SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549







FORM
10-K







(Mark
One)


x
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For
the fiscal year ended December 31, 2007




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 000-51471







Bronco
Drilling Company, Inc.




(Exact
name of registrant as specified in its charter)




Delaware
            20-2902156(State
      or Other Jurisdiction of
              Incorporation
      or Organization)
            (I.R.S.
      Employer
              Identification
      No.)16217
      North May Avenue
            73013(Address
      of Registrant’s Principal Executive Offices)
            (Zip
      Code)




(405)
242-4444


(Registrant’s
telephone number, including area code)





Securities
      Registered Pursuant to Section 12(b) of the Act:Title
      of Each Class
            
            Name
      of Each Exchange on Which RegisteredCommon
      Stock $0.01 Par Value per Share
            
            The
      Nasdaq Stock Market LLCSecurities
      Registered Pursuant to Section 12(g) of the Act:None






Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.    Yes   ̈    No x




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the
Act.    Yes   ̈    No  x




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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K.   ̈




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, non-accelerated filer or a smaller reporting company. See
definitions of “accelerated filer and large accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (check one):




Large
      Accelerated Filer   ̈
            Accelerated
      Filer  x
            Non-Accelerated
      Filer   ̈
            Smaller
      Reporting Company   ̈




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).    Yes   ̈    No  x




The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant as of the most recently completed second fiscal
quarter (June 30, 2007), based on the price at which the common equity was last
sold on such date: $426,796,695.




As of
February 29, 2008, 26,269,961 shares of common stock were
outstanding.


Table of Contents




Documents
Incorporated By Reference




Certain
information called for by Part III is incorporated by reference to certain
sections of the Proxy Statement for the 2008 Annual Meeting of our stockholders
which will be filed with the Securities and Exchange Commission not later than
120 days after December 31, 2007.





-2-
 Table of Contents


BRONCO DRILLING COMPANY, INC.




INDEX




Item
              No.
            
            Form
              10-K
              Report
              PageCautionary Note Regarding Forward-Looking
      Statements
            4PART I1.
            Business
            41A.
            Risk Factors
            91B.
            Unresolved Staff Comments
            142.
            Properties
            153.
            Legal Proceedings
            154.
            Submission of Matters to a Vote of Security
      Holders
            15PART
      II5.
            Market for Registrant’s Common Equity, Related Stockholder
      Matters and Issuer Purchases of Equity Securities
            166.
            Selected Financial Data
            177.
            Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
            187A.
            Quantitative and Qualitative Disclosures About Market
      Risk
            238.
            Financial Statements and Supplementary
      Data
            239.
            Changes in and Disagreements with Accountants on
      Accounting and Financial Disclosure
            239A.
            Controls and Procedures
            239B.
            Other Information
            26PART
      III10.
            Directors and Executive Officers and Corporate
      Governance
            2611.
            Executive Compensation
            2612.
            Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters
            2613.
            Certain Relationships and Related Transactions, and
      Director Independence
            2614.
            Principal Accounting Fees and
    Services
            26PART
      IV15.
            Exhibits and Financial Statement
      Schedules
            26


-3-
 Table of Contents


Cautionary Note Regarding Forward-Looking
Statements




Our
disclosure and analysis in this Form 10-K may include forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as
amended, or the Securities Act, Section 21E of the Securities Exchange Act
of 1934, as amended, or the Exchange Act, and the Private Securities Litigation
Reform Act of 1995, that are subject to risks and uncertainties. Forward-looking
statements give our current expectations and projections relating to our
financial condition, results of operations, plans, objectives, future
performance and business. You can identify these statements by the fact that
they do not relate strictly to historical or current facts. These statements may
include words such as “anticipate,” “estimate,” “expect,” “project,” “intend,”
“plan,” “believe” and other words and terms of similar meaning in connection
with any discussion of the timing or nature of future operating or financial
performance or other events. All statements other than statements of historical
facts included in this Form 10-K that address activities, events or developments
that we expect, believe or anticipate will or may occur in the future are
forward-looking statements.




These
forward-looking statements are largely based on our expectations and beliefs
concerning future events, which reflect estimates and assumptions made by our
management. These estimates and assumptions reflect our best judgment based on
currently known market conditions and other factors relating to our operations
and business environment, all of which are difficult to predict and many of
which are beyond our control.




Although
we believe our estimates and assumptions to be reasonable, they are inherently
uncertain and involve a number of risks and uncertainties that are beyond our
control. In addition, management’s assumptions about future events may prove to
be inaccurate. Management cautions all readers that the forward-looking
statements contained in this Form 10-K are not guarantees of future performance,
and we cannot assure any reader that those statements will be realized or the
forward-looking events and circumstances will occur. Actual results may differ
materially from those anticipated or implied in the forward-looking statements
due to the factors listed in the “Risk Factors” and “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” sections and
elsewhere in this Form 10-K. All forward-looking statements speak only as of the
date of this Form 10-K. We do not intend to publicly update or revise any
forward-looking statements as a result of new information, future events or
otherwise, except as required by law. These cautionary statements qualify all
forward-looking statements attributable to us or persons acting on our
behalf.




PART
I




Item 1. Business




Unless
otherwise indicated or the context otherwise requires, all references in this
report to “Bronco,” the “Company,” “us,” “our,” or “we,” are to Bronco Drilling
Company, Inc., a Delaware corporation, and its consolidated
subsidiaries.





Our
Company





We
provide contract land drilling and workover services to oil and natural gas
exploration and production companies. As of February 29, 2008, we owned a fleet
of 56 land drilling rigs, of which 45 were marketed and 11 were held in
inventory. We also owned a fleet of 59 workover rigs, of which 49 were operating
and ten were in the process of being manufactured. As of February 29, 2008, we
also owned a fleet of 70 trucks used to transport our rigs.





We
commenced operations in 2001 with the purchase of one stacked 650-horsepower
drilling rig that we refurbished and deployed. We subsequently made selective
acquisitions of both operational and inventoried drilling rigs, as well as
ancillary equipment. Our management team has significant experience not only
with acquiring rigs, but also with refurbishing and deploying inventoried rigs.
We have successfully refurbished and brought into operation 25 inventoried
drilling rigs during the period from November 2003 through December 2007. In
addition, we have a 41,000 square foot machine shop in Oklahoma City, which
allows us to refurbish and repair our rigs and equipment in-house. This
facility, which complements our three drilling rig refurbishment yards,
significantly reduces our reliance on outside machine shops and the attendant
risk of third-party delays in our rig refurbishment program.




We
currently operate our drilling rigs in Oklahoma, Texas, Colorado, Montana, Utah
and Louisiana.  Our workover rigs are currently operating in Oklahoma,
Texas, Kansas, Colorado and New Mexico.  A majority of the wells we
have drilled for our customers have been drilled in search of natural gas
reserves. Natural gas is often found in deep and complex geologic formations
that generally require higher horsepower, premium rigs and experienced crews to
reach targeted depths. Our current fleet of 56 rigs includes 36 rigs ranging
from 950 to 2,500 horsepower. Accordingly, such rigs can, or in the case of
inventoried rigs upon refurbishment, will be able to, reach the depths required
to explore for deep natural gas reserves. Our higher horsepower land drilling
rigs can also drill horizontal wells, which are increasing as a percentage of
total wells drilled in North America. We believe our premium rig fleet,
inventory and experienced crews position us to benefit from the natural gas
drilling activity in our core operating areas.




On
January 23, 2008, we entered into a merger agreement with Allis-Chalmers Energy
Inc., which we refer to as Allis-Chalmers, providing for the acquisition of us
by Allis-Chalmers.  Pursuant to the merger agreement, we and
Allis-Chalmers agreed that, subject to the satisfaction of several closing
conditions (including approval by each company’s stockholders), Elway Merger
Sub, Inc., a wholly-owned subsidiary of Allis-Chalmers, which we refer to as
Merger Sub, would merge with and into Bronco, and Bronco would survive the
merger as a subsidiary of Allis-Chalmers.  The merger agreement was
approved by our board of directors and by the respective boards of directors of
Allis-Chalmers and Merger Sub.




The
merger agreement provides that at the effective time of the merger, our
stockholders will receive merger consideration with an aggregate value of
approximately $437.8 million, comprised of (1) $280.0 million in cash and (2)
Allis-Chalmers common stock valued at approximately $157.8
million.  The number of shares of Allis-Chalmers common stock that
will be issued for each share of our common stock will be calculated based on an
exchange ratio that will be determined by dividing (1) the quotient obtained by
dividing $157,836,000 by the average of the closing sale prices of
Allis-Chalmers common stock on the NYSE Composite Transactions Tape for each of
the ten consecutive trading days ending with the second complete trading day
prior to the merger closing date by (2) the aggregate number of shares of our
common stock issued and outstanding immediately prior to the effective time of
the merger. The affirmative vote of a majority of the votes cast on this
matter is required to consummate the merger. For more information regarding
the merger, please refer to the joint proxy statement/prospectus of
Allis-Chalmers and Bronco that is included in the registration statement on Form
S-4 (Registration No. 333-149326) filed by Allis-Chalmers with the Securities
and Exchange Commission, or the SEC, on February 20, 2008, and other relevant
materials that may be filed by us or Allis-Chalmers with the SEC, including any
amendments to such registration statement.




Our
Acquisitions




The
following table summarizes completed acquisitions in which we acquired rigs and
rig related equipment since June 2001:




Date
            Acquisition
            
            Purchase
              Price
            
            
            Number of Land
      Drilling /Workover RigsJune
      2001
            Ram
      Petroleum
            
            $
            1,250,000
            
            
            
            1May 2002
            Bison
      Drilling and Four Aces Drilling
            
            $
            12,500,000
            
            
            
            7August 2003
            Elk Hill Drilling and U.S. Rig & Equipment
            
            $
            49,000,000
            
            
            
            22July 2005
            Strata
      Drilling and Strata Property
            
            $
            20,000,000
            
            
            
            3October 2005
            Eagle
      Drilling
            
            $
            50,000,000
            
            
            
            12October 2005
            Thomas
      Drilling
            
            $
            68,000,000
            
            
            
            13January 2006
            Big
      A Drilling
            
            $
            18,150,000
            
            
            
            6January 2007
            Eagle
      Well Service
            
            $
            32,085,000
            
            
            
            31




In May
2002, we purchased seven drilling rigs ranging in size from 400 to 950
horsepower, associated spare parts and equipment, drill pipe, haul trucks and
vehicles from Bison Drilling L.L.C. and Four Aces Drilling L.L.C. After
accepting delivery of the rigs, we spent approximately $97,000 upgrading the
rigs before placing six of them into service.





In August
2003, we purchased all of the outstanding stock of Elk Hill Drilling, Inc., or
Elk Hill, and certain drilling rig structures and components from U.S.
Rig & Equipment, Inc., an affiliate of Elk Hill. In these transactions,
we acquired drilling rigs and inventoried structures and components which, with
refurbishment and upgrades, could be used to assemble 22 drilling rigs. At the
date of its acquisition, Elk Hill was an inactive corporation with no customers,
employees, operations or operational drilling rigs. We began refurbishing the
acquired rigs and have deployed seventeen of the rigs since November
2003.





In July
2005, we acquired all of the membership interests of Strata Drilling, L.L.C. and
Strata Property, L.L.C., or together Strata.  Included in the Strata
acquisitions were two operating rigs, one rig that was refurbished, related
structures, equipment and components and a 16 acre yard in Oklahoma City,
Oklahoma used for equipment storage and refurbishment of inventoried
rigs.





In
September 2005, we acquired 18 trucks and related equipment through our
acquisition of Hays Trucking, Inc., or Hays Trucking, for a purchase price
consisting of $3.0 million in cash, which included the repayment of
$1.9 million of debt owed by Hays Trucking, and 65,368 shares of our common
stock.







-4-
 Table of Contents




In
October 2005, we purchased 12 land drilling rigs from Eagle Drilling, L.L.C., or
Eagle Drilling, for approximately $50.0 million plus approximately $500,000 of
related transaction costs, and 13 land drilling rigs from Thomas Drilling Co.
for approximately $68.0 million plus approximately $2.6 million of related
transaction costs.


In
January 2006, we purchased six land drilling rigs and certain other assets,
including heavy haul trucks and excess rig equipment and inventory, from Big A
Drilling L.L.C., or Big A, for $16.3 million in cash and 72,571 shares of our
common stock.





On
January 9, 2007, we completed the acquisition of 31 workover rigs, 24 of which
were operating, from Eagle Well Service, Inc., or Eagle Well, and related
subsidiaries for $2.6 million in cash, 1,070,390 shares of our common stock, and
the assumption of certain liabilities.  We subsequently deployed the
remaining seven rigs periodically during the first nine months of
2007.





On
January 4, 2008, we acquired a 25% equity interest in Challenger Limited,
or Challenger, in exchange for six drilling rigs and $5.0 million in
cash.  Challenger is an international provider of contract land
drilling and workover services to oil and natural gas companies with its
principal operations in Libya.  Five of the contributed drilling rigs
were from our existing marketed fleet and one was a newly constructed rig. The
general specifications of the contributed rigs are as follows:





ApproximateDrillingRig
            
            Design
            Depth
      (ft)
            Type
            Horsepower3
            
            Cabot
      900
            10,000
            Mechanical
            95018
            
            Gardner
      Denver 1500E
            25,000
            Electric
            2,00019
            
            Mid
      Continent U-1220 EB
            25,000
            Electric
            2,00038
            
            National
      1320
            25,000
            Electric
            2,00093
            
            National
      T-32
            8,000
            Mechanical
            50096
            
            Ideco
      H-35
            8,000
            Mechanical
            400





In a separate
transaction, we sold to Challenger four additional drilling rigs and ancillary
equipment for $13.4 million, payable in installments over thirty-six
months.  The general specifications of the sold rigs are as
follows:





ApproximateDrillingRig
            
            Design
            Depth
      (ft)
            Type
            Horsepower91
            
            Ideco
      H-35
            8,000
            Mechanical
            45092
            
            Weiss
      45
            8,000
            Mechanical
            50094
            
            Unit
      U-15
            9,000
            Mechanical
            65095
            
            Emsco
      GB800
            12,000
            Mechanical
            1,000





Drilling
Equipment




General




A
drilling rig consists of engines, a hoisting system, a rotating system, pumps
and related equipment to circulate drilling fluid, blowout preventors and
related equipment.




Diesel or
gas engines are typically the main power sources for a drilling rig. Power
requirements for drilling jobs may vary considerably, but most drilling rigs
employ two or more engines to generate between 500 and 2,000 horsepower,
depending on well depth and rig design. Most drilling rigs capable of drilling
in deep formations, involving depths greater than 15,000 feet, use
diesel-electric power units to generate and deliver electric current through
cables to electrical switch gears, then to direct-current electric motors
attached to the equipment in the hoisting, rotating and circulating
systems.




Drilling
rigs use long strings of drill pipe and drill collars to drill wells. Drilling
rigs are also used to set heavy strings of large-diameter pipe, or casing,
inside the borehole. Because the total weight of the drill string and the casing
can exceed 500,000 pounds, drilling rigs require significant hoisting and
braking capacities. Generally, a drilling rig’s hoisting system is made up of a
mast, or derrick, a drilling line, a traveling block and hook assembly and
ancillary equipment that attaches to the rotating system, a mechanism known as
the drawworks. The drawworks mechanism consists of a revolving drum, around
which the drilling line is wound, and a series of shafts, clutches and chain and
gear drives for generating speed changes and reverse motion. The drawworks also
houses the main brake, which has the capacity to stop and sustain the weights
used in the drilling process. When heavy loads are being lowered, a hydromatic
or electric auxiliary brake assists the main brake to absorb the great amount of
energy developed by the mass of the traveling block, hook assembly, drill pipe,
drill collars and drill bit or casing being lowered into the well.




The
rotating equipment from top to bottom consists of a swivel, the kelly bushing,
the kelly, the rotary table, drill pipe, drill collars and the drill bit. We
refer to the equipment between the swivel and the drill bit as the drill stem.
The swivel assembly sustains the weight of the drill stem, permits its rotation
and affords a rotating pressure seal and passageway for circulating drilling
fluid into the top of the drill string. The swivel also has a large handle that
fits inside the hook assembly at the bottom of the traveling block. Drilling
fluid enters the drill stem through a hose, called the rotary hose, attached to
the side of the swivel. The kelly is a triangular, square or hexagonal piece of
pipe, usually 40 feet long, that transmits torque from the rotary table to the
drill stem and permits its vertical movement as it is lowered into the hole. The
bottom end of the kelly fits inside a corresponding triangular, square or
hexagonal opening in a device called the kelly bushing. The kelly bushing, in
turn, fits into a part of the rotary table called the master bushing. As the
master bushing rotates, the kelly bushing also rotates, turning the kelly, which
rotates the drill pipe and thus the drill bit. Drilling fluid is pumped through
the kelly on its way to the bottom. The rotary table, equipped with its master
bushing and kelly bushing, supplies the necessary torque to turn the drill stem.
The drill pipe and drill collars are both steel tubes through which drilling
fluid can be pumped. Drill pipe, sometimes called drill string, comes in 30-foot
sections, or joints, with threaded sections on each end. Drill collars are
heavier than drill pipe and are also threaded on the ends. Collars are used on
the bottom of the drill stem to apply weight to the drilling bit. At the end of
the drill stem is the bit, which chews up the formation rock and dislodges it so
that drilling fluid can circulate the fragmented material back up to the surface
where the circulating system filters it out of the fluid.




Drilling
fluid, often called mud, is a mixture of clays, chemicals and water or oil,
which is carefully formulated for the particular well being drilled. Bulk
storage of drilling fluid materials, the pumps and the mud-mixing equipment are
placed at the start of the circulating system. Working mud pits and reserve
storage are at the other end of the system. Between these two points the
circulating system includes auxiliary equipment for drilling fluid maintenance
and equipment for well pressure control. Within the system, the drilling mud is
typically routed from the mud pits to the mud pump and from the mud pump through
a standpipe and the rotary hose to the drill stem. The drilling mud travels down
the drill stem to the bit, up the annular space between the drill stem and the
borehole and through the blowout preventer stack to the return flow line. It
then travels to a shale shaker for removal of rock cuttings, and then back to
the mud pits, which are usually steel tanks. The reserve pits, usually one or
two fairly shallow excavations, are used for waste material and excess water
around the location.


There are
numerous factors that differentiate drilling rigs, including their power
generation systems and their drilling depth capabilities. The actual drilling
depth capability of a rig may be less than or more than its rated depth
capability due to numerous factors, including the size, weight and amount of the
drill pipe on the rig. The intended well depth and the drill site conditions
determine the amount of drill pipe and other equipment needed to drill a well.
Generally, land rigs operate with crews of five to six persons.





Our
Fleet of Drilling Rigs




As of
February 29, 2008, our drilling rig fleet consisted of 56 drilling rigs, of
which 45 were marketed, and 11 were held in inventory. The following table sets
forth information regarding utilization for our fleet of marketed drilling
rigs:


For The Year Ended December 31,2007
            
            
            2006
            
            
            2005Average
      number of marketed rigs
            
            
            51
            
            
            
            45
            
            
            
            17Average
      utilization rate
            
            
            76
            %
            
            
            93
            %
            
            
            95
            %




-5-
 Table of Contents




The following
table sets forth information regarding our drilling fleet as of February 29,
2008:








ApproximateDrillingRig
            
            Design
            Depth
      (ft)
            Type
            HorsepowerWorking
      Rigs21
            
            National
      1320
            20,000
            Electric
            2,00017
            
            Skytop
      Brewster NE-95
            20,000
            Electric
            1,70012
            
            Gardner
      Denver 1100E
            18,000
            Electric
            1,50025
            
            Mid
      Continent U-914
            18,000
            Electric
            1,50027
            
            Mid
      Continent U-914
            18,000
            Electric
            1,50029
            
            Mid
      Continent U-914
            18,000
            Electric
            1,50016
            
            Oilwell840E
            18,000
            Electric
            1,40020
            
            Mid
      Continent U-914-EC
            18,000
            Electric
            1,40015
            
            Mid
      Continent U-712-EA
            16,000
            Electric
            1,20014
            
            Mid
      Continent U-712-EA
            16,000
            Electric
            1,20077
            
            Ideco
      711
            16,000
            Mechanical
            1,20078
            
            Seaco
      1200
            12,000
            Mechanical
            1,20026
            
            Ideco
      1200E
            14,000
            Electric
            1,20028
            
            Ideco
      1200E
            14,000
            Electric
            1,20056
            
            BDW
      800 MI
            16,500
            Mechanical
            1,10057
            
            Continental
      Emsco D-3
            15,000
            Mechanical
            1,10011
            
            Gardner
      Denver 800E
            15,000
            Electric
            1,00010
            
            Gardner
      Denver 800E
            15,000
            Electric
            1,00043
            
            Gardner
      Denver 800
            15,000
            Mechanical
            1,0008
            
            National
      80-UE
            15,000
            Electric
            1,00023
            
            Continental
      Emsco D-3
            15,000
            Electric
            1,00022
            
            Continental
      Emsco D-3
            15,000
            Electric
            1,00062
            
            Brewster
      N-75
            12,000
            Mechanical
            1,00037
            
            Citation
      A-800
            14,000
            Electric
            1,00055
            
            Oilwell
      660
            12,000
            Mechanical
            1,0004
            
            Skytop
      Brewster N46
            14,000
            Mechanical
            95041
            
            Skytop-Brester
      N-46
            13,500
            Mechanical
            95060
            
            Skytop
      Brewster N46
            14,000
            Mechanical
            85051
            
            Skytop
      Brewster N42
            12,000
            Mechanical
            85052
            
            Continental
      Emsco G-500
            11,000
            Mechanical
            85053
            
            Skytop
      Brewster N42
            12,000
            Mechanical
            85054
            
            Skytop
      Brewster N46
            13,000
            Mechanical
            85059
            
            Skytop
      Brewster N46
            13,000
            Mechanical
            85097
            
            Mid
      Con U-15
            12000
            Mechanical
            85058
            
            National
      N55
            12,000
            Mechanical
            80072
            
            Skytop
      Brewster N42
            10,000
            Mechanical
            75075
            
            Ideco
      750
            14,000
            Mechanical
            75076
            
            National
      N55
            12,000
            Mechanical
            70042
            
            Gardner
      Denver 500
            12,000
            Mechanical
            6509
            
            Gardner
      Denver 500
            11,000
            Mechanical
            6507
            
            Mid
      Con U36A
            12,000
            Mechanical
            6506
            
            Mid
      Con U36A
            12,000
            Mechanical
            6505
            
            Mid
      Con U36A
            12,000
            Mechanical
            65070
            
            Schaeffer
      6000S
            6,000
            Mechanical
            4502
            
            Cardwell
      L-350
            6,000
            Mechanical
            400Rigs
      In Inventory24
            
            Skytop
      Brewster N-12
            25,000
            Electric
            2,00073
            
            Gardner
      Denver 1500
            18,000
            Mechanical
            2,00074
            
            National
      1320
            20,000
            Mechanical
            2,00036
            
            Continental
      Emsco C-1
            18,000
            Electric
            1,50031
            
            National
      80 UE
            14,000
            Electric
            1,00030
            
            Mid
      Continent U-914
            18,000
            Electric
            1,50032
            
            Mid
      Continent U-914
            18,000
            Electric
            1,50033
            
            Continental
      Emsco D-3
            15,000
            Electric
            1,00035
            
            Ideco
      7-11
            12,000
            Electric
            1,00034
            
            Ideco
      900E
            12,000
            Electric
            90061
            
            National
      50-A
            11,500
            Mechanical
            850Excess
      Rig Inventory79
            
            Oilwell
      500
            10,000
            Mechanical
            50080
            
            Mac
      400
            6,000
            Mechanical
            40081
            
            Mid
      Continent U34B
            6,000
            Mechanical
            40082
            
            Ideco
      H-35 Hydrair
            6,000
            Mechanical
            400




Working
Drilling Rigs




As of
February 29, 2008, we had 45 marketed drilling rigs, ten of which were operating
on term contracts ranging from one to two years.  Thirty-five of these
drilling rigs were operating on a well-to-well basis.  Thirty-two of
the forty-five drilling rigs have undergone significant refurbishment since
October 2003 by us or the parties from which the rigs were
purchased.




Drilling
Rigs In Inventory




We
currently have 11 drilling rigs held in inventory in our rig yards in Oklahoma.
We define an inventoried rig as a rig that could be part of a refurbishment plan
and assigned a start and delivery date given favorable market conditions. Given
sufficient demand, we could refurbish and deploy our remaining rigs held in
inventory on a periodic basis.


-6-
 Table of Contents




Other
Equipment




As of
February 29, 2008, we owned a fleet of 70 trucks and related transportation
equipment that we use to transport our drilling rigs to and from drilling sites.
By owning our own trucks, we reduce the cost of rig moves, downtime between rig
moves and general wear and tear on our drilling rigs.




We
believe that our operating drilling rigs and other related equipment are in good
operating condition. Our employees perform periodic maintenance and minor repair
work on our drilling rigs. Historically, we have relied on various oilfield
service companies for major repair work and overhaul of our drilling equipment.
In April 2005, we opened a 41,000 square foot machine shop in Oklahoma City,
which allows us to refurbish and repair our rigs and equipment in-house. In the
event of major breakdowns or mechanical problems, our rigs could be subject to
significant idle time and a resulting loss of revenue if the necessary repair
services are not immediately available.




In
January 2007, we acquired 31 workover rigs, 24 of which were in service at the
time of acquisition, and we  subsequently deployed the remaining rigs
periodically during the first nine months of 2007.  We subsequently
purchased 28 additional workover rigs during 2007.




Drilling
Contracts




As a
provider of contract land drilling services, our business and the profitability
of our operations depend on the level of drilling activity by oil and natural
gas exploration and production companies operating in the geographic markets
where we operate. Our business has generally not been affected by seasonal
fluctuations. The oil and natural gas exploration and production industry is a
historically cyclical industry characterized by significant changes in the
levels of exploration and development activities. During periods of lower levels
of drilling activity, price competition tends to increase and results in
decreases in the profitability of daywork contracts. In this lower level
drilling activity and competitive price environment, we may be more inclined to
enter into footage contracts that expose us to greater risk of loss without
commensurate increases in potential contract profitability.




We obtain
our contracts for drilling oil and natural gas wells either through competitive
bidding or through direct negotiations with customers. Our drilling contracts
generally provide for compensation on either a daywork or footage basis. The
contract terms we offer generally depend on the complexity and risk of
operations, the on-site drilling conditions, the type of equipment used and the
anticipated duration of the work to be performed. Generally, our contracts
provide for the drilling of a single well and typically permit the customer to
terminate on short notice, usually on payment of an agreed fee.




The
following table presents, by type of contract, information about the total
number of wells we completed for our customers during the years ended
December 31, 2007, 2006 and 2005.


Years
      Ended December 31,2007
              
              
              2006
              
              
              2005Daywork
      Contracts
              
              
              430
              
              
              
              449
              
              
              
              148Footage
      Contracts
              
              
              3
              
              
              
              1
              
              
              
              5Turnkey
      Contracts
              
              
              -
              
              
              
              -
              
              
              
              -Total
              
              
              433
              
              
              
              450
              
              
              
              153


Daywork
Contracts. Under daywork drilling contracts, we provide a drilling rig
with required personnel to our customer who supervises the drilling of the well.
We are paid based on a negotiated fixed rate per day while the rig is used.
Daywork drilling contracts specify the equipment to be used, the size of the
hole and the depth of the well. Under a daywork drilling contract, the customer
bears a large portion of the out-of-pocket drilling costs and we generally bear
no part of the usual risks associated with drilling, such as time delays and
unanticipated costs.




Footage Contracts. Under
footage contracts, we are paid a fixed amount for each foot drilled, regardless
of the time required or the problems encountered in drilling the well. We
typically pay more of the out-of-pocket costs associated with footage contracts
as compared to daywork contracts. The risks to us on a footage contract are
greater because we assume most of the risks associated with drilling operations
generally assumed by the operator in a daywork contract, including the risk of
blowout, loss of hole, stuck drill pipe, machinery breakdowns, abnormal drilling
conditions and risks associated with subcontractors’ services, supplies, cost
escalation and personnel. We manage this additional risk through the use of
engineering expertise and bid the footage contracts accordingly, and we maintain
insurance coverage against some, but not all, drilling hazards. However, the
occurrence of uninsured or under-insured losses or operating cost overruns on
our footage jobs could have a negative impact on our profitability.




Turnkey Contracts. Turnkey
contracts typically provide for a drilling company to drill a well for a
customer to a specified depth and under specified conditions for a fixed price,
regardless of the time required or the problems encountered in drilling the
well. The drilling company would provide technical expertise and engineering
services, as well as most of the equipment and drilling supplies required to
drill the well. The drilling company may subcontract for related services, such
as the provision of casing crews, cementing and well logging. Under typical
turnkey drilling arrangements, a drilling company would not receive progress
payments and would be paid by its customer only after it had performed the terms
of the drilling contract in full.





Although
we have not historically entered into any turnkey contracts, we may decide to
enter into such arrangements in the future. The risks to a drilling company
under a turnkey contract are substantially greater than on a well drilled on a
daywork basis. This is primarily because under a turnkey contract the drilling
company assumes most of the risks associated with drilling operations generally
assumed by the operator in a daywork contract, including the risk of blowout,
loss of hole, stuck drill pipe, machinery breakdowns, abnormal drilling
conditions and risks associated with subcontractors’ services, supplies, cost
escalations and personnel.





