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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
 þ
    
    Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the Fiscal Year Ended December 31, 2005
 Commission file number 1-8226
 
 GREY WOLF, INC.
  Texas
(State or other jurisdiction of
incorporation or organization)
    
    74-2144774
(I.R.S. Employer
Identification Number)10370 Richmond Avenue, Suite 600, Houston, Texas
(Address of principal executive offices)
    
    77042
(Zip Code)
   Name of each exchangeTitle of each class
    
    on which registeredCommon Stock, par value $0.10
Rights to Purchase Junior Participating
Preferred Stock, par value $1.00
    
    American Stock Exchange
American Stock Exchange
   þ o
  o þ
 þ o
 þ
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer o
 o þ




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PagePart IItem 1.
    
    Business
    
    3Item 1A.
    
    Risk Factors
    
    8Item 1B.
    
    Unresolved Staff Comments
    
    15Item 2.
    
    Properties
    
    15Item 3.
    
    Legal Proceedings
    
    17Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    17Part IIItem 5.
    
    Market for Registrants Common Equity and Related Shareholder Matters and Issuer Purchases of Equity Securities
    
    18Item 6.
    
    Selected Financial Data
    
    18Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    19Item 7A.
    
    Quantitative and Qualitative Disclosure About Market Risk
    
    32Item 8.
    
    Financial Statements and Supplementary Data
    
    33Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    55Item 9A.
    
    Controls and Procedures
    
    55Item 9B.
    
    Other Information
    
    56Part IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    
    56Item 11.
    
    Executive Compensation
    
    56Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Shareholders Matters
    
    56Item 13.
    
    Certain Relationships and Related Transactions
    
    56Item 14.
    
    Principal Accountant Fees  and Services
    
    56Part IVItem 15.
    
    Exhibits and Financial Statement Schedules
    
    57Signatures
    
    61List of SubsidiariesConsent of Independent Registered Public Accounting Firm, KPMG LLPCertification of CEO pursuant to Rule 13a-14aCertification of CFO pursuant to Rule 13a-14aCertification pursuant to Section 1350
 -2-




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Item 1. Business
 General
   Business Strategy
   
    
    delivering quality, value-added service to our customers;
    
    maintaining a strong position in the markets where we operate;
    
    responding to market conditions by balancing dayrates we receive on our
rigs with the number of rigs we market;
    
    maintaining a high level of utilization for our marketed rigs;
    
    using term contracts to provide sufficient cash flow to recover, after
operating expenses, a majority of the incremental capital expended for refurbishments
on rigs or the purchase of new rigs;
  
    
    maintaining a premium fleet of equipment with a bias toward deep drilling for natural gas;
    
    enhancing cash flow through our turnkey and trucking operations and use of our top drives;
    
    controlling costs and exercising capital spending discipline;
  
    
    searching for new market opportunities where we believe our quality fleet
of rigs would be able to generate attractive returns; and
    
    searching for potential acquisition candidates that we believe would
diversify operations and be accretive.
 Industry Overview
  -3-




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Current Conditions and Outlook
       Operations
    
    
    Ark-La-Tex;
    
    Gulf Coast;
    
    Mississippi/Alabama;
    
    South Texas;
    
    Rocky Mountain;
    
    Mid-Continent.
 -4-




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Ark-La-Tex Division.
  Gulf Coast Division.
  South Texas Division.
  Rocky Mountain Division.
  Mid-Continent District.
 Rigs Available for Refurbishment
  -5-




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Contracts
  Daywork Contracts.
  Turnkey Contracts.
  Footage Contracts.
 -6-




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Customers and Marketing
   Insurance
  Deductible/Limit
    
    Aggregate
    
    Self-Insured RetentionCoverage
    
    Per Occurrence
    
    Limit
    
    per OccurrenceWorkers compensation/employer
liability
    
    Statutory(1)
/$1.0 million
    
    None
    
    $
    500,000Automobile liability
    
    $1.0 million
    
    None
    
    $
    500,000Commercial general
liability
    
    $1.0 million
    
    $2.0 million
    
    $
    250,000Commercial excess
liability
    
    $10.0 million
    
    $10.0 million
    
    Underlying insuranceCommercial excess
liability
    
    $90.0 million
    
    $90.0 million
    
    Underlying insurance
 
 (1)
    
    Workers compensation policy limits vary depending on the laws of the particular states in
which we operate.   -7-




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Environmental Regulations










Employees







Item 1A. Risk Factors




A material or extended decline in expenditures by oil and natural gas exploration and production
companies, due to a decline or volatility in oil and natural gas prices, a decrease in demand for
oil and natural gas, an increase in rig supply or other factors, would reduce our revenue and
income.




-8-



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
    
    our revenues, cash flows and earnings;
    
    the fair market value of our rig fleet, which in turn could trigger a
writedown of the carrying value of these assets for accounting purposes;
    
    our ability to maintain or increase our borrowing capacity;
    
    our ability to obtain additional capital to finance our business and make
acquisitions, and the cost of that capital; and
    
    our ability to retain skilled rig personnel who we would need in the event
of an increase in the demand for our services.
  
    
    weather conditions in the United States and elsewhere;
    
    economic conditions in the United States and elsewhere;
    
    actions by OPEC, the Organization of Petroleum Exporting Countries;
    
    political instability in the Middle East, Venezuela, Nigeria and other major producing regions;
    
    governmental regulations, both domestic and foreign;
    
    the pace adopted by foreign governments for exploration of their national reserves; and
    
    the overall supply and demand for oil and natural gas.
 An economic downturn may adversely affect our business.
  The intense price competition and cyclical nature of our industry could have an adverse effect on
our revenues and profitability.
  
    
    the type and condition of drilling rigs;
    
    the quality of service and experience of rig crews;
    
    the safety record of the company and the particular drilling rig;
    
    the offering of ancillary services; and
    
    the ability to provide drilling equipment adaptable to, and personnel
familiar with, new technologies and drilling techniques.
   -9-




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We face competition from competitors with greater resources.
  
    
    build new rigs or acquire and refurbish existing rigs to be able to place
rigs into service more quickly than us in periods of high drilling demand;
    
    compete more effectively on the basis of price and technology;
    
    better withstand industry downturns; and
    
    retain skilled rig personnel.
 Our drilling operations involve operating hazards which if not adequately insured or indemnified
against could adversely affect our results of operations and financial condition.
  
    
    blowouts;
    
    reservoir damage;
    
    cratering;
    
    fires, pollution and explosions;
    
    collapse of the borehole;
    
    lost or stuck drill strings; and
    
    damage or loss from natural disasters.
  
    
    suspension of drilling operations;
    
    damage to the environment;
    
    damage to, or destruction of, our property and equipment and that of others;
    
    personal injury and loss of life; and
    
    damage to producing or potentially productive oil and natural gas
formations through which we drill.
  Business acquisitions entail numerous risks and may disrupt our business or distract management
attention.
  
    
    unanticipated costs and liabilities;
    
    difficulty of integrating the operations and assets of the acquired business;
 -10-




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
    
    our ability to properly access and maintain an effective internal control
environment over an acquired company, in order to comply with public reporting
requirements;
    
    potential loss of key employees and customers of the acquired companies; and
    
    an increase in our expenses and working capital requirements.
  Our operations are subject to environmental laws that may expose us to liabilities for
noncompliance, which may adversely affect us.
  
    
    environmental quality;
    
    pollution control; and
    
    remediation of environmental contamination.
  We have had only four profitable years since 1996.
  Unexpected cost overruns on our turnkey and footage drilling jobs could adversely affect us.
  -11-




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We could be adversely affected if delivery times for rigs and rig equipment lengthen.
  
    
    deployment of newly-built rigs;
    
    redeployment of the rigs we are refurbishing or plan to refurbish;
    
    upgrades to our marketed fleet of rigs; and
    
    repair and maintenance of our rigs.
 We could be adversely affected if the demand for qualified rig personnel increases.
   Our credit agreement may prohibit us from participation in certain transactions that we may
consider advantageous.
   We have a significant amount of indebtedness and could incur additional indebtedness, which could
materially and adversely affect our financial condition and results of operations and prevent us
from fulfilling our obligations under the notes and our other outstanding indebtedness.
  -12-




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
    
    make it more difficult for us to satisfy our obligations with respect to
the 3.75% Notes and the Floating Rate Notes;
    
    increase our vulnerability to general adverse economic and industry
conditions;
    
    require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness thereby reducing the availability of our
cash flow to fund working capital, capital expenditures and other general corporate
purposes;
    
    limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate;
    
    place us at a competitive disadvantage compared to our competitors that have less debt; and
    
    limit our ability to borrow additional funds.
   Our existing senior indebtedness is, and any senior indebtedness we incur will be, effectively
subordinated to any present or future obligations to secured creditors and liabilities of our
subsidiaries.
  To service our indebtedness, we will require a significant amount of cash. Our ability to generate
cash depends on many factors beyond our control.
  Credit ratings affect our ability to obtain financing and the cost of such financing.
  -13-




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Investors in our common stock should not expect to receive dividend income, and will be dependent
on the appreciation of our common stock to earn a return on their investment.
  Certain provisions of our organizational documents, securities and credit agreement have
anti-takeover effects which may prevent our shareholders from receiving the maximum value for their
shares.
  
    
    classification of our board of directors into three classes, with each
class serving a staggered three year term;
    
    giving our board of directors the exclusive authority to adopt, amend or
repeal our bylaws and thus prohibiting shareholders from doing so;
    
    requiring our shareholders to give advance notice of their intent to submit
a proposal at the annual meeting; and
    
    limiting the ability of our shareholders to call a special meeting and act
by written consent.
   Large amounts of our common stock may be resold into the market in the future which could cause the
market price of our common stock to drop significantly, even if our business is doing well.
  Forward-Looking Statements
  
    
    business strategy;
    
    demand for our services;
    
    spending by our customers;
    
    2006 rig activity and financial results;
    
    projected depreciation expense and interest expense;
 -14-




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
    
    reactivation, timing and cost of reactivation of rigs available for refurbishment;
    
    cost of building new rigs;
    
    projected dayrates;
    
    the ability to recover our refurbishment costs or the purchase price of rigs from term contracts;
    
    the availability and financial terms of term contracts;
    
    rigs expected to be engaged in turnkey and footage operations;
    
    projected tax rate;
    
    wage rates and retention of employees;
    
    sufficiency of our capital resources and liquidity; and
    
    depreciation and capital expenditures in 2006.
    
