UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    FORM 10-K

[X]   Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
      Act of 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996

[ ]   Transition Report Pursuant to Section 13 or 15(d) of the Securities
      Exchange Act of 1934

                          Commission file number 1-8226

                               DI INDUSTRIES, INC.
             (Exact name of registrant as specified in its charter)

                      TEXAS                               74-2144774
         (State or other jurisdiction of               (I.R.S. Employer
         incorporation or organization)             Identification Number)

        10370 RICHMOND AVENUE, SUITE 600
                 HOUSTON, TEXAS                              77042
    (Address of principal executive offices)              (Zip Code)

        Registrant's telephone number, including area code: (713)435-6100

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

                                                     Name of each exchange
               Title of each class                    on which registered
               -------------------                    -------------------
          COMMON STOCK, PAR VALUE $0.10             AMERICAN STOCK EXCHANGE

        Securities registered pursuant to Section 12(g) of the Act: NONE

   Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X]  No [ ]

   Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (229.405 under the Securities Exchange Act of 1934) is not
contained herein, and will not be contained, to the best of Registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]

   At March 24, 1997, 137,474,034 shares of the Registrant's common stock were
outstanding. The aggregate market value of the Registrant's voting stock held by
non-affiliates (based upon the closing price on the American Stock Exchange on
March 24, 1997 of $2.625) was approximately $131 million.

   The following documents have been incorporated by reference into the Parts of
this Report indicated: Certain sections of the Registrant's definitive proxy
statement for the Company's 1997 Annual Meeting of shareholders and is to be
filed pursuant to Regulation 14A under the Securities Exchange Act of 1934
within 120 days of the Registrant's fiscal year ended December 31, 1996, are
incorporated by reference into Part III hereof.
================================================================================
                                     1 of 51
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                                     PART I

ITEM 1. BUSINESS

INTRODUCTION

   DI Industries, Inc. (the "Company"), a Texas corporation formed in 1980, is
engaged in the business of providing onshore contract drilling services to the
oil and gas industry. The Company and its subsidiaries conduct operations in
Texas, Arkansas, Louisiana, Ohio, Pennsylvania, New York, Michigan, and other
states; and currently have international operations in Venezuela. As used
herein, the term "Company" refers to DI Industries, Inc. and its subsidiaries,
unless the context otherwise indicates. The Company's principal office is
located at 10370 Richmond Avenue, Suite 600, Houston, Texas 77042, and its
telephone number is (281) 874-0202.

   In 1996, the Company elected a substantially new board of directors,
installed new senior management and completed several transactions that
significantly improved its liquidity and added drilling rigs to its existing
fleet. As a result of the mergers, acquisitions and divestitures accomplished by
the Company, the Company's rig fleet is now comprised of 90 rigs, 65 which are
marketable and 25 which are held in inventory for refurbishment. In addition,
the Company supplies the labor and expertise to operate five additional rigs
owned by others. The combined effect of these changes materially changed the
Company's principal shareholders, management, capital structure, and business
strategy.

1996 AND RECENT DEVELOPMENTS

   CHANGE IN MANAGEMENT. The Company began its management restructuring in April
1996, with the termination of its former President and Chief Executive Officer
on April 9, 1996. Since that date, the Company has hired a majority of its
current senior management team, including Thomas P. Richards, President and
Chief Executive Officer, Forrest M. Conley, Jr., Senior Vice President -
International, Donald J. Guedry, Treasurer, Ronnie E. McBride, Senior Vice
President - Operations, T. Scott O'Keefe, Senior Vice President and Chief
Financial Officer, and David W. Wehlmann, Vice President and Controller. Mr.
Wehlmann began his employment in July 1996 while Messers Conley, McBride,
O'Keefe and Richards began their employment in September 1996. Mr. Guedry joined
the Company in October 1996. In addition, on August 27, 1996, the shareholders
of the Company elected a Board of Directors comprised of five members, all but
one of which were elected to the Board for the first time. Returning to the
Board as Chairman was Ivar Siem. Directors Roy T. Oliver, Jr., Steven A.
Webster, William R. Ziegler and Peter M. Holt were newly elected to the Board of
Directors of the Company. In connection with the acquisition of Flournoy
Drilling Company ("Flournoy") on January 31, 1997, Mr. Lucien Flournoy, the
founder of Flournoy, joined the Company's Board of Directors.

   CHANGE IN BUSINESS STRATEGY. The Company also began implementing in 1996 a
new business strategy intended to return the Company to profitability and to
enable it to keep pace with rapidly changing competitive conditions in the land
drilling business which, management believes, is undergoing a period of rapid
consolidation. This strategy involves:

   o  redeploying its drilling rigs and related assets where feasible to
      geographic markets with greater potential for increased gross operating
      margin;

   o  restoring certain of its stacked rigs to marketable condition through a
      program of capital expenditures; and

   o  acquiring businesses and assets complementing its land drilling
      operations.

To meet the increased capital resources and liquidity requirements of its new
business strategy, the Company will incur additional bank debt and may require
other forms of debt or equity financing.

   REFURBISHMENT OF STACKED RIGS. The majority of the Company's existing
drilling rigs were built during 1979 to 1981, the industry's most recent rig
building cycle. As of the date of this Report, approximately one quarter of its
rig fleet is stacked. Over the years, the Company has deferred some maintenance
on its stacked rigs. Management believes that the market for land drilling rigs
in the Southern United States, particularly in Arkansas, Louisiana, Oklahoma and
Texas, has improved sufficiently to justify a program to restore certain of its
stacked rigs to marketable condition. Accordingly, as market conditions warrant
and the Company's finances permit, the Company plans to undertake capital
expenditures to refurbish and upgrade certain of its rig inventory. As noted
below, the Company recently placed in service one of the deep

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land drilling rigs acquired in the Mergers (hereinafter defined). In 1997, the
Company refurbished three of its rigs at an estimated total cost of
approximately $1.5 to $2.0 million and these rigs are now operating in the
Company's Ark-La-Tex and South Texas divisions.

   SALE OF WESTERN DIVISION. On June 24, 1996, the Company completed the sale of
its Western Division to Pool Company, a Texas corporation ("Pool") for
$3,950,000 in cash pursuant to an agreement entered into on June 3, 1996. The
Western Division was headquartered in Glendive, Montana, with a district office
in Roosevelt, Utah, and provided well workover services in Montana, Utah and
North Dakota. The Western Division consisted of 23 carrier-mounted workover rigs
and certain real estate owned by the Company in Glendive, Montana and Roosevelt,
Utah. A workover is a repair, maintenance or modification of a producing well
designed to remedy mechanical problems in the well, productivity problems in the
formation or other difficulties in extracting oil and gas. Workover services are
vital to the oil and gas producing industry as most producing wells eventually
encounter these problems. Workover services include repairing and replacing
down-hole production equipment, opening additional productive intervals,
re-completion of wells to new producing zones, completing newly drilled wells,
drilling out of plugs and packers, and the converting producing wells to
injection wells during enhanced recovery operations. Pursuant to the purchase
agreement, Pool assumed the obligations of the Company under its real and
personal property leases relating to the division. The Company recognized a gain
of approximately $2.7 million on the sale of this division.

   RTO/LRAC AND SOMERSET MERGERS. On August 27, 1996, the shareholders of the
Company approved two merger transactions (See Note 2 to "Notes to Consolidated
Financial Statements") which represented a significant step in accomplishing the
Company's new strategy in that the acquisition of 18 ultra deep drilling rigs
and the infusion of $25 million of capital enabled the Company to focus on
higher margin markets where drilling projects are of a longer duration than the
Company's previous markets.

   Under the first agreement, R.T. Oliver, Inc. ("RTO") and Land Rig Acquisition
Corporation ("LRAC") merged with a new subsidiary of the Company with the
capital stock of RTO and LRAC being exchanged for 39,423,978 shares of the
Company's common stock. In addition, warrants were issued to acquire up to
1,720,000 additional shares of common stock, the exercise of which is contingent
upon the occurrence of certain events. These mergers resulted in the acquisition
of 18 inactive, deep capacity land drilling rigs which includes five 3,000
horsepower and nine 2,000 horsepower land rigs which are rated for depths of
25,000 feet or greater. The Company believes that these rigs can be brought up
to operating condition within a reasonable time on an economic basis and that
this group of rigs represents a significant concentration of the relatively
small number of such deep drilling land rigs currently available in the market.

   Under the second agreement, a subsidiary of Somerset Drilling Associates,
L.L.C. ("Somerset"), a privately-held investment limited liability company, was
merged into the Company. The stock of the subsidiary was exchanged for
39,423,978 shares of the Company's common stock and warrants to acquire up to
1,720,000 additional shares of common stock, the exercise of which is contingent
upon the occurrence of certain events. This merger transaction resulted in a $25
million equity infusion into the Company.

   MESA ACQUISITION. On October 3, 1996 the Company acquired all of the South
Texas operating assets of Mesa Drilling, Inc. ("Mesa") in exhange for 5,500,000
shares of the Company's common stock. The assets acquired consist of six diesel
electric SCR drilling rigs, three of which are currently operating in South
Texas. The other three rigs are currently stacked.

   DIAMOND M ACQUISITION. On December 31, 1996 the Company completed the
acquistion of all of the South Texas operational assets of Diamond M Onshore,
Inc., a wholly owned subsidiary of Diamond Offshore Drilling, Inc. The assets
were acquired for $26 million in cash and consist of ten land based drilling
rigs, all of which are currently operating, 19 rig hauling trucks, a yard
facility in Alice, Texas and various other equipment. The purchase price was
funded through the closing of a new revolving credit facility.

   FLOURNOY ACQUISITION. On January 31, 1997, the Company acquired all of the
South Texas operating assets of Flournoy Drilling Company ("Flournoy") which
makes DI the largest contractor in the South Texas Market. The Company acquired
13 drilling rigs, 17 rig hauling trucks, a yard and office facility in Alice,
Texas and various other equipment and drill pipe for 12.4 million shares of the
Company's common stock and $800,000 in cash.

   NEW MARKET FOCUS. As a result of the Company's desire to redeploy assets to
more productive markets, during the fourth quarter of 1996, the Company decided
to withdraw from both the Argentina and Mexico markets. The Company's

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four drilling rigs have already been mobilized out of Mexico to the United
States where they will be refurbished and returned to service. The Company
recorded $987,000 in mobilization cost as well as other exit costs of $1.0
million which primarily consists of the forfeiture of a performance bond and
other costs to be incurred in closing the office and exiting Mexico. The Company
has tentatively agreed to sell three of the six drilling rigs and certain other
assets located in Argentina for $1.5 million. As a result, the Company recorded
a write down of rig equipment and other assets of $2.5 million. In addition the
Company recorded $761,000 in exit costs which primarily represent costs expected
to be incurred during the period necessary to close the office and exit
Argentina.

   PENDING GREY WOLF ACQUISITION. On March 10, 1997, the Company entered into a
definitive agreement to acquire Grey Wolf Drilling Company ("Grey Wolf") for up
to $61.6 million in cash and approximately 14 million shares of the Company's
common stock. The terms of the agreement call for Grey Wolf to merge with and
into Drillers, Inc. a subsidiary of DI Industries, Inc. subject to obtaining
regulatory and Grey Wolf shareholders' approval and certain other conditions.
The number of shares of the Company's common stock to be issued in the merger is
subject to decrease or increase if the average trading price of the Company's
common stock in the ten trading days prior to the merger is greater than $4.00
or less than $3.00 per share. Additionally, the merger agreement calls for the
decrease of cash consideration and corresponding increase in the number of
shares issued so that at least 45% of the value of the merger consideration
consists of the Company's common stock. An escrow will be established for
certain post-closing contingencies with $5.0 million of the cash consideration.

   NEW CREDIT FACILITY. As of December 31, 1996, the Company entered into a
$35.0 million reducing revolving credit facility (the "Facility") to fund the
Diamond M acquisition and for other general corporate purposes. The Facility
provides for an initial loan commitment of $35.0 million which reduces by $5.0
million each year until maturity on December 31, 1999. The Facility is secured
by substantially all of the Company's assets and calls for quarterly interest
payments on the outstanding balance at either LIBOR plus 3% or the lending
institution's prime rate plus 2%. In connection with entering into the Facility,
the Company utilized existing working capital to repay the $9.4 million balance
outstanding under its previous term loan agreement.

   Each of the Company's completed or pending acquisitions have been or will be
accounted for using purchase accounting. As such all revenues and expenses have
been or will be recorded by the Company beginning at the date of acquisition.

DISCONTINUED OPERATIONS

   On June 7, 1995, the Company entered into an agreement to sell its producing
oil and gas properties, effective April 1, 1995, for a cash sales price of $4.2
million, subject to certain adjustments. The sale was closed August 9, 1995.
Proceeds from this transaction were used to pay off the Company's production
term note which had an outstanding balance of approximately $1.5 million,
purchase two certificates of deposit totaling approximately $1.4 million as
collateral for two letters of credit that were then outstanding under the
Company's revolving line of credit, with the remainder of the proceeds,
approximately $1.3 million, used for working capital purposes.

   The December 31, 1995 Consolidated Balance Sheet has been restated with all
assets and liabilities associated with the oil and gas properties identified as
Discontinued Operations. The Consolidated Statements of Operations for the 1995
and 1994 periods presented identifies the income (loss) from producing oil and
gas operations as discontinued operations. In 1995, as a result of the sale of
the oil and gas properties, the Company recorded a $768,000 non-cash loss.

INDUSTRY SEGMENTS

   The Company has United States operations as well as foreign operations in
South America and Mexico. Reference is made to Note 6 of the Notes to
Consolidated Financial Statements for information regarding the Company's
industry segments.

INDUSTRY CONDITIONS AND COMPETITION

   The Company experiences intense competition in its onshore drilling markets.
The contract drilling industry is cyclical and is characterized by high capital
and maintenance costs. During the early eighties, in response to a steep
increase in demand for drilling rigs, a significant number of drilling rigs were
added to the market. By 1985 demand for drilling rigs had dropped to a record
low resulting in a huge gap between the supply of drilling rigs and the demand.
During 1995 and

                                       -4-
<PAGE>
1996, the spread between supply and demand has narrowed as the industry wide
fleet of drilling rigs ages. This has resulted in, higher utilization and higher
per day revenues in certain of the Company's geographic markets. The market,
however, continues to be highly competitive where no one competitor is dominant.
Companies generally compete on the basis of price, workforce experience,
equipment suitability and availability, reputation, expertise and financial
capability. While competition is primarily on a regional basis, rigs can be
moved from one region to another in response to changes in levels of drilling
activity, subject to crew availability and mobilization expenses. The Company's
ability to obtain drilling contracts is dependent primarily on the level of
domestic oil and gas exploration and development activity, as well as the
Company's ability to acquire and retain qualified personnel. The Company's
ability to continue to generate business in the future will depend, in part, on
its ability to adapt to new technology and drilling techniques as they become
available. Certain of the Company competitors have greater financial resources
than the Company.

   The Company's operations are materially dependent upon the levels of activity
in the exploration, development and production of oil and gas in the United
States and worldwide. Such activity levels are affected both by short-term and
long-term trends in the prices of oil and natural gas. In recent years, oil and
natural gas prices, and therefore the level of drilling and exploration
activity, have been volatile. Worldwide military, political and economic events
have contributed to, and are likely to continue to contribute to, such price
volatility. Any prolonged reduction in oil and natural gas prices would depress
the level of exploration and development activity and would result in a
corresponding decline in the demand for the Company's services and therefore
have a material adverse effect on the Company's revenues and profitability. The
Company's future success will depend in large part upon a general economic
improvement in the domestic oil and gas and contract drilling industries, which
cannot be predicted with certainty.

   In response to the depressed domestic drilling activity in the late 1980's,
the Company focused on foreign opportunities, especially the Central and
South American markets where the Company's foreign operations have, in recent
years, conducted drilling operations in Argentina, Guatemala, El Salvador,
Venezuela and Mexico. Currently, the Company has withdrawn or is withdrawing
from all international markets except Venezuela. Due to the recent upswings in
the Venezuelan market, the Company has renewed its focus on this market and
expects to spend additional capital in Venezuela in 1997. Due to declines in
Argentina and Mexico the Company has decided to exit those markets. The Company
will, from time to time, consider expansion into additional selected
international markets.

   There is a general shortage in the industry of used drill pipe, and the cost
of obtaining new and used drill pipe is substantially higher than in prior
periods and is currently escalating. At present, the Company has an adequate,
but not a surplus, supply of drill pipe and drill collars and has began a
gradual replacement program in 1996. The Company has formed an alliance with a
drill pipe manufacturer to ensure a steady supply of new drill pipe to outfit
the 18 rigs that were acquired through the merger transaction and for its
existing fleet. Also, depending on rig utilization, the Company may need to
purchase additional drill pipe for rigs in service or placed in service.

CONTRACT DRILLING

   DRILLING OPERATIONS. As of March 14, 1997, the Company has a total rig fleet
of 90 rigs with 65 rigs being actively marketed and 25 being held in inventory
for refurbishment. As part of the Company's new strategy, during 1997,
management plans on refurbishing several rigs out of its inventory to be placed
into service in the Ark-La-Tex and South Texas Divisions. In addition, the
Company supplies the labor and expertise to operate five additional rigs owned
by others. Of the marketable rigs, 59 are operated in seven states and six are
operated in Venezuela. Under a typical oil and gas drilling contract, the
Company provides its customers with drilling rigs and related equipment, as well
as field personnel. The Company considers a rig which is presently working to be
an "active" rig. Rigs which are not working but which are currently being
actively marketed are viewed as "idle." "Inventory" rigs are rigs which are not
working and are not currently being actively marketed. Inventory rigs will
require additional capital expenditures to reactivate them for service. The
Company estimates that the costs required to reactivate its inventory rigs may
range between $100,000 and several million dollars per rig. During 1996, the
Company's contract drilling operations were conducted through four operating
divisions in the United States organized by geographic area and their foreign
operations were conducted through three divisions located in Venezuela,
Argentina and Mexico.

   ARK-LA-TEX DIVISION. The Ark-La-Tex Division's office is located in
Shreveport, Louisiana, and provides oil and gas contract drilling services
primarily in the states of Texas, Louisiana and Arkansas. The Ark-La-Tex
Division has a fleet of 15 marketable rigs with 13 having rated depth capacities
of over 10,000 feet and two at 20,000 feet or deeper. During 1996, the Company
had on average about ten rigs operating in this Division. The Company has moved
two rigs from the South Texas Division and refurbished three rigs out of
inventory to account for the increase.

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   SOUTH TEXAS DIVISION. The South Texas Division is headquartered in Alice,
Texas. The South Texas Division operates 30 rigs, which includes one labor
contract. Thirteen of the rigs are trailer mounted mobile rigs having rated
depth capacities between 9,000 feet and 13,000 feet, nine are "SCR" rigs having
rated depth capacities of 15,000 feet to 25,000 feet and the balance are
conventional rigs which have rated depth capacities of 10,000 feet to 13,000
feet. This Division drills primarily in South Texas for major and independent
oil and gas companies. The Mesa, Diamond M and Flournoy acquisitions added 26
rigs of this Divisions total of 30 rigs. The Company is seeing increased demand
for rigs in both the Ark-La-Tex and South Texas Divisions.