Customers
and Marketing





We market our
rigs to a number of customers. In 2007, we drilled wells for 67 different
customers, compared to 80 customers in 2006, and 52 customers in
2005.  The following table shows our customers that accounted for more
than 5% of our total contract drilling revenue for each of our last three
years.





Customer
            Total
      Contract Drilling Revenue Percentage2007Antero
      Resources
            11%Chesapeake
      Energy Corporation
            8%Comstock
      Oil and Gas
            7%XTO
      Energy
            6%Pablo
      Energy II, LLC
            5%2006Chesapeake
      Energy Corporation
            7%Comstock
      Oil and Gas
            5%2005New
      Dominion LLC
            10%Chesapeake
      Energy Corporation
            9%Carl
      E. Gungoll Exploration LLC
            6%Western
      Oil and Gas Development Co
            6%XTO
      Energy
            5%




We
primarily market our drilling rigs through employee marketing representatives.
These marketing representatives use personal contacts and industry periodicals
and publications to determine which operators are planning to drill oil and
natural gas wells in the near future in our market areas. Once we have been
placed on the “bid list” for an operator, we will typically be given the
opportunity to bid on most future wells for that operator in the areas in which
we operate. Our rigs are typically contracted on a well-by-well
basis.




From time
to time we also enter into informal, nonbinding commitments with our customers
to provide drilling rigs for future periods at specified rates plus fuel and
mobilization charges, if applicable, and escalation provisions. This practice is
customary in the contract land drilling services business during times of
tightening rig supply.


-7-
 Table of Contents




Competition




We
encounter substantial competition from other drilling contractors. Our primary
market area is highly fragmented and competitive. The fact that drilling rigs
are mobile and can be moved from one market to another in response to market
conditions heightens the competition in the industry.




The
drilling contracts we compete for are usually awarded on the basis of
competitive bids. Our principal competitors are Nabors Industries, Inc.,
Patterson-UTI Energy, Inc., Unit Corp. and Helmerich & Payne, Inc. We
believe pricing and rig availability are the primary factors our potential
customers consider in determining which drilling contractor to select. In
addition, we believe the following factors are also important:


•
              the
      type and condition of each of the competing drilling
  rigs;
  •
              the
      mobility and efficiency of the
rigs;
  •
              the
      quality of service and experience of the rig
  crews;
  •
              the
      offering of ancillary services; and
  •
              the
      ability to provide drilling equipment adaptable to, and personnel familiar
      with, new technologies and drilling
techniques.


While we
must be competitive in our pricing, our competitive strategy generally
emphasizes the quality of our equipment and the experience of our rig crews to
differentiate us from our competitors. This strategy is less effective as lower
demand for drilling services or an oversupply of rigs usually results in
increased price competition and makes it more difficult for us to compete on the
basis of factors other than price. In all of the markets in which we compete, an
oversupply of rigs can cause greater price competition.




Contract
drilling companies compete primarily on a regional basis, and the intensity of
competition may vary significantly from region to region at any particular time.
If demand for drilling services improves in a region where we operate, our
competitors might respond by moving in suitable rigs from other regions. An
influx of drilling rigs from other regions could rapidly intensify competition
and reduce profitability.




Many of
our competitors have greater financial, technical and other resources than we
do. Their greater capabilities in these areas may enable them to:


•
              better
      withstand industry downturns;
  •
              compete
      more effectively on the basis of price and
  technology;
  •
              better
      retain skilled rig personnel; and
  •
              build
      new rigs or acquire and refurbish existing rigs so as to be able to place
      rigs into service more quickly than us in periods of high drilling
      demand.


Raw
Materials




The
materials and supplies we use in our operations include fuels to operate our
drilling equipment, drilling mud, drill pipe, drill collars, drill bits and
cement. We do not rely on a single source of supply for any of these items.
While we are not currently experiencing any shortages, from time to time there
have been shortages of drilling equipment and supplies during periods of high
demand.




Shortages
could result in increased prices for drilling equipment or supplies that we may
be unable to pass on to customers. In addition, during periods of shortages, the
delivery times for equipment and supplies can be substantially longer. Any
significant delays in our obtaining drilling equipment or supplies could limit
drilling operations and jeopardize our relations with customers. In addition,
shortages of drilling equipment or supplies could delay and adversely affect our
ability to obtain new contracts for our rigs, which could have a material
adverse effect on our financial condition and results of
operations.




Operating
Risks and Insurance




Our
operations are subject to the many hazards inherent in the contract land
drilling business, including the risks of:


•
              blowouts;
  •
              fires
      and explosions;
  •
              loss
      of well control;
  •
              collapse
      of the borehole;
  •
              lost
      or stuck drill strings; and
  •
              damage
      or loss from natural disasters.


Any of
these hazards can result in substantial liabilities or losses to us from, among
other things:


•
              suspension
      of drilling operations;
  •
              damage
      to, or destruction of, our property and equipment and that of
      others;
  •
              personal
      injury and loss of life;
  •
              damage
      to producing or potentially productive oil and natural gas formations
      through which we drill; and
  •
              environmental
      damage.


We seek
to protect ourselves from some but not all operating hazards through insurance
coverage. However, some risks are either not insurable or insurance is available
only at rates that we consider uneconomical.  Depending on competitive
conditions and other factors, we attempt to obtain contractual protection
against uninsured operating risks from our customers. However, customers who
provide contractual indemnification protection may not in all cases have
sufficient financial resources or maintain adequate insurance to support their
indemnification obligations. We can offer no assurance that our insurance or
indemnification arrangements will adequately protect us against liability or
loss from all the hazards of our operations. The occurrence of a significant
event that we have not fully insured or indemnified against or the failure of a
customer to meet its indemnification obligations to us could materially and
adversely affect our results of operations and financial condition. Furthermore,
we may not be able to maintain adequate insurance in the future at rates we
consider reasonable.




Our
insurance coverage includes property insurance on our rigs, drilling equipment
and real property. Our insurance coverage for property damage to our rigs and to
our drilling equipment is based on a third party estimate of the appraised value
of the rigs and drilling equipment. The policy provides for a deductible on rigs
of $1.0 million per occurrence. Our umbrella liability insurance coverage is
$25.0 million per occurrence and in the aggregate, with a deductible of $10,000
per occurrence. We believe that we are adequately insured for public liability
and property damage to others with respect to our operations. However, such
insurance may not be sufficient to protect us against liability for all
consequences of well disasters, extensive fire damage or damage to the
environment.


-8-
 Table of Contents




Employees




As of February 29, 2008,
we had 1,551 employees. Approximately 195 of these employees are salaried
administrative or supervisory employees. The rest of our employees are hourly
employees, the majority of whom operate or maintain our drilling rigs, workover
rigs and rig-hauling trucks. The number of hourly employees fluctuates depending
on the number of drilling projects we are engaged in at any particular time.
None of our employees are subject to collective bargaining
arrangements.




Our
operations require the services of employees having the technical training and
experience necessary to obtain the proper operational results. As a result, our
operations depend, to a considerable extent, on the continuing availability of
such personnel. Although we have not encountered material difficulty in hiring
and retaining qualified rig crews, shortages of qualified personnel are
occurring in our industry. If we should suffer any material loss of personnel to
competitors or be unable to employ additional or replacement personnel with the
requisite level of training and experience to adequately operate our equipment,
our operations could be materially and adversely affected. While we believe our
wage rates are competitive and our relationships with our employees are
satisfactory, a significant increase in the wages paid by other employers could
result in a reduction in our workforce, increases in wage rates, or both. The
occurrence of either of these events for a significant period of time could have
a material and adverse effect on our financial condition and results of
operations.




Governmental
Regulation




Our
operations are subject to stringent federal, state and local laws and
regulations governing the protection of the environment and human health and
safety. Several such laws and regulations relate to the handling, storage and
disposal of oilfield waste and restrict the types, quantities and concentrations
of such regulated substances that can be released into the environment. Several
such laws also require removal and remedial action and other cleanup under
certain circumstances, commonly regardless of fault. Planning, implementation
and maintenance of protective measures are required to prevent accidental
discharges. Spills of oil, natural gas liquids, drilling fluids and other
substances may subject us to penalties and cleanup requirements. In addition,
our operations are sometimes conducted in or near ecologically sensitive areas,
which are subject to special protective measures and which may expose us to
additional operating costs and liabilities related to restricted operations, for
accidental discharges of oil, natural gas, drilling fluids, contaminated water
or other substances or for noncompliance with other aspects of applicable laws
and regulations. Historically, we have not been required to obtain environmental
or other permits prior to drilling a well. Instead, the operator of the oil and
gas property has been obligated to obtain the necessary permits at its own
expense.




The
federal Clean Water Act, as amended by the Oil Pollution Act, the federal Clean
Air Act, the Resource Conservation and Recovery Act, the Comprehensive
Environmental Response, Compensation and Liability Act, or CERCLA, the Safe
Drinking Water Act, the Occupational Safety and Health Act, or OSHA, and their
state counterparts and similar statutes and related regulations are the primary
vehicles for imposition of such requirements and for civil, criminal and
administrative penalties and other sanctions for violation of their
requirements. The OSHA hazard communication standard and related regulations,
the Environmental Protection Agency “community right-to-know” regulations under
Title III of the federal Superfund Amendment and Reauthorization Act and
comparable state statutes require us to organize and report information about
the hazardous materials we use in our operations to employees, state and local
government authorities and local citizens. In addition, CERCLA, also known as
the “Superfund” law, and similar state statutes impose strict liability, without
regard to fault or the legality of the original conduct, on certain classes of
persons who are considered responsible for the release or threatened release of
hazardous substances into the environment. These persons include the current
owner or operator of a facility where a release has occurred, the owner or
operator of a facility at the time a release occurred and companies that
disposed of or arranged for the disposal of hazardous substances found at a
particular site. This liability may be joint and several. Such liability, which
may be imposed for the conduct of others and for conditions others have caused,
includes the cost of removal and remedial action as well as damages to natural
resources. Few defenses exist to the liability imposed by environmental laws and
regulations. It is also not uncommon for third parties to file claims for
personal injury and property damage caused by substances released into the
environment.




Environmental
laws and regulations are complex and subject to frequent changes. Failure to
comply with governmental requirements or inadequate cooperation with
governmental authorities could subject a responsible party to administrative,
civil or criminal action. We may also be exposed to environmental or other
liabilities originating from businesses and assets that we acquired from others.
We believe we are in substantial compliance with applicable environmental laws
and regulations and, to date, such compliance has not materially affected our
capital expenditures, earnings or competitive position. We do not expect to
incur material capital expenditures in our next fiscal year in order to comply
with current or reasonably anticipated environment control requirements.
However, our compliance with amended, new or more stringent requirements,
stricter interpretations of existing requirements or the future discovery of
regulatory noncompliance or contamination may require us to make material
expenditures or subject us to liabilities that we currently do not
anticipate.




In
addition, our business depends on the demand for land drilling services from the
oil and natural gas industry and, therefore, is affected by tax, environmental
and other laws relating to the oil and natural gas industry generally, by
changes in those laws and by changes in related administrative regulations. It
is possible that these laws and regulations may in the future add significantly
to our operating costs or those of our customers or otherwise directly or
indirectly affect our operations.




Available
Information




Our annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments
to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act are made available free of charge on the Investor Relations page of
our website at www.broncodrill.com
as soon as reasonably practicable after such material is electronically filed
with, or furnished to, the SEC.  Our code of conduct and business
ethics is also available on our website.  Information contained on our
website, or on other websites that may be linked to our website, is not
incorporated by reference in this annual report on Form 10-K and should not be
considered part of this report or any other filing that we make with the
SEC.




For more information regarding the
merger, please refer to the joint proxy statement/prospectus of Allis-Chalmers
and Bronco that is included in the registration statement on Form S-4
(Registration No. 333-149326) filed by Allis-Chalmers with the SEC on February
20, 2008, and other relevant materials that may be filed by us or Allis-Chalmers
with the SEC, including any amendments to such registration
statement.




Item 1A. Risk Factors




Risks
Relating to the Oil and Natural Gas Industry




We
derive all our revenues from companies in the oil and natural gas exploration
and production industry, a historically cyclical industry with levels of
activity that are significantly affected by the levels and volatility of oil and
natural gas prices.




Worldwide
political, economic and military events have contributed to oil and natural gas
price volatility and are likely to continue to do so in the future. Depending on
the market prices of oil and natural gas, oil and natural gas exploration and
production companies may cancel or curtail their drilling programs, thereby
reducing demand for our services. Oil and natural gas prices have been volatile
historically and, we believe, will continue to be so in the future. Many factors
beyond our control affect oil and natural gas prices, including:


•
                the
      cost of exploring for, producing and delivering oil and natural
      gas;
  •
                the
      discovery rate of new oil and natural gas
  reserves;
  •
                the
      rate of decline of existing and new oil and natural gas
      reserves;
  •
                available
      pipeline and other oil and natural gas transportation
      capacity;
  •
                the
      ability of oil and natural gas companies to raise
  capital;
  •
                actions
      by OPEC, the Organization of Petroleum Exporting
  Countries;
  •
                political
      instability in the Middle East and other major oil and natural gas
      producing regions;
  •
                economic
      conditions in the United States and
elsewhere;
  •
                governmental
      regulations, both domestic and
foreign;
  •
                domestic
      and foreign tax policy;
 •
              weather
      conditions in the United States and
elsewhere;
  
 -9-
 Table of Contents




•
              the
      pace adopted by foreign governments for the exploration, development and
      production of their national
reserves;
  •
              the
      price of foreign imports of oil and natural gas;
  and
  •
              the
      overall supply and demand for oil and natural
  gas.





Any prolonged
reduction in the overall level of exploration and development activities,
whether resulting from changes in oil and natural gas prices or otherwise, can
adversely impact us in many ways by negatively affecting:


•
              our
      revenues, cash flows and
profitability;
  •
              our
      ability to maintain or increase our borrowing
  capacity;
  •
              our
      ability to obtain additional capital to finance our business and make
      acquisitions, and the cost of that
capital;
  •
              our
      ability to retain skilled rig personnel whom we would need in the event of
      an upturn in the demand for our services;
and
  •
              the
      fair market value of our rig
fleet.
  Risks
Relating to Our Business





Our
acquisition strategy exposes us to various risks, including those relating to
difficulties in identifying suitable acquisition opportunities and integrating
businesses, assets and personnel, as well as difficulties in obtaining financing
for targeted acquisitions and the potential for increased leverage or debt
service requirements.




As a
component of our business strategy, we have pursued and intend to continue to
pursue selected acquisitions of complementary assets and businesses. In May
2002, we purchased seven drilling rigs, associated spare parts and equipment,
drill pipe, haul trucks and vehicles. In August 2003, we acquired drilling rigs
and inventoried structures and components which, with refurbishment and
upgrades, could be used to assemble 22 drilling rigs. In July 2005, we acquired
three additional rigs and related inventory, equipment, components and a rig
yard. On October 3, 2005, we acquired five operating rigs, seven inventoried
rigs and rig equipment and parts. On October 14, 2005, we acquired nine
operating rigs, two rigs undergoing refurbishment, two inventoried rigs and rig
equipment and parts. On January 18, 2006, we acquired six operating land
drilling rigs and certain other assets, including heavy haul trucks and excess
rig equipment. On January 9, 2007, we acquired 31 workover rigs through our
acquisition of Eagle Well.  Acquisitions, including those described
above, involve numerous risks, including:


•
              unanticipated
      costs and assumption of liabilities and exposure to unforeseen liabilities
      of acquired companies, including but not limited to environmental
      liabilities;
  •
              difficulty
      in integrating the operations and assets of the acquired business and the
      acquired personnel and distinct
cultures;
  •
              our
      ability to properly access and maintain an effective internal control
      environment over an acquired company, in order to comply with public
      reporting requirements;
  •
              potential
      loss of key employees and customers of the acquired
    companies;
  •
              risk
      of entering markets in which we have limited prior experience;
      and
  •
              an
      increase in our expenses and working capital
  requirements.
  The
process of integrating an acquired business may involve unforeseen costs and
delays or other operational, technical and financial difficulties and may
require a disproportionate amount of management attention and financial and
other resources. Our failure to achieve consolidation savings, to incorporate
the acquired businesses and assets into our existing operations successfully or
to minimize any unforeseen operational difficulties could have a material
adverse effect on our financial condition and results of
operations.




In addition,
we may not have sufficient capital resources to complete additional
acquisitions. Historically, we have funded the acquisition of rigs and the
refurbishment of our rig fleet through a combination of debt and equity
financing and cash flows from operations. We may incur substantial additional
indebtedness to finance future acquisitions and also may issue equity, debt or
convertible securities in connection with such acquisitions. Debt service
requirements could represent a significant burden on our results of operations
and financial condition and the issuance of additional equity or convertible
securities could be dilutive to our existing stockholders. Furthermore, we may
not be able to obtain additional financing on satisfactory terms. Even if we
have access to the necessary capital, we may be unable to continue to identify
additional suitable acquisition opportunities, negotiate acceptable terms or
successfully acquire identified targets.





Increases
in the supply of rigs could decrease dayrates and utilization
rates.




An increase
in the supply of land rigs, whether through new construction or refurbishment,
could decrease dayrates and utilization rates, which would adversely affect our
revenues and profitability. In addition, such adverse affect on our revenue and
profitability caused by such increased competition and lower dayrates and
utilization rates could be further aggravated by any downturn in oil and natural
gas prices. There has been a substantial increase in the supply of land rigs in
the United States over the past two years which has led to a broad decline in
dayrates and utilization industry wide.





A
material reduction in the levels of exploration and development activities in
Oklahoma or Texas or an increase in the number of rigs mobilized to Oklahoma or
Texas could negatively impact our dayrates and utilization rates.





We
currently conduct a substantial portion of our operations in Oklahoma and Texas.
A material reduction in the levels of exploration and development activities in
Oklahoma or Texas due to a variety of oil and natural gas industry risks
described above or an increase in the number of rigs mobilized to Oklahoma or
Texas could negatively impact our dayrates and utilization rates, which could
adversely affect our revenues and profitability.





Our
investment in Challenger is illiquid and may never generate
cash.


There
currently is no readily available market that would facilitate the disposal of
our 25% equity investment in Challenger.  Furthermore, based on our
minority equity position in Challenger, We will not directly receive cash
proceeds resulting from the operations of Challenger.  We can not
assure that the investment will ever yield cash proceeds, absent a liquidating
event or the increase in our equity position above a threshold that would
constitute control.





Our
minority equity investment in Challenger limits our control of the
company.
  Bronco
representatives hold two of the eight total board seats on the Challenger board
of directors. We also have various rights as a shareholder which
include:
  •
              preemptive rights;
  •
              transfer
      rights;
  •
              tag-along
      rights;
  •
              drag-along
      rights;
  •
              registration
      rights; and
  •
              certain
      voting rights.
 
 Bronco is one
of three shareholder groups in Challenger.  Any two of the three
shareholders can effectuate decisions at the board level.  Due to our
minority equity interest in Challenger, Bronco cannot accomplish specific
objectives or initiatives if we are unable to align our interest with at least
one of the remaining shareholders.


-10-
 Table of Contents


International
operations are subject to uncertain political, economic and other risks which
could affect our financial results.


Challenger is an
Isle of Man company with its principal operations in Libya.  Risks
associated with Challenger’s contract land drilling and workover operations
include:





•
              terrorist
      acts, war and civil disturbances;
  •
              expropriation
      or nationalization of assets;
  •
              renegotiation
      or nullification of existing
contracts;
  •
              foreign
      taxation, including changes in law or interpretation of existing
      law;
  •
              assaults
      on property or
personnel;




•
            changing
      political conditions;




•
              foreign
      and domestic monetary policies;
and




•
              travel
      limitations or operational problems caused by public health
      threats.




We anticipate
that we will account for our investment in Challenger using the equity method of
accounting, and that our balance sheet and statement of operations will contain
captions showing the investment in Challenger based on fair market value of the
contributed assets and the income or loss generated by our 25% ownership in
Challenger.  The manifestation of any of the risks enumerated above
could adversely affect the financial results we report relating to our ownership
interest in Challenger.





We
operate in a highly competitive, fragmented industry in which price competition
could reduce our profitability.




The fact
that drilling rigs are mobile and can be moved from one market to another in
response to market conditions heightens the competition in the
industry.




The
drilling contracts we compete for are usually awarded on the basis of
competitive bids or direct negotiations with customers. We believe pricing and
quality of equipment are the primary factors our potential customers consider in
determining which drilling contractor to select. In addition, we believe the
following factors are also important:




•
            the
      type and condition of each of the competing drilling
  rigs;




•
            the
      mobility and efficiency of the
rigs;




•
            the
      quality of service and experience of the rig
  crews;




•
            the
      offering of ancillary services; and




•
            the
      ability to provide drilling equipment adaptable to, and personnel familiar
      with, new technologies and drilling
techniques.




While we must
be competitive in our pricing, our competitive strategy generally emphasizes the
quality of our equipment and experience of our rig crews to differentiate us
from our competitors. This strategy is less effective as lower demand for
drilling services or an oversupply of rigs usually results in increased price
competition and makes it more difficult for us to compete on the basis of
factors other than price. In all of the markets in which we compete, an
oversupply of rigs can cause greater price competition which can, in turn,
reduce our profitability.




Contract
drilling companies compete primarily on a regional basis, and the intensity of
competition may vary significantly from region to region at any particular time.
If demand for drilling services improves in a region where we operate, our
competitors might respond by moving in suitable rigs from other regions. An
influx of rigs from other regions could rapidly intensify competition and reduce
profitability.




We
face competition from competitors with greater resources that may make it more
difficult for us to compete, which can reduce our dayrates and utilization
rates.




Some of
our competitors have greater financial, technical and other resources than we do
that may make it more difficult for us to compete, which can reduce our dayrates
and utilization rates. Their greater capabilities in these areas may enable them
to:


•
              better
      withstand industry downturns;
  •
              compete
      more effectively on the basis of price and
  technology;
  •
              retain
      skilled rig personnel; and
  •
              build
      new rigs or acquire and refurbish existing rigs so as to be able to place
      rigs into service more quickly than us in periods of high drilling
      demand.
  In
the event we enter into footage or turnkey contracts, we could be subject to
unexpected cost overruns, which could negatively impact our
profitability.




For the
years ended December 31, 2007 and 2006, 0% of our total revenues were
derived from footage contracts. Under footage contracts, we are paid a fixed
amount for each foot drilled, regardless of the time required or the problems
encountered in drilling the well. We typically pay more of the out-of-pocket
costs associated with footage contracts as compared to daywork contracts. The
risks to us on a footage contract are greater because we assume most of the
risks associated with drilling operations generally assumed by the operator in a
daywork contract, including the risk of blowout, loss of hole, stuck drill pipe,
machinery breakdowns, abnormal drilling conditions and risks associated with
subcontractors’ services, supplies, cost escalation and personnel. The
occurrence of uninsured or under-insured losses or operating cost overruns on
our footage jobs could have a negative impact on our profitability. Similar to
our footage contracts, under turnkey contacts drilling companies assume most of
the risks associated with drilling operations that the operator generally
assumes under a daywork contract. Although we historically have not entered into
turnkey contracts, if we were to enter into a turnkey contract or acquire such a
contract in connection with future acquisitions, the occurrence of uninsured or
under-insured losses or operating cost overruns on such a job could negatively
impact our profitability.




Our
operations involve operating hazards, which if not insured or indemnified
against, could adversely affect our results of operations and financial
condition.




Our
operations are subject to the many hazards inherent in the contract land
drilling business, including the risks of:




•
              blowouts;
  •
              fires
      and explosions;
  •
              loss
      of well control;
  •
              collapse
      of the borehole;
  •
              lost
      or stuck drill strings; and
  •
              damage
      or loss from natural
disasters.


-11-
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Any of
these hazards can result in substantial liabilities or losses to us from, among
other things:




•
            suspension
      of drilling operations;




•
            damage
      to, or destruction of, our property and equipment and that of
      others;




•
            personal
      injury and loss of life;




•
            damage
      to producing or potentially productive oil and natural gas formations
      through which we drill; and




•
            environmental
      damage.




We seek
to protect ourselves from some but not all operating hazards through insurance
coverage. However, some risks are either not insurable or insurance is available
only at rates that we consider uneconomical. Depending on competitive conditions
and other factors, we attempt to obtain contractual protection against uninsured
operating risks from our customers. However, customers who provide contractual
indemnification protection may not in all cases maintain adequate insurance to
support their indemnification obligations. Our insurance or indemnification
arrangements may not adequately protect us against liability or loss from all
the hazards of our operations. The occurrence of a significant event that we
have not fully insured or indemnified against or the failure of a customer to
meet its indemnification obligations to us could materially and adversely affect
our results of operations and financial condition. Furthermore, we may be unable
to maintain adequate insurance in the future at rates we consider
reasonable.




We
face increased exposure to operating difficulties because we primarily focus on
drilling for natural gas.




A majority of
our drilling contracts are with exploration and production companies in search
of natural gas. Drilling on land for natural gas generally occurs at deeper
drilling depths than drilling for oil. Although deep-depth drilling exposes us
to risks similar to risks encountered in shallow-depth drilling, the magnitude
of the risk for deep-depth drilling is greater because of the higher costs and
greater complexities involved in drilling deep wells. We generally enter into
International Association of Drilling Contractors contracts that contain
“daywork” indemnification language that transfers responsibility for down hole
exposures such as blowout and fire to the operator, leaving us responsible only
for damage to our rig and our personnel. If we do not adequately insure the risk
from blowouts or if our contractual indemnification rights are insufficient or
unfulfilled, our profitability and other results of operation and our financial
condition could be adversely affected in the event we encounter blowouts or
other significant operating difficulties while drilling at deeper depths. If our
primary focus shifts from drilling for customers in search of natural gas to
drilling for customers in search of oil, a portion of our rig fleet could be
disadvantaged in competing for new oil drilling projects as compared to
competitors that primarily use shallower drilling depth rigs when drilling in
search of oil.




Our
operations are subject to various laws and governmental regulations that could
restrict our future operations and increase our operating costs.




Many
aspects of our operations are subject to various federal, state and local laws
and governmental regulations, including laws and regulations
governing:


•
              environmental
      quality;
  •
              pollution
      control;
  •
              remediation
      of contamination;
  •
              preservation
      of natural resources; and
  •
                worker
      safety.
  Our
operations are subject to stringent federal, state and local laws and
regulations governing the protection of the environment and human health and
safety. Several such laws and regulations relate to the disposal of hazardous
oilfield waste and restrict the types, quantities and concentrations of such
regulated substances that can be released into the environment. Several such
laws also require removal and remedial action and other cleanup under certain
circumstances, commonly regardless of fault. Planning, implementation and
maintenance of protective measures are required to prevent accidental
discharges. Spills of oil, natural gas liquids, drilling fluids and other
substances may subject us to penalties and cleanup requirements. Handling,
storage and disposal of both hazardous and non-hazardous wastes are also subject
to these regulatory requirements. In addition, our operations are often
conducted in or near ecologically sensitive areas, which are subject to special
protective measures and that may expose us to additional operating costs and
liabilities for accidental discharges of oil, natural gas, drilling fluids,
contaminated water or other substances or for noncompliance with other aspects
of applicable laws and regulations. Historically, we have not been required to
obtain environmental or other permits prior to drilling a well. Instead, the
operator of the oil and gas property has been obligated to obtain the necessary
permits at its own expense.




The
federal Clean Water Act, as amended by the Oil Pollution Act, the federal Clean
Air Act, the federal Resource Conservation and Recovery Act, the federal
Comprehensive Environmental Response, Compensation, and Liability Act, or
CERCLA, the Safe Drinking Water Act, the Occupational Safety and Health Act, or
OSHA, and their state counterparts and similar statutes are the primary vehicles
for imposition of such requirements and for civil, criminal and administrative
penalties and other sanctions for violation of their requirements. The OSHA
hazard communication standard, the Environmental Protection Agency “community
right-to-know” regulations under Title III of the federal Superfund Amendment
and Reauthorization Act and comparable state statutes require us to organize and
report information about the hazardous materials we use in our operations to
employees, state and local government authorities and local citizens. In
addition, CERCLA, also known as the “Superfund” law, and similar state statutes
impose strict liability, without regard to fault or the legality of the original
conduct, on certain classes of persons who are considered responsible for the
release or threatened release of hazardous substances into the environment.
These persons include the current owner or operator of a facility where a
release has occurred, the owner or operator of a facility at the time a release
occurred, and companies that disposed of or arranged for the disposal of
hazardous substances found at a particular site. This liability may be joint and
several. Such liability, which may be imposed for the conduct of others and for
conditions others have caused, includes the cost of removal and remedial action
as well as damages to natural resources. Few defenses exist to the liability
imposed by environmental laws and regulations. It is also not uncommon for third
parties to file claims for personal injury and property damage caused by
substances released into the environment.




