##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
 þ
    
    Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the Fiscal Year Ended December 31, 2006
 Commission file number 1-8226
 
 GREY WOLF, INC.
  Texas
    
    74-2144774(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification Number)10370 Richmond Avenue, Suite 600, Houston, Texas
    
    77042(Address of principal executive offices)
    
    (Zip Code)
   Name of each exchangeTitle of each class
    
    on which registeredCommon Stock, par value $0.10
    
    American Stock ExchangeRights to Purchase Junior Participating
    
    American Stock ExchangePreferred Stock, par value $1.00
  þ o
 o þ
 þ o
 o
  þ o o




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##### 



GREY WOLF, INC.
 
 PagePart IItem 1.
    
    Business
    
    
    3Item 1A.
    
    Risk Factors
    
    
    8Item 1B.
    
    Unresolved Staff Comments
    
    
    15Item 2.
    
    Properties
    
    
    15Item 3.
    
    Legal Proceedings
    
    
    17Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    17Part IIItem 5.
    
    Market for Registrants Common Equity and Related Shareholder Matters and Issuer Purchases of Equity Securities
    
    
    17Item 6.
    
    Selected Financial Data
    
    
    19Item 7.
    
    Managements Discussion and Analysis Of Financial Condition and Results Of Operations
    
    
    20Item 7A.
    
    Quantitative and Qualitative Disclosure about Market Risk
    
    
    33Item 8.
    
    Financial Statements and Supplementary Data
    
    
    34Item 9.
    
    Changes In and Disagreements with Accountants on Accounting and Financial
    
    
    59Item 9A.
    
    Controls and Procedures
    
    
    59Item 9B.
    
    Other Information
    
    
    59Part IIIItem 10.
    
    Directors, Executive Officers and Corporate Governance
    
    
    59Item 11.
    
    Executive Compensation
    
    
    59Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Shareholders  Matters
    
    
    60Item 13.
    
    Certain Relationships and Related Transactions
    
    
    60Item 14.
    
    Principal Accountant Fees and Services
    
    
    60Part IVItem 15.
    
    Exhibits and Financial Statement Schedules
    
    
    61Signatures
    
    
    65Consent of KPMG LLPCertification of CEO Pursuant to Rule 13a-14(a)Certification of CFO Pursuant to Rule 13a-14(a)Certifications Pursuant to Section 1350
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PART I
 
 Item 1. Business
 General
   Business Strategy
   
    
    delivering quality, value-added service to our customers;
    
    maintaining a strong position in the markets where we operate;
    
    responding to market conditions by balancing dayrates we receive on our rigs with the number of rigs we market;
    
    using term contracts to provide sufficient cash flow to recover, after operating
expenses, a majority of the incremental capital expended for the purchase of new rigs;
  
    
    maintaining a premium fleet of equipment with a bias toward deep and horizontal/directional drilling;
    
    enhancing cash flow through our turnkey and trucking operations and use of our top drives;
    
    controlling costs and exercising capital spending discipline;
  
    
    searching for new market opportunities where we believe our quality fleet of rigs
would be able to generate attractive returns; and
    
    searching for potential strategic acquisition candidates.
  Industry Overview
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Current Conditions and Outlook
      Operations
   
    
    Ark-La-Tex;
    
    Gulf Coast;
    
    Mississippi/Alabama;
    
    South Texas;
    
    Rocky Mountain;
    
    Mid-Continent.
 -4-




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Ark-La-Tex Division.
  Gulf Coast Division.
  South Texas Division.
  Rocky Mountain Division.
  Mid-Continent District.
 Contracts
  -5-




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Daywork Contracts.
  Turnkey Contracts.
  Footage Contracts.
 Customers and Marketing
  -6-




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




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Environmental Regulations
     Employees
  
 Item 1A. Risk Factors
  A material or extended decline in expenditures by oil and natural gas exploration and production
companies, due to a decline or volatility in oil and natural gas prices, a decrease in demand for
oil and natural gas, an increase in rig supply or other factors, would reduce our revenue and
income.
  
    
    our revenues, cash flows and earnings;
    
    the fair market value of our rig fleet, which in turn could trigger a writedown of
the carrying value of these assets for accounting purposes;
    
    our ability to maintain or increase our borrowing capacity;
    
    our ability to obtain additional capital to finance our business and make acquisitions, and the cost of that capital; and
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
    
    our ability to retain skilled rig personnel who we would need in the event of an increase in the demand for our services.
  
    
    weather conditions in the United States and elsewhere;
    
    economic conditions in the United States and elsewhere;
    
    actions by OPEC, the Organization of Petroleum Exporting Countries;
    
    political instability in the Middle East, Venezuela, Nigeria and other major producing regions;
    
    governmental regulations, both domestic and foreign;
    
    the pace adopted by foreign governments for exploration of their national reserves; and
    
    the overall supply and demand for oil and natural gas.
 An economic downturn may adversely affect our business.
  The intense price competition and cyclical nature of our industry could have an adverse effect on
our revenues and profitability.
  
    
    the type and condition of drilling rigs;
    
    the quality of service and experience of rig crews;
    
    the safety record of the company and the particular drilling rig;
    
    the offering of ancillary services; and
    
    the ability to provide drilling equipment adaptable to, and personnel familiar with,
new technologies and drilling techniques.
    -9-




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We face competition from competitors with greater resources.
  
    
    build new rigs or acquire existing rigs to be able to place rigs into service more
quickly than us in periods of high drilling demand;
    
    compete more effectively on the basis of price and technology;
    
    better withstand industry downturns; and
    
    retain skilled rig personnel.
 Our drilling operations involve operating hazards which if not adequately insured or indemnified
against could adversely affect our results of operations and financial condition.
  
    
    blowouts;
    
    reservoir damage;
    
    cratering;
    
    fires, pollution and explosions;
    
    collapse of the borehole;
    
    lost or stuck drill strings; and
    
    damage or loss from natural disasters.
  
    
    suspension of drilling operations;
    
    damage to the environment;
    
    damage to, or destruction of, our property and equipment and that of others;
    
    personal injury and loss of life; and
    
    damage to producing or potentially productive oil and natural gas formations through which we drill.
  Business acquisitions entail numerous risks and may disrupt our business or distract management
attention.
  
    
    unanticipated costs and liabilities;
    
    difficulty of integrating the operations and assets of the acquired business;
    
    our ability to properly access and maintain an effective internal control
environment over an acquired company, in order to comply with public reporting
requirements;
    
    potential loss of key employees and customers of the acquired companies; and
    
    an increase in our expenses and working capital requirements.
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Our operations are subject to environmental laws that may expose us to liabilities for
noncompliance, which may adversely affect us.
  
    
    environmental quality;
    
    pollution control; and
    
    remediation of environmental contamination.
  We may incur losses in future years resulting from downturns in the land drilling industry
  Unexpected cost overruns on our turnkey and footage drilling jobs could adversely affect us.
  -11-




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We could be adversely affected if delivery times for rigs and rig equipment lengthen.
  
    
    deployment of newly-built rigs;
    
    upgrades to our marketed fleet of rigs; and
    
    repair and maintenance of our rigs.
 We could be adversely affected if the demand for qualified rig personnel increases.
   Our credit agreement may prohibit us from participation in certain transactions that we may
consider advantageous.
   We have a significant amount of indebtedness and could incur additional indebtedness, which could
materially and adversely affect our financial condition and results of operations and prevent us
from fulfilling our obligations under the notes and our other outstanding indebtedness.
   
    
    make it more difficult for us to satisfy our obligations with respect to the 3.75% Notes and the Floating Rate Notes;
    
    increase our vulnerability to general adverse economic and industry conditions;
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
    
    require us to dedicate a substantial portion of our cash flow from operations to
payments on our indebtedness thereby reducing the availability of our cash flow to fund
working capital, capital expenditures and other general corporate purposes;
    
    limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
    
    place us at a competitive disadvantage compared to our competitors that have less debt; and
    
    limit our ability to borrow additional funds.
   Our existing senior indebtedness is, and any senior indebtedness we incur will be, effectively
subordinated to any present or future obligations to secured creditors and liabilities of our
subsidiaries.
  To service our indebtedness, we will require a significant amount of cash. Our ability to generate
cash depends on many factors beyond our control.
  Credit ratings affect our ability to obtain financing and the cost of such financing.
  Investors in our common stock should not expect to receive dividend income, and will be dependent
on the appreciation of our common stock to earn a return on their investment.
  -13-




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Certain provisions of our organizational documents, securities and credit agreement have
anti-takeover effects which may prevent our shareholders from receiving the maximum value for their
shares.
  
    
    classification of our board of directors into three classes, with each class serving
a staggered three year term;
    
    giving our board of directors the exclusive authority to adopt, amend or repeal our
bylaws and thus prohibiting shareholders from doing so;
    
    requiring our shareholders to give advance notice of their intent to submit a proposal at the annual meeting; and
    
    limiting the ability of our shareholders to call a special meeting and act by written consent.
   Large amounts of our common stock may be resold into the market in the future which could cause the
market price of our common stock to drop significantly, even if our business is doing well.
  Forward-Looking Statements
  
    
    business strategy;
    
    demand for our services;
    
    spending by our customers;
    
    2007 rig activity;
    
    increases in rig supply and its effects on us;
    
    projected interest expense;
    
    cost of building new rigs and delivery times of these rigs;
    
    projected dayrates;
    
    the ability to recover our refurbishment costs or the purchase price of rigs from term contracts;
 -14-




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
    
    the availability and financial terms of term contracts;
    
    rigs expected to be engaged in turnkey and footage operations;
    
    projected tax rate;
    
    wage rates and retention of employees;
    
    sufficiency of our capital resources and liquidity;
    
    projected depreciation and capital expenditures in 2007;
    
    future common stock repurchases by us and our expected dividend policy; and
    
    projected sources and uses of cash.
    
