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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-Q





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

For the quarterly period ended June 30, 2007

OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES EXCHANGE ACT OF 1934
|- | -------------------------------------------------------------------------------------

For the transition period from  to

Commission File Number 1-8182



|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|TEXAS                                                          |  | 74-2088619                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)



|                                                   |  |           
|-------------------------------------------------- |  | ----------
|1250 N.E. Loop 410, Suite 1000, San Antonio, Texas |  | 78209     
|(Address of principal executive offices)           |  | (Zip Code)

210-828-7689

(Registrants telephone number, including area code)



PIONEER DRILLING COMPANY

(Exact name of registrant as specified in its charter)

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  þ     No ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.

Large accelerated filer ̈Accelerated filer  þ         Non-accelerated filer ̈

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

As of August 1, 2007, there were 49,650,978 shares of common stock, par value $0.10 per share, of the registrant issued and outstanding.



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PART I. FINANCIAL INFORMATION



|ITEM 1. | FINANCIAL STATEMENTS
|------- | --------------------

PIONEER DRILLING COMPANY AND
SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                          |  |              |             |               |   |            
|--------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ----------- | ------------- | - | -----------
|                                                                                                                                                          |  | June 30,2007 |             | March 31,2007
|ASSETS                                                                                                                                                    |  |              |             |               |   |            
|Current assets:                                                                                                                                           |  |              |             |               |   |            
|Cash and cash equivalents                                                                                                                                 |  | $            | 79,883,922  |               | $ | 84,945,210 
|Receivables:                                                                                                                                              |  |              |             |               |   |            
|Trade, net                                                                                                                                                |  |              | 53,011,791  |               |   | 54,205,696 
|Contract drilling in progress                                                                                                                             |  |              | 10,615,170  |               |   | 9,837,323  
|Income tax receivable                                                                                                                                     |  |              |            |               |   | 3,491,846  
|Deferred income taxes                                                                                                                                     |  |              | 2,542,019   |               |   | 2,174,947  
|Prepaid expenses                                                                                                                                          |  |              | 2,918,147   |               |   | 3,653,096  
|                                                                                                                                                          |  |              |             |               |   |            
|Total current assets                                                                                                                                      |  |              | 148,971,049 |               |   | 158,308,118
|                                                                                                                                                          |  |              |             |               |   |            
|Property and equipment, at cost:                                                                                                                          |  |              | 511,381,609 |               |   | 462,748,886
|Less accumulated depreciation and amortization                                                                                                            |  |              | 133,855,427 |               |   | 119,847,687
|                                                                                                                                                          |  |              |             |               |   |            
|Net property and equipment                                                                                                                                |  |              | 377,526,182 |               |   | 342,901,199
|Intangible and other assets                                                                                                                               |  |              | 271,515     |               |   | 286,307    
|                                                                                                                                                          |  |              |             |               |   |            
|Total assets                                                                                                                                              |  | $            | 526,768,746 |               | $ | 501,495,624
|                                                                                                                                                          |  |              |             |               |   |            
|                                                                                                                                                          |  |             
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                      |  |              |             |               |   |            
|Current liabilities:                                                                                                                                      |  |              |             |               |   |            
|Accounts payable                                                                                                                                          |  | $            | 21,529,367  |               | $ | 18,625,737 
|Income tax payable                                                                                                                                        |  |              | 5,873,770   |               |   |           
|Prepaid drilling contracts                                                                                                                                |  |              | 140,090     |               |   |           
|Accrued expenses:                                                                                                                                         |  |              |             |               |   |            
|Payroll and related employee costs                                                                                                                        |  |              | 4,445,623   |               |   | 7,086,450  
|Insurance premiums and deductibles                                                                                                                        |  |              | 7,688,074   |               |   | 6,754,331  
|Other                                                                                                                                                     |  |              | 3,131,956   |               |   | 1,752,751  
|                                                                                                                                                          |  |              |             |               |   |            
|Total current liabilities                                                                                                                                 |  |              | 42,808,880  |               |   | 34,219,269 
|Non-current liabilities                                                                                                                                   |  |              | 360,863     |               |   | 346,196    
|Deferred income taxes                                                                                                                                     |  |              | 41,166,014  |               |   | 38,820,868 
|                                                                                                                                                          |  |              |             |               |   |            
|Total liabilities                                                                                                                                         |  |              | 84,335,757  |               |   | 73,386,333 
|                                                                                                                                                          |  |              |             |               |   |            
|Commitments and contingencies                                                                                                                             |  |              |             |               |   |            
|Shareholders equity:                                                                                                                                     |  |              |             |               |   |            
|Preferred stock, 10,000,000 shares authorized; none issued and outstanding                                                                                |  |              |            |               |   |           
|Common stock $.10 par value; 100,000,000 shares authorized; 49,650,978 shares and 49,628,478 shares issued and outstanding at June 30, 2007
and March 31, |  |              |             |               |   |            
|2007, respectively                                                                                                                                        |  |              | 4,965,097   |               |   | 4,962,847  
|Additional paid-in capital                                                                                                                                |  |              | 292,840,246 |               |   | 291,607,071
|Accumulated earnings                                                                                                                                      |  |              | 144,627,646 |               |   | 131,539,373
|                                                                                                                                                          |  |              |             |               |   |            
|Total shareholders equity                                                                                                                                |  |              | 442,432,989 |               |   | 428,109,291
|                                                                                                                                                          |  |              |             |               |   |            
|Total liabilities and shareholders equity                                                                                                                |  | $            | 526,768,746 |               | $ | 501,495,624
|                                                                                                                                                          |  |              |             |               |   |            

See accompanying notes to condensed consolidated financial statements.



2



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PIONEER DRILLING COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



|                                                        |  |                             |             |   |      |   |             |  
|------------------------------------------------------- |  | --------------------------- | ----------- | - | ---- | - | ----------- | -
|                                                        |  | Three Months Ended June 30, |            
|                                                        |  | 2007                        |             |   | 2006 |  
|Contract drilling revenues                              |  | $                           | 102,779,450 |   |      | $ | 93,493,307  |  
|                                                        |  |                             |             |   |      |   |             |  
|Costs and expenses:                                     |  |                             |             |   |      |   |             |  
|Contract drilling                                       |  |                             | 63,792,295  |   |      |   | 49,542,784  |  
|Depreciation and amortization                           |  |                             | 16,097,709  |   |      |   | 11,570,006  |  
|General and administrative                              |  |                             | 3,320,133   |   |      |   | 2,925,502   |  
|                                                        |  |                             |             |   |      |   |             |  
|Total operating costs and expenses                      |  |                             | 83,210,137  |   |      |   | 64,038,292  |  
|                                                        |  |                             |             |   |      |   |             |  
|Income from operations                                  |  |                             | 19,569,313  |   |      |   | 29,455,015  |  
|                                                        |  |                             |             |   |      |   |             |  
|Other income (expense):                                 |  |                             |             |   |      |   |             |  
|Interest expense                                        |  |                             | (856        | ) |      |   | (63,151     | )
|Interest income                                         |  |                             | 861,938     |   |      |   | 1,097,724   |  
|Other                                                   |  |                             | 19,402      |   |      |   | 23,328      |  
|                                                        |  |                             |             |   |      |   |             |  
|Total other income                                      |  |                             | 880,484     |   |      |   | 1,057,901   |  
|                                                        |  |                             |             |   |      |   |             |  
|Income before income taxes                              |  |                             | 20,449,797  |   |      |   | 30,512,916  |  
|Income tax expense                                      |  |                             | (7,361,524  | ) |      |   | (11,026,419 | )
|                                                        |  |                             |             |   |      |   |             |  
|Net earnings                                            |  | $                           | 13,088,273  |   |      | $ | 19,486,497  |  
|                                                        |  |                             |             |   |      |   |             |  
|Earnings per common share  Basic                       |  | $                           | 0.26        |   |      | $ | 0.39        |  
|                                                        |  |                             |             |   |      |   |             |  
|Earnings per common share  Diluted                     |  | $                           | 0.26        |   |      | $ | 0.39        |  
|                                                        |  |                             |             |   |      |   |             |  
|Weighted average number of shares outstanding  Basic   |  |                             | 49,634,192  |   |      |   | 49,591,978  |  
|                                                        |  |                             |             |   |      |   |             |  
|Weighted average number of shares outstanding  Diluted |  |                             | 50,211,958  |   |      |   | 50,167,928  |  
|                                                        |  |                             |             |   |      |   |             |  

See accompanying notes to condensed consolidated financial statements.



