UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549



















FORM
10-Q



















(Mark
One)


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





For
the quarterly period ended September 30, 2008





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


Edmond,
OK 73013


(Address
of principal executive offices) (Zip Code)





(405)
242-4444


(Registrant’s
telephone number, including area code)







Indicate
by check mark whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.    Yes x
    No  







Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “accelerated filer,” “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





As of
October 31, 2008, 26,809,751 shares of common stock were
outstanding.




























BRONCO DRILLING COMPANY, INC.





INDEX




PagePART
      I—FINANCIAL INFORMATIONItem 1.
            
            Financial
      Statements
            
            3Bronco
      Drilling Company, Inc.:Consolidated
      Balance Sheets as of September 30, 2008 (unaudited) and December 31,
      2007
            
            3Consolidated
      Statements of Operations for the three and nine months ended September 30,
      2008 and 2007 (unaudited)
            
            4Consolidated
      Statement of Stockholders’ Equity for the nine months ended September 30,
      2008 (unaudited)
            
            5Consolidated
      Statements of Cash Flows for the nine months ended September 30, 2008 and
      2007 (unaudited)
            
            6Notes to
      Consolidated Financial Statements (unaudited)
            
            7Item 2.
            
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            
            13Item 3.
            
            Quantitative and
      Qualitative Disclosures about Market Risks
            
            17Item 4.
            
            Controls and
      Procedures
            
            17PART II—OTHER
      INFORMATIONItem 1.
            
            Legal
      Proceedings
            
            18Item 1A.
            
            Risk
      Factors
            
            18Item 2.
            
            Unregistered
      Sale of Equity Securities and Use of Proceeds
            
            18Item 3.
            
            Defaults Upon
      Senior Securities
            
            18Item 4.
            
            Submission of
      Matters to Vote of Security Holders
            
            18Item 5.
            
            Other
      Information
            
            18Item 6.
            
            Exhibits
            
            19Signatures
            
            20





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 Table of Contents





Bronco Drilling Company, Inc. and
SubsidiariesCONSOLIDATED BALANCE SHEETS(Amounts
      in thousands, except share par value)September
      30,
            
            
            December
      31,2008
            
            
            2007ASSETS
            
            (Unaudited)CURRENT
      ASSETSCash
      and cash equivalents
            
            $
            2,057
            
            
            $
            5,721ReceivablesTrade
      and other, net of allowance for doubtful accounts of$1,222
      and $1,834 in 2008 and 2007, respectively
            
            
            58,822
            
            
            
            61,499Contract
      drilling in progress
            
            
            3,018
            
            
            
            2,128Income
      tax receivable
            
            
            1,414
            
            
            
            1,191Current
      deferred income taxes
            
            
            642
            
            
            
            775Current
      maturities of note receivable
            
            
            5,078
            
            
            
            -Prepaid
      expenses
            
            
            1,351
            
            
            
            705Total
      current assets
            
            
            72,382
            
            
            
            72,019PROPERTY
      AND EQUIPMENT - AT COSTDrilling
      rigs and related equipment
            
            
            495,462
            
            
            
            510,962Transportation,
      office and other equipment
            
            
            43,201
            
            
            
            41,942538,663
            
            
            
            552,904Less
      accumulated depreciation
            
            
            113,408
            
            
            
            86,274425,255
            
            
            
            466,630OTHER
      ASSETSGoodwill
            
            
            
            
            24,328
            
            
            
            23,908Note
      receivable, less current maturities
            
            
            5,070
            
            
            
            -Investment
      in Challenger
            
            
            77,986
            
            
            
            -Restricted
      cash and deposit
            
            
            2,829
            
            
            
            2,745Intangibles,
      net, and other
            
            
            6,904
            
            
            
            3,303117,117
            
            
            
            29,956$
            614,754
            
            
            $
            568,605LIABILITIES
      AND STOCKHOLDERS' EQUITYCURRENT
      LIABILITIESAccounts
      payable
            
            $
            23,767
            
            
            $
            16,715Accrued
      liabilities
            
            
            15,135
            
            
            
            19,280Current
      maturities of long-term debt
            
            
            1,488
            
            
            
            1,256Total
      current liabilities
            
            
            40,390
            
            
            
            37,251LONG-TERM
      DEBT,  less current maturities
            
            
            86,594
            
            
            
            66,862DEFERRED
      INCOME TAXES
            
            
            75,227
            
            
            
            68,063COMMITMENTS
      AND CONTINGENCIESSTOCKHOLDERS'
      EQUITYCommon
      stock, $.01 par value, 100,000 shares authorized;26,346 and
      26,031 shares issued and outstandingat
      September 30, 2008 and December 31, 2007
            
            
            266
            
            
            
            262Additional
      paid-in capital
            
            
            302,734
            
            
            
            298,195Retained
      earnings
            
            
            109,543
            
            
            
            97,972Total
      stockholders' equity
            
            
            412,543
            
            
            
            396,429$
            614,754
            
            
            $
            568,605The
      accompanying notes are an integral part of these
    statements.


-3-
 Table of Contents


Bronco Drilling Company, Inc. and
SubsidiariesCONSOLIDATED
      STATEMENTS OF OPERATIONS(Amounts
      in thousands, except per share amounts)Three
      Months Ended September 30,
            
            
            Nine
      Months Ended September 30,2008
            
            
            2007
            
            
            2008
            
            
            2007(Unaudited)
            
            
            (Unaudited)REVENUESContract
      drilling revenues, including 1%, 0%, 1%,and 1% to related parties
            
            $
            63,509
            
            
            $
            70,441
            
            
            $
            178,076
            
            
            $
            214,311Well
      service, including 5%, 0%, 2%, and 0% torelated parties
            
            
            9,474
            
            
            
            5,845
            
            
            
            27,017
            
            
            
            15,676Gain
      (loss) on Challenger transactions
            
            
            (63
            )
            
            
            -
            
            
            
            3,138
            
            
            
            -72,920
            
            
            
            76,286
            
            
            
            208,231
            
            
            
            229,987EXPENSESContract
      drilling
            
            
            39,190
            
            
            
            39,135
            
            
            
            109,099
            
            
            
            120,448Well
      service
            
            
            8,201
            
            
            
            3,931
            
            
            
            19,222
            
            
            
            9,853Depreciation
      and amortization
            
            
            12,939
            
            
            
            9,219
            
            
            
            37,321
            
            
            
            31,317General
      and administrative
            
            
            13,199
            
            
            
            5,353
            
            
            
            24,353
            
            
            
            15,44473,529
            
            
            
            57,638
            
            
            
            189,995
            
            
            
            177,062Income
      (loss) from operations
            
            
            (609
            )
            
            
            18,648
            
            
            
            18,236
            
            
            
            52,925OTHER
      INCOME (EXPENSE)Interest
      expense
            
            
            (969
            )
            
            
            (1,009
            )
            
            
            (3,356
            )
            
            
            (3,071
            )Interest
      income
            
            
            43
            
            
            
            366
            
            
            
            1,052
            
            
            
            617Equity
      in income of Challenger
            
            
            1,078
            
            
            
            -
            
            
            
            2,854
            
            
            
            -Other,
      net
            
            
            (520
            )
            
            
            72
            
            
            
            (67
            )
            
            
            238(368
            )
            
            
            (571
            )
            
            
            483
            
            
            
            (2,216
            )Income
      (loss) before income taxes
            
            
            (977
            )
            
            
            18,077
            
            
            
            18,719
            
            
            
            50,709Income
      tax expense (benefit)
            
            
            (60
            )
            
            
            7,009
            
            
            
            7,148
            
            
            
            19,540NET
      INCOME (LOSS)
            
            $
            (917
            )
            
            $
            11,068
            
            
            $
            11,571
            
            
            $
            31,169Income
      (loss) per common share-Basic
            
            $
            (0.03
            )
            
            $
            0.43
            
            
            $
            0.44
            
            
            $
            1.20Income
      (loss) per common share-Diluted
            
            $
            (0.03
            )
            
            $
            0.42
            
            
            $
            0.44
            
            
            $
            1.20Weighted
      average number of shares outstanding-Basic
            
            
            26,290
            
            
            
            26,025
            
            
            
            26,275
            
            
            
            25,984Weighted
      average number of shares outstanding-Diluted
            
            
            26,290
            
            
            
            26,126
            
            
            
            26,363
            
            
            
            26,064The
      accompanying notes are an integral part of these
    statements.





