%           %
                                                                          2008 v      2008 v
                                       2008*       2007*       2006*       2007        2006
      Active Drilling Rigs:
      U.S.                             1,878       1,767       1,648        6.3 %      14.0 %
      Canada                             379         344         470       10.2 %     (19.4 %)
      International                    1,079       1,005         925        7.4 %      16.6 %

      Worldwide                        3,336       3,116       3,043        7.1 %       9.6 %

      West Texas Intermediate
      Crude Prices (per barrel)      $ 99.63     $ 72.33     $ 66.00       37.7 %      51.0 %

      Natural Gas Prices ($/mmbtu)   $  8.86     $  6.97     $  6.74       27.1 %      31.5 %

* Averages for the years indicated. See sources below.

The following table details the U.S., Canadian, and international rig activity and West Texas Intermediate Oil prices for the past nine quarters ended December 31, 2008 on a quarterly basis:

Executive Summary
National Oilwell Varco generated earnings of $2.0 billion or $4.90 per fully diluted share in 2008, on revenues of $13.4 billion. Earnings per share increased 30 percent and revenue increased 37 percent from the Company's 2007 earnings and revenues, respectively, due in part to our acquisition of Grant Prideco, Inc., discussed below. Operating income was $2.9 billion or 22 percent of sales for the year, including charges of $110.6 million before tax or $0.18 per share after-tax related to the acquisition. Excluding these transaction related charges earnings would have been $5.08 per diluted share for the year, an increase of 35 percent.
Grant Prideco Acquisition
On April 21, 2008 the Company completed its acquisition of Grant Prideco, Inc. for a combination of approximately $3.0 billion in cash and the issuance of 56.9 million shares of National Oilwell Varco common stock. The Grant Prideco merger further strengthened National Oilwell Varco's position as manufacturer to the oilfield. Its drill bits and reamers are being integrated into the Company's offering of drilling motors, non-magnetic drill collars, jars and shock tools, to complement its comprehensive package of bottomhole assembly tools used to drill complex wellpaths. Additionally, Grant Prideco's drillpipe products are purchased and consumed by the Company's existing drilling contractor customer base. The Company believes that consumption of drillpipe per foot of hole drilled, or per rig running, has been increasing due to the rising complexity of wellpath designs. Overall the acquisition better positioned National Oilwell Varco to capitalize on continued application of horizontal, directional and extended-reach drilling, through both drillpipe and drill bit product sales. Integration of the business has proceeded well. The Company is introducing new drillpipe tracking products, and expanding OEM drillpipe repair and maintenance offerings through its worldwide network of pipe service operations. The Company is also consolidating of a number of bit and downhole tool sales facilities worldwide, and leveraging combined manufacturing and marketing capabilities. Oil & Gas Equipment and Services Market