3



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PIONEER DRILLING COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



|                                                                                    |  |                             |             |   |      |   |             |  
|----------------------------------------------------------------------------------- |  | --------------------------- | ----------- | - | ---- | - | ----------- | -
|                                                                                    |  | Three Months Ended June 30, |            
|                                                                                    |  | 2007                        |             |   | 2006 |  
|Cash flows from operating activities:                                               |  |                             |             |   |      |   |             |  
|Net earnings                                                                        |  | $                           | 13,088,273  |   |      | $ | 19,486,497  |  
|Adjustments to reconcile net earnings to net cash provided by operating activities: |  |                             |             |   |      |   |             |  
|Depreciation and amortization                                                       |  |                             | 16,097,709  |   |      |   | 11,570,006  |  
|Loss on disposal of property and equipment                                          |  |                             | 858,441     |   |      |   | 1,372,815   |  
|Change in deferred income taxes                                                     |  |                             | 1,978,074   |   |      |   | 1,287,259   |  
|Stock-based compensation expense                                                    |  |                             | 1,074,890   |   |      |   | 915,460     |  
|Changes in current assets and liabilities:                                          |  |                             |             |   |      |   |             |  
|Receivables                                                                         |  |                             | 1,193,905   |   |      |   | (9,925,196  | )
|Contract drilling in progress                                                       |  |                             | (777,847    | ) |      |   | 100,056     |  
|Income tax receivable                                                               |  |                             | 3,491,846   |   |      |   |            |  
|Prepaid expenses                                                                    |  |                             | 734,949     |   |      |   | 532,803     |  
|Accounts payable                                                                    |  |                             | 1,646,197   |   |      |   | 5,485,273   |  
|Prepaid drilling contracts                                                          |  |                             | 140,090     |   |      |   | 325,399     |  
|Income tax payable                                                                  |  |                             | 5,873,770   |   |      |   | 3,693,361   |  
|Accrued expenses                                                                    |  |                             | (313,212    | ) |      |   | 256,465     |  
|                                                                                    |  |                             |             |   |      |   |             |  
|Net cash provided by operating activities                                           |  |                             | 45,087,085  |   |      |   | 35,100,198  |  
|                                                                                    |  |                             |             |   |      |   |             |  
|Cash flows from financing activities:                                               |  |                             |             |   |      |   |             |  
|Proceeds from exercise of options                                                   |  |                             | 106,700     |   |      |   |            |  
|Excess tax benefit of stock option exercises                                        |  |                             | 53,834      |   |      |   |            |  
|                                                                                    |  |                             |             |   |      |   |             |  
|Net cash provided by financing activities                                           |  |                             | 160,534     |   |      |   |            |  
|                                                                                    |  |                             |             |   |      |   |             |  
|Cash flows from investing activities:                                               |  |                             |             |   |      |   |             |  
|Purchase of property and equipment                                                  |  |                             | (50,648,692 | ) |      |   | (43,121,261 | )
|Proceeds from sale (purchase) of marketable securities, net                         |  |                             |            |   |      |   | (15,000,000 | )
|Proceeds from sale of property and equipment                                        |  |                             | 339,785     |   |      |   | 2,961,106   |  
|                                                                                    |  |                             |             |   |      |   |             |  
|Net cash used in investing activities                                               |  |                             | (50,308,907 | ) |      |   | (55,160,155 | )
|                                                                                    |  |                             |             |   |      |   |             |  
|Net decrease in cash and cash equivalents                                           |  |                             | (5,061,288  | ) |      |   | (20,059,957 | )
|Beginning cash and cash equivalents                                                 |  |                             | 84,945,210  |   |      |   | 91,173,764  |  
|                                                                                    |  |                             |             |   |      |   |             |  
|Ending cash and cash equivalents                                                    |  | $                           | 79,883,922  |   |      | $ | 71,113,807  |  
|                                                                                    |  |                             |             |   |      |   |             |  
|Supplementary Disclosure:                                                           |  |                             |             |   |      |   |             |  
|Interest and commitment fees paid                                                   |  | $                           | 856         |   |      | $ | 31,554      |  
|Income taxes paid (refund received)                                                 |  | $                           | (4,036,000  | ) |      | $ | 6,045,800   |  

See accompanying notes to condensed consolidated financial statements.



4



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PIONEER DRILLING COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Basis of
Presentation

Business and Principles of Consolidation

Pioneer Drilling Company provides contract land drilling services to its customers in select oil and natural gas exploration and production regions in the United States. As of June 30, 2007, our rig fleet
consisted of 66 operating drilling rigs, 17 of which were operating in our South Texas division, 20 of which were operating in our East Texas division, ten of which were operating in our North Texas division, six of which were operating in our
Western Oklahoma division and 13 of which were operating in our Rocky Mountain divisions in Utah and North Dakota. In addition, at June 30, 2007, we were upgrading, with top drives and other components, a 1500 horsepower rig acquired in April
2007 and a 1500 horsepower rig acquired in May 2007. We also agreed to acquire another 1500 horsepower rig in May 2007 that is currently under construction. These three rigs are ideally suited for our expansion into international markets and are not
included in our 66 operating rig count. We conduct our operations through our principal operating subsidiary, Pioneer Drilling Services, Ltd. The accompanying consolidated financial statements include our accounts and the accounts of our wholly
owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

The accompanying unaudited condensed
consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of our management, all adjustments (consisting of normal, recurring
accruals) necessary for a fair presentation have been included. In preparing the accompanying unaudited condensed consolidated financial statements, we make various estimates and assumptions that affect the amounts of assets and liabilities we
report as of the dates of the balance sheets and income and expenses we report for the periods shown in the income statements and statements of cash flows. Our actual results could differ significantly from those estimates. Material estimates that
are particularly susceptible to significant changes in the near term relate to our recognition of revenues and costs for turnkey contracts, our estimate of the allowance for doubtful accounts, our estimate of the self-insurance portion of our health
and workers compensation insurance, our estimate of asset impairments, our estimate of deferred taxes and our determination of depreciation and amortization expense. The condensed consolidated balance sheet as of March 31, 2007 has been
derived from our audited financial statements. We suggest that you read these condensed consolidated financial statements together with the consolidated financial statements and the related notes included in our annual report on Form 10-K for the
fiscal year ended March 31, 2007.

Drilling Contracts

Our drilling contracts generally provide for compensation on either a daywork, turnkey or footage basis. Contract terms generally depend on the complexity and risk of operations, the on-site drilling conditions, the
type of equipment used and the anticipated duration of the work to be performed. Generally, our contracts provide for the drilling of a single well and typically permit the customer to terminate on short notice. However, during periods of high rig
demand, we enter into more longer-term drilling contracts. In addition, we have entered into longer-term drilling contracts for our newly constructed rigs. As of August 1, 2007, we had 25 contracts with terms of six months to two years in
duration, of which 13 will expire by February 1, 2008, five have a remaining term of seven to 12 months, four have a remaining term of 13 to 18 months and three have a remaining term in excess of 18 months.

Income Taxes

Pursuant to Statement of Financial
Accounting Standards (SFAS) No. 109, Accounting for Income Taxes, we follow the asset and liability method of accounting for income taxes, under which we recognize 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 basis. We measure our deferred tax assets and liabilities by using the enacted tax rates we expect
to apply to taxable income in the years in which we expect to recover or settle those temporary differences. Under SFAS No. 109, we reflect in income the effect of a change in tax rates on deferred tax assets and liabilities in the period
during which the change occurs.



5



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Stock-based Compensation

Effective April 1, 2006, we adopted SFAS No. 123 (Revised), Share-Based Payment(SFAS 123R),utilizing the modified prospective approach. Prior to the adoption of SFAS 123R, we
accounted for stock option grants in accordance with the intrinsic-value-based method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees(APB 25),and related
interpretations, as permitted by SFAS No. 123, Accounting for Stock-Based Compensation(SFAS 123). Accordingly, we recognized no compensation expense for stock options granted, as all stock options were granted at
an exercise price equal to the closing market value of the underlying common stock on the date of grant. Under the modified prospective approach, compensation cost for the three months ended June 30, 2007 includes compensation cost for all
stock options granted prior to, but not yet vested as of, April 1, 2006, based on the grant-date fair value estimated in accordance with SFAS 123, and compensation cost for all stock options granted subsequent to April 1, 2006, based on
the grant-date fair value estimated in accordance with SFAS 123R. We use the graded vesting method for recognizing compensation costs for stock options. Prior periods were not restated to reflect the impact of adopting this new standard.

Compensation costs of approximately $875,000 and $200,000 for stock options were recognized in general and administrative expense and
contract drilling costs, respectively, for the three months ended June 30, 2007. Approximately $261,000 of the compensation costs included in general and administrative expense relate to stock options granted to outside directors that vested
immediately upon grant pursuant to our stock option plans. In accordance with SFAS 123R, the entire compensation cost has been recognized for stock options that are fully vested at the grant date.

We receive 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. In accordance with SFAS 123R, we reported all excess tax benefits resulting from the exercise of stock options as financing cash flows in our consolidated statement of cash flows. There
were 22,500 stock options exercised during the three months ended June 30, 2007.

We estimate the fair value of each option grant on
the date of grant using a Black-Scholes options-pricing model. The following table summarizes the assumptions used in the Black-Scholes option-pricing model for the three months ended June 30, 2007 and 2006:



|                                          |  |                             |         |   |      |   |         |  
|----------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                          |  | Three Months Ended June 30, |        
|                                          |  | 2007                        |         |   | 2006 |  
|Weighted average expected volatility      |  |                             | 47      | % |      |   | 49      | %
|Weighted-average risk-free interest rates |  |                             | 4.7     | % |      |   | 5.0     | %
|Weighted-average expected life in years   |  |                             | 3.88    |   |      |   | 2.86    |  
|Options granted                           |  |                             | 769,500 |   |      |   | 482,000 |  
|Weighted-average grant-date fair value    |  | $                           | 5.84    |   |      | $ | 5.36    |  

The assumptions above are based on multiple factors, including historical exercise patterns of
homogeneous groups with respect to exercise and post-vesting employment termination behaviors, expected future exercising patterns for these same homogeneous groups and volatility of our stock price. As we have not declared dividends since we became
a public company, we did not use a dividend yield. In each case, the actual value that will be realized, if any, will depend on the future performance of our common stock and overall stock market conditions. There is no assurance the value an
optionee actually realizes will be at or near the value we have estimated using the Black-Scholes options-pricing model.



