PARKER DRILLING CO /DE/ - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003

OR

[ ] 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 (I.R.S. Employer Identification No.)
incorporation or organization)

1401 Enclave Parkway, Suite 600, Houston, Texas 77077
-----------------------------------------------------
(Address of principal executive offices) (zip code)

Registrant's telephone number, including area code (281) 406-2000

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 [X] No [ ]

Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2 of the Exchange Act of 1934).
Yes [X] No [ ]

As of July 31, 2003, 93,112,887 common shares were outstanding.

PARKER DRILLING COMPANY

INDEX

1

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)

See accompanying notes to unaudited consolidated condensed financial statements.

2

PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Dollars in Thousands Except Per Share Amounts)
(Unaudited)

See accompanying notes to unaudited consolidated condensed financial statements

3

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

See accompanying notes to unaudited consolidated condensed financial statements

4

PARKER DRILLING COMPANY AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

1. General - In the opinion of the 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 June 30, 2003 and December 31, 2002, (2)
the results of operations for the three and six months ended June 30, 2003
and 2002, and (3) cash flows for the six months ended June 30, 2003 and
2002. Results for the six months ended June 30, 2003 are not necessarily
indicative of the results, which will be realized for the year ending
December 31, 2003. The financial statements should be read in conjunction
with the Company's Form 10-K for the year ended December 31, 2002.

Our independent accountants have performed a review of these interim
financial statements in accordance with standards established by the
American Institute of Certified Public Accountants. Pursuant to Rule 436(c)
under the Securities Act of 1933, their report of that review should not be
considered a report within the meaning of Section 7 and 11 of that Act, and
the independent accountants liability under Section 11 does not extend to
it.

Stock-Based Compensation - The Company's stock-based employee compensation
plan is accounted for under the recognition and measurement principles of
the Accounting Principles Board Opinion ("APB") No. 25, "Accounting for
Stock Issued to Employees," and related Interpretations. No stock-based
employee compensation cost related to stock options is reflected in net
loss, as all options granted under the plan had an exercise price equal to
the market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net loss and loss per share if
the Company had applied the fair value recognition provisions of the
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation," to stock-based employee compensation.

The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions for both the three and six months ended June 30, 2003 and 2002:
no dividend yield; expected volatility of 52.5%; risk-free interest rate
ranged from 2.94% to 2.96% and 4.48% to 4.88%, respectively; and expected
lives of options, 5-7 years.

5

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)

2. Earnings Per Share -

RECONCILIATION OF INCOME AND NUMBER OF SHARES USED
TO CALCULATE BASIC AND DILUTED EARNINGS PER SHARE (EPS)

6

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)

2. Earnings Per Share (continued) -

RECONCILIATION OF INCOME AND NUMBER OF SHARES USED
TO CALCULATE BASIC AND DILUTED EARNINGS PER SHARE (EPS)

The Company has outstanding $109,706,000 of 5.5% Convertible Subordinated
Notes which are convertible into 7,128,395 shares of common stock at $15.39
per share. The notes have been outstanding since their issuance in July
1997 but were not included in the computation of diluted EPS because the
assumed conversion of the notes would have had an anti-dilutive effect on
EPS. For the three and six months ended June 30, 2003, options to purchases
9,858,809 shares of common stock at prices ranging from $1.96 to $12.19,
were outstanding but not included in the computation of diluted EPS because
the assumed exercise of the options would have had an anti-dilutive effect
on EPS due to the net loss incurred during the period. For the three and
six months ended June 30, 2002, options to purchase 8,463,810 shares of
common stock at prices ranging from $2.25 to $12.19, were outstanding but
not included in the computation of diluted EPS because the assumed exercise
of the options would have had an anti-dilutive effect on EPS due to the net
loss incurred during the period.

7

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)

3. Business Segments - The primary services the Company provides are as
follows: U.S. drilling, international drilling and rental tools.
Information regarding the Company's operations by industry segment for the
three and six months ended June 30, 2003 and 2002 is as follows (dollars in
thousands):

(1) Operating income by segment is calculated by excluding net construction
contract operating income and general and administrative expense from
operating income, as reported in the consolidated condensed statements of
operations.

8

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)

4. Discontinued Operations - In June 2003, the Company's board of directors
approved a plan to sell its Latin American assets consisting of 17 land
rigs and related inventory and spare parts and its Gulf of Mexico offshore
assets consisting of seven jackup rigs and four platform rigs. The Company
is actively marketing the assets through an independent broker and expects
to complete the sales by the end of December, 2003. At June 30, 2003, the
net book value of the assets to be sold exceeds the estimated fair value
and as a result an impairment charge including estimated sales expenses has
been recognized in the amount of $54.0 million. One Latin America land rig
and related spare parts were sold to a third party for $1.8 million in
July, 2003.

The two operations that constitute this plan of disposition meet the
requirements of discontinued operations under the provisions of SFAS No.
144 "Accounting for the Impairment or Disposal of Long-Lived Assets." The
consolidated financial statements have been restated to present the Latin
America operations and the Gulf of Mexico jackup and platform operations as
discontinued operations. The discontinued operations assets are mainly
comprised of the estimated fair value of drilling rigs and related spare
parts and supplies. The discontinued operations liabilities consist mainly
of deferred revenue and estimated accrued costs to sell the assets.

9

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)

5. Reclassifications - Effective in 2003 the Company changed its accounting
for reimbursable costs. In prior years, the Company netted the
reimbursement with the cost in the Statement of Operations. Beginning in
2003 the Company has recorded the reimbursements as operating revenues and
the costs in operating expense. There is no effect on total operating
income. The prior periods presented have been reclassified to conform to
the current presentation. The effect of making this change was an increase
in both total drilling and rental revenues and total drilling and rental
operating expenses of $12.5 million and $17.3 million for the six months
ended June 30, 2003 and 2002, respectively and $4.6 million and $8.3
million for the three months ended June 30, 2003 and 2002, respectively.

6. Construction Contract - The Company historically only constructed drilling
rigs for its own use. At the request of one of its significant customers,
the Company entered into a contract to design, construct, mobilize and sell
("construction contract") a specialized drilling rig to drill extended
reach wells to offshore targets from a land-based location on Sakhalin
Island, Russia, for an international consortium of oil and gas companies.
The Company also entered into a contract to subsequently operate the rig on
behalf of the consortium. Generally Accepted Accounting Principles ("GAAP")
requires that revenues received and costs incurred related to the
construction contract be accounted for and reported on a gross basis and
income for the related fees should be recognized on a percentage of
completion basis. Because this construction contract is not a part of the
Company's historical or normal operations, the revenues and costs related
to this contract have been shown as a separate component in the statement
of operations. The estimated profit from the engineering, construction,
mobilization and rig-up fees is calculated on a percentage of completion
basis. During the second quarter ended June 30, 2003 the Company recognized
$1.0 million in estimated profit. The total estimated profit recognized to
date under the design, construction, mobilization and rig-up contract is
$3.5 million, $1.0 million in 2003 and $2.5 million during 2002. Final
completion of all construction is expected by September 2003.

