• 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;

• 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;

• inability of the Company to access the credit markets;

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

• worldwide demand for oil;

• fluctuations in the market prices of oil and natural 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;

• changes in the tax laws that would allow double taxation on foreign sourced income;

• the outcome of our investigation and the parallel investigations by the Securities and Exchange Commission and the Department of Justice into possible violations of U.S. law, including the Foreign Corrupt Practices Act;

• adverse environmental events;

• adverse weather conditions;

• global health concerns;

DISCLOSURE NOTE REGARDING FORWARD-LOOKING STATEMENTS (continued)
• changes in the concentration of customer and supplier relationships;

• ability of our customers and suppliers to obtain financing for their operations;

• 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 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, including the risk factors described in our 2008 Annual Report on Form 10-K and our other reports and filings with the Securities and Exchange Commission).

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.
OVERVIEW AND OUTLOOK
Summary
We reported positive earnings for the first quarter of 2009 in spite of the continued impact of the global economic turmoil and constrained credit markets on energy prices and demand. The U.S. Gulf of Mexico ("GOM") barge activity continues to be constrained although we have been successful in acquiring a significant share of the business that does exist. Our rental tools business posted strong results even though utilization declined during the first quarter of 2009 from the record highs achieved in 2008. With many long-term contracts secured for our international rig fleet, utilization remains strong, although we have experienced some pricing pressure in this sector. Overview
Revenues for the first quarter of 2009 were $173.9 million on par with revenues achieved in the first quarter of 2008 on the strength of increases in our International Drilling and Project Management and Engineering Services segments. Revenues for the U.S. Drilling segment were $9.9 million in the first quarter of 2009 down from $45.9 million in the first quarter of 2008 as both dayrates and utilization have dropped.
Drilling and rental operating income was $25.6 million for the first quarter of 2009 as compared to $41.5 million for the first quarter of 2008 driven primarily by a $26.1 million decline in the GOM barge drilling margin offset partially by increases in the International Drilling and Project Management and Engineering Services segments.
Increases in International Drilling operating income of $11.5 million in the first quarter of 2009 as compared to the comparable quarter of 2008 are primarily the result of a higher dayrate for our Caspian Sea barge ($8.2 million), three additional rigs fully operating in the Americas group ($6.3 million), and reduced operating expenses in African and Asia Pacific operations ($7.6 million), offset by loss of revenues related to the change out of equipment in Western Kazakhstan ($4.1 million). Outlook
Our outlook for 2009 remains uncertain, tempered by the indeterminable duration of weakened global markets (See Risk Factors). We do believe our strategy, performance and diversification will help us sustain our performance through the downturn and expect to gain the benefits of a leaner operating structure.

OUTLOOK AND OVERVIEW (continued)
Outlook
We expect utilization in our GOM barge business to increase as the number of prospects in the recent weeks has increased and we have secured work for at least three additional rigs since the end of the first quarter. Our status as the preferred driller in this market has served us well as we continue to be successful in obtaining most of the work that is available, as we have six of the ten operating rigs in this depressed market. Most of the current work is of a short term nature, including workover wells. We expect to maintain our market share in our GOM barge business throughout the year in this depressed market as a result of the quality of our equipment and our performance record.
Internationally, we expect strong utilization in all regions and better operating results in the CIS/AME region as our equipment issues have been resolved.
Results for our Rental Tools business are also expected to decline in the short term as the result of lower utilization and increased discounts. The business is expected to maintain high activity in the Bakken and Haynesville shale areas, where drilling has been less affected by current conditions. In addition, we have been supplying equipment to the Marcellus shale region where drilling has increased year-to-year and we will have deepwater and international projects beginning later this year.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2009 Compared with Three Months Ended March 31, 2008
We recorded net income of $2.1 million for the three months ended March 31, 2009, as compared to net income of $23.2 million for the three months ended March 31, 2008. Gross margin was $25.6 million for the three months ended March 31, 2009 as compared to $41.5 million for the three months ended March 31, 2008.
In the first quarter of 2008, we began separate presentation of our project management and engineering services segment. As part of our long-term strategic growth plan, we have begun to separately monitor the results of this non-capital intensive group of operations. We also created a new segment in the second quarter of 2008 to separately reflect results of our extended-reach rig construction contract.
The following is an analysis of our operating results for the comparable quarters:

                                                               Three Months Ended March 31,
                                                        2009                                2008
                                                                   (Dollars in Thousands)
Revenues:
International Drilling                        $  77,381              44 %       $       68,740            40 %
U.S. Drilling                                     9,856               6 %               45,888            26 %
Project Management and Engineering
Services                                         32,054              18 %               19,179            11 %
Construction Contract                            16,745              10 %                    -             -
Rental Tools                                     37,889              22 %               39,471            23 %

Total revenues                                $ 173,925             100 %       $      173,278           100 %


