The following discussion is intended to assist you in understanding our financial position at December 31, 2008 and 2007, and our results of operations for each of the years in the three-year period ended December 31, 2008. You should read the accompanying consolidated financial statements and related notes in conjunction with this discussion.
EXECUTIVE OVERVIEW
Our 2008 financial and operating results include:
• operating revenues totaling $3.4 billion;

• net income of $1.6 billion or $5.85 per diluted share;

• net cash from operating activities totaling $1.9 billion;

• an increase in our average dayrate across our worldwide fleet to $174,506 from $139,948 in 2007;

• a decrease in debt to 14.9 percent of total capitalization at the end of 2008, down from 15.4 percent at the end of 2007.

The global financial crisis created an environment of uncertainty during late 2008 that has continued into 2009, and it has raised concerns that the worldwide economy may enter into a prolonged recession. Deterioration in the worldwide economy could result in reduced demand for oil and gas exploration and production activity and, therefore, reduce demand for offshore drilling services. The financial crisis has created significant reductions in available credit and other sources of capital, which may restrict our ability to fund our operations and capital expenditures and adversely impact our customers' and lenders' ability to fulfill their obligations to us. Other possible negative impacts include a decline in dayrates under new contracts, an increase in early termination of or defaults under existing contracts and a slowing in the pace of new contract activity.
Demand for our drilling services generally depends on a variety of economic and political factors, including worldwide demand for oil and gas, the ability of the Organization of Petroleum Exporting Countries ("OPEC") to set and maintain production levels and pricing, the level of production of non-OPEC countries and the policies of various governments regarding exploration and development of their oil and gas reserves. Our results of operations depend on activity in the oil and gas production and development markets worldwide. Historically, oil and gas prices and market expectations of potential changes in these prices have significantly affected that level of activity. Generally, higher oil and natural gas prices or our customers' expectations of higher prices result in a greater demand for our services and lower oil and gas prices result in reduced demand for our services. Oil and gas prices are extremely volatile and have declined sharply since mid-2008.
Demand for our services is also a function of the worldwide supply of mobile offshore drilling units. Industry sources report that a total of 74 newbuild jackups and 96 deepwater newbuilds are scheduled to enter service worldwide between 2009 and 2012. The majority of these units reportedly do not have a contractual commitment from a customer and are referred to in the offshore drilling industry as "being built on speculation". The introduction of non-contracted rigs into the marketplace could have an adverse affect on the level of demand for our services or the dayrates we are able to achieve. We cannot predict the future level of demand for our drilling services or future conditions in the offshore contract drilling industry. Decreases in commodity prices or the level of demand for our drilling services or increases in the supply of drilling rigs in the market could have an adverse effect on our results of operations.
We continued to face significant cost pressure in 2008 as a result of increases in labor costs and prices for materials and services that are essential to our operations. Daily operating costs increased to $53,528 per day in 2008 from $45,375 per day in 2007. Given the current high demand for personnel and equipment, we expect to see continued upward pressure on operating costs in 2009.

Our long-standing business strategy is the active expansion of our worldwide offshore drilling and deepwater capabilities through acquisitions, upgrades and modifications, and the deployment of drilling assets in important geological areas. Since the beginning of 2001, we have added seven jackups, two deepwater semisubmersibles, and two ultra-deepwater semisubmersible baredeck hulls, both of which are now being completed into rigs, to our worldwide fleet through acquisitions. We have also actively expanded our offshore drilling and deepwater capabilities in recent years through the construction of new rigs. In 2008, we continued our expansion strategy as indicated by the following developments and activities:
• we took delivery of our newbuild F&G JU-2000E enhanced premium independent leg cantilevered jackup, the Noble Hans Deul, which is now operating under a long-term drilling contract;

• construction continued on one F&G JU-2000E enhanced premium independent leg cantilevered jackups, the Noble Scott Marks, which is being constructed in China and is scheduled for delivery in the second quarter of 2009;

• construction continued on three newbuild ultra-deepwater semisubmersibles, the Noble Danny Adkins, which is scheduled for delivery in the third quarter of 2009, and the Noble Dave Beard and the Noble Jim Day, which are scheduled for delivery in the fourth quarter of 2009; and

• we entered into agreements for the construction of a new, dynamically positioned, ultra-deepwater, harsh environment Globetrotter-class drillship, which is scheduled to be delivered in the second half of 2011. We are continuing to evaluate the possibility of exercising options to construct up to three additional Globetrotter-class drillships.