   EASTERN DIVISION. The Eastern Division's office is located in Midvale, Ohio,
and drills gas wells in Ohio, Pennsylvania and New York, principally at depths
of 7,000 feet or less. This Division currently markets five rigs and
historically, contracts to drill packages of several wells. The Eastern
Division's operations are limited during April and May of each year due to
"frost laws" in the jurisdictions in which it operates which restrict movement
of equipment on public roads during such period. Demand for the Company's
drilling services has remained relatively constant for the past several years.

   INDRILLERS, L.L.C. DIVISION. On April 15, 1996, the Company completed the
formation of a joint venture, INDRILLERS, L.L.C., between its wholly-owned
subsidiary, Drillers, Inc., and Dart Energy Corp. to combine the Michigan
contract drilling operations of Drillers,Inc. with the Michigan contract
drilling operations of Indril, a subsidiary of Dart Energy Corp. Drillers, Inc.
and Dart Energy Corp. each contributed five drilling rigs to the joint venture
with Drillers, Inc. having a 65% interest and Dart Energy having a 35% interest
in the joint venture.

   The office of INDRILLERS, L.L.C. is located in Mt. Pleasant, Michigan. The
Company drills oil and gas wells principally in Michigan, at depths of 1,000 to
16,000 feet. Of INDRILLERS, L.L.C. ten rigs, nine are rated 6,000 to 8,500 feet,
and one is rated at up to 16,000 feet. INDRILLERS' operations are also limited
during April and May of each year due to "frost laws" in the jurisdictions in
which it operates which restrict movement of equipment on public roads during
such periods. The Michigan market continues to experience weak demand.

   VENEZUELA DIVISION. The Company owns four land-based drilling rigs and two
land-based workover rigs in Venezuela. In addition, the Company operates four
drilling rigs under a labor contract. The Venezuela Division provides oil and
gas contract drilling services under daywork contracts and workover services
under hourly contracts. The Venezuela drilling rigs have rated depths of 10,000
to 15,000 feet. The Company has been given notice that the contract for the four
labor contracts will not be renewed at the end of March, 1997. The Company's
revenue and operating profit will be negatively effected by the cessation of
these contracts, however, the Company is actively pursuing additional contracts
in the Venezuela market and hopes to replace the revenue and operating profit
previously generated by these contracts. The Company has seen an increase in
demand for drilling rigs with deeper capacity.

   ARGENTINA AND MEXICO DIVISIONS. As part of the new strategic business plan,
the Company ceased operations in Mexico and Argentina in order to focus on more
profitable market areas. The drilling rigs which previously operated in Mexico
have been mobilized to the United States where they will be refurbished and
placed in service in Ark-La-Tex and South Texas Divisions. The Company currently
has 6 drilling rigs in Argentina; three of which are under letter of intent to
be sold for $1.5 million, the remaining rigs will be mobilized to the United
States or possibly Venezuela. The cost of this mobilization will be expensed as
incurred in 1997.

   The Company will continue to evaluate foreign opportunities and may in the
future return to either Argentina or Mexico depending on contract opportunities.

   CONTRACTS. The Company's contracts for drilling oil and gas wells are
obtained either through competitive bidding or as a result of negotiations with
customers. The Company's oil and gas drilling contracts provide for compensation
on a "daywork," "footage" or "turnkey" basis. Under daywork contracts, the
Company receives a fixed amount per day for drilling the well, and the customer
bears a major portion of out-of-pocket costs of drilling. Under footage
contracts, the Company is paid a fixed amount for each foot drilled, regardless
of the time required or the problems encountered in drilling the well. The
Company pays more of the out-of-pocket costs associated with footage contracts
than with daywork contracts. Under turnkey contracts, the Company agrees to
drill a well to a specified depth for a fixed price, regardless of the time
required or the problems encountered in drilling the well. Footage and turnkey
contracts generally involve a higher degree of risk to the Company than daywork
contracts because the Company bears the cost of unanticipated down-hole problems
and cost escalation. "Hourly" contracts call for the Company to provide a rig
and crew, for which it is paid on an hourly basis. The work currently conducted
by the Ark-La-Tex Division is primarily daywork with some turnkey contracts.
Almost all of the

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wells drilled by the Eastern Division are drilled pursuant to footage contracts.
Operations in the South Texas Division are typically split between daywork and
turnkey/footage at a 60/40 ratio. INDRILLERS wells are drilled under footage and
daywork contracts. The Venezuela wells are drilled under daywork, and hourly
contracts. The Company believes that it is adequately insured against normal and
foreseeable risks in its operations in accordance with industry standards;
however, such insurance may not be adequate to protect the Company against
liability from all consequences of well disasters, extensive fire damage or
damage to the environment.

   CUSTOMERS. The Company's oil and gas contract drilling customers include
large and small independent producers and major oil companies. A significant
portion of the Company's international drilling contracts are with national
utility or national petroleum companies in South America. No customer accounted
for more than 10% of the Company's consolidated revenues for the years ended
December 31, 1996 and 1995 or the nine months ended December 31, 1994.

   The Company primarily markets its oil and gas drilling rigs on a regional
basis through employee salesmen located in Houston, Texas; Shreveport,
Louisiana; Mt. Pleasant, Michigan; Midvale, Ohio; and Barinas, Venezuela. These
salesmen utilize personal contacts and industry periodicals and publications to
determine which operators are planning to drill oil and gas wells or need
workover services in the immediate future. Once the Company has been placed on
the "bid list" for a particular operator, the Company will normally be given the
opportunity to bid on all future wells for that operator on an area basis.
Repeat business from previous customers accounts for a substantial portion of
the Company's business.

EMPLOYEES

   At March 24, 1997, the Company had approximately 1,580 employees. The Company
believes that its relationship with its employees is satisfactory.

INSURANCE

   The Company believes that it is adequately insured against normal and
foreseeable risks in its operations in accordance with industry standards;
however, such insurance may not be adequate to protect the Company against
liability from all consequences of well disasters, extensive fire damage or
damage to the environment. The Company maintains appropriate insurance with
respect to workers' compensation liability. The contract drilling industry's
level of workers' compensation costs has increased over the past few years and
constitutes a substantial portion of the Company's direct labor operating costs.
The Company does not carry business interruption insurance. No assurance can be
given that the Company will be able to maintain adequate insurance in the future
at rates which are commercially reasonable.

   At March 31, 1994, American Premier Underwriters, Inc. ("American Premier"),
formerly named the Penn Central Corporation, was the owner of 20,690,105 (53.5%)
shares of the Company's outstanding common stock. In June 1994, Norex Drilling
Ltd. ("Norex Drilling"), a wholly-owned subsidiary of Norex Industries, Inc.
("Norex Industries"), completed the purchase of all shares of the Company's
common stock owned by American Premier.

   Prior to June 2, 1994, certain of the Company's insurance coverage, including
workers' compensation and excess liability coverage, was arranged by American
Premier as part of a program which American Premier provided to its
subsidiaries. Subsequent to the sale of the Company's common shares by American
Premier to Norex Drilling, the Company obtained workers' compensation, excess
liability coverage and certain other insurance from other sources. The Company
and American Premier entered into an agreement pursuant to which the Company
agreed to reimburse American Premier for all amounts advanced by American
Premier from time to time on behalf of the Company in connection with American
Premier's administration of the Company's workers' compensation and certain
other insurance programs for the periods between July 20, 1989 and the closing
of the sale of Company common stock by American Premier to Norex Drilling. The
amounts reimbursable to American Premier at December 31, 1995 relating to this
program were $1,900,000. All amounts due to American Premier were paid in 1996.

CERTAIN RISKS

   OPERATIONAL RISKS. The Company's operations are subject to the many hazards
inherent in the drilling business, including blowouts, cratering, fires and
collisions. These hazards could cause personal injury and loss of life, suspend
drilling operations or seriously damage or destroy the property and equipment
involved and, in addition to environmental damage, could cause damage to
producing formations and surrounding areas. Although the Company maintains
insurance against many of these hazards, the Company does not have casualty or
other insurance with respect to the rigs themselves,

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and such other insurance is subject to substantial deductibles and provides for
premium adjustments based on claims. Certain other matters may also be excluded
from coverage, such as loss of earnings on certain rigs.

   INTERNATIONAL OPERATIONS AND RISKS. A significant portion of the Company's
revenues are attributable to international operations. Risks associated with
operating in international markets include foreign exchange restrictions and
currency fluctuations, foreign taxation, changing political conditions and
foreign and domestic monetary policies, expropriation, nationalization,
nullification, modification or renegotiation of contracts, war and civil
disturbances or other risks that may limit or disrupt markets. For example, the
Company has operated in countries in Latin America that have experienced major
currency fluctuations in the recent past. The ability of the Company to compete
in the international drilling markets may be adversely affected by foreign
government regulations that favor or require the awarding of such contracts to
local contractors, or by regulations requiring foreign contractors to employ
citizens of, or purchase supplies from, a particular jurisdiction. No
predictions can be made as to what foreign government regulations may be enacted
in the future that could be applicable to the Company's operations.

   The Company's primary international contract drilling operations are in South
America. These international contract drilling operations are primarily covered
by drilling contracts which, in the case of Venezuela, are structured where
payment is split between partial payment in United States currency and the
balance paid in local currency. A significant portion of costs and expenses
relating to the Company's international operations are comprised of goods and
services procured, in the respective foreign countries and paid for in the
respective countries' currencies.

   The Company is subject to taxation in many jurisdictions, and the final
determination of its tax liabilities involves the interpretation of the statutes
and requirements of various domestic and foreign taxing authorities. Foreign
income tax returns of foreign subsidiaries are subject to examination by foreign
tax authorities. The Company has recorded its estimated tax liability in each of
the jurisdictions in which the Company operates.

   To date, the Company has not entered into any currency hedges to protect it
from such losses, however the assets in the foreign countries are managed to
minimize the exposure from currency fluctuations. During the year ended December
31, 1995, the Company realized currency gains of $888,000. Unrealized gains or
losses are recorded as a separate component of shareholders' equity and in 1996,
$404,000 was recorded due to a devaluation in Venezuela.

   CHANGE IN BUSINESS STRATEGY AND MANAGEMENT. In early 1996, the Company began
implementing a new business strategy which involves new management, focusing its
resources toward higher margin markets and recapitalizing the Company to provide
for growth capacity. Implementing the new strategy will involve redeploying its
rigs to more profitable markets, refurbishing certain of its rigs, and acquiring
businesses and assets complementing the Company's land drilling operations.
Inherent in such strategy are certain risks, such as increasing demand for
liquidity and capital resources, increasing debt service requirements, combining
disparate company cultures and facilities, and conducting operations in
geographically and competitively diverse markets.

   Material changes in the Company's management and business strategy have only
recently occurred. The Company is therefore unable to predict the effect of
these material changes on the Company's financial condition and results of
operations. This is particularly so in light of the rapid consolidation and
competitive changes in the Company's most profitable markets. The success of the
Company's new business strategy and its ability to repay increased debt service
will depend in part on the Company's ability (i) to redeploy its rigs to higher
margin markets, (ii) to finance and timely complete the refurbishment of its rig
inventory on a cost effective basis and, (iii) to continue to contract for,
finance and integrate into its business future acquisitions. There can be no
assurance these material changes will result in the desired effect of improving
the Company's competitive position and its financial condition.

   LEVERAGE AND LIQUIDITY. The Company currently has approximately $27 million
of debt obligations. Accordingly, the Company will require substantial cash flow
to meet its debt service requirements. Payment of principal and interest on
these obligations will depend on the Company's future performance, which is
subject to general economic and business factors beyond the Company's control.
The Company's programs of rig refurbishment will require increasing amounts of
capital and to the extent, if any, it is unable to continue such programs, the
Company will have fewer rigs available for service. Further debt may be needed
to finance any future acquisitions, including the pending Grey Wolf Acquisition.
It is likely therefore, that the Company's exposure to the risks associated with
leverage will increase as its new business strategy is continued. There can be
no assurance that debt or equity capital needed for the future will be available
or, if so, on acceptable terms.

                                       -8-
<PAGE>
   The Company's current credit facility (the "Facility") restricts, among other
things, the Company's ability to incur additional indebtedness in excess of
certain amounts, encumber certain of its properties and make certain asset
dispositions. Furthermore, the Facility prohibits the payment of dividends by
the Company and requires the Company to maintain a minimum working capital
balance of $5.0 million and minimum net worth of $60.0 million. In addition, the
Facility requires the Company to maintain certain financial ratios. These
restrictions could limit the Company's flexibility in responding to changing
market conditions.

   NEW MANAGEMENT AND BOARD OF DIRECTORS; DEPENDENCE ON KEY PERSONNEL. Since
April 1996, the Company has hired a majority of its current senior management
team. In addition, in August 1996, the shareholders of the Company elected a
Board of Directors comprised of five members, all but one of which were elected
for the first time. In connection with an acquisition, another new member was
added to the Company's Board of Directors effective January 31, 1997. The
Company believes that its operations are dependent upon the Company's small
group of relatively new management personnel, the loss of any of whom could have
a material adverse effect on the Company.

   INTENSE COMPETITION; INDUSTRY CONDITIONS. The Company experiences intense
competition in its drilling markets. The contract drilling industry is cyclical
and is characterized by high capital and maintenance costs. Due to an oversupply
of rigs, the onshore drilling market is highly competitive and no one competitor
is dominant. While price is a primary factor in the selection of drilling
contractors, a contractor's safety record, crew quality, service record and
equipment capability are also important factors. Certain of the Company's
competitors have greater financial and other resources than the Company and may
commit more resources than the Company to these important factors.

   The Company's operations are materially dependent upon the levels of activity
in the exploration, development and production of oil and natural gas in the
United States and worldwide. Such activity levels are affected both by
short-term and long-term trends in the prices of oil and natural gas. In recent
years, oil and natural gas prices, and therefore the level of drilling and
exploration activity, have been volatile. Worldwide military, political and
economic events have contributed to, and are likely to continue to contribute
to, such price volatility. Any prolonged reduction in oil and natural gas prices
would depress the level of exploration and development activity and would result
in a corresponding decline in the demand for the Company's services and
therefore have a material adverse effect on the Company's financial condition
and results of operations.

   LOSS FROM OPERATIONS. The historical financial data for the Company reflects
net losses of $11.7 million and $13.4 million for the years ended December 31,
1996 and 1995, respectively, and $2.2 million for nine months ended December 31,
1994. The calendar year 1996 loss includes non-recurring charges of $6.1 million
while the 1995 loss includes a provision for asset impairment of $5.3 million.
There can be no assurance that the Company will not continue to experience
losses.

   SHARES ELIGIBLE FOR FUTURE SALE. There are approximately 95 million shares of
the Company's common stock that are available for resales by selling
shareholders under the Company's several Registration Statements under the
Securities Act of 1933, as amended, on forms S-3 and S-8 including 5.37 million
shares issuable upon exercise of warrants or options. There are an additional
360,000 shares issuable upon the exercise of options which have not been
registered. On a fully diluted basis, such shares represent approximately 67% of
the Company's outstanding common stock. Future sale of substantial amounts of
common stock in the public market could adversely affect prevailing market
prices. See "Item 5 Market for Registrant's Common Equity and Related
Shareholder Matters-Shares Available for Future Sale."

   LIMITATIONS ON THE AVAILABILITY OF THE COMPANY'S NET OPERATING LOSS
CARRYFORWARDS. As a result of the RTO/LRAC and the Somerset Mergers, the Company
has undergone an "ownership change" within the meaning of Section 382 of the
Internal Revenue Code of 1986, as amended. Therefore, the right of the Company
to use its existing net operating loss carryforwards ("NOLs") and certain other
tax attributes for both regular tax and alternative minimum tax purposes during
each future year is limited to a percentage (currently approximately six
percent) of the fair market value of the Company's common stock immediately
before the ownership change (the "Section 382 Limitation"). To the extent that
taxable income exceeds the Section 382 Limitation in any year subsequent to the
ownership change, such excess income may not be offset by NOLs from years prior
to the ownership change. To the extent the amount of taxable income in any
subsequent year is less than the Section 382 Limitation for such year, the
Section 382 Limitation for future years is correspondingly increased. There is
generally no restriction on the use of NOLs arising after the ownership change,
although Section 382 applies anew each time there is an ownership change. The
actual effect, if any, of such utilization of NOLs will depend on the Company's
profitability in future years. As of December 31, 1996, the Company had
approximately $23

                                       -9-
<PAGE>
million of NOLs, a significant portion of which are already subject to a Section
382 Limitation resulting from ownership changes in years prior to 1996.

   GOVERNMENTAL REGULATIONS. Many aspects of the Company's operations are
affected by political developments and by federal, state, foreign and local laws
and regulations relating to the energy industry. The adoption of laws and
regulations curtailing exploration and development oil and gas drilling for
economic and other policy related reasons would adversely affect the Company's
operations by limiting demand for its contract drilling services. The Company
cannot determine to what extent future operations and earnings of the Company
may be affected by new legislation, new regulations or changes in existing
regulations.

   The Company's activities are also subject to laws and regulations relating to
environmental protection and pollution control, including certain regulations
that control the discharge of materials into the environment or require
remediation of contaminations. Usually, these environmental laws and regulations
impose "strict liability", rendering a person liable without regard to
negligence or fault. Although the Company's cost of compliance with such
legislation and regulations has not been material to date, such laws and
regulations may substantially increase the cost of the Company's activities and
may prevent or delay the commencement or continuance of a given operation. The
Company believes that such legislation and regulations have not had a materially
adverse effect on its present method of operations. In the future, federal,
state and local government environmental controls may require the Company to
make significant expenditures, although the magnitude of such expenditures
cannot be predicted.

   The Company is subject to the requirements of the Occupational Safety and
Health Act ("OSHA") and comparable state statutes. The OSHA hazard communication
standard, the Environmental Protection Agency "community right-to-know"
regulations under Title III of the Federal Superfund Amendment and
Reauthorization Act and comparable state statutes require the Company to
organize information about the hazardous materials used in its operations. The
Company will likely be required to increase its expenditures during the next
several years to comply with higher industry and regulatory safety standards
such as those described above. Such expenditures cannot be accurately estimated
at this time.

