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                                  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, 1998

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

                          Commission file number 1-8226

                                [GREY WOLF LOGO]

                                 GREY WOLF, 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
RIGHTS TO PURCHASE JUNIOR PARTICIPATING          AMERICAN STOCK EXCHANGE
   PREFERRED STOCK, PAR VALUE $1.00

        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. [X]

         At March 15, 1999, 165,065,391 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 15, 1999 of $1.125) was approximately $133 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 1999 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, 1998, are
incorporated by reference into Part III hereof.

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                                     PART I

ITEM 1. BUSINESS

GENERAL

         Grey Wolf, Inc. is a leading provider of contract land drilling
services in the United States with a domestic fleet of 120 rigs at March 1,
1999. In addition to its domestic operations, the Company maintains a fleet of
five rigs in Venezuela, giving the Company a total of 125 rigs, 113 of which are
marketable. Of the 113 marketable rigs, 52 are cold stacked (49 domestically and
3 in Venezuela) as of March 1, 1999. A cold stacked rig is one which is not
currently being marketed, has no personnel assigned to it and has virtually no
ongoing direct costs. Each cold stacked rig can however, be reactivated in a
very short period of time, with little cost other than the cost of mobilization
provided that no equipment has been removed from the rig during the cold stacked
period. The Company has an inventory of 12 non- marketed rigs that are being
held for refurbishment as demand for the Company's services warrants.

         The Company is a Texas corporation formed in 1980. Beginning in
mid-1996, the Company implemented a new strategy whereby it elected a
substantially new board of directors, installed new senior management and
completed several acquisitions, mergers and financing transactions that
significantly improved its liquidity and added drilling rigs to its existing
fleet. Since the first quarter of 1998, however, demand for the Company's
drilling services in the markets served by the Company has been deteriorating.
This resulted in a $0.03 per share loss in the third quarter of 1998, increasing
to a loss (before unusual charges) of $0.06 per share during the fourth quarter
of 1998. In addition, the Company recorded unusual charges of $0.43 per share in
the fourth quarter of 1998. The adverse land drilling market conditions and
related one time charge to earnings produced a loss of $0.50 per share for the
entire year.

         Pretax unusual charges of $94.9 million ($71.0 million after tax or 
$0.43 per share), consisted of a $93.2 million asset impairment, $0.5 million 
in severance costs, and $1.2 million in write-downs associated with 
international operations. The non-cash asset impairment charge of $93.2 million 
was a result of the application of Statement of Financial Accounting Standards 
No. 121 (SFAS 121), which requires that long-lived assets and certain 
identifiable intangibles held and used by the Company be reviewed for 
impairment whenever events or changes in circumstances indicate that the 
carrying amount of an asset may not be recoverable. The severity as well as the 
duration of the current oil and gas industry downturn is such an event. The 
Company's review of its long-lived assets indicated that the carrying value of 
certain of the Company's foreign and domestic drilling rigs was more than the 
estimated undiscounted future net cash flows. As such, under SFAS No. 121 the 
Company wrote-down those assets to their estimated fair market value. 
Undiscounted future net cash flows were calculated on a rig by rig basis using 
projected future utilization and dayrates over the estimated useful lives of 
the rigs. Fair market value was based on an appraisal performed by an 
independent appraiser, retained by the lenders, in connection with the 
Company's new bank credit facility. The effect of this write-down is an after 
tax charge of $69.8 million or $0.42 per share in 1998 and a reduction of 
approximately $6.0 million per year in depreciation expense in future years. 
The impairment was recorded based on certain estimates and projections 
stipulated in SFAS No. 121.

         The Company's performance continues to suffer from lower rig
utilization and dayrates in the first quarter of 1999. The Company currently
estimates that it will experience a loss of approximately $0.07 - $0.08 per
share in the first quarter of 1999.

         As used herein, the term "Company" refers to Grey Wolf, Inc. and its
subsidiaries, unless the context otherwise indicates. Prior to September 19,
1997, the Company's corporate name was DI Industries, Inc. The Company's
principal office is located at 10370 Richmond Avenue, Suite 600, Houston, TX
77042, and its telephone number is (713) 435-6100.

INDUSTRY OVERVIEW

         Since the first quarter of 1998, the land drilling industry as a whole
has experienced a dramatic downturn due to falling oil and gas commodity prices.
The price of West Texas Intermediate crude dropped from $17.64 per barrel at
December 31, 1997 to $12.05 per barrel at December 31, 1998. The price of
natural gas, delivered at Henry Hub, dropped from $2.264 to $1.945 per mmbtu for
the same period. The Company's customers, the exploration and production ("E&P")
companies, are faced with lower revenues and cash flows due to these lower
commodity prices. As such, the E&P companies have reduced their capital spending
programs, and have not been drilling their reserves. The land rig count as
reported by industry sources has dropped approximately 50% from approximately
850 rigs at December 31, 1997 to approximately 420 rigs at March 1, 1999.

         The Company believes that during the period from January 1, 1996
through March 1, 1999, there have been at least 48 completed or pending
transactions involving the acquisition of a combined total of approximately 590
rigs, the majority of which were acquired by six land rig companies including
the Company. The Company accounted for 13 of these transactions which involved
its acquisition of 100 rigs, of which 67 were actively marketed at the time of
acquisition and 33 were inventoried for later refurbishment. Despite the
downturn in the land drilling industry the industry continues to consolidate.

         Industry sources estimate that the supply of domestic land drilling
rigs available for work in the U.S. has declined from over 5,000 rigs in 1982 to
1,400 rigs currently. Although the Company has experienced a marked decrease in
demand for its land drilling rigs, this decreased demand is consistent with
overall drilling industry conditions. We believe that as oil and gas commodity
prices move toward their December 31, 1997 levels providing our customers with
higher cash flows, that the demand for land drilling rigs will also improve and
the Company's utilization and dayrates will increase.


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SIGNIFICANT ACQUISITIONS AND SALES

         The Company has completed a series of transactions since August 1996
that have significantly increased the size of its rig fleet, refocused its
operations, established its market position with the largest or second largest
rig fleet in its domestic markets and positioned the Company to benefit from
eventual increases in demand in the land drilling industry. The most significant
transactions were:

         Murco Acquisition. In January 1998, the Company acquired all of the
outstanding common stock of Murco Drilling Corporation ("Murco") for $60.8
million in cash. At closing, Murco had net liabilities of approximately $4.5
million. The Company funded this stock purchase through the use of working
capital and $30 million of borrowings under its bank credit facility. Murco
operated ten land drilling rigs in the Ark-La-Tex and Mississippi/Alabama
regions. The rigs acquired consisted of two 1,500 horsepower Silicon Controlled
Rectifier ("SCR") rigs, one 1,000 horsepower SCR rig, one 800 horsepower SCR rig
and six mechanical rigs with horsepower ratings from 650 to 1,500.

         Justiss Acquisition. In late October and early November 1997, the
Company acquired substantially all of the operating assets of Justiss Drilling
Company ("Justiss"), a division of Justiss Oil Company, Inc. for $36.1 million
in cash. The assets included a fleet of 12 operating rigs and related equipment.
Two of the rigs acquired have been taken out of service and used for spare
parts.

         Kaiser-Francis Rig Purchase. In August 1997, the Company acquired six
drilling rigs and related drilling equipment from Cactus Drilling Company, a
division of Kaiser-Francis Oil Company, for a cash purchase price of $25.4
million (the "Kaiser-Francis Rig Purchase").

         GWDC Acquisition. In June 1997, the Company acquired Grey Wolf Drilling
Company ("GWDC") which owned a fleet of 18 operating drilling rigs and related
assets located in the Company's Gulf Coast market. The consideration for the
GWDC Acquisition consisted of $61.6 million in cash and 14.0 million shares of
common stock valued by the Company at $47.6 million under the purchase method of
accounting. The GWDC Acquisition established the Company's presence in its Gulf
Coast market.

         Flournoy Acquisition. In January 1997, the Company acquired the
operating assets of Flournoy Drilling Company, which included 13 operating
drilling rigs and other assets located in the Company's South Texas market, in
exchange for 12.4 million shares of the Company's Common stock and $800,000 in
cash (the "Flournoy Acquisition"). As a result of the Flournoy Acquisition, the
Company believes it is currently the largest land drilling contractor in its
South Texas market.

         Diamond M Acquisition. In December 1996, the Company acquired the
assets of Diamond M Onshore, Inc. for $26.0 million in cash. The assets
consisted of ten operating land drilling rigs and other related assets located
in South Texas.

         Mesa Rig Purchase. In October 1996, the Company acquired six diesel
electric SCR rigs, three of which were operating, from Mesa Drilling, Inc.
("Mesa") in exchange for 5.5 million shares of Common stock. The Mesa
acquisition established the Company's presence in South Texas.

         RTO/LRAC Acquisition. In August 1996, the Company acquired 18 land
drilling rigs in exchange for 39.4 million shares of Common stock. These 18 rigs
provided the Company with a supply of additional rigs suitable for refurbishment
and reactivation.

         Sale of INDRILLERS, L.L.C. In November 1997, the Company closed the
sale of its 65% interest in INDRILLERS, LLC ("Indrillers") and certain related
drilling assets to Dart Energy Corporation ("Dart") in exchange for $1.65
million in cash and title to a 1,200 horsepower SCR rig previously held by
Indrillers. Indrillers, a limited liability company, operated drilling rigs in
Michigan and was formed in 1996 through the combination of certain drilling
assets of the Company and Dart with resulting ownership of 65% and 35%,
respectively. Indrillers' rig fleet consisted of nine smaller mechanical rigs
ranging from 300 to 900 horsepower and one 1,200 horsepower SCR rig.

         Sale of Eastern Division Assets. In February 1998, the Company signed a
definitive agreement to sell all of the rigs and drilling related equipment of
the Company's Eastern Division located in Ohio to Union Drilling, Inc. for $2.4
million. The sale closed in steps as each of the rigs completed its current
drilling contract with the last transaction being completed in March 1998. The
Eastern division's rig fleet consisted of six 450 horsepower mechanical rigs.

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DOMESTIC OPERATIONS

         At March 1, 1999, the Company had a total domestic rig fleet of 120
rigs: 59 marketed, 49 cold stacked and 12 held in inventory for future
refurbishment and reactivation. The Company conducts its domestic operations
primarily in its four core domestic drilling markets, the Ark-La-Tex,
Mississippi/Alabama, South Texas and Gulf Coast markets. The Company believes
that approximately 90% of the wells it drilled during 1998 were principally
targeted by its customers for production of natural gas and the balance for
crude oil. The Ark-La-Tex and Mississippi/Alabama markets are served by the
Ark-La-Tex Division, while the South Texas and Gulf Coast market areas are each
served by a separate operating division of the Company. The Company believes it
currently has the leading market position in its Gulf Coast market and the
second leading position in its South Texas, Ark-La-Tex and Mississippi/Alabama
markets.

         Ark-La-Tex Division. The Ark-La-Tex Division provides drilling services
primarily in Northeast Texas, Northern Louisiana, Southern Arkansas, Mississippi
and Alabama. The Ark-La-Tex Division rig fleet consists of 15 actively marketed
rigs and 22 cold stacked rigs. The majority of the drilling in the Ark-La-Tex
market is directed to three of the five principal target geologic formations in
the region, generally located at depths ranging from 8,900 to 13,000 feet. For
these target formations, 450 to 1,000 horsepower mechanical rigs are typically
utilized in the Ark-La- Tex market. Twenty-four of the divisions's rigs are
suited for drilling to these depths, 19 of which are mechanical, and five are
SCR rigs. The other two principal geologic targets in the market, the Austin
Chalk and Pinnacle Reef formations, are located at substantially greater depths,
typically from 15,500 to 22,000 feet. The Company has 13 marketable rigs
suitable for these target depths. Three of these deep drilling rigs are 1,500
horsepower mechanical rigs capable of drilling to 20,000 feet, two are diesel
electric 1,500 and 2,000 horsepower rigs capable of drilling to depths ranging
from 20,000 to 25,000 feet and eight are diesel electric SCR rigs ranging from
1,200 to 3,000 horsepower and capable of drilling from 17,000 to 30,000 feet.

         During 1998, approximately 76% of the division's revenues were
generated from daywork contracts, and 24% from turnkey and footage contracts.
The average revenue per rig day worked by the division during 1998 was $8,181
and its average rig utilization rate for 1998 was 55%.

         South Texas Division. The South Texas Division fleet consists of 24
actively marketed rigs and 13 cold stacked rigs. Sixteen of the division's total
fleet are trailer mounted rigs with rated depth capacities ranging from 9,500 to
14,000 feet, 13 diesel electric SCR rigs with rated depth capacities from 12,000
to 25,000 feet and eight conventional mechanical rigs with rated depth
capacities ranging from 10,000 to 14,000 feet. The Company believes that trailer
mounted rigs and 1,500 to 2,000 horsepower diesel electric SCR rigs are in
highest demand in this market. Trailer mounted rigs are relatively more mobile
than conventional rigs, thus decreasing the time and expense to the customer of
moving the rig to and from the drillsite. Under ordinary conditions, the
Company's trailer mounted rigs are capable of drilling an average of two 10,000
foot wells per month. The Company believes it operates the largest trailer
mounted rig fleet in this market. The South Texas Division also operates a fleet
of 35 trucks, which are used exclusively to move the Company's rigs.

         During 1998, approximately 77% of the division's revenues were
generated from daywork contracts, and 23% from turnkey and footage contracts.
The average revenue per rig day worked by the division during 1998 was $9,271
and its average rig utilization rate for 1998 was 75%.

         Gulf Coast Division. The Gulf Coast Division's drilling services are
provided to operators in Southern Louisiana and along the Texas Gulf Coast. The
Gulf Coast Division's rig fleet consists of 20 actively marketed rigs and 14
cold stacked rigs, including ten 1,500 to 2,000 horsepower diesel electric rigs
with rated depth capacities of 20,000 to 25,000 feet, fourteen 1,000 to 4,000
horsepower diesel electric SCR rigs with rated depth capacities of 15,000 to
40,000 feet and ten mechanical rigs with rated depth capacities of 10,000 to
20,000 feet.

         During 1998, approximately 81% of the division's revenues were
generated from daywork contracts, and 19% from turnkey and footage contracts.
Average revenue per rig day worked by the division during 1998 was $10,100, and
its average rig utilization rate for 1998 was 63%.

FOREIGN OPERATIONS

         During 1998 and 1997, the Company's foreign operations were in the
Venezuelan market having withdrawn from both the Argentine and Mexican markets
during 1996.

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         The Venezuela Division maintains three mechanical land drilling rigs
with rated depths of 10,000 to 11,000 feet and two mechanical workover rigs, of
which two drilling rigs are under contract and the remainder are cold stacked.
The downturn in the industry has, however, also had a negative impact on the
international markets, including Venezuela. As such, after the completion of
current contracts in March 1999, operations in Venezuela along with all other
international efforts will be suspended. As market conditions improve,
international opportunities will again be explored.

         Foreign operations contributed approximately 4 %, 3%, and 36% of the
Company's operating revenues for the years ended December 31, 1998, 1997 and
1996, respectively. Foreign operations accounted for 10% and 71%, respectively,
of the Company's total losses from operations for 1998 and 1996, and reduced
operating income by 9% in 1997. During 1998 and 1997, the Company's foreign
operations were conducted in Venezuela. In 1996, the Company also had operations
in Mexico and Argentina.

RIG INVENTORY AND REFURBISHMENTS

         As of March 1, 1999, the Company has an inventory of 12 rigs, or
approximately 10% of its rig fleet, which are suitable for refurbishment and
reactivation to meet future demand. The Company considers "inventory rigs" to be
rigs that are not working, are not actively marketed and that require
significant additional capital expenditures to return them to service.

         From the fourth quarter of 1996 through mid-1998, the Company completed
the refurbishment of 29 rigs at an aggregate cost of approximately $74.0
million. Of these 29 recently refurbished rigs, 23 are diesel electric SCR rigs
ranging from 1,000 to 4,000 horsepower with depth ratings of 15,000 to 40,000
feet, one rig is a 1,500 horsepower mechanical rig with a depth rating of 20,000
feet, and the remaining five rigs are mechanical rigs ranging from 750 to 1,000
horsepower with rated depth capacities of 9,500 to 15,000 feet.

         As a result of the recent decline in demand for land drilling services,
the Company has delayed any further refurbishment of its 12 remaining inventory
rigs until such time as management believes that demand for drilling services in
the Company's core domestic markets or international opportunities again
justifies resumption of the Company's refurbishment program. Under current
market conditions, the Company may utilize certain component parts from its
inventory rigs in order to conserve cash flow. While the Company spent
approximately $2.6 million per rig for the refurbishments completed to date, the
cost and actual number of rig refurbishments completed by the Company in the
future, however, will depend on many factors, including management's assessment
of existing and anticipated demand and dayrates, the Company's success in
bidding for domestic and international contracts, timing of the refurbishment
and possible future acquisitions of rigs.

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. Contract terms offered by the Company are generally dependent on the
complexity and risk of operations, on-site drilling conditions, type of
equipment used and the anticipated duration of the work to be performed.
Generally, domestic drilling contracts are for a single well, while foreign
drilling contracts are for multiple wells or a specified term. The contracts
typically obligate the Company to pay certain operating expenses, including
wages of drilling personnel, maintenance expenses, incidental rig supplies,
equipment and local office facilities. Domestic drilling contracts are typically
subject to termination by the customer on short notice, usually upon payment of
a fee. Foreign drilling contracts generally require longer notice periods for
termination and may also require that the customer pay for the mobilization and
demobilization costs. The Company's drilling contracts generally provide for
compensation on either a daywork, turnkey or footage basis.

         Daywork Contracts. Under daywork drilling contracts, the Company
provides a drilling rig with required personnel to the operator, who supervises
the drilling of the well. The Company is paid based on a negotiated fixed rate
per day while the rig is utilized. Daywork drilling contracts specify the
equipment to be used, the size of the hole and the depth of the well. Under a
daywork drilling contract, the customer bears a large portion of out-of-pocket
costs of drilling and the Company generally bears no part of the usual capital
risks associated with oil and gas exploration (such as time delays for various
reasons, including stuck drill pipe and blowout).

         Turnkey Contracts. Under a turnkey contract, the Company contracts to
drill a well to an agreed-upon depth under specified conditions for a fixed
price, regardless of the time required or the problems encountered in drilling
the well. The


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Company provides technical expertise and engineering services, as well as most
of the equipment required for the well, and is compensated when the contract
terms have been satisfied. Turnkey contracts afford an opportunity to earn a
higher return than would normally be available on daywork or footage contracts
if the contract can be completed successfully without complications.

         The risks to the Company under a turnkey contract are substantially
greater than on a well drilled on a daywork basis because the Company assumes
most of the risks associated with drilling operations generally assumed by the
operator in a daywork contract, including the risk of blowout, loss of hole,
stuck drill pipe, machinery breakdowns, abnormal drilling conditions and risks
associated with subcontractors' services, supplies, cost escalation and
personnel. The Company employs or contracts for engineering expertise to analyze
seismic, geologic and drilling data to identify and reduce many of the drilling
risks assumed by the Company. Management uses the results of this analysis to
evaluate the risks of a proposed contract and seeks to account for such risks in
its bid preparation. The Company believes that its operating experience,
qualified drilling personnel, risk management program, internal engineering
expertise and access to proficient third party engineering contractors have
allowed it to reduce the risks inherent in turnkey drilling operations. The
Company also maintains insurance coverage against some but not all drilling
hazards.

         Footage Contracts. 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 compared with daywork contracts. Similar
to a turnkey contract, the risks to the Company on a footage contract are
greater because it assumes most of the risks associated with drilling operations
generally assumed by the operator in a daywork contract, including the risk of
blowout, loss of hole, stuck drill pipe, machinery breakdowns, abnormal drilling
conditions and risks associated with subcontractors' services, supplies, cost
escalation and personnel. As with turnkey contracts, the Company manages this
additional risk through the use of engineering expertise and bids the footage
contracts accordingly. The Company also maintains insurance coverage against
certain drilling hazards.