Newbuild capital expenditures totaled $800 million in 2008 for our rigs under construction during the year.
PROPOSED TRANSACTION
In December 2008, we announced a proposed merger, reorganization and consolidation transaction (the "Transaction"), which, if completed, will restructure our corporate organization. The Transaction would result in a new Swiss holding company serving as the publicly traded parent of the Noble group of companies. The Transaction would effectively change the place of incorporation of the publicly traded parent company from the Cayman Islands to Switzerland.
The Transaction will involve several steps. First, we have formed a new Swiss corporation registered in the Canton of Zug, Switzerland named Noble Corporation ("Noble-Switzerland") as a direct, wholly-owned subsidiary of Noble Corporation, the Cayman Islands company that is the current ultimate parent company ("Noble-Cayman"). Noble-Switzerland, in turn, has formed a new Cayman Islands subsidiary named Noble Cayman Acquisition Ltd. ("merger sub"). We have set a meeting of members on March 17, 2009 to approve the Transaction, and, assuming we have obtained the necessary member approval, we plan to have a subsequent hearing of the Grand Court of the Cayman Islands on March 26, 2009 to approve the Transaction. If the requisite member and court approvals are obtained, we expect to close the Transaction promptly following the court approval. In connection with the Transaction, merger sub will merge with Noble-Cayman, with Noble-Cayman as the surviving company. As a result of the Transaction, merger sub will be dissolved and will cease to exist and Noble-Cayman will become a direct, wholly-owned subsidiary of Noble-Switzerland, the resulting publicly traded parent of the Noble group. In the Transaction, all of the outstanding ordinary shares of Noble-Cayman will be cancelled, and Noble-Switzerland will issue, through an exchange agent, one share of Noble-Switzerland in exchange for each share of Noble-Cayman, plus an additional 15 million shares of Noble-Switzerland to Noble-Cayman, which may in turn subsequently transfer these shares to one or more other subsidiaries of Noble-Switzerland for future use to satisfy our obligation to deliver these shares in connection with awards granted under our employee benefits plans and other general corporate purposes. We expect the Noble-Switzerland shares to be listed and traded on the New York Stock Exchange under the symbol "NE", the same symbol under which our shares are currently listed and traded.
We have not concluded whether we will relocate our principal executive offices from Sugar Land, Texas. However, we are continuing to analyze this issue and we may relocate such offices either before or after the consummation of the Transaction if we believe it would be in the best interests of Noble and our shareholders.
We currently believe that the Transaction should have no material impact on how we conduct our day-to-day operations. Where we conduct our future operations will depend on a variety of factors, independent of our legal domicile, including the worldwide demand for our services and the overall needs of our business.

CONTRACT DRILLING SERVICES BACKLOG
We maintain a backlog (as defined below) of commitments for contract drilling
services. The following table sets forth as of December 31, 2008 the amount of
our contract drilling services backlog and the percent of available operating
days committed for the periods indicated:

                                                                                 Year Ending December 31,
                                    Total              2009              2010              2011              2012            2013-2016
                                                                             (In thousands)
Contract Drilling Services
Backlog
Semisubmersibles/Drillships
(1)                              $  8,894,000       $ 1,794,000       $ 2,016,000       $ 1,695,000       $ 1,167,000       $ 2,222,000
Jackups/Submersibles (2)            2,646,000         1,887,000           577,000           182,000                 -                 -

Total (3)(4)                     $ 11,540,000       $ 3,681,000       $ 2,593,000       $ 1,877,000       $ 1,167,000       $ 2,222,000


Percent of Available
Operating Days Committed (5)                                 79 %              40 %              24 %              13 %               7 %

(1) Our drilling contracts with Petroleo Brasileiro S.A. ("Petrobras") provide an opportunity for us to earn performance bonuses based on downtime experienced for our rigs operating offshore Brazil. With respect to our semisubmersibles operating offshore Brazil, we have included in our backlog an amount equal to 75 percent of potential performance bonuses for such semisubmersibles, which amount is based on and generally consistent with our historical earnings of performance bonuses for these rigs. With respect to our drillships operating offshore Brazil, we
(a) have not included in our backlog any performance bonuses for periods prior to the commencement of certain upgrade projects planned for 2010 and 2011, which projects are designed to enhance the reliability and operational performance of our drillships, and
(b) have included in our backlog an amount equal to 75 percent of potential performance bonuses for periods after the estimated completion of such upgrade projects. Our backlog for semisubmersibles/drillships includes approximately $335 million attributable to these performance bonuses.

