Parker Drilling (PKDC) 10-Q 2007 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(MARK ONE)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For The Quarterly Period Ended SEPTEMBER 30, 2007

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                    to                    

Commission File Number 1-7573

PARKER DRILLING COMPANY

(Exact name of registrant as specified in its charter)

Delaware	73-0618660
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

1401 Enclave Parkway, Suite 600, Houston, Texas 77077

(Address of principal executive offices) (Zip code)

(281) 406-2000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  þ        No  o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes  þ        No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Exchange Act Rule 12b-2.

Large accelerated filer  þ        Accelerated filer  o        Non-accelerated filer  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o        No  þ

As of October 31, 2007, 111,843,152 common shares were outstanding.

TABLE OF CONTENTS

	Page
Part I.Financial Information
Item 1. Financial Statements		3
Consolidated Condensed Balance Sheets (Unaudited) September 30, 2007 and December 31, 2006		3
Consolidated Condensed Statements of Operations (Unaudited) Three and Nine Months Ended September 30, 2007 and 2006		4
Consolidated Condensed Statements of Cash Flows (Unaudited) Nine Months Ended September 30, 2007 and 2006		5
Notes to the Unaudited Consolidated Condensed Financial Statements		6-21
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		22
Item 3. Quantitative and Qualitative Disclosures about Market Risk		33
Item 4. Controls and Procedures		33
Part II.Other Information
Item 1. Legal Proceedings		33
Item 1A. Risk Factors		33
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities		33
Item 3. Defaults Upon Senior Securities		34
Item 4. Submission of Matters to a Vote of Security Holders		34
Item 5. Other Information		34
Item 6. Exhibits		35
Signatures		36
Officer Certifications
Restated Certificate of Incorporation, as amended
Certification of Chairman & CEO Pursuant to Section 302
Certification of VP & CFO Pursuant to Section 302
Certification of Chairman & CEO Pursuant to Section 906
Certification of VP & CFO Pursuant to Section 906

2

PART I.FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS

PARKER DRILLING COMPANY AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(Dollars in Thousands)

(Unaudited)

	September 30,			December 31,
	2007			2006
ASSETS
Current assets:
Cash and cash equivalents	$	66,954		$	92,203
Marketable securities		—			62,920
Accounts and notes receivable, net		161,500			112,359
Rig materials and supplies		21,509			15,000
Deferred costs		9,872			6,662
Deferred income taxes		17,307			17,307
Other current assets		44,663			11,123
Total current assets		321,805			317,574
Property, plant and equipment less accumulated depreciation and amortization of $606,183 at September 30, 2007 and $570,650 at December 31, 2006		562,952			435,473
Goodwill		100,315			100,315
Assets held for sale		—			4,828
Investment in and advances to unconsolidated joint venture		14,091			10,267
Other noncurrent assets		81,777			32,844
Total assets	$	1,080,940		$	901,301
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	88,386		$	95,226
Accrued income taxes		15,896			6,677
Total current liabilities		104,282			101,903
Long-term debt		353,882			329,368
Other long-term liabilities		110,009			10,931
Long-term deferred tax liability		15,181			—
Contingencies (Note 11)		—			—
Stockholders’ equity:
Common stock		18,639			18,220
Capital in excess of par value		591,313			568,253
Accumulated deficit		(112,366	)		(127,374	)
Total stockholders’ equity		497,586			459,099
Total liabilities and stockholders’ equity	$	1,080,940		$	901,301

See accompanying notes to the unaudited consolidated condensed financial statements.

3 

PARKER DRILLING COMPANY AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(Dollars in Thousands Except Per Share and Weighted Average Shares Outstanding)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
Drilling and rental revenues:
U.S. drilling	$	59,700		$	52,347		$	178,975		$	135,297
International drilling		76,997			61,605			197,867			214,407
Rental tools		35,500			32,831			96,905			90,401
Total drilling and rental revenues		172,197			146,783			473,747			440,105
Drilling and rental operating expenses:
U.S. drilling		25,563			20,944			76,940			58,228
International drilling		51,618			52,280			148,018			171,506
Rental tools		14,579			12,349			38,263			33,788
Depreciation and amortization		23,043			16,993			60,744			51,665
Total drilling and rental operating expenses		114,803			102,566			323,965			315,187
Drilling and rental operating income		57,394			44,217			149,782			124,918
General and administration expense		(6,246	)		(7,992	)		(18,380	)		(23,261	)
Provision for reduction in carrying value of certain assets		(1,091	)		—			(1,091	)		—
Gain on disposition of assets, net		543			4,328			17,216			6,901
Total operating income		50,600			40,553			147,527			108,558
Other income and (expense):
Interest expense		(7,576	)		(7,923	)		(19,891	)		(25,223	)
Changes in fair value of derivative positions		(262	)		(1,029	)		(671	)		166
Interest income		2,080			2,521			5,576			5,966
Loss on extinguishment of debt		(2,396	)		(1,910	)		(2,396	)		(1,912	)
Equity in loss of unconsolidated joint venture, net of taxes		(1,123	)		—			(1,123	)		—
Minority interest		—			(304	)		(1,000	)		(1,224	)
Other		510			(96	)		587			(110	)
Total other income and (expense)		(8,767	)		(8,741	)		(18,918	)		(22,337	)
Income before income taxes		41,833			31,812			128,609			86,221
Income tax expense:
Current		14,598			1,166			43,223			10,692
Deferred		4,582			12,007			15,879			31,671
Total income tax expense		19,180			13,173			59,102			42,363
Net income	$	22,653		$	18,639		$	69,507		$	43,858
Basic earnings per share:
Net income	$	0.21		$	0.17		$	0.64		$	0.41
Diluted earnings per share:
Net income	$	0.20		$	0.17		$	0.63		$	0.41
Number of common shares used in computing earnings per share:
Basic		110,270,207			107,233,881			109,269,867			106,272,123
Diluted		111,278,430			108,211,580			110,522,914			107,766,841

See accompanying notes to the unaudited consolidated condensed financial statements.

4

PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)

	Nine Months Ended September 30,
	2007			2006
Cash flows from operating activities:
Net income	$	69,507		$	43,858
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		60,744			51,665
Gain on disposition of assets		(17,216	)		(6,901	)
Deferred income tax expense		15,879			31,671
Equity in loss of unconsolidated joint venture, net of tax		1,123			—
Provision for reduction in carrying value of certain assets		1,091			—
Expenses not requiring cash		11,008			10,394
Change in accounts receivable		(48,524	)		(23,354	)
Change in other assets		(28,579	)		(4,013	)
Change in liabilities		(12,979	)		7,442
Net cash provided by operating activities		52,054			110,762
Cash flows from investing activities:
Capital expenditures		(191,381	)		(129,023	)
Proceeds from the sale of assets		23,243			49,292
Proceeds from insurance settlements		—			4,431
Purchase of marketable securities		(101,075	)		(196,120	)
Proceeds from sale of marketable securities		163,995			126,740
Net cash used in investing activities		(105,218	)		(144,680	)
Cash flows from financing activities:
Proceeds from issuance of debt		125,000			—
Principal payments under debt obligations		(100,000	)		(50,000	)
Purchase of call options		(31,475	)		—
Proceeds from sale of common stock warrants		20,250			—
Proceeds from common stock offering		—			99,947
Payment of debt issuance costs		(3,563	)		—
Proceeds from stock options exercised		15,791			6,675
Excess tax benefit from stock based compensation		1,912			2,089
Net cash provided by financing activities		27,915			58,711
Net increase (decrease) in cash and cash equivalents		(25,249	)		24,793
Cash and cash equivalents at beginning of year		92,203			60,176
Cash and cash equivalents at end of period	$	66,954		$	84,969
Supplemental cash flow information:
Interest paid	$	16,370		$	21,162
Income taxes paid	$	44,270		$	13,207

See accompanying notes to the unaudited consolidated condensed financial statements.

5 

PARKER DRILLING COMPANY AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

1.	General —In the opinion of the management of Parker Drilling Company, the accompanying unaudited consolidated condensed financial statements reflect all adjustments (of a normally recurring nature) which are necessary for a fair presentation of (1) the financial position as of September 30, 2007 and December 31, 2006, (2) the results of operations for the three and nine months ended September 30, 2007 and 2006, and (3) cash flows for the nine months ended September 30, 2007 and 2006. Results for the nine months ended September 30, 2007 are not necessarily indicative of the results that will be realized for the year ending December 31, 2007. The financial statements should be read in conjunction with our Form 10-K for the year ended December 31, 2006.
	Stock-Based Compensation —Total stock-based compensation expense recognized under SFAS No. 123R for the three and nine month periods ended September 30, 2007 was $2.2 million and $6.3 million respectively, all of which was related to restricted stock plan expense. Total stock-based compensation expense recognized under SFAS No. 123R for the three and nine month periods ended September 30, 2006 was $1.8 million and $4.9 million respectively, of which $1.8 million and $4.7 million, respectively, was related to restricted stock plan expense. Stock-based compensation expense is included in our consolidated condensed income statement in “General and administration expense.” There were 8,334 unvested stock options at December 31, 2006 and none as of September 30, 2007. Total unrecognized compensation cost related to stock options granted under our plans was approximately $1,200 at December 31, 2006 and zero at September 30, 2007. The Company had 1,262,300 outstanding and exercisable stock options as of September 30, 2007, the aggregate intrinsic value of which was $5.4 million, with a weighted average exercise price of $5.88. Unvested restricted stock awards at December 31, 2006 and September 30, 2007 were 1,556,485 shares and 1,501,224 shares, respectively. Total unrecognized compensation cost related to unamortized restricted stock awards was $4.8 million as of December 31, 2006 and $7.0 million as of September 30, 2007. There were 54,738 and 859,083 restricted shares granted (net of forfeitures, if any) to certain officers and key employees during the three and nine month periods ended September 30, 2007, respectively. The remaining unrecognized compensation cost related to unamortized restricted stock awards will be amortized over a weighted-average vesting period of approximately one year.
	During the nine months ended September 30, 2006 the valuation assumptions used in our Black-Scholes option pricing model to estimate the fair value of stock options granted were 16.9 percent for expected volatility, 0.25 years expected term, 4.23 percent risk free interest rate and there was no expected dividend yield. There were no stock options granted in 2007.
	The excess tax benefit realized for the tax deductions from options exercised and restricted stock vesting totaled $1.9 million for the nine months ended September 30, 2007, which has been reported as a financing cash inflow in the consolidated condensed statement of cash flows.
2.	Common Stock Offering —In January 2006, we issued 8,900,000 shares of common stock pursuant to a Free Writing Prospectus dated January 17, 2006 and a Prospectus Supplement dated January 18, 2006. On January 23, 2006, we realized $11.23 per share or a total of $99.9 million of net proceeds before expenses, but after underwriter discount, from the offering.