CUSTOMERS AND MARKETING

         The Company's contract drilling customers include independent
producers, major oil companies and national petroleum companies. The Company
believes that approximately 90% of the wells it drilled in 1998 were principally
targeted by its customers for production of natural gas and the balance for
crude oil. One unaffiliated customer accounted for 10% of the Company's revenues
for the year ended December 31, 1997. There were no such significant customers
for the years ended December 31, 1998 and 1996.

         The Company primarily markets its drilling rigs on a regional basis
through employee sales representatives. These sales representatives utilize
personal contracts and industry periodicals and publications to determine which
operators are planning to drill oil and gas wells in the immediate future. Once
the Company has been placed on the "bid list" for an operator, the Company will
typically be given the opportunity to bid on all future wells for that operator
in the area.

         The Company from time to time enters into informal, nonbinding
commitments with its customers to provide drilling rigs for future periods at
agreed upon rates plus fuel and mobilization charges, if applicable, and
escalation provisions. This practice is customary in the land drilling business
during times of tightening rig supply. Although neither the Company nor the
customer is legally required to honor these commitments, the Company strives to
satisfy such commitments in order to maintain good customer relations.

REGULATION

         Many aspects of the Company's operations are affected by domestic and
foreign political developments and are subject to numerous laws and regulations
that may relate directly or indirectly to the contract drilling industry. For
example, drilling operations are subject to extensive and evolving laws and
regulations governing environmental quality, pollution control, remediation of
contamination and preservation of natural resources. Such laws and regulations
pertain, among other things, to air emissions, waste management, spills and
other discharges, wetlands and endangered species protection and cleanup of
contamination. The Company's operations are often conducted in or near
ecologically sensitive areas such as wetlands which are subject to protective
measures. The handling of waste materials, some of which are classified as
hazardous substances, is a routine part of the Company's operations.
Consequently, the regulations applicable to the Company's operations include
those with respect to containment, disposal and control of the discharge of
hazardous oilfield waste and other nonhazardous waste material into the
environment, requiring removal and cleanup under certain circumstances, or
otherwise relating to the protection of the environment. Laws and regulations
protecting the environment

                                       -6-

<PAGE>   7


have become more stringent in recent years and may in certain circumstances
impose strict liability, rendering a party liable for environmental damage
without regard to negligence or fault on the part of such party. Such laws and
regulations may expose the Company to liability for the conduct of, or
conditions caused by, others or for acts of the Company which were in compliance
with all applicable laws at the time such acts were performed. The Company may
also be exposed to environmental or other liabilities originating from
businesses and assets subsequently acquired by the Company. Compliance with such
laws and regulations may require significant capital expenditures. Although such
compliance costs to date have not had a material effect on the Company,
application of these requirements or the adoption of new requirements could have
a material adverse effect on the Company. In addition, the modification or
judicial interpretation of existing laws or regulations or the adoption of new
laws or regulations curtailing exploratory or development drilling for oil and
gas for economic, environmental or other reasons could have a material adverse
effect on the Company's operations by limiting future contract drilling
opportunities.

         Environmental regulation has led to higher drilling costs, a more
difficult and lengthy well permitting process and, in general, has adversely
affected many oil companies' drilling decisions. The primary environmental
statutory and regulatory programs that affect the Company's operations include
those summarized below.

         Oil Pollution Act and Clean Water Act. The Oil Pollution Act of 1990
("OPA") amends certain provisions of the Federal Water Pollution Control Act of
1972, commonly referred to as the Clean Water Act ("CWA"), and other statutes as
they pertain to the prevention of and response to hazardous substances and oil
spills into navigable waters. OPA requires responsible parties to maintain proof
of financial responsibility to cover some portion of the cost of a potential
spill and to prepare an oil spill contingency plan. Under OPA, a person owning
or operating a facility or equipment from which there is a discharge or threat
of a discharge of oil into or upon navigable waters or adjoining shorelines is
liable as a "responsible party" for removal costs and damages. Many of the
Company's activities are conducted in or near ecologically sensitive areas, such
as wetlands, coastal environment and inland waterways. An oil spill in a wetland
or inland waterway could produce substantial damage to the environment,
including wildlife and natural resources, and result in material liability.
Federal law imposes strict, joint and several liability on facility owners for
containment and clean-up costs and certain other damages, including natural
resource damages, arising from a spill as well as civil and criminal penalties
for violation of regulatory requirements.

         The CWA also regulates the discharge of pollutants to surface water and
the discharge of dredged or fill material to wetlands areas.

         Superfund. The Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA"), commonly referred to as the "Superfund" law, imposes
strict, joint and several liability on certain classes of persons with respect
to the release or threatened release of a hazardous substance to the
environment. These persons include: (i) the current owner and operator of a
facility from which hazardous substances are released; (ii) owners and operators
of a facility at the time any hazardous substances were disposed; (iii)
generators of hazardous substances who arranged for treatment or disposal at or
transport to such facility and (iv) transporters who selected the facility for
treatment or disposal of hazardous substances. The Company may be responsible
under CERCLA for all or part of the costs to clean up sites at which hazardous
substances have been released. To date, however, the Company has not been named
a potentially responsible party under CERCLA or any similar state Superfund
laws.

         Hazardous Waste Disposal. The Company's operations involve the
generation or handling of materials that are classified as hazardous waste, and
that are subject to the Federal Resource Conservation and Recovery Act ("RCRA")
and comparable state statues. The Environmental Protection Agency and various
state agencies have imposed strict requirements regulating the treatment,
storage, transport and disposal of hazardous wastes.

         NORM. Oil and gas exploration and production activities have been
identified as generators of naturally- occurring radioactive materials ("NORM").
The generation, handling and disposal of NORM waste due to oil and gas
exploration and production activities is currently regulated in various states
including Louisiana and Texas. The Company does not believe that its compliance
with such regulations will have a material effect on its operations or financial
condition, but there can be no assurance in this regard.

         Occupational Safety and Health. The Occupational Safety and Health Act
of 1970, as amended, ("OSHA") establishes employer responsibilities including
maintenance of a workplace free of recognized hazards likely to cause death or
serious injury, compliance with standards promulgated by the Occupational Safety
and Health Administration, and various record keeping, disclosure and procedural
requirements. Such requirements include, for example, the Hazard 

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<PAGE>   8


Communication Standard which applies to all private-sector employers including
those in the oil and gas exploration and production industry, and requires such
employers to assess chemical hazards, obtain and maintain certain written
descriptions of these hazards, develop a hazard communication program and train
employees to work safely with chemicals on site. Failure to comply with the
requirements of OSHA may result in administrative, civil and criminal penalties.
The Company believes it is in substantial compliance with OSHA requirements and
does not believe it will be required to expend material amounts by reason of
such requirements. However, the Company is unable to predict the ultimate cost
of compliance with these changing requirements.

INSURANCE

         The Company's operations are subject to the many hazards inherent in
the drilling business, including, for example, blowouts, cratering, fires,
explosions and adverse weather. These hazards could cause personal injury,
suspend drilling operations or seriously damage or destroy the equipment
involved and could cause substantial damage to producing formations and
surrounding areas. Damage to the environment could also result from the
Company's operations, particularly through oil spillage and extensive,
uncontrolled fires. As a protection against operating hazards, the Company
maintains insurance coverage, including property casualty insurance on its rigs
and drilling equipment, comprehensive general liability and commercial contract
indemnity (including a separate policy for foreign liability), commercial
umbrella and workers' compensation insurance and "control of well" insurance.

         The Company's insurance coverage for property damage to its rigs and
drilling equipment is based on the Company's estimate, as of June 1998 of the
cost of comparable used equipment to replace the insured property. There is an
annual aggregate deductible on rigs of $500,000 to be comprised of losses
otherwise recoverable thereafter in excess of a $50,000 maintenance deductible.
There is a $10,000 deductible per occurrence on equipment.

         The Company's third party liability insurance coverage under each of
the general and foreign policies is $1.0 million per occurrence, with a
deductible of $50,000 per occurrence. The Company believes that it is adequately
insured for public liability and property damage to others with respect to its
operations. However, such insurance may not be sufficient to protect the Company
against liability for all consequences of well disasters, extensive fire damage
or damage to the environment.

         The Company also maintains insurance coverage to protect against
certain hazards inherent in its turnkey contract drilling operations. This
insurance covers "control of well" (including blowouts above and below the
surface), cratering, seepage and pollution and care, custody and control. The
Company's current insurance provides $500,000 coverage per occurrence for care,
custody and control, and coverage per occurrence for control of well, cratering,
seepage and pollution associated with drilling operations of either $10.0
million or $20.0 million, depending upon the area in which the well is drilled
and its target depth. Each form of coverage provides for a deductible for the
account of the Company, as well as a maximum limit of liability. Each casualty
is an occurrence, and there may be more than one such occurrence on a well, each
of which would be subject to a separate deductible.

EMPLOYEES

         At March 1, 1999, the Company had approximately 1300 employees. None of
the Company's employees are subject to collective bargaining agreements, and
management believes its employee relations are satisfactory.


                                       -8-

<PAGE>   9

CERTAIN RISKS

         The Company's business is subject to a number of risks and
uncertainties, the most important of which are listed below:

         Dependence on Oil and Gas Industry. The Company's current business and
operations are substantially dependent upon conditions of the oil and gas
exploration and production companies. The demand for contract land drilling and
related services is directly influenced by oil and gas prices, expectations
about future prices, the cost of producing and delivering oil and gas,
government regulations, local and international political and economic
conditions, including the ability of the Organization of Petroleum Exporting
Countries ("OPEC") to set and maintain production levels and prices, the level
of production by non-OPEC countries and the policies of the various governments
regarding exploration and development of their oil and gas reserves. There can
be no assurance that current levels of oil and gas exploration expenditures will
increase or that demand for the Company's services will reflect the level of
such expenditures.

         Recent Weakening of Demand for Drilling Services. During 1997,
conditions in the oil and gas industry were such that demand for land drilling
services was generally strong in each of the four core domestic markets in which
the Company operates. The Company's 1997 average rig utilization rate for those
four core markets was approximately 96%. For the year ended December 31, 1998,
however, the Company's average rig utilization rate in its four core domestic
markets declined to approximately 64%. This lower average utilization rate is
believed by the Company to be due to an overall weakening of demand for land
drilling services in its four core domestic markets. The generally reduced
demand for land drilling services during 1998 is believed by the Company to be
attributable to lower prices for oil and gas production. In December 1998, the
price for domestic oil production was reported in the press to have reached the
lowest level in over a decade. Although gas prices have not declined to the same
extent as oil prices, gas prices have decreased from levels at the beginning of
the fourth quarter of 1997. Some potential customers, the Company believes, may
also be postponing their near-term drilling commitments in hopes of obtaining
reduced rates for oil field goods and services, including contract land drilling
services. The average dayrates received by the Company in its core domestic 
markets during the fourth quarter of 1998 reflected an average decline of 
approximately 34% from that received under dayrate contracts entered into 
during the fourth quarter of 1997 for the same or comparable rigs. In addition, 
the average dayrates received by the Company under its most recently awarded 
dayrate drilling contracts in its core domestic markets have declined by 
approximately 5% from the fourth quarter of 1998 levels. If these industry
conditions persist or worsen, they could have a continued material adverse
effect on the Company's financial condition and results of operations.

         History of Losses from Operations. Although the Company had net income
of $10.2 million for the year ended December 31, 1997, it incurred net losses of
$83.2 million and $11.7 million for the years ended December 31, 1998 and 1996,
respectively. Additionally, the Company has a history of losses and before 1997
had not had a profitable full year since 1991. The 1998 loss included $94.9
million of unusual charges while the 1996 loss included $6.1 million of unusual
charges. Profitability in the future will depend upon many factors, but largely
upon utilization rates and dayrates for the Company's drilling rigs. There can
be no assurance that current utilization rates and dayrates will not decline or
that the Company will not experience additional losses.

         Debt Service Requirements. The Company's ability to meet its debt
service obligations and reduce its total indebtedness will be dependent upon the
Company's future performance, which will be subject to the success of its
business strategy, general economic conditions, industry cycles, levels of
interest rates, and financial, business and other factors affecting the
operations of the Company, many of which are beyond its control. Cash flow
generated from operating activities during the fourth quarter of 1998, excluding
unusual charges, was approximately $4.8 million. If cash flow generated from
operating activities continues at that level or further deteriorates, the
Company will utilize a portion of its existing cash balance in order to meet
debt service requirements of approximately $5.5 million per quarter. There can
be no assurance that the Company's business will generate sufficient cash flow
from operations to meet debt service requirements and payments of principal, and
if the Company is unable to do so, it may be required to sell assets, to
refinance all or a portion of its indebtedness, including the Senior notes, or
to obtain additional financing. There can be no assurance that any such
refinancing would be possible or that any additional financing could be
obtained.

         Significant Leverage. In June 1997, the Company issued $175.0 million
in 87/8% senior notes in an underwritten public offering, the net proceeds of
which were used primarily to finance acquisitions (including the GWDC
Acquisition) and expand its operations. Additionally, in May 1998, the Company
issued $75.0 million of 8 7/8% senior notes, the net proceeds of which were used
to repay approximately $30.0 million of indebtedness outstanding under the
Company's former bank credit facility and also for working capital and other
general corporate purposes. The terms and conditions of both issues of senior
notes ("Notes") are substantially consistent. The Company has significant debt
service requirements related

                                       -9-

<PAGE>   10



to the Notes. Additionally, the Company terminated its former $50.0 million Bank
Credit Facility and entered into a $50.0 million senior secured revolving credit
facility with The CIT Group/Business Credit, Inc. ("the CIT Facility").
Currently, the CIT Facility is undrawn. The Company expects to borrow under the
CIT Facility and possible future credit arrangements in order to finance
possible future acquisitions and for working capital and other general corporate
purposes. The Indentures for the Notes ("the Indentures") permit the Company to
incur additional indebtedness, including up to $100.0 million of senior
indebtedness under the CIT Facility or one or more credit or revolving credit
facilities with banks, financial institutions or other lenders which may be
secured by liens on all of the assets of the Company and its Subsidiaries,
subject to certain limitations.

         The level of the Company's indebtedness could have several important
effects on the Company's future operations, including its ability to obtain
additional financing for working capital, acquisitions, capital expenditures,
general corporate and other purposes may be limited. In addition, a substantial
portion of the Company's cash flow from operations will be dedicated to the
payment of principal and interest on its indebtedness, thereby reducing funds
available for other purposes, and the Company's significant leverage could make
it more vulnerable to economic downturns in the industry.

         Restrictions Imposed by Terms of Indebtedness. The Indentures under
which the Notes were issued contain covenants restricting or limiting the
ability of the Company and certain of its subsidiaries to, among other things:
(i) incur additional indebtedness; (ii) pay dividends or make other restricted
payments; (iii) make asset dispositions; (iv) permit liens; (v) enter into sale
and leaseback transactions; (vi) enter into certain mergers, acquisitions and
consolidations; (vii) make certain investments; (viii) enter into transactions
with related persons and (ix) engage in unrelated lines of business.

         In addition, the loan agreement setting forth the terms of the CIT
Facility (the "Bank Credit Agreement") contains certain other and more
restrictive covenants than those contained in the Indentures. These covenants
may adversely affect the Company's ability to pursue its acquisition and rig
refurbishment strategies and limit its flexibility in responding to changing
market conditions. The Bank Credit Agreement also requires the Company to
satisfy certain financial condition tests after the availability under the line
and cash on hand falls below $25.0 million. The Company's ability to meet those
financial condition tests can be affected by events beyond its control, and
there can be no assurance that the Company will meet those tests. The Bank
Credit Agreement contains default terms that effectively cross default with the
Indentures. Accordingly, the breach by the Company or its subsidiaries of the
covenants contained in the Indentures likely will result in a default under not
only the Indentures but also the CIT Facility, and possibly certain other then
outstanding debt obligations of the Company or its subsidiaries. If the
indebtedness under the CIT Facility or other indebtedness of the Company or its
subsidiaries is in excess of $10.0 million and is not paid when due or is
accelerated by the holders thereof, an event of default under the Indentures
would occur. In any such case, there can be no assurance that the Company's
assets would be sufficient to repay in full all of the Company's and its
subsidiaries' indebtedness, including the Notes.

         Dependence on Key Personnel. The Company believes that its operations
are dependent upon a small group of management personnel, the loss of any one of
whom could have a material adverse effect on the Company's financial condition
and results of operations.

         Competition. The land drilling industry is a highly competitive and
cyclical business characterized by high capital and maintenance costs. Drilling
contracts are usually awarded on a competitive basis and, while an operator may
consider factors such as quality of service and type and location of equipment
as well as the ability to provide ancillary services, price and rig availability
are the primary factors in determining which contractor is awarded a job. An
increasingly important competitive factor in the land drilling industry is the
ability to provide drilling equipment adaptable to, and personnel familiar with,
new technologies and drilling techniques as they become available. The land
drilling business is also highly fragmented. As a result, even though the
Company has the largest or second largest rig fleet in its four core domestic
markets, the Company estimates that its market share represents only 16% to 33%
of the overall market share in each of these four core markets. Certain of the
Company's competitors have greater financial and human resources than the
Company, which may enable them to better withstand periods of low rig
utilization, to compete more effectively on the basis of price and technology,
to build new rigs or acquire existing rigs and to provide rigs more quickly than
the Company in periods of high rig utilization. A number of the Company's
competitors have also announced plans to refurbish and reactivate rigs from
their inventory of stacked rigs when the market improves. The deployment of
these additional rigs to the Company's core markets could further intensify
competition based on pricing and rig availability. There can be no assurance
that the Company will be able to compete successfully against all its
competitors in the future or that the level of competition will allow the
Company to obtain adequate margins from its drilling services.


                                      -10-

<PAGE>   11


         Turnkey Drilling Risk. Contract drilling services performed under
turnkey drilling contracts have historically represented, and are expected to
continue to represent, a significant component of the Company's revenues.
Typically, in periods of low demand for land drilling services, the percentage
of the Company's revenues from turnkey contracts increases. Under a turnkey
drilling contract, the Company contracts to drill a well to a contract depth
under specified conditions for a fixed price. In addition, the Company provides
technical expertise and engineering services, as well as most of the equipment
required for the well, and is compensated when the contract terms have been
satisfied. On a turnkey well, the Company often subcontracts for related
services and manages the drilling process. The risks to the Company on a turnkey
drilling contract are substantially greater than on a well drilled on a daywork
basis because the Company assumes most of the risks associated with drilling
operations generally assumed by the operator in a daywork contract, including
risk of blowout, loss of hole, stuck drill string, machinery breakdowns,
abnormal drilling conditions and risks associated with subcontractors' services,
supplies and personnel. Although the Company has obtained insurance coverage in
the past to reduce certain of the risks inherent in turnkey drilling operations,
there can be no assurance that such coverage will be obtained or available in
the future. The occurrence of an uninsured or under- insured loss could have a
material adverse effect on the Company's financial position and result of
operations.

         Operating Hazards and Insurance. The Company's operations are subject
to the many hazards inherent in the land drilling business, including blowouts,
cratering, fires, explosions, loss of hole, lost or stuck drill strings and
damage or loss from adverse weather. These hazards could also cause personal
injury and loss of life, substantial damage to the environment, suspension of
drilling operations or serious damage to or destruction of the property and
equipment involved and damage to producing formations and surrounding areas. The
Company maintains insurance coverage against some but not all operating hazards.
However, such insurance may not be sufficient to protect the Company against
liability for all consequences of well disasters such as personal injury, damage
to the Company's rigs, damage to the property of others or damage to the
environment. The insurance maintained by the Company is subject to substantial
deductibles and provides for premium adjustments based on claims. In view of
difficulties that may be encountered in renewing such insurance at reasonable
rates, no assurance can be given that the Company will be able to maintain the
type and amount of coverage that it considers adequate. The occurrence of a
significant event for which the Company is not fully insured could have a
material adverse effect on the Company's financial position and results of
operations.