7. Contingency - On July 6, 2001, the Ministry of State Revenues of Kazakhstan
("MSR") issued an Act of Audit to the Kazakhstan branch ("PKD Kazakhstan")
of Parker Drilling Company International Limited ("PDCIL"), a wholly owned
subsidiary of the Company, assessing additional taxes of approximately
$29.0 million for the years 1998-2000. The assessment consisted primarily
of adjustments in corporate income tax based on a determination by the
Kazakhstan tax authorities that payments by Offshore Kazakhstan
International Operating Company, ("OKIOC"), to PDCIL of $99.0 million, in
reimbursement of costs for modifications to barge rig 257, performed by
PDCIL prior to the importation of the drilling rig into Kazakhstan, are
income to PKD Kazakhstan, and therefore, taxable to PKD Kazakhstan. PKD
Kazakhstan filed an Act of Non-Agreement that such reimbursements should
not be taxable and requested that the Act of Audit be revised accordingly.
In November 2001, the MSR rejected PKD Kazakhstan's Act of Non-Agreement,
prompting PKD Kazakhstan to seek judicial review of the assessment. On
December 28, 2001, the Astana City Court issued a judgment in favor of PKD
Kazakhstan, finding that the reimbursements to PDCIL were not income to PKD
Kazakhstan and not otherwise subject to tax based on the U.S.-Kazakhstan
Tax Treaty. The MSR appealed the decision of the Astana City Court to the
Civil Panel of the Supreme Court, which confirmed the decision of the
Astana City Court that the reimbursements were not income to PKD Kazakhstan
in March 2002. Although the court agreed with the MSR's position on certain
minor issues, no additional taxes were payable as a result of this
assessment. The MSR had until the end of March 2003 to appeal the decision
of the Civil Panel to the Supervisory Panel of the Supreme Court of
Kazakhstan. As of July 31, 2003, no appeal has been made by the MSR, but
the MSR may petition the Supreme Court of Kazakhstan to reopen the case if
material new evidence is discovered. In addition, PDCIL has filed a
petition with the U.S. Treasury Department for competent authority review,
which is a tax treaty procedure to resolve disputes as to which country may
tax income covered under the treaty. The U.S. Treasury Department has
granted our petition and has initiated proceedings with the MSR, which are
ongoing.

10

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)

8. Recent Accounting Pronouncements - In April 2002, the Financial Accounting
Standard Board ("FASB") issued SFAS No. 145, "Rescission of FASB Statements
No. 4, No. 44, and No. 64, Amendment of FASB Statement No. 13, and
Technical Corrections." SFAS No. 145 is effective for fiscal years
beginning after May 15, 2002. We adopted this standard in the first quarter
of 2003 and it did not have a significant effect on our results of
operations or our financial position.

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 is effective for
exit or disposal activities initiated after December 31, 2002. The adoption
of this standard has not had any impact on our financial position or
results of operations.

In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
including Indirect Guarantees of Indebtedness of Others." The
interpretation requires disclosure about the nature and terms of
obligations under certain guarantees that the Company has issued. The
interpretation also clarifies that a guarantor is required to recognize, at
inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing a guarantee. The initial recognition and initial
measurement provisions are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002. The disclosure requirements in
this interpretation are effective immediately. We do not expect to be
impacted by the issuance of FIN 45.

On December 31, 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure - An Amendment of SFAS
No. 123." The standard provides additional transition guidance for
companies that elect to voluntarily adopt the accounting provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation." SFAS No. 148 does not
change the provisions of SFAS No. 123 that permit entities to continue to
apply the intrinsic value method of APB No. 25, "Accounting for Stock
Issued to Employees." As we continue to follow APB No. 25, our accounting
for stock-based compensation will not change as a result of SFAS No. 148.
SFAS No. 148 does require certain new disclosures in both annual and
interim financial statements. The interim disclosure provisions have been
included as Note 1.

On January 17, 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities, An Interpretation of Accounting Research Bulletin No.
51." The primary objectives of FIN 46 are to provide guidance on how to
identify entities for which control is achieved through means other than
through voting rights (variable interest entities ("VIE")) and how to
determine when and which business enterprise should consolidate the VIE.
This new model for consolidation applies to an entity in which either (1)
the equity investors do not have a controlling financial interest or (2)
the equity investment at risk is insufficient to finance that entity's
activities without receiving additional subordinated financial support from
other parties. See Note 10 regarding our consolidation of AralParker, a
company in which we own a 50 percent equity interest. We are consolidating
AralParker because we exert significant influence and have a financial
interest in the form of a loan, in addition to our equity interest.

In March 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under
FASB Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities. This Statement will be effective for contracts entered into,
modified or designated as hedges after June 30, 2003. We will adopt this
standard in July 2003 and do not expect it to have a significant effect on
our results of operations or our financial position.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity."
This statement improves the accounting for certain financial instruments
that, under previous guidance, issuers could account for as equity and
requires that those instruments be classified as liabilities (or assets in
certain circumstances) in statements of financial position. This statement
will be effective for all financial statements entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. We will adopt this
standard as of July 1, 2003 and do not expect it to have a significant
effect on financial position.

11

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)

9. Derivative Financial Instruments - The Company is exposed to interest rate
risk from its fixed-rate debt. In January 2002, the Company hedged against
a portion of the risk of changes in fair value associated with its $214.2
million 9.75% Senior Notes by entering into three fixed-to-variable
interest rate swap agreements with a total notional amount of $150.0
million. The Company assumed no ineffectiveness as each interest rate swap
agreement met the short-cut method requirements under SFAS No. 133 for fair
value hedges of debt instruments. As a result, changes in the fair value of
the interest rate swap agreements were offset by changes in the fair value
of the debt and no net gain or loss was recognized in earnings. During the
three and six months ended June 30, 2002, the interest rate swap agreements
reduced interest expense by $1.1 million and $2.3 million, respectively.

On July 24, 2002, the Company terminated all the interest rate swap
agreements and received $3.5 million. A gain totaling $2.6 million will be
recognized as a reduction to interest expense over the remaining term
(ending November 2006) of the debt instrument, of which $0.2 million and
$0.4 million was recognized during the three and six months ended June 30,
2003, respectively.

10. Guarantor/Non-Guarantor Consolidating Condensed Financial Statements - Set
forth on the following pages are the consolidating condensed financial
statements of the restricted subsidiaries and our subsidiaries which are
not restricted by the Senior Notes. All of the Company's Senior Notes are
guaranteed by substantially all wholly owned subsidiaries of Parker
Drilling. There are currently no restrictions on the ability of the
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. In prior years, the
non-guarantors were inconsequential, individually and in the aggregate, to
the consolidated financial statements and separate financial statements of
the guarantors were not presented because management had determined that
they would not be material to investors.

In August, 2002, Parker Drilling Company International Limited ("PDCIL")
sold two of its rigs in Kazakhstan to AralParker, a Kazakhstan closed joint
stock company which is owned 50 percent by PDCIL and 50 percent by a
Kazakhstan company, Aralnedra, CJSC. Because PDCIL has significant
influence over the business affairs of AralParker, its financial statements
are consolidated with those of the Company.

AralParker, Casuarina Limited (a wholly owned captive insurance company)
and Parker Drilling Investment Company are all non-guarantor subsidiaries
whose aggregate financial position and results of operations are no longer
deemed to be inconsequential and, accordingly the Company is providing
consolidating condensed financial information of the parent, Parker
Drilling, the guarantor subsidiaries, and the non-guarantor subsidiaries as
of June 30, 2003 and for the three and six months ended June 30, 2003.