6

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(continued)

3. Earnings Per Share (“EPS”)

	Three Months Ended September 30, 2007
	Income		Shares		Per-Share
	(Numerator)		(Denominator)		Amount
Basic EPS:
Net income	$	22,653,000		110,270,207	$	0.21
Effect of dilutive securities:
Stock options and restricted stock		—		1,008,223		—
Diluted EPS:
Net income	$	22,653,000		111,278,430	$	0.20

	Nine Months Ended September 30, 2007
	Income		Shares		Per-Share
	(Numerator)		(Denominator)		Amount
Basic EPS:
Net income	$	69,507,000		109,269,867	$	0.64
Effect of dilutive securities:
Stock options and restricted stock		—		1,253,047		—
Diluted EPS:
Net income	$	69,507,000		110,522,914	$	0.63

	Three Months Ended September 30, 2006
	Income		Shares		Per-Share
	(Numerator)		(Denominator)		Amount
Basic EPS:
Net income	$	18,639,000		107,233,881	$	0.17
Effect of dilutive securities:
Stock options and restricted stock		—		977,699		—
Diluted EPS:
Net income	$	18,639,000		108,211,580	$	0.17

	Nine Months Ended September 30, 2006
	Income		Shares		Per-Share
	(Numerator)		(Denominator)		Amount
Basic EPS:
Net income	$	43,858,000		106,272,123	$	0.41
Effect of dilutive securities:
Stock options and restricted stock		—		1,494,718		—
Diluted EPS:
Net income	$	43,858,000		107,766,841	$	0.41

7

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(continued)

3.	Earnings Per Share (“EPS”) (continued)
	Options to purchase 325,500 shares of common stock with exercise prices ranging from $10.81 to $12.19 per share were outstanding during the three and nine months ended September 30, 2007, but were not included in the computation of diluted EPS because the options’ exercise prices were greater than the average market price of the common shares. Options to purchase 2,187,000 shares of common stock with exercise prices ranging from $8.87 to $12.19 per share were outstanding during the three and nine months ended September 30, 2006, but were not included in the computation of diluted EPS because the options’ exercise prices were greater than the average market price of the common shares.
4.	Business Segments —The primary services we provide are as follows: U.S. drilling, international drilling and rental tools. Information regarding our operations by industry segment for the three and nine months ended September 30, 2007 and 2006 is as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
	(Dollars in Thousands)						(Dollars in Thousands)
Drilling and rental revenues:
U.S. drilling	$	59,700		$	52,347		$	178,975		$	135,297
International drilling		76,997			61,605			197,867			214,407
Rental tools		35,500			32,831			96,905			90,401
Total drilling and rental revenues	$	172,197		$	146,783		$	473,747		$	440,105
Drilling and rental operating income:
U.S. drilling	$	25,345		$	24,755		$	78,126		$	59,822
International drilling		17,679			3,674			30,259			22,654
Rental tools		14,370			15,788			41,397			42,442
Total drilling and rental operating income		57,394			44,217			149,782			124,918
General and administration expense		(6,246	)		(7,992	)		(18,380	)		(23,261	)
Provision for reduction in carrying value of certain assets		(1,091	)		—			(1,091	)		—
Gain on disposition of assets, net		543			4,328			17,216			6,901
Total operating income		50,600			40,553			147,527			108,558
Interest expense		(7,576	)		(7,923	)		(19,891	)		(25,223	)
Changes in fair value of derivative positions		(262	)		(1,029	)		(671	)		166
Loss on extinguishment of debt		(2,396	)		(1,910	)		(2,396	)		(1,912	)
Other		1,467			2,121			4,040			4,632
Income before income taxes	$	41,833		$	31,812		$	128,609		$	86,221

5.	Disposition of AssetsAsset dispositions in 2007 consist primarily of the sale of workover barge Rigs 9 and 26 for proceeds of approximately $20.5 million resulting in a recognized gain of $15.1 million. These two rigs were classified as assets held for sale as of December 31, 2006. In 2006, asset dispositions resulted in a gain of $6.9 million that included the sale of Nigerian Barge rigs 73 and 75 ($1.8 million), gains on insurance proceeds relating to assets damaged ($1.9 million) and other miscellaneous asset sales ($3.2 million).
6.	Accounting for Uncertainty in Income Taxes —In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement 109” (“FIN 48”). This accounting statement prescribes financial statement recognition threshold and measurement criteria for tax positions taken or expected to be taken in tax returns.
	In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement 109” (“FIN 48”). This accounting statement prescribes financial statement recognition threshold and measurement criteria for tax positions taken or expected to be taken in tax returns.

8

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(continued)

6.	Accounting for Uncertainty in Income Taxes (continued)
	The Company adopted FIN 48 effective January 1, 2007. As a result, the Company has increased its liability by $54.5 million for unrecognized tax amounts related to various federal, state and international tax matters. Included in this amount is $35.1 million of tax positions that, if recognized, would have impacted the Company’s effective tax rate. The recognition of this liability is required under FIN 48 because of the uncertainty regarding the ultimate outcome of certain tax positions. The Company has accounted for the entire $54.5 million as a reduction to the January 1, 2007 balance of retained earnings.
	Of the $54.5 million increase referred to above, $49 million is attributable to tax positions in Kazakhstan. As of September 30, 2007, we have a total liability of $90.6 million accrued for tax positions in Kazakhstan before the recognition of U.S. tax benefits. This liability has been classified as non-current in our balance sheet. For a complete overview of this issue, see Kazakhstan Tax Claims in Note 11.
	The Company has classified foreign currency exchange rate fluctuations, interest and penalties as a component of tax expense. On January 1, 2007, we recorded approximately $41.3 million for interest and penalties. During the nine months ended September 30, 2007, the Company recognized an additional liability of approximately $5.5 million, comprising of foreign currency exchange rate fluctuations, interest and a release of previously recognized liabilities. The Company does not expect that the unrecognized tax amounts will change significantly within the next twelve months.
	The Company conducts business globally and, as a result, the Company or one or more of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business our returns are subject to examination by taxing authorities throughout the world.
7.	Income Tax Expense —Income tax expense was $19.2 million for the third quarter of 2007, as compared to income tax expense of $13.2 million for the third quarter of 2006. Income tax for the third quarter of 2007 includes a benefit of $0.5 million of interest and foreign currency exchange rate fluctuations related to our FIN 48 calculation.
8.	Saudi Arabia Joint Venture –A subsidiary of Parker Drilling Company is a 50 percent shareholder of Al-Rushaid Parker Drilling, a Saudi Arabia limited liability company (“ARPD”), which has a six rig drilling contract with Saudi Aramco (“SA Contract”). ARPD has obtained bank financing for $160 million of the cost of the six rigs, which loan is secured by assignment of proceeds of the SA contract and personal guarantee of the Chairman of Abdullah Rasheed Al-Rushaid Company for Drilling Oil and Gas Limited, our Saudi partner (“AR”). Our subsidiary and AR have each advanced $15 million in shareholder loans to fund construction costs for the rigs as of October 31, 2007. Due to construction delays and cost overruns, including remedial work to correct problems with construction, integration of components and rig specifications, ARPD expects to incur approximately $40 to $50 million in additional construction costs over the next six to nine months, although the total cost of the six rigs has not been determined at this time. The Company’s subsidiary anticipates contributing up to 50 percent of the additional construction costs for the six rigs. The first rig began drilling operations on April 21, 2007 the second rig commenced drilling on July 17, 2007 and the third rig began drilling on October 8, 2007. It is anticipated that Rig 4 will commence operations during the fourth quarter 2007 and the remaining two rigs will begin drilling in the first quarter of 2008.
	During the quarter ended September 30, 2007, the Company recorded two adjustments primarily related to prior 2007 quarters. One adjustment eliminates $2.8 million ($1.8 million after-tax) of previously recognized costs advanced by Parker Drilling on behalf of ARPD which was billed to ARPD during the fourth quarter of 2007. The other offsetting adjustment records the Company’s share of equity losses, net of taxes, from ARPD through September 30, 2007 ($1.1 million). We do not believe these adjustments to be material.

9

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(continued)

8.	Saudi Arabia Joint Venture (continued)
	ARPD may be liable for liquidated damages as a result of delays in the commencement of drilling operations under the SA Contract. See “Contingencies” (Note 11). Continuing losses are anticipated for operations related to the SA Contract through 2008 and will continue until operating expenses can be reduced. However, there is no assurance that costs can be sufficiently reduced to avoid further losses, in which case future profitability will be contingent upon an increase in dayrates through negotiation of a contract extension with Saudi Aramco.
9.	Long-Term Debt

	September 30, 2007		December 31, 2006
	(Dollars in Thousands)
Senior Notes:
Interest rate 2.125% convertible due 2012	$	125,000	$	—
Interest rate floating (LIBOR + 4.75%), due 2010		—		100,000
Interest rate 9.625%, due 2013		228,882		229,368
Total debt		353,882		329,368
Less current portion		—		—
Total long-term debt	$	353,882	$	329,368

	On July 5, 2007, we issued $125.0 million aggregate principal amount of 2.125 percent Convertible Notes due July 15, 2012 pursuant to a prospectus dated June 28, 2007. Interest is payable semiannually on July 15th and January 15th. The initial conversion price is approximately $13.85 per share and is subject to adjustment for the occurrence of certain events stated within the indenture. Proceeds from the transaction were used to call our outstanding Floating Rate notes, to pay the net cost of hedge and warrant transactions, and for general corporate purposes. Effectively, the hedge and warrant transactions increase the conversion price to approximately $18.29 per share.
	On September 20, 2007, we replaced our existing $40.0 million credit facility with a new $60.0 million credit facility pursuant to an Amended and Restated Credit Agreement, which expires in September 2012 (the “2007 Credit Facility”). The 2007 Credit Facility is secured by rental tools equipment, accounts receivable and the stock of substantially all of our domestic subsidiaries, other than domestic subsidiaries owned by a foreign subsidiary, and contains customary affirmative and negative covenants such as minimum ratios for consolidated leverage, consolidated interest coverage and consolidated senior secured leverage.
	The 2007 Credit Facility is available for general corporate purposes and to fund reimbursement obligations under letters of credit the banks issue on our behalf pursuant to the 2007 Credit Facility. Revolving loans are available under the 2007 Credit Facility subject to a borrowing base limitation based on 85 percent of eligible receivables plus a value for eligible rental tools equipment. The 2007 Credit Facility calls for a borrowing base calculation only when the 2007 Credit Facility has outstanding loans, including letters of credit, totaling at least $40.0 million. As of September 30, 2007, there were $13.5 million in letters of credit outstanding and no loans.
10.	Derivative Instruments —We have used derivative instruments to manage risks associated with interest rate fluctuations in connection with our $100.0 million Senior Floating Rate Notes which were fully redeemed on September 27, 2007. These derivative instruments, which consisted of variable-to-fixed interest rate swaps, did not meet the hedge criteria in SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and were therefore not designated as hedges. Accordingly, the change in the fair value of the interest rate swaps is recognized currently in earnings.
	On July 17, 2007, we terminated one swap scheduled to expire in September 2008 and received $0.7 million. On September 4, 2007, our one remaining swap expired.

