<PAGE>   1
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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

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

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999

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

                          Commission file number 1-8226

                             [GREY WOLF, INC. LOGO]

                                 GREY WOLF, INC.
             (Exact name of registrant as specified in its charter)


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


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


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

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


<TABLE>
<CAPTION>
                                                                                   Name of each exchange
                           Title of each class                                      on which registered
                           -------------------                                    ---------------------
<S>                                                                               <C>
                      COMMON STOCK, PAR VALUE $0.10                               AMERICAN STOCK EXCHANGE
                 RIGHTS TO PURCHASE JUNIOR PARTICIPATING                          AMERICAN STOCK EXCHANGE
                    PREFERRED STOCK, PAR VALUE $1.00
</TABLE>


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

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

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

         At March 3, 2000, 165,385,291 shares of the Registrant's common stock
were outstanding. The aggregate market value of the Registrant's voting stock
held by non-affiliates (based upon the closing price on the American Stock
Exchange on March 3, 2000 of $4.00) was approximately $555 million.

         The following documents have been incorporated by reference into the
Parts of this Report indicated: Certain sections of the Registrant's definitive
proxy statement for the Registrant's 2000 Annual Meeting of shareholders which
is to be filed pursuant to Regulation 14A under the Securities Exchange Act of
1934 within 120 days of the Registrant's fiscal year ended December 31, 1999,
are incorporated by reference into Part III hereof.


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                                       -1-
<PAGE>   2
                                     PART I


ITEM 1. BUSINESS

GENERAL

         Grey Wolf, Inc. is a leading provider of contract land drilling
services in the United States with a domestic fleet of 120 rigs at March 3,
2000. In addition to our domestic operations, we maintain a fleet of five
non-marketable rigs in Venezuela, giving us a total of 125 rigs, 108 of which
are marketable. Of the 108 marketable rigs, 70 rigs are marketed while 38 are
cold stacked. We also have an inventory of 17 non-marketable rigs held for
refurbishment as demand for drilling services warrants, of which 12 are located
in the United States and the remainder in Venezuela. Our customers include
independent producers and major oil companies. We conduct our operations through
our subsidiaries.

         Grey Wolf, Inc. is a Texas corporation formed in 1980. Our principal
office is located at 10370 Richmond Avenue, Suite 600, Houston, TX 77042, and
our telephone number is (713) 435-6100.

BUSINESS STRATEGY

         Within the framework of a very cyclical industry, our business
philosophy is to maximize value during periods of expanding demand and mitigate
risk during periods of reduced demand. We attempt to achieve this by:


<TABLE>
<S>               <C>
        o         delivering quality service to our customers;
        o         maintaining a leading position in our core domestic markets;
        o         balancing utilization and market share while trying to maintain a high level of utilization on our
                  marketed rigs;
        o         enhancing cash-flow through our turnkey and trucking operations;
        o         controlling costs and maintaining capital spending discipline;
        o         searching for new market opportunities primarily in North
                  America, where we believe our quality fleet of rigs would be
                  able to generate attractive returns; and
        o         searching for potential acquisition candidates that we believe would be accretive.
</TABLE>


INDUSTRY OVERVIEW

         Our business depends on the level of drilling activity by oil and gas
exploration and production companies. The number of wells they choose to drill
is strongly influenced by past trends in oil and gas prices, current prices, and
their outlook for future oil and gas prices.

         Beginning in late 1997, oil and gas prices dropped significantly and
these lower commodity prices extended into 1999. The price of West Texas
Intermediate crude dropped from $17.64 per barrel at December 31, 1997 to $11.37
per barrel in February 1999. The price of natural gas, delivered at Henry Hub,
dropped from $2.26 to $1.63 per mmbtu over the same period. Confronted with
falling commodity prices and the resulting loss of revenues and cash flows,
exploration and production companies reduced their domestic drilling budgets. As
a result, the domestic land rig count as reported by industry sources dropped
approximately 55% from a reported 850 rigs at December 31, 1997 to a historical
low of 380 rigs at April 23, 1999.

         Land drilling activity has improved in response to rising oil and gas
prices in 1999 and 2000. The price of West Texas Intermediate crude increased
from $11.37 per barrel in February 1999, to $31.77 per barrel on March 1, 2000.
The price of natural gas, delivered at Henry Hub, also increased from $1.63 to
$2.73 per mmbtu over the same period. The domestic land rig count climbed to 651
rigs at March 3, 2000, an increase of approximately 71% from the April 1999 low.

         Overall, the land drilling industry is still fragmented and very
competitive. At March 3, 2000, we maintained a leading market position in our
four core domestic markets combined, representative of a market share of 22%.
There has been significant consolidation within the industry. From January 1,
1996 through March 3, 2000, we believe there were approximately 53 completed or
pending transactions involving the acquisition of a combined total of
approximately 935 rigs, the majority of which were acquired by six land rig
companies, including us. Our acquisitions accounted for 13 of


                                       -2-
<PAGE>   3
these transactions which involved the acquisition of 100 rigs, of which 67 were
actively marketed at the time of acquisition and 33 were inventoried for later
refurbishment. Despite the downturn in the land drilling industry, the industry
continues to consolidate with several major transactions in 1999. The
consolidation that has taken place in the land drilling industry is exemplified
in our core domestic markets where in December 1996, 70% of the operating rigs
were owned by 19 companies and in December 1999, 70% of the operating rigs were
owned by only five companies, including us. Some of the significant acquisitions
we made are described below under "--Significant Acquisitions and Sales."

IMPROVING CONDITIONS IN 1999

         Like the domestic land drilling industry at large, our drilling
activity declined substantially in 1998 and the first half of 1999. However, our
business began improving at the end of the second quarter of 1999 and that trend
has continued in 2000.

         During the period from April 1999 to March 3, 2000, in which the
domestic operating land rig count rebounded by 71%, our rig count increased by
91%. For the first two months of the first quarter of 2000, we had an average of
61 operating rigs (representing a 56% utilization rate). The recent increase in
demand for our rigs has allowed us to return 36 additional rigs to work since
May 1999, including 11 of the 49 rigs which had been cold stacked. We believe
our greater percentage increase in working rigs over the period is primarily
attributable to our strategic decision not to reduce wages in order to retain
key operating personnel, which has allowed us to return rigs to work more
quickly.

         In addition to the increases in rig utilization in 1999, there has also
been a modest increase in the dayrates we receive for our services. From a low
bid range of $5,500 to $6,000 per day during the second quarter of 1999, our
leading edge bid rates have increased approximately 20% to a range of $6,500 to
$7,200 per day in early March 2000.

