Summary - We reported solid financial results from operations for the fourth quarter and the year ended 2008. As we anticipated in the third quarter, the effect of the global economic downturn and substantial drop in oil and natural gas prices has primarily been limited to our U.S. Gulf of Mexico ("GOM") barge business. Utilization of our international rigs was solid during the fourth quarter, and our rental tool business continued to perform at high utilization rates.

The worldwide economy has continued to slow and the global recession continues to widen. We believe that our strategy, performance and diversification have been sound, and have cushioned us from the severity of current market forces, but the nature and extent of any reduction in worldwide demand for drilling as a consequence of a worldwide economic recession and its ultimate effect on our operations is still unknown. We believe that utilization of our international rigs will remain stable in 2009 due to the number of rigs under long term contracts (see Item 1A - Risk Factors), and expect our rental tools business to remain stable as well. Accordingly, we expect our operating performance in these two segments to be better than what current industry trends would indicate. We expect utilization of our GOM barge rigs to remain at low levels for the near future as customers in this market are watching energy prices and waiting for signs of stability before making decisions on spending plans for 2009. However, operators may curtail or delay projects that are dependent upon financing or may experience an inability to pay suppliers and/or service companies, including our Company. We have not experienced material delays in payments from our customers.

Overview - In the fourth quarter of 2008 we took a $100.3 million non-cash goodwill charge primarily as a result of the application of SFAS No. 142 in today's economic environment. Current accounting rules require a comparison of carrying values of assets including goodwill to current equity is in excess of market capitalization. The write off eliminates all of the goodwill that was recognized at the time we acquired our rental tools business and GOM barge rigs in 1996. This goodwill write off will have no impact on ongoing operations or cash flows. Exclusive of the goodwill charge, we achieved record operating results for the entire year.

In the fourth quarter of 2008 gross margin declined $4.6 million to $47.7 million as compared to $52.3 million for the third quarter of 2008. Our GOM barge business gross margin was $5.5 million for the fourth quarter of 2008, lower than the $14.2 gross margin achieved in the third quarter of 2008. For the year, GOM results, while lower than previous periods, were solid at $54.0 million operating gross margin.

Gross margin for our international drilling operations declined in the fourth quarter of 2008 as compared to the third quarter of 2008 overall by $1.5 million due to $5.2 million related to equipment changes that delayed drilling on our four rig contract in Western Kazakhstan. Gross margins in our other international operations increased by $3.7 million in the fourth quarter of 2008 as compared to the third quarter of 2008, with increases coming from all regions and all areas other than the Karachaganak area in Western Kazakhstan discussed above. Overall, utilization for our international fleet was 87 percent for the fourth quarter of 2008 as compared to 84 percent in the third quarter of 2008.

Rental tools gross margin increased 3.5 percent in the fourth quarter of 2008, as compared to the third quarter of 2008 as a result of increased rental tools sales. Our rental tools segment achieved another year of record operating results.

Gross margin from our contract and engineering services business increased $5.4 million in the fourth quarter of 2008 as compared to the third quarter of 2008, primarily as a result of higher dayrates on our operations and maintenance contracts, and earnings on our rig construction project.

Capital expenditures for 2008 totaled $213.9 million, including major projects of $153.7 million and $58.7 for maintenance and drill pipe. Major projects included completion of new rigs of approximately $62.7 million, construction on AADU rigs and office set up for Alaska operations of $58.3 million,

Overview (continued)

$21.2 million upgrades and refurbishments for GOM barges and $11.6 million for equipment and property for our rental tools business. Cash expenditures totaled $197.1 million, with an additional $16.8 million in accrued expenditures.

