04-HP-876_10K.qxd 12/15/04 2:43 PM Page 5 platforms, tension-leg platforms and spars in offshore areas. Each of the drilling rigs consists of engines, drawworks, a mast, pumps, blowout preventers, a drillstring, and related equipment. The intended well depth and the drilling site  conditions are the principal factors that determine the size and type of rig most suitable for a particular drilling job. A land drilling rig may be moved from location to location without modification to the rig. A helicopter rig is one that can be disassembled into component par loads of approximately 4,000-20,000 pounds and transported to remote locations by helicopter cargo plane, or other means. A platform rig is specifically designed to perform drilling operations upon a particular platform. While a platform rig may be moved from its original platform, significant expense is incurred to  modif a platform rig for operation on each subsequent platform. In addition to traditional platform rigs, the Company operates self-moving minimum-space platform drilling rigs and drilling rigs to be used on tension-leg platforms and spars. The minimum-space rig is designed to be moved without the use of expensive derrick barges. The tension-leg platforms and spars allow drilling operations to be conducted in much deeper water than traditional fixed platforms. During fiscal 1998, the Company put to work a new generation of six highly mobile/depth flexible land drilling rigs  (individually the “FlexRig ® ”). The FlexRig has been able to significantly reduce average rig move times compared to  similar depth-rated traditional land rigs. In addition the FlexRig allows a greater depth flexibility of between 8,000 to 18,000 feet and provides greater operating efficiency The original six rigs were designated as FlexRig1 rigs. Subsequently the Company built and completed 12 new FlexRig2 rigs. During fiscal 2001, the Company announced that it would build an additional 25 new FlexRigs. These new rigs, known as “FlexRig3”, were the next generation of FlexRigs which incorporated new drilling technology and new environmental and safety design. This new design included integrated top drive, AC electric drive, hydraulic BOP handling system, hydraulic tubular make-up and break-out system, split crown and traveling blocks and an enlarged drill floor that enables simultaneous crew activities. All 25 of these FlexRig3s were completed by June of 2003. Subsequently , the Company constructed seven more FlexRig3s at an approximate cost of $11,250,000 each. Construction of these rigs was completed by March of 2004. All FlexRigs are available for work in the Company’s U.S. and international drilling operations. The Company’s drilling contracts are obtained through competitive bidding or as a result of negotiations with customers, and sometimes cover multi-well and multi-year projects. Each drilling rig operates under a separate drilling contract. During fiscal 2004, all drilling services were performed on a “daywork” contract basis, under which the Company charges a fixed rate per day with the price determined by the location, depth, and complexity of the well to be drilled, operating conditions, the duration of the contract, and the competitive forces of the market. The Company has previously performed contracts on a combination “footage” and “daywork” basis, under which the Company charged a fixed rate per foot of hole drilled to a stated depth, usually no deeper than 15,000 feet, and a fixed rate per day for the remainder of the hole. Contracts performed on a “footage” basis involve a greater element of risk to the contractor than do contracts performed on a “daywork” basis. Also the Company has previously accepted “turnkey” contracts under which the Company charges a fixed sum to deliver a hole to a stated depth and agrees to furnish services such as testing, coring, and casing the hole which are not normally done on a “footage” basis. “Turnkey” contracts entail varying degrees of risk greater than the usual “footage” contract. The Company did not accept any “footage” or “turnkey” contracts during fiscal 2004. The Company believes that under current market conditions “footage” and “turnkey” contract rates do not  adequately compensate contractors for the added risks. The duration of the Company's drilling contracts are “well-to-well” or for a fixed term. “Well-to-well” contracts are cancelable at the option of either party upon the completion of drilling at any one site. Fixed-term contracts customarily provide for termination at the election of the customer, with an “early ter- mination payment” to be paid to the contractor if a contract is terminated prior to the expiration of the fixed term. While the duration for current fixed-term contracts are for six month to three year periods, some fixed-term and  well-to-well contracts are expected to be continued for longer periods than the original terms. However, the contracting parties have no legal obligation to extend the contracts. Contracts generally contain renewal or extension provisions  exercisable at the option of the customer at prices mutually agreeable to the Company and the customer. In most instances contracts provide for additional payments for mobilization and demobilization. 2