ITEM 2. PROPERTIES

DRILLING AND WORKOVER EQUIPMENT

   The Company considers a rig which is presently working to be an "active" rig.
Rigs which are not working but which are currently being actively marketed are
viewed as "idle." "Inventory" rigs are rigs which are not working and are not
currently being actively marketed. Inventory rigs will require additional
capital expenditures to reactivate them for service. The following table
describes the oil and gas drilling rigs owned and operated by the Company at
March 24, 1996, and the status of each rig during the preceding 45 days:

Rig    Year Built/                         Rated
No.      Rebuilt         Drawworks         Depth       Location         Status
---    -----------   -------------------  --------  --------------    ----------
ARK-LA-TEX  DIVISION
--------------------
  1     1957/1980    Brewster N-85         15,000'   N. Louisiana      Active
  2     1957/1981    Brewster N-85         15,000'   N. Louisiana      Active
  3     1960/1982    Cont-Emsco A-550      13,500'   E. Texas          Active
  6     1957/1980    Brewster N-85         15,000'   N. Louisiana      Active
  7     1978         National 55           12,500'   N. Louisiana      Active
 10     1964/1989    Gard-Denver 800       14,000'   N. Louisiana      Active
 12     1980         Gard-Denver 700       12,500'   N. Louisiana      Active
 13     1981         Brewster N-75B        13,000'   N. Louisiana      Active
 15     1965/1989    National 610          14,000'   N. Louisiana      Active
 19     1981/1997    National 80-B         15,000'   N. Louisiana      Active
 39     1980/1989    Gard-Denver 800       16,000'   E. Texas          Active
 40     1979         Gard-Denver 1100E     20,000'   E. Texas          Active
 44     1982         Gard-Denver 1500E     25,000'   E. Texas          Active
 48     1981         Ideco 3000-UE         30,000'   Oklahoma          Active
 75     1982/1996    Cont-Emsco D-3E       16,000'   N. Louisiana      Active

                                      -10-
<PAGE>
Rig    Year Built/                         Rated
No.      Rebuilt         Drawworks         Depth       Location         Status
---    -----------   -------------------  --------  --------------    ----------
SOUTH TEXAS DIVISION
--------------------
 31     1980/1994    Cabot 750             10,000'   S. Texas          Active
 33     1981/1992    National 80 UE        16,000'   S. Texas          Active
 34     1981/1992    Superior 700 UE       12,000'   S. Texas          Active
 37     1981/1992    Cont-Emsco Elec. II   25,000'   S. Texas          Active
 42     1981         Cont-Emsco Elec. II   25,000'   S. Texas          Active
 43     1981         Ideco E-1200          17,000'   S. Texas          Active
 93(a)  1981         Mid-Continent 712-UE  16,000'   S. Texas          Active
301     1990/        Mid-Continent U-36A   12,000'   S. Texas          Active
302     1964/1988    RMI 750               10,500'   S. Texas          Active
303     1966/1995    Brewster N-75         14,000'   S. Texas          Active
304     1969/1975    Cabot 750              9,500'   S. Texas          Active
305     1973/1990    Cabot 1000            13,000'   S. Texas          Active
306     1990/1997    RMI 1000              13,500'   S. Texas          Active
307     1993/1995    Ideco 1200E           17,000'   S. Texas          Active
308     1975/1992    Ideco BIR-800         10,000'   S. Texas          Active
309     1976/1990    Gard Denver 500       10,000'   S. Texas          Active
310     1980/1995    Brester N-46          12,000'   S. Texas          Active
311     1981/1996    Ideco BIR-800         10,000'   S. Texas          Active
312     1982         Gard Denver 1100E     17,000'   S. Texas          Active
314     1996         Cabot 750              9,500'   S. Texas          Active
840     1981/1994    Oilwell 840E          18,000'   S. Texas          Active
851     1982/1994    National 80B          14,000'   S. Texas          Active
859     1978/1991    Brewster N -75        14,000'   S. Texas          Active
860     1976/1995    Cabot 750              9,500'   S. Texas          Active
861     1978/1993    Cabot 900             11,000'   S. Texas          Active
862     1976         Cabot 900             13,000'   S. Texas          Active
863     1978/1988    Cabot 1000            13,000'   S. Texas          Active
864     1975/1994    Cabot 1000            13,000'   S. Texas          Active
865     1979/1993    Cabot 1200            14,000'   S. Texas          Active
866     1982/1993    Cabot 1200            14,000'   S. Texas          Active

EASTERN DIVISION
----------------
202     1981         Wilson Mogul 42        8,000'   N.W. Penn.        Active
203     1980         Wilson Mogul 42        8,000'   N.E. Ohio         Active
204     1979         Wilson Mogul 42        6,500'   N.E. Ohio         Active
208     1980         Wilson Mogul 42        6,500'   N.W. Penn.        Active
215     1980         Wilson Mogul 42        6,500'   N.W. Penn.        Active

INDRILLERS DIVISION
-------------------
  1     1980         Challenger 320         5,500'   Michigan          Idle
  2     1979         Ideco H-37             7,000'   Michigan          Idle
  3     1980         Challenger 320         5,500'   Michigan          Idle
  4     1980         Challenger 320         5,500'   Michigan          Idle
  5     1980         Ideco H-1000          10,500'   Michigan          Active
 41     1981         Ideco E-1200          20,000'   Michigan          Idle
 53     1976         Cabot 550              6,500'   Michigan          Active
 56     1980         Ideco DIR 700          8,500'   Michigan          Idle
 57     1977         Ideco BIR 550          6,500'   Michigan          Active
 58     1977         Ideco DIR 700          8,500'   Michigan          Active

                                      -11-
<PAGE>
Rig    Year Built/                         Rated
No.      Rebuilt         Drawworks         Depth       Location         Status
---    -----------   -------------------  --------  --------------    ----------
VENEZUELA DIVISION
------------------
407     1980         Cooper LT0 350        14,000'   Venezuela         Idle
408(a)  1980         Cabot 1,000           12,000'   Venezuela         Active
412(a)  1980         National 610-E        12,000'   Venezuela         Active
417(a)  1981         Cont.-Emsco D-3       14,000'   Venezuela         Active
421(a)  1978         Cont.-Emsco C-1       15,000'   Venezuela         Active
423     1981/1996    Mid-Continent 712-U   15,000'   Venezuela         Active
441     1980         Wilson Mogul 42       12,000'   Venezuela         Idle
451     1981         Cabot 900             10,000'   Venezuela         Idle
452     1975/1994    Cabot 900             10,000'   Venezuela         Idle
453     1982/1994    Ideco-Hydrair H-35    10,500'   Venezuela         Idle

RIGS HELD IN INVENTORY
----------------------
 38     1981         Oilwell 840B          16,000'   S. Texas          Inventory
 47     1982         Ideco E-1200          20,000'   Michigan          Inventory
 49     1982         Ideco E-1200          20,000'   Michigan          Inventory
 70     1981         Ideco BIR 800         12,000'   N. Louisiana      Inventory
 76     1982         Cont.Emsco D-3E       16,000'   Oklahoma          Inventory
 77     1981         Mid-Cont. 914EC       20,000'   Oklahoma          Inventory
 78     1981         Cont. Emsco C-2E      25,000'   Oklahoma          Inventory
 79     1981         National 110 UE       18,000'   Oklahoma          Inventory
 80     1981/1982    Oilwell E-2000        25,000'   Oklahoma          Inventory
 81     1981         Oilwell E-2000        25,000'   Oklahoma          Inventory
 82     1981         Oilwell E-2000        25,000'   Houston           Inventory
 83     1981         Oilwell E-2000        25,000'   Oklahoma          Inventory
 84     1982         Oilwell E-2000        25,000'   Oklahoma          Inventory
 85     1981         National 1320 UE      25,000'   Oklahoma          Inventory
 86     1981         National 1320 UE      25,000'   Houston           Inventory
 87     1979         National 1320 UE      25,000'   Lysite, WY        Inventory
 88     1981         Cont. Emsco C-3       30,000'   Oklahoma          Inventory
 89     1981         Oilwell E-3000        30,000'   Oklahoma          Inventory
 90     1980/1981    National 1625 DE      30,000'   Ft. Stockton,TX   Inventory
 91     1980/1981    National 1625 DE      30,000'   Oklahoma          Inventory
 92     1980/1981    National 1625 DE      30,000'   Oklahoma          Inventory
454     1981         Ideco BIR H-1000      12,000'   Argentina         Inventory
455     1981         Ideco BIR H-1000      12,000'   Argentina         Inventory
472     1981/1994    Cabot 750             10,000'   Argentina         Inventory
473     1981/1994    Cabot 900             10,000'   Argentina         Inventory
-----------
(a)  Rig operated by the Company under a labor contract with the owner of the 
     rig

FACILITIES

      The Company leases its principal executive office in Houston, Texas, for
approximately $9,000 per month pursuant to a lease which extended through
November 1996 and month to month for approximately $13,000 thereafter. The
Company has leased approximately 17,200 square feet of new office space for its
principal executive offices effective April 1, 1997, at a cost of approximately
$22,000 per month. In addition, the Company owns field locations in: Fillmore,
Louisiana; Mt. Pleasant, Michigan; Midvale, Ohio; Woodward and Oklahoma City,
Oklahoma; Alice, Houston and Midland, Texas.

                                      -12-
<PAGE>
ITEM 3. LEGAL PROCEEDINGS

      The Company is involved in litigation incidental to the conduct of its
business, none of which management believes is, individually or in the
aggregate, material to the Company's consolidated financial condition or results
of operations.

      The Company was proceeding against Charlestown Industries, Inc. (a 50%
"Partner"), who was a co-defendant, along with the Company, in the joint venture
to recover their respective portion ($1,800,000) of the OFS 1987, Mid-Year et.
al. v DI Exploration lawsuit. In 1994, a judgment was rendered in favor of the
Company against the Partner in the state of Oklahoma. The Partner, subsequent to
the judgement, filed for protection under the US Bankruptcy Act and the
Company's claim was ruled on by the bankruptcy court in October of 1996. The
bankruptcy court ruled against the Company. The Company has determined not to
pursue other appeals. Since the future recovery of the amount and term of
recovery was uncertain no amount had been recorded by the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

MARKET DATA

      The Company's common stock is listed on the American Stock Exchange under
the symbol "DRL." At March 24, 1997, there were approximately 647 shareholders
of record of the common stock.

      The following table sets forth the high and low sale prices of the common
stock reported by the American Stock Exchange for the periods indicated:

                                                      HIGH        LOW
                                                    --------    --------
Period from January 1, 1997 to March 24, 1997 ..     3.6250      2.5000

Year Ended December 31, 1996:

   Quarter ended March 31, 1996 ................     0.6875      0.5000
   Quarter ended June 30, 1996 .................     1.8750      0.6875
   Quarter ended September 30, 1996 ............     1.8125      1.2500
   Quarter ended December 31, 1996 .............     2.9375      1.5000

Year Ended December 31, 1995:

   Quarter ended March 31, 1995 ................     1.0000      0.6250
   Quarter ended June 30, 1995 .................     1.0625      0.6875
   Quarter ended September 30, 1995 ............     0.8750      0.6250
   Quarter ended December 31, 1995 .............     0.8750      0.6250

SHARES ELIGIBLE FOR FUTURE SALE

      There are approximately 95 million shares of the Company's common stock
that are available for resale by selling shareholders under the Company's
several Registration Statements under the Securities Act of 1933, as amended, on
Forms S-3 or S-8, including 5.37 million shares issuable upon exercise of
warrants or options. There are an additional 360,000 shares issuable upon the
exercise of options which have not been registered. On a fully diluted basis,
such shares represent approximately 67% of the Company's outstanding common
stock. The contractual registration periods for such shares terminate at various
times during the period ending on the later of August 29, 1999, and three years
after exercise of any warrants. The Company also may be required to issue
additional shares of common under certain repricing provisions of a private
placement of the Company's common stock to affiliates of Wexford Management,
L.L.C. and a recently completed

                                      -13-
<PAGE>
acquisition of the operating assets of Flournoy Drilling Company. Any additional
shares issued under these obligations would also be subject to similar shelf
registration rights. There can be no assurance that additional shares will not
be issued under these provisions or that the Company may not agree to similar
provisions or that the Company may not agree to similar provisions in connection
with future acquisitions.

      On March 24, 1997, the last reported sales price of the company's common
stock on the American Stock Exchange was $2.625 per share. The Company has never
paid dividends on its common stock and is currently restricted under certain
debt agreements from paying dividends.

RECENT SALES OF UNREGISTERED SECURITIES

      On October 3, 1996, the Company issued 5.5 million shares of common stock
in exchange for all the South Texas operating assets of Mesa Drilling, Inc. The
shares were issued to Mesa Drilling, Inc. and affiliates in a negotiated
transaction exempt from registration under the Securities Act of 1933 pursuant
to Section 4(2) thereof. These shares were subsequently registered for resale
under a self registration statement on Form S-3 that became effective November
12, 1996.

      On December 30, 1996, the Company issued of 1.75 million shares of the
Company's common stock for approximately $4.12 million to four funds managed by
Wexford Management LLC in a negotiated transaction exempt from registration
under the Securities Act of 1933 pursuant to Section 4(2) thereof. A shelf
registration statement was filed by the Company registering these shares for
resale on Form S-3 that became effective February 12, 1997. DI will have to
issue more shares to the extent the Wexford funds hold less than $4.12 million
in value on the one year-anniversary date of the issuance.

ITEM 6. SELECTED FINANCIAL DATA

               (Amounts in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                                NINE
                                                    YEARS ENDED              MONTHS ENDED
                                                    DECEMBER 31,             DECEMBER 31,   YEAR ENDED MARCH 31,
                                                  1996        1995              1994(1)     1994(1)     1993
                                               ---------    --------           --------    --------    --------
CONTINUING OPERATIONS:
   <S>                                         <C>          <C>                <C>         <C>         <C>
   Revenues ................................   $  81,767    $ 94,709           $ 50,987    $ 67,855    $ 62,242
   Loss from continuing operations .........     (10,877)    (12,675)            (2,260)     (1,384)     (3,555)

DISCONTINUED OPERATIONS (2):
   Income (loss) from oil and gas operations        --            (4)                51      (1,274)         60

   Loss from sale of oil and gas properties         --          (768)              --          --          --

NET LOSS ...................................     (11,722)    (13,447)            (2,209)     (2,658)     (3,495)

LOSS PER COMMON SHARE:
   From continuing operations ..............        (.18)       (.33)              (.06)       (.04)       (.09)
   From discontinued operations ............        --          (.02)              --          (.03)       --
   Net loss ................................        (.18)       (.35)              (.06)       (.07)       (.09)

TOTAL ASSETS (3) ...........................     117,819      57,783             62,860      40,325      41,937

LONG-TERM DEBT (3) .........................      26,846      11,146             10,224         198         223

SERIES A PREFERRED STOCK - MANDATORY
   REDEEMABLE ..............................         764         900              1,900        --          --
</TABLE>
--------------
(1)  During 1994 the Company changed its fiscal year end from March 31 to
     December 31.

(2)  To account for the discontinued operation of DI Energy, effective
     April 1, 1995.

(3)Total assets and long term debt have been restated to account for the
discontinued operations of DI Energy, effective April 1, 1995.

                                     -14-
<PAGE>
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS.

      The following discussion should be read in conjunction with the
consolidated financial statements of DI Industries, Inc. ("DI" or the "Company")
included elsewhere herein. All significant intercompany transactions have been
eliminated.

INDUSTRY OVERVIEW

      The gap between the supply of workable rigs and demand for their services
has decreased in recent months. There are less rigs that are operational due to
age of the fleet in the U.S. and demand has increased for rigs in recent months.
The stabilization of working rig count that began in 1995 has continued into
1996 and 1997 and in fact an increase is now being seen . The weekly national
count of working land rigs in the United States as reported by Hughes
Christensen Incorporated on March 7, 1997 was 882 compared to 719 on March 8,
1996.

      The significant decline in oil and gas prices in the mid-1980's severely
depressed oil and gas exploration activities and reduced demand for the
Company's oil and gas drilling services. Although industry conditions have
improved during 1995 and 1996, a reversal of this trend could have an ongoing
negative effect on the company's future operating results. The decline in
drilling activity in the mid 1980's resulted in an oversupply of drilling
equipment and created intense competition, particularly in the price received
for contract drilling services by drilling contractors. Demand for oil and gas
drilling services will continue to be dependent upon the present and anticipated
sales price for oil and gas, which is subject to conditions such as consumer
demand, events in the Middle East, and other factors that are not controlled by
the Company.

      There has been an increase in the demand for oil and gas drilling services
in Venezuela. In response to this, the Company expanded into Venezuela during
1994. The Company has also completed projects in South America and Mexico;
however, the Company's only current operations are in Venezuela. The Company
will continue to market its services into selected international markets.

      There is a general shortage in the industry of used drill pipe, and the
cost of obtaining new and used drill pipe is substantially higher than in prior
periods and is currently escalating. At present, the Company does not have a
critical shortage of drill pipe or other equipment but, depending on rig
utilization, will need to purchase additional drill pipe for rigs in service. In
response to this shortage, the Company has formed an alliance with a drill pipe
manufacturer to ensure a steady supply of new drill pipe to outfit the 18 rigs
that were acquired through the merger transactions mentioned above and for its
existing rig fleet.

CHANGE IN BUSINESS STRATEGY AND MANAGEMENT

      In early 1996, the Company began implementing a new business strategy
which involved new management, a recapitalization of the Company to provide for
growth capacity and redeployment of the Company's assets into higher margin
markets.

      On April 9, 1996, the employment of the Company's chief executive officer
was terminated, signaling the beginning of significant management changes. Since
that date, the Company has hired the majority of its current senior management
team. Joining the Company in September of 1996 were Thomas P. Richards,
President and Chief Executive Officer, T. Scott O'Keefe, Senior Vice President
and Chief Financial Officer, Ronnie E. McBride, Senior Vice President-Domestic
Operations, and Forrest M. Conley, Jr., Senior Vice President-International.
David W. Wehlmann, Vice President and Controller, joined the Company in July
1996, while Donald J. Guedry, Treasurer, began his employment in October of
1996.

      On August 27, 1996, the shareholders of the Company elected a Board of
Directors comprised of five members, all but one of which were elected to the
Board for the first time. Returning to the Board as Chairman was Ivar Siem.
Directors Roy T. Oliver, Steven A. Webster, William R. Ziegler and Peter M. Holt
were newly elected to the Board of Directors of the Company. The shareholders
also approved the merger transactions (See Note 2 to "Notes to Consolidated
Financial Statements") which represented a significant step in accomplishing the
Company's new strategy in that the 18 ultra deep drilling rigs and the $25
million of capital to refurbish them has enabled the Company to focus on higher
margin markets where drilling projects are of a longer duration than the
Company's current markets. The merger transactions closed on August 29, 1996.

                                     -15-
<PAGE>
FINANCIAL CONDITION AND LIQUIDITY

      The Company funded its activities (other than the purchase price of
acquisitions) through a combination of cash generated from operations, cash
sales of non-strategic assets, short-term loans from affiliates, a deferral of
monthly payments otherwise due on debt, and issuances of its common stock and
preferred stock in exchange for cash and operating assets. With the exception of
the Diamond M acquisition, substantially all of the purchase price of the
several acquisitions accomplished by the Company during 1996 (other than
transaction costs) was paid by the issuance of the Company's common stock and
common stock purchase warrants. The merger transactions that occurred in August
1996, described further below, significantly improved the Company's financial
position. In the merger transactions, the Company obtained net cash of
approximately $25.0 million and 18 inactive, deep capacity drilling rigs in
exchange for the issuance of common stock thus increasing working capital and
net property and equipment.