Worldwide developed economies turned down sharply late in 2008 as looming housing-related asset write-downs at major financial institutions paralyzed credit markets and sparked a serious global banking crisis. Major central banks are responding vigorously, but credit and financial markets have not yet recovered, and a credit-driven worldwide economic recession is in full force. Asset and commodity prices, including oil and gas prices, have declined sharply. After rising steadily for six years to peak at around $147 per barrel in July 2008, oil prices collapsed back to the $35 to $50 per barrel range recently. Higher oil and gas prices over the past several years have led to high levels of exploration and development drilling in many oil and gas basins around the globe, but this is slowing, at least in the near term. The count of rigs actively drilling in the U.S. as measured by Baker Hughes (a good measure of the level of oilfield activity and spending) peaked at 2,031 rigs on September 12, 2008, but has decreased to 1,399 rigs as of February 6, 2009, as a result of the lower commodity prices and tight credit. Many oil and gas operators reliant on external financing to fund their drilling programs are curtailing some of their drilling activity in view of tighter credit markets and lower commodity prices. So far this appears to be having the greatest impact on gas drilling across North America. Most international activity is driven by oil exploration and production by national oil companies, which has historically been less susceptible to short-term commodity price swings. Therefore we expect international drilling activity to be less impacted by the credit crisis, but the international rig count may show some declines nonetheless. The Company believes its Petroleum Services & Supplies segment and its Distribution Services segment will be affected by a drilling downturn first and most acutely, while the Company's Rig Technology segment would largely be less impacted in the short term owing to its high level of backlog.
Recent downturns follow an extended period of high drilling activity which fueled strong demand for oilfield services since 2003. Incremental drilling activity through the upswing shifted toward harsh environments, employing increasingly sophisticated technology to find and produce reserves. Higher utilization of drilling rigs has tested the capability of the world's fleet of rigs, much of which is old and of limited capability. Technology has advanced significantly since most of the existing rig fleet was built. The industry invested little during the late 1980's and 1990's on new drilling equipment, but drilling technology progressed steadily nonetheless, as the Company and its competitors continued to invest in new and better ways of drilling. As a consequence, the safety, reliability, and efficiency of new, modern rigs surpass the performance of most of the older rigs at work today. Drilling rigs are now being pushed to drill deeper wells, more complex wells, highly deviated wells and horizontal wells, tasks which require larger rigs with more capabilities. The drilling process effectively consumes the mechanical components of a rig, which wear out and need periodic repair or replacement. This process has been accelerated by very high rig utilization and wellbore complexity. Drilling consumes rigs; more complex and challenging drilling consumes rigs faster. The industry responded by launching many new rig construction projects since 2005, to retool the existing fleet of jackup rigs (349 of the existing 440 jackup rigs are more than 20 years old); to replace older mechanical and DC electric land rigs with improved AC power, electronic controls, automatic pipe handling and rapid rigup and rigdown technology; and to build out additional ultradeep floating drilling rigs, including semisubmersibles and drillships, to employ recent advancements in deepwater drilling to exploit unexplored deepwater basins. We believe that the newer rigs offer considerably higher efficiency, safety, and capability, and that many will effectively replace a portion of the existing fleet. As a result of these trends the Company's Rig Technology segment grew