 Item 1b. Unresolved Staff Comments
  
 Item 2. Properties
 Drilling Equipment
     -15-




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Maximum Rated Depth Capacity (1)Under
    
    10,000
    
    15,000
    
    20,00010,000
    
    to 14,999
    
    to 19,999
    
    and Deeper
    
    TotalArk-La-TexDiesel Electric
    
    
    
    
    
    
    1
    
    
    
    9
    
    
    
    6
    
    
    
    16Trailer-Mounted
    
    
    
    
    
    
    3
    
    
    
    1
    
    
    
    
    
    
    
    4
    (2)Mechanical
    
    
    
    
    
    
    1
    
    
    
    4
    
    
    
    3
    
    
    
    8Gulf Coast
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diesel Electric
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    19
    
    
    
    22Mechanical
    
    
    
    
    
    
    1
    
    
    
    2
    
    
    
    2
    
    
    
    5South Texas
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diesel Electric
    
    
    
    
    
    
    1
    
    
    
    5
    
    
    
    10
    
    
    
    16Trailer-Mounted
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    8Mechanical
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    1
    
    
    
    5Rocky Mountain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diesel Electric
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    3
    
    
    
    7Mechanical
    
    
    3
    
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    10Mid-Continent
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diesel Electric
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    5
    
    
    
    9Trailer-Mounted
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    2Mechanical
    
    
    
    
    
    
    3
    
    
    
    3
    
    
    
    
    
    
    
    6Total Rig Fleet (3)
    
    
    3
    
    
    
    31
    
    
    
    35
    
    
    
    49
    
    
    
    118
 
 (1)
    
    The actual drilling capacity of a rig may be less than its rated capacity due to numerous
factors, such as the length of the drill string and casing size. The intended well depth and
the drill site conditions determine the length of the drill string and other equipment needed
to drill a well.(2)
    
    Includes one diesel electric rig.(3)
    
    We have three new 1,500 hp diesel electric rigs on order, expected to be delivered at various
times during 2007, that will bring the total rig fleet to 121. The maximum depth capacity of
each of these rigs is 18,000 feet. Facilities
  Location
    
    Interest
    
    UsesHouston, Texas
    
    Leased
    
    Corporate OfficeAlice, Texas
    
    Owned
    
    Division Office, Rig Yard, Truck YardEunice, Louisiana
    
    Owned
    
    Division Office, Rig YardHaughton, Louisiana
    
    Owned
    
    Rig YardShreveport, Louisiana
    
    Leased
    
    Division OfficeShreveport, Louisiana
    
    Owned
    
    Truck YardCasper, Wyoming
    
    Owned
    
    Division Office, Rig YardGrand Junction, Colorado
    
    Leased
    
    Division Satellite OfficeMidland, Texas
    
    Leased
    
    District Office
  -16-




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Item 3. Legal Proceedings
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 PART II
 
 Item 5. Market for Registrants Common Equity and Related Shareholder Matters and Issuer Purchases of Equity Securities
 Market Data
  High
    
    LowPeriod from January 1, 2007 to February 20, 2007
    
    $
    7.08
    
    
    $
    6.38Year Ended December 31, 2006Quarter ended March 31, 2006
    
    
    8.93
    
    
    
    6.50Quarter ended June 30, 2006
    
    
    8.85
    
    
    
    6.61Quarter ended September 30, 2006
    
    
    7.79
    
    
    
    6.35Quarter Ended December 31, 2006
    
    
    7.43
    
    
    
    6.10Year Ended December 31, 2005Quarter ended March 31, 2005
    
    
    6.85
    
    
    
    3.70Quarter ended June 30, 2005
    
    
    8.00
    
    
    
    5.52Quarter ended September 30, 2005
    
    
    8.60
    
    
    
    6.75Quarter ended December 31, 2005
    
    
    8.57
    
    
    
    6.81
   -17-




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Issuer Purchases of Equity Securities
  Total Number of
    
    ApproximateShares
    
    Dollar Value ofPurchased as
    
    Shares that MayTotal Number of
    
    Average Price
    
    Part of Publicly
    
    Yet be PurchasedShares
    
    Paid per
    
    Announced
    
    Under thePeriod
    
    Purchased
    
    Share
    
    Program
    
    Program(1) (2)May 25, 2006 to May 31, 2006
    
    
    600
    
    
    $
    7.75
    
    
    
    600
    
    
    $
    95,348June 1, 2006 to June 30, 2006
    
    
    793
    
    
    
    7.19
    
    
    
    793
    
    
    
    89,644July 1, 2006 to July 31, 2006
    
    
    570
    
    
    
    6.90
    
    
    
    570
    
    
    
    85,710August 1, 2006 to August 31, 2006
    
    
    422
    
    
    
    7.20
    
    
    
    422
    
    
    
    82,672September 1, 2006 to September 30, 2006
    
    
    4,560
    
    
    
    6.99
    
    
    
    4,560
    
    
    
    50,820October 1, 2006 to October 31, 2006
    
    
    541
    
    
    
    6.41
    
    
    
    541
    
    
    
    47,355November 1, 2006 to November 30, 2006
    
    
    1,806
    
    
    
    6.91
    
    
    
    1,806
    
    
    
    34,881December 1, 2006 to December 31, 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34,881
 
 (1)
    
    On May 25, 2006, we announced that our board of directors approved a plan authorizing
the repurchase of up to $100.0 million of our common stock in open market or in
privately-negotiated block-trade transactions. The number of shares to be purchased and
the timing of purchases will be based on several factors, including the price of the common
stock, general market conditions, available cash and alternate investment opportunities.
There is no expiration date for the stock repurchase program, but it is subject to
termination prior to completion.(2)
    
    Through February 20, 2007 we repurchased an additional 1.2 million shares at an average
price of $6.59. Accordingly, at February 20, 2007 the approximate dollar value of shares
that may yet be repurchased under our plan was $26.9 million. Stock Performance Graph
  
 -18-




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Comparison of Five Year Cumulative Total Return Among Grey Wolf, Inc., The Amex Composite and a
Peer Group
 Years Ended December 31,2001
    
    2002
    
    2003
    
    2004
    
    2005
    
    2006Grey Wolf, Inc.
    
    $
    100.00
    
    
    $
    134.34
    
    
    $
    125.93
    
    
    $
    177.44
    
    
    $
    260.27
    
    
    $
    230.98Amex Composite
    
    
    100.00
    
    
    
    100.08
    
    
    
    144.57
    
    
    
    178.46
    
    
    
    220.35
    
    
    
    262.17Peer Group (1)
    
    
    100.00
    
    
    
    112.09
    
    
    
    126.10
    
    
    
    158.00
    
    
    
    231.38
    
    
    
    177.78
 
 (1)
    
    Consists of Nabors Industries, Inc., Parker Drilling Company, Helmerich & Payne,
Precision Drilling and Patterson UTI Energy, Inc. All of the members of the
Peer Group are providers of contract oil and gas land drilling services.  
 Item 6. Selected Financial Data
 Years Ended December 31,2006
    
    2005
    
    2004
    
    2003
    
    2002(In thousands, except per share amounts)Revenues
    
    $
    945,527
    
    
    $
    696,979
    
    
    $
    424,634
    
    
    $
    285,974
    
    
    $
    250,260Net income (loss)
    
    
    219,951
    
    
    
    120,637
    
    
    
    8,078
    
    
    
    (30,200
    )
    
    
    (21,476
    )Net income (loss) per common shareBasic
    
    
    1.16
    
    
    
    0.63
    
    
    
    0.04
    
    
    
    (0.17
    )
    
    
    (0.12
    )Diluted
    
    
    0.98
    
    
    
    0.54
    
    
    
    0.04
    
    
    
    (0.17
    )
    
    
    (0.12
    )Total assets
    
    
    1,086,984
    
    
    
    869,035
    
    
    
    635,876
    
    
    
    532,184
    
    
    
    593,964Senior and contingent convertible notes &
other long-term debt
    
    
    275,000
    
    
    
    275,000
    
    
    
    275,000
    
    
    
    234,898
    
    
    
    249,613
 -19-




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Item 7. Managements Discussion And Analysis Of Financial Condition And Results Of Operations
  Overview
   New Rig Purchases and Reactivations
  Rig Activity
  Domestic
    
    2005
    
    
    2006
    
    
    2007Land Rig
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Full
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Full
    
    
    1/1 toCount
    
    Q-1
    
    
    Q-2
    
    
    Q-3
    
    
    Q-4
    
    
    Year
    
    
    Q-1
    
    
    Q-2
    
    
    Q-3
    
    
    Q-4
    
    
    Year
    
    
    2/16Baker
Hughes
    
    
    1,153
    
    
    
    1,218
    
    
    
    1,307
    
    
    
    1,375
    
    
    
    1,263
    
    
    
    1,417
    
    
    
    1,512
    
    
    
    1,603
    
    
    
    1,609
    
    
    
    1,535
    
    
    
    1,616Grey Wolf
    
    
    98
    
    
    
    99
    
    
    
    103
    
    
    
    108
    
    
    
    102
    
    
    
    109
    
    
    
    108
    
    
    
    107
    
    
    
    110
    
    
    
    108
    
    
    
    111
 Term Contracts
   -20-




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Drilling Contract Rates
   Turnkey and Footage Contract Activity
    2006 Results and First Quarter 2007 Outlook
  -21-




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Critical Accounting Policies
  Property and Equipment.
 Impairment of Long-Lived Assets.
  -22-




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Goodwill.
  Revenue Recognition.
 Insurance Accruals.
  Income Taxes.
  -23-




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Financial Condition and Liquidity
  December 31, 2006
    
    
    December 31, 2005(Dollars in thousands)Amount
    
    
    %
    
    
    Amount
    
    
    %Working capital
    
    $
    304,764
    
    
    
    32
    
    
    $
    250,446
    
    
    
    32Property and equipment, net
    
    
    608,136
    
    
    
    65
    
    
    
    499,965
    
    
    
    65Goodwill
    
    
    10,377
    
    
    
    1
    
    
    
    10,377
    
    
    
    1Other noncurrent assets, net
    
    
    16,625
    
    
    
    2
    
    
    
    13,098
    
    
    
    2Total
    
    $
    939,902
    
    
    
    100
    
    
    $
    773,886
    
    
    
    100Long-term debt
    
    $
    275,000
    
    
    
    29
    
    
    $
    275,000
    
    
    
    35Other long-term liabilities
    
    
    131,108
    
    
    
    14
    
    
    
    129,654
    
    
    
    17Shareholders equity
    
    
    533,794
    
    
    
    57
    
    
    
    369,232
    
    
    
    48Total
    
    $
    939,902
    
    
    
    100
    
    
    $
    773,886
    
    
    
    100
 Significant Changes in Financial Condition
    3.75% Notes
  -24-




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




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##### Table of Contents




    
    during any calendar quarter, if the closing sale price per share of our common stock
for at least 20 trading days in the period of 30 consecutive trading days ending on the
last trading day of the calendar quarter preceding the quarter in which the conversion
occurs, is more than 120% of the conversion price per share ($7.81 per share) on that
30th trading day;
    
    if we have called the Floating Rate Notes for redemption;
    
    during any period that the credit ratings assigned to the 3.75% Notes by both
Moodys Investors Service (Moodys) and Standard & Poors Ratings Group (S&P) are
reduced below B1 and B+, respectively, or if neither rating agency is rating our 3.75%
Notes;
    
    during the five trading day period immediately following any nine consecutive
trading day period in which the average trading price per $1,000 principal amount of
the Floating Rate Notes for each day of such period was less than 95% of the product of
the closing sale price per share of our common stock on that day multiplied by the
number of shares of common stock issuable upon conversion of $1,000 principal amount of
the Floating Rate Notes; or
    
    upon the occurrence of specified corporate transactions, including a change of control.
  CIT Facility
    