      The following table summarizes the Company's financial position at
December 31, 1996 and 1995.

                                 DECEMBER 31, 1996    DECEMBER 31, 1995
                                 AMOUNT        %       AMOUNT       %

Working capital                $  6,195        7       7,503       22
Property and equipment, net      88,476       92      25,910       77
Other noncurrent assets           1,132        1         277        1
                                -------     ----      ------      -----
      Total                    $ 95,803      100    $ 33,690      100
                                ========    =====     =========   ======

Long-term debt                 $ 26,846       28    $ 11,146       33
Other long-term liabilities       4,311        4       2,850        8
Shareholders' equity             64,646       68      19,694       59
                                --------    ----      -----------------
      Total                    $ 95,803      100   $  33,690      100
                                ========    =====     =========   ======

      The most significant changes in the Company's financial position are the
increases in property and equipment of $62.6 million, long-term debt of $15.7
million, and shareholders' equity of $45.0 million. These changes are a direct
result of the Company's rebuilding process which began in the first quarter of
1996.

      On August 27, 1996, the shareholders of the Company approved two merger
transactions whereby the Company exchanged a total of 78,847,956 shares of
common stock for 18 inactive, deep capacity land drilling rigs valued at
approximately $25 million and an equity infusion of $25 million. These merger
transactions increased shareholders' equity by $49.6 million and property and
equipment by $25.2 million.

      On October 3, 1996, the Company acquired all the South Texas operating
assets of Mesa Drilling, Inc. in exchange for 5,500,000 shares of the Company's
common stock. This transaction added six diesel electric SCR drilling rigs to
the Company's rig fleet; three which are currently operating in South Texas and
three which are stacked. This transaction increased both shareholders' equity
and property and equipment by approximately $7.5 million.

      On December 31, 1996, the Company completed the acquisition of the South
Texas operating assets of Diamond M Onshore, Inc. ("Diamond M") for
approximately $26.0 million in cash. The assets consist of ten land drilling
rigs, all of which are currently operating, 19 rig hauling trucks, a yard
facility in Alice, Texas and various other equipment and drill pipe. This
resulted in an increase in property and equipment of approximately $26.0 million
and long-term debt of $25.0 million.

      Concurrent with the Diamond M asset acquisition the Company entered into a
loan facility (the "Facility") dated as of December 31, 1996, with Bankers Trust
Company, ING (US) Capital Corporation and NordlandsBanken AS which provided the
funds for the acquisition. The Facility provides for an initial $35.0 million
reducing revolving line of credit which reduces by $5.0 million each year until
maturity on December 31, 1999. The Facility is secured by substantially all of
the Company's assets, calls for quarterly interest payments on the outstanding
balance at either LIBOR plus 3% or the prime rate plus 2%, and contains
customary affirmative and negative covenants. In connection with the Company
entering into the Facility, the Company utilized existing working capital to
repay the $9.4 million balance outstanding under its previous term loan
agreement.

                                     -16-
<PAGE>
      On December 30, 1996, also in connection with closing the Facility, the
Company completed a private placement of 1,750,000 shares of the Company's
common stock for approximately $4,120,000 to four funds managed by Wexford
Management LLC. The proceeds were utilized to repay a $4.0 million note payable.
(See Note 2 to the Notes to the Consolidated Financial Statements).

      On January 31, 1997, the Company acquired the operating assets of Flournoy
Drilling Company for 12,426,000 shares of the Company's common stock and
$800,000 in cash. The assets acquired include 13 drilling rigs, 17 rigs hauling
trucks, a yard and office facility in Alice, Texas and various other equipment
and drill pipe.

      On March 10, 1997, the Company entered into a definitive agreement to
acquire Grey Wolf Drilling Company ("Grey Wolf") for up to $61.6 million in cash
and approximately 14 million shares of the Company's common stock. The terms of
the agreement call for Grey Wolf to merge with and into Drillers, Inc. a
subsidiary of DI Industries, Inc. subject to obtaining regulatory and Grey Wolf
shareholders' approval and certain other conditions. Grey Wolf was founded in
1919 and is a premier Gulf Coast onshore drilling contractor with a high quality
fleet of 18 large drilling rigs currently working in South Louisiana and the
upper Texas Gulf Coast. The number of shares of the Company's common stock to be
issued in the merger is subject to decrease or increase if the average trading
price of the Company's common stock in the ten trading days prior to the merger
is greater than $4.00 or less than $3.00 per share. Additionally, the merger
agreement calls for the decrease of cash consideration and a corresponding
increase in the number of shares issued so that at least 45% of the value of the
merger consideration consists of the Company's common stock. An escrow will be
established for certain post-closing contingencies with $5.0 million of the cash
consideration. Management anticipates the issuance of some form of debt or
possibly equity financing to fund the cash portion of the acquisition price for
Grey Wolf.

      Each of the Company's completed or pending acquisitions have been or will
be accounted for using purchase accounting. As such all revenues and expenses
have been or will be recorded by the Company beginning at the date of
acquisition.

      The Company will require substantial funding to complete the acquisition
of Grey Wolf, complete its rig refurbishment program and continue operations.
The Company does not currently have the borrowing capacity under the Facility
and does not anticipate cash flow from operations will fund its needs. The
Company anticipates making up the shortfall with borrowing under new facilities
or other debt agreements or possibly equity financing.

      The Company's liquidity at any time and the amount of cash available for
operations, and reinvestment is affected by a number of factors including (1)
demand for and utilization of the Company's operating drilling rigs (2) prices
received for daywork, footage and turnkey contracts, (3) the demand for and
refurbishment of rigs out of inventory, and (4) the amount of bank borrowings
and the extent of repayment of existing indebtedness.

      During 1996, the Company made the decision to exit the Argentina and
Mexico markets. The drilling rigs previously operating in Mexico have already
been mobilized back to the United States, at a cost of approximately $1 million,
where they will be refurbished and returned to service. The Company has a signed
letter of intent to sell three of the Argentina drilling rigs and certain other
assets for $1.5 million which resulted in the Company recording a non-cash
impairment of $2.5 million. Additionally, the Company recorded $1.5 million in
estimated costs to withdraw from the Argentina and Mexico markets.

      The Company is still actively reviewing possible expansion and acquisition
opportunities. While the Company has no definitive agreements to acquire
additional equipment, other than as disclosed above, suitable opportunities may
arise in the future. The timing, size or success of any acquisition effort and
the associated potential capital commitments are unpredictable. From time to
time, the Company may have one or more bids outstanding for contracts that could
require significant capital expenditures and mobilization costs. The Company
currently has several bids outstanding in Venezuela that would require the
refurbishment of a merger rig and the mobilization of that rig to Venezuela. The
Company's ability to consummate additional expansion or acquisition transactions
will in part be effected by the Company's ability to fund such transactions.

      The Company has no derivative contracts related to its foreign currency
exposure in the countries that it operates. However, the Company generally
structures its foreign operations and related drilling contracts in such a
manner as to minimize any potential foreign currency exchange restrictions and
any exposure for foreign currency fluctuations. At December 31, 1996, the
Company believes that foreign currency exposure, if any, is not significant. See
further discussion in certain Business Risks - "International Operations and
Risks" within Item 1. Business.

                                     -17-
<PAGE>
      The Company has not paid any cash dividends on the Company's common stock
and does not anticipate paying dividends on the Company's common stock at any
time in the foreseeable future. Furthermore, the Facility prohibits the payment
of dividends without the consent of the participating banks.

RESULTS OF OPERATIONS

      Effective December 31, 1994, the Company changed it's fiscal year end from
March 31 to December 31 to enhance the comparability of the Company's results of
operations with other drilling companies. The following tables highlight rig
days worked, revenues and operating expenses, for the Company's domestic and
foreign operations for the years ended December 31, 1996 and 1995 and the twelve
months ended December 31, 1994 (unaudited).

                             FOR THE YEAR ENDED DECEMBER 31, 1996
 
                            DOMESTIC        FOREIGN
                           OPERATIONS      OPERATIONS       TOTAL
                       ($ in thousands, except average revenue per day)

Rig days worked              7,050          3,694          10,744

Average revenue per day  $   7,446     $    7,924      $    7,610

Drilling revenue         $  52,495     $   29,272      $   81,767
Operating expenses(1)       49,431         30,957          80,388
                         ----------     ----------     ----------

Gross profit (loss)      $   3,064     $   (1,685)     $    1,379
                         =========      ==========      =========

                             FOR THE YEAR ENDED DECEMBER 31, 1995

                            DOMESTIC        FOREIGN
                           OPERATIONS     OPERATIONS       TOTAL

Rig days worked              6,289          5,405         11,694

Average revenue per day  $   7,123      $   8,455      $   7,739

Drilling revenue         $  44,797      $  45,698      $  90,495
Export Sales                  -             4,214          4,214
Operating expenses(1)       40,867         48,277         89,144
Export sales expenses         -             4,681          4,681
                          --------      ---------      ---------

Gross profit (loss)      $   3,930      $  (3,046)    $      884
                         =========      ==========      ========

                       FOR THE TWELVE MONTH PERIOD ENDED DECEMBER 31, 1994

                          DOMESTIC        FOREIGN
                         OPERATIONS     OPERATIONS       TOTAL

Rig days worked              6,246           1,209         7,455

Average revenue per day  $   7,930      $   11,566     $   8,520

Drilling revenue         $  49,530      $   13,983     $  63,513
Export Sales                  -              1,880         1,880
Operating expense(1)        47,722          13,204        60,926
Export Sales expenses         -              2,147         2,147
                          --------       ---------      ---------

Gross profit             $   1,808      $      512     $   2,320
                         =========        ========       =========
---------------

(1)Operating Expense exclude expenses for depreciation and amortization and
general and administrative.

                                  -18-
<PAGE>
COMPARISON OF FISCAL YEAR ENDED DECEMBER 31, 1996 AND 1995

      Contract drilling revenues decreased approximately $12.9 million to $81.8
million for the year ended December 31, 1996 compared to $94.7 million for the
year ended December 31, 1995. This decrease was primarily due to a decrease in
revenue from foreign operations of $20.6 million where rig utilization decreased
by 1,711 days. During 1996 operations were curtailed in the Mexico and Argentina
markets due to a decline in revenue per day and low rig utilization. Revenue
generated in the Mexico and Argentina markets decreased by $17.3 million to
$11.3 million for the year ended December 31, 1996 compared to $28.6 million for
the year ended December 31, 1995. Revenue generated in Venezuela increased
slightly to $18.0 million for the year ended December 31, 1996 compared to $17.1
million for the year ended December 31, 1995. The increase is due entirely to
increases in day rates received as the number of rig days worked actually
decreased by 360 days. The remainder of the decrease in revenue from foreign
operations is due to $4.2 million in non-recurring export sales during the year
ended December 31, 1995. The decrease in revenues from foreign operations was
partially offset by a $7.7 million increase in revenue from domestic operations
to $52.5 million for the year ended December 31, 1996 compared to $44.8 million
for the year ended December 31, 1995. Domestic rig utilization improved by 7% in
1996 and average revenue per day increased by 5% due to an overall improvement
in the domestic contract drilling market.

      Drilling expenses decreased by $13.4 million to $80.4 million for the year
ended December 31, 1996 compared to $93.8 million for the year ended December
31, 1995. The decrease is due to a decrease in foreign drilling expenses of
$22.0 million partially offset by an increase in drilling expenses from domestic
operations of $8.5 million. Drilling expenses from Mexico and Argentina
decreased by $16.0 million to $15.3 million for the year ended December 31,
1996, compared to $31.3 million for the year ended December 31, 1996. This
decrease is due to the lower utilization and ultimate withdrawal from those
markets. Drilling expenses for Mexico and Argentina included $1 million in
mobilization cost to transport the Company's drilling rigs from Mexico to the
United States. Drilling expenses in Venezuela decreased by $1.3 million to $15.7
million for the year ended December 31, 1996 compared to $17.0 million for the
year ended December 31, 1995. Also contributing to the decrease in operating
expenses from foreign operations is $4.7 million in cost related to
non-recurring export sales for the year ended December 31, 1995. Drilling
expenses from domestic operations increased $8.5 million to $49.4 million for
the year ended December 31, 1996 compared to $40.9 million for the year ended
December 31, 1995. This increase is primarily due to increased utilization but
is also partially due to increasing direct labor costs.

      Depreciation expense decreased by less than $200,000 for the year ended
December 31, 1996 compared to 1995. The decrease in depreciation expense is
primarily attributed to the decrease in depreciable asset base resulting from
the $5.3 million impairment provision recorded in the fourth quarter of 1995.
While the RTO/LRAC merger transactions increased the Company's asset base, the
rigs will not be depreciated until they are placed in service. Only one of the
merger rigs was placed in service late in 1996.

      During the year ended December 31, 1996 the Company recorded non-recurring
charges of $6.1 million which included $1.1 million in employment severance
costs, $4.6 million dollars in cost to exit the Argentina and Mexico markets and
$.4 million of other non-recurring charges. The employment severance cost
includes $602,000 in contractual severance pay to be paid over a two year period
to the Company's former President and Chief Executive Officer and the transfer
to him of certain drilling equipment with a net book value of $535,000 in
settlement of a dispute over stock options to purchase Company common stock. As
a result of the Company's desire to redeploy assets to more productive markets
the Company had decided to withdraw from both the Argentina and Mexico markets.
As a result the Company has recorded estimated exit costs of $1.3 million for
Mexico which primarily consists of the forfeiture of a performance bond and
other costs to be incurred to close the office and exit cost of $.8 million for
Argentina which primarily consist of costs expected to be incurred during the
period necessary to exit the market and close the office. In addition, the
Company has tentatively agreed to sell three of the six drilling rigs and
certain other assets located in Argentina for $1.5 million. As a result, the
Company recorded a write down of rig equipment and other assets of $2.5 million.
The remaining Argentina drilling rigs will be mobilized out of Argentina to the
United States or possibly Venezuela where they will be refurbished and returned
to service. Mobilization costs will be expensed as incurred in 1997.

      General and Administrative Expenses increased by $.7 million to $4.3
million for the year ended December 31, 1996 due to increased payroll cost of
new management members and increased staff size, legal fees due to the
resolution of the Charleston Industries lawsuit and other professional fees.

      Interest expense decreased by $252,000 for the year ended December 31,
1996, primarily as a result of lower average outstanding debt levels during 1996
in the United States and lower outstanding levels on an overdraft facility in
Argentina.

                                     -19-
<PAGE>
COMPARISON OF FISCAL YEAR ENDED DECEMBER 31, 1995 TO TWELVE MONTHS ENDED
DECEMBER 31, 1994

      Consolidated revenues increased 44.8% to $94.7 million for the fiscal year
ended December 31, 1995 compared to $65.4 million for the twelve months ended
December 31, 1994. This increase was primarily due to the expansion in South
America, Mexico and Central America. Revenues from the Company's foreign
operations increased by $34.0 million to $49.9 million for the year ended
December 31, 1995 compared to $15.9 million for the twelve months ended December
31, 1994. This increase is due to an increase in rig days from 1,209 during 1994
to 5,405 during 1995, which is partially offset by a decrease in average revenue
per day from $11,566 to $8,455. The increase in rig days is primarily due to the
inclusion of Venezuelan operations for a full twelve months in 1995 compared to
only four months in 1994 as the Venezuelan operating company was acquired
effective September 1, 1994. The addition of four rigs to the Argentina market
and three rigs to the Mexico market also contributed to the increase in rig
days. International export revenues for the year ended December 31, 1995 were
$4.2 million and resulted from materials sold for export to Costa Rica. The
increase in revenue from foreign operations was partially offset by a decrease
in revenue from domestic operations of $4.7 million to $44.8 million for the
year ended December 31, 1995 compared to $49.5 million for the twelve months
ended December 31, 1994. This decrease was due entirely to a decrease in revenue
per day of $807 per day from $7,930 during 1994 compared to $7,123 during 1995.

      Consolidated operating expenses increased 48.8% to $93.8 million for the
year ended December 31, 1995 compared to $63.1 million for the twelve months
ended December 31, 1994. Operating expenses for the Company's foreign operations
increased $37.6 million for the year ended December 31, 1995 compared to the
1994 twelve month period as a result of the expansion of the Argentina drilling
rig fleet and acquisition of the Venezuela operating company discussed above,
and also due to start-up costs on the four rigs added to Argentina and higher
than expected repairs, maintenance and rig move costs experienced on all
Argentina rigs during 1995. International export operating and other expenses
for the year ended December 31, 1995 were $4.7 million, primarily representing
costs of materials sold for export to Costa Rica. U.S. operating expenses
decreased by $6.9 million for the year ended December 31, 1995 as compared to
the twelve months ended December 31, 1994. This decrease in cost from domestic
operations is due to a change in the mix of the Company's rig utilization from
higher cost markets to lower cost markets and a change in the type of work from
a greater percentage of turnkey in 1994 to a greater percentage of day work in
1995.

      In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
effective for years beginning after December 15, 1995. As the FASB encourages
earlier application, the Company adopted the provisions of SFAS No. 121 during
the fourth quarter, 1995. This new accounting standard requires certain assets
to be reviewed for impairment whenever events or circumstances indicate the
carrying amount may not be recoverable. The Company has provided a non-cash
impairment provision of $5.3 million for certain drilling rigs and equipment due
to market indications that the carrying amounts were not fully recoverable. Net
realizable value was determined based upon appraisal, comparable sale data and
management estimates.

      Depreciation and amortization increased 54.8% to $4.8 million for the year
ended December 31, 1995 compared to $3.1 million for the twelve months ended
December 31, 1994. This increase was due to the acquisition of drilling
equipment for foreign operations.

      General and administrative expenses increased to $2.9 million for the year
ended December 31, 1995 compared to $2.4 million for the twelve months ended
December 31, 1994, primarily due to the expanded scope of foreign operations.

      Gain from foreign currency of $888,000 for the year ended December 31,
1995 is the result of currency exchange transactions derived from the Venezuelan
operations.

      Interest expense increased to $1.4 million for the year ended December 31,
1995 compared to $425,000 for the twelve months ended December 31, 1994. The
increase was due to an increase in borrowings for expansion in foreign markets.

      The net loss from discontinued operations was $772,000 for the year ended
December 31, 1995 as compared to net income of $55,000 for the twelve months
ended December 31, 1994. The net loss in 1995 includes a $768,000 non-cash
provision resulting from the disposal of the Company's oil and gas properties in
August 1995.

                                     -20-
<PAGE>
INFLATION AND CHANGING PRICES

      Contract drilling revenues do not necessarily track the changes in general
inflation as they tend to respond to the level of activity on the part of the
oil and gas industry in combination with the supply of equipment and the number
of competing companies. Capital and operating costs are influenced to a larger
extent by specific price changes in the oil and gas industry and to a lesser
extent by changes in general inflation.