6



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Related-Party Transactions

We purchased services from Frontier Services, Inc. during the three months ended June 30, 2007 and 2006. Frontier Services, Inc. is more than 5% owned by an immediate family member of a Vice President of
Operations of our company. The following summarizes the transactions with this company in each period.



|                        |  |                            |       |      |   |    
|----------------------- |  | -------------------------- | ----- | ---- | - | ---
|                        |  | Three Months EndedJune 30,
|                        |  | 2007                       |       | 2006
|Frontier Services, Inc. |  |                            |       |      |   |    
|Purchases               |  | $                          | 5,031 |      | $ | 606
|Payments                |  |                            | 9,598 |      |   | 606

From July 2005 to June 2007, we leased a portion of our corporate office space on a month-to-month
basis to Wedge Oil and Gas Services Incorporated for $370 per month for one of its employees located in San Antonio. Wedge Oil and Gas Services Incorporated is an affiliate of WEDGE Group Incorporated. An officer of WEDGE Group Incorporated is a
member of our Board of Directors.

Our Chief Executive Officer, Chief Operating Officer, Senior Vice President of Marketing, and a Vice
President of Operations occasionally acquire a 1% to 5% minority working interest in oil and gas wells that we drill for one of our customers. These individuals acquired a minority working interest in two wells that we drilled for this customer
during the three months ended June 30, 2007. We recognized contract drilling revenues of approximately $859,000 on these wells during the three months ended June 30, 2007. These individuals did not acquire a minority working interest in
any wells that we drilled during the three months ended June 30, 2006.

Recently Issued Accounting Standards

In July 2006, the Financial Accounting Standards Board (the FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes  An Interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a companys financial statements in accordance with SFAS
No. 109. FIN 48 also 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 new FASB standard also provides
guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. We adopted the provisions of FIN 48 effective April 1, 2007. The adoption of FIN 48 had no material impact on our
financial position or results of operations and financial condition.

In September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosure of fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit
fair value measurements and, accordingly, does not require any new fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We do not expect the adoption of SFAS
No. 157 to have a material impact on our financial position or results of operations and financial condition.

In September 2006, the
FASB issued Staff Position AUG AIR-1, Accounting for Planned Major Maintenance Activities, which eliminates the acceptability of the accrue-in-advance method of accounting for planned major maintenance activities. This FASB Staff Position is
effective for fiscal years beginning after December 15, 2006. We do not use the accrue-in-advance method of accounting for rig refurbishments. We use a built-in overhaul method of accounting for rig refurbishments, whereby these
expenditures are recognized as capital asset additions when incurred. The application of this FASB Staff Position had no material impact on our financial position or results of operations and financial condition.

In September 2006, the SEC released Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements When Quantifying
Misstatements in Current Year Financial Statements, (SAB 108), which provides interpretive guidance on the SECs views regarding the process of quantifying materiality of financial statement misstatements. SAB 108
is effective for fiscal years ending after November 15, 2006, with early application for the first interim period ending after November 15, 2006. Since we had no prior-year misstatements during the year ended March 31, 2007, the
application of SAB 108 did not have a material effect on our financial position or results of operations and financial condition.



7



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In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities  Including an amendment of FASB Statement No. 115. This statement permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be
measured at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is
effective for fiscal years beginning after November 15, 2007. We do not expect the adoption of SFAS No. 159 to have a material impact on our financial position or results of operations and financial condition.

2. Long-term Debt and Notes Payable

We have a
$20,000,000 credit facility with Frost National Bank, consisting of a $10,000,000 revolving line and letter of credit facility and a $10,000,000 acquisition facility for the acquisition of drilling rigs, drilling rig transportation equipment and
associated equipment. Borrowings under the credit facility bear interest at a rate equal to Frost National Banks prime rate (8.25% at June 30, 2007) or, at our option, at LIBOR plus a percentage ranging from 1.5% to 2.25%, based on our
operating leverage ratio. Borrowings are secured by most of our assets, including all our drilling rigs and associated equipment and receivables. At June 30, 2007, we had no borrowings under the acquisition facility and we had used
approximately $4,267,000 of availability under the revolving line and letter of credit facility through the issuance of letters of credit in the ordinary course of business. The remaining availability under the revolving line and letter of credit
facility is $5,733,000. Both the revolving line and letter of credit facility and acquisition facility are scheduled to mature in October 2008.

The sum of (1) the draws and (2) the amount of all outstanding letters of credit issued for our account under the revolving line and letter of credit facility portion of our credit facility is limited to 75% of our eligible
accounts receivable, not to exceed $10,000,000. Therefore, if 75% of our eligible accounts receivable was less than $10,000,000, our ability to draw under this line would be reduced. At June 30, 2007, we had no outstanding advances under this
line of credit, we had outstanding letters of credit of approximately $4,267,000 and 75% of our eligible accounts receivable was approximately $34,372,000. The letters of credit have been issued to three workers compensation insurance
companies to secure possible future claims under the deductibles on these policies. It is our practice to pay any amounts due under these deductibles as they are incurred. Therefore, we do not anticipate that the lenders will be required to fund any
draws under these letters of credit.

At June 30, 2007, we were in compliance with all covenants contained in the credit agreement
related to our credit facility. Those covenants include, among others, requirements that we maintain a debt to total capitalization ratio of not greater than 0.2 to 1, a fixed charged coverage ratio of not less than 1.5 to 1 and an operating
leverage ratio of not more than 2.5 to 1. The covenants also restrict us from paying dividends, restrict us from the sale of assets not permitted by the credit facility and restrict us from the incurrence of additional indebtedness in excess of
$3,000,000, to the extent not otherwise allowed by the credit facility.

3. Commitments and Contingencies

In May 2007, we paid a deposit of $4,565,000 towards the $9,130,000 purchase price of a 1500 horsepower rig that is currently under construction. Of the
remaining $4,565,000 balance of our purchase commitment 50% was paid in July 2007 and 50% will be paid upon delivery of the rig in August 2007.

In connection with our expansion into international markets, we have obtained bonds for bidding on drilling contracts, performing under drilling contracts, and remitting customs and importation duties. We have guaranteed payments of
approximately $8,300,000 relating to our performance relating to these bonds.

In addition, due to the nature of our business, we are, from
time to time, involved in routine litigation or subject to disputes or claims related to our business activities, including workers compensation claims and employment-related disputes. Legal costs relating to these matters are expensed as
incurred. In the opinion of our management, none of the pending litigation, disputes or claims against us will have a material adverse effect on our financial condition, results of operations or cash flow from operations and there is only a remote
possibility that any such matter will require any additional loss accrual.



8



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4. Earnings Per Common Share

The following table presents a reconciliation of the numerators and denominators of the basic earnings per share and diluted earnings per share computations as required by SFAS No. 128:



|                         |  |                            |            |      |   |           
|------------------------ |  | -------------------------- | ---------- | ---- | - | ----------
|                         |  | Three Months EndedJune 30,
|                         |  | 2007                       |            | 2006
|Basic                    |  |                            |            |      |   |           
|Net earnings             |  | $                          | 13,088,273 |      | $ | 19,486,497
|                         |  |                            |            |      |   |           
|Weighted average shares  |  |                            | 49,634,192 |      |   | 49,591,978
|                         |  |                            |            |      |   |           
|Earnings per share       |  | $                          | 0.26       |      | $ | 0.39      
|                         |  |                            |            |      |   |           
|                         | 
|                         |  | Three Months EndedJune 30,
|                         |  | 2007                       |            | 2006
|Diluted                  |  |                            |            |      |   |           
|Net earnings             |  | $                          | 13,088,273 |      | $ | 19,486,497
|                         |  |                            |            |      |   |           
|Weighted average shares: |  |                            |            |      |   |           
|Outstanding              |  |                            | 49,634,192 |      |   | 49,591,978
|Options                  |  |                            | 577,766    |      |   | 575,950   
|                         |  |                            |            |      |   |           
|                         |  |                            | 50,211,958 |      |   | 50,167,928
|                         |  |                            |            |      |   |           
|Earnings per share       |  | $                          | 0.26       |      | $ | 0.39      
|                         |  |                            |            |      |   |           

5. Equity Transactions

Employees exercised stock options for the purchase of 22,500 shares of common stock during the three months ended June 30, 2007 at prices ranging from $4.52 to $4.77 per share. There were no stock options
exercised during the three months ended June 30, 2006.