10

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(continued)

11.	Contingencies
	Kazakhstan Tax Claims
	On October 12, 2005, the Kazakhstan Branch (“PKD Kazakhstan”) of our subsidiary, Parker Drilling Company International Limited (“PDCIL”) received an Act of Tax Audit from the Ministry of Finance of Kazakhstan (“MinFin”) assessing PKD Kazakhstan an amount of KZT (Kazakhstan Tenge) 14.9 billion (approximately $126.1 million). Approximately KZT 7.5 billion or $63.5 million was assessed for import Value Added Tax (“VAT”), administrative fines and interest on equipment imported to perform the drilling contracts (the “VAT Assessment”) and approximately KZT 7.4 billion or $62.6 million for corporate income tax, individual income tax and social tax, administrative fines and interest in connection with the reimbursements received by PDCIL from a client for the upgrade of Barge Rig 257 and other issues related to PKD Kazakhstan’s operations in the Republic of Kazakhstan (the “Income Tax Assessment”).
	On May 24, 2006, the Supreme Court of the Republic of Kazakhstan (“SCK”) issued a decision upholding the VAT Assessment. Consistent with its contractual obligations, on November 20, 2006, the client advanced the actual amount of the VAT Assessment and this amount has been remitted to MinFin. The client has also contractually agreed to reimburse PKD Kazakhstan for any incremental income taxes that PKD Kazakhstan incurs from the reimbursement of this VAT Assessment
	Contrary to two previous rulings on this precise issue, the May 24, 2006, ruling of the SCK affirmed the Income Tax Assessment. The SCK stayed enforcement and supervisory review to allow the Competent Authorities from the U.S. and the Republic of Kazakhstan to address this matter under the Mutual Agreement Procedure (“MAP”) of the U.S.-Kazakhstan Tax Treaty (the “Tax Treaty”), but when the Competent Authorities met on March 20-22, 2007, they were unable to achieve mutual agreement as to which country may tax the income in issue under the Tax Treaty.
	On July 30, 2007, the supervisory panel of the SCK affirmed the May 24, 2006 ruling upholding the income tax assessment of MinFin and on August 7, 2007, MinFin issued a notice of assessment of corporate income taxes of approximately $40 million and interest of approximately $33 million. A liability associated with this claim has been fully accrued as described in Note 6. PKD Kazakhstan immediately filed a Complaint Against the Notice (“Complaint”) and MinFin acknowledged receipt of this Complaint and that no enforcement action would occur pending resolution of the Complaint pursuant to the MAP of the Tax Treaty. The Competent Authorities re-convened on October 8-11, 2007, to address the double taxation issue, but no decision has been announced and PKD Kazakhstan has no assurance as to the ultimate resolution of the double taxation issue.
	Bangladesh Claim
	In September 2005, a subsidiary of the Company was served with a lawsuit filed in the 152nd District Court of Harris County State of Texas on behalf of numerous citizens of Bangladesh claiming $250 million in damages due to various types of property damage and personal injuries (none involving loss of life) arising as a result of two blowouts that occurred in Bangladesh in January and June 2005, although only the June 2005 blowout involved the Company. This case was dismissed against the subsidiary of the Company based on forumnon conveniens, a legal defense raised by the subsidiary claiming that Houston, Texas, is not the appropriate location for this suit to be filed. The plaintiffs have appealed this dismissal; however the Company believes the plaintiffs’ prospects of being successful on appeal are remote.
	Asbestos-Related Claims
	In August 2004, the Company was notified that certain of its subsidiaries have been named, along with other defendants, in several complaints that have been filed in the Circuit Courts of the State of Mississippi by several hundred persons that allege that they were employed by some of the named defendants between approximately 1965 and 1986. The complaints name as defendants numerous other companies that are not affiliated with the Company, including companies that allegedly manufactured drilling related products containing asbestos that are the subject of the complaints.

11

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(continued)

11.	Contingencies (continued)
	Asbestos-Related Claims(continued)
	The complaints allege that the Company’s subsidiaries and other drilling contractors used asbestos-containing products in offshore drilling operations, land-based drilling operations and in drilling structures, drilling rigs, vessels and other equipment and assert claims based on, among other things, negligence and strict liability and claims under the Jones Act and that the Plaintiffs are entitled to monetary damages. Based on the report of the special master, these complaints have been severed and venue of the claims transferred to the county in which the plaintiff resides or the county in which the cause of action allegedly accrued. Subsequent to the filing of amended complaints, Parker has joined with other co-defendants in filing motions to compel discovery to determine what plaintiffs have an employment relationship with which defendant, including whether or not any plaintiffs have an employment relationship with subsidiaries of the Company. Out of 528 amended single-plaintiff complaints filed to date, twelve plaintiffs have identified Parker Drilling or one of its affiliates as a defendant. Discovery is proceeding in groups of 60 based on selection of six by plaintiff’s counsel, six by defense counsel and 48 by random selection of the special master.
	The subsidiaries named in these asbestos-related lawsuits intend to defend themselves vigorously and, based on the information available to the Company at this time, the Company does not expect the outcome to have a material adverse effect on its financial condition, results of operations or cash flows; however, there can be no assurance as to the ultimate outcome of these lawsuits.
	Gulfco Site
	In 2003 the Company received an information request under CERCLA designating a subsidiary of the Company as a potentially responsible party with respect to the Gulfco Marine Maintenance, Inc. Superfund Site in Freeport, Texas (EPA No. TX 055144539). We responded to this request in 2003 and have been in contact with EPA regarding the response. In July 2005, EPA issued a Unilateral Administrative Order for remedial investigation to five potentially responsible parties. The EPA order did not name us. According to EPA, three of the potentially responsible parties who received the order are currently performing a remedial investigation of the site to define the nature and extent of the contamination there. Based on the currently available information, we do not believe we have responsibility for the Gulfco Marine Site. Among other reasons, our subsidiary, Parker Drilling Offshore Company neither owned nor operated the site during the relevant time period, and is not otherwise connected to the site. If a claim were to be brought against us in the future by the United States or the parties performing the work, we would defend that action vigorously. The amount of any such future claim cannot be estimated with accuracy until after the remedial investigation is completed, but it is not expected to be material to our business or financial condition.
	Freight Forwarding and Customs Agent Request
	During the third quarter of 2007, the U.S. Department of Justice requested us to provide information regarding our utilization of the services of a freight forwarding and customs agent during the past five years to verify if the services provided by this freight forwarding and customs agent were in compliance with the Foreign Corrupt Practices Act. It is our understanding that a similar request was sent to several other service contractors. We are fully cooperating with the request for information.
	Saudi Arabia Joint Venture
	A subsidiary of Parker Drilling Company is a 50 percent shareholder of Al-Rushaid Parker Drilling, a Saudi Arabia limited liability company (“ARPD”), which has a six rig drilling contract with Saudi Aramco (“SA Contract”). As previously discussed in Note 8, the construction, delivery and commissioning for each of these rigs is delayed. Under the terms of the SA Contract, Saudi Aramco has the ability to reduce future day rates by 50 percent for each day of delay per rig, which over the duration of the SA Contract term would aggregate to approximately $23.0 million, creating a contingent liability of approximately $11.5 million (50 percent of the ARPD exposure) for Parker’s subsidiary.

12

     NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(continued)

11.	Contingencies (continued)
	Saudi Arabia Joint Venture(continued)
	We believe these delays are substantially caused by circumstances beyond the reasonable control of ARPD. At the request of ARPD, Saudi Aramco has deferred imposing any liquidated damages for at least six months and ARPD anticipates continued discussions with Saudi Aramco to obtain a waiver of all or substantially all of the liquidated damages based on the delays being beyond the reasonable control of ARPD.
12.	Recent Accounting Pronouncements— In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Liabilities-Including an Amendment of FASB Statement No. 115(SFAS No. 159). SFAS No. 159 allows certain financial assets and liabilities to be recognized, at the Company’s election, at fair market value, with any gains or losses for the period recorded in the statement of income. This gives a company the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The statement is effective for fiscal years beginning after November 15, 2007. The Company has not determined the impact on its Consolidated Financial Statements, if any, of the adoption of SFAS No. 159.
13.	Parent, Guarantor, Non-Guarantor Unaudited Consolidating Condensed Financial Statements—Set forth on the following pages are the unaudited consolidating condensed financial statements of (i) Parker Drilling, (ii) our restricted subsidiaries that are guarantors of the Senior Notes and (iii) our restricted and unrestricted subsidiaries that are not guarantors of the Senior Notes. All of our Senior Notes are guaranteed by substantially all of the restricted subsidiaries of Parker Drilling. There are currently no restrictions on the ability of the restricted subsidiaries to transfer funds to Parker Drilling in the form of cash dividends, loans or advances. Parker Drilling is a holding company with no operations, other than through its subsidiaries.
	The non-guarantor subsidiaries are AralParker (a Kazakhstan closed joint stock company, owned 80 percent by Parker Drilling (Kazakstan), LLC and 20 percent by Aralnedra, CJSC), Casuarina Limited (a wholly-owned captive insurance company), KDN Drilling Limited, Mallard Drilling of South America, Inc., Mallard Drilling of Venezuela, Inc., Parker Drilling Investment Company, Parker Drilling (Nigeria) Limited, Parker Drilling Company (Bolivia) S.A., Parker Drilling Company Kuwait Limited, Parker Drilling Company Limited (Bahamas), Parker Drilling Company of New Zealand Limited, Parker Drilling Company of Sakhalin, Parker Drilling de Mexico, S. de R.L. de C.V., Parker Drilling International of New Zealand Limited, Parker Drilling Tengiz, Ltd., PD Servicios Integrales, S. de R.L. de C.V., PKD Sales Corporation, Parker SMNG Drilling Limited Liability Company (owned 50 percent by Parker Drilling Company International, LLC), Parker Drilling Asia Pacific, LLC, Parker Drilling Kazakhstan B.V., Parker Drilling Netherlands B.V., Parker Drilling International B.V., Parker Drilling Offshore B.V., Parker Drilling Overseas B.V., Parker Drilling Russia B.V., Parker Drilling Dutch B.V., Parker Drilling AME Limited, Parker Drillsource, LLC, Parker 3source, LLC, Parker Enex, LLC, Parker Hungary Rig Holdings Limited Liability Company, Parker 5272, LLC, Parker Drilling Spain Rig Services S.L., Parker Cyprus Leasing Limited, Parker Cyprus Ventures Limited, PD International Holdings C.V., PD Dutch Holdings C.V., PD Offshore Holdings C.V., PD Selective Holdings, C.V., PD Labor Services, Ltd., and PD Labor Sourcing, Ltd. We are providing unaudited consolidating condensed financial information of the parent, Parker Drilling, the guarantor subsidiaries, and the non-guarantor subsidiaries as of September 30, 2007 and December 31, 2006 and for the three and nine months ended September 30, 2007 and 2006. The condensed consolidating financial statements present investments in both consolidated and unconsolidated subsidiaries using the equity method of accounting.

