UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

FOR THE TRANSITION PERIOD FROM              TO             

COMMISSION FILE NUMBER 1-7573

PARKER DRILLING COMPANY

(Exact name of registrant as specified in its charter)

1401 Enclave Parkway, Suite 600, Houston, Texas 77077

(Address of principal executive offices)                (Zip code)

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

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

None

      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 o

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

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).     Yes þ          No o

      The aggregate market value of our common stock held by non-affiliates on June 30, 2004 was $339.9 million. At January 31, 2005, there were 95,014,249 shares of common stock issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of our definitive proxy statement for the 2005 annual meeting of shareholders are incorporated by reference in Part III.

TABLE OF CONTENTS

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

      This Form 10-K contains statements that are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All statements contained in this Form 10-K, other than statements of historical facts, are “forward-looking statements” for purposes of these provisions, including any statements regarding:

      In some cases, you can identify these statements by forward-looking words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “outlook,” “may,” “should,” “will” and “would” or similar words. Forward-looking statements are based on certain assumptions and analyses made by our management in light of their experience and perception of historical trends, current conditions, expected future developments and other factors they believe are relevant. Although our management believes that their assumptions are reasonable based on information currently available, those assumptions are subject to significant risks and uncertainties, many of which are outside of our control. The following factors, as well as any other cautionary language in this Form 10-K, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements:

      Each forward-looking statement speaks only as of the date of this Form 10-K, and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. You should be aware that the occurrence of the events described above and elsewhere in this Form 10-K could have a material adverse effect on our business, results of operations, cash flows and financial condition.

PART I

ITEM 1.     BUSINESS

GENERAL DEVELOPMENT

      Parker Drilling Company was incorporated in the state of Oklahoma in 1954 after having been established in 1934 by its founder, Gifford C. Parker. The founder was the father of Robert L. Parker, chairman and a principal stockholder, and the grandfather of Robert L. Parker Jr., president and chief executive officer. In March 1976, the state of incorporation of the Company was changed to Delaware through the merger of the Oklahoma corporation into its wholly-owned subsidiary Parker Drilling Company, a Delaware corporation. Unless otherwise indicated, the terms “Company,” “we,” “us” and “our” refer to Parker Drilling Company together with its subsidiaries and “Parker Drilling” refers solely to the parent, Parker Drilling Company. We make available free of charge on our website at www.parkerdrilling.com, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports as soon as reasonably practicable after we electronically file such material with, or furnish to, the Securities and Exchange Commission (“SEC”). Additionally, these reports are available on an Internet website maintained by the SEC. The address of that site is http://www.sec.gov.

Our Company

      We are a leading worldwide provider of contract drilling and drilling-related services. Since beginning operations in 1934, we have operated in 51 foreign countries and the United States, making us among the most geographically diverse drilling contractors in the world. Due to our extensive experience and expertise in drilling difficult wells and operating in remote, harsh and ecologically sensitive areas, operators look to us to provide oil and gas exploration and development drilling around the world.

      Our revenues are derived from three segments: international drilling, U.S. drilling and rental tools.

      We also manage and provide labor resources for drilling rigs owned by third parties, which are generally oil companies that prefer to own rig equipment but choose to rely upon our technical expertise or labor resources to operate rigs.

Our Rig Fleet

      The diversity of our rig fleet, both in terms of geographic location and asset class, enables us to provide a broad range of services to oil and gas operators worldwide. As of December 31, 2004, our fleet of rigs available for service consisted of:

ITEM 1.     BUSINESS (continued)

Our Rig Fleet (continued)

Our Rental Tools Business

      Quail Tools, our rental tools business based in New Iberia, Louisiana, is a provider of premium rental tools used for land and offshore oil and gas drilling and workover activities. Quail Tools offers a full line of drill pipe, drill collars, tubing, high and low-pressure blowout preventers, choke manifolds, casing scrapers, and junk and cement mills. Approximately two-thirds of Quail Tools’ equipment is utilized in offshore and coastal water operations. Founded in 1978, Quail Tools was acquired by Parker Drilling in 1996. Quail Tools’ base of operations is an 88,000 square foot facility on a 15-acre complex in New Iberia, Louisiana. Since we acquired Quail Tools, we have expanded operations with the addition of a 48,000 square foot facility on an 11-acre complex in Victoria, Texas, an 8,000 square foot facility on nearly 10-acres in Odessa, Texas and a 19,000 square foot facility on just over 6-acres in Evanston, Wyoming. Quail Tools’ principal customers are major and independent oil and gas exploration and production companies operating in the Gulf of Mexico and other major U.S. producing markets. In 2004, Quail Tools began providing rental tools internationally in Mexico and Sakhalin Island, Russia.

Our Market Areas

      Our core drilling operations are subject to different market factors and industry trends depending on the location. International markets differ from the U.S. market in terms of competition, nature of customers, equipment and experience requirements. The contract drilling industry is a competitive and cyclical business characterized by high capital requirements and difficulty in finding and retaining qualified field personnel. However, participants in this industry typically generate substantial cash flows and economic returns during cyclical peaks.

      International Markets. The majority of the international drilling markets in which we operate have one or more of the following characteristics: (i) a small number of competitors; (ii) customers who typically are major, large independent or national oil companies and integrated service providers; (iii) drilling programs in remote locations with little infrastructure and/or harsh environments requiring specialized drilling equipment with a large inventory of spare parts and other ancillary equipment; and (iv) difficult (i.e., high pressure, deep, hazardous or geologically challenging) wells requiring specialized drilling equipment and considerable experience to drill. Due to the long lead time in the development and implementation of international drilling projects, international markets are attractive to us because they usually allow us to secure longer-term contracts and higher dayrates when compared with drilling operations in the U.S. Gulf of Mexico.

      U.S. Gulf of Mexico. The drilling industry in the U.S. Gulf of Mexico is highly cyclical and is typically driven by general economic activity and changes in actual or anticipated oil and gas prices.

ITEM 1.     BUSINESS (continued)

Our Market Areas (continued)

Utilization and dayrates typically move in conjunction with oil and gas prices. The increase in gas prices since 2003 has resulted in increased exploration and development drilling activity in the U.S. Gulf of Mexico. In addition, the United States government has provided incentives for operators to develop deeper gas reserves. We believe that these incentives will continue to benefit our barge rigs that are capable of drilling deep gas wells, as well as our rental tools business.

Our Strategy

      Our strategy is to maintain our position as a leading worldwide provider of contract drilling, drilling-related services and rental tools and to position our company operationally and financially for long-term and consistent profitability. Key elements in implementing our strategy include:

      Significantly Reducing Our Debt and Enhancing Our Liquidity. One of our primary goals has been to reduce debt from the $589.9 million outstanding at December 31, 2002 by approximately $200 million. Since establishing this goal, we have reduced total long-term debt by $134.0 million to $455.9 million as of March 1, 2005. We accomplished this reduction by utilizing proceeds from the sale of assets, insurance proceeds received for damaged rigs and cash generated from operations. We intend to continue our debt reduction program in 2005 through proceeds from the sale of additional assets and cash generated from operations.

      Increasing the Utilization of Our Barge and Land Rigs. One of our strategic objectives is the increased utilization of our barge and land rigs. Rig utilization has already increased from 40 percent in 2003 to 74 percent as of March 1, 2005 due partly to improved market conditions, restructuring of our various operating regions, including revisions to our compensation structure to provide incentives directly related to profitability.

      Controlling Our Costs and Minimizing Our Capital Expenditures. We continue to be vigilant in our efforts to conserve cash by controlling general and administrative expenses and limiting capital expenditures. We will continue to make adjustments as appropriate for our level of operations. Our capital expenditure program calls for limiting expenditures to scheduled ongoing maintenance projects, expenditures required under our preventive maintenance program and for capital projects that we believe have the potential to yield an attractive rate of return and support our goal of increased utilization. Our capital expenditures were $47.3 million and $35.0 million in 2004 and 2003, respectively, and are budgeted for approximately $60.0 million in 2005.

      Pursuing Strategic Growth Opportunities. We continue to pursue selective strategic growth opportunities in our drilling and rental tools operations that will not only provide an attractive rate of return but will also promote consistent profitability.

Our Competitive Strengths

      Our competitive strengths have historically contributed to our operating performance and we believe the following strengths should enable us to capitalize on future opportunities:

      Geographically Diverse Operations and Assets. We currently operate in 15 countries and have operated in 51 foreign countries and the United States since our founding in 1934, making us among the most geographically diverse drilling contractors in the world. Our international drilling revenues constituted approximately 59 percent of our total revenues in the twelve months ended December 31, 2004. Our core international land drilling operations focus primarily on the CIS, where we have eight land rigs, the Asia Pacific region, where we have 10 land rigs, including seven helicopter transportable rigs, and Mexico, where we have recently moved seven land rigs. Our international offshore drilling operations focus on the Caspian Sea, where we own and operate the world’s largest arctic-class barge rig, Mexico, where we

ITEM 1.     BUSINESS (continued)

Our Competitive Strengths (continued)

recently initiated barge operations with one barge rig, and Nigeria, where we have two barge rigs. We also have 19 drilling and workover barges in the transition zones of the U.S. Gulf of Mexico.

      Significant Experience in Our Core International Markets. Our reputation and experience have led operators to look to us as a pioneer for the exploration of oil and gas in new frontiers around the world as well as to manage environmentally and operationally challenging and multi-rig projects. We have been one of the pioneers in arctic drilling services and have considerable experience with the technology required to drill in these ecologically sensitive areas. Although originally developed for the North Slope of Alaska, this technological expertise in arctic drilling is an asset to us in marketing our services to operators in international markets with similar environmental considerations, such as the Caspian Sea, Western Siberia and Sakhalin Island. Our expertise in drilling deep, difficult wells, in addition to our arctic experience, helped us become the first western drilling contractor to enter Russia, in 1991, and Kazakhstan, which is now one of our most active markets, in 1993. We were the first western contract driller to enter China, in 1980, and we continue to provide drilling services to the Asia Pacific market. In 2004, we began operating eight rigs in Mexico, which we believe will be an important market for the foreseeable future.