-4-
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Bronco Drilling Company, Inc. and SubsidiariesCONSOLIDATED
      STATEMENT OF STOCKHOLDERS' EQUITY(Amounts
      in thousands)For
      the nine months ended September 30, 2008(Unaudited)Additional
            
            
            
            
            
            TotalCommon
            
            
            Common
            
            
            Paid
      In
            
            
            Retained
            
            
            Stockholders'Shares
            
            
            Amount
            
            
            Capital
            
            
            Earnings
            
            
            EquityBalance
      as of January 1, 2008
            
            
            26,031
            
            
            $
            262
            
            
            $
            298,195
            
            
            $
            97,972
            
            
            $
            396,429Net
      income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            11,571
            
            
            
            11,571Stock
      compensation
            
            
            315
            
            
            
            4
            
            
            
            4,539
            
            
            
            -
            
            
            
            4,543Balance
      as of September 30, 2008
            
            
            26,346
            
            
            $
            266
            
            
            $
            302,734
            
            
            $
            109,543
            
            
            $
            412,543The
      accompanying notes are an integral part of these
    statements.





-5-
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Bronco Drilling Company, Inc. and SubsidiariesCONSOLIDATED
      STATEMENTS OF CASH FLOWS(Amounts
      in thousands)Nine
      Months Ended September 302008
            
            
            2007(Unaudited)Cash
      flows from operating activities:Net income
            
            $
            11,571
            
            
            $
            31,169Adjustments to reconcile net income to net cashprovided by operating activities:Depreciation
      and amortization
            
            
            37,759
            
            
            
            31,758Bad
      debt expense
            
            
            135
            
            
            
            2,061Loss
      (gain) on sale of assets
            
            
            1
            
            
            
            (1,189
            )Gain
      on Challenger transactions
            
            
            (3,138
            )
            
            
            -Equity
      in income of Challenger
            
            
            (2,854
            )
            
            
            -Stock
      compensation
            
            
            4,543
            
            
            
            2,676Provision
      for deferred income taxes
            
            
            7,148
            
            
            
            15,077Changes
      in current assets and liabilities:Receivables
            
            
            2,234
            
            
            
            (6,291
            )Contract
      drilling in progress
            
            
            (890
            )
            
            
            579Prepaid
      expenses
            
            
            (683
            )
            
            
            (629
            )Other
      assets
            
            
            586
            
            
            
            (272
            )Accounts
      payable
            
            
            (5,430
            )
            
            
            (12,529
            )Accrued
      expenses
            
            
            (4,145
            )
            
            
            (675
            )Income
      taxes payable
            
            
            (493
            )
            
            
            (5,545
            )Net
      cash provided by operating activities
            
            
            46,344
            
            
            
            56,190Cash
      flows from investing activities:Restricted cash account
            
            
            70
            
            
            
            -Business acquisitions, net of cash acquired
            
            
            (5,063
            )
            
            
            (2,306
            )Proceeds
      from sale of assets
            
            
            4,679
            
            
            
            3,492Purchase of property and equipment
            
            
            (64,880
            )
            
            
            (54,094
            )Net
      cash used in investing activities
            
            
            (65,194
            )
            
            
            (52,908
            )Cash
      flows from financing activities:Proceeds
      from borrowings
            
            
            21,100
            
            
            
            12,000Payments
      of debt
            
            
            (2,413
            )
            
            
            (24,219
            )Debt
      issue costs
            
            
            (3,501
            )
            
            
            -Net
      cash provided by (used in) financing activities
            
            
            15,186
            
            
            
            (12,219
            )Net
      decrease in cash and cash equivalents
            
            
            (3,664
            )
            
            
            (8,937
            )Beginning
      cash and cash equivalents
            
            
            5,721
            
            
            
            10,608Ending
      cash and cash equivalents
            
            $
            2,057
            
            
            $
            1,671Supplementary
      disclosure of cash flow information:Interest
      paid, net of amount capitalized
            
            $
            2,838
            
            
            $
            2,831Income
      taxes paid
            
            
            493
            
            
            
            10,005Supplementary
      disclosure of non-cash investing and financing:Liabilities
      assumed in acquisition
            
            
            -
            
            
            
            8,527Common
      stock issued for acquisition
            
            
            -
            
            
            
            15,124Debt
      assumed in acquistion
            
            
            -
            
            
            
            6,516Notes
      issued for acquisition of property and equipment
            
            
            1,277
            
            
            
            3,649Assets
      exchanged/sold for equity interest and note receivable
            
            
            72,503
            
            
            
            -Common
      stock received for payment of receivable
            
            
            1,900
            
            
            
            -Purchase
      of property and equipment in accounts payable
            
            
            12,480
            
            
            
            11,590The
      accompanying notes are an integral part of these
    statements.





-6-
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Bronco Drilling Company, Inc. and Subsidiaries


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)


($
Amounts in thousands, except per share amounts)





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





1.
Organization and Summary of Significant Accounting Policies





Business
and Principles of Consolidation





Bronco
Drilling Company, Inc. 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.   Investments in
unconsolidated subsidiaries representing ownership of at least 20%, but less
than 50%, are accounted for under the equity method.  All intercompany
accounts and transactions have been eliminated in consolidation.




The Company
has prepared the accompanying unaudited consolidated financial statements and
related notes in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions of Form 10-Q and Regulation S-X. 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.





In
management’s opinion, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting of normal recurring accruals)
necessary to present fairly the financial position of the Company as of
September 30, 2008, the related results of operations for the three months and
nine months ended September 30, 2008 and 2007 and the cash flows for the nine
months ended September 30, 2008 and 2007.  The information included in
this Quarterly Report on Form 10-Q should be read in conjunction with the
Company’s Annual Report on Form 10-K for the year ended December 31,
2007.




The results
of operations for the three months and nine months ended September 30, 2008 are
not necessarily an indication of the results expected for the full
year.




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 and money market mutual funds to be cash
equivalents.




The Company
maintains its cash and cash equivalents in accounts and instruments which may
not be federally insured. 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.




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 depreciable life of other equipment
is three years. Depreciation is not commenced until acquired or refurbished 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 $37,587 and $61,604 as of
September 30, 2008 and December 31, 2007, respectively.  Due to
immateriality, gains and losses on dispositions with the exception of the
Challenger transactions are included in contract drilling and well service
revenues.




The Company
capitalizes interest as a component of the cost of drilling rigs constructed for
its own use. For the nine months ended September 30, 2008 and 2007, the Company
capitalized $663 and $1,269, respectively, and for the three months ended
September 30, 2008 and 2007, the Company capitalized $205 and $366,
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.





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% 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 September 30, 2008,
the tax years ended December 31, 2004 through December 31, 2007 are open for
examination by the Company's major taxing jurisdictions, which are the United
States, and the states of Oklahoma and Texas.





Net
Income Per Common Share




The Company
computes and presents net income per common share in accordance with SFAS
No. 128, “Earnings per
Share.” This standard requires dual presentation of basic and diluted net
income per share on the face of the Company’s statement of operations. Basic net
income 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 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.





Stock-based
Compensation




The Company
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 to 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 adoption of the
provisions of SFAS 157 did not have a material impact on the Company’s financial
statements.


-7-
 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 adoption of the provisions of SFAS 159 did
not have a material impact on the Company’s financial statements.





In December
2007, the FASB issued SFAS No. 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 No. 141R
applies prospectively to business combinations for which the acquisition date is
on or after the beginning of the first annual reporting period beginning on or
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 No. 160 (“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 fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008.  The Company is currently evaluating the
potential impact, if any, of the adoption of SFAS 160 on its consolidated
financial statements.




In March
2008, the FASB issued SFAS No. 161 (“SFAS 161”), “Disclosures about Derivative Instruments and Hedging
Activities – an amendment of FASB Statement No. 133.”SFAS 161
requires enhanced disclosures for derivative instruments and hedging activities
that include how and why an entity uses derivatives, how instruments and the
related hedged items are accounted for under FAS 133 and related
interpretations, and how derivative instruments and related hedged items affect
the entity’s financial position, results of operations and cash
flows.  SFAS 161 is effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008. The Company
does not expect the adoption of SFAS 161 to have a material impact on its
financial position or results of operations.




In May 2008,
the FASB issued SFAS No. 162 (“SFAS 162”), “The
Hierarchy of Generally Accepted Accounting Principles.”This
statement identifies the sources of accounting principles and the framework for
selecting the principles to be used in the preparation of financial statements
in conformity with generally accepted accounting principles (GAAP) in the United
States. This statement is effective 60 days following the SEC’s approval of the
Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning ofPresent Fairly
in Conformity With Generally Accepted Accounting Principles”. The Company does
not expect the adoption of SFAS No. 162 to have a material impact on its
financial position or results of operations.