9



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|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

Statements we make in the following discussion that express a belief, expectation or intention, as well as those that are not historical fact, are
forward-looking statements that are subject to risks, uncertainties and assumptions. Our actual results, performance or achievements, or industry results, could differ materially from those we express in the following discussion as a result of a
variety of factors, including general economic and business conditions and industry trends, the continued strength or weakness of the contract land drilling industry in the geographic areas in which we operate, decisions about onshore exploration
and development projects to be made by oil and gas companies, the highly competitive nature of our business, our future financial performance, including availability, terms and deployment of capital, the continued availability of qualified
personnel, and changes in, or our failure or inability to comply with, government regulations, including those relating to the environment. We have discussed many of these factors in more detail elsewhere in this report and in our annual report on
Form 10-K for the fiscal year ended March 31, 2007. These factors are not necessarily all the important factors that could affect us. Unpredictable or unknown factors we have not discussed in this report or in our annual report on Form 10K
could also have material adverse effects on actual results of matters that are the subject of our forward-looking statements. We do not intend to update our description of important factors each time a potential important factor arises, except as
required by applicable securities laws and regulations. We advise our shareholders that they should (1) be aware that important factors not referred to above could affect the accuracy of our forward-looking statements and (2) use caution
and common sense when considering our forward-looking statements.

Company Overview

Pioneer Drilling Company provides contract land drilling services to independent and major oil and gas exploration and production companies. In addition
to our drilling rigs, we provide the drilling crews and most of the ancillary equipment needed to operate our drilling rigs. We have focused our operations in selected oil and natural gas production regions in the United States. Our company was
incorporated in 1979 as the successor to a business that had been operating since 1968. We conduct our operations through our principal operating subsidiary, Pioneer Drilling Services, Ltd. We are an oil and gas services company. We do not invest in
oil and natural gas properties. The drilling activity of our customers is highly dependent on the current and forecasted future price of oil and natural gas. Since November 2006, we have been experiencing a decline in the demand for drilling rigs
and have experienced a decline in revenue rates on contract renewals due to an excess supply of drilling rigs within the industry, which is due to the substantial addition of new and refurbished drilling rigs during the past year. Any continued
weakness in the demand for additional drilling rigs will likely result in lower revenue rates for our rigs as existing contracts expire and more drilling rigs are added to the market.

Our business strategy is to own and operate a high-quality fleet of land drilling rigs in active drilling markets, to position ourselves to maximize rig
utilization and dayrates and to enhance shareholder value. We intend to continue making additions to our drilling fleet, either through acquisitions of businesses or selected assets or through the construction of new or refurbished drilling rigs, as
attractive opportunities arise. We may explore acquiring businesses in other sectors within the oilfield services industry. In addition, we are evaluating opportunities for expansion into international markets beginning with Colombia. We will
commence operations in Colombia with a contract for one drilling rig in August 2007 and we are negotiating a contract for a second drilling rig that would begin in September 2007. Our immediate international business strategy is to continue our
expansion in Colombia to include at least three drilling rigs by fiscal year end.

Since September 1999, we have significantly expanded our
fleet of drilling rigs through acquisitions and the construction of new and refurbished rigs. As of August 1, 2007, our rig fleet consisted of 66 operating drilling rigs, of which 25 are premium electric rigs that drill in depth ranges between
6,000 and 18,000 feet. Seventeen of our rigs are operating in our South Texas division, 20 in our East Texas division, ten in our North Texas division, six in our western Oklahoma division and 13 in our Rocky Mountains divisions in Utah and North
Dakota. We actively market all of these rigs. In addition, at June 30, 2007, we were upgrading, with top drives and other components, a 1500 horsepower rig acquired in April 2007 and a 1500 horsepower rig acquired in May 2007. We also agreed to
acquire another 1500 horsepower rig in May 2007 that is currently under construction. These three rigs are ideally suited for our expansion into international markets and are not included in our 66 operating rig count.

We earn our revenues by drilling oil and gas wells for our customers, as our rigs can be used by our customers to drill for either oil or natural gas. We
obtain our contracts for drilling oil and gas wells either through competitive bidding or through direct negotiations with customers. Our drilling contracts generally provide for compensation on either a daywork, turnkey or footage basis. Contract
terms 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. Historically, our contracts provide for the drilling of a single
well and typically permit the customer to terminate on short notice. As demand for drilling



10



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rigs improved during the past two years, we entered into more longer-term drilling contracts. As of August 1, 2007, we had 25 contracts with terms of
six months to two years in duration, of which 13 will expire by February 1, 2008, five have a remaining term of seven to 12 months, four have a remaining term of 13 to 18 months and three have a remaining term in excess of 18 months.

A significant performance measurement in our industry is rig utilization. We compute 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 rig. Revenue days for each rig are days when the rig is earning revenues under a contract, which is usually a period
from the date the rig begins moving to the drilling location until the rig is released from the contract. For each period presented below, all of our rigs were capable of working and are included in our rig utilization calculations.

For the three months ended June 30, 2007 and 2006 our rig utilization, revenue days and number of operating drilling rigs were as follows:



|                        |  |       |   |  |       |  
|----------------------- |  | ----- | - |  | ----- | -
|                        |  | 2007  |   |  | 2006  |  
|Utilization Rates       |  | 90    | % |  | 95    | %
|Revenue Days            |  | 5,387 |   |  | 4,881 |  
|Operating Drilling Rigs |  | 66    |   |  | 57    |  

The primary reason for the increase in the number of revenue days in 2007 over 2006 is the
increase in size of our rig fleet. Due to the current excess supply of drilling rigs available for work, we currently expect a 5% to 10% decrease in utilization rates for the remainder of fiscal year 2008 as compared to fiscal year 2007.

In addition to high commodity prices, we attribute our relatively high utilization rates to a strong sales effort, quality equipment, good field and
operations personnel, a disciplined safety approach, and our generally successful performance of turnkey operations during periods of reduced demand for drilling rigs.

We devote substantial resources to maintaining and upgrading our rig fleet. In the short term, these actions result in fewer revenue days and slightly lower utilization; however, in the long term, we believe the
upgrades will help the marketability of our rigs and improve their operating performance. Upgrades for the fiscal year ending March 31, 2008 will primarily focus on: replacing older engines with more modern, efficient engines; upgrading to
higher horsepower mud pumps; upgrading to modern mud cleaning systems on some of our drilling rigs; and adding iron roughnecks to approximately 38 of our drilling rigs.

Market Conditions in Our Industry

The U.S. contract land drilling services industry is highly
cyclical. Volatility in oil and 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 gas prices and the outlook for future oil and gas prices strongly influence the number of wells oil and gas exploration and production companies decide to drill.

In addition, the availability of drilling rigs capable of working affects our revenue rates and utilization rates. For much of the past two years, our
industry experienced a shortage of drilling rigs leading to revenue rates and utilization rates that were at historically high levels. However, our industry is currently experiencing an excess drilling rig supply due to new construction and
refurbishments. This condition may correct itself over time if older drilling rigs are retired and if the outlook for oil and gas pricing improves and results in an increase in drilling activity.

On July 20, 2007, the spot price for West Texas Intermediate crude oil was $75.57, the spot price for Henry Hub natural gas was $6.45 and the Baker
Hughes land rig count was 1,685, a 7% increase from 1,571 on July 21, 2006. Since January 1, 2007, the Baker Hughes land rig count has been between 1,588 and 1,704.



11



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The average weekly spot prices of West Texas Intermediate crude oil and Henry Hub natural gas and the
average weekly domestic land rig count, per the Baker Hughes land rig count, for the quarter ended June 30, 2007 and each of the previous five years ended June 30, 2007 were:



|                              |  |                                |       |                      |      |       |      |   |       |  |      |       |  |   |       |  |   |      
|----------------------------- |  | ------------------------------ | ----- | -------------------- | ---- | ----- | ---- | - | ----- |  | ---- | ----- |  | - | ----- |  | - | -----
|                              |  | Three MonthsEndedJune 30, 2007 |       | Years Ended June 30,
|                              |  |                                | 2007  |                      | 2006 |       | 2005 |   | 2004  |  | 2003
|Oil (West Texas Intermediate) |  | $                              | 65.11 |                      | $    | 63.49 |      | $ | 64.33 |  | $    | 48.74 |  | $ | 33.78 |  | $ | 29.96
|Natural Gas (Henry Hub)       |  | $                              | 7.47  |                      | $    | 6.79  |      | $ | 8.98  |  | $    | 6.20  |  | $ | 5.39  |  | $ | 4.81 
|U.S. Land Rig Count           |  |                                | 1,655 |                      |      | 1,624 |      |   | 1,402 |  |      | 1,153 |  |   | 1,000 |  |   | 778  

Most of our customers drill in search of natural gas; however, we currently operate five rigs in
the Williston Basin of the Rocky Mountains, where our customers drill in search of oil.

Critical Accounting Policies and Estimates

Revenue and cost recognition  We earn our revenues by drilling oil and gas wells for our customers under daywork, turnkey or footage
contracts, which usually provide for the drilling of a single well. We recognize revenues on daywork contracts for the days completed based on the dayrate each contract specifies. We recognize revenues from our turnkey and footage contracts on the
percentage-of-completion method based on our estimate of the number of days to complete each contract. Contract drilling in progress represents revenues we have recognized in excess of amounts billed on contracts in progress. Individual contracts
are usually completed in less than 60 days. The risks to us under a turnkey contract and, to a lesser extent, under footage contracts, are substantially greater than on a contract drilled on a daywork basis. Under a turnkey contract, we assume most
of the risks associated with drilling operations that are generally assumed by the operator in a daywork contract, including the risks of blowout, loss of hole, stuck drill pipe, machinery breakdowns and abnormal drilling conditions, as well as
risks associated with subcontractors services, supplies, cost escalations and personnel operations.