    
    1 to 1 EBITDA coverage of debt service, tested monthly on a trailing 12 month basis;
and
    
    minimum tangible net worth (as defined in the CIT Facility) at the end of each
quarter will be at least the prior year tangible net worth less non-cash write-downs
since the prior year-end and less fixed amounts for each quarter end for which the test
is calculated.
  -26-




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##### Table of Contents




    
    default with respect to other indebtedness in excess of $350,000;
    
    legal judgments in excess of $350,000; or
    
    a change in control which means that we cease to own 100% of our two principal
subsidiaries, some person or group has either acquired beneficial ownership of 30% or
more of the Company or obtained the power to elect a majority of our board of
directors, or our board of directors ceases to consist of a majority of continuing
directors (as defined by the CIT Facility).
   Cash Flow
  Years Ended December 31,2006
    
    
    2005
    
    
    2004Net cash provided by (used in):Operating activities
    
    $
    288,230
    
    
    $
    221,612
    
    
    $
    45,146Investing activities
    
    
    (170,514
    )
    
    
    (128,250
    )
    
    
    (74,077
    )Financing activities
    
    
    (61,088
    )
    
    
    8,073
    
    
    
    46,291Net increase in cash
    
    $
    56,628
    
    
    $
    101,435
    
    
    $
    17,360
    -27-




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##### Table of Contents



7 8
 Certain Contractual Commitments
  Payments Due by Period (1)Less than
    
    
    1-3
    
    
    4-5
    
    
    After 5Contractual Obligation
    
    Total
    
    
    1 year
    
    
    years
    
    
    years
    
    
    years3.75% Notes (2)Principal
    
    $
    150,000
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    150,000Interest
    
    
    92,813
    
    
    
    5,625
    
    
    
    11,250
    
    
    
    11,250
    
    
    
    64,688Floating Rate Notes (2)Principal
    
    
    125,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    125,000Interest (3)
    
    
    114,497
    
    
    
    6,638
    
    
    
    13,275
    
    
    
    13,275
    
    
    
    81,309New rig purchases
    
    
    47,041
    
    
    
    47,041
    
    
    
    
    
    
    
    
    
    
    
    Rig equipment
    
    
    3,775
    
    
    
    3,775
    
    
    
    
    
    
    
    
    
    
    
    Drill pipe and collars
    
    
    8,419
    
    
    
    8,419
    
    
    
    
    
    
    
    
    
    
    
    Operating leases
    
    
    2,616
    
    
    
    757
    
    
    
    1,241
    
    
    
    618
    
    
    
    Total contractual
cash obligations
    
    $
    544,161
    
    
    $
    72,255
    
    
    $
    25,766
    
    
    $
    25,143
    
    
    $
    420,997
 
 (1)
    
    This assumes no conversion under, or acceleration of maturity dates due to redemption,
breach of, or default under, the terms of the applicable contractual obligation.(2)
    
    See Floating Rate Notes and 3.75% Notes, above, for information relating to covenants,
the breach of which could cause a default under, and acceleration of, the maturity date. Also
see 3.75% Notes and Floating Rate Notes for information related to the holders conversion
rights.(3)
    
    Assumes the 3-month LIBOR effective for the first quarter of 2007 of 5.36% minus a spread of
0.05% (5.31% as of December 31, 2006) -28-




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##### Table of Contents



Payments Due by Period (1)Potential
    
    Total
    
    
    Less than
    
    
    1-3
    
    
    4-5
    
    
    Over 5Contractual Obligation
    
    Committed
    
    
    1 year
    
    
    years
    
    
    years
    
    
    YearsStandby letters of credit
    
    $
    29,554
    
    
    $
    
    
    
    $
    29,554
    
    
    $
    
    
    
    $
    Total
    
    $
    29,554
    
    
    $
    
    
    
    $
    29,554
    
    
    $
    
    
    
    $
    
 
 (1)
    
    Assumes no acceleration of maturity date due to breach of, or default under, the potential
contractual obligation. Projected Cash Sources and Uses
    Results of Operations
   -29-




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##### Table of Contents



Years Ended December 31,2006
    
    
    2005
    
    
    2004Earnings before interest expense, taxes,
depreciation and amortization
    
    $
    431,975
    
    
    $
    265,775
    
    
    $
    84,342Depreciation and amortization
    
    
    (74,010
    )
    
    
    (61,279
    )
    
    
    (55,329
    )Interest expense
    
    
    (13,614
    )
    
    
    (11,364
    )
    
    
    (14,759
    )Total income tax expense
    
    
    (124,400
    )
    
    
    (72,495
    )
    
    
    (6,176
    )Net income applicable to common
shares
    
    $
    219,951
    
    
    $
    120,637
    
    
    $
    8,078
  For the Year Ended December 31, 2006Daywork
    
    
    TurnkeyOperations
    
    
    Operations (1)
    
    
    Total(Dollars in thousands, except averages per rig day worked)Rig days worked
    
    
    35,662
    
    
    
    3,899
    
    
    
    39,561Contract drilling revenues
    
    $
    736,773
    
    
    $
    208,754
    
    
    $
    945,527Drilling operations expenses
    
    
    (368,637
    )
    
    
    (148,150
    )
    
    
    (516,787
    )General and administrative expense (2)
    
    
    (22,025
    )
    
    
    (2,280
    )
    
    
    (24,305
    )Interest income (2)
    
    
    10,365
    
    
    
    1,121
    
    
    
    11,486Gain on sale of assets (2)
    
    
    10,633
    
    
    
    1,262
    
    
    
    11,895Gain on insurance proceeds (2)
    
    
    3,675
    
    
    
    484
    
    
    
    4,159EBITDA
    
    $
    370,784
    
    
    $
    61,191
    
    
    $
    431,975Averages per rig day worked:Contract drilling revenues
    
    $
    20,660
    
    
    $
    53,540
    
    
    $
    23,901EBITDA
    
    $
    10,397
    
    
    $
    15,694
    
    
    $
    10,919
 For the Year Ended December 31, 2005Daywork
    
    
    TurnkeyOperations
    
    
    Operations (1)
    
    
    Total(Dollars in thousands, except averages per rig day worked)Rig days worked
    
    
    33,718
    
    
    
    3,511
    
    
    
    37,229Contract drilling revenues
    
    $
    538,250
    
    
    $
    158,729
    
    
    $
    696,979Drilling operations expenses
    
    
    (308,708
    )
    
    
    (109,936
    )
    
    
    (418,644
    )General and administrative expense (2)
    
    
    (14,750
    )
    
    
    (1,498
    )
    
    
    (16,248
    )Interest income (2)
    
    
    3,236
    
    
    
    337
    
    
    
    3,573Gain on sale of assets (2)
    
    
    111
    
    
    
    4
    
    
    
    115EBITDA
    
    $
    218,139
    
    
    $
    47,636
    
    
    $
    265,775Averages per rig day worked:Contract drilling revenues
    
    $
    15,963
    
    
    $
    45,209
    
    
    $
    18,721EBITDA
    
    $
    6,470
    
    
    $
    13,568
    
    
    $
    7,139
 -30-




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##### Table of Contents



For the Year Ended December 31, 2004Daywork
    
    
    TurnkeyOperations
    
    
    Operations (1)
    
    
    Total(Dollars in thousands, except averages per rig day worked)Rig days worked
    
    
    27,616
    
    
    
    3,561
    
    
    
    31,177Contract drilling revenues
    
    $
    308,851
    
    
    $
    115,783
    
    
    $
    424,634Drilling operations expenses
    
    
    (234,630
    )
    
    
    (93,167
    )
    
    
    (327,797
    )General and administrative expense (2)
    
    
    (11,935
    )
    
    
    (1,382
    )
    
    
    (13,317
    )Interest income (2)
    
    
    691
    
    
    
    86
    
    
    
    777Gain on sale of assets (2)
    
    
    34
    
    
    
    11
    
    
    
    45EBITDA
    
    $
    63,011
    
    
    $
    21,331
    
    
    $
    84,342Averages per rig day worked:Contract drilling revenues
    
    $
    11,184
    
    
    $
    32,515
    
    
    $
    13,620EBITDA
    
    $
    2,282
    
    
    $
    5,990
    
    
    $
    2,705
 
 (1)
    
    Turnkey operations include the results from turnkey and footage contracts.(2)
    
    These income and expense items are not contract related and are allocated between daywork and
turnkey based upon operating rig days. Comparison of Fiscal Years ended December 31, 2006 and 2005
  Daywork Operations
  Turnkey Operations
  -31-




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##### Table of Contents



Other
    Comparison of Fiscal Years ended December 31, 2005 and 2004
  Daywork Operations
   Turnkey Operations
  -32-




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##### Table of Contents



Other
  7 8 7 8
  Inflation and Changing Prices
  
 Item 7A. Quantitative and Qualitative Disclosure about Market Risk
 Interest Rate Risk.
 -33-




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##### Table of Contents



Item 8. Financial Statements and Supplementary Data
 Index to
Consolidated Financial Statements
and Financial Statement Schedule
 Managements Report on Internal Control Over Financial Reporting
    
    
    35Reports of Independent Registered Public Accounting Firm
    
    
    36Consolidated Balance Sheets as of December 31, 2006 and 2005
    
    
    38Consolidated Statements of Operations for the Years Ended December 31, 2006, 2005 and 2004
    
    
    39Consolidated Statements of Shareholders Equity And Comprehensive Income For the Years Ended December 31, 2006, 2005, and 2004
    
    
    40Consolidated Statements of Cash Flows for the Years Ended December 31, 2006, 2005, and 2004
    
    
    41Notes to Consolidated Financial Statements
    
    
    42Financial Statement Schedule:Schedule II  Valuation and Qualifying Accounts
    
    
    58
  -34-




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##### Table of Contents



MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
    /s/ Thomas P. Richards
    
    /s/ David W. WehlmannThomas P. Richards
    
    David W. WehlmannChairman, President and Chief Executive Officer
    
    Executive Vice President and Chief Financial OfficerFebruary 27, 2007
 -35-




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
     Internal Control 
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO)
  
 -36-




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 Managements Report on
Internal Control Over Financial Reporting Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO)
    Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) Internal ControlIntegrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
   
 -37-




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##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES
 
 Consolidated Balance Sheets
  December 31,2006
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    229,773
    
    
    $
    173,145Restricted cash
    
    
    817
    
    
    
    780Accounts receivable, net of allowance of
of $3,169 and $2,674, respectively
    
    
    206,523
    
    
    