2.
Acquisitions




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 $7,608.  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 final allocation of purchase price to the
Company’s acquisition of Well Service:





Assets
      acquired:Cash
            
            $
            198Prepaid
      expenses
            
            
            227Accounts
      receivable
            
            
            1,667Workover
      equipment
            
            
            23,912Vehicles
            
            
            1,943Other
      equipment
            
            
            244Customer
      lists
            
            
            910Trade
      name
            
            
            190Goodwill
            
            
            3,214$
            32,505




On
January 4, 2008, we acquired a 25% equity interest in Challenger Limited
(“Challenger”), in exchange for six drilling rigs and $5,063 in
cash.  The Company’s 25% interest at September 30, 2008 was based on
64,957,265 shares of Challenger issued.  The Company recorded equity
in income of Challenger of $1,078 and $2,854 for the three months and nine
months ended September 30, 2008 related to its equity investment in
Challenger.  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





The Company
also sold to Challenger four drilling rigs and ancillary
equipment.  The sales price of $12,990 consisted of $1,950 in cash,
installment receivable of $1,500 and a term note of $9,540.  The
installment receivable and term note bear interest at 8.5%.  Interest
and principal payments of $909 on the note are due quarterly until maturity at
December 31, 2010.  The note receivable is collateralized by the
assets sold to Challenger.




The Company
recorded a net gain of $3,138 relating to the contribution and sale of rigs and
equipment to Challenger.  The transactions were completed on January
4, 2008.  Prior to these transactions, Challenger owned a fleet of 23
rigs.




At
September 30, 2008, the book value of our ordinary share investment in
Challenger was $77,986.  The Company’s 25% share of the net assets of
Challenger was estimated to be $36,857.  The Company is in the process of
gathering additional information in order to finalize the accounting treatment
related to these transactions, including the allocation of the difference
between the amount of the Company’s investment and the amount of the underlying
equity in the net assets of Challenger.  The Company will make an
adjustment to record any identified intangibles and any additional amounts
attributed to the Company's interest in the tangible assets and begin
amortization, as required, upon completion of the allocation.




Challenger is
still in the process of securing a debt facility to meet short-term capital
needs including those related to start-up of our rigs and to mitigate downtime
that has affected Challenger’s operations due to past underinvestment in
adequate rig supplies and spare equipment.  The Company believes that
an entry into a debt facility by Challenger is an important factor in
determining the long-term success of Challenger and anticipates that Challenger
will continue to have unpredictable financial results in the near
future.


-8-
 Table of Contents




3.
Long-term Debt





Long-term
debt consists of the following:


September
      30,
                2008
              
              
              December 31,
                  2007Notes
      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)
              
              $
              3,328
              
              
              $
              5,120Revolving
      credit facility with Fortis Bank SA/NV, New York Branch, collateralized by
      theCompany's
      assets, and matures on September 29, 2013.  Loans under the
      revolvingcredit
      facility bear interest at variable rates as defined in the credit
      agreement. (2)
              
              
              81,100
              
              
              
              60,000Note
      payable to Ameritas Life Insurance Corp., collateralized by the building,
      payable in
                principaland
      interest installments of $14, interest on the note is 6.0%, maturity date
      ofJanuary
      1, 2021. (3)
              
              
              1,456
              
              
              
              1,521Notes
      payable to General Motors Acceptance Corporation, collateralized by
      trucks, payable in
                monthly
      principal and interest installments of $72, various due dates.
      (4)
              
              
              2,015
              
              
              
              1,184Note
      payable to John Deere Construction & Forestry Company, collateralized
      by forklifts,
                payable
      in thirty-six monthly installments of $11, due December 1, 2009.
      (5)
              
              
              157
              
              
              
              258Notes
      payable to Ford Credit, collateralized by truck, payable in principal and
      interestinstallments
      of $1.  Interest on the note is 2.9%, due November 10, 2010.
      (6)
              
              
              26
              
              
              
              3588,082
              
              
              
              68,118Less
      current installments
              
              
              1,488
              
              
              
              1,256$
              86,594
              
              
              $
              66,862


(1)
            On
      December 7, 2005, January 4, 2006, and June 12, 2006, 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 $4,512. The proceeds of the term loans were
      used to purchase four 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 book runner, and a syndicate of lenders.  On
      September 29, 2008, the Company amended and restated this revolving credit
      facility.  This $150.0 million amended and restated credit
      facility is with Fortis Bank SA/NV, New York Branch, as administrative
      agent, joint lead arranger and sole bookrunner, and a syndicate of
      lenders, which include The Royal Bank of Scotland plc, The CIT
      Group/Business Credit, Inc., The Prudential Insurance Company of America,
      Legacy Bank, Natixis and Caterpillar Financial Services Corporation. The
      revolving credit facility matures on September 29, 2013.  Loans
      under the revolving credit facility bear interest at LIBOR plus a 4.0%
      margin or, at our option, the prime rate plus a 3.0%
      margin.   The Company incurred $3,501 in debt issue costs
      related to the amended and restated credit
  facility.





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 three and nine months ended September 30, 2008 were $106 and
$221, respectively, and for the three and nine months ended September 30, 2007
were $112 and $261, respectively. The Company’s domestic 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 equity interests 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 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 1.05 to 1.00 for the four
consecutive quarters ending March 29, 2009, 1.10 to 1.00 for the four
consecutive quarters ending June 30, 2009 and 1.15 to 1.00 for the four
consecutive quarters ending September 30, 2009 and each quarter thereafter and a
maximum total leverage ratio of 2.00 to 1.00. The Company was in compliance with
all covenants at September 30, 2008.  The revolving credit facility
provides for mandatory prepayments under certain circumstances.





(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 and 2008, the Company entered into term loan
      agreements with General Motors Acceptance Corporation.  The
      loans provide for term installments in an aggregate not to exceed
      $2,516.  The proceeds of the term loans were used to purchase 61
      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 September 30, 2008 is as
follows:





2009
            
            $
            1,4882010
            
            
            1,4952011
            
            
            1,0642012
            
            
            7682013
            
            
            81,8952014
      and thereafter
            
            
            1,372$
            88,082


4.
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
$7,330 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 September 30, 2008 and December 31, 2007, the Company
had deposits of $2,829 and $2,745, respectively, with an insurance company
collateralizing a letter of credit. The deposit is reflected in restricted cash
and deposit. Accrued expenses at September 30, 2008 and December 31, 2007
included approximately $3,565 and $2,959, 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
September 30, 2008 and December 31, 2007 included approximately $1,518 and
$409, respectively, for our estimate of incurred but not reported costs related
to the self-insurance portion of our health insurance.


-9-
 Table of Contents


5.
Transactions with Affiliates
  The
Company has six operating leases with affiliated entities.  Related
rent expense was approximately $185 and $340 for the three and nine months ended
September 30, 2008. Related rent expense was approximately $45 and $83 for the
three and nine months ended September 30, 2007.


The
Company provided contract drilling services totaling $448 and $1,571 to
affiliated entities during the three and nine months ended September 30,
2008.   The Company provided contract drilling services totaling
$0 and $2,616 to affiliated entities during the three and nine months ended
September 30, 2007.  The Company provided workover services totaling
$432 and $661 to affiliated entities for the three and nine months ended
September 30, 2008.





6.
Commitments and Contingencies





Following
the announcement of the Agreement and Plan of Merger, by and among
Allis-Chalmers Energy Inc. (“Allis-Chalmers”), the Company and Elway Merger Sub,
Inc. (“Merger Sub”), on January 24, 2008, three purported class action
complaints were filed challenging the proposed merger. Two complaints were filed
in Oklahoma in the District Court of Oklahoma County, the
first on January 29, 2008 (the “Boothe action”), and the second on
February 28, 2008 (the “Goff action”). On April 9, 2008, the Boothe
action and the Goff action were consolidated into a single action (together, the
“Oklahoma action”). The defendants named in the Oklahoma action are the Company,
the board of directors of the Company and Allis-Chalmers. The third complaint
was filed in the Delaware Court of Chancery on January 29, 2008 (the
“Delaware action”). The defendants named in the Delaware action are the Company,
the board of directors of the Company, Allis-Chalmers and Merger
Sub.




The
Oklahoma and Delaware actions generally alleged that the proposed merger
consideration was inadequate, that the board of directors of the Company
breached its fiduciary duties and that Allis-Chalmers aided and abetted the
Company board of directors’ alleged breaches of fiduciary duties. The actions
also allege that the preliminary joint proxy statement/prospectus included as
part of Allis-Chalmers’ registration statement on Form S-4, filed with the
SEC on February 20, 2008, contained materially incomplete and misleading
information. The actions generally requested, among other things, that the suits
be designated class actions on behalf of the Company’s stockholders, that the
proposed merger be enjoined and that the board of directors of the Company
undertake an auction of the Company or otherwise take action to maximize
stockholder value. Additionally, the Delaware action requested that all
allegedly misleading or omitted information be corrected in Allis-Chalmers’
preliminary joint proxy statement/prospectus. The Delaware action seeks monetary
damages for the Company’s stockholders and the Oklahoma action requested that
the proposed merger be rescinded if it is consummated.