its backlog of capital equipment orders from $0.9 billion at March 31, 2005, to $11.1 billion at December 31, 2008. However, as a result of the credit crisis and slowing drilling activity, the backlog declined six percent from its third quarter 2008 peak of $11.8 billion. This was the first decline since National Oilwell and Varco merged in 2005. The Company expects the backlog to decline during 2009 as revenue out of backlog is likely to exceed inbound new orders. The land rig backlog comprised 14 percent and equipment destined for offshore operations comprised 86 percent of the total backlog as of December 31, 2008. Equipment destined for international markets totaled 90 percent of the backlog. The Company believes that its existing contracts for rig equipment are strong in that they carry significant down payment and progress billing terms favorable to the ultimate completion of these projects, and generally do not allow customers to cancel projects for convenience. For this reason we do not expect the credit crisis or softer market conditions to result in material cancelations of contracts or abandonment of major projects; however, there can be no assurance that such discontinuance of projects will not occur, particularly if the credit crisis or economic downturn deepens significantly. Segment Performance
Rig Technology generated $7.5 billion in revenue and $2.0 billion in operating profit in 2008, yielding an operating margin of 26.2%. The group generated 32 percent operating leverage or flowthrough (the increase in operating profit divided by the increase in revenue) on 31 percent revenue growth from 2007. As of December 31, 2008 the scheduled outflow of revenue from backlog is expected to be in the range of $1.3 billion per quarter in 2009, or $5.3 billion for the full year. Non-backlog revenue for the segment totaled $2.2 billion or 29.6 percent of the segment total for 2008. From 2005 through the end of 2008, the segment has delivered a total of 41 newly built offshore rigs.
The Petroleum Services & Supplies segment generated revenues of $4.7 billion and operating profit of $1.0 billion in 2008, which included only a partial year contribution from the acquired Grant Prideco businesses. On an adjusted basis for a full year contribution of Grant Prideco, Inc., including estimated fixed asset and intangible asset stepup impact but excluding transaction charges and inventory step up amortization, the segment generated $5.3 billion in revenue and $1.3 billion in operating profit, yielding an operating margin of 24.4 percent. Operating profit leverage or flowthrough from 2007, on the same adjusted basis, was 35 percent on six percent sales growth. North America accounted for approximately 57.5 percent of Petroleum Services & Supplies segment revenues during the year.
Distribution Services segment revenues were $1.8 billion during 2008, an increase of 24 percent from the prior year. Operating profit was $129.7 million or 7.3 percent of sales, and operating profit leverage or flowthrough was 10 percent from the prior year. The U.S. accounted for about 57 percent of the segment's 2008 revenues overall, and Canadian sales accounted for about 18.2 percent of the 2008 mix. International sales benefitted from a number of expansion initiatives in new geographic markets undertaken in 2008 and prior, and total international sales were approximately 24.8 percent of the mix in 2008. Included in these initiatives were the Company's unique rig store concept. Outlook
The recent emergence of a serious banking crisis, a global recession, and lower commodity prices are presenting increasingly challenging prospects to our business. Consequently we are cautious in our outlook for 2009, and believe we will see orders for new rigs fall by half or more in 2009. Drilling activity, particularly by independent gas producers reliant on external financing, will likely continue to decline through at least the first half of the year. As a result our outlook for the Company's Petroleum Services & Supplies segment and Distribution Services segment remains very guarded. We expect revenues for both groups to decline sharply in the first quarter, due mostly to North American drilling activity declines, and we are uncertain when they may recover to prior levels. Decremental leverage for both groups is expected to be above our long term estimated levels (30 percent for Petroleum Services & Supplies; 10 percent for Distribution Services) due to rising pricing pressure we are experiencing, particularly in North America. Our outlook for international markets, which are more driven by national oil company activity, are historically less volatile and expected to see better market conditions. The Rig Technology segment is expected to be less affected by the downturn due to the strength of its backlog.
The Company is nevertheless well positioned to manage through this uncertain period, and should benefit from its strong balance sheet and capitalization, access to credit, and a high level of contracted orders which are expected to continue to generate good earnings well into the downturn. The Company has a long history of cost-control and downsizing in response to depressed market conditions, and of executing strategic acquisitions during difficult periods. Steel prices have begun to decline in many areas, and the Company is reducing outsourcing, overtime, and discretionary expenditures in view of the market. Such a period may present opportunities to the Company to effect new organic growth and acquisition initiatives, and we remain hopeful that a downturn will generate new opportunities.

