• 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;

• contemplated U.S. legislation on carbon emissions;

DISCLOSURE NOTE REGARDING FORWARD-LOOKING STATEMENTS (continued)
• potential new "employer" taxes on U.S. Health Care Plans;

• adverse environmental events;

• adverse weather conditions;

• global health concerns;

• 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 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
The results of this past quarter reflect the harsh conditions that prevailed in many of our markets as well as the durability and resilience of the Company's strategy, business balance and geographic diversity. Through cost containment actions we were able to moderate the adverse effects on our operations' results while employing our business strategies as previously disclosed and discussed in our annual filings, we were able to maintain our competitive position.
The International Drilling, U.S. Gulf of Mexico Barge Drilling and Rental Tools segments reported lower revenues, compared to the prior year's third quarter. These lower revenues were caused by reduced utilization in each business and lower dayrates for the barge drilling operations and higher price discounts for rental tools. The international drilling segment has experienced pricing pressures, though, by managing costs, the segment has improved its gross margin and gross margin as percent of revenues. Meanwhile, Project Management & Engineering Services revenues increased, due primarily to the long-term nature of our customers' plans and programs. Construction Contract revenues increased in line with progress on the BP-owned Liberty rig ("Liberty"). Despite difficult and challenging market conditions, each of our operations produced positive gross margins, including the barge drilling business which recorded a 18.6 percent gross margin as a percent of sales (excluding non-cash depreciation) this past quarter and has achieved a positive gross margin year-to-date. Overview
Revenues for the three months ended September 30, 2009 declined 20.0 percent to $181.4 million from the prior year's third quarter revenues of $227.5 million, attributable to declines in worldwide drilling and tool rental revenues partially offset by increased revenues related to project management and construction contracts.

OVERVIEW AND OUTLOOK (continued)
International Drilling revenues fell as a result of lower average fleet utilization. Rental Tools revenues decreased primarily from the decline in U.S. land and Gulf of Mexico shelf drilling activity and the impact of increased discounting. The discounting has been partially offset by increased demand for work-over equipment, increasing opportunities in the active shale regions and additional offshore deep drilling accounts. U.S. Barge Drilling revenues declined due to lower utilization and reduced dayrates. Revenues for Project Management and Engineering Services segment increased reflecting the contribution of pre-operational revenues for the Liberty rig operations and maintenance contract and from a FEED ("Front End Engineering Design") study for Arkutun Dagi, while the Construction Contract segment revenues represent the Company's progress on delivering, rigging-up and commissioning the Liberty rig.
The Company recorded operating income of $4.9 million for the 2009 third quarter, compared to $43.8 million for the prior year's third quarter. International Drilling's gross margin decreased from the prior year while gross margin as a percent of revenues improved, primarily as a result of lower operating costs throughout the segment. The decline in gross margin for Rental Tools reflected the significant reduction in overall demand due to reduced drilling activity in the U.S. land market and Gulf of Mexico shelf. This has led to competitive discounting of rental rates that has impacted the segment's gross margin and gross margin as a percent of revenues. U.S. Barge Drilling's gross margin level reflects the reduced market activity in the Gulf of Mexico barge drilling market. An improvement from the 2009 second quarter was achieved through increased rig utilization and cost management initiatives. Project Management and Engineering Services' gross margin and gross margin as a percent of revenues increased due to the contribution from a FEED ("Front End Engineering Design") study for Arkutun Dagi, commissioning the Liberty rig and a lower level of reimbursables in the current quarter. Outlook
The U.S. Gulf of Mexico barge rig utilization rate increased sequentially in each of the last two quarters, rental tool placements have risen, the number of tenders for international drilling contracts has grown and project management opportunities have expanded. There are still areas of concern - dayrates remain under competitive market pressure, tool rental rates continue to be heavily discounted and contract commitments are slow to develop. Overall, though, we believe the outlook may be slowly improving. While there is some uncertainty in our outlook - and we believe it is warranted - we remain confident in the ability of our businesses to manage through these current market conditions to retain or add business based upon our technical capabilities and safety performance, and we will continue to control costs as we have demonstrated throughout the year. We believe these conditions present opportunities to make competitive and strategic gains based on the strength of our operations and business relationships.
We expect to maintain our international rig utilization near the current rate in the short term. The level of rig tenders is improving and should support the current fleet utilization rates. There is still some pressure on dayrates on re-contracted rigs and our challenge will be to match this with lower costs and improved efficiency. In addition, our Caspian Sea barge drilling rig will be on reduced dayrate beginning in the fourth quarter as it undergoes a scheduled overhaul and upgrade.
The slow pace of U.S. drilling and price discounting will continue to hamper our Rental Tools business. Added deepwater work and incremental activity in the Marcellus and other shale plays is expected to provide a partial offset to the discounting.
In the near-term, we expect the U.S. Gulf of Mexico barge business to stabilize around current levels. There has been an improvement in the market's overall fleet utilization which may improve dayrates. We are near the end of hurricane season and that should remove one impediment to drilling demand.
Based on the currently contracted business, we anticipate project management to continue to perform at current levels through the remainder of the year.
Construction Contract revenues and gross margin will reflect progress on the BP-owned Liberty rig which has been successfully sea-lifted to its satellite drilling island in Alaska with completion of this contract anticipated to occur in early 2010.