      Outstanding Safety Record. We have an outstanding safety record in the operation of our barge and land rigs. Our safety record, as evidenced by our low total recordable incidence rate, has been better than the industry average in each of the last eight years. This has contributed to our success in obtaining drilling contracts, as well as contracts to manage and provide labor resources to drilling rigs owned by third parties.

      Rental Tools Business. Quail Tools, our rental tools business headquartered in New Iberia, Louisiana, is a provider of premium rental tools used for land and offshore oil and gas drilling and workover activities. Quail Tools’ principal customers include both major and independent oil and gas exploration and production companies. Quail Tools has facilities in New Iberia, Louisiana; Victoria, Texas; Odessa, Texas and Evanston, Wyoming. Quail Tools generated gross margins of approximately 58 percent in 2004 and 2003.

      Strong Market Position in the Transition Zones of the U.S. Gulf of Mexico. We are one of only two drilling companies with a significant presence in the transition zones of the U.S. Gulf of Mexico. This area historically has been the world’s largest market for shallow-water barge drilling, and in recent months barge utilization and dayrates have been increasing due to strong natural gas prices. We currently have 19 drilling and workover barges, including the recent addition of barge rig 72 from Nigeria, and are positioned to take advantage of recent drilling opportunities in this market.

      Strong and Experienced Senior Management Team. Our management team has extensive experience in the contract drilling industry. Our chairman, Robert L. Parker, joined Parker Drilling in 1948 and served as our chief executive officer from 1969 to 1991. Robert L. Parker Jr. joined Parker Drilling in 1973 and has served as our president and chief executive officer since 1991. Under the leadership of Mr. Parker and Mr. Parker Jr., we have developed a reputation as a leading worldwide provider of contract drilling services. James W. Whalen joined Parker Drilling in October 2002 as senior vice president and chief financial officer. Prior to joining Parker Drilling, Mr. Whalen served as chief commercial officer for Coral Energy and as chief financial officer for Tejas Gas Corporation. He has also held several executive positions at Coastal Corporation including senior vice president, finance. Mr. Whalen has considerable experience with mergers, acquisitions, and divestitures in the oil and gas industry. David C. Mannon recently joined our senior management team as senior vice president and chief operating officer. Mr. Mannon has served in various managerial positions, culminating with his appointment as president and chief executive officer for Triton Engineering Services Company, a subsidiary of Noble Corporation. He brings a broad range of over 24 years of experience to our drilling operations which will enhance our ability to achieve our goals of increased utilization and profitable growth.

ITEM 1.     BUSINESS (continued)

DRILLING OPERATIONS

CIS

      Eight of our land rigs are currently located in the oil and gas producing regions of the CIS. We were the first western drilling contractor to enter this market in 1991, and it continues to be a major area of operations. We currently have five rigs located in Kazakhstan (two operate under the AralParker joint venture), one rig in Russia and two rigs in Turkmenistan. We are currently negotiating to move a third rig to Turkmenistan, which is currently located in Russia. Drilling operations under this new contract are expected to commence in the third quarter of 2005.

Asia Pacific/Africa

      As of December 31, 2004, we have 10 land rigs located in the Asia Pacific region and two land rigs in Africa. Included are seven helicopter transportable rigs which facilitate exploration in areas of difficult access, such as the mountainside and jungle terrains of Indonesia and Papua New Guinea. We are currently negotiating to sell one of the land rigs in Africa and during the second quarter of 2005 we expect this transaction to close.

International Barge Drilling

      Our international barge drilling operations are located in the transition zones of Nigeria and Mexico, and the shallow water of the Caspian Sea. Barge rigs are utilized in these areas because of their ability to carry drilling equipment on board and navigate in shallow waters where conventional jackup rigs are unable to operate.

      Since 1996, we have been a major provider of barge rigs in Nigeria and currently have two of the six rigs in this market. In 2003, Nigeria experienced significant community unrest which resulted in two of our four barge rigs being evacuated. As a result of the community unrest, barge rig 74 received substantial damage and was removed from our marketable rig count and one other barge rig was moved to the U.S. Gulf of Mexico. We also own and operate the world’s largest arctic-class barge rig in the Caspian Sea. This barge rig completed its initial four-year contract in November 2003 and was stacked until late December 2004 when it began drilling under a new two-well contract with options for an additional four wells. In May 2004, barge rig 53 was transferred from the U.S. Gulf of Mexico region to Mexico to begin operating under a two-year contract with Petroleos Mexicanos S.A. (“Pemex”).

U.S. Barge Drilling and Workover

      The U.S. market for our barge drilling rigs is the transition zones of the U.S. Gulf of Mexico, primarily in Louisiana and, to a lesser extent, Alabama, Mississippi and Texas. This area historically has been the world’s largest market for shallow-water barge drilling. With 19 drilling and workover barges, we are one of two companies with a significant presence in this market. We recently moved barge rig 72 from Nigeria to the U.S. Gulf of Mexico to take advantage of this active market. We have also recently upgraded barge rig 76 to provide ultra-deep drilling services to our customers, for which we are primarily receiving a significantly enhanced dayrate.

Project Management

      We are active in managing and providing labor resources for drilling rigs owned by third parties. In Russia, we mobilized a new rig to Sakhalin Island which we designed, constructed and sold to Exxon Neftegas Limited (“ENL”). Drilling operations under a five-year operations and maintenance contract with this customer began in June 2003. We also recently signed a second operations and maintenance contract with ENL to provide labor services on their offshore platform off the coast of Sakhalin Island, which is expected to begin drilling during the third quarter of 2005. As of December 31, 2004, we were

ITEM 1.     BUSINESS (continued)

Project Management (continued)

actively managing third party-owned drilling rigs in Russia, Kazakhstan, Papua New Guinea, Kuwait and China.

Competition

      The contract drilling industry is a competitive, cyclical business characterized by high capital requirements and challenges in securing and retaining qualified field personnel.

      In the U.S. Gulf of Mexico barge drilling market, we compete with one major contractor. In international land markets, we compete with a number of international drilling contractors as well as smaller local contractors. However, due to the high capital costs of operating in international land markets as compared to the U.S. land market, the high cost of mobilizing land rigs from one country to another, and the technical expertise required, there are usually fewer competitors in international land markets than in domestic markets. In international land and offshore markets, our experience in operating in challenging environments and our customer alliances have both been factors in securing contracts for remote drilling projects. We believe that the market for drilling contracts, both land and offshore, will continue to be highly competitive for the foreseeable future. Certain competitors may have greater financial resources than we do, which may better enable them to withstand industry downturns, compete more effectively on the basis of price, build new rigs or acquire existing rigs.

      Our management believes that Quail Tools is one of the leading rental tools companies in the offshore Gulf of Mexico and other major U.S. producing markets. Nonetheless, some of Quail Tools’ competitors are substantially larger and have greater financial resources than Quail Tools.

Customers

      We believe that we have developed a reputation for providing efficient, safe, environmentally conscious and innovative drilling services. An increasing trend indicates that a number of our customers have been seeking to establish exploration or development drilling programs based on partnering relationships or alliances with a limited number of preferred drilling contractors. Such relationships or alliances can result in longer-term work and higher efficiencies that increase profitability for drilling contractors at a lower overall well cost for oil and gas operators. We are currently a preferred contractor for operators in certain U.S. and international locations which our management believes is a result of our quality of equipment, personnel, safety program, service and experience.

      Our drilling and rental tools customer base consists of major, independent and national-owned oil and gas companies and integrated service providers. In 2004, Tengizchevroil (“TCO”), a consortium led by ChevronTexaco accounted for approximately 13 percent of our total revenues, including discontinued operations. Our ten most significant customers collectively accounted for approximately 57 percent of our total revenues in 2004, including discontinued operations.

Contracts

      Most drilling contracts are awarded based on competitive bidding. The rates specified in drilling contracts are generally on a dayrate basis, and vary depending upon the type of rig employed, equipment and services supplied, geographic location, term of the contract, competitive conditions and other variables. Our contracts generally provide for a basic dayrate during drilling operations, with lower rates or no payment for periods of equipment breakdown, adverse weather or other conditions, which may be beyond our reasonable control. When a rig mobilizes to or demobilizes from an operating area, a contract may provide for different dayrates, specified fixed payments or no payment during the mobilization or demobilization. Contracts to employ our drilling rigs have a term based on a specified period of time or the time required to drill a specified well or number of wells. The contract term in some instances may be

ITEM 1.     BUSINESS (continued)

Contracts (continued)

extended by the customer exercising options for the drilling of additional wells or for an additional term, or by exercising a right of first refusal. Most drilling contracts permit the customer to terminate the contract at the customer’s option without paying a termination fee. Due to various reasons, including a change in market conditions, our customers may seek renegotiation of drilling contracts to reduce their obligations or may seek to suspend or terminate their contracts. Some contracts may be terminated by the customer under various circumstances such as the loss or destruction of the drilling unit or the suspension of drilling operations for a specified period of time as a result of a breakdown of major equipment.

      We generally receive a lump sum fee to move our equipment to the drilling site, which in most cases approximates the cost incurred by us. U.S. contracts are generally for one to three wells with options to drill additional wells, while international contracts are more likely to be for multi-well, longer-term programs.

      Rental tools contracts are typically on a dayrate basis with rates based on type of equipment, investment and competition.

Insurance and Indemnification

      In our drilling contracts, we generally seek to obtain indemnification from our customers for some of the risks related to our drilling services. To the extent that we are unable to transfer such risks to customers by contract or indemnification agreements, we generally seek protection through insurance. To address the hazards inherent in our business, we maintain insurance coverage that includes physical damage coverage, third party general liability coverage, employer’s liability, environmental and pollution coverage and other coverage. We believe that our insurance coverage is customary for the industry and adequate for our business. However, there are risks that such insurance will not adequately protect us against or not be available to cover all the liability from all of the consequences and hazards we may encounter in our drilling operations.

Employees

      The following table sets forth the composition of our employees.