         These improved conditions are, however, recent developments and
substantial additional, sustained improvements will be required for us to
achieve profitability. How our drilling operations were affected by industry
conditions is summarized below under "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations."

DOMESTIC OPERATIONS

         At March 3, 2000, we had a total domestic rig fleet of 120 rigs: 70
marketed, 38 cold stacked and 12 held in inventory for future refurbishment and
reactivation. We currently conduct our operations in the following domestic
drilling markets:


<TABLE>
<S>               <C>
        o         Ark-La-Tex;
        o         Gulf Coast;
        o         Mississippi/Alabama; and
        o         South Texas.
</TABLE>


         We conduct our operations in the domestic markets which we believe have
historically had greater utilization rates and dayrates than the combined total
of all other domestic markets. This is in part due to the heavy concentration of
natural gas reserves in these markets. During 1999, approximately 96% of the
wells we drilled for our customers were drilled in search of natural gas.
Natural gas reserves are typically found in deeper geological formations and
generally require premium equipment and quality crews to drill the wells.

         Ark-La-Tex Division. Our Ark-La-Tex division provides drilling services
primarily in the Ark-La-Tex market which consists of Northeast Texas, Northern
Louisiana and Southern Arkansas, and the Mississippi/Alabama market. Our
Ark-La-Tex division also operates a fleet of 19 trucks which are used
exclusively to move our rigs. Our rig fleet in this division consists of:


<TABLE>
<CAPTION>
                                            Marketed            Cold-Stacked           Total
                                            --------            ------------           -----
<S>                                         <C>                 <C>                    <C>
         Diesel Electric                         9                     5                 14
         Trailer-Mounted                        -                      2                  2
         Mechanical                             10                    11                 21
                                                --                    --                 --
              Total                             19                    18                 37
                                                ==                    ==                 ==
</TABLE>


                                       -3-
<PAGE>   4
         The average rig utilization rate based on total rigs in our Ark-La-Tex
division during 1999 was 32%. Daywork contracts generated approximately 67% of
our revenues in this division, while turnkey and footage contracts generated the
remaining 33%. The average revenue per rig day worked by the division during
1999 was $6,977. Based on industry sources, we had the third largest number of
operating rigs in the Ark-La-Tex market, or a market share of approximately 14%,
as of February 24, 2000. At the same date we shared, with five other
competitors, the second-leading position, or a market share of 8%, in the
Mississippi/Alabama market.

         Gulf Coast Division. Our Gulf Coast division provides drilling services
in Southern Louisiana and along the Texas Gulf Coast. Our rig fleet in this
division consists of:


<TABLE>
<CAPTION>
                                            Marketed           Cold-Stacked                Total
                                            --------           ------------                -----
<S>                                         <C>                <C>                         <C>
         Diesel Electric                        19                     6                     25
         Mechanical                              3                     7                     10
                                                --                    --                     --
              Total                             22                    13                     35
                                                ==                    ==                     ==
</TABLE>


         The average rig utilization rate based on total rigs in our Gulf Coast
division during 1999 was 38%. Daywork contracts generated approximately 51% of
our revenues in this division, while turnkey and footage contracts generated the
remaining 49%. The average revenue per rig day worked by the division during
1999 was $11,212. Based on industry sources, we had the largest number of
operating rigs in this market, or a market share of approximately 32% as of
February 29, 2000.

         South Texas Division. We believe that trailer-mounted rigs and 1,500 to
2,000 horsepower diesel electric rigs are in highest demand in this market.
Trailer-mounted rigs are relatively more mobile than conventional rigs, thus
decreasing the time and expense to the customer of moving the rig to and from
the drillsite. Under ordinary conditions, trailer-mounted rigs are capable of
drilling an average of two 10,000 foot wells per month. We believe we operate
the largest trailer-mounted rig fleet in this market. The South Texas division
also operates a fleet of 35 trucks which are used exclusively to move our rigs.
Our rig fleet in this division consists of:


<TABLE>
<CAPTION>
                                            Marketed           Cold-Stacked            Total
                                            --------           ------------            -----
<S>                                         <C>                <C>                     <C>
         Diesel Electric                        13                    -                  13
         Trailer-Mounted                        11                     4                 15
         Mechanical                              5                     3                  8
                                                --                    --                 --
              Total                             29                     7                 36
                                                ==                    ==                 ==
</TABLE>

         The average rig utilization rate based on total rigs in our South Texas
division during 1999 was 52%. Daywork contracts generated approximately 66% of
our revenues in this division, while turnkey and footage contracts generated the
remaining 34%. The average revenue per rig day worked by the division during
1999 was $8,669. Based on industry sources, we had the largest number of
operating rigs in this market, or a market share of approximately 24%, as of
February 25, 2000.

FOREIGN OPERATIONS

         During 1999, 1998 and 1997, our foreign operations were conducted in
the Venezuelan market. We withdrew from both the Argentine and Mexican markets
during 1996.

         The downturn in the industry since late 1997, has also had a negative
impact on the international markets, including Venezuela. As such, in March
1999, our operations in Venezuela along with all other international marketing
efforts were suspended. If market conditions improve, international
opportunities will again be explored.

         Foreign operations contributed approximately 1%, 4%, and 3% of our
operating revenues for the years ended December 31, 1999, 1998, and 1997,
respectively. Foreign operations accounted for 3% and 10%, respectively, of our
total losses from operations for 1999 and 1998, and reduced operating income by
9% in 1997.


                                       -4-
<PAGE>   5
COLD-STACKED RIGS AND INVENTORY RIGS

         We categorize a rig that is not currently being marketed by us as
either a "cold-stacked rig" or an "inventory rig." An inventory rig is one that
will require substantial capital expenditures before it can be returned to
marketable status. A cold-stacked rig is one that has previously been marketed
by us and that can be returned to marketed status for substantially less capital
cost than would be required to reactivate one of our inventory rigs. To
illustrate, from May 1999 through March 3, 2000, we reactivated 11 of our
cold-stacked rigs at an average cost of approximately $80,900 per rig. In
contrast, our average capital expenditure per inventory rig that we refurbished
and returned to service in late 1996 through early 1998 was $2.6 million per
rig.

         At March 3, 2000, 38 of our rigs, or approximately 30% of our domestic
rig fleet, were cold-stacked. Seventeen of our rigs, or approximately 14% of our
fleet, were categorized as inventory rigs. Of the 17 inventory rigs, 12 are
located in the United States and the remainder in Venezuela. To save costs in
1999 and to date in 2000, we have used components from selected cold-stacked
rigs and inventory rigs as replacement parts for marketed rigs, rather than
buying new parts.