Environmental
laws and regulations are complex and subject to frequent changes. Failure to
comply with governmental requirements or inadequate cooperation with
governmental authorities could subject a responsible party to administrative,
civil or criminal action. We may also be exposed to environmental or other
liabilities originating from businesses and assets that we acquired from others.
We are in substantial compliance with applicable environmental laws and
regulations and, to date, such compliance has not materially affected our
capital expenditures, earnings or competitive position. We do not expect to
incur material capital expenditures in our next fiscal year in order to comply
with current or reasonably anticipated environment control requirements.
However, our compliance with amended, new or more stringent requirements,
stricter interpretations of existing requirements or the future discovery of
regulatory noncompliance or contamination may require us to make material
expenditures or subject us to liabilities that we currently do not
anticipate.




In
addition, our business depends on the demand for land drilling services from the
oil and natural gas industry and, therefore, is affected by tax, environmental
and other laws relating to the oil and natural gas industry generally, by
changes in those laws and by changes in related administrative regulations. It
is possible that these laws and regulations may in the future add significantly
to our operating costs or those of our customers or otherwise directly or
indirectly affect our operations.




We
rely on a few key employees whose absence or loss could disrupt our operations
resulting in a loss of revenues.




Many
key responsibilities within our business have been assigned to a small number of
employees. The loss of their services, particularly the loss of Frank Harrison,
our Chief Executive Officer, or Zachary Graves, our Chief Financial Officer,
could disrupt our operations resulting in a loss of revenues. Although we have
employment agreements with a small number of our employees, as a practical
matter such employment agreements will not assure the retention of those
employees. In addition, we do not maintain “key person” life insurance policies
on any of our employees. As a result, we are not insured against any losses
resulting from the death of our key employees.




We
may be unable to attract and retain qualified, skilled employees necessary to
operate our business.




Our
success depends in large part on our ability to attract and retain skilled and
qualified personnel. Our inability to hire, train and retain a sufficient number
of qualified employees could impair our ability to manage and maintain our
business. We require skilled employees who can perform physically demanding
work. Shortages of qualified personnel are occurring in our industry. As a
result of the volatility of the oil and natural gas industry and the demanding
nature of the work, potential employees may choose to pursue employment in
fields that offer a more desirable work environment at wage rates that are
competitive with ours. If we should suffer any material loss of personnel to
competitors or be unable to employ additional or replacement personnel with the
requisite level of training and experience to adequately operate our equipment,
our operations could be materially and adversely affected. With a reduced pool
of workers, it is possible that we will have to raise wage rates to attract
workers from other fields and to retain our current employees. If we are not
able to increase our service rates to our customers to compensate for wage-rate
increases, our profitability and other results of operations may be adversely
affected.


-12-
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Shortages
in equipment and supplies could limit our operations and jeopardize our
relations with customers.




The
materials and supplies we use in our operations include fuels to operate our
drilling equipment, drilling mud, drill pipe, drill collars, drill bits and
cement. Shortages in drilling equipment and supplies could limit our drilling
operations and jeopardize our relations with customers. We do not rely on a
single source of supply for any of these items. From time to time there have
been shortages of drilling equipment and supplies during periods of high demand
which we believe could reoccur. Shortages could result in increased prices for
drilling equipment or supplies that we may be unable to pass on to customers. In
addition, during periods of shortages, the delivery times for equipment and
supplies can be substantially longer. Any significant delays in our obtaining
drilling equipment or supplies could limit our operations and jeopardize our
relations with customers. In addition, shortages of drilling equipment or
supplies could delay and adversely affect our ability to obtain new contracts
for our drilling rigs, which could negatively impact our revenues and
profitability.




We
have incurred and will continue to incur increased costs as a result of being a
public company.




As a
result of becoming a public company in August 2005, we have incurred and will
continue to incur significant legal, accounting and other expenses that we did
not incur as a private company. We have incurred and will continue to incur
costs associated with our public company reporting requirements and costs
associated with recently adopted corporate governance requirements, including
requirements under the Sarbanes-Oxley Act of 2002, as well as new rules
implemented by the SEC and the NASD.  These rules and regulations
could increase our legal and financial compliance costs and could make some
activities more time-consuming and costly. These new rules and regulations could
make it more difficult and more expensive for us to obtain director and officer
liability insurance and we may be required to accept reduced policy limits and
coverage or incur substantially higher costs to obtain the same or similar
coverage. As a result, it may be more difficult for us to attract and retain
qualified individuals to serve on our board of directors or as executive
officers.




If
the price of our common stock fluctuates significantly, your investment could
lose value.




Prior to
our initial public offering in August 2005, there had been no public market for
our common stock. Although our common stock is now quoted on The Nasdaq Global
Market, we cannot assure you that an active public market will continue to exist
for our common stock or that our common stock will continue to trade in the
public market at or above current prices. If an active public market for our
common stock does not continue, the trading price and liquidity of our common
stock will be materially and adversely affected.  If there is a thin
trading market or “float” for our stock, the market price for our common stock
may fluctuate significantly more than the stock market as a
whole.  Without a large float, our common stock is less liquid than
the stock of companies with broader public ownership and, as a result, the
trading price of our common stock may be more volatile.  In addition,
in the absence of an active public trading market, investors may be unable to
liquidate their investment in us.  In addition, the stock market is
subject to significant price and volume fluctuations, and the price of our
common stock could fluctuate widely in response to several factors,
including:




•
              our
      quarterly operating results;
  •
              changes
      in our earnings estimates;
  •
              additions
      or departures of key personnel;
  •
              changes
      in the business, earnings estimates or market perceptions of our
      competitors;
  •
              changes
      in general market or economic conditions;
and
  •
              announcements
      of legislative or regulatory
change.
  The stock
market has experienced extreme price and volume fluctuations in recent years
that have significantly affected the quoted prices of the securities of many
companies, including companies in our industry. The changes often appear to
occur without regard to specific operating performance. The price of our common
stock could fluctuate based upon factors that have little or nothing to do with
our company and these fluctuations could materially reduce our stock
price.




The
market price of our common stock could decline following sales of substantial
amounts of our common stock in the public markets.




If a
large number of shares of our common stock is sold in the open market, the
trading price of our common stock could decrease. As of December 31, 2007,
we had an aggregate of 71,491,670 shares of our common stock authorized but
unissued and not reserved for specific purposes. In general, we may issue all of
these shares without any approval by our stockholders. We may pursue
acquisitions and may issue shares of our common stock in connection with these
acquisitions.




We
may issue preferred stock whose terms could adversely affect the voting power or
value of our common stock.




Our
certificate of incorporation authorizes us to issue, without the approval of our
stockholders, one or more classes or series of preferred stock having such
designations, preferences, limitations and relative rights, including
preferences over our common stock respecting dividends and distributions, as our
board of directors may determine. The terms of one or more classes or series of
preferred stock could adversely impact the voting power or value of our common
stock. For example, we might grant holders of preferred stock the right to elect
some number of our directors in all events or on the happening of specified
events or the right to veto specified transactions. Similarly, the repurchase or
redemption rights or liquidation preferences we might assign to holders of
preferred stock could affect the residual value of the common
stock.




Provisions
in our organizational documents could delay or prevent a change in control of
our company, even if that change would be beneficial to our
stockholders.




The
existence of some provisions in our organizational documents could delay or
prevent a change in control of our company, even if that change would be
beneficial to our stockholders. Our certificate of incorporation and bylaws
contain provisions that may make acquiring control of our company difficult,
including:


•
              provisions
      regulating the ability of our stockholders to nominate directors for
      election or to bring matters for action at annual meetings of our
      stockholders;
  •
              limitations
      on the ability of our stockholders to call a special meeting and act by
      written consent;
  •
              the
      authorization given to our board of directors to issue and set the terms
      of preferred stock; and
  •
              limitations
      on the ability of our stockholders from removing our directors without
      cause.
  We
do not intend to pay cash dividends on our common stock in the foreseeable
future, and therefore only appreciation of the price of our common stock, which
may not occur, will provide a return to our stockholders.




We
currently anticipate that we will retain all future earnings, if any, to finance
the growth and development of our business. We do not intend to pay cash
dividends in the foreseeable future. Any payment of cash dividends will depend
upon our financial condition, capital requirements, earnings and other factors
deemed relevant by our board of directors. In addition, the terms of our credit
facilities prohibit us from paying dividends and making other distributions. As
a result, only appreciation of the price of our common stock, which may not
occur, will provide a return to our stockholders.




Risk
Factors Relating to the Merger





The
number of shares of Allis-Chalmers common stock that holders of Bronco common
stock will receive is not fixed because the stock component of the merger
consideration is based on the average of the closing sale prices of
Allis-Chalmers common stock during a ten-day period ending two trading days
before the merger closes.




The number of
shares of Allis-Chalmers common stock to be issued in the merger will be based
on the average of the closing sale prices of Allis-Chalmers common stock on the
NYSE Composite Transactions Tape (as reported by The
Wall Street Journal(Northeast edition), or, if not reported thereby, as
reported by any other authoritative source) for the ten consecutive trading days
ending with the second complete trading day prior to the closing date (not
including the closing date), or the Allis-Chalmers Common Stock Value. Although
the aggregate value of the stock consideration in the merger is fixed at $157.8
million, the number of shares of Allis-Chalmers common stock to be issued to our
stockholders will depend on the Allis- Chalmers Common Stock Value. Therefore,
our stockholders cannot be sure of the number of shares that they will receive,
and Allis-Chalmers stockholders cannot be sure of the number of shares of
Allis-Chalmers common stock that will be issued to the our stockholders. In
addition, because the exchange ratio will be determined using a period that ends
two trading days prior to the closing date, the number of shares of
Allis-Chalmers common stock to be issued will likely be different than it would
be if the price on the closing date were to be used.


-13-
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  For more
information regarding the merger, please refer to the joint proxy
statement/prospectus of Allis-Chalmers and Bronco that is included in the
registration statement on Form S-4 (Registration No. 333-149326) filed by
Allis-Chalmers with the SEC on February 20, 2008, and other relevant materials
that may be filed by us or Allis-Chalmers with the SEC, including any amendments
to such registration statement.




The
price of Allis-Chalmers common stock will continue to fluctuate after the merger
and may be affected by factors that are different than the separate factors that
currently affect the prices of Allis-Chalmers common stock and Bronco common
stock.




Holders of
our common stock will receive Allis-Chalmers common stock in the merger.
Allis-Chalmers’ results of operations, as well as the price of Allis-Chalmers
common stock following the merger, may be affected by factors that are different
than those factors currently affecting Allis-Chalmers’ or our results of
operations and the prices of Allis-Chalmers common stock and our common
stock.




Any
delay in completing the merger and integrating the businesses may reduce the
benefits expected to be obtained from the merger.




In addition
to obtaining the required regulatory clearances and approvals, the merger is
subject to a number of other conditions beyond the control of Bronco and
Allis-Chalmers that may prevent, delay or otherwise materially adversely affect
its completion.  Allis-Chalmers and Bronco cannot predict whether or
when the conditions to closing will be satisfied. Any delay in completing the
merger and integrating the businesses may reduce the benefits that
Allis-Chalmers and Bronco expect to achieve in the merger.





Failure
to complete the announced merger with Allis-Chalmers could negatively affect the
stock price and the future business and financial results of
Bronco.




There can be
no assurance that the merger agreement will be adopted by Bronco stockholders,
that the issuance of the shares of Allis-Chalmers common stock will be approved
by Allis-Chalmers stockholders or that the other conditions to the completion of
the merger will be satisfied. In addition, Bronco has the right to terminate the
merger agreement and pursue alternative transactions under certain conditions.
If the merger is not completed, Bronco’s stockholders will not receive any
expected benefits of the merger and will be subject to risks and/or liabilities,
including the following:




•
              failure
      to complete the merger might be followed by a decline in the market price
      of Bronco common stock;
   •
              Bronco
      must pay Allis-Chalmers a termination fee and expense reimbursements of up
      to $10.0 million if the merger agreement is terminated under specified
      circumstances;
  •
              some
      costs relating to the merger (such as legal and accounting fees) are
      payable by Bronco regardless of whether the merger is completed;
      and
  •
              the
      proposed merger
      may disrupt our business and distract our management and employees from
      day-to-day operations, because work related to the merger (including
      integration planning) requires substantial time and resources, which could
      otherwise have been devoted to other business opportunities for the
      benefit of Bronco.
 If the merger
is not completed, these risks and liabilities may materially adversely affect
Bronco’s business, financial results, financial condition and stock
price.





There
are three separate lawsuits seeking to delay or prevent the consummation of the
merger.




Three of
our stockholders have separately filed complaints seeking class action status
relating to our proposed merger with Allis-Chalmers.  Two actions were
filed in the District Court of Oklahoma County in the State of Oklahoma on
January 29, 2008 and February 28, 2008, respectively.  The defendants
named in the first Oklahoma complaint are Bronco, the Bronco board of directors,
Allis-Chalmers and Merger Sub while the defendants named in the second Oklahoma
complaint are Bronco, the Bronco board of directors and
Allis-Chalmers.  The third action was filed in the Court of Chancery
in the State of Delaware on January 29, 2008.  The defendants named in
the Delaware complaint are Bronco, the Bronco board of directors and
Allis-Chalmers.  The plaintiff in the first Oklahoma complaint has
filed a motion for expedited discovery.  The complaints generally
allege that the merger consideration is inadequate and that the Bronco board of
directors has breached its fiduciary duties.  The second Oklahoma
complaint also alleges that the joint proxy statement/prospectus included as
part of Allis-Chalmers’ registration statement on Form S-4 filed with the SEC on
February 20, 2008 contains materially incomplete and misleading information. The
actions generally seek to enjoin the merger, cause the Bronco board of directors
to undertake an auction for Bronco or otherwise take action to maximize
stockholder value, award monetary damages to the stockholders of Bronco and, in
the case of the two Oklahoma complaints, rescind the transaction (to the extent
that it is consummated).  The claims against Allis-Chalmers seek
monetary damages.  Answers to the complaints are not yet due, although
a motion to dismiss the first Oklahoma proceeding has been filed by
Bronco.  Bronco intends to vigorously defend these
actions.  As of this time, no order has been issued in either
proceeding that would preclude the consummation of the merger.  Each
of Allis-Chalmers and Bronco has the right to terminate the merger agreement in
the event a court enjoins the consummation of the merger.





A
group that beneficially owns a significant amount of our outstanding voting
stock has announced its intention to oppose the merger.




On January
25, 2008, we received a letter from Third Avenue Management LLC, or Third
Avenue, stating that it was opposed to the merger. The letter was also filed
with the SEC by Third Avenue on an amendment to its Schedule 13D on January 25,
2008. According to its filing, Third Avenue, on behalf of its investment
advisory clients, beneficially owned 5,512,116 shares of our common stock,
representing 21.18% of our outstanding common stock as of January 25,
2008.





The
rights of Bronco stockholders who become Allis-Chalmers stockholders in the
merger will be governed by Allis-Chalmers’ certificate of incorporation and
bylaws.




Bronco
stockholders who receive shares of Allis-Chalmers common stock in the merger
will become Allis-Chalmers stockholders. Although their rights as stockholders
will remain subject to the Delaware General Corporation Law, they will be
governed by Allis-Chalmers’ certificate of incorporation and bylaws, rather than
Bronco’s certificate of incorporation and bylaws. As a result, there will be
material differences between the current rights of Bronco stockholders, as
compared to the rights they will have as Allis-Chalmers
stockholders.





The
directors and executive officers of Bronco may have personal interests that
differ from yours and that may motivate them to support or approve the
merger.




The directors
of Bronco who have recommended the merger to Bronco stockholders and the
executive officers of Bronco who provided information to the Bronco board of
directors relating to the merger have employment, indemnification and/or
severance benefit arrangements, will benefit from the acceleration of restricted
stock awards, if any, and have rights to ongoing indemnification and director
and officer insurance.  Any of these arrangements or benefits may
cause these individuals to have interests that may differ from yours. The
benefits that would result from the merger may have influenced these directors
in approving the merger and these executive officers in supporting the merger.
You should consider these interests when you consider the recommendation of the
Bronco board of directors that you vote for the adoption of the merger
agreement. As a result of these interests, these directors and executive
officers may be more likely to support the merger than they would if they did
not have these interests.





The
merger agreement limits Bronco’s ability to pursue an alternative to the
merger.




The merger
agreement prohibits Bronco from soliciting alternative
transactions.  Additionally, under the merger agreement, before (i)
the board of directors of Bronco changes its recommendation regarding the merger
as a result of its receipt of an unsolicited acquisition proposal, (ii) the
board of directors of Bronco recommends an alternative transaction or (iii)
Bronco enters into an alternative transaction, Bronco must allow Allis-Chalmers
a four-business day period to make a revised proposal. These provisions limit
Bronco’s ability to pursue offers from third parties that could result in
greater value to its stockholders.  Bronco’s obligation to pay a
termination fee may also discourage a third party from pursuing an alternative
transaction proposal. Under the merger agreement, Bronco may be required to pay
to Allis-Chalmers a termination fee of $10.0 million or out-of-pocket expenses
of up to $5.0 million if the merger agreement is terminated under specified
circumstances. If a termination fee is payable, the payment of this fee could
have material and adverse consequences on Bronco’s financial
condition.




Item 1B. Unresolved Staff Comments




None.


-14-
 Table of Contents




Item 2. Property




Our
corporate headquarters is located at 16217 North May Avenue, Edmond, Oklahoma in
an office building we purchased on January 2, 2007.  The approximately
18,100 square foot building was purchased for a total purchase price of $3.0
million, less an amount equal to one-half of the principal reduction on the
seller’s loan secured by the property between the effective date of the purchase
agreement and the closing. We paid $1.4 million in cash and assumed existing
debt of approximately $1.6 million. Prior to closing, we subleased a total of
9,050 square feet of the building from its tenants until the closing date for a
monthly rental of $8,341.




We own or
lease from third parties the following properties:


•
              an
      approximately 6,205 square foot building used for office space in Duncan,
      Oklahoma;
  •
              an
      approximately 841 square foot building used for office space in Craig,
      Colorado;
  •
              an
      approximately 2,300 square foot building used for office space in Craig,
      Colorado;
  •
              an
      approximately 465 square foot building used for office space in Shattuck,
      Oklahoma;
  •
              a
      13 acre yard used for equipment storage and the refurbishment of our
      inventoried rigs in Duncan,
Oklahoma;
  •
              a
      15 acre yard, which includes an operations office, rig and equipment
      storage and a repair facility in Oklahoma City,
  Oklahoma;
  •
              Two
      16 acre yards used for equipment storage and the refurbishment of our
      inventoried rigs in Oklahoma City,
Oklahoma;
  •
              a
      10 acre yard used to dispatch trucks in Davis,
  Oklahoma;
  •
              a
      10 acre yard used to dispatch trucks in Shawnee,
  Oklahoma;
  •
              a
      13 acre yard which includes a machine shop used for drilling rig
      refurbishment, repair and maintenance in Oklahoma City,
      Oklahoma;
  •
              a 4
      acre yard which includes a machine shop used for drilling rig
      refurbishment, repair and maintenance in Liberal,
  Kansas;
  •
              a 3
      acre yard which includes a machine shop used for drilling rig
      refurbishment, repair and maintenance in Raton, New
  Mexico;
  •
              a
      10 acre yard which includes a machine shop used for drilling rig
      refurbishment, repair and maintenance in Snyder,
  Texas;
  •
              a 1
      acre yard which includes a machine shop used for drilling rig
      refurbishment, repair and maintenance in Ulysses,
  Kansas;
  •
              a 4
      acre yard which includes a machine shop used for drilling rig
      refurbishment, repair and maintenance in El Reno,
  Oklahoma;
  •
              a 4
      acre yard which includes a repair shop used for well service equipment,
      storage and workover rig repair in Guymon,
  Oklahoma;
  •
              a 2
      acre yard which includes a repair shop used for well service equipment,
      storage and workover rig repair in Craig,
  Colorado;
  •
              a 2
      acre yard which includes a repair shop used for well service equipment,
      storage and workover rig repair in Cushing,
  Oklahoma;
  •
              a 1
      acre yard which includes a repair shop used for well service equipment,
      storage and workover rig repair in Midland,
  Texas;
  •
              a 4
      acre yard which includes a repair shop used for well service equipment,
      storage and workover rig repair in Healdton, Oklahoma;
  and
  •
              a 4
      acre yard which includes a repair shop used for well service equipment,
      storage and workover rig repair in Levelland,
  Texas.
 
 Item 3. Legal Proceedings




Three of
our stockholders have separately filed complaints seeking class action status
relating to our proposed merger with Allis-Chalmers.  Two actions were
filed in the District Court of Oklahoma County in the State of Oklahoma on
January 29, 2008 and February 28, 2008, respectively.  The defendants
named in the first Oklahoma complaint are Bronco, the Bronco board of directors,
Allis-Chalmers and Merger Sub while the defendants named in the second Oklahoma
complaint are Bronco, the Bronco board of directors and
Allis-Chalmers.  The third action was filed in the Court of Chancery
in the State of Delaware on January 29, 2008.  The defendants named in
the Delaware complaint are Bronco, the Bronco board of directors and
Allis-Chalmers.  The plaintiff in the first Oklahoma complaint has
filed a motion for expedited discovery.  The complaints generally
allege that the merger consideration is inadequate and that the Bronco board of
directors has breached its fiduciary duties.  The second Oklahoma
complaint also alleges that the joint proxy statement/prospectus included as
part of Allis-Chalmers’ registration statement on Form S-4 filed with the SEC on
February 20, 2008 contains materially incomplete and misleading information. The
actions generally seek to enjoin the merger, cause the Bronco board of directors
to undertake an auction for Bronco or otherwise take action to maximize
stockholder value, award monetary damages to the stockholders of Bronco and, in
the case of the two Oklahoma complaints, rescind the transaction (to the extent
that it is consummated).  The claims against Allis-Chalmers seek
monetary damages.  Answers to the complaints are not yet due, although
a motion to dismiss the first Oklahoma proceeding has been filed by
Bronco.  Bronco intends to vigorously defend these
actions.  As of this time, no order has been issued in either
proceeding that would preclude the consummation of the merger.  Each
of Allis-Chalmers and Bronco has the right to terminate the merger agreement in
the event a court enjoins the consummation of the merger.




In
addition to the merger litigation, due to the nature of our business, we are,
from time to time, involved in routine litigation or subject to disputes or
claims related to our business activities, including workers’ compensation
claims and employment related disputes. In the opinion of our management, none
of the pending litigation, disputes or claims against us, if decided adversely,
will have a material adverse effect on our financial condition or results of
operations.




Item 4. Submission of Matters to a Vote of Security
Holders





We did not
submit any matter to a vote of our stockholders during the fourth quarter of
2007.


-15-
 Table of Contents




PART
II




Item 5.
            Market For Registrant’s Common
      Equity, Related Stockholder Matters and Issuer Purchases of Equity
      Securities.






Market
      Information




Our
common stock has been quoted on The Nasdaq Global Market (formerly the Nasdaq
National Market) under the symbol “BRNC” since August 16, 2005. The
following table sets forth for the indicated periods the high and low sale
prices of our common stock as quoted on The Nasdaq Global Market.




High
            
            
            LowYear
      Ending December 31, 2005:Third
      Quarter (since August 16, 2005)
            
            $
            30.00
            
            
            $
            18.00Fourth
      Quarter
            
            $
            29.10
            
            
            $
            20.97Year
      Ending December 31, 2006:First
      Quarter
            
            $
            32.00
            
            
            $
            22.50Second
      Quarter
            
            $
            29.57
            
            
            $
            17.50Third
      Quarter
            
            $
            21.41
            
            
            $
            16.01Fourth
      Quarter
            
            $
            19.69
            
            
            $
            15.25Year
      Ending December 31, 2007:First
      Quarter
            
            $
            17.20
            
            
            $
            13.53Second
      Quarter
            
            $
            19.21
            
            
            $
            15.37Third
      Quarter
            
            $
            16.67
            
            
            $
            13.58Fourth
      Quarter
            
            $
            16.04
            
            
            $
            13.10Year
      Ending December 31, 2008:First
      Quarter (through February 29, 2008)
            
            $
            16.15
            
            
            $
            11.21





On February 29,
2008, the last reported sale price of our common stock on The Nasdaq Global
Market was $15.81 and we had approximately 11,000 beneficial holders of our
common stock.




Dividend
Policy




We have
never declared or paid dividends on our common stock, and we currently
anticipate that we will retain all future earnings, if any, to finance the
growth and development of our business. We do not intend to pay cash dividends
in the foreseeable future. Any payment of cash dividends will depend upon our
financial condition, capital requirements, earnings and other factors deemed
relevant by our board of directors. In addition, the terms of our credit
facility prohibit us from paying dividends and making other
distributions.




Equity
Compensation Plan Information




The
following table provides information as of December 31, 2007 with respect to
shares of our common stock that may be issued under on our equity compensation
plan:




Number
      of securitiesremaining
      available forNumber
      of securities to be
              
              Weighted-average
              
              future
      issuance under equityissued
      upon exercise of
              
              exercise
      price per share
              
              compensation
      plansoutstanding
      options,
              
              of
      outstanding options,
              
              (excluding
      securitiesPlan
      category
              
              warrants
      and rights
              
              warrants
      and rights
              
              reflected
      in column (a))(a)
              
              (b)
              
              (c)Equity
      compensation plans approvedby
      security holders
              
              20
              
              $                                26.14
              
              1,904Equity
      compensation plans not approvedby
      security holders
              
              -
              
              -
              
              -20
              
              $                                26.14
              
              1,904


-16-
 Table of Contents


Item 6. Selected Financial Data.




The
following table sets forth our selected historical financial data as of and for
each of the years indicated. We derived the selected historical financial data
as of and for each of the years ended 2007, 2006, 2005, 2004 and 2003 from our
historical audited consolidated financial statements. You should review this
information together with “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and consolidated historical financial
statements and related notes included elsewhere in this Form 10-K.




Years
      Ended December 31,(in
      thousands, except per share amounts)2007
              
              2006
              
              
              2005
              
              
              2004
              
              
              2003Consolidated
      Statements of OperationsInformation:Contract
      drilling revenues
              
              $
              276,088
              
              
              $
              285,828
              
              
              $
              77,885
              
              
              $
              21,873
              
              
              $
              12,533Well
      service
              
              
              22,864
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Costs
      and expenses:Contract
      drilling
              
              
              153,797
              
              
              
              139,607
              
              
              
              44,695
              
              
              
              18,670
              
              
              
              10,537Well
      service
              
              
              14,299
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Depreciation
      and amortization
              
              
              44,241
              
              
              
              30,335
              
              
              
              9,143
              
              
              
              3,695
              
              
              
              1,985General
      and administrative
              
              
              22,690
              
              
              
              15,709
              
              
              
              9,395
              
              
              
              1,714
              
              
              
              1,226Total
      operating costs and expenses
              
              
              235,027
              
              
              
              185,651
              
              
              
              63,233
              
              
              
              24,079
              
              
              
              13,748Income
      (loss) from operations
              
              
              63,925
              
              
              
              100,177
              
              
              
              14,652
              
              
              
              (2,206)
              
              
              
              (1,215)Other
      income (expense):Interest
      expense
              
              
              (4,762)
              
              
              
              (1,736)
              
              
              
              (1,415)
              
              
              
              (285)
              
              
              
              (21)Loss
      from early extinguishment of debt
              
              
              -
              
              
              
              (1,000)
              
              
              
              (2,062)
              
              
              
              -
              
              
              
              -Interest
      income
              
              
              1,239
              
              
              
              164
              
              
              
              432
              
              
              
              10
              
              
              
              3Other
      income
              
              
              294
              
              
              
              284
              
              
              
              53
              
              
              
              -
              
              
              
              -Total
      other income (expense)
              
              
              (3,229)
              
              
              
              (2,288)
              
              
              
              (2,992)
              
              
              
              (275)
              
              
              
              (18)Income
      (loss) before income taxes
              
              
              60,696
              
              
              
              97,889
              
              
              
              11,660
              
              
              
              (2,481)
              
              
              
              (1,233)Income
      tax expense
              
              
              23,104
              
              
              
              38,056
              
              
              
              6,529
              
              
              
              285
              
              
              
              317Net
      income (loss)
              
              $
              37,592
              
              
              $
              59,833
              
              
              $
              5,131
              
              
              $
              (2,766)
              
              
              $
              (1,550)Income
      per common share-Basic
              
              $
              1.45
              
              
              $
              2.43
              
              
              $
              0.32Income
      per common share-Diluted
              
              $
              1.44
              
              
              $
              2.43
              
              
              $
              0.31Weighted
      average number of shares outstanding-Basic
              
              
              25,996
              
              
              
              24,585
              
              
              
              16,259Weighted
      average number of shares outstanding-Diluted
              
              
              26,101
              
              
              
              24,623
              
              
              
              16,306Pro
      Forma C Corporation Data (Unaudited): (1)Historical
      income (loss)before
      income taxes
              
              
              
              
              
              
              
              
              
              $
              11,660
              
              
              $
              (2,481)
              
              
              $
              (1,233)Pro
      forma provision (benefit) for incometaxes
              
              
              
              
              
              
              
              
              
              
              4,396
              
              
              
              (935)
              
              
              
              (465)Pro
      forma income (loss)
              
              
              
              
              
              
              
              
              
              $
              7,264
              
              
              $
              (1,546)
              
              
              $
              (768)Pro
      forma income (loss) per common share basic and diluted
              
              
              
              
              
              
              
              
              
              $
              0.45
              
              
              $
              (0.12)
              
              
              $
              (0.06)Weighted
      average pro forma shares outstanding-Basic
              
              
              
              
              
              
              
              
              
              
              16,259
              
              
              
              13,360
              
              
              
              13,360Weighted
      average pro forma shares outstanding-Diluted
              
              
              
              
              
              
              
              
              
              
              16,306
              
              
              
              13,360
              
              
              
              13,360Other
      Financial Data (Unaudited):Calculation
      of EBITDA (2):Net
      income (loss)
              
              $
              37,592
              
              
              $
              59,833
              
              
              $
              5,131
              
              
              $
              (2,766)
              
              
              $
              (1,550)Interest
      expense
              
              
              4,762
              
              
              
              1,736
              
              
              
              1,415
              
              
              
              285
              
              
              
              21Income
      tax expense
              
              
              23,104
              
              
              
              38,056
              
              
              
              6,529
              
              
              
              285
              
              
              
              317Depreciation
      and amortization
              
              
              44,241
              
              
              
              30,335
              
              
              
              9,143
              
              
              
              3,695
              
              
              
              1,985EBITDA
      (2)
              
              $
              109,699
              
              
              $
              129,960
              
              
              $
              22,218
              
              
              $
              1,499
              
              
              $
              773Consolidated
      Cash Flow Information:Net
      cash provided by (used in):Operating
      activities
              
              $
              82,607
              
              
              $
              93,053
              
              
              $
              3,318
              
              
              $
              2,364
              
              
              $
              (1,914)Investing
      activities  (3)
              
              
              (79,984)
              
              
              
              (143,199)
              
              
              
              (190,326)
              
              
              
              (19,511)
              
              
              
              (4,846)Financing
      activities
              
              
              (7,510)
              
              
              
              43,715
              
              
              
              202,908
              
              
              
              16,623
              
              
              
              7,798As
      of December 31,2007
              
              
              
              2006
              
              
              
              2005
              
              
              
              2004
              
              
              
              2003Consolidated
      Balance Sheet Information:Total
      current assets
              
              $
              72,019
              
              
              $
              73,372
              
              
              $
              53,953
              
              
              $
              8,118
              
              
              $
              5,682Total
      assets
              
              
              568,605
              
              
              
              482,488
              
              
              
              330,520
              
              
              
              90,143
              
              
              
              71,920Total
      debt
              
              
              68,118
              
              
              
              64,727
              
              
              
              51,825
              
              
              
              18,100
              
              
              
              4,300Total
      liabilities
              
              
              172,176
              
              
              
              142,503
              
              
              
              91,184
              
              
              
              39,340
              
              
              
              21,218Total
      stockholders'/members' equity
              
              
              396,429
              
              
              
              339,985
              
              
              
              239,336
              
              
              
              50,803
              
              
              
              50,702


-17-
 Table of Contents




(1)
            Prior
      to the completion of our initial public offering in August 2005, we merged
      with Bronco Drilling Company, L.L.C., our predecessor company. Bronco
      Drilling Company, L.L.C. was a limited liability company treated as a
      partnership for federal income tax purposes. As a result, essentially all
      of its taxable earnings and losses were passed through to its members, and
      it did not pay federal income taxes at the entity level. Historical income
      taxes consist mainly of deferred income taxes on a taxable subsidiary, Elk
      Hill. Since we are a C corporation, for comparative purposes we have
      included a pro forma provision (benefit) for income taxes assuming we had
      been taxed as a C corporation in all periods prior to the
      merger.





