RESULTS OF OPERATIONS

The following table highlights Rowan's operating results for the years indicated (in millions):

                                               2008          2007          2006

       Revenues:
       Drilling                              $ 1,451.6     $ 1,382.6     $ 1,067.4
       Manufacturing:
       Drilling products and systems             493.5         498.6         241.0
       Mining, forestry and steel products       267.6         213.8         202.3

       Total manufacturing                       761.1         712.4         443.3

       Total revenues                        $ 2,212.7     $ 2,095.0     $ 1,510.7

       Costs and expenses:
       Drilling                              $   781.5     $   720.8     $   619.7
       Manufacturing:
       Drilling products and systems             538.1         455.6         217.5
       Mining, forestry and steel products       235.0         184.7         187.8

       Total manufacturing                       773.1         640.3         405.3

       Total costs and expenses              $ 1,554.6     $ 1,361.1     $ 1,025.0

       Operating income:
       Drilling                              $   670.1     $   661.8     $   447.7
       Manufacturing:
       Drilling products and systems             (44.6 )        43.0          23.5
       Mining, forestry and steel products        32.6          29.1          14.5

       Total manufacturing                       (12.0 )        72.1          38.0

       Total operating income                $   658.1     $   733.9     $   485.7

       Income from continuing operations     $   427.6     $   483.8     $   317.0

       Income from discontinued operations   $     0.0     $     0.0     $     1.2

       Net income                            $   427.6     $   483.8     $   318.2

As indicated in the preceding table, Rowan's results of operations are primarily driven by the performance of our Drilling division, which comprises about 95% of our fixed assets and, over the past three years, has generated 67% of our aggregate revenues and 95% of our aggregate operating income. Our Manufacturing division, featuring our Drilling Products and Systems segment, has led the strategic expansion and upgrade of our drilling fleet over the past decade and, in recent years, has expanded product lines and improved contributions to our operating results.

Costs and expenses in 2008 included $111.2 million of charges and other expenses, including impairment charges relating to the cancelled rig construction project, realizable value of manufacturing inventories and goodwill, professional service fees and other expenses incurred in connection with the suspended LTI monetization process and severance costs resulting from the retirement of the Company's Chief Executive Officer effective December 31, 2008 and headcount reductions. The monetization costs were allocated between manufacturing segments based upon relative revenues; all other items were directly attributable to a specific operating segment. These items are described more fully in the operating segment discussions below.

Income from continuing operations is after interest income and expense, other income and expense items and provision for income taxes, as follows (in millions):

                                             2008         2007         2006

            Interest income                $    6.3     $   20.9     $   28.0
            Interest expense                  (18.6 )      (25.9 )      (28.3 )
            Capitalized interest               17.4         10.0          7.8
            Other income (expense) - net       (9.1 )        0.2          0.2
            Provision for income taxes       (226.5 )     (255.3 )     (176.4 )

The amount shown in the preceding table as Income from discontinued operations in 2006 reflects the after-tax effect of an excise tax refund related to our aviation operations that were sold in 2004. The performance of each of our operating segments over the 2006-2008 period is discussed more fully below.

Drilling Operations

Rowan's Drilling operating results are primarily a function of the activity (or utilization) and day rates achieved by our land and offshore rig fleets. Rig activity and day rates are primarily determined by oil and gas company exploration and development expenditures, which are heavily influenced by trends in oil and natural gas prices, and the availability of competitive equipment. When drilling markets are strengthening, as they have in recent years, day rates generally lag the upward trend in rig activity and day rate increases can be more significant as utilization approaches 100%. When drilling markets are weakening, as they are currently, day rates are often significantly reduced in an effort to maintain utilization. Due to intense competition in the contract drilling industry, both utilization and day rates have historically declined much faster than they have risen.

Current Market Conditions

For most of the past several years, global demand for oil and natural gas has been increasing, especially in developing nations like China and India. At the same time, many key producers increasingly struggled with depleting reserves, requiring more drilling simply to maintain production levels. These market forces caused a dramatic increase in energy prices. Oil prices, for example, which averaged around $30 per barrel throughout the 2000-2004 period, stayed consistently above $50 during the 2005-2006 period, ended 2007 near $100 and hit an all-time high of more than $145 in July 2008. Natural gas prices have followed a similar pattern in recent years, though with much more volatility, generally staying above $6 per mcf since late 2004 and peaking in mid 2008 at around $14. As a result, marginal drilling projects that went undrilled with oil at $30 per barrel or gas at $3 per mcf, became very economical at prices well above $50 and $5, respectively. Many of these projects were in increasingly difficult drilling environments and demanded the most capable drilling equipment.