         Risks of Acquisition Strategy. As a key component of its business
strategy, the Company has pursued and intends to continue to pursue acquisitions
of complementary assets and businesses. Certain risks are inherent in an
acquisition strategy, such as increasing leverage and debt service requirements
and combining disparate company cultures and facilities, which could adversely
affect the Company's operating results. The success of any completed acquisition
will depend in part on the Company's ability to integrate effectively the
acquired business into the Company. The process of integrating such acquired
business may involve unforeseen difficulties and may require a disproportionate
amount of management's attention and the Company's financial and other
resources. No assurance can be given that the Company will be able to continue
to identify additional suitable acquisition opportunities, negotiate acceptable
terms, obtain financing for acquisitions on satisfactory terms or successfully
acquire identified targets. The Company's failure to achieve consolidation
savings, to incorporate the acquired business and assets into its existing
operations successfully or to minimize any unforeseen operational difficulties
could have a material adverse effect on the Company's financial condition and
results of operations.

         Shortages of Equipment, Supplies and Personnel. While the Company is
not currently experiencing any shortages, from time to time there have been
shortages of drilling equipment and supplies which the Company believes could
reoccur. During periods of shortage the cost and delivery times of equipment and
supplies are substantially greater. In 1996, in response to such shortages , the
Company formed an alliance with a drill pipe manufacturer that enabled the
Company to take delivery through 1998 of agreed maximum quantities of drill pipe
in commonly used diameters at fixed prices, plus possible escalations for
increases in the manufacturer's cost of raw materials. The Company believes that
the alliance reduced its exposure to price increases and supply shortages of
drill pipe. Although the Company has formed similar informal supply alliances
with manufacturers and suppliers of other equipment and supplies, and is
attempting to establish arrangements to assure adequate availability of certain
other necessary equipment and supplies on satisfactory terms, there can be no
assurance that it will be able to do so. Shortages by the Company of drilling
equipment or supplies could delay and adversely affect its ability to refurbish
its inventory rigs and obtain contracts for its marketable rigs, which could
have a material adverse effect on its financial condition and results of
operations.

         Although the Company has not encountered material difficulty in hiring
and retaining qualified rig crews, such shortages have in the past occurred in
the industry. The Company may experience shortages of qualified personnel to
operate its rigs, which could have a material adverse effect on the Company's
financial condition and results of operations.


                                      -11-

<PAGE>   12


         Governmental Regulations and Environmental. Many aspects of the
Company's operations are affected by domestic and foreign political developments
and are subject to numerous laws and regulations that may relate directly or
indirectly to the contract drilling industry. For example, drilling operations
are subject to extensive and evolving laws and regulations governing
environmental quality, pollution control, remediation of contamination and
preservation of natural resources. Such laws and regulations pertain, among
other things, to air emissions, waste management, spills and other discharges,
wetlands and endangered species protection and cleanup of contamination. The
Company's operations are often conducted in or near ecologically sensitive
areas, such as wetlands, which are subject to protective measures. The handling
of waste materials, some of which are classified as hazardous substances, is a
routine part of the Company's operations. Consequently, the regulations
applicable to the Company's operations include those with respect to
containment, disposal and controlling the discharge of hazardous oilfield waste
and other nonhazardous waste material into the environment, requiring removal
and cleanup under certain circumstances, or otherwise relating to the protection
of the environment. Laws and regulations protecting the environment have become
more stringent in recent years and may in certain circumstances impose strict
liability, rendering a party liable for environmental damage without regard to
negligence or fault on any part of such party. Such laws and regulations may
expose the Company to liability for the conduct of, or conditions caused by,
others or for acts of the Company which were in compliance with all applicable
laws at the time such acts were performed. The Company may also be exposed to
environmental or other liabilities originating from businesses and assets
subsequently acquired by the Company. Compliance with such laws and regulations
may require significant capital expenditures. Although such compliance costs to
date have not had a material effect on the Company, application of these
requirements or the adoption of new requirements could have a material adverse
effect on the Company. In addition, the modification or judicial interpretations
of existing laws or regulations or the adoption of new laws or regulations
curtailing exploratory or development drilling for oil and gas for economic,
environmental or other reasons could have a material adverse effect on the
Company's operations by limiting future contract drilling opportunities.

         Risks of International Operations. The Company derives revenue from
international operations. The Company's 1997 and 1998 international operations
were conducted only in Venezuela. Risks associated with operating in
international markets include foreign exchange restrictions and currency
fluctuations, foreign taxation, political instability, foreign and domestic
monetary and tax policies, expropriation, nationalization, nullification,
modification or renegotiation of contracts, war and civil disturbances or other
risks that may limit or disrupt markets. Additionally, 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. Furthermore, the Company's foreign subsidiaries may face
governmentally imposed restrictions from time to time on their ability to
transfer funds to the Company. If market conditions improve, the Company intends
to explore international opportunities in Venezuela, where 5 of its rigs are
located, and elsewhere. No predictions can be made as to what foreign
governmental regulations may be applicable to the Company's operations in the
future.

         Shares Eligible for Future Sale. Approximately 41% of the outstanding
Common stock is available for resale by selling shareholders under an effective
shelf registration statement (the "Resale Shelf") under the Securities Act of
1933, as amended (the "Securities Act"). Approximately 9% of the outstanding
Common stock is not covered by the Resale Shelf, but is available for resale
under Rules 144 and 145 under the Securities Act and is covered to a substantial
extent by currently unexercised registration rights. An additional 5,622,125
shares are issuable upon exercise of options and 489,600 shares are issuable
upon the exercise of warrants. Future sales of substantial amounts of Common
stock in the public market, or the perception that such sales may occur, could
adversely affect prevailing market prices of the Common stock.

         Qualification of the GWDC Acquisition as a Reorganization for U.S.
Federal Tax Purposes. The GWDC Acquisition is intended to qualify as a tax free
reorganization under Sections 368(a)(1)(A) and 368(a)(2)(D) of the Internal
Revenue Code of 1986, as amended (the "Code"), with respect to Common stock
received by GWDC shareholders. A principal condition for such qualification is
that the former shareholders of GWDC will satisfy the continuity of proprietary
interest standard with respect to Common stock received in the GWDC Acquisition.
Thus, under previous Internal Revenue Service ("IRS") guidelines, dispositions
of Common stock by GWDC shareholders during the five years following the GWDC
Acquisition could cause the IRS to assert that the GWDC Acquisition does not
qualify as a tax free reorganization. The Company has no contractual agreements
with GWDC shareholders preventing the disposition of their shares. If the GWDC
Acquisition fails to qualify as a tax free reorganization for failure to meet
the continuity of interest standard or for any other reason, the receipt of
Common stock will be taxable to the GWDC shareholders at the time of the GWDC
Acquisition, and GWDC will be deemed to have sold all of its assets in a taxable
exchange triggering a corporate tax liability to GWDC estimated to be in excess
of $30.0 million. The Company would be liable for any such corporate tax which,
if imposed, would have a material adverse effect on the financial condition of
the Company.

                                      -12-

<PAGE>   13


FORWARD-LOOKING STATEMENTS
 
         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. The specific
forward-looking statements cover rig supply and demand, rig attrition, new
construction costs, anticipated capital expenditures, expected utilization,
expected dayrates, first quarter 1999 income and unusual charges, spending by
customers, demand for the Company's services and the future prices for oil and
gas. These forward-looking statements are subject to a number of risks and
uncertainties and actual results may differ materially. Please refer to "Certain
Risks" listed above and Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for additional information
concerning risk factors that could cause actual results to differ from these
forward-looking statements.

ITEM 2. PROPERTIES

DRILLING EQUIPMENT

         A land drilling rig consists of engines, drawworks, a mast,
substructure, pumps to circulate drilling fluid, blowout preventers, drill
string and related equipment. The actual drilling capacity of a rig may be less
than its rated drilling capacity due to numerous factors, including the length
of the drill pipe on the rig. The intended well depth and the drill site
conditions determine the amount of drill pipe and other equipment needed to
drill a well. Generally, land rigs operate domestically with crews of five to
six persons and in Venezuela with crews of ten to 12 persons.

         The Company's rig fleet consists of several rig types to meet the
demands of its customers in each of the markets it serves. The Company's rig
fleet consists of two basic types of drilling rigs, the mechanical and the
diesel electric. Mechanical rigs transmit power generated by a diesel engine
directly to an operation (for example the drawworks or mud pumps on a rig)
through a compound consisting of chains, gears and hydraulic clutches. Diesel
electric rigs are further broken down into two subcategories, direct current
rigs and SCR rigs. Direct current rigs transmit the power generated by a diesel
engine to a direct current generator. This direct current electrical system then
distributes the electricity generated to direct current motors on the drawworks
and mud pumps. SCR rig's diesel engines drive alternating current generators and
this alternating current can be transmitted to use for rig lighting and rig
quarters or converted to direct current to drive the direct current motors on
the rig.


                                      -13-

<PAGE>   14



         The following table summarizes the rigs owned by the Company at March
1, 1999, by maximum rated depth capacity:

<TABLE>
<CAPTION>
                                 Maximum Rated Depth Capacity
                       ----------------------------------------------
                        Under     10,000      15,000         20,000
                       10,000   to 14,999    to 19,999     and Deeper    Total  
                       ------   ---------    ---------     ----------    -----  
<S>                    <C>      <C>          <C>           <C>           <C>
Ark-La-Tex
    Diesel Electric        --           1            5              9       15
    Mechanical             --          10            9              3       22
South Texas
    Diesel Electric        --           2            5              6       13
    Mechanical              4          20           --             --       24
Gulf Coast
    Diesel Electric        --          --            2             22       24
    Mechanical             --           3            2              5       10
Venezuela
    Diesel Electric        --          --           --             --       --
    Mechanical             --           5           --             --        5
                       ------   ---------    ---------     ----------    -----  
Total Marketed(1)           4          41           23             45      113
Inventory
    Diesel Electric        --          --            2              8       10
    Mechanical             --           1            1             --        2
                       ------   ---------    ---------     ----------    -----  
Total Rig Fleet             4          42           26             53      125
                       ======   =========    =========     ==========    =====
</TABLE>

         (1) Includes 52 cold stacked rigs of varying maximum rated depth 
             capacities and types.

FACILITIES

The following table summarizes the Company's significant owned and leased
properties:

<TABLE>
<CAPTION>
Location                                     Interest                    Uses
--------                                     --------                    ----
<S>                                          <C>              <C>
Houston, Texas..............................   Leased         Executive Offices
Alice, Texas................................   Owned          Field Office, Rig Yard, Truck Yard
Eunice, Louisiana...........................   Owned          Field Office
Fillmore, Louisiana.........................   Owned          Field Office
Oklahoma City, Oklahoma.....................   Owned          Rig Yard
Shreveport, Louisiana.......................   Leased         Field Office
Shreveport, Louisiana.......................   Owned          Rig Yard
</TABLE>

         The Company leases approximately 22,700 square feet of office space for
its principal executive offices at a cost of approximately $33,000 per month.
The Company considers all of its facilities to be in good operating condition
and adequate for their present uses. Rig yards in Duson, Louisiana and Midvale,
Ohio are currently held for sale.

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.

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

None


                                      -14-

<PAGE>   15


                                     PART II

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

MARKET DATA

         The Common stock is listed and traded on the American Stock Exchange
("AMEX") under the symbol "GW." During the periods below prior to September 19,
1997, the Company's corporate name was DI Industries, Inc. and the Common stock
was listed on the AMEX under the Symbol "DRL" The following table sets forth the
high and low closing prices of the Common stock on the AMEX for the periods
indicated:

<TABLE>
<CAPTION>
                                                                 High        Low 
                                                                -------    -------
          <S>                                                   <C>        <C>  
          Period from January 1, 1999 to March 15, 1999          1.125       .8125

          Year Ended December 31, 1998:
              Quarter ended March 31, 1998                       5.3750     3.5000
              Quarter ended June 30, 1998                        4.4375     2.8750
              Quarter ended September 30, 1998                   3.0000     1.1875
              Quarter ended December 31, 1998                    1.4375      .6875

          Year Ended December 31, 1997:
              Quarter ended March 31, 1997                       3.5000     2.4375
              Quarter ended June 30, 1997                        4.4375     2.4375
              Quarter ended September 30, 1997                   7.9375     4.3125
              Quarter ended December 31, 1997                    9.8750     7.8750
</TABLE>

         The Company has never declared or paid cash dividends on its Common
stock and does not expect to pay cash dividends in 1999 or for the foreseeable
future. The Company anticipates that all cash flow generated from operations in
the foreseeable future will be retained and used to develop or expand the
Company's business and reduce outstanding indebtedness. Any future payment of
cash dividends will depend upon the Company's results of operations, financial
condition, cash requirements and other factors deemed relevant by the Board of
Directors.

         The terms of the Company's CIT Facility prohibit the payment of
dividends without the prior written consent of the lender and the terms of the
Indentures under which the Notes are issued also restrict the Company's ability
to pay dividends under certain conditions. See Item 7 - Certain Credit
Arrangements.

         On March 15, 1999, the last reported sales price of the Company's
Common stock on the AMEX was $1.125 per share.


                                      -15-

<PAGE>   16



ITEM 6. SELECTED FINANCIAL DATA

                (Amounts in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                                                                   Nine
                                                                       Years Ended December 31,                 Months Ended
                                                        --------------------------------------------------      December 31,
                                                          1998            1997         1996          1995         1994(1)
                                                        ---------      ---------    ---------      --------     ------------
<S>                                                     <C>            <C>           <C>            <C>           <C>    
CONTINUING OPERATIONS:
    Revenues                                            $ 240,979      $ 215,923     $ 81,767       $ 94,709      $ 50,987
    Income (loss)
        from continuing operations                       (111,164)        18,849      (10,877)       (12,675)       (2,260)

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

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

NET INCOME (LOSS)                                         (83,213)        10,218      (11,722)       (13,447)       (2,209)

INCOME (LOSS) PER COMMON SHARE - BASIC AND DILUTED:
    From continuing operations                               (.50)           .07         (.18)          (.33)         (.06)
    From discontinued operations                               --             --           --           (.02)           --
    Net income (loss)                                        (.50)           .07         (.18)          (.35)         (.06)

TOTAL ASSETS (3)                                          501,303        533,752      117,819         57,783        62,860

LONG-TERM DEBT (3)                                        250,527        176,225       26,846         11,146        10,224

SERIES A PREFERRED STOCK - MANDATORILY
    REDEEMABLE                                                305            305          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.


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 Grey Wolf, Inc. ("Grey Wolf" or the
"Company") included elsewhere herein. All significant intercompany transactions
have been eliminated.

GENERAL

         Since 1996, the drilling industry has experienced a period of rapid
consolidation. The Company participated in this consolidation by acquiring 100
drilling rigs in 13 transactions from late 1996 through January 1998. In
addition, from the fourth quarter of 1996 through mid 1998, the Company
refurbished 29 rigs at an approximate total cost of $74.0 million. As a result
of these acquisitions and the refurbishment of rigs from inventory, the
Company's rig fleet now consists of 125 rigs, of which 113 are marketable and 12
remain in inventory for later refurbishment. The increase in the size of the
Company's rig fleet coupled with favorable market conditions during 1997 yielded
significantly higher total revenues and net income for the Company. However,
beginning in the first quarter of 1998, the Company has experienced significant
decreases in average rig utilization as well as average dayrates.

         Average rig utilization in its core domestic markets has decreased from
96% for the year ended December 31, 1997, to 64% for the year ended December 31,
1998, and 40% through February 28, 1999. In addition, the bid rate for new
drilling contracts in the Company's core domestic markets for the fourth quarter
of 1998 were approximately 34% lower than the highest bid rates achieved during
the last quarter of 1997. The bid rate for new contracts in the

                                      -16-

<PAGE>   17



Company's core domestic markets in February, 1999 were approximately 5% lower
than the bid rates achieved during the last quarter of 1998. The lower
utilization and erosion of dayrates for the Company's land drilling rigs is a
function of the overall decline in demand for land drilling services. The
Company's customers are faced with lower revenues and cash flows due to lower
commodity prices which has led many to reduce their actual and planned drilling
expenditures. To successfully weather the current adverse business conditions,
the Company has taken numerous steps to minimize cost and conserve cash. Through
March 1, 1999, the Company has "cold stacked" 52 rigs (49 domestically and 3 in
Venezuela), reduced overhead at both the division and corporate level and has
begun a program whereby components are used from spare equipment or cold-stacked
rigs instead of buying new parts. If the current trends of lower utilization and
declining dayrates persist or worsen, they could have a material adverse effect
on the Company's financial condition and results of operations and may in the
future affect its ability to meet its debt service requirements.

FINANCIAL CONDITION AND LIQUIDITY

         The following table summarizes the Company's financial position at
December 31, 1998 and 1997.

<TABLE>
<CAPTION>
                                  December 31, 1998         December 31, 1997
                                ---------------------     ---------------------
                                 Amount         %          Amount         %    
                                                  (In thousands)

<S>                             <C>          <C>          <C>          <C>
Working capital                 $ 44,489           10     $ 66,644           14
Property and equipment, net      411,316           88      409,088           85
Other noncurrent assets            9,306            2        6,983            1
                                --------     --------     --------     --------
Total                           $465,111          100     $482,715          100
                                ========     ========     ========     ========

Long-term debt                  $250,527           54     $176,225           36
Other long-term liabilities       47,893           10       57,274           12
Shareholders' equity             166,691           36      249,216           52
                                --------     --------     --------     --------
        Total                   $465,111          100     $482,715          100
                                ========     ========     ========     ========
</TABLE>

         The significant changes in the Company's financial position from
December 31, 1997 to December 31, 1998 are the decreases in working capital and
shareholders' equity of $22.2 million and $82.5 million, respectively, and the
increase in long-term debt of $74.3 million. The change in working capital is
due primarily to an overall decline in the Company's operating activity, while
the decrease in shareholders' equity is due to the net loss of $83.2 million
suffered by the Company in the current year, the majority of which consisted of
unusual charges recorded by the Company during the fourth quarter of 1998. The
increase in long-term debt is primarily due to the $75.0 million senior note
offering discussed below.

         In January 1998, the Company acquired all of the outstanding common
stock of Murco Drilling Corporation ("Murco") for $60.8 million in cash. At
closing, Murco had net liabilities of approximately $4.5 million. The Company
funded this stock purchase out of working capital and $30.0 million of
borrowings under the bank credit facility. Murco operated ten land drilling rigs
in the Ark-La-Tex and Mississippi/Alabama markets.

         In May 1998, the Company completed an additional offering of $75.0
million of senior notes ("Notes") due July 1, 2007 with interest at 8 7/8% per
annum. The net proceeds from the offering were $71.4 million after deducting
commissions, fees and expenses. Fees and expenses are being amortized over the
life of the Notes. A portion of the net proceeds from the offering was used to
repay the approximately $30.0 million of indebtedness incurred under the bank
credit facility to partially finance the acquisition of Murco. The remaining
proceeds are being used for working capital and other general corporate
purposes.

         Pretax unusual charges of $94.9 million ($71.0 million after tax or
$.43 per share), consisted of a $93.2 million asset impairment, $0.5 million in
severance costs, and $1.2 million in write-downs associated with international
operations. In addition, the Company recorded a provision for doubtful accounts
during 1998 of $1.7 million. The provision for doubtful accounts, severance cost
and other write-downs are all associated with the downturn in the land drilling
industry.

         The non-cash asset impairment charge of $93.2 million was a result of
the application of Statement of Financial Accounting Standards No. 121 (SFAS No.
121), which requires that long-lived assets and certain identifiable intangibles
held and used by the Company be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The severity as well as the duration of the current oil and gas
industry

                                      -17-

<PAGE>   18



downturn is such an event. The Company's review of its long-lived assets
indicated that the carrying value of certain of the Company's foreign and
domestic drilling rigs was more than the estimated undiscounted future net cash
flows. As such, under SFAS No. 121 the Company wrote-down those assets to their
estimated fair market value. Undiscounted future net cash flows were calculated
on a rig by rig basis using projected future utilization and dayrates over the
estimated useful lives of the rigs. Fair market value was based on an appraisal
performed by an independent appraiser, retained by the lender, in connection
with the Company's new bank credit facility. The effect of this write-down is an
after tax charge of $69.8 million or $.42 per share in 1998 and a reduction of
approximately $6.0 million per year in depreciation expense in future years. The
impairment was recorded based on certain estimates and projections as stipulated
in SFAS No. 121.