(2) Our drilling contracts with Pemex Exploracion y Produccion ("Pemex") for certain jackups operating offshore in Mexico are subject to price review and adjustment of the rig dayrate. Presently, contracts for five jackups have dayrates indexed to the world average of the highest dayrates published by ODS-Petrodata. After an initial firm dayrate period, the dayrates are generally adjusted quarterly based on formulas calculated from the index. Our contract drilling services backlog has been calculated using the December 31, 2008 index-based dayrates for periods subsequent to the initial firm dayrate period.

(3) Pemex has the ability to cancel its drilling contracts on 30 days or less notice without Pemex's making an early termination payment. We currently have 13 rigs contracted to Pemex in Mexico, and our backlog includes approximately $1.5 billion related to such contracts at December 31, 2008.

(4) The Noble Scott Marks must be provided by September 30, 2009 or our customer has the right to terminate the contract. The Noble Danny Adkins must be delivered from the shipyard by July 30, 2009 or the customer has the right to terminate the contract. The drilling contract for the Noble Jim Day contains a termination right in the event the rig is not ready to commence operations by December 31, 2010. The drilling contract for the Noble Dave Beard gives the customer the right to terminate the contract if the rig did not commence operations by December 2008 and also gives the customer the right to apply a penalty for delay beyond the date upon which it had the right to cancel. We continue to discuss an extension for commencement and a reduction in penalty for this rig and believe we will come to an accommodation with the client that is acceptable to us.

(5) Percentages take into account additional capacity from the estimated dates of deployment of our newbuild rigs that are scheduled to commence operations during 2009 through 2011.

Our contract drilling services backlog consists of commitments we believe to be firm. Our contract drilling services backlog reported above reflects estimated future revenues attributable to both signed drilling contracts and letters of intent. A letter of intent is generally subject to customary conditions, including the execution of a definitive drilling contract. If worldwide economic conditions continue to deteriorate, it is possible that some customers that have entered into letters of intent will not enter into signed drilling contracts. We calculate backlog for any given unit and period by multiplying the full contractual operating dayrate for such unit by the number of days remaining in the period. The reported contract drilling services backlog does not include amounts representing revenues for mobilization, demobilization and contract preparation, which are not expected to be significant to our contract drilling services revenues, reimbursable amounts from customers or amounts attributable to uncommitted option periods under drilling contracts or letters of intent. The amount of actual revenues earned and the actual periods during which revenues are earned may differ from the backlog amounts and backlog periods set forth in the table above due to various factors, including, but not limited to, shipyard and maintenance projects, unplanned downtime, weather conditions and other factors that result in applicable dayrates lower than the full contractual operating dayrate. In addition, amounts included in the backlog may change because drilling contracts may be varied or modified by mutual consent or customers may exercise early termination rights or decline to enter into a drilling contract after executing a letter of intent. As a result, our backlog as of any particular date may not be indicative of our actual operating results for the subsequent periods for which the backlog is calculated.