         As demand warrants, we plan to return cold-stacked rigs to service. In
some cases, we expect to upgrade some of the rig components of cold-stacked rigs
when they are reactiviated to improve their marketability. We expect that the
actual average cost per rig of returning our remaining cold-stacked rigs to
marketed status will be more than the $80,900 we expended to reactivate the last
11 cold-stacked rigs. The actual cost to reactivate these rigs will depend on
the extent to which component parts are used from the cold-stacked rigs and the
extent to which we choose to upgrade the cold- stacked rigs before returning
them to service. For information concerning our current estimates of the costs
to return our cold-stacked rigs to marketed status, see "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Financial Condition and Liquidity."

         We have not refurbished any inventory rigs since the second quarter of
1998. The cost and actual number of rig refurbishments completed in the future
will depend on many factors, including our estimation of existing and
anticipated demand and day rates, our success in bidding for domestic and
international contracts, timing of the refurbishments and whether we acquire
additional rigs in the future.

CONTRACTS

         Our contracts for drilling oil and gas wells are obtained either
through competitive bidding or as a result of negotiations with customers.
Contract terms offered by us are generally dependent on the complexity and risk
of operations, on-site drilling conditions, type of equipment used and the
anticipated duration of the work to be performed. Generally, domestic drilling
contracts are for a single well, while foreign drilling contracts are for
multiple wells or a specified term. Domestic drilling contracts are typically
subject to termination by the customer on short notice, usually upon payment of
a fee. Foreign drilling contracts generally require longer notice periods for
termination and may also require that the customer pay for the mobilization and
demobilization costs. Our drilling contracts generally provide for compensation
on either a daywork, turnkey or footage basis.

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

         Turnkey Contracts. Under a turnkey contract, we contract to drill a
well to an agreed-upon depth under specified conditions for a fixed price,
regardless of the time required or the problems encountered in drilling the
well. We provide technical expertise and engineering services, as well as most
of the equipment required for the well, and are compensated when the contract
terms have been satisfied. Turnkey contracts afford an opportunity to earn a
higher return than would normally be available on daywork or footage contracts
if the contract can be completed successfully without complications.

         The risks to us under a turnkey contract are substantially greater than
on a well drilled on a daywork basis because we assume most of the risks
associated with drilling operations generally assumed by the operator in a
daywork


                                       -5-
<PAGE>   6
contract, including the risk of blowout, loss of hole, stuck drill pipe,
machinery breakdowns, abnormal drilling conditions and risks associated with
subcontractors' services, supplies, cost escalation and personnel. We employ or
contract for engineering expertise to analyze seismic, geologic and drilling
data to identify and reduce many of the drilling risks assumed by us. We use the
results of this analysis to evaluate the risks of a proposed contract and seeks
to account for such risks in our bid preparation. We believe that our operating
experience, qualified drilling personnel, risk management program, internal
engineering expertise and access to proficient third party engineering
contractors have allowed us to reduce the risks inherent in turnkey drilling
operations. We also maintain insurance coverage against some but not all
drilling hazards.

         Footage Contracts. Under footage contracts, we are paid a fixed amount
for each foot drilled, regardless of the time required or the problems
encountered in drilling the well. We pay more of the out-of-pocket costs
associated with footage contracts compared with daywork contracts. Similar to a
turnkey contract, the risks to us on a footage contract are greater because we
assume most of the risks associated with drilling operations generally assumed
by the operator in a daywork contract, including the risk of blowout, loss of
hole, stuck drill pipe, machinery breakdowns, abnormal drilling conditions and
risks associated with subcontractors' services, supplies, cost escalation and
personnel. As with turnkey contracts, we manage this additional risk through the
use of engineering expertise and bid the footage contracts accordingly. We also
maintain insurance coverage against certain drilling hazards.

CUSTOMERS AND MARKETING

         Our contract drilling customers include independent producers, major
oil companies and national petroleum companies. One unaffiliated customer
accounted for 10% of our revenues for the year ended December 31, 1997. There
were no such significant customers for the years ended December 31, 1999 and
1998.

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

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

INSURANCE

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

         Our insurance coverage for property damage to our rigs and drilling
equipment is based on our estimate, as of June 1999 of the cost of comparable
used equipment to replace the insured property. There is a deductible on rigs of
$750,000 in the aggregate over an eighteen month policy period (with a sublimit
of up to $500,000 in respect of such aggregate limit) to be comprised of losses
otherwise recoverable thereafter in excess of a $50,000 maintenance deductible.
There is a $10,000 deductible per occurrence on other equipment.

         Our third party liability insurance coverage under each of the general
and foreign policies is $1.0 million per occurrence, with a deductible of
$50,000 per occurrence. We believe that we are adequately insured for public
liability and property damage to others with respect to our operations. However,
such insurance may not be sufficient to protect us against liability for all
consequences of well disasters, extensive fire damage or damage to the
environment.


                                       -6-
<PAGE>   7
         We also maintain insurance coverage to protect against certain hazards
inherent in our turnkey contract drilling operations. This insurance covers
"control of well" (including blowouts above and below the surface), cratering,
seepage and pollution and care, custody and control. Our current insurance
provides $500,000 coverage per occurrence for care, custody and control, and
coverage per occurrence for control of well, cratering, seepage and pollution
associated with drilling operations of either $10.0 million or $20.0 million,
depending upon the area in which the well is drilled and its target depth. Each
form of coverage provides for a deductible that we must meet, as well as a
maximum limit of liability. Each casualty is an occurrence, and there may be
more than one such occurrence on a well, each of which would be subject to a
separate deductible.

SIGNIFICANT ACQUISITIONS AND SALES

         In the process of focusing our operations in our core domestic markets,
we completed a number of acquisitions and divestitures, the most significant of
which follow:

         Murco Acquisition. In January 1998, we acquired all of the outstanding
common stock of Murco Drilling Corporation ("Murco") for $60.8 million in cash.
At closing, Murco had net liabilities of approximately $4.5 million. We funded
this stock purchase through the use of working capital and $30.0 million of
borrowings under our bank credit facility. Murco operated ten drilling rigs in
the Ark-La-Tex and Mississippi/Alabama regions. The rigs acquired consisted of
two 1,500 horsepower Silicon Controlled Rectifier ("SCR") rigs, one 1,000
horsepower SCR rig, one 800 horsepower SCR rig and six mechanical rigs with
horsepower ratings from 650 to 1,500.

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

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

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

         Flournoy Acquisition. In January 1997, we acquired the operating assets
of Flournoy Drilling Company, which included 13 operating drilling rigs and
other assets located in our South Texas market, in exchange for 12.4 million
shares of our common stock and $800,000 in cash. The shares were valued at $31.1
million under the purchase method accounting.