Allis-Chalmers
and the Company filed motions to dismiss the Boothe action on February 21,
2008 and February 19, 2008, respectively. In response to these motions, the
parties to the Boothe action agreed to extend the time for the plaintiff to
amend his complaint, and for the defendants to amend or withdraw their motions
to dismiss, or file answers to the amended complaint. After the Boothe action
and the Goff action were consolidated into the Oklahoma action on April 9,
2008, the plaintiffs in the Oklahoma action filed a consolidated amended
complaint on April 17, 2008. Allis-Chalmers filed a motion to dismiss the
amended complaint on May 14, 2008, and the Company and the board of
directors of the Company filed a motion to dismiss the amended complaint on
May 19, 2008. In response to these motions, the parties to the Oklahoma
action agreed to extend the time for the plaintiffs to respond to the
defendants’ motions to dismiss. Under the agreement, the plaintiffs were to
respond by September 3, 2008. The parties revised this agreement to allow the
plaintiffs to respond by November 3, 2008. On November 4, 2008, the plaintiffs
in the Oklahoma action voluntarily dismissed the Oklahoma action.  The
parties agreed to allow the court to maintain jurisdiction following the
voluntary dismissal to consider the plaintiffs' application for reasonable
attorney’s fees.





The
plaintiff in the Delaware action filed an amended complaint on April 23,
2008. The parties to the Delaware action agreed to indefinitely extend the time
for the defendants to respond to the plaintiff’s amended complaint. Under the
agreement, no defendant must answer the plaintiff’s amended complaint or
otherwise respond until one of the following two events occurs: (1) the
plaintiff files a second amended complaint, in which case the defendants will
have 30 days from the date of service to answer the second amended complaint or
otherwise respond; or (2) the plaintiff provides written notice to all the
defendants that each defendant must answer the amended complaint, in which case
each defendant will have, upon receiving the written notice, 30 days to answer
the amended complaint or otherwise respond.





Allis-Chalmers,
the Company, the board of directors of the Company and Merger Sub deny the
substantive allegations in the two complaints, believe the claims asserted are
baseless and intend to vigorously defend these actions.  The Company,
Merger Sub and Allis Chalmers mutually terminated the merger agreement on August
8, 2008. The Company agreed to pay $4,500 to Allis-Chalmers to terminate the
merger agreement.





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.





7.
Business Segments





The
Company’s reportable business segments are contract land drilling and well
servicing.  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 the nine months ended
September 30, 2008, our drilling rigs operated in Oklahoma, Texas, Colorado,
Montana, Utah, North Dakota, Louisiana, and Wyoming.  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 the nine months ended September 30, 2008, our workover rigs
operated in Oklahoma, Texas, Kansas, Colorado, Arkansas, Wyoming, 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.





The following table sets forth
certain financial information with respect to the Company’s reportable
segments:





Contract
      drilling
            
            
            Well
      servicing
            
            
            TotalThree
      Months Ended September 30, 2008Operating
      Revenues
            
            $
            63,509
            
            
            $
            9,474
            
            
            $
            72,983Direct
      operating costs
            
            
            (39,190
            )
            
            
            (8,201
            )
            
            $
            (47,391
            )Segment
      profits
            
            $
            24,319
            
            
            $
            1,273
            
            
            $
            25,592Depreciation
      and amortization
            
            $
            11,360
            
            
            $
            1,579
            
            
            $
            12,939Capital
      expenditures
            
            $
            22,456
            
            
            $
            2,265
            
            
            $
            24,721Identifiable
      assets
            
            $
            548,183
            
            
            $
            66,571
            
            
            $
            614,754Three
      Months Ended September 30, 2007Operating
      Revenues
            
            $
            70,441
            
            
            $
            5,845
            
            
            $
            76,286Direct
      operating costs
            
            
            (39,135
            )
            
            
            (3,931
            )
            
            $
            (43,066
            )Segment
      profits
            
            $
            31,306
            
            
            $
            1,914
            
            
            $
            33,220Depreciation
      and amortization
            
            $
            8,170
            
            
            $
            1,049
            
            
            $
            9,219Capital
      expenditures
            
            $
            16,073
            
            
            $
            6,195
            
            
            $
            22,268Identifiable
      assets
            
            $
            496,863
            
            
            $
            50,872
            
            
            $
            547,735Contract
      drilling
            
            
            Well
      servicing
            
            
            TotalNine
      Months Ended September 30, 2008Operating
      Revenues
            
            $
            178,076
            
            
            $
            27,017
            
            
            $
            205,093Direct
      operating costs
            
            
            (109,099
            )
            
            
            (19,222
            )
            
            $
            (128,321
            )Segment
      profits
            
            $
            68,977
            
            
            $
            7,795
            
            
            $
            76,772Depreciation
      and amortization
            
            $
            33,009
            
            
            $
            4,312
            
            
            $
            37,321Capital
      expenditures
            
            $
            54,926
            
            
            $
            9,954
            
            
            $
            64,880Identifiable
      assets
            
            $
            548,183
            
            
            $
            66,571
            
            
            $
            614,754Nine
      Months Ended September 30, 2007Operating
      Revenues
            
            $
            214,311
            
            
            $
            15,676
            
            
            $
            229,987Direct
      operating costs
            
            
            (120,448
            )
            
            
            (9,853
            )
            
            $
            (130,301
            )Segment
      profits
            
            $
            93,863
            
            
            $
            5,823
            
            
            $
            99,686Depreciation
      and amortization
            
            $
            28,668
            
            
            $
            2,649
            
            
            $
            31,317Capital
      expenditures
            
            $
            37,869
            
            
            $
            16,225
            
            
            $
            54,094Identifiable
      assets
            
            $
            496,863
            
            
            $
            50,872
            
            
            $
            547,735


-10-
 Table of Contents





The following
table reconciles the segment profits above to the operating income as reported
in the consolidated statements of operations:


Three
      Months Ended
              
              
              Three
      Months EndedSeptember
      30, 2008
              
              
              September
      30, 2007Segment
      profits
              
              $
              25,592
              
              
              $
              33,220General
      and administrative expenses
              
              
              (13,199
              )
              
              
              (5,353
              )Depreciation
      and amortization
              
              
              (12,939
              )
              
              
              (9,219
              )Gain
      (Loss) on Challenger transactions
              
              
              (63
              )
              
              
              -Operating
      income (loss)
              
              $
              (609
              )
              
              $
              18,648Nine
      Months Ended
              
              
              Nine
      Months EndedSeptember
      30, 2008
              
              
              September
      30, 2007Segment
      profits
              
              $
              76,772
              
              
              $
              99,686General
      and administrative expenses
              
              
              (24,353
              )
              
              
              (15,444
              )Depreciation
      and amortization
              
              
              (37,321
              )
              
              
              (31,317
              )Gain
      (Loss) on Challenger transactions
              
              
              3,138
              
              
              
              -Operating
      income
              
              $
              18,236
              
              
              $
              52,925
  8.
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:
 Three
      Months Ended
              
              
              Nine
      Months EndedSeptember 30,
              
              
              September
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007Basic:Net
      income (loss)
              
              $
              (917
              )
              
              $
              11,068
              
              
              $
              11,571
              
              
              $
              31,169Weighted
      average shares
              
              
              26,290
              
              
              
              26,025
              
              
              
              26,275
              
              
              
              25,984Earnings
      (loss) per share
              
              $
              (0.03
              )
              
              $
              0.43
              
              
              $
              0.44
              
              
              $
              1.20Diluted:Net
      income (loss)
              
              $
              (917
              )
              
              $
              11,068
              
              
              $
              11,571
              
              
              $
              31,169Weighted
      average shares:Outstanding
              
              
              26,290
              
              
              
              26,025
              
              
              
              26,275
              
              
              
              25,984Restricted
      stock/options
              
              
              -
              
              
              
              101
              
              
              
              88
              
              
              
              8026,290
              
              
              
              26,126
              
              
              
              26,363
              
              
              
              26,064Income
      (loss) per share
              
              $
              (0.03
              )
              
              $
              0.42
              
              
              $
              0.44
              
              
              $
              1.20
  The weighted average number of diluted
shares excludes 199 and 17,285 shares for the three months ended September
30, 2008 and 2007, respectively, and 7,405 and 25,216 shares for the nine
months ended September 30, 2008 and 2007, respectively, subject to restricted
stock awards due to their antidilutive effects.
  9.
Equity Transactions
  In March
2007, the Company closed a public offering of 3,450,000 shares of 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 the 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.
 