13

PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATING CONDENSED BALANCE SHEET
(Dollars in Thousands)
(Unaudited)

	September 30, 2007
	Parent			Guarantor			Non-Guarantor			Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	38,010		$	13,086		$	15,858		$	—		$	66,954
Marketable securities		—			—			—			—			—
Accounts and notes receivable, net		82,557			178,930			67,873			(167,860	)		161,500
Rig materials and supplies		—			11,008			10,501			—			21,509
Deferred costs		—			4,161			5,711			—			9,872
Deferred income taxes		17,307			—			—			—			17,307
Other current assets		28,328			8,215			8,066			54			44,663
Total current assets		166,202			215,400			108,009			(167,806	)		321,805
Property, plant and equipment, net		79			458,613			104,138			122			562,952
Goodwill		—			100,315			—			—			100,315
Investment in subsidiaries and intercompany advances		772,691			908,213			(17,729	)		(1,663,175	)		—
Investment in and advances to unconsolidated joint venture		—			—			14,091			—			14,091
Other noncurrent assets		53,354			24,186			4,237			—			81,777
Total assets	$	992,326		$	1,706,727		$	212,746		$	(1,830,859	)	$	1,080,940
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	52,540		$	201,052		$	55,627		$	(220,833	)	$	88,386
Accrued income taxes		2,136			11,203			2,557			—			15,896
Total current liabilities		54,676			212,255			58,184			(220,833	)		104,282
Long-term debt		353,882			—			—			—			353,882
Other long-term liabilities		99			104,210			5,700			—			110,009
Long-term deferred tax liability		11,500			(3,261	)		6,942			—			15,181
Intercompany payables		74,583			580,356			32,764			(687,703	)		—
Contingencies (Note 11)		—			—			—			—			—
Stockholders’ equity:
Common stock		18,639			39,900			21,153			(61,053	)		18,639
Capital in excess of par value		591,313			1,042,724			86,555			(1,129,279	)		591,313
Retained earnings (accumulated deficit)		(112,366	)		(269,457	)		1,448			268,009			(112,366	)
Total stockholders’ equity		497,586			813,167			109,156			(922,323	)		497,586
Total liabilities and stockholders’ equity	$	992,326		$	1,706,727		$	212,746		$	(1,830,859	)	$	1,080,940

14

PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATING CONDENSED BALANCE SHEET
(Dollars in Thousands)

	December 31, 2006
	Parent			Guarantor			Non-Guarantor			Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	60,029		$	14,367		$	17,807		$	—		$	92,203
Marketable securities		60,920			2,000			—			—			62,920
Accounts and notes receivable, net		53,844			143,905			33,625			(119,015	)		112,359
Rig materials and supplies		—			7,173			7,827			—			15,000
Deferred costs		—			6,321			341			—			6,662
Deferred income taxes		17,307			—			—			—			17,307
Other current assets		798			8,969			1,319			37			11,123
Total current assets		192,898			182,735			60,919			(118,978	)		317,574
Property, plant and equipment, net		134			354,356			80,861			122			435,473
Assets held for sale		—			4,828			—			—			4,828
Goodwill		—			100,315			—			—			100,315
Investment in subsidiaries and intercompany advances		694,050			846,800			(8,053	)		(1,532,797	)		—
Investment in unconsolidated joint venture		—			—			10,267			—			10,267
Other noncurrent assets		18,043			19,774			(4,973	)		—			32,844
Total assets	$	905,125		$	1,508,808		$	139,021		$	(1,651,653	)	$	901,301
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	44,667		$	175,092		$	44,611		$	(169,144	)	$	95,226
Accrued income taxes		(10,514	)		17,039			152			—			6,677
Total current liabilities		34,153			192,131			44,763			(169,144	)		101,903
Long-term debt		329,368			—			—			—			329,368
Other long-term liabilities		1,596			9,030			265			40			10,931
Intercompany payables		80,909			544,250			37,219			(662,378	)		—
Contingencies (Note 11)		—			—			—			—			—
Stockholders’ equity:
Common stock		18,220			39,899			21,251			(61,150	)		18,220
Capital in excess of par value		568,253			1,013,736			34,526			(1,048,262	)		568,253
Retained earnings (accumulated deficit)		(127,374	)		(290,238	)		997			289,241			(127,374	)
Total stockholders’ equity		459,099			763,397			56,774			(820,171	)		459,099
Total liabilities and stockholders’ equity	$	905,125		$	1,508,808		$	139,021		$	(1,651,653	)	$	901,301

15

PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
(Dollars in Thousands)
(Unaudited)

	Three months ended September 30, 2007
	Parent			Guarantor			Non-Guarantor			Eliminations			Consolidated
Drilling and rental revenues	$	—		$	150,950		$	41,899		$	(20,652	)	$	172,197
Drilling and rental operating expenses		—			77,437			34,971			(20,648	)		91,760
Depreciation and amortization		—			20,026			3,017			—			23,043
Drilling and rental operating income		—			53,487			3,911			(4	)		57,394
General and administration expense (1)		(42	)		(6,253	)		49			—			(6,246	)
Provision for reduction in carrying value of certain assets		—			(1,091	)		—			—			(1,091	)
Gain (loss) on disposition of assets, net		—			556			(13	)		—			543
Total operating income (loss)		(42	)		46,699			3,947			(4	)		50,600
Other income and (expense):
Interest expense		(8,766	)		(11,795	)		(88	)		13,073			(7,576	)
Changes in fair value of derivative positions		(262	)		—			—			—			(262	)
Interest income		12,169			2,166			819			(13,074	)		2,080
Loss on extinguishment of debt		(2,396	)		—			—			—			(2,396	)
Equity in loss of unconsolidated joint														—
venture, net of taxes		—			—			(1,123	)		—			(1,123	)
Other		3			510			(2	)		(1	)		510
Equity in net earnings of subsidiaries		35,643			—			—			(35,643	)		—
Total other income and (expense)		36,391			(9,119	)		(394	)		(35,645	)		(8,767	)
Income (loss) before income taxes		36,349			37,580			3,553			(35,649	)		41,833
Income tax expense :
Current		11,251			2,586			761			—			14,598
Deferred		2,445			1,198			939			—			4,582
Income tax expense		13,696			3,784			1,700			—			19,180
Net income (loss)	$	22,653		$	33,796		$	1,853		$	(35,649	)	$	22,653

(1) All field operations general and administration expenses are included in operating expenses.

16

PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
(Dollars in Thousands)
(Unaudited)

	Three Months Ended September 30, 2006
	Parent			Guarantor			Non-Guarantor			Eliminations			Consolidated
Drilling and rental revenues	$	—		$	129,174		$	27,156		$	(9,547	)	$	146,783
Drilling and rental operating expenses		—			68,440			26,680			(9,547	)		85,573
Depreciation and amortization		—			15,994			999			—			16,993
Drilling and rental operating income (loss)		—			44,740			(523	)		—			44,217
General and administration expense (1)		(42	)		(7,946	)		(4	)		—			(7,992	)
Gain on disposition of assets, net		—			4,319			9			—			4,328
Total operating income (loss)		(42	)		41,113			(518	)		—			40,553
Other income and (expense):
Interest expense		(9,105	)		(11,790	)		(387	)		13,359			(7,923	)
Changes in fair value of derivative positions		(1,029	)		—			—			—			(1,029	)
Interest income		12,988			2,014			878			(13,359	)		2,521
Loss on extinguishment of debt		(1,910	)		—			—			—			(1,910	)
Minority interest		—			—			(304	)		—			(304	)
Other		(2	)		(52	)		(42	)		—			(96	)
Equity in net earnings of subsidiaries		32,563			—			—			(32,563	)		—
Total other income and (expense)		33,505			(9,828	)		145			(32,563	)		(8,741	)
Income (loss) before income taxes		33,463			31,285			(373	)		(32,563	)		31,812
Income tax expense (benefit)
Current		1,714			(1,949	)		1,401			—			1,166
Deferred		13,110			(1,264	)		161			—			12,007
Income tax expense (benefit)		14,824			(3,213	)		1,562			—			13,173
Net income (loss)	$	18,639		$	34,498		$	(1,935	)	$	(32,563	)	$	18,639

(1) All field operations general and administration expenses are included in operating expenses.

17

PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
(Dollars in Thousands)
(Unaudited)

	Nine months ended September 30, 2007
	Parent			Guarantor			Non-Guarantor			Eliminations			Consolidated
Drilling and rental revenues	$	—		$	425,656		$	83,777		$	(35,686	)	$	473,747
Drilling and rental operating expenses		1			226,908			71,999			(35,687	)		263,221
Depreciation and amortization		—			55,531			5,213			—			60,744
Drilling and rental operating income		(1	)		143,217			6,565			1			149,782
General and administration expense (1)		(125	)		(18,216	)		(39	)		—			(18,380	)
Provision for reduction in carrying value of certain assets		—			(1,091	)		—			—			(1,091	)
Gain (loss) on disposition of assets, net		—			17,233			(17	)		—			17,216
Total operating income (loss)		(126	)		141,143			6,509			1			147,527
Other income and (expense):
Interest expense		(23,462	)		(35,386	)		(489	)		39,446			(19,891	)
Changes in fair value of derivative positions		(671	)		—			—			—			(671	)
Interest income		36,280			6,323			2,420			(39,447	)		5,576
Loss on extinguishment of debt		(2,396	)		—			—			—			(2,396	)
Equity in loss of unconsolidated joint venture, net of taxes		—			—			(1,123	)		—			(1,123	)
Minority interest		—			—			(1,000	)		—			(1,000	)
Other		8			574			11			(6	)		587
Equity in net earnings of subsidiaries		93,924			—			—			(93,924	)		—
Total other income and (expense)		103,683			(28,489	)		(181	)		(93,931	)		(18,918	)
Income (loss) before income taxes		103,557			112,654			6,328			(93,930	)		128,609
Income tax expense:
Current		28,404			12,054			2,765			—			43,223
Deferred		5,646			8,739			1,494			—			15,879
Income tax expense		34,050			20,793			4,259			—			59,102
Net income (loss)	$	69,507		$	91,861		$	2,069		$	(93,930	)	$	69,507

(1) All field operations general and administration expenses are included in operating expenses.

18

PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
(Dollars in Thousands)
(Unaudited)

	Nine Months Ended September 30, 2006
	Parent			Guarantor			Non-Guarantor			Eliminations			Consolidated
Drilling and rental revenues	$	—		$	377,364		$	98,457		$	(35,716	)	$	440,105
Drilling and rental operating expenses		—			199,006			100,232			(35,716	)		263,522
Depreciation and amortization		—			48,656			3,009			—			51,665
Drilling and rental operating income		—			129,702			(4,784	)		—			124,918
General and administration expense (1)		(124	)		(23,123	)		(14	)		—			(23,261	)
Gain (loss) on disposition of assets, net		(6	)		6,835			72			—			6,901
Total operating income (loss)		(130	)		113,414			(4,726	)		—			108,558
Other income and (expense):
Interest expense		(28,770	)		(35,389	)		(1,342	)		40,278			(25,223	)
Changes in fair value of derivative positions		166			—			—			—			166
Interest income		37,656			6,043			2,545			(40,278	)		5,966
Loss on extinguishment of debt		(1,912	)		—			—			—			(1,912	)
Minority interest		—			—			(1,224	)		—			(1,224	)
Other		9			(158	)		39			—			(110	)
Equity in net earnings of subsidiaries		72,667			—			—			(72,667	)		—
Total other income and (expense)		79,816			(29,504	)		18			(72,667	)		(22,337	)
Income (loss) before income taxes		79,686			83,910			(4,708	)		(72,667	)		86,221
Income tax expense (benefit):
Current		2,737			4,652			3,303			—			10,692
Deferred		33,091			(1,726	)		306			—			31,671
Income tax expense		35,828			2,926			3,609			—			42,363
Net income (loss)	$	43,858		$	80,984		$	(8,317	)	$	(72,667	)	$	43,858

(1) All field operations general and administration expenses are included in operating expenses.