Environmental Considerations

      Our operations are subject to numerous federal, state, local and foreign laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. Numerous governmental agencies, such as the U.S. Environmental Protection Agency (“EPA”), issue regulations to implement and enforce such laws, which often require difficult and costly compliance measures that carry substantial administrative, civil and criminal penalties or may result in injunctive relief for failure to comply. These laws and regulations may require the acquisition of a permit before drilling commences, restrict the types, quantities and concentrations of various substances that can be released into the environment in connection with drilling and production activities, limit or prohibit construction or

ITEM 1.     BUSINESS (continued)

Environmental Considerations (continued)

drilling activities on certain lands lying within wilderness, wetlands, ecologically sensitive and other protected areas, require remedial action to prevent pollution from former operations, and impose substantial liabilities for pollution resulting from our operations. Changes in environmental laws and regulations occur frequently, and any changes that result in more stringent and costly compliance could adversely affect our operations and financial position, as well as those of similarly situated entities operating in the Gulf Coast market. While our management believes that we are in substantial compliance with current applicable environmental laws and regulations, there is no assurance that compliance can be maintained in the future.

      The drilling of oil and gas wells is subject to various federal, state, local and foreign laws, rules and regulations. As an owner or operator of both onshore and offshore facilities, including mobile offshore drilling rigs in or near waters of the United States, we may be liable for the costs of removal and damages arising out of a pollution incident to the extent set forth in the Federal Water Pollution Control Act, as amended by the Oil Pollution Act of 1990 (“OPA”), the Outer Continental Shelf Lands Act (“OCSLA”), the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), and the Resource Conservation and Recovery Act (“RCRA”), each as may be amended from time to time. In addition, we may also be subject to applicable state law and other civil claims arising out of any such incident.

      The OPA and regulations promulgated pursuant thereto impose a variety of regulations on “responsible parties” related to the prevention of oil spills and liability for damages resulting from such spills. A “responsible party” includes the owner or operator of a vessel, pipeline or onshore facility, or the lessee or permittee of the area in which an offshore facility is located. The OPA assigns liability of oil removal costs and a variety of public and private damages to each responsible party.

      The liability for a mobile offshore drilling rig is determined by whether the unit is functioning as a vessel or is in place and functioning as an offshore facility. If operating as a vessel, liability limits of $600 per gross ton or $0.5 million, whichever is greater, apply. If functioning as an offshore facility, the mobile offshore drilling rig is considered a “tank vessel” for spills of oil on or above the water surface, with liability limits of $1,200 per gross ton or $10.0 million, whichever is greater. To the extent damages and removal costs exceed this amount, the mobile offshore drilling rig will be treated as an offshore facility and the offshore lessee will be responsible up to higher liability limits for all removal costs plus $75.0 million. The party must reimburse all removal costs actually incurred by a governmental entity for actual or threatened oil discharges associated with any Outer Continental Shelf facilities, without regard to the limits described above. A party also cannot take advantage of liability limits if the spill was caused by gross negligence or willful misconduct or resulted from violation of a federal safety, construction or operating regulation. If the party fails to report a spill or to cooperate fully in the cleanup, liability limits likewise do not apply.

      Few defenses exist to the liability imposed by the OPA. The OPA also imposes ongoing requirements on a responsible party, including proof of financial responsibility for offshore facilities and vessels in excess of 300 gross tons (to cover at least some costs in a potential spill) and preparation of an oil spill contingency plan for offshore facilities and vessels. The OPA requires owners and operators of offshore facilities that have a worst case oil spill potential of more than 1,000 barrels to demonstrate financial responsibility in amounts ranging from $10.0 million in specified state waters to $35.0 million in federal Outer Continental Shelf waters, with higher amounts, up to $150.0 million, in certain limited circumstances where the U.S. Minerals Management Service believes such a level is justified by the risks posed by the quantity or quality of oil that is handled by the facility. For “tank vessels,” as our offshore drilling rigs are typically classified, the OPA requires owners and operators to demonstrate financial responsibility in the amount of their largest vessel’s liability limit, as those limits are described in the

ITEM 1.     BUSINESS (continued)

Environmental Considerations (continued)

preceding paragraph. A failure to comply with ongoing requirements or inadequate cooperation in a spill may even subject a responsible party to civil or criminal enforcement actions.

      In addition, the OCSLA authorizes regulations relating to safety and environmental protection applicable to lessees and permittees operating on the Outer Continental Shelf. Specific design and operational standards may apply to Outer Continental Shelf vessels, rigs, platforms, vehicles and structures. Violations of environmentally related lease conditions or regulations issued pursuant to the OCSLA can result in substantial civil and criminal penalties as well as potential court injunctions curtailing operations and the cancellation of leases. Such enforcement liabilities can result from either governmental or citizen prosecution.

      All of our operating U.S. barge drilling rigs have zero-discharge capabilities as required by law. In addition, in recognition of environmental concerns regarding dredging of inland waters and permitting requirements, we conduct negligible dredging operations, with approximately two-thirds of our offshore drilling contracts involving directional drilling, which minimizes the need for dredging. However, the existence of such laws and regulations has had and will continue to have a restrictive effect on us and our customers.

      CERCLA (also known as “Superfund”) and comparable state laws impose liability without regard to fault or the legality of the original conduct, on certain classes of persons who are considered to be responsible for the release of a “hazardous substance” into the environment. While CERCLA exempts crude oil from the definition of hazardous substances for purposes of the statute, our operations may involve the use or handling of other materials that may be classified as hazardous substances. CERCLA assigns strict liability to each responsible party for all response and remediation costs, as well as natural resource damages. Few defenses exist to the liability imposed by CERCLA. We have received an information request under CERCLA designating a subsidiary of Parker Drilling as a potentially responsible party with respect to a Superfund site in Freeport, Texas. We are currently evaluating our relationship to the site and have not yet estimated the amount or impact on our operations, financial position or cash flows of any costs related to the site.

      RCRA generally does not regulate most wastes generated by the exploration and production of oil and gas. RCRA specifically excludes from the definition of hazardous waste “drilling fluids, produced waters, and other wastes associated with the exploration, development or production of crude oil, natural gas or geothermal energy.” However, these wastes may be regulated by EPA or state agencies as solid waste. Moreover, ordinary industrial wastes, such as paint wastes, waste solvents, laboratory wastes, and waste oils, may be regulated as hazardous waste. Although the costs of managing solid and hazardous wastes may be significant, we do not expect to experience more burdensome costs than similarly situated companies involved in drilling operations in the Gulf Coast market.

      The drilling industry is dependent on the demand for services from the oil and gas exploration and development industry, and accordingly, is affected by changes in laws relating to the energy business. Our business is affected generally by political developments and by federal, state, local and foreign regulations that may relate directly to the oil and gas industry. The adoption of laws and regulations, both U.S. and foreign, that curtail exploration and development drilling for oil and gas for economic, environmental and other policy reasons may adversely affect our operations by limiting available drilling opportunities.

FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS AND GEOGRAPHIC AREAS

      We operate in three segments, U.S. drilling operations, international drilling operations and rental tools. Information about our business segments and operations by geographic areas for the years ended December 31, 2004, 2003 and 2002 is set forth in Note 11 in the notes to the consolidated financial statements.

      We lease office space in Houston for our corporate headquarters. Additionally, we own and lease office space and operating facilities in various locations, but only to the extent necessary for administrative and operational support functions. We own a ten-story building in Tulsa, Oklahoma, our previous corporate headquarters, which is vacant and classified in assets held for sale. Our bank accounts, accounts receivable, rig materials and supplies, rental tools equipment of Quail Tools, L.P., and the stock of substantially all of our domestic subsidiaries are pledged as collateral to the banks under the 2004 Credit Agreement described in the “Liquidity and Capital Resources” section.

Land Rigs

      The following table shows, as of December 31, 2004, the locations and drilling depth ratings of our 34 land rigs available for service. Twenty-two of these rigs were under contract and the remainder were available for contract as of December 31, 2004.

Barge Rigs

      The following table shows our four international deep drilling barges as of December 31, 2004. All of these rigs were under contract at December 31, 2004.

Barge Rigs (continued)

     The following table shows our 19 deep, intermediate, and workover and shallow drilling barge rigs located in the U.S. Gulf of Mexico. Fifteen of these barge rigs were under contract and the remainder were available for contract as of December 31, 2004.

     The following table presents our utilization rates and rigs available for service for the years ended December 31, 2004 and 2003.

     As of December 31, 2004, we removed seven idle rigs from our marketable rig count. The following table reflects, on a pro forma basis, our rig utilization for 2004 as if the seven rigs had been removed on January 1, 2004.

Rig Related to Discontinued Operations

      As of December 31, 2004, we had one rig in discontinued operations, which was jackup rig 25, a Le Tourneau Class 150-44 (IC). The rig was sold on January 3, 2005.

      We are a party to certain legal proceedings that have resulted from the ordinary conduct of our business. In the opinion of our management, none of these proceedings is expected to have a material adverse effect on our financial position, results of operations or cash flows.

      There were no matters submitted to Parker Drilling Company security holders during the fourth quarter of 2004.

      Officers are elected each year by the board of directors following the annual meeting for a term of one year and until the election and qualification of their successors. The current executive officers of the Company and their ages, positions with the Company and business experience are presented below:

Other Parker Drilling Company Officer

PART II

      Parker Drilling Company common stock is listed for trading on the New York Stock Exchange under the symbol “PKD.” At the close of business on December 31, 2004, there were 2,525 holders of record of Parker Drilling common stock. The following table sets forth the high and low closing prices per share of Parker Drilling’s common stock, as reported on the New York Stock Exchange composite tape, for the periods indicated:

      Substantially all of our stockholders maintain their shares in “street name” accounts and are not individually, stockholders of record. As of January 31, 2005, our common stock was held by 2,511 holders of record and an estimated 23,500 beneficial owners.

      No dividends have been paid on common stock since February 1987. Restrictions contained in Parker Drilling’s existing credit agreement and the indentures for the Senior Notes restrict the payment of dividends. The Company has no present intention to pay dividends on its common stock in the foreseeable future because of the restrictions noted.

      The information under the caption “Equity Compensation Plan Information” in Parker Drilling’s definitive Proxy Statement for the Annual Meeting of Shareholders to be held on April 27, 2005, to be filed with the SEC (the “2005 Proxy Statement”), is incorporated herein by reference.