(2)
            EBITDA
      is a non-GAAP financial measure equal to net income (loss), the most
      directly comparable Generally Accepted Accounting Principles, or GAAP,
      financial measure, plus interest expense, income tax expense, and
      depreciation and amortization. We have presented EBITDA because we use
      EBITDA as an integral part of our internal reporting to measure our
      performance and to evaluate the performance of our senior management. We
      consider EBITDA to be an important indicator of the operational strength
      of our business. EBITDA eliminates the uneven effect of considerable
      amounts of non-cash depreciation and amortization. A limitation of this
      measure, however, is that it does not reflect the periodic costs of
      certain capitalized tangible and intangible assets used in generating
      revenues in our business. Management evaluates the costs of such tangible
      and intangible assets and the impact of related impairments through other
      financial measures, such as capital expenditures, investment spending and
      return on capital. Therefore, we believe that EBITDA provides useful
      information to our investors regarding our performance and overall results
      of operations. EBITDA is not intended to be a performance measure that
      should be regarded as an alternative to, or more meaningful than, either
      net income as an indicator of operating performance or to cash flows from
      operating activities as a measure of liquidity. In addition, EBITDA is not
      intended to represent funds available for dividends, reinvestment or other
      discretionary uses, and should not be considered in isolation or as a
      substitute for measures of performance prepared in accordance with GAAP.
      The EBITDA measure presented in this Form 10-K may not be comparable
      to similarly titled measures presented by other companies, and may not be
      identical to corresponding measures used in our various
      agreements.





(3)
            In
      August 2003, we acquired 22 drilling rigs and drilling rig structures and
      components for an aggregate of $49.0 million. These transactions were
      funded directly by our equity holders. Accordingly, they have been
      accounted for as acquisitions by our equity holders followed by their
      contribution to us of the acquired assets. As a result, net cash used in
      investing activities for 2003 does not include the $33.5 million cash
      portion of the acquisition cost.






Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operation.




The
following discussion and analysis should be read in conjunction with the
“Selected Historical Financial Data” and the consolidated financial statements
and related notes included elsewhere in this Form 10-K. This discussion contains
forward-looking statements reflecting our current expectations and estimates and
assumptions concerning events and financial trends that may affect our future
operating results or financial position. Actual results and the timing of events
may differ materially from those contained in these forward-looking statements
due to a number of factors, including those discussed in the sections entitled
“Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements”
appearing elsewhere in this Form 10-K.




Overview




We earn
our contract drilling revenues by drilling oil and natural gas wells for our
customers. We obtain our contracts for drilling oil and natural gas wells either
through competitive bidding or through direct negotiations with customers. Our
drilling contracts generally provide for compensation on either a daywork or
footage basis. We have not historically entered into turnkey contracts and do
not intend to enter into any turnkey contracts, subject to changes in market
conditions, although it is possible that we may acquire such contracts in
connection with future acquisitions. Contract terms we offer generally depend on
the complexity and risk of operations, the on-site drilling conditions, the type
of equipment used and the anticipated duration of the work to be performed.
Although, we currently have ten of our drilling rigs operating under agreements
with initial terms ranging from one to two years, our contracts generally
provide for the drilling of a single well and typically permit the customer to
terminate on short notice.




A
significant performance measurement in our industry is operating rig
utilization. We compute operating drilling rig utilization rates by dividing
revenue days by total available days during a period. Total available days are
the number of calendar days during the period that we have owned the operating
rig. Revenue days for each operating rig are days when the rig is earning
revenues under a contract, i.e. when the rig begins moving to the drilling
location until the rig is released from the contract. On daywork contracts,
during the mobilization period we typically receive a fixed amount of revenue
based on the mobilization rate stated in the contract. We begin earning our
contracted daywork rate and mobilization revenue when we begin drilling the
well. Occasionally, in periods of increased demand, we will receive a percentage
of the contracted dayrate during the mobilization period. We account for these
revenues as mobilization fees.




For the
years ended December 31, 2007, 2006 and 2005, our drilling rig utilization
rates, revenue days and average number of operating rigs were as
follows:





Year
      Ended December 31,2007
            
            2006
            
            2005Average
      number of operating rigs
            
            51
            
            45
            
            17Revenue
      days
            
            14,245
            
            15,202
            
            5,781Utilization
      Rates
            
            76%
            
            93%
            
            95%





The decrease
in the number of revenue days in 2007 is attributable to the decrease in
utilization partially offset by the increase in the size of our operating
drilling rig fleet.The annual increase in the
number of revenue days in 2006 is attributable to the increase in the size of
our operating drilling rig fleet.




We devote
substantial resources to maintaining, upgrading and expanding our rig fleet. We
substantially completed the refurbishment of three drilling rigs in 2007, 12
drilling rigs in 2006 and six drilling rigs in 2005.




Market
Conditions in Our Industry




The
United States contract land drilling services industry is highly cyclical.
Volatility in oil and natural gas prices can produce wide swings in the levels
of overall drilling activity in the markets we serve and affect the demand for
our drilling services and the dayrates we can charge for our rigs. The
availability of financing sources, past trends in oil and natural gas prices and
the outlook for future oil and natural gas prices strongly influence the number
of wells oil and natural gas exploration and production companies decide to
drill.




The
following table depicts the prices for near month delivery contracts for crude
oil and natural gas as traded on the NYMEX, as well as the most recent Baker
Hughes domestic land rig count, on the dates indicated:





At
      December 31,2007
            
            
            2006
            
            
            2005Crude
      oil (Bbl)
            
            $
            95.98
            
            
            $
            61.05
            
            
            $
            61.04Natural
      gas (Mmbtu)
            
            $
            7.48
            
            
            $
            6.30
            
            
            $
            11.23U.S.
      Land Rig Count
            
            
            1,719
            
            
            
            1,626
            
            
            
            1,391




On
February 29, 2008, the closing prices for near month delivery contracts for
crude oil and natural gas as traded on the NYMEX were $101.84 per barrel and
$9.37 per MMbtu, respectively. The Baker Hughes domestic land drilling rig count
as of February 29, 2008 was 1,704. Baker Hughes is a large oil field services
firm that has issued the rotary rig counts as a service to the petroleum
industry since 1944.




We
believe capital spent on incremental natural gas production will be driven by an
increase in hydrocarbon demand as well as changes in supply of natural gas. The
Energy Information Administration estimated that U.S. consumption of natural gas
exceeded domestic production by 16% in 2005 and forecasts that U.S. consumption
of natural gas will exceed U.S. domestic production by 24% in 2010. In addition,
a study published by the National Petroleum Council in September 2003 concluded
from drilling and production data over the preceding ten years that average
“initial production rates from new wells have been sustained through the use of
advanced technology; however, production declines from these initial rates have
increased significantly; and recoverable volumes from new wells drilled in
mature producing basins have declined over time.” The report went on to state
that “without the benefit of new drilling, indigenous supplies have reached a
point at which U.S. production declines by 25% to 30% each year” and predicted
that in ten years eighty percent of gas production “will be from wells yet to be
drilled.” We believe all of these factors tend to support a higher natural gas
price environment, which should create strong incentives for oil and natural gas
exploration and production companies to increase drilling activity in the U.S.
Consequently, these factors may result in higher rig dayrates and rig
utilization.


-18-
 Table of Contents




Critical
Accounting Policies and Estimates




Our
discussion and analysis of our financial condition and results of operations is
based upon our consolidated financial statements, which have been prepared in
accordance with accounting policies that are described in the notes to our
consolidated financial statements. The preparation of the consolidated financial
statements requires management to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. We continually evaluate our
judgments and estimates in determining our financial condition and operating
results. Estimates are based upon information available as of the date of the
financial statements and, accordingly, actual results could differ from these
estimates, sometimes materially. Critical accounting policies and estimates are
defined as those that are both most important to the portrayal of our financial
condition and operating results and require management’s most subjective
judgments. The most critical accounting policies and estimates are described
below.




Revenue and Cost
Recognition—We earn our revenues by drilling oil and natural gas wells
for our customers under daywork or footage contracts, which usually provide for
the drilling of a single well. We recognize revenues on daywork contracts for
the days completed based on the dayrate each contract specifies. Mobilization
revenues and costs are deferred and recognized over the drilling days of the
related drilling contract. Individual contracts are usually completed in less
than 120 days. We follow the percentage-of-completion method of accounting for
footage contract drilling arrangements. Under this method, drilling revenues and
costs related to a well in progress are recognized proportionately over the time
it takes to drill the well. Percentage of completion is determined based upon
the amount of expenses incurred through the measurement date as compared to
total estimated expenses to be incurred drilling the well. Mobilization costs
are not included in costs incurred for percentage-of-completion calculations.
Mobilization costs on footage contracts and daywork contracts are deferred and
recognized over the days of actual drilling. Under the percentage-of-completion
method, management estimates are relied upon in the determination of the total
estimated expenses to be incurred drilling the well. When estimates of revenues
and expenses indicate a loss on a contract, the total estimated loss is
accrued.




Our
management has determined that it is appropriate to use the
percentage-of-completion method to recognize revenue on our footage contracts,
which is the predominant practice in the industry. Although our footage
contracts do not have express terms that provide us with rights to receive
payment for the work that we perform prior to drilling wells to the agreed upon
depth, we use this method because, as provided in applicable accounting
literature, we believe we achieve a continuous sale for our work-in-progress and
we believe, under applicable state law, we ultimately could recover the fair
value of our work-in-progress even in the event we were unable to drill to the
agreed upon depth in breach of the applicable contract. However, ultimate
recovery of that value, in the event we were unable to drill to the agreed upon
depth in breach of the contract, would be subject to negotiations with the
customer and the possibility of litigation.




We are
entitled to receive payment under footage contracts when we deliver to our
customer a well completed to the depth specified in the contract, unless the
customer authorizes us to drill to a shallower depth. Since inception, we have
completed all our footage contracts. Although our initial cost estimates for
footage contracts do not include cost estimates for risks such as stuck drill
pipe or loss of circulation, we believe that our experienced management team,
our knowledge of geologic formations in our areas of operations, the condition
of our drilling equipment and our experienced crews enable us to make reasonably
dependable cost estimates and complete contracts according to our drilling plan.
While we do bear the risk of loss for cost overruns and other events that are
not specifically provided for in our initial cost estimates, our pricing of
footage contracts takes such risks into consideration. When we encounter, during
the course of our drilling operations, conditions unforeseen in the preparation
of our original cost estimate, we immediately adjust our cost estimate for the
additional costs to complete the contracts. If we anticipate a loss on a
contract in progress at the end of a reporting period due to a change in our
cost estimate, we immediately accrue the entire amount of the estimated loss,
including all costs that are included in our revised estimated cost to complete
that contract, in our consolidated statement of operations for that reporting
period. During 2006 and 2007, we did not experience a loss on the footage jobs
we completed.  We are more likely to encounter losses on footage
contracts in years in which revenue rates are lower for all types of
contracts.




Revenues
and costs during a reporting period could be affected by contracts in progress
at the end of a reporting period that have not been completed before our
financial statements for that period are released. We had no footage contracts
in progress at December 31, 2007 and 2006. At December 31, 2007 and
2006, our contract drilling in progress totaled $2.1 million and $2.0 million,
respectively, all of which relates to the revenue recognized but not yet billed
or costs deferred on daywork contracts in progress.




We accrue
estimated contract costs on footage contracts for each day of work completed
based on our estimate of the total costs to complete the contract divided by our
estimate of the number of days to complete the contract. Contract costs include
labor, materials, supplies, repairs and maintenance and operating overhead
allocations. In addition, the occurrence of uninsured or under-insured losses or
operating cost overruns on our footage contracts could have a material adverse
effect on our financial position and results of operations. Therefore, our
actual results could differ significantly if our cost estimates are later
revised from our original estimates for contracts in progress at the end of a
reporting period that were not completed prior to the release of our financial
statements.




Accounts
Receivable—We evaluate the creditworthiness of our customers based on
their financial information, if available, information obtained from major
industry suppliers, current prices of oil and natural gas and any past
experience we have with the customer. Consequently, an adverse change in those
factors could affect our estimate of our allowance for doubtful accounts. In
some instances, we require new customers to establish escrow accounts or make
prepayments. We typically invoice our customers at 30-day intervals during the
performance of daywork contracts and upon completion of the daywork contract.
Footage contracts are invoiced upon completion of the contract. Our typical
contract provides for payment of invoices in 10 to 30 days. We generally do not
extend payment terms beyond 30 days. We are currently involved in legal actions
to collect various overdue accounts receivable.  Our allowance for
doubtful accounts was $1,834,000 and $400,000 at December 31, 2007 and
2006, respectively. Any allowance established is subject to judgment and
estimates made by management. We determine our allowance by considering a number
of factors, including the length of time trade accounts receivable are past due,
our previous loss history, our customer’s current ability to pay its obligation
to us and the condition of the general economy and the industry as a whole. We
write off specific accounts receivable when they become uncollectible and
payments subsequently received on such receivables reduce the allowance for
doubtful accounts.




If a
customer defaults on its payment obligation to us under a footage contract, we
would need to rely on applicable law to enforce our lien rights, because our
footage contracts do not expressly grant to us a security interest in the work
we have completed under the contract and we have no ownership rights in the
work-in-progress or completed drilling work, except any rights arising under the
applicable lien statute on foreclosure. If we were unable to drill to the agreed
on depth in breach of the contract, we might also need to rely on equitable
remedies outside of the contract, including quantum meruit, available in
applicable courts to recover the fair value of our work-in-progress under a
footage contract.




Asset Impairment
and Depreciation—We review long-lived assets to be held and used for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable.  We also
evaluate the carrying value of goodwill during the fourth quarter of each year
and between annual evaluations if events occur or circumstances change that
would more likely than not reduce the fair value below its carrying
amount.  Factors that we consider important and could trigger an
impairment review would be our customers’ financial condition and any
significant negative industry or economic trends. More specifically, among other
things, we consider our contract revenue rates, our rig utilization rates, cash
flows from our drilling rigs, current oil and natural gas prices, industry
analysts’ outlook for the industry and their view of our customers’ access to
debt or equity and the trends in the price of used drilling equipment observed
by our management. If a review of our drilling rigs, intangible assets and
goodwill indicate that our carrying value exceeds the estimated undiscounted
future cash flows, we are required under applicable accounting standards to
write down the drilling equipment, intangible assets and goodwill to its fair
market value. A one percent write-down in the cost of our drilling equipment,
intangible assets, and goodwill, at December 31, 2007, would have resulted in a
corresponding decrease in our net income of approximately $3.0
million.




Our
determination of the estimated useful lives of our depreciable assets, directly
affects our determination of depreciation expense and deferred taxes. A decrease
in the useful life of our drilling equipment would increase depreciation expense
and reduce deferred taxes. We provide for depreciation of our drilling rigs,
transportation and other equipment on a straight-line method over useful lives
that we have estimated and that range from three to fifteen years after the rig
was placed into service. We record the same depreciation expense whether an
operating rig is idle or working. Depreciation is not recorded on an inventoried
rig until placed in service. Our estimates of the useful lives of our drilling,
transportation and other equipment are based on our experience in the drilling
industry with similar equipment.




We
capitalize interest cost as a component of drilling and workover rigs
refurbished for our own use. During the years ended December 31, 2007 and
2006, we capitalized approximately $1.7 million and $3.6 million,
respectively.




Stock Based
Compensation---We have adopted SFAS No. 123(R), “Share-Based Payment” upon
granting our first stock options on August 16, 2005. SFAS No. 123(R)
requires a public entity to measure the costs of employee services received in
exchange for an award of equity or liability instruments based on the grant-date
fair value of the award. That cost will be recognized over the periods during
which an employee is required to provide service in exchange for the
award.  Stock compensation expense was $3.7 million, $2.8 million and
$589,000 for 2007, 2006 and 2005, respectively.




The fair
value of each option award is estimated on the date of grant using a Black
Scholes valuation model that uses various assumptions related to volatility,
expected life, forfeitures, exercise patterns, risk free rates and expected
dividends. Expected volatilities are based on the historical volatility of a
selected peer and other factors. The majority of our options were granted to
employees that made up one group with similar expected exercise behavior for
valuation purposes. The expected term of options granted was estimated based on
an average of the vesting period and the contractual period. The risk-free rate
for periods within the contractual life of the option was based on the U.S.
Treasury yield curve in effect at the time of the grant.




We have
not declared dividends since we became a public company and do not intend to do
so in the foreseeable future, and thus did not use a dividend yield. Expected
life has been determined using the permitted short cut method.





Under our
2005 Stock Incentive Plan, employee stock options become exercisable in equal
monthly installments over a three-year period, and all options generally expire
ten years after the date of grant. The 2005 Plan provides that all options must
have an exercise price not less than the fair market value of our common stock
on the date of the grant.


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On April
20, 2007, we filed a Tender Offer Statement on Schedule TO relating to our offer
to eligible directors, officers, employees and consultants to exchange certain
outstanding options to purchase shares of our common stock for restricted stock
awards consisting of the right to receive restricted shares of our common stock,
which we refer to as the “restricted stock awards.” The offer expired on May 21,
2007. Pursuant to the offer, we accepted for cancellation eligible options to
purchase 729,000 shares of our common stock tendered by directors, officers,
employees and consultants eligible to participate in the
offer.  Subject to the terms and conditions of the offer, on May 21,
2007 we granted one restricted stock award in exchange for every two shares of
common stock underlying the eligible options tendered.  Half of the
restricted stock awards vested on January 1, 2008 and the balance vest
on January 1, 2009, subject to earlier vesting or forfeiture in
certain circumstances. We granted the restricted stock awards under our 2006
Stock Incentive Plan, effective as of April 20, 2006.





An
incremental cost was computed in accordance with SFAS No. 123(R) upon the
conversion of options to restricted stock.  The incremental cost was
measured as the excess of the fair value of the modified award over the fair
value to the original award immediately preceding conversion, measured based on
the share price and other pertinent factors at that date.  The
incremental cost to be recognized over the vesting period of the modified award
is $387,000.




Deferred Income
Taxes—We provide deferred income taxes for the basis difference in our
property and equipment, stock compensation expense and other items between
financial reporting and tax reporting purposes. For property and equipment,
basis differences arise from differences in depreciation periods and methods and
the value of assets acquired in a business acquisition where we acquire the
stock in an entity rather than just its assets. For financial reporting
purposes, we depreciate the various components of our drilling rigs and
refurbishments over fifteen years, while federal income tax rules require that
we depreciate drilling rigs and refurbishments over five years. Therefore, in
the first five years of our ownership of a drilling rig, our tax depreciation
exceeds our financial reporting depreciation, resulting in our providing
deferred taxes on this depreciation difference. After five years, financial
reporting depreciation exceeds tax depreciation, and the deferred tax liability
begins to reverse.




Other Accounting
Estimates—Our other accrued expenses as of December 31, 2007 and
December 31, 2006 included accruals of approximately $3.0 million and $1.9
million, respectively, for costs under our workers’ compensation insurance. We
have a deductible of $1.0 million per covered accident under our workers’
compensation insurance. We maintain letters of credit in the aggregate amount of
$4.8 million for the benefit of various insurance companies as collateral for
retrospective premiums and retained losses which may become payable under the
terms of the underlying insurance contracts.  The letters of credit
are typically renewed annually.  No amounts have been drawn under the
letters of credit. At December 31, 2007 and 2006, we had deposits of $2.7
million and $2.6 million, respectively, with an insurance company
collateralizing a letter of credit. We accrue for these costs as claims are
incurred based on cost estimates established for each claim by the insurance
companies providing the administrative services for processing the claims,
including an estimate for incurred but not reported claims, estimates for claims
paid directly by us, our estimate of the administrative costs associated with
these claims and our historical experience with these types of
claims.  We also have a self-insurance program for major medical,
hospitalization and dental coverage for employees and their
dependents.  We recognize both reported and incurred but not reported
costs related to the self-insurance portion of our health
insurance.  Since the accrual is based on estimates of expenses for
claims, the ultimate amount paid may differ from accrued amounts.




Year
in Review Highlights




The following
are recent highlights that have impacted our results of operations for the year
ended December 31, 2007:




•
            On
      January 2, 2007, we purchased an approximately 18,100 square foot building
      located in Oklahoma City, Oklahoma for a total purchase price of $3.0
      million, less an amount equal to one-half of the principal reduction on
      the seller’s loan secured by the property between the effective date of
      the purchase agreement and the closing. We paid $1.4 million in cash and
      assumed existing debt of approximately $1.6 million. Prior to closing, we
      subleased a total of 9,050 square feet of the building from its tenants
      until the closing date for a monthly rental of
  $8,341.




•
            On
      January 9, 2007, we completed the acquisition of 31 workover rigs, 24 of
      which were operating, from Eagle Well and related subsidiaries for $2.6
      million in cash, 1,070,390 shares of our common stock and the assumption
      of debt of $6.5 million, liabilities of $678,000 and additional deferred
      income taxes of $7.2 million.  We subsequently deployed the
      remaining rigs and added 28 new rigs to bring our total fleet to 59
      workover rigs.




Recent
Developments




On January 4,
2008, Bronco MENA Investments LLC, one of our wholly-owned subsidiaries, closed
a transaction with Challenger, a company organized under the laws of the Isle of
Man, and certain of its affiliates to acquire a 25% equity interest in
Challenger in exchange for six drilling rigs and $5.0 million in
cash.  Challenger is an international provider of contract land
drilling and workover services to oil and natural gas companies with its
principal operations in Libya.  In a separate transaction we sold to
Challenger four drilling rigs and ancillary equipment for $13.4 million, payable
in installments. The transactions were completed on January 4,
2008.  Prior to these transactions, Challenger owned a fleet of 23
rigs.




On January
23, 2008, we entered into an agreement and plan of merger with Allis-Chalmers
and Merger Sub, providing for the acquisition of Bronco by
Allis-Chalmers.




Under the
terms of the merger agreement, which was approved by the respective boards of
directors of each of the Company, Allis-Chalmers and Merger Sub, Merger Sub will
merge with and into the Company, with the Company surviving as a wholly owned
subsidiary of Allis-Chalmers.  The merger agreement provides that, at
the effective time of the merger, Bronco stockholders will receive merger
consideration with an aggregate value of approximately $437.8 million, comprised
of (a) an aggregate of $280.0 million in cash and (b) shares of Allis-Chalmers
common stock having an aggregate value of approximately $157.8 million. The
number of shares issued as merger consideration will be based on the average
closing price of Allis-Chalmers common stock for a ten trading day period ending
two days prior to the closing.  Allis Chalmers will also assume all of
the outstanding debt of Bronco, which totaled $68.1 million at December 31,
2007.




For more
information regarding the merger, please refer to the joint proxy
statement/prospectus of Allis-Chalmers and Bronco that is included in the
registration statement on Form S-4 (Registration No. 333-149326) filed by
Allis-Chalmers with the SEC on February 20, 2008, and other relevant materials
that may be filed by us or Allis-Chalmers with the SEC, including any amendments
to such registration statement.




Results
of Operations





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




Contract Drilling
Revenue. For the year ended December 31, 2007, we reported contract
drilling revenues of approximately $276.1 million, a 3% decrease from revenues
of $285.8 million for 2006. The decrease is primarily due to a decrease in total
revenue days partially offset by increases in average dayrates and average
number of drilling rigs working for the year ended December 31, 2007 as
compared to 2006. Revenue days decreased 6% to 14,245 days for the year ended
December 31, 2007 from 15,202 days during 2006.   Average
dayrates for our drilling services increased $491, or 3%, to $17,876 for the
year ended December 31, 2007 from $17,385 in 2006. Our average number of
operating drilling rigs increased to 51 from 45, or 13%, for the year ended
December 31, 2007, as compared to 2006. The decrease in the number of
revenue days for the year ended December 31, 2007 as compared to 2006 is
attributable to the decrease in our utilization rate partially offset by the
increase in the size of our operating drilling rig fleet. Utilization decreased
to 76% from 93% for the year ended December 31, 2007 as compared to
2006.  The 18% decrease in utilization was primarily due to a more
competitive market resulting from an increase in the supply of drilling
rigs.





Well Service
Revenue.For the year ended December 31, 2007, we
reported well service revenues of approximately $22.9 million, revenue hours of
63,746 and an average hourly rate of $356.  Our average number of
operating workover rigs was 33 for the year ended December 31, 2007. There
were no well service revenues for the year ended December 31, 2006.




Contract Drilling Expense.
Contract drilling expense increased $14.2 million to $153.8 million for the year
ended December 31, 2007 from $139.6 million in 2006. This 10% increase is
primarily due to the increase in the average number of operating drilling rigs
in our fleet to 51 for the year ended December 31, 2007 as compared to 45
in 2006 as well as a broad increase in the cost of materials and supplies used
to operate our drilling rigs. As a percentage of contract drilling revenue,
drilling expense increased to 56% for the year ended December 31, 2007 from
49% in 2006 due primarily to expenses related to the retention of crews of idle
drilling rigs.




Well Service Expense. Well
service expense was approximately $14.3 million for the year ended
December 31, 2007. As a percentage of well service revenue, well service
expense was 63% for the year ended December 31, 2007. There were no well
service expenses for the year ended December 31, 2006.




Depreciation and Amortization
Expense. Depreciation and amortization expense increased $13.9 million to
$44.2 million for the year ended December 31, 2007 from $30.3 million in
2006. The increase is primarily due to the 30% increase in fixed assets,
including the substantial completion of three additional rigs from our inventory
during 2007, the Eagle Well Service acquisition, as well as incremental
increases in ancillary equipment.




General and Administrative
Expense. General and administrative expense increased $7.0 million, or
44%, to $22.7 million for the year ended December 31, 2007 from $15.7
million in 2006. This primarily resulted from a $4.2 million increase in
accounts receivable write-offs, a $1.4 million increase in payroll costs, a
$959,000 increase in stock compensation expense, a $502,000 increase in yard
expense, and a $388,000 increase in rent expense.  These increases
were partially offset by a decrease in severance expense of
$565,000.  The increase in bad debt expense is due to the
identification of additional accounts receivable deemed
uncollectible.