12

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

13

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

14

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

15

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

16

Report of Independent Accountants

To the Board of Directors and Shareholders
Parker Drilling Company

We have reviewed the consolidated condensed balance sheet of Parker
Drilling Company and subsidiaries as of June 30, 2003 and the related
consolidated condensed statements of operations for the three and six month
periods ended June 30, 2003 and 2002 and the consolidated condensed statements
of cash flows for the six month periods ended June 30, 2003 and 2002. These
interim financial statements are the responsibility of the Company's management.

We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures and
making inquiries of persons responsible for financial and accounting matters. It
is substantially less in scope than an audit conducted in accordance with
auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications
that should be made to the consolidated condensed financial statements referred
to above for them to be in conformity with accounting principles generally
accepted in the United States of America.

We previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet as of
December 31, 2002, and the related consolidated statements of operations,
stockholders' equity and cash flows for the year then ended (not presented
herein); and in our report, dated January 29, 2003, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying consolidated condensed balance sheet
as of December 31, 2002, is fairly stated in all material respects in relation
to the consolidated balance sheet from which it has been derived.

/s/ PricewaterhouseCoopers LLP
------------------------------
PricewaterhouseCoopers LLP

Tulsa, Oklahoma
August 4, 2003

17

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

This Form 10-Q contains certain statements that are "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934. These
statements may be made in this document, or may be "incorporated by reference,"
which means the statements are contained in other documents filed by the Company
with the Securities and Exchange Commission. All statements included in this
document, other than statements of historical facts, that address activities,
events or developments that the Company expects, projects, believes or
anticipates will or may occur in the future are "forward-looking statements,"
including without limitation:

*future operating results,

*future rig utilization, dayrates and rental tool activity,

*future capital expenditures and investments in the acquisition and
refurbishment of rigs and equipment,

*repayment of debt,

*restructure, renew and or replace indebtedness,

*future sales of assets

*maintenance of the Company's revolver borrowing base, and

*expansion and growth of operations.

Forward-looking statements are based on certain assumptions and
analyses made by the management of the Company in light of their experience and
perception of historical trends, current conditions, expected future
developments and other factors it believes are relevant. Although management of
the Company believes that its assumptions are reasonable based on current
information available, they are subject to certain risks and uncertainties, many
of which are outside the control of the Company. These risks and uncertainties
include:

*worldwide economic and business conditions that adversely affect
market conditions and/or the cost of doing business,

*the pace of recovery in the U.S. economy and the demand for natural
gas,

*fluctuations in the market prices of oil and gas,

*imposition of unanticipated trade restrictions and political
instability,

*operating hazards and uninsured risks,

*political instability

*governmental regulations that adversely affect the cost of doing
business,

*adverse environmental events,

*adverse weather conditions,

*changes in concentration of customer and supplier relationships,

*unexpected cost increases for upgrade and refurbishment projects,

*unanticipated cancellation of contracts by operators without cause,

*changes in competition, and

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

Because the forward-looking statements are subject to risks and
uncertainties, the actual results of operations and actions taken by the Company
may differ materially from those expressed or implied by such forward-looking
statements. These risks and uncertainties are referenced in connection with
forward-looking statements that are included from time to time in this document.
Each forward-looking statement speaks only as of the date of this Form 10-Q, and
the Company undertakes no obligation to publicly update or revise any
forward-looking statement.

18

OUTLOOK AND OVERVIEW

The financial results for the second quarter of 2003 continue to
reflect depressed conditions in most drilling markets. Despite high utilization
for jackup rigs in the Gulf of Mexico, the dayrates for jackups and barges in
this market continue to remain at depressed levels. Utilization for
international land drilling operations, while ending its downward trend that
began during the second quarter of 2002, remains at depressed levels. Even
though dayrates have not increased in the Gulf of Mexico, our rental tool
business has responded favorably to the recent increase in activity.

As we have reported in recent filings, the conundrum of continued
depressed dayrates in the Gulf of Mexico in the face of rising natural gas
prices can possibly be attributed to several factors, including: operators
addressing debt reduction issues, lack of acceptable well prospects and funding
issues for independent operators. These market conditions continue to create
unusual situations as our jackup utilization increased from 75 percent in the
first quarter of 2003 to 82 percent in the second quarter of 2003 as our jackup
dayrates decreased during the same period. Barge drilling activity results were
more predictable for the current operating environment with barge utilization
and dayrates declining during the second quarter when compared with the first
quarter, despite a brief surge in activity during June. As several new contracts
commence during the third quarter, utilization will improve slightly, but we
anticipate that the Gulf of Mexico drilling market will remain flat throughout
the third quarter.

Our rental tool business in the Gulf of Mexico increased during the
second quarter of 2003 when compared to the first quarter of 2003. Also
contributing to the increase in operating income of $0.2 million during this
period has been the development of Quail Tools' new Evanston, Wyoming Operation
that continues to establish a solid customer base. The outlook for the rental
tools business for the remainder of 2003 is positive and we anticipate that, the
year over year growth for the remainder of 2003 will equal or exceed that of the
first two quarters.

The Commonwealth of Independent States (former Soviet Union, referred
to herein as "CIS") is our leading market of international land operations. In
addition to our established operations in Kazakhstan and Russia, we recently
announced that a subsidiary of Parker, in cooperation with Calik Enerji, A.S.,
has signed a three year, two rig contract to provide drilling services to
Turkmeneft State Concern in Turkmenistan. Our remaining international land
operations showed little signs of improvement during the second quarter due
primarily to our Asia Pacific operation. However, this area will improve during
the third and fourth quarters of 2003 as a result of a recent contract extension
in Indonesia, two new contracts in New Zealand and a new contract in Bangladesh.
The Indonesia operations will increase activity for three months while the new
contracts in New Zealand and Bangladesh are anticipated to last from nine to
twelve months. As bidding activity increases in the Asia Pacific market, we are
hopeful that this market will continue to grow. We are also continuing our
pursuit of opportunities to increase our presence in Russia through alliances
with operators who are making long term investments.

International offshore activity was negatively impacted during the
second quarter of 2003 by continued community unrest in Nigeria that has
resulted in the shutdown of one barge rig since March 2003. We are in
negotiations with the operator of this project to activate one of our other
barge rigs that is currently idle until such time as we are able to access,
evaluate and repair any damage to the former rig due to the community unrest.
The operator of our barge rig operation in the Caspian Sea has given notice of
termination at the end of its four year term in September. Although we
anticipate that this rig will resume operating in the future, we do not expect
any increase in our international offshore markets in the near term.

19

OUTLOOK AND OVERVIEW (continued)

We recently announced that the negotiations with a third party for the
sale of a package of rigs in Latin America and the Gulf of Mexico have been
terminated due to a material change in the offer by the third party which we
rejected. Although the termination of these negotiations will delay our initial
goal of reducing our debt by $200 million, we remain cautiously optimistic that
we will complete the sale of a group of assets by year end. We are committed to
accomplishing our strategic plan of using asset sales and debt reduction and
restructuring to posture the Company for future growth. Even though our asset
sales have been delayed, such operations meet the requirements of a
"Discontinued Operation." The assets held for sale have been written down to an
estimated fair value, resulting in a non-cash impairment charge of $54.0 million
recognized in the second quarter. Included in the discontinued operations line
on the Statement of Operations is the non-cash loss anticipated on the eventual
sale of the assets, the results of operations of the discontinued operations and
any applicable taxes relating to the results of operations and the anticipated
sale. In addition we reclassified prior quarter operating results. We will
continue to report separately the results of operations of these segments until
the closing of the actual sale.