      The Company purchased 89,725 shares at a price per share of $4.20 on March 4, 2004 and 1,587 shares at a price of $3.07 from executives resulting from the vesting of a portion of a restricted stock grant issued in July 2003 and August 2002, respectively. Upon vesting of the restricted shares a tax withholding obligation to the Company from the executive was satisfied by delivering back to the Company some of the shares on which the restrictions had lapsed.

      The following table presents selected historical consolidated financial data derived from the audited financial statements of Parker Drilling for each of the four years in the period ended December 31, 2004, and from our unaudited financial statements for the year ended December 31, 2000. The following financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and related notes appearing elsewhere in this Form 10-K.

RESULTS OF OPERATIONS

Outlook and Overview

      The financial results for 2004 reflect the improvement in market conditions that we reported in the first quarter of 2004. These market conditions are to a great extent due to the continuation of strong demand combined with uncertainty over disruptions in supply of oil and gas, which have fostered record high oil and gas prices over the past year. We have experienced substantial increases in utilization and dayrates in most of our drilling segments during 2004 and anticipate that these market conditions will continue during 2005. We expect our rental tools business to continue to benefit from these market conditions during 2005.

      Although we anticipated in our 2003 annual report that we would be reporting positive earnings by the fourth quarter of 2004, the improvements in utilization and dayrates have been more than offset by non-routine matters that have delayed our return to profitability. We are not currently aware of any additional matters of this nature that would adversely affect our operating and financial results in a material way for the foreseeable future and we expect to be profitable in 2005.

      Our positive outlook on operations is due in certain respects to the continuation of projects that either commenced or were committed to during the latter part of 2004. Our eight rig operation in Mexico reached 100 percent operating status late in the third quarter of 2004 and should continue at this level for the next two years, with options for extensions beyond that period. We also began receiving dayrates under our new contract for barge rig 257 in the Caspian Sea during the last few days of 2004. This contract is a two-well contract with options for an additional four wells. In Turkmenistan we are negotiating to move a third rig into the country, which had previously operated in Russia. In addition, we have entered into a contract to provide operations and maintenance support to a second offshore rig in Sakhalin Island, Russia. These last two operations are significant contributions to our existing operations in the Commonwealth of Independent States (“CIS”) which are anchored by our drilling operations in Kazakhstan and have the potential for additional growth in the near future. In Nigeria, two barge rigs have returned to work under long-term contracts. Barge rig 75 began a three-year contract in September 2004 and barge rig 73 began a two-year contract with a one-year option in late December 2004.

      Our domestic utilization rate as of March 1, 2005 was 79 percent. Our upgraded barge rig 76 began operating in October 2004 at a significantly higher dayrate due to its ultra-deep drilling capacity, for which we anticipate continued demand due to the high level of natural gas prices. We have moved barge rig 72 from Nigeria to the U.S. Gulf of Mexico to take advantage of the strong demand for deep barge drilling in this segment of our operations. We expect barge rig 72 to begin work in the U.S. Gulf of Mexico early in the second quarter of 2005. Based on the current trend, we anticipate dayrates and utilization to show modest improvement throughout 2005.

      Our rental tools segment, Quail Tools, continues to expand its market share in the U.S. The fourth quarter margin for Quail Tools was one of its best in history. Quail Tools also established an international presence in 2004 by providing rental tools to operations in Mexico and Sakhalin Island, Russia. We anticipate Quail Tools’ financial results will remain strong throughout 2005.

      We have also made substantial progress toward our goal of $200 million in debt reduction, primarily through the sale of assets. As previously reported, we sold our jackup and platform rigs in August 2004, which, together with insurance proceeds of $41.6 million from the damage to barge rig 74 and jackup rig 14, allowed us to further reduce our debt by $134.0 million, through February 15, 2005. This results in achieving 67 percent of the debt reduction goal we established at the end of 2002. We also restructured $150.0 million in debt by issuing new Senior Floating Rate Notes due 2010. In addition, although the interest rate on the majority of the debt paid off during 2004 was 5.5%, the restructuring allowed us to

RESULTS OF OPERATIONS (continued)

Outlook and Overview (continued)

reduce the average stated interest rate on our remaining debt from 9.0% to 8.9%. We are continuing our efforts to sell additional assets to reach our debt reduction goal and to reduce our overall interest cost.

      As we have reported during our recent conference calls, profitable growth and completion of our debt reduction goal are primary objectives for 2005. Even though we anticipate higher levels of activity in 2005, we will continue to conserve cash by closely monitoring our capital expenditures, working capital, inventory and general and administrative expenses. We are positioned to show improved results for 2005 and we expect earnings to be in line with previously announced guidance of net income per share in the $0.05 to $0.14 range.

Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

      We recorded a net loss of $47.1 million for the year ended December 31, 2004 as compared to a net loss of $109.7 million for the year ended December 31, 2003. The loss from continuing operations was $50.6 million and $52.4 million for the years ended December 31, 2004 and 2003, respectively. The income (loss) from discontinued operations was $3.5 million and ($57.3) million for 2004 and 2003, respectively. An impairment of $53.8 million is included in 2003 discontinued operations related primarily to the sale of U.S. jackup and platform rigs that were completed in 2004, except for jackup rig 25 which was sold in January 2005.

      Revenues increased $37.9 million to $376.5 million in 2004 as compared to 2003. The increase is attributed to higher utilization in the U.S. barge operations, international land operations and our rental tools operations, Quail Tools.

RESULTS OF OPERATIONS (continued)

U.S. Drilling Segment

      U.S. drilling revenues increased $21.1 million in 2004 to $88.5 million due to higher utilization and dayrates. As of December 31, 2004 the U.S. drilling segment consisted of 19 barge rigs; nine deep drilling barge rigs, four intermediate drilling barge rigs and six workover barge rigs. During the fourth quarter of 2004, two workover barge rigs were impaired and removed from the marketable rig fleet. In addition, during the second quarter of 2004, deep drilling barge rig 53 was moved to Mexico to begin work on a two-year contract for Pemex. Average 2004 utilization for the barge rigs increased to 63 percent from an average utilization during 2003 of 50 percent. The increase in utilization accounted for approximately $10.8 million of the increase in revenues. Average 2004 dayrates increased approximately $2,200 per day as compared to 2003 accounting for the remaining $10.2 million of the revenue increase. During the third quarter of 2004 we upgraded barge rig 76 enabling it to drill effectively in ultra-deep shelf drilling. The rig began drilling under a multi-well program in late October at a significantly higher dayrate of approximately $37,000 per day, compared to the previous dayrate of approximately $21,000 per day. In addition, we have relocated barge rig 72 from Nigeria to the U.S. Gulf of Mexico to take advantage of the increased utilization and dayrates. The rig will undergo maintenance and refurbishment and will be available for contract in April 2005. As a result of higher dayrates and utilization, gross margins in the U.S. drilling segment increased $14.7 million to $34.4 million. Gross margins during the fourth quarter of 2004 were negatively impacted by $1.5 million for the move of barge rig 72 from Nigeria to the U.S. Gulf of Mexico.

International Drilling Segment

      International drilling revenues increased $4.3 million to $220.8 million in 2004 as compared to 2003. International land drilling revenues increased $48.7 million to $188.0 million offset by a reduction in international offshore drilling revenues of $44.4 million to $32.8 million. International drilling gross margins decreased by $12.0 million to $52.4 million due almost entirely to reduced activity in the international offshore barge rigs.

      International land operations experienced increased utilization in all regions except the Latin America countries of Colombia, Bolivia and Peru. During the second and third quarters of 2004 we moved seven land rigs which had been located in Colombia, Bolivia and Argentina to Mexico to begin a two-year

RESULTS OF OPERATIONS (continued)

International Drilling Segment (continued)

drilling contract for Halliburton de Mexico (“Halliburton”) contributing $19.8 million in revenues. In our Asia Pacific region, we increased revenues by $14.0 million as a result of new drilling contracts in Bangladesh, New Zealand and Papua New Guinea when compared to 2003. In our CIS region we increased revenues by $25.6 million by adding a second rig in Turkmenistan in March 2004 and from the full year impact of our five-year labor agreement on Sakhalin Island. The Sakhalin Island contract commenced operations in June 2003. Rig 236 which had been operating in northern Russia completed its drilling activities in June 2004 and was stacked for the remainder of the year. We are currently negotiating a contract to operate this rig in Turkmenistan which would commence in the third quarter of 2005. Utilization in Colombia, Bolivia and Peru decreased significantly during most of 2004, resulting in $10.3 million less revenues when compared to 2003. In Peru, operations under the contract utilizing rig 228 were suspended, at the request of the customer, effective April 1, 2004. Since April we have been receiving a reduced standby rate. We expect this rig to return to a full operating dayrate during the third quarter of 2005. In Bolivia no rigs worked during 2004. Because we do not anticipate any change in this market for the foreseeable future, we decided to close the operation and recognized a $2.4 million impairment charge during the fourth quarter of 2004, reducing the net carrying value of the Bolivia assets to net realizable value. Three land rigs remain in Colombia and, as of the end of 2004 and into the first quarter of 2005, all three are operating.

      International land gross margins increased $16.0 million in 2004 when compared to 2003. The increase is primarily the result of increased activity as noted above in the CIS and Asia Pacific regions. In addition, gross margins increased in the last half of 2004 as our seven land rigs began operations in Mexico, even with increased costs related to the amortization of a loss on mobilization and startup costs. The quarterly amortization approximates $1.0 million and will be fully amortized by the end of the first quarter 2006. In 2004 when compared to 2003, international land gross margins were negatively impacted by a $4.0 million decrease in Latin America operations, excluding Mexico. The decrease is primarily attributed to the standby situation in Peru and the reduced activity in Colombia.