-20-
 Table of Contents




Interest Expense. Interest
expense increased $3.1 million to $4.8 million for the year ended
December 31, 2007 from $1.7 million in 2006. The increase is due to an
increase in the average debt outstanding for the year and a decrease in the
capitalization of interest expense related to our rig refurbishment program. We
capitalized $1.7 million of interest for the year ended December 31, 2007 as
compared to $3.6 million for the same period in 2006 as part of our rig
refurbishment program. We also made an adjustment in the fourth quarter to
accrue for use tax liabilities, which included interest expense in the amount of
$634.




Income Tax Expense. We
recorded an income tax expense of $23.1 million for the year ended
December 31, 2007. This compares to an income tax expense of $38.1 million
in 2006. This decrease is primarily due to a $37.2 million decrease in pre-tax
income to $60.7 million for the year ended December 31, 2007 from $97.9 million
in 2006.




Year
Ended December 31, 2006 Compared to Year Ended December 31,
2005





Contract Drilling
Revenue.For the year
ended December 31, 2006, we reported contract drilling revenues of approximately
$285.8 million, a 267% increase from revenues of $77.9 million for 2005. The
increase is primarily due to increases in dayrates, revenue days and average
number of rigs working for the year ended December 31, 2006 as compared to 2005.
Average dayrates for our drilling services increased $3,932, or 29%, to $17,385
for the year ended December 31, 2006 from $13,453 in 2005. Revenue days
increased 163% to 15,202 days for the year ended December 31, 2006 from 5,781
days during 2005. Our average number of operating rigs increased to 45 from 17,
or 165%, for the year ended December 31, 2006 as compared to 2005. The increase
in the number of revenue days for the year ended December 31, 2006 as compared
to 2005 is attributable to the increase in the size of our operating rig fleet.
These increases were partially offset by a slight decrease in utilization to 93%
from 95% for the year ended December 31, 2006 as compared to
2005.





Contract Drilling Expense.Contract drilling expense increased $94.9 million to $139.6 million for
the year ended


December
31, 2006 from $44.7 million in 2005. This 212% increase is primarily due to the
increases in revenue days and average number of operating rigs in our fleet for
the year ended December 31, 2006 as compared to 2005. As a percentage of
contract drilling revenue, drilling expense decreased to 49% for the year ended
December 31, 2006 from 57% in 2005 due primarily to an escalation in
dayrates.





Depreciation and Amortization
Expense.Depreciation and amortization expense increased $21.2 million to
$30.3 million for the year ended December 31, 2006 from $9.1 million in 2005.
The increase is primarily due to the 60% increase in fixed assets, including the
substantial completion of 12 additional rigs from our inventory during 2006, the
Big A acquisition and a full year of depreciation and amortization expense
associated with the Strata, Eagle, and Thomas acquisitions.





General and Administrative Expense.General and administrative expense increased $6.3 million, or 67%, to
$15.7 million for the year ended December 31, 2006 from $9.4 million in 2005.
This primarily resulted from a $2.2 million increase in stock compensation
expense, a $1.6 million increase in yard expense, an increase of $565,000 in
severance expense, an increase of $493,000 in professional fees, an increase in
franchise taxes of $349,000, a $286,000 increase in rent expense and an increase
in filing fees of $148,000. These increases were partially offset by a decrease
in payroll costs of $620,000 and a decrease in administrative reimbursement
costs of $245,000. The increase in stock compensation expense is attributable to
additional grants of options and restricted stock during 2006 and a full year of
expense related to grants awarded in 2005.  The increases in yard and
rent expense are due to additional locations in 2006.  The increase in
severance expense to $565,000 for the year ended December 31, 2006 from $0 for
the year ended December 31, 2005 is due to payments made to our former Chief
Operating Officer, Karl Benzer, upon termination of his employment in 2006. The
increase in professional fees to $1.1 million for the year ended December 31,
2006 from $619,000 in 2005 is due to an increase in accounting and legal
expense.  The increase in franchise taxes is due to taxes paid to the
state of Delaware where we were incorporated upon completion of our initial
public offering.  The increase in filing fees is due to costs of being
a public company.  The decrease in payroll costs to $5.2 million for
the year ended December 31, 2006 from $5.8 million in 2005 is primarily due to
payments made in 2005 by Bronco Drilling Holdings, L.L.C. to our former
President and Chief Operating Officer, Steve Hale, following successful
completion of our initial public offering. Although we did not make the payment,
we were required to account for these payments as a capital contribution to us
in the amount of $4.0 million and compensation expense of $4.0 million. The
remaining increase in payroll costs is due to our increased employee count and
related wage increases during 2005. The decrease in administrative reimbursement
to $54,000 for the year ended December 31, 2006 from $299,000 in 2005 is due to
the termination of our administrative services agreement with Gulfport Energy
Corporation, or Gulfport, effective April 1, 2006.





Interest Expense.Interest
expense increased $300,000 to $1.7 million for the year ended December 31, 2006
from $1.4 million in 2005. The increase is due to an increase in the average
debt outstanding for the year, partially offset by the capitalization of
interest expense related to our rig refurbishment program. We capitalized $3.6
million of interest for the year ended December 31, 2006 as compared to $1.2
million for the same period in 2005 as part of our rig refurbishment
program.





Income Tax Expense. We
recorded an income tax expense of $38.1 million for the year ended December 31,
2006. This compares to an income tax expense of $6.5 million in 2005. This
increase is primarily due to an increase in pre−tax income of $86.2 million to
$97.9 million for the year ended December 31, 2006 from $11.7 million in 2005,
an increase in our effective tax rate and our conversion from a limited
liability company to a taxable entity in August 2005 in connection with our
initial public offering.




Liquidity
and Capital Resources




Operating
Activities. Net
cash provided by operating activities was $82.6 million in 2007, $93.1 million
in 2006 and $3.3 million in 2005. The decrease of $10.5 million from 2006 to
2007 was primarily due to a decrease in cash receipts from customers and higher
cash payments to employees and suppliers.  The increase of $89.8
million from 2005 to 2006 was primarily due to increased cash receipts from
customers, partially offset by higher cash payments to employees and
suppliers.




Investing
Activities. We
use a significant portion of our cash flows from operations and financing
activities for acquisitions and for the refurbishment of our rigs. We used cash
for investing activities of $80.0 million for 2007 as compared to approximately
$143.2 million for 2006, and $190.3 million for 2005. In 2007, approximately
$2.4 million was used for an acquisition made during 2007 and $82.8 million was
used to purchase property and equipment, which amounts were partially offset by
$5.1 million from the sale of assets.  In 2006, approximately $17.0
million was used for acquisitions made during 2006 and related transaction
costs, $130.5 million was used to purchase property and equipment and
$416,000 was placed in a restricted account as security for a letter of credit
issued to our workers’ compensation insurance carrier, which amounts were
partially offset by $4.8 million from the sale of assets. In 2005, approximately
$135.2 million was used for acquisitions made during 2005 and related
transaction costs, $53.6 million was used to purchase property and
equipment and $1.5 million was placed in a restricted account as security for a
letter of credit issued to our workers’ compensation insurance
carrier.




Financing
Activities. Our
cash flows used by financing activities were $7.5 million for 2007 as compared
to $43.7 million provided by financing activities for 2006 and $202.9 million
for 2005.  Our net cash used for financing activities for 2007 related
to principal payments on borrowings of $17.0 million to Fortis, $5.5 million to
Bank of Beaver City and $2.0 million to other finance companies, partially
offset by borrowings of $17.0 million under our credit agreement with
Fortis.  Our net cash provided by financing activities for 2006
related to net proceeds of approximately $36.2 million from our public offering,
borrowings of $44.0 million under our credit agreement with Fortis, partially
offset by principal payments on borrowings of $34.9 million to Fortis. Our net
cash provided by financing activities for 2005 related to net proceeds of
approximately $176.0 million from our initial and follow-on public offerings,
borrowings of $43.0 million under our credit agreement with Merrill Lynch,
borrowings of $68.0 million from Solitair LLC, Theta Investors LLC and Alpha
Investors LLC, entities controlled by Wexford Capital LLC, or Wexford,
borrowings of $7.5 million from GECC, and borrowings of $1.2 million from
International Bank of Commerce, partially offset by principal payments on
borrowings of $23.8 million to GECC, $68.0 million to Solitair LLC and Alpha
Investors LLC, and capital contributions of $1.5 million from entities
controlled by Wexford.




Sources of
Liquidity.Our
primary sources of liquidity are cash from operations and borrowings under our
credit facilities and equity financing.




Debt Financing. On
December 26, 2003, we entered into a credit facility with GECC which
provided for term loan advances of up to $12.0 million. At September 24,
2004 and April 22, 2005, we amended our credit facility with GECC to
increase the maximum amount of the terms loans to $18.0 million and then to
$25.5 million, respectively. Borrowings under this facility bore interest at a
rate equal to LIBOR plus 5.0% and were secured by substantially all of our
property and assets, including our drilling rigs and associated equipment, and
ownership interests in our subsidiaries, but excluding cash and accounts
receivable. Draws on the facility were required to be in $2.5 million increments
each with a five-year term. Payments of principal and accrued but unpaid
interest were due on the first day of each month. This credit facility, which
was to mature on October 1, 2010, was repaid in full on August 29,
2005 with a portion of the proceeds from our initial public offering and the
credit facility was terminated.




On
July 1, 2004, we entered into a revolving line of credit with International
Bank of Commerce with a borrowing base of the lesser of $2.0 million or 80% of
current receivables. Borrowings under this line bore interest at a rate equal to
the greater of 4.0% or JPMorgan Chase prime (effective rate of 7.25% at
December 31, 2005). Accrued but unpaid interest was payable monthly. On
January 1, 2005, we amended our line of credit with International Bank of
Commerce to increase the borrowing base to the lesser of $3.0 million or 80% of
current receivables. The line of credit had a maturity date of November 1,
2006. It was repaid in full in January 2006 with a portion of the proceeds from
our new revolving credit facility and then terminated.




On
February 15, 2005, we entered into a $5.0 million revolving credit facility
with Solitair LLC, an entity controlled by Wexford Capital LLC, which we refer
to as Wexford.  At the time, Wexford was our sole equity sponsor and
controlled our company. Borrowings under this facility bore interest at a rate
equal to LIBOR plus 5.0%.


-21-
 Table of Contents








In July
2005, we acquired all of the membership interests in Strata Drilling, L.L.C. and
Strata Property, L.L.C. and a related rig yard for an aggregate of $20.0
million, of which $13.0 million was paid in cash and $7.0 million paid in the
form of promissory notes issued to the sellers. We funded the cash portion of
the purchase price with a $13.0 million loan from Alpha Investors LLC, an entity
controlled by Wexford. The outstanding principal balance of the loan plus
accrued but unpaid interest was due in full upon the earlier to occur of the
completion of our initial public offering and the maturity of the loan on
July 1, 2006. We repaid this loan in full on August 22, 2005 with a
portion of the proceeds from our initial public offering. Borrowings under our
loan with Alpha bore interest at a rate equal to LIBOR plus 5% until
September 30, 2005, and thereafter were to bear interest at a rate equal to
LIBOR plus 7.5%. The $7.0 million original aggregate principal balance of the
promissory notes issued to the sellers was automatically reduced by the amount
of any costs and expenses we paid in connection with the refurbishment of one of
the rigs we acquired from the sellers. The amount due on these notes, net of
costs and expenses paid by us, was $4.5 million at December 31, 2005. The
outstanding balance of the loan was paid in full on January 5, 2006 upon
completion of the refurbishment of this rig.




On
September 19, 2005, we entered into a term loan and security agreement with
Merrill Lynch Capital, a division of Merrill Lynch Business Financial Services,
Inc. The term loan provided for a term installment loan in an aggregate amount
not to exceed $50.0 million and provided for a commitment by Merrill Lynch to
advance funds from time to time until December 31, 2005. The outstanding
balance under the term loan could not exceed 60% of the net orderly liquidation
value of our operating land drilling rigs. On September 19, 2005, we
borrowed $43.0 million under the term loan. A portion of these borrowings,
together with proceeds from our initial public offering, were used to fund the
Eagle acquisition. The term loan bore interest on the outstanding principal
balance at a variable per annum rate equal to LIBOR plus 271 basis points (7.1%
at December 31, 2005). For the period from September 19, 2005 to
January 1, 2006, interest only was payable monthly on the outstanding
principal balance. Commencing February 1, 2006, the outstanding principal
and interest on the term loan were payable in sixty consecutive monthly
installments, each in an amount equal to one sixtieth of the outstanding
principal balance on January 1, 2006 plus accrued interest on the
outstanding principal balance. The maturity date was January 1, 2011. Our
obligations under the term loan were secured by a first lien and security
interest on substantially all of our assets and were guaranteed by each of our
principal subsidiaries. The term loan included usual and customary negative
covenants and events of default for loan agreements of this type. The term loan
also required us to meet certain financial covenants, including maintaining a
minimum Fixed Charge Coverage Ratio and a maximum Total Debt to EBITDA Ratio.
This term loan was repaid in full in January 2006 with a portion of the proceeds
from our new revolving credit facility and the term loan was
terminated.




On
October 14, 2005, we entered into a loan agreement with Theta Investors,
LLC, an entity controlled by Wexford, for purposes of funding a portion of the
purchase price for the Thomas acquisition. The Theta loan provided maximum
aggregate borrowings of up to $60.0 million, which borrowings bore interest at a
rate equal to LIBOR plus 400 basis points until December 15, 2005 and,
thereafter, at a rate equal to LIBOR plus 600 basis points. Payment of principal
and accrued but unpaid interest was due on October 15, 2006. Our
obligations under the Theta loan were guaranteed by each of our principal
subsidiaries. We borrowed $50.0 million under this loan on October 14,
2005. We repaid this facility in full on November 3, 2005 with a portion of
the proceeds from our follow-on public offering, which closed November 2,
2005.




On
January 13, 2006, we entered into a $150.0 million revolving credit
facility with Fortis Capital Corp., as administrative agent, lead arranger and
sole bookrunner, and a syndicate of lenders, which include The Royal Bank of
Scotland plc, The CIT Group/Business Credit, Inc., Calyon Corporate and
Investment Bank, Merrill Lynch Capital, Comerica Bank and Caterpillar Financial
Services Corporation. The revolving credit facility matures on January 13,
2009. The initial aggregate revolving commitment of $150.0 million is
automatically and permanently reduced by $10.0 million at the end of each fiscal
quarter starting September 30, 2006.  The aggregate revolving
commitment was $90.0 million as of December 31, 2007.  Loans under the
revolving credit facility bear interest at LIBOR plus a margin that can range
from 2.0% to 3.0% or, at our option, the prime rate plus a margin that can range
from 1.0% to 2.0%, depending on the ratio of our outstanding senior debt to
“Adjusted EBITDA,” as defined in the credit agreement. Our borrowings under this
revolving credit facility were used to fund a portion of the Big A acquisition
and to repay in full all outstanding borrowings under our term loan with Merrill
Lynch Capital and our revolving line of credit with International Bank of
Commerce.





The
revolving credit facility also provides for a quarterly commitment fee of
0.5% per annum of the unused portion of the revolving credit facility, and
fees for each letter of credit issued under the facility. Commitment fees
expense for the years ended December 31, 2007 and 2006 were $257,000 and
$445,000, respectively.  Our subsidiaries have guaranteed the loans
and other obligations under the revolving credit facility. The obligations under
the revolving credit facility and the related guarantees are secured by a first
priority security interest in substantially all of our assets, as well as the
shares of capital stock of our direct and indirect subsidiaries.





The
revolving credit facility contains customary covenants for facilities of this
type, including among other things, covenants that restrict our ability to make
capital expenditures, incur indebtedness, incur liens, dispose of property,
repay debt, pay dividends, repurchase shares and make certain acquisitions. The
financial covenants are a minimum fixed charge coverage ratio of 1.75 to 1.00
and a maximum total leverage ratio of 2.00 to 1.00. We were in compliance with
all covenants at December 31, 2007.  The revolving credit facility
provides for mandatory prepayments under certain circumstances as more fully
discussed in the revolving credit facility. The revolving credit facility
contains various events of default, including failure to pay principal and
interest when due, breach of covenants, materially incorrect representations,
default under certain other agreements, bankruptcy or insolvency, the occurrence
of specified ERISA events, entry of enforceable judgments against us in excess
of $3.0 million not stayed, and the occurrence of a change of control. If an
event of default occurs, all commitments under the revolving credit facility may
be terminated and all of our obligations under the revolving credit facility
could be accelerated by the lenders, causing all loans outstanding (including
accrued interest and fees payable thereunder) to be declared immediately due and
payable.





We are
party to term installment loans for an aggregate principal amount of
approximately $6.0 million. These term loans are payable in 96 monthly
installments, mature in 2013 and 2015 and have a weighted average annual
interest rate of 6.93%. The proceeds from these term loans were used to purchase
cranes.




We are
party to a term loan agreement with Ameritas Life Insurance Corp. for an
aggregate principal amount of approximately $1.6 million related to the
acquisition of a building. This term loan is payable in 166 monthly
installments, matures in 2021 and has an interest rate of 6%.




Issuances
of Equity.




In
connection with our acquisitions of Big A in January 2006 and Eagle Well in
January 2007, we issued 72,571, and 1,070,390 shares of our common stock,
respectively. See “—Capital Expenditures” below.




In March 2006, we closed a
public offering of 3,450,000 shares of our common stock at a price of $22.75 per
share. In the offering, a total of 1,700,000 shares were sold by us and
1,750,000 shares were sold by the selling stockholder. The offering resulted in
net proceeds to us of approximately $36.2 million, excluding offering expenses
of $577,000. We did not receive any proceeds from the sale of shares by the
selling stockholder.




Capital
Expenditures.




During
2007 we substantially completed the refurbishment of three rigs, ranging from
1,200 to 1,500 horsepower. We incurred aggregate refurbishment costs of $23.5
million, ranging from $7.0 million to $8.5 million per rig, which were funded
with borrowings under our revolving credit facility with Fortis Capital Corp.
and cash flow from operations.




On
January 2, 2007, we purchased an approximately 18,100 square foot building
located in Edmond, Oklahoma for cash of $1.4 million and the assumption of
existing debt of approximately $1.6 million, less one-half of the principal
reduction on the sellers’ loan secured by the property between the effective
date and closing.  Prior to closing on the building we subleased a
total of 9,050 square feet of the building from its current tenants for a
monthly rental of $8,341.




On
January 9, 2007, we completed the acquisition of 31workover rigs, 24 of which
were operating, from Eagle Well and related subsidiaries for $2.6 million in
cash, 1,070,390 shares of our common stock and the assumption of debt of $6.5
million, liabilities of $678,000 and additional deferred income taxes of $7.2
million.  We subsequently deployed the remaining rigs periodically
during the first nine months of 2007.




During
2006, we substantially completed the refurbishment of 12 rigs ranging from 450
to 1,500 horsepower.  We incurred aggregate refurbishment costs of
$67.7 million, ranging from $544,000 to $7.9 million per rig, which were funded
with borrowings under our various credit facilities, public offerings, and cash
flows from operations.




In
January 2006, the refurbishment of a 1,000-horsepower mechanical rig was
completed pursuant to a $7.0 million seller’s note incurred in the Strata
acquisition. We designated this Rig No. 43 and repaid the note with
proceeds from our November 2005 follow-on offering.




On
January 18, 2006, we purchased six operating rigs and certain other assets,
including heavy haul trucks and excess rig equipment and inventory, from Big A.
The purchase price for the assets consisted of $16.3 million paid in cash and
72,571 shares of our common stock.




In
October 2006, we purchased a 1,000-horsepower electric drilling rig, which we
designated Rig No. 37.  We paid approximately $7.4 million for this
rig.




During
2005, we completed the refurbishment of six rigs, ranging from 950 to 2,500
horsepower.  We incurred aggregate refurbishment costs of $34.3
million, ranging from $4.5 million to $6.6 million per rig, which were funded
with borrowings under our various credit facilities and proceeds from our
initial public offering and follow-on offering.




-22-
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We believe that
cash flow from our operations and borrowings under our revolving credit facility
will be sufficient to fund our operations for at least the next twelve months.
However, additional capital may be required for future rig acquisitions. While
we would expect to fund such acquisitions with additional borrowings and the
issuance of debt and equity securities, we cannot assure you that such funding
will be available or, if available, that it will be on terms acceptable to
us.




Contractual and Commercial
Commitments




The
following table summarizes our contractual obligations and commercial
commitments at December 31, 2007 (in thousands):





Payments
      Due by PeriodContractual
      Obligations
            
            Total
            
            
            Less
      than 1
            
            
            1-3
      years
            
            
            4-5
      years
            
            
            More
      than 5year
            
            
            
            
            
            
            
            
            yearsShort
      and long-term debt
            
            $
            68,118
            
            
            $
            1,256
            
            
            $
            63,422
            
            
            $
            1,964
            
            
            $
            1,476Operating
      lease obligations
            
            
            2,366
            
            
            
            533
            
            
            
            1,101
            
            
            
            430
            
            
            
            302Total
            
            $
            70,484
            
            
            $
            1,789
            
            
            $
            64,523
            
            
            $
            2,394
            
            
            $
            1,778




Off
Balance Sheet Arrangements




We do not
have any off balance sheet arrangements.





Recent
Accounting Pronouncements





In September
2006, the FASB issued SFAS No. 157, or SFAS 157, “Fair Value
Measurements.”  This Statement defines fair value, establishes
a framework for measuring fair value in generally accepted accounting
principles, and expands disclosures about fair value measurements. This
Statement applies under other accounting pronouncements that require or permit
fair value measurements, the FASB having previously concluded in those
accounting pronouncements that fair value is the relevant measurement attribute.
Accordingly, this Statement does not require any new fair value measurements.
This Statement is effective for fiscal years beginning after November 15, 2007,
however, on February 12, 2008, the FASB issued FSP FAS No. 157-2, Effective Dates of FASB Statement
No. 157,which delays the effective date of SFAS No. 157 for fiscal years
beginning after November 15, 2008 for all nonfinancial assets and nonfinancial
liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis.  We do not expect the
adoption of SFAS 157 to have a material impact on our financial position or
results of operation and financial condition.





In
February 2007, the FASB issued SFAS No. 159, or SFAS 159, “The Fair Value Option for Financial
Assets and Financial Liabilities−−Including an amendment of FASB Statement No.
115.” SFAS No. 159 permits entities to choose to measure many financial
instruments and certain other items at fair value. Unrealized gains and losses
on items for which the fair value option has been elected will be recognized in
earnings at each subsequent reporting date. SFAS No. 159 is effective for fiscal
years beginning January 1, 2008. We do not expect the adoption of SFAS 159 to
have a material impact on our financial position or results of operations and
financial condition.





In
December 2007, the FASB issued SFAS 141 (revised 2007) “Business Combinations”, or
SFAS 141R. SFAS 141R establishes principles and requirements for how the
acquirer of a business recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed and any noncontrolling
interest in the acquiree. SFAS 141R also provides guidance for recognizing and
measuring the goodwill acquired in the business combination and determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. SFAS 141R applies
prospectively to business combinations for fiscal years beginning after December
15, 2008. We are currently evaluating the potential impact, if any, of the
adoption of SFAS 141R on our consolidated financial statements.





In
December 2007, the FASB issued SFAS 160, or SFAS 160, “Noncontrolling Interests in
Consolidated Financial Statements — an amendment of ARB No. 51.” SFAS 160
establishes accounting and reporting standards for the noncontrolling interest
in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a
noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. SFAS 160 is effective for annual periods beginning after
December 15, 2008 and should be applied prospectively. SFAS 160 requires
retroactive adoption of the presentation and disclosure requirements for
existing minority interests. All other requirements of SFAS 160 shall be applied
prospectively. We are currently evaluating the potential impact of the adoption
of SFAS 160 on our consolidated financial statements.





Item 7A. Quantitative and Qualitative Disclosures About
Market Risk.





We are
subject to market risk exposure related to changes in interest rates on our
outstanding floating rate debt. Borrowings under our new revolving credit
facility bear interest at a floating rate equal to LIBOR plus a margin that can
range from 2.0% to 3.0% or, at our option, the prime rate plus a margin that can
range from 1.0% to 2.0%, depending on the ratio of our outstanding senior debt
to adjusted EBITDA. An increase or decrease of 1% in the interest rate would
have a corresponding decrease or increase in our net income (loss) of
approximately $398,000 annually, based on the $65.0 million outstanding in the
aggregate under our credit facility as of February 29, 2008.




Item 8. Financial Statements and Supplementary
Data.




Our
Financial Statements begin on page 31 of this Form 10-K, Index to Consolidated
Financial Statements, and are incorporated herein by this
reference.




Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure.




None.




Item 9A. Controls and Procedures.





Evaluation of Disclosure Control and
Procedures.





As of the
end of the period covered by this Annual Report on Form 10−K, our management,
under the supervision and with the participation of our Chief Executive Officer
and Chief Financial Officer, evaluated the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rules
13a−15(e) or 15d−15(e) under the Securities Exchange Act of 1934, as amended).
Based on that evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that as of December 31, 2007 our disclosure controls and
procedures are effective.





Disclosure
controls and procedures are controls and procedures designed to ensure that
information required to be disclosed in our reports filed or submitted under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms; and include
controls and procedures designed to ensure that information is accumulated and
communicated to our management, and made known to our Chief Executive Officer
and Chief Financial Officer, particularly during the period when this Annual
Report on Form 10−K was prepared, as appropriate to allow timely decision
regarding the required disclosure.





Management's
Report on Internal Control over Financial Reporting.





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a−15(f) and 15d−15(f)
under the Securities Exchange Act of 1934. Our internal control over financial
reporting is designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with GAAP. Our internal control over financial reporting
includes those policies and procedures that:





(i)           pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of our
company;





(ii)           provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with GAAP, and that receipts
and expenditures are being made only in accordance with authorizations of
management and our Board of Directors; and





(iii)           provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material effect
on the financial statements.







-23-
 Table of Contents




Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions or that the degree of compliance
with the policies or procedures may deteriorate.
 Management,
with the participation of our Chief Executive Officer and Chief Financial
Officer, conducted its evaluation of the effectiveness of internal control over
financial reporting based on the framework in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. This evaluation included review of the documentation of
controls, evaluation of the design effectiveness of controls, testing of the
operating effectiveness of controls and a conclusion on this
evaluation.  Although there are inherent limitations in the
effectiveness of any system of internal controls over financial reporting, based
on our evaluation, management has concluded that our internal control over
financial reporting was effective as of December 31,
2007.




The
independent registered public accounting firm that audited the Company's
financial statements, Grant Thornton LLP, has also audited the
effectiveness of the Company’s internal control over financial reporting as of
December 31, 2007, as stated in their accompanying report.





Changes
in Internal Controls over Financial Reporting.


There
were no changes in internal control over financial reporting during the fourth
quarter that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting


-24-
 Table of Contents








Report of Independent
Registered Public Accounting Firm








Board of
Directors


Bronco
Drilling Company, Inc.




We have
audited Bronco Drilling Company, Inc.’s (the “Company”) internal control over
financial reporting as of December 31, 2007, based on criteria established in
Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission ("COSO"). The Company’s management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on the
Company's internal control over financial reporting based on our
audit.






We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.






A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the company's
assets that could have a material effect on the financial
statements.






Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.






In our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2007, based on criteria
established in Internal
Control - Integrated Frameworkissued by COSO.




We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of the Company
as of December 31, 2007 and 2006, and the related consolidated statements of
operations, members’/stockholders’equity and cash flows for each of the three
years in the period ended December 31, 2007 and our report dated March 17,
2008 expressed an unqualified opinion.














/s/ GRANT
THORNTON LLP





Oklahoma
City, Oklahoma


March 17,
2008







-25-
 Table of Contents




Item 9B. Other Information.




None.


PART
III




Item 10. Directors and Executive Officers and Corporate
Governance.




The
information relating to this Item 10 is incorporated by reference to the
Proxy Statement for our 2008 Annual Meeting of Stockholders, which will be filed
with the SEC no later than 120 days after December 31, 2007.




Item 11. Executive Compensation.




The
information relating to this Item 11 is incorporated by reference to the
Proxy Statement for our 2008 Annual Meeting of Stockholders, which will be filed
with the SEC no later than 120 days after December 31, 2007.


Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.




The
information relating to this Item 12 is incorporated by reference to the
Proxy Statement for our 2008 Annual Meeting of Stockholders, which will be filed
with the SEC no later than 120 days after December 31, 2007.




Item 13. Certain Relationships and Related Transactions, and
Director Independence.




The
information relating to this Item 13 is incorporated by reference to the
Proxy Statement for our 2008 Annual Meeting of Stockholders, which will be filed
with the SEC no later than 120 days after December 31, 2007.




Item 14. Principal Accounting Fees and
Services




The
information relating to this Item 14 is incorporated by reference to the
Proxy Statement for our 2008 Annual Meeting of Stockholders, which will be filed
with the SEC no later than 120 days after December 31, 2007.





PART
IV




Item 15. Exhibits, Financial Statement
Schedules.




(a) The
following documents are filed as part of this report:




1.
            Financial
      Statements




See Index
to Consolidated Financial Statements on page 28 of this Form 10-K.