Outlook - We expect solid earnings from our international operations throughout 2009. We expect increases in earnings for our four rig contract in Kazakhstan as drilling resumed in late December 2008 for one rig, February 2009 for two and in early March 2009 for the last rig. Two of these rigs are under contract through mid 2010 and the other two through mid 2011. In Mexico we have eight rigs drilling, two of which are under contract through mid 2009, four of which are under contract through early to mid 2010, one through the third quarter of 2012, and one with a recent three well extension which is expected to keep the rig operating throughout 2009. Current utilization of our international rigs is at 74 percent.

Our rental tools operations should remain stable as we anticipate many of our major oil company customers will continue to operate at current levels, primarily in deepwater E&P projects. In fact, several of our largest customers have indicated that their drilling programs will continue at prior year levels. In addition, we expect the development of unconventional resource plays to continue through 2009 as operators ensure that they satisfy their drilling obligations under oil and gas leases in these areas, particularly in the Haynesville Shale area, which are generally short term and expensive.

We also expect solid results from our project management and engineering services segment, including increased earnings from our construction contract segment in 2009. These increased earnings are due primarily to the BP Liberty construction contract as we progress toward the completion of the construction and delivery of the rig which is targeted for the first quarter 2010. Earnings on this project are based on percentage of completion.

Current U.S. GOM barge utilization is 20% with only three rigs drilling. Barge 76 will resume operation in early March 2009 after the completion of shipyard refurbishments. We are in discussion with other customers regarding drilling prospects which could be awarded as early as March 2009. However, we currently have no assurance that GOM utilization will increase as this is dependent upon the factors noted above. (See also Risk Factors in Item 1A).

Capital expenditures for 2009 are projected to be approximately $180 - $200 million which includes approximately $125 - $135 million for major projects and $30 - $35 million for maintenance and drill pipe spending of which $25 - $30 million is for Quail. Major projects are comprised primarily of $100 million to complete the Alaskan AADU ("Alaskan Arctic Drilling Units") rigs and facilities and approximately $25 million for upgrades for our barge rig operating in the Caspian Sea.

On September 12, 2008 we drew down $10 million on our revolving credit facility, and on October 16 and 17, 2008, we drew down an additional aggregate amount of $48 million. The funds will be used over the next 12 months to fund the construction of two new-build rigs to perform the five year drilling contract in Alaska based on the executed letter of intent with BP.

Year Ended December 31, 2008 Compared with Year Ended December 31, 2007

We recorded net income of $25.6 million for the year ended December 31, 2008 which included a goodwill write-off of $100.3 million, as compared to net income of $104.1 million for the year ended December 31, 2007. Operating gross margin was $191.5 million for the year ended December 31, 2008 which consists of increases in international drilling operations, project management and engineering services, construction contract and rental tools of $63.6 million offset by a decrease of $41.7 million in U.S. drilling and a $31.2 million increase in depreciation expense as compared to the year ended December 31, 2007.

In 2008, we began separate presentation of our project management and engineering services segment. . We have begun to separately monitor this non-capital intensive segment as a focus of our long-term strategic growth plan. Prior to 2008, these results were included in the U.S. and International drilling segments, and as

Overview (continued)

such, 2007 segment information has been recasted to conform to the new presentation. We also created a new segment in 2008 to separately reflect results of our extended-reach rig construction contract.

                       RESULTS OF OPERATIONS (continued)

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


                                                                    Year Ended December 31,
                                                                2008                       2007
                                                                    (Dollars in Thousands)

Revenues:
U.S. drilling                                           $  173,633         21 %    $ 225,263         34 %
International drilling                                     325,096         39 %      213,566         33 %
Project management and engineering services                110,147         13 %       77,713         12 %
Construction contract                                       49,412          6 %            -
Rental tools                                               171,554         21 %      138,031         21 %

Total revenues                                          $  829,842        100 %    $ 654,573        100 %