Results of Operations
Years Ended December 31, 2008 and December 31, 2007 The following table summarizes the Company's revenue and operating profit by operating segment in 2008 and 2007. The actual results include results from Grant Prideco operations from the acquisition date of April 21, 2008 (in millions):

                                                  Years Ended December 31,                   Variance
                                                   2008                2007               $              %
Revenue:
Rig Technology                                $      7,528.1         $ 5,744.7        $ 1,783.4          31.0 %
Petroleum Services & Supplies                        4,651.4           3,061.0          1,590.4          52.0 %
Distribution Services                                1,771.9           1,423.7            348.2          24.5 %
Eliminations                                          (520.0 )          (440.4 )          (79.6 )        18.1 %

Total Revenue                                 $     13,431.4         $ 9,789.0        $ 3,642.4          37.2 %


Operating Profit:
Rig Technology                                $      1,969.5         $ 1,393.6        $   575.9          41.3 %
Petroleum Services & Supplies                        1,043.9             731.6            312.3          42.7 %
Distribution Services                                  129.7              94.0             35.7          38.0 %
Unallocated expenses and eliminations                 (225.6 )          (174.8 )          (50.8 )        29.1 %

Total Operating Profit                        $      2,917.5         $ 2,044.4        $   873.1          42.7 %


Operating Profit %:
Rig Technology                                          26.2 %            24.3 %
Petroleum Services & Supplies                           22.4 %            23.9 %
Distribution Services                                    7.3 %             6.6 %

Total Operating Profit %                                21.7 %            20.9 %

Rig Technology
Rig Technology revenue for the year ended December 31, 2008 was $7,528.1 million, an increase of $1,783.4 million (31.0%) compared to 2007. Revenue out of backlog increased $1,216.5 million or 29.8% from 2007 due to the growing market for capital equipment, as evidenced by backlog growth during the first three quarters of 2008. The increase in orders and backlog resulted from continued capital investments by drilling contractors in 2008, primarily related to the international offshore market. Non-backlog revenue increased $566.9 million or 34.1% over 2007, largely due to increased spare parts sales and service revenues related to the increased drilling activity during the year. Operating profit from Rig Technology was $1,969.5 million for the year ended December 31, 2008, an increase of $575.9 million (41.3%) over the same period of 2007. The increase in operating profit was largely due to the increased activity discussed above as well as improved pricing on large rig contracts and after market products.
The Rig Technology group monitors its capital equipment backlog to plan its business. New orders are added to backlog only when we receive a firm written order for major drilling rig components or a signed contract related to a construction project. The capital equipment backlog was $11.1 billion at December 31, 2008, an increase of $2.1 billion (23.3%) over backlog of $9.0 billion at December 31, 2007. Approximately $5.2 billion of the current backlog is expected to be delivered in 2009. Petroleum Services & Supplies
Revenue from Petroleum Services & Supplies was $4,651.4 million for 2008 compared to $3,061.0 million for 2007, an increase of $1,590.4 million (52.0%). The increase was mostly attributable to the acquisition of Grant Prideco, Inc. which contributed sales of $1,434.9 million since the acquisition date of April 21, 2008. Higher demand for most of the products and services offered by the segment also contributed to the higher revenue compared to 2007. Rig count in North America and international markets during 2008 were up 6.9% and 7.3% respectively compared to 2007 averages, prompting higher demand from our services group.
Operating profit from Petroleum Services & Supplies was $1,043.9 million for 2008 compared to $731.6 million for 2007, an increase