 Item 1B.
Unresolved Staff Comments
  
 Item 2. Properties
 Drilling Equipment
     -15-




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Maximum Rated Depth Capacity(1)Under
    
    
    10,000
    
    
    15,000
    
    
    20,00010,000
    
    
    to 14,999
    
    
    to 19,999
    
    
    and Deeper
    
    
    TotalMarketedArk-La-TexDiesel Electric
    
    
    
    
    
    
    1
    
    
    
    7
    
    
    
    4
    
    
    
    12Trailer-Mounted
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    1
    
    
    
    4
    (2)Mechanical
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    3
    
    
    
    7Gulf CoastDiesel Electric
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    19
    
    
    
    20Mechanical
    
    
    
    
    
    
    1
    
    
    
    2
    
    
    
    2
    
    
    
    5South TexasDiesel Electric
    
    
    
    
    
    
    1
    
    
    
    6
    
    
    
    9
    
    
    
    16Trailer-Mounted
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    8Mechanical
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    1
    
    
    
    5Rocky MountainDiesel Electric
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    3
    
    
    
    7Mechanical
    
    
    3
    
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    10Mid-ContinentDiesel Electric
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    5
    
    
    
    8Trailer-Mounted
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    2Mechanical
    
    
    
    
    
    
    4
    
    
    
    3
    
    
    
    
    
    
    
    7Total Marketed
    
    
    3
    
    
    
    31
    
    
    
    30
    
    
    
    47
    
    
    
    111Non-marketedRigs Being RefurbishedMechanical
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diesel Electric
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1
    
    
    
    2Total Rigs Being Refurbished
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1
    
    
    
    2Rigs Available For
Refurbishment
Diesel Electric
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    2Total Rigs Available For
Refurbishment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    2Total Non-Marketed
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    3
    
    
    
    4Total Rig Fleet(3)
    
    
    3
    
    
    
    31
    
    
    
    31
    
    
    
    50
    
    
    
    115
 
 (1)
    
    The actual drilling capacity of a rig may be less than its rated capacity due to numerous
factors, such as the length of the drill string and casing size. The intended well depth and
the drill site conditions determine the length of the drill string and other equipment needed
to drill a well.(2)
    
    Includes one diesel electric rig.(3)
    
    The Company has ordered four new 1,500 hp diesel electric rigs with delivery expected in the
fourth quarter of 2006 that will bring the total rig fleet to 119. -16-




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Facilities
  Location
    
    Interest
    
    
    UsesHouston, Texas
    
    Leased
    
    Corporate OfficeAlice, Texas
    
    Owned
    
    Division Office, Rig Yard, Truck YardEunice, Louisiana
    
    Owned
    
    Division Office, Rig YardHaughton, Louisiana
    
    Owned
    
    Rig YardShreveport, Louisiana
    
    Leased
    
    Division OfficeShreveport, Louisiana
    
    Owned
    
    Rig Yard, Truck YardCasper, Wyoming
    
    Owned
    
    Division Office, Rig YardGrand Junction, Colorado
    
    Leased
    
    Division Satellite OfficeMidland, Texas
    
    Leased
    
    District Office
  
 Item 3. Legal Proceedings
  
 Item 4. Submission of Matters to a Vote of Security Holders
  -17-




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PART II
 
 Item 5. Market for Registrants Common Equity and Related Shareholder Matters  and Issuer Purchases of Equity Securities
 Market Data
  High
    
    LowPeriod from January 1, 2006 to February 23, 2006
    
    $
    8.93
    
    
    $
    7.00Year Ended December 31, 2005Quarter ended March 31, 2005
    
    
    6.85
    
    
    
    3.70Quarter ended June 30, 2005
    
    
    8.00
    
    
    
    5.52Quarter ended September 30, 2005
    
    
    8.60
    
    
    
    6.75Quarter ended December 31, 2005
    
    
    8.57
    
    
    
    6.81Year Ended December 31, 2004Quarter ended March 31, 2004
    
    
    4.63
    
    
    
    3.63Quarter ended June 30, 2004
    
    
    4.35
    
    
    
    3.30Quarter ended September 30, 2004
    
    
    4.89
    
    
    
    3.75Quarter ended December 31, 2004
    
    
    5.58
    
    
    
    4.61
   
 Item 6. Selected Financial Data
 Years Ended December 31,2005
    
    2004
    
    2003
    
    2002
    
    2001(In thousands, except per share amounts)Revenues
    
    $
    696,979
    
    
    $
    424,634
    
    
    $
    285,974
    
    
    $
    250,260
    
    
    $
    433,739Net income (loss)
    
    
    120,637
    
    
    
    8,078
    
    
    
    (30,200
    )
    
    
    (21,476
    )
    
    
    68,453Net income (loss) per common shareBasic
    
    
    0.63
    
    
    
    0.04
    
    
    
    (0.17
    )
    
    
    (0.12
    )
    
    
    0.38Diluted
    
    
    0.54
    
    
    
    0.04
    
    
    
    (0.17
    )
    
    
    (0.12
    )
    
    
    0.38Total assets
    
    
    869,035
    
    
    
    635,876
    
    
    
    532,184
    
    
    
    593,964
    
    
    
    627,900Senior and contingent convertible
notes & other long-term debt
    
    
    275,000
    
    
    
    275,000
    
    
    
    234,898
    
    
    
    249,613
    
    
    
    250,695
 -18-




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Item 7. Managements Discussion And Analysis Of Financial Condition And Results Of
Operations
  Overview
   New Rig Purchases and Reactivations
   Rig Activity
  2004
    
    2005
    
    2006DomesticLand Rig
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Full
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Full
    
    1/1 toCount
    
    Q-1
    
    Q-2
    
    Q-3
    
    Q-4
    
    Year
    
    Q-1
    
    Q-2
    
    Q-3
    
    Q-4
    
    Year
    
    2/24Baker Hughes
    
    
    1,002
    
    
    
    1,049
    
    
    
    1,115
    
    
    
    1,131
    
    
    
    1,074
    
    
    
    1,153
    
    
    
    1,218
    
    
    
    1,307
    
    
    
    1,375
    
    
    
    1,263
    
    
    
    1,406Grey Wolf
    
    
    65
    
    
    
    86
    
    
    
    94
    
    
    
    96
    
    
    
    85
    
    
    
    98
    
    
    
    99
    
    
    
    103
    
    
    
    108
    
    
    
    102
    
    
    
    109
 Term Contracts
  -19-




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Drilling Contract Rates
   Turnkey and Footage Contract Activity
   2005 Results and First Quarter 2006 Outlook
   -20-




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Critical Accounting Policies
  Property and Equipment.
 Impairment of Long-Lived Assets.
   -21-




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EstimatedPer RigRefurbishmentand ReactivationNumber
    
    CostRig Category
    
    Of Rigs
    
    (excluding drill pipe)Marketed
    
    111
    
    N/ARigs being refurbished
    
    2
    
    $10.4 MillionAvailable for refurbishment
    
    2
    
    $12.3 Million
  Goodwill and Other Intangible Assets.
  Revenue Recognition.
 Insurance Accruals.
  -22-




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Income Taxes.
  Financial Condition and Liquidity
  December 31, 2005
    
    
    December 31, 2004(Dollars in thousands)Amount
    
    
    %
    
    
    Amount
    
    
    %Working capital
    
    $
    250,446
    
    
    
    32
    
    
    $
    118,096
    
    
    
    20Property and equipment, net
    
    
    499,965
    
    
    
    65
    
    
    
    437,330
    
    
    
    76Goodwill
    
    
    10,377
    
    
    
    1
    
    
    
    10,377
    
    
    
    2Other noncurrent assets
    
    
    13,098
    
    
    
    2
    
    
    
    9,489
    
    
    
    2Total
    
    $
    773,886
    
    
    
    100
    
    
    $
    575,292
    
    
    
    100Long-term debt
    
    $
    275,000
    
    
    
    35
    
    
    $
    275,000
    
    
    
    48Other long-term liabilities
    
    
    129,654
    
    
    
    17
    
    
    
    62,810
    
    
    
    11Shareholders equity
    
    
    369,232
    
    
    
    48
    
    
    
    237,482
    
    
    
    41Total
    
    $
    773,886
    
    
    
    100
    
    
    $
    575,292
    
    
    
    100
 Significant Changes in Financial Condition
  Floating Rate Notes
  -23-




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
    
    during any calendar quarter, if the closing sale price per share of our
common stock for at least 20 trading days in the period of 30 consecutive trading days
ending on the last trading day of the calendar quarter preceding the quarter in which
the conversion occurs, is more than 120% of the conversion price per share ($7.81 per
share) on that 30th trading day;
    
    if we have called the Floating Rate Notes for redemption;
    
    during any period that the credit ratings assigned to the 3.75% Notes by
both Moodys Investors Service (Moodys) and Standard & Poors Ratings Group (S&P)
are reduced below B1 and B+, respectively, or if neither rating agency is rating our
3.75% Notes;
    
    during the five trading day period immediately following any nine
consecutive trading day period in which the average trading price per $1,000 principal
amount of the Floating Rate Notes for each day of such period was less than 95% of the
product of the closing sale price per share of our common stock on that day multiplied
by the number of shares of common stock issuable upon conversion of $1,000 principal
amount of the Floating Rate Notes; or
    
    upon the occurrence of specified corporate transactions, including a change of control.
  3.75% Notes
  -24-




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
    
    during any calendar quarter, if the closing sale price per share of our
common stock for at least 20 trading days in the period of 30 consecutive trading days
ending on the last trading day of the calendar quarter preceding the quarter in which
the conversion occurs, is more than 110% of the conversion price per share ($7.10 per
share) on that 30th trading day;
    
    if we have called the 3.75% Notes for redemption;
    
    during any period that the credit ratings assigned to the 3.75% Notes by
both Moodys and S&P are reduced below B1 and B+, respectively, or if neither rating
agency is rating the 3.75% Notes;
    
    during the five trading day period immediately following any nine
consecutive trading day period in which the average trading price per $1,000 principal
amount of the 3.75% Notes for each day of such period was less than 95% of the product
of the closing sale price per share of our common stock on that day multiplied by the
number of shares of common stock issuable upon conversion of $1,000 principal amount of
the 3.75% Notes; or
    
    upon the occurrence of specified corporate transactions, including a change of control.
   8 7/8% Senior Notes due 2007
  CIT Facility
   -25-




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
    
    1 to 1 EBITDA coverage of debt service, tested monthly on a trailing 12
month basis; and
    
    minimum tangible net worth (as defined in the CIT Facility) at the end of
each quarter will be at least the prior year tangible net worth less non-cash
write-downs since the prior year-end and less fixed amounts for each quarter end for
which the test is calculated.
  
    
    default with respect to other indebtedness in excess of $350,000;
    
    legal judgments in excess of $350,000; or
    
    a change in control which means that we cease to own 100% of our two
principal subsidiaries, some person or group has either acquired beneficial ownership
of 30% or more of the Company or obtained the power to elect a majority of our board of
directors, or our board of directors ceases to consist of a majority of continuing
directors (as defined by the CIT Facility).
  Cash Flow
  Years Ended December 31,2005
    
    
    2004
    
    
    2003Net cash provided by (used in):Operating activities
    
    $
    221,612
    
    
    $
    45,146
    
    
    $
    (7,040
    )Investing activities
    
    
    (128,250
    )
    
    
    (74,077
    )
    
    
    (33,927
    )Financing activities
    
    
    8,073
    
    
    
    46,291
    
    
    
    (18,582
    )Net increase (decrease) in cash:
    
    $
    101,435
    
    
    $
    17,360
    
    
    $
    (59,549
    )
   -26-




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##### Table of Contents



Certain Contractual Commitments
  Payments Due by Period (1)Less than
    
    
    1-3
    
    
    4-5
    
    
    After 5Contractual Obligation
    
    Total
    
    
    1 year
    
    
    years
    
    
    years
    
    
    years3.75% Notes(2)Principal
    
    $
    150,000
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    150,000Interest
    