Operating gross margin:
U.S. drilling gross margin excluding depreciation and
amortization(1)                                         $   89,202         51 %    $ 130,911         58 %
International drilling gross margin excluding
depreciation and amortization(1)                            93,687         29 %       59,227         28 %
Project management and engineering services gross
margin excluding depreciation and amortization(1)           18,470         17 %       12,732         16 %
Construction contract gross margin excluding
depreciation and amortization(1)                             2,597          5 %            -
Rental tools gross margin excluding depreciation and
amortization(1)                                            104,506         61 %       83,654         61 %
Depreciation and amortization                             (116,956 )                 (85,803 )

Total operating gross margin(2)                            191,506                   200,721
General and administrative expense                         (34,708 )                 (24,708 )
Impairment of goodwill                                    (100,315 )
Provision for reduction in carrying value of certain
assets                                                           -                    (1,462 )
Gain on disposition of assets, net                           2,697                    16,432

Total operating income                                  $   59,180                 $ 190,983

(1) Gross margins, excluding depreciation and amortization, are computed as revenues less direct operating expenses, excluding depreciation and amortization expense; gross margin percentages are computed as gross margin, excluding depreciation and amortization, as a percent of 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 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:

                       RESULTS OF OPERATIONS (continued)


                                                                                        Project
                                                                                       Management
                                                                  International           and           Construction
                                             U.S. Drilling          Drilling          Engineering         Contract          Rental Tools
Year Ended December 31, 2008                                                   (Dollars in Thousands)

Operating gross margin(2)                   $        53,964      $        41,786      $     18,470      $       2,597      $       74,689
Depreciation and amortization                        35,238               51,901                 -                  -              29,817

Operating gross margin excluding
depreciation and amortization               $        89,202      $        93,687      $     18,470      $       2,597      $      104,506

Year Ended December 31, 2007
Operating gross margin(2)                   $        97,679      $        31,046      $     12,732      $           -      $       59,264
Depreciation and amortization                        33,232               28,181                 -                  -              24,390

Operating gross margin excluding
depreciation and amortization               $       130,911      $        59,227      $     12,732      $           -      $       83,654

(2) Operating gross margin - revenues less direct operating expenses, including depreciation and amortization expense.

U.S. Drilling Segment

Revenues for the U.S drilling segment decreased $51.6 million to $173.6 million for the year ended December 31, 2008 as compared to the year ended December 31, 2007. The decreased revenues were primarily due to a $40.3 million decrease for our barge drilling operations as average dayrates for our deep drilling barges fell approximately $4,500 per day. Also in 2007 we had two land rigs drilling in the U.S. that historically operate in our international land segment. These rigs contributed $11.3 million in revenues as compared to no U.S. revenues in the same period for 2008 as the two rigs were relocated to our Mexico operations during 2007.

As a result of the above mentioned factors, gross margins, excluding depreciation and amortization, decreased $41.7 million to $89.2 million for the year ended December 31, 2008 as compared to the same period of 2007.

International Drilling Segment

International drilling revenues increased $111.5 million to $325.1 million for the year ended December 31, 2008 as compared to the same period in 2007.

Revenues in Mexico, Algeria and Turkmenistan increased by $69.0 million, $11.1 million and $3.6 million, respectively, as there were minimal drilling operations in these countries during 2007 and a dayrate increase for our barge rig operating in Mexico. Revenues in the CIS region increased by $63.7 million primarily attributable to a $19.5 million increase in the Karachaganak area of Kazakhstan as a result of the addition of Rigs 249 and 258 to existing operations of Rigs 107 and 216, an increase in the dayrate for our barge rig operating in the Caspian Sea and the above mentioned Turkmenistan revenues. These increases were offset by lower utilization of our two rigs in Colombia in 2008, resulting in a decrease of $22.2 million as compared to 2007.

In our Asia Pacific region, revenues decreased $8.2 million due mainly to completion of our contract within Bangladesh for Rig 225 in March 2007
($3.5 million), lower utilization (50%) in Papua New Guinea ($15.6 million)
being partially offset by a $4.8 million increase in New Zealand due to increased dayrates and operating days and a $6.2 million increase in our Indonesia operations.

