation model also reflected our intention to hold our auction rate securities until they can be liquidated in a market that facilitates orderly transactions and our belief that we have the ability to maintain our investment indefinitely.
We reviewed inputs to the valuations performed by the independent third party valuation firm, evaluated results and performed sensitivity analysis on key assumptions. Based on our review, we concluded that the fair value measurement of our auction rate securities as of March 31, 2008 was appropriate.
Based on the results of our fair value measurement, we recognized an unrealized loss of $3.1 million for the three-month period ended March 31, 2008, which was included in other, net in our condensed consolidated statement of income. The carrying value of our auction rate securities as of March 31, 2008 totaled $79.9 million, and included $74.9 million classified as long-term investments and $5.0 million classified as other current assets on our condensed consolidated balance sheet.
We anticipate realizing the par value of our auction rate securities because we intend to hold them until they are redeemed or until they can be sold in a market that facilitates orderly transactions. The $3.1 million unrealized loss recognized for the three-month period ended March 31, 2008, resulted primarily from the liquidity risk (rather than credit risk) of our auction rate securities.
Assets measured at fair value using significant Level 3 inputs constituted 1.5% of our total assets as of March 31, 2008. No assets or liabilities were valued using Level 3 inputs as of December 31, 2007.
LIQUIDITY AND CAPITAL RESOURCES
Although our business is very cyclical, we historically have relied on our cash flow from operations to meet liquidity needs and fund the majority of our cash requirements. We have maintained a strong financial position through the disciplined and conservative use of debt. A substantial amount of our cash flow is invested in the expansion and enhancement of our fleet of drilling rigs.
During the three-month period ended March 31, 2008, our primary source of cash was $151.2 million generated from operations and our primary use of cash was $116.2 million for the construction, enhancement and other improvement of our drilling rigs.
During the three-month period ended March 31, 2007, our primary sources of cash included $279.7 million generated from operations and $9.8 million from the exercise of stock options. Our primary uses of cash for the same period included $127.8 million for the repurchase of common stock and $106.0 million for the construction, enhancement and other improvement of our drilling rigs.
Detailed explanations of our liquidity and capital resources for the three-month periods ended March 31, 2008 and 2007, are set forth below.

Cash Flow and Capital Expenditures
    Our cash flow from operations and capital expenditures for the three-month
periods ended March 31, 2008 and 2007 were as follows (in millions):


                                         2008      2007

    Cash flow from operations           $151.2   $279.7
---------------------------------------------------------
    Capital expenditures
      New rig construction              $ 76.4   $ 66.2
      Rig enhancements                    16.3     15.4
      Minor upgrades and improvements     23.5     24.4
---------------------------------------------------------
                                        $116.2   $106.0
---------------------------------------------------------

Cash flow from operations decreased by $128.5 million, or 46%, for the three-month period ended March 31, 2008 as compared to the prior year first quarter. The decrease resulted primarily from an $83.0 million increase in our investment in auction rate securities, an $86.2 million increase in tax related payments and a $45.5 million increase in cash payments related to contract drilling expenses, partially offset by a $78.5 million increase in cash receipts from drilling services.
We continue to expand the size and quality of our drilling rig fleet. We have four ultra-deepwater semisubmersible rigs under construction with scheduled delivery dates in the third quarter of 2008, the first and fourth quarters of 2009 and the third quarter of 2010. Our Board of Directors recently authorized construction of a fifth ultra-deepwater semisubmersible rig, with an estimated construction cost of approximately $515.0 million and delivery in late 2011. The first three rigs to be delivered have secured long-term drilling contracts in the Gulf of Mexico and during the first quarter of 2008 we entered into a letter of intent with a customer for a long-term drilling contract on ENSCO 8503.
Based on our current projections, we expect capital expenditures in 2008 to include approximately $545.0 million for construction of our five ENSCO 8500® Series rigs, approximately $25.0 million for rig enhancement projects and approximately $110.0 million for minor upgrades and improvements. Depending on market conditions and opportunities, we may also make additional capital expenditures to upgrade rigs and construct or acquire additional rigs. Financing and Capital Resources
Our long-term debt, total capital and long-term debt to total capital ratio as of March 31, 2008 and December 31, 2007 are summarized below (in millions, except percentages):

                                      March 31,     December 31,
                                        2008            2007

Long-term debt                       $  291.4        $  291.4
Total capital*                        4,322.3         4,043.4
Long-term debt to total capital           6.7 %           7.2 %

* Total capital includes long-term debt and stockholders' equity.

In March 2006, our Board of Directors authorized the repurchase of up to $500.0 million of our outstanding common stock. In August 2007, following completion of the authorized repurchase, our Board of Directors authorized the repurchase of an additional $500.0 million of our outstanding common stock (the "supplemental authorization"). From inception of our stock repurchase programs in March 2006 through December 31, 2007, we repurchased an aggregate 12.8 million shares at a cost of $681.6 million (an average cost of $53.05 per share). No repurchases of common stock occurred under the supplemental . . .