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

         Mesa Rig Purchase. In October 1996, we acquired six diesel electric SCR
rigs, three of which were operating, from Mesa Drilling, Inc. ("Mesa") in
exchange for 5.5 million shares of our common stock. The Mesa acquisition
established our presence in our South Texas market area.

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

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


                                       -7-
<PAGE>   8
         Sale of Eastern Division Assets. In February 1998, we signed a
definitive agreement to sell all of the rigs and drilling related equipment of
our Eastern Division located in Ohio to Union Drilling, Inc. for $2.4 million.
The sale closed in steps as each of the rigs completed its drilling contract
with the last transaction being completed in March 1998. The Eastern division's
rig fleet consisted of six 450 horsepower mechanical rigs.

CERTAIN RISKS

         Our business is subject to a number of risks and uncertainties, the
most important of which are listed below:

Our business can be adversely affected by low oil and gas prices and
expectations of low prices.

         As a supplier of land drilling services, our business depends on the
level of drilling activity by oil and gas exploration and production companies
operating in the geographic markets where we operate. The number of wells they
choose to drill is strongly influenced by past trends in oil and gas prices,
current prices, and their outlook for future oil and gas prices within those
geographic markets. Low oil and gas prices, or the perception among oil and gas
companies that future prices are likely to remain low or decline further, can
materially and adversely affect us in many ways, including:


<TABLE>
<S>               <C>
        o         our revenues, cash flows and earnings;
        o         the fair market value of our rig fleet;
        o         our ability to maintain or increase our borrowing capacity;
        o         our ability to obtain additional capital to finance our business and make acquisitions, and the cost of
                  that capital; and
        o         our ability to retain skilled rig personnel who we would need in the event of an upturn in the demand
                  for our services.
</TABLE>


         Oil and gas prices have been volatile historically and, we believe,
will continue to be so in the future. Many factors beyond our control affect oil
and gas prices, including:


<TABLE>
<S>               <C>
         o        weather conditions in the United States and elsewhere;
         o        economic conditions in the United States and elsewhere;
         o        actions by OPEC, the Organization of Petroleum Exporting Countries;
         o        political stability in the Middle East and other major producing regions;
         o        governmental regulations, both domestic and foreign;
         o        the pace adopted by foreign governments for exploration of their national reserves;
         o        the price of foreign imports of oil and gas; and
         o        the overall supply and demand for oil and gas.
</TABLE>


We operate in a highly competitive, fragmented industry in which price
competition has intensified as excess drilling rig capacity has increased.

         We operate in a highly competitive business. The drilling contracts we
compete for are usually awarded on the basis of competitive bids. Pricing and
rig availability are the primary factors considered by our potential customers
in determining which drilling contractor to select. We believe other factors are
also important. Among those factors are:


<TABLE>
<S>               <C>
        o         the type and condition of drilling rigs;
        o         the quality of service and experience of rig crews;
        o         the safety record of the rig;
        o         the contractor's offering of ancillary services; and
        o         the ability of the contractor to provide drilling equipment
                  adaptable to, and personnel familiar with, new technologies
                  and drilling techniques.
</TABLE>


         While we must generally be competitive in our pricing, our competitive
strategy generally emphasizes the quality of our equipment, the safety record of
our rigs and the experience of our rig crews to differentiate us from our
competitors. This strategy was less effective as lower demand for drilling
services intensified price competition and made it more difficult for us to
compete on the basis of factors other than price. In all of the markets in which
we compete there is an over supply of rigs which has provoked greater price
competition.


                                       -8-
<PAGE>   9
         Contract drilling companies compete primarily on a regional basis, and
the intensity of competition may vary significantly from region to region at any
particular time. If demand for drilling services improves in a region where we
operate, our competitors might respond by moving in suitable rigs from other
regions. An infux of rigs from other regions could rapidly intensify competition
and make any improvement in demand for drilling rigs short-lived.

          We face competition from many competitors. Certain of our competitors
have greater financial and human resources than do we. Their greater
capabilities in these areas may enable them to:


<TABLE>
<S>               <C>
        o         better withstand periods of low rig utilization;
        o         compete more effectively on the basis of price and technology;
        o         retain skilled rig personnel; and
        o         build new rigs or acquire and refurbish existing rigs so as to
                  be able to place rigs into service more quickly than us in
                  periods of high drilling activity.
</TABLE>


Our drilling operations involve inherent risks of loss which if not insured or
indemnified against could adversely affect our results of operations.

         Our business is subject to the many hazards inherent in the land
drilling business including the risks of:

<TABLE>
<S>               <C>
        o         blowouts;
        o         fires and explosions;
        o         collapse of the borehole;
        o         lost or stuck drill strings; and
        o         damage or loss from natural disasters.
</TABLE>


         We attempt to obtain indemnification from our customers by contract for
certain of these risks under daywork contracts but are not always able to do so.
We also seek to protect ourselves from some but not all operating hazards
through insurance coverage.

         If these drilling hazards occur they can produce substantial
liabilities to us from, among other things:


<TABLE>
<S>               <C>
        o         suspension of drilling operations;
        o         damage to the environment;
        o         damage to, or destruction of our property and equipment and that of others;
        o         personal injury and loss of life; and
        o         damage to producing or potentially productive oil and gas formations through which we drill.
</TABLE>


         The indemnification we receive from our customers and our own insurance
coverage may not, however, be sufficient to protect us against liability for all
consequences of disasters, personal injury and property damage. Additionally,
our insurance coverage generally provides that we bear a portion of the claim
through substantial insurance coverage deductibles. The premiums we pay for
insurance policies are also subject to substantial increase based upon our
claims history, which may increase our operating costs. We can offer no
assurance that our insurance or indemnification arrangements will adequately
protect us against liability from all of the hazards of our business. We are
also subject to the risk that we may be unable to obtain or renew insurance
coverage of the type and amount we desire at reasonable rates. If we were to
incur a significant liability for which we were not fully insured or indemnified
it could have a material adverse effect on our financial position and results of
operations.

Our operations are subject to domestic and foreign environmental laws that may
expose us to liabilities for noncompliance which adversely affect us.