19

PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)

	Nine months ended September 30, 2007
	Parent			Guarantor			Non-Guarantor			Eliminations			Consolidated
Cash flows from operating activities:
Net income (loss)	$	69,507		$	91,861		$	2,069		$	(93,930	)	$	69,507
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		—			55,531			5,213			—			60,744
Loss/(gain) on disposition of assets		—			(17,233	)		17			—			(17,216	)
Deferred income tax expense		5,646			8,739			1,494			—			15,879
Equity in loss of unconsolidated joint venture, net of tax		—			—			1,123			—			1,123
Provision for reduction in carrying value
of certain assets		—			1,091			—			—			1,091
Expenses not requiring cash		10,408			600			—			—			11,008
Equity in net earnings of subsidiaries		(93,924	)		—			—			93,924			—
Change in accounts receivable		(28,713	)		14,437			(34,248	)		—			(48,524	)
Change in other assets		(9,459	)		(49,080	)		29,960			—			(28,579	)
Change in liabilities		(625	)		(28,070	)		15,710			6			(12,979	)
Net cash provided by (used in) operating activities		(47,160	)		77,876			21,338			—			52,054
Cash flows from investing activities:
Capital expenditures		—			(161,846	)		(29,535	)		—			(191,381	)
Proceeds from the sale of assets		54			22,162			1,027			—			23,243
Purchase of marketable securities		(101,075	)		—			—			—			(101,075	)
Proceeds from sale of marketable securities		161,995			2,000			—			—			163,995
Net cash (used in) investing activities		60,974			(137,684	)		(28,508	)		—			(105,218	)
Cash flows from financing activities:
Proceeds from issuance of debt		125,000			—			—			—			125,000
Principal payments under debt obligations		(100,000	)		—			—			—			(100,000	)
Purchase of call options		(31,475	)		—			—			—			(31,475	)
Proceeds from sale of common stock warrants		20,250			—			—			—			20,250
Payment of debt issuance costs		(3,563	)		—			—			—			(3,563	)
Proceeds from stock options exercised		15,791			—			—			—			15,791
Excess tax benefit from stock based compensation		1,912			—			—			—			1,912
Intercompany advances, net		(63,748	)		58,527			5,221			—			—
Net cash provided by (used in) financing activities		(35,833	)		58,527			5,221			—			27,915
Net decrease in cash and cash equivalents		(22,019	)		(1,281	)		(1,949	)		—			(25,249	)
Cash and cash equivalents at beginning of year		60,029			14,367			17,807			—			92,203
Cash and cash equivalents at end of period	$	38,010		$	13,086		$	15,858		$	—		$	66,954

20

PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)

	Nine Months Ended September 30, 2006
	Parent			Guarantor			Non-Guarantor			Eliminations			Consolidated
Cash flows from operating activities:
Net income (loss)	$	43,858		$	80,984		$	(8,317	)	$	(72,667	)	$	43,858
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		—			48,656			3,009			—			51,665
Loss (gain) on disposition of assets		6			(6,835	)		(72	)		—			(6,901	)
Deferred income tax expense (benefit)		33,091			(1,726	)		306			—			31,671
Expenses not requiring cash		6,637			3,757			—			—			10,394
Equity in net earnings of subsidiaries		(72,667	)		—			—			72,667			—
Change in accounts receivable		(8,746	)		(15,582	)		974			—			(23,354	)
Change in other assets		603			(5,900	)		1,284			—			(4,013	)
Change in liabilities		7,378			(473	)		537			—			7,442
Net cash provide by (used in) operating activities		10,160			102,881			(2,279	)		—			110,762
Cash flows from investing activities:
Capital expenditures		—			(126,285	)		(2,738	)		—			(129,023	)
Proceeds from the sale of assets		(6	)		47,638			1,660			—			49,292
Proceeds from insurance settlements		—			4,431			—			—			4,431
Purchase of marketable securities		(194,120	)		(2,000	)		—			—			(196,120	)
Proceeds from sale of marketable securities		124,740			2,000			—			—			126,740
Net cash used in investing activities		(69,386	)		(74,216	)		(1,078	)		—			(144,680	)
Cash flows from financing activities:
Principal payments under debt obligations		(50,000	)		—			—			—			(50,000	)
Proceeds from common stock offering		99,947			—			—			—			99,947
Proceeds from stock options exercised		6,675			—			—			—			6,675
Excess tax benefit from stock based compensation		2,089			—			—			—			2,089
Intercompany advances, net		25,815			(27,883	)		2,068			—			—
Net cash provided by (used in) financing activities		84,526			(27,883	)		2,068			—			58,711
Net increase (decrease) in cash and cash equivalents		25,300			782			(1,289	)		—			24,793
Cash and cash equivalents at beginning of year		31,978			11,145			17,053			—			60,176
Cash and cash equivalents at end of period	$	57,278		$	11,927		$	15,764		$	—		$	84,969

21

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

DISCLOSURE NOTE REGARDING FORWARD-LOOKING STATEMENTS

     This Form 10-Q contains statements that are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All statements contained in this Form 10-Q, other than statements of historical facts, are “forward-looking statements” for purposes of these provisions, including any statements regarding:

• stability of prices and demand for oil and natural gas;

• levels of oil and natural gas exploration and production activities;

• demand for contract drilling and drilling related services and demand for rental tools;

• our future operating results and profitability;

• our future rig utilization, dayrates and rental tools activity;

• entering into new, or extending existing, drilling contracts and our expectations concerning when our rigs will commence operations under such contracts;

• growth through acquisitions of companies or assets;

• construction or upgrades of rigs and expectations regarding when these rigs will commence operations;

• capital expenditures for acquisition of rigs, construction of new rigs or major upgrades to existing rigs;

• entering into joint venture agreements with local companies;

• our future liquidity;

• availability and sources of funds to reduce our debt and expectations of when debt will be reduced;

• the outcome of pending or future legal proceedings, tax assessments and other claims;

• the availability of insurance coverage for pending or future claims;

• the enforceability of contractual indemnification in relation to pending or future claims;

• compliance with covenants under our senior credit facility and indentures for our senior notes; and

• organic growth of our operations.

     In some cases, you can identify these statements by forward-looking words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “outlook,” “may,” “should,” “will” and “would” or similar words. Forward-looking statements are based on certain assumptions and analyses made by our management in light of their experience and perception of historical trends, current conditions, expected future developments and other factors they believe are relevant. Although our management believes that their assumptions are reasonable based on information currently available, those assumptions are subject to significant risks and uncertainties, many of which are outside of our control. The following factors, as well as any other cautionary language included in this Form 10-Q, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our “forward-looking statements:”

• worldwide economic and business conditions that adversely affect market conditions and/or the cost of doing business;

• the U.S. economy and the demand for natural gas;

• fluctuations in the market prices of oil and gas;

• imposition of unanticipated trade restrictions;

• unanticipated operating hazards and uninsured risks;

• political instability, terrorism or war;

• governmental regulations, including changes in accounting rules or tax laws or ability to remit funds to the U.S., that adversely affect the cost of doing business;

• adverse environmental events;

• adverse weather conditions;

• changes in the concentration of customer and supplier relationships;

• unexpected cost increases for new construction and upgrade and refurbishment projects;

• delays in obtaining components for capital projects and in ongoing operational maintenance;

• shortages of skilled labor;

• unanticipated cancellation of contracts or imposition of penalties by operators;

• breakdown of equipment;

• other operational problems including delays in start-up of operations

• changes in competition;

• the effect of litigation and contingencies; and

• other similar factors (some of which are discussed in documents referred to in this Form 10-Q).

22

DISCLOSURE NOTE REGARDING FORWARD-LOOKING STATEMENTS(continued)

     Each “forward-looking statement” speaks only as of the date of this Form 10-Q, and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Before you decide to invest in our securities, you should be aware that the occurrence of the events described in these risk factors and elsewhere in this Form 10-Q could have a material adverse effect on our business, results of operations, financial condition and cash flows.

OUTLOOK AND OVERVIEW

     As anticipated in our last report, international land drilling revenues increased 28 percent over the second quarter of 2007 and rental tools revenues were up 13 percent in the third versus the second quarter of 2007. Six international land rigs completed transition to higher dayrate contracts and our rental tools segment grew on utilization of new equipment from capital invested earlier in 2007. Our U.S. Gulf of Mexico drilling barges continued strong performance with utilization percent of 83 percent, the highest utilization in over three years. We expect continued strong performance for the remainder of 2007 as we achieve full period benefits of international land operations just begun, commencement of operations of additional international land rigs during the fourth quarter of 2007 and the first quarter of 2008 and continued growth of our rental tool business. Even though we have begun to see downward pricing pressure in the U.S. Gulf of Mexico drilling barge market and reduction in our backlog of contracts, we expect continued solid performance from this sector into 2008.

Overview

     Drilling and rental operating income was up 27 percent over the third quarter of 2006 due primarily to full quarter results of international land rigs that began drilling in the second quarter of 2007 and commencement of operations of six additional international land rigs during the third quarter. Utilization overall averaged over 78 percent compared to 73 percent in the second quarter of 2007.

     While average dayrates for our U.S. Gulf of Mexico barge operation decreased from $48,000 per day in the second quarter of 2007 to $45,100 per day in the third quarter, utilization increased to 83 percent in the third quarter 2007 compared to 74 percent in the second quarter of 2007 and 72 percent in the third quarter of 2006.

     In our international drilling operations, third quarter 2007 operating profit grew almost $15 million over the third quarter of 2006 as we commenced operations on six rigs during the quarter, with two in CIS region, three in the Asia Pacific region, and one in Algeria. In addition, three rigs in Mexico that began drilling during the middle to latter half of the second quarter drilled the entire third quarter.

     Quail operating profit for the third quarter of 2007 was $1.3 million lower than the third quarter of 2006 due to higher depreciation costs in 2007.

     We closed on our $125.0 million 2.125 percent Convertible Notes in July 2007 and used the proceeds to redeem in full, $100.0 million of our outstanding Floating Rate Notes in September 2007, reducing our cash interest costs by approximately $7.7 million per year. Additionally, we closed on an Amended and Restated Credit Agreement which increased the amount of availability under our revolver from $40.0 million to $60.0 million and extended it for five years. Capital expenditures through September 30, 2007 totaled $191.4 million, including $4.7 million of capitalized interest relating to rig construction projects.

Outlook

     In our CIS region, the commencement of two additional rigs under a three year contract toward the end of the second quarter increased the total to four rigs working in the Karachaganak area. In addition, we were recently awarded a one-year contract for another rig in the CIS region that completed its contract earlier in the quarter. We have also secured a new two-rig contract commencing in 2008, utilizing rig 247, which has been undergoing repairs and upgrades, and rig 269, a newly built rig. These international land rigs transitioning to new contracts are expected to provide sustained higher international utilization in the fourth quarter of 2007 and in 2008.

23

OUTLOOK AND OVERVIEW(continued)

Outlook(continued)

     Two new build land rigs are being commissioned for operation in Mexico and are expected to begin operations late in the fourth quarter. This will bring the land rig total to five rigs under this three-year contract. One barge rig continues to operate in Mexico under a recently signed two-year contract. Another land rig that had been idle after completion of work in the U.S. land market is mobilizing to a new two-year contract in northern Mexico.

     In the Africa/Middle East region, the two new rigs that commenced operations earlier this year in Algeria continue to operate and another is rigging up in Libya; all under three-year contracts.

     For our U.S. Gulf of Mexico barge market, we expect both utilization and dayrates to soften modestly during the fourth quarter. Some rigs are expected to incur downtime between contracts, and dayrates are anticipated to decline from record-setting highs set earlier in 2007. However, we expect rates to remain at levels that generate strong results into 2008 and we believe we will continue to experience high utilization as a preferred contractor by providing our customers a value-added service consisting of quality rigs and efficient and safe operations.

     Our rental tools operation, Quail Tools, continues its solid performance and with the capital infused earlier in the year, the outlook is very positive for 2008. The new Texarkana, Texas location and satellite facility in North Dakota have continued to exceed our initial expectations. We expect this performance to continue through the end of 2007 based on customer forecasts and our new locations.

Recent Events

     New High-Efficiency Rig –

     With the announcement of a two-rig contract commencing in early 2008, we introduced our new design, high efficiency class rig. The new high-efficiency rig is a 2,000 horsepower land rig that incorporates advanced features to meet the increasing demand of operators, including:

— Hydraulic cylinder to raise mast and substructure without engines, reducing rig-up costs, time and emissions,

— “plug and play” adaptability, allowing the operator to customize individual components for different drilling programs,

— enhance safety features, including swing-up structures, and

— fully automated drilling system featuring fuel efficient AC technology and variable frequency drive.