      International offshore drilling revenues decreased $44.4 million to $32.8 million in 2004 as compared to 2003. The decrease in revenues was attributable to a $24.6 million decrease in the Caspian Sea operation and a $24.8 million decrease in our Nigerian operations, partially offset by increased revenues of $5.0 million from our barge rig in Mexico. In November 2003, our arctic-class barge rig 257 completed its initial four-year contract and was demobilized and stacked throughout most of 2004. During the fourth quarter of 2004, we signed a two-well contract with options for an additional four wells. Barge rig 257 began recognizing revenues under this new contract in late December 2004. In Nigeria, revenues decreased significantly due to reduced utilization. Barge rig 75 worked throughout 2003 but returned to port for repairs in June 2004 and its initial five-year contract expired mid-September 2004. A three-year contract extension was signed in September 2004 at a dayrate approximately 15 percent less than the initial five-year term. Barge rig 73 operated the first five months of 2004 and was stacked until mid-December 2004. In mid-December, barge rig 73 began mobilizing under a new two-year contract with a one-year option. Barge rig 74 remains evacuated since sustaining substantial damage due to community unrest in March 2003. In December 2004, we received insurance proceeds in the amount of $18.5 million, a portion of which was used in February 2005 to reduce long-term debt. During the fourth quarter of 2004, we made the decision to move barge rig 72 from Nigeria to the U.S. Gulf of Mexico region.

      International offshore gross margins decreased $27.9 million in 2004 as compared to 2003. Costs to maintain barge rig 257 in a stacked condition approximated $1.0 million per quarter and we also settled an assessment of duties, taxes and penalties for barge rig 257 with the Customs Control in Mangistau, Kazakhstan, in the third quarter of 2004 for $2.1 million, resulting in a negative gross margin of $6.2 million. In Nigeria, lower utilization on the barge rigs caused reduced revenues in 2004. Ongoing costs to maintain the barges in stacked condition and increased insurance cost caused by losses incurred, both negatively impacted gross margin. In addition, Nigerian tax authorities assessed additional Value

RESULTS OF OPERATIONS (continued)

International Drilling Segment (continued)

Added Tax (“VAT”), resulting in a charge of $2.3 million in the second quarter of 2004. All of these factors combined to reduce the $11.7 million 2003 gross margin in Nigeria to breakeven in 2004. Barge rig 53 commenced operations in Mexico in May 2004 under a new two-year contract for Pemex. Prior to receiving this contract, the barge rig had operated in the U.S. Gulf of Mexico.

Rental Tools Segment

      Rental tools revenues increased $12.5 million to $67.2 million in 2004. The increases in revenues were attributable to a $2.5 million increase from the New Iberia, Louisiana facility, $3.0 million from the Victoria, Texas facility, $4.8 million from the Odessa, Texas facility, and $2.2 million from the Evanston, Wyoming facility. Both the New Iberia, Louisiana and Victoria, Texas operations experienced an increase in customer demand due to increased deep water drilling in the Gulf of Mexico. All locations experienced increased customer demand and saw an expansion in customer base.

Other Financial Data

      Depreciation and amortization expense decreased $4.4 million to $69.2 million in 2004. The decrease is primarily attributable to the continued commitment to our capital expenditure program that calls for limiting expenditures to scheduled ongoing maintenance projects, expenditures required under our preventive maintenance program and for capital projects with an attractive rate of return.

      General and administrative expense increased $4.2 million to $23.4 million for the year ended December 31, 2004 as compared to 2003. During the first quarter of 2004 we incurred an expense of $1.0 million related to the accelerated vesting of certain restricted stock including our portion of the FICA expense. The restricted shares were granted in July 2003 and were scheduled to vest over seven years, but included an accelerated vesting feature based on stock performance goals. In accordance with the accelerated vesting feature, 377,500 shares of the grant vested in March 2004 based on meeting the initial stock performance goal of $3.50 per share for 30 consecutive days. Subsequent to December 31, 2004, the remaining 340,000 shares vested in March 2005 after the closing stock price of $5.00 was met for 30 consecutive days which will result in an expense of $0.7 million. This expense will be recognized during the first quarter of 2005. In the second quarter of 2004, we expensed $1.4 million related to severance costs associated with our former chief operating officer. In addition, during 2004, we incurred approximately $2.7 million related to the documentation and testing for compliance with section 404 of the Sarbanes-Oxley Act of 2002 (“SOX”).

      During 2004, we recognized a provision for reduction in carrying value of certain assets of $13.1 million. During the fourth quarter of 2004, we determined that two workover barge rigs in the U.S. Gulf of Mexico fleet were not economically marketable. As a result, we recorded an impairment of $3.2 million and will dispose of the two barge rigs. In the Asia Pacific region, we reduced the carrying amount of two rigs to net realizable value, which resulted in recording an impairment charge of $0.7 million. Also, during the fourth quarter of 2004, we made the decision to dispose of all the assets in Bolivia, which included two land rigs, inventory and spare parts. We incurred an impairment charge of $2.4 million to reduce the cost basis of these assets to net realizable value. We expect to close the Bolivia office the second quarter of 2005. During the second quarter of 2004, we reclassified our Latin America assets from discontinued operations to continuing operations and recognized a $5.1 million charge to adjust the value of the Latin America assets to their fair value. GAAP requires that an operation reclassified from discontinued operations to continuing operations be measured at the lower of its (a) carrying amount before the asset was classified as held for sale, adjusted for any depreciation expense that would have been recognized had the asset been continuously classified as held and used, or (b) fair value at the date of the subsequent decision not to sell. The $5.1 million represents the depreciation that would have been recognized had the assets been continuously classified as held and used. In addition, during 2004 we

RESULTS OF OPERATIONS (continued)

Other Financial Data (continued)

reserved $1.7 million for an asset representing premiums paid in prior years on two split dollar life insurance policies for Robert L. Parker. The value of the asset was reduced to the cash surrender value of the insurance policies. See Note 13 in the notes to the consolidated financial statements.

      In 2003, three non-marketable rigs in the Asia Pacific region and certain spare parts and equipment in New Iberia, Louisiana were impaired by $2.6 million to estimated salvage value. Subsequent to December 31, 2003, we signed an agreement to sell the New Iberia, Louisiana land and buildings for a net sales price of $6.4 million. This resulted in an impairment of $3.4 million at December 31, 2003, as the net book value of the property exceeded the net sales price. The transaction closed in August 2004 and no additional gain or loss was recognized upon disposition.

      Interest expense decreased $3.4 million to $50.4 million for the year ended December 31, 2004 as compared to 2003. The decrease in interest expense is primarily attributable to the net reduction of $90.2 million to our outstanding debt balance in 2004. The majority of the debt reduction occurred in August 2004 with proceeds from the sale of our jackup and platform rigs.

      In August and September of 2004, we entered into three variable-to-fixed interest rate swap agreements. The swap agreements did not qualify for hedge accounting and accordingly, we are reporting the mark-to-market change in the fair value of the interest rate derivatives currently in earnings. For the year ended December 31, 2004, we recognized a non-cash charge for a decrease in the fair value of the derivative positions of $0.8 million. This amount is included in other income (expense) in the selected financial data.

      On September 2, 2004, we issued $150.0 million of Senior Floating Rate Notes and concurrently repurchased $80.0 million of our 10.125% Senior Notes at a premium and paid off $70.0 million of our delay draw term loan. Total charges of $8.8 million consisting of the 6.54 percent premium on the repurchase of the 10.125% Senior Notes, the write-off of the previously capitalized debt issuance costs associated with the repurchase of the 10.125% Senior Notes and the repayment of the delay draw term loan, and legal and other fees were recorded as loss on extinguishment of debt in the statement of operations. In 2003, in conjunction with the refinancing of a portion of our debt, we incurred $5.3 million expense related to the retirement of our 9.75% Senior Notes. These costs have been recorded as loss on extinguishment of debt and include costs of the call premium on the 9.75% Senior Notes, write-off of remaining capitalized debt issuance costs offset by the write-off of the remaining swap gain that was being amortized over the remaining life of the 9.75% Senior Notes. These amounts are included in other income (expenses) in the selected financial data.

      We have a 50 percent interest in a joint venture in Kazakhstan, AralParker, which owns and operates two drilling rigs and other drilling equipment. AralParker is included in the consolidated financial statements of Parker Drilling Company. During 2004, AralParker generated net income of $2.2 million and accordingly, we have recognized an expense for minority interest of $1.1 million. During 2003, AralParker generated a loss of $0.9 million resulting in income from minority interest of $0.5 million.

      Income tax expense from continuing operations consists of foreign tax expense of $15.0 million for the year ended December 31, 2004. For the year ended December 31, 2003, income tax expense from continuing operations consisted of foreign tax expense of $17.0 million. Foreign taxes decreased $2.0 million in 2004 due primarily to reduced activity in Nigeria in addition to barge rig 257 in Kazakhstan being stacked the majority of the year. Partially offsetting these reductions were increased taxes in Papua New Guinea related to current and prior year assessments and the startup of operations in Mexico. Although we incurred a net loss in the current year, no additional deferred tax benefit was recognized since the sum of our deferred tax assets, principally the net operating loss carryforwards, exceeded the deferred tax liabilities, principally the excess of tax depreciation over book depreciation. This additional deferred tax asset was fully reserved through a valuation allowance in both 2004 and 2003.

RESULTS OF OPERATIONS (continued)

Analysis of Discontinued Operations

     On August 2, 2004, we finalized the sale of five jackup and four platform rigs, realizing net proceeds of $39.3 million. No gain or loss was recorded on the sale and the proceeds were used to pay down debt. Jackup rig 25 was excluded from this sale, although the purchaser retained the exclusive right to purchase it. On January 3, 2005, we sold jackup rig 25 to such purchaser. We received proceeds of $21.5 million and recognized an additional impairment on the disposition of $4.1 million in December 2004. With the consummation of this transaction all the jackup and platform rigs have been sold. No other assets remain related to our discontinued operations and all proceeds were used to pay down debt.

Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

      We recorded a loss from continuing operations of $52.4 million for the year ended December 31, 2003 as compared to a loss from continuing operations of $21.2 million for the year ended December 31, 2002. We recorded a loss from discontinued operations of $57.3 million for the year ended December 31, 2003 as compared to a loss from discontinued operations of $19.7 million for the year ended December 31, 2002. The loss from discontinued operations in 2003 included an impairment of $53.8 million to recognize those assets held for sale at lower of cost or market. For the year ended December 31, 2002 we recognized a change in accounting principle related to our adoption of SFAS No. 142, “Goodwill and Other Intangible Assets” which resulted in recording an impairment of goodwill of $73.1 million in the first quarter of 2002.