         Many aspects of our operations are subject to domestic and foreign laws
and regulations. For example, our drilling operations are typically subject to
extensive and evolving laws and regulations governing:


<TABLE>
<S>               <C>
        o         environmental quality;
        o         pollution control; and
        o         remediation of environmental contamination.
</TABLE>


                                       -9-
<PAGE>   10
         Our operations are often conducted in or near ecologically sensitive
areas, such as wetlands which are subject to special protective measures and
which may expose us to additional operating costs and liabilities for
noncompliance. The handling of waste materials, some of which are classified as
hazardous substances, is a necessary part of our operations. Consequently, our
operations are subject to stringent regulations relating to protection of the
environment and waste handling which may impose liability on us for our own
noncompliance and, in addition, that of others parties without regard to whether
we were negligent or otherwise at fault. We may also be exposed to environmental
or other liabilities originating from businesses and assets which we purchased
from others. Compliance with applicable laws and regulations may require us to
incur significant expenses and capital expenditures which could have a material
and adverse effect on our operations by increasing our expenses and limiting our
future contract drilling opportunities.

Despite recent improvements, we are still experiencing relatively weak demand
for our services due, we believe, to uncertainty about oil and gas prices.

          Volatility in oil and gas prices can produce wide swings in the levels
of overall drilling activity in the markets we serve and affect the demand for
our drilling services and the dayrates we can charge for our rigs. Pronounced
downturns in oil and gas prices can adversely affect our business.

         We believe our operating and financial performance illustrates this
risk. Oil and gas prices generally dropped beginning in late 1997, with
generally lower commodity prices extending well into 1999. Beginning in the
first quarter of 1998, drilling activity in the markets we serve also dropped
significantly, and we experienced significant declines both in the utilization
rates of our rigs and in the dayrates we could charge for them. Our rig
utilization rate in our core domestic markets was 81% during the first quarter
of 1998 but declined to an average of 41% for the year 1999. Our average revenue
per rig day worked was $9,407 in the first quarter of 1998, declining to $7,825
for the quarter ended June 30, 1999.

         Future demand for our rigs may remain the same or may decline and we
can offer you no assurance otherwise. If drilling activity does increase in the
areas where we operate, we cannot assure you that demand for our rigs will also
increase.

In addition to trade liabilities, we have $250.0 million of indebtedness under
our senior notes and our recent operations have not generated sufficient cash
flow to cover our semi-annual interest payments of approximately $11.1 million.

         We are indebted for a total of $250.0 million in principal amount under
our 87/8% Senior Notes due 2007. Semi-annual interest payments on the senior
notes of approximately $11.1 million are due on January 1 and July 1 of each
year. For the year ended December 31, 1999, however, our operating activities,
investing activities and financing activities each consumed net cash rather than
provided additional cash. To meet our debt service obligations under the senior
notes and provide necessary cash, we were required to use our cash on hand.

         Our ability in the future to meet our debt service obligations and
reduce our total indebtedness will depend on a number of factors including:


<TABLE>
<S>               <C>
        o         oil and gas prices;
        o         demand for our drilling services;
        o         whether our business strategy is successful;
        o         levels of interest rates; and
        o         other financial and business factors that affect us.
</TABLE>


         Many of these factors are beyond our control.

         If we do not generate sufficient cash flow to pay debt service and
repay principal in the future, we will likely be required to use one or more of
the following measures:


<TABLE>
<S>               <C>
        o         further diminish our cash balances;
        o         use our existing credit facility;
        o         obtain additional external financing;
        o         refinance our indebtedness;
</TABLE>


                                      -10-
<PAGE>   11
<TABLE>
<S>               <C>
        o         sell our assets.
</TABLE>


We have had only one profitable year since 1991.

         We have a history of losses with our only profitable year since 1991
being 1997 in which we had net income of $10.2 million. Whether we are able to
become profitable in the future will depend on many factors, but primarily on
whether we are able to obtain substantially higher utilization rates for our
rigs and the rates we charge for them. Whether we can achieve those goals will
largely depend on oil and gas prices which are beyond our control.

Unexpected cost overruns on our turnkey and footage drilling jobs could
adversely affect us.

         We have historically derived a significant portion of our revenues from
turnkey and footage drilling contracts and we expect that they will continue to
represent a significant component of our revenues. The occurrence of uninsured
or under-insured losses or operating cost overruns on our turnkey and footage
jobs could have a material adverse effect on our financial position and results
of operations. Under a typical turnkey or footage drilling contract, we agree to
drill a well for our customer to a specified depth and under specified
conditions for a fixed price. We typically provide technical expertise and
engineering service, as well as most of the equipment required for the drilling
of turnkey and footage wells. We often subcontract for related services. Under
typical turnkey drilling arrangements, we do not receive progress payments and
are entitled to be paid by our customer only after we have performed the terms
of the drilling contract in full. For these reasons, the risk to us under
turnkey and footage drilling contracts is substantially greater than for wells
drilled on a daywork basis because we must assume most of the risks associated
with drilling operations that are generally assumed by our customer under a
daywork contract. Although we attempt to obtain insurance coverage to reduce
certain of the risks inherent in our turnkey and footage drilling operations, we
can offer no assurance that adequate coverage will be obtained or will be
available in the future.

We could be adversely affected if we lost the services of certain of our senior
managers.

         Our business is dependent to a significant extent on a small group of
our executive management personnel. The loss of any one of these individuals
could have a material adverse effect on our financial condition and results of
operations.

Our indentures and credit agreements may prohibit us from participation in
certain transactions that we may consider advantageous.

          The indentures under which we issued our senior notes contain
restrictions on our ability and the ability of certain of our subsidiaries to
engage in certain types of transactions. These restrictive covenants may
adversely affect our ability to pursue business acquisitions and rig
refurbishments. These include covenants prohibiting or limiting our ability to:


<TABLE>
<S>               <C>
        o         incur additional indebtedness;
        o         pay dividends or make other restricted payments;
        o         sell material assets;
        o         grant or permit liens to exist on our assets;
        o         enter into sale and lease-back transactions;
        o         enter into certain mergers, acquisitions and consolidations;
        o         make certain investments;
        o         enter into transactions with related persons; and
        o         engage in lines of business unrelated to our core land drilling business.
</TABLE>


         Our senior secured credit facility also contains covenants restricting
our ability and our subsidiaries' ability to undertake many of the same types of
transactions, and contains financial ratio covenants. They may also limit our
ability to respond to changes in market conditions. Our ability to meet the
financial ratio covenants of our credit agreements can be affected by events and
conditions beyond our control and we may be unable to meet those tests.

         Our senior secured credit facility contains default terms that
effectively cross default with the indentures covering our senior notes. If we
breach the covenants in the indentures it could cause our default under the
indentures


                                      -11-
<PAGE>   12
but also under our senior secured credit agreement, and possibly other then
outstanding debt obligations owed by us or our subsidiaries. If the indebtedness
under our senior secured credit agreement or other indebtedness owed by us or
our subsidiaries is more that $10.0 million and is not paid when due, or is
accelerated by the holders of the debt, then an event of default under the
indenture covering our senior notes would occur. If circumstances arise in which
we are in default under our various credit agreements, our cash and other assets
may be insufficient to repay our indebtedness and that of our subsidiaries.