FORWARD-LOOKING INFORMATION

      This Annual Report on Form 10-K contains "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. All statements
other than statements of historical facts included in this report including,
without limitation, statements regarding the Company's business strategy, plans,
objectives and beliefs of management for future operations, and the anticipated
closing and methods of financing the merger with Grey Wolf Drilling Company are
forward looking statements. Although the Company believes the expectations and
beliefs reflected in such forward-looking statements are reasonable, it can give
no assurance that such expectations will prove to have been correct. Important
factors that could cause actual results to differ materially from the Company's
expectations ("Cautionary Statements") are discussed in Item 1 "Business" and
Item 7 "Management's Discussion and Analysis of Financial Condition and Results
of Operations".

ACCOUNTING MATTERS

      In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", which is effective for financial statements for fiscal years
beginning after December 15, 1995. The statements defines a fair value based
method of accounting for an employee stock option or similar equity instrument
and encourages all entities to adopt that method of accounting for all of their
employee stock compensation plans. However, it also allows an entity to continue
to measure compensation cost for those plans using the intrinsic value based
method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock
Issued to Employees". The statement requires certain financial statement
disclosures about stock-based employee compensation arrangements regardless of
the method used to account for them. The Company has decided not to adopt this
new fair value- based method of accounting for its stock-based incentive plans,
however, the Company will comply with all disclosure requirements.

                                     -21-
<PAGE>
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                                   INDEX TO
                       CONSOLIDATED FINANCIAL STATEMENTS
                       AND FINANCIAL STATEMENT SCHEDULES

Independent Auditors' Report................................................23

Independent Auditors' Report................................................24

Consolidated Balance Sheets as of December 31, 1996 and 1995................25

Consolidated Statements of Operations for the Years
      Ended December 31, 1996 and 1995, and the Nine Months Ended
      December 31, 1994 ....................................................26

Consolidated Statements of Shareholders' Equity for the
      Years Ended December 31, 1996 and 1995, and the Nine Months Ended
      December 31, 1994.....................................................27

Consolidated Statements of Cash Flows for the Years
      Ended December 31, 1996 and 1995, and the Nine Months Ended
      December 31, 1994.....................................................28

Notes to Consolidated Financial Statements..................................30

Financial Statement Schedule:

       Schedule II - Valuation and Qualifying Accounts......................41

Schedules other than those listed above are omitted because they are either not
applicable or not required or the information required is included in the
consolidated financial statements or notes thereto.

                                     -22-
<PAGE>
INDEPENDENT AUDITORS' REPORT

To the Shareholders and Board of Directors
of DI Industries, Inc.:

      We have audited the accompanying consolidated balance sheet of DI
Industries, Inc. and Subsidiaries as of December 31, 1996, and the related
consolidated statements of operations, changes in shareholders' equity, and cash
flows for the year then ended. In connection with our audit of the consolidated
financial statements, we have also audited the financial statement schedule
for the year ended December 31, 1996. These consolidated financial statements
and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedule based on our audit.

      We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

      In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of DI
Industries, Inc. and Subsidiaries as of December 31, 1996, and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects the information set forth therein.

                                    KPMG Peat Marwick LLP

Houston, Texas
March 14, 1997

                                     -23-
<PAGE>
INDEPENDENT AUDITORS' REPORT

To the Shareholders and Board of Directors
of DI Industries, Inc.:

      We have audited the accompanying consolidated balance sheet of DI
Industries, Inc. and its Subsidiaries (the "Company") as of December 31, 1995
and the related consolidated statements of operations, cash flows and
shareholders' equity for the year ended December 31, 1995 and the nine months
ended December 31, 1994. Our audits also included the financial statement
schedule listed in the Index. These financial statements and the financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.

      We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company at December 31,
1995 and the results of its operations and its cash flows for the year then
ended and the nine months ended December 31, 1994 in conformity with generally
accepted accounting principles. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.

Deloitte & Touche LLP

Houston, Texas
March 28, 1996

                                     -24-
<PAGE>
                     DI INDUSTRIES, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                   (Amounts in thousands,except share data)

                                                            DECEMBER 31,
                                                         1996         1995

                            ASSETS

Current assets:

   Cash and cash equivalents                         $    6,162    $   1,859
   Restricted cash - insurance deposits                   1,000        1,612
   Accounts receivable, net of allowance
     of $1,333 and $1,951, respectively                  15,866       19,423
   Rig inventory and supplies                               936        2,498
   Assets held for sale                                     557        2,398
   Prepaids and other current assets                      3,690        3,806
                                                      ---------    ---------
   Total current assets                                  28,211       31,596
                                                     ----------   ----------

Property and equipment:

   Land, buildings and improvements                       4,312        3,523
   Drilling and well service equipment                   95,059       39,039
   Furniture and fixtures                                 1,088        1,136
   Less: accumulated depreciation and amortization      (11,983)     (17,788)
                                                     -----------  -----------
     Net property and equipment                          88,476       25,910
                                                     ----------   ----------

Other noncurrent assets                                   1,132          277
                                                     ---------     -------

                                                     $  117,819  $    57,783
                                                     ===========  ==========

             LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:

   Current maturities of long-term debt              $      613  $     1,315
   Accounts payable - trade                              11,826       12,529
   Accrued workers' compensation                          1,502        3,357
   Payroll and related employee costs                     3,340        3,172
   Customer advances                                      2,466          116
   Foreign taxes payables                                   845          -
   Other accrued liabilities                              1,424        3,604
                                                      ---------    ---------
     Total current liabilities                           22,016       24,093
                                                     ----------   ----------

Long-term debt net of current maturities                 26,846       11,146
Other long-term liabilities and minority interest         3,547        1,950
Series A preferred stock - mandatory redeemable             764          900

Commitments and contingent liabilities                      -            -

Shareholders' equity:

   Series B Preferred stock, $1 par value; 10,000 shares
     authorized, 4,000 shares subscribed                    -          4,000

   Common stock, $.10 par value; 300,000,000 and 75,000,000
     shares authorized; 125,043,234 and 38,669,378 issued
     and outstanding, respectively                       12,504        3,867

   Additional paid-in capital                            99,301       46,458
   Cumulative translation adjustments                      (404)         -
   Accumulated deficit                                  (46,755)     (34,631)
                                                     -----------  -----------
       Total shareholders' equity                        64,646       19,694
                                                     ----------   ----------

                                                     $  117,819  $    57,783
                                                     ===========  ==========

         SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                     -25-
<PAGE>
                     DI INDUSTRIES, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS
               (Amounts in thousands, except per share amounts)

                                                                    Nine
                                   Year Ended      Year Ended    Months Ended
                                   December 31,   December 31,   December 31,
                                       1996           1995           1994
                                     -------        --------        ------

Revenues:

   Contract drilling              $   81,767      $   94,709     $   50,987

Costs and expenses:

   Drilling operations                80,388          93,825         48,988
   Depreciation and amortization       4,689           4,832          2,377
   General and administrative          4,274           3,555          2,074
   Provision for asset impairment         -            5,290             -
   Non-recurring charges               6,131              -              -
                                    ---------       --------         ------
     Total costs and expenses         95,482         107,502         53,439
                                    ----------  -------------        ------

Operating loss                       (13,715)        (12,793)        (2,452)

Other income (expense):

   Interest income                       505             292            353
   Gain on sale of assets              3,078             466            277
   Interest expense                   (1,220)         (1,472)          (332)
   Minority interest                     475             (56)            17
   Foreign currency gains                 -              888             -
   Other, net                             -               -            (123)
                                    --------        --------      ---------
     Other income (expense), net       2,838             118            192
                                   ---------        --------      ---------

Loss from continuing operations      (10,877)        (12,675)        (2,260)

Discontinued operations:

   Income (loss) from oil and gas
      operations                          -               (4)            51
   Loss from sale of oil and gas
      properties                          -             (768)             -
                                     --------       --------        -------
     Income (loss) from discontinued
      operations                          -             (772)            51
                                     --------        --------     ---------

Loss before income taxes             (10,877)        (13,447)        (2,209)

Income taxes                             845              -              -
                                    --------       ---------         ------

Net loss                             (11,722)        (13,447)        (2,209)

Series B preferred stock subscription

   dividend requirement                (402)               -             -
                                    --------         --------         ------

Net loss applicable to common 
     stock                        $  (12,124)     $   (13,447)    $   (2,209)
                                  ===========      ===========     ==========

Loss per common share from 
     continuing operations        $     (.18)     $      (.33)    $     (.06)
Loss per common share from 
     discontinued operations               -             (.02)            -
Net loss per common share         $     (.18)     $      (.35)    $     (.06)

Weighted average common and common 
     equivalent shares outstanding    67,495           38,669          38,641
                                   ==========       ==========     ==========

         SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                     -26-
<PAGE>
                     DI INDUSTRIES, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

                            (Amounts in thousands)

<TABLE>
<CAPTION>
                              Series B
                              Preferred  Common
                               Stock     Stock     Additional           Cumulative
                              $1 par    $.10 par   Paid-in              Translation
                               VALUE     VALUE     CAPITAL    DEFICIT  ADJUSTMENTS   TOTAL

<S>                           <C>       <C>       <C>         <C>          <C>      <C>     
Balance, March 31, 1994       $  -      $  3,842   $  46,283  $  (18,975)  $  -     $  31,150

   Issuance of Common Stock      -            25         175          -       -           200

   Net loss                      -            -           -       (2,209)     -        (2,209)
                              ------     -------      ------    ---------- ------   ---------

Balance, December 31, 1994       -         3,867      46,458     (21,184)     -        29,141

   Series B Preferred Stock 
     Subscribed                4,000          -           -          -        -         4,000

   Net loss                      -            -           -      (13,447)     -       (13,447)
                              ------     -------     ------    -----------  -----   ----------

Balance, December 31, 1995     4,000       3,867      46,458     (34,631)     -        19,694

   Issuance of shares in Merger
     Transactions                -         7,885      41,673          -       -        49,558

   Issuance of shares in Mesa
     transaction                 -           550       6,985          -       -         7,535

   Issuance of stock in
     Wexford transaction         -           175       3,945          -       -         4,120

   Exercise of stock options     -            27         253          -       -           280

   Redemption of Series A
     Preferred Stock             -            -          (13)         -       -           (13)

   Series B Preferred Stock 
     dividend requirement       402           -            -       (402)      -            -

   Recision of Series B 
     Preferred Stock 
     Subscription            (4,402)          -            -          -       -        (4,402)

   Unrealized translation loss   -            -            -          -    (404)         (404)

   Net loss                      -            -            -    (11,722)     -        (11,722)
                              ------    -------        ------  ----------- -----   ----------

Balance, December 31, 1996  $    -     $ 12,504    $   99,301  $(46,755)  $(404)    $  64,646
                              ======    =========  ========= ======================  =========

</TABLE>
          SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                           -27-
<PAGE>
                     DI INDUSTRIES, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                            (Amounts in thousands)
 
                                                                   Nine Months
                                      Year Ended     Year Ended       Ended
                                      December 31,   December 31,  December 31,

                                          1996           1995          1994
                                        --------       --------       ------
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net loss                            ($11,722)       ($13,447)     ($2,209)
   Adjustments to reconcile net loss 
   to net cash provided by (used in)
   operating activities:
     Depreciation and amortization        4,689           4,832        2,377
     Provision for asset impairment          -            5,290           -
     Non-recurring charges                2,497              -            -
     Gain on sale of assets              (3,078)           (466)        (277)
     Discontinued operations - Loss from
       sale of oil and gas properties        -              768            -
     Provision for doubtful accounts        302             291          122
   (Increase) Decrease in restricted 
     cash                                   612          (1,612)           -
   (Increase) Decrease in accounts and
      notes receivable                    3,255          (3,558)      (5,334)
   (Increase) Decrease in inventory       1,190           1,152       (1,214)
   (Increase) Decrease in assets held 
     for sale                             1,841             118            -
   (Increase) Decrease in other current 
     assets                                 116             274       (2,222)
   Increase (Decrease) in accounts payable (703)          5,289        3,244
   Increase (Decrease) in accrued workers' 
     compensation                        (1,855)            394         (800)
   Increase (Decrease) in customer 
     advances                             2,350          (1,233)         985
   Increase (Decrease) in other current 
     liabilities                         (1,167)          4,288          503
   Increase (Decrease) in  minority 
     interest                             1,047            (131)         (17)
   Increase (Decrease) in other            (813)           (179)       1,799
   (Increase) Decrease in discontinued 
     operations                              -              419        1,134
                                       --------        --------      ------- 
     Cash provided by (used in) operating
     activities                          (1,439)          2,489       (1,909)
                                       --------        --------      ------- 
CASH FLOWS FROM INVESTING ACTIVITIES:
   Property and equipment additions     (38,436)         (5,657)       (9,250)
   Proceeds from sales of equipment       4,917             737           323
   Proceeds from sale of discontinued 
     operations                              -            4,200            -
                                       --------        --------      ------- 
     Cash used in investing activities  (33,519)           (720)       (8,927)
                                       --------        --------      --------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from long-term debt          31,542           2,066        18,703
   Repayments of long-term debt         (16,544)         (5,490)       (8,576)
   Repayments of long-term debt-
     discontinued operations                 -           (2,114)         (321)
   Proceeds from issuance of common 
     stock                               28,678              -              -
   Proceeds from exercise of stock 
     options                                280              -              -
   Redemption of Series A Preferred Stock  (149)             -              -
   Sale (recession) of preferred stock 
     subscriptions                       (4,402)          4,000             -
                                       --------        --------        ------- 
   Cash provided by (used in) financing
      activities                         39,405          (1,538)         9,806
                                       --------        --------        ------- 

EFFECT OF EXCHANGE RATE CHANGES ON CASH    (144)              -             -

NET INCREASE (DECREASE) IN CASH AND 
     CASH EQUIVALENTS                     4,303             231         (1,030)
CASH AND CASH EQUIVALENTS, BEGINNING 
     OF PERIOD                            1,859           1,628          2,658
                                       --------        --------        ------- 
CASH AND CASH EQUIVALENTS, END OF 
     PERIOD                           $   6,162       $   1,859       $  1,628
                                      ==========      ==========      =========

         SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                     -28-
<PAGE>
                     DI INDUSTRIES, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                            (Amounts in thousands)

                                                                 Nine Months
                                    Year Ended     Year Ended       Ended
                                    December 31,  December 31,   December 31,

                                       1996          1995           1994
                                     ---------     ---------       ------

SUPPLEMENTAL CASH FLOW DISCLOSURE

CASH PAID FOR INTEREST:            $    1,220   $    1,472      $    332
                                   ==========    ==========     ========
CASH PAID FOR TAXES:                       -            -             -
                                    =========     =========       ======

NON CASH TRANSACTIONS:

   Issuance of common stock for
     Oliver/Mullen rigs
     Change in property and equipment
          additions                    25,000           -             -
     Change in issuance of common 
          stock                        25,000           -             -

   Issuance of common stock for Mesa rigs
     Change in property and equipment
          additions                     7,783           -             -
     Change in issuance of common 
          stock                         7,535           -             -
     Change in deferred tax liability     248           -             -

   An-Son rig acquisition
     Change in property and equipment
          additions                        -            -         3,800
     Change in acquisition note payable    -            -         1,900
     Change in Series A Preferred Stock    -            -         1,900

   McRae Energy rig acquisition
     Change in property and equipment 
          additions                        -            -         1,300
     Change in notes payable               -            -         1,300

         SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                      -29-
<PAGE>
                      DI INDUSTRIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION. The consolidated
financial statements include the accounts of DI Industries, Inc. and its
majority-owned subsidiaries ("the Company" or "DI"). All significant
intercompany accounts and transactions are eliminated in consolidation.
Accumulated earnings of the minority interest owners are shown as a separate
item in the consolidated financial statements. Prior to June 1994, American
Premier Underwriters, Inc. ("American Premier"), owned 20,690,105 shares
(approximately 54%) of common stock of DI Industries, Inc. In June 1994, Norex
Drilling Ltd. ("Norex Drilling"), a wholly-owned subsidiary of Norex Industries,
Inc. ("Norex Industries"), completed the purchase of all shares of the Company's
common stock owned by American Premier. Shortly thereafter and in accordance
with regulatory filings made at the time of the purchase transaction, Norex
Drilling reduced its ownership to 18,730,105 shares, or less than 50%, of the
outstanding shares of the Company's common stock. As a result of the merger
transactions, effected in 1996 (discussed further in Footnote 2) Norex
Drilling's shares now represent 13.6% of the outstanding ownership of the
Company's common stock and Somerset Drilling Associates owns 29,962,223 shares
or approximately 21.8% of the outstanding ownership of the Company's common
stock.

      Effective December 31, 1994, the Company changed its fiscal year end from
March 31 to December 31 to enhance the comparability of the Company's results of
operations with other drilling companies. Accordingly, the accompanying
financial statements include the results of the Company's operations for the
years ended December 31, 1996 and 1995, and the nine months ended December 31,
1994.

      INVENTORY.  Inventory consists primarily of drilling and support equipment
and is stated at the lower of specifically identified cost or market.

      ASSETS HELD FOR SALE. Assets held for sale are primarily comprised of
drilling rigs and equipment and is stated at the Company's net book value.
Management believes the carrying value is less than net realizable value on the
basis of purchase offers received in 1995 and 1996 and recent appraisals.

      PROPERTY AND EQUIPMENT. Property and equipment is stated at cost.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets between three and twelve years. The Company's
producing oil and gas properties were sold on August 9, 1995. Such properties
were recorded using the full-cost method of accounting. Under this method, all
costs incurred in connection with the exploration for and development of oil and
gas were capitalized. Depreciation, depletion and amortization of oil and gas
properties was computed on the basis of physical units, with oil and gas
converted to a common unit of measure based on the approximate relative energy
content. Unamortized costs were compared to the present value of estimated
future net revenues and any excess was charged to expense during the period in
which the excess occurred.

      In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
effective for years beginning after December 15, 1995. As the FASB encouraged
earlier application, the Company adopted the provisions of SFAS No. 121 during
the fourth quarter of 1995. This accounting standard requires certain assets be
reviewed for impairment whenever events or circumstances indicate the carrying
amount may not be recoverable. During 1995, the Company provided a provision of
$5.3 million for certain drilling rigs and equipment due to market indications
that the carrying amounts were not fully recoverable. Net realizable value was
determined based upon appraisal, comparable sale data and management estimates.

      REVENUE RECOGNITION. Revenue from turnkey drilling contracts is recognized
using the percentage-of-completion method based upon costs incurred to date and
estimated total contract costs. Revenue from daywork, footage and hourly
drilling contracts is recognized based upon the provisions of the contract.
Provision is made currently for anticipated losses, if any, on uncompleted
contracts.