RESULTS OF OPERATIONS
Three Months Ended September 30, 2009 Compared with Three Months Ended September 30, 2008
We recorded net income of $7.1 million for the three months ended September 30, 2009, as compared to net income of $17.8 million for the three months ended September 30, 2008. Operating gross margin was $16.2 million for the three months ended September 30, 2009 as compared to $52.3 million for the three months ended September 30, 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 segment of operations. We also created a new segment in the second quarter of 2008 to separately reflect results of our rig construction contracts.
The following is an analysis of our operating results for the comparable quarters:

                                                              Three Months Ended September 30,
                                                         2009                                 2008
                                                                     (Dollars in Thousands)
Revenues:
International Drilling                        $    63,966              35 %       $       92,226            41 %
U.S. Drilling                                      12,350               7 %               44,743            20 %
Project Management and Engineering
Services                                           25,869              14 %               24,089            10 %
Construction Contracts                             55,325              30 %               20,421             9 %
Rental Tools                                       23,899              14 %               45,975            20 %

Total revenues                                $   181,409             100 %       $      227,454           100 %


Operating gross margin (1):
International Drilling gross margin
excluding depreciation and amortization       $    22,002              34 %       $       28,544            31 %
U.S. Drilling gross margin excluding
depreciation and amortization                       2,293              19 %               22,893            51 %
Project Management and Engineering
Services gross margin excluding
depreciation and amortization                       6,449              25 %                2,638            11 %
Construction Contracts excluding
depreciation and amortization                       3,122               6 %                1,098             5 %
Rental Tools gross margin excluding
depreciation and amortization                      11,667              49 %               27,809            60 %
Depreciation and amortization                     (29,307 )                              (30,663 )

Total operating gross margin (2)                   16,226                                 52,319

General and administration expense                 (9,812 )                               (9,271 )
Provision for reduction in carrying
value of certain assets                            (2,757 )                                    -
Gain on disposition of assets, net                  1,225                                    799

Total operating income                        $     4,882                         $       43,847

(1) Gross margins, excluding the depreciation and amortization line item 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
                                                                                             and
                                            International                                Engineering         Construction
         Three Months Ended:                  Drilling             U.S. Drilling           Services            Contract            Rental Tools
                                                                                   (Dollars in Thousands)
September 30, 2009
Operating gross margin (2)                 $         8,734        $        (4,842 )      $      6,449        $       3,122        $        2,763
Depreciation and amortization                       13,268                  7,135                   -                    -                 8,904

Drilling and rental gross margin
excluding depreciation and
amortization                               $        22,002        $         2,293        $      6,449        $       3,122        $       11,667


September 30, 2008
Operating gross margin (2)                 $        14,241        $        14,166        $      2,638        $       1,098        $       20,176
Depreciation and amortization                       14,303                  8,727                   -                    -                 7,633

Drilling and rental gross margin
excluding depreciation and
amortization                               $        28,544        $        22,893        $      2,638        $       1,098        $       27,809