    159,438Prepaids and other current assets
    
    
    7,817
    
    
    
    8,010Deferred tax assets
    
    
    6,916
    
    
    
    4,222Total current assets
    
    
    451,846
    
    
    
    345,595Property and equipment:Land, buildings and improvements
    
    
    7,044
    
    
    
    6,530Drilling equipment
    
    
    1,107,457
    
    
    
    934,648Furniture and fixtures
    
    
    4,839
    
    
    
    4,217Total property and equipment
    
    
    1,119,340
    
    
    
    945,395Less: accumulated depreciation
    
    
    (511,204
    )
    
    
    (445,430
    )Net property and equipment
    
    
    608,136
    
    
    
    499,965Rigs held for sale, net
    
    
    
    
    
    
    5,524Goodwill
    
    
    10,377
    
    
    
    10,377Other noncurrent assets, net
    
    
    16,625
    
    
    
    7,574$
    1,086,984
    
    
    $
    869,035LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable-trade
    
    $
    85,253
    
    
    $
    61,087Accrued workers compensation
    
    
    7,435
    
    
    
    6,575Payroll and related employee costs
    
    
    15,952
    
    
    
    12,131Accrued interest payable
    
    
    2,536
    
    
    
    2,156Current income taxes payable
    
    
    20,641
    
    
    
    6,141Other accrued liabilities
    
    
    15,265
    
    
    
    7,059Total current liabilities
    
    
    147,082
    
    
    
    95,149Contingent convertible senior notes
    
    
    275,000
    
    
    
    275,000Other long-term liabilities
    
    
    9,877
    
    
    
    12,403Deferred income taxes
    
    
    121,231
    
    
    
    117,251Commitments and contingent liabilities
    
    
    
    
    
    
    Shareholders equity:Series B Junior Participating Preferred stock; $1 par value;
250,000 shares authorized; none outstanding
    
    
    
    
    
    
    Common stock; $0.10 par value; shares authorized: 300,000,000; shares issued:195,228,691
at December 31, 2006 and 192,625,650 at December 31, 2005; shares outstanding: 185,936,440 at December 31, 2006
and 192,625,650 at December 31, 2005
    
    
    19,523
    
    
    
    19,263Additional paid-in capital
    
    
    383,482
    
    
    
    374,012Treasury stock, at cost: 9,292,251 shares at December 31, 2006
    
    
    (65,119
    )
    
    
    Retained earnings (deficit)
    
    
    195,908
    
    
    
    (24,043
    )Total shareholders equity
    
    
    533,794
    
    
    
    369,232$
    1,086,984
    
    
    $
    869,035
 See accompanying notes to consolidated financial statements
 -38-




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##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES
 
 Consolidated Statements of Operations
  Years Ended December 31,2006
    
    
    2005
    
    
    2004Revenues:Contract drilling
    
    $
    945,527
    
    
    $
    696,979
    
    
    $
    424,634Costs and expenses:Drilling operations
    
    
    516,787
    
    
    
    418,644
    
    
    
    327,797Depreciation and amortization
    
    
    74,010
    
    
    
    61,279
    
    
    
    55,329General and administrative
    
    
    24,305
    
    
    
    16,248
    
    
    
    13,317Gain on sale of assets
    
    
    (11,895
    )
    
    
    (115
    )
    
    
    (45
    )Gain on insurance proceeds
    
    
    (4,159
    )
    
    
    
    
    
    
    Total costs and expenses
    
    
    599,048
    
    
    
    496,056
    
    
    
    396,398Operating income
    
    
    346,479
    
    
    
    200,923
    
    
    
    28,236Other income (expense):Interest expense
    
    
    (13,614
    )
    
    
    (11,364
    )
    
    
    (14,759
    )Interest income
    
    
    11,486
    
    
    
    3,573
    
    
    
    777Other expense, net
    
    
    (2,128
    )
    
    
    (7,791
    )
    
    
    (13,982
    )Income before income taxes
    
    
    344,351
    
    
    
    193,132
    
    
    
    14,254Income tax expense:Current
    
    
    123,114
    
    
    
    11,717
    
    
    
    200Deferred
    
    
    1,286
    
    
    
    60,778
    
    
    
    5,976Total income tax expense
    
    
    124,400
    
    
    
    72,495
    
    
    
    6,176Net income
    
    $
    219,951
    
    
    $
    120,637
    
    
    $
    8,078Net income per common share (Note 1):Basic
    
    $
    1.16
    
    
    $
    0.63
    
    
    $
    0.04Diluted
    
    $
    0.98
    
    
    $
    0.54
    
    
    $
    0.04Weighted average common shares outstanding:Basic
    
    
    190,088
    
    
    
    191,364
    
    
    
    185,868Diluted
    
    
    233,818
    
    
    
    235,412
    
    
    
    187,654
 See accompanying notes to consolidated financial statements
 -39-




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##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES
 
 Consolidated Statements of Shareholders Equity And Comprehensive Income
  Series BJuniorParticipating
    
    
    Common Stock
    
    
    
    
    
    
    Treasury StockPreferred
    
    
    
    
    
    
    Amount,
    
    
    Additional
    
    
    
    
    
    
    
    
    
    
    RetainedStock
    
    
    Number of
    
    
    at $0.10
    
    
    Paid-in
    
    
    Number
    
    
    Amount,
    
    
    Earnings$1 par Value
    
    
    Shares
    
    
    par value
    
    
    Capital
    
    
    of Shares
    
    
    at cost
    
    
    (Deficit)
    
    
    TotalBalance, December 31, 2003
    
    
    
    
    
    
    181,283
    
    
    $
    18,129
    
    
    $
    330,266
    
    
    
    
    
    
    $
    
    
    
    $
    (152,758
    )
    
    $
    195,637Non-cash compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    77
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    77Exercise of stock options
    
    
    
    
    
    
    4,243
    
    
    
    424
    
    
    
    9,729
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,153Tax benefit of stock
option exercises
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,193
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,193Issuance of common stock
    
    
    
    
    
    
    4,610
    
    
    
    461
    
    
    
    19,883
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,344Comprehensive net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,078
    
    
    
    8,078Balance, December 31, 2004
    
    
    
    
    
    
    190,136
    
    
    
    19,014
    
    
    
    363,148
    
    
    
    
    
    
    
    
    
    
    
    (144,680
    )
    
    
    237,482Exercise of stock options
    
    
    
    
    
    
    2,292
    
    
    
    229
    
    
    
    7,844
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,073Tax benefit of stock option exercises
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,842
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,842Issuance of restricted stock, net of forfeitures
    
    
    
    
    
    
    198
    
    
    
    20
    
    
    
    (20
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    198
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    198Comprehensive net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    120,637
    
    
    
    120,637Balance, December 31, 2005
    
    
    
    
    
    
    192,626
    
    
    
    19,263
    
    
    
    374,012
    
    
    
    
    
    
    
    
    
    
    
    (24,043
    )
    
    
    369,232Exercise of stock options
    
    
    
    
    
    
    905
    
    
    
    90
    
    
    
    3,062
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,152Tax benefit of stock option exercises
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,330
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,330Issuance of restricted stock, net of forfeitures
    
    
    
    
    
    
    1,697
    
    
    
    170
    
    
    
    (170
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,248
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,248Purchase of treasury stock
    
    
    
    
    
    
    (9,292
    )
    
    
    
    
    
    
    
    
    
    
    9,292
    
    
    
    (65,119
    )
    
    
    
    
    
    
    (65,119
    )Comprehensive net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    219,951
    
    
    
    219,951Balance, December 31, 2006
    
    
    
    
    
    
    185,936
    
    
    $
    19,523
    
    
    $
    383,482
    
    
    
    9,292
    
    
    $
    (65,119
    )
    
    $
    195,908
    
    
    $
    533,794
 See accompanying notes to consolidated financial statements
 -40-




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##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES
 
 Consolidated Statements of Cash Flows
  Years Ended December 31,2006
    
    
    2005
    
    
    2004Cash flows from operating activities:Net income
    
    $
    219,951
    
    
    $
    120,637
    
    
    $
    8,078Adjustments to reconcile net income to
net cash provided by operating activities:Depreciation and amortization
    
    
    74,010
    
    
    
    61,279
    
    
    
    55,329Non-cash compensation expense
    
    
    
    
    
    
    
    
    
    
    77Gain on insurance proceeds
    
    
    (4,159
    )
    
    
    
    
    
    
    Gain on sale of assets
    
    
    (11,895
    )
    
    
    (115
    )
    
    
    (45
    )Provision for doubtful accounts
    
    
    495
    
    
    
    250
    
    
    
    Stock-based compensation expense
    
    
    5,248
    
    
    
    198
    
    
    
    Deferred income taxes
    
    
    1,286
    
    
    
    60,778
    
    
    
    2,778Accretion of debt discount
    
    
    
    
    
    
    
    
    
    
    102Excess tax benefit of stock option exercises
    
    
    (879
    )
    
    
    2,842
    
    
    
    3,193Increase in restricted cash
    
    
    (37
    )
    
    
    (22
    )
    
    
    (9
    )Increase in other accounts receivable
    
    
    (47,580
    )
    
    
    (61,623
    )
    
    
    (34,128
    )(Increase) decrease in other current assets
    
    
    193
    
    
    
    (2,913
    )
    
    
    (718
    )Increase in trade accounts payable
    
    
    24,166
    
    
    
    18,333
    
    
    
    9,596Increase (decrease) in accrued workers compensation
    
    
    (1,530
    )
    
    
    6,257
    
    
    
    2,402Increase(decrease) in other current liabilities
    
    
    12,407
    
    
    
    8,019
    
    
    
    (3,642
    )Increase (decrease) in current taxes payable
    
    
    15,830
    
    
    
    5,941
    
    
    
    200Increase in other
    
    
    724
    
    
    
    1,751
    
    
    
    1,933Cash provided by operating activities
    
    
    288,230
    
    
    
    221,612
    
    
    
    45,146Cash flows from investing activities:Property and equipment additions
    
    
    (197,161
    )
    
    
    (131,352
    )
    
    
    (46,951
    )Insurance proceeds
    
    
    11,076
    
    
    
    
    
    
    
    Deposits for new rig purchases
    
    
    (10,979
    )
    
    
    
    
    
    
    Payments to acquire New Patriot Drilling Corp
    
    
    
    
    
    
    
    
    
    
    (28,906
    )Proceeds from sale of assets
    
    
    26,550
    
    
    
    3,102
    
    
    
    1,780Cash used in investing activities
    
    
    (170,514
    )
    
    
    (128,250
    )
    
    
    (74,077
    )Cash flows from financing activities:Net proceeds from long-term debt
    