International operating gross margin, excluding depreciation and amortization, increased $34.5 million to $93.7 million during the year ended 2008 compared to the year ended 2007, due primarily to favorable increases in our operations in Mexico ($25.5 million) and the CIS region ($21.4 million), offset by decreases in Colombia ($14.3 million) and our Asia Pacific region ($2.2 million). The increase in Mexico is attributable to five rigs operating the entire period in 2008 and two rigs commencing operations in February in 2008 as we were in the start up phase for these operations in the third quarter of 2007. In the CIS region, the primary driver was the increased dayrates for our barge rig operating in the Caspian Sea, increased utilization in the

International Drilling Segment (continued)

Karachaganak area of Kazakhstan and operation of Rig 230 in Turkmenistan were the main drivers of the $24.1 million increase. In Colombia, the completion of our contracts in late 2007 and late February 2008 were the cause of the decrease, although Rig 268 began a one year contract in mid-May 2008. Our Asia Pacific region decline of $2.2 million was a result of Rig 225 in Bangladesh not operating in 2008 as compared to 2007 and Papua New Guinea incurring lower utilization when compared to the same period of 2007, with these declines being partially offset by increases in our New Zealand and Indonesia operations.

Project Management and Engineering Services Segment

Revenues for this segment increased $32.4 million during 2008 as compared to 2007. This increase was the result of higher revenues for our operations in Sakhalin Island ($20.9 million) and Kuwait ($13.1 million). For Sakhalin operations, $9.1 million was due to higher dayrates and $11.8 million due to reimbursable expenses on which we earn a fixed fee. For our Kuwait contract $11.0 million of the increase was due to reimbursables and $2.1 million was due to additional services provided. These increases were partially offset by a decrease of $1.9 million in our Papua New Guinea project management contracts that ceased operations during 2007. Project management and engineering services do not incur depreciation and amortization, and as such, gross margin for this segment increased $5.7 million in the current period as compared to the prior period. Labor rate increases effective in November 2008 which were retroactive to June 2008, positively impacted gross margin.

Construction Contract Segment

Revenues from the construction of the extended-reach drilling rig for use in the Alaskan Beaufort Sea were $49.4 million for 2008. This project is a cost plus fixed fee contract. Gross margin for the EPCI project was $2.6 million based on the percentage of completion of the contract in which costs-to-date compared to projected total costs are used to determine the percent complete (cost to cost method).

Rental Tools Segment

Rental tools revenues increased $33.5 million to $171.6 million during the year ended December 31, 2008 as compared to 2007. The increase was due primarily to an increase in rental revenues of $13.6 million at our Texarkana, Texas facility, $2.8 million at our New Iberia, Louisiana facility, $20.2 million from our newest location in Williston, North Dakota and $1.3 million from our Victoria, Texas location, partially offset by declines of $0.9 million from our Evanston, Wyoming facility, $1.7 million at our Odessa, Texas location and $1.8 million at our international operations. Revenues increased as a result of our expansion efforts in Texarkana, Texas and Williston, North Dakota.

Rental tools gross margins, excluding depreciation and amortization, increased $20.9 million to $104.5 million for the current period as compared to 2007. The 2007 and 2008 expansion of Quail has been completed as equipment has been delivered and Quail's new facility in Texarkana, Texas opened in April 2007. The new facility provides increased coverage of the Barnett, Fayetteville, Woodford and Haynesville shale areas in East Texas, Southwest Arkansas, Southeast Oklahoma and Northwest Louisiana.