Our management has determined
that it is appropriate to use the percentage-of-completion method, as defined in the American Institute of Certified Public Accountants Statement of Position 81-1, to recognize revenue on our turnkey and footage contracts. Although our turnkey
and 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-on 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 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-on depth in breach
of the applicable contract. However, in the event we were unable to drill to the agreed-on depth in breach of the contract, ultimate recovery of that value would be subject to negotiations with the customer and the possibility of litigation.

If a customer defaults on its payment obligation to us under a turnkey or footage contract, we would need to rely on applicable law to
enforce our lien rights, because our turnkey and 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 also would 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 turnkey or footage contract.

We accrue
estimated contract costs on turnkey and 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, operating overhead allocations and allocations of depreciation and amortization expense. In addition, the occurrence of uninsured or under-insured losses or operating cost overruns on our turnkey
and footage contracts could have a material adverse effect on our financial position and results of operations. Therefore, our actual results for a contract could differ significantly if our cost estimates for that contract are later revised from
our original cost estimates for a contract in progress at the end of a reporting period which was not completed prior to the release of our financial statements.

Asset impairments  We assess the impairment of property and equipment whenever events or circumstances indicate that the carrying value may not be recoverable. Factors that we consider important and which
could trigger an impairment review would be our customers financial condition and any significant negative industry or economic trends. More



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specifically, among other things, we consider our contract revenue rates, our rig utilization rates, cash flows from our drilling rigs, current oil and gas
prices and trends in the price of used drilling equipment observed by our management. If a review of our drilling rigs indicates that our carrying value exceeds the estimated undiscounted future net cash flows, we are required under applicable
accounting standards to write down the drilling equipment to its fair market value. A one percent write-down in the cost of our drilling equipment, at June 30, 2007, would have resulted in a corresponding decrease in our net earnings of
approximately $3,177,000 for the three months ended June 30, 2007.

Deferred taxes  We provide deferred taxes for the
basis differences in our property and equipment between financial reporting and tax reporting purposes and other costs such as compensation, employee benefit and other accrued liabilities which are deducted in different periods for 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 an entity rather than just its
assets. For financial reporting purposes, we depreciate the various components of our drilling rigs over five to 15 years and refurbishments over three to five 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.

Accounting estimates  We consider the recognition of revenues and costs on turnkey and footage contracts to be critical accounting estimates. On these types of contracts, we are required to estimate the number of days needed
for us to complete the contract and our total cost to complete the contract. Our actual costs could substantially exceed our estimated costs if we encounter problems such as lost circulation, stuck drill pipe or an underground blowout on contracts
still in progress subsequent to the release of the financial statements.

We receive payment under turnkey and 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 1995, when current management joined our company, we have completed all our turnkey or footage
contracts. Although our initial cost estimates for turnkey and 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 turnkey and 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 increase our cost estimate to complete the contract. 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 accrue the entire amount of the estimated loss, including all costs that are included in our revised estimated cost to complete that contract, in our consolidated statement of operations for that reporting period. During the
quarter ended June 30, 2007, we experienced losses on three of the 18 turnkey and footage contracts completed, with losses exceeding $25,000 each on two contracts. During the quarter ended June 30, 2006, we experienced losses on two of the
15 turnkey and footage contracts completed, and those losses were each less than $25,000. We are more likely to encounter losses on turnkey and footage contracts in periods in which revenue rates are lower for all types of contracts. During periods
of reduced demand for drilling rigs, our overall profitability on turnkey and footage contracts has historically exceeded our profitability on daywork contracts.

Revenues and costs during a reporting period could be affected for contracts in progress at the end of a reporting period which have not been completed before our financial statements for that period are released. We
had one footage contract in progress at June 30, 2007, which was completed prior to the release of the financial statements included in this report. Our contract drilling in progress totaled approximately $10,615,000 at June 30, 2007. Of
that amount accrued, footage contract revenues were approximately $593,000. The remaining balance of approximately $10,022,000 related to the revenue recognized but not yet billed on daywork contracts in progress at June 30, 2007. At
March 31, 2007, drilling in progress totaled $9,837,000, of which $329,000 related to footage contracts and $9,508,000 related to daywork contracts.

We estimate an allowance for doubtful accounts based on the creditworthiness of our customers as well as general economic conditions. We evaluate the creditworthiness of our customers based on information obtained
from major industry suppliers, current prices of oil and 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 15-day intervals during the performance of daywork contracts and upon completion of the daywork contract. Turnkey and 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



13



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extend payment terms beyond 30 days and have not extended payment terms beyond 90 days for any of our contracts in the last three fiscal years. We had an
allowance for doubtful accounts of $1,000,000 at June 30, 2007 and March 31, 2007.

Another critical estimate is our
determination of the useful lives of our depreciable assets, which 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, transportation and other equipment on a straight-line method over useful lives that we have estimated and that range from three to 15 years. We record the same depreciation expense whether
a rig is idle or working. Our estimates of the useful lives of our drilling, transportation and other equipment are based on our more than 35 years of experience in the drilling industry with similar equipment.

Our accrued insurance premiums and deductibles as of June 30, 2007 include accruals of approximately $621,000 and $5,518,000 for costs incurred
under the self-insurance portion of our health insurance and under our workers compensation insurance, respectively. We have a deductible of (1) $125,000 per covered individual per year under the health insurance and (2) $250,000 per
occurrence under our workers compensation insurance, except in North Dakota, where we do not have a deductible. We accrue for these costs as claims are incurred based on historical claim development data, and we accrue the costs of
administrative services associated with claims processing. We also evaluate our claim cost estimates based on estimates provided by the insurance companies that provide claims processing services.

Liquidity and Capital Resources

Sources of Capital Resources

Our rig fleet has grown from eight rigs in August 2000 to 66 operating rigs as of August 1, 2007. We have financed this growth with a
combination of debt and equity financing. We have raised additional equity or used equity for growth nine times since January 2000. We plan to continue to grow our rig fleet and we may pursue other business opportunities that are complementary to
our U.S. contract land drilling business. We may finance these growth opportunities through the issuance of debt and the issuance of additional shares of our common stock.

We have a $20,000,000 credit facility with Frost National Bank consisting of a $10,000,000 revolving line and letter of credit facility and a $10,000,000
acquisition facility for the acquisition of drilling rigs, drilling rig transportation equipment and associated equipment. Borrowings under the credit facility bear interest at a rate equal to Frost National Banks prime rate (8.25% at
June 30, 2007) or, at our option, at LIBOR plus a percentage ranging from 1.5% to 2.25%, based on our operating leverage ratio. Borrowings are secured by most of our assets, including all our drilling rigs and associated equipment and
receivables. At June 30, 2007, we had no borrowings under the acquisition facility and we had used approximately $4,267,000 of availability under the revolving line and letter of credit facility through the issuance of letters of credit in the
ordinary course of business. The remaining availability under the revolving line and letter of credit facility is $5,733,000. Both the revolving line and letter of credit facility and acquisition facility are scheduled to mature in October 2008.

Uses of Capital Resources

For the
three months ended June 30, 2007, the additions to our property and equipment consisted of the following:



|                         |  |   |           
|------------------------ |  | - | ----------
|Drilling rigs            |  | $ | 35,657,919
|Other drilling equipment |  |   | 15,242,887
|Transportation equipment |  |   | 717,765   
|Other                    |  |   | 287,555   
|                         |  |   |           
|                         |  | $ | 51,906,126
|                         |  |   |           

Property and equipment additions for the three months ended June 30, 2007 include
approximately $1,257,000 of purchases recorded in accounts payable at March 31, 2007.

As of March 31, 2007, we were constructing
one 1000-horsepower mechanical rig. We placed this rig into service in April 2007 and incurred approximately $2,124,000 for construction costs during the three months ended June 30, 2007 for this rig. In addition, we incurred approximately
$33,047,000 during the three months ended June 30, 2007 to purchase and upgrade the three drilling rigs we intend to use for expansion into international markets. We expect to incur an additional $26,000,000 on acquisition and upgrade costs for
these three drilling rigs during the remainder of fiscal year 2008.



14



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For the remainder of fiscal year 2008, we project capital expenditures (excluding the new rig acquisition
and upgrade costs for the three drilling rigs noted above) to be approximately $61,500,000, comprised of routine rig capital expenditures of approximately $28,500,000, rig upgrade expenditures of approximately $27,300,000, spare equipment
expenditures of approximately $1,300,000, transportation equipment expenditures of approximately $3,300,000, and other capital expenditures of approximately $1,100,000. We expect to fund these capital expenditures primarily from operating cash flow
in excess of our working capital and other normal cash flow requirements.

Working Capital

Our working capital was $106,162,169 at June 30, 2007, compared to $124,088,849 at March 31, 2007. Our current ratio, which we calculate by
dividing our current assets by our current liabilities, was 3.5 at June 30, 2007, compared to 4.6 at March 31, 2007.

Our
operations have historically generated cash flows sufficient to at least meet our requirements for debt service and normal capital expenditures. However, during periods when higher percentages of our contracts are turnkey and footage contracts, our
short-term working capital needs could increase. If necessary, we can defer rig upgrades to improve our cash position. We believe our cash generated by operations and our ability to borrow under the currently unused portion of our line of credit and
letter of credit facility should allow us to meet our routine financial obligations for the foreseeable future.

The changes in the
components of our working capital were as follows:



|                                           |  |              |             |               |   |             |  |   |             |  
|------------------------------------------ |  | ------------ | ----------- | ------------- | - | ----------- |  | - | ----------- | -
|                                           |  | June 30,2007 |             | March 31,2007 |   | Change      | 
|Cash and cash equivalents                  |  | $            | 79,883,922  |               | $ | 84,945,210  |  | $ | (5,061,288  | )
|Trade receivables, net                     |  |              | 53,011,791  |               |   | 54,205,696  |  |   | (1,193,905  | )
|Contract drilling in progress              |  |              | 10,615,170  |               |   | 9,837,323   |  |   | 777,847     |  
|Income tax receivable                      |  |              |            |               |   | 3,491,846   |  |   | (3,491,846  | )
|Deferred income taxes                      |  |              | 2,542,019   |               |   | 2,174,947   |  |   | 367,072     |  
|Prepaid expenses                           |  |              | 2,918,147   |               |   | 3,653,096   |  |   | (734,949    | )
|                                           |  |              |             |               |   |             |  |   |             |  
|Current assets                             |  |              | 148,971,049 |               |   | 158,308,118 |  |   | (9,337,069  | )
|                                           |  |              |             |               |   |             |  |   |             |  
|                                           |  |              |            
|Accounts payable                           |  |              | 21,529,367  |               |   | 18,625,737  |  |   | 2,903,630   |  
|Income tax payable                         |  |              | 5,873,770   |               |   |            |  |   | 5,873,770   |  
|Prepaid drilling contracts                 |  |              | 140,090     |               |   |            |  |   | 140,090     |  
|Accrued payroll and related employee costs |  |              | 4,445,623   |               |   | 7,086,450   |  |   | (2,640,827  | )
|Accrued insurance premiums and deductibles |  |              | 7,688,074   |               |   | 6,754,331   |  |   | 933,743     |  
|Other accrued expenses                     |  |              | 3,131,956   |               |   | 1,752,751   |  |   | 1,379,205   |  
|                                           |  |              |             |               |   |             |  |   |             |  
|Current liabilities                        |  |              | 42,808,880  |               |   | 34,219,269  |  |   | 8,589,611   |  
|                                           |  |              |             |               |   |             |  |   |             |  
|                                           |  |              |            
|Working capital                            |  | $            | 106,162,169 |               | $ | 124,088,849 |  | $ | (17,926,680 | )
|                                           |  |              |             |               |   |             |  |   |             |  

The decrease in cash and cash equivalents was primarily due to property and equipment expenditures
of approximately $50,649,000 during the three months ended June 30, 2007.

The decrease in our receivables and contract drilling in
progress at June 30, 2007 from March 31, 2007 was due to the decrease of approximately $784 per day in average revenue rates, partially offset by our operating one additional rig.

The decrease in our income tax receivable is due to the collection of an income tax refund that resulted from an excess tax deposit for our fiscal year
ended March 31, 2007.

Substantially all our prepaid expenses at June 30, 2007 and March 31, 2007 consisted of prepaid
insurance. We renew and pay most of our insurance premiums in late October of each year and some in April of each year. At June 30, 2007, we had amortized eight months of the October premiums, compared to five months of amortization as of
March 31, 2007.



15



---

The increase in accounts payable at June 30, 2007 from March 31, 2007 was primarily due to
timing of property and equipment purchases.

The decrease in accrued expenses at June 30, 2007, compared to March 31, 2007, was
due to fewer days of accrued payroll, partially offset by an increase in the accruals for property taxes and self-insurance costs.

The
increase in income tax payable at June 30, 2007 from March 31, 2007 primarily related to the timing of quarterly income tax payments.

Long-term Debt

We had no long-term debt outstanding at June 30, 2007. See - Sources of Capital Resources
for a description of our credit facility.

Contractual Obligations

The following table includes all our contractual obligations of the types specified below at June 30, 2007.



|                            |  |                        |            |                 |   |            |  |           |         |                  |   |         |  |   |        
|--------------------------- |  | ---------------------- | ---------- | --------------- | - | ---------- |  | --------- | ------- | ---------------- | - | ------- |  | - | -------
|                            |  | Payments Due by Period
|Contractual Obligations     |  | Total                  |            | Less than 1year |   | 1-3 years  |  | 4-5 years |         | More than5 years
|Purchase Obligations        |  | $                      | 12,983,751 |                 | $ | 12,983,751 |  | $         |        |                  | $ |        |  | $ |       
|Operating Lease Obligations |  |                        | 1,646,965  |                 |   | 337,126    |  |           | 540,345 |                  |   | 434,622 |  |   | 334,872
|                            |  |                        |            |                 |   |            |  |           |         |                  |   |         |  |   |        
|Total                       |  | $                      | 14,630,716 |                 | $ | 13,320,877 |  | $         | 540,345 |                  | $ | 434,622 |  | $ | 334,872
|                            |  |                        |            |                 |   |            |  |           |         |                  |   |         |  |   |        

Debt Requirements

The sum of (1) the draws and (2) the amount of all outstanding letters of credit issued for our account under the revolving line and letter of credit facility portion of our credit facility is limited to 75%
of our eligible accounts receivable, not to exceed $10,000,000. Therefore, if 75% of our eligible accounts receivable was less than $10,000,000, our ability to draw under this line would be reduced. At June 30, 2007, we had no outstanding
advances under this line of credit, we had outstanding letters of credit of approximately $4,267,000 and 75% of our eligible accounts receivable was approximately $34,372,000. The letters of credit have been issued to three workers
compensation insurance companies to secure possible future claims under the deductibles on these policies. It is our practice to pay any amounts due under these deductibles as they are incurred. Therefore, we do not anticipate that the lenders will
be required to fund any draws under these letters of credit.

Our credit facility contains various covenants pertaining to a debt to total
capitalization ratio, operating leverage ratio and fixed charge coverage ratio and restricts us from paying dividends. We determine compliance with the ratios on a quarterly basis, based on the previous four quarters. Events of default, which could
trigger an early repayment requirement, include, among others:



| |  |  | our failure to make required payments;
| | - |  | --------------------------------------



| |  |  | any sale of assets by us not permitted by the credit facility;
| | - |  | --------------------------------------------------------------



| |  |  | our failure to comply with financial covenants related to a debt to total capitalization ratio not to exceed 0.2 to 1, an operating leverage ratio of not more than
2.5 to 1, and a fixed charge coverage ratio of not less than 1.5 to 1;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our incurrence of additional indebtedness in excess of $3,000,000, to the extent not otherwise allowed by the credit facility;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | any event which results in a change in the ownership of at least 40% of all classes of our outstanding capital stock; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------



16



---

| |  |  | any payment of cash dividends on our common stock.
| | - |  | --------------------------------------------------

The limitation on additional indebtedness described above has not affected our operations or liquidity, and we do not expect it to affect our future operations or liquidity, as we expect to continue to generate
adequate cash flow from operations to fund our anticipated working capital and other normal cash flow requirements.

Results of Operations

Our operations consist of drilling oil and gas wells for our customers under daywork, turnkey or footage contracts usually on a
well-to-well basis. Daywork contracts are the least complex for us to perform and involve the least risk. Turnkey contracts are the most difficult to perform and involve much greater risk but provide the opportunity for higher operating profits.

Daywork Contracts. Under daywork drilling contracts, we provide a drilling rig with required personnel to our
customer, who supervises the drilling of the well. We are paid based on a negotiated fixed rate per day while the rig is used. During the mobilization period, we typically earn a fixed amount of revenue based on the mobilization rate stated in the
contract. We attempt to set the mobilization rate at an amount equal to our external costs for the move plus our internal costs during the mobilization period. We begin earning our contracted daywork rate when we begin drilling the well.
Occasionally, in periods of increased demand, our contracts will provide for the trucking costs to be paid by the customer, and we will receive a reduced dayrate during the mobilization period.

Turnkey Contracts.Under a turnkey contract, we agree to drill a well for our customer to a specified depth and under specified
conditions for a fixed price, regardless of the time required or the problems encountered in drilling the well. We provide technical expertise and engineering services, as well as most of the equipment and drilling supplies required to drill the
well. We often subcontract for related services, such as the provision of casing crews, cementing and well logging. Under typical turnkey drilling arrangements, we do not receive progress payments and are entitled to be paid by our customer only
after we have performed the terms of the drilling contract in full. The risks under a turnkey contract are greater than those under a daywork contract, because under a turnkey contract we assume most of the risks associated with drilling operations
that the operator generally assumes under a daywork contract.

Footage Contracts. Under footage contracts, we are paid
a fixed amount for each foot drilled, regardless of the time required or the problems encountered in drilling the well. We typically pay more of the out-of-pocket costs associated with footage contracts as compared to daywork contracts. Similar to
turnkey contracts, under a footage contract we assume most of the risks associated with drilling operations that the operator generally assumes under a daywork contract.

During periods of reduced demand for drilling rigs or excess capacity of drilling rigs in the industry, revenue rates and utilization rates may be significantly lower than the rates we are currently experiencing. Our
profitability in the future will depend on many factors, but largely on utilization rates and revenue rates for our drilling rigs.

The
current demand for drilling rigs greatly influences the types of contracts we are able to obtain. As the demand for rigs increases, daywork rates move up and we are able to switch primarily to daywork contracts.

For the three months ended June 30, 2007 and 2006, the percentages of our drilling revenues by type of contract were as follows:



|                  |  |                           |   |  |      |  
|----------------- |  | ------------------------- | - |  | ---- | -
|                  |  | Three MonthsEndedJune 30, |  
|                  |  | 2007                      |   |  | 2006 |  
|Daywork contracts |  | 96                        | % |  | 96   | %
|Turnkey contracts |  | 1                         | % |  |     |  
|Footage contracts |  | 3                         | % |  | 4    | %

We had no turnkey contracts in progress at June 30, 2007 or June 30, 2006. We had one
footage contract in progress at both June 30, 2007 and June 30, 2006.



17



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Statement of Operations Analysis

The following table provides information for our operations for the three months ended June 30, 2007 and 2006.



|                                          |  |                             |             |   |      |   |            |  
|----------------------------------------- |  | --------------------------- | ----------- | - | ---- | - | ---------- | -
|                                          |  | Three Months Ended June 30, |            
|                                          |  | 2007                        |             |   | 2006 |  
|Contract drilling revenues:               |  |                             |             |   |      |   |            |  
|Daywork contracts                         |  | $                           | 98,427,102  |   |      | $ | 90,060,866 |  
|Turnkey contracts                         |  |                             | 853,608     |   |      |   |           |  
|Footage contracts                         |  |                             | 3,498,740   |   |      |   | 3,432,441  |  
|                                          |  |                             |             |   |      |   |            |  
|Total contract drilling revenues          |  | $                           | 102,779,450 |   |      | $ | 93,493,307 |  
|                                          |  |                             |             |   |      |   |            |  
|Contract drilling costs:                  |  |                             |             |   |      |   |            |  
|Daywork contracts                         |  | $                           | 60,083,589  |   |      | $ | 47,479,704 |  
|Turnkey contracts                         |  |                             | 741,265     |   |      |   |           |  
|Footage contracts                         |  |                             | 2,967,441   |   |      |   | 2,063,080  |  
|                                          |  |                             |             |   |      |   |            |  
|Total contract drilling costs             |  | $                           | 63,792,295  |   |      | $ | 49,542,784 |  
|                                          |  |                             |             |   |      |   |            |  
|Drilling margin:                          |  |                             |             |   |      |   |            |  
|Daywork contracts                         |  | $                           | 38,343,513  |   |      | $ | 42,581,162 |  
|Turnkey contracts                         |  |                             | 112,343     |   |      |   |           |  
|Footage contracts                         |  |                             | 531,299     |   |      |   | 1,369,361  |  
|                                          |  |                             |             |   |      |   |            |  
|Total drilling margin                     |  | $                           | 38,987,155  |   |      | $ | 43,950,523 |  
|                                          |  |                             |             |   |      |   |            |  
|Revenue days by type of contract:         |  |                             |             |   |      |   |            |  
|Daywork contracts                         |  |                             | 5,130       |   |      |   | 4,695      |  
|Turnkey contracts                         |  |                             | 27          |   |      |   |           |  
|Footage contracts                         |  |                             | 230         |   |      |   | 186        |  
|                                          |  |                             |             |   |      |   |            |  
|Total revenue days                        |  |                             | 5,387       |   |      |   | 4,881      |  
|                                          |  |                             |             |   |      |   |            |  
|Contract drilling revenue per revenue day |  | $                           | 19,079      |   |      | $ | 19,154     |  
|Contract drilling costs per revenue day   |  | $                           | 11,842      |   |      | $ | 10,150     |  
|Drilling margin per revenue day           |  | $                           | 7,237       |   |      | $ | 9,004      |  
|Rig utilization rates                     |  |                             | 90          | % |      |   | 95         | %
|Average number of rigs during the period  |  |                             | 65.7        |   |      |   | 56.7       |  

We present drilling margin information, defined as contract drilling revenues less contract
drilling costs, because we believe it provides investors and our management additional information to assist them in assessing our business and performance in comparison to other companies in our industry. Since drilling margin is a
non-GAAP financial measure under the rules and regulations of the SEC, we have included below a reconciliation of drilling margin to net earnings, which is the nearest comparable GAAP financial measure.



|                                                   |  |                             |             |   |      |   |             |  
|-------------------------------------------------- |  | --------------------------- | ----------- | - | ---- | - | ----------- | -
|                                                   |  | Three Months Ended June 30, |            
|                                                   |  | 2007                        |             |   | 2006 |  
|Reconciliation of drilling margin to net earnings: |  |                             |             |   |      |   |             |  
|Drilling margin                                    |  | $                           | 38,987,155  |   |      | $ | 43,950,523  |  
|Depreciation and amortization                      |  |                             | (16,097,709 | ) |      |   | (11,570,006 | )
|General and administrative expense                 |  |                             | (3,320,133  | ) |      |   | (2,925,502  | )
|Other income                                       |  |                             | 880,484     |   |      |   | 1,057,901   |  
|Income tax expense                                 |  |                             | (7,361,524  | ) |      |   | (11,026,419 | )
|                                                   |  |                             |             |   |      |   |             |  
|Net earnings                                       |  | $                           | 13,088,273  |   |      | $ | 19,486,497  |  
|                                                   |  |                             |             |   |      |   |             |  

Our contract drilling revenues grew by approximately $9,286,000, or 10%, in the quarter ended
June 30, 2007 from the quarter ended June 30, 2006, due a 10% increase in revenue days that resulted from an increase in the number of rigs in our fleet.



18



---

Our contract drilling costs grew by approximately $14,249,000, or 29%, in the quarter ended June 30,
2007 from the corresponding quarter in 2006 due to the increase in the number of revenue days and a $1,692 increase in the average drilling costs per revenue day, which was primarily due to higher wages, higher repairs and maintenance expenses and
more turnkey and footage costs. Under turnkey and footage contracts, we provide supplies and materials such as fuel, drill bits, casing and drilling fluids, which significantly add to drilling costs when compared to daywork contracts. These costs
are also included in the revenues we recognize for turnkey and footage contracts, resulting in higher revenue rates per day for turnkey and footage contracts compared to daywork contracts, which do not include such costs.

Our depreciation and amortization expenses for the quarter ended June 30, 2007 increased by approximately $4,528,000, or 39%, compared to the
corresponding quarter in 2006. The increase in 2007 over 2006 resulted primarily from an increase in the average size of our rig fleet, which increase consisted entirely of newly constructed rigs. The higher costs of our new rigs increased our
average depreciation costs per revenue day by $618 to $2,988 in the quarter ended June 30, 2007 from $2,370 in the quarter ended June 30, 2006.

Our general and administrative expense for the quarter ended June 30, 2007 increased by approximately $395,000, or 13%, compared to the corresponding quarter in 2006. The increase resulted primarily from
compensation expense recognized for stock options and increases in professional and consulting costs. We expect compensation costs for stock options to be approximately $2,665,000 for the remainder of fiscal year 2008, of which approximately
$1,967,000 will be recognized as general and administrative expense.

Our other income for the quarter ended June 30, 2007 decreased
by approximately $177,000, or 17%, compared to the corresponding quarter in 2006. The decrease was primarily due to decreased interest income that resulted from decreased cash and cash equivalents and marketable security balances. Cash and cash
equivalents decreased from $93,493,000 at June 30, 2006 to $79,884,000 at June 30, 2007.

Our effective income tax rate of 36%
for the quarters ended June 30, 2007 and 2006 differs from the federal statutory rate of 35%, due to permanent differences and state income taxes. Permanent differences are costs included in results of operations in the accompanying financial
statements which are not fully deductible for federal income tax purposes. During the quarter ended June 30, 2006, we recognized a nonrecurring increase in income tax expense and deferred income taxes of approximately $362,000, due to the
effects of changes in Texas franchise taxes on the future reversals of temporary differences. The Texas franchise tax changes became effective June 1, 2006.

Inflation

Due to the increased rig count in each of our market areas, availability of personnel to operate our rigs is
limited. In April 2005, January 2006 and May 2006, we raised wage rates for our rig personnel by an average of 6%, 6% and 14%, respectively. We were able to pass these wage rate increases on to our customers based on contract terms. We
currently do not anticipate additional wage rate increases in fiscal year 2008.

We are experiencing increases in costs for rig repairs and
maintenance and costs of rig upgrades and new rig construction, due to the increased industry-wide demand. We estimate these costs increased between 10% and 15% in fiscal year 2007, and we may experience similar cost increases in fiscal year 2008 if
the rig count continues to increase. We may not be able to recover these cost increases through improvements in our daywork revenue rates.

Off Balance
Sheet Arrangements

We do not currently have any off balance sheet arrangements.

Recently Issued Accounting Standards

In July 2006,
the Financial Accounting Standards Board (the FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes  An Interpretation of FASB Statement No. 109 (FIN 48). FIN 48
clarifies the accounting for uncertainty in income taxes recognized in a companys financial statements in accordance with SFAS No. 109. FIN 48 also 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 new FASB standard also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and
transition. We adopted the provisions of FIN 48 effective April 1, 2007. The adoption of FIN 48 had no material impact on our financial position or results of operations and financial condition.



19



---

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No.
157 defines fair value, establishes a framework for measuring fair value and expands disclosure of fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements and,
accordingly, does not require any new fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We do not expect the adoption of SFAS No. 157 to have a
material impact on our financial position or results of operations and financial condition.

In September 2006, the FASB issued Staff
Position AUG AIR-1, Accounting for Planned Major Maintenance Activities, which eliminates the acceptability of the accrue-in-advance method of accounting for planned major maintenance activities. This FASB Staff Position is effective for
fiscal years beginning after December 15, 2006. We do not use the accrue-in-advance method of accounting for rig refurbishments. We use a built-in overhaul method of accounting for rig refurbishments, whereby these expenditures are
recognized as capital asset additions when incurred. The application of this FASB Staff Position had no material impact on our financial position or results of operations and financial condition.

In September 2006, the SEC released Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements When Quantifying
Misstatements in Current Year Financial Statements, (SAB 108), which provides interpretive guidance on the SECs views regarding the process of quantifying materiality of financial statement misstatements. SAB 108
is effective for fiscal years ending after November 15, 2006, with early application for the first interim period ending after November 15, 2006. Since we had no prior-year misstatements during the year ended March 31, 2007, the
application of SAB 108 did not have a material effect on our financial position or results of operations and financial condition.

In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities  Including an amendment of FASB Statement No. 115. This statement permits entities to choose to measure
many financial instruments and certain other items at fair value that are not currently required to be measured at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose
different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We do not expect the adoption of SFAS No. 159 to have a material impact on our
financial position or results of operations and financial condition.



|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------

Our exposure to market risk from changes in interest rates primarily relates to our cash equivalents, which consist of investments in highly liquid debt instruments denominated in U.S. dollars. We are averse to principal loss and ensure the
safety and preservation of our invested funds by limiting default risk, market risk and reinvestment risk.

We are subject to market risk
exposure related to changes in interest rates on floating rate debt we may incur under our credit facility. However, at June 30, 2007, we had no outstanding borrowings under our credit facility.



|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------

In accordance with
Exchange Act Rules 13a-15 and 15d-15, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls
and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2007 to
provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange
Commissions rules and forms.

There has been no change in our internal control over financial reporting that occurred during the nine
months ended June 30, 2007 which has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



20



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PART II. OTHER INFORMATION



|ITEM 1A. | RISK FACTORS
|-------- | ------------

The following should be considered by
investors in our securities, in addition to the risk factors we included under the heading Risk Factors in Item 1 of our annual report on Form 10-K for the year ended March 31, 2007:

As we expand into international markets, our international operations will be subject to political, economic and other uncertainties not encountered
in our domestic operations.

As we continue to implement our strategy of expanding into areas outside the United States, our
international operations will be subject to political, economic and other uncertainties not generally encountered in our U.S. operations. These will include:



| |  | risks of war, terrorism and civil unrest;
|- |  | -----------------------------------------



| |  | expropriation, confiscation or nationalization of our assets;
|- |  | -------------------------------------------------------------



| |  | renegotiation or nullification of contracts;
|- |  | --------------------------------------------



| |  | foreign taxation;
|- |  | -----------------



| |  | the inability to repatriate earnings or capital, due to laws limiting the right and ability of foreign subsidiaries to pay dividends and remit earnings to
affiliated companies;
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | changing political conditions and changing laws and policies affecting trade and investment;
|- |  | --------------------------------------------------------------------------------------------



| |  | regional economic downturns;
|- |  | ----------------------------



| |  | the overlap of different tax structures; and
|- |  | --------------------------------------------



| |  | the risks associated with the assertion of foreign sovereignty over areas in which our operations are conducted.
|- |  | ----------------------------------------------------------------------------------------------------------------

Our international operations may also face the additional risks of fluctuating currency values, hard currency shortages and controls of foreign currency
exchange. Additionally, in some jurisdictions, we may be subject to foreign governmental regulations favoring or requiring the awarding of contracts to local contractors or requiring foreign contractors to employ citizens of, or purchase supplies
from, a particular jurisdiction. These regulations could adversely affect our ability to compete.



|ITEM 6. | EXHIBITS
|------- | --------

The following exhibits are filed as part
of this report or incorporated by reference herein:



|       |  |   |  |                                                                                                                                                                                  
|------ |  | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       |  |  
|3.1 *  |  | - |  | Articles of Incorporation of Pioneer Drilling Company, as amended (Form 10-K for the year ended March 31, 2001 (File No. 1-8182, Exhibit 3.1)).                                  
|       |  |  
|3.2 *  |  | - |  | Articles of Amendment to the Articles of Incorporation of Pioneer Drilling Company (Form 10-Q for the quarter ended September 30, 2001 (File No. 1-8182, Exhibit 3.1)).          
|       |  |  
|3.3 *  |  | - |  | Amended and Restated Bylaws of Pioneer Drilling Company (Form 10-Q for the quarter ended December 31, 2003 (File No. 1-8182, Exhibit 3.3)).                                      
|       |  |  
|10.1 * |  | - |  | Letter dated as of July 17, 2007 from Pioneer Drilling Company to Joyce M. Schuldt setting forth terms of employment (Form 8-K dated July 17, 2007 File No. 1-8182, Exhibit
10.1)



21



---

|       |  |   |  |                                                                                                                                                                                                                                          
|------ |  | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       |  |  
|10.2 * |  | - |  | Letter dated as of July 17, 2007 from William D. Hibbetts to Pioneer Drilling Company relating to reassignment (Form 8-K dated July 17, 2007 File No. 1-8182, Exhibit
10.2).                                                             
|       |  |  
|31.1   |  | - |  | Certification by Wm. Stacy Locke, President and Chief Executive Officer, pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934.                                                                              
|       |  |  
|31.2   |  | - |  | Certification by Joyce M. Schuldt, Executive Vice President and Chief Financial Officer, pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934.                                                              
|       |  |  
|32.1   |  | - |  | Certification by Wm. Stacy Locke, President and Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of
Title 18, United States Code).                
|       |  |  
|32.2   |  | - |  | Certification by Joyce M. Schuldt, Executive Vice President and Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350,
Chapter 63 of Title 18, United States Code).

---

|* | Incorporated herein by reference to the specified prior filing by Pioneer Drilling Company.
|- | -------------------------------------------------------------------------------------------

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



PIONEER DRILLING COMPANY/s/ Joyce M. SchuldtJoyce M. Schuldt Executive Vice President and Chief
Financial Officer (Principal Financial Officer and Duly Authorized Representative)


Dated: August 2, 2007



22



---

Index to Exhibits



|       |  |   |  |                                                                                                                                                                                                                                          
|------ |  | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       |  |  
|3.1 *  |  | - |  | Articles of Incorporation of Pioneer Drilling Company, as amended (Form 10-K for the year ended March 31, 2001 (File No. 1-8182, Exhibit 3.1)).                                                                                          
|       |  |  
|3.2 *  |  | - |  | Articles of Amendment to the Articles of Incorporation of Pioneer Drilling Company (Form 10-Q for the quarter ended September 30, 2001 (File No. 1-8182,
Exhibit 3.1)).                                                                  
|       |  |  
|3.3 *  |  | - |  | Amended and Restated Bylaws of Pioneer Drilling Company (Form 10-Q for the quarter ended December 31, 2003 (File No. 1-8182, Exhibit 3.3)).                                                                                              
|       |  |  
|10.1 * |  | - |  | Letter dated as of July 17, 2007 from Pioneer Drilling Company to Joyce M. Schuldt setting forth terms of employment (Form 8-K dated July 17, 2007 File No. 1-8182, Exhibit 10.1).                                                       
|       |  |  
|10.2 * |  | - |  | Letter dated as of July 17, 2007 from William D. Hibbetts to Pioneer Drilling Company relating to reassignment (Form 8-K dated July 17, 2007 File No. 1-8182,
Exhibit 10.2).                                                             
|       |  |  
|31.1   |  | - |  | Certification by Wm. Stacy Locke, President and Chief Executive Officer, pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934.                                                                              
|       |  |  
|31.2   |  | - |  | Certification by Joyce M. Schuldt, Executive Vice President and Chief Financial Officer, pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934.                                                              
|       |  |  
|32.1   |  | - |  | Certification by Wm. Stacy Locke, President and Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of
Title 18, United States Code).                
|       |  |  
|32.2   |  | - |  | Certification by Joyce M. Schuldt, Executive Vice President and Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350,
Chapter 63 of Title 18, United States Code).

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|* | Incorporated herein by reference to the specified prior filing by Pioneer Drilling Company.
|- | -------------------------------------------------------------------------------------------