    
    98,438
    
    
    
    5,625
    
    
    
    11,250
    
    
    
    11,250
    
    
    
    70,313Floating Rate Notes(2)Principal
    
    
    125,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    125,000Interest(3)
    
    
    103,341
    
    
    
    5,663
    
    
    
    11,325
    
    
    
    11,325
    
    
    
    75,028Operating leases
    
    
    3,166
    
    
    
    757
    
    
    
    1,254
    
    
    
    1,108
    
    
    
    47Total contractual
cash obligations
    
    $
    479,945
    
    
    $
    12,045
    
    
    $
    23,829
    
    
    $
    23,683
    
    
    $
    420,388
 
 (1)
    
    This assumes no conversion under, or acceleration of maturity dates due to redemption,
breach of, or default under, the terms of the applicable contractual obligation.(2)
    
    See Floating Rate Notes and 3.75% Notes, above, for information relating to covenants,
the breach of which could cause a default under, and acceleration of, the maturity date. Also
see 3.75% Notes and Floating Rate Notes for information related to the holders conversion
rights.(3)
    
    Assumes the 3-month LIBOR effective for the first quarter of 2006 of 4.58% minus a spread of
0.05% (4.53%)  Payments Due by Period (1)Potential
    
    Total
    
    
    Less than
    
    
    1-3
    
    
    4-5
    
    
    Over 5Contractual Obligation
    
    Committed
    
    
    1 year
    
    
    years
    
    
    years
    
    
    YearsStandby letters of credit
    
    $
    23,874
    
    
    $
    
    
    
    $
    23,874
    
    
    $
    
    
    
    $
    Total
    
    $
    23,874
    
    
    $
    
    
    
    $
    23,874
    
    
    $
    
    
    
    $
    
 
 (1)
    
    Assumes no acceleration of maturity date due to breach of, or default under, the potential
contractual obligation. -27-




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##### Table of Contents



Projected Cash Sources and Uses
     Results of Operations
   -28-




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##### Table of Contents



Three MonthsEndedMarch 31, 2006
    
    
    Years Ended December 31,(projected)(1)
    
    
    2005
    
    
    2004
    
    
    2003Earnings before interest expense, taxes,
depreciation and amortization
    
    $
    84,950
    
    
    $
    265,775
    
    
    $
    84,342
    
    
    $
    30,770Depreciation and amortization
    
    
    (17,190
    )
    
    
    (61,279
    )
    
    
    (55,329
    )
    
    
    (50,521
    )Interest expense
    
    
    (3,285
    )
    
    
    (11,364
    )
    
    
    (14,759
    )
    
    
    (27,832
    )Total income tax (expense) benefit
    
    
    (24,204
    )
    
    
    (72,495
    )
    
    
    (6,176
    )
    
    
    17,383Net income (loss) applicable to common
shares
    
    $
    40,271
    
    
    $
    120,637
    
    
    $
    8,078
    
    
    $
    (30,200
    )
 
 (1)
    
    These projections do not include an after tax gain of $5.9 million related to the sale of
five of our rigs available for refurbishment on January 3, 2006.  For the Year Ended December 31, 2005Daywork
    
    
    TurnkeyOperations
    
    
    Operations(1)
    
    
    Total(Dollars in thousands, except averages per rig day worked)Rig days worked
    
    
    33,718
    
    
    
    3,511
    
    
    
    37,229Contract drilling revenues
    
    $
    538,250
    
    
    $
    158,729
    
    
    $
    696,979Drilling operations expenses
    
    
    (308,708
    )
    
    
    (109,936
    )
    
    
    (418,644
    )General and administrative expense(2)
    
    
    (14,750
    )
    
    
    (1,498
    )
    
    
    (16,248
    )Interest income(2)
    
    
    3,236
    
    
    
    337
    
    
    
    3,573Gain on sale of assets(2)
    
    
    111
    
    
    
    4
    
    
    
    115EBITDA
    
    $
    218,139
    
    
    $
    47,636
    
    
    $
    265,775Averages per rig day worked:Contract drilling revenues
    
    $
    15,963
    
    
    $
    45,209
    
    
    $
    18,721EBITDA
    
    $
    6,470
    
    
    $
    13,568
    
    
    $
    7,139
 For the Year Ended December 31, 2004Daywork
    
    
    TurnkeyOperations
    
    
    Operations(1)
    
    
    Total(Dollars in thousands, except averages per rig day worked)Rig days worked
    
    
    27,616
    
    
    
    3,561
    
    
    
    31,177Contract drilling revenues
    
    $
    308,851
    
    
    $
    115,783
    
    
    $
    424,634Drilling operations expenses
    
    
    (234,630
    )
    
    
    (93,167
    )
    
    
    (327,797
    )General and administrative expense(2)
    
    
    (11,935
    )
    
    
    (1,382
    )
    
    
    (13,317
    )Interest income(2)
    
    
    691
    
    
    
    86
    
    
    
    777Gain on sale of assets(2)
    
    
    34
    
    
    
    11
    
    
    
    45EBITDA
    
    $
    63,011
    
    
    $
    21,331
    
    
    $
    84,342Averages per rig day worked:Contract drilling revenues
    
    $
    11,184
    
    
    $
    32,515
    
    
    $
    13,620EBITDA
    
    $
    2,282
    
    
    $
    5,990
    
    
    $
    2,705
 -29-




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##### Table of Contents



For the Year Ended December 31, 2003Daywork
    
    
    TurnkeyOperations
    
    
    Operations(1)
    
    
    Total(Dollars in thousands, except averages per rig day worked)Rig days worked
    
    
    18,700
    
    
    
    3,447
    
    
    
    22,147Contract drilling revenues
    
    $
    178,818
    
    
    $
    107,156
    
    
    $
    285,974Drilling operations expenses
    
    
    (158,141
    )
    
    
    (86,146
    )
    
    
    (244,287
    )General and administrative expenses(2)
    
    
    (10,472
    )
    
    
    (1,494
    )
    
    
    (11,966
    )Interest income(2)
    
    
    812
    
    
    
    142
    
    
    
    954Gain on sale of assets(2)
    
    
    69
    
    
    
    12
    
    
    
    81Other, net(2)
    
    
    12
    
    
    
    2
    
    
    
    14EBITDA
    
    $
    11,098
    
    
    $
    19,672
    
    
    $
    30,770Averages per rig day worked:Contract drilling revenues
    
    $
    9,562
    
    
    $
    31,087
    
    
    $
    12,913EBITDA
    
    $
    593
    
    
    $
    5,707
    
    
    $
    1,389
 
 (1)
    
    Turnkey operations include the results from turnkey and footage contracts.(2)
    
    These income and expense items are not contract related and are allocated between daywork and
turnkey based upon operating rig days. Comparison of Fiscal Years ended December 31, 2005 and 2004
  Daywork Operations
   Turnkey Operations
  -30-




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##### Table of Contents



Other
    Comparison of Fiscal Years ended December 31, 2004 and 2003
  Daywork Operations
  Turnkey Operations
  Other
  -31-




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##### Table of Contents



Inflation and Changing Prices
  
 Item 7A. Quantitative and Qualitative Disclosure about Market Risk
 Interest Rate Risk.
 -32-




---



##### Table of Contents



Item 8. Financial Statements and Supplementary Data
 Index to
Consolidated Financial Statements
and Financial Statement Schedule
 Managements Report on Internal Control over Financial Reporting
    
    
    34Reports of Independent Registered Public Accounting Firm
    
    
    35Consolidated Balance Sheets as of December 31, 2005 and 2004
    
    
    37Consolidated Statements of Operations for the Years
Ended December 31, 2005, 2004, and 2003
    
    
    38Consolidated Statements of Shareholders Equity and Comprehensive Income (Loss)
for the Years Ended December 31, 2005, 2004, and 2003
    
    
    39Consolidated Statements of Cash Flows for the Years
Ended December 31, 2005, 2004, and 2003
    
    
    40Notes to Consolidated Financial Statements
    
    
    41Financial Statement Schedule:Schedule II  Valuation and Qualifying Accounts
    
    
    55
  -33-




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##### Table of Contents



MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
    /s/ Thomas P. Richards
    
    /s/ David W. WehlmannThomas P. Richards
    
    David W. WehlmannChairman, President and Chief Executive Officer
    
    Executive Vice President and Chief Financial Officer
 March 1, 2006 -34-




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
      
 -35-




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 Managements Report on
Internal Control Over Financial Reporting
       
 -36-




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##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES
 
 Consolidated Balance Sheets
  December 31,2005
    
    
    2004ASSETSCurrent assets:Cash and cash equivalents
    
    $
    173,145
    
    
    $
    71,710Restricted cash  insurance deposits
    
    
    780
    
    
    
    758Accounts receivable, net of allowance
of $2,674 and $2,424, respectively
    
    
    159,438
    
    
    
    98,065Prepaids and other current assets
    
    
    8,010
    
    
    
    5,097Deferred tax assets
    
    
    4,222
    
    
    
    3,050Total current assets
    
    
    345,595
    
    
    
    178,680Property and equipment:Land, buildings and improvements
    
    
    6,530
    
    
    
    5,061Drilling equipment
    
    
    934,648
    
    
    
    824,901Furniture and fixtures
    
    
    4,217
    
    
    
    3,578Total property and equipment
    
    
    945,395
    
    
    
    833,540Less: accumulated depreciation
    
    
    (445,430
    )
    
    
    (396,210
    )Net property and equipment
    
    
    499,965
    
    
    
    437,330Rigs held for sale, net
    
    
    5,524
    
    
    
    Goodwill
    
    
    10,377
    
    
    
    10,377Other noncurrent assets, net
    
    
    7,574
    
    
    
    9,489$
    869,035
    
    
    $
    635,876LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable  trade
    
    $
    61,087
    
    
    $
    42,754Accrued workers compensation
    
    
    6,575
    
    
    
    4,303Payroll and related employee costs
    
    
    12,131
    
    
    
    8,699Accrued interest payable
    
    
    2,156
    
    
    
    1,516Current income taxes payable
    
    
    6,141
    
    
    
    200Other accrued liabilities
    
    
    7,059
    
    
    
    3,112Total current liabilities
    
    
    95,149
    
    
    
    60,584Contingent convertible notes
    
    
    275,000
    
    
    
    275,000Other long-term liabilities
    
    
    12,403
    
    
    
    7,509Deferred income taxes
    
    
    117,251
    
    
    
    55,301Commitments and contingent liabilities
    
    
    
    
    
    
    Shareholders equity:Series B Junior Participating Preferred stock,
$1 par value; 250,000 shares authorized,
none outstanding
    
    
    
    
    
    
    Common stock, $.10 par value; 300,000,000 shares
authorized 192,625,650 and 190,136,471 issued
and outstanding, respectively
    
    
    19,263
    
    
    
    19,014Unearned restricted stock awards
    
    
    (937
    )
    
    
    Additional paid-in capital
    
    
    374,949
    
    
    
    363,148Accumulated deficit
    
    
    (24,043
    )
    
    
    (144,680
    )Total shareholders equity
    
    
    369,232
    
    
    
    237,482$
    869,035
    
    
    $
    635,876
 See accompanying notes to consolidated financial statements
 -37-




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##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES
 
 Consolidated Statements of Operations
  Years Ended December 31,2005
    
    
    2004
    
    
    2003Revenues:Contract drilling
    
    $
    696,979
    
    
    $
    424,634
    
    
    $
    285,974Costs and expenses:Drilling operations
    
    
    418,644
    
    
    
    327,797
    
    
    
    244,287Depreciation and amortization
    
    
    61,279
    
    
    
    55,329
    
    
    
    50,521General and administrative
    
    
    16,248
    
    
    
    13,317
    
    
    
    11,966Gain on sale of assets
    
    
    (115
    )
    
    
    (45
    )
    
    
    (81
    )Total costs and expenses
    
    
    496,056
    
    
    
    396,398
    
    
    
    306,693Operating income (loss)
    
    
    200,923
    
    
    
    28,236
    
    
    
    (20,719
    )Other income (expense):Interest expense
    
    
    (11,364
    )
    
    
    (14,759
    )
    
    
    (27,832
    )Interest income
    
    
    3,573
    
    
    
    777
    
    
    
    954Other, net
    
    
    
    
    
    
    
    
    
    
    14Other expense, net
    
    
    (7,791
    )
    
    
    (13,982
    )
    
    
    (26,864
    )Income (loss) before income taxes
    
    
    193,132
    
    
    
    14,254
    
    
    
    (47,583
    )Income tax expense (benefit):Current
    
    
    11,717
    
    
    
    200
    
    
    
    (938
    )Deferred
    
    
    60,778
    
    
    
    5,976
    
    
    
    (16,445
    )Total income tax expense (benefit)
    
    
    72,495
    
    
    
    6,176
    
    
    
    (17,383
    )Net income (loss)
    
    $
    120,637
    
    
    $
    8,078
    
    
    $
    (30,200
    )Net income (loss) per common share (Note 1):Basic
    
    $
    0.63
    
    
    $
    0.04
    
    
    $
    (0.17
    )Diluted
    
    $
    0.54
    
    
    $
    0.04
    
    
    $
    (0.17
    )Weighted average common shares outstanding:Basic
    
    
    191,364
    
    
    
    185,868
    
    
    
    181,210Diluted
    
    
    235,412
    
    
    
    187,654
    
    
    
    181,210
 See accompanying notes to consolidated financial statements
 -38-




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##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES
 
 Consolidated Statements of Shareholders Equity And Comprehensive Income (Loss)
  Series BJuniorParticipating
    
    
    
    
    
    
    Common
    
    
    
    
    
    
    UnearnedPreferred
    
    
    
    
    
    
    Stock
    
    
    Additional
    
    
    RestrictedStock
    
    
    Common
    
    
    $.10 par
    
    
    Paid-in
    
    
    Stock$1 par Value
    
    
    Shares
    
    
    Value
    
    
    Capital
    
    
    Awards
    
    
    Deficit
    
    
    TotalBalance, December 31, 2002
    
    
    
    
    
    
    181,038
    
    
    $
    18,104
    
    
    $
    329,712
    
    
    
    
    
    
    $
    (122,558
    )
    
    $
    225,258Exercise of stock options
    
    
    
    
    
    
    245
    
    
    
    25
    
    
    
    343
    
    
    
    
    
    
    
    
    
    
    
    368Tax benefit of stock
option exercises
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    211
    
    
    
    
    
    
    
    
    
    
    
    211Comprehensive net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (30,200
    )
    
    
    (30,200
    )Balance, December 31, 2003
    
    
    
    
    
    
    181,283
    
    
    
    18,129
    
    
    
    330,266
    
    
    
    
    
    
    
    (152,758
    )
    
    
    195,637Non-cash compensation
expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    77
    
    
    
    
    
    
    
    
    
    
    
    77Exercise of stock options
    
    
    
    
    
    
    4,243
    
    
    
    424
    
    
    
    9,729
    
    
    
    
    
    
    
    
    
    
    
    10,153Tax benefit of stock
option exercises
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,193
    
    
    
    
    
    
    
    
    
    
    
    3,193Issuance of common stock
    
    
    
    
    
    
    4,610
    
    
    
    461
    
    
    
    19,883
    
    
    
    
    
    
    
    
    
    
    
    20,344Comprehensive net
income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,078
    
    
    
    8,078Balance, December 31, 2004
    
    
    
    
    
    
    190,136
    
    
    
    19,014
    
    
    
    363,148
    
    
    
    
    
    
    
    (144,680
    )
    
    
    237,482Exercise of stock options
    
    
    
    
    
    
    2,292
    
    
    
    229
    
    
    
    7,844
    
    
    
    
    
    
    
    
    
    
    
    8,073Tax benefit of stock
option exercises
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,842
    
    
    
    
    
    
    
    
    
    
    
    2,842Issuance of restricted
stock
    
    
    
    
    
    
    198
    
    
    
    20
    
    
    
    1,115
    
    
    
    (1,135
    )
    
    
    
    
    
    
    Amortization of
restricted stock awards
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    198
    
    
    
    
    
    
    
    198Comprehensive net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    120,637
    
    
    
    120,637Balance, December 31, 2005
    
    
    
    
    
    
    192,626
    
    
    $
    19,263
    
    
    $
    374,949
    
    
    $
    (937
    )
    
    $
    (24,043
    )
    
    $
    369,232
 See accompanying notes to consolidated financial statements
 -39-




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##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES
 
 Consolidated Statements of Cash Flows
  Years Ended December 31,2005
    
    
    2004
    
    
    2003Cash flows from operating activities:Net income (loss)
    
    $
    120,637
    
    
    $
    8,078
    
    
    $
    (30,200
    )Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:Depreciation and amortization
    
    
    61,279
    
    
    
    55,329
    
    
    
    50,521Non-cash compensation expense
    
    
    
    
    
    
    77
    
    
    
    Gain on sale of assets
    
    
    (115
    )
    
    
    (45
    )
    
    
    (81
    )Amortization of restricted stock awards
    
    
    198
    
    
    
    
    
    
    
    Foreign exchange gain
    
    
    
    
    
    
    
    
    
    
    (14
    )Deferred income taxes
    
    
    60,778
    
    
    
    2,778
    
    
    
    (16,656
    )Accretion of debt discount
    
    
    
    
    
    
    102
    
    
    
    285Tax benefit of stock option exercises
    
    
    2,842
    
    
    
    3,193
    
    
    
    211(Increase) decrease in restricted cash
    
    
    (22
    )
    
    
    (9
    )
    
    
    35Increase in accounts receivable
    
    
    (61,373
    )
    
    
    (34,128
    )
    
    
    (13,147
    )Increase in other current assets
    
    
    (2,913
    )
    
    
    (718
    )
    
    
    (961
    )Increase in trade accounts payable
    
    
    18,333
    
    
    
    9,596
    
    
    
    8,476Increase (decrease) in accrued workers compensation
    
    
    6,257
    
    
    
    2,402
    
    
    
    (326
    )Increase (decrease) in other current liabilities
    
    
    13,960
    
    
    
    (3,442
    )
    
    
    (8,660
    )Increase in other
    
    
    1,751
    
    
    
    1,933
    
    
    
    3,477Cash provided by (used in) operating activities
    
    
    221,612
    
    
    
    45,146
    
    
    
    (7,040
    )Cash flows from investing activities:Property and equipment additions
    
    
    (131,352
    )
    
    
    (46,951
    )
    
    
    (35,102
    )Payments to acquire New Patriot Drilling Corp.
    
    
    
    
    
    
    (28,906
    )
    
    
    Proceeds from sales of equipment
    
    
    3,102
    
    
    
    1,780
    
    
    
    1,175Cash used in investing activities
    
    
    (128,250
    )
    
    
    (74,077
    )
    
    
    (33,927
    )Cash flows from financing activities:Net proceeds from long-term debt
    
    
    
    
    
    
    122,187
    
    
    
    146,625Repayments of long-term debt
    
    
    
    
    
    
    (85,000
    )
    
    
    (165,000
    )Financing costs
    
    
    
    
    
    
    (1,049
    )
    
    
    (575
    )Proceeds from exercise of stock options
    
    
    8,073
    
    
    
    10,153
    
    
    
    368Cash provided by (used in) financing activities
    
    
    8,073
    
    
    
    46,291
    
    
    
    (18,582
    )Net increase (decrease) in cash and cash equivalents
    
    
    101,435
    
    
    
    17,360
    
    
    
    (59,549
    )Cash and cash equivalents, beginning of year
    
    
    71,710
    
    
    
    54,350
    
    
    
    113,899Cash and cash equivalents, end of year
    
    $
    173,145
    
    
    $
    71,710
    
    
    $
    54,350Supplemental Cash Flow Disclosure:Cash paid for interest
    
    $
    9,862
    
    
    $
    15,872
    
    
    $
    30,510Cash paid for (refund of) taxes
    
    $
    2,985
    
    
    $
    
    
    
    $
    (879
    )
 See accompanying notes to consolidated financial statements
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GREY WOLF, INC. AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (1)
    
    Summary of Significant Accounting Policies
 Nature of Operations.
 Property and Equipment.
 Useful Lives (in years)Drilling rigs and related equipment
    
    
    3-15Furniture and fixtures
    
    
    7Buildings and improvements
    
    
    5-20Vehicles
    
    
    3-6Other
    
    
    3-5
  Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of.
 Goodwill and Intangible Assets.
 Revenue Recognition.
 Accounts Receivable.
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GREY WOLF, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Earnings per Share.
  2005
    
    
    2004
    
    
    2003(In thousands, except per share amounts)Numerator:Net income (loss)
    
    $
    120,637
    
    
    $
    8,078
    
    
    $
    (30,200
    )Add interest expense on contingent
convertible senior notes, net of
related tax effects
    
    
    6,596
    
    
    
    
    
    
    
    Adjusted net income (loss)  diluted
    
    $
    127,233
    
    
    $
    8,078
    
    
    $
    (30,200
    )Denominator:Weighted average common shares
outstanding  basic
    
    
    191,364
    
    
    
    185,868
    
    
    
    181,210Effect of dilutive securities:Options  treasury stock method
    
    
    1,552
    
    
    
    1,786
    
    
    
    Restricted stock  treasury stock method
    
    
    39
    
    
    
    
    
    
    
    Contingent convertible senior notes
    
    
    42,457
    
    
    
    
    
    
    
    Weighted average common shares
outstanding  diluted
    
    
    235,412
    
    
    
    187,654
    
    
    
    181,210Earnings (loss) per common share:Basic
    
    $
    0.63
    
    
    $
    0.04
    
    
    $
    (0.17
    )Diluted
    
    $
    0.54
    
    
    $
    0.04
    
    
    $
    (0.17
    )
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GREY WOLF, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Income Taxes.
 Stock-Based Compensation.
 2005
    
    
    2004
    
    
    2003Net income (loss), as reported
    
    $
    120,637
    
    
    $
    8,078
    
    
    $
    (30,200
    )Add: Stock-based employee compensation
expense included in reporting net
income (loss), net of related tax effects
    
    
    124
    
    
    
    52
    
    
    
    Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects
    
    
    (2,322
    )
    
    
    (2,082
    )
    
    
    (2,523
    )Pro forma net income (loss)
    
    $
    118,439
    
    
    $
    6,048
    
    
    $
    (32,723
    )Basic earnings per shareAs reported
    
    $
    0.63
    
    
    $
    0.04
    
    
    $
    (0.17
    )Pro forma
    
    $
    0.62
    
    
    $
    0.03
    
    
    $
    (0.18
    )Diluted earnings per shareAs reported
    
    $
    0.54
    
    
    $
    0.04
    
    
    $
    (0.17
    )Pro forma
    
    $
    0.53
    
    
    $
    0.03
    
    
    $
    (0.18
    )
   Fair Value of Financial Instruments.
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GREY WOLF, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Cash Flow Information.
 Restricted Cash.
 Use of Estimates.
 Concentrations of Credit Risk.
 Comprehensive Income.
 Recent Accounting Pronouncements.
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GREY WOLF, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   Reclassification.
 (2)
    
    Acquisitions and Intangible Assets
    Current assets
    
    $
    3,992Property and equipment
    
    
    42,384Intangible assets
    
    
    3,200Goodwill
    
    
    10,377Total assets acquired
    
    
    59,953Current liabilities
    
    
    (4,490
    )Deferred tax liabilities
    
    
    (5,977
    )Total liabilities assumed
    
    
    (10,467
    )Net assets acquired
    
    $
    49,486
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GREY WOLF, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (3) Income Taxes
  For the Years Ended December 31,2005
    
    
    2004
    
    
    2003CurrentFederal
    
    $
    10,260
    
    
    $
    125
    
    
    $
    Foreign
    
    
    107
    
    
    
    75
    
    
    
    State
    
    
    1,350
    
    
    
    
    
    
    
    (938
    )$
    11,717
    
    
    $
    200
    
    
    $
    (938
    )DeferredFederal
    
    $
    56,937
    
    
    $
    6,082
    
    
    $
    (14,958
    )State
    
    
    3,841
    
    
    
    (106
    )
    
    
    (1,487
    )$
    60,778
    
    
    $
    5,976
    
    
    $
    (16,445
    )
  December 31,2005
    
    
    2004Deferred tax assetsNet operating loss carryforwards
    
    $
    
    
    
    $
    49,013Tax credit carryforwards
    
    
    
    
    
    
    139Workers compensation accruals
    
    
    6,717
    
    
    
    4,395Other
    
    
    1,567
    
    
    
    1,8478,284
    
    
    
    55,394Deferred tax liabilitiesDepreciation
    
    
    121,313
    
    
    
    107,645Net deferred tax liability
    
    $
    113,029
    
    
    $
    52,251
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##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  For the Years Ended December 31,2005
    
    
    2004
    
    
    2003Income tax expense (benefit) at statutory rate
    
    $
    67,596
    
    
    $
    4,989
    
    
    $
    (16,654
    )Increase (decrease) in taxes resulting from:Permanent differences, primarily due to
basis differences in assets that
were purchased in capital stock
acquisitions
    
    
    1,360
    
    
    
    1,179
    
    
    
    1,208State taxes, net
    
    
    3,131
    
    
    
    (69
    )
    
    
    (1,576
    )Other
    
    
    408
    
    
    
    77
    
    
    
    (361
    )Income tax expense (benefit)
    
    $
    72,495
    
    
    $
    6,176
    
    
    $
    (17,383
    )
 (4)
    
    Long-Term Debt
  December 31,2005
    
    
    2004Contingent convertible senior notes due May 2023,
general unsecured senior obligations guaranteed by
the Companys domestic subsidiaries, bearing interest
at 3.75% per annum payable semi-annually
    
    $
    150,000
    
    
    $
    150,000Floating rate contingent convertible senior notes due April 2024,
general unsecured senior obligations guaranteed by the
Companys domestic subsidiaries, bearing interest of
no less than zero or more than 6.00% per annum
payable semi-annually
    
    
    125,000
    
    
    
    125,000275,000
    
    
    
    275,000Less current maturities
    
    
    
    
    
    
    Long-term debt
    
    $
    275,000
    
    
    $
    275,000
 Floating Rate Notes
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GREY WOLF, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    
    
    during any calendar quarter, if the closing sale price per share of the
Companys common stock for at least 20 trading days in the period of 30 consecutive
trading days ending on the last trading day of the calendar quarter preceding the
quarter in which the conversion occurs, is more than 120% of the conversion price per
share ($7.81 per share) on that 30th trading day;
    
    if the Company has called the Floating Rate Notes for redemption;
    
    during any period that the credit ratings assigned to the Companys 3.75%
Notes by both Moodys Investors Service (Moodys) and Standard & Poors Ratings Group
(S&P) are reduced below B1 and B+, respectively, or if neither rating agency is
rating the Companys 3.75% Notes;
    
    during the five trading day period immediately following any nine
consecutive trading day period in which the average trading price per $1,000 principal
amount of the Floating Rate Notes for each day of such period was less than 95% of the
product of the closing sale price per share of the Companys common stock on that day
multiplied by the number of shares of common stock issuable upon conversion of $1,000
principal amount of the Floating Rate Notes; or
    
    upon the occurrence of specified corporate transactions, including a change
of control.
  3.75% Notes
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##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  RedemptionPeriod
    
    PriceMay 14, 2008 through May 6, 2009
    
    
    101.88
    %May 7, 2009 through May 6, 2010
    
    
    101.50
    %May 7, 2010 through May 6, 2011
    
    
    101.13
    %May 7, 2011 through May 6, 2012
    
    
    100.75
    %May 7, 2012 through May 6, 2013
    
    
    100.38
    %May 7, 2013 and thereafter
    
    
    100.00
    %
   
    
    during any calendar quarter, if the closing sale price per share of the
Companys common stock for at least 20 trading days in the period of 30 consecutive
trading days ending on the last trading day of the calendar quarter preceding the
quarter in which the conversion occurs, is more than 110% of the conversion price per
share ($7.10 per share) on that 30th trading day;
    
    if the Company has called the 3.75% Notes for redemption;
    
    during any period that the credit ratings assigned to the 3.75% Notes by
both Moodys and S&P are reduced below B1 and B+, respectively, or if neither rating
agency is rating the 3.75% Notes;
    
    during the five trading day period immediately following any nine
consecutive trading day period in which the average trading price per $1,000 principal
amount of the 3.75% Notes for each day of such period was less than 95% of the product
of the closing sale price per share of the Companys common stock on that day
multiplied by the number of shares of common stock issuable upon conversion of $1,000
principal amount of the 3.75% Notes; or
    
    upon the occurrence of specified corporate transactions, including a change
of control.
   87/8% Senior Notes due 2007
 7 8 7 8 7 8
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GREY WOLF, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 7 8
 CIT Facility
    
    
    1 to 1 EBITDA coverage of debt service, tested monthly on a trailing 12
month basis; and
    
    minimum tangible net worth (as defined in the CIT Facility) at the end of
each quarter will be at least the prior year tangible net worth less non-cash
write-downs since the prior year-end and less fixed amounts for each quarter end for
which the test is calculated.
  
    
    default with respect to other indebtedness in excess of $350,000;
    
    legal judgments in excess of $350,000; or
    
    a change in control which means that the Company ceases to own 100% of its
two principal subsidiaries, some person or group that has either acquired beneficial
ownership of 30% or more of the Company or obtained the power to elect a majority of
the Companys board of directors, or the Companys board of directors ceases to consist
of a majority of continuing directors (as defined by the CIT Facility).
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GREY WOLF, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Non-Cash Activities
  (5)
    
    Capital Stock and Stock Option Plans
    
    
    incentive stock options;
    
    non-statutory stock options;
    
    restricted shares; and
    
    other stock-based and cash awards.
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##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  2005
    
    
    2004
    
    
    2003Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageNo. of
    
    
    Exercise
    
    
    No. of
    
    
    Exercise
    
    
    No. of
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    Price
    
    
    Shares
    
    
    PriceOutstanding  beginning of
the year
    
    
    6,494
    
    
    $
    3.60
    
    
    
    10,209
    
    
    $
    3.09
    
    
    
    8,721
    
    
    $
    2.85Granted
    
    
    472
    
    
    
    5.67
    
    
    
    1,224
    
    
    
    3.92
    
    
    
    2,161
    
    
    
    3.91Exercised
    
    
    (2,291
    )
    
    
    3.52
    
    
    
    (4,243
    )
    
    
    2.39
    
    
    
    (246
    )
    
    
    1.50Cancelled
    
    
    (422
    )
    
    
    4.08
    
    
    
    (696
    )
    
    
    3.97
    
    
    
    (427
    )
    
    
    3.43Outstanding  end of year
    
    
    4,253
    
    
    $
    3.83
    
    
    
    6,494
    
    
    $
    3.60
    
    
    
    10,209
    
    
    $
    3.09
   WeightedAverage
    
    
    WeightedRemaining
    
    
    AverageNumber
    
    
    Contractual
    
    
    ExerciseRange of Exercise Prices
    
    Outstanding
    
    
    Life(1)
    
    
    Price$0.94 to $1.63
    
    
    271
    
    
    
    1.78
    
    
    $
    1.47$2.54 to $4.26
    
    
    3,124
    
    
    
    6.53
    
    
    
    3.43$4.50 to $7.57
    
    
    858
    
    
    
    7.14
    
    
    
    6.004,253
    
    
    
    6.35
    
    
    $
    3.83
 
 (1)
    
    Represents weighted average remaining contractual life in years.  (6)
    
    Segment Information
  (7)
    
    Related-Party Transactions
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GREY WOLF, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (8) Commitments and Contingencies
 Operating Leases
  Year
    
    Amount2006
    
    $
    757,0002007
    
    
    698,0002008
    
    
    556,0002009
    
    
    542,0002010
    
    
    566,000Thereafter
    
    
    47,000$
    3,166,000
  Contingencies
  (9)
    
    Employee Benefit Plan
  (10)
    
    Concentrations
  (11)
    
    Subsequent Event
  -53-




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##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (12)
    
    Quarterly Financial Data (unaudited)
  Quarter EndedMarch
    
    
    June
    
    
    September
    
    
    December2005
    
    
    2005
    
    
    2005
    
    
    2005Contract drilling revenues
    
    $
    149,992
    
    
    $
    161,315
    
    
    $
    181,523
    
    
    $
    204,149Operating income
    
    
    38,851
    
    
    
    46,150
    
    
    
    52,541
    
    
    
    63,381Income before income taxes
    
    
    36,684
    
    
    
    44,053
    
    
    
    50,661
    
    
    
    61,734Net income
    
    
    23,044
    
    
    
    27,633
    
    
    
    31,779
    
    
    
    38,181Net income per common share- basic
    
    $
    0.12
    
    
    $
    0.14
    
    
    $
    0.17
    
    
    $
    0.20- diluted
    
    $
    0.10
    
    
    $
    0.12
    
    
    $
    0.14
    
    
    $
    0.17
 Quarter EndedMarch
    
    
    June
    
    
    September
    
    
    December2004
    
    
    2004
    
    
    2004
    
    
    2004Contract drilling revenues
    
    $
    75,200
    
    
    $
    103,750
    
    
    $
    116,290
    
    
    $
    129,394Operating income (loss)
    
    
    (3,438
    )
    
    
    1,990
    
    
    
    11,199
    
    
    
    18,485Income (loss) before income taxes
    
    
    (9,438
    )
    
    
    (1,748
    )
    
    
    9,173
    
    
    
    16,267Net income (loss)
    
    
    (6,431
    )
    
    
    (1,482
    )
    
    
    5,462
    
    
    
    10,529Net income (loss) per common share- basic
    
    $
    (0.04
    )
    
    $
    (0.01
    )
    
    $
    0.03
    
    
    $
    0.06- diluted
    
    $
    (0.04
    )
    
    $
    (0.01
    )
    
    $
    0.03
    
    
    $
    0.05
 Quarter EndedMarch
    
    
    June
    
    
    September
    
    
    December2003
    
    
    2003
    
    
    2003
    
    
    2003Contract drilling revenues
    
    $
    62,387
    
    
    $
    66,949
    
    
    $
    72,383
    
    
    $
    84,255Operating income (loss)
    
    
    (8,414
    )
    
    
    (7,820
    )
    
    
    (7,681
    )
    
    
    3,196Loss before income taxes
    
    
    (14,148
    )
    
    
    (21,921
    )
    
    
    (11,183
    )
    
    
    (331
    )Net income (loss)
    
    
    (9,621
    )
    
    
    (14,185
    )
    
    
    (6,950
    )
    
    
    556Net income (loss) per common share- basic
    
    $
    (0.05
    )
    
    $
    (0.08
    )
    
    $
    (0.04
    )
    
    $
    0.00- diluted
    
    $
    (0.05
    )
    
    $
    (0.08
    )
    
    $
    (0.04
    )
    
    $
    0.00
 -54-




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Schedule II
 GREY WOLF, INC. AND SUBSIDIARIES
 
 Valuation and Qualifying Accounts
 (In thousands)
 Additions
    
    
    DeductionsBalance at
    
    
    Charged to
    
    
    From
    
    
    Balance atBeginning
    
    
    Bad Debt
    
    
    Bad Debt
    
    
    Endof Period
    
    
    Allowance
    
    
    Allowance
    
    
    of PeriodYear Ended December 31, 2003Allowance for doubtful accounts receivable
    
    $
    2,500
    
    
    $
    
    
    
    $
    (57
    )
    
    $
    2,443Year Ended December 31, 2004Allowance for doubtful accounts receivable
    
    $
    2,443
    
    
    $
    
    
    
    $
    (19
    )
    
    $
    2,424Year Ended December 31, 2005Allowance for doubtful accounts receivable
    
    $
    2,424
    
    
    $
    250
    
    
    $
    
    
    
    $
    2,674
 
 Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
  
 Item 9A. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Managements Report on Internal Control Over Financial Reporting
  Changes in Internal Controls
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Item 9B. Other Information
  
 PART III
 
 Item 10. Directors and Executive Officers of the Registrant
  
 Item 11. Executive Compensation
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholders Matters
  
 Item 13. Certain Relationships and Related Transactions
  
 Item 14. Principal Accountant Fees and Services
  -56-




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PART IV
 
 Item 15. Exhibits and Financial Statement Schedules
 (a)
    
    The following documents are filed as part of this report:
 1. and 2. Financial Statements and Schedule
  3.
    
    Exhibits
 ExhibitNo.
    
    
    
    Documents2.1
    
    
    
    Agreement and Plan of Merger between Grey Wolf, Inc. and New
Patriot Drilling Corp. dated March 5, 2004 (incorporated by
reference to Exhibit 99 to Grey Wolfs Form 8-K dated March 8,
2004.3.1
    
    
    
    Articles of Incorporation of Grey Wolf, Inc., as amended
(incorporated herein by reference to Exhibit 3.1 to Form 10-Q dated
May 12, 1999).3.2
    
    
    
    By-Laws of Grey Wolf, Inc., as amended (incorporated herein by
reference to Exhibit 99.1 to Form 8-K dated March 23, 1999).4.1
    
    
    
    Rights Agreement dated as of September 21, 1998 by and between the
Company and American Stock Transfer and Trust Company as Rights
Agent (incorporated herein by reference to Exhibit 4.1 to Form 8-K
filed September 22, 1998).4.2
    
    
    
    Indenture, dated as of May 7, 2003, relating to the 3.75%
Contingent Convertible Senior Notes due 2023 between the Company,
the Guarantors, and JPMorgan Chase Bank, a New York Banking
Corporation, as Trustee (incorporated herein by reference to
Exhibit 4.2 to the Companys Registration Statement on Form S-3 No.
333-106997 filed July 14, 2003).4.3
    
    
    
    Supplemental Indenture, dated as of May 22, 2003, relating to the
3.75% Contingent Convertible Senior Notes due 2023 between the
Company, the Guarantors, and JPMorgan Chase Bank, a New York
Banking Corporation, as Trustee (incorporated herein by reference
to Exhibit 4.3 to the Companys Registration Statement on Form S-3
No. 333-106997 filed July 14, 2003).4.4
    
    
    
    Indenture, dated as of March 31, 2004, relating to the Floating
Rate Contingent Convertible Senior Notes Due 2024 between the
Company, the Guarantors, and J.P. Morgan Chase Bank, a New York
banking corporation, as Trustee (incorporated by reference to
Exhibit 4.1 to Form 10-Q dated May 5, 2004).4.5
    
    
    
    Registration Rights Agreement as of March 31, 2004 by and between
Grey Wolf, Inc., the Guarantors, and the Initial Purchasers of the
Floating Rate Contingent Convertible Senior Notes due 2024
(incorporated by reference to Exhibit 4.2 to the Quarterly Report
on Form 10-Q filed May 5, 2004).4.6
    
    
    
    Second Supplemental Indenture, dated as of March 31, 2004, relating
to the 3.75% Contingent Convertible Senior Notes due 2023 between
the Company, the Guarantors, and JP Morgan Chase Bank, a New York
Banking Corporation, as Trustee (incorporated by reference to
Exhibit 4.3 to the Quarterly Report on Form 10-Q filed May 5,
2004).+10.1
    
    
    
    Form of Non-Qualified Stock Option Agreement dated September 3,
1996, by and between the Company and Thomas P. Richards
(incorporated herein by reference to Exhibit 10.2 to Registration
Statement on Form S-3 No. 333-14783 filed October 24, 1996).
 -57-




---



##### Table of Contents



ExhibitNo.
    
    
    
    Documents+10.2
    
    
    
    DI Industries, Inc. 1996 Employee Stock Option Plan (incorporated
herein by reference to Grey Wolf, Inc. 1996 Annual Meeting of
Shareholders definitive proxy materials filed August 2, 1996).+10.3
    
    
    
    Grey Wolf Inc. Amendment to 1996 Employee Stock Option Plan
(incorporated herein by reference to Exhibit 4.3 to Grey Wolf,
Inc.s Registration Statement on Form S-8 No. 333-41334 filed July
13, 2000).+10.4
    
    
    
    Grey Wolf, Inc. Second Amendment to 1996 Employee Stock Option Plan
dated May 14, 2002 (incorporated herein by reference to Exhibit 4.6
to Grey Wolf, Inc. Registration Statement on Form S-8 No. 333-90888
filed June 21, 2002).+10.5
    
    
    
    Form of Non-Qualified Stock Option Agreement dated February 10,
1998, by and between the Company and David W. Wehlmann
(incorporated herein by reference to Exhibit 10.35 to the Grey
Wolf, Inc. Annual Report on Form 10-K for the year ended December
31, 1997, filed March 30, 1998).+10.6
    
    
    
    Non-Qualified Stock Option Agreement dated January 16, 1999, by and
between the Company and Edward S. Jacob, III. (incorporated herein
by reference to Exhibit 10.33 to the Grey Wolf, Inc. Annual Report
on Form 10-K for the year ended December 31, 1999, filed March 7,
2000).+10.7
    
    
    
    Form of Amendment to Non-Qualified Stock Option Agreements dated
November 13, 2001, by and between the Company and Thomas P.
Richards (incorporated herein by reference to Exhibit 10.13 to the
Grey Wolf, Inc. Annual Report on Form 10-K for the year ended
December 31, 2001, filed March 15, 2002).+10.8
    
    
    
    Form of Amendment to Non-Qualified Stock Option Agreement dated
November 13, 2001, by and among the Company (f.k.a. DI Industries,
Inc.), Thomas P. Richards and Richards Brothers Interests, L.P
(incorporated herein by reference to Exhibit 10.14 to the Grey
Wolf, Inc. Annual Report on Form 10-K for the year ended December
31, 2001, filed March 15, 2002).+10.9
    
    
    
    Form of Amendment to Non-Qualified Stock Option Agreements dated
November 13, 2001, by and between the Company and each of David W.
Wehlmann, Edward S. Jacob III, Gary D. Lee, Ronnie E. McBride, Kent
D. Cauley, and Donald J. Guedry, Jr. (incorporated herein by
reference Exhibit 10.15 to the to Grey Wolf, Inc. Annual Report on
Form 10-K for the year ended December 31, 2001, filed March 15,
2002).+10.10
    
    
    
    Grey Wolf, Inc. Executive Severance Plan effective November 15,
2001 (incorporated herein by reference to Exhibit 10.16 to the Grey
Wolf, Inc. Annual Report on Form 10-K for the year ended December
31, 2001, filed March 15, 2002).+10.11
    
    
    
    Amended and Restated Employment Agreement dated November 13, 2001,
by and between the Company and Thomas P. Richards (incorporated
herein by reference to Exhibit 10.17 to the Grey Wolf, Inc. Annual
Report on Form 10-K for the year ended December 31, 2001, filed
March 15, 2002).+10.12
    
    
    
    Amended and Restated Employment Agreement dated November 13, 2001,
by and between the Company and David W. Wehlmann (incorporated
herein by reference to Exhibit 10.18 to the Grey Wolf, Inc. Annual
Report on Form 10-K for the year ended December 31, 2001, filed
March 15, 2002).+10.13
    
    
    
    Amended and Restated Employment Agreement dated November 13, 2001,
by and between the Company and Edward S. Jacob III (incorporated
herein by reference to Exhibit 10.19 of the Grey Wolf, Inc. Annual
Report on Form 10-K for the year ended December 31, 2001, filed
March 15, 2002).+10.14
    
    
    
    Employment Agreement effective December 28, 2005 by and between
Robert J. Proffit (incorporated by reference to Exhibit 10.1 of the
Grey Wolf, Inc. Current Report on Form 8-K filed December 28,
2005).
 -58-




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##### Table of Contents



ExhibitNo.
    