Operating gross margin:
International Drilling gross margin
excluding depreciation and amortization
(1)                                           $  27,604              36 %       $       16,119            23 %
U.S. Drilling gross margin excluding
depreciation and amortization (1)                (3,280 )           -33 %               24,366            53 %
Project Management and Engineering
Services gross margin excluding
depreciation and amortization (1)                 6,160              19 %                3,518            18 %
Construction Contract excluding
depreciation and amortization (1)                   831               5 %                    -             -
Rental Tools gross margin excluding
depreciation and amortization (1)                21,435              57 %               23,653            60 %
Depreciation and amortization                   (27,124 )                              (26,166 )

Total operating gross margin (2)                 25,626                                 41,490

General and administration expense              (13,060 )                               (6,668 )
Gain on disposition of assets, net                   78                                    579

Total operating income                        $  12,644                         $       35,401

RESULTS OF OPERATIONS (continued)
(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:

                                                                                        Project
                                                                                       Management
                                                                                          and
                                         International                                Engineering         Construction
                                           Drilling             U.S. Drilling           Services            Contract            Rental Tools
                                                                                 (Dollars in Thousands)
Three Months Ended March 31, 2009
Drilling and rental operating
income (2)                              $        15,912        $       (10,458 )      $      6,160        $         831        $       13,181
Depreciation and amortization                    11,692                  7,178                   -                    -                 8,254

Drilling and rental gross margin
excluding depreciation and
amortization                            $        27,604        $        (3,280 )      $      6,160        $         831        $       21,435


Three Months Ended March 31, 2008
Drilling and rental operating
income (2)                              $         5,759        $        15,673        $      3,518        $           -        $       16,540
Depreciation and amortization                    10,360                  8,693                   -                    -                 7,113

Drilling and rental gross margin
excluding depreciation and
amortization                            $        16,119        $        24,366        $      3,518        $           -        $       23,653

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

International Drilling Segment
This segment's revenues increased $8.6 million to $77.4 million during the current quarter when compared to the first quarter of 2008.
Revenues in our Americas region increased by $5.4 million mainly due to an additional three rigs being fully operational during the current quarter as two were rigging up during the comparable quarter and one other became operational later in 2008. Revenues in our CIS region increased by $7.3 million primarily attributable to a higher dayrate for our barge rig operating in the Caspian Sea. In our Asia Pacific region, revenues decreased $3.6 million due to lower utilization.
International operating gross margin, excluding depreciation and amortization, increased $11.5 million to $27.6 million during the current quarter of 2009 as compared to the first quarter of 2008. The improved margins are attributable to the above mentioned increase in revenues and lower operating expenses in our Africa-Middle East and Asia-Pacific regions being partially offset by decreased revenue due to the change out of equipment in Western Kazakhstan.
U.S. Drilling Segment
Revenues for this segment decreased $36.0 million to $9.9 million for the quarter ended March 31, 2009 as compared to the quarter ended March 31, 2008. The decrease in revenues was primarily due to the market downturn which caused utilization for the U.S. barges to drop to 25 percent for the current quarter as compared 77 percent in the same period in 2008.
As a result of the above mentioned factors, gross margin, excluding depreciation and amortization, decreased $27.6 million to a negative $3.3 million when compared to the first quarter of 2008.

RESULTS OF OPERATIONS (continued)
Project Management and Engineering Services Segment Revenues for this segment increased $12.0 million during the current quarter as compared to the first quarter of 2008. This increase was the result of higher revenues for our Kuwait and Sakhalin project management operations ($1.4 million and $8.8 million, respectively) and an increase of $2.6 million related to a Front End Engineering Design ("FEED") study for our Arkutun Dagi project. Project management and engineering services do not incur depreciation and amortization, and as such, operating gross margin for this segment increased $2.4 million in the current period as compared to the prior period due to the revenue increase discussed above.
Construction Contract Segment
Revenues from the construction of the extended-reach drilling rig for use in the Alaskan Beaufort Sea were $16.7 million for the first quarter of 2009. This project is a cost plus fixed fee contract. Operating gross margin for the EPCI project was $0.8 million based on the percentage of completion of the contract. Rental Tools Segment
Rental tools revenues decreased $1.6 million to $37.9 million during the current quarter as compared to the first quarter of 2008.
Rental tools operating gross margins, excluding depreciation and amortization, decreased $2.2 million to $21.4 million for the current quarter as compared to the first quarter of 2008. The gross margin decrease relates directly to the decrease in revenues mentioned above. Other Financial Data
Gain on asset dispositions for the first quarter of 2009 and 2008 was insignificant as a result of minor asset sales during each period. Interest expense increased $1.3 million during the current quarter as compared to the first quarter of 2008 as additional borrowings during 2008 led to a higher level of outstanding debt. Interest income remained relatively unchanged on a comparative basis. General and administration expense increased $6.4 million as compared to the first quarter of 2008 due primarily to higher legal and professional fees associated with the ongoing DOJ and SEC investigations into the customs agent discussed in Note 10 in the notes to the unaudited consolidated condensed financial statements.
Income tax expense was $2.7 million for the first quarter of 2009, as compared to income tax expense of $4.7 million for the first quarter of 2008. Income tax for the first quarter of 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 8 - Kazakhstan Tax Case) and a valuation allowance of $4.1 million related to a Papua New Guinea deferred tax asset.
Depreciation expense benefited by $4.1 million due to a change in accounting estimate to extend the useful life of certain long-lived assets for depreciation purposes. We extended useful lives of these long-lived assets based on our review of their service lives, technological improvements in the assets, and recent changes to our refurbishment and maintenance practices which helped to extend the lives.

LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
As of March 31, 2009, we had cash and cash equivalents of $148.4 million, a decrease of $23.9 million from December 31, 2008. The primary sources of cash for the three-month period ended March 31, 2009 as reflected on the consolidated condensed statements of cash flows were $24.5 million provided by operating activities and proceeds of $4.0 million from draws on our credit facilities. The primary use of cash was $51.4 million for capital expenditures. Major capital expenditures for the period included $17.5 million on the construction of two new Alaska rigs and $17.2 million for tubulars and other tools for Rental Tools.
As of March 31, 2008, we had cash and cash equivalents of $44.7 million, a decrease of $15.4 million from December 31, 2007. The primary sources of cash for the three-month period ended March 31, 2008 as reflected on the consolidated condensed statements of cash flows were $15.9 million provided by operating activities, proceeds of $15.0 million from a draw on our revolver and net proceeds of $2.2 million from the sale of assets and insurance proceeds. The primary uses of cash were $43.2 million for capital expenditures and a $5.0 million investment in our unconsolidated joint venture. Major capital expenditures for the period included $30.9 million on construction of new land rigs and upgrades to existing rigs and $12.3 million for tubulars and other rental tools for Quail Tools.
Financing Activity
On July 5, 2007, we issued $125.0 million aggregate principal amount of 2.125 percent Convertible Senior Notes due July 15, 2012. 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 Senior 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 was 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.
On May 15, 2008 we entered into a new Credit Agreement ("2008 Credit Facility") with a five year senior secured $80.0 million revolving credit facility ("Revolving Credit Facility) and a senior secured term loan facility ("Term Loan Facility") of up to $50.0 million. The obligations of the Company under the 2008 Credit Facility are guaranteed by substantially all of the Company's domestic subsidiaries, except for domestic subsidiaries owned by foreign subsidiaries and certain immaterial subsidiaries, each of which has executed a guaranty. The 2008 Credit Facility contains customary affirmative and negative covenants such as minimum ratios for consolidated leverage, consolidated interest coverage and consolidated senior secured leverage.
The 2008 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 2008 Credit Facility subject to a borrowing base calculation based on a percentage of eligible accounts receivable, certain specified barge drilling rigs and eligible rental equipment of the Company and its subsidiary guarantors. As of March 31, 2009, there were $17.7 million in letters of credit outstanding, $50.0 million outstanding on the Term Loan Facility and $62.0 million outstanding on the Revolving Credit Facility. As of March 31, 2009, the amount drawn represents nearly 100 percent of the capacity of the Revolving Credit Facility. The Term Loan will begin amortizing on September 30, 2009 at equal installments of $3.0 million per quarter. On January 30, 2009, Lehman Commercial Paper, Inc. assigned its obligations under the 2008 Credit Facility to Trustmark National Bank. Upon assignment, Trustmark National Bank fully funded Lehman Commercial Paper, Inc.'s commitments, including an additional $4.0 million that Lehman Commercial Paper, Inc. did not fund in October 2008, therefore, increasing our borrowings under the Revolving Credit Facility to $62.0 million. The Company expects to use the drawn amounts over the next twelve months to fund construction of two new rigs for work in Alaska. Although the credit crisis may affect certain customers' ability to pay, the Company has not experienced significant delays in payments from customers as a result of the current credit crisis. The Company anticipates it has sufficient liquidity to meet its expected capital expenditures and manage any delays in collection of receivables, should they occur.

RESULTS OF OPERATIONS (continued)
Financing Activity (continued)
We had total long-term debt, including current portion, of $446.5 million as of March 31, 2009, which consists of:
• $125.0 million aggregate principal amount of Convertible Senior Notes at a coupon rate of 2.125 percent, which are due July 15, 2012 net of $18.4 million in unamortized debt discount;

• $225.0 million aggregate principal amount of 9.625 percent Senior Notes, which are due October 1, 2013 plus an associated $2.9 million in unamortized debt premium; and,

• $112.0 million drawn against our 2008 Credit Facility, including $62.0 million on our Revolving Credit Facility and $50.0 million on our Term Loan Facility, $9.0 million of which is classified as short term.

As of March 31, 2009, we had approximately $148.7 million of liquidity which was comprised of $148.4 million of cash and cash equivalents on hand and $0.3 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.
In July 2008, we entered into a contract with BP for five-year drilling contracts that will require a subsidiary to construct and operate two new rigs for development drilling on the North Slope of Alaska. The cost of construction of the two new rigs will be funded partially by the above-mentioned draws on our 2008 Credit Facility.
The following table summarizes our future contractual cash obligations as of March 31, 2009:

                                                       Less than                                               More than
                                       Total            1 Year            Years 2-3         Years 4-5           5 Years
                                                          (Dollars in Thousands)
. . .