RESULTS OF OPERATIONS (continued)

      The reduction in revenues from $385.7 million to $338.7 million was attributed to reduced drilling activity worldwide as a result of the economic downturn in the United States and increased inventories of oil and natural gas.

RESULTS OF OPERATIONS (continued)

      U.S. drilling revenues generated from 21 barge rigs in the U.S. Gulf of Mexico decreased $10.9 million in 2003 to $67.5 million due primarily to lower dayrates. The U.S. Gulf of Mexico market declined significantly during the fourth quarter of 2001 and continued throughout 2002 and 2003 due primarily to a reduction in drilling activity. Average dayrates declined nine percent during 2003 as compared to 2002. Utilization for the barge rigs remained comparable year to year at just over 50 percent. Although prices for natural gas rose during 2003, uncertainty regarding the economy and international issues caused operators to be hesitant to significantly increase drilling. The U.S. drilling operations gross margin decreased $6.1 million during 2003 as compared to 2002. The gross margin percentage decreased from 33 percent to 29 percent primarily attributed to the decrease in barge rig revenues.

International Drilling Segment

      International drilling revenues decreased $43.3 million to $216.6 million in 2003 as compared to 2002, of which $26.2 million was attributed to a decrease in international land drilling revenues. International drilling gross margin decreased $20.0 million in 2003 as compared to the year ended December 31, 2002.

      International land drilling revenues in the CIS region increased $2.8 million in 2003 primarily attributable to the commencement of drilling operations on Sakhalin Island, Russia. Drilling activity began in June 2003, on a five-year contract with five one-year options, contributing revenues of $13.3 million. This increase was partially offset by decreased revenues in Kazakhstan. In the Karachaganak field, we worked three rigs during 2002 while only one worked during 2003. In addition, in December 2002, one Tengizchevroil (“TCO”) owned rig for which we provided labor services was released, resulting in reduced revenues in 2003. This rig was reinstated and returned to active drilling in November 2003. Revenues decreased in the Asia Pacific region and the Middle East by $11.0 million related primarily to reduced utilization in Papua New Guinea and Indonesia. This decrease was partially offset by a new contract in Bangladesh that began drilling during the fourth quarter of 2003. Revenues decreased $18.0 million in the Latin America region due to a decrease in utilization. The region operated an average of 3.0 rigs during 2003 as compared to 7.0 rigs during the year ended December 31, 2002. The decline in utilization was primarily attributed to Colombia and Ecuador, partially offset by operations in Peru. In 2002, Ecuador had one rig operating; the contract was completed in late 2002 and the rig was mobilized to Bangladesh. Peru had one rig operating at full dayrate during 2003 as compared to a partial year for the year ended December 31, 2002. International land drilling gross margins decreased $17.6 million to $41.2 million in 2003 due primarily to the reduced revenues in our land drilling operations in Kazakhstan, Papua New Guinea, New Zealand and Latin America. The gross margin percentage for the international land drilling decreased from 36 percent for 2002 to 30 percent in 2003.

      International offshore drilling revenues accounted for the remaining $17.1 million decrease in international drilling revenues and was attributable entirely to Nigeria. In March 2003, two of the three barge rigs suspended drilling and were evacuated due to community unrest. After evacuation both barge rigs were placed on force majeure rates at approximately 90 percent of the full dayrate. One of the barge rigs, rig 75, returned to full operations while the second barge rig remains evacuated. In April 2003, barge rig 74 was placed on a standby rate at approximately 45 percent of the full dayrate. This dayrate terminated in February 2004. The international offshore drilling gross margin decreased $2.4 million to $23.1 million for 2003. Gross margin in Nigeria decreased approximately $6.3 million during 2003 when compared to 2002, primarily due to loss of revenues caused by community unrest issues. This decrease was partially offset by an increase of $3.9 million in gross margin related to barge rig 257 in the Caspian Sea. The gross margin in 2003 was positively impacted by demobilization revenues that exceeded the costs to stack barge rig 257 upon completion of the contract in the fourth quarter of 2003. The 2002 gross margin was negatively impacted by an additional assessment for property taxes.

RESULTS OF OPERATIONS (continued)

      Rental tools revenues increased $7.1 million to $54.6 million in 2003. Revenues increased $3.5 million from the New Iberia, Louisiana operation, increased $1.3 million from the Victoria, Texas operation, decreased $0.4 million from the Odessa, Texas operation, and generated an increase of $2.7 million from its operation in Evanston, Wyoming. Both the New Iberia, Louisiana and Victoria, Texas operations experienced an increase in customer demand due to increased deep water drilling in the Gulf of Mexico. Demand at the Odessa, Texas facility was down seven percent in 2003 as compared to 2002 due to a decrease in customer activity in the region and a highly competitive pricing environment. The Evanston, Wyoming operation that opened in May 2002 continues to expand its customer base. Rental tools gross margin increased $5.9 million to $31.6 million during 2003 as compared to 2002. Gross margin percentage increased to 58 percent during 2003 as compared to 54 percent for the year ended December 31, 2002, due to a 15 percent increase in revenues and only a six percent increase in operating expenses. The slight increase in operating expenses was driven primarily by increased direct costs and increased man hours worked.

Other Financial Data

      Depreciation and amortization expense decreased $3.7 million to $73.7 million during 2003 as compared to 2002. Depreciation expense decreased due to the reclassification of Latin America assets to assets held for sale as of June 30, 2003. As a result, depreciation related to the assets held for sale was not recorded for the last six months of 2003.

      During the first quarter of 2002, we announced a new contract to build and operate a rig to drill extended-reach wells to offshore targets from a land-based location on Sakhalin Island, Russia for an international consortium. The revenues and expenses for the construction phase of the project were recognized as construction contract revenues and expenses, with the profit calculated on a percentage-of-completion basis. The construction project was completed in June 2003. We recognized profit of $2.0 million and $2.5 million for the years ended December 31, 2003 and 2002, respectively.

      General and administrative expense decreased $5.5 million to $19.3 million for the year ended December 31, 2003 as compared to 2002. This decrease was primarily attributed to the following: salaries and wages decreased $2.1 million as a result of the reduction in force in June 2002, a decrease in professional and legal fees of $0.8 million, a $1.3 million decrease in property and franchise tax expense, and unscheduled maintenance of $0.2 million on the former corporate headquarters in Tulsa, Oklahoma during 2002. The remaining decrease was a result of the cost reduction program implemented in 2002.

      During 2003, we recognized a provision for reduction in carrying value of certain assets of $6.0 million. Three non-marketable rigs in the Asia Pacific region and certain spare parts and equipment in New Iberia, Louisiana were impaired by $2.6 million to estimated salvage value. Subsequent to December 31, 2003, we signed an agreement to sell the New Iberia, Louisiana land and buildings for a net sales price of $6.4 million. This sale was consummated in August 2004. This resulted in an impairment of $3.4 million at December 31, 2003, as the net book value of the property exceeded the net sales price.

      Interest expense increased $1.4 million for the year ended December 31, 2003 as compared to 2002. During the first quarter of 2002, we entered into three $50.0 million swap agreements that resulted in $2.9 million in interest savings during 2002. The swap agreements were terminated during the third quarter of 2002. Effective July 1, 2002, interest expense increased due to the exchange of $235.6 million in principal amount of new 10.125% Senior Notes due 2009 for a like amount of 9.75% Senior Notes due 2006. Partially offsetting this increase was a reduction in interest from the purchase of $14.8 million of 5.5% Convertible Subordinated Notes on the open market in May 2003, reduced interest resulting from the principal reduction of the Boeing Capital Corporation note and the amortization of the swap gain recognized upon liquidation of the swap agreements.

RESULTS OF OPERATIONS (continued)

Other Financial Data (continued)

      In conjunction with our refinancing of a portion of our debt, we incurred $5.3 million of costs related to the retirement of our 9.75% Senior Notes. These costs have been recorded as loss on extinguishment of debt and include costs of the premium to call the 9.75% Senior Notes, write-off of remaining capitalized debt issuance costs offset by the write-off of the remaining swap gain that was being amortized over the remaining life of the 9.75% Senior Notes. This amount is included in other income (expense) in the selected financial data.

      Other income (expense) improved $3.4 million in 2003 as compared to the year ended December 31, 2002. The year ended 2002 included $3.6 million related to the debt exchange offer completed in the second quarter of 2002 and $0.4 million costs incurred for an attempted acquisition. This amount is included in other income (expense) in the selected financial data.

      Income tax expense from continuing operations consisted of foreign tax expense of $17.0 million for the year ended December 31, 2003. For the year ended December 31, 2002 income tax expense from continuing operations consisted of foreign tax expense of $21.3 million and a U.S. deferred tax benefit of $17.1 million. In the year-to-year comparison, foreign taxes decreased $4.3 million. Foreign taxes decreased in 2003 due to a 2002 increase in Colombia related to a change in allowable depreciation and increased taxes in 2002 from Kazakhstan and the Asia Pacific region. For 2003 we incurred a net loss; however, no additional deferred tax benefit was recognized since the sum of our deferred tax assets, principally the net operating loss carryforwards, exceeded the deferred tax liabilities, principally the excess of tax depreciation over book depreciation. This additional deferred tax asset was fully reserved through a valuation allowance.

Analysis of Discontinued Operations

RESULTS OF OPERATIONS (continued)

Analysis of Discontinued Operations (continued)

     Revenues for the U.S. jackup and platform drilling operations increased $5.4 million to $47.2 million in 2003 as compared to 2002. The jackup rigs contributed to the increase with higher utilization and improved dayrates. Utilization for the jackup rigs increased from 80 percent to 82 percent and average dayrates improved 11 percent for 2003 as compared to the year ended December 31, 2002.

      The U.S. jackup and platform drilling operations gross margin was $6.3 million in 2003, an increase of $4.5 million from 2002. The gross margin was positively impacted in 2003 by higher dayrates and utilization for the jackup rigs and platform rigs as discussed above.