    
    
    
    
    
    
    
    
    
    122,187Repayments of long-term debt
    
    
    
    
    
    
    
    
    
    
    (85,000
    )Financing costs
    
    
    
    
    
    
    
    
    
    
    (1,049
    )Proceeds from exercise of stock options
    
    
    3,152
    
    
    
    8,073
    
    
    
    10,153Excess tax benefit of stock options
    
    
    879
    
    
    
    
    
    
    
    Purchase of treasury stock
    
    
    (65,119
    )
    
    
    
    
    
    
    Cash (used in) provided by financing activities
    
    
    (61,088
    )
    
    
    8,073
    
    
    
    46,291Net increase in cash and cash equivalents
    
    
    56,628
    
    
    
    101,435
    
    
    
    17,360Cash and cash equivalents, beginning of year
    
    
    173,145
    
    
    
    71,710
    
    
    
    54,350Cash and cash equivalents, end of year
    
    $
    229,773
    
    
    $
    173,145
    
    
    $
    71,710Supplemental Cash Flow DisclosureCash paid for interest
    
    $
    12,373
    
    
    $
    9,862
    
    
    $
    15,872Cash paid for taxes
    
    $
    107,052
    
    
    $
    2,985
    
    
    $
    
 See accompanying notes to consolidated financial statements
 -41-




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##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (1) Summary of Significant Accounting Policies
 Nature of Operations.
 Property and Equipment.
 Useful Lives (in years)Drilling rigs and related equipment
    
    3-15Furniture and fixtures
    
    7Buildings and improvements
    
    5-20Vehicles
    
    3-6Other
    
    3-5
  Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of.
 Goodwill and Intangible Assets.
 Revenue Recognition.
 Accounts Receivable.
 -42-




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##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Earnings per Share.
  2006
    
    
    2005
    
    
    2004(In thousands, except per share amounts)Numerator:Net income
    
    $
    219,951
    
    
    $
    120,637
    
    
    $
    8,078Add interest expense on contingent
convertible senior notes, net of
related tax effects
    
    
    8,117
    
    
    
    6,596
    
    
    
    Adjusted net income  diluted
    
    $
    228,068
    
    
    $
    127,233
    
    
    $
    8,078Denominator:Weighted average common shares
outstanding  basic
    
    
    190,088
    
    
    
    191,364
    
    
    
    185,868Effect of dilutive securities:Options  treasury stock method
    
    
    887
    
    
    
    1,552
    
    
    
    1,786Restricted stock  treasury stock method
    
    
    386
    
    
    
    39
    
    
    
    Contingent convertible senior notes
    
    
    42,457
    
    
    
    42,457
    
    
    
    Weighted average common shares
outstanding  diluted
    
    
    233,818
    
    
    
    235,412
    
    
    
    187,654Earnings per common share:Basic
    
    $
    1.16
    
    
    $
    0.63
    
    
    $
    0.04Diluted
    
    $
    0.98
    
    
    $
    0.54
    
    
    $
    0.04
 -43-




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##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Years Ended December 31,2006
    
    
    2005
    
    
    2004Basic earnings per share:Unvested restricted stock
    
    
    1,895,831
    
    
    
    197,750
    
    
    
    Diluted earnings per share:Anti-dilutive stock options
    
    
    757,944
    
    
    
    
    
    
    
    904,200Anti-dilutive restricted stock
    
    
    
    
    
    
    135,144
    
    
    
    Anti-dilutive stock from 3.75% Notes
    
    
    
    
    
    
    
    
    
    
    23,255,820Anti-dilutive stock from Floating Rate Notes
    
    
    
    
    
    
    
    
    
    
    19,201,225Total anti-dilutive securities excluded from
diluted earnings per share
    
    
    757,944
    
    
    
    135,144
    
    
    
    43,361,245
 Income Taxes.
 Share-Based Payment Arrangements.
   -44-




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##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   Weighted-AverageWeighted-
    
    
    Remaining
    
    
    AggregateAverage
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Exercise Price
    
    
    Life
    
    
    Value(in thousands)
    
    
    
    
    
    
    (in years)
    
    
    (in thousands)Outstanding at January 1, 2006
    
    
    4,253
    
    
    $
    3.83Granted
    
    
    340
    
    
    
    7.34Exercised
    
    
    (905
    )
    
    
    3.48Forfeited
    
    
    (69
    )
    
    
    4.43Outstanding at December 31, 2006
    
    
    3,619
    
    
    $
    4.23
    
    
    
    5.97
    
    
    $
    9,516Exercisable at December 31, 2006
    
    
    1,760
    
    
    $
    3.76
    
    
    
    4.72
    
    
    $
    5,464
    Weighted-AverageGrant-DateShares
    
    
    Fair Value(in thousands)Non-vested at January 1, 2006
    
    
    198
    
    
    $
    5.73Granted
    
    
    1,794
    
    
    
    7.30Forfeited
    
    
    (96
    )
    
    
    7.03Non-vested at December 31, 2006
    
    
    1,896
    
    
    $
    7.16
  -45-




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##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  For the Years Ended December 31,2005
    
    
    2004Net income, as reported
    
    $
    120,637
    
    
    $
    8,078Add: Stock-based compensation expense included
in reported net income, net of related tax effects
    
    
    124
    
    
    
    52Deduct: Total stock-based compensation expense
determined under fair value based method for all awards,
net of related tax effects
    
    
    (2,322
    )
    
    
    (2,082
    )Pro forma net income
    
    $
    118,439
    
    
    $
    6,048Basic earnings per shareAs reported
    
    $
    0.63
    
    
    $
    0.04Pro forma
    
    $
    0.62
    
    
    $
    0.03Diluted earnings per shareAs reported
    
    $
    0.54
    
    
    $
    0.04Pro forma
    
    $
    0.53
    
    
    $
    0.03
  Fair Value of Financial Instruments.
 Cash Flow Information.
 Restricted Cash.
 Use of Estimates.
 Concentrations of Credit Risk.
 -46-




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##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Comprehensive Income.
 Recent Accounting Pronouncements.
   Reclassification.
 (2) Acquisitions and Intangible Assets
   -47-




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##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   Current assets
    
    $
    3,992Property and equipment
    
    
    42,384Intangible assets
    
    
    3,200Goodwill
    
    
    10,377Total assets acquired
    
    
    59,953Current liabilities
    
    
    (4,490
    )Deferred tax liabilities
    
    
    (5,977
    )Total liabilities assumed
    
    
    (10,467
    )Net assets acquired
    
    $
    49,486
  (3) Income Taxes
  For the Years Ended December 31,2006
    
    
    2005
    
    
    2004CurrentFederal
    
    $
    111,885
    
    
    $
    10,260
    
    
    $
    125Foreign
    
    
    
    
    
    
    107
    
    
    
    75State
    
    
    11,229
    
    
    
    1,350
    
    
    
    $
    123,114
    
    
    $
    11,717
    
    
    $
    200DeferredFederal
    
    $
    2,933
    
    
    $
    56,937
    
    
    $
    6,082State
    
    
    (1,647
    )
    
    
    3,841
    
    
    
    (106
    )$
    1,286
    
    
    $
    60,778
    
    
    $
    5,976
 -48-




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##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  December 31,2006
    
    
    2005Deferred tax assetsWorkers compensation accruals
    
    $
    6,072
    
    
    $
    6,717Long-term incentive plans
    
    
    4,062
    
    
    
    74Other
    
    
    3,116
    
    
    
    1,493$
    13,250
    
    
    $
    8,284Deferred tax liabilitiesDepreciation
    
    
    127,565
    
    
    
    121,313Net deferred tax liability
    
    $
    114,315
    
    
    $
    113,029
   For the Years Ended December 31,2006
    
    
    2005
    
    
    2004Income tax expense at statutory rate
    
    $
    120,523
    
    
    $
    67,596
    
    
    $
    4,989Increase (decrease) in taxes resulting from:Permanent differencesSection 199 Manufacturing Deduction
    
    
    (3,418
    )
    
    
    
    
    
    
    Basis differences in assets that were
purchased in capital stock acquisitions
    
    
    972
    
    
    
    972
    
    
    
    972State taxes, net
    
    
    5,950
    
    
    
    3,131
    
    
    
    (69
    )Other
    
    
    373
    
    
    
    796
    
    
    
    284Income tax expense
    
    $
    124,400
    
    
    $
    72,495
    
    
    $
    6,176
 -49-




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##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (4) Long-Term Debt
  December 31,2006
    
    
    2005Contingent Convertible Senior Notes due May 2023
    
    $
    150,000
    
    
    $
    150,000Floating Rate Contingent Convertible Senior Notes due April 2024
    
    
    125,000
    
    
    
    125,000$
    275,000
    
    
    $
    275,000Less current maturities
    
    
    
    
    
    
    Long-term debt
    
    $
    275,000
    
    
    $
    275,000
 3.75% Notes
   RedemptionPeriod
    
    PriceMay 14, 2008 through May 6, 2009
    
    
    101.88
    %May 7, 2009 through May 6, 2010
    
    
    101.50
    %May 7, 2010 through May 6, 2011
    
    
    101.13
    %May 7, 2011 through May 6, 2012
    
    
    100.75
    %May 7, 2012 through May 6, 2013
    
    
    100.38
    %May 7, 2013 and thereafter
    
    
    100.00
    %
   
    
    during any calendar quarter, if the closing sale price per share of the
Companys common stock for at least 20 trading days in the period of 30 consecutive
trading days ending on the last trading
 -50-




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##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 day of the calendar quarter preceding the quarter in which the conversion occurs, is
more than 110% of the conversion price per share ($7.10 per share) on that 30th
trading day;
    
    if the Company has called the 3.75% Notes for redemption;
    
    during any period that the credit ratings assigned to the 3.75% Notes by
both Moodys and S&P are reduced below B1 and B+, respectively, or if neither rating
agency is rating the 3.75% Notes;
    
    during the five trading day period immediately following any nine
consecutive trading day period in which the average trading price per $1,000 principal
amount of the 3.75% Notes for each day of such period was less than 95% of the product
of the closing sale price per share of the Companys common stock on that day
multiplied by the number of shares of common stock issuable upon conversion of $1,000
principal amount of the 3.75% Notes; or
    
    upon the occurrence of specified corporate transactions, including a change
of control.
 th
 Floating Rate Notes
    -51-




