PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Years Ended December31,
2006 / 2005 / 2004
(In thousands, except per share data)
Operating revenues:
Contract drilling / $ / 2,169,370 / $ / 1,485,684 / $ / 809,691
Pressure pumping / 145,671 / 93,144 / 66,654
Drilling and completion fluids / 192,358 / 122,011 / 90,557
Oil and natural gas / 39,187 / 39,616 / 33,867
2,546,586 / 1,740,455 / 1,000,769
Operating costs and expenses:
Contract drilling / 1,002,001 / 776,313 / 556,869
Pressure pumping / 77,755 / 54,956 / 37,561
Drilling and completion fluids / 150,372 / 98,530 / 76,503
Oil and natural gas / 13,374 / 9,566 / 7,978
Depreciation, depletion and impairment / 196,370 / 156,393 / 122,800
Selling, general and administrative / 55,065 / 39,110 / 31,983
Embezzlement costs, net of recoveries / 3,081 / 20,043 / 19,122
Other operating expenses / 9,404 / 4,248 / (514 / )
1,507,422 / 1,159,159 / 852,302
Operating income / 1,039,164 / 581,296 / 148,467
Other income (expense):
Interest income / 5,925 / 3,551 / 1,140
Interest expense / (1,602 / ) / (516 / ) / (695 / )
Other / 347 / 428 / 235
4,670 / 3,463 / 680
Income before income taxes and cumulative effect of change in accounting principle / 1,043,834 / 584,759 / 149,147
Income tax expense (benefit):
Current / 375,373 / 194,918 / 39,952
Deferred / (4,106 / ) / 17,101 / 14,849
371,267 / 212,019 / 54,801
Income before cumulative effect of change in accounting principle / 672,567 / 372,740 / 94,346
Cumulative effect of change in accounting principle, net of related income tax expense of $398 / 687 / — / —
Net income / $ / 673,254 / $ / 372,740 / $ / 94,346
Net income per common share:
Basic:
Income before cumulative effect of change in accounting principle / $ / 4.07 / $ / 2.19 / $ / 0.57
Cumulative effect of change in accounting principle / $ / — / $ / — / $ / —
Net income / $ / 4.08 / $ / 2.19 / $ / 0.57
Diluted:
Income before cumulative effect of change in accounting principle / $ / 4.02 / $ / 2.15 / $ / 0.56
Cumulative effect of change in accounting principle / $ / — / $ / — / $ / —
Net income / $ / 4.02 / $ / 2.15 / $ / 0.56
Weighted average number of common shares outstanding:
Basic / 165,159 / 170,426 / 166,258
Diluted / 167,413 / 173,767 / 169,211

The accompanying notes are an integral part of these consolidated financial statements.

PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December31,
2006 / 2005
(In thousands,
except share data)
ASSETS
Current assets:
Cash and cash equivalents / $ / 13,385 / $ / 136,398
Accounts receivable, net of allowance for doubtful accounts of $7,484 and $2,199 at December31, 2006 and 2005, respectively / 484,106 / 422,002
Accrued Federal and state income taxes receivable / 5,448 / —
Inventory / 43,947 / 27,907
Deferred tax assets, net / 48,868 / 26,382
Deposit on equipment purchase contract / 24,746 / —
Other / 32,170 / 25,168
Total current assets / 652,670 / 637,857
Property and equipment, at cost, net / 1,435,804 / 1,053,845
Goodwill / 99,056 / 99,056
Other / 4,973 / 5,023
Total assets / $ / 2,192,503 / $ / 1,795,781
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable:
Trade / $ / 138,372 / $ / 113,226
Accrued revenue distributions / 15,359 / 13,379
Other / 18,424 / 5,294
Accrued Federal and state income taxes payable / — / 11,034
Accrued expenses / 145,463 / 112,476
Total current liabilities / 317,618 / 255,409
Borrowings under line of credit / 120,000 / —
Deferred tax liabilities, net / 187,960 / 169,188
Other / 4,459 / 4,173
Total liabilities / 630,037 / 428,770
Commitments and contingencies / — / —
Stockholders’ equity:
Preferred stock, par value $.01; authorized 1,000,000shares, no shares issued / — / —
Common stock, par value $.01; authorized 300,000,000shares with 176,656,401 and 175,909,274 issued and 156,542,512 and 172,441,178 outstanding at December31, 2006 and 2005, respectively / 1,766 / 1,759
Additional paid-in capital / 681,069 / 672,151
Deferred compensation / — / (9,287 / )
Retained earnings / 1,346,542 / 719,113
Accumulated other comprehensive income, net of tax / 8,390 / 8,565
Treasury stock, at cost, 20,113,889shares and 3,468,096shares at December31, 2006 and 2005, respectively / (475,301 / ) / (25,290 / )
Total stockholders’ equity / 1,562,466 / 1,367,011
Total liabilities and stockholders’ equity / $ / 2,192,503 / $ / 1,795,781