Shortages of Equipment, Supplies and Personnel.

         While we are not currently experiencing any shortages, from time to
time there have been shortages of drilling equipment and supplies which we
believe could reoccur. During periods of shortages, the cost and delivery times
of equipment and supplies are substantially greater. In the past, in response to
such shortages, we have formed alliances with various suppliers and
manufacturers that enabled us to reduce our exposure to price increases and
supply shortages. Although we have formed many informal supply alliances with
manufacturers and suppliers of equipment and supplies, and are attempting to
establish arrangements to assure adequate availability of certain necessary
equipment and supplies on satisfactory terms, there can be no assurance that we
will be able to do so or to maintain existing alliances. Shortages of drilling
equipment or supplies could delay and adversely affect our ability to return to
service our cold-stacked or inventory rigs and obtain contracts for our
marketable rigs, which could have a material adverse effect on our financial
condition and results of operations.

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

EMPLOYEES

         At March 3, 2000, we had approximately 1,745 employees. None of our
employees are subject to collective bargaining agreements, and we believe our
employee relations are satisfactory.

FORWARD-LOOKING STATEMENTS

         This Annual Report on Form 10-K contains "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. The specific
forward-looking statements cover:


<TABLE>
<S>               <C>
        o         rig supply and demand;
        o         rig attrition;
        o         expected results for the first quarter 2000;
        o         anticipated capital expenditures;
        o         expected utilization;
        o         expected dayrates;
        o         spending by customers;
        o         demand for our services;
        o         the future prices for oil and gas; and
        o         expected future cash needs.
</TABLE>


         These forward-looking statements are subject to a number of risks and
uncertainties and actual results may differ materially. Please refer to "Certain
Risks" listed above and Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for additional information
concerning risk factors that could cause actual results to differ from these
forward-looking statements.


                                      -12-
<PAGE>   13
ITEM 2. PROPERTIES

DRILLING EQUIPMENT

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

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

         We generally deploy our rig fleet among our divisions based on the
types of rigs preferred by our customers for drilling in the geographic markets
served by our divisions. The following table summarizes the rigs we own as of
March 3, 2000:


<TABLE>
<CAPTION>
                                                 Maximum Rated Depth Capacity
                                 -----------------------------------------------------------
                                  Under          10,000'            15,000'        20,000'
                                 10,000'        to 14,999         to 19,999'      and Deeper            Total
                                 -------        ---------         ----------      ----------            -----
<S>                              <C>            <C>               <C>             <C>                   <C>
MARKETABLE
Ark-La-Tex
    Diesel Electric                  -                1                 6                 7               14
    Trailer-Mounted                  -                2                 -                 -                2
    Mechanical                       -                9                 9                 3               21
Gulf Coast
    Diesel Electric                  -                -                 1                24               25
    Mechanical                       -                3                 2                 5               10
South Texas
    Diesel Electric                  -                1                 6                 6               13
    Trailer-Mounted                  4               11                 -                 -               15
    Mechanical                       -                7                 1                 -                8
                                    --               --                --                --              ---
Total Marketable(1)                  4               34                25                45              108

INVENTORY
Domestic
    Diesel Electric                  -                -                 2                 8               10
    Trailer-Mounted                  -                1                 -                 -                1
    Mechanical                       -                -                 1                 -                1
Venezuela
    Trailer-Mounted                  -                2                 -                 -                2
    Mechanical                       -                3                 -                 -                3
                                    --               --                --                --              ---
Total Inventory                      -                6                 3                 8               17
                                    --               --                --                --              ---
Total Rig Fleet                      4               40                28                53              125
                                    ==               ==                ==                ==              ===
</TABLE>


         (1) Includes 38 cold-stacked rigs of which three are in the under
10,000' category, 11 are in the 10,000' to 14,900' category, seven are in the
15,000' to 19,999' category, and 17 are in the 20,000' and deeper category. For
additional information on our cold-stacked rigs, refer to "Item 1
Business--Domestic Operations."


                                      -13-
<PAGE>   14
FACILITIES

         The following table summarizes our significant real estate:

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


         We lease approximately 22,700 square feet of office space in Houston,
Texas for our principal executive offices at a cost of approximately $33,000 per
month. We believe that all our facilities are in good operating condition and
that they are adequate for their present uses.

ITEM 3.  LEGAL PROCEEDINGS

         We are involved in litigation incidental to the conduct of our
business, none of which we believe is, individually or in the aggregate,
material to our consolidated financial condition or results of operations.

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

None.


                                      -14-
<PAGE>   15
                                     PART II

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

MARKET DATA

         Our common stock is listed and traded on the American Stock Exchange
 ("AMEX") under the symbol "GW." The following table sets forth the high and low
 closing prices of our common stock on the AMEX for the periods
indicated:


<TABLE>
<CAPTION>
                                                                                    High           Low
                                                                                   ------         ------
<S>                                                                                <C>            <C>
                  Period from January 1, 2000 to March 3, 2000                     4.1875         2.8125

                  Year Ended December 31, 1999:
                      Quarter ended March 31, 1999                                 1.5000          .8125
                      Quarter ended June 30, 1999                                  2.6875         1.0625
                      Quarter ended September 30, 1999                             3.6875         2.0625
                      Quarter ended December 31, 1999                              3.3125         2.1875

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


         We have never declared or paid cash dividends on our common stock and
do not expect to pay cash dividends in 2000 or for the foreseeable future. We
anticipate that all cash flow generated from operations in the foreseeable
future will be retained and used to develop or expand our business, pay debt
service and reduce outstanding indebtedness. Any future payment of cash
dividends will depend upon our results of operations, financial condition, cash
requirements and other factors deemed relevant by our board of directors.

         The terms of our credit facility with CIT prohibit the payment of
dividends without the prior written consent of the lender and the terms of the
Indentures under which our senior notes are issued also restrict our ability to
pay dividends under certain conditions.

         On March 3, 2000, the last reported sales price of our common stock on
the AMEX was $4.00 per share.