As we pursue asset sales, we continue to be vigilant in our efforts to
conserve cash by maintaining capital expenditures below $50.0 million and
corporate overhead below $20.0 million for the year. The Company intends to use
proceeds from the asset sales to reduce debt and to cover debt maturities. In
addition, the Company is in discussions to renew or replace its senior credit
facility, which currently consists of a revolving credit agreement (see
Liquidity and Capital Resources Section) with a larger facility that will
consist of a revolving credit agreement and a term loan agreement. If the
Company is not successful in either (i) selling assets or (ii) renewing or
replacing its senior credit facility with a larger senior credit facility that
includes a term loan, we anticipate that cash generated from operations may not
be sufficient to pay the $110 million of Convertible Subordinated Notes due in
August 2004. All of the Company's debt agreements contain cross-default
provisions. Accordingly, if the Company is unable to pay the Convertible
Subordinated Notes when due, all of its debt would be declared in default and
thus would become immediately due and payable. As indicated in our conference
call for the second quarter, we are reducing our guidance for 2003 to a
projected loss in diluted earnings per share to a range of $0.38 to $0.42 for
continuing operations. This guidance takes into consideration debt restructuring
costs and refinancing costs associated with the new debt offering which we are
planning in conjunction with the asset sales, as well as slower than anticipated
market reaction to commodity prices that continues to affect a number of our
drilling markets.

RESULTS OF OPERATIONS

Three Months Ended June 30, 2003 Compared with Three Months Ended June 30, 2002

The Company recorded a net loss of $74.4 million for the three months
ended June 30, 2003 including a loss of $60.7 million attributed to discontinued
operations as compared to a net loss of $11.5 million for the three months ended
June 30, 2002 which includes a loss of $3.8 million attributed to discontinued
operations. The net loss from continuing operations for the current quarter was
$13.7 million compared to a net loss of $7.7 million for the three months ended
June 30, 2002.

In June 2003, the board of directors approved a plan to sell the Gulf
of Mexico jackup and platform operations and the Latin America operations. In
compliance with Generally Accepted Accounting Principles the Company has
recognized the jackup and platform operations and the Latin America operations
as discontinued operations. Reclassifications have been made to reflect
operations from continuing operations and discontinued operations for 2003 and
2002. The analysis below reflects these reclassifications, beginning with an
analysis of the continuing operations followed by a discussion of discontinued
operations.

20

RESULTS OF OPERATIONS (continued)

Analysis of Continuing Operations

The Company's drilling and rental revenues decreased $9.8 million to
$73.9 million in the current quarter as compared to the second quarter of 2002.
U.S. drilling revenues consisting of 22 barge rigs decreased $0.8 million due to
declining dayrates. The marginal improvement of the barge rigs utilization from
52 percent to 55 percent in the current quarter as compared to the second
quarter of 2002 partially offset the effect of the decline in dayrates.

International drilling revenues decreased $9.4 million to $42.1 million
in the current quarter as compared to the second quarter of 2002. International
land drilling revenues decreased $5.6 million while international offshore
drilling revenues decreased $3.8 million. All international land locations
experienced a decrease in revenues in the second quarter of 2003 as compared to
2002. Land drilling revenues in the CIS region decreased $0.9 million primarily
attributed to our Kazakhstan operations. During the second quarter 2002 the
Company had three rigs operating in the Karachaganak field in Kazakhstan. Two of
these rigs were released during the latter half of 2002, resulting in decreased
revenues of $1.9 million. The Company's operations in Tengiz with Tengizchevroil
("TCO") accounted for $0.4 million reduction in revenues due to TCO's release of
one rig, owned by TCO, on which the Company had previously provided labor
services. Decreased revenues in Kazakhstan were partially offset by increased
revenues in Russia. During the second quarter of 2003, rig 262 began operations
on Sakhalin Island resulting in increased revenues of $0.7 million. Revenues in
our Asia Pacific region decreased by $5.0 million due primarily to three fewer
rigs operating in the second quarter of 2003 as compared to the second quarter
of 2002. In Indonesia, revenues decreased $1.3 million as the Company operated
three rigs in 2002 compared to one rig during the second quarter of 2003. In
Papua New Guinea, revenues decreased $2.6 million due to a one rig decrease in
utilization and reduced labor contract days. In New Zealand, revenues decreased
$1.1 million due to a one rig decrease in utilization.

The decrease of $3.8 million in international offshore drilling
revenues was due primarily to reduced dayrates in Nigeria, even though three of
the four Nigerian barge rigs were under contract during the second quarter of
2002 and 2003. In March of 2003, two of the three barge rigs suspended drilling
and were evacuated due to civil unrest. During the suspension, the contract
provides for the application of a force majeure rate which is approximately 90
percent of the full operating dayrate. One of the barge rigs returned to full
operations at the end of April 2003. The second barge rig, barge rig 74, remains
evacuated and the Company has been unable to access or retrieve the rig due to
continued unrest in the area. In April, barge rig 74 was placed on a standby
rate approximating 45 percent of the full dayrate. As of the end of July 2003,
barge rigs 75 and 73 are operating on full dayrates and barge rig 74 remains on
the above standby rate. Barge rig 72 has been stacked since the completion of
its contract during the third quarter of 2002.

Rental tool revenues increased $0.5 million as Quail Tools reported
revenues in the current quarter of $13.7 million. Revenues increased $0.6
million and $0.4 million from the Victoria, Texas and Evanston, Wyoming
operations, respectively. The Odessa, Texas operations revenues decreased $0.5
million and revenues from the New Iberia, Louisiana operations remained flat in
the current period as compared to the second quarter 2002. The Victoria, Texas
operations experienced a 31 percent increase in net rental revenues, driven by
customer drilling activity in the south Texas region. Operations in the
Evanston, Wyoming region commenced the second quarter of 2002; thus, its
increased revenues are the result of continued marketing efforts that have
expanded our customer base in the region. The Odessa, Texas operations
experienced a 14 percent decline in net rental revenues, due to reduced customer
drilling activity and a highly competitive pricing environment in the region in
the current quarter as compared to the second quarter 2002.

21

RESULTS OF OPERATIONS (continued)

(Drilling and rental gross margin - drilling and rental revenues less direct
drilling and rental operating expenses; drilling and rental gross margin
percentages - drilling and rental gross margin as a percent of drilling and
rental revenues.)

Drilling and rental gross margin of $24.2 million in the current
quarter decreased $3.7 million from the second quarter of 2002. In the U.S.
drilling market, gross margin for the barge rigs decreased $0.6 million.