Meanwhile, the global jack-up fleet, with relatively few net rig additions between 1986 and 2005, continued to age. These factors caused a surge in worldwide drilling activity beginning in 2005, with all available rigs benefitting. The more capable rigs were marketable throughout the world, and were generally able to obtain longer-term contracts and higher day rates than older and less capable "commodity" rigs. Rowan's average day rates improved from less than $50,000 during 2004 to over $163,000 in 2008.

Since the middle of 2008, when the global economy began slipping into recession and access to capital diminished significantly due to weakening financial markets, both oil and natural gas prices have declined by approximately 70%. Most companies have been forced to reduce spending in order to preserve liquidity, and energy companies in particular, with the prospect of significantly reduced cash flows and constrained capital resources, are cutting future exploration and development expenditures. We discuss the likely impact on our future operations under Outlook beginning on page 36.

Our Rig Fleets

Our offshore fleet consists currently of 22 jack-up rigs, featuring:

• Two 84 class jack-ups and one 116 class jack-up built during the mid-to-late 1970s,

• Seven 116C class jack-ups built during the early 1980s,

• Three Gorilla class jack-ups built during the early 1980s,

• Four Super Gorilla class jack-ups constructed during the 1998-2003 period,

• Four Tarzan Class jack-ups delivered during the 2004-2008 period, and

• One 240C class jack-up delivered in 2008.

Six additional jack-ups are under construction or on order with deliveries currently expected over the 2009-2011 period, including two 240C class rigs and four EXL (formerly Super 116E) class rigs - see further discussion of our offshore newbuild program under Capital Expenditures beginning on page 43.

Our current land fleet totals 31 rigs, including 15 rigs constructed over the past three years, four rigs built during 2001-2002 and 12 older rigs that have been refurbished over the years. One additional land rig is expected to be delivered in the first quarter of 2009.

Our International Expansion

For most of our history offshore, our drilling operations have been focused in the Gulf of Mexico, where ten of our offshore rigs are currently operating. This market is highly fragmented among several oil and gas companies, many of whom are independent operators whose drilling activities are highly dependent upon near-term operating cash flows. A typical drilling assignment may call for 60 days of exploration or development work, performed under a single-well contract with negotiable renewal options. Long-term contracts have been relatively rare, and generally are available only from the major integrated oil companies and a few of the larger independent operators. Thus, drilling activity and day rates in this market have tended to fluctuate rather quickly, and generally follow trends in natural gas prices.

In 2005, we began to increasingly focus our marketing efforts in foreign areas where demand was strengthening and longer-term drilling opportunities for high specification rigs were becoming more prevalent. Since that time, we have substantially diversified our drilling operations from the Gulf of Mexico. The relocation of rigs from one geographic area to another is a significant undertaking, which, together with any associated equipment upgrades, often interrupts revenues and cash flows for three to four months. Thus, such actions are typically carried out only when the likelihood of higher long-term returns heavily outweighs the short-term costs.

This migration of rigs to foreign markets, together with the significant loss of equipment during the 2005 hurricanes and higher commodity prices, led to increased drilling activity and created a jack-up supply deficit in the Gulf of Mexico in 2006. As a result, rig day rates, which increased dramatically in late 2005, continued to set new records during 2006 and early 2007, and the occasional term drilling contract, ranging from six months to two years, became available for certain high specification rigs that remained. Generally, Gulf of Mexico market conditions peaked in 2007 and began weakening in late 2008.

The Middle East market has been a primary focus for our drilling operations since late 2005, when we obtained three-year contracts from Saudi Aramco for four of our jack-up rigs, which commenced operations offshore Saudi Arabia in April 2006. In 2007, we added four rigs to this market: two-year contracts for Maersk offshore Qatar, which began in late January, and four-year contracts covering two Tarzan Class rigs for Saudi Aramco, which began in late March. A third Tarzan Class rig became our ninth rig in the Middle East market when it began a three-year assignment for Saudi Aramco in the second quarter of 2008. Both Qatar rigs have been extended for an additional year.