      FOREIGN CURRENCY TRANSLATION. Assets and liabilities of foreign
subsidiaries have been translated into United States dollars at the applicable
rate of exchange in effect at the end of the period reported. Revenues and
expenses have been

                                      -30-
<PAGE>
                      DI INDUSTRIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

translated at the applicable weighted average rates of exchange in effect during
the period reported. Translation adjustments are reflected as a separate
component of stockholders' equity. Any transaction gains and losses are included
in net income. During 1996, the Company recorded an unrealized translation loss
of $404,000 as a reduction of stockholders' equity.

      LOSS PER SHARE. Loss per share of common stock is based upon the weighted
average number of shares of common stock outstanding. The Company's outstanding
stock options and warrants are considered common stock equivalents but are not
included in the computation since their inclusion would be either insignificant
or antidilutive during the periods presented in the accompanying financial
statements.

      INCOME TAXES. The Company accounts for income taxes based upon Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109") which requires recognition of deferred income tax liabilities and assets
for the expected future tax consequences of events that have been recognized in
the Company's financial statements or tax returns. Under this method, deferred
income tax liabilities and assets are determined based on the temporary
differences between the financial statement carrying amounts and the tax bases
of existing assets and liabilities and available tax credit carryforwards.

      FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying amount of the Company's
cash and short-term investments approximates fair value because of the short
maturity of those instruments. The carrying amount of the Company's long-term
debt approximates fair value as the interest is indexed to the prime rate or
LIBOR.

      CASH FLOW INFORMATION. Cash flow statements are prepared using the
indirect method. The Company considers all unrestricted highly liquid
investments with a maturity of three months or less at the time of purchase to
be cash equivalents.

      RESTRICTED CASH. Restricted cash consists of investments in interest
bearing certificates of deposit totaling $1.0 million and $1.6 million at
December 31, 1996 and 1995, respectively as collateral for a letter of credit
securing insurance deposits. The carrying value of the investments approximates
the current market value.

      USE OF ESTIMATES. Management of the Company has made a number of estimates
and assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.

(2)   SIGNIFICANT PROPERTY TRANSACTIONS

      Effective September 1, 1994 as part of the Company's expansion into the
international markets, the Company purchased the Venezuelan drilling operations
of An-Son Drilling Company of Colombia S.A. ("An-Son"). This acquisition
included two oil and gas drilling rigs, two workover rigs, certain other oil
field equipment, operating contracts for each of the rigs and a labor contract
to operate one drilling rig. The purchase price for this transaction was
$4,100,000 consisting of $300,000 in cash, an acquisition note payable of
$1,900,000, of which $1,700,000 was paid during 1995, and the remainder by
issuance during 1995 of the Company's Series A redeemable preferred stock (the
"Series A Preferred") valued at $1,900,000. Pursuant to the Acquisition
Agreement, the Company conducted a post-closing audit of the acquired companies
in 1995 and settled claims for purchase price credit from An-Son in March, 1996
with the Company receiving credits of $1,213,000. During March 1996, 100,000
shares of Series A Preferred, totaling $1,000,000, were returned to the Company
in settlement of asserted claims. At December 31, 1995, $200,000 of the
Acquisition Note that remained unpaid which was offset against the settlement
with the remaining credit of $1,013,000 recorded as reductions in the
appropriate accounts in the accompanying financial statements.

      In September 1994, the Company purchased three drilling rigs from McRae
Energy Corporation for a total purchase price of $1,500,000. The Company paid a
cash down payment of $200,000 with the remaining $1,300,000 to be paid from cash
flow as defined in the purchase agreement. The three rigs were refurbished by
the Company in 1994 with two of the drilling rigs being added to the Company's
drilling fleet in Argentina and one drilling rig being added to the Company's
drilling fleet in Venezuela.

      On May 7, 1996 the Company entered into two separate definitive merger
agreements (the "Mergers") to effect a $25 million equity infusion and the
acquisition of deep drilling equipment. These Mergers were closed on August 29,
1996.

                                      -31-
<PAGE>
                      DI INDUSTRIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      Under the first agreement, R.T. Oliver, Inc. ("RTO") and Land Rig
Acquisition Corporation ("LRAC") merged with a new subsidiary of the Company
with the capital stock of RTO and LRAC being exchanged for 39,423,978 shares of
the Company's common stock. In addition, warrants were issued to acquire up to
1,720,000 additional shares of DI common stock, the exercise of which is
contingent upon the occurrence of certain events. As result of certain events
which occurred prior to year end, at December 31, 1996, 612,000 warrants
remained outstanding, and the remainder have been canceled. These Mergers
resulted in the acquisition of 18 inactive, deep capacity land drilling rigs
which included five 3,000 horsepower and nine 2,000 horsepower land rigs which
are rated for depths of 25,000 feet or greater. The Company believes that these
rigs can be brought up to operating condition within a reasonable time on an
economic basis and that this group of rigs represents a significant
concentration of the relatively small number of such deep drilling land rigs
currently available in the market. The Company placed one of these rigs in
operation during 1996.

      Under the second agreement, a subsidiary of Somerset Drilling Associates,
L.L.C. ("Somerset"), a privately-held investment limited liability company, was
merged into the Company. The stock of the subsidiary was exchanged for
39,423,978 shares of DI common stock and warrants to acquire up to 1,720,000
shares of DI common stock, the exercise of which is contingent upon the
occurrence of certain events. As a result of certain events which occurred prior
to year end, at December 31, 1996, 612,000 warrants remained outstanding, and
the remainder were canceled. This merger transaction resulted in a $25 million
equity infusion into the Company.

      A definitive proxy statement was mailed to shareholders of record as of
July 15, 1996, and the Mergers were approved by the shareholders at a meeting on
August 27, 1996. These Mergers resulted in an ownership change in the Company as
defined by Section 382 of the Internal Revenue Code which limits the ultimate
utilization of the Company's net operating loss carryforward (see footnote 3).

      As part of the Merger agreements, the 1995 subscription by Norex Drilling
for 4,000 shares of Series B Preferred Stock and related Series B Warrants was
rescinded. The $4.0 million subscription plus accrued dividends were repaid to
Norex Drilling by the Company with the proceeds from a term loan that was made
by Norex Drilling to the Company. The Norex Drilling $4.0 million term loan was
paid in full on December 30, 1996 from the proceeds of a private placement of
the Company's common stock (see below). Interest was at 12% and was payable on
the last business day of each calendar quarter.

      On June 24, 1996, the Company closed a transaction whereby it sold all of
the operational assets of Western Oil Well Service Co. ("Western"), a
wholly-owned subsidiary of the Company, for $3.95 million in cash. Western
provided oil and gas well workover services principally in Montana, Utah and
North Dakota. Pursuant to the sale, the buyer assumed all of Western's existing
leases, primarily for vehicles, which totaled $251,000 at closing. The Company
recorded a gain of $2.8 million in the second quarter of 1996 as a result of
this sale.

      On October 3, 1996 the Company acquired all of the South Texas operating
assets of Mesa Drilling, Inc. ("Mesa") in exchange for 5,500,000 shares of the
Company's common stock. The assets acquired consist of six diesel electric SCR
drilling rigs, three of which are currently operating in South Texas. The other
three rigs are currently stacked.

      On December 31, 1996, the Company completed the acquisition of all the
South Texas operating assets of Diamond M Onshore, Inc., a wholly owned
subsidiary of Diamond Offshore Drilling, Inc. The assets were acquired for
approximately $26 million in cash and consist of ten land drilling rigs, all of
which are currently operating, 19 hauling trucks, a yard facility in Alice,
Texas and various other equipment and drill pipe. DI hired the majority of the
personnel operating the assets.

      Also on December 31, 1996, the Company closed a loan facility (the
"Facility") with Bankers Trust Company, ING (US) Capital Corporation and
NordlandsBanken AS which provided the funds to acquire the assets of Diamond M
Onshore, Inc. The Facility provides for an initial $35 million revolving line of
credit which reduces by $5 million each year until the December 31, 1999
maturity date. The Facility is secured by substantially all of the Company's
assets and calls for quarterly interest payments on the outstanding balance at
either LIBOR plus 3% or prime plus 2%. The Facility contains customary
affirmative and negative covenants.

      In connection with closing the Facility, DI also completed a private
placement of 1,750,000 shares of DI common stock for approximately $4,120,000 to
four funds managed by Wexford Management LLC. The proceeds generated from this
private placement were utilized to repay a $4,000,000 Norex Drilling term note.
DI also agreed to issue more shares to the

                                      -32-
<PAGE>
                      DI INDUSTRIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

extent the Wexford funds hold value less than $4,120,000 on the one-year
anniversary date of the issuance. Immediate shelf registration rights were also
granted by DI in connection with the share issuance. These shares were
subsequently registered.

      Each of the Company's acquisitions have been accounted for using purchase
accounting. As such all revenues and expenses have been recorded by the Company
beginning at the date of acquisition.

(3)   INCOME TAXES

      The Company and its domestic subsidiaries file a consolidated U.S. federal
income tax return. The Company's foreign owned subsidiaries file tax returns in
the country where they are domiciled. The Company records current income taxes
based upon its estimated tax liability in the United States and foreign
countries for the year. In 1996, the Company recorded $845,000 of current tax
expense based its estimate of taxes payable in Venezuela.

      The Company follows Statement of Financial Accounting Standard No. 109
("SFAS No. 109") which requires the balance sheet approach of income tax
accounting whereby deferred income taxes are provided at the balance sheet date
for the (a) differences existing in the tax basis of assets and liabilities and
their financial statement carrying amounts plus (b) operating loss and tax
credit carryforwards.

      At December 31, 1996, the Company had U.S. net operating loss ("NOL")
carryforwards of approximately $23.0 million and investment tax credit (ITC)
carryforwards of approximately $2.4 million which expire at various times
through 2010 and 2000, respectively. The NOL and ITC carryforwards are subject
to annual limitations because of the changes in ownership of the Company in
1989, 1994 and 1996.

      For financial accounting purposes, approximately $21.0 million of the NOL
carryforwards was utilized to offset the book versus tax basis differential in
the recording of the assets acquired in the Mergers and the Mesa acquisition.

      Deferred tax liabilities of approximately $5.5 million exist at December
31, 1996 and are comprised of temporary differences between federal income tax
and financial accounting practices for the Company's property and equipment.
Deferred tax benefits of $3.7 million exist at December 31, 1996, attributable
to costs that were expended for financial reporting purposes that will be
deducted in future years for income tax purposes. These items are comprised of
workmans compensation and bad debt reserves as well as the current year net
operating loss. These items are augmented by the $2.4 million of investment tax
credit carryforwards. A net deferred tax benefit of $.6 million was not
recognized in 1996 as a valuation allowance was provided against it, as the
recognition criteria set forth in SFAS No. 109 for a deferred tax asset, had not
been met. At December 31, 1995, deferred tax assets and deferred tax liabilities
were $14.6 million and $5.3 million respectively and were primarily attributable
to the same items noted above.

      In the Company's Venezuelan subsidiary, no temporary differences exist as
of December 31, 1996. In the Company's other foreign subsidiaries, the Company's
net operating loss carryforwards and other timing differences will not be
recoverable since the Company is exiting these markets.

      The following summarizes the differences between the statutory tax rates
applicable in each year and the Company's effective tax rate (amounts in
thousands):

                                                                   Nine
                                 Year Ended    Year Ended      Months Ended
                                 December 31,  December 31,     December 31,
                                    1996         1995              1994
                                 ---------     ---------         -------

Tax at statutory rate           $    (3,986)  $   (4,572)      $    (751)

Increase (decrease) in taxes 
     resulting from:
     Change in valuation allowance    1,169        4,572             751
     Loss of foreign deductions       3,662           -               -
                                 ----------    ---------         -------
Provision for income taxes       $     845    $       -        $      -
                                 =========     =========         =======

                                    -33-
<PAGE>
                      DI INDUSTRIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(4) LONG-TERM DEBT

    Long-Term debt consists of the following (amounts in thousands):
                                                        DECEMBER 31,
                                                       1996       1995

$35,000 reducing revolving line of credit between 
    the Company and Bankers Trust Company, ING(US)
    Capital Corporation and NordlandBanken AS, secured
    by substantially all of the Company's assets;
    bearing interest at either LIBOR plus 3% or prime
    plus 2% due quarterly                            $ 25,000    $ -

$10,000 term loan agreement between the Company and 
    NordlandsBanken AS, secured by most of the 
    Company's U.S. domestic oil and gas drilling 
    equipment; bearing interest at prime plus 21/8% 
    (fixed at 8% through June 12, 1996), with 36 equal
    monthly principal installments beginning June 12,
    1995 (Amended October 1, 1995, bearing interest
    at LIBOR plus 21/8% with 36 equal monthly
    installments beginning January 1997). The Company
    had the option to pay interest quarterly and/or 
    semi-annually.                                        -         9,444

Note to McRae Energy Corporation, payable from
    available cash flow, as defined, matures
    September 1998                                      1,300       1,300

$2,500 revolving line of credit, which converted to 
    a term loan in 1995, with a bank, secured by
    the Company's accounts receivable, bearing 
    interest at the bank's prime rate plus 1% 
    (9.75% at December 31, 1995)                          -           575

Capital leases, secured by transportation and other 
    equipment, bearing interest at 10% to 14%             858         733

Insurance premium financed over 12 months with 
    certain insurance agencies due in equal monthly
    installments                                          264         270

Promissory note payable secured by trust deed to
    certain land and building, bearing interest at
    4%, due in monthly installments                        -           47

Promissory note payable secured by trust deed to 
    certain land and building, bearing interest at
    9.75%, due in equal monthly installments through
    September 1, 1997                                      37          92
                                                    ---------    --------  
                                                       27,459      12,461

Less current maturities                                   613       1,315
                                                    ---------    --------
Long-term debt                                      $  26,846   $  11,146
                                                    =========   =========

DISCONTINUED OPERATIONS:

$3,000 term note with a bank, secured by all the 
    Company's oil and gas producing properties,
    bearing interest at the bank's prime rate plus 
    1.25% (10% at December 31, 1995) payable in
    monthly installments equal to 75% of the net
    proceeds from production subject to minimum 
    semi-annual payments through March 10, 1997. 
    This loan was paid in full during 1995          $      -    $   2,114
                                                    --------    --------- 
                                    
                                      -34-
<PAGE>
                      DI INDUSTRIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      On December 31, 1996, the Company closed a $35 million reducing revolving
line of credit with Bankers Trust Company, ING (US) Capital Corporation and
NordlandsBanken AS. The Facility reduces by $5.0 million each year until the
December 31, 1999 maturity date. The facility is secured by substantially all
the Company's assets and calls for quarterly interest payments on the
outstanding balance at either LIBOR plus 3% or prime plus 2% (8.625% at December
31, 1996). The Facility also contains customary affirmative and negative
covenants with which the Company was in compliance.

      In connection with entering into the new Facility, the $10.0 million term
loan agreement between the Company and NordlandsBanken was paid in full out of
existing working capital on December 31, 1996.

      On August 28, 1996, the Company entered into a $4 million term loan with
Norex Drilling. The term loan was due on August 29, 1997 and bore interest at
12%. The loan was paid in full from the proceeds of a private placement of the
Company's common stock on December 31, 1996.

      The revolving $2,500,000 bank line of credit was converted to a term loan
in 1995 with the balance of $575,000 at December 31, 1995 being paid in monthly
installments through June 1996. The weighted average outstanding balance for the
year ended December 31, 1995 was $867,000 bearing weighted average interest of
10%.

      During 1995, the Company issued 190,000 shares, out of 200,000 authorized,
of Series A Preferred stock valued at $1,900,000. The Series A Preferred is
redeemable in cash at a redemption price payable from available cumulative
Venezuelan positive net cash flows, as defined, commencing the first fiscal
quarter following the original issuance date. The Company may redeem, at any
time, the Series A Preferred upon consent of the holders or upon written notice
commencing five years from the original issuance date. At the election of the
Company, dividends may be declared and payable in common stock equivalent to the
value of the dividends. Each Series A Preferred holder of record has no voting
right on any matters voted on by stockholders of the Company. As referred to in
Note 2, during March 1996, 100,000 shares of Series A Preferred, totaling
$1,000,000, were returned to the Company in settlement of asserted claims
against An-Son. At December 31, 1995, the balance of the Series A Preferred had
been adjusted to reflect this settlement. During 1996, the Company voluntarily
redeemed 13,500 shares of Series A Preferred leaving 76,500 shares outstanding
at December 31, 1996.

      Annual maturities of the debt outstanding at December 31, 1996 are as
follows: 1997 - $613,000; 1998 - $1,583,000; 1999 - $25,202,000; 2000 - $60,000;
and 2001 - $1,000.

(5)   CAPITAL STOCK AND STOCK OPTION PLANS

      During the fourth quarter of 1995, Norex Drilling subscribed to and paid
$4,000,000 for a new Company issue of Series B Preferred Stock (the "Series B
Preferred"), to be issued subsequent to December 31, 1995. This subscription was
in the form of 4,000 shares (10,000 authorized) of Series B 15% Senior
Cumulative Redeemable Preferred, par value $1. This stock had annual dividends
of 15% per annum, payable through the issuance of additional preferred shares
for the first three years. On August 28, 1996 $4,000,000 subscription plus
accrued dividends was repaid to Norex Drilling by the Company with the proceeds
from a term loan that was made by Norex Drilling to the Company.