INTERNAL INVESTIGATION
In June 2007, we announced that we were conducting an internal investigation of our Nigerian operations, focusing on the legality under the U.S. Foreign Corrupt Practices Act of 1977, as amended (the "FCPA"), and local laws of our Nigerian affiliate's reimbursement of certain expenses incurred by our customs agents in connection with obtaining and renewing permits for the temporary importation of drilling units and related equipment into Nigerian waters, including permits that are necessary for our drilling units to operate in Nigerian waters. We also announced that the audit committee of our Board of Directors had engaged a leading law firm with significant experience in investigating and advising on FCPA matters to lead the investigation as independent outside counsel. The scope of the investigation also includes our dealings with customs agents and customs authorities in certain parts of the world other than Nigeria in which we conduct our operations, as well as dealings with other types of local agents in Nigeria and such other parts of the world. There can be no assurance that evidence of additional potential FCPA violations may not be uncovered through the investigation.
The audit committee commissioned the internal investigation after our management brought to the attention of the audit committee a news release issued by another company. The news release disclosed that the other company was conducting an internal investigation into the FCPA implications of certain actions by a customs agent in Nigeria in connection with the temporary importation of that company's vessels into Nigeria. Our drilling units that conduct operations in Nigeria do so under temporary import permits, and management considered it prudent to review our own practices in this regard.
We voluntarily contacted the SEC and the U.S. Department of Justice ("DOJ") to advise them that an independent investigation was underway. We have been cooperating, and intend to continue to cooperate fully with both agencies. If the SEC or the DOJ determines that violations of the FCPA have occurred, they could seek civil and criminal sanctions, including monetary penalties, against us and/or certain of our employees, as well as additional changes to our business practices and compliance programs, any of which could have a material adverse effect on our business or financial condition. In addition, such actions, whether actual or alleged, could damage our reputation and ability to do business, to attract and retain employees, and to access capital markets. Further, detecting, investigating, and resolving such actions is expensive and consumes significant time and attention of our senior management.
The independent outside counsel appointed by the audit committee to perform the internal investigation made a presentation of the results of its investigation to the DOJ and the SEC in June 2008. The SEC and the DOJ have begun to review these results and information gathered by the independent outside counsel in the course of the investigation. Neither the SEC nor the DOJ has indicated what action it may take, if any, against us or any individual, or whether it may request that the audit committee's independent outside counsel conduct further investigation. Therefore, we consider the internal investigation to be ongoing and cannot predict when it will conclude. Furthermore, we cannot predict whether either the SEC or the DOJ will open its own proceeding to investigate this matter, or if a proceeding is opened, what potential remedies these agencies may seek. We could also face fines or sanctions in relevant foreign jurisdictions. Based on information obtained to date in our internal investigation, we have not determined that any potential liability that may result is probable or remote or can be reasonably estimated. As a result, we have not made any accrual in our consolidated financial statements at December 31, 2008.
We are currently operating two jackup rigs offshore Nigeria. The temporary import permits covering the rigs expired in November 2008 and we have pending applications to renew these permits. However, as of February 25, 2009, the Nigerian customs office had not acted on our applications. We continue to seek to avoid material disruption to our Nigerian operations; however, there can be no assurance that we will be able to obtain new permits or further extensions of permits necessary to continue the operation of our rigs in Nigeria. If we cannot obtain a new permit or an extension necessary to continue operations of any rig, we may need to cease operations under the drilling contract for such rig and relocate such rig from Nigerian waters. In any case, we also could be subject to actions by Nigerian customs for import duties and fines for these two rigs, as well as other drilling rigs that operated in Nigeria in the past. We cannot predict what impact these events may have on any such contract or our business in Nigeria. Furthermore, we cannot predict what changes, if any, relating to temporary import permit policies and procedures may be established or implemented in Nigeria in the future, or how any such changes may impact our business there.

Notwithstanding that the internal investigation is ongoing, we concluded that certain changes to our FCPA compliance program would provide us greater assurance that our assets are not used, directly or indirectly, to make improper payments, including customs payments, and that we are in compliance with the FCPA's record-keeping requirements. Although we have had a long-standing published policy requiring compliance with the FCPA and broadly prohibiting any improper payments by us to foreign or U.S. officials, we adopted additional measures intended to enhance FCPA compliance procedures. Further measures may be required once the investigation concludes.
RESULTS OF OPERATIONS
2008 Compared to 2007
General
Net income for 2008 was $1.6 billion, or $5.85 per diluted share, on operating revenues of $3.4 billion, compared to net income for 2007 of $1.2 billion, or $4.48 per diluted share, on operating revenues of $3.0 billion. Rig Utilization, Operating Days and Average Dayrates Operating revenues and operating costs and expenses for our contract drilling services segment are dependent on three primary metrics - rig utilization, operating days and dayrates. The following table sets forth the average rig utilization, operating days and average dayrates for our rig fleet for 2008 and 2007:

                           Average Rig
                         Utilization(1)                    Operating Days(2)                           Average Dayrates
                                                                                 %                                           %
                        2008          2007          2008          2007         Change         2008           2007          Change
Jackups                      92 %         97 %      13,879        14,294            -3 %    $ 148,532      $ 120,229            24 %
Semisubmersibles
>6,000'(3)                   96 %         99 %       2,466         2,358             5 %      327,558        274,613            19 %
Semisubmersibles
<6,000'(4)                  100 %         89 %       1,098           971            13 %      220,475        177,790            24 %
Drillships                   67 %         89 %         732           970           -25 %      201,819        119,669            69 %
Submersibles                 66 %         73 %         729           802            -9 %       54,106         74,171           -27 %

Total                        90 %         95 %      18,904        19,395            -3 %    $ 174,506      $ 139,948            25 %

(1) Information reflects our policy of reporting on the basis of the number of rigs in our fleet, excluding newbuild rigs under construction.