2.
            Financial Statement
      Schedules




Schedule
II




3.
            Exhibits:




-26-
 Table of Contents


The
following exhibits are filed as part of this report or, where indicated, were
previously filed and are hereby incorporate by reference.


Exhibit
No.                                                                Description




2.1
            Merger
      Agreement, dated as of August 11, 2005, by and among Bronco Drilling
      Holdings, L.L.C, Bronco Drilling Company, L.L.C. and Bronco Drilling
      Company, Inc. (incorporated by reference to Exhibit 2.1 to the
      Registration Statement on Form S-1, File No. 333-128861, filed by the
      Company with the SEC on October 6,
2005).




2.2
            Agreement
      and Plan of Merger by and among the Company, BDC Acquisition Company,
      Eagle Well Service, Inc. (“Eagle”), and the stockholders of Eagle dated as
      of January 9, 2007 (incorporated by reference to Exhibit 2.1 to the
      Company’s Current Report on Form 8-K, File No. 000-51571, filed by the
      Company with the SEC on January 16,
2007).





2.3
            Agreement
      and Plan of Merger, dated as of January 23, 2008, by and among
      Allis-Chalmers Energy, Inc., Bronco Drilling Company, Inc. and Elway
      Merger Sub, Inc. (incorporated by reference to Exhibit 2.1 to the Current
      Report on Form 8-K, File No. 000-51471, filed by the Company with the SEC
      on January 24, 2008).





3.1
            Amended
      and Restated Certificate of Incorporation of the Company, dated August 11,
      2005 (incorporated by reference to Exhibit 2.1 to the Registration
      Statement on Form S-1, File No. 333-128861, filed by the Company with the
      SEC on October 6, 2005).





3.2
            Bylaws
      of the Company (incorporated by reference to Exhibit 3.2 to Amendment No.
      1 to the Registration Statement on Form S-1, File No. 333-125405, filed by
      the Company with the SEC on July 14,
2005).





4.1
            Form
      of Common Stock certificate (incorporated by reference to Exhibit 4.1 to
      Amendment No. 2 to the Registration Statement on Form S-1, File No.
      333-125405, filed by the Company with the SEC on August 2,
      2005).





4.2
            Shareholders’
      Agreement relating to Challenger Limited dated January 4, 2008
      (incorporated by reference to Exhibit 10.1 to the Current Report on Form
      8-K, File No. 000-51471, filed by the Company with the SEC on January 9,
      2008).





10.1
            Drilling
      Rigs Purchase and Sale Agreement by and between Bronco Drilling Company,
      Inc., Hays Trucking, Inc., and Challenger Limited dated January 4, 2008
      (incorporated by reference to Exhibit 10.2 to the Current Report on Form
      8-K, File No. 000-51471, filed by the Company with the SEC on January 9,
      2008).





10.2
            Promissory
      Note and Security Agreement by Challenger Limited dated January 4, 2008
      (incorporated by reference to Exhibit 10.3 to the Current Report on Form
      8-K, File No. 000-51471, filed by the Company with the SEC on January 9,
      2008).





10.3
            Credit
      Agreement, dated January 13, 2006, by and between the Company and Fortis
      Capital Corp. (incorporated by reference to Exhibit 10.1 to the Current
      Report on Form 8-K, File No. 000-51471, filed by the Company with the SEC
      on January 20, 2006).





+10.4
            Consulting
      Agreement, dated February 28, 2006, by and between the Company and Michael
      O. Thompson (incorporated by reference to Exhibit 10.18 to the Company’s
      Annual Report on Form 10-K, File No.  000-51471, filed by the
      Company with the SEC on March 7,
2006).





10.5
            Daywork
      Drilling Contract, dated as of January 26, 2006, by and between Windsor
      Energy Resources, Inc. and the Company (incorporated by reference to
      Exhibit 10.20 to Amendment No. 2 to the Registration Statement on Form
      S-1, filed by the Company with the SEC on March 17,
  2006).





+10.6
            Bronco
      Drilling Company, Inc. 2006 Stock Incentive Plan (incorporated by
      reference to Appendix B to the Company’s Proxy Statement, filed by the
      Company with the SEC on April 28,
2006).





+10.7
            Form
      of Restricted Stock Award Agreement (incorporated by reference to Exhibit
      10.2 to the Company’s Current Report on Form 8-K, File No. 000-51571,
      filed by the Company with the SEC on June 15,
  2006).





+10.8
            Form
      of Stock Option Agreement (incorporated by reference to Exhibit 10.3 to
      the Company’s Current Report on Form 8-K, File No. 000-51571, filed by the
      Company with the SEC on June 15,
2006).





+10.9
            Employment
      Agreement, dated effective as of August 8, 2006, by and between the
      Company and D. Frank Harrison (incorporated by reference to Exhibit 10.4
      to the Company’s Quarterly Report on Form 10-Q, filed by the Company with
      the Sec on August 10, 2006).





+10.10
            Amendment
      to Employment Agreement, dated as of August 2, 2007, by and between the
      Company and D. Frank Harrison (incorporated by reference to Exhibit 10.3
      to the Company’s Quarterly Report on Form 10-Q, filed by the Company with
      the Sec on August 3, 2007).





+10.11
            Employment
      Agreement, dated effective as of August 8, 2006, by and between the
      Company and Zachary M. Graves (incorporated by reference to Exhibit 10.5
      to the Company’s Quarterly Report on Form 10-Q, filed by the Company with
      the Sec on August 10, 2006).





+10.12
            Amendment
      to Employment Agreement, dated as of August 2, 2007, by and between the
      Company and Zachary M. Graves (incorporated by reference to Exhibit 10.4
      to the Company’s Quarterly Report on Form 10-Q, filed by the Company with
      the Sec on August 3, 2007).





+10.13
            Employment
      Agreement, dated effective as of August 8, 2006, by and between the
      Company and Mark Dubberstein(incorporated by reference to Exhibit 10.6 to
      the Company’s Quarterly Report on Form 10-Q, filed by the Company with the
      Sec on August 10, 2006).





+10.14
            Amendment
      to Employment Agreement, dated as of August 2, 2007, by and between the
      Company and Mark Dubberstein (incorporated by reference to Exhibit 10.5 to
      the Company’s Quarterly Report on Form 10-Q, filed by the Company with the
      Sec on August 3, 2007).





+10.15
            Employment
      Agreement, dated effective as of August 2, 2007, by and between the
      Company and Larry Bartlett (incorporated by reference to Exhibit 10.1 to
      the Company’s Quarterly Report on Form 10-Q, filed by the Company with the
      Sec on August 3, 2007).





+10.16
            Employment
      Agreement, dated effective as of August 2, 2007, by and between the
      Company and Steven Starke (incorporated by reference to Exhibit 10.2 to
      the Company’s Quarterly Report on Form 10-Q, filed by the Company with the
      Sec on August 3, 2007).





*21.1
            List
      of Company's Subsidiaries




*23.1
            Consent
      of Grant Thornton LLP




*24.1
            Power
      of Attorney (included on signature
page).




*31.1
            Certification
      of Chief Executive Officer of Bronco Drilling Company, Inc. pursuant to
      Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as
      amended.





*31.2
            Certification
      of Chief Financial Officer of Bronco Drilling Company, Inc. pursuant to
      Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as
      amended





*32.1
            Certification
      of Chief Executive Officer of Bronco Drilling Company, Inc. pursuant to
      Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as
      amended, and Section 1350 of Chapter 63 of Title 18 of the United States
      Code.





*32.2
            Certification
      of Chief Financial Officer of Bronco Drilling Company, Inc. pursuant to
      Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as
      amended, and Section 1350 of Chapter 63 of Title 18 of the United States
      Code.





+
      Management contract, compensatory plan or
  arrangement


*Filed
      herewith.


-27-
 Table of Contents




INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS




BRONCO
DRILLING COMPANY, INC. AND SUBSIDIARIES




PageBronco
      Drilling Company, Inc. and SubsidiariesReport
      of Independent Registered Public Accounting Firm
            29Consolidated
      Balance Sheets as of December 31, 2007 and 2006
            30Consolidated
      Statements of Operations for the years ended December 31, 2007, 2006
      and 2005
            31Consolidated
      Statements of Members’/Stockholders’ Equity for the years ended
      December 31, 2005, 2006 and 2007
            32Consolidated
      Statements of Cash Flows for the years ended December 31, 2007, 2006
      and 2005
            33Notes
      to Consolidated Financial Statements
            34







-28-
 Table of Contents








Report of Independent
Registered Public Accounting Firm








Board of
Directors


Bronco
Drilling Company, Inc.





We have
audited the accompanying consolidated balance sheets of Bronco Drilling Company,
Inc. and Subsidiaries (the “Company”) as of December 31, 2007 and 2006, and the
related consolidated statements of operations, members’/stockholders’equity and
cash flows for each of the three years in the period ended December 31,
2007.  These financial statements are the responsibility of the
Company’s management.  Our responsibility is to express an opinion on
these financial statements based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement.  An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements.  An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation.  We believe that
our audits provide a reasonable basis for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Bronco Drilling Company,
Inc. and Subsidiaries as of December 31, 2007 and 2006, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2007, in conformity with accounting principles generally accepted
in the United States of America.





We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company’s internal control over financial
reporting as of December 31, 2007, based on the criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) and our report dated March 17, 2008 expressed an
unqualified opinion.














/s/ GRANT
THORNTON LLP





Oklahoma
City, Oklahoma


March 17,
2008


-29-
 Table of Contents


Bronco
      Drilling Company, Inc. and SubsidiariesCONSOLIDATED
      BALANCE SHEETS(Amounts
      in thousands, except share par value)December
      31,2007
              
              
              2006ASSETSCURRENT
      ASSETSCash
      and cash equivalents
              
              $
              5,721
              
              
              $
              10,608ReceivablesTrade
      and other, net of allowance for doubtful accounts of$1,834
      and $400 in 2007 and 2006, respectively
              
              
              61,499
              
              
              
              60,282Contract
      drilling in progress
              
              
              2,128
              
              
              
              1,989Income
      tax receivable
              
              
              1,191
              
              
              
              -Current
      deferred income taxes
              
              
              775
              
              
              
              155Prepaid
      expenses
              
              
              705
              
              
              
              338Total
      current assets
              
              
              72,019
              
              
              
              73,372PROPERTY
      AND EQUIPMENT - AT COSTDrilling
      rigs and related equipment
              
              
              510,962
              
              
              
              396,499Transportation,
      office and other equipment
              
              
              41,942
              
              
              
              29,928552,904
              
              
              
              426,427Less
      accumulated depreciation
              
              
              86,274
              
              
              
              44,505466,630
              
              
              
              381,922OTHER
      ASSETSGoodwill
              
              
              23,908
              
              
              
              21,280Restricted
      cash and deposit
              
              
              2,745
              
              
              
              2,600Intangibles,
      net, and other
              
              
              3,303
              
              
              
              3,31429,956
              
              
              
              27,194$
              568,605
              
              
              $
              482,488LIABILITIES
      AND STOCKHOLDERS' EQUITYCURRENT
      LIABILITIESAccounts
      payable
              
              $
              16,715
              
              
              $
              19,677Accrued
      liabilities
              
              
              19,280
              
              
              
              11,767Income
      tax payable
              
              
              -
              
              
              
              3,724Current
      maturities of long-term debt
              
              
              1,256
              
              
              
              636Total
      current liabilities
              
              
              37,251
              
              
              
              35,804LONG-TERM
      DEBT,  less current maturities
              
              
              66,862
              
              
              
              64,091DEFERRED
      INCOME TAXES
              
              
              68,063
              
              
              
              42,608COMMITMENTS
      AND CONTINGENCIES (Note 8)STOCKHOLDERS'
      EQUITYCommon
      stock, $.01 par value, 100,000shares
      authorized; 26,031 and 24,938 sharesissued
      and outstanding at December 31, 2007 and 2006
              
              
              262
              
              
              
              250Additional
      paid-in capital
              
              
              298,195
              
              
              
              279,355Retained
      earnings
              
              
              97,972
              
              
              
              60,380Total
      stockholders' equity
              
              
              396,429
              
              
              
              339,985$
              568,605
              
              
              $
              482,488The
      accompanying notes are an integral part of these
    statements.
  -30-
 Table of Contents
  Bronco
      Drilling Company, Inc. and SubsidiariesCONSOLIDATED
      STATEMENTS OF OPERATIONS(Amounts
      in thousands, except per share amounts)Years
      Ended December 31,2007
                
                
                2006
                
                
                2005REVENUESContract drilling
      revenues, including 1%, 4% and 3%to
      related parties
                
                $
                276,088
                
                
                $
                285,828
                
                
                $
                77,885Well
      service
                
                
                22,864
                
                
                
                -
                
                
                
                -298,952
                
                
                
                285,828
                
                
                
                77,885EXPENSESContract
      drilling
                
                
                153,797
                
                
                
                139,607
                
                
                
                44,695Well
      service
                
                
                14,299
                
                
                
                -
                
                
                
                -Depreciation
      and amortization
                
                
                44,241
                
                
                
                30,335
                
                
                
                9,143General
      and administrative
                
                
                22,690
                
                
                
                15,709
                
                
                
                9,395235,027
                
                
                
                185,651
                
                
                
                63,233Income
      from operations
                
                
                63,925
                
                
                
                100,177
                
                
                
                14,652OTHER
      INCOME (EXPENSE)Interest
      expense
                
                
                (4,762
                )
                
                
                (1,736
                )
                
                
                (1,415
                )Loss
      from early extinguishment of debt
                
                
                -
                
                
                
                (1,000
                )
                
                
                (2,062
                )Interest
      income
                
                
                1,239
                
                
                
                164
                
                
                
                432Other
                
                
                294
                
                
                
                284
                
                
                
                53(3,229
                )
                
                
                (2,288
                )
                
                
                (2,992
                )Income
      before income taxes
                
                
                60,696
                
                
                
                97,889
                
                
                
                11,660Income
      tax expense
                
                
                23,104
                
                
                
                38,056
                
                
                
                6,529NET
      INCOME
                
                $
                37,592
                
                
                $
                59,833
                
                
                $
                5,131Income
      per common share-Basic
                
                $
                1.45
                
                
                $
                2.43
                
                
                $
                0.32Income
      per common share-Diluted
                
                $
                1.44
                
                
                $
                2.43
                
                
                $
                0.31Weighted
      average number of shares outstanding-Basic
                
                
                25,996
                
                
                
                24,585
                
                
                
                16,259Weighted
      average number of shares outstanding-Diluted
                
                
                26,101
                
                
                
                24,623
                
                
                
                16,306PRO
      FORMA INFORMATION (unaudited):Historical
      income before income taxes
                
                
                
                
                
                
                
                
                
                $
                11,660Pro
      forma provision for income taxes
                
                
                
                
                
                
                
                
                
                
                4,396Pro
      forma income
                
                
                
                
                
                
                
                
                
                $
                7,264Pro
      forma income per common share-Basic and Diluted
                
                
                
                
                
                
                
                
                
                $
                0.45Weighted
      average number of shares outstanding-Basic
                
                
                
                
                
                
                
                
                
                
                16,259Weighted
      average number of shares outstanding-Diluted
                
                
                
                
                
                
                
                
                
                
                16,306The
      accompanying notes are an integral part of these
    statements.
 
 -31-
 Table of Contents
  Bronco
      Drilling Company, Inc. and SubsidiariesCONSOLIDATED
      STATEMENT OF MEMBERS'/STOCKHOLDERS' EQUITY(Amounts
      in thousands)Additional
                
                
                
                
                
                TotalMembers'
                
                
                Common
                
                
                Common
                
                
                Paid
      In
                
                
                Retained
                
                
                Stockholders'Equity
                
                
                Shares
                
                
                Amount
                
                
                Capital
                
                
                Earnings
                
                
                EquityBalance
      as of December 31, 2004
                
                $
                50,803
                
                
                
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -Net
      income through August 15, 2005
                
                
                4,584
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Conversion
      to a Delaware corporation
                
                
                (55,387
                )
                
                
                13,360
                
                
                
                134
                
                
                
                55,254
                
                
                
                -
                
                
                
                55,388Issuance
      of common stock in initial public offering;net
      of related expenses of $1,354
                
                
                -
                
                
                
                5,715
                
                
                
                57
                
                
                
                88,944
                
                
                
                -
                
                
                
                89,001Stock
      issued in acquisition
                
                
                -
                
                
                
                65
                
                
                
                1
                
                
                
                1,274
                
                
                
                -
                
                
                
                1,275Issuance
      of common stock in follow-on offering;net
      of related expenses of $462
                
                
                -
                
                
                
                4,025
                
                
                
                40
                
                
                
                86,981
                
                
                
                -
                
                
                
                87,021Net
      income, August 16, 2005 through December 31, 2005
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                547
                
                
                
                547Stock
      compensation
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                589
                
                
                
                -
                
                
                
                589Capital
      contributions
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                5,515
                
                
                
                -
                
                
                
                5,515Balance
      as of December 31, 2005
                
                
                -
                
                
                
                23,165
                
                
                
                232
                
                
                
                238,557
                
                
                
                547
                
                
                
                239,336Stock
      issued in acquisition
                
                
                -
                
                
                
                73
                
                
                
                1
                
                
                
                1,815
                
                
                
                -
                
                
                
                1,816Issuance
      of common stock in follow-on offering;net
      of related expenses of $577
                
                
                -
                
                
                
                1,700
                
                
                
                17
                
                
                
                36,212
                
                
                
                -
                
                
                
                36,229Net
      income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                59,833
                
                
                
                59,833Stock
      compensation
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                2,771
                
                
                
                -
                
                
                
                2,771Balance
      as of December 31, 2006
                
                
                -
                
                
                
                24,938
                
                
                
                250
                
                
                
                279,355
                
                
                
                60,380
                
                
                
                339,985Stock
      issued in acquisition
                
                
                -
                
                
                
                1,070
                
                
                
                10
                
                
                
                15,114
                
                
                
                -
                
                
                
                15,124Net
      income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                37,592
                
                
                
                37,592Stock
      compensation
                
                
                -
                
                
                
                23
                
                
                
                2
                
                
                
                3,726
                
                
                
                -
                
                
                
                3,728Balance
      as of December 31, 2007
                
                $
                -
                
                
                
                26,031
                
                
                $
                262
                
                
                $
                298,195
                
                
                $
                97,972
                
                
                $
                396,429The
      accompanying notes are an integral part of these
    statements.
  -32-
 Table of Contents
   Bronco Drilling Company, Inc. and
      SubsidiariesCONSOLIDATED
      STATEMENTS OF CASH FLOWS(Amounts
      in thousands)Years
      Ended December 31,2007
                
                
                2006
                
                
                2005Cash
      flows from operating activities:Net
      income
                
                $
                37,592
                
                
                $
                59,833
                
                
                $
                5,131Adjustments
      to reconcile net income to net cashprovided
      by operating activities:Depreciation
      and amortization
                
                
                44,826
                
                
                
                30,901
                
                
                
                9,193Bad
      debt expense
                
                
                4,370
                
                
                
                70
                
                
                
                184Non-cash
      compensation expense
                
                
                -
                
                
                
                -
                
                
                
                4,000Gain
      on sale of assets
                
                
                (1,589
                )
                
                
                (2,379
                )
                
                
                -Write
      off of debt issue costs
                
                
                -
                
                
                
                267
                
                
                
                799Stock
      compensation
                
                
                3,728
                
                
                
                2,771
                
                
                
                589Provision
      for deferred income taxes
                
                
                17,648
                
                
                
                21,237
                
                
                
                5,157Changes
      in current assets and liabilities, net of assets and liabilities of
      business acquired:Receivables
                
                
                (3,920
                )
                
                
                (25,274
                )
                
                
                (28,721
                )Contract
      drilling in progress
                
                
                (139
                )
                
                
                (763
                )
                
                
                177Prepaid
      expenses
                
                
                (176
                )
                
                
                147
                
                
                
                (445
                )Other
      assets
                
                
                (417
                )
                
                
                232
                
                
                
                (485
                )Accounts
      payable
                
                
                (15,831
                )
                
                
                (2,309
                )
                
                
                1,827Accrued
      expenses
                
                
                1,430
                
                
                
                5,968
                
                
                
                4,540Income
      taxes payable
                
                
                (4,915
                )
                
                
                2,352
                
                
                
                1,372Net
      cash provided by operating activities
                
                
                82,607
                
                
                
                93,053
                
                
                
                3,318Cash
      flows from investing activities:Restricted
      cash account
                
                
                145
                
                
                
                (416
                )
                
                
                (1,515
                )Business
      acquisitions, net of cash acquired
                
                
                (2,431
                )
                
                
                (17,046
                )
                
                
                (135,213
                )Proceeds
      from the sale of assets
                
                
                5,084
                
                
                
                4,761
                
                
                
                -Purchase
      of property and equipment
                
                
                (82,782
                )
                
                
                (130,498
                )
                
                
                (53,598
                )Net
      cash used in investing activities
                
                
                (79,984
                )
                
                
                (143,199
                )
                
                
                (190,326
                )Cash
      flows (used in) from financing activities:Proceeds
      from borrowings ($68,000 from affiliates in 2005)
                
                
                17,000
                
                
                
                44,000
                
                
                
                119,950Payments
      of debt ($68,000 to affiliates in 2005)
                
                
                (24,510
                )
                
                
                (34,867
                )
                
                
                (93,706
                )Debt
      issue costs
                
                
                -
                
                
                
                (1,647
                )
                
                
                (873
                )Capital
      contributions
                
                
                -
                
                
                
                -
                
                
                
                1,515Proceeds
      from sale of common stock, netof
      offering costs of $577 and $1,816
                
                
                -
                
                
                
                36,229
                
                
                
                176,022Net
      cash (used in) provided by financing activities
                
                
                (7,510
                )
                
                
                43,715
                
                
                
                202,908Net
      increase (decrease) in cash and cash equivalents
                
                
                (4,887
                )
                
                
                (6,431
                )
                
                
                15,900Beginning
      cash and cash equivalents
                
                
                10,608
                
                
                
                17,039
                
                
                
                1,139Ending
      cash and cash equivalents
                
                $
                5,721
                
                
                $
                10,608
                
                
                $
                17,039Supplmentary
      disclosure of cash flow informationInterest
      paid, net of amount capitalized
                
                $
                3,250
                
                
                $
                1,771
                
                
                $
                1,324Income
      taxes paid
                
                
                10,373
                
                
                
                14,467
                
                
                
                -Supplementary
      disclosure of non-cash investing and financing:Liabilities
      assumed in acquisition
                
                $
                7,867
                
                
                $
                -
                
                
                $
                1,775Common
      stock issued for acquisition
                
                
                15,124
                
                
                
                1,816
                
                
                
                1,275Note
      assumed in acquisition
                
                
                6,527
                
                
                
                -
                
                
                
                7,000Notes
      issued for acquisition of property and equipment
                
                
                4,386
                
                
                
                3,769
                
                
                
                -In
      kind contribution by founder
                
                
                -
                
                
                
                -
                
                
                
                4,000The
      accompanying notes are an integral part of these
    statements.
 -33-
 Table of Contents
  Bronco
Drilling Company, Inc. and Subsidiaries
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 ($
Amounts in thousands, except per share amounts)
  1.
Organization and Summary of Significant Accounting Policies
  Business
and Principles of Consolidation
  Bronco
Drilling Company, Inc. (the “Company”) provides contract land drilling and
workover services to oil and natural gas exploration and production companies.
The accompanying consolidated financial statements include the Company’s
accounts and the accounts of its wholly owned subsidiaries. All intercompany
accounts and transactions have been eliminated in consolidation.
  The
Company has prepared the consolidated financial statements and related notes in
accordance with accounting principles generally accepted in the United States of
America. In preparing the financial statements, the Company made various
estimates and assumptions that affect the amounts of assets and liabilities the
Company reports as of the dates of the balance sheets and amounts the Company
reports for the periods shown in the consolidated statements of operations,
stockholders’ equity and cash flows. The Company’s actual results could differ
significantly from those estimates. Material estimates that are particularly
susceptible to significant changes in the near term relate to the Company’s
recognition of revenues and accrued expenses, estimate of the allowance for
doubtful accounts, estimate of asset impairments, estimate of deferred taxes and
determination of depreciation and amortization expense.
  A summary
of the significant accounting policies consistently applied in the preparation
of the accompanying consolidated financial statements follows.
  Cash
and Cash Equivalents
  The
Company considers all highly liquid debt instruments purchased with a maturity
of three months or less when acquired and money market mutual funds to be cash
equivalents.
  The
Company maintains its cash and cash equivalents in accounts and instruments that
may not be federally insured beyond certain limits. The Company has not
experienced any losses in such accounts and believes it is not exposed to any
significant credit risks on cash and cash equivalents.
  Revenue
Recognition
  The
Company earns contract drilling revenue under daywork and footage
contracts.
 
 Revenues
on daywork contracts are recognized based on the days completed at the dayrate
each contract specifies. Mobilization revenues and costs for daywork contracts
are deferred and recognized over the days of actual drilling.
  The
Company follows the percentage-of-completion method of accounting for footage
contract drilling arrangements. Under this method, drilling revenues and costs
related to a well in progress are recognized proportionately over the time it
takes to drill the well. Percentage-of-completion is determined based upon the
amount of expenses incurred through the measurement date as compared to total
estimated expenses to be incurred drilling the well. Mobilization costs are not
included in costs incurred for percentage-of-completion calculations.
Mobilization costs on footage contracts are deferred and recognized over the
days of actual drilling. Under the percentage-of-completion method, management
estimates are relied upon in the determination of the total estimated expenses
to be incurred drilling the well. When estimates of revenues and expenses
indicate a loss on a contract, the total estimated loss is accrued.
 
 The
receivables from contract drilling in progress represents revenues in excess of
amounts billed on contracts in progress.
  Revenue
arising from claims for amounts billed in excess of the contract price or for
amounts not included in the original contract are recognized when billed less
any allowance for uncollectibility. Revenue from such claims is only recognized
if it is probable that the claim will result in additional revenue, the costs
for the additional services have been incurred, management believes there is a
legal basis for the claim and the amount can be reliably estimated. Revenue from
such claims are recorded only to the extent that contract costs relating to the
claim have been incurred.  Historically we have not billed any
customers for amounts not included in the original contract.
  Accounts
Receivable
  The
Company records trade accounts receivable at the amount invoiced to customers.
Substantially all of the Company’s accounts receivable are due from companies in
the oil and gas industry. Credit is extended based on evaluation of a customer’s
financial condition and, generally, collateral is not required. Accounts
receivable are due within 30 days and are stated at amounts due from customers,
net of an allowance for doubtful accounts when the Company believes collection
is doubtful. Accounts outstanding longer than the contractual payment terms are
considered past due. The Company determines its allowance by considering a
number of factors, including the length of time trade accounts receivable are
past due, the Company’s previous loss history, the customer’s current ability to
pay its obligation to the Company and the condition of the general economy and
the industry as a whole. The Company writes off specific accounts receivable
when they become uncollectible and payments subsequently received on such
receivables reduce the allowance for doubtful accounts. At December 31,
2007 and 2006, our allowance for doubtful accounts was $1,834 and $400,
respectively. The Company continues to accrue additional receivables related
to a customer which had $3,556 of receivables past due ninety days or more
at December 31, 2007. The Company recognizes interest income related to certain
accounts receivable based on the amounts invoiced to customers.
  Prepaid
Expenses
  Prepaid
expenses include items such as insurance and fees. The Company routinely
expenses these items in the normal course of business over the periods these
expenses benefit.
 