International drilling gross margin decreased $3.7 million in the
current quarter as compared to the second quarter of 2002. International land
drilling gross margin decreased $3.6 million to $7.0 million during the current
quarter due primarily to declining utilization in Asia Pacific. The Asia Pacific
region gross margin decreased $3.4 million in the second quarter of 2003.
Indonesia had three rigs operating in 2002 compared to one in 2003. Utilization
in Papua New Guinea and New Zealand declined from 67 percent and 36 percent
respectively in 2002, to 33 percent and 14 percent in 2003. The CIS region gross
margin for land operations decreased $0.5 million in 2003, due primarily to a
reduction in utilization in the Karachaganak field from the equivalent of 2.5
operating rigs in 2002 (one rig was released in May of 2002) to one operating
rig in 2003.

The international offshore gross margin was $4.4 million in the current
quarter reflecting only a slight decrease in total from the second quarter of
2002. However, the gross margin related to the four Nigerian barge rigs
decreased $0.9 million which was offset by an increase in gross margin for barge
rig 257 in the Caspian Sea. Gross margins in Nigeria decreased primarily due to
the community unrest in Nigeria which has resulted in significant damage to
barge rig 74. As of June 30, 2003, the Company estimated that damage to the rig
will approximate $7.5 million, resulting in a cost to the Company, net of
expected insurance proceeds, of $1.7 million which was expensed. The cost to
repair barge rig 74 is only an estimate based on a third party's observation, as
Company personnel have been unable to board the rig for a thorough evaluation.
The increase in gross margin for barge rig 257 in the Caspian Sea is the result
of a one-time assessment during 2002 for property taxes that were related to
previous years.

Rental tool gross margin increased $0.7 million to $8.1 million during
the current quarter as compared to the second quarter of 2002. Gross margin
percentage increased to 59 percent during the current quarter as compared to 56
percent for the second quarter of 2002, due to a slight increase in revenues and
a three percent decrease in operating expenses. More specifically, salaries and
benefits have experienced a six percent decline during the current quarter, as
compared to the second quarter of 2002.

Depreciation and amortization expense increased $0.3 million to $17.3
million in the current quarter. Depreciation expense increased due to capital
additions during 2002.

22

RESULTS OF OPERATIONS (continued)

During the first quarter of 2002, the Company announced a new contract
to design, construct, mobilize and sell a rig to drill extended reach wells to
offshore targets from a land-based location on Sakhalin Island, Russia for an
international consortium. The Company also entered into a contract to
subsequently operate the rig on behalf of the international consortium. The
revenue and expense for the project are recognized as construction contract
revenue and expense. The estimated profit from the engineering, construction,
mobilization and rig-up fees is calculated on a percentage of completion basis.
During the second quarter ended June 30, 2003 the Company recognized $1.0
million in estimated profit. The total estimated profit recognized to date from
the design, construction, mobilization and rig-up contract is $3.5 million, $1.0
million of which was recognized in 2003 and $2.5 million was recognized during
2002. Final completion of all construction is expected by September 2003.

General and Administrative expense decreased $0.3 million to $5.3
million in the current quarter as compared to the second quarter of 2002. The
decrease is attributed to the following: salaries and wages decreased $0.2
million as a result of the reduction in force in June 2002, and the remaining
decrease is a result of the ongoing cost reduction program implemented in 2002.

Interest expense increased $0.7 million in the second quarter of 2003
as compared to the second quarter of 2002. The increase was due in part to the
termination of a $50 million swap agreement during the third quarter of 2002
that resulted in $1.2 million in interest savings during the second quarter of
2002. Interest expense also increased due to the exchange of $235.6 million in
principal amount of new 10.125% Senior Notes due 2009 for a like amount of its
9.75% Senior Notes due 2006, which was effective July 1, 2002. These increases
were offset partially during the current quarter by the purchase of $14.8
million of the Company's Convertible Subordinated Notes on the open market in
May 2003, reduced interest amortization of the Boeing note and the amortization
of the SWAP gain recognized upon liquidation of the SWAP agreements.

Income tax expense consists of foreign tax expense of $3.9 million for
the second quarter of 2003. For the second quarter of 2002 income tax expense
consisted of foreign tax expense of $1.4 million and a deferred tax benefit of
$4.5 million. Foreign taxes increased $2.5 million due primarily to a tax
benefit realized in 2002 from a Kazakhstan tax ruling related to prior years.
For the second quarter of 2003 the Company incurred a net loss, however, no
additional deferred tax benefit was recognized since the sum of the Company's
deferred tax assets, principally the net operating loss carryforwards, exceeds
the deferred tax liabilities, principally the excess of tax depreciation over
book depreciation. This additional deferred tax asset was fully reserved through
a valuation allowance in the current quarter.

Analysis of Discontinued Operations

23

RESULTS OF OPERATIONS (continued)

Revenues in Latin America decreased $7.4 million primarily due to
declining utilization in Colombia and Ecuador. During the second quarter of 2002
the Latin America region averaged 7.2 rigs operating as compared to an average
of 2.7 rigs working during the second quarter of 2003. During the second quarter
of 2002, a customer released four rigs in the deep drilling regions of Colombia
and currently only one rig has resumed operations. In the second quarter of
2002, Ecuador had one rig operating, the contract was completed in late 2002 and
the rig is currently being prepared to mobilize to Bangladesh from its current
location in Houston. Increased revenue in Peru partially offset the decline in
Colombia and Ecuador. During the second quarter of 2003 Peru had one rig
operating at full dayrate as compared to one rig on a reduced move rate during
the second quarter of 2002.

In Latin America gross margin declined $2.7 million. The decreasing
utilization in the Colombia and Ecuador operations, as previously mentioned,
contributed to the reduction in gross margin for the region. Also additional
expense was incurred in Colombia related to the preparation of the
demobilization of three rigs to the U.S.

U. S. Gulf of Mexico discontinued operations revenues increased $1.1
million in the current quarter as compared to the second quarter 2002. Jackup
rig revenues increased $1.0 million as a result of an improvement in average
utilization from 78 percent to 82 percent and a five percent increase in
dayrates from the second quarter 2002 to the current quarter, respectively. The
platform rig revenues increased $0.1 million due to a slight improvement in
average dayrates in the current quarter as compared to the second quarter 2002.

U.S. Gulf of Mexico discontinued operations gross margin increased $0.6
million in the current quarter as compared to the second quarter 2002. The gross
margin was positively impacted during the current quarter by higher utilization
and dayrates from the jackup rigs and higher dayrates on the platform rigs as
previously discussed.

Six Months Ended June 30, 2003 Compared with Six Months Ended June 30, 2002

The Company recorded a net loss from continuing operations of $24.3
million for the six months ended June 30, 2003 compared to a net loss from
continuing operations of $9.5 million before the cumulative effect of a change
in accounting principle for the six months ended June 30, 2002. Losses from
discontinued operations were $66.3 million and $13.1 million for the six months
ended June 30, 2003 and 2002, respectively. During the six months ended June 30,
2002 the Company adopted SFAS No. 142 which resulted in a $73.1 million
impairment of goodwill which was recognized as a change in accounting principle.

Analysis of Continuing Operations

The Company's drilling and rental revenues decreased $18.0 million to
$151.8 million in the current six-month period as compared to the six months
ended June 30, 2002. U.S. drilling revenues increased $0.6 million due to
increased utilization despite the decrease in average dayrate in the Company's
Gulf of Mexico barge drilling operations. Utilization increased from 48 percent
in 2002 to 54 percent for the six months ended June 30, 2003 while average
dayrates decreased approximately 13 percent in 2003 as compared to 2002.

24

RESULTS OF OPERATIONS (continued)

International drilling revenues decreased $19.6 million to $89.8
million in the current six-month period as compared to the six months ended June
30, 2002. International land drilling revenues decreased $12.4 million while
international offshore drilling revenues decreased $7.2 million. Land drilling
revenues in the CIS operations decreased $4.8 million due to reduced utilization
in Kazakhstan. In the Karachaganak field the Company worked three rigs during
2002 while only one worked during the six months ended June 30, 2003. In
addition in December of 2002, TCO's release of one rig, owned by TCO, which the
Company provided labor services, resulted in reduced revenues. Decreased
revenues in Kazakhstan were partially offset by increased revenues in Russia.
During the second quarter rig 262 began drilling operations on the Sakhalin
Island resulting in increased revenues. Revenues in our Asia Pacific region
decreased $8.4 million in 2003 as compared to 2002. Reduced utilization was the
primary factor in all three countries in which we operate. Indonesia worked on
average three rigs in 2002 and one rig during 2003. Both, New Zealand and Papua
New Guinea, had one less rig working in 2003 as compared to 2002.

The decrease of $7.2 million in international offshore drilling
revenues was due primarily to reduced dayrates in Nigeria. As noted earlier,
significant civil unrest resulted in the suspension of drilling operations on
two of the three rigs working during 2003. Both of the barge rigs were evacuated
and were placed on force majeure rates approximately 90 percent of the full
dayrate. One of the barge rigs returned to full operations while the second
barge rig, barge rig 74, remains evacuated. In April 2003, barge rig 74 was
placed on a standby rate approximating 45 percent of the full dayrate. As of the
end of July 2003, barge rigs 75 and 73 are operating on full dayrates and barge
rig 74 remains on a standby rate. Barge rig 72 has been stacked since the
completion of its contract during the third quarter of 2002.

Rental tool revenues increased $1.0 million as Quail Tools reported
revenues in the current year of $26.3 million. Revenues increased $0.3 million
from the New Iberia, Louisiana operations, increased $0.6 million from the
Victoria, Texas operations, decreased $0.6 million from the Odessa, Texas
operations and generated $0.7 million from its new operations in Evanston,
Wyoming. Both, New Iberia, Louisiana and the Victoria, Texas operations
experienced an increase in customer demand in the respective regions due to
increased drilling activity. The Odessa, Texas operation was down 19 percent in
2003 as compared to 2002 due to a decrease in customer activity in the region
and a highly competitive pricing environment.

(Drilling and rental gross margin - drilling and rental revenues less direct
drilling and rental operating expenses; drilling and rental gross margin
percentages - drilling and rental gross margin as a percent of drilling and
rental revenues.)

Drilling and rental gross margin of $52.3 million in the current
six-month period reflected a decrease of $5.4 million from the six months ended
June 30, 2002. Increased gross margin in the U.S. drilling operations and rental
tool operations were more than offset by decreased operating margin in the
international operations. The U.S. drilling operation's gross margin increased
$0.6 million during the current period. The gross margin percentage increased
from 27 percent to 29 percent primarily attributed to more efficient management
of barge rig costs, such as repairs, maintenance and supplies.

25

RESULTS OF OPERATIONS (continued)

International drilling gross margin decreased $7.4 million in the
current six-month period as compared to the six months ended June 30, 2002.
International land drilling gross margin decreased $7.0 million to $15.7 million
during the current six-month period due primarily to the reduced revenues in the
Company's land drilling operations as previously discussed. The gross margin
percentage for the international land drilling decreased from 37 percent to 32
percent in the current six-month period due to certain fixed costs at
international locations such as marketing and administrative. The international
offshore drilling gross margin decreased $0.3 million to $11.2 million in the
current six-month period. The decrease is primarily attributed to reduced
revenues resulting from the community unrest issues in Nigeria as previously
discussed. Gross margins in Nigeria decreased approximately $1.2 million during
the current six-month period. This decrease was partially offset by an increase
in gross margin related to barge rig 257 in the Caspian Sea. The increased gross
margin was directly related to a one-time payment for property taxes, as
previously mentioned.

Rental tool gross margin increased $1.3 million to $15.3 million during
the current six-month period as compared to 2002. Gross margin percentage
increased to 58 percent during the current period as compared to 55 percent for
the six months ended June 30, 2002, due to a slight increase in revenues and a
three percent decrease in operating expenses. This decrease in operating
expenses was driven by the decline in costs to repair rental tools and costs
associated with the disposition of rental tools that were sold or junked.

Depreciation and amortization expense increased $1.3 million to $34.4
million during the current period. Depreciation expense increased due to capital
additions during 2002.

Interest expense increased $1.7 million for the six months ended June
30, 2003 as compared to 2002. During the first quarter of 2002, the Company
entered into three $50.0 million swap agreements that resulted in $2.3 million
in interest savings during the six months ended June 30, 2002. The swap
agreements were terminated during the third quarter of 2002. Effective July 1,
2002 interest expense increased due to the exchange of $235.6 million in
principal amount of new 10.125% Senior Notes due 2009 for a like amount of its
9.75% Senior Notes due 2006. Partially offsetting this increase was a reduction
in interest from the purchase of $14.8 million of Convertible Subordinated Notes
on the open market in May 2003, reduced interest amortization of the Boeing note
and the amortization of the SWAP gain recognized upon liquidation of the SWAP
agreements.

During the first quarter of 2002, the Company announced a new contract
to build and operate a rig to drill extended reach wells to offshore targets
from a land-based location on Sakhalin Island, Russia for an international
consortium. The revenue and expense for the project are recognized as
construction contract revenue and expense, with the engineering fee calculated
on a percentage of completion basis, $1.0 million and $1.2 million were
recognized during the six months ended June 30, 2003 and 2002, respectively.

General and Administrative expense decreased $2.1 million to $10.4
million in the current six-month period as compared to the six months ended June
30, 2002. This decrease is primarily attributed to the following: salaries and
wages decreased $0.7 million as a result of the reduction in force in June 2002;
professional and legal fees decreased $0.6 million; and unscheduled maintenances
of $0.2 million on the former corporate headquarters in Tulsa during 2002. The
remaining decrease is a result of the ongoing cost reduction program implemented
last year.

Other expense decreased $4.2 million in the current six-month period as
compared to the six months ended June 30, 2002. The six months ended June 30,
2002 included $3.6 million related to the Exchange Offer and $0.6 million costs
incurred for the attempted acquisition of Australian Oil and Gas.

Income tax expense consists of foreign tax expense of $7.7 million for
the current six-month period. For the six months ended June 30, 2002 income tax
expense included foreign tax expense of $4.9 million and deferred tax benefit of
$9.7 million. Foreign taxes increased $2.8 million in the current six-month
period due primarily to a tax benefit realized in 2002 from a Kazakhstan tax
ruling related to prior years. For the current six-month period the Company
incurred a net loss, however, no additional deferred tax benefit was recognized
since the sum of the Company's deferred tax assets, principally the net
operating loss carryforwards, exceeds the deferred tax liabilities, principally
the excess of tax depreciation over book depreciation. This additional deferred
tax asset was fully reserved through a valuation allowance in the current
quarter.