                                      -15-
<PAGE>   16
ITEM 6. SELECTED FINANCIAL DATA

                (Amounts in thousands, except per share amounts)


<TABLE>
<CAPTION>
                                                                                Years Ended December 31,
                                                         -------------------------------------------------------------------
                                                           1999          1998           1997          1996           1995
                                                         --------      ---------      ---------     ---------      ---------
<S>                                                      <C>           <C>            <C>           <C>            <C>
CONTINUING OPERATIONS:
    Revenues                                             $147,203      $ 240,979      $ 215,923     $  81,767      $  94,709
    Income (loss)
        from continuing operations                        (56,818)      (111,164)        18,849       (10,877)       (12,675)

DISCONTINUED OPERATIONS (1):
    Loss from oil and gas operations                         --             --             --            --               (4)

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

NET INCOME (LOSS)                                         (41,262)       (83,213)        10,218       (11,722)       (13,447)

INCOME (LOSS) PER COMMON SHARE - BASIC AND DILUTED:
    From continuing operations                               (.25)          (.50)           .07          (.18)          (.33)
    From discontinued operations                             --             --             --            --             (.02)
    Net income (loss)                                        (.25)          (.50)           .07          (.18)          (.35)

TOTAL ASSETS                                              452,846        501,303        533,752       117,819         57,783

SENIOR NOTES & OTHER LONG-TERM DEBT                       249,962        250,527        176,225        26,846         11,146

SERIES A PREFERRED STOCK - MANDATORILY
    REDEEMABLE                                               --              305            305           764            900
</TABLE>

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


                                      -16-
<PAGE>   17
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

         The following discussion should be read in conjunction with our
consolidated financial statements included elsewhere herein. All significant
intercompany transactions have been eliminated.

GENERAL

         We are a leading provider of contract land drilling services in the
United States with a domestic fleet of 120 rigs at March 3, 2000. In addition to
our domestic operations, we maintain a fleet of five non-marketable rigs in
Venezuela, giving us a total of 125 rigs, 108 of which are marketable. Of the
108 marketable rigs, 70 rigs are marketed while 38 are cold stacked. We also
have an inventory of 17 non-marketable rigs held for refurbishment as demand for
drilling services warrants, of which 12 are located in the United States and the
remainder in Venezuela.

         Like the domestic land drilling industry at large, our drilling
activity declined substantially in 1998 and the first half of 1999. However, our
business began improving at the end of the second quarter of 1999 and that trend
has continued in 2000 through the date of this Report. How our drilling
operations were affected by industry conditions, both before and after the
turnaround in drilling activity which began at the end of the second quarter of
1999, is summarized below.

         Utilization Rates

         Beginning in the first quarter of 1998 and continuing through most of
the second quarter of 1999, industry-wide demand for land drilling services
deteriorated and our rig utilization rate declined. Our average domestic
utilization rate for the year ended December 31, 1999, was 41% compared to 64%
for the year ended December 31, 1998 and 96% for the year ended December 31,
1997. During this extended period of lower utilization rates we took numerous
steps to minimize cost and conserve cash. We cold stacked a total of 49 rigs,
reduced overhead at both the division and corporate levels and used components
from the spare equipment or cold-stacked rigs instead of buying new replacement
parts.

         Our utilization rate has improved from 31% for the second quarter of
1999 to 56% for the first two months of 2000. During the period from April 1999
to March 3, 2000, in which the overall land drilling count rebounded by 71%, our
rig count increased by 91%. For the first two months of the first quarter of
2000, we had an average of 61 rigs working (56% utilization). The recent
increase in demand for our rigs has allowed us to return 36 rigs to work since
April 1999, including 11 of the 49 rigs which had been cold stacked. We believe
our greater percentage increase in working rigs over the period is primarily
attributable to our strategic decision not to reduce wages in order to retain
key operating personnel, which has allowed us to return rigs to work more
quickly.

         As price competition intensified in 1998 and the first half of 1999,
some of our competitors were able to reduce the rates they charged for their
rigs largely, we believe, by decreasing the wages they pay their rig crews. We
chose not to cut the wages of our rig crews for strategic reasons, principally
to help us retain the experienced rig crews so as to better position us to
participate in future increases in drilling activity. This pricing strategy
caused our rig utilization to decline and caused us to temporarily lose market
share. Increases in drilling demand since the second half of 1999 have allowed
us to recapture market share.


                                      -17-
<PAGE>   18
         The table below shows our rig utilization in our core domestic markets
during the periods indicated:


<TABLE>
<CAPTION>
    1997                               1998                                                   1999                              2000
    ----           --------------------------------------------           ---------------------------------------------        -----
<S>                <C>       <C>       <C>        <C>      <C>            <C>       <C>        <C>       <C>       <C>         <C>
    Full                                                   Full                                                    Full        Q1 to
    Year           Q-1       Q-2       Q-3        Q-4      Year           Q-1       Q-2        Q-3       Q-4       Year         date
    ----           ---       ---       ---        ---      ----           ---       ---        ---       ---       ----        -----
    96%            81%       71%       59%        49%       64%           39%       31%        40%       54%       41%          56%
</TABLE>


         Drilling Contract Bid Rates

         In addition to the increases in rig utilization rates in 1999, there
has also been a modest increase in the day rates we receive for our services.
From a low bid range of $5,500 to $6,000 per day during the second quarter of
1999 our leading edge bid rates have increased to a range $6,500 to $7,200 per
day in early March 2000.

         While bid rates for new drilling contracts in our core domestic markets
for the fourth quarter of 1999 were approximately 9% greater than the last
quarter of 1998, they remain 28% less than the bid rates received in the fourth
quarter of 1997.

         Turnkey and Footage Contract Activity

         Revenue generated from turnkey and footage contracts is expected to be
approximately 40% of total revenue in the first quarter of 2000, consistent with
the fourth quarter of 1999 and compared to approximately 39% for the twelve-
month period ending December 31, 1999 and 21% for the twelve-month period ending
December 1998. EBITDA margin generated on turnkey and footage contracts for 1999
and 1998 was 18% of revenue. The demand for drilling services under turnkey and
footage contracts is, however, greater during periods of overall lower demand
and there can be no assurance that we will be able to maintain the current level
of turnkey and footage revenue.

         Financial Results

         The fourth quarter of 1999 marked the second sequential quarter of
improvement from our low in the second quarter of 1999. Net losses declined from
$12.2 million in the second quarter of 1999, to $11.5 million in the third
quarter of 1999, to $8.1 million in the fourth quarter of 1999. This reflected
the improved utilization of our drilling rigs working under daywork and turnkey
contracts as well as increases in the rates received for our services. The third
and fourth quarters of 1999 reflected the improvement in utilization, dayrates
and EBITDA after a steady decline beginning in the first quarter of 1998. Based
on the current levels of utilization and day rates, we believe our results for
the first quarter of 2000, should be better than those of the fourth quarter of
1999.

FINANCIAL CONDITION AND LIQUIDITY

         The following table summarizes our financial position at December 31,
1999 and 1998.