 10.
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”). The compensation cost that has been
charged against income before taxes related to stock options was $22 and $1,029
for the three and nine months ended September 30, 2007,
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.
 
 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.  Half of the Restricted
Stock Awards vested on January 1, 2008, and the balance of the Restricted Stock
Awards will vest on 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.
 -11-
 Table of Contents
  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
Company did not have any outstanding options at September 30, 2008.
  The
Company has not declared dividends since it became a public company and does 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 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 Plans
during the first nine months of 2008:
 Weighted
                
                
                WeightedAverage
                
                
                Average
      Remaining
                
                
                AggregateExercise
      Price
                
                
                Contractual
                
                
                IntrinsicShares
                
                
                per
      Share
                
                
                Life
                
                
                ValueOptions
      outstanding at December 31, 2007
                
                
                20,000
                
                
                $
                26.14
                
                
                
                8.30
                
                
                $
                (227
                )Granted
                
                
                -
                
                
                
                -Exercised
                
                
                -
                
                
                
                -Converted
                
                
                -
                
                
                
                -Forfeited/expired
                
                
                (20,000
                )
                
                
                26.14Options
      outstanding at September 30, 2008
                
                
                -
                
                
                $
                -
                
                
                
                -
                
                
                $
                -Options
      fully vested and exercisable at September 30, 2008
                
                
                -
                
                
                $
                -
                
                
                
                -
                
                
                $
                -Weighted
      Average
                
                
                AggregateGrant
      Date
                
                
                Grant
      DateShares
                
                
                Fair
      Value
                
                
                Fair
      ValueOptions
      nonvested at December 31, 2007
                
                
                9,319
                
                
                $
                13.34
                
                
                $
                121Granted
                
                
                -
                
                
                
                -
                
                
                
                -Vested
                
                
                -
                
                
                
                -
                
                
                
                -Converted
                
                
                -
                
                
                
                -
                
                
                
                -Forfeited/expired
                
                
                (9,319
                )
                
                
                13.34
                
                
                
                (121
                )Options
      nonvested at September 30, 2008
                
                
                -
                
                
                $
                -
                
                
                $
                -
 As of September 30, 2008, there was $0 total
unrecognized compensation cost related to nonvested share-based compensation
arrangements granted under the Plans.
  11. Restricted Stock
  Under all
restricted stock awards to date, 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 three and nine months ended September 30, 2008, related to shares of
restricted stock was $1,954 and $4,543, respectively, and for the three and nine
months ended September 30, 2007 was $981 and $1,647,
respectively.  Restricted stock activity for the nine months ended
September 30, 2008 was as follows:
 Weighted
      AverageGrant
      DateShares
              
              
              Fair
      ValueOutstanding
      at December 31, 2007
              
              
              553,445
              
              
              $
              16.64Granted
              
              
              232,874
              
              
              
              13.98Vested
              
              
              (321,889
              )
              
              
              16.40Forfeited/expired
              
              
              (750
              )
              
              
              16.69Outstanding
      at September 30, 2008
              
              
              463,680
              
              
              $
              15.45
 There was $3,708 of
total unrecognized compensation cost related to nonvested restricted stock
awards to be recognized over a weighted-average period of 1.17 years as of
September 30, 2008.
  12. Employee Benefit
Plans
  The Company
implemented a new 401(k) retirement plan for its eligible employees during 2007.
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 three and nine months ended September 30,
2008 were $299 and $839, respectively, and for the three and nine months
ended September 30, 2007 were $270 and $780, respectively.
 -12-
 Table of Contents
  ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
  The following
discussion and analysis should be read in conjunction with the “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”
section and audited consolidated financial statements and related notes thereto
included in our Annual Report on Form 10-K, filed with the Securities and
Exchange Commission, or SEC, on March 17, 2008 and with the unaudited
consolidated financial statements and related notes thereto presented in this
Quarterly Report on Form 10-Q.
 
 Disclosure
Regarding Forward-Looking Statements
  Our
disclosure and analysis in this Form 10-Q 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-Q 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-Q 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 “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and “Risk Factors” sections of
this Quarterly Report on Form 10-Q and our most recent Annual Report on Form
10-K. All forward-looking statements speak only as of the date of this Form
10-Q. 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.
 
 Overview
  We provide
contract land drilling and workover services to oil and natural gas exploration
and production companies. As of October 31, 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 61 workover rigs, of which 56 were operating and five were in
the process of being refurbished. As of October 31, 2008, we also owned a fleet
of 66 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, North Dakota, Louisiana
and Mexico.  Our workover rigs are currently operating in Oklahoma,
Texas, Kansas, Colorado, Arkansas, and New Mexico.  A majority of the
wells we drill for our customers are drilled in unconventional basins also known
as resource plays. These plays are generally characterized by complex geologic
formations that often 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 and have the capability of drilling horizontal and directional 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 drilling activity in our core operating areas.
  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 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 28 of our rigs operating under agreements with
durations of up 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 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 earn
a fixed amount of revenue based on the mobilization rate stated in the contract.
We begin earning our contracted daywork rate 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 three
and nine months ended September 30, 2008 and 2007 and for the years ended
December 31, 2007, 2006 and 2005, our rig utilization rates, revenue days and
average number of operating rigs were as follows:
  Three
      Months Ended
              
              
              Nine
      Months EndedSeptember
      30,
              
              
              September
      30,
              
              
              Years
      Ended December 31,2008
              
              
              2007
              
              
              2008
              
              
              2007
              
              
              2007
              
              
              2006
              
              
              2005Average
      number of operating rigs
              
              
              42
              
              
              
              53
              
              
              
              44
              
              
              
              52
              
              
              
              51
              
              
              
              45
              
              
              
              17Revenue
      days
              
              
              3,208
              
              
              
              3,739
              
              
              
              9,412
              
              
              
              10,995
              
              
              
              14,245
              
              
              
              15,202
              
              
              
              5,781Utilization
      Rates
              
              
              84
              %
              
              
              76
              %
              
              
              78
              %
              
              
              77
              %
              
              
              76
              %
              
              
              93
              %
              
              
              95
              %
  The decrease
in the number of revenue days in the three and nine month-periods ended
September 30, 2008 as compared to the same period in 2007 is attributable to a
decrease in our average number of operating rigs due primarily to the rigs sold
and contributed to Challenger.  See “—Recent Highlights”
below.
  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
      September 30,
              
              
              At
      December 31,2008
              
              
              2007
              
              
              2006
              
              
              2005Crude
      oil (Bbl)
              
              $
              100.64
              
              
              $
              95.98
              
              
              $
              61.05
              
              
              $
              61.04Natural
      gas (Mmbtu)
              
              $
              7.44
              
              
              $
              7.48
              
              
              $
              6.30
              
              
              $
              11.23U.S.
      Land Rig Count
              
              
              1,926
              
              
              
              1,719
              
              
              
              1,626
              
              
              
              1,391
 -13-
 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. 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 well. Individual wells 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.  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 September 30, 2008 and December 31, 2007. At
September 30, 2008 and December 31, 2007, our contract drilling in progress
totaled $3.0 million and $2.1 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 $1.2 million and $1.8 million at September 30, 2008 and
December 31, 2007, 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 September 30, 2008, would have resulted in a
corresponding decrease in our net income of approximately $2.8
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 three and nine months ended
September 30, 2008, we capitalized approximately $205,000 and $663,000,
respectively, and during the three and nine months ended September 30, 2007 we
capitalized approximately $366,000 and $1.3 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 $2.0 million and $4.5 million
for the three and nine months ended September 30, 2008, respectively, and $1.0
million  and $2.7 million for the three and nine months ended
September 30, 2007, respectively.
 -14-
 Table of Contents
  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.
 
 The
Company’s board of directors and a majority of the Company’s stockholders
approved the Company’s 2006 Stock Incentive Plan, 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.
 
 On April
20, 2007, we filed a Tender Offer Statement on Schedule TO relating to our offer
to twenty-five 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 September 30, 2008 and
December 31, 2007 included accruals of approximately $3.6 million and $3.0
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
$7.3 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 September 30, 2008 and December 31, 2007, we had
deposits of $2.8 million and $2.7 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.
  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, or 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 to 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 adoption of the
provisions of SFAS 157 did not have a material impact on our financial
statements.
  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. The adoption of the provisions of SFAS 159 did
not have a material impact on our financial statements.
  In December
2007, the FASB issued SFAS No. 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 No. 141R
applies prospectively to business combinations for which the acquisition date is
on or after the beginning of the first annual reporting period beginning on or
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 No. 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 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 fiscal years, and interim periods within those fiscal years, beginning on or
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 March
2008, the FASB issued SFAS No. 161, or SFAS 161, “Disclosures about Derivative Instruments and Hedging
Activities – an amendment of FASB Statement No. 133.”SFAS 161
requires enhanced disclosures for derivative instruments and hedging activities
that include how and why an entity uses derivatives, how instruments and the
related hedged items are accounted for under FAS 133 and related
interpretations, and how derivative instruments and related hedged items affect
the entity’s financial position, results of operations and cash
flows.  SFAS 161 is effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008. We do not
expect the adoption of SFAS 161 to have a material impact on our financial
position or results of operations.
  In May 2008,
the FASB issued SFAS No. 162 or SFAS 162, “The
Hierarchy of Generally Accepted Accounting Principles.”This
statement identifies the sources of accounting principles and the framework for
selecting the principles to be used in the preparation of financial statements
in conformity with generally accepted accounting principles (GAAP) in the United
States. This statement is effective 60 days following the SEC’s approval of the
Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning ofPresent Fairly
in Conformity With Generally Accepted Accounting Principles”. We do not expect
the adoption of SFAS No. 162 to have a material impact on our financial position
or results of operations.
 
 Recent
Highlights
 
 The
following are highlights that impacted our liquidity or results of operations
for the nine months ended September 30, 2008:
  On January 4,
2008, Bronco MENA Investments LLC, one of our wholly-owned subsidiaries, closed
a transaction with Challenger Limited, or 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 $5.1 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.  We also sold to Challenger four
drilling rigs and ancillary equipment for $13.0 million, payable in
installments.  We recorded a net gain of $3.1 million relating to the
exchange and sale of rigs and equipment to Challenger.  Prior to these
transactions, Challenger owned a fleet of 23 rigs.  We recorded equity
in income of Challenger of $1.1 million and $2.9 million for the three and nine
months ended September 30, 2008 related to our equity investment in
Challenger.
 -15-
 Table of Contents
 
 Eight
of the rigs contributed or sold to Challenger are in
Libya.  Challenger is still in the process of securing a debt facility
to meet short-term capital needs, including $14.7 million of liabilities due to
Bronco, and those related to start-up of our rigs and to mitigate downtime that
has affected Challenger’s operations due to past underinvestment in adequate rig
supplies and spare equipment.  We believe that an entry into a debt
facility by Challenger is an important factor in determining the long-term
success of Challenger and anticipate that Challenger will continue to have
unpredictable financial results in the near future.
  On January
23, 2008, we entered into an Agreement and Plan of Merger, as amended by the
First Amendment thereto, dated as of June 1, 2008, which together we refer to as
the merger agreement, with Allis-Chalmers and Merger Sub, 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),
Bronco would merge with and into Merger Sub, a wholly-owned subsidiary of
Allis-Chalmers, and Merger Sub would survive the merger and simultaneously
change its name to “Bronco Drilling Company LLC”.  The merger
agreement was approved by our board of directors and by the respective boards of
directors of Allis-Chalmers and Merger Sub.  The proposed merger was
terminated mutually by us and Allis-Chalmers on August 8, 2008.  We
incurred $6.0 million in expense during the third quarter related to the
proposed merger.
  Results
of Operations
 
 Three
Months Ended September  30, 2008 Compared to Three Months Ended
September 30, 2007
  Contract Drilling
Revenue. For the three months ended September 30, 2008, we reported
contract drilling revenues of $63.5 million, a 10% decrease from revenues of
$70.4 million for the same period in 2007. The decrease is primarily due to a
decrease in revenue days and average number of rigs working for the three
months ended September 30, 2008 as compared to the same period in 2007. Revenue
days decreased 14% to 3,208 days for the three months ended September 30, 2008
from 3,739 days during the same period in 2007. Our average number of operating
rigs decreased to 42 from 53, or 21%, for the three months ended September 30,
2008 as compared to the same period in 2007. The decrease in the number of
revenue days and size of our operating rig fleet for the three months ended
September 30, 2008, as compared to the same period in 2007, is primarily due to
the sale and contribution of rigs to Challenger. The decrease was partially
offset by an increase in average dayrates for our drilling services of $613, or
4%, to $17,869 for the three months ended September 30, 2008 from $17,256 in the
same period in 2007.
  Well Service
Revenue.For the three months ended September 30, 2008, we
reported well service revenues of approximately $9.5 million, a 62% increase
from revenues of $5.8 million for the same period in 2007.  The
increase is primarily due to an increase in revenue hours, average number of
operating workover rigs, and the average hourly rate for the three months ended
September 30, 2008 as compared to the same period in 2007.  Revenue
hours increased 48% to 25,401 hours for the three months ended September 30,
2008 from 17,184 hours during the same period in 2007.  Our average
number of operating workover rigs increased to 54 from 35, or 54%, for the three
months ended September 30, 2008 as compared to the same period in
2007.  The increase in revenue hours and size of our operating
workover rig fleet is due to additional workover rigs purchased during
2008.  The average hourly rate increased to $373 from $340, or 10%,
for the three months ended September 30, 2008 as compared to the same period in
2007.
  Equity in Income of
Challenger.Equity in income of Challenger was $1.1
million for the three months ended September 30, 2008 related to our investment
in Challenger.  Challenger is still in the process of securing a debt
facility to meet short-term capital needs including those related to start-up of
our rigs and to mitigate downtime that has affected Challenger’s operations due
to past underinvestment in adequate rig supplies and spare equipment.  We
believe that an entry into a debt facility is an important factor in
determining the long-term success of Challenger and repaying amounts due to
Bronco.
  Contract Drilling
Expense. Direct rig cost increased $56,000 to $39.2 million for the
three months ended September 30, 2008 from $39.1 million for the same period in
2007. This increase is primarily due to an increase in daily operating expenses
partially offset by the decrease in revenue days and the decrease in average
number of operating rigs in our fleet for the three months ended September 30,
2008 as compared to the same period in 2007.  As a percentage of
contract drilling revenue, drilling expense increased to 62% for the three-month
period ended September 30, 2008 from 56% for the same period in 2007 due
primarily to a wage increase that was enacted at the beginning of the third
quarter.
  Well Service
Expense. Well service expense increased $4.3 million to $8.2 million for
the three months ended September 30, 2008 from $3.9 million for the same period
in 2007.  This 109% increase is primarily due to the increase in
revenue hours and the average number of operating workover rigs in our fleet for
the three months ended September  30, 2008 as compared to the same
period in 2007 and an increase in workers compensation expense of $1.4 million
due primarily to one claim.
  Depreciation
Expense. Depreciation expense increased $3.7 million to $12.9
million for the three months ended September 30, 2008 from $9.2 million for the
same period in 2007. The increase is primarily due to the 4% increase in fixed
assets and an entry to credit depreciation expense in the third quarter of 2007
for $2.1 million related to a change in the depreciable life of certain rig
components that moved between working rigs and the yard.
  General and
Administrative Expense. General and administrative expense increased
$7.8 million to $13.2 million for the three months ended September 30, 2008 from
$5.4 million for the same period in 2007. The increase is primarily attributed
to the termination fee of $4.5 million paid to Allis-Chalmers upon termination
of the proposed merger. Attorney expense increased $1.0 million and consulting
fees expense increased $501,000 primarily due to the terminated
merger.  The remaining increase is due to an increase in
administrative salaries of $1.1 million, and an increase in stock compensation
expense of $951,000.  The increase in administrative salaries and stock
compensation expense is primarily due to the termination of our employment
agreement with Larry Bartlett, our former Senior Vice President of Rig
Operations, during the third quarter of 2008.  These increases were
partially offset by a decrease in accounts receivable write offs of
$453,000.
  Interest
Expense. Interest expense decreased $39,000 to $969,000 for the
three months ended September 30, 2008 from $1.0 million for the same period in
2007. The decrease is due to a decrease in the average interest rate on our
revolving credit facility partially offset by a higher outstanding balance on
our revolving credit facility and a decrease in the capitalization of interest
related to our rig refurbishment program.  We capitalized $205,000 of
interest for the three months ended September 30, 2008 as compared to $366,000
for the same period in 2007.
  IncomeTax Expense
(Benefit). We recorded a tax benefit of $60,000 for the three
months ended September 30, 2008. This compares to a deferred tax expense of $7.0
million for the three months ended September 30, 2007. This decrease is due to
the decrease in pre-tax income.
 
 Nine
months Ended September 30, 2008 Compared to Nine months Ended September 30,
2007
  Contract Drilling
Revenue. For the nine months ended September 30, 2008, we reported
contract drilling revenues of $178.1  million, a 17% decrease from
revenues of $214.3 million for the same period in 2007. The decrease is
primarily due to a decrease in dayrates, revenue days and average number of rigs
working for the nine months ended September 30, 2008 as compared to the same
period in 2007. Average dayrates for our drilling services decreased $875, or
5%, to $17,202 for the nine months ended September 30, 2008 from $18,077 in the
same period in 2007. Revenue days decreased 14% to 9,412 days for the nine
months ended September 30, 2008 from 10,995 days during the same period in 2007.
Our average number of operating rigs decreased to 44 from 52, or 15%, for the
nine months ended September 30, 2008 as compared to the same period in 2007. The
decrease in the number of revenue days and size of our operating rig fleet for
the nine months ended September 30, 2008 as compared to the same period in 2007
is primarily due to the sale and contribution of rigs to
Challenger.
  Well Service
Revenue.For the nine months ended September 30, 2008, we
reported well service revenues of approximately $27.0 million, a 72% increase
from revenues of $15.7 million for the same period in 2007.  The
increase is primarily due to an increase in revenue hours and average number of
operating workover rigs for the nine months ended September 30, 2008 as compared
to the same period in 2007.  Revenue hours increased 71% to 74,798
hours for the nine months ended September 30, 2008 from 43,657 hours during the
same period in 2007.  Our average number of operating workover rigs
increased to 52 from 29, or 79%, for the nine months ended September 30, 2008 as
compared to the same period in 2007.  The increase in revenue hours
and size of our operating workover rig fleet is due to additional workover rigs
purchased.
  Equity in Income of
Challenger.Equity in income of Challenger was $2.9
million for the nine months ended September 30, 2008 related to our investment
in Challenger.  Challenger is still in the process of securing a debt
facility to meet short-term capital needs including those related to start-up of
our rigs and to mitigate downtime that has affected Challenger’s operations due
to past underinvestment in adequate rig supplies and spare
equipment.  We believe that an entry into a debt facility is an
important factor in determining the long-term success of Challenger and repaying
amounts due to Bronco.
  Contract Drilling
Expense. Direct rig cost decreased $11.3 million to $109.1 million
for the nine months ended September 30, 2008 from $120.4 million for the same
period in 2007. This 9% decrease is primarily due to the decrease in revenue
days and the decrease in average number of operating rigs in our fleet for the
nine months ended September 30, 2008 as compared to the same period in
2007.  As a percentage of contract drilling revenue, drilling expense
increased to 61% for the three-month period ended September 30, 2008 from
56% for the same period in 2007 due primarily to a wage increase that was
enacted at the beginning of the third quarter.
  Well Service
Expense. Well service expense increased $9.3 million to $19.2 million for
the nine months ended September 30, 2008 from $9.9 million for the same period
in 2007.  This 95% increase is primarily due to the increase in
revenue hours and the average number of operating workover rigs in our fleet for
the nine months ended September 30, 2008 as compared to the same period in 2007
and an increase in workers compensation expense of $1.4 million due primarily to
one claim.
  
 -16-
 Table of Contents
 
 Depreciation
Expense.
 
 General and
Administrative Expense. General and administrative expense increased
$9.0 million to $24.4 million for the nine months ended September 30, 2008 from
$15.4 million for the same period in 2007. The increase is primarily attributed
to the termination fee of $4.5 million paid to Allis-Chalmers upon termination
of the proposed merger. Attorney expense increased $1.1 million and consulting
fees expense increased $521,000 primarily due to the terminated
merger.  The remaining increase is due to an increase in
administrative salaries of $2.2 million, and an increase in stock compensation
expense of $1.9 million.  The increase in administrative salaries and stock
compensation expense is primarily due to the termination of our employment
agreement with Larry Bartlett, our former Senior Vice President of Rig
Operations, during the third quarter of 2008.  The remainder of the
increase in administrative salaries and related is due to our increased employee
count and selected wage increases.  The remainder of the increase in
stock compensation expense is due to additional awards of restricted stock
during 2008.  These increases were partially offset by a decrease in
accounts receivable write offs of $1.7 million..
  Interest
Expense. Interest expense increased $285,000 to $3.4 million for the
nine months ended September 30, 2008 from $3.1 million for the same period in
2007. The increase is due to a decrease in the capitalization of interest
related to our rig refurbishment program and a higher outstanding balance on our
revolving credit facility partially offset by a decrease in the average interest
rate on our revolving credit facility.  We capitalized $663,000 of
interest for the nine months ended September 30, 2008 as compared to $1.3
million for the same period in 2007.
  IncomeTax Expense
(Benefit). We recorded a tax expense of $7.1 million for the nine
months ended September 30, 2008 all of which was deferred tax expense. This
compares to a deferred tax expense of $19.5 million for the nine months ended
September 30, 2007. This decrease is due to the decrease in pre-tax
income.
 
 Liquidity
and Capital Resources
  Operating
Activities. Net cash provided by
operating activities was $46.3 million for the nine months ended September 30,
2008 as compared to $56.2 million in 2007. The decrease of $9.9 million
from 2007 to 2008 was primarily due to a decrease in cash receipts from
customers, partially offset by lower cash payments to suppliers and $4.5 million
paid to Allis-Chalmers related to the termination of the proposed
merger.
  Investing
Activities. We use a significant
portion of our cash flows from operations and financing activities for
acquisitions and the refurbishment of our rigs. Cash used in investing
activities was $65.2 million for the nine months ended September 30, 2008 as
compared to $52.9 million for the same period in 2007.   For the
nine months ended September 30, 2008, we used $64.9 million to purchase fixed
assets and $5.1 million to purchase an equity interest in
Challenger.  These amounts were partially offset by $4.7 million of
proceeds received from the sale of assets.  For the nine months ended
September 30, 2007, we used $54.1 million to purchase fixed assets and $2.3
million to purchase Well Service.  These amounts were partially offset
by $3.5 million of proceeds received from the sale of assets.
  Financing
Activities. Our cash flows provided
by financing activities were $15.2 million for the nine months ended September
30, 2008 as compared to $12.2 million used in financing activities for the same
period in 2007. For the nine months ended September 30, 2008, our net cash
provided by financing activities related to borrowings of $21.1 million under
our credit facility with Fortis Capital Corp., partially offset by principal
payments of $2.4 million to various lenders and $3.5 million of debt issuance
costs related to the refinancing of our debt facility with Fortis Capital
Corp.  Our net cash used in 2007 for financing activities related
to principal payments of $24.2 million under our credit agreement with Fortis
Capital Corp., partially offset by borrowings of $12.0 million under our credit
facility with Fortis Capital Corp.
  Sources of
Liquidity. Our primary sources of
liquidity are cash from operations and debt and equity financing.
  Debt
Financing.   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 book runner, and a syndicate of
lenders.  On September 29, 2008, we amended and restated this
revolving credit facility.  This $150.0 million amended and restated
credit facility is with Fortis Bank SA/NV, New York Branch, as administrative
agent, joint lead arranger and sole bookrunner, and a syndicate of lenders,
which include The Royal Bank of Scotland plc, The CIT Group/Business Credit,
Inc., The Prudential Insurance Company of America, Legacy Bank, Natixis and
Caterpillar Financial Services Corporation. The revolving credit facility
matures on September 29, 2013.  Loans under the revolving credit
facility bear interest at LIBOR plus a 4.0% margin or, at our option, the prime
rate plus a 3.0% margin.
  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
three and nine months ended September 30, 2008 were $106 and $221, respectively,
and for the three and nine months ended September 30, 2007 were $112 and $261,
respectively. Our domestic 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
equity interests 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 our ability to 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 1.05 to 1.00 for the four consecutive
quarters ending March 29, 2009, 1.10 to 1.00 for the four consecutive quarters
ending June 30, 2009 and 1.15 to 1.00 for the four consecutive quarters ending
September 30, 2009 and each quarter thereafter and a maximum total leverage
ratio of 2.00 to 1.00. We are in compliance with all covenants at September 30,
2008.  The revolving credit facility provides for mandatory
prepayments under certain circumstances.
  We are party
to term installment loans for an aggregate principal amount of approximately
$4.5 million. These term loans are payable in 96 monthly installments, mature in
2013 and 2014 and have a weighted average annual interest rate of 6.92%. 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 acquisition of Well Service in January 2007, we issued
1,070,390 shares of our common stock.
  Capital
Expenditures.
  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 12
months.  However, additional capital may be required for future
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.
  Item 3. Quantitative and Qualitative Disclosures About Market
Risks
  We are
subject to market risk exposure related to changes in interest rates on our
outstanding floating rate debt. Borrowings under our revolving credit facility
bear interest at a floating rate equal to LIBOR plus a 4.0% margin or, at our
option, the prime rate plus a 3.0% margin. An increase or decrease of 1% in the
interest rate would have a corresponding decrease or increase in our net income
(loss) of approximately $505,000 annually, based on the $81.1 million
outstanding in the aggregate under our credit facility as of September 30,
2008.
 
 Item 4.
Controls and Procedures.
 
 Evaluation of Disclosure Control and
Procedures.
  As of the end
of the period covered by this Quarterly Report on Form 10−Q, 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 September 30, 2008 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 Quarterly
Report on Form 10−Q was prepared, as appropriate to allow timely decision
regarding the required disclosure.
  -17-
 Table of Contents
 
 Changes in Internal Control over
Financial Reporting.
  There were no
changes in our internal control over financial reporting that occurred during
the first nine months of 2008 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.
  PART II: OTHER INFORMATION
 
 Item 1. Legal Proceedings
 
 Following the announcement of the Agreement and Plan of Merger, by and
among Allis-Chalmers Energy Inc. (“Allis-Chalmers”), the Company and Elway
Merger Sub, Inc. (“Merger Sub”), on January 24, 2008, three purported class
action complaints were filed challenging the proposed merger. Two complaints
were filed in Oklahoma in the
District Court of Oklahoma County, the first on
January 29, 2008 (the “Boothe action”), and the second on February 28,
2008 (the “Goff action”). On April 9, 2008, the Boothe action and the Goff
action were consolidated into a single action (together, the “Oklahoma action”).
The defendants named in the Oklahoma action are the Company, the board of
directors of the Company and Allis-Chalmers. The third complaint was filed in
the Delaware Court of Chancery on January 29, 2008 (the “Delaware action”).
The defendants named in the Delaware action are the Company, the board of
directors of the Company, Allis-Chalmers and Merger Sub.
  The Oklahoma and Delaware actions generally alleged that the proposed
merger consideration was inadequate, that the board of directors of the Company
breached its fiduciary duties and that Allis-Chalmers aided and abetted the
Company board of directors’ alleged breaches of fiduciary duties. The actions
also alleged that the preliminary joint proxy statement/prospectus included as
part of Allis-Chalmers’ registration statement on Form S-4, filed with the
SEC on February 20, 2008, contained materially incomplete and misleading
information. The actions generally requested, among other things, that the suits
be designated class actions on behalf of the Company’s stockholders, that the
proposed merger be enjoined and that the board of directors of the Company
undertake an auction of the Company or otherwise take action to maximize
stockholder value. Additionally, the Delaware action requested that all
allegedly misleading or omitted information be corrected in Allis-Chalmers’
preliminary joint proxy statement/prospectus. The Delaware action seeks monetary
damages for the Company’s stockholders and the Oklahoma action requested that
the proposed merger be rescinded if it is consummated.
 
 Allis-Chalmers and the Company filed motions to dismiss the Boothe action
on February 21, 2008 and February 19, 2008, respectively. In response
to these motions, the parties to the Boothe action agreed to extend the time for
the plaintiff to amend his complaint, and for the defendants to amend or
withdraw their motions to dismiss, or file answers to the amended complaint.
After the Boothe action and the Goff action were consolidated into the Oklahoma
action on April 9, 2008, the plaintiffs in the Oklahoma action filed a
consolidated amended complaint on April 17, 2008. Allis-Chalmers filed a
motion to dismiss the amended complaint on May 14, 2008, and the Company
and the board of directors of the Company filed a motion to dismiss the amended
complaint on May 19, 2008. In response to these motions, the parties to the
Oklahoma action agreed to extend the time for the plaintiffs to respond to the
defendants’ motions to dismiss. Under the agreement, the plaintiffs were to
respond by September 3, 2008. The parties revised this agreement to allow the
plaintiffs to respond by November 3, 2008.  On November 4, 2008, the
plaintiffs in the Oklahoma action voluntarily dismissed the Oklahoma
action.  The parties agreed to allow the court to maintain
jurisdiction following the voluntary dismissal to consider the plaintiffs'
application for reasonable attorney’s fees.
 
 The plaintiff in the Delaware action filed an amended complaint on
April 23, 2008. The parties to the Delaware action agreed to indefinitely
extend the time for the defendants to respond to the plaintiff’s amended
complaint. Under the agreement, no defendant must answer the plaintiff’s
amended complaint or otherwise respond until one of the following two events
occurs: (1) the plaintiff files a second amended complaint, in which case the
defendants will have 30 days from the date of service to answer the second
amended complaint or otherwise respond; or (2) the plaintiff provides written
notice to all the defendants that each defendant must answer the amended
complaint, in which case each defendant will have, upon receiving the written
notice, 30 days to answer the amended complaint or otherwise
respond.
 
 Allis-Chalmers, the Company, the board of directors of the Company and
Merger Sub deny the substantive allegations in the two complaints, believe the
claims asserted are baseless and intend to vigorously defend these
actions.  The Company, Merger Sub and Allis Chalmers mutually
terminated the merger agreement on August 8, 2008. The Company agreed
to pay $4.5 million to Allis-Chalmers to terminate the merger
agreement.
 
 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.
 
 Item 1A. Risk Factors
 
 There have been no material changes to the Risk Factors previously
reported in our Annual Report on Form 10-K for the year ended December 31,
2007 and filed with the SEC on March 17, 2008.
  Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds
 
 None.
 
 Item 3. Defaults Upon Senior Securities
 
 None.
 
 Item 4.
Submission of Matters to a Vote of Security Holders
 
 None.
 
 Item 5.
Other Information
  On
November 4, 2008, our Board of Directors approved a form of indemnification
agreement and, pursuant to the Board’s authorization, we to entered into an
indemnification agreement with each of our directors and officers. The
indemnification agreements supersede any prior agreements between us and our
directors and officers pertaining to indemnification and advancement rights, and
they supplement the indemnification and advancement rights provided to our
directors and officers in our Certificate of Incorporation and our
Bylaws.
  The
indemnification agreements require the Company to indemnify each indemnitee,
subject to certain limitations, to the fullest extent permitted by law for
certain expenses and liabilities incurred in connection with any proceeding
brought against the indemnitee by reason of his or her service to the Company.
The indemnification agreements also require the Company to make advancements to
the indemnitees for certain expenses incurred in defending such proceedings.
Indemnification, however, is not available under the agreements (i) when an
indemnitee did not act in good faith or in a manner he reasonably believed to
the best interests of the Company, (ii) for most proceedings brought directly by
an indemnitee, (iii) to the extent prohibited by applicable law, or (iv) in
connection with certain securities law claims. The foregoing description is
qualified in its entirety by reference to the form of indemnificationagreement attached hereto as
Exhibit 10.4.  -18-
 Table of Contents
  Item 6. Exhibits
 Exhibits:
              Description2.1
              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, dated as of January 23, 2008, by and among Bronco
      Drilling Company, Inc., Allis-Chalmers Energy, 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).
 
 2.3
              First
      Amendment, dated as of June 1, 2008, to Agreement and Plan of Merger 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 June 2, 2008).
 
 3.1
              Amended
      and Restated Certificate of Incorporation of the Company, dated August 11,
      2005 (incorporated by reference to Exhibit 3.1 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).
 
 10.1
              Mutual
      Termination and Release Agreement, dated August 8, 2008, by and among
      Allis-Chalmers Energy, Inc., Bronco Drilling Company, Inc., and Elway
      Merger Sub, LLC (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 August 8, 2008).
 
 10.2
              Amended
      and Restated Credit Agreement, dated as of September 29, 2008, among
      Bronco Drilling Company, Inc., as Borrower, certain subsidiaries thereof,
      as Guarantors, the lenders from time to time party thereto, as Lenders,
      Fortis Bank SA/NV, New York Branch, as Administrative Agent, Joint Lead
      Arranger and Sole Bookrunner, The Royal Bank of Scotland plc, as Joint
      Lead Arranger and Co-Syndication Agent, the Prudential Insurance Company
      of America, as Co-Syndication Agent, and The CIT Group/Business Credit,
      Inc. and Caterpillar Finance Services Corporation, as Co-Documentation
      Agents (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
      September 29, 2008).
 
 *+10.3
              Separation
      Agreement, dated effective as of September 10, 2008, by and between the
      Company and Larry Bartlett.
 
 *+10.4
              Form
      of Indemnification Agreement.
 
 *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.
 
 
 *  Filed
      herewith.
 +
      Management contract, compensating plan or
  arrangement.
 -19-
 Table of Contents
  SIGNATURE
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on their behalf by the undersigned,
thereunto duly authorized.
  Dated:
      November 7, 2008
              
              BRONCO
      DRILLING COMPANY, INC.By:
              
              /s/
      Zachary M. GravesZachary
      M. GravesChief
      Financial Officer(Principal
      Accounting and Financial Officer)Dated:
      November 7, 2008
              
              By:
              
              /s/
      D. Frank HarrisonD.
      Frank HarrisonChief
      Executive Officer(Authorized
      Officer and Principal Executive
Officer)
 
  -20-