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##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
    
    during any calendar quarter, if the closing sale price per share of the
Companys common stock for at least 20 trading days in the period of 30 consecutive
trading days ending on the last trading day of the calendar quarter preceding the quarter in which the conversion occurs, is
more than 120% of the conversion price per share ($7.81 per share) on that 30th
trading day;
    
    if the Company has called the Floating Rate Notes for redemption;
    
    during any period that the credit ratings assigned to the Companys 3.75%
Notes by both Moodys Investors Service (Moodys) and Standard & Poors Ratings Group
(S&P) are reduced below B1 and B+, respectively, or if neither rating agency is
rating the Companys 3.75% Notes;
    
    during the five trading day period immediately following any nine
consecutive trading day period in which the average trading price per $1,000 principal
amount of the Floating Rate Notes for each day of such period was less than 95% of the
product of the closing sale price per share of the Companys common stock on that day
multiplied by the number of shares of common stock issuable upon conversion of $1,000
principal amount of the Floating Rate Notes; or
    
    upon the occurrence of specified corporate transactions, including a change
of control.
  87/8% Senior Notes due 2007
 7 8 7 8 7 8 7 8
 CIT Facility
   -52-




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##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  
    
    1 to 1 EBITDA coverage of debt service, tested monthly on a trailing 12
month basis; and
    
    minimum tangible net worth (as defined in the CIT Facility) at the end of
each quarter will be at least the prior year tangible net worth less non-cash
write-downs since the prior year-end and less fixed amounts for each quarter end for
which the test is calculated.
  
    
    default with respect to other indebtedness in excess of $350,000;
    
    legal judgments in excess of $350,000; or
    
    a change in control which means that the Company ceases to own 100% of its
two principal subsidiaries, some person or group that has either acquired beneficial
ownership of 30% or more of the Company or obtained the power to elect a majority of
the Companys board of directors, or the Companys board of directors ceases to consist
of a majority of continuing directors (as defined by the CIT Facility).
   (5) Capital Stock and Stock Option Plans
   -53-




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##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   
    
    incentive stock options;
    
    non-statutory stock options;
    
    restricted shares; and
    
    other stock-based and cash awards.
    (6) Segment Information
  (7) Related-Party Transactions
  -54-




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##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (8) Commitments and Contingencies
 Operating Leases
  Year
    
    Amount2007
    
    $
    757,0002008
    
    
    647,0002009
    
    
    594,0002010
    
    
    570,0002011
    
    
    48,000$
    2,616,000
  New Rig Purchases
  Contingencies
  (9) Employee Benefit Plan
  (10) Concentrations
  (11) Insurance Recoveries
  -55-




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##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  (12) Asset Sales
  (13) Treasury Stock
  (14) Quarterly Financial Data (unaudited)
  Quarter EndedMarch
    
    June
    
    September
    
    December2006
    
    2006
    
    2006
    
    2006Contract drilling revenues
    
    $
    222,879
    
    
    $
    239,590
    
    
    $
    242,728
    
    
    $
    240,330Operating income
    
    
    87,069
    
    
    
    90,425
    
    
    
    87,041
    
    
    
    81,944Income before income taxes
    
    
    85,916
    
    
    
    90,123
    
    
    
    86,726
    
    
    
    81,586Net income
    
    
    54,249
    
    
    
    57,915
    
    
    
    55,262
    
    
    
    52,525Net income per common share basic
    
    $
    0.28
    
    
    $
    0.30
    
    
    $
    0.29
    
    
    $
    0.28 diluted
    
    $
    0.24
    
    
    $
    0.25
    
    
    $
    0.25
    
    
    $
    0.24
 Quarter EndedMarch
    
    June
    
    September
    
    December2005
    
    2005
    
    2005
    
    2005Contract drilling revenues
    
    $
    149,992
    
    
    $
    161,315
    
    
    $
    181,523
    
    
    $
    204,149Operating income
    
    
    38,851
    
    
    
    46,150
    
    
    
    52,541
    
    
    
    63,381Income before income taxes
    
    
    36,684
    
    
    
    44,053
    
    
    
    50,661
    
    
    
    61,734Net income
    
    
    23,044
    
    
    
    27,633
    
    
    
    31,779
    
    
    
    38,181Net income per common share basic
    
    $
    0.12
    
    
    $
    0.14
    
    
    $
    0.17
    
    
    $
    0.20 diluted
    
    $
    0.10
    
    
    $
    0.12
    
    
    $
    0.14
    
    
    $
    0.17
 -56-




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##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Quarter EndedMarch
    
    June
    
    September
    
    December2004
    
    2004
    
    2004
    
    2004Contract drilling revenues
    
    $
    75,200
    
    
    $
    103,750
    
    
    $
    116,290
    
    
    $
    129,394Operating income (loss)
    
    
    (3,438
    )
    
    
    1,990
    
    
    
    11,199
    
    
    
    18,485Income (loss) before income taxes
    
    
    (9,438
    )
    
    
    (1,748
    )
    
    
    9,173
    
    
    
    16,267Net income (loss)
    
    
    (6,431
    )
    
    
    (1,482
    )
    
    
    5,462
    
    
    
    10,529Net income (loss) per common share basic
    
    $
    (0.04
    )
    
    $
    (0.01
    )
    
    $
    0.03
    
    
    $
    0.06 diluted
    
    $
    (0.04
    )
    
    $
    (0.01
    )
    
    $
    0.03
    
    
    $
    0.05
 -57-




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##### Table of Contents



Schedule II
 GREY WOLF, INC. AND SUBSIDIARIES
 
 Valuation and Qualifying Accounts
 (In thousands)
 Additions
    
    
    DeductionsBalance at
    
    
    Charged to
    
    
    From
    
    
    Balance atBeginning
    
    
    Bad Debt
    
    
    Bad Debt
    
    
    Endof Period
    
    
    Allowance
    
    
    Allowance
    
    
    of PeriodYear ended December 31, 2004

Allowance for doubtful accounts receivable
    
    $
    2,443
    
    
    $
    
    
    
    $
    (19
    )
    
    $
    2,424Year Ended December 31, 2005

Allowance for doubtful accounts receivable
    
    $
    2,424
    
    
    $
    250
    
    
    $
    
    
    
    $
    2,674Year ended December 31, 2006

Allowance for doubtful accounts receivable
    
    $
    2,674
    
    
    $
    495
    
    
    $
    
    
    
    $
    3,169
 -58-




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##### Table of Contents



Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
  
 Item 9A. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Managements Report on Internal Control Over Financial Reporting
  Changes in Internal Controls
  
 Item 9B. Other Information
  
 PART III
 
 Item 10. Directors, Executive Officers and Corporate Governance
  
 Item 11. Executive Compensation
  -59-




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##### Table of Contents



Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
  
 Item 13. Certain Relationships and Related Transactions, and Director independence
  
 Item 14. Principal Accountant Fees and Services
  -60-




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##### Table of Contents



PART IV
 
 Item 15. Exhibits and Financial Statement Schedules
  1. and 2. Financial Statements and Schedule
  3.
    
    Exhibits
 ExhibitNo.
    
    
    
    Documents2.1
    
    
    
    Agreement and Plan of Merger between Grey Wolf, Inc. and New
Patriot Drilling Corp. dated March 5, 2004 (incorporated by
reference to Exhibit 99 to Grey Wolfs Form 8-K dated March 8,
2004.3.1
    
    
    
    Articles of Incorporation of Grey Wolf, Inc., as amended
(incorporated herein by reference to Exhibit 3.1 to Form 10-Q dated
May 12, 1999).3.2
    
    
    
    By-Laws of Grey Wolf, Inc., as amended (incorporated herein by
reference to Exhibit 99.1 to Form 8-K dated March 23, 1999).4.1
    
    
    
    Rights Agreement dated as of September 21, 1998 by and between the
Company and American Stock Transfer and Trust Company as Rights
Agent (incorporated herein by reference to Exhibit 4.1 to Form 8-K
filed September 22, 1998).4.2
    
    
    
    Indenture, dated as of May 7, 2003, relating to the 3.75%
Contingent Convertible Senior Notes due 2023 between the Company,
the Guarantors, and JPMorgan Chase Bank, a New York Banking
Corporation, as Trustee (incorporated herein by reference to
Exhibit 4.2 to the Companys Registration Statement on Form S-3 No.
333-106997 filed July 14, 2003).4.3
    
    
    
    Supplemental Indenture, dated as of May 22, 2003, relating to the
3.75% Contingent Convertible Senior Notes due 2023 between the
Company, the Guarantors, and JPMorgan Chase Bank, a New York
Banking Corporation, as Trustee (incorporated herein by reference
to Exhibit 4.3 to the Companys Registration Statement on Form S-3
No. 333-106997 filed July 14, 2003).4.4
    
    
    
    Indenture, dated as of March 31, 2004, relating to the Floating
Rate Contingent Convertible Senior Notes Due 2024 between the
Company, the Guarantors, and J.P. Morgan Chase Bank, a New York
banking corporation, as Trustee (incorporated by reference to
Exhibit 4.1 to Form 10-Q dated May 5, 2004).4.5
    
    
    
    Registration Rights Agreement as of March 31, 2004 by and between
Grey Wolf, Inc., the Guarantors, and the Initial Purchasers of the
Floating Rate Contingent Convertible Senior Notes due 2024
(incorporated by reference to Exhibit 4.2 to the Quarterly Report
on Form 10-Q filed May 5, 2004).4.6
    
    
    
    Second Supplemental Indenture, dated as of March 31, 2004, relating
to the 3.75% Contingent Convertible Senior Notes due 2023 between
the Company, the Guarantors, and JP Morgan Chase Bank, a New York
Banking Corporation, as Trustee (incorporated by reference to
Exhibit 4.3 to the Quarterly Report on Form 10-Q filed May 5,
2004).+10.1
    
    
    
    Form of Non-Qualified Stock Option Agreement dated September 3,
1996, by and between the Company and Thomas P. Richards
(incorporated herein by reference to Exhibit 10.2 to Registration
Statement on Form S-3 No. 333-14783 filed October 24, 1996).
 -61-




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##### Table of Contents



ExhibitNo.
    