26

RESULTS OF OPERATIONS (continued)

Analysis of Discontinued Operations

Revenues in Latin America decreased $14.6 million to $12.3 million in
the current six-month. The region operated an average of 3.0 rigs in the current
six-month period as compared to 7.4 rigs in the six months ended June 30, 2002.
The decline in utilization in Colombia and Ecuador, as mentioned previously, was
partially offset by operations in Peru and Bolivia. Bolivia recognized
mobilization revenue on a contract for one rig in the current period. Peru had
one rig operating at full dayrate for the current six-month period as compared
to a reduced move rate for a portion of the six months ended June 30, 2002. In
addition, Peru recognized additional revenue which had been previously deferred
and is now being amortized over the life of the contract.

Gross margin in the Latin America region decreased $5.5 million to $1.5
million in the current period as compared to the six months ended June 30, 2002.
The loss of four contracts in Colombia in mid 2002 and one contract in Ecuador
contributed to the decline in gross margin. Of the four contracts cancelled in
Colombia, only one rig was returned to work in early 2003.

Revenues for the U. S. Gulf of Mexico discontinued operations increased
$5.3 million to $22.3 million in the current six-month period as compared to the
six months ended June 30, 2002. The jackup rigs contributed to the increase with
higher utilization and improved dayrates. Utilization for the jackup rigs
increased from 66 percent to 79 percent and average dayrates improved 10 percent
in the current six-month period as compared to the six months ended June 30,
2002. The platform rigs utilization remained constant at 17 percent, but
experienced an increase in average dayrates of 12 percent from the current
six-month period as compared to the six months ended June 30, 2002.

The U.S. Gulf of Mexico discontinued operations gross margin was $1.5
million in the current period, an increase of $3.2 million from the six months
ended June 30, 2002. The gross margin was positively impacted in the current
period by higher dayrates and utilization for the jackup rigs and improved
dayrates on the platform rigs as previously discussed.

27

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2003, the Company had cash and cash equivalents of $66.0
million, an increase of $14.0 million from December 31, 2002. The primary
sources of cash for the six-month period as reflected on the Consolidated
Condensed Statement of Cash Flows were $45.6 million provided by operating
activities and $2.6 million from the disposition of equipment.

The primary uses of cash for the six-month period ended June 30, 2003
were $15.7 million for capital expenditures and $18.4 million for repayment of
debt. The Company used $14.5 million cash to purchase $14.8 million face value
of its outstanding Convertible Subordinated Notes on the open market in May
2003. Major capital projects during the current six-month period included
expenditures on drill pipe and tubulars for Quail Tools.

As of June 30, 2002, the Company had cash and cash equivalents of $23.4
million, a decrease of $37.0 million from December 31, 2001. The net cash used
in operating activities as reflected on the Consolidated Condensed Statement of
Cash Flows was $9.6 million. This included $27.1 million of net receivables
relating to construction of rig 262 for the Sakhalin Island project. Cash flows
from investing activities included $28.1 million for capital expenditures and
proceeds from the sale of assets of $3.3 million. Cash flows from financing
activities included $2.6 million repayment of debt.

The Company has total long-term debt of $571.3 million, including the
current portion of $6.2 million at June 30, 2003. The Company has a senior
credit facility that currently consists of a $50.0 million revolving credit
agreement ("revolver") with a group of banks led by Bank of America. This
revolver is available for working capital requirements, general corporate
purposes and to support letters of credit. The revolver is collateralized by
accounts receivable, inventory, and certain barge rigs located in the Gulf of
Mexico. The revolver contains customary affirmative and negative covenants.
Availability under the revolver is subject to a borrowing base limitation based
on 80 percent of eligible receivables plus 50 percent of supplies in inventory.
Currently, the borrowing base is $35.5 million, of which none has been drawn
down, and $10.7 million has been reserved for letters of credit resulting in
available revolving credit of $24.8 million. The senior credit facility,
including the revolver terminates on October 22, 2003. The Company is in the
process of renewing or replacing the senior credit facility with a larger
facility, which would include a revolving credit agreement and a term loan
agreement. The Company is seeking to obtain this larger senior credit facility
so that the term loan would be available to be used as a source of funds to pay
a portion of the Convertible Subordinated Notes payable in August 2004 in the
event these notes have not been refinanced or retired by such date. If the
Company is not successful in either (i) selling assets or (ii) renewing or
replacing its senior credit facility with a larger senior credit facility that
includes a term loan, we anticipate that cash generated from operations may not
be sufficient to pay the $110 million of Convertible Subordinated Notes due in
August 2004. All of the Company's debt agreements contain cross-default
provisions. Accordingly, if the Company is unable to pay the Convertible
Subordinated Notes when due, all of its debt would be declared in default and
thus would become immediately due and payable.

The Company anticipates the working capital needs and funds required
for capital spending will be met from existing cash and cash provided by
operations. It is management's present intention to limit capital spending, net
of reimbursements from customers, to approximately $50.0 million in 2003. Should
new opportunities requiring additional capital arise, the Company may seek
project financing or equity participation from outside alliance partners or
customers. The Company cannot predict whether such financing or equity
participation would be available on terms acceptable to the Company.

28

LIQUIDITY AND CAPITAL RESOURCES (continued)

The following tables summarize the Company's future contractual cash
obligations and other commercial commitments as of June 30, 2003.

(1) Long-term debt includes the principal and interest cash
obligations of the 9.75% Senior Notes, the 10.125% Senior
Notes, the 5.5% Convertible Subordinated Notes, the secured
10.1278% promissory note and the capital leases. Premiums
related to the Senior Notes and interest rate swap to market
gain (see Note 9 of the Notes to Unaudited Consolidated
Condensed Financial Statements) are 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) The Company has a $50.0 million revolving credit facility with
an available borrowing base of $35.5 million. As of June 30,
2003, none has been drawn down, but $10.7 million of
availability has been used to support letters of credit that
have been issued. The revolving credit facility expires in
October 2003.

The Company does not have any unconsolidated special-purpose entities,
off-balance-sheet financing arrangements or guarantees of third-party financial
obligations. The Company has no energy or commodity contracts.

OTHER MATTERS

Critical Accounting Policies

The Company considers certain accounting policies related to impairment
of property, plant and equipment, impairment of goodwill, the valuation of
deferred tax assets and revenue recognition to be critical accounting policies
due to the estimation processes involved in each.

Impairment of property, plant and equipment - Management periodically
evaluates the Company's property, plant and equipment to determine that their
net carrying value is not in excess of their net realizable value. These
evaluations are performed when the Company has realized sustained significant
declines in utilization and dayrates and recovery is not contemplated in the
near future. Management considers a number of factors such as estimated future
cash flows, appraisals and current market value analysis in determining net
realizable value. Assets are written down to their fair value if it is below its
net carrying value.