         During the year ended December 31, 1998, the Company funded its
activities through a combination of cash generated from operations, borrowings
under the Company's bank credit facility (the "Bank Credit Facility"), the
remaining proceeds from the November 1997 issuance of Common stock, and the May
1998 offering of $75 million of senior notes. The net cash provided by or used
in the operating, investing and financing activities of the Company is
summarized below (dollars in thousands):

<TABLE>
<CAPTION>
                                                                         Years Ended December 31,   
                                                            -------------------------------------------------
                                                               1998                 1997               1996   
                                                            -----------          -----------       ----------
<S>                                                         <C>                  <C>               <C>        
     Net cash provided by (used in):
         Operating activities                               $    30,799          $    21,783       $   (1,439)
         Investing activities                                  (109,908)            (213,341)         (33,519)
         Financing activities                                    71,378              239,022           39,405
         Effect of exchange rate changes on cash                     --                   --             (144)
                                                            -----------          -----------       ----------
     Net increase (decrease) in cash:                       $    (7,731)         $    47,464       $    4,303
                                                            ===========          ===========       ==========
</TABLE>

         The Company's cash flows from operating activities are affected by a
number of factors including the number of rigs under contract and whether the
contracts are daywork, footage or turnkey, as well as whether the Company's
overall activity is expanding as in 1997 or shrinking as in 1998. The Company's
cash flow from operating activities in 1998 was greater than in 1997 due to a
decrease in the amount of working capital required of $25.9 million partially
offset by a decrease in cash flow from operations of $16.9 million due to fewer
operating days and lower average dayrates. Cash flow from operating activities
in 1997 was greater than 1996 due to an increase in cash flow from operations of
$44.4 million resulting from a greater number of operating days and higher
average dayrates, partially offset by an increase in working capital
requirements of $21.2 million.

         Cash flow used in investing activities in 1998 primarily included the
cash portion of the Murco Acquisition of $60.8 million as well as capital
expenditures for rig refurbishments, drill pipe and other capital maintenance of
$19.6 million, $11.2 million and $18.3 million, respectively. Cash flow used in
investing activities during 1997 primarily consisted of the cash portion of the
GWDC Acquisition of $62.0 million, the cash acquisition of Justiss,
Kaiser-Francis rigs and other rig purchases of $79.7 million, $52.1 million
spent on refurbishments and $19.5 million spent on drill pipe and other related
equipment.

         Cash flow from financing activities in 1998 primarily consisted of net
proceeds from the issuance of senior notes of $71.4 million and borrowings and
repayments of long-term debt of $30.6 million and $31.3 million, respectively.
Cash flow from financing activities in 1997 primarily consisted of $169.1
million in net proceeds from the issuance of senior notes, net proceeds from the
issuance of Common stock of $94.3 million and $52.8 million and $78.1 million,
respectively, in borrowings and repayments of long-term debt.

CURRENT OUTLOOK

         As discussed previously, the Company's cash flow generated from
operating activities was negatively impacted by lower drilling activity in the
Company's markets and lower dayrates during 1998 as compared to 1997. Oil and
gas commodity prices have remained depressed during 1999 and the U.S. land
drilling rig count, as reported by Baker Hughes, has declined from 500 on
December 30, 1998 to a historic low of 417 on February 19, 1999. During the
first quarter of 1999, the Company continues to experience downward pressure on
both utilizations and dayrates. The Company's average utilization for the first
quarter is expected to be approximately 40% and dayrates received in the first
quarter have declined by approximately 5% from those received during the fourth
quarter of 1998. 

         As is typical during periods of lower demand, the Company's revenue 
from turnkey and footage contracts has been increasing. Revenue generated from 
turnkey contracts

                                      -18-

<PAGE>   19



is expected to be approximately 35% of total revenue in the first quarter of
1999 compared to approximately 30% for the fourth quarter of 1998 and
approximately 20% for all of 1998.

         To successfully weather the current adverse business conditions,
numerous steps have been taken to minimize the cost of operations and conserve
cash. Those steps include, but are not limited to the following:

     o Cold stack 52 drilling rigs (49 domestically and 3 in Venezuela),
     o Reduce operating, division, corporate office, and executive personnel, 
     o Reduce certain other expenditures at the division and corporate levels, 
     o Establish vendor alliances to reduce the cost of operating supplies and
       equipment, and 
     o Utilize components from spare equipment or cold stacked rigs instead of
       buying new parts.

         As a result of the declines in utilization and dayrates in 1999, in
January 1999, the Company recognized unusual items of approximately $300,000 for
severance cost as well as costs to cold stack 14 additional rigs which are
estimated to be between $400,000 and $700,000. The Company currently estimates
that it will experience a loss of approximately $0.07 - $0.08 per share in the
first quarter of 1999.

         Capital expenditures for 1999 are estimated to be between $3.0 million
and $3.5 million and its debt service requirements are approximately $22.0
million. The Company believes that the cash flow from operations, current cash
balances, and to the extent required and available, borrowings under the CIT
Facility, defined below, will be sufficient to fund the Company's anticipated
capital expenditures as well as debt service requirements for 1999.

         The Company continues to actively review possible acquisition
opportunities. While the Company has no agreements to acquire additional
businesses or equipment, suitable opportunities may arise in the future. The
timing or success of any acquisition effort and the size of the associated
potential capital commitments cannot be predicted at this time. The ability of
the Company to consummate any such transaction will be dependent in large part
on its ability to fund such transaction. There can be no assurance that adequate
funding will be available on terms satisfactory to the Company.

CERTAIN CREDIT ARRANGEMENTS

         During the year ended December 31, 1998, the Company's principal credit
arrangements (other than customary trade credit and capital leases) consisted of
a bank credit facility and its Notes. Effective January 14, 1999, the Company
entered into a new bank credit facility, as discussed below.

         Bank Credit Facility. Throughout 1998, the Company maintained a senior
secured revolving credit facility with a syndicate of commercial banks ("Bank
Credit Facility"). The Bank Credit Facility provided the borrower with the
ability to borrow up to $50.0 million from time to time prior to April 30, 2000,
subject to certain reductions, with up to $5.0 million of such amount available
for letters of credit. Interest under the Bank Credit Facility accrued at a
variable rate, using either prime plus 0.75% to 1.50% or LIBOR plus 1.75% to
2.50% depending upon the Company's debt to EBITDA ratio for the trailing 12
month period. Letters of credit accrued a fee of 0.25% per annum. The borrowers
paid a commitment fee of 0.5% per annum on the average unused portion of the
lenders' commitments. Indebtedness under the Bank Credit Facility was secured by
a security interest in substantially all of the Company's and its domestic
subsidiaries assets and by guarantees of certain of its wholly-owned
subsidiaries.

         Among the various covenants that had to be satisfied by the Company
under the Bank Credit Facility were the following five financial covenants
pursuant to which the Company could not permit: (i) working capital (as defined
in the Bank Credit Facility) to be less than $5.0 million on the last day of any
fiscal quarter; (ii) consolidated net worth to be less than the sum of $60
million plus (a) 50% of the Company's consolidated net income, if positive, for
the period from January 1, 1997, to the final day of the most recent period for
which consolidated financial information of the Company is available and (b) 50%
of the increase to shareholders' equity of the Company attributable to the
issuance of Common stock; (iii) the ratio of (a) the appraised fair market value
of domestic rigs and related equipment to (b) the lenders' commitments to be
less than 2 to 1; (iv) the ratio of consolidated debt to total capitalization to
exceed 0.6 to 1 and (v) the ratio of consolidated EBITDA to consolidated
interest expense for the most recent quarter to be less than 3 to 1. At December
31, 1998, the Company was in compliance with the financial covenants. Effective
January 14, 1999, the Company terminated its Bank Credit Facility and entered
into a more flexible agreement with The CIT Group/Business Credit, Inc. Also in
January 1999, the Company wrote off approximately $600,000 in deferred loan
costs related to the terminated Bank Credit Facility.

         New CIT Facility. Effective January 1999, the Company entered into a
new senior secured revolving credit facility with The CIT Group/Business Credit,
Inc. ("the CIT Facility"). The CIT Facility provides the borrower with the
ability to


                                      -19-

<PAGE>   20



borrow up to the lesser of $50 million or 50% of the orderly liquidation value
("OLV") as defined in the CIT Facility of marketable drilling rig equipment
located in the 48 contiguous states of the United States. As defined in the CIT
Facility, the initial term of the CIT Facility is for four years through January
14, 2003, with automatic annual renewals thereafter unless terminated by the
lender on any subsequent anniversary date and then only upon 60 days prior
notice. The CIT Facility provides the borrower with up to $10,000,000 available
for letters of credit with such amounts being reserved from availability.
Interest under the CIT Facility accrues at a variable rate, using (at the
borrower's election) either prime plus 0.25% to 1.50% or LIBOR plus 1.75% to
3.50%, depending upon the Company's debt service coverage ratio for the trailing
12 month period. During the first year of the CIT Facility, the interest rate is
fixed at LIBOR plus 2.5% or prime plus 1%. Letters of credit accrue a fee of
1.25% per annum. The borrower pays a commitment fee of 0.375% per annum on the
average unused portion of the lender's commitments. Indebtedness under the CIT
Facility is secured by an exclusive lien security interest in substantially all
of the Company's and its domestic subsidiaries' assets and by guarantees of the
Company and certain of its wholly owned subsidiaries. There have been no
borrowings under the CIT Facility.

         The lender's commitments will be reduced by the amount of net cash
proceeds received by the Company or its subsidiaries from sales or other
dispositions of collateral in excess of $1.0 million individually or $2.0
million in the aggregate in any 12 month period (other than sales or other
dispositions of certain types of inventory, rigs identified in the CIT Facility
as equipment held for sale and up to $75.0 million of rigs and accessories). In
addition, mandatory prepayments would be required upon (i) the receipt of net
proceeds received by the Company or its subsidiaries from the incurrence of
certain other debt or sales of debt or equity securities in a public offering or
private placement, or (ii) the receipt of net cash proceeds by the Company or
its subsidiaries from asset sales (including proceeds from sale of rigs
identified in the credit agreement as equipment held for sale but excluding
proceeds from dispositions of inventory in the ordinary course of business, and
sales of up to $75.0 million of rigs and rig accessories or (iii) the receipt of
insurance proceeds on assets of the Company , in each case this clause (iii) to
the extent that such proceeds are in excess of $500,000 individually or $1.0
million in the aggregate in any twelve month period.

         Among the various covenants that must be satisfied by the Company under
the CIT Facility are the following two covenants which shall apply whenever the
Company's liquidity, defined as the sum of cash, cash equivalents and
availability under the CIT Facility, falls below $25,000,000: (i) 1 to 1 EBITDA
coverage of debt service, tested monthly on a trailing 12 month basis and (ii)
minimum tangible net worth (as defined in the CIT Facility) at the end of each
quarter will be the prior year tangible net worth less $30,000,000 adjusted for
quarterly tests. Additionally, it will be a covenant default if the OLV of the
domestic drilling equipment (including inventoried rigs) falls below
$150,000,000. Also, if the two month average rig utilization falls below 45%,
the lender will have the option to request one additional appraisal per year to
aid in determining the current OLV of the drilling equipment. While rig
utilization for the first two months of 1999 has dropped below 45%, the lender
has not requested an additional appraisal. Prepayment would be required if the
OLV falls below the level specified above.

         The CIT Facility also contains provisions restricting the ability of
the Company and its subsidiaries to, among other things, (i) engage in new lines
of business unrelated to their current activities, (ii) enter into mergers or
consolidations or asset sales or purchases (with specified exceptions), (iii)
incur liens or debts or make advances, investments or loans (in each case, with
specified exceptions), (iv) pay dividends or redeem stock (except for certain
inter-company transfers), (v) prepay or materially amend any other indebtedness
and (vi) issue any stock (other than common stock).

         Events of default under the CIT Facility include, in addition to
non-payment of amounts due, misrepresentations and breach of loan covenants and
certain other events of default, (i) default with respect to other indebtedness
in excess of $350,000, (ii) judgements in excess of $350,000, or (iii) a change
in control (meaning that) (a) the Company ceases to own 100% of its two
principal subsidiaries, (b) some person or group has either acquired beneficial
ownership of 30% or more of the Company or obtained the power to elect a
majority of the Company's board of directors or (c) the Company's board of
directors ceases to consist of a majority of "continuing directors" (as defined
by the CIT Facility).

         Senior Notes. Concurrently with the closing of the GWDC Acquisition in
June 1997, the Company concluded a public offering of $175 million in principal
amount of senior notes and in May 1998, the Company completed an offering of an
additional $75.0 million. The Notes bear interest at 8 7/8% per annum and mature
July 1, 2007. The terms and conditions of these notes are substantially
identical in all material respects. The Notes are general unsecured senior
obligations of the Company and are guaranteed, on a joint and several basis, by
all domestic wholly-owned subsidiaries of the Company.


                                      -20-

<PAGE>   21




         Except as discussed below, the Notes are not redeemable at the option
of the Company prior to July 1, 2002. On or after such date, the Company shall
have the option to redeem the Notes in whole or in part during the twelve months
beginning July 1, 2002 at 104.4375%, beginning July 1, 2003 at 102.9580%,
beginning July 1, 2004 at 101.4792% and beginning July 1, 2005 and thereafter at
100.0000% together with any interest accrued and unpaid to the redemption date.
However, at any time during the first 36 months after the issue date, the
Company may at its option, redeem up to a maximum of 30% of the aggregate
principal amount with the net cash proceeds of one or more equity offerings at a
redemption price equal to 108.875% of the principal amount thereof, plus accrued
and unpaid interest thereon to the redemption date, provided that at least
$170.0 million aggregate principal amount shall remain outstanding immediately
after the occurrence of any such redemption. Upon a Change of Control as defined
in the Indentures, each holder of the Notes will have the right to require the
Company to repurchase all or any part of such holder's Notes at a purchase price
equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid
interest to the date of purchase.

         The Indentures permit the Company and its subsidiaries to incur
additional indebtedness, including senior indebtedness of up to $100.0 million
aggregate principal amount which may be secured by liens on all of the assets of
the Company and its subsidiaries, subject to certain limitations. The Indentures
contain other covenants limiting the ability of the Company and its subsidiaries
to, among other things, pay dividends or make certain other restricted payments,
make certain investments, incur additional indebtedness, permit liens, incur
dividend and other payment restrictions affecting subsidiaries, enter into
consolidation, merger, conveyance, lease or transfer transactions, make asset
sales, enter into transactions with affiliates or engage in unrelated lines of
business. These covenants are subject to certain exceptions and qualifications.

RESULTS OF OPERATIONS

         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, 1998, 1997 and 1996.

<TABLE>
<CAPTION>
                                                     For the Year Ended December 31, 1998  
                                          ----------------------------------------------------------  
                                            Domestic              Foreign
                                           Operations            Operations                 Total            
                                          ------------          ------------            ------------
                                             ($ in thousands, except averages per rig day worked)
         <S>                              <C>                   <C>                     <C>   
         Rig days worked                        25,387                   843                  26,230

         Drilling revenue                 $    232,276          $      8,703            $    240,979
         Operating expenses(1)                 182,057                 9,360                 191,417
                                          ------------          ------------            ------------
         Gross profit (loss)              $     50,219          $       (657)           $     49,562
                                          ============          ============            ============

         Averages per rig day worked:
            Drilling revenue              $      9,149          $     10,324            $      9,187
            Operating expenses                   7,171                11,103                   7,298
                                          ------------          ------------            ------------
            Gross profit (loss)           $      1,978          $       (779)           $      1,889
                                          ============          ============            ============
</TABLE>


                                      -21-

<PAGE>   22



<TABLE>
<CAPTION>
                                                     For the Year Ended December 31, 1997  
                                          ----------------------------------------------------------  
                                            Domestic              Foreign
                                           Operations            Operations                 Total            
                                          ------------          ------------            ------------
                                             ($ in thousands, except averages per rig day worked)
         <S>                              <C>                   <C>                     <C>   

         Rig days worked                        23,575                   830                  24,405

         Drilling revenue                 $    209,423          $      6,500            $    215,923
         Operating expenses(1)                 155,021                 7,731                 162,752
                                          ------------          ------------            ------------
         Gross profit (loss)              $     54,402          $     (1,231)           $     53,171
                                          ============          ============            ============     

         Averages per rig day worked:
            Drilling revenue              $      8,883          $      7,831            $      8,847
            Operating expenses                   6,576                 9,314                   6,669
                                          ------------          ------------            ------------
            Gross profit (loss)           $      2,307          $     (1,483)           $      2,178
                                          ============          ============            ============     
</TABLE>

<TABLE>
<CAPTION>
                                                     For the Year Ended December 31, 1996  
                                          ----------------------------------------------------------  
                                            Domestic              Foreign
                                           Operations            Operations                 Total            
                                          ------------          ------------            ------------
                                             ($ in thousands, except averages per rig day worked)
         <S>                              <C>                   <C>                     <C>   

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

         Drilling revenue                 $     52,495          $     29,272            $     81,767
         Operating expenses(1)                  49,129                30,957                  80,086
                                          ------------          ------------            ------------
         Gross profit (loss)              $      3,366          $     (1,685)           $      1,681
                                          ============          ============            ============     

         Averages per rig day worked:
            Drilling revenue              $      7,446          $      7,924            $      7,610
            Operating expenses                   6,969                 8,380                   7,454
                                          ------------          ------------            ------------
            Gross profit (loss)           $        477          $       (456)           $        156
                                          ============          ============            ============     
</TABLE>

     (1) Operating expenses exclude depreciation and amortization, general and
     administrative expenses, provision for doubtful accounts, and unusual
     charges including the provision for asset impairment.

COMPARISON OF FISCAL YEAR ENDED DECEMBER 31, 1998 AND 1997

         Contract drilling revenues increased approximately $25.1 million, or
12%, to $241.0 million for the year ended December 31, 1998 compared to $215.9
million for the year ended December 31, 1997. This increase is due to an
increase in revenue from domestic operations of $22.9 million and an increase in
revenue from foreign operations of $2.2 million. Revenues from domestic
operations increased due to an increase in rig days worked of 1,812 and an
increase in average revenue per rig day worked of $266. The increase in
operating days is due to the acquisition of 54 operating rigs during 1997 and
January of 1998. The increase in average revenue per rig day worked of $266 is
due to a 19% increase in the average revenue per rig day worked from turnkey
contracts as well as a 4% increase in average revenue per rig day worked from
daywork contracts. While average revenue per rig day worked increased in 1998
compared to 1997, average revenue per rig day worked in the fourth quarter of
1998 was below the 1997 average. Revenue from foreign operations increased due
to an increase in average revenue per rig day worked of $2,493, while rig days
worked remained relatively flat.

         Operating expenses increased by $28.7 million, or 18%, to $191.4
million for the year ended December 31, 1998 compared to $162.7 million for the
year ended December 31, 1997. The increase is primarily due to a $27.0 million
increase in drilling operating expenses from domestic operations. The increase
in domestic drilling operating expenses is due to the increase in the number of
rigs owned and available for service and the corresponding 1,812 day increase in
the days worked as well as 10% and 26% increases in the average cost per rig day
worked on both daywork and turnkey contracts, respectively. The increase in
average cost per rig day worked on daywork and turnkey contracts is due to a
number of things including: a wage increase in mid-1997, higher trucking cost
due to lower utilization and down time between contracts and fixed costs spread
over a fewer number of days. The remaining increase in operating expenses of
$1.7 million is due to an increase in operating expense from foreign operations
resulting from increased labor costs in the Company's Venezuela operations.


                                      -22-

<PAGE>   23



         Depreciation and amortization expense increased by $17.1 million, or
82%, to $38.1 million for the year ended December 31, 1998 compared to $21.0
million for the year ended December 31, 1997. The increase is primarily due to
additional depreciation associated with the acquisition of additional operating
rigs noted above, and refurbishment of 25 rigs from inventory and is partially
offset by approximately $6.0 million due to the change in depreciable lives of
certain of the Company's drilling rigs.

         General and administrative expenses increased by $799,000 or 10%, to
$8.9 million for the year ended December 31, 1998 compared to $8.1 million for
the year ended December 31, 1997 due primarily to the increased size of the
Company's operations.