    
    
    Documents+10.2
    
    
    
    DI Industries, Inc. 1996 Employee Stock Option Plan (incorporated
herein by reference to Grey Wolf, Inc. 1996 Annual Meeting of
Shareholders definitive proxy materials filed August 2, 1996).+10.3
    
    
    
    Grey Wolf Inc. Amendment to 1996 Employee Stock Option Plan
(incorporated herein by reference to Exhibit 4.3 to Grey Wolf,
Inc.s Registration Statement on Form S-8 No. 333-41334 filed July
13, 2000).+10.4
    
    
    
    Grey Wolf, Inc. Second Amendment to 1996 Employee Stock Option Plan
dated May 14, 2002 (incorporated herein by reference to Exhibit 4.6
to Grey Wolf, Inc. Registration Statement on Form S-8 No. 333-90888
filed June 21, 2002).+10.5
    
    
    
    Form of Non-Qualified Stock Option Agreement dated February 10,
1998, by and between the Company and David W. Wehlmann
(incorporated herein by reference to Exhibit 10.35 to the Grey
Wolf, Inc. Annual Report on Form 10-K for the year ended December
31, 1997, filed March 30, 1998).+10.6
    
    
    
    Non-Qualified Stock Option Agreement dated January 16, 1999, by and
between the Company and Edward S. Jacob, III. (incorporated herein
by reference to Exhibit 10.33 to the Grey Wolf, Inc. Annual Report
on Form 10-K for the year ended December 31, 1999, filed March 7,
2000).+10.7
    
    
    
    Form of Amendment to Non-Qualified Stock Option Agreements dated
November 13, 2001, by and between the Company and Thomas P.
Richards (incorporated herein by reference to Exhibit 10.13 to the
Grey Wolf, Inc. Annual Report on Form 10-K for the year ended
December 31, 2001, filed March 15, 2002).+10.8
    
    
    
    Form of Amendment to Non-Qualified Stock Option Agreement dated
November 13, 2001, by and among the Company (f.k.a. DI Industries,
Inc.), Thomas P. Richards and Richards Brothers Interests, L.P
(incorporated herein by reference to Exhibit 10.14 to the Grey
Wolf, Inc. Annual Report on Form 10-K for the year ended December
31, 2001, filed March 15, 2002).+10.9
    
    
    
    Form of Amendment to Non-Qualified Stock Option Agreements dated
November 13, 2001, by and between the Company and each of David W.
Wehlmann, Edward S. Jacob III, Gary D. Lee, Ronnie E. McBride, Kent
D. Cauley, and Donald J. Guedry, Jr. (incorporated herein by
reference Exhibit 10.15 to the to Grey Wolf, Inc. Annual Report on
Form 10-K for the year ended December 31, 2001, filed March 15,
2002).+10.10
    
    
    
    Grey Wolf, Inc. Executive Severance Plan effective November 15,
2001 (incorporated herein by reference to Exhibit 10.16 to the Grey
Wolf, Inc. Annual Report on Form 10-K for the year ended December
31, 2001, filed March 15, 2002).+10.11
    
    
    
    Amended and Restated Employment Agreement dated November 13, 2001,
by and between the Company and Thomas P. Richards (incorporated
herein by reference to Exhibit 10.17 to the Grey Wolf, Inc. Annual
Report on Form 10-K for the year ended December 31, 2001, filed
March 15, 2002).+10.12
    
    
    
    Amended and Restated Employment Agreement dated November 13, 2001,
by and between the Company and David W. Wehlmann (incorporated
herein by reference to Exhibit 10.18 to the Grey Wolf, Inc. Annual
Report on Form 10-K for the year ended December 31, 2001, filed
March 15, 2002).+10.13
    
    
    
    Amended and Restated Employment Agreement dated November 13, 2001, by and between the Company and Edward S. Jacob III (incorporated
herein by reference to Exhibit 10.19 of the Grey Wolf, Inc. Annual
Report on Form 10-K for the year ended December 31, 2001, filed
March 15, 2002).+10.14
    
    
    
    Employment Agreement effective December 28, 2005 by and between
Robert J. Proffit (incorporated by reference to Exhibit 10.1 of the
Grey Wolf, Inc. Current Report on Form 8-K filed December 28,
2005).
 -62-




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##### Table of Contents



ExhibitNo.
    
    
    
    Documents+10.15
    
    
    
    Form of Non-Qualified Stock Option Agreement dated as of February
13, 2002, by and between the Company and each of Frank M. Brown,
William T. Donovan, James K.B. Nelson, Robert E. Rose, Steven A.
Webster, and William R. Ziegler (incorporated herein by reference
to Exhibit 10.22 of the Grey Wolf, Inc. Annual Report on Form 10-K
for the year ended December 31, 2001, filed March 15, 2002).+10.16
    
    
    
    Grey Wolf, Inc. 2003 Incentive Plan (incorporated herein by
reference to Appendix A to the Grey Wolf, Inc. 2003 Annual Meeting
of Shareholders definitive proxy materials filed March 28, 2003).+10.17
    
    
    
    Form of Non-Qualified Stock Option Agreement under the Grey Wolf,
Inc. 2003 Incentive Plan (incorporated by reference to Exhibit 10.1
to the Grey Wolf, Inc. Current Report on Form 8-K filed February
22, 2005).+10.18
    
    
    
    Form of Restricted Stock Agreement (incorporated by reference to
Exhibit 10.2 to the Grey Wolf, Inc. current Report on Form 8-K
filed February 22, 2005).+10.19
    
    
    
    Form of Stock Option Agreement under the 2003 Incentive Plan for
Thomas P. Richards (incorporated by reference to Exhibit 10.1 to
Grey Wolf, Inc. Current Report on Form 8-K filed February 21,
2006.)+10.20
    
    
    
    Form of Restricted Stock Agreement under the 2003 Incentive Plan
for Thomas P. Richards (incorporated by reference to Exhibit 10.2
to Grey Wolf, Inc. Current Report on Form 8-K filed February 21,
2006.)+10.21
    
    
    
    Form of Stock Option Agreement under the 2003 Incentive Plan for
the other executive officers (incorporated by reference to Exhibit
10.3 to Grey Wolf, Inc. Current Report on Form 8-K filed February
21, 2006.)+10.22
    
    
    
    Form of Restricted Stock Agreement under the 2003 Incentive Plan
for other executive officers (incorporated by reference to Exhibit
10.4 to Grey Wolf, Inc. Current Report on Form 8-K filed February
21, 2006).+10.23
    
    
    
    Form of Restricted Stock Agreement for Thomas P. Richards under the
Retention Plan (incorporated by reference to Exhibit 10.5 to Grey
Wolf, Inc. Current Report on Form 8-K filed February 21, 2006).+10.24
    
    
    
    Form of Restricted Stock Agreement for other executive officers
under the Retention Plan (incorporated by reference to Exhibit 10.6
to Grey Wolf, Inc. Current Report on Form 8-K filed February 21,
2006).+10.25
    
    
    
    Form of Restricted Stock Agreement for non-employee directors
(incorporated by reference to Exhibit 10.7 to Grey Wolf, Inc.
Current Report on Form 8-K filed February 21, 2006).+10.26
    
    
    
    Anticipated compensation of officers and directors for 2007
(incorporated by reference to Grey Wolf, Inc. Current Report on
Form 8-K filed February 16, 2007).10.27
    
    
    
    Revolving Credit Agreement dated as of January 14, 1999 among Grey
Wolf Drilling Company LP (as borrower), Grey Wolf, Inc. (as
guarantor), The CIT Group/Business Credit, Inc. (as agent) and
various financial institutions (as lenders) (incorporated herein by
reference to Exhibit 10.1 to Grey Wolf, Inc. current report on Form
8-K dated January 26, 1999).10.28
    
    
    
    First Amendment to Loan Agreement dated as of December 20, 2001, by
and among Grey Wolf Drilling Company, LP (as borrower) and Grey
Wolf, Inc. (as guarantor) and the CIT Group/Business Credit, Inc.
(as agent) and various financial institutions (as lenders)
(incorporated herein by reference to Exhibit 10.11 to Grey Wolf,
Inc. Annual Report on Form 10-K for the year ended December 31,
2001, filed March 14, 2002).10.29
    
    
    
    Second Amendment to Loan Agreement dated as of February 7, 2003 by
and among Grey Wolf Drilling Company L.P. (as borrower), Grey Wolf,
Inc. and various subsidiaries (as guarantors) and the CIT
Group/Business Credit, Inc. and various financial institutions (as
lenders) (incorporated herein by reference to Exhibit 10.24 to the
Grey Wolf, Inc. Annual Report on Form 10-K for the year ended
December 31, 2002, filed March 16, 2003).
 -63-




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##### Table of Contents



ExhibitNo.
    
    
    
    Documents10.30
    
    
    
    Third Amendment to Loan Agreement as of May 1, 2003, by and among
Grey Wolf Drilling Company, L.P. (as borrower), Grey Wolf, Inc. and
various subsidiaries (as guarantors) and the CIT Group/Business
Credit, Inc. and various financial institutions (as lenders)
(incorporated by reference to Exhibit 10.1 to the Quarterly Report
on Form 10-Q filed May 5, 2004).10.31
    
    
    
    Fourth Amendment to Loan Agreement as of March 31, 2004, by and
among Grey Wolf Drilling Company L.P. (as borrower), Grey Wolf,
Inc. and various subsidiaries (as guarantors) and the CIT
Group/Business Credit, Inc. and various financial institutions (as
lenders) (incorporated by reference to Exhibit 10.2 to the
Quarterly Report on Form 10-Q filed May 5, 2004).10.32
    
    
    
    Fifth Amendment to the Loan Agreement dated December 31, 2004 by
and among Grey Wolf Drilling Company, L.P. (as borrower,) Grey
Wolf, Inc and various subsidiaries (as guarantor) and the CIT
Business Credit, Inc. (as agent) and various financial institutions
(as lenders) (incorporated by reference to Exhibit 10.6 of the Grey
Wolf, Inc. Current Report on Form 8-K filed January 5, 2005).10.33
    
    
    
    Sixth Amendment to the Loan Agreement dated September 13, 2005 by
and between Grey Wolf Drilling Company, L.P. (as borrower,) Grey
Wolf Inc. and various subsidiaries (as guarantor) and the CIT Business Credit, inc. (as agent) and various financial institutions
(as lenders) (incorporated by reference to Exhibit 10.7 of the Grey
Wolf, Inc. Current Report on Form 8-K filed September 14, 2005).21.1
    
    
    
    List of Subsidiaries of Grey Wolf, Inc.*23.1
    
    
    
    Consent of Independent Registered Public Accounting Firm, KPMG LLP*31.1
    
    
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a).*31.2
    
    
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a).**32.1
    
    
    
    Certification pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Thomas
P. Richards, Chairman, President and Chief Executive Officer and
David W. Wehlmann, Executive Vice President and Chief Financial
Officer.
 