(2) Information reflects the number of days that our rigs were operating under contract.

(3) These units have water depth ratings of 6,000 feet or greater.

(4) These units have water depth ratings of less than 6,000 feet.

Contract Drilling Services
The following table sets forth the operating revenues and the operating costs
and expenses for our contract drilling services segment for 2008 and 2007:

                                                                                Change
                                             2008            2007             $           %
 Operating Revenues:
 Contract drilling services               $ 3,298,850     $ 2,714,250     $ 584,600        22 %
 Reimbursables (1)                             76,099          83,944        (7,845 )      -9 %
 Other                                          1,275           1,326           (51 )      -4 %

                                          $ 3,376,224     $ 2,799,520     $ 576,704        21 %

 Operating Costs and Expenses:
 Contract drilling services               $ 1,011,882     $   880,049     $ 131,833        15 %
 Reimbursables (1)                             65,251          70,964        (5,713 )      -8 %
 Depreciation and amortization                349,448         283,225        66,223        23 %
 Selling, general and administrative           72,381          83,695       (11,314 )     -14 %
 Hurricane losses and (recoveries), net        10,000          (3,514 )      13,514        **

                                            1,508,962       1,314,419       194,543        15 %

 Operating Income                         $ 1,867,262     $ 1,485,101     $ 382,161        26 %

** Not a meaningful percentage

(1) We record reimbursements from customers for out-of-pocket expenses as revenues and the related direct costs as operating expenses. Changes in the amount of these reimbursables do not have a material effect on our financial position, results of operations or cash flows.

Operating Revenues. Contract drilling services revenue increases for 2008 as compared to 2007 were primarily driven by increases in average dayrates. Average dayrates increased revenues approximately $670 million for 2008, while fewer operating days reduced revenues approximately $86 million.
Average dayrates increased 25 percent in 2008 as compared to 2007. Except for our submersible rigs, which were impacted by weakening demand in the shallow waters of the U.S. Gulf of Mexico, higher average dayrates were received across all rig categories as strong demand for drilling rigs drove market dayrates higher. Demand in the U.S. Gulf of Mexico has been weakened due to decreases in natural gas prices and increases in operating costs compared to on-shore drilling.
The decrease in operating days in 2008 as compared to 2007 was primarily due to an increase in downtime of certain rigs in 2008. Unpaid shipyard days increased 417 days in 2008 as compared to 2007, as the Noble Roy Butler and the Noble George McLeod each spent significant time in the shipyard during 2008 for rig modifications and regulatory inspections, and the Noble Roger Eason is currently completing repairs for fire damage suffered in November 2007. Additionally, the Noble Fri Rodli, the Noble Don Walker, the Noble Roy Butler and the Noble Carl Norberg spent an aggregate total of 852 days stacked during 2008. The Noble Fri Rodli has been cold-stacked since October 2007 due to weakening demand in the shallow waters of the U.S. Gulf of Mexico. The Noble Don Walker, the Noble Roy Butler and the Noble Carl Norberg spent time stacked in 2008 due to weakness in the Nigerian market. The Noble Carl Norberg and the Noble Roy Butler are currently under contract in Mexico, and the Noble Don Walker is operating under a contract off the West African coast of Benin. The aggregate number of stacked days in 2007 was 255 days. These decreases in operating days were partially offset by increased operating days of 471 days for three recently completed newbuilds, the ultra-deepwater semisubmersible the Noble Clyde Boudreaux and the enhanced premium jackups the Noble Roger Lewis and the Noble Hans Deul, which were added to the fleet in June 2007, September 2007 and November 2008, respectively. Additionally, 2008 had one more available operating day than 2007 due to leap year, which added 54 more operating days in 2008. . . .