LIQUIDITY AND CAPITAL RESOURCES

Operating Cash Flows

      As of December 31, 2004, we had cash and cash equivalents of $44.3 million, a decrease of $23.5 million from December 31, 2003. The primary sources of cash for the twelve-month period as reflected on the consolidated statement of cash flows were $28.8 million provided by operating activities, $41.6 million of insurance proceeds, and $52.4 million of proceeds from the disposition of assets and marketable securities. The primary uses of cash for the twelve-month period ended December 31, 2004 were $47.3 million for capital expenditures and $99.0 million for financing activities. Major capital expenditures for the period included $11.9 million to refurbish rigs for work in Mexico, $7.5 million to refurbish barge rig 76 for ultra-deep drilling in the shallow waters of the U.S. Gulf of Mexico and $13.0 million for tubulars and other rental tools for Quail Tools. Our financing activities include a net reduction in debt of $90.2 million and are further detailed in a subsequent paragraph.

      As of December 31, 2003, we had cash and cash equivalents of $67.8 million, an increase of $15.8 million from December 31, 2002. The primary sources of cash for the twelve-month period as reflected on the consolidated statement of cash flows were $62.5 million provided by operating activities, $6.0 million of insurance proceeds for barge rig 18 and $6.3 million of proceeds from the disposition of equipment. The primary uses of cash for the twelve month period ended December 31, 2003 were $35.0 million for capital expenditures and $15.2 million net reduction of debt. Major capital expenditures during 2003 included $18.1 million for Quail Tools (consisting mostly of purchases of drill pipe and tubulars) and $2.1 million to refurbish rig 230 and rig 247 for work in Turkmenistan. The major components of our net debt reduction were the purchases of $19.3 million face value of our outstanding 5.5% Convertible Subordinated Notes on the open market, $14.8 million in May 2003 and $4.5 million in December 2003. In addition, we paid down $5.5 million of a secured promissory note to Boeing Capital Corporation. During the fourth quarter of 2003 we paid off all of our outstanding 9.75% Senior Notes ($214.2 million face value) with proceeds from our new 9.625% Senior Notes ($175.0 million face value) and a $50.0 million initial draw of a $100.0 million term loan.

Financing Activity

      On July 30, 2004 we drew down the remaining $50.0 million on our delay draw term loan portion of our credit agreement dated October 10, 2003. Those funds, along with existing cash, were used to retire the existing $64.4 million of our 5.5% Convertible Subordinated Notes on August 2, 2004. On the same day, August 2, 2004, we received proceeds from the sale of our five jackup rigs and four platform rigs and paid down $25.0 million of the delay draw term loan. On August 5, 2004, we paid an additional $5.0 million on the delay draw term loan with proceeds from the sale of our New Iberia facilities, leaving an outstanding balance of $70.0 million on the delay draw term loan.

      In September 2004, we refinanced a portion of our existing debt by issuing $150.0 million of Senior Floating Rate Notes due 2010 with interest terms set at the three-month LIBOR rate plus 4.75%. In addition, we have entered into interest rate swap agreements to fix the interest rate at a range of 6.54% to

LIQUIDITY AND CAPITAL RESOURCES (continued)

Financing Activity (continued)

8.83% for portions of this debt through 2008. See Note 6 in the notes to the consolidated financial statements. Proceeds were used to pay off the $70.0 million outstanding balance of our delay draw term loan and to retire $80.0 million of the 10.125% Senior Notes due 2009 that had been tendered pursuant to a tender offer dated August 6, 2004. Total proceeds of $150.0 million from this transaction were used to pay down debt. Cash costs associated with the transaction totaled $9.7 million and were paid from existing cash. Cash costs included an early tender premium of 2.0 percent and a tender offer consideration of 104.54 percent on the $80.0 million tendered 10.125% Senior Notes, as well as underwriting, legal and other fees associated with the issuance of $150.0 million Senior Floating Rate Notes.

      In December 2004, we replaced our existing $50.0 million credit facility with a new $40.0 million credit facility that expires in December 2007. The new revolving credit facility is secured by rental tools equipment, accounts receivable and substantially all of the stock of the subsidiaries, and contains customary affirmative and negative covenants such as minimum ratios for consolidated leverage, consolidated interest coverage and consolidated senior secured leverage.

      We anticipate the working capital needs and funds required for capital spending will be met from existing cash, cash provided by operations and asset sales. It is our intention to limit capital spending, net of reimbursements from customers, to approximately $60.0 million in 2005. Should new opportunities requiring additional capital arise, we may seek project financing or equity participation from outside alliance partners or customers. We have no assurances that such financing or equity participation would be available on terms acceptable to us.

      In October 2003, we refinanced a portion of our existing debt by issuing $175.0 million of the 9.625% Senior Notes due 2013 and replaced our senior credit facility with a $150.0 million senior credit agreement. The senior credit agreement consisted of a four-year $100.0 million delay draw term loan facility and a three-year $50.0 million revolving credit facility that were secured by certain drilling rigs, rental tools equipment, accounts receivable and substantially all of the stock of the subsidiaries, and contains customary affirmative and negative covenants. The proceeds of the 9.625% Senior Notes, plus an initial draw of $50.0 million under the delay draw term loan facility, were used to retire $184.3 million of the 9.75% Senior Notes due 2006 that had been tendered pursuant to a tender offer dated September 24, 2003. The balance of the proceeds from the 9.625% Senior Notes and the initial draw down under the term loan facility were used to retire the remaining $29.9 million of 9.75% Senior Notes that were not tendered. We redeemed the remaining bonds on November 15, 2003 at a call premium of 1.625 percent.

      The new revolving credit facility is available for working capital requirements, general corporate purposes and to support letters of credit. Availability under the revolving credit facility is subject to a borrowing base limitation based on 85 percent of eligible receivables plus a value for eligible rental tools equipment. The credit facility calls for a borrowing base calculation only when the credit facility has commitments of at least $25.0 million. As of December 31, 2004, the total commitments of the credit facility were $16.1 million, of which $15.3 million related to letters of credit and $0.8 million related to the mark-to-market value of the variable-to-fixed, interest rate swap agreements relating to our Senior Floating Rate Notes, thus a borrowing base calculation was not required.

      We had total debt of $481.1 million at December 31, 2004. The debt included:

LIQUIDITY AND CAPITAL RESOURCES (continued)

Financing Activity (continued)

      As of December 31, 2004, we had approximately $68.2 million of liquidity. This liquidity was comprised of $44.3 million of cash on hand and an estimated $23.9 million of undrawn availability under the new revolving credit facility.

      On February 7, 2005, we purchased an additional $25.0 million face value of our 10.125% Senior Notes pursuant to a redemption notice dated January 6, 2005 at the redemption price of 105.0625 percent.

      The following table summarizes our future contractual cash obligations as of December 31, 2004:

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

OTHER MATTERS

Business Risks

      Internationally, we specialize in drilling geologically challenging wells in locations that are difficult to access and/or involve harsh environmental conditions. Our international services are primarily utilized by major and national oil companies and integrated service providers in the exploration and development of reserves of oil. In the United States, we primarily drill in the transition zones of the U.S. Gulf of Mexico for major and independent oil and gas companies. Business activity is primarily dependent on the exploration and development activities of the companies that make up our customer base. Generally, temporary fluctuations in oil and gas prices do not materially affect these companies’ exploration and

OTHER MATTERS (continued)

Business Risks (continued)

development activities and consequently do not materially affect our operations, except for the U.S. Gulf of Mexico, where drilling contracts are generally for a shorter term, and oil and gas companies tend to respond more quickly to upward or downward changes in prices. Many international contracts are of longer duration and oil and gas companies have committed to longer-term projects to develop reserves and thus our international operations are not as susceptible to shorter-term fluctuations in prices. However, sustained increases or decreases in oil and natural gas prices could have an impact on customers’ long-term exploration and development activities, which in turn could materially affect our operations. Generally, a sustained change in the price of oil would have a greater impact on our international operations while a sustained change in the price of natural gas would have a greater effect on U.S. operations. Due to the locations in which we drill, our operations are subject to interruption, prolonged suspension and possible expropriation due to political instability and local community unrest. Further, we are exposed to potential liability issues from pollution and to loss of revenues in the event of a blowout. The majority of the political and environmental risks are transferred to the operator by contract or otherwise insured.

Critical Accounting Policies

      Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate our estimates, including those related to bad debts, materials and supplies obsolescence, property and equipment, goodwill, income taxes, workers’ compensation and health insurance and contingent liabilities for which settlement is deemed to be probable. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. While we believe that such estimates are reasonable, actual results could differ from these estimates.

      We believe the following are our most critical accounting policies as they are complex and require significant judgments, assumptions and/or estimates in the preparation of our consolidated financial statements. Other significant accounting policies are summarized in Note 1 in the notes to the consolidated financial statements.

      Impairment of Property, Plant and Equipment. We periodically evaluate our property, plant and equipment to determine that the net carrying value is not in excess of the net realizable value. We review our property, plant and equipment for impairment when events or changes in circumstances indicate that the carrying value of such assets may be impaired. For example, evaluations are performed when we experience sustained significant declines in utilization and dayrates and we do not contemplate recovery in the near future, or when we reclassify property and equipment to assets held for sale or as discontinued operations as prescribed by SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” We consider a number of factors, including estimated undiscounted future cash flows, appraisals less estimated selling costs and current market value analysis in determining net realizable value. Assets are written down to fair value if the fair value is below net carrying value.

      We recorded impairments to our long-lived assets of $13.1 million, $6.0 million and $1.1 million in 2004, 2003, and 2002, respectively. We also recorded $9.4 million and $53.8 million of impairments to our discontinued operations assets in 2004 and 2003, respectively.

      Asset impairment evaluations are, by nature, highly subjective. They involve expectations about future cash flows generated by our assets, reflect management’s assumptions and judgments regarding future

OTHER MATTERS (continued)

Critical Accounting Policies (continued)

industry conditions and their effect on future utilization levels, dayrates and costs. The use of different estimates and assumptions could result in materially different carrying values of our assets.