 Property
and Equipment
 
 Property and
equipment, including renewals and betterments, are capitalized and stated at
cost, while maintenance and repairs are expensed currently. Assets are
depreciated on a straight-line basis. The depreciable lives of drilling rigs and
related equipment are three to 15 years.  The Company made an
adjustment of $2,066 to reduce depreciation expense in the third quarter of
2007. The adjustment was due to the use of an incorrect depreciable life for
certain rig components that were transferred between working rigs and the yard,
which resulted in an overstatement of depreciation expense and accumulated
depreciation of $1,245 during 2006 and $821 during the first quarter of 2007.
The Company does not believe this adjustment was material to the 2006 or
2007 annual financial statements. The depreciable life of other equipment
is three years. Depreciation is not commenced until acquired rigs are placed in
service. Once placed in service, depreciation continues when rigs are being
repaired, refurbished or between periods of deployment. Assets not placed in
service and not being depreciated were $61,604 and $57,247 as of
December 31, 2007 and 2006, respectively.  Gains and losses on
dispositions are included in operating revenues.  Due to
immateriality, these amounts are included in contract drilling
revenue.
  The
Company capitalizes interest as a component of the cost of drilling rigs
constructed for its own use. For the years ended December 31, 2007 and
2006, the Company capitalized $1,676 and $3,590, respectively, of interest costs
incurred during the construction periods of certain drilling rigs.
  The
Company reviews long-lived assets to be held and used for impairment whenever
events or changes in circumstances indicate that the carrying amount of the
assets may not be recoverable. If the sum of the undiscounted expected future
cash flows is less than the carrying amount of the assets, the Company
recognizes an impairment loss based upon fair value of the asset.
  Goodwill
  The
Company evaluates the carrying value of goodwill during the fourth quarter of
each year and between annual evaluations if events occur or circumstances change
that would more likely than not reduce the fair value below its carrying amount.
Such circumstances could include, but are not limited to: (1) a significant
adverse change in legal factors or in business climate, (2) unanticipated
competition, or (3) an adverse action or assessment by a regulator. When
evaluating whether goodwill is impaired, the Company compares its fair value to
its carrying amount, including goodwill. Fair value is estimated using a
combination of income, or discounted cash flows approach and the market
approach, which utilizes comparable companies’ data. If the carrying amount
exceeds its fair value, then the amount of the impairment loss must be measured.
The impairment loss would be calculated by comparing the implied fair value of
reporting unit goodwill to its carrying amount. In calculating the implied fair
value of goodwill, the fair value of the Company is allocated to all of its
other assets and liabilities based on their fair values. The excess of the fair
value of the Company over the amount assigned to its other assets and
liabilities is the implied fair value of goodwill. An impairment loss would be
recognized when the carrying amount of goodwill exceeds its implied fair value.
No impairment of goodwill has been required during impairment evaluations.
Goodwill recognized during 2007 and 2006 through acquisitions was $2,628 and
$380, respectively.
 -34-
 Table of Contents
  Intangibles,
Net and Other
  Intangibles,
restricted cash and other assets consist of intangibles related to acquisitions,
net of amortization, cash deposits related to the deductibles on our workers
compensation insurance policies and debt issue costs, net of amortization. The
Company follows Statement of Financial Accounting Standards (“SFAS”)
No. 142, “Goodwill and
Other Intangibles” to account for amortizable intangibles. Intangible
assets that are acquired either individually or with a group of other assets are
recognized based on its fair value and amortized over its useful life.
  The
Company’s amortizable intangibles consist entirely of customer lists and
relationships obtained through acquisitions. Customer lists and relationships
are amortized over their estimated benefit period of four years. Depreciation
and amortization expense includes amortization of intangibles of $919, $672, and
$87 for the years ended December 31, 2007, 2006, and 2005, respectively.
Total cost and accumulated amortization of intangibles at December 31, 2007 and
2006 was $3,705 and $1,678 and $2,619 and $759, respectively.
  Estimated
amortization expense for each year subsequent to December 31, 2007 is as
follows:
 2008
                
                $
                9282009
                
                
                7062010
                
                
                2032011
                
                
                1822012
                
                
                8
  Legal fees
and other debt issue costs incurred in obtaining financing are amortized over
the term of the debt using a method which approximates the effective interest
method. Gross debt issue costs were $1,589 at December 31, 2007 and 2006,
respectively. Amortization expense related to debt issue costs was $564, $508,
and $53 for years ended December 31, 2007, 2006 and 2005, respectively, and
is included in interest expense in the consolidated statements of operations.
Accumulated amortization related to loan fees was $1,072 and $508 as of
December 31, 2007 and 2006, respectively.  On January 13, 2006,
the Company paid off its term note with Merrill Lynch Capital.  The
Company incurred a prepayment penalty of $497 and wrote-off debt issue costs of
$503, which is included in loss from early extinguishment of debt on the
consolidated statement of operations for the year ended December 31,
2006.  On August 29, 2005, the Company paid off its term note
with General Electric Capital Corporation. The Company incurred a prepayment
penalty of $644 and wrote-off debt issue costs of $349, which is included in
loss from early extinguishment of debt on the consolidated statement of
operations for the year ended December 31, 2005. On November 2, 2005,
the Company paid off its term note with Theta Investors, LLC, formerly Alpha
Investors LLC, an entity controlled by Wexford Capital, LLC (“Wexford”), which
at that time, was the Company’s equity sponsor and controlled the Company. The
Company wrote-off debt issue costs of $1,075, which is included in loss from
early extinguishment of debt on the consolidated statement of operations for the
year ended December 31, 2005.
  Restricted
Cash and Deposit
  At
December 31, 2007 and 2006, the Company had a deposit and restricted cash
of $2,745 and $2,600, respectively, at an insurance company and a bank
collateralizing letters of credit with the Company’s workers’ compensation
insurers.
  Income
Taxes
  Pursuant
to Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes,”
the Company follows the asset and liability method of accounting for income
taxes, under which the Company recognizes deferred tax assets and liabilities
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities were measured
using enacted tax rates expected to apply to taxable income in the years in
which the Company expects to recover or settle those temporary differences. A
statutory Federal tax rate of 35% (34% in 2005) and effective state tax rate of
3.7% (net of Federal income tax effects) were used for the enacted tax rates for
all periods.
  As
changes in tax laws or rates are enacted, deferred income tax assets and
liabilities are adjusted through the provision for income taxes. Deferred tax
assets are reduced by a valuation allowance if, based on available evidence, it
is more likely than not that some portion or all of the deferred tax assets will
not be realized. The classification of current and noncurrent deferred tax
assets and liabilities is based primarily on the classification of the assets
and liabilities generating the difference.
  The Company
adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes — an interpretation of FASB Statement No. 109(“FIN 48”), on
January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprise’s financial statements and prescribes a recognition
threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. The
Company is continuing its practice of recognizing interest and/or penalties
related to income tax matters as income tax expense.  As of December
31, 2007, the tax years ended December 31, 2004 through December 31, 2006 are
open for examination by U.S. taxing authorities.
  Pro
Forma Income Taxes (unaudited)
  Our
predecessor, a limited liability company, was classified as a partnership for
income tax purposes. Accordingly, income taxes on net earnings were payable by
the members and are not reflected in historical financial statements, prior to
our initial public offering (“IPO”) on August 15, 2005 except for tax expense
(benefit) associated with a taxable subsidiary. As a result of our conversion to
a taxable corporation on August 15, 2005, a charge to income tax expense of
$4,412 was made to record deferred taxes for the differences between the tax
basis and financial reporting basis of our assets and liabilities. Pro forma
adjustments are reflected to provide for income taxes in accordance with SFAS
No. 109. For unaudited pro forma income tax calculations, deferred tax
assets and liabilities were recognized for the future tax consequences
attributable to differences between the assets and liabilities and were measured
using enacted tax rates expected to apply to taxable income in the years in
which the Company expects to recover or settle those temporary differences. A
statutory Federal tax rate of 34% and effective state tax rate of 3.7% (net of
Federal income tax effects) were used for the pro forma enacted tax rate for all
periods. The pro forma tax effects are based upon currently available
information and assume the Company had been a taxable entity in the periods
presented. Management believes that these assumptions provide a reasonable basis
for presenting the pro forma tax effects.
  Net
income (Loss) Per Common Share
  The
Company computes and presents net income (loss) per common share in accordance
with SFAS No. 128 “Earnings per Share.” This
standard requires dual presentation of basic and diluted net income (loss) per
share on the face of the Company’s statement of operations. Basic net income
(loss) per common share is computed by dividing net income or loss attributable
to common stock by the weighted average number of common shares outstanding for
the period. Diluted net income (loss) per common share reflects the potential
dilution that could occur if options or other contracts to issue common stock
were exercised or converted into common stock.
  Pro
Forma Income (Loss) Per Share (unaudited)
  Pro forma
income (loss) per basic and diluted common share is computed based on weighted
average pro forma number of basic and diluted shares assumed to be outstanding
during the periods prior to our IPO on August 15, 2005.
  Stock-based
Compensation
  The
Company has adopted SFAS No. 123(R), “Share-Based Payment” upon
granting its first stock options on August 16, 2005. SFAS No. 123(R)
requires a public entity to measure the costs of employee services received in
exchange for an award of equity or liability instruments based on the grant-date
fair value of the award. That cost will be recognized over the periods during
which an employee is required to provide service in exchange for the
award.
  Recent
Accounting Pronouncements
  In September
2006, the FASB issued SFAS No. 157 (“SFAS 157”), “Fair Value
Measurements.”  This Statement defines fair value, establishes
a framework for measuring fair value in generally accepted accounting principles
(“GAAP”), and expands disclosures about fair value measurements. This Statement
applies under other accounting pronouncements that require or permit fair value
measurements, the FASB having previously concluded in those accounting
pronouncements that fair value is the relevant measurement attribute.
Accordingly, this Statement does not require any new fair value measurements.
This Statement is effective for fiscal years beginning after November 15, 2007,
however, on February 12, 2008, the FASB issued FSP FAS No. 157-2, Effective Dates of FASB Statement
No. 157,which delays the effective date of SFAS No. 157 for fiscal years
beginning after November 15, 2008 for all nonfinancial assets and nonfinancial
liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis.  The Company does not
expect the adoption of SFAS 157 to have a material impact on its financial
position or results of operation and financial condition.
 -35-
 Table of Contents
  In February
2007, the FASB issued SFAS No. 159 (“SFAS 159”), “The Fair Value Option for Financial
Assets and Financial Liabilities−−Including an amendment of FASB Statement No.
115.” SFAS No. 159 permits entities to choose to measure many financial
instruments and certain other items at fair value. Unrealized gains and losses
on items for which the fair value option has been elected will be recognized in
earnings at each subsequent reporting date. SFAS No. 159 is effective for fiscal
years beginning January 1, 2008. The Company does not expect the adoption of
SFAS 159 to have a material impact on its financial position or results of
operations and financial condition.
  In December
2007, the FASB issued SFAS 141 (revised 2007) “Business Combinations” (“SFAS
141R”). SFAS 141R establishes principles and requirements for how the acquirer
of a business recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree. SFAS 141R also provides guidance for recognizing and
measuring the goodwill acquired in the business combination and determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. SFAS 141R applies
prospectively to business combinations for fiscal years beginning after December
15, 2008. The Company is currently evaluating the potential impact, if any, of
the adoption of SFAS 141R on its consolidated financial statements.
  In December
2007, the FASB issued SFAS 160, “Noncontrolling Interests in
Consolidated Financial Statements — an amendment of ARB No. 51.” SFAS 160
establishes accounting and reporting standards for the noncontrolling interest
in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a
noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. SFAS 160 requires retroactive adoption of the presentation
and disclosure requirements for existing minority interests. All other
requirements of SFAS 160 shall be applied prospectively. SFAS 160 is effective
for annual periods beginning after December 15, 2008 and should be applied
prospectively. The Company is currently evaluating the potential impact of the
adoption of SFAS 160 on its consolidated financial
statements.
  2.
Acquisitions
  In July
2005, the Company acquired all the membership interests in Strata Drilling,
L.L.C. and Strata Property, L.L.C. (together “Strata”) and a related rig yard.
Included in these acquisitions were two operating rigs, one rig that was being
refurbished, related structures, equipment and components and a 16 acre yard in
Oklahoma City, Oklahoma used for equipment storage and refurbishment of
inventoried rigs. The aggregate purchase price was $20,000, of which $13,000 was
paid in cash and $7,000 was paid in the form of promissory notes issued to the
sellers. The Company funded the cash portion of the purchase price with a
$13,000 loan from Theta Investors, LLC, formerly Alpha Investors LLC, an entity
controlled by Wexford. The outstanding principal balance of this loan was paid
in full on August 22, 2005 with proceeds from our initial public offering.
This purchase was accounted for as an acquisition of a business, and the results
of operations of the acquired business have been included in our statement of
operations since the date of acquisition. We allocated the purchase price to
property and equipment and related assets based on their relative fair values at
the date of acquisition.
  The
$7,000 original aggregate outstanding principal balance of the promissory notes
issued to the sellers was automatically reduced by the amount of any costs and
expenses the Company paid in connection with the refurbishment of one of the
rigs it acquired from the sellers. The Company granted the sellers a security
interest in this rig to secure its obligations under the notes. The outstanding
principal balance on these notes did not bear any interest other than default
interest in the event of a default. In January 2006, the rig was completed to
the satisfaction of the Company and title passed at such point. Upon acceptance
of the rig the note was paid in full.
  In
September 2005, the Company acquired all the outstanding common stock of Hays
Trucking, Inc. (“Hays Trucking”) for $3,000 in cash, which includes the
repayment of $1,900 of debt owed by Hays Trucking, and the issuance of 65,368
shares of common stock with a fair value of $1,274 based on the closing stock
price at date of acquisition. In this acquisition, the Company acquired 18
trucks used to mobilize rigs to contracted drilling locations as well as other
ancillary equipment. Approximately $286 of the purchase price was allocated to
customer lists and is included in intangibles on the balance sheets at December
31, 2006 and December 31, 2005.   Customer lists are being
amortized over an expected life of four years.
  In
October 2005, the Company purchased 12 land drilling rigs from Eagle Drilling,
L.L.C., and two of its affiliates (“Eagle”). This acquisition involved five
operating rigs, seven inventoried rigs and rig equipment and parts for a
purchase price of approximately $50,528. The purchase price of $50,528, which
includes approximately $528 of related transaction costs, was funded with a
$7,517 from cash on hand and a $43,000 loan from Merrill Lynch Business
Financial Services, Inc., as lender (see Note 4). The purchase price has been
allocated to property and equipment totaling $33,838, goodwill of $16,037 and
customer lists and relationships of $653.  Customer lists are being
amortized over an expected life of four years.  The entire amount
allocated to goodwill is considered deductible for tax purposes.
  In
October 2005, the Company purchased 13 land drilling rigs from Thomas Drilling
Company (“Thomas”). This acquisition involved nine operating rigs, two rigs
being refurbished, two inventoried rigs and rig equipment and parts for a
purchase price of approximately $70,737, which includes approximately $2,737 of
related transaction costs.  The purchase price was partially funded
through a $50,000 loan from Theta Investors LLC, an entity controlled by
Wexford. This loan was repaid in full on November 3, 2005 with a portion of
the proceeds from the Company’s follow-on common stock offering which closed on
November 2, 2005. The purchase price has been allocated to property and
equipment totaling $64,708, goodwill of $4,686 and customer lists of
$1,166.  Customer lists are being amortized over an expected life of
four years.  The entire amount allocated to goodwill is considered
deductible for tax purposes.
  On
January 18, 2006, the Company completed the acquisition of six land
drilling rigs and certain other assets, including heavy haul trucks and excess
rig equipment and inventory, from Big A Drilling, L.L.C. (“Big A”). The results
of Big A’s operations have been included in the consolidated financial
statements since that date. The purchase price for the assets consisted of
$16,028 in cash and 72,571 shares of our common stock with a fair market value
of $1,816. The purchase price has been allocated to property and equipment
totaling $17,077, goodwill of $380 and customer lists of $387. Customer lists
are being amortized over an expected life of four years. The entire amount
allocated to goodwill is considered deductible for tax purposes.
  On January 9,
2007, the Company completed the acquisition of 31 workover rigs, 24 of which
were in service at the time of the acquisition, from Eagle Well Service, Inc.
(“Well Service”) and related subsidiaries for $2,567 in cash, 1,070,390 shares
of our common stock with a fair market value of $15,125, and the assumption of
debt of $6,527, liabilities of $678, and additional deferred income taxes of
$7,188.  This acquisition provided a platform for the Company to
expand into the well service industry.  The Company acquired the stock
of Well Service, which was accounted for using the purchase method of
accounting.  The deferred tax liability assumed in the acquisition was
the main factor that resulted in the Company recording goodwill, all of which is
not deductible for tax purposes.  The amortizable intangibles acquired
include trade name and customer lists, which will be amortized over two and five
years, respectively.  The operations related to the Well Service
acquisition are included in the Company’s statement of operations as of the
respective closing date.
  The
following table summarizes the allocation of purchase price to the Company’s
significant acquisitions:
 Year
      Ended December 31,2007
                  
                  
                  2006
                  
                  
                  2005Well
      Service
                  
                  
                  Big
      A
                  
                  
                  Strata
                  
                  
                  Eagle
                  
                  
                  Thomas
                  
                  
                  TotalAssets
      acquired:Cash
                  
                  $
                  198
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -Prepaid
      expenses
                  
                  
                  227
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Accounts
      receivable
                  
                  
                  1,667
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Drilling
      equipment
                  
                  
                  -
                  
                  
                  
                  16,724
                  
                  
                  
                  11,840
                  
                  
                  
                  33,838
                  
                  
                  
                  64,288
                  
                  
                  
                  109,966Workover
      equipment
                  
                  
                  23,912
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Rig
      under construction
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  7,000
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  7,000Yard
      equipment
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  170
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  170Other
      equipment
                  
                  
                  244
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Vehicles
                  
                  
                  1,943
                  
                  
                  
                  353
                  
                  
                  
                  18
                  
                  
                  
                  -
                  
                  
                  
                  420
                  
                  
                  
                  438Buildings
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  729
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  729Land
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  243
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  243Customer
      lists
                  
                  
                  910
                  
                  
                  
                  387
                  
                  
                  
                  -
                  
                  
                  
                  653
                  
                  
                  
                  1,166
                  
                  
                  
                  1,819Trade
      name
                  
                  
                  190
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Goodwill
                  
                  
                  2,794
                  
                  
                  
                  380
                  
                  
                  
                  -
                  
                  
                  
                  16,037
                  
                  
                  
                  4,686
                  
                  
                  
                  20,723$
                  32,085
                  
                  
                  $
                  17,844
                  
                  
                  $
                  20,000
                  
                  
                  $
                  50,528
                  
                  
                  $
                  70,560
                  
                  
                  $
                  141,088




-36-
 Table of Contents


The following
pro forma information gives effect to the Strata, Eagle, Thomas and Big A
acquisitions as though they were effective at the beginning of 2005 and the Well
Service acquisition as though it was effective at the beginning of 2006. Pro
forma adjustments primarily relate to additional depreciation, amortization and
interest costs. The information reflects the Company’s historical data and
historical data from the acquired business for the periods indicated. The pro
forma data may not be indicative of the results the Company would have achieved
had it completed the acquisition at the beginning of each year presented, or
that it may achieve in the future. The pro forma financial information should be
read in conjunction with the accompanying historical financial statements. Pro
forma income per basic and diluted common share is computed based on the
weighted average pro forma number of basic and diluted shares assumed to be
outstanding during the period. Pro forma per share information is presented for
the year ended December 31, 2005 on the basis of 16,259,000 and 16,306,000
weighted average shares issued basic and diluted, respectively, and 72,571
shares issued in the Big A acquisition. Pro forma per share information is
presented for the year ended December 31, 2006 on the basis of 24,585,000 and
24,623,000 weighted average shares issued basic and diluted, respectively, and
1,070,000 shares issued in the Well Service acquisition. Dilutive pro forma
effect is given to shares which are issuable upon the exercise of outstanding
options under the Company’s employee stock option plan.
 
 Pro
      Forma(Unaudited)Year
      Ended December 31,2006
              
              
              2005
              
              
              2004Total
      revenues
              
              $
              299,964
              
              
              $
              156,090
              
              
              $
              47,960Net
      income
              
              $
              61,299
              
              
              $
              12,193
              
              
              $
              (6,021
              )Net
      income per common share:Basic
              
              $
              2.39
              
              
              $
              0.75
              
              
              $
              (0.45
              )Diluted
              
              $
              2.39
              
              
              $
              0.75
              
              
              $
              (0.45
              )
  3.
Accrued liabilities
  Accrued
liabilities consisted of the following at December 31, 2007 and
2006:
  2007
              
              
              2006Salaries,
      wages, payroll taxes and benefits
              
              $
              4,828
              
              
              $
              5,277Workers'
      compensation liability
              
              
              2,959
              
              
              
              1,869Sales,
      use and other taxes
              
              
              8,122
              
              
              
              945Health
      insurance
              
              
              409
              
              
              
              404Deferred
      revenue
              
              
              1,720
              
              
              
              2,978Accrued
      interest
              
              
              1,242
              
              
              
              294$
              19,280
              
              
              $
              11,767
  The
Company made an adjustment during the fourth quarter of 2007 to accrue for sales
and use taxes in the amount of $6,237.  The adjustment was due to the
Company’s non-payment of taxes upon initial acquisition of
equipment.  Included in the adjustment made in the fourth quarter is
an accrual of interest in the amount of $634, of which $404, $227 and $3 relate
to 2007, 2006 and 2005, respectively.  The fourth quarter adjustment
also includes additional depreciation expense in the amount of $1,167, of which
$684, $459 and $24 relate to 2007, 2006 and 2005, respectively.  The
Company does not believe this adjustment is material to either the 2007, 2006 or
2005 annual financial statements.  The Company expects to settle the
liability with the respective tax authorities in April 2008.
  4.
Long-term Debt
  Long-term
debt consists of the following:
 December
      31,
              
              
              December
      31,2007
              
              
              2006Notes
      payable to De Lage Landen Financial Services, collateralized by
      cranes,payable
      in ninety-six monthly principal and interest installments of
      $61Interest
      on the notes ranges from 6.74% - 7.07%, with various due dates
      (1)
              
              $
              5,120
              
              
              $
              4,167Revolving
      credit facility with Fortis Capital Corp., collateralized by the Company's
      assets,and
      matures on January 13, 2009.  Loans under the revolving credit
      facilitybear
      interest at variable rates as defined in the credit agreement.
      (2)
              
              
              60,000
              
              
              
              60,000Note
      payable to Ameritas Life Insurance Corp., collateralized by the building,
      payable in principal
                and
      interest installments of $14, interest on the note is 6.0%, maturity date
      of January 1, 2021. (3)
              
              
              1,521
              
              
              
              -Notes
      payable to General Motors Acceptance Corporation, collateralized by
      trucks, payable in
                monthly
      principal and interest installments of $35, various due dates.
      (4)
              
              
              1,184
              
              
              
              -Note
      payable to John Deere Construction & Forestry Company, collaterized by
      forklifts, in
                thirty-six
      monthly installments of $11, due December 1, 2009 (5)
              
              
              258
              
              
              
              393Note
      payable to Ford Motor Credit, collateralized by truck,payable
      in principal and interest installments of $1Interest
      on the note is 2.9%, due November 10, 2010. (6)
              
              
              35
              
              
              
              16768,118
              
              
              
              64,727Less
      current installments
              
              
              1,256
              
              
              
              636$
              66,862
              
              
              $
              64,091
 -37-
 Table of Contents
 (1)
              On
      December 7, 2005, January 4, 2006, June 12, 2006 and April 15,
      2007, the Company entered into Term Loan and Security Agreements with De
      Lage Landen Financial Services, Inc. The loans provide for term
      installments in an aggregate amount not to exceed $6,000. The proceeds of
      the term loans were used to purchase five
  cranes.
 
 (2)
              On
      January 13, 2006, the Company entered into a $150.0 million revolving
      credit facility with Fortis Capital Corp., as administrative agent, lead
      arranger and sole bookrunner, and a syndicate of lenders, which include
      The Royal Bank of Scotland plc, The CIT Group/Business Credit, Inc.,
      Calyon Corporate and Investment Bank, Merrill Lynch Capital, Comerica Bank
      and Caterpillar Financial Services Corporation. The revolving credit
      facility matures on January 13, 2009. The initial aggregate revolving
      commitment of $150.0 million is automatically and permanently reduced by
      $10.0 million at the end of each fiscal quarter starting September 30,
      2006.  The aggregate revolving commitment was $90,000 as of
      December 31, 2007.  Loans under the revolving credit facility
      bear interest at LIBOR plus a margin that can range from 2.0% to 3.0% or,
      at our option, the prime rate plus a margin that can range from 1.0% to
      2.0%, depending on the ratio of our outstanding senior debt to “Adjusted
      EBITDA” as defined in the credit agreement. Borrowings under this
      revolving credit facility were used to fund a portion of the Big A
      acquisition and to repay in full all outstanding borrowings under the
      Company’s term loan with Merrill Lynch Capital and its revolving line of
      credit with International Bank of
Commerce.
 
 The
revolving credit facility also provides for a quarterly commitment fee of
0.5% per annum of the unused portion of the revolving credit facility, and
fees for each letter of credit issued under the facility. Commitment fees
expense for the years ended December 31, 2007 and 2006 were $257 and $445,
respectively.  The Company’s subsidiaries have guaranteed the loans
and other obligations under the revolving credit facility. The obligations under
the revolving credit facility and the related guarantees are secured by a first
priority security interest in substantially all of our assets, as well as the
shares of capital stock of our direct and indirect subsidiaries.
 
 The
revolving credit facility contains customary covenants for facilities of this
type, including among other things, covenants that restrict the Company’s
ability to make capital expenditures, incur indebtedness, incur liens, dispose
of property, repay debt, pay dividends, repurchase shares and make certain
acquisitions. The financial covenants are a minimum fixed charge coverage ratio
of 1.75 to 1.00 and a maximum total leverage ratio of 2.00 to 1.00. The Company
was in compliance with all covenants at December 31, 2007.  The
revolving credit facility provides for mandatory prepayments under certain
circumstances as more fully discussed in the revolving credit
facility.
 
 (3)
              On
      January 2, 2007, the Company assumed a term loan agreement with Ameritas
      Life Insurance Corp. related to the acquisition of a
      building.  The loan provides for term installments in an
      aggregate not to exceed $1,590.
 
 (4)
              On
      various dates during 2007, the Company entered into term loan agreements
      with General Motors Acceptance Corporation.  The loans provide
      for term installments in an aggregate not to exceed $1,277.  The
      proceeds of the term loans were used to purchase 30
  trucks.
 
 (5)
              On
      November 21, 2006, the Company entered into term loan agreements with John
      Deere Credit.  The loans provide for term installments in an
      aggregate not to exceed $403.  The proceeds of the term loans
      were used to purchase two
forklifts.
 
 (6)
              On
      November 9, 2007, the Company entered into a term loan agreement with Ford
      Credit.  The loan provides for a term installment in an
      aggregate not to exceed $36.  The proceeds of the term loan were
      used to purchase a truck.
  