Other Financial Data

Gain on asset dispositions was $2.7 million, a decrease of $13.7 million as a result of minor asset sales in 2008 as compared to gains of $16.4 million during the same period in 2007 as we sold two workover barge rigs in January 2007 for a recognized gain of $15.1 million. Interest expense for 2008 was relatively unchanged as compared to the same period of 2007. Interest income for 2008 decreased $5.1 million due to lower cash balances available for investments as compared to 2007. General and administration expense increased $10.0 million as compared to the year ended 2007, due primarily to higher legal and professional fees associated with the ongoing DOJ and SEC investigations into the customs agent discussed in Note 13 in

Other Financial Data (continued)

the notes to the consolidated financial statements. These fees included upgrades to our compliance process and code of conduct.

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. During 2008, we had no swaps outstanding and therefore reported no charge or benefit related to swaps, as compared to the year ended December 31, 2007 where we recognized a $0.7 million decrease in the fair value of the derivative positions. For additional information see Note 6.

Income tax expense was $8.8 million for the year ended December 31, 2008, as compared to income tax expense of $37.7 million for the year ended December 31, 2007. Income tax expense for 2008 includes a benefit of $13.4 million of FIN 48 interest and foreign currency exchange rate fluctuations related to our settlement of interest related to our Kazakhstan tax case (see Note 13
- Kazakhstan Tax Case), the establishment of a valuation allowance of $4.1 million related to a Papua New Guinea deferred tax asset, the reversal of a $5.7 million valuation allowance relating to 2007 foreign tax credits, a charge of $4.5 million accounted for under FIN 48 related to certain intercompany transactions between our U.S. companies and foreign affiliates, a charge of $12.6 million related to non-deductible goodwill and a benefit of $12.2 million for the recovering of prior years foreign taxes as a credit in the U.S. versus a deduction. Based on the level of projected future taxable income over the periods for which the deferred tax asset is deductible in Papua New Guinea, management believes that it is more likely than not that our subsidiary will not realize the benefit of this deduction in Papua New Guinea.

Year Ended December 31, 2007 Compared with Year Ended December 31, 2006

We recorded net income of $104.1 million for the year ended December 31, 2007, as compared to net income of $81.0 million for the year ended December 31, 2006. Operating gross margin was $200.7 million for the year ended December 31, 2007 as compared to $167.5 million for the year ended December 31, 2006. Gain on disposition of assets for 2007 was $16.4 million as compared to $7.6 million in the comparable period in 2006.

                       RESULTS OF OPERATIONS (continued)


Other Financial Data (continued)

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


                                                                   Year Ended December 31,
                                                                2007                      2006
                                                                    (Dollars in Thousands)

Revenues:
U.S. drilling                                           $ 225,263         34 %    $ 191,225         33 %
International drilling                                    213,566         33 %      184,280         31 %
Project management and engineering services                77,713         12 %       88,936         15 %
Rental tools                                              138,031         21 %      121,994         21 %

Total revenues                                          $ 654,573        100 %    $ 586,435        100 %

Operating gross margin:
U.S. drilling gross margin excluding depreciation and
amortization(1)                                         $ 130,911         58 %    $ 107,689         56 %
International drilling gross margin excluding
depreciation and amortization(1)                           59,227         28 %       39,964         22 %
Project management and engineering services gross
margin excluding depreciation and amortization(1)          12,732         16 %       13,616         15 %
Rental tools gross margin excluding depreciation and
amortization(1)                                            83,654         61 %       75,540         62 %
Depreciation and amortization                             (85,803 )                 (69,270 )

Total operating gross margin(2)                           200,721                   167,539
General and administrative expense                        (24,708 )                 (31,786 )
Provision for reduction in carrying value of certain
assets                                                     (1,462 )                       -
Gain on disposition of assets, net                         16,432                     7,573

Total operating income                                  $ 190,983                 $ 143,326

(1) Operating gross margins, excluding depreciation and amortization, are computed as revenues less operating expenses, excluding depreciation and amortization expense; operating gross margin percentages are computed as gross margin, excluding depreciation and amortization, as a percent of 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 operating gross margin. Management

                       RESULTS OF OPERATIONS (continued)


Other Financial Data (continued)

    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:




. . .