of $312.3 million (42.7%). Grant Prideco, Inc. contributed $296.9 million of operating profit since April 21, 2008. Included in the Grant Prideco operating profit was $89.1 million of expense recorded in cost of revenue that resulted from the fair value step up of inventory as part of the purchase accounting valuation of Grant Prideco. The increase was also attributable to higher profitability across most product lines. Distribution Services
Revenue from Distribution Services totaled $1,771.9 million, an increase of $348.2 million (24.5%) from the prior period. The number of drilling rigs actively searching for oil and gas is a key metric for this business segment. Worldwide rig count increased 7.1% in 2008 compared to 2007, with increases of 10.3%, 7.3% and 6.3% in Canada, international and the U.S. rig activity, respectively. The Company's Distribution Services segment continued efforts to expand in international markets resulted in a 25% increase in international revenue. The expansion primarily consisted of opening rig stores or facilities that maintain levels of consumables used on rigs, in centrally located areas. In addition, the Company has begun to open stores on individual rigs. After opening its first rig store in 2007, the Company opened eight additional stores during 2008 continuing the efforts to expand its presence both in the U.S. and internationally.
Operating income increased in 2008 to $129.7 million compared to $94.0 million in 2007. Margins increased slightly to 7.3% of revenue in 2008 compared to 6.6% of revenue in 2007. The increase in margin was primarily due to the cost reduction actions taken in Canada to offset the weakening demand seen in the later part of 2007 combined with the increase in profit margins from international locations.
Unallocated expenses and eliminations
Unallocated expenses and eliminations were $225.6 million for the year ended December 31, 2008 compared to $174.8 million for 2007. The increase in unallocated expenses and eliminations was primarily due to greater inter-segment profit eliminations and greater stock-based compensation expense. The stock-based compensation expense was $60.8 million and $43.1 million for the years ended December 31, 2008 and 2007, respectively. The 2008 results also included $10.9 million of integration costs related to the 2008 acquisition of Grant Prideco, Inc.
Interest and financial costs
Interest and financial costs were $67.3 million for 2008 compared to $50.3 million for 2007. The increase was primarily due to the borrowings related to the merger with Grant Prideco, Inc.
Equity Income in Unconsolidated Affiliate Equity income in unconsolidated affiliate was $42.4 million for 2008 and was related to the April 21, 2008 acquisition of Grant Prideco. The income was related to the equity earnings from the Company's 50.01% investment in Voest-Alpine Tubulars ("VAT") located in Kindberg, Austria. The Company's investment in VAT is accounted for under the equity method of accounting due to the minority owner having substantive participating rights. Step-up depreciation and amortization of $7.5 million was recorded in 2008 related to VAT and charges of $10.6 million were recorded related to inventory step-up. Other income (expense), net
Other income (expense), net was an income, net of $24.1 million and an expense of $17.8 million for the years ended December 31, 2008 and December 31, 2007, respectively. The 2008 income was primarily due to a net foreign exchange gain which was $50.2 million for the year ended December 31, 2008, as compared to a net foreign exchange loss of $7.0 million for the year ended December 31, 2007. The 2008 foreign exchange gains were primarily due to the weakening of the British pound sterling, Canadian dollar and Norwegian kroner compared to the U.S. dollar. See Item 7A. "Quantitative and Qualitative Disclosures About Market Risk" Foreign Currency Exchange Rates.
Provision for income taxes
The effective tax rate for the year ended December 31, 2008 was 33.5% compared to 33.3% for 2007. The 2008 rate reflects increasing benefits in the U.S. from the tax incentive for manufacturing activities and a higher percentage of earnings in foreign jurisdictions with lower tax rates. This was partially offset by additional tax provisions related to the Company's decision to repatriate earnings from certain foreign subsidiaries during the year and net higher tax expense in Norway related to movement in exchange rates after the change of the functional currency to the U.S. dollar. The net additional tax expense in Norway included a $45.8 million charge resulting from realized foreign exchange gains on U.S. dollar denominated assets and liabilities. This was partially offset by a $30.3 million benefit for the same period, which was reported as provision for income tax, from the remeasurement into U.S. dollars

of foreign currency denominated deferred tax assets and liabilities in the balance sheet.
Years Ended December 31, 2007 and December 31, 2006 The following table summarizes the Company's revenue and operating profit by operating segment in 2007 and 2006 (in millions).

                                                 Years Ended December 31,                    Variance
                                                  2007                2006               $               %
Revenue:
Rig Technology                                $     5,744.7         $ 3,584.9        $ 2,159.8           60.2 %
Petroleum Services & Supplies                       3,061.0           2,425.0            636.0           26.2 %
Distribution Services                               1,423.7           1,369.6             54.1            4.0 %
Eliminations                                         (440.4 )          (353.7 )          (86.7 )         24.5 %

Total Revenue                                 $     9,789.0         $ 7,025.8        $ 2,763.2           39.3 %


Operating Profit:
Rig Technology                                $     1,393.6         $   608.5        $   785.1          129.0 %
Petroleum Services & Supplies                         731.6             545.6            186.0           34.1 %
Distribution Services                                  94.0              94.0                -            0.0 %
Unallocated expenses and eliminations                (174.8 )          (137.0 )          (37.8 )         27.6 %

Total Operating Profit                        $     2,044.4         $ 1,111.1        $   933.3           84.0 %

. . .