 +
    
    Management contract, compensation plan or arrangement*
    
    Filed herewith**
    
    Furnished, not filed, pursuant to Item 101(b) (32) of Regulation S-K. -64-




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##### Table of Contents



SIGNATURES
 th
 Grey Wolf, Inc.By:
    
    /s/ David W. WehlmannDavid W. Wehlmann, Executive Vice President and
Chief Financial Officer
  Signatures and Capacities
    
    DateBy:
    
    /s/ Thomas P. Richards
    
    February 27, 2007Thomas P. Richards, Chairman, President and Chief Executive Officer
(Principal Executive Officer)By:
    
    /s/ David W. Wehlmann
    
    February 27, 2007David W. Wehlmann, Executive Vice President and Chief Financial OfficerBy:
    
    /s/ Kent D. Cauley
    
    February 27, 2007Kent D. Cauley, Vice President and ControllerBy:
    
    /s/ William R. Ziegler
    
    February 27, 2007William R. Ziegler, DirectorBy:
    
    /s/ Frank M. Brown
    
    February 27, 2007Frank M. Brown, DirectorBy:
    
    /s/ William T. Donovan
    
    February 27, 2007William T. Donovan, DirectorBy:
    
    /s/ Robert E. Rose
    
    February 27, 2007Robert E. Rose, DirectorBy:
    
    /s/ Trevor M. Turbidy
    
    February 27, 2007Trevor M. Turbidy, DirectorBy:
    
    /s/ Steven A. Webster
    
    February 27, 2007Steven A. Webster, Director
 -65-




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##### Table of Contents



2.1
    
    
    
    Agreement and Plan of Merger between Grey Wolf, Inc. and New
Patriot Drilling Corp. dated March 5, 2004 (incorporated by
reference to Exhibit 99 to Grey Wolfs Form 8-K dated March 8,
2004.3.1
    
    
    
    Articles of Incorporation of Grey Wolf, Inc., as amended
(incorporated herein by reference to Exhibit 3.1 to Form 10-Q dated
May 12, 1999).3.2
    
    
    
    By-Laws of Grey Wolf, Inc., as amended (incorporated herein by
reference to Exhibit 99.1 to Form 8-K dated March 23, 1999).4.1
    
    
    
    Rights Agreement dated as of September 21, 1998 by and between the
Company and American Stock Transfer and Trust Company as Rights
Agent (incorporated herein by reference to Exhibit 4.1 to Form 8-K
filed September 22, 1998).4.2
    
    
    
    Indenture, dated as of May 7, 2003, relating to the 3.75%
Contingent Convertible Senior Notes due 2023 between the Company,
the Guarantors, and JPMorgan Chase Bank, a New York Banking
Corporation, as Trustee (incorporated herein by reference to
Exhibit 4.2 to the Companys Registration Statement on Form S-3 No.
333-106997 filed July 14, 2003).4.3
    
    
    
    Supplemental Indenture, dated as of May 22, 2003, relating to the
3.75% Contingent Convertible Senior Notes due 2023 between the
Company, the Guarantors, and JPMorgan Chase Bank, a New York
Banking Corporation, as Trustee (incorporated herein by reference
to Exhibit 4.3 to the Companys Registration Statement on Form S-3
No. 333-106997 filed July 14, 2003).4.4
    
    
    
    Indenture, dated as of March 31, 2004, relating to the Floating
Rate Contingent Convertible Senior Notes Due 2024 between the
Company, the Guarantors, and J.P. Morgan Chase Bank, a New York
banking corporation, as Trustee (incorporated by reference to
Exhibit 4.1 to Form 10-Q dated May 5, 2004).4.5
    
    
    
    Registration Rights Agreement as of March 31, 2004 by and between
Grey Wolf, Inc., the Guarantors, and the Initial Purchasers of the
Floating Rate Contingent Convertible Senior Notes due 2024
(incorporated by reference to Exhibit 4.2 to the Quarterly Report
on Form 10-Q filed May 5, 2004).4.6
    
    
    
    Second Supplemental Indenture, dated as of March 31, 2004, relating
to the 3.75% Contingent Convertible Senior Notes due 2023 between
the Company, the Guarantors, and JP Morgan Chase Bank, a New York
Banking Corporation, as Trustee (incorporated by reference to
Exhibit 4.3 to the Quarterly Report on Form 10-Q filed May 5,
2004).+10.1
    
    
    
    Form of Non-Qualified Stock Option Agreement dated September 3,
1996, by and between the Company and Thomas P. Richards
(incorporated herein by reference to Exhibit 10.2 to Registration
Statement on Form S-3 No. 333-14783 filed October 24, 1996).




---



##### Table of Contents



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




---



##### Table of Contents



+10.15
    
    
    
    Form of Non-Qualified Stock Option Agreement dated as of February
13, 2002, by and between the Company and each of Frank M. Brown,
William T. Donovan, James K.B. Nelson, Robert E. Rose, Steven A.
Webster, and William R. Ziegler (incorporated herein by reference
to Exhibit 10.22 of the Grey Wolf, Inc. Annual Report on Form 10-K
for the year ended December 31, 2001, filed March 15, 2002).+10.16
    
    
    
    Grey Wolf, Inc. 2003 Incentive Plan (incorporated herein by
reference to Appendix A to the Grey Wolf, Inc. 2003 Annual Meeting
of Shareholders definitive proxy materials filed March 28, 2003).+10.17
    
    
    
    Form of Non-Qualified Stock Option Agreement under the Grey Wolf,
Inc. 2003 Incentive Plan (incorporated by reference to Exhibit 10.1
to the Grey Wolf, Inc. Current Report on Form 8-K filed February
22, 2005).+10.18
    
    
    
    Form of Restricted Stock Agreement (incorporated by reference to
Exhibit 10.2 to the Grey Wolf, Inc. current Report on Form 8-K
filed February 22, 2005).+10.19
    
    
    
    Form of Stock Option Agreement under the 2003 Incentive Plan for
Thomas P. Richards (incorporated by reference to Exhibit 10.1 to
Grey Wolf, Inc. Current Report on Form 8-K filed February 21,
2006.)+10.20
    
    
    
    Form of Restricted Stock Agreement under the 2003 Incentive Plan
for Thomas P. Richards (incorporated by reference to Exhibit 10.2
to Grey Wolf, Inc. Current Report on Form 8-K filed February 21,
2006.)+10.21
    
    
    
    Form of Stock Option Agreement under the 2003 Incentive Plan for
the other executive officers (incorporated by reference to Exhibit
10.3 to Grey Wolf, Inc. Current Report on Form 8-K filed February
21, 2006.)+10.22
    
    
    
    Form of Restricted Stock Agreement under the 2003 Incentive Plan
for other executive officers (incorporated by reference to Exhibit
10.4 to Grey Wolf, Inc. Current Report on Form 8-K filed February
21, 2006).+10.23
    
    
    
    Form of Restricted Stock Agreement for Thomas P. Richards under the
Retention Plan (incorporated by reference to Exhibit 10.5 to Grey
Wolf, Inc. Current Report on Form 8-K filed February 21, 2006).+10.24
    
    
    
    Form of Restricted Stock Agreement for other executive officers
under the Retention Plan (incorporated by reference to Exhibit 10.6
to Grey Wolf, Inc. Current Report on Form 8-K filed February 21,
2006).+10.25
    
    
    
    Form of Restricted Stock Agreement for non-employee directors
(incorporated by reference to Exhibit 10.7 to Grey Wolf, Inc.
Current Report on Form 8-K filed February 21, 2006).+10.26
    
    
    
    Anticipated compensation of officers and directors for 2007
(incorporated by reference to Grey Wolf, Inc. Current Report on
Form 8-K filed February 16, 2007).10.27
    
    
    
    Revolving Credit Agreement dated as of January 14, 1999 among Grey
Wolf Drilling Company LP (as borrower), Grey Wolf, Inc. (as
guarantor), The CIT Group/Business Credit, Inc. (as agent) and
various financial institutions (as lenders) (incorporated herein by
reference to Exhibit 10.1 to Grey Wolf, Inc. current report on Form
8-K dated January 26, 1999).10.28
    
    
    
    First Amendment to Loan Agreement dated as of December 20, 2001, by
and among Grey Wolf Drilling Company, LP (as borrower) and Grey
Wolf, Inc. (as guarantor) and the CIT Group/Business Credit, Inc.
(as agent) and various financial institutions (as lenders)
(incorporated herein by reference to Exhibit 10.11 to Grey Wolf,
Inc. Annual Report on Form 10-K for the year ended December 31,
2001, filed March 14, 2002).10.29
    
    
    
    Second Amendment to Loan Agreement dated as of February 7, 2003 by
and among Grey Wolf Drilling Company L.P. (as borrower), Grey Wolf,
Inc. and various subsidiaries (as guarantors) and the CIT
Group/Business Credit, Inc. and various financial institutions (as
lenders) (incorporated herein by reference to Exhibit 10.24 to the
Grey Wolf, Inc. Annual Report on Form 10-K for the year ended
December 31, 2002, filed March 16, 2003).




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##### Table of Contents



10.30
    
    
    
    Third Amendment to Loan Agreement as of May 1, 2003, by and among
Grey Wolf Drilling Company, L.P. (as borrower), Grey Wolf, Inc. and
various subsidiaries (as guarantors) and the CIT Group/Business
Credit, Inc. and various financial institutions (as lenders)
(incorporated by reference to Exhibit 10.1 to the Quarterly Report
on Form 10-Q filed May 5, 2004).10.31
    
    
    
    Fourth Amendment to Loan Agreement as of March 31, 2004, by and
among Grey Wolf Drilling Company L.P. (as borrower), Grey Wolf,
Inc. and various subsidiaries (as guarantors) and the CIT
Group/Business Credit, Inc. and various financial institutions (as
lenders) (incorporated by reference to Exhibit 10.2 to the
Quarterly Report on Form 10-Q filed May 5, 2004).10.32
    
    
    
    Fifth Amendment to the Loan Agreement dated December 31, 2004 by
and among Grey Wolf Drilling Company, L.P. (as borrower,) Grey
Wolf, Inc and various subsidiaries (as guarantor) and the CIT
Business Credit, Inc. (as agent) and various financial institutions
(as lenders) (incorporated by reference to Exhibit 10.6 of the Grey
Wolf, Inc. Current Report on Form 8-K filed January 5, 2005).10.33
    
    
    
    Sixth Amendment to the Loan Agreement dated September 13, 2005 by
and between Grey Wolf Drilling Company, L.P. (as borrower,) Grey
Wolf Inc. and various subsidiaries (as guarantor) and the CIT Business Credit, inc. (as agent) and various financial institutions
(as lenders) (incorporated by reference to Exhibit 10.7 of the Grey
Wolf, Inc. Current Report on Form 8-K filed September 14, 2005).21.1
    
    
    
    List of Subsidiaries of Grey Wolf, Inc.*23.1
    
    
    
    Consent of Independent Registered Public Accounting Firm, KPMG LLP*31.1
    
    
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a).*31.2
    
    
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a).**32.1
    
    
    
    Certification pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Thomas
P. Richards, Chairman, President and Chief Executive Officer and
David W. Wehlmann, Executive Vice President and Chief Financial
Officer.
 
 +
    
    Management contract, compensation plan or arrangement*
    
    Filed herewith**
    
    Furnished, not filed, pursuant to Item 101(b) (32) of Regulation S-K.