<TABLE>
<CAPTION>
                                                December 31, 1999         December 31, 1998
                                              ---------------------     ---------------------
                                               Amount          %         Amount         %
                                              --------     --------     --------     --------
                                                           (Amounts in thousands)
<S>                                           <C>          <C>          <C>          <C>
Working capital                               $ 16,353            4     $ 44,489           10
Property and equipment, net                    384,361           94      411,316           88
Other noncurrent assets                          7,847            2        9,306            2
                                              --------     --------     --------     --------
Total                                         $408,561          100     $465,111          100
                                              ========     ========     ========     ========

Long-term debt                                $249,962           61     $250,527           54
Other long-term liabilities                     33,022            8       47,893           10
Shareholders' equity                           125,577           31      166,691           36
                                              --------     --------     --------     --------
        Total                                 $408,561          100     $465,111          100
                                              ========     ========     ========     ========
</TABLE>


                                      -18-
<PAGE>   19
         The significant changes in our financial position from December 31,
1998 to December 31, 1999 are the decrease in working capital of $28.1 million
and the decrease in shareholders' equity of $41.1 million. The change in working
capital is due primarily to an overall decline in our operating activity, while
the decrease in shareholders' equity is due to our net loss in 1999 of $41.3
million.

         We owe a total of $250.0 million in principal amount under our senior
notes. While the principal is not due until 2007, semi-annual interest payments
of approximately $11.1 million are due on January 1 and July 1 of each year. For
the year ended December 31, 1999, our operating activities, investing
activities, and financing activities each consumed net cash rather than provided
additional cash. In order to pay debt service under the senior notes and meet
our other cash needs, we were required to use our cash on hand. To the extent we
are unable to generate cash flow sufficient to pay debt service and meet our
other cash needs, including capital expenditures, we would be required to draw
on our existing credit facility or seek other external financing. We can give
no assurance that any such sources of funds would be adequate to meet our needs
or be available on terms acceptable to us.

         During the year ended December 31, 1999, we funded our activities
through a combination of cash generated from operations and the remaining
proceeds from our May 1998 offering of $75.0 million of senior notes. The net
cash provided by or used in our operating, investing and financing activities is
summarized below (amounts in thousands):


<TABLE>
<CAPTION>
                                                                     Years Ended December 31,
                                                             ---------------------------------------
                                                                1999          1998           1997
                                                             ---------      ---------      ---------
<S>                                                          <C>            <C>            <C>
Net cash provided by (used in):
    Operating activities                                     $ (17,470)     $  30,799      $  21,783
    Investing activities                                        (6,011)      (109,908)      (213,341)
    Financing activities                                        (1,914)        71,378        239,022
                                                             ---------      ---------      ---------
Net increase (decrease) in cash:                             $ (25,395)     $  (7,731)     $  47,464
                                                             =========      =========      =========
</TABLE>


         Our cash flows from operating activities are affected by a number of
factors including the number of rigs under contract and whether the contracts
are daywork, footage or turnkey, as well as whether our overall activity is
expanding or contracting. We used $21.9 million in cash flow in operating
activities in 1999 versus generating $20.2 million in cash flow from operating
activities in 1998 due primarily to a decrease in overall operating activity in
1999 versus 1998. Our cash flows from operating activities were also impacted by
reductions in working capital which provided $4.4 million in cash flow in 1999
versus $10.6 million in 1998. Our cash flow from operating activities in 1998
was greater than in 1997 due to a decrease in the amount of working capital
required which was partially offset by a decrease in cash flow from operations
of $16.9 million due to fewer operating days worked and lower average day rates.

         Cash flow used in investing activities in 1999 primarily consisted of
capital expenditures for rig maintenance. Cash flow used in investing activities
in 1998 included the cash portion of the Murco Acquisition of $60.8 million, as
well as capital expenditures for rig refurbishments, drill pipe and other
capital maintenance of $19.6 million, $11.2 million and $18.3 million,
respectively. Cash flow used in investing activities during 1997 consisted of
the cash portion of the GWDC Acquisition of $62.0 million, the cash acquisition
of Justiss, Kaiser-Francis rigs and other rig purchases of $79.7 million, $52.1
million spent on refurbishments and $19.5 million spent on drill pipe and other
related equipment.

         Cash flow used in financing activities in 1999 primarily consisted of
repayments of long-term debt of $1.1 million and financing costs related to the
CIT facility of $861,000. Cash flow from financing activities in 1998 primarily
consisted of net proceeds from the issuance of senior notes of $71.4 million and
borrowings and repayments of long-term debt of $30.6 million and $31.3 million,
respectively. Cash flow from financing activities in 1997 primarily consisted of
$169.1 million in net proceeds from the issuance of senior notes, net proceeds
from the issuance of common stock of $94.3 million and $52.8 million and $78.1
million, respectively, in borrowings and repayments of long-term debt.

         At March 3, 2000, after our January 1, 2000 payment of $11.1 million of
interest on our senior notes, our cash balance was $9.5 million.

         Capital expenditures for 2000 are estimated to be between $9.0 million
and $15.0 million depending on our level of activity and the number of
cold-stacked rigs ultimately reactivated. In addition, the demand for top drive
units is growing in the land drilling industry and we expect to buy or rent
additional top drive units as required to meet customer demand. Estimated
capital expenditures for 2000 include approximately $2.5 million for the
acquisition of two additional top drives. Through March 3, 2000, we have
redeployed 11 of our domestic cold-stacked rigs for an


                                      -19-
<PAGE>   20
aggregate capital investment of $890,000. If demand warrants, we believe we can
return the next 15 cold-stacked rigs to marketed condition for estimated capital
expenditures of approximately $1.3 million, which would bring our marketed rig
count to 85 rigs. To bring the next 15 rigs to marketed status, increasing
marketed rigs to 100, would require an estimated $4.6 million to $5.9 million.
An estimated $10.0 million would be required to return our final eight cold-
stacked rigs to marketed status. The actual cost of returning cold-stacked rigs
to marketed status will depend on the extent to which component parts are used
from the cold-stacked rigs and the extent to which we choose to upgrade the
cold-stacked rigs before returning them to service.

CERTAIN CREDIT ARRANGEMENTS

         During the year ended December 31, 1999, our principal credit
arrangements (other than customary trade credit and capital leases) consisted of
a credit facility and our 87/8% Senior Notes due 2007.

         Bank Credit Facility

         Throughout 1998, we maintained a senior secured revolving credit
facility with a syndicate of commercial banks. Effective January 14, 1999, we
terminated that credit facility and entered into a more flexible agreement with
The CIT Group/Business Credit, Inc. Also in January 1999, we wrote off
approximately $623,000 in deferred loan costs related to the terminated credit
facility.

         CIT Facility

         Effective January 1999, we entered into a senior secured revolving
credit facility with The CