This management's discussion and analysis of financial condition and results of operations ("MD&A") section of our Quarterly Report on Form 10-Q discusses our results of operations, liquidity and capital resources, and certain factors that may affect our future results, including economic and industry-wide factors. You should read this MD&A in conjunction with our condensed financial statements and accompanying notes included under Part I, Item 1, of this Quarterly Report, as well as with our Annual Report on Form 10-K for the calendar year ended December 31, 2007.

Statements we make in the following MD&A discussion and in other parts of this report that express a belief, expectation or intention, as well as those which are not historical fact, are forward-looking statements within the meaning of the federal securities laws and are subject to risks, uncertainties and assumptions. These forward-looking statements may be identified by the use of words such as "expect," "anticipate," "believe," "estimate," "potential" or similar words. These matters include statements concerning management's plans and objectives relating to our operations or economic performance and related assumptions, including general economic and business conditions and industry trends, the continued strength or weakness of the contract land drilling industry in the geographic areas in which we operate, decisions about onshore exploration and development projects to be made by oil and gas companies, the highly competitive nature of our business, our future financial performance, including availability, terms and deployment of capital, the continued availability of qualified personnel, and changes in, or our failure or inability to comply with, government regulations, including those relating to the environment. We specifically disclaim any duty to update any of the information set forth in this report, including any forward-looking statements. Forward-looking statements are made based on management's current expectations and beliefs concerning future events and, therefore, involve a number of assumptions, risks and uncertainties, including the risk factors described in Part II. Item 1A, "Risk Factors," below. Management cautions that forward-looking statements are not guarantees, and our actual results could differ materially from those expressed or implied in the forward-looking statements.

Company Overview

Union Drilling, Inc. ("Union," "Company" or "we") provides contract land drilling services and equipment, primarily to natural gas producers in the United States. In addition to our drilling rigs, we provide the drilling crews and most of the ancillary equipment needed to operate our drilling rigs. We commenced operations in 1997 with 12 drilling rigs and related equipment acquired from an entity providing contract drilling services under the name "Union Drilling." Through a combination of acquisitions and new rig construction, we have increased the size of our fleet to 71 marketed land drilling rigs. We presently focus our operations in selected natural gas production regions in the United States, primarily the Fort Worth Basin in North Texas, the Arkoma Basin in Oklahoma and Arkansas and throughout the Appalachian Basin. We do not invest in oil and natural gas properties.

We completed several transactions from 2005 through 2008 that enhanced our ability to serve our markets. These transactions provided us with unconventional natural gas contract drilling operations in North Texas and the Arkoma Basin. We have purchased existing rigs and newly constructed rigs and have devoted significant capital expenditures to upgrade other rigs in our fleet for underbalanced and horizontal drilling. These investments have positioned our fleet to capitalize on our customers' unconventional formation exploration and development activity.

Key Indicators of Financial Performance for Management

Significant performance measurements in our industry are rig utilization, revenue per revenue day and operating expenses per revenue day. Revenue days for each rig are days when the rig is earning revenues under a contract, which is usually a period from the date the rig begins moving to the drilling location until the rig is released from the contract. We compute rig utilization rates by dividing revenue days by total available days during a period. Total available days are the number of calendar days during the period that we have owned the marketed rig. During 2008, three rigs were removed from our marketed rig fleet, and the components were made available for use on other rigs.

The following table summarizes management's key indicators of financial performance for the three and nine months ended September 30, 2008 and 2007.

                                          Three Months Ended          Nine Months Ended
                                             September 30,              September 30,
                                           2008          2007         2008          2007
   Revenue days                              4,823        4,597        13,004       13,400
   Average number of marketed rigs            71.0         71.0          71.0         70.5
   Marketed rig utilization rates             73.8 %       70.4 %        66.8 %       70.0 %
   Revenue per revenue day              $   17,093     $ 16,737     $  17,064     $ 16,543
   Operating expenses per revenue day   $   10,879     $  9,548     $  11,138     $  9,551

Critical Accounting Policies and Estimates

Revenue and cost recognition - We generate revenue principally by drilling wells for natural gas producers on a contracted basis under daywork or footage contracts, which provide for the drilling of single or multiple well projects. Revenues on daywork contracts are recognized based on the days worked at the dayrate each contract specifies. Mobilization fees are recognized as the related drilling services are provided. We recognize revenues on footage contracts based on the footage drilled for the applicable accounting period. Expenses are recognized based on the costs incurred during that same accounting period.