     Kazakhstan Tax Case –

     As referenced in Note 11, we have been contesting an income tax assessment of the Ministry of Finance (“MinFin”) of the Republic of Kazakhstan relating to some reimbursements received in the United States for costs incurred in performing modifications to a barge drilling rig that was later transported to the RoK waters of the North Caspian Sea. We received two prior rulings of the Supreme Court of Kazakhstan (“SCK”) which determined that the income tax assessment was improper, but in May 2006 the SCK reversed its earlier ruling and upheld the assessment, the supervisory panel of the SCK affirmed this ruling on July 30, 2007, and MinFin issue a formal assessment of income taxes on August 6, 2007. We filed a Complaint Against the Notice and MinFin acknowledged that enforcement of the notice would not occur pending resolution of the double taxation issue pursuant to the U.S.-Kazakhstan Tax Treaty. The Competent Authority proceedings re-convened on October 8-11, 2007, but there has been no decision regarding resolution of the double taxation issue and the Company has no assurance as to the ultimate resolution of the double taxation issue.

24

RESULTS OF OPERATIONS

Three Months Ended September 30, 2007 Compared with Three Months Ended September 30, 2006

     We recorded net income of $22.7 million for the three months ended September 30, 2007, as compared to net income of $18.6 million for the three months ended September 30, 2006. Drilling and rental operating income was $57.4 million for the three months ended September 30, 2007 as compared to $44.2 million for the three months ended September 30, 2006.

     The following is an analysis of our operating results for the comparable quarters:

	Three Months Ended September 30,
	2007					2006
	(Dollars in Thousands)
Drilling atnd rental revenues:
U.S. drilling	$	59,700		35	%	$	52,347		36	%
International drilling		76,997		45	%		61,605		42	%
Rental tools		35,500		20	%		32,831		22	%
Total drilling and rental revenues	$	172,197		100	%	$	146,783		100	%
Drilling and rental operating income:
U.S. drilling gross margin excluding depreciation and amortization (1)	$	34,137		57	%	$	31,403		60	%
International drilling gross margin excluding depreciation and amortization (1)		25,379		33	%		9,325		15	%
Rental tools gross margin excluding depreciation and amortization (1)		20,921		59	%		20,482		62	%
Depreciation and amortization		(23,043	)				(16,993	)
Total drilling and rental operating income (2)		57,394					44,217
General and administration expense		(6,246	)				(7,992	)
Provision for reduction in carrying value of certain assets		(1,091	)				—
Gain on disposition of assets, net		543					4,328
Total operating income	$	50,600				$	40,553

(1) Drilling and rental gross margins, excluding depreciation and amortization, are computed as drilling and rental revenues less direct drilling and rental operating expenses, excluding depreciation and amortization expense; drilling and rental gross margin percentages are computed as drilling and rental gross margin, excluding depreciation and amortization, as a percent of drilling and rental revenues. The gross margin amounts, excluding depreciation and amortization, and gross margin percentages should not be used as a substitute for those amounts reported under accounting principles generally accepted in the United States (“GAAP”). However, we monitor our business segments based on several criteria, including drilling and rental gross margin. Management believes that this information is useful to our investors because it more accurately reflects cash generated by segment. Such gross margin amounts are reconciled to our most comparable GAAP measure as follows:

			International
Three Months Ended September 30, 2007	U.S. Drilling		Drilling		Rental Tools
	(Dollars in Thousands)
Drilling and rental operating income (2)	$	25,345	$	17,679	$	14,370
Depreciation and amortization		8,792		7,700		6,551
Drilling and rental gross margin excluding depreciation and amortization	$	34,137	$	25,379	$	20,921
Three Months Ended September 30, 2006
Drilling and rental operating income (2)	$	24,755	$	3,674	$	15,788
Depreciation and amortization		6,648		5,651		4,694
Drilling and rental gross margin excluding depreciation and amortization	$	31,403	$	9,325	$	20,482

(2) Drilling and rental operating income — drilling and rental revenues less direct drilling and rental operating expenses, including depreciation and amortization expense.

25

RESULTS OF OPERATIONS(continued)

U.S. Drilling Segment

     Revenues for the U.S. drilling segment increased $7.4 million to $59.7 million for the quarter ended September 30, 2007 as compared to the quarter ended September 30, 2006. The increased revenues were primarily due to a $5.3 million increase for our barge drilling operations from higher dayrates and additional operating days for our drilling barges, that more than offset fewer operating days for our workover barges primarily attributable to the sale of workover barge Rigs 9 and 26 (see Note 5) in January 2007. Other factors contributing to the increase were:

• Barge Rig 50 undergoing refurbishment during the third quarter of 2006,

• Newly constructed Barge Rig 77 commencing operations in December 2006,

• Repositioning two international land rigs in the U.S. market during the last half of 2006, one of which contributed $1.5 million to U.S. drilling segment revenues,

• Ongoing BP Liberty engineering and procurement project contributed $2.8 million, and

• Average dayrates for the deep drilling barge rigs increased approximately $2,100 per day in 2007 as compared to 2006.

     As a result of approximately seven percent higher dayrates on all barge rigs and the one operating land rig, gross margins, excluding depreciation and amortization, increased $2.7 million to $34.1 million.

International Drilling Segment

     International drilling revenues increased $15.4 million to $77.0 million during the third quarter of 2007 as compared to the third quarter of 2006. Of this increase, $18.8 million is related to international land drilling revenues, offset by a $3.4 million decrease in revenues from offshore operations. The decline of $3.4 million in offshore operations is due primarily to the sale of our barge rigs in Nigeria in August 2006, partially offset by a $1.1 million improvement in Barge Rig 53 revenues in Mexico due primarily to a higher dayrate.

     Land revenues in Colombia, Mexico and Algeria increased by $9.7 million, $9.2 million and $3.6 million, respectively, as there were no drilling operations in each of these countries in the third quarter of 2006. Net revenues in the CIS increased by $2.9 million primarily attributable to:

• a $5.1 million increase in the Karachaganak area of Kazakhstan as a result of the addition of Rigs 249 and 258 to existing operations of 107 and 216,

• a $1.7 million increase in revenues from our O&M contracts on Sakhalin Island,

• a $1.8 million increase from commencement of operations of Rig 236 in Kazakhstan in late 2006, and

• a $6.2 million decrease due to the completion of the TCO contract in Kazakhstan (Tengiz area) in 2006.

     In our Asia Pacific region, revenues decreased $6.4 million due mainly to completion of our contract within Bangladesh for Rig 225 in March 2007 ($3.2 million) and O&M contracts in Papua New Guinea ($1.4 million) and lower utilization (54 percent) in New Zealand during the third quarter of 2007 ($2.0 million).

     Gross margin, excluding depreciation and amortization, for international land operations increased $15.2 million, due primarily to our operations in Mexico ($4.6 million), Colombia ($4.5 million) and the CIS ($6.0 million). The increases in Colombia and Mexico are attributable to having operations in 2007 compared to no operations during the third quarter of 2006. In the CIS region, our operations in the Karachaganak area of Kazakhstan contributed $2.1 million of gross margin excluding depreciation and amortization; our O&M contract on Sakhalin Island added $1.0 million and Rig 230 in Turkmenistan contributed $2.2 million. The increase in Turkmenistan is due to shutdown costs related to completed contracts incurred in the third quarter 2006.

     International offshore revenues declined $3.4 million to $10.0 million during the third quarter of 2007 compared to the third quarter of 2006. This decrease was due primarily to the sale of our Nigerian barge rigs in the third quarter of 2006 partially offset by higher revenues for Barge Rig 53 in Mexico. Gross margins, excluding depreciation and amortization, for international offshore operations increased $1.7 million as a result of the higher dayrate in Mexico combined with lower costs in the Caspian Sea, offset partially by the sale of the Nigerian barge rigs.

26

RESULTS OF OPERATIONS(continued)

Rental Tools Segment

     Rental tools revenues increased $2.7 million to $35.5 million during the third quarter of 2007 as compared to the third quarter of 2006. The increase was due primarily to an increase in rental revenues of $4.9 million at our Texarkana, Texas operations, $3.2 million from our Evanston, Wyoming operations, and $0.7 million from our international operations, partially offset by declines of $2.9 million and $2.5 million at our Victoria and Odessa, Texas locations, respectively and $0.6 million at our New Iberia, Louisiana operations. Revenues increased as a result of our expansion efforts in Texarkana, Texas and in Wyoming.

     Rental tools gross margins, excluding depreciation and amortization, increased $0.4 million to $20.9 million for the current quarter as compared to the third quarter of 2006. Gross margin percentage, excluding depreciation and amortization, decreased to 59 percent in the current quarter as compared to 62 percent in the comparable period in 2006. The margin decline relates to higher operating costs in the third quarter of 2007. The 2006/2007 expansion of Quail has been completed as equipment has been delivered and Quail’s new facility in Texas, Texas opened in April 2007. The new facility provides increased coverage of the Barnett, Fayetteville and Woodford shale areas in East Texas, Arkansas and Oklahoma.

Other Financial Data

     Gain on asset dispositions was $0.5 million, a decrease of $3.8 million as a result of minor asset sales in the third quarter of 2007 as compared to a gain of $4.3 million in 2006 as a result of the sale of two rigs in Nigeria and a cash gain of $1.9 million in connection with the collection of final insurance proceeds with regards to Barge Rig 57 that was damaged in a July 2005 incident while under tow. Interest expense declined $0.3 million in the third quarter of 2007 as compared to the third quarter of 2006 due primarily to capitalization of $1.3 million in interest on rig construction projects in 2007 as compared to $1.0 million of capitalized interest in the third quarter of 2006. Interest income decreased $0.4 million due to higher investments in marketable securities in the third quarter of 2006 as compared to 2007. General and administration expense decreased $1.8 million as compared to the third quarter of 2006 due to a revision of our allocation method to more fairly match overhead costs directly to our operations.

     In 2004, we entered into two variable-to-fixed interest rate swap agreements. The swap agreements did not qualify for hedge accounting and accordingly, we reported the mark-to-market change in the fair value of the interest rate derivatives in earnings. For the three months ended September 30, 2007, we recognized a $0.3 million decrease in the fair value of the derivative positions and for the three months ended September 30, 2006 we recognized a $1.0 million decrease in the fair value of the derivative positions. For additional information see Note 8 in the notes to the unaudited consolidated condensed financial statements. On July 17, 2007, we terminated one swap scheduled to expire in September 2008 and received $0.7 million. The second swap was not renewed and expired on September 4, 2007.

     Income tax expense was $19.2 million for the third quarter of 2007 as compared to $13.2 million for the third quarter of 2006. Income tax for the third quarter of 2007 includes a benefit of $0.5 million of interest and foreign currency exchange rate fluctuations related to our FIN 48 calculation.

Nine Months Ended September 30, 2007 Compared with Nine Months Ended September 30, 2006

     We recorded net income of $69.5 million for the nine months ended September 30, 2007, as compared to net income of $43.9 million for the nine months ended September 30, 2006. Drilling and rental operating income was $149.8 million for the nine months ended September 30, 2007 as compared to $124.9 million for the nine months ended September 30, 2006. Gain on disposition of assets for the current period was $17.2 million as compared to $6.9 million in the comparable period in 2006.