      The Company's 1982 Stock Option and Long-Term Incentive Plan for Key
Employees (the "1982 Plan") reserves 2,500,000 shares of the Company's common
stock for issuance upon the exercise of options. At December 31, 1996 options to
purchase 1,871,800 shares of common stock were available for grant under the
1982 Plan. The Company's 1987 Stock Option Plan for Non-Employee Directors (the
"1987 Director Plan") reserves 250,000 shares of common stock for issuance upon
the exercise of options and provides for the automatic grant of options to
purchase shares of common stock to any non-employee who becomes a director of
the Company. At December 31, 1996, options under the 1987 Director Plan to
purchase 212,800 shares of common stock were available for grant until June 30,
1997. The Company's 1996 Employee Stock Option Plan (the "1996 Plan") reserves
7,000,000 shares of the Company's common stock for issuance upon the exercise of
options. At December 31, 1996 options under the 1996 Plan to purchase 5,205,000
shares of common stock were available for grant until July 29, 2006. The
exercise price of stock options under the 1982 Plan, the 1987 Director Plan and
the 1996 Plan approximates the fair market value of the stock at the time the
option is granted. The Company has 2,410,000 shares reserved for other Incentive
Stock Option Agreements between the Company and its' executive officers and
directors. Two million of the shares are reserved for the Company's President,
50,000 are reserved for the Company's Chief Financial Officer and the remaining
shares are reserved for non-employee directors. Options become exercisable in
varying increments over four- to

                                      -35-
<PAGE>
                      DI INDUSTRIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

five-year periods and the majority of the options expire on the tenth
anniversary of the inception of the plans. Stock option activity for all plans
was as follows (number of shares in thousands):

                                   Number                   Option

                                  OF SHARES                 PRICE RANGE

Outstanding March 31, 1994:           2,035             $ 0.88- $ 2.38

   Granted                             103              $ 0.88- $ 0.94
   Exercised                            (2)             $ 0.88
   Canceled                           (148)             $ 0.88- $ 1.63

Outstanding December 31, 1994:        1,988             $ 0.88- $ 2.38

   Granted                              253             $ 0.69- $ 0.88
   Canceled                            (267)            $ 0.94- $ 2.38

Outstanding December 31, 1995:        1,974             $ 0.69- $ 1.63

   Granted                               50             $ 0.69- $ 1.00
                                      3,700             $ 1.13- $ 1.75
                                        475             $ 2.56- $ 2.88
   Exercised                           (232)            $ 0.69- $ 1.00
                                        (44)            $ 1.25- $ 1.75
   Canceled                          (1,282)            $ 0.69- $ 1.00
                                       (132)            $ 1.25- $ 1.75

Outstanding December 31, 1996:          276             $ 0.69- $ 1.00
                                      3,758             $ 1.13- $ 1.63
                                        475             $ 2.56- $ 2.88

Exercisable at December 31,1996:        809             $ 0.69- $ 1.75

       At December 31, 1996, the Company has three stock-based compensation
plans, which were described above. The Company applies APB Opinion 25 and
related interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized. Had compensation cost for the Company's
three stock-based compensation plans been determined on the fair value at the
grant dates for awards under those plans consistent with the method of Statement
of Financial Accounting Standards No. 123, the Company's net income and earnings
per share would have been reduced to the pro forma amounts indicated below
(amounts in thousands, except per share amounts):

                                           1996           1995
                                         ---------      ------
    Net loss

       As reported                       $   (12,124)   $   (13,447)
       Pro forma                         $   (13,723)   $   (13,447)

    Earnings per share

       As reported                       $      (.18)   $    (.35)
       Pro forma                         $      (.20)   $    (.35)

      For purposes of determining compensation costs using the provisions of
SFAS #123, the fair value of option grants were determined using the
Black-Scholes option-valuation model. The key input variables used in valuing
the options were: risk-free interest rate based on the five year Treasury strips
of 7.8%; dividend yield of zero; stock price volatility of 60%; expected option
lives of five years.

                                      -36-
<PAGE>
                      DI INDUSTRIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(6)   GEOGRAPHIC AREA INFORMATION

      The following table sets forth the Company's operations based on the
geographic areas in which it operates (amounts in thousands).

                                                                 Nine Months
                                  Year Ended     Year Ended      Year Ended
                                  December 31,  December 31,     December 31,
                                    1996            1995             1994
                                   --------       --------          ------

     Revenues:

       Domestic                   $   52,495   $   44,797      $   40,515
       Mexico                          3,504       12,617           1,706
       South America                  25,768       37,295           8,766
                                  ----------   ----------       ---------
                                  $   81,767   $   94,709      $   50,987
                                  ==========   ==========      ==========

     Loss from continuing operations:

       Domestic                   $   (4,002)  $   (4,093)     $   (2,095)
       Mexico                         (3,818)         238             (77)
       South America                  (5,895)      (8,938)           (280)
                                  ----------   ----------       ---------
                                  $  (13,715)  $  (12,793)     $   (2,452)
                                  ==========   ==========      ==========

     Identifiable assets:

       Domestic                   $   103,608  $   39,069      $   47,524
       Mexico                           1,500       4,008           3,470
       South America                   12,711      14,706          11,866
                                   ----------   ---------      ----------
                                  $   117,819  $   57,783      $   62,860
                                  ===========  ==========      ==========

      During the years ended December 31, 1996 and 1995 and the nine months
ended December 31, 1994, no customer accounted for more than 10% of the
Company's consolidated revenues.

(7)   RELATED-PARTY TRANSACTIONS

      Prior to June 2, 1994, certain of the Company's insurance coverage,
including workers' compensation and excess liability coverage, was arranged by
American Premier as part of a program which American Premier provided to its
subsidiaries. Subsequent to the sale of the Company's common shares by American
Premier, the Company obtained workers' compensation, excess liability coverage
and certain other insurance from other sources. The Company and American Premier
entered into an agreement pursuant to which the Company agreed to reimburse
American Premier for all amounts advanced by American Premier from time to time
on behalf of the Company in connection with American Premier's administration of
the Company's workers' compensation and certain other insurance programs for the
periods between July 20, 1989 and the closing of the common stock transaction.
The amount reimbursable to American Premier at December 31, 1995 relating to
this program was $1,900,000. All amounts outstanding under the program were paid
in full during 1996.

      During the year ended March 31,1994, Thermal Drilling, Inc. ("Thermal"),
the minority interest owner of the Company's majority-owned subsidiary,
DI/Perfensa Inc. ("DI/Perfensa"), borrowed and repaid with interest certain sums
from DI/Perfensa. At December 31, 1996 and 1995, $60,000 was due to DI/Perfensa
from the President of Thermal.

      As part of the Merger agreements, the 1995 subscription by Norex Drilling
for 4,000 shares of Series B preferred Stock and related Series B Warrants was
rescinded. The $4,000,000 subscription plus accrued dividends was repaid to
Norex Drilling by the Company with the proceeds from a term loan that was made
by Norex Drilling to the Company. Interest was at 12% and was payable on the
last business day of each calendar quarter. The note payable was paid in full
December 31,1996 using the proceeds from a private placement of the Company's
common stock.

                                      -37-
<PAGE>
                      DI INDUSTRIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      On June 10, 1996, Norex Drilling advanced $1,000,000 to the Company
pursuant to a Promissory Note (the "Note") and Commercial Security Agreement.
The Note provided for interest at 12% per annum, and matured on the Closing Date
of the Merger transactions. The Company's domestic accounts receivable were
pledged under the security agreement. The Company repaid this loan, plus accrued
interest, in early July 1996 with the proceeds from the sale of the assets
discussed in footnote 2.

      A consulting fee of $10,000 per month has been paid by the Company under a
consulting arrangement with the Company's Chairman of the Board.

      One of the Company's directors is a partner in a law firm that performed
legal services for the Company. During 1996 the Company paid the firm $200,000.

(8)   LEASE COMMITMENTS

      The Company leases certain office space under noncancellable lease
agreements accounted for as operating leases. At December 31, 1996, lease
commitments under noncancellable operating leases with an initial term of more
than one year are $96,000 for the year ended December 31, 1996. Rental expense
under operating leases was $109,000 and $101,000 for the years ended December
31, 1996 and 1995, and $77,000 for the nine months ended December 31, 1994. The
Company's future lease commitments are approximately $264,000 per year through
2002.

      Capital leases for the Company's field trucks and automobiles are included
in long-term debt.

(9)   CONTINGENCIES

      The Company was proceeding against Charlestown Industries, Inc. (a 50%
"Partner"), who was a co-defendant, along with the Company, in the joint venture
to recover their respective portion ($1,800,000) of the OFS 1987, Mid-Year et.
al. v DI Exploration lawsuit. In 1994, a judgment was rendered in favor of the
Company against the Partner in the state of Oklahoma. The Partner, subsequent to
the judgement, filed for protection under the US Bankruptcy Act and the
Company's claim was ruled on by the bankruptcy court in October of 1996. The
bankruptcy court ruled against the Company. The Company has determined not to
pursue other appeals. Since the future recovery of the amount and term of
recovery was uncertain no amount had been recorded by the Company.

      The Company is involved in litigation incidental to the conduct of its
business, none of which management believes is, individually or in the
aggregate, material to the Company's consolidated financial condition or results
of operations.

      Substantially all of the Company's contract drilling activities are
conducted with independent oil and gas companies in the United States or with
national utility or national petroleum companies in Mexico, Central America and
South America. Historically, the Company has not required collateral or other
security for the related receivables from such customers. However, the Company
has required certain customers to deposit funds in escrow prior to the
commencement of drilling. Actions typically taken by the Company in the event of
nonpayment include filing a lien on the customer's producing properties and
filing suit against the customer.

(10)  EMPLOYEE BENEFIT PLAN

      The Company has a defined contribution employee benefit plan covering
substantially all of its employees. The Company matches individual employee
contributions up to 2% of the employee's compensation. Employer matching
contributions under the plan totaled $104,000 and $144,000 for the years ended
December 31, 1996 and 1995, and $55,000 for the nine months ended December 31,
1994. Employer matching contributions vest over a five year period. Effective
January 1, 1997, the Company increased the matching provisions to include
matching 100% of the first 3% of individual employee contributions and 50% of
the next 3% of individual employee contributions. Other provisions of plans were
also amended.

                                      -38-
<PAGE>
                      DI INDUSTRIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(11)  NON-RECURRING CHARGES

      During the year ended December 31, 1996, the Company recorded
non-recurring charges of $6.1 million which included $1.1 million in employment
severance costs, $4.6 million in cost to exit the Argentina and Mexico markets
and $.4 million of other non-recurring charges. The employment severance cost
includes $602,000 in contractual severance pay to be paid over a two year period
to the Company's former President and Chief Executive Officer and the transfer
to him of certain drilling equipment with a net book value of $535,000 in
settlement of a dispute over stock options to purchase the Company's common
stock. As a result of the Company's desire to redeploy assets to more profitable
markets, the Company decided to withdraw from both the Argentina and Mexico
markets. As a result, the Company has recorded estimated exit costs of $1.3
million for Mexico which primarily consists of the forfeiture of a performance
bond and other costs to be incurred to close the office and exit the market and
exit costs of $.8 million for Argentina which primarily consists of costs
expected to be incurred during the period necessary to close the office and exit
the market. In addition, the Company has tentatively agreed to sell three of the
six drilling rigs and certain other assets located in Argentina for $1.5
million. As a result, the Company recorded a write down of rig equipment and
other assets of $2.5 million. The remaining Argentina rigs will be mobilized to
the United States or possibly Venezuela where they will be refurbished and
returned to service. Mobilization costs will be expensed as they are incurred
during 1997.

(12)  SUBSEQUENT EVENTS

      On January 31, 1997, the Company acquired the operating assets of Flournoy
Drilling Company for 12,426,000 shares of DI common stock and $800,000 in cash.
The assets acquired include 13 drilling rigs, 17 rig hauling trucks, a yard and
office facility in Alice, Texas and various other equipment and drill pipe. With
respect to one-half of the shares to be issued in the transaction, DI agreed to
issue additional shares if the shareholders of Flournoy hold value less than $2
per share one year from closing.

      The December 31, 1996 consolidated balance sheet includes the effect of
the Mergers, the Diamond M acquisition, the Mesa acquisition, the private
placement and the new credit facility. The unaudited proforma balance sheet
assumes the Flournoy acquisition and related common stock issuance occurred on
December 31, 1996. The rigs acquired in the Mergers had no historical operations
as they were stacked while owned by RTO and LRAC. The following unaudited
consolidated proforma results of operations assume the Mergers, the Diamond M
acquisition, the Mesa acquisition, the Flournoy acquisition, the private
placement and the new credit facility had occurred at January 1, 1996 and do not
purport to be indicative of what would have occurred had the transactions
occurred at those dates or of results which may occur in the future. The
unaudited proforma results of operations shown below include the operations of
Diamond M and Flournoy and additional expenses for storing the rigs acquired in
the Mergers (in thousands, except per share amounts):

                                              As of
                                        DECEMBER 31, 1996

Working capital                           $      5,995
Total assets                                   158,322
Shareholders' equity                            95,712

                                          For the year ended
                                          DECEMBER 31, 1996

Total revenue                             $     148,779
Net income (loss)applicable to common stock     (13,006)
Net income (loss) per share                        (.09)

      On March 10, 1997, the Company entered into an agreement to acquire by
merger Grey Wolf Drilling Company ("Grey Wolf") for up to $61.6 million in cash
and approximately 14.0 million shares of the Company's common stock. The number
of shares to be issued in the merger is subject to decrease or increase if the
average trading price of DI's common stock ten days prior to the merger is
greater than $4.00 or less than $3.00 per share. Additionally, the merger
agreement calls for the decrease of the cash consideration and a corresponding
increase in the number of shares issued so that at least 45% of the value of the
merger consideration consists of the Company's common stock. An escrow will be
established for certain post-

                                      -39-
<PAGE>
closing contingencies with $5 million of the cash consideration. The Merger is
subject to obtaining regulatory and Grey Wolf shareholder's approval and certain
other conditions. The Company expects this merger to close by the end of the
second quarter of 1997.

(13)  QUARTERLY FINANCIAL DATA (UNAUDITED)

      Summarized quarterly financial data for years ended December 31, 1996 and
1995, and the nine months ended December 31, 1994 are set forth below (amounts
in thousands, except per share amounts).

                                      QUARTER ENDED
                               March     June      September     December
                               1996      1996         1996         1996

Revenues                   $  20,102   $  19,183   $  22,031   $  20,451
Gross profit (loss) (1)        1,166        (199)      3,144      (2,732)
Operating loss                (1,253)     (2,398)      1,108     (11,172)
Loss-continuing operations    (1,491)        524         808     (10,718)
Discontinued operations           -           -           -           - 
Net loss                      (1,491)        524         808     (11,563)
Net loss per common share       (.04)        .01         .01        (.09)

                                                    QUARTER ENDED
                               March       June     September   December
                               1995        1995        1995       1995

Revenues                   $  22,344   $  23,151   $ 27,106   $ 22,108
Gross profit(1)                 (180)      1,075        448       (459)
Operating loss                (1,946)       (814)    (1,565)    (8,468)
Loss-continuing operations    (2,219)     (1,122)    (1,234)    (8,100)
Discontinued operations          (11)       (543)      (116)      (102)
Net loss                      (2,230)     (1,665)    (1,350)    (8,202)
Net loss per common share       (.06)       (.04)      (.03)      (.22)


                                   QUARTER ENDED
                                June   September  December
                                1994     1994     1994

Revenues                    $ 14,331  $17,215   $19,441
Gross profit (1)                  29      545     1,425
Operating income (loss)       (1,292)    (837)     (323)
Income (loss)-continuing 
     operations                 (935)    (872)     (453)
Discontinued operations           14       49       (12)
Net income (loss)               (921)    (823)     (465)
Net loss per common share       (.03)    (.02)     (.01)

(1) Gross Profit is computed as consolidated revenues less operating expenses
    (which excludes expenses for Depreciation and Amortization, General and
    Administrative and Non-Recurring Charges).

                                      -40-
<PAGE>                             
                                                           SCHEDULE II

                      DI INDUSTRIES, INC. AND SUBSIDIARIES

                        VALUATION AND QUALIFYING ACCOUNTS
                                 (In thousands)

                                   Balance at  Additions  Collections Balance at
                                    Beginning  Charged to    and        End
                                    OF PERIOD   ALLOWANCE  WRITE-OFFS OF PERIOD

Nine Months Ended December 31, 1994:
    Allowance for doubtful accounts
      receivable                     $  2,171   $  122    $   (227)  $  2,066
                                    =========     ======    =========  ========
Year Ended December 31, 1995:
    Allowance for doubtful accounts
      receivable                     $  2,066   $  291    $  (406)   $  1,951
                                 =============  =======   ========    =======

Year Ended December 31, 1996:
    Allowance for doubtful accounts 
      receivable                     $  1,951   $  302    $  (920)   $  1,333
                                  =============  ========  ========  ========

                                      -41-
<PAGE>
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
       DISCLOSURE

    Deloitte & Touche LLP was previously the principal accountants for DI
Industries, Inc. On October 2, 1996, that firm's appointment as principal
accountants was terminated and KPMG Peat Marwick LLP was engaged as principal
accountants. The decision to change accountants was approved by the Board of
Directors upon recommendation of the Audit Committee of the Board of Directors.

    In connection with the audits of the two fiscal years ended December 31,
1995, and the subsequent interim period through June 30, 1996, there were no
disagreements with Deloitte & Touche LLP on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedures,
which disagreements if not resolved to their satisfaction would have caused them
to make reference in connection with their opinion to the subject matter of the
disagreement.

    The audit reports of Deloitte & Touche LLP on the consolidated financial
statements of DI Industries, Inc. and subsidiaries as of and for the years ended
December 31, 1995 and 1994, did not contain any adverse opinion or disclaimer of
opinion, nor were they qualified or modified as to uncertainty, audit scope, or
accounting principles.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

    The information required by this item as to the directors and executive
officers of the Company is hereby incorporated by reference to such information
appearing under the captions "Election of Directors" and "Executive Officers" in
the Company's definitive proxy statement for the Company's 1997 Annual Meeting
of shareholders and is to be filed with the Securities and Exchange Commission
("Commission") pursuant to the Securities Exchange Act of 1934 within 120 days
of the end of the Company's fiscal year on December 31, 1996.

ITEM 11.  EXECUTIVE COMPENSATION

    The information required by this item as to the management of the Company is
hereby incorporated by reference to such information appearing under the caption
"Executive Compensation" in the Company's definitive proxy statement for the
Company's 1997 Annual Meeting of shareholders and is to be filed with the
Commission pursuant to the Securities Exchange Act of 1934 within 120 days of
the end of the Company's fiscal year on December 31, 1996.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

    The information required by this item as to the ownership by management and
others of securities of the Company is hereby incorporated by reference to such
information appearing under the caption "Nominees for Director" and "Certain
Shareholders" in the Company's definitive proxy statement for the Company's 1997
Annual Meeting of shareholders and to be filed with the Commission pursuant to
the Securities Exchange Act of 1934 within 120 days of the end of the Company's
fiscal year on December 31, 1996.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

    The information required by this item as to certain business relationships
and transactions with management and other related parties of the Company is
hereby incorporated by reference to such information appearing under the caption
"Certain Transactions" in the Company's definitive proxy statement for the
Company's 1997 Annual Meeting of shareholders and is to filed with the
Commission pursuant to the Securities Exchange Act of 1934 within 120 days of
the end of the Company's fiscal year on December 31, 1996.

                                      -42-
<PAGE>
                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

    (a)The following documents are filed as part of this report:

       1. AND 2. FINANCIAL STATEMENTS AND SCHEDULE.

       The consolidated financial statements and supplemental schedule of DI
       Industries, Inc. and Subsidiaries are included in Part II, Item 8 and are
       listed in the Index to Consolidated Financial Statements and Financial
       Statement Schedule therein.