    
    
    Documents+10.15
    
    
    
    Form of Non-Qualified Stock Option Agreement dated as of February
13, 2002, by and between the Company and each of Frank M. Brown,
William T. Donovan, James K.B. Nelson, Robert E. Rose, Steven A.
Webster, and William R. Ziegler (incorporated herein by reference
to Exhibit 10.22 of the Grey Wolf, Inc. Annual Report on Form 10-K
for the year ended December 31, 2001, filed March 15, 2002).+10.16
    
    
    
    Grey Wolf, Inc. 2003 Incentive Plan (incorporated herein by
reference to Appendix A to the Grey Wolf, Inc. 2003 Annual Meeting
of Shareholders definitive proxy materials filed March 28, 2003).+10.17
    
    
    
    Anticipated compensation of officers and directors for 2005
(incorporated by reference to Grey Wolf, Inc. Current Report on
Form 8-K filed February 22, 2005).+10.18
    
    
    
    Form of Non-Qualified Stock Option Agreement under the Grey Wolf,
Inc. 2003 Incentive Plan (incorporated by reference to Exhibit 10.1
to the Grey Wolf, Inc. Current Report on Form 8-K filed February
22, 2005).+10.19
    
    
    
    Form of Restricted Stock Agreement (incorporated by reference to
Exhibit 10.2 to the Grey Wolf, Inc. current Report on Form 8-K
filed February 22, 2005).+10.20
    
    
    
    Anticipated compensation of officers and directors for 2006
(incorporated by reference to Grey Wolf, Inc. Current Report on
Form 8-K filed February 21, 2006).+10.21
    
    
    
    Form of Stock Option Agreement under the 2003 Incentive Plan for
Thomas P. Richards (incorporated by reference to Exhibit 10.1 to
Grey Wolf, Inc. Current Report on Form 8-K filed February 21,
2006.)+10.22
    
    
    
    Form of Restricted Stock Agreement under the 2003 Incentive Plan
for Thomas P. Richards (incorporated by reference to Exhibit 10.2
to Grey Wolf, Inc. Current Report on Form 8-K filed February 21,
2006.)+10.23
    
    
    
    Form of Stock Option Agreement under the 2003 Incentive Plan for
the other executive officers (incorporated by reference to Exhibit
10.3 to Grey Wolf, Inc. Current Report on Form 8-K filed February
21, 2006.)+10.24
    
    
    
    Form of Restricted Stock Agreement under the 2003 Incentive Plan
for other executive officers (incorporated by reference to Exhibit
10.4 to Grey Wolf, Inc. Current Report on Form 8-K filed February
21, 2006).+10.25
    
    
    
    Form of Restricted Stock Agreement for Thomas P. Richards under the
Retention Plan (incorporated by reference to Exhibit 10.5 to Grey
Wolf, Inc. Current Report on Form 8-K filed February 21, 2006).+10.26
    
    
    
    Form of Restricted Stock Agreement for other executive officers
under the Retention Plan (incorporated by reference to Exhibit 10.6
to Grey Wolf, Inc. Current Report on Form 8-K filed February 21,
2006).+10.27
    
    
    
    Form of Restricted Stock Agreement for non-employee directors
(incorporated by reference to Exhibit 10.7 to Grey Wolf, Inc.
Current Report on Form 8-K filed February 21, 2006).10.28
    
    
    
    Revolving Credit Agreement dated as of January 14, 1999 among Grey
Wolf Drilling Company LP (as borrower), Grey Wolf, Inc. (as
guarantor), The CIT Group/Business Credit, Inc. (as agent) and
various financial institutions (as lenders) (incorporated herein by
reference to Exhibit 10.1 to Grey Wolf, Inc. current report on Form
8-K dated January 26, 1999).10.29
    
    
    
    First Amendment to Loan Agreement dated as of December 20, 2001, by
and among Grey Wolf Drilling Company, LP (as borrower) and Grey
Wolf, Inc. (as guarantor) and the CIT Group/Business Credit, Inc.
(as agent) and various financial institutions (as lenders)
(incorporated herein by reference to Exhibit 10.11 to Grey Wolf,
Inc. Annual Report on Form 10-K for the year ended December 31,
2001, filed March 14, 2002).
 -59-




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##### Table of Contents



ExhibitNo.
    
    
    
    Documents10.30
    
    
    
    Second Amendment to Loan Agreement dated as of February 7, 2003 by
and among Grey Wolf Drilling Company L.P. (as borrower), Grey Wolf,
Inc. and various subsidiaries (as guarantors) and the CIT
Group/Business Credit, Inc. and various financial institutions (as
lenders) (incorporated herein by reference to Exhibit 10.24 to the
Grey Wolf, Inc. Annual Report on Form 10-K for the year ended
December 31, 2002, filed March 16, 2003).10.31
    
    
    
    Third Amendment to Loan Agreement as of May 1, 2003, by and among
Grey Wolf Drilling Company, L.P. (as borrower), Grey Wolf, Inc. and
various subsidiaries (as guarantors) and the CIT Group/Business
Credit, Inc. and various financial institutions (as lenders)
(incorporated by reference to Exhibit 10.1 to the Quarterly Report
on Form 10-Q filed May 5, 2004).10.32
    
    
    
    Fourth Amendment to Loan Agreement as of March 31, 2004, by and
among Grey Wolf Drilling Company L.P. (as borrower), Grey Wolf,
Inc. and various subsidiaries (as guarantors) and the CIT
Group/Business Credit, Inc. and various financial institutions (as
lenders) (incorporated by reference to Exhibit 10.2 to the
Quarterly Report on Form 10-Q filed May 5, 2004).10.33
    
    
    
    Fifth Amendment to the Loan Agreement dated December 31, 2004 by
and among Grey Wolf Drilling Company, L.P. (as borrower,) Grey
Wolf, Inc and various subsidiaries (as guarantor) and the CIT
Business Credit, Inc. (as agent) and various financial institutions
(as lenders) (incorporated by reference to Exhibit 10.6 of the Grey
Wolf, Inc. Current Report on Form 8-K filed January 5, 2005).10.34
    
    
    
    Sixth Amendment to the Loan Agreement dated September 13, 2005 by
and between Grey Wolf Drilling Company, L.P. (as borrower,) Grey
Wolf Inc. and various subsidiaries (as guarantor) and the CIT
Business Credit, inc. (as agent) and various financial institutions
(as lenders) (incorporated by reference to Exhibit 10.7 of the Grey
Wolf, Inc. Current Report on Form 8-K filed September 14, 2005).*21.1
    
    
    
    List of Subsidiaries of Grey Wolf, Inc.*23.1
    
    
    
    Consent of Independent Registered Public Accounting Firm, KPMG LLP*31.1
    
    
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a).*31.2
    
    
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a).**32.1
    
    
    
    Certification pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Thomas
P. Richards, Chairman, President and Chief Executive Officer and
David W. Wehlmann, Executive Vice President and Chief Financial
Officer.
 
 +
    
    Management contract, compensation plan or arrangement*
    
    Filed herewith**
    
    Furnished, not filed, pursuant to Item 101(b) (32) of Regulation S-K. -60-




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##### Table of Contents



SIGNATURES
  Grey Wolf, Inc.By:
    
    /s/ David W. WehlmannDavid W. Wehlmann, Executive Vice President andChief Financial Officer
  Signatures and Capacities
    
    
    
    DateBy:
    
    /s/ Thomas P. Richards
    
    
    
    March 1, 2006

Thomas P. Richards, Chairman, President and Chief Executive Officer(Principal Executive Officer)By:
    
    /s/ David W. Wehlmann
    
    
    
    March 1, 2006David W. Wehlmann, Executive Vice President and Chief Financial OfficerBy:
    
    /s/ Kent D. Cauley
    
    
    
    March 1, 2006Kent D. Cauley, Vice President and ControllerBy:
    
    /s/ William R. Ziegler
    
    
    
    March 1, 2006William R. Ziegler, DirectorBy:
    
    /s/ Frank M. Brown
    
    
    
    March 1, 2006Frank M. Brown, DirectorBy:
    
    /s/ William T. Donovan
    
    
    
    March 1, 2006William T. Donovan, DirectorBy:
    
    /s/ Robert E. Rose
    
    
    
    March 1, 2006Robert E. Rose, DirectorBy:
    
    /s/ Trevor M. Turbidy
    
    
    
    March 1, 2006Trevor M. Turbidy, DirectorBy:
    
    /s/ Steven A. Webster
    
    
    
    March 1, 2006Steven A. Webster, Director
 -61-




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##### Table of Contents



Index to Exhibits
 ExhibitNo.
    
    
    
    Documents2.1
    
    
    
    Agreement and Plan of Merger between Grey Wolf, Inc. and New
Patriot Drilling Corp. dated March 5, 2004 (incorporated by
reference to Exhibit 99 to Grey Wolfs Form 8-K dated March 8,
2004.3.1
    
    
    
    Articles of Incorporation of Grey Wolf, Inc., as amended
(incorporated herein by reference to Exhibit 3.1 to Form 10-Q dated
May 12, 1999).3.2
    
    
    
    By-Laws of Grey Wolf, Inc., as amended (incorporated herein by
reference to Exhibit 99.1 to Form 8-K dated March 23, 1999).4.1
    
    
    
    Rights Agreement dated as of September 21, 1998 by and between the
Company and American Stock Transfer and Trust Company as Rights
Agent (incorporated herein by reference to Exhibit 4.1 to Form 8-K
filed September 22, 1998).4.2
    
    
    
    Indenture, dated as of May 7, 2003, relating to the 3.75%
Contingent Convertible Senior Notes due 2023 between the Company,
the Guarantors, and JPMorgan Chase Bank, a New York Banking
Corporation, as Trustee (incorporated herein by reference to
Exhibit 4.2 to the Companys Registration Statement on Form S-3 No.
333-106997 filed July 14, 2003).4.3
    
    
    
    Supplemental Indenture, dated as of May 22, 2003, relating to the
3.75% Contingent Convertible Senior Notes due 2023 between the
Company, the Guarantors, and JPMorgan Chase Bank, a New York
Banking Corporation, as Trustee (incorporated herein by reference
to Exhibit 4.3 to the Companys Registration Statement on Form S-3
No. 333-106997 filed July 14, 2003).4.4
    
    
    
    Indenture, dated as of March 31, 2004, relating to the Floating
Rate Contingent Convertible Senior Notes Due 2024 between the
Company, the Guarantors, and J.P. Morgan Chase Bank, a New York
banking corporation, as Trustee (incorporated by reference to
Exhibit 4.1 to Form 10-Q dated May 5, 2004).4.5
    
    
    
    Registration Rights Agreement as of March 31, 2004 by and between
Grey Wolf, Inc., the Guarantors, and the Initial Purchasers of the
Floating Rate Contingent Convertible Senior Notes due 2024
(incorporated by reference to Exhibit 4.2 to the Quarterly Report
on Form 10-Q filed May 5, 2004).4.6
    
    
    
    Second Supplemental Indenture, dated as of March 31, 2004, relating
to the 3.75% Contingent Convertible Senior Notes due 2023 between
the Company, the Guarantors, and JP Morgan Chase Bank, a New York
Banking Corporation, as Trustee (incorporated by reference to
Exhibit 4.3 to the Quarterly Report on Form 10-Q filed May 5,
2004).+10.1
    
    
    
    Form of Non-Qualified Stock Option Agreement dated September 3,
1996, by and between the Company and Thomas P. Richards
(incorporated herein by reference to Exhibit 10.2 to Registration
Statement on Form S-3 No. 333-14783 filed October 24, 1996).




---



##### Table of Contents



ExhibitNo.
    