27

RESULTS OF OPERATIONS(continued)

     The following is an analysis of our operating results for the comparable periods:

	Nine Months Ended September 30,
	2007					2006
	(Dollars in Thousands)
Drilling and rental revenues:
U.S. drilling	$	178,975		38	%	$	135,297		31	%
International drilling		197,867		42	%		214,407		49	%
Rental tools		96,905		20	%		90,401		20	%
Total drilling and rental revenues	$	473,747		100	%	$	440,105		100	%
Drilling and rental operating income:
U.S. drilling gross margin excluding depreciation and amortization (1)	$	102,035		57	%	$	77,069		57	%
International drilling gross margin excluding depreciation and amortization (1)		49,849		25	%		42,901		20	%
Rental tools gross margin excluding depreciation and amortization (1)		58,642		61	%		56,613		63	%
Depreciation and amortization		(60,744	)				(51,665	)
Total drilling and rental operating income (2)		149,782					124,918
General and administration expense		(18,380	)				(23,261	)
Provision for reduction in carrying value of certain assets		(1,091	)				—
Gain on disposition of assets, net		17,216					6,901
Total operating income	$	147,527				$	108,558

(1) Drilling and rental gross margins, excluding depreciation and amortization, are computed as drilling and rental revenues less direct drilling and rental operating expenses, excluding depreciation and amortization expense; drilling and rental gross margin percentages are computed as drilling and rental gross margin, excluding depreciation and amortization, as a percent of drilling and rental revenues. The gross margin amounts, excluding depreciation and amortization, and gross margin percentages should not be used as a substitute for those amounts reported under accounting principles generally accepted in the United States (“GAAP”). However, we monitor our business segments based on several criteria, including drilling and rental gross margin. Management believes that this information is useful to our investors because it more accurately reflects cash generated by segment. Such gross margin amounts are reconciled to our most comparable GAAP measure as follows:

			International
Nine Months Ended September 30, 2007	U.S. Drilling		Drilling		Rental Tools
	(Dollars in Thousands)
Drilling and rental operating income (2)	$	78,126	$	30,259	$	41,397
Depreciation and amortization		23,909		19,590		17,245
Drilling and rental gross margin excluding depreciation and amortization	$	102,035	$	49,849	$	58,642
Nine Months Ended September 30, 2006
Drilling and rental operating income (2)	$	59,822	$	22,654	$	42,442
Depreciation and amortization		17,247		20,247		14,171
Drilling and rental gross margin excluding depreciation and amortization	$	77,069	$	42,901	$	56,613

(2) Drilling and rental operating income — drilling and rental revenues less direct drilling and rental operating expenses, including depreciation and amortization expense.

U.S. Drilling Segment

     Revenues for the U.S drilling segment increased $43.7 million to $179.0 million for the nine months ended September 30, 2007 as compared to the nine months ended September 30, 2006. The increased revenues were primarily due to a $30.0 million increase for our barge drilling operations from significantly higher dayrates that more than offset fewer operating days, primarily related to the sale of workover Barge Rigs 9 and 26 (see Note 5) and the refurbishment of Barge Rig 8 during the third quarter of 2007. Barge Rig 12 was undergoing an upgrade from workover to deep drilling status until late May 2006 and newly constructed Barge Rig 77 also began operations in December 2006. During 2007 we also had two repositioned international land rigs operating in the U.S. market which contributed $9.1 million to the increase in U.S. drilling segment revenues as well as an additional $4.6 million related to the BP Liberty engineering and procurement project.

28

RESULTS OF OPERATIONS(continued)

U.S. Drilling Segment(continued)

     Average dayrates for the deep drilling barge rigs increased approximately $8,900 per day in 2007 as compared to 2006. As a result of approximately 35 percent higher dayrates on all barge rigs, the addition of two land rigs and effective operating cost controls, gross margins, excluding depreciation and amortization, increased $25.0 million to $102.0 million. This increase includes $1.2 million for the two land rigs and $1.8 million for the engineering project referred to above.

International Drilling Segment

     International drilling revenues decreased $16.5 million to $197.9 million during the first nine months of 2007 as compared to the first nine months of 2006. Of this decrease, $2.2 million is related to international land drilling revenues and $14.4 million to revenues from offshore operations. The decline in land revenues relates primarily to the release of rigs previously working under our TCO contract in Kazakhstan and the completion of our contract wells in Turkmenistan, being mostly offset by our operations in Colombia which contributed an additional $26.8 million in revenues. The decline of $14.4 million in offshore operations is due primarily to the sale of our barge rigs in Nigeria.

     Land revenues in the CIS decreased by $17.6 million due to the TCO contract completion in 2006 ($25.6 million), the release of our three rigs in Turkmenistan ($7.3 million) during the third quarter of 2006 and reduction in revenues related to our Sakhalin Island operations ($6.4 million) primarily related to lower reimbursable revenues and the completion of a water reinjection well project in July 2006. In the Karachaganak area of Kazakhstan, revenues increased by $9.0 million as a result of higher dayrates and the addition of Rig 107 (which was released in late December 2005 from the TCO contract) which commenced operations at the end of March 2006 and the addition of Rigs 249 and 258 (from the TCO contract). In addition Rig 236, which began drilling in Kazakhstan in late 2006, contributed $10.1 million in revenues. In our Asia Pacific region, revenues decreased $9.6 million due mainly to terminations of contracts within Bangladesh for Rig 225 ($5.2 million) and for two of our rigs within New Zealand ($3.1 million).

     Gross margin, excluding depreciation and amortization, for international land operations increased by $4.0 million. In Mexico gross margin, excluding depreciation and amortization, improved by $8.7 million due to lower expenses in 2007, as 2006 included costs to close down operations and relocate the rigs out of the country. In Colombia, gross margin, excluding depreciation and amortization, increased by $12.4 million as two rigs drilled the entire period in 2007, compared to no rigs operating in Colombia in the comparable period of 2006. In the Karachaganak area of Kazakhstan, gross margin, excluding depreciation and amortization, increased $4.7 million as two rigs operated all of the period of 2007, compared to one rig in the comparable period of 2006 and also as a result of pre-mobilization standby revenues on another two rigs received in the first nine months of 2007. Rig 236, also in Kazakhstan contributed an increase of $2.4 million for the period of 2007, as this rig was not working in the region in the comparable period in 2006. These increases were partially offset by the completion of contract wells under our TCO contract, the release of rigs in Turkmenistan, and shifting of Rig 122 and 256 to U.S. operations.

     International offshore revenues declined $14.4 million to $26.7 million during the first nine months of 2007 compared to the first nine months of 2006. This decrease was due primarily to the sale of our Nigerian barge rigs in the third quarter of 2006. Revenues for Barge Rig 53 in Mexico increased $3.1 million due to a higher dayrate. Gross margins, excluding depreciation and amortization, for international offshore operations increased $3.8 million as a result of the higher dayrate in Mexico combined with lower costs in the Caspian Sea, partially offset by the sale of the Nigeria barge rigs.

Rental Tools Segment

     Rental tools revenues increased $6.5 million to $96.9 million during the first nine months of 2007 as compared to the first nine months of 2006. The increase was due primarily to an increase in rental revenues of $1.7 million from international rentals and $5.8 million from our Evanston, Wyoming operations, partially offset by a decline of $0.9 million from our Victoria and Odessa, Texas operations.

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RESULTS OF OPERATIONS(continued)

Rental Tools Segment(continued)

     Revenues increased primarily due to higher demand and higher rental tool sales. Rental tools gross margins, excluding depreciation and amortization, increased $2.0 million to $58.6 million for the current period as compared to the comparable period of 2006. Gross margin percentage, excluding depreciation and amortization, decreased to 61 percent in the current period as compared to 63 percent in the comparable period in 2006, due primarily to fewer equipment sales.

Other Financial Data

     Gain on asset dispositions increased by $10.3 million, due primarily to the gain on the sale of the two workover barge rigs in the first quarter of 2007. Interest expense declined $5.3 million in the current period of 2007 as compared to 2006 due to lower average outstanding debt and capitalization of $4.7 million in interest on rig construction projects in 2007. There was $2.0 million of capitalized interest in the first nine months of 2006. Interest income for the current period was relatively unchanged when compared to the same period for 2006. General and administration expense decreased $4.9 million as compared to first nine months of 2006 due to a revision of our allocation method to more fairly match overhead costs directly to our operations.

     In 2004, we entered into two variable-to-fixed interest rate swap agreements. The swap agreements did not qualify for hedge accounting and accordingly, we have reported the mark-to-market change in the fair value of the interest rate derivatives currently in earnings. For the nine months ended September 30, 2007, we recognized a $0.7 million decrease in the fair value of the derivative positions and for the nine months ended September 30, 2006, we recognized a $0.2 million increase in the fair value of the derivative positions. On July 17, 2007, we terminated one swap scheduled to expire in September 2008 and received $0.7 million. In addition, the second swap was not renewed and expired on September 4, 2007.

     Income tax expense was $59.1 million for the first nine months of 2007 as compared to $42.4 million for the third quarter of 2006. The $16.7 million increase in taxes during the current period was due primarily to the impact of the gain on the sale of the two U.S. workover barge rigs, the inclusion of FIN 48 interest and foreign currency exchange rate fluctuation described in Note 6 and the increase in operating income related to U.S. operations.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

     As of September 30, 2007, we had cash, cash equivalents and marketable securities of $67.0 million, a decrease of $88.2 million from December 31, 2006. The primary sources of cash for the nine-month period as reflected on the consolidated condensed statements of cash flows were $52.1 million provided by operating activities, $110.2 million from the issuance of convertible debt, net of issuance costs and hedge and warrant transactions and $15.8 million from stock options exercised. The primary use of cash was $105.2 million used in investing activities, including $191.4 million for capital expenditures, net proceeds of $20.5 million from the sale of two workover barge rigs and $62.9 million in net proceeds from the sale and purchase of marketable securities and a $100.0 million reduction in debt. Major capital expenditures for the period included $55.9 million on construction of new land rigs and $57.2 million for tubulars and other rental tools for the expansion of Quail Tools.

     As of September 30, 2006, we had cash and cash equivalents of $172.3 million, an increase of $94.2 million from December 31, 2005. The primary sources of cash for the nine-month period as reflected on the consolidated condensed statements of cash flows were $110.8 million provided by operating activities, $144.7 million used in investing activities, $58.7 million provided from financing activities, $99.9 million of net proceeds on our common stock issuance in January 2006 and a $50.0 million reduction in debt, net of premium. Major investing activities during the nine-month period ended September 30, 2006 included proceeds of $46.0 million from the sale of two Nigeria barge rigs, a $69.4 million net investment in auction rate securities and $129.0 million for capital expenditures. Major capital expenditures for the period included $19.0 million on construction of four new 2,000 HP land rigs, $30.7 million for tubulars and other rental tools for Quail Tools, $7.4 million on the conversion of workover Barge Rig 12 to a deep drilling barge and $21.5 million on construction of a new ultra-deep drilling barge.

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LIQUIDITY AND CAPITAL RESOURCES(continued)

Financing Activity

     On July 5, 2007, we issued $125.0 million aggregate principal amount of 2.125 percent Convertible Notes due July 15, 2012 pursuant to a prospectus dated June 28, 2007. Interest is payable semiannually on July 15th and January 15th. The initial conversion price is approximately $13.85 per share and is subject to adjustment for the occurrence of certain events stated within the indenture. Proceeds from the transaction were used to call our outstanding Floating Rate notes, to pay the net cost of hedge and warrant transactions, and for general corporate purposes. Effectively, the hedge and warrant transactions increase the conversion price to approximately $18.29 per share.