         As discussed in "Financial Condition and Liquidity", during 1998, the
Company recorded pretax unusual charges of $94.9 million ($71.0 million after
tax or $.43 per share). There were no such unusual charges recorded in 1997. The
unusual charge consisted of a $93.2 million asset impairment, $0.5 million in
severance costs, and $1.2 million in write-downs associated with international
operations. The asset impairment charge was required by Statement of Financial
Accounting Standards No. 121 which requires that long-lived assets held and used
by the Company be reviewed whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The current
downturn in the oil and gas industry, due to the magnitude and duration,
qualifies as such an event. In addition, the Company recorded a provision for
doubtful accounts during 1998 of $1.7 million compared to a reversal of
provision for doubtful accounts of $.2 million in 1997. The severance cost,
write-downs associated with international operations and the provision for
doubtful accounts are also associated with the downturn in the oil services
industry.

         Interest expense increased by $12.9 million or 147 %, to $21.6 million
for the year ended December 31,1998, compared to $8.7 million for the year ended
December 31, 1997. The increase is due to an increase in the average outstanding
debt balance of $112.1 million to $214.5 million for the year ended December 31,
1998 from $102.4 for the year ended December 31, 1997. This increase in the
outstanding debt balance is primarily due to the issuance of $175.0 million of
Notes during June 1997 to complete the GWDC merger and to continue refurbishment
of the rigs purchased in 1997 and the issuance of $75 million of Notes in May
1998 of which $30 million was used to repay the indebtedness incurred under the
Bank Credit Facility to partially finance the acquisition of Murco.

         Other income, net increased by $1.2 million to $4.5 million for the
year ended December 31, 1998, as compared to $3.3 million for the year ended
December 31, 1997. The increase is primarily due to the $1.8 million gain
recognized during 1998 on the sale of rigs and drilling related equipment of the
Company's Eastern Division located in Ohio to Union Drilling, Inc., an affiliate
of two of the Company's directors and the $543,000 gain also recognized during
1998 on the sale of a rig yard.

COMPARISON OF FISCAL YEAR ENDED DECEMBER 31, 1997 AND 1996

         Contract drilling revenues increased approximately $134.1 million, or
164%, to $215.9 million for the year ended December 31, 1997 compared to $81.8
million for the year ended December 31, 1996. This increase is primarily due to
an increase in revenue from domestic operations of $156.9 million due to an
increase in average revenue per rig day worked of $1,437 and an increase in
utilization of 16,525 days. The increase in operating days is due to the
acquisition of 57 operating rigs in late 1996 and 1997 as well as an overall
increase in utilization. The increase in revenue from domestic operations was
partially offset by a decrease in revenue from foreign operations of $22.8
million where rig days worked decreased by 2,864 days. During 1996, the Company
suspended its operations in the Mexico and Argentina markets due to a decline in
revenue per rig day worked and rig utilization. Revenue generated in Mexico and
Argentina markets during 1997 was zero compared to $11.3 million for the year
ended December 31, 1996. Revenue generated in Venezuela decreased by $11.5
million to $6.5 million for the year ended December 31, 1997 compared to $18.0
million for the year ended December 31, 1996. This decrease is due primarily to
the expiration of a contract to supply labor for four drilling rigs.

         Drilling expenses increased by $82.7 million, or 103.2%, to $162.8
million for the year ended December 31, 1997 compared to $80.1 million for the
year ended December 31, 1996. The increase is due to an increase in drilling
expenses from domestic operations of $105.9 million partially offset by a
decrease in drilling expenses from foreign operations of $23.2 million. Drilling
expenses from domestic operations increased by $105.9 million, or 215%, to
$155.0 million for the year ended December 31, 1997 from $49.1 million for the
year ended December 31, 1996. This increase is primarily due to increased
utilizations, but is also partially due to increasing direct labor and other
costs. The decrease in drilling expenses from foreign operations of $23.2
million, or 75%, to $7.7 million for the year ended December 31, 1997 from 

                                      -23-

<PAGE>   24
$31.0 million for the year ended December 31, 1996 is due to the withdrawal from
the Mexico and Argentina markets and the expiration of the labor contracts in
Venezuela discussed previously.

         Depreciation expense increased by $16.3 million, or 347%, to $21.0
million for the year ended December 31, 1997 compared to $4.7 million for the
year ended December 31, 1996. However, depreciation as a percentage of revenue
increased by only 4% to approximately 10% for the year ended December 31, 1997
from 6% for the year ended December 31, 1996. The increase is due to the
incrementally higher cost basis of the rigs acquired in recent transactions.

         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 $400,000 of other non-recurring charges. The employment severance
cost included $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 has withdrawn from both the Argentina and Mexico markets. As
a result, in 1996, the Company recorded estimated exit cost of $1.3 million for
Mexico which primarily consisted of the forfeiture of a performance bond and
other costs incurred to close the office and exit cost of $800,000 for Argentina
which primarily consist of costs incurred during the period necessary to exit
the market and close the office. In addition, during the first quarter of 1997,
the Company sold three of the six drilling rigs and certain other assets located
in Argentina for $1.5 million. In contemplation of the sale, in 1996 the Company
recorded a write-down of rig equipment and other assets of $2.5 million. The
remaining Argentina drilling rigs have been mobilized out of Argentina to the
United States where they have been refurbished and returned to service.
Mobilization costs of approximately $900,000 were incurred during 1997 and are
included in operating expense.

         General and administrative expenses increased by $3.8 million, or
88.4%, to $8.1 million for the year ended December 31, 1997 compared to $4.3
million for the year ended December 31, 1996 due to increased payroll cost of
new management members and increased staff size. General and administrative
expenses as a percentage of revenue, however, have decreased to 3.7% for the
year ended December 31, 1997 from 5.2% for the year ended December 31, 1996.

         Interest expense increased by $7.5 million, or 625%, to $8.7 million
for the year ended December 31, 1997 compared to $1.2 million for the year ended
December 31, 1996. This is primarily due to the issuance of $175 million in
Senior Notes during June 1997 to complete the Grey Wolf Acquisition and continue
the refurbishment of the rigs purchased in the stacked rig acquisitions.

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.

FOREIGN EXCHANGE

         Venezuelan operations are often performed by the Company pursuant to
drilling contracts under which payments to the Company are denominated in United
States Dollars but are payable in Venezuelan currency at a floating exchange
rate. Although the Company's Venezuelan contracts usually allow the Company to
exchange up to 35% of payments made to it in Venezuelan currency for United
States Dollars for a limited period of time following the payment and at the
official Venezuelan exchange rate in effect at the time the payment was made to
the Company (thus offering limited protection against adverse currency
fluctuation), the Company is typically subject to the risk of adverse currency
fluctuations with respect to the balance of such payments. Additionally, 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. Accordingly, management expects that the Company's subsidiaries
operating in Venezuela will be required to maintain significant cash balances in
Venezuelan currency. The Company is not a party to any currency hedging
arrangements and has not during the three-year period ending December 31, 1998
entered into any currency hedges to protect it from foreign currency losses.
Instead, the Company attempts to manage assets in foreign countries to minimize
its exposure to currency fluctuations. Despite those efforts, however, the
Company remains subject to the risk of foreign currency losses. During the year
ended December 31, 1998, the Company recognized a foreign exchange loss of
$178,000, 
                                      -24-

<PAGE>   25
while in 1997 and 1996, $50,000 and $404,000, respectively, were recorded as
decreases in shareholders' equity due to a devaluation of the Venezuelan
Bolivar.

YEAR 2000 COMPLIANCE

         The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Computer
equipment, software and other devices with imbedded technology that are
time-sensitive may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure causing disruptions of
administrative operations, including, among other things, temporary inability to
process data.

         The Company has undertaken various initiatives intended to ensure that
its computer equipment and software will function properly with respect to dates
in the year 2000 and thereafter. For this purpose, the term "computer equipment
and software" includes systems that are commonly thought of as information
technology ("IT") systems, including accounting, data processing, telephone
systems and other miscellaneous systems, as well as systems that are not
commonly thought of as IT systems, such as alarm systems, sprinkler systems, fax
machines, or other miscellaneous systems. Both IT and non-IT systems may contain
imbedded technology, which complicates the Company's Year 2000 identification,
assessment, remediation, and testing efforts. Based upon its identification and
assessment efforts to date, the Company believes that certain of the computer
equipment and software it currently uses will require replacement or
modification. In addition, in the ordinary course of replacing computer
equipment and software, the Company attempts to obtain replacements that it
believes are Year 2000 compliant. Utilizing both internal and external resources
to identify and assess needed Year 2000 remediation, the Company currently
anticipates that its Year 2000 identification, assessment, remediation, and
testing efforts, which began in June 1998, will be completed by June 30, 1999,
and that such efforts will be completed prior to any currently anticipated
impact on its computer equipment and software.

         The Company is in the process of mailing letters to its significant
vendors and customers and has verbally communicated with many strategic vendors
and customers to determine the extent to which interfaces with such entities are
vulnerable to Year 2000 issues and whether the products purchased from or by
such entities are Year 2000 compliant.

         The Company believes that as of February 28, 1999, it had completed
approximately 40% of the initiatives necessary to fully address potential Year
2000 issues relating to its computer equipment and software. The projects
comprising the remaining 60% of the initiatives are in process and expected to
be completed on or about June 30, 1999. As of December 31, 1998, the Company had
incurred costs of approximately $60,000 related to its Year 2000 identification,
assessment, remediation, and testing efforts consisting of upgrades to existing
software. The Company estimates that the future costs associated with the Year
2000 issue will not be material, and as such will not have a significant impact
on the Company's financial position or operating results.

         The Company presently believes that the Year 2000 issues will not pose
significant operational problems for the Company. However, if all Year 2000
issues are not properly identified, or assessment, remediation, and testing are
not effected timely with respect to Year 2000 problems that are identified,
there can be no assurance that the Year 2000 issue will not materially adversely
impact the Company's results of operations or adversely affect the Company's
relationships with customers, vendors, or others. Additionally, there can be no
assurance that the Year 2000 issues of other entities will not have a material
adverse impact on the Company's systems or results of operations.

         In the event the Company's key vendors do not achieve Year 2000
compliance, the Company could experience delays in delivery of supplies or
services to its drilling rigs resulting in less efficient operations, temporary
work stoppages or the loss of potential future contracts. If the Company's
customers do not achieve Year 2000 compliance the Company's cash flow could be
negatively impacted due to customers' inability to process invoices and issue
checks. While the Company believes its accounting systems will be Year 2000
compliant on a timely basis, in the event that they are not, significant
increase in manpower may be required to generate financial reports and process
invoices for payment.

         The Company has begun, but not yet completed, a comprehensive analysis
of operational problems and costs (including loss of revenues) that would be
reasonably likely to result from the failure by the Company and certain third
parties to complete efforts to achieve Year 2000 compliance on a timely basis. A
contingency plan has not been developed for dealing with the most reasonably
likely worst case scenario, and such scenario has not yet been clearly
identified. The Company currently plans to complete such analysis and
contingency planning by June 30, 1999. The contingency plan will be continually
refined as the Company obtains additional information regarding its Year 2000
condition. However, it is unlikely that any contingency plan will fully address
all events that may arise.


                                      -25-

<PAGE>   26


OTHER

         Grey Wolf, Inc. is a holding company, substantially all of its
operations are conducted through and substantially all of its assets consist of
equity interest in its subsidiaries. As a holding company, Grey Wolf Inc.'s
liquidity is dependent on the operations of its subsidiaries. Certain financing
arrangements that Grey Wolf, Inc. and its subsidiaries are party to restrict
Grey Wolf, Inc.'s ability to access funds from its subsidiaries.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

          Interest Rate Risk. The Company is subject to market risk exposure
related to changes in interest rates on its CIT Facility. Interest on borrowings
under the CIT Facility accrues at a variable rate, using either the prime rate
plus 0.25% to 1.50% or LIBOR plus 1.75% to 3.5%, depending upon the Company's
debt service coverage ratio for the trailing 12 month period. At December 31,
1998 and as of March 1, 1999 the Company had no outstanding balance under the
CIT Facility and as such has no exposure at this time to a change in the
interest rate.

         Foreign Currency Exchange Rate Risk. The Company currently conducts
business in Venezuela and is sensitive to fluctuations in foreign currency
exchange rates. See Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Foreign Exchange.

                                      -26-

<PAGE>   27



ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


                                    INDEX TO
                        CONSOLIDATED FINANCIAL STATEMENTS
                        AND FINANCIAL STATEMENT SCHEDULE


<TABLE>
<S>                                                                               <C>
Independent Auditors' Report.......................................................28

Consolidated Balance Sheets as of December 31, 1998 and 1997.......................29

Consolidated Statements of Operations for the Years
         Ended December 31, 1998, 1997, and 1996...................................30

Consolidated Statements of Shareholders' Equity and Comprehensive Income
         for the Years Ended December 31, 1998, 1997 and 1996......................31

Consolidated Statements of Cash Flows for the Years
         Ended December 31, 1998, 1997, and 1996...................................32

Notes to Consolidated Financial Statements.........................................34

Financial Statement Schedule:
          Schedule II - Valuation and Qualifying Accounts..........................48
</TABLE>


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.


                                      -27-

<PAGE>   28



INDEPENDENT AUDITORS' REPORT


To the Shareholders and Board of Directors
of Grey Wolf, Inc.:

         We have audited the accompanying consolidated balance sheets of Grey
Wolf, Inc. and Subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, shareholders' equity and comprehensive
income, and cash flows for each of the years in the three-year period ended
December 31, 1998. In connection with our audits of the consolidated financial
statements, we have also audited the financial statement schedule for the years
ended December 31, 1998, 1997 and 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 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 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 Grey Wolf,
Inc. and Subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, 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 LLP


Houston, Texas
February 16, 1999



                                      -28-

<PAGE>   29




                        GREY WOLF, INC. AND SUBSIDIARIES

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

<TABLE>
<CAPTION>
                                                                           December 31,
                                                                    ------------------------
                                                                       1998           1997 
                                                                    ---------      ---------
<S>                                                                 <C>            <C>      
                                          ASSETS
Current assets:
    Cash and cash equivalents                                       $  45,895      $  53,626
    Restricted cash - insurance deposits                                  762            450
    Accounts receivable, net of allowance
          of $1,106 and $1,053, respectively                           30,598         56,499
    Prepaids and other current assets                                   3,426          7,106
                                                                    ---------      ---------
       Total current assets                                            80,681        117,681

Property and equipment:
    Land, buildings and improvements                                    5,538          5,293
    Drilling equipment                                                561,850        430,524
    Furniture and fixtures                                              1,920          1,573
                                                                    ---------      ---------
       Total property and equipment                                   569,308        437,390
    Less: accumulated depreciation and amortization                  (157,992)       (28,302)
                                                                    ---------      ---------
       Net property and equipment                                     411,316        409,088

Other noncurrent assets                                                 9,306          6,983
                                                                    ---------      ---------

                                                                    $ 501,303      $ 533,752
                                                                    =========      =========


                           LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
    Current maturities of long-term debt                            $   1,162      $   1,148
    Accounts payable - trade                                           13,761         29,434
    Accrued workers' compensation                                       4,503          2,678
    Payroll and related employee costs                                  3,672          8,103
    Accrued interest payable                                           11,096          7,938
    Other accrued liabilities                                           1,998          1,736
                                                                    ---------      ---------
       Total current liabilities                                       36,192         51,037

Senior notes                                                          249,268        174,182
Long-term debt, net of current maturities                               1,259          2,043
Other long-term liabilities                                             1,460          3,863
Deferred income taxes                                                  46,128         53,106
Series A preferred stock - mandatorily redeemable                         305            305

Commitments and contingent liabilities                                     --             --

Shareholders' equity:
    Series B Preferred stock, $1 par value; 10,000 shares
       authorized, none outstanding                                        --             --
    Common stock, $.10 par value; 300,000,000 shares
       authorized; 165,065,391 and 164,746,291 issued and
       outstanding, respectively                                       16,506         16,474
    Additional paid-in capital                                        270,389        269,733
    Cumulative translation adjustments                                   (454)          (454)
    Accumulated deficit                                              (119,750)       (36,537)
          Total shareholders' equity                                  166,691        249,216
                                                                    ---------      ---------

                                                                    $ 501,303      $ 533,752
                                                                    =========      =========
</TABLE>


          See accompanying notes to consolidated financial statements.


                                      -29-

<PAGE>   30




                        GREY WOLF, INC. AND SUBSIDIARIES

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


<TABLE>
<CAPTION>
                                                          Years Ended December 31,
                                                  ---------------------------------------
                                                     1998           1997           1996 
                                                  ---------      ---------      ---------
<S>                                               <C>            <C>            <C>      
Revenues:
    Contract drilling                             $ 240,979      $ 215,923      $  81,767

Costs and expenses:
    Drilling operations                             191,417        162,752         80,086
    Depreciation and amortization                    38,069         20,957          4,689
    General and administrative                        8,880          8,081          4,274
    Provision for asset impairment                   93,193             --             --
    Provision for doubtful accounts                   1,723           (200)           302
    Unusual charges                                   1,722             --          6,131
                                                  ---------      ---------      ---------
       Total costs and expenses                     335,004        191,590         95,482
                                                  ---------      ---------      ---------

Operating income (loss)                             (94,025)        24,333        (13,715)

Other income (expense):
    Interest expense                                (21,621)        (8,748)        (1,220)
    Interest income                                   1,946          1,248            505
    Gain on sale of assets                            2,709          1,692          3,078
    Other, net                                         (173)           324            475
                                                  ---------      ---------      ---------
          Other income (expense), net               (17,139)        (5,484)         2,838
                                                  ---------      ---------      ---------

Income (loss) before income taxes                  (111,164)        18,849        (10,877)

Income tax expense (benefit)                        (27,951)         8,631            845
                                                  ---------      ---------      ---------

Net income (loss)                                   (83,213)        10,218        (11,722)

Series A preferred stock redemption premium              --           (240)           (13)
Series B preferred stock subscription
    dividend requirement                                 --             --           (402)
                                                  ---------      ---------      ---------
Net income (loss) applicable to Common  stock     $ (83,213)     $   9,978      $ (12,137)
                                                  ---------      ---------      ---------

Basic net income (loss) per Common share          $    (.50)     $     .07      $    (.18)
                                                  =========      =========      =========

Basic weighted average shares outstanding           164,944        145,854         67,495
                                                  =========      =========      =========

Diluted net income (loss) per Common share        $    (.50)     $     .07      $    (.18)
                                                  =========      =========      =========

Diluted weighted average shares outstanding         164,944        149,724         67,495
                                                  =========      =========      =========
</TABLE>

          See accompanying notes to consolidated financial statements.


                                      -30-

<PAGE>   31



                        GREY WOLF, INC. AND SUBSIDIARIES

    CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
                             (Amounts in thousands)

<TABLE>
<CAPTION>
                                        Series B
                                        Preferred                Common                                 Cumulative
                                         Stock                    Stock      Additional               Comprehensive
                                         $1 par         Common  $.10 par      Paid-in                     Income
                                          Value         Shares    Value       Capital      Deficit      Adjustments         Total 
<S>                                     <C>             <C>     <C>          <C>          <C>         <C>               <C>      
Balance, December 31, 1995              $   4,000       38,669  $   3,867     $  46,458   $ (34,631)     $      --      $  19,694

    Issuance of shares in Merger
       transactions                            --       78,848      7,885        41,673          --             --         49,558

    Issuance of shares in Mesa
       transaction                             --        5,500        550         6,985          --             --          7,535

    Issuance of shares in
       Wexford transaction                     --        1,750        175         3,945          --             --          4,120

    Exercise of stock options                  --          276         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)

    Comprehensive income:
       Unrealized translation loss             --           --         --            --          --           (404)          (404)
       Net loss                                --           --         --            --     (11,722)            --        (11,722)
                                        ---------    ---------  ---------     ---------   ---------      ---------      ---------
    Total comprehensive income                 --           --         --            --     (11,722)          (404)       (12,126)
                                        ---------    ---------  ---------     ---------   ---------      ---------      ---------

Balance, December 31, 1996                     --      125,043     12,504        99,301     (46,755)          (404)        64,646

    Issuance of shares in
       Flournoy acquisition                    --       12,426      1,243        29,823          --             --         31,066

    Exercise of stock options                  --          777         78         1,624          --             --          1,702

    Redemption of Series A
       Preferred stock                         --           --         --          (240)         --             --           (240)

    Issuance of shares in
       Grey Wolf merger                        --       14,000      1,400        46,200          --             --         47,600

    Sale of Common stock                       --       12,500      1,249        93,025          --             --         94,274

    Comprehensive income:
       Unrealized translation loss             --           --         --            --          --            (50)           (50)
       Net income                              --           --         --            --      10,218             --         10,218
                                        ---------    ---------  ---------     ---------   ---------      ---------      ---------
    Total comprehensive income                 --           --         --            --      10,218            (50)        10,168
                                        ---------    ---------  ---------     ---------   ---------      ---------      ---------

Balance, December 31, 1997                     --      164,746     16,474       269,733     (36,537)          (454)       249,216

    Exercise of stock options                  --          319         32           656          --             --            688

    Comprehensive income - net loss            --           --         --            --     (83,213)            --        (83,213)
                                        ---------    ---------  ---------     ---------   ---------      ---------      ---------

Balance, December 31, 1998              $      --      165,065  $  16,506     $ 270,389   $(119,750)     $    (454)     $ 166,691
                                        =========    =========  =========     =========   =========      =========      =========
</TABLE>


          See accompanying notes to consolidated financial statements.