    
    
    Documents+10.2
    
    
    
    DI Industries, Inc. 1996 Employee Stock Option Plan (incorporated
herein by reference to Grey Wolf, Inc. 1996 Annual Meeting of
Shareholders definitive proxy materials filed August 2, 1996).+10.3
    
    
    
    Grey Wolf Inc. Amendment to 1996 Employee Stock Option Plan
(incorporated herein by reference to Exhibit 4.3 to Grey Wolf,
Inc.s Registration Statement on Form S-8 No. 333-41334 filed July
13, 2000).+10.4
    
    
    
    Grey Wolf, Inc. Second Amendment to 1996 Employee Stock Option Plan
dated May 14, 2002 (incorporated herein by reference to Exhibit 4.6
to Grey Wolf, Inc. Registration Statement on Form S-8 No. 333-90888
filed June 21, 2002).+10.5
    
    
    
    Form of Non-Qualified Stock Option Agreement dated February 10,
1998, by and between the Company and David W. Wehlmann
(incorporated herein by reference to Exhibit 10.35 to the Grey
Wolf, Inc. Annual Report on Form 10-K for the year ended December
31, 1997, filed March 30, 1998).+10.6
    
    
    
    Non-Qualified Stock Option Agreement dated January 16, 1999, by and
between the Company and Edward S. Jacob, III. (incorporated herein
by reference to Exhibit 10.33 to the Grey Wolf, Inc. Annual Report
on Form 10-K for the year ended December 31, 1999, filed March 7,
2000).+10.7
    
    
    
    Form of Amendment to Non-Qualified Stock Option Agreements dated
November 13, 2001, by and between the Company and Thomas P.
Richards (incorporated herein by reference to Exhibit 10.13 to the
Grey Wolf, Inc. Annual Report on Form 10-K for the year ended
December 31, 2001, filed March 15, 2002).+10.8
    
    
    
    Form of Amendment to Non-Qualified Stock Option Agreement dated
November 13, 2001, by and among the Company (f.k.a. DI Industries,
Inc.), Thomas P. Richards and Richards Brothers Interests, L.P
(incorporated herein by reference to Exhibit 10.14 to the Grey
Wolf, Inc. Annual Report on Form 10-K for the year ended December
31, 2001, filed March 15, 2002).+10.9
    
    
    
    Form of Amendment to Non-Qualified Stock Option Agreements dated
November 13, 2001, by and between the Company and each of David W.
Wehlmann, Edward S. Jacob III, Gary D. Lee, Ronnie E. McBride, Kent
D. Cauley, and Donald J. Guedry, Jr. (incorporated herein by
reference Exhibit 10.15 to the to Grey Wolf, Inc. Annual Report on
Form 10-K for the year ended December 31, 2001, filed March 15,
2002).+10.10
    
    
    
    Grey Wolf, Inc. Executive Severance Plan effective November 15,
2001 (incorporated herein by reference to Exhibit 10.16 to the Grey
Wolf, Inc. Annual Report on Form 10-K for the year ended December
31, 2001, filed March 15, 2002).+10.11
    
    
    
    Amended and Restated Employment Agreement dated November 13, 2001,
by and between the Company and Thomas P. Richards (incorporated
herein by reference to Exhibit 10.17 to the Grey Wolf, Inc. Annual
Report on Form 10-K for the year ended December 31, 2001, filed
March 15, 2002).+10.12
    
    
    
    Amended and Restated Employment Agreement dated November 13, 2001,
by and between the Company and David W. Wehlmann (incorporated
herein by reference to Exhibit 10.18 to the Grey Wolf, Inc. Annual
Report on Form 10-K for the year ended December 31, 2001, filed
March 15, 2002).+10.13
    
    
    
    Amended and Restated Employment Agreement dated November 13, 2001,
by and between the Company and Edward S. Jacob III (incorporated
herein by reference to Exhibit 10.19 of the Grey Wolf, Inc. Annual
Report on Form 10-K for the year ended December 31, 2001, filed
March 15, 2002).+10.14
    
    
    
    Employment Agreement effective December 28, 2005 by and between
Robert J. Proffit (incorporated by reference to Exhibit 10.1 of the
Grey Wolf, Inc. Current Report on Form 8-K filed December 28,
2005).




---



##### Table of Contents



ExhibitNo.
    
    
    
    Documents+10.15
    
    
    
    Form of Non-Qualified Stock Option Agreement dated as of February
13, 2002, by and between the Company and each of Frank M. Brown,
William T. Donovan, James K.B. Nelson, Robert E. Rose, Steven A.
Webster, and William R. Ziegler (incorporated herein by reference
to Exhibit 10.22 of the Grey Wolf, Inc. Annual Report on Form 10-K
for the year ended December 31, 2001, filed March 15, 2002).+10.16
    
    
    
    Grey Wolf, Inc. 2003 Incentive Plan (incorporated herein by
reference to Appendix A to the Grey Wolf, Inc. 2003 Annual Meeting
of Shareholders definitive proxy materials filed March 28, 2003).+10.17
    
    
    
    Anticipated compensation of officers and directors for 2005
(incorporated by reference to Grey Wolf, Inc. Current Report on
Form 8-K filed February 22, 2005).+10.18
    
    
    
    Form of Non-Qualified Stock Option Agreement under the Grey Wolf,
Inc. 2003 Incentive Plan (incorporated by reference to Exhibit 10.1
to the Grey Wolf, Inc. Current Report on Form 8-K filed February
22, 2005).+10.19
    
    
    
    Form of Restricted Stock Agreement (incorporated by reference to
Exhibit 10.2 to the Grey Wolf, Inc. current Report on Form 8-K
filed February 22, 2005).+10.20
    
    
    
    Anticipated compensation of officers and directors for 2006
(incorporated by reference to Grey Wolf, Inc. Current Report on
Form 8-K filed February 21, 2006).+10.21
    
    
    
    Form of Stock Option Agreement under the 2003 Incentive Plan for
Thomas P. Richards (incorporated by reference to Exhibit 10.1 to
Grey Wolf, Inc. Current Report on Form 8-K filed February 21,
2006.)+10.22
    
    
    
    Form of Restricted Stock Agreement under the 2003 Incentive Plan
for Thomas P. Richards (incorporated by reference to Exhibit 10.2
to Grey Wolf, Inc. Current Report on Form 8-K filed February 21,
2006.)+10.23
    
    
    
    Form of Stock Option Agreement under the 2003 Incentive Plan for
the other executive officers (incorporated by reference to Exhibit
10.3 to Grey Wolf, Inc. Current Report on Form 8-K filed February
21, 2006.)+10.24
    
    
    
    Form of Restricted Stock Agreement under the 2003 Incentive Plan
for other executive officers (incorporated by reference to Exhibit
10.4 to Grey Wolf, Inc. Current Report on Form 8-K filed February
21, 2006).+10.25
    
    
    
    Form of Restricted Stock Agreement for Thomas P. Richards under the
Retention Plan (incorporated by reference to Exhibit 10.5 to Grey
Wolf, Inc. Current Report on Form 8-K filed February 21, 2006).+10.26
    
    
    
    Form of Restricted Stock Agreement for other executive officers
under the Retention Plan (incorporated by reference to Exhibit 10.6
to Grey Wolf, Inc. Current Report on Form 8-K filed February 21,
2006).+10.27
    
    
    
    Form of Restricted Stock Agreement for non-employee directors
(incorporated by reference to Exhibit 10.7 to Grey Wolf, Inc.
Current Report on Form 8-K filed February 21, 2006).10.28
    
    
    
    Revolving Credit Agreement dated as of January 14, 1999 among Grey
Wolf Drilling Company LP (as borrower), Grey Wolf, Inc. (as
guarantor), The CIT Group/Business Credit, Inc. (as agent) and
various financial institutions (as lenders) (incorporated herein by
reference to Exhibit 10.1 to Grey Wolf, Inc. current report on Form
8-K dated January 26, 1999).10.29
    
    
    
    First Amendment to Loan Agreement dated as of December 20, 2001, by
and among Grey Wolf Drilling Company, LP (as borrower) and Grey
Wolf, Inc. (as guarantor) and the CIT Group/Business Credit, Inc.
(as agent) and various financial institutions (as lenders)
(incorporated herein by reference to Exhibit 10.11 to Grey Wolf,
Inc. Annual Report on Form 10-K for the year ended December 31,
2001, filed March 14, 2002).




---



##### Table of Contents



ExhibitNo.
    
    
    
    Documents10.30
    
    
    
    Second Amendment to Loan Agreement dated as of February 7, 2003 by
and among Grey Wolf Drilling Company L.P. (as borrower), Grey Wolf,
Inc. and various subsidiaries (as guarantors) and the CIT
Group/Business Credit, Inc. and various financial institutions (as
lenders) (incorporated herein by reference to Exhibit 10.24 to the
Grey Wolf, Inc. Annual Report on Form 10-K for the year ended
December 31, 2002, filed March 16, 2003).10.31
    
    
    
    Third Amendment to Loan Agreement as of May 1, 2003, by and among
Grey Wolf Drilling Company, L.P. (as borrower), Grey Wolf, Inc. and
various subsidiaries (as guarantors) and the CIT Group/Business
Credit, Inc. and various financial institutions (as lenders)
(incorporated by reference to Exhibit 10.1 to the Quarterly Report
on Form 10-Q filed May 5, 2004).10.32
    
    
    
    Fourth Amendment to Loan Agreement as of March 31, 2004, by and
among Grey Wolf Drilling Company L.P. (as borrower), Grey Wolf,
Inc. and various subsidiaries (as guarantors) and the CIT
Group/Business Credit, Inc. and various financial institutions (as
lenders) (incorporated by reference to Exhibit 10.2 to the
Quarterly Report on Form 10-Q filed May 5, 2004).10.33
    
    
    
    Fifth Amendment to the Loan Agreement dated December 31, 2004 by
and among Grey Wolf Drilling Company, L.P. (as borrower,) Grey
Wolf, Inc and various subsidiaries (as guarantor) and the CIT
Business Credit, Inc. (as agent) and various financial institutions
(as lenders) (incorporated by reference to Exhibit 10.6 of the Grey
Wolf, Inc. Current Report on Form 8-K filed January 5, 2005).10.34
    
    
    
    Sixth Amendment to the Loan Agreement dated September 13, 2005 by
and between Grey Wolf Drilling Company, L.P. (as borrower,) Grey
Wolf Inc. and various subsidiaries (as guarantor) and the CIT
Business Credit, inc. (as agent) and various financial institutions
(as lenders) (incorporated by reference to Exhibit 10.7 of the Grey
Wolf, Inc. Current Report on Form 8-K filed September 14, 2005).*21.1
    
    
    
    List of Subsidiaries of Grey Wolf, Inc.*23.1
    
    
    
    Consent of Independent Registered Public Accounting Firm, KPMG LLP*31.1
    
    
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a).*31.2
    
    
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a).**32.1
    
    
    
    Certification pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Thomas
P. Richards, Chairman, President and Chief Executive Officer and
David W. Wehlmann, Executive Vice President and Chief Financial
Officer.
 
 +
    
    Management contract, compensation plan or arrangement*
    
    Filed herewith**
    
    Furnished, not filed, pursuant to Item 101(b) (32) of Regulation S-K.