The accompanying notes are an integral part of these consolidated financial statements.

F-4

PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Accumulated
Common Stock / Additional / Other
Number of / Paid-In / Deferred / Retained / Comprehensive / Treasury
Shares / Amount / Capital / Compensation / Earnings / Income / Stock / Total
(In thousands)
Balance, December31, 2003 / 82,483 / $ / 825 / $ / 506,018 / $ / — / $ / 290,237 / $ / 4,389 / $ / (11,655 / ) / $ / 789,814
Issuance of common stock for acquisition / 1,388 / 14 / 49,462 / — / — / — / — / 49,476
Issuance of restricted stock / 189 / 2 / 6,640 / (6,642 / ) / — / — / — / —
Amortization of deferred compensation expense / — / — / — / 1,222 / — / — / — / 1,222
Exercise of stock options and warrants / 2,580 / 25 / 24,494 / — / — / — / — / 24,519
Tax benefit related to exercise of stock options / — / — / 10,666 / — / — / — / — / 10,666
Foreign currency translation adjustment (net of tax of $1,716) / — / — / — / — / — / 2,961 / — / 2,961
Purchase of treasury stock / — / — / — / — / — / — / (1,482 / ) / (1,482 / )
Payment of cash dividend (see Note10) / — / — / — / — / (10,021 / ) / — / — / (10,021 / )
Effect of two-for-one stock split (see Note10) / 84,986 / 850 / — / — / (850 / ) / — / — / —
Net income / — / — / — / — / 94,346 / — / — / 94,346
Balance, December31, 2004 / 171,626 / 1,716 / 597,280 / (5,420 / ) / 373,712 / 7,350 / (13,137 / ) / 961,501
Issuance of restricted stock / 305 / 3 / 8,040 / (8,043 / ) / — / — / — / —
Amortization of deferred compensation expense / — / — / — / 2,825 / — / — / — / 2,825
Forfeitures of restricted shares / (65 / ) / — / (1,351 / ) / 1,351 / — / — / — / —
Exercise of stock options / 4,043 / 40 / 43,434 / — / — / — / — / 43,474
Tax benefit related to exercise of stock options / — / — / 24,748 / — / — / — / — / 24,748
Foreign currency translation adjustment (net of tax of $705) / — / — / — / — / — / 1,215 / — / 1,215
Purchase of treasury stock / — / — / — / — / — / — / (12,153 / ) / (12,153 / )
Payment of cash dividend (see Note10) / — / — / — / — / (27,339 / ) / — / — / (27,339 / )
Net income / — / — / — / — / 372,740 / — / — / 372,740
Balance, December31, 2005 / 175,909 / 1,759 / 672,151 / (9,287 / ) / 719,113 / 8,565 / (25,290 / ) / 1,367,011
Elimination of deferred compensation due to change in accounting principle / — / — / (9,287 / ) / 9,287 / — / — / — / —
Issuance of restricted stock / 613 / 6 / (6 / ) / — / — / — / — / —
Forfeitures of restricted shares / (47 / ) / (1 / ) / 1 / — / — / — / — / —
Exercise of stock options / 181 / 2 / 1,944 / — / — / — / — / 1,946
Tax benefit related to exercise of stock options / — / — / 1,087 / — / — / — / — / 1,087
Stock based compensation, net of cumulative effect of change in accounting principle / — / — / 15,179 / — / — / — / — / 15,179
Foreign currency translation adjustment, (net of tax of $6) / — / — / — / — / — / (175 / ) / — / (175 / )
Payment of cash dividend (see Note10) / — / — / — / — / (45,825 / ) / — / — / (45,825 / )
Purchase of treasury stock / — / — / — / — / — / — / (450,011 / ) / (450,011 / )
Net income / — / — / — / — / 673,254 / — / — / 673,254
Balance, December31, 2006 / 176,656 / $ / 1,766 / $ / 681,069 / $ / — / $ / 1,346,542 / $ / 8,390 / $ / (475,301 / ) / $ / 1,562,466