                                      -31-

<PAGE>   32




                        GREY WOLF, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Amounts in thousands)


<TABLE>
<CAPTION>
                                                                       Years Ended December 31,
                                                               ---------------------------------------
                                                                 1998           1997           1996 
                                                               ---------      ---------      ---------
<S>                                                            <C>            <C>            <C>      
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net income (loss)                                          $ (83,213)     $  10,218      $ (11,722)
    Adjustments to reconcile net income (loss) to net cash
    provided by (used in) operating activities:
       Depreciation and amortization                              38,069         20,957          4,689
       Provision for asset impairment                             93,193             --             --
       Provision for doubtful accounts                             1,723           (200)           302
       Unusual charges                                                --             --          2,497
       Gain on sale of assets                                     (2,709)        (1,692)        (3,078)
       Foreign exchange loss                                         178             --             --
       Deferred income taxes                                     (27,033)         7,864             --
    (Increase) decrease in restricted cash                          (312)           550            612
    (Increase) decrease in accounts receivable                    24,014        (28,336)         3,255
    (Increase) decrease in other current assets                    3,585         (1,064)         3,147
    Increase (decrease) in accounts payable trade                (15,616)         8,783           (703)
    Increase (decrease) in accrued workers' compensation           1,825            201         (1,855)
    Increase (decrease) in customer advances                        (478)        (2,841)         2,350
    Increase (decrease) in other current liabilities              (1,327)         7,208         (1,167)
    Increase (decrease) in  minority interest                         --         (1,197)         1,047
    Increase (decrease) in other                                  (1,100)         1,332           (813)
                                                               ---------      ---------      ---------
       Cash provided by (used in) operating activities            30,799         21,783         (1,439)
                                                               ---------      ---------      ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Property and equipment additions                            (114,294)      (218,723)       (38,436)
    Proceeds from sales of equipment                               4,386          5,382          4,917
                                                               ---------      ---------      ---------
       Cash used in investing activities                        (109,908)      (213,341)       (33,519)
                                                               ---------      ---------      ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Proceeds from senior notes                                    75,000        174,161             --
    Proceeds from long-term debt                                  30,620         52,811         31,542
    Repayments of long-term debt                                 (31,304)       (78,141)       (16,544)
    Proceeds from sale of Common stock                                --         94,274         28,678
    Senior notes financing costs                                  (3,626)        (5,086)            --
    Proceeds from exercise of stock options                          688          1,702            280
    Redemption of Series A Preferred stock                            --           (699)          (149)
    Recession of preferred stock subscriptions                        --             --         (4,402)
                                                               ---------      ---------      ---------
       Cash provided by financing activities                      71,378        239,022         39,405
                                                               ---------      ---------      ---------

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

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS              (7,731)        47,464          4,303
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                      53,626          6,162          1,859
                                                               ---------      ---------      ---------
CASH AND CASH EQUIVALENTS, END OF YEAR                         $  45,895      $  53,626      $   6,162
                                                               =========      =========      =========
</TABLE>

          See accompanying notes to consolidated financial statements.


                                      -32-

<PAGE>   33



                        GREY WOLF, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Amounts in thousands)



<TABLE>
<CAPTION>
                                                                  Years Ended December 31,
                                                           -----------------------------------
                                                             1998          1997         1996 
                                                           --------      --------     --------
<S>                                                        <C>           <C>          <C>      

SUPPLEMENTAL CASH FLOW DISCLOSURE

CASH PAID FOR INTEREST:                                    $ 17,955      $  2,572     $  1,220
                                                           ========      ========     ========
CASH PAID FOR (REFUND OF) TAXES:                           $ (1,985)     $  1,999     $     --
                                                           ========      ========     ========

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

    Issuance of Common stock for Flournoy acquisition
       Change in property and equipment additions                --        40,503           --
       Change in issuance of Common stock                        --        31,066           --
       Change in deferred tax liability                          --         9,437           --

    Issuance of Common stock for Grey Wolf acquisition
       Change in property and equipment additions                --        86,038           --
       Change in issuance of Common stock                        --        47,600           --
       Change in deferred tax liability                          --        35,557           --
       Change in accounts receivable                             --        12,097           --
       Change in prepaids and other current assets               --           859           --
       Change in other assets                                    --           180           --
       Change in accounts payable                                --         8,825           --
       Change in accrued workers' compensation costs             --           975           --
       Change in payroll and related employee costs              --         1,305           --
       Change in customer advances                               --           898           --
       Change in income tax payable                              --         1,099           --
       Change in other accrued liabilities                       --         1,832           --
       Change in long term debt                                  --         1,083           --

    Murco acquisition
       Change in property and equipment additions            20,055            --           --
       Change in deferred tax liability                      20,055            --           --
</TABLE>

          See accompanying notes to consolidated financial statements.


                                      -33-

<PAGE>   34


                        GREY WOLF, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(1)    Summary of Significant Accounting Policies

         Nature of Operations. Grey Wolf, Inc. (formerly DI Industries, Inc.) is
a Texas corporation formed in 1980. On July 14, 1997, by written consent, the
Board of Directors and a majority of the shareholders of DI Industries, Inc.
approved an amendment to the corporate charter to change the name of the company
from DI Industries, Inc. to Grey Wolf, Inc. The Articles of Amendment effecting
the amendment were filed with the Texas Secretary of State on September 18,
1997.

         Principles of Consolidation and Basis of Presentation. Grey Wolf, Inc.
is engaged in the business of providing onshore contract drilling services to
the oil and gas industry. Grey Wolf, Inc. and its subsidiaries conduct
operations in Texas, Arkansas, Louisiana, Mississippi and other states and has
international operations in Venezuela. The consolidated financial statements
include the accounts of Grey Wolf, Inc. and its majority-owned subsidiaries
("the Company" or "Grey Wolf"). All significant intercompany accounts and
transactions are eliminated in consolidation.

         Property and Equipment. Property and equipment is stated at cost.
Depreciation is calculated using the straight-line method over the estimated
useful lives of the assets between three and fifteen years. Effective January 1,
1998, the Company changed the depreciable lives of the majority of its drilling
rigs from 12 to 15 years to better reflect the useful lives of the Company's
refurbished and upgraded rig fleet. The effect of this change reduced
depreciation expense for the year ended December 31, 1998 by approximately $6.0
million.

         Statement of Financial Accounting Standards ("SFAS") No. 121
"Accounting for the Impairment of Long- Lived Assets and Long-Lived Assets to be
Disposed of " sets forth guidance as to when to recognize an impairment of
long-lived assets and how to measure such impairment. The standard requires
certain assets be reviewed for impairment whenever events or circumstances
indicate the carrying amount may not be recoverable. Based on the application of
SFAS No. 121 the Company recognized a $93.2 million pretax charge during 1998
(See Note 11 for additional information).

         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. Venezuela has a highly inflationary
economy as defined by Statement of Financial Accounting Standards No. 52,
"Foreign Currency Translation." As such, the Company's functional currency is
the U.S. dollar. Accordingly, monetary assets and liabilities denominated in
foreign currency are re-measured to U.S. dollars at the rate of exchange in
effect at the end of the period, items of income and expense and other
non-monetary amounts are re-measured at historical rates. Gains or losses on
foreign currency re-measurement are included in other income (expense), net in
the consolidated statement of operations. During the year ended December 31,
1998, the Company recognized foreign exchange losses of $178,000. Prior to 1998,
assets and liabilities of foreign subsidiaries were translated into United
States dollars at the applicable rate of exchange in effect at the end of the
period reported. Revenues and expenses were translated at the applicable
weighted average rates of exchange in effect during the period reported.
Translation adjustments were reflected as a separate component of shareholders'
equity. Any transaction gains and losses were included in net income. During
1997 and 1996 respectively, the Company recorded unrealized translation losses
of $50,000 and $404,000 as a reduction of shareholders' equity.

         Income (Loss) per Share. In February 1997, the Financial Accounting
Standards Board issued SFAS No. 128, "Earnings per Share." SFAS No. 128
specifies new measurement, presentation and disclosure requirements for earnings
per share and is required to be applied retroactively upon initial adoption. The
Company adopted SFAS No. 128 effective December 31, 1997, and accordingly, has
restated herein all previously reported earnings per share data. Basic earnings
per share is based on weighted average shares outstanding without any dilutive
effects considered. Diluted earnings per share reflects dilution from all
contingently issuable shares, including options, warrants and convertible
preferred stock. During 1998 and 1996, the Company's diluted earnings per share
excludes all contingently issuable shares as they were antidilutive. A
reconciliation of the weighted average common shares outstanding on a basic and
diluted basis is as follows (in thousands):

                                      -34-

<PAGE>   35


                                         GREY WOLF, INC. AND SUBSIDIARIES

                                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



<TABLE>
<CAPTION>
                                     1998        1997        1996 
                                   -------     -------     -------
<S>                                <C>         <C>         <C>   
Weighted average common shares
    outstanding - Basic            164,944     145,854      67,495

Effect of dilutive securities:
    Options                             --       2,883          --
    Redeemable preferred stock          --         329          --
    Warrants                            --         658          --
                                   -------     -------     -------
                                        --       3,870          --
                                   -------     -------     -------
Weighted average common shares
    outstanding - Diluted          164,944     149,724      67,495
                                   =======     =======     =======
</TABLE>

         Income Taxes. The Company records deferred tax liabilities utilizing an
asset and liability approach. This method gives consideration to the future tax
consequences associated with differences between the financial accounting and
tax basis of assets and liabilities. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.

         Interest Capitalization. Interest is capitalized on rig refurbishments
during the refurbishment period. Interest is capitalized to the rigs using an
allocation method based on the Company's actual interest cost. Total interest
capitalized for the years ended December 31, 1998 and 1997 was $874,000 and $1.8
million, respectively. No interest was capitalized for the year ended December
31, 1996.

         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 credit
facility approximates fair value as the interest is indexed to the prime rate or
LIBOR. The fair value of the senior notes at December 31, 1998 was $203 million
compared to the carrying value of $250 million. For the year ended December 31,
1997, fair value of the senior notes approximated carrying value as the
Company's notes were being traded at their face amounts. Fair value was
estimated based on quoted market prices.

         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 $762,000 and $450,000 at December 31,
1998 and 1997, 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. The preparation of financial statements in conformity
with generally accepted accounting principles requires the use of certain
estimates and assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities. Actual results could
differ from those estimates.

         Concentrations of Credit Risk. Substantially all of the Company's
contract drilling activities are conducted with independent oil and gas
companies in the United States or with national petroleum companies in 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.

         Comprehensive Income. During the first quarter of 1998, the Company
adopted Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income", which established standards for reporting and display of
comprehensive income and its components. Comprehensive income includes all
changes in a company's equity during the period that result from transactions
and other economic events, other than transactions with its stockholders. In
addition to net income (loss), comprehensive income of the Company includes
cumulative translation losses.

                                      -35-

<PAGE>   36


                        GREY WOLF, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



(2)      SIGNIFICANT PROPERTY TRANSACTIONS

         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.

         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 Grey Wolf Common stock, the exercise of which is
contingent upon the occurrence of certain events. As a result of certain events
which occurred prior to December 31, 1998, 244,000 warrants remained outstanding
and the remainder were canceled. These Mergers resulted in the acquisition of 18
idle, deep capacity land drilling rigs.

         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 Grey Wolf Common stock and warrants to acquire up to
1,720,000 shares of Grey Wolf Common stock, the exercise of which is contingent
upon the occurrence of certain events. As a result of certain events which
occurred prior to December 31, 1998, 244,000 warrants remained outstanding and
the remainder were canceled. This merger transaction resulted in a $25 million
equity infusion into the Company.

         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 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 consisted of six
diesel electric SCR drilling rigs, three of which were operating in South Texas
and the other rigs were 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, 19
hauling trucks, a yard facility in Alice, Texas and various other equipment and
drill pipe.

         On January 31, 1997, the Company acquired the operating assets of
Flournoy Drilling Company ("Flournoy") for 12.4 million shares of the Company's
Common stock and $800,000 in cash. The assets acquired included 13 drilling
rigs, 17 rig hauling trucks, a yard and office facility in Alice, Texas, and
various other equipment and drill pipe.

         In May and June 1997, the Company purchased six stacked rigs in four
separate transactions for an aggregate purchase price of $15.8 million in cash.
Four of the rigs were purchased from an affiliate of one of the Company's
directors.

         On June 27, 1997, the Company acquired all of the outstanding capital
stock of Grey Wolf Drilling Company ("GWDC") by merger in exchange for $61.6
million cash and 14.0 million shares of the Company's Common stock. Transaction
costs of approximately $0.6 million were incurred in connection with the merger.
GWDC operated 18 large premium drilling rigs in South Louisiana and along the
upper Texas Gulf Coast.

                                      -36-

<PAGE>   37


                        GREY WOLF, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



         In July 1997, the Company purchased one operating rig for $2.4 million
in cash. In August 1997, the Company purchased six stacked drilling rigs and
related equipment from Cactus Drilling Company, a division of Kaiser-Francis Oil
Company, for $25.4 million (the "Kaiser-Francis Rig Purchase").

         On September 15, 1997, the Company entered into a definitive agreement
to acquire substantially all of the operating assets of Justiss Drilling Company
(the "Justiss Acquisition"), a division of Justiss Oil Company, Inc. The assets
included a fleet of 12 operating drilling rigs and related equipment. The total
purchase price for the Justiss acquisition was $36.1 million in cash of which
$28.6 million was paid on October 21, 1997, upon delivery of nine of the 12
rigs. The remaining three rigs were purchased and the balance of the purchase
price ($7.5 million) was paid in November 1997, as each rig completed a turnkey
drilling contract. The Company borrowed $28.0 million under its bank credit
facility for the first nine rigs and the November purchases were funded from the
Company's stock offering (discussed below). Two of the rigs acquired have been
taken out of service and used for spare parts.

         On November 13, 1997, the Company closed the sale of its 65% interest
in INDRILLERS, L.L.C. ("Indrillers") and certain related drilling assets to Dart
Energy Corporation ("Dart") in exchange for $1.65 million in cash and title to a
1,200 horsepower SCR rig previously held by Indrillers. Indrillers, a limited
liability company, operated ten drilling rigs in Michigan and was formed in 1996
though the combination of certain drilling assets of the Company and Dart with
resulting ownership of 65% and 35%, respectively. Indrillers' rig fleet
consisted of nine smaller mechanical rigs ranging from 300 to 900 horsepower and
one 1,200 horsepower SCR rig. The Company recorded a gain of approximately
$700,000 on the sale.

         On January 30, 1998, the Company acquired all of the outstanding common
stock of Murco Drilling Corporation ("Murco") for $60.8 million in cash. At
closing, Murco had net liabilities of approximately $4.5 million. The Company
funded this stock purchase out of working capital and $30 million borrowings
under its bank credit facility. Murco operated ten land drilling rigs in Texas,
Louisiana, Mississippi and Alabama.

         On February 26, 1998, the Company signed a definitive agreement to sell
all of the rigs and drilling related equipment of the Company's Eastern Division
located in Ohio to Union Drilling, Inc. ("Union"), an affiliate of two of the
Company's directors, for $2.4 million. The sale closed in steps as each of the
rigs completed its current drilling contract with the last transaction being
completed on March 4, 1998. The Eastern division rig fleet consisted of six 450
horsepower mechanical rigs. The Company recorded a gain of $1.8 million on the
sale during the first quarter of 1998.

         Since late 1996, twenty-four of the idle rigs acquired in the above
transactions have been refurbished and are ready for service. The remaining nine
rigs are included in the Company's inventory of twelve rigs to be refurbished as
market conditions improve. 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.

         The following unaudited pro forma consolidated financial data for the
year ended December 31, 1998 includes the historical results of the Company for
the year ended December 31, 1998, and gives effect to the acquisition of Murco
and related borrowings under the bank credit facility, as if they had occurred
on January 1, 1998. The following unaudited pro forma consolidated financial
data for the year ended December 31, 1997 includes the historical results of the
Company for the year ended December 31, 1997, and gives effect to the
acquisition of Murco and related borrowings under the bank credit facility as
well as the previously disclosed merger, acquisitions and sale transactions
which occurred before December 31, 1997, as if they occurred on January 1, 1997.
Inventory rig purchases had no historical operations as the rigs had been
stacked and the impact of the unaudited pro forma consolidated financial data is
not material and has not been presented.

                                      -37-

<PAGE>   38


                        GREY WOLF, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
                                                       For the Years Ended December 31,   
                                                      -----------------------------------
                                                         1998                      1997    
                                                      ----------                ---------
                                                      (Amounts in thousands, except 
                                                             per share amounts)

<S>                                                   <C>                        <C>      
              Total revenues                          $  243,052                 $ 298,426
              Net income (loss) applicable
                  to common stock                        (83,151)                    6,872

              Net income (loss) per basic
              and diluted share                             (.50)                      .04
</TABLE>

(3)      INCOME TAXES

         The Company and its U.S. subsidiaries file consolidated federal income
tax returns. The components of the provision for income taxes consisted of the
following (amounts in thousands):

<TABLE>
<CAPTION>
                                                            For the Years Ended December 31,
                                                          ------------------------------------
                                                            1998            1997         1996    
                                                          ---------       -------       ------
<S>                                                       <C>             <C>           <C>   
       Current
              Federal                                     $    (935)      $   949       $   --
              State                                              --           108           --
              Foreign                                            17          (290)         845
                                                          ---------       -------       ------
                                                               (918)          767          845
                                                          =========       =======       ======
       Deferred
              Federal                                       (23,377)        6,654           --
              State                                          (3,656)        1,210           --
              Foreign                                            --            --           --
                                                          ---------       -------       ------
                                                          $ (27,033)      $ 7,864       $   --
                                                          =========       =======       ======
</TABLE>

       Deferred income taxes are determined based upon the difference between
the carrying amount of assets and liabilities for financial reporting purposes
and amounts used for income tax purposes, and net operating loss and tax credit
carryforwards. The tax effects of the Company's temporary differences and
carryforwards are as follows (amounts in thousands):

<TABLE>
<CAPTION>
                                                                  December 31,   
                                                            ----------------------
                                                              1998           1997   
<S>                                                         <C>            <C>    

       Deferred tax assets
              Net operating loss carryforwards              $ 18,502       $  3,463
              Tax credit carryforwards                         2,414          3,349
              Workers compensation accruals                    2,281          2,290
              Other                                              423            499
                                                            --------       --------
                                                              23,620          9,601
              Valuation allowance                             (2,400)        (2,400)
                                                            --------       --------
                                                              21,220          7,201
       Deferred tax liabilities
              Depreciation and amortization                   67,348         60,307
                                                            --------       --------

       Net deferred tax liability                           $ 46,128       $ 53,106
                                                            ========       ========
</TABLE>

         At December 31, 1998 and 1997, the Company had U.S. net operating loss
("NOL") carryforwards of $69.4 million and $32.0 million, respectively, which
expire at various times through 2018. In addition, the Company had investment
tax credit carryforwards ("ITC") of approximately $2.4 million which expire in
2000. The NOL and ITC carryforwards are subject to annual limitations as a 
result of the changes in ownership of the Company in 1989, 1994 and 1996.