       3.EXHIBITS

<TABLE>
<CAPTION>
         EXHIBIT NO.                  DOCUMENTS
         -----------                  ---------
<S>                   <C>        
         2.1          --Agreement and Plan of Merger dated May 7, 1996, among DI Industries, Inc. DI Merger
                        Sub, Inc., Roy T. Oliver, Inc. And Land Rig Acquisition Corp. (Incorporated herein by
                        reference to Exhibit 2.1 to Registration Statement No. 333-6077).
         2.1.1        --Amendment to Agreement and Plan of Merger dated May 7, 1996, among DI Industries,
                        Inc., DI Merger Sub, Inc., Roy T. Oliver, Jr., Mike L. Mullen, R.T. Oliver, Inc. and Land
                        Rig Acquisition Corp. (Incorporated herein by reference to Exhibit 2.1.1 to Registration
                        Statement No. 333-6077).
         2.1.2        --Second Amendment and Plan of Merger dated July 26, 1996, among DI Industries, Inc., DI
                        Merger Sub, Inc., Roy T. Oliver, Jr., Mike L. Mullen, R.T. Oliver, Inc. and Land Rig
                        Acquisition Corp. (Incorporated herein by reference to Exhibit 2.1.2 to Amendment No. 1
                        to Registration Statement No. 333-6077).
         2.2          --Agreement and Plan of Merger dated May 7, 1996, among DI Industries, Inc. and Somerset
                        Investment Corp. (Incorporated herein by reference to Exhibit 2.2 to Registration Statement
                        No. 333-6077).
         2.2.1        --Amendment to Agreement and Plan of Merger dated May 7, 1996, among DI industries, Inc.
                        and Somerset Investment Corp. (Incorporated herein by reference to Exhibit 2.2.1 to
                        Registration Statement No. 333-6077).
         2.2.2        --Second Amendment to Agreement an Plan of Merger dated July 26, 1996, among DI
                        Industries, Inc. and Somerset Investment Corp. (Incorporated herein by reference to Exhibit
                        2.2.2 to Amendment No. 1 to Registration Statement No. 333-6077).
         2.3          --Asset Purchase Agreement dated October 3, 1996, by and
                        between the Company and Meritus, Inc., a Texas
                        corporation, Mesa Rig 4 L.L.C., a Texas limited
                        liability company, Mesa Venture, a Texas general
                        partnership and Mesa Drilling, Inc., a Texas corporation
                        (Incorporated by reference to Exhibit 2.1 to
                        Registration no. 333-14783).
         2.4.1        --Asset Purchase Agreement dated November 12, 1996, between Diamond M Onshore, Inc.
                        and Drillers, Inc. (the Asset purchase Agreement") (Incorporated herein by reference to
                        Exhibit 2.1 to Form 8-K dated December 30, 1996).
         2.4.2        --Letter Agreement dated December 31, 1996, between
                        Diamond M Onshore and Drillers, Inc. amending the Asset
                        Purchase Agreement (Incorporated herein by reference to
                        Exhibit 2.2 to Form 8-K dated December 30, 1996).
         2.5          --Asset Purchase Agreement dated December 31, 1996, between Flournoy Drilling Company
                        and Drillers, Inc. (Incorporated herein by reference to Exhibit 2.1 to Form 8-K filed January
                        31, 1997).
         2.6          --Agreement and Plan of Merger dated March 7, 1997, by
                        and among DI Industries, Inc., Drillers Inc., and Grey
                        Wolf Drilling Company including form of Escrow
                        Agreement, form of Trust Under Grey Wolf Drilling
                        Company Deferred Corporation Plan, and form of Grey Wolf
                        Drilling Company Deferred Compensation Plan.
                        (Incorporated herein by reference to Exhibit 10.1 to
                        Form 8-K filed March 10, 1997).
         2.7          --Voting and Support Agreement dated March 7, 1997, of Sheldon B. Lubar. (Incorporated
                        herein by reference to Exhibit 10.2 to Form 8-K dated March 10, 1997).
         2.8          --Voting and Support Agreement dated March 7, 1997, of Felicity Ventures, Ltd.
                        (Incorporated herein by reference to Exhibit 10.3 to Form 8-K dated March 10, 1997).

                                      -43-
<PAGE>
         2.9          --Voting and Support Agreement dated March 7, 1997, of James K.B. Nelson. (Incorporated
                        herein by reference to Exhibit 10.4 to Form 8-K dated March 10, 1997).
         2.10         --Indemnification Agreement dated as of March 6, 1997, by and between Grey Wolf Drilling
                        Company and James K.B. Nelson. (Incorporated herein by reference to Exhibit 10.5 to Form
                        8-K dated March 10, 1997).
         2.11         --Indemnification Agreement dated as of March 6, 1997, by and between Grey Wolf Drilling
                        Company and Billy G. Emanis. (Incorporated herein by reference to Exhibit 10.6 to Form 8-
                        K dated March 10, 1997).
         2.12         --Indemnification Agreement dated as of March 6, 1997,
                        by and between Grey Wolf Drilling Company and Bill
                        Brannon. (Incorporated herein by reference to Exhibit
                        10.7 to Form 8-K dated March 10, 1997).
         2.13         --Indemnification Agreement dated as of March 6, 1997, by and between Grey Wolf Drilling
                        Company and Tom L. Ferguson. (Incorporated herein by reference to Exhibit 10.8 to
                        Form 8-K dated March 10, 1997).
         2.14         --Indemnification Agreement dated as of March 6, 1997, by and between Grey Wolf Drilling
                        Company and John D. Peterson. (Incorporated herein by reference to Exhibit 10.9 to
                        Form 8-K dated March 10, 1997).
         2.15         --Indemnification Agreement dated as of March 6, 1997, by and between Grey Wolf Drilling
                        Company and Janet V. Campbell. (Incorporated herein by reference to Exhibit 10.10 to
                        Form 8-K dated March 10, 1997).
         2.16         --Indemnification Agreement dated as of March 6, 1997, by and between Grey Wolf Drilling
                        Company and Sheldon B. Lubar. (Incorporated herein by reference to Exhibit 10.11 to Form
                        8-K dated March 10, 1997).
         2.17         --Indemnification Agreement dated as of March 6, 1997, by and between Grey Wolf Drilling
                        Company and Robert P. Probst. (Incorporated herein by reference to Exhibit 10.12 to
                        Form 8-K dated March 10, 1997).
         2.18         --Indemnification Agreement dated as of March 6, 1997, by and between Grey Wolf Drilling
                        Company and Uriel E. Dutton. (Incorporated herein by reference to Exhibit 10.13 to
                        Form 8-K dated March 10, 1997).
         3.1          --Articles of Incorporation of DI Industries, Inc., as amended.
         3.2          --By-Laws of DI Industries, Inc., as amended.
         3.3          --Statement of Resolutions Establishing the Series A Convertible Redeemable Preferred
                        Stock.
         10.1         --Shareholders' Agreement dated May 7, 1996, among Somerset Drilling Associates, L.L.C.,
                        Roy T. Oliver, Jr., U.S. Rig and Equipment, Inc., Mike Mullen Energy Equipment Resource,
                        Inc., GCT Investments, Inc., Mike L. Mullen, Norex Drilling Ltd., and Pronor Holdings, Ltd.
                        (Incorporated herein by reference to Exhibit 10.9 to Registration Statement No. 333-6077).
         10.1.1       --Amendment to Shareholders' Agreement dated May 7, 1996, among Somerset Drilling
                        Associates, L.L.C., Somerset Capital Partners, Roy T. Oliver, Jr., U.S. Rig and Equipment,
                        Inc., Mike Mullen Energy Equipment Resource, Inc., GCT Investments, Inc., Mike L.
                        Mullen, Norex Drilling Ltd., and Pronor Holdings, Ltd. (Incorporated herein by reference
                        to Exhibit 10.9.1 to Registration Statement No. 333-6077).
         10.2         --Form of Shadow Warrant to be issued to the shareholders of Somerset Investment
                        Corporation. (Incorporated herein by reference to Exhibit 10.10 to Registration Statement
                        No. 333-6077).
         10.3         --Form of Shadow Warrant to be issued to the shareholders of R.T. Oliver, Inc. And Land Rig
                        Acquisition Corporation (Incorporated herein by reference to Exhibit 10.11 to Registration
                        Statement No. 333-6077).
         10.4         --Registration Rights Agreement dated May 7, 1996, among Somerset Drilling Associates,
                        L.L.C., Roy T. Oliver, Jr., U.S. Rig and Equipment, Inc., Mike Mullen Energy Equipment
                        Resource, Inc., GCT Investments, Inc., Norex Drilling Ltd., and Pronor Holdings, Ltd.
                        (Incorporated herein by reference to Exhibit 10.12 to Registration Statement No. 333-6077)
         10.4.1       --Amendment to Registration Rights Agreement dated May 7, 1996, among Somerset Drilling
                        Associates, L.L.C., Somerset Capital Partners, Roy T. Oliver, Jr., U.S. Rig and Equipment,
                        Inc., Mike Mullen Energy Equipment Resource, Inc., GCT Investments, Inc., Norex Drilling
                        Ltd., and Pronor Holdings, Ltd. (Incorporated herein by reference to Exhibit 10.12.1 to
                        Registration Statement No. 333-6077).

                                      -44-
<PAGE>
         10.4.2       --Second Amendment to Registration Rights Agreement dated July 26, 1996, among Somerset
                        Drilling Associates, L.L.C., Somerset Capital partners, Roy T. Oliver, Jr., U.S. Rig and
                        Equipment, Inc., Mike Mullen Energy Equipment Resource, Inc., GCT Investments, Inc.,
                        Norex Drilling Ltd., and Pronor Holdings, Ltd. (Incorporated herein by reference to Exhibit
                        10.4.2 to Amendment No. 1 to Registration Statement No. 333-6077).
         10.5         --Investment Monitoring Agreement dated May 7, 1996, among DI Industries, Inc., Somerset
                        Capital Partners and Somerset Drilling Associates, L.L.C. (Incorporated herein by reference
                        to Exhibit 10.13 to Registration Statement No. 333-6077).
         10.6         --Form of Non-Competition Agreement to be executed among DI Industries, Inc., Roy T.
                        Oliver, Jr., U.S. Rig and Equipment, Inc., Mike L. Mullen and mike Mullen Energy
                        Equipment Resource, Inc. (Incorporated herein by reference to Exhibit 10.14 to Registration
                        Statement No. 333-6077).
         10.7         --Employment Agreement dated September 3, 1996, by and between the Company and
                        Thomas P. Richards (incorporated herein by reference to Exhibit 10.1 to Registration
                        Statement No. 333-14783).
         10.8         --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 No. 333-14783).
         10.9         --Letter Agreement dated April 2, 1996, by and between the Company and T. Scott O'Keefe,
                        regarding consulting arrangement and stock options. (Incorporated herein by reference to
                        Exhibit 10.9 to Post Effective Amendment No. 1 to Registration Statement No. 333-14783).
         10.10        --Letter Agreement dated August 31, 1996, by and between the Company and T. Scott
                        O'Keefe, regarding employment and stock options. (Incorporated herein by reference to
                        Exhibit 10.10 to Post Effective Amendment No. 1 to Registration Statement No. 333-
                        14783).
         10.11        --Employment Agreement dated September 17, 1996, by and between the Company and
                        Forrest M. Conley, Jr. (Incorporated herein by reference to Exhibit 10.11 to Post Effective
                        Amendment No. 1 to Registration Statement No. 333-14783).
         10.12        --Incentive Stock Option Agreement dated September 17, 1996, by and between the Company
                        and Forrest M. Conley, Jr. (Incorporated herein by reference to Exhibit 10.12 to Post
                        Effective Amendment No. 1 to Registration Statement No. 333-14783).
         10.13        --Employment Agreement dated September 3, 1996, by and between the Company and
                        Ronnie E. McBride. (Incorporated herein by reference to Exhibit 10.13 to Post Effective
                        Amendment No. 1 to Registration Statement No. 333-14783).
         10.14        --Incentive Stock Option Agreement dated September 3, 1996, by and between the Company
                        and Ronnie E. McBride. (Incorporated herein by reference to Exhibit 10.14 to Post Effective
                        Amendment No. 1 to Registration Statement No. 333-14783).
         10.15        --Non-Qualified Stock Option Agreement dated September 3, 1996, by and between the
                        Company and Ronnie E. McBride. (Incorporated herein by reference to Exhibit 10.15 to
                        Post Effective Amendment No. 1 to Registration Statement No. 333-14783).
         10.16        --Employment Agreement dated October 1, 1996, by and between the Company and Terrell
                        L. Sadler. (Incorporated herein by reference to Exhibit 10.16 to Post Effective Amendment
                        No. 1 to Registration Statement No. 333-14783).
         10.17        --Non-Qualified Stock Option Agreement dated October 1, 1996, by and between the
                        Company and Terrell L. Sadler. (Incorporated herein by reference to Exhibit 10.17 to Post
                        Effective Amendment No. 1 to Registration Statement No. 333-14783).
         10.18        --Incentive Stock Option Agreement dated October 1, 1996, by and between the Company and
                        Terrell L. Sadler. (Incorporated herein by reference to Exhibit 10.17 to Post Effective
                        Amendment No. 1 to Registration Statement No. 333-14783).
         10.19        --DI Industries, Inc.  1996 Employee Stock Option Plan. (Incorporated herein by reference
                        to DI Industries, Inc. 1996 Annual Meeting of Shareholders definitive proxy materials
         10.20        --Stock Purchase Agreement dated as of December 28,
                        1996, between DI Industries, and Wexford Special
                        Situations 1996, L.P., Wexford-Euris Special Situations
                        1996, L.P., Wexford Special Situations 1996
                        Institutional, L.P. and Wexford Special Situations 1996
                        Limited (Incorporated herein by reference to Exhibit
                        10.1 to Form 8-K dated December 30, 1996).

                                      -45-
<PAGE>
         10.21        --Senior Secured Reducing Revolving Credit Agreement dated as of December 31, 1996,
                        among DI Industries, Inc. and Drillers, Inc. (as borrowers), DI International, Inc. (as
                        guarantor), Bankers Trust Company (as agent and  administrative agent), ING (US) Capital
                        Corporation (as co-agent) and Nordlandsbanken AS (as lender). (Incorporated herein by
                        reference to Exhibit 99.1 to Form 8-K dated December 30, 1996).
         10.22        --Asset Purchase Agreement dated December 31, 1996, by
                        and between Flournoy Drilling Company and Drillers, Inc.
                        (Incorporated herein by reference to Exhibit 2.1 to Form
                        8-K dated January 31, 1996).
         10.23        --Form of Shareholder Agreement entered into January 31, 1997, by DI Industries, Inc.,
                        Drillers, Inc., and Lucien Flournoy, Maxine E. Flournoy, Betty Louise Flournoy Fields,
                        Helen Ruth Flournoy Pope, Mary Anne Flournoy Guthrie, F.C. West, Gregory M. Guthrie,
                        Byron W. Fields, John B. Pope, the Flournoy First, Second and Third Fields Grandchild
                        Trusts, the Flournoy First, Second and Third Pope Grandchild Trusts, and the Flournoy First,
                        Second, Third, Fourth and Fifth Guthrie Grandchild Trusts. (Incorporated herein by
                        reference to Exhibit 10.22 to Amendment No. 2 to Registration Statement No. 333-20423).
         10.27        --Drillers Inc. 1982 Stock Option and Long-Term Incentive Plan for Key Employees.
                        (Incorporated by reference to Drillers Inc. 1982 Annual Meeting definitive proxy solicitation
                        materials.)
         10.28        --Drillers Inc. Stock Option Plan for Non-Employee Directors.  (Incorporated by reference
                        to  Drillers Inc. 1982 Annual Meeting definitive proxy solicitation materials.)
         10.29        --DI Industries, Inc. 1987 Stock Option Plan for Non-Employee Directors.  (Incorporated by
                        reference to  DI Industries, Inc. 1987 Annual Meeting definitive proxy solicitation
                        materials.)
         *10.30       --Non-Qualified Stock Option Agreement dated December 16, 1996, by and between the
                        Company and Forrest M. Conley, Jr.
         *10.31       --Employment Agreement dated March 17, 1997, by and between the Company and Gary
                        D. Lee.
         *10.32       --Incentive Stock Option Agreement dated March 17, 1997, by and between the Company
                        and Gary D. Lee.
         *11.1        --Statement regarding computation of per share earnings.
          16.1        --Change in Certifying Accountant. (Incorporated by reference to Exhibit 16.1 to 8-K filed
                        on October 2, 1996.)
         *21.1        --List of Subsidiaries of DI Industries, Inc.
         *24.1        --Consent of KPMG Peat Marwick LLP
         *24.2        --Consent of Deloitte & Touche LLP
         *27.         --Financial Data Schedule
</TABLE>
------
* Filed herewith.

    (b)Reports on Form 8-K

      A current report on form 8-K was filed with the Securities and Exchange
Commission on December 30, 1996 announcing the Company's acquisition of the
South Texas operating assets of Diamond M Onshore, Inc. and the Company's new
$35.0 million loan facility dated December 31, 1996, with Bankers Trust Company,
ING (US) Capital Corporation and NordlandsBanken AS (Item 2). Also, announced
was the Company's private placement of 1.75 million shares of the Company's
common stock and the signing of a definitive asset purchase agreement to acquire
the operating assets of Flournoy Drilling Company (Item 5). The current report
set forth Diamond M Onshore, Inc.'s statement of net assets of certain
properties as of September 30, 1996 (Unaudited) and December 31, 1995 and of
Revenues and Certain Expenses of Certain Properties for the nine months ended
September 30, 1996 (Unaudited) and the year ended December 31, 1995 (Item 7). A
current report on Form 8-K (Item 2) was filed with the Securities and Exchange
Commission on January 31, 1997. This Current Report reported the acquisition of
the operating assets of Flournoy Drilling Company and the election of Mr. Lucien
Flournoy, the founder of Flournoy Drilling Company to the Company's Board of
Directors. A current report on Form 8-K (Item 5) was filed with the Securities
and Exchange Commission on March 10, 1997 announcing the signing of an agreement
to acquire by merger Grey Wolf Drilling Company.

                                      -46-
<PAGE>
                                    SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, this twenty-eighth
(24th) day of March, 1997.

                                    DI Industries, Inc.

                                    By:  /S/ THOMAS  P. RICHARDS
                                             Thomas P. Richards, President and 
                                             Chief Executive Officer

    Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

SIGNATURES AND CAPACITIES                                            DATE

    By:  /S/ THOMAS P. RICHARDS                                  March 24, 1997
        ----------------------------------------------------
        Thomas P. Richards, President and  Chief Executive 
        Officer (Principal Executive Officer)

    By:  /S/ T. SCOTT O'KEEFE                                    March 24, 1997
        ---------------------------------------------------- 
         T. Scott O'Keefe, Senior Vice President and Chief 
         Financial Officer

    By: /S/ DAVID W. WEHLMANN                                    March 24, 1997
        ----------------------------------------------------
        David W. Wehlmann, Vice President and Controller

    By:  /S/  IVAR SIEM                                          March 24, 1997
        ----------------------------------------------------
        Ivar Siem, Chairman of the Board and Director

    By: /S/ ROY T. OLIVER                                        March 24, 1997
        ----------------------------------------------------
        Roy T. Oliver, Director

    By:  /S/ STEVEN A. WEBSTER                                   March 24, 1997
        ----------------------------------------------------
        Steven A. Webster, Director

    By:  /S/ WILLIAM R. ZIEGLER                                  March 24, 1997
        ----------------------------------------------------
        William R. Ziegler, Director

    By: /S/ PETER M. HOLT                                        March 24, 1997
        ----------------------------------------------------
        Peter M. Holt, Director

                                      -47-