Accounts receivable- We evaluate the creditworthiness of our customers based on their financial information, if available, information obtained from major industry suppliers, and our past experiences with the customer. In some instances, we require new customers to establish escrow accounts or make prepayments. We typically invoice our customers during the performance of daywork contracts and upon completion of the daywork contract. Footage contracts are invoiced upon completion of the contract. Our contracts generally provide for payment of invoices in 30 days. We established an allowance for doubtful accounts of approximately $2.2 million and $311,000 at September 30, 2008 and December 31, 2007, respectively. Any allowance established is subject to judgment and estimates made by management. We determine our allowance by considering a number of factors, including the length of time trade accounts receivable are past due, our previous loss history, our assessment of our customers' current abilities to pay obligations to us and the condition of the general economy and the industry as a whole. We write off specific accounts receivable when they become uncollectible.

At September 30, 2008 and December 31, 2007, our unbilled receivables, excluding the reserve for sales credits, totaled $2.2 million and $4.3 million, respectively, all of which relates to the revenue recognized but not yet billed, on daywork and footage contracts in progress at September 30, 2008 and December 31, 2007, respectively. The $2.1 million decrease at September 30, 2008 compared to December 31, 2007 is due to an increase in month end progress billings to customers during the performance of daywork contracts, and is reflected as an increase in billed receivables. As of September 30, 2008 and December 31, 2007, the reserve for sales credits was approximately $208,000 and $186,000, respectively.

Accrued workers' compensation - The Company accrues for costs under its workers' compensation insurance program in accrued expenses and other liabilities. We have a deductible of $100,000 per covered accident under our workers' compensation insurance. Our insurance policy requires us to maintain a letter of credit to cover our deductible payments. As of September 30, 2008 and December 31, 2007, we satisfied this requirement with letters of credit totaling $4.3 million and $5.0 million, respectively, with our bank and our borrowing capacity under our revolving credit agreement with our bank has been reduced by the same amount. We accrue for these costs as claims are incurred based on cost estimates established for each claim by the insurance companies providing the administrative services for processing the claims, including estimates for incurred but not reported claims, claims paid directly by us, administrative costs associated with these claims and our historical experience with these types of claims. Some of our employees, primarily those engaged in our Texas field operations, are considered to be "shared employees." Under this arrangement, certain human resource functions, including the workers' compensation and payroll liabilities, are assumed by the third-party professional employer organization.

Stock-based compensation - Compensation cost resulting from share-based payment awards are measured at fair value and recognized in general and administrative expense on a straight line basis over the requisite service period for the entire award. The amount of compensation cost recognized at any date is at least equal to the portion of the grant-date value of the award that is vested at that date. For the three and nine months ended September 30, 2008, the Company recorded stock-based compensation expense of approximately $792,000 ($532,000, net of tax) and $1.3 million ($927,000, net of tax), respectively. For the three and nine months ended September 30, 2007, the Company recorded stock-based compensation expense of approximately $217,000 ($165,000, net of tax) and $700,000 ($534,000, net of tax), respectively. Total unamortized stock-based compensation was $5.2 million at September 30, 2008 and will be recognized over a weighted average service period of 3.4 years.

The fair value of stock options granted is estimated using the Black-Scholes option valuation model based on assumptions for the risk-free interest rate, expected life of the option, dividend yield and volatility of our stock price. Volatility is based upon price performance of the Company and a peer company, as the Company does not have a sufficient historical price base to determine potential volatility over the term of the issued options. No stock options were granted during the nine months ended September 30, 2008. The fair value of restricted stock or restricted stock units is the closing trade price of the Company's stock on the date of grant. During the nine months ended September 30, 2008, 200,000 restricted stock units were granted.

New shares of common stock are issued to satisfy options exercised. Cash received from the exercise of options during the nine months ended September 30, 2008 was approximately $416,000. The tax benefit realized from stock option exercises is included as a cash inflow from financing activities on the condensed statements of cash flows.

Goodwill - The Company assesses the impairment of its goodwill annually or on an interim basis if events or circumstances indicate that the fair value of the asset has decreased below its carrying value. If the carrying value of goodwill is determined to be impaired, it is reduced for the impaired value with a corresponding charge to pretax earnings in the period in which it is determined to be impaired. During the fourth quarter of 2008, the Company's stock price has declined significantly, resulting in the Company's market capitalization being below the book value of the Company. As a result of this condition, the Company will perform an impairment test of its goodwill in the fourth quarter, and it is reasonably possible that an impairment of the Company's goodwill may be recognized in the future.

Results of Operations

Our operations primarily consist of drilling natural gas wells for our customers under either daywork contracts and, to a lesser extent, footage contracts. Contract terms we offer generally depend on the complexity and risk of operations, the on-site drilling conditions, the type of equipment used, the anticipated duration of the work to be performed and the overall demand for rigs in our markets. Our contracts generally provide for the drilling of a specified number of wells or a specific period of time for which the rig will be under contract.