 Long-term
debt maturing each year subsequent to December 31, 2007 is as
follows:
  2008
              
              $
              1,2562009
              
              
              61,3442010
              
              
              1,1922011
              
              
              8862012
              
              
              9492013
      and thereafter
              
              
              2,491$
              68,118
 5. Income Taxes
 
 The
Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes — an interpretation of FASB Statement No. 109(“FIN 48”), on
January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprise’s financial statements and prescribes a recognition
threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. As
of December 31, 2007, the Company had no unrecognized tax
benefits.  The Company is continuing its practice of recognizing
interest and/or penalties related to income tax matters as income tax
expense.  As of December 31, 2007, the tax years ended December 31,
2004 through December 31, 2006 are open for examination by U.S. taxing
authorities.
  Income
tax expense consists of the following:
  Years
      Ended December 31,2007
              
              
              2006
              
              
              2005Current:State
              
              $
              541
              
              
              $
              2,456
              
              
              $
              205Federal
              
              
              4,915
              
              
              
              14,363
              
              
              
              1,167Deferred:State
              
              
              1,878
              
              
              
              2,023
              
              
              
              510Federal
              
              
              15,770
              
              
              
              19,214
              
              
              
              4,647Income
      tax expense
              
              $
              23,104
              
              
              $
              38,056
              
              
              $
              6,529
 Deferred
income tax assets and liabilities are as follows:
 Years
      Ended December 31,2007
              
              
              2006Deferred
      tax assets:Stock
      option expense
              
              $
              2,609
              
              
              $
              1,299Alternative
      minimum tax credit carryforward
              
              
              2,095
              
              
              
              -Other
              
              
              775
              
              
              
              155Total
      deferred tax assets
              
              
              5,479
              
              
              
              1,454Deferred
      tax liabilities:Property
      and equipment, principally dueto
      differences in depreciation
              
              
              72,767
              
              
              
              42,901Other
              
              
              -
              
              
              
              1,006Total
      deferred tax liabilities
              
              
              72,767
              
              
              
              43,907Net
      deferred tax liabilities
              
              $
              67,288
              
              
              $
              42,453
  For the year
ended December 31, 2006 the Company’s effective tax rate increased approximately
1.0% from that of the prior years due to an increase in taxable
income.  This change caused an increase of the deferred tax asset and
deferred tax liability amounts of approximately $38 and $1,135,
respectively.
 -38-
 Table of Contents
  Upon the
conversion from a limited liability company to a taxable corporation in
conjunction with its initial public offering, the Company incurred a one-time
charge to operations in the third quarter of 2005 of approximately $4,412 to
record deferred taxes upon change in tax status.
  In
assessing its ability to realize deferred tax assets, the Company considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. Its ultimate realization of deferred tax assets
depends on the generation of future taxable income during the periods in which
those temporary differences become deductible. The Company considers the
scheduled reversal of deferred tax liabilities and projected future taxable
income in making this assessment. The Company believes it is more likely than
not that it will realize the benefits of these deductible
differences.
  The
provision for income taxes on continuing operations differs from the amounts
computed by applying the federal income tax rate of 35% (34% for 2005) to net
income. The differences are summarized as follows:
 Years
      Ended December 31,2007
              
              
              2006
              
              
              2005Expected
      tax expense (benefit)
              
              $
              21,244
              
              
              $
              34,261
              
              
              $
              3,964State
      income taxes
              
              
              2,246
              
              
              
              3,622
              
              
              
              431Tax
      basis adjustment to 35% for prior year deferred tax
    components
              
              
              -
              
              
              
              562
              
              
              
              -Conversion
      to a taxable corporation
              
              
              -
              
              
              
              -
              
              
              
              4,412(Income)
      loss attributable to nontaxable entity
              
              
              -
              
              
              
              -
              
              
              
              (2,200
              )Nondeductible
      officer compensation
              
              
              98
              
              
              
              -
              
              
              
              -Tax
      exempt interest
              
              
              -
              
              
              
              -
              
              
              
              (78
              )Domestic
      production activities
              
              
              (83
              )
              
              
              (467
              )
              
              
              -Nondeductible
      meals and entertainment
              
              
              45
              
              
              
              47
              
              
              
              -Other
              
              
              (446
              )
              
              
              31
              
              
              
              -$
              23,104
              
              
              $
              38,056
              
              
              $
              6,529
 6.Workers’ Compensation and Health Insurance
  The
Company is insured under a large deductible workers’ compensation insurance
policy. The policy generally provides for a $1,000 deductible per covered
accident. The Company maintains letters of credit in the aggregate amount of
$4,835 for the benefit of various insurance companies as collateral for
retrospective premiums and retained losses which may become payable under the
terms of the underlying insurance contracts.  The letters of credit
are typically renewed annually.  No amounts have been drawn under the
letters of credit. At December 31, 2007 and 2006, the Company had deposits
of $2,745 and $2,600, respectively, with an insurance company collateralizing a
letter of credit. The deposits are reflected in restricted cash and deposit.
Accrued expenses at December 31, 2007 and 2006 included approximately $2,959 and
$1,869, respectively, for estimated incurred but not reported costs and premium
accruals related to our workers’ compensation insurance.
  On
November 1, 2005, the Company initiated a self-insurance program for major
medical, hospitalization and dental coverage for employees and their dependents,
which is partially funded by payroll deductions. The Company provided for both
reported and incurred but not reported medical costs in the accompanying
consolidated balance sheets. We have a maximum liability of $100 per
employee/dependent per year. Amounts in excess of the stated maximum are covered
under a separate policy provided by an insurance company. Accrued expenses at
December 31, 2007 and 2006 included approximately $409 and $404,
respectively, for our estimate of incurred but not reported costs related to the
self-insurance portion of our health insurance.
  7.
Transactions with Affiliates
  Effective
April 1, 2005, the Company entered into an administrative services
agreement with its then affiliate Gulfport Energy Corporation (“Gulfport”).
Under this agreement, Gulfport agreed to provide certain services to the
Company, including accounting, human resources, legal and technical support
services. In return for the services, the Company agreed to pay Gulfport an
annual fee of approximately $414 payable in equal monthly installments during
the term of this agreement. In addition, the Company leased approximately 1,200
square feet of office space from Gulfport for the Company’s headquarters for an
annual rent of $21 payable in equal monthly installments. The services the
Company received under the administrative services agreement and the fees for
such services could be amended by mutual agreement of the parties. In January
2006, the Company reduced the level of administrative services being provided by
Gulfport and increased its office space to approximately 2,500 square feet. As a
result, the Company’s annual fee for administrative services was reduced to
approximately $150 and its annual rental was increased to approximately $44. The
administrative services agreement had a three-year term, and upon expiration of
that term the agreement would continue on a month-to-month basis until cancelled
by either party with at least 30 days prior written notice. The administrative
services agreement was terminable (1) by the Company at any time with at
least 30 days prior written notice to Gulfport and (2) by either party if
the other party is in material breach of the agreement and such breach had not
been cured within 30 days of receipt of written notice of such breach. The
Company terminated the administrative services agreement effective April 1,
2006. The Company paid Gulfport approximately $96 and $353 in consideration for
these services during 2006 and 2005, respectively.  As the agreement
was terminated effective April 1, 2006, no further services were provided to the
Company after that date.  At December 31, 2007 and December 31, 2006,
$0 was owed to Gulfport.  Prior to entry into this administrative
services agreement, we reimbursed Gulfport for its dedicated employee time,
office space and general and administrative costs based upon the pro rata share
of time its employees spent performing services for the
Company.  Gulfport is no longer an affiliate of the
Company.
  The
Company has five operating leases with affiliated entities.  Related
rent expense was approximately $130 for the year ended December 31,
2007.
  Additionally,
the Company provided contract drilling services totaling $2,617, $10,025, and
$2,527 to affiliated entities for the years ended December 31, 2007, 2006
and 2005. Effective March 16, 2007, these entities were no longer affiliates of
the Company.  The Company had receivables from affiliates of $0 and
$1,016 at December 31, 2007 and 2006, respectively.  Certain
borrowings for acquisitions (see Note 2) were from affiliates.
  8.
Commitments and Contingencies
  The
Company leases twelve service locations under noncancelable operating leases
that have various expirations from 2008 to 2015. Related rent expense was $790,
$643, and $358 for the years ended December 31, 2007, 2006 and 2005,
respectively.
  Aggregate
future minimum lease payments under the noncancelable operating leases for years
subsequent to December 31, 2007 are as follows:
  2008
              
              $
              5332009
              
              
              3882010
              
              
              3932011
              
              
              3202012
              
              
              2102013
      and thereafter
              
              
              522$
              2,366
  Various
other claims and lawsuits, incidental to the ordinary course of business, are
pending against the Company. In the opinion of management, all matters are
adequately covered by insurance or, if not covered, are not expected to have a
material effect on the Company’s consolidated financial position, results of
operations or cash flows.
  9.
Business Segments and Concentrations
 
 The
Company’s reportable business segments are contract land drilling and well
servicing. The Company's only reportable business segment for 2006 was
contract land drilling. The contract drilling segment utilizes a fleet of land
drilling rigs to provide contract drilling services to oil and natural gas
exploration and production companies.  During 2007 our rigs operated
in Oklahoma, Texas, Colorado, Montana, North Dakota, Kansas and
Louisiana.  The well servicing segment encompasses a full range of
services performed with a mobile well servicing rig, including the installation
and removal of downhole equipment and elimination of obstructions in the well
bore to facilitate the flow of oil and gas. During 2007 our workover rigs
operated in Oklahoma, Texas, Kansas, Colorado and New Mexico.  The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies.  The Company’s reportable
segments are strategic business units that offer different products and
services.
 -39-
 Table of Contents
  The following
table sets forth certain financial information with respect to the Company’s
reportable segments:
  Contract
      drilling
              
              
              Well
      servicing
              
              
              TotalYear
      ended December 31, 2007Operating
      Revenues
              
              $
              276,088
              
              
              $
              22,864
              
              
              $
              298,952Direct
      operating costs
              
              
              (153,797
              )
              
              
              (14,299
              )
              
              
              (168,096
              )Segment
      profits
              
              $
              122,291
              
              
              $
              8,565
              
              
              $
              130,856Depreciation
      and amortization
              
              $
              40,905
              
              
              $
              3,336
              
              
              $
              44,241Capital
      expenditures
              
              $
              58,857
              
              
              $
              23,925
              
              
              $
              82,782Identifiable
      assets
              
              $
              509,814
              
              
              $
              58,791
              
              
              $
              568,605
  The following
table reconciles the segment profits above to the operating income as reported
in the consolidated statements of operations:
 Year
      EndedDecember
      31, 2007Segment
      profits
              
              $
              130,856General
      and administrative expenses
              
              
              (22,690
              )Depreciation
      and amortization
              
              
              (44,241
              )Operating
      income
              
              $
              63,925
  For the
year ended December 31, 2007, revenue from one customer was approximately 11% of
total revenue, for 2006 no one customer exceeded 10% of total revenue, and for
2005 revenue from one customer was approximately 10% of total
revenue.  At December 31, 2007, six customers accounted for
approximately 13%, 12%, 9%, 8%, 5%, and 5% of accounts receivable.  At
December 31, 2006, four customers accounted for approximately 10%, 7%, 6%, and
6% of accounts receivable.
  10.
Net Income Per Common Share
  The
following table presents a reconciliation of the numerators and denominators of
the basic and diluted earnings per share (“EPS”) and diluted EPS comparisons as
required by SFAS No. 128 (amounts in thousands, except per share amounts)
:
 Year
      EndedDecember
      31,2007
              
              
              2006
              
              
              2005Basic:Net
      income
              
              $
              37,592
              
              
              $
              59,833
              
              
              $
              5,131Weighted
      average shares
              
              
              25,996
              
              
              
              24,585
              
              
              
              16,259Income
      per share
              
              $
              1.45
              
              
              $
              2.43
              
              
              $
              0.32Diluted:Net
      income
              
              $
              37,592
              
              
              $
              59,833
              
              
              $
              5,131Weighted
      average shares:Outstanding
      (thousands)
              
              
              25,996
              
              
              
              24,585
              
              
              
              16,259Restricted
      Stock and Options (thousands)
              
              
              105
              
              
              
              38
              
              
              
              4726,101
              
              
              
              24,623
              
              
              
              16,306Income
      per share
              
              $
              1.44
              
              
              $
              2.43
              
              
              $
              0.31
 The weighted
average number of diluted shares excludes 23,132 shares and 78,218 shares for
the years ended December 31, 2007 and 2006, respectively, for options and
restricted stock due to their antidilutive effects.
  11.
Equity Transactions
  Effective
January 18, 2006, the Company issued 72,571 shares of common stock to the equity
owners of Big A in connection with the Company’s acquisition of the assets of
Big A.  (See Note 2)
 
 In March
2006, the Company closed a public offering of 3,450,000 shares of our common
stock at a price of $22.75 per share.  In the offering, a total of
1,700,000 shares were sold by the Company and 1,750,000 shares were sold by a
selling stockholder.  The offering resulted in net proceeds to the
Company of approximately $36,229, excluding offering expenses of
$577.  The Company did not receive any proceeds from the sale of
shares by the selling stockholder.
 
 Effective
January 9, 2007, the Company issued 1,070,390 shares of common stock to the
equity owners of Well Service in connection with the Company’s acquisition of
Well Service. (See Note 2)
  12.
Stock Options and Stock Option Plan
  The
Company’s 2005 Stock Incentive Plan was adopted on July 20, 2005 and
amended on November 16, 2005 (the “2005 Plan”) which is described below.
The compensation cost that has been charged against income before taxes related
to stock options was $1,029 and $2,658 for the years ended December 31, 2007 and
December 31, 2006, respectively.  These options are reported as equity
instruments and their fair value is amortized to expense using the straight line
method over the vesting period. The shares of stock issued upon the exercise of
the options will be from authorized but unissued common stock.
 
 The
Company receives a tax deduction for certain stock option exercises during the
period the options are exercised, generally for the excess of the price at which
the options are sold over the exercise price of the options. There have been no
stock options exercised under the 2005 Plan.
 
 The
purpose of the 2005 Plan was to enable the Company, and any of its affiliates,
to attract and retain the services of the types of employees, consultants and
directors who will contribute to its long-range success and to provide
incentives which are linked directly to increases in share value which will
inure to the benefit of the Company’s stockholders. The 2005 Plan provided a
means by which eligible recipients of awards may be given an opportunity to
benefit from increases in value of the Company’s common stock through the
granting of incentive stock options and nonstatutory stock options. Eligible
award recipients under the 2005 Plan were employees, consultants and directors
of the Company and its affiliates. Incentive stock options under the 2005 Plan
could be granted only to employees. Awards other than incentive stock options
under the 2005 Plan could be granted to employees, consultants and directors.
The shares that may be issued upon exercise of the options will be from
authorized but unissued common stock, and the maximum aggregate amount of such
common stock which could be issued upon exercise of all awards under the plan,
including incentive stock options, could not exceed 1,000,000 shares, subject to
adjustment to reflect certain corporate transactions or changes in the Company’s
capital structure.
 
 The
Company’s board of directors and a majority of the Company’s stockholders
approved the Company’s 2006 Stock Incentive Plan (the “2006 Plan,” and together
with the 2005 Plan, the “Plans”), effective April 20, 2006.  No
further awards will be made under the 2005 Plan.  The purpose of the
2006 Plan is to provide a means by which eligible recipients of awards may be
given an opportunity to benefit from increases in value of the Company’s common
stock through the granting of one or more of the following awards: (1) incentive
stock options, (2) nonstatutory stock options, (3) restricted awards, (4)
performance awards and (5) stock appreciation rights.  The maximum
aggregate amount of the Company’s common stock which may be issued upon exercise
of all awards under the 2006 Plan, may not exceed 2,500,000 shares, less shares
underlying options granted to employees under the 2005 Plan prior to the
adoption of the 2006 Plan.  There have been no stock options exercised
under the 2006 Plan.
 -40-
 Table of Contents
  On April
20, 2007, the Company filed a Tender Offer Statement on Schedule TO relating to
the Company’s offer to twenty-five eligible directors, officers, employees and
consultants to exchange certain outstanding options to purchase shares of the
Company’s common stock for restricted stock awards consisting of the right to
receive restricted shares of the Company’s common stock (the “Restricted Stock
Awards”). The offer expired on May 21, 2007. Pursuant to the offer, the Company
accepted for cancellation eligible options to purchase 729,000 shares of the
Company’s common stock tendered by directors, officers, employees and
consultants eligible to participate in the offer.  Subject to the
terms and conditions of the offer, on May 21, 2007 the Company granted one
Restricted Stock Award in exchange for every two shares of common stock
underlying the eligible options tendered.  The Restricted Stock Awards
will vest in equal amounts on January 1, 2008 and
January 1, 2009, subject to earlier vesting or forfeiture in certain
circumstances. The Company granted the Restricted Stock Awards under the 2006
Plan.
  An
incremental cost was computed in accordance with SFAS No. 123(R) upon the
conversion of options to restricted stock.  The incremental cost was
measured as the excess of the fair value of the modified award over the fair
value to the original award immediately preceding conversion, measured based on
the share price and other pertinent factors at that date.  The
incremental cost to be recognized over the vesting period of the modified award
is $387.
  The fair
value of each option award is estimated on the date of grant using a
Black-Scholes valuation model that uses the assumptions noted in the following
table. Expected volatilities are based on the historical volatility of a
selected peer. The majority of the Company’s options were held by employees that
made up one group with similar expected exercise behavior for valuation
purposes. The expected term of options granted is estimated based on an average
of the vesting period and the contractual period. The risk-free rate for periods
within the contractual life of the option is based on the U.S. Treasury yield
curve in effect at the time of the grant.
 
 Under the
2005 Plan, employee stock options become exercisable in equal monthly
installments over a three-year period, and all options generally expire ten
years after the date of grant. Under the 2006 Plan, employee stock options
become exercisable to the extent the options have become vested pursuant to the
vesting schedule set forth in the applicable stock option award certificate, and
all options generally expire ten years after the date of grant.  The
Plans provide that all options must have an exercise price not less than the
fair market value of the Company’s common stock on the date of the grant. The
following table summarizes the assumptions used in the Black-Scholes
option-pricing model for the year ended December 31, 2006.  The
Company did not grant any options during the year ended December 31,
2007.
 December
      31,2006Expected
      volatility
                  
                  48%Expected
      life in years
                  
                  5.77Weighted
      average risk free interest rate
                  
                  4.65%
 The
Company has not declared dividends since it became a public company and does not
anticipate doing so in the foreseeable future, and thus did not use a dividend
yield. Expected life has been determined using the permitted simplified
method.  In each case, the actual value that will be realized, if any,
will depend on the future performance of the common stock and overall stock
market conditions. There is no assurance that the value an optionee actually
realizes will be at or near the value estimated using the Black–Scholes model.
The following table provides information relating to activity in the 2005 and
2006 Plans during the years ended December 31, 2007 and 2006:
  Weighted
              
              
              WeightedAverage
              
              
              Average
      Remaining
              
              
              AggregateExercise
      Price
              
              
              Contractual
              
              
              IntrinsicShares
              
              
              per
      Share
              
              
              Life
              
              
              ValueOptions
      outstanding at December 31, 2005
              
              
              574,500
              
              
              $
              18.08Granted
              
              
              445,500
              
              
              
              23.37Exercised
              
              
              -Forfeited/expired
              
              
              (188,333
              )
              
              
              20.38Options
      outstanding at December 31, 2006
              
              
              831,667
              
              
              $
              20.39
              
              
              
              8.91
              
              
              $
              (2,632
              )Granted
              
              
              -
              
              
              
              -Exercised
              
              
              -
              
              
              
              -Converted
              
              
              (769,000
              )
              
              
              20.14Forfeited/expired
              
              
              (42,667
              )
              
              
              22.23Options
      outstanding at December 31, 2007
              
              
              20,000
              
              
              $
              26.14
              
              
              
              8.30
              
              
              $
              (227
              )Options
      fully vested and exercisable at December 31, 2007
              
              
              10,681
              
              
              $
              26.14
              
              
              
              8.30
              
              
              $
              (124
              )
  Weighted
      Average
              
              
              AggregateGrant
      Date
              
              
              Grant
      DateShares
              
              
              Fair
      Value
              
              
              Fair
      ValueOptions
      nonvested at December 31, 2005
              
              
              511,446
              
              
              $
              10.05
              
              
              $
              5,140Granted
              
              
              445,500
              
              
              
              11.93
              
              
              
              5,313Vested
              
              
              (255,520
              )
              
              
              10.90
              
              
              
              (2,785
              )Forfeited/expired
              
              
              (188,333
              )
              
              
              10.45
              
              
              
              (1,968
              )Options
      nonvested at December 31, 2006
              
              
              513,093
              
              
              $
              11.11
              
              
              $
              5,700Granted
              
              
              -
              
              
              
              -
              
              
              
              -Vested
              
              
              (97,397
              )
              
              
              11.19
              
              
              
              (985
              )Converted
              
              
              (382,423
              )
              
              
              11.02
              
              
              
              (4,321
              )Forfeited/expired
              
              
              (23,954
              )
              
              
              11.40
              
              
              
              (273
              )Options
      nonvested at December 31, 2007
              
              
              9,319
              
              
              $
              13.34
              
              
              $
              121
  As of
December 31, 2007, there was $121 of total unrecognized compensation cost
related to nonvested share-based compensation arrangements granted under the
2005 and 2006 Plans. That cost is expected to be recognized over a
weighted-average period of 1.0 year.
  13.
Restricted Stock
 
 Under the
terms of all outstanding restricted stock awards, shares were issued when
granted and nonvested shares are subject to forfeiture for failure to fulfill
service conditions.  Restricted stock awards are valued at the grant
date market value of the underlying common stock and are being amortized to
operations over the respective vesting period.  Compensation expense
for the years ended December 31, 2007 and 2006 related to shares of restricted
stock was $2,699 and $113, respectively.  Restricted stock activity
for the years ended December 31, 2007 and 2006 was as follows:
 -41-
 Table of Contents
 Weighted
      AverageGrant
      DateShares
              
              
              Fair
      ValueOutstanding
      at December 31, 2005
              
              
              -
              
              
              
              -Granted
              
              
              66,667
              
              
              $
              20.25Vested
              
              
              -
              
              
              
              -Forfeited/expired
              
              
              -
              
              
              
              -Outstanding
      at December 31, 2006
              
              
              66,667
              
              
              
              20.25Granted
              
              
              125,000
              
              
              
              15.47Converted
              
              
              384,500
              
              
              
              16.58Vested
              
              
              (22,222
              )
              
              
              20.25Forfeited/expired
              
              
              (500
              )
              
              
              16.69Outstanding
      at December 31, 2007
              
              
              553,445
              
              
              $
              16.64
 There was
$6,211 of total unrecognized compensation cost related to nonvested restricted
stock awards to be recognized over a weighted-average period of 1.36 years as of
December 31, 2007.
  14.
Fair Value of Financial Instruments
  Cash
and cash equivalents, trade receivables and payables and short-term
debt:
  The
carrying amounts of our cash and cash equivalents, trade receivables, payables
and short-term debt approximate their fair values due to the short-term nature
of these instruments.
  Long-term
debt
  The
carrying amount of our long-term debt approximates its fair value, as supported
by the recent issuance of the debt and because the rates and terms currently
available to us approximate the rates and terms of the existing
debt.
  15.
Employee Benefit Plans
  The
Company implemented a new 401(k) retirement plan for its eligible employees
during 2006. Under the plan, the Company matches 100% of employees’
contributions up to 5% of eligible compensation.  Employee and
employer contributions vest immediately.  The Company’s contributions
for the years ended December 31, 2007 and 2006 were $1,030, and $698,
respectively.
  16.
Quarterly Results of Operations (unaudited)
  The
following table summarizes quarterly financial data for our years ended
December 31, 2007 and 2006;
  Bronco
      Drilling Company Inc.Quarterly
      ResultsYear
      Ended December 31, 2007(Amounts
      in thousands except per share amounts)First
              
              
              Second
              
              
              Third
              
              
              FourthQuarter
              
              
              Quarter
              
              
              Quarter
      (1)
              
              
              Quarter
      (2)2007Revenues
              
              $
              78,981
              
              
              $
              74,720
              
              
              $
              76,286
              
              
              $
              68,965Income
      from operations
              
              
              19,643
              
              
              
              14,633
              
              
              
              18,648
              
              
              
              11,001Income
      tax expense
              
              
              7,101
              
              
              
              5,428
              
              
              
              7,009
              
              
              
              3,566Net
      income
              
              
              11,386
              
              
              
              8,714
              
              
              
              11,068
              
              
              
              6,424Income
      per share:Basic
              
              
              0.44
              
              
              
              0.33
              
              
              
              0.43
              
              
              
              0.25Diluted
              
              
              0.44
              
              
              
              0.33
              
              
              
              0.42
              
              
              
              0.252006Revenues
              
              $
              56,387
              
              
              $
              67,151
              
              
              $
              79,814
              
              
              $
              82,476Income
      from operations
              
              
              19,252
              
              
              
              23,598
              
              
              
              28,403
              
              
              
              28,924Income
      tax expense
              
              
              6,915
              
              
              
              8,747
              
              
              
              10,527
              
              
              
              11,867Net
      income
              
              
              11,347
              
              
              
              14,729
              
              
              
              17,405
              
              
              
              16,352Income
      per share:Basic
              
              
              0.48
              
              
              
              0.59
              
              
              
              0.70
              
              
              
              0.66Diluted
              
              
              0.48
              
              
              
              0.59
              
              
              
              0.70
              
              
              
              0.66
 (1)
The Company made an adjustment of $2,066 to reduce depreciation expense in the
third quarter of 2007. The adjustment was due to the use of an incorrect
depreciable life for certain rig components that were transferred between
working rigs and the yard, which resulted in an overstatement of depreciation
expense and accumulated depreciation of $1,245 during 2006 and $821 during the
first quarter of 2007.
  (2)
The Company made an adjustment during the fourth quarter of 2007 to accrue for
sales and use tax in the amount of $6,237. The adjustment was due to the
Company's non-payment of taxes upon initial acquistion of equipment. Included in
the adjustment made in the fourth quarter is an accrual for interest in the
amount of $634, of which $404, $227 and $3 relate to 2007, 2006 and 2005,
respectively. The fourth quarter adjustment also includes additional
depreciation expense in the amount of $1,167, of which $684, $459, and $24
relate to 2007, 2006 and 2005, respectively.
  -42-
 Table of Contents
  17.
Valuation and Qualifying Accounts
  The
Company’s valuation and qualifying accounts for the years ended
December 31, 2007, 2006 and 2005 are as follows:
 Valuation
      and Qualifying AccountsBalance
                
                
                Chargedat
                
                
                to
      Costs
                
                
                Deductions
                
                
                BalanceBeginning
                
                
                and
                
                
                from
                
                
                atof
      Year
                
                
                Expenses
                
                
                Accounts
                
                
                Year
      EndYear
      ended December 31, 2005Allowance
      for doubtful receivables
                
                $
                146
                
                
                $
                184
                
                
                $
                -
                
                
                $
                330Year
      ended December 31, 2006Allowance
      for doubtful receivables
                
                $
                330
                
                
                $
                70
                
                
                $
                -
                
                
                $
                400Year
      ended December 31, 2007Allowance
      for doubtful receivables
                
                $
                400
                
                
                $
                4,370
                
                
                $
                (2,936
                )
                
                $
                1,834
   18.
Subsequent Events (Unaudited)
 
 On
January 4, 2008, Bronco MENA Investments LLC, one of the Company’s wholly-owned
subsidiaries closed a transaction with Challenger Limited, which the Company
refers to as Challenger, a company organized under the laws of the Isle of Man,
and certain of its affiliates to acquire a 25% equity interest in Challenger in
exchange for six drilling rigs and $5.0 million in cash.  Challenger
is an international provider of contract land drilling and workover services to
oil and natural gas companies with principal operations in Libya.  In
a separate transaction the Company sold to Challenger four drilling rigs and
ancillary equipment for $12.0 million, payable in installments. The transactions
were completed on January 4, 2008.  Prior to these transactions,
Challenger owned a fleet of 23 rigs.
 
 On
January 24, 2008, the Company announced that we had entered into an agreement
and plan of merger, dated January 23, 2008 with Allis-Chalmers, Bronco and Elway
Merger Sub, providing for the acquisition of Bronco by
Allis-Chalmers.
 
 Under the
terms of the merger agreement, which was approved by the respective boards of
directors of each of the Company, Allis-Chalmers and Merger Sub, Merger Sub will
merge with and into the Company, with the Company surviving as a wholly owned
subsidiary of Allis-Chalmers.  The merger agreement provides that, at
the effective time of the merger, Bronco stockholders will receive merger
consideration with an aggregate value of approximately $437.8 million, comprised
of (a) an aggregate of $280.0 million in cash and (b) shares of Allis-Chalmers
common stock having an aggregate value of approximately $157.8 million. The
number of shares issued as merger consideration will be based on the average
closing price of Allis-Chalmers common stock for a ten trading day period ending
two days prior to the closing.  Allis Chalmers will also assume all of
the outstanding debt of Bronco, which totaled $68.1 million at December 31,
2007. The affirmative vote of a majority of the votes cast on this matter is
required to consummate the merger.
  Three of
the Company’s stockholders have separately filed complaints seeking class action
status relating to the merger.  Two actions were filed in the District
Court of Oklahoma County in the State of Oklahoma on January 29, 2008 and
February 28, 2008, respectively.  The defendants named in the first
Oklahoma complaint are Bronco, the Bronco board of directors, Allis-Chalmers and
Merger Sub while the defendants named in the second Oklahoma complaint are
Bronco, the Bronco board of directors and Allis-Chalmers.  The third
action was filed in the Court of Chancery in the State of Delaware on January
29, 2008.  The defendants named in the Delaware complaint are Bronco,
the Bronco board of directors and Allis-Chalmers.  The plaintiff in
the first Oklahoma complaint has filed a motion for expedited
discovery.  The complaints generally allege that the merger
consideration is inadequate and that the Bronco board of directors has breached
its fiduciary duties.  The second Oklahoma complaint also alleges that
the joint proxy statement/prospectus included as part of Allis-Chalmers’
registration statement on Form S-4 filed with the SEC on February 20, 2008
contains materially incomplete and misleading information. The actions generally
seek to enjoin the merger, cause the Bronco board of directors to undertake an
auction for Bronco or otherwise take action to maximize stockholder value, award
monetary damages to the stockholders of Bronco and, in the case of the two
Oklahoma complaints, rescind the transaction (to the extent that it is
consummated).  The claims against Allis-Chalmers seek monetary
damages.  Answers to the complaints are not yet due, although a motion
to dismiss the first Oklahoma proceeding has been filed by
Bronco.  Bronco intends to vigorously defend these
actions.  As of this time, no order has been issued in either
proceeding that would preclude the consummation of the merger.  Each
of Allis-Chalmers and Bronco has the right to terminate the merger agreement in
the event a court enjoins the consummation of the merger.
 -43-
 Table of Contents
 SIGNATURES
  Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, Bronco Drilling Company, Inc. has duly caused this Annual Report on
Form 10-K to be signed on its behalf by the undersigned, thereunto duly
authorized.
  BRONCO DRILLING COMPANY, INC.Date:
      March 17, 2008
                By:
                /S/    D.
      FRANK
      HARRISOND.
      Frank Harrison
                  Chief
      Executive Officer
  Power
of Attorney
  Each of
the persons whose signature appears below hereby constitutes and appoints D.
Frank Harrison, Zachary M. Graves and Mark Dubberstein, and each of them, his
true and lawful attorneys-in-fact and agents, with full power of substitution
and resubstitution, from such person and in each person’s name, place and stead,
in any and all capacities, to sign the Form 10-K filed herewith and any and all
amendments to said Form 10-K, with all exhibits thereto and all documents in
connection therewith, with the SEC, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done as fully to all said
attorneys-in-fact and agents, or any of them, may lawfully do or cause to be
done by virtue thereof.
  Pursuant
to the requirements of the Securities and Exchange Act of 1934, this report has
been signed below by the following persons on behalf of Bronco Drilling Company,
Inc. and in the capacities and on the dates indicated.
  Name
                Title
                Date/S/    D.
      FRANK HARRISON
                  
                  D.
      Frank Harrison
                Chief
      Executive, President and Director
                  (Principal
      Executive Officer)
                March 17,
      2008/S/    ZACHARY M. GRAVES
                  
                  Zachary
      M. Graves
                Chief
      Financial Officer
                  (Principal
      Accounting and Financial Officer)
                March
      17, 2008/S/    MIKE LIDDELL
                  
                  Mike
      Liddell
                Director
                March 17, 2008/S/    DAVID L. HOUSTON
                  
                  David
      L. Houston
                Director
                March 17, 2008/S/    GARY
      HILL
                  
                  Gary
      Hill
                Director
                March 17, 2008/S/    WILLIAM R. SNIPES
                  
                  William
      R. Snipes
                Director
                March 17,
2008
 
 -44-