     On September 20, 2007, we replaced our existing $40.0 million Credit Agreement with a new $60.0 million Amended and Restated Credit Agreement (“2007 Credit Facility”) which expires in September 2012. The 2007 Credit Facility is secured by rental tools equipment, accounts receivable and the stock of substantially all of our domestic subsidiaries, other than domestic subsidiaries owned by a foreign subsidiary and contains customary affirmative and negative covenants such as minimum ratios for consolidated leverage, consolidated interest coverage and consolidated senior secured leverage.

     The 2007 Credit Facility is available for general corporate purposes and to fund reimbursement obligations under letters of credit the banks issue on our behalf pursuant to this facility. Revolving loans are available under the 2007 Credit Facility subject to a borrowing base limitation based on 85 percent of eligible receivables plus a value for eligible rental tools equipment. The 2007 Credit Facility calls for a borrowing base calculation only when the 2007 Credit Facility has outstanding loans, including letters of credit, totaling at least $40.0 million. As of September 30, 2007, there were $13.5 million in letters of credit outstanding and no loans.

     On September 27, 2007, we redeemed $100.0 million face value of our Senior Floating Rate Notes pursuant to a redemption notice dated August 17, 2007 at the redemption price of 101.0 percent. Proceeds from the sale of our Convertible Notes were used to fund the redemption.

     On January 18, 2006 we issued 8,900,000 shares of our common stock pursuant to a Free Writing Prospectus dated January 17, 2006 and a Prospectus Supplement dated January 18, 2006. On January 23, 2006, we realized $11.23 per share or a total of $99.9 million of net proceeds before expenses, but after underwriter discount, from the offering. Proceeds from this offering are being used for capital expansions, including rig upgrades, new rig construction and expansion of our rental tools business.

     On September 8, 2006, we redeemed $50.0 million face value of our Senior Floating Rate Notes pursuant to a redemption notice dated August 8, 2006 at the redemption price of 102.0 percent. Proceeds from the sale of our Nigerian barge rigs and cash on hand were used to fund the redemption.

     We had total long-term debt of $353.9 million as of September 30, 2007. The long-term debt included:

• $125.0 million aggregate principal amount of Convertible Senior Notes bearing interest at a rate of 2.125 percent, which are due July 15, 2012; and

• $225.0 million aggregate principal amount of 9.625 percent Senior Notes, which are due October 1, 2013 plus an associated $3.9 million in unamortized debt premium.

     As of September 30, 2007, we had approximately $113.5 million of liquidity. This liquidity was comprised of $67.0 million of cash and cash equivalents on hand and $46.5 million of availability under the revolving credit facility. We do not have any unconsolidated special-purpose entities, off-balance-sheet financing arrangements nor guarantees of third-party financial obligations. We have no energy or commodity contracts.

31

LIQUIDITY AND CAPITAL RESOURCES(continued)

Financing Activity(continued)

     The following table summarizes our future contractual cash obligations as of September 30, 2007:

			Less than						More than
	Total		1 Year		Years 2 - 3		Years 4 - 5		5 Years
	(Dollars in Thousands)
Contractual cash obligations:
Long-term debt — principal (1)	$	350,000	$	—	$	—	$	125,000	$	225,000
Long-term debt — interest (1)		142,666		24,313		48,625		48,072		21,656
Operating leases (2)		9,074		4,625		3,446		1,003		—
Purchase commitments (3)		24,232		24,232		—		—		—
Total contractual obligations	$	525,972	$	53,170	$	52,071	$	174,075	$	246,656
Commercial commitments:
Revolving credit facility (4)	$	—	$	—	$	—	$	—	$	—
Standby letters of credit (4)		13,529		13,529		—		—		—
Total commercial commitments	$	13,529	$	13,529	$	—	$	—	$	—

(1)	Long-term debt includes the principal and interest cash obligations of the 9.625 percent Senior Notes. The remaining unamortized premium of $3.9 million is not included in the contractual cash obligations schedule.
(2)	Operating leases consist of lease agreements in excess of one year for office space, equipment, vehicles and personal property.
(3)	We have purchase commitments outstanding as of September 30, 2007, related to rig upgrade projects and new rig construction. In addition, we expect to contribute an additional $20-$25 million to our Saudi Arabia joint venture in the next six to nine months, as our share of additional rig costs.
(4)	We have a $60.0 million revolving credit facility. As of September 30, 2007, no amounts have been drawn down, but $13.5 million of availability has been used to support letters of credit that have been issued, resulting in an estimated $46.5 million of availability. The revolving credit facility expires September 20, 2012.

OTHER MATTERS

Critical Accounting Policies

     Accounting for Uncertainty in Income Taxes —Our accounting policy for income taxes was recently modified due to the adoption of FIN 48 on January 1, 2007. In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). The preparation of financial statements in accordance with FIN 48 requires management to make estimates and assumptions that affect amounts of liabilities reported and related disclosures due to the uncertainty as to the final resolution of certain tax matters. We have discussed those estimates that we believe are critical and require the use of complex judgment in their application in Note 6 of this quarterly report on 2007 Form 10-Q. The application of the prescribed factors in evaluating and estimating our tax positions and tax benefits may result in recognition of liabilities due to uncertainties of certain tax positions. Because the recognition of liabilities may require periodic adjustments and may not necessarily imply any change in management’s assessment of the ultimate outcome of such tax matters, the amount recorded as a liability for unrecognized tax benefits may not accurately anticipate actual outcomes. Other than the adoption of FIN 48, our critical accounting policies and the methodologies and assumptions we apply under them have not materially changed since the date of our 2006 Form 10-K.

32

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We have used derivative instruments to manage risks associated with interest rate fluctuations in connection with our $100.0 million Senior Floating Rate Notes which were fully redeemed on September 27, 2007. These derivative instruments, which consisted of variable-to-fixed interest rate swaps, did not meet the hedge criteria in SFAS No. 133 and were therefore not designated as hedges. Accordingly, the change in the fair value of the interest rate swaps was recognized in earnings.

     On July 17, 2007, we terminated one swap scheduled to expire in September 2008 and received $0.7 million. On September 4, 2007, our one remaining swap expired.

ITEM 4.CONTROLS AND PROCEDURES

     Evaluation of Disclosure Controls and Procedures —We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure based on the definition of “disclosure controls and procedures” in Rule 13a-15(e). In designing and evaluating the disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. We performed evaluations under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2007. Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level at September 30, 2007.

     Changes in Internal Control Over Financial Reporting—There have been no changes in our internal control over financial reporting during the quarter ended September 30, 2007 covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II.OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

     For information regarding legal proceedings, see Note 11, “Contingencies,” in Item 1 of this quarterly report on Form 10-Q, which information is incorporated herein by reference into this item.

ITEM 1A.RISK FACTORS

     There have been no material changes in risk factors involving the Company or its subsidiaries from those previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006.

ITEM 2.CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES

					Total Number		Maximum Number
					of Shares Purchased		of Shares That May
					as Part of Publicly		Yet be Purchased
	Total Number of		Average Price		Announced Plans		Under the Plans
Date	Shares Purchased		Paid Per Share		or Programs		or Programs
March 31, 2007		3,306	$	9.79		—		—
April 6, 2007		181,530	$	9.85		—		—
May 6, 2007		59,328	$	11.35		—		—

33

ITEM 3.DEFAULTS UPON SENIOR SECURITIES

     None.

ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     None.

ITEM 5.OTHER INFORMATION

     None.

34

ITEM 6.EXHIBITS

     (a) Exhibits: The following exhibits are filed as a part of this report:

Exhibit
Number	Description
3.1	Restated Certificate of Incorporation (as amended) of Parker Drilling Company.
4.1	Indenture, dated as of July 5, 2007, among Parker Drilling Company, the guarantors from time to time party thereto, and The Bank of New York Trust Company, N.A., with respect to the 2.125 percent Convertible Senior Notes due 2013 (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on July 5, 2007).
4.2	Form of 2.125 percent Convertible Senior Note due 2013 (included in Exhibit 4.1).
10.1	Confirmation of Convertible Bond Hedge Transaction, dated as of June 28, 2007, by and between Parker Drilling Company and Bank of America, N.A. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 5, 2007).
10.2	Confirmation of Convertible Bond Hedge Transaction, dated as of June 28, 2007, by and between Parker Drilling Company and Deutsche Bank AG, London Branch (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on July 5, 2007).
10.3	Confirmation of Convertible Bond Hedge Transaction, dated as of June 28, 2007, by and between Parker Drilling Company and Lehman Brothers OTC Derivatives Inc. (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on July 5, 2007).
10.4	Confirmation of Issuer Warrant Transaction dated as of June 28, 2007, by and between Parker Drilling Company and Bank of America, N.A. (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on July 5, 2007).
10.5	Confirmation of Issuer Warrant Transaction, dated as of June 28, 2007, by and between Parker Drilling Company and Deutsche Bank AG, London Branch (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on July 5, 2007).
10.6	Confirmation of Issuer Warrant Transaction dated as of June 28, 2007, by and between Parker Drilling Company and Lehman Brothers OTC Derivatives Inc. (incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed on July 5, 2007).
10.7	Amendment to Confirmation of Issuer Warrant Transaction dated as of June 29, 2007, by and between Parker Drilling Company and Bank of America, N.A. (incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K filed on July 5, 2007).
10.8	Amendment to Confirmation of Issuer Warrant Transaction, dated as of June 29, 2007, by and between Parker Drilling Company and Deutsche Bank AG, London Branch (incorporated by reference to Exhibit 10.8 to the Company’s Current Report on Form 8-K filed on July 5, 2007).
10.9	Amendment to Confirmation of Issuer Warrant Transaction, dated as of June 29, 2007, by and between Parker Drilling Company and Lehman Brothers OTC Derivatives Inc. (incorporated by reference to Exhibit 10.9 to the Company’s Current Report on Form 8-K filed on July 5, 2007).
10.10	Amended and Restated Credit Agreement, dated September 20, 2007, by and between the Company, the several lenders thereto, Lehman Brothers, Inc., as syndication agent, Bank of America, N.A., as Sole Advisor, Sole Lead Arranger and Sole Bookrunner, and Lehman Commercial Paper, Inc., as Administrative Agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 25, 2007)
31.1	Section 302 Certification – Chairman and Chief Executive Officer
31.2	Section 302 Certification – Senior Vice President and Chief Financial Officer
32.1	Section 906 Certification – Chairman and Chief Executive Officer
32.2	Section 906 Certification – Senior Vice President and Chief Financial Officer

35

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	PARKER DRILLING COMPANY
Date: November 9, 2007	Registrant
	By:	/s/ Robert L. Parker Jr.
		Robert L. Parker Jr.
		Chairman and Chief Executive Officer
	By:	/s/ W. Kirk Brassfield
		W. Kirk Brassfield
		Senior Vice President and Chief Financial Officer

36

INDEX TO EXHIBITS

Exhibit
Number	Description
3.1	Restated Certificate of Incorporation (as amended) of Parker Drilling Company.
31.1	Section 302 Certification – Chairman and Chief Executive Officer
31.2	Section 302 Certification – Senior Vice President and Chief Financial Officer
32.1	Section 906 Certification – Chairman and Chief Executive Officer
32.2	Section 906 Certification – Senior Vice President and Chief Financial Officer

37