29

OTHER MATTERS (continued)

In June 2003, the board of directors approved a plan to sell the Latin
America assets consisting of 17 land rigs and related inventory and spare parts
and the U.S. Gulf of Mexico assets consisting of seven jackup rigs and four
platform rigs. The Company is actively marketing the assets through an
independent broker and expects to complete the sale by the end of December,
2003. At June 30, 2003, the net book value of the assets to be sold exceeded the
fair value and as a result an impairment charge including estimated sales
expenses was recognized in the amount of $54.0 million, (see Note 4 of the Notes
to Unaudited Consolidated Condensed Financial Statements for additional
information).

Impairment of goodwill - Management periodically assesses whether the
excess of cost over net assets acquired is impaired based on the estimated fair
value of the operation to which it relates, which value is generally determined
based on estimated future cash flows of that operation. If the estimated fair
value is in excess of the carrying value of the operation, no further analysis
is performed. If the fair value of each operation, to which goodwill has been
assigned, is less than the carrying value, we will deduct the fair value of the
tangible and intangible assets and compare the residual amount to the carrying
value of the goodwill to determine if impairment should be recorded.

In 2002, SFAS No. 142, "Goodwill and Other Intangible Assets," became
effective and as a result, the Company discontinued the amortization of $189.1
million of goodwill. In lieu of amortization, the Company performed an initial
impairment review of goodwill and as a result impaired goodwill by $73.1
million. The Company will perform an annual impairment review, in December,
hereafter. The impairment was recognized as a cumulative effect of a change in
accounting principle. The Company performed its annual impairment review during
the fourth quarter of 2002 with no additional impairment required.

Accounting for income taxes - As part of the process of preparing the
consolidated financial statements, the Company is required to estimate the
income taxes in each of the jurisdictions in which the Company operates. This
process involves estimating the actual current tax exposure together with
assessing temporary differences resulting from differing treatment of items,
such as depreciation, amortization and certain accrued liabilities for tax and
accounting purposes. These differences and the net operating loss carryforwards
result in deferred tax assets and liabilities, which are included within the
Company's consolidated balance sheet. The Company must then assess the
likelihood that the deferred tax assets will be recovered from future taxable
income, and to the extent the Company believes that recovery is not likely, the
Company must establish a valuation allowance. To the extent the Company
establishes a valuation allowance or increases or decreases this allowance in a
period, the Company must include an expense or reduction of expense within the
tax provision in the statement of operations.

Revenue recognition - The Company recognizes revenues and expenses on
dayrate contracts as the drilling progresses (percentage of completion method)
because the Company does not bear the risk of completion of the well. For
meterage contracts, the Company recognizes the revenues and expenses upon
completion of the well (completed contract method). Revenues from rental
activities are recognized ratably over the rental term which is generally less
than six months.

Recent Accounting Pronouncements

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, No. 44, and No. 64, Amendment of FASB Statement No. 13, and
Technical Corrections." SFAS No. 145 is effective for fiscal years beginning
after May 15, 2002. We adopted this standard in the first quarter of 2003 and it
did not have a significant effect on our results of operations or our financial
position.

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 is effective for exit
or disposal activities initiated after December 31, 2002. The adoption of this
standard has not had any impact on our financial position or results of
operations.

30

OTHER MATTERS (continued)

In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, including
Indirect Guarantees of Indebtedness of Others." The interpretation requires
disclosure about the nature and terms of obligations under certain guarantees
that the Company has issued. The interpretation also clarifies that a guarantor
is required to recognize, at inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing a guarantee. The initial
recognition and initial measurement provisions are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002. The disclosure
requirements in this interpretation are effective immediately. We do not expect
to be impacted by the issuance of FIN 45.

On December 31, 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure - An Amendment of SFAS No.
123." The standard provides additional transition guidance for companies that
elect to voluntarily adopt the accounting provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 148 does not change the
provisions of SFAS No. 123 that permit entities to continue to apply the
intrinsic value method of APB No. 25, "Accounting for Stock Issued to
Employees." As we continue to follow APB No. 25, our accounting for stock-based
compensation will not change as a result of SFAS No. 148. SFAS No. 148 does
require certain new disclosures in both annual and interim financial statements.
The interim disclosure provisions have been included as Note 1.

On January 17, 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities, An Interpretation of Accounting Research Bulletin No. 51."
The primary objectives of FIN 46 are to provide guidance on how to identify
entities for which control is achieved through means other than through voting
rights (variable interest entities ("VIE")) and how to determine when and which
business enterprise should consolidate the VIE. This new model for consolidation
applies to an entity in which either (1) the equity investors do not have a
controlling financial interest or (2) the equity investment at risk is
insufficient to finance that entity's activities without receiving additional
subordinated financial support from other parties. See Note 10 regarding our
consolidation of AralParker, a company in which we own a 50 percent equity
interest. We are consolidating AralParker because we exert significant influence
and have a financial interest in the form of a loan, in addition to our equity
interest.

In March 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under FASB
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities.
This Statement will be effective for contracts entered into, modified or
designated as hedges after June 30, 2003. We will adopt this standard in July
2003 and do not expect it to have a significant effect on our results of
operations or our financial position.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
statement improves the accounting for certain financial instruments that, under
previous guidance, issuers could account for as equity and requires that those
instruments be classified as liabilities (or assets in certain circumstances) in
statements of financial position. This statement will be effective for all
financial statements entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. We will adopt this standard as of July 1, 2003 and do not expect it to
have a significant effect on financial position.

31

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

The Company is exposed to interest rate risk from its fixed-rate debt.
In January 2002, the Company hedged against a portion of the risk of changes in
fair value associated with its $214.2 million 9.75% Senior Notes by entering
into three fixed-to-variable interest rate swap agreements with a total notional
amount of $150.0 million. The Company assumed no ineffectiveness as each
interest rate swap agreement met the short-cut method requirements under SFAS
No. 133 for fair value hedges of debt instruments. As a result, changes in the
fair value of the interest rate swap agreements were offset by changes in the
fair value of the debt and no net gain or loss was recognized in earnings.
During the three and six months ended June 30, 2002 the interest rate swap
agreements reduced interest expense by $1.1 million and $2.3 million
respectively.

On July 24, 2002, the Company terminated all the interest rate swap
agreements and received $3.5 million. A gain totaling $2.6 million will be
recognized as a reduction to interest expense over the remaining term (ending
November 2006) of the debt instrument, of which $0.2 million and $0.4 million
was recognized during the three and six months ended June 30, 2003.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures - The Company's management, with the
participation of the Company's Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of the Company's disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the
end of the period covered by this quarterly report. Based on such evaluation,
the Company's Chief Executive Officer and Chief Financial Officer have concluded
that, as of the end of such period, the Company's disclosure controls and
procedures are effective in recording, processing, summarizing and reporting, on
a timely basis, information required to be disclosed by the Company in the
reports that it files or submits under the Exchange Act.

Internal Control Over Financial Reporting - There have not been any
changes in the Company's internal control over financial reporting (as such term
is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the
fiscal quarter to which this report relates that have materially affected, or
are reasonably likely to materially affect, the Company's internal control over
financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES OR DIVIDEND ARREARAGES

None.

32

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

None

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:

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

33

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

Registrant

Date: August 13, 2003

By: /s/ James W. Whalen
------------------------------------
James W. Whalen
Senior Vice President and
Chief Financial Officer

By: /s/ W. Kirk Brassfield
------------------------------------
W. Kirk Brassfield
Vice President and Controller

34

INDEX TO EXHIBITS