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

International Drilling Segment
This segment's revenues decreased $28.3 million to $64.0 million during the current quarter when compared to the third quarter of 2008.
Revenues in our Americas region decreased by $10.1 million mainly due to lower utilization and lower average dayrates. Revenues in our CIS AME region decreased by $12.2 million primarily due to three fewer rigs working during the period, with some offset resulting from improved dayrates on contracted rigs. In our Asia Pacific region, revenues decreased $6.0 million due to our operations ending in Papua New Guinea earlier in the year.
International operating gross margin, excluding depreciation and amortization, decreased $6.5 million to $22.0 million during the current quarter of 2009 as compared to the third quarter of 2008. The decreased margins are attributable to the above mentioned decrease in revenues in the Asia Pacific regions being partially offset by lower operating expenses in our Africa Middle East regions and decreased margin during the third quarter of 2008, due to the change out of equipment in CIS AME and reduced activity in Indonesia. U.S. Drilling Segment
Revenues for this segment decreased $32.4 million to $12.4 million for the quarter ended September 30, 2009 as compared to the quarter ended September 30, 2008. The decrease in revenues was primarily due to the market downturn which caused utilization to drop to 33 percent for the current quarter as compared to 79 percent in the same period in 2008 and a significant decrease in average dayrates from $39,900 to $26,200.
As a result of the above mentioned factors, operating gross margin, excluding depreciation and amortization, decreased $20.7 million to $2.3 million when compared to the third quarter of 2008.
Project Management and Engineering Services Segment Revenues for this segment increased $1.8 million during the current period as compared to the comparable period of 2008. This increase was primarily the result of higher revenues recognized for a FEED study for our Arkutun Dagi project and for start-up activities related to the Liberty project. This was partially offset by decreases in our project management division and engineering services segment.
Construction Contract Segment
Revenues from the construction of the Liberty extended-reach drilling rig for use in the Alaskan Beaufort Sea were $55.3 million for the third quarter of 2009. This project is a cost plus fixed fee contract. Operating gross margin for the EPCI project was $3.1 million based on the percentage of completion of the contract.

RESULTS OF OPERATIONS (continued)
Rental Tools Segment
Rental tools revenues decreased $22.1 million to $23.9 million during the current quarter as compared to the third quarter of 2008. Lower overall demand has led to increased discounting, impacting both revenues and gross margin. Rental tools operating gross margins, excluding depreciation and amortization, decreased $16.1 million to $11.7 million for the current quarter as compared to the third quarter of 2008.
Other Financial Data
Gain on disposition of assets for the third quarters of 2009 and 2008 was insignificant as a result of minor asset sales during each period. Interest expense and interest income remained relatively unchanged on a comparative basis. General and administration expense increased $0.5 million as compared to the third quarter of 2008.
Depreciation expense remained relatively unchanged on a comparative basis due to a change in the accounting estimate, extending 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 asset, and recent improvements to our refurbishment and maintenance practices.
Provision for reduction in carrying value of certain assets was the result of writing down a $2.8 million asset related to vendor pre-payments whereby vendor filed bankruptcy.
Income tax benefit was $9.2 million for the third quarter of 2009, as compared to income tax expense of $19.7 million for the third quarter of 2008 which includes the reversal of a $3.1 million reserve for 2007 foreign tax credits. The decrease in income tax expense in the third quarter of 2009, compared to the third quarter of 2008, was primarily due to lower pre-tax income in the third quarter of 2009, as well as an incremental tax benefit of $6.1 million for crediting foreign taxes previously deducted. Nine Months Ended September 30, 2009 Compared with Nine Months Ended September 30, 2008
We recorded net income of $13.6 million for the nine months ended September 30, 2009, as compared to net income of $62.9 million for the nine months ended September 30, 2008. Operating gross margin was $69.1 million for the nine months ended September 30, 2009 as compared to $143.8 million for the nine months ended September 30, 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 continue 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 rig construction contracts and we continue to separately monitor the results of that segment as well.

RESULTS OF OPERATIONS (continued)
   The following is an analysis of our operating results for the comparable
periods:

                                                          Nine Months Ended September 30,
                                                        2009                           2008
                                                              (Dollars in Thousands)
Revenues:
International Drilling                        $  220,626            38 %      $ 238,885            39 %
U.S. Drilling                                     35,095             6 %        139,999            22 %
Project Management and Engineering
Services                                          81,814            14 %         72,219            12 %
Construction Contracts                           149,642            26 %         40,501             7 %
Rental Tools                                      89,948            16 %        125,858            20 %

Total revenues                                $  577,125           100 %      $ 617,462           100 %


Operating gross margin (1):
International Drilling gross margin
excluding depreciation and amortization       $   79,998            36 %      $  65,970            28 %
U.S. Drilling gross margin excluding
depreciation and amortization                        274             1 %         74,497            53 %
Project Management and Engineering
Services gross margin excluding
depreciation and amortization                     18,217            22 %         10,400            14 %
Construction Contracts excluding
depreciation and amortization                      7,525             5 %          2,128             5 %
Rental Tools gross margin excluding
depreciation and amortization                     48,510            54 %         75,844            60 %
Depreciation and amortization                    (85,382 )                      (84,995 )

Total operating gross margin (2)                  69,142                        143,844

General and administration expense               (33,998 )                      (24,420 )
Provision for reduction in carrying
value of certain assets                           (2,757 )                            -
Gain on disposition of assets, net                 2,007                          2,014

Total operating income                        $   34,394                      $ 121,438

(1) Gross margins, excluding the depreciation and amortization line item included within the above table, 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:

. . .