The North Sea is a mature, harsh-environment offshore drilling market that has long been dominated by major oil and gas companies operating within a relatively tight regulatory environment. Project lead times are often lengthy and drilling assignments, which typically require ultra premium equipment capable of handling extreme weather conditions and high down-hole pressures and temperatures, can range from several months to several years. Thus, drilling activity and day rates in the North Sea move slowly in response to market conditions, and generally follow trends in oil prices. We currently have two Super Gorilla class rigs operating in the North Sea market, one under contract into the first quarter of 2010 and the other into the second quarter of 2010.

We have operated offshore eastern Canada at varying levels since the early 1980s, though not since late 2006. One of our Gorilla class rigs will return to eastern Canada in mid 2009 for two assignments totaling approximately eleven months.

In the past, Rowan has not cold-stacked its offshore drilling rigs during extended idle periods as the long-term costs of rehiring and retraining personnel and restarting equipment typically negate any short-term savings. Thus, our drilling expenses have not typically fluctuated with rig activity, though they have increased as our rig fleets have been expanded and relocated.

2008 Compared to 2007

The following table highlights the performance of our Drilling division during
2008 compared to 2007 (dollars in millions):


                                                       2008                                2007
                                           Amount         % of Revenues        Amount         % of Revenues

Revenues                                  $ 1,451.6                  100      $ 1,382.6                  100
Operating costs                              (629.8 )                (43 )       (591.4 )                (43 )
Depreciation expense                         (125.9 )                 (9 )       (101.8 )                 (7 )
Selling, general and administrative
expenses                                      (69.2 )                 (5 )        (68.3 )                 (5 )
Gains on property disposals                    68.0                    5           40.7                    3
Material charges and other operating
expenses                                      (24.6 )                 (2 )            -                    -

Operating income                          $   670.1                   46      $   661.8                   48

Drilling revenues increased by $69.0 million or 5% in 2008, due primarily to the effects of increased drilling activity and average day rates, as follows (in millions):

               New rigs                                      $ 33.2
               Increases in average day rates                  23.7
               Net increase in activity for existing rigs      16.6
               Net increase in activity for relocated rigs     12.5
               Lost or sold rigs                               (9.4 )
               Other, primarily reduced rebilled expenses      (7.6 )

               Total increase                                $ 69.0

Our overall offshore fleet utilization was 95% in 2008, up from 94% in 2007, with most of the downtime in each period associated with rigs being prepared for long-term assignments overseas. We compute rig utilization as revenue-producing days divided by total available rig-days. Our average offshore day rate was $163,200 in 2008, an increase of approximately 4% over 2007. Average day rates are determined as recorded revenues, excluding rebilled expenses, divided by revenue-producing days. Total revenue-producing days offshore increased by 103 or 1% between years, with most of that increase associated with our new rigs.

Middle East. Our nine jack-ups working offshore Saudi Arabia and Qatar collectively generated approximately $480 million of drilling revenues in 2008, averaging more than $155,000 per day, compared to almost $400 million from eight rigs averaging $149,000 per day in 2007. Our utilization averaged 94% in 2008, up from 92% in 2007.

North Sea. Our two rigs working in the North Sea generated approximately $164 million of drilling revenues in 2008, averaging about $245,000 per day, compared to $246 million from three rigs averaging $241,000 per day in 2007. Our utilization averaged 91% in 2008, down from 96% in 2007, with most of the downtime in the current year due to rigs undergoing shipyard upgrades.

Other International. After relocating from the North Sea in early January 2008, Gorilla VII was 96% utilized offshore West Africa and provided almost $325,000 per day in drilling revenues during the remainder of the year. Gorilla III was 100% utilized offshore Trinidad during the first five months of 2008, generating approximately $40 million of drilling revenues during the period, or more than $249,000 per day. Gorilla III relocated to the Gulf of Mexico during the second quarter of 2008 where the rig was 98% utilized during the remainder of the year.