The accompanying notes are an integral part of these consolidated financial statements.

F-6

PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN CASH FLOWS

Years Ended December31,
2006 / 2005 / 2004
(In thousands)
Cash flows from operating activities:
Net income / $ / 673,254 / $ / 372,740 / $ / 94,346
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion and impairment / 196,370 / 156,393 / 122,800
Provision for bad debts / 5,400 / 1,231 / 897
Dry holes and abandonments / 4,338 / — / —
Deferred income tax expense (benefit) / (3,708 / ) / 17,101 / 14,849
Tax benefit related to exercise of stock options / — / 24,748 / 10,666
Stock based compensation expense / 15,179 / 2,825 / 1,222
(Gain) loss on disposal of assets / 3,819 / (1,253 / ) / (1,411 / )
Changes in operating assets and liabilities, net of business acquired:
Accounts receivable / (67,417 / ) / (208,248 / ) / (50,682 / )
Federal income taxes receivable/payable / (16,231 / ) / 7,068 / 15,734
Inventory and other current assets / (47,406 / ) / (9,402 / ) / (13,556 / )
Accounts payable / 27,184 / 60,860 / 12,861
Accrued expenses / 32,972 / 32,514 / 1,555
Other liabilities / 13,416 / 3,902 / (6,090 / )
Net cash provided by operating activities / 837,170 / 460,479 / 203,191
Cash flows from investing activities:
Acquisitions, net of cash acquired / — / (73,577 / ) / (30,387 / )
Purchases of property and equipment / (597,919 / ) / (380,094 / ) / (174,589 / )
Proceeds from disposal of property and equipment / 10,934 / 12,674 / 3,303
Change in other assets / — / 1,766 / (1,766 / )
Net cash used in investing activities / (586,985 / ) / (439,231 / ) / (203,439 / )
Cash flows from financing activities:
Purchase of treasury stock / (450,011 / ) / (12,153 / ) / (1,482 / )
Dividends paid / (45,825 / ) / (27,339 / ) / (10,021 / )
Tax benefit related to exercise of stock options / 1,087 / — / —
Proceeds from borrowings under line of credit / 274,000 / — / —
Repayments on line of credit / (154,000 / ) / — / —
Line of credit issuance costs / (342 / ) / — / (780 / )
Proceeds from exercise of stock options and warrants / 1,946 / 43,474 / 24,519
Net cash provided by (used in) financing activities / (373,145 / ) / 3,982 / 12,236
Effect of foreign exchange rate changes on cash / (53 / ) / (1,203 / ) / (100 / )
Net increase (decrease) in cash and cash equivalents / (123,013 / ) / 24,027 / 11,888
Cash and cash equivalents at beginning of year / 136,398 / 112,371 / 100,483
Cash and cash equivalents at end of year / $ / 13,385 / $ / 136,398 / $ / 112,371
Supplemental disclosure of cash flow information:
Net cash paid during the year for:
Interest expense / $ / (1,278 / ) / $ / (418 / ) / $ / (245 / )
Income taxes / (377,847 / ) / (156,709 / ) / (12,500 / )