      Impairment of Goodwill. We periodically assess whether the excess of cost over net assets acquired is impaired based generally on the estimated future cash flows of that operation. If the estimated fair value is in excess of the carrying value of the operation, no further analysis is performed. If the fair value of each operation, to which goodwill has been assigned, is less than the carrying value, we will deduct the fair value of the tangible and intangible assets and compare the residual amount to the carrying value of the goodwill to determine if impairment should be recorded. Changes in the assumptions such as dayrate and utilization used in the fair value calculation could result in an estimated reporting unit fair value that is below the carrying value, which may give rise to an impairment of goodwill. In addition to the annual review, we also test for impairment should an event occur or circumstances change that may indicate a reduction in the fair value of a reporting unit below its carrying value.

      In 2002, SFAS No. 142, “Goodwill and Other Intangible Assets,” became effective and as a result, we discontinued the amortization of goodwill. In lieu of amortization, we performed an impairment review at year-end 2002 and recorded an impairment of $73.1 million. Our annual impairment tests of goodwill at year-end 2003 and 2004 indicated that the fair value of operations to which goodwill relates exceeded the carrying values as of December 31, 2003 and 2004; accordingly, no impairments were recorded.

      Insurance Reserves. Our operations are subject to many hazards inherent to the drilling industry, including blowouts, explosions, fires, loss of well control, loss of hole, damaged or lost drilling equipment and damage or loss from inclement weather or natural disasters. Any of these hazards could result in personal injury or death, damage to or destruction of equipment and facilities, suspension of operations, environmental damage and damage to the property of others. Generally, drilling contracts provide for the division of responsibilities between a drilling company and its customer, and we seek to obtain indemnification from our customers by contract for certain of these risks. To the extent that we are unable to transfer such risks to customers by contract or indemnification agreements, we seek protection through insurance. However, there is no assurance that such insurance or indemnification agreements will adequately protect us against liability from all of the consequences of the hazards described above. Moreover, our insurance coverage generally provides that we assume a portion of the risk in the form of an insurance coverage deductible.

      Based on the risks discussed above, it is necessary for us to estimate the level of our liability related to insurance and record reserves for these amounts in our consolidated financial statements. Reserves related to insurance are based on the facts and circumstances specific to the insurance claims and our past experience with similar claims. The actual outcome of insured claims could differ significantly from estimated amounts. We maintain actuarially-determined accruals in our consolidated balance sheet to cover self-insurance retentions for workers’ compensation, employers’ liability, general liability and automobile liability claims. These accruals are based on certain assumptions developed utilizing historical data to project future losses. Loss estimates in the calculation of these accruals are adjusted based upon actual claim settlements and reported claims. These loss estimates and accruals recorded in our financial statements for claims have historically been reasonable in light of the actual amount of claims paid.

      As the determination of our liability for insurance claims is subject to significant management judgment and in certain instances is based on actuarially estimated and calculated amounts, and such liabilities could be material in nature, management believes that accounting estimates related to insurance reserves are critical.

      Accounting for Income Taxes. As part of the process of preparing the consolidated financial statements, we are required to estimate the income taxes in each of the jurisdictions in which we operate. This process involves estimating the actual current tax exposure together with assessing temporary

OTHER MATTERS (continued)

Critical Accounting Policies (continued)

differences resulting from differing treatment of items, such as depreciation, amortization and certain accrued liabilities for tax and accounting purposes. These differences and the net operating loss carryforwards result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We then assess the likelihood that the deferred tax assets will be recovered from future taxable income, to the extent we believe that recovery is not likely, we establish a valuation allowance. To the extent we established a valuation allowance or increase or decrease this allowance in a period, we include an expense or reduction of expense within the tax provision in the statement of operations.

      Revenue Recognition. We recognize revenues and expenses on dayrate contracts as the drilling progresses. For meterage contracts, which are rare, we recognize the revenues and expenses upon completion of the well. Revenues from rental activities are recognized ratably over the rental term which is generally less than six months. Mobilization fees received and related mobilization costs incurred, if significant, are deferred and amortized over the term of the related drilling contract.

      Accounting for Derivative Instruments. We follow SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” as amended by SFAS No. 137 and SFAS No. 138. SFAS No. 133 established accounting and disclosure requirements for most derivative instruments and hedge transactions involving derivatives. SFAS No. 133 also requires formal documentation procedures for hedging relationships and effectiveness testing when hedge accounting is to be applied.

      In August and September 2004, we entered into two variable-to-fixed interest rate swap agreements to reduce our cash flow exposure to increases in interest rates on our Senior Floating Rate Notes. The interest rate swap agreements provide us with interest rate protection on the $150.0 million Senior Floating Rate Notes due 2010.

      We did not elect to pursue hedge accounting for the interest rate swap agreements, which were executed to provide the economic hedge against cash flow variability on the floating rate notes. We assessed the key characteristics of the interest rate swap agreements and the notes and determined that the hedging relationship would not be highly effective. This ineffectiveness is caused by the existence of embedded written call options in the interest rate swap agreements and not in the notes. Accordingly, we will recognize the volatility of the swap agreements on a mark-to-market basis in the statement of operations. For the year ended December 31, 2004, we recognized a non-cash decrease in the fair value of the interest rate derivatives of $0.8 million. This non-cash expense is reported in the statement of operations as “Changes in fair value of derivative positions.” The non-cash decrease in fair value is reported in the balance sheet as “Other long-term liabilities.” For additional information see Note 6 in the notes to the consolidated financial statements.

      The fair market value adjustment of these swap agreements will generally fluctuate based on the implied forward interest rate curve for the three-month LIBOR. If the implied forward interest rate curve decreases, the fair market value of the interest swap agreements will decrease and we will record an additional charge. If the implied forward interest rate curve increases, the fair market value of the interest swap agreements will increase, and we will record income. We will analyze the position of the swap agreements on a quarterly basis and record the mark-to-market impact based on the analysis.

Recent Accounting Pronouncements

      In November 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 151, “Inventory Costs — An Amendment of Accounting Research Bulletin (“ARB”) No. 43, Chapter 4.” SFAS No. 151 clarifies the accounting for idle facility expense, freight, handling costs and wasted material to require that all of the aforementioned items be recognized as current period costs. ARB No. 43 previously required that these items reach a level of abnormality before they were expensed. SFAS No. 151 eliminates the “abnormality” requirement and

OTHER MATTERS (continued)

Recent Accounting Pronouncements (continued)

establishes current period recognition. SFAS No. 151 will become effective for us beginning with the calendar year 2006. The adoption of this standard should not have a significant impact on our financial position, results of operations or cash flows.

      In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets — an Amendment of Accounting Principles Board (“APB”) Opinion No. 29.” Under APB Opinion No. 29, “Accounting for Nonmonetary Transactions,” the fundamental premise was that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. There was, however, an exception that allowed the exchange of similar productive assets to be recorded on a carryover basis of the original asset. This standard eliminates this exception and replaces it with a general exception that allows for a carryover basis only for exchanges that do not have commercial substance. A nonmonetary exchange is considered to have commercial substance if the entity’s future cash flows are expected to change as a result of the exchange. SFAS No. 153 will become effective for us for nonmonetary transactions entered into beginning with the calendar year 2006. We do not anticipate that the statement will have significant effect on our financial position, results of operations or cash flows.

      Also in December 2004, the FASB revised SFAS No. 123, “Accounting for Stock Based Compensation” through issuance of SFAS No. 123R. SFAS No. 123R eliminates the alternative under the original statement to account for situations in which an entity compensates employees with share-based payments using the intrinsic value method established in APB Opinion No. 25. SFAS No. 123R requires that all such transactions be accounted for using the fair value method. We plan to adopt SFAS No. 123R on July 1, 2005 using the modified prospective method without restatement of prior interim periods of the current fiscal year. The impact of adopting SFAS No. 123R will be to record expense for previously-issued but unvested employee stock options and any employee stock options that we issue in the future. We expect the dollar impact on our financial statements to be consistent with the impact disclosed in Note 1 in the notes to the consolidated financial statements.

Interest Rate Risk

      The Company entered into two variable-to-fixed interest rate swap agreements as a strategy to manage the floating rate risk on the $150.0 million Senior Floating Rate Notes. The first agreement, signed on August 18, 2004, fixed the interest rate on $50.0 million at 8.83% for a three-year period beginning September 1, 2005 and terminating September 2, 2008 and fixed the interest rate on an additional $50.0 million at 8.48% for the two-year period beginning September 1, 2005 and terminating September 4, 2007. In each case, an option to extend each swap for an additional two years at the same rate was given to the issuer, Bank of America, N.A. The second agreement, signed on September 14, 2004, fixed the interest rate on $150.0 million at 6.54% for the three-month period beginning December 1, 2004 and terminating March 1, 2005. Options to extend $100.0 million at a fixed interest rate of 7.08% for the six-month period beginning March 1, 2005 and to extend $50.0 million at a fixed interest rate of 7.60% for the 18-month period beginning March 1, 2005 and terminating September 1, 2006 were given to the issuer, Bank of America, N.A. Subsequent to year end, Bank of America, N.A. allowed these options to expire unexercised.

      These swap agreements do not meet the hedge criteria in SFAS No. 133 and are, therefore, not designated as hedges. Accordingly, the change in the fair value of the interest rate swaps is recognized currently in earnings. As of December 31, 2004, the Company had the following derivative instruments outstanding related to its interest rate swaps:

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Parker Drilling Company

      We have completed an integrated audit of Parker Drilling Company’s 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 2004 and audits of its 2003 and 2002 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated financial statements and financial statement schedule

      In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of Parker Drilling Company and its subsidiaries at December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

      As discussed in Note 3 to the consolidated financial statements, in 2002, the Company changed its method of accounting for goodwill as a result of adopting the provisions of Statement of Financial Accounting Standards No. 142, “Goodwill and other Intangible Assets.”

Internal control over financial reporting

      Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of December 31, 2004 based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control — Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (continued)

design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

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

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

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

Houston, Texas

March 15, 2005

PARKER DRILLING COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF OPERATIONS

(Dollars in Thousands, Except Per Share and Weighted Average Shares Outstanding)

See accompanying notes to the consolidated financial statements.

PARKER DRILLING COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

(Dollars in Thousands)