Gulf of Mexico. The following table summarizes average natural gas prices and our Gulf of Mexico fleet utilization and average day rates during the year:

                                    Natural           Average         Average
                                   Gas (MCF)*       Utilization      Day Rate

            First quarter 2008    $       8.74                91 %   $ 114,100
            Second quarter 2008          11.47                98 %     126,600
            Third quarter 2008            8.98               100 %     131,400
            Fourth quarter 2008           6.40               100 %     144,600
            Full year 2008                8.90                97 %     129,900
            Full year 2007                7.12                96 %     129,300

* Source: New York Mercantile Exchange (NYMEX)

Natural gas prices remained at historically high levels over the first half of 2008, and our fleet achieved stable utilization and increasing average day rates during that period, though shipyard time for upgrades to the Bob Palmer reduced average utilization during the first quarter. As prices weakened dramatically over the last half of the year, our contracted backlog helped to insulate Rowan from the effects of reduced drilling demand that ensued in the Gulf of Mexico and throughout the United States. The addition of the Rowan-Mississippi and J. P. Bussell in November 2008, coupled with the loss of our oldest jack-up, the Rowan-Anchorage, during Hurricane Ike in September, increased our average rate during the fourth quarter. As shown in the preceding table, our average Gulf of Mexico day rate increased by $1,100 or 1% during 2008, though, by year end, we had begun to feel the impact of weakening demand for our three skid-off rigs. Our total revenue-producing days in the Gulf of Mexico decreased by 97 or 3% in 2008, due primarily to the effects of rig relocations.

Land. Contracted backlog also enabled our 30 deep-well land rigs in Texas, Louisiana, Oklahoma and Alaska to withstand the volatile domestic market conditions during 2008, and attain 93% utilization and an average day rate of $22,600 during the year, compared to 95% and $22,800 in 2007. The fleet included four new 2000 horsepower rigs that were delivered during 2008, which contributed to a 701 or 7% increase in revenue-producing days during the year.

Operating Costs. Drilling operating costs increased by $38.4 million or 6% in 2008 compared to 2007, due primarily to effects of the following (in millions):

Compensation costs and related benefits for existing rigs increased by 7%   $  19.8
Repairs and maintenance for existing rigs increased by 18%                     19.3
Rig insurance costs for existing rigs decreased by 21%                        (11.7 )
New rigs - Rowan-Mississippi and J. P. Bussell (November 2008) and four
land rigs                                                                      11.2
All other                                                                      (0.2 )

Total increase                                                              $  38.4

Depreciation expense incurred by our drilling operations increased by $24.1 million or 24% in 2008, due primarily to the addition of the rigs noted above. Selling, general and administrative costs increased by $0.9 million or 1% in 2008, due primarily to higher professional service fees resulting from our international expansion and incremental incentive compensation costs associated with our improved financial results.

Our drilling operations realized $68.0 million of gains on asset disposals during 2008, including $37.1 million from insurance proceeds received in connection with the loss of the Rowan-Anchorage during Hurricane Ike, $14.5 million from the sale of our London office, $5.4 million from the sale of our Fourchon, Louisiana yard and

$4.7 million from the sale of a land rig. Our 2007 net gain was $40.7 million, and included $14.1 million from the sale of our Alaska-based drilling camps and $23.4 million related to the installment sale of the Rowan-Midland and related equipment.

Our fourth quarter 2008 Drilling operations included $24.6 million of charges and other operating expenses, including $11.8 million for the estimated unrecoverable cost of amounts expended on the fourth 240C rig which has been cancelled, $8.5 million related to severance costs, including the impact of accelerated equity awards, primarily resulting from our CEO's retirement effective December 31, 2008, $2.8 million of primarily professional service fees incurred in connection with the suspended LTI monetization process, and $1.5 million related to the impairment of goodwill.

2007 Compared to 2006

The following table highlights the performance of our Drilling division during
2007 compared to 2006 (dollars in millions):


                                                            2007                                2006
                                                Amount         % of Revenues        Amount         % of Revenues

Revenues                                       $ 1,382.6                  100      $ 1,067.4                  100
Operating costs                                   (591.4 )                (43 )       (504.9 )                (47 )
Depreciation expense                              (101.8 )                 (7 )        (77.5 )                 (7 )
Selling, general and administrative expenses       (68.3 )                 (5 )        (56.5 )                 (5 )
Gains on property disposals                         40.7                    3           19.2                    2

Operating income                               $   661.8                   48      $   447.7                   43

Drilling revenues increased by $315.2 million or 30% in 2007, due primarily to the effects of increased average day rates between periods, which more than offset the net impact of changes in our rigs fleets and reduced drilling activity for relocating rigs, as follows (in millions):

        Increases in average day rates                            $ 140.8
        New or reactivated rigs                                     124.3
        Net increase in activity for relocated rigs                  77.8
        Decrease in rebilled expenses                               (18.8 )
        Other, primarily net reduced activity for existing rigs      (8.9 )

        Total increase                                            $ 315.2

Our overall offshore fleet utilization was 94% in 2007, up from 86% in 2006, as several rigs were being prepared for long-term assignments overseas. Our average offshore day rate was $156,200 in 2007, an increase of approximately 11% over 2006. Total revenue-producing days declined by just over 1,154 or 19% between years, with much of that decrease associated with the rigs that were being prepared for long-term assignments overseas.

Middle East. During early 2007, four of our rigs commenced operations in the Middle East under multi-year contracts following their relocation from the Gulf of Mexico. Our eight jack-ups working offshore Saudi Arabia and Qatar collectively generated approximately $400 million of drilling revenues in 2007, averaging almost $149,000 per day, compared to almost $115 million from four rigs averaging $113,000 per day in 2006. Our utilization averaged 92% in 2007, up from 66% in 2006, with most of the downtime in each period associated with relocating rigs.

North Sea. After relocating from Canada in early 2007, Gorilla VI was 100% utilized in the North Sea and provided more than $302,000 per day there in drilling revenues during the remainder of the year. Our three rigs working in the North Sea generated approximately $246 million of drilling revenues in 2007, averaging more than $241,000 per day, compared to $119 million from two rigs averaging $169,000 per day in 2006. Our utilization averaged 96% in 2007, unchanged from 2006.

Other International. Gorilla III was 100% utilized offshore Trinidad in 2007 and generated more than $76 million of drilling revenues, or almost $209,000 per day during the year.

Gulf of Mexico. The following table summarizes average natural gas prices and our Gulf of Mexico fleet utilization and average day rates during the year:

                                    Natural           Average         Average
                                   Gas (MCF)*       Utilization      Day Rate

            First quarter 2007    $       7.17                98 %   $ 127,700
            Second quarter 2007           7.66                92 %     123,800
            Third quarter 2007            6.24                98 %     132,100
            Fourth quarter 2007           7.39                94 %     133,300
            Full year 2007                7.12                96 %     129,300
            Full year 2006                6.98                91 %     138,800

* Source: New York Mercantile Exchange (NYMEX)

As discussed above, natural gas prices remained at historically high levels throughout 2007, though fluctuating weather conditions and high storage levels contributed to price weakness during the third quarter and reduced drilling demand in the Gulf of Mexico and throughout the United States. Thus, the migration of many competitive jack-ups from the Gulf of Mexico continued throughout the year. Most of the available rigs that remained in the area encountered tougher competition for fewer drilling assignments and, as a result, declining day rates. Our six-month to two-year term commitments for four of our nine Gulf of Mexico rigs helped to insulate Rowan from the impact of weakening demand, as such rigs above were collectively 95% utilized in 2007 and averaged more than $180,000 per day in drilling revenues during the year. As shown in the preceding table, our average Gulf of Mexico day rate decreased by $9,500 or 7% during 2007.

The Rowan-Louisiana, which was severely damaged in 2005 during Hurricane Katrina, returned to service in the Gulf of Mexico in December 2006, and was 100% utilized in 2007. Our total revenue-producing days in the Gulf of Mexico decreased by 777 or 20% in 2007 due to the rig relocations that occurred over the past two years.

Land. Our 29 deep-well land rigs in Texas, Louisiana, Oklahoma and Alaska generally withstood the weakening domestic market conditions during 2007, and attained 95% utilization and an average day rate of $22,800 during the year, compared to 97% and $22,600 in 2006. The fleet included twelve new 2000 horsepower rigs that were constructed during the past two years which contributed to a 2,497 or 36% increase in revenue-producing days in 2007.

. . .