                                      -38-

<PAGE>   39


                        GREY WOLF, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


       For financial reporting 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 in
1996.

       The following summarizes the differences between the federal statutory
tax rates (35%, 35%, 34%, respectively) and the Company's effective tax rate
(amounts in thousands):

<TABLE>
<CAPTION>
                                                               For the Years Ended December 31,
                                                               1998          1997         1996 
                                                             --------      --------     --------
          <S>                                                <C>           <C>          <C>      
          Income tax expense (benefit) at statutory rate     $(38,908)     $  6,597     $ (3,698)

          Increase (decrease) in taxes resulting from:
                 Permanent differences                         10,004           838           --
                 Change in valuation allowance                     --            --        1,169
                 Loss of foreign deductions                     3,040           292        3,374
                 State taxes (net)                             (2,376)          857           --
                 Other                                            289            47           --
                                                             --------      --------     --------
          Income tax expense (benefit)                       $(27,951)     $  8,631     $    845
                                                             ========      ========     ========
</TABLE>

(4)    LONG-TERM DEBT

       Long-Term debt consists of the following (amounts in thousands):

<TABLE>
<CAPTION>
                                                                                        December 31,
                                                                                     1998         1997 
                                                                                   --------     --------
          <S>                                                                       <C>         <C>  
          $250,000 and $175,000, respectively, senior notes due 2007, general
             unsecured senior obligations guaranteed by the Company's domestic
             subsidiaries, bearing interest
             at 8 7/8% per annum payable semiannually                              $249,268     $174,182

          Capital leases, secured by transportation and other equipment,
             bearing interest at 10% to 14%                                           2,421        3,191
                                                                                   --------     --------
                                                                                    251,689      177,373

          Less current maturities                                                     1,162        1,148
                                                                                   --------     --------
          Long-term debt                                                           $250,527     $176,225
                                                                                   ========     ========
</TABLE>


             Concurrently with the closing of the GWDC merger in June 1997, the
Company concluded a public offering of $175 million in principal amount of
senior notes ("Notes"). The Notes bear interest at 8 7/8% per annum and mature
July 1, 2007. The net proceeds from the sale of the Notes were used (i) to pay
the cash portion of the GWDC merger, (ii) to repay the Company's then
outstanding balance under its revolving line of credit from its commercial
banks, (iii) to pay the purchase price for the Kaiser-Francis Rig Purchase and
the additional rig purchases and (iv) for capital expenditures to refurbish
certain of the Company's rigs and for other general corporate purposes. The
Notes are general unsecured senior obligations of the Company and are
guaranteed, on a joint and several basis, by all domestic wholly-owned
subsidiaries of the Company.

         In May 1998, the Company completed an additional offering of $75.0
million of senior notes ("Notes"). The terms and conditions of these newly
issued notes are substantially consistent with the senior notes issued in June
1997. The net proceeds from the offering were $71.4 million after deducting
commissions fees and expenses. All fees and expenses are being amortized over
the life of the Notes. A portion of the net proceeds from the offering was used
to repay approximately $30.0 million of indebtedness then outstanding under the
Company's bank credit facility. The remaining proceeds will be used for general
corporate purposes.

         Except as discussed below, the Notes are not redeemable at the option
of the Company prior to July 1, 2002. On or after such date, the Company shall
have the option to redeem the Notes in whole or in part during the twelve months
beginning July 1, 2002 at 104.4375%, beginning July 1, 2003 at 102.9580%,
beginning July 1, 2004 at 101.4792% and


                                      -39-

<PAGE>   40


                        GREY WOLF, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


beginning July 1, 2005 and thereafter at 100.0000% together with any
interest accrued and unpaid to the redemption date. However, at any time during
the first 36 months after the issue date, the Company may at its option, redeem
up to a maximum of 30% of the aggregate principal amount with the net cash
proceeds of one or more equity offerings at a redemption price equal to 108.875%
of the principal amount thereof, plus accrued and unpaid interest thereon to the
redemption date provided that at least $170.0 million aggregate principal amount
shall remain outstanding immediately after the occurrence of any such
redemption. Upon a Change of Control as defined in the Indentures, each holder
of the Notes will have the right to require the Company to repurchase all or any
part of such holder's Notes at a purchase price equal to 101% of the aggregate
principal amount thereof, plus accrued and unpaid interest to the date of
purchase.

         Effective January 14, 1999, the Company terminated its senior secured
revolving credit facility ("the Bank Credit Facility") with a syndicate of
commercial banks. The Bank Credit Facility provided the Company with the ability
to borrow up to $50.0 million from time to time prior to April 30, 2000, subject
to the certain reductions with up to $5.0 million of such amount available for
letters of credit. Interest under the Bank Credit Facility accrued at a sliding
variable rate based on certain financial ratios of either LIBOR plus 1.75% to
2.5% or prime plus .75% to 1.5%. The Company paid commitment fees of .5% on the
unused portion of the Bank Credit Facility. The Bank Credit Facility was secured
by substantially all of the Company's assets and called for quarterly interest
payments on the outstanding balance. At December 31, 1998 and 1997, there were
no borrowings outstanding under the Bank Credit Facility. The Bank Credit
Facility also contained customary affirmative and negative covenants with which
the Company was in compliance at December 31, 1998.

         In connection with the termination of the Facility, in January 1999,
the Company wrote off approximately $600,000 of deferred loan costs related to
the Facility.

         Also on January 14, 1999, the Company entered into a new senior secured
revolving credit facility with The CIT Group/Business Credit, Inc. ("the CIT
Facility"), replacing its prior $50.0 million facility. The CIT Facility
provides the Company with the ability to borrow up to the lessor of $50.0
million or 50% of the orderly liquidation value (as defined in the agreement) of
marketable drilling rig equipment located in the 48 contiguous United States.
The CIT Facility is a four year revolving facility with periodic interest
payments at a floating rate based upon the Company's debt service coverage ratio
within a range of either LIBOR plus 1.75% to 3.5% or prime plus .25% to 1.5%.
During the first year of the CIT Facility the interest rate is fixed at LIBOR
plus 2.5% or prime plus 1%. The Company is required to pay a commitment fee of
0.375% per annum on the unused portion of the CIT Facility. In addition, the CIT
Facility contains certain affirmative and negative covenants including a minimum
appraisal value of the drilling rigs and related equipment plus certain
financial covenants which take effect if the Company's cash on hand and
borrowing capacity under the CIT Facility falls below $25 million. Substantially
all of the Company's assets, including its drilling equipment, are pledged as
collateral under the CIT Facility. The Company, however, retains the option,
subject to a minimum appraisal value, under the CIT Facility to extract $75
million of the equipment out of the collateral pool for other purposes. The
Company currently has no borrowings outstanding under the CIT facility.

         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 stock 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. During 1997 and 1996, the Company voluntarily redeemed 45,900 and
13,500 shares, respectively, of Series A Preferred leaving 30,600 shares
outstanding at December 31, 1998.

         Annual maturities of the debt outstanding at December 31, 1998 for the
next five years are as follows (amounts in thousands): 1999 - $1,162; 2000 -
$835; 2001 - $374; 2002 - $50; 2003 - $-0- and thereafter $249,268.

(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

                                      -40-

<PAGE>   41


                        GREY WOLF, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


$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, the $4,000,000 subscription plus accrued dividends was repaid to Norex
Drilling by the Company with the proceeds from a term loan.

         On December 31, 1996, in connection with closing the Bank Credit
Facility, the Company completed a private placement of 1,750,000 shares of Grey
Wolf 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 the above mentioned $4,000,000 term note. Immediate shelf registration
rights were also granted by Grey Wolf in connection with the share issuance.
These shares were subsequently registered.

         On November 3, 1997, the Company closed an offering of 25.0 million
shares of its common stock. The Company sold 12.5 million newly issued common
shares and certain shareholders sold 12.5 million additional shares at $8.00 per
share. The Company received proceeds, net of underwriting discount, of
approximately $95 million. Other costs incurred to complete the offering were
approximately $722,000 and were recorded as a reduction of additional paid-in
capital. The proceeds of the offering were used to pay down the Bank Credit
Facility and to complete the Murco Acquisition.

         On September 21, 1998, the Company adopted a Shareholder Rights Plan
(the "Plan") in which rights to purchase shares of Junior Preferred stock will
be distributed as a dividend at the rate of one Right for each share of Common
stock.

         Each Right will entitle holders of the Company's Common stock to buy
one-one thousandth of a share of Grey Wolf's Series B Junior Participating
Preferred Stock at an exercise price of $11. The Rights will be exercisable only
if a person or group acquires beneficial ownership of 15% or more of Grey Wolf's
Common stock or announces a tender or exchange offer upon consummation of which
such person or group would beneficially own 15% or more of Grey Wolf's Common
stock. Furthermore, if any person becomes the beneficial owner of 15% or more of
Grey Wolf's Common stock, each Right not owned by such person or related parties
will enable its holder to purchase, at the Right's then-current exercise price,
shares of Common stock of the Company having a value of twice the Right's
exercise price. The Company will generally be entitled to redeem the Rights at
$.001 per Right at any time until the 10th day following public announcement
that a 15% position has been acquired.

         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, 1998 options to
purchase 1,893,100 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. Options under the 1987 Director Plan to purchase 212,800 shares of
common stock were available for grant until June 30, 1997 when the plan was
canceled. 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, 1998 options under the 1996 Plan to
purchase 3,457,875 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 2,360,000 shares reserved for
other Incentive Stock Option Agreements between the Company and its' executive
officers and directors. One million five hundred thousand of the shares are
reserved for the Company's Chief Executive Officer and 500,000 are reserved for
one of the Company's directors. The options become exercisable in varying
increments over four to five-year periods and the majority of the options expire
on the tenth anniversary of the date of grant. The remaining shares are reserved
for non-employee directors and are immediately exercisable upon issuance. Stock
option activity for all plans was as follows (number of shares in thousands):

                                      -41-

<PAGE>   42


                        GREY WOLF, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



<TABLE>
<CAPTION>
                                                     Number                            Option
                                                    of Shares                         Price Range
                                                    ---------                    -------------------
           <S>                                      <C>                          <C>          <C>   
           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

                 Granted                                  800                    $ 2.50    -  $ 2.88
                                                          630                    $ 3.13    -  $ 4.06
                                                           10                    $ 8.25
                 Exercised                               (107)                   $  .69    -  $ 1.00
                                                         (670)                   $ 1.13    -  $ 1.75
                 Canceled                                 (13)                   $ 2.50    -  $ 2.88
                                                           (4)                   $  .69    -  $ 1.75
                                                          (20)                   $ 2.50    -  $ 2.88

           Outstanding December 31, 1997                  156                    $  .69    -  $ 1.00
                                                        3,084                    $ 1.13    -  $ 1.75
                                                        1,255                    $ 2.50    -  $ 2.88
                                                          630                    $ 3.13    -  $ 4.06
                                                           10                    $ 8.25

                 Granted                                   50                    $ 1.50
                                                          108                    $ 3.69
                                                          988                    $ 4.06    -  $ 4.38

                 Exercised                                (50)                   $  .69    -  $ 1.00
                                                         (269)                   $ 1.25    -  $1.625

                 Canceled                                 (16)                   $  .69    -  $  .94
                                                          (46)                   $ 1.25    -  $1.625
                                                          (75)                   $ 2.81    -  $ 3.13
                                                         (203)                   $ 4.06

           Outstanding December 31, 1998                   90                    $  .69    -  $ 1.00
                                                        2,819                    $ 1.13    -  $ 1.75
                                                        1,543                    $ 2.50    -  $ 3.69
                                                        1,160                    $ 4.06    -  $ 4.38
                                                           10                    $ 8.25

           Exercisable December 31, 1998                2,412                    $  .69    -  $ 8.25
</TABLE>

                                      -42-

<PAGE>   43
                        GREY WOLF, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         At December 31, 1998, the Company has three stock-based compensation
plans, which are 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 SFAS 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):

<TABLE>
<CAPTION>
                                                              1998        1997      1996 
                                                            ---------   --------  ---------
          <S>                                               <C>         <C>       <C>       
          Net income (loss)
              As reported                                   $ (83,213)  $ 10,218  $ (12,124)
              Pro forma                                     $ (84,563)  $  9,531  $ (13,723)
          Earnings (loss) per share - basic and diluted
              As reported                                   $    (.50)  $    .07  $    (.18)
              Pro forma                                     $    (.51)  $    .06  $    (.20)
</TABLE>

         For purposes of determining compensation costs using the provisions of
SFAS No. 123, the fair value of option grants was 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; dividend yield of zero; stock price volatility of 60%; and expected
option lives of five years.

(6)      SEGMENT AND GEOGRAPHIC INFORMATION

         Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 establishes new standards for
segment reporting based on the way management organizes segments within a
company for making operating decisions and assessing performance. The Company
manages its business as two reportable segments; domestic operations and foreign
operations. Although the Company provides contract drilling services in several
markets domestically, these operations have been aggregated into one reportable
segment based on the similarity of economic characteristics among all markets
including the nature of the services provided and the type of customers of such
services.

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

<TABLE>
<CAPTION>
                                For the Years Ended December 31,
                            ---------------------------------------
                              1998           1997           1996 
                            ---------      ---------      ---------
<S>                         <C>            <C>            <C>      
Revenues:
   Domestic                 $ 232,276      $ 209,423      $  52,495
   Mexico                          --             --          3,504
   South America                8,703          6,500         25,768
                            ---------      ---------      ---------
                            $ 240,979      $ 215,923      $  81,767
                            =========      =========      =========

Operating income (loss)
   Domestic                 $ (85,013)     $  26,822      $  (4,002)
   Mexico                          --             --         (3,818)
   South America               (9,012)        (2,489)        (5,895)
                            ---------      ---------      ---------
                            $ (94,025)     $  24,333      $ (13,715)
                            =========      =========      =========

Total assets:
   Domestic                 $ 489,543      $ 515,683      $ 103,608
   Mexico                           1              3          1,500
   South America               11,759         18,066         12,711
                            ---------      ---------      ---------  
                            $ 501,303      $ 533,752      $ 117,819
                            =========      =========      =========
</TABLE>

         During 1998, operating income (loss) above includes provisions for
asset impairments from domestic and foreign operations of $87.4 million and $5.8
million, respectively; unusual charges from domestic and foreign operations of
$.5 million and $1.2 million, respectively; and provisions for doubtful accounts
from domestic and foreign operations of $1.6 million and $.1 million,
respectively. (See Note 11)

         Capital expenditures related to foreign operations in 1998, 1997 and
1996 were $2.5 million, $3.6 million and $1.2 million, respectively, while
depreciation expense was $.7 million, $.5 million and $1.7 million,
respectively.

         During the year ended December 31, 1997, one domestic customer
accounted for 10% of the Company's consolidated revenues. During the years ended
December 31, 1998 and 1996, no customer accounted for 10% or more of the
Company's consolidated revenues.

(7)      RELATED-PARTY TRANSACTIONS

         On June 10, 1996, Norex Drilling advanced $1,000,000 to the Company
pursuant to a Promissory Note (the "Note") and Commercial Security Agreement.

                                      -43-

<PAGE>   44


                        GREY WOLF, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 Note 2.

         During 1996 a consulting fee of $10,000 per month was paid by the
Company under a consulting arrangement with the Company's then 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 1998, 1997 and 1996, the
Company paid the firm $8,000, $41,000 and $200,000, respectively.

         During 1997 the Company purchased four drilling rigs from an affiliate
of one of the Company's directors.

         During 1998, the Company sold its Eastern Division assets to Union, an
affiliate of two of the Company's directors.

         From time to time, in the normal course of business, the Company
purchases equipment from affiliates of two of the Company's directors. Total
purchases during 1998 were $898,000.

(8)      LEASE COMMITMENTS

         Aggregate minimum lease payments required under noncancellable
operating leases having terms greater than one year are as follows as of
December 31, 1998: 1999 - $137,000; 2000 - $123,000; 2001 - $104,000; 2002 -
$101,000; and 2003 - $76,000.

         Rent expense under operating leases for 1998, 1997 and 1996 was
approximately $458,000, $268,000, and $109,000, respectively.

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

(9)      CONTINGENCIES

         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 GWDC merger is intended to qualify as a tax free reorganization
under Sections 368(a)(1)(A) and 368(a)(2)(D) of the Internal Revenue Code of
1986, as amended (the "Code"), with respect to common stock received by GWDC
shareholders. A principal condition for such qualification is that the former
shareholders of GWDC will satisfy the continuity of proprietary interest
standard with respect to common stock received in the GWDC merger. Thus, under
previous Internal Revenue Service ("IRS") guidelines, dispositions of common
stock by GWDC shareholders during the five years following the GWDC merger could
cause the IRS to assert that the GWDC merger does not qualify as a tax free
reorganization. The Company has no contractual agreements with GWDC shareholders
preventing the disposition of their shares. If the GWDC merger fails to qualify
as a tax free reorganization for failure to meet the continuity of interest
standard or for any reason, the receipt of common stock will be taxable to the
GWDC shareholders at the time of the GWDC merger and GWDC will be deemed to have
sold all of its assets in a taxable exchange triggering a corporate tax
liability to GWDC estimated to be in excess of $30.0 million. The Company's
wholly-owned subsidiary, Grey Wolf Drilling Company (formerly Drillers, Inc.),
as the surviving corporation of the GWDC merger, would be liable for any such
corporate tax which, if imposed, would have a material adverse effect on the
financial condition of the Company.

(10)     EMPLOYEE BENEFIT PLAN

         The Company has a defined contribution employee benefit plan covering
substantially all of its employees. Prior to 1997, the Company matched
individual employee contributions up to 2% of the employee's compensation.
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 the
plan were also amended. Employer matching contributions under the plan totaled
$1.4 million, $852,000 and $104,000 for the years 

                                      -44-

<PAGE>   45


                        GREY WOLF, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ended December 31, 1998, 1997 and 1996, respectively. Participants vest in
employer matching contributions over a five year period based upon service with
the Company.

(11)     PROVISION FOR ASSET IMPAIRMENT AND UNUSUAL CHARGES

         During the year ended December 31, 1998, the Company recorded pre-tax
unusual charges of $94.9 million which included a $93.2 million asset
impairment, $0.5 million in severance costs, and $1.2 million in write-downs
associated with international operations. The severance costs relate to
employees terminated during 1998, while the write-downs associated with
international operations are primarily the write-off of other assets which, due
to industry and market conditions, will not be realizable.

         The non-cash asset impairment charge of $93.2 million was recorded in
accordance with Statement of Financial Accounting Standards No. 121, which
requires that long-lived assets and certain identifiable intangibles held and
used by the Company be reviewed for impairment whenever events or changes in
circumstance indicate that the carrying amount of an asset may not be
recoverable. The severity as well as the duration of the current oil and gas
industry downturn is such an event. The Company's review of its long-lived
assets indicated that the carrying value of certain of the Company's foreign and
domestic drilling rigs was more than the estimated undiscounted future net cash
flows. As such, under SFAS No. 121, the Company wrote-down those assets to their
estimated fair market value. Undiscounted future net cash flows were calculated
on a rig by rig basis using projected future utilization and dayrates over the
estimated useful lives of the rigs. Fair market value was based on an appraisal
performed by an independent appraiser retained by the lender in connection with
the CIT Facility. The effect of this write-down is an after tax charge of $69.8
million, or $.42 per share in 1998, and a reduction of approximately $6.0
million per year in depreciation expense in future years. The impairment was
recorded based on certain estimates and projections as stipulated in SFAS No.
121.

         During the year ended December 31, 1996, the Company recorded unusual
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
$400,000 of other non-recurring charges. The employment severance cost included
$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 withdrew from both the Argentina and Mexico markets. As a result, during
1996, the Company recorded estimated exit costs of $1.3 million for Mexico which
primarily consisted of the forfeiture of a performance bond and other costs
incurred to close the office and exit the market and exit costs of $800,000 for
Argentina which primarily consisted of costs incurred during the period
necessary to close the office and exit the market. In addition, the Company sold
three of the six drilling rigs and certain other assets located in Argentina for
$1.5 million. As a result, during 1996 the Company recorded a write-down of rig
equipment and other assets of $2.5 million. The remaining Argentina rigs were
mobilized to the United States, where they were refurbished and returned to
work. Mobilization costs were approximately $900,000 and were expensed as they
were incurred during 1997.

                                      -45-

<PAGE>   46


                        GREY WOLF, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(12)     QUARTERLY FINANCIAL DATA (UNAUDITED)

         Summarized quarterly financial data for years ended December 31, 1998,
1997 and 1996 are set forth below (amounts in thousands, except per share
amounts).

<TABLE>
<CAPTION>
                                                                        Quarter Ended        
                                                         --------------------------------------------
                                                          March     June        September    December
                                                          1998      1998          1998         1998   
                                                         -------   -------      ---------   ---------
<S>                                                       <C>       <C>            <C>         <C>   
         Revenues                                         74,015    65,458         56,637      44,869
         Gross Profit (1)                                 19,238    16,305          9,524       4,495
         Operating income (loss)                           8,066     3,735         (2,497)   (103,329)
         Income (loss) before income taxes                 6,032    (1,351)        (7,417)   (108,428)
         Net income (loss)                                 3,109    (1,351)        (5,388)    (79,583)
         Net income (loss) per common share - basic
              and diluted                                    .02      (.01)          (.03)       (.48)
</TABLE>

<TABLE>
<CAPTION>
                                                                        Quarter Ended        
                                                         --------------------------------------------
                                                          March     June        September    December
                                                           1997     1997          1997         1997   
                                                         -------   -------      ---------   ---------
<S>                                                      <C>       <C>          <C>         <C>   
         Revenues                                        $35,975   $40,071      $  63,750   $  76,127
         Gross profit (1)                                  7,183     6,531         18,508      20,949
         Operating income                                  3,322     2,043          9,132       9,836
         Income before income taxes                        2,976     1,734          5,952       8,187
         Net income                                        2,314     1,040          2,722       4,142
         Net income per common share - basic                 .02       .01            .02         .03
              and diluted
</TABLE>

<TABLE>
<CAPTION>
                                                                        Quarter Ended        
                                                         --------------------------------------------
                                                          March     June        September    December
                                                           1996     1996          1996         1996   
                                                         -------   -------      ---------   ---------
<S>                                                      <C>       <C>          <C>         <C>   
         Revenues                                        $20,102   $19,183      $  22,031   $  20,451
         Gross profit (loss) (1)                           1,166         1          3,144      (2,630)
         Operating income (loss)                          (1,253)   (2,398)         1,108     (11,172)
         Income (loss) before income taxes                (1,491)      524            808     (10,718)
         Net income (loss)                                (1,491)      524            808     (11,563)
         Net income (loss) per common share - basic         (.04)      .01            .01        (.09)
              and diluted
</TABLE>

         (1)  Gross profit (loss) is computed as consolidated revenues less
              operating expenses (which excludes expenses for depreciation and
              amortization, general and administrative, unusual charges,
              including the asset impairment, and provision for doubtful
              accounts.

(13)     SUBSEQUENT EVENTS

         Effective January 1999, the Company entered into a new senior secured
revolving credit facility with the CIT Group/Business Credit, Inc. ("the CIT
Facility"). The CIT Facility is a four year revolving facility with periodic
interest payments at a floating rate based upon the Company's debt service
coverage ratio within a range of either LIBOR plus 1.75% to 3.5% or prime plus
 .25% to 1.5%. During the first year of the facility the interest rate is fixed
at LIBOR plus 2.5% or prime plus 1%. In addition, the CIT Facility contains
certain affirmative and negative covenants including a minimum appraisal value
of the drilling rigs and related equipment plus certain financial covenants
which take effect if the Company's cash on hand and borrowing capacity under the
new credit facility falls below $25 million. Substantially all of the Company's
assets, including its drilling rigs and related drilling equipment, are pledged
as collateral under the CIT Facility. The Company, however, retains the option,
subject to a minimum appraisal value, under the CIT Facility to extract $75
million of the equipment out of the collateral pool for other purposes. The
Company currently has no borrowings outstanding under the CIT Facility.

         During January 1999, the Company recognized a charge of approximately
$600,000 for the write-off of deferred loan costs commensurate with signing the
CIT Facility in January. In addition, the Company recognized unusual items of
approximately $300,000 for severance costs in addition to costs to cold stack 14
additional rigs (between $400,000 and $700,000).

                                      -46-

<PAGE>   47



                                                                     SCHEDULE II

                        GREY WOLF, INC. AND SUBSIDIARIES

                        VALUATION AND QUALIFYING ACCOUNTS
                                 (In thousands)





<TABLE>
<CAPTION>
                                                           Balance at     Additions      Collections     Balance at
                                                            Beginning     Charged to         and            End
                                                            of Period     Allowance      Write-Offs      of Period
                                                           ----------     ----------     -----------     ----------
<S>                                                        <C>            <C>            <C>             <C>       
Year Ended December 31, 1996:
     Allowance for doubtful accounts receivable            $    1,951     $      302     $      (920)    $    1,333
                                                           ==========     ==========     ===========     ==========

Year Ended December 31, 1997:
     Allowance for doubtful accounts receivable            $    1,333     $     (200)    $       (80)    $    1,053
                                                           ==========     ==========     ===========     ==========

Year Ended December 31, 1998
     Allowance for doubtful accounts receivable            $    1,053     $    1,723     $    (1,670)    $    1,106
                                                           ==========     ==========     ===========     ==========
</TABLE>

                                      -48-

<PAGE>   48



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

     None

                                    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 1999 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, 1998.

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 1999 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, 1998.

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 1999
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, 1998.

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 1999 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, 1998.



                                      -48-

<PAGE>   49



                                     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 Grey
         Wolf, 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>   <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 DI
                                    Industries, Inc. 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).
</TABLE>

                                      -49-

<PAGE>   50



<TABLE>
             <S>              <C>   <C>                                   
                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).
                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 Tom L. Ferguson (incorporated herein by reference to
                                    Exhibit 10.8 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 Janet V. Campbell (incorporated herein by reference to
                                    Exhibit 10.10 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 Sheldon B. Lubar (incorporated herein by reference to
                                    Exhibit 10.11 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 Robert P. Probst (incorporated herein by reference to
                                    Exhibit 10.12 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 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 Grey Wolf, Inc., as amended.
                3.2           --    By-Laws of Grey Wolf, Inc., as amended.
                3.3           --    Statement of Resolutions Establishing the Series A Convertible Redeemable
                                    Preferred Stock.
                4.1           --    Form of Trust Indenture, dated June 20, 1997, relating to the Senior Notes due
                                    2007 of the Company and Texas Commerce Bank National Association, as Trustee
                                    (incorporated herein by reference to Exhibit 4.2 to the Company's Registration
                                    Statement on Form S-3 No. 333-26519 filed June 24, 1997).
                4.2           --    Form of Trust Indenture, dated May 8, 1998, relating to the Senior Notes due 2007
                                    by and among the Company, the Guarantors, and Chase Bank of Texas, National
                                    Association, as Trustee (incorporated herein by reference to Exhibit 4.3 to Form
                                    8-K filed May 21, 1998).
                4.3           --    Rights Agreement dated as of September 21, 1998 by and between the Company
                                    and American Stock Transfer and Trust Company as Rights Agent (incorporated
                                    herein by reference to Exhibit 4.1 to Form 8-K filed September 22, 1998).
               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).
</TABLE>

                                      -50-

<PAGE>   51


<TABLE>
             <S>              <C>   <C>                                   
             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).
             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 Grey Wolf, 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 Grey Wolf, 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           --    Form of Non-Qualified Stock Option Agreement dated September 3, 1996, by and
                                    between the Company and Thomas P. Richards (incorporated herein by reference
                                    to Exhibit 10.2 to Registration Statement 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          --    Form of 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          --    Form of 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).
</TABLE>

                                      -51-

<PAGE>   52


<TABLE>
             <S>              <C>   <C>                                   
               10.15          --    Form of 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          --    Grey Wolf, Inc.  1996 Employee Stock Option Plan (incorporated herein by
                                    reference to Grey Wolf, Inc. 1996 Annual Meeting of Shareholders definitive
                                    proxy materials).
               10.17          --    Stock Purchase Agreement dated as of December 28, 1996, between Grey Wolf,
                                    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).
               10.18          --    Amended and Restated Senior Secured Revolving Credit Agreement dated as of
                                    April 30, 1997 among DI Industries, Inc. and Drillers, Inc. (as borrowers), DI
                                    International, Inc. (as guarantor), Bankers Trust Company, as Agent, \ING (US)
                                    Capital Corporation, as Co-agent, and various financial institutions, as Lenders.
                                    (incorporated herein by reference to Exhibit 10.1 to Registration Statement No.
                                    333-26519).
               10.19          --    Amendment to the Credit Facility dated June 6, 1997 (incorporated herein by
                                    reference to Exhibit 10.2 to Amendment No. 1 to Registration Statement No. 333-
                                    26519).
               10.20          --    Amendment to Credit Facility dated June 23, 1997. (incorporated herein by
                                    reference to Grey Wolf, Inc. Annual Report on Form 10-K for the year ended
                                    December 31, 1997.)
               10.21          --    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).
               10.22          --    Form of Shareholder Agreement entered into January 31, 1997, by Grey Wolf, 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).
               10.23          --    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.)
               10.24          --    Grey Wolf, Inc. 1987 Stock Option Plan for Non-Employee Directors.
                                    (incorporated by reference to  Grey Wolf, Inc. 1987 Annual Meeting definitive
                                    proxy solicitation materials.)
               10.25          --    Form of Non-Qualified Stock Option Agreement dated December 16, 1996, by and
                                    between the Company and Forrest M. Conley, Jr. (incorporated by reference to DI
                                    Industries, Inc. Annual Report on Form 10-K for the year ended December 31,
                                    1996.)
               10.26          --    Employment Agreement dated March 17, 1997, by and between the Company and
                                    Gary D. Lee. (incorporated by reference to DI Industries, Inc. Annual Report of
                                    Form 10-K for the year ended December 31, 1996.)
               10.27          --    Form of Incentive Stock Option Agreement dated March 17, 1997, by and between
                                    the Company and Gary D. Lee (incorporated by reference to DI Industries, inc.
                                    Annual Report of Form 10-K for the year ended December 31, 1996.)
               10.28          --    Stock Purchase Agreement by and among Grey Wolf Drilling Company, Grey
                                    Wolf, Inc., Murco Drilling Corporation, et al., dated December 30, 1997.
                                    (incorporated by reference to Exhibit 10.1 to Form 8-K dated February 5, 1998)
               10.29          --    Employment Agreement dated January 1, 1998, by and between the Company and
                                    David W. Wehlmann (incorporated herein by reference to Grey Wolf, Inc. Annual
                                    Report on Form 10-K for the year ended December 31, 1997.)
               10.30          --    Form of Incentive Stock Option Agreement dated February 10, 1998, by and
                                    between the Company and David W. Wehlmann (incorporated herein by reference
                                    to Grey Wolf, Inc. Annual Report on Form 10-K for the year ended December 31,
                                    1997.)
</TABLE>

                                      -52-

<PAGE>   53


<TABLE>
             <S>              <C>   <C>                                   
               10.31          --    Revolving Credit Agreement dated as of January 14, 1999 among Grey Wolf
                                    Drilling Company LP (as borrower), Grey Wolf, Inc. (as guarantor), The CIT
                                    Group/Business Credit, Inc. (as agent) and various financial institutions (as
                                    lenders).  (incorporated herein by reference to Exhibit 10.1 to Form 8-K dated
                                    January 26, 1999.)
               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 Grey Wolf, Inc.
              *23.1           --    Consent of KPMG 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 January 26, 1999 announcing that the Company entered into a $50.0
million credit facility with The CIT Group/Business Credit, Inc. This facility
replaced the Company's previous credit facility (Item 5).

         A current report on form 8-K was filed with the Securities and Exchange
Commission on February 9, 1999 announcing that the Company recognized a pre-tax,
non-cash charge of approximately $93.0 million in the fourth quarter of 1998 as
a result of a Statement of Financial Standard No. 121 asset impairment (Item 5).


                                      -53-

<PAGE>   54



                                   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 17th day of
March, 1999.

                               Grey Wolf, Inc.



                               By:  /s/ Thomas  P. Richards
                                   ---------------------------------------------
                                   Thomas P. Richards, Chairman, 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.


<TABLE>
<CAPTION>
Signatures and Capacities                                                                                 Date      
-------------------------                                                                            --------------      
<S>     <C>                                                                                          <C> 
  By:    /s/ Thomas P. Richards                                                                      March 17, 1999
        ----------------------------------------------------------------------------
        Thomas P. Richards, Chairman, President and Chief Executive Officer
        (Principal Executive Officer)

  By:    /s/ David W. Wehlmann                                                                       March 17, 1999
        --------------------------------------------------------------------
        David W. Wehlmann, Senior Vice President and Chief Financial Officer

  By:   /s/ Merrie S. Costley                                                                        March 17, 1999
        --------------------------------------------------------------------
        Merrie S. Costley, Vice President and Controller

  By:   /s/  William R. Ziegler                                                                      March 17, 1999
        --------------------------------------------------------------------
        William R. Ziegler, Director

  By:    /s/ William T. Donovan                                                                      March 17, 1999
        --------------------------------------------------------------------
        William T. Donovan, Director

  By:   /s/ James K. B. Nelson                                                                       March 17, 1999
        --------------------------------------------------------------------
        James K. B. Nelson, Director

  By:   /s/ Roy T. Oliver, Jr.                                                                       March 17, 1999
        --------------------------------------------------------------------
        Roy T. Oliver, Jr., Director

  By:   /s/ Ivar Siem                                                                                March 17, 1999
        --------------------------------------------------------------------
        Ivar Siem, Director
</TABLE>



                                      -54-

<PAGE>   55



                               INDEX TO EXHIBITS
<TABLE>
<CAPTION>
             Exhibit No.            Documents
             -----------            ---------
             <S>              <C>   <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 DI
                                    Industries, Inc. 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).
</TABLE>

                                      

<PAGE>   56



<TABLE>
             <S>              <C>   <C>                                   
                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).
                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 Tom L. Ferguson (incorporated herein by reference to
                                    Exhibit 10.8 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 Janet V. Campbell (incorporated herein by reference to
                                    Exhibit 10.10 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 Sheldon B. Lubar (incorporated herein by reference to
                                    Exhibit 10.11 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 Robert P. Probst (incorporated herein by reference to
                                    Exhibit 10.12 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 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 Grey Wolf, Inc., as amended.
                3.2           --    By-Laws of Grey Wolf, Inc., as amended.
                3.3           --    Statement of Resolutions Establishing the Series A Convertible Redeemable
                                    Preferred Stock.
                4.1           --    Form of Trust Indenture, dated June 20, 1997, relating to the Senior Notes due
                                    2007 of the Company and Texas Commerce Bank National Association, as Trustee
                                    (incorporated herein by reference to Exhibit 4.2 to the Company's Registration
                                    Statement on Form S-3 No. 333-26519 filed June 24, 1997).
                4.2           --    Form of Trust Indenture, dated May 8, 1998, relating to the Senior Notes due 2007
                                    by and among the Company, the Guarantors, and Chase Bank of Texas, National
                                    Association, as Trustee (incorporated herein by reference to Exhibit 4.3 to Form
                                    8-K filed May 21, 1998).
                4.3           --    Rights Agreement dated as of September 21, 1998 by and between the Company
                                    and American Stock Transfer and Trust Company as Rights Agent (incorporated
                                    herein by reference to Exhibit 4.1 to Form 8-K filed September 22, 1998).
               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).
</TABLE>

                                      

<PAGE>   57


<TABLE>
             <S>              <C>   <C>                                   
             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).
             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 Grey Wolf, 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 Grey Wolf, 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           --    Form of Non-Qualified Stock Option Agreement dated September 3, 1996, by and
                                    between the Company and Thomas P. Richards (incorporated herein by reference
                                    to Exhibit 10.2 to Registration Statement 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          --    Form of 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          --    Form of 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).
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             <S>              <C>   <C>                                   
               10.15          --    Form of 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          --    Grey Wolf, Inc.  1996 Employee Stock Option Plan (incorporated herein by
                                    reference to Grey Wolf, Inc. 1996 Annual Meeting of Shareholders definitive
                                    proxy materials).
               10.17          --    Stock Purchase Agreement dated as of December 28, 1996, between Grey Wolf,
                                    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).
               10.18          --    Amended and Restated Senior Secured Revolving Credit Agreement dated as of
                                    April 30, 1997 among DI Industries, Inc. and Drillers, Inc. (as borrowers), DI
                                    International, Inc. (as guarantor), Bankers Trust Company, as Agent, \ING (US)
                                    Capital Corporation, as Co-agent, and various financial institutions, as Lenders.
                                    (incorporated herein by reference to Exhibit 10.1 to Registration Statement No.
                                    333-26519).
               10.19          --    Amendment to the Credit Facility dated June 6, 1997 (incorporated herein by
                                    reference to Exhibit 10.2 to Amendment No. 1 to Registration Statement No. 333-
                                    26519).
               10.20          --    Amendment to Credit Facility dated June 23, 1997. (incorporated herein by
                                    reference to Grey Wolf, Inc. Annual Report on Form 10-K for the year ended
                                    December 31, 1997.)
               10.21          --    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).
               10.22          --    Form of Shareholder Agreement entered into January 31, 1997, by Grey Wolf, 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).
               10.23          --    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.)
               10.24          --    Grey Wolf, Inc. 1987 Stock Option Plan for Non-Employee Directors.
                                    (incorporated by reference to  Grey Wolf, Inc. 1987 Annual Meeting definitive
                                    proxy solicitation materials.)
               10.25          --    Form of Non-Qualified Stock Option Agreement dated December 16, 1996, by and
                                    between the Company and Forrest M. Conley, Jr. (incorporated by reference to DI
                                    Industries, Inc. Annual Report on Form 10-K for the year ended December 31,
                                    1996.)
               10.26          --    Employment Agreement dated March 17, 1997, by and between the Company and
                                    Gary D. Lee. (incorporated by reference to DI Industries, Inc. Annual Report of
                                    Form 10-K for the year ended December 31, 1996.)
               10.27          --    Form of Incentive Stock Option Agreement dated March 17, 1997, by and between
                                    the Company and Gary D. Lee (incorporated by reference to DI Industries, inc.
                                    Annual Report of Form 10-K for the year ended December 31, 1996.)
               10.28          --    Stock Purchase Agreement by and among Grey Wolf Drilling Company, Grey
                                    Wolf, Inc., Murco Drilling Corporation, et al., dated December 30, 1997.
                                    (incorporated by reference to Exhibit 10.1 to Form 8-K dated February 5, 1998)
               10.29          --    Employment Agreement dated January 1, 1998, by and between the Company and
                                    David W. Wehlmann (incorporated herein by reference to Grey Wolf, Inc. Annual
                                    Report on Form 10-K for the year ended December 31, 1997.)
               10.30          --    Form of Incentive Stock Option Agreement dated February 10, 1998, by and
                                    between the Company and David W. Wehlmann (incorporated herein by reference
                                    to Grey Wolf, Inc. Annual Report on Form 10-K for the year ended December 31,
                                    1997.)
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<PAGE>   59


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             <S>              <C>   <C>                                   
               10.31          --    Revolving Credit Agreement dated as of January 14, 1999 among Grey Wolf
                                    Drilling Company LP (as borrower), Grey Wolf, Inc. (as guarantor), The CIT
                                    Group/Business Credit, Inc. (as agent) and various financial institutions (as
                                    lenders).  (incorporated herein by reference to Exhibit 10.1 to Form 8-K dated
                                    January 26, 1999.)
               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 Grey Wolf, Inc.
              *23.1           --    Consent of KPMG LLP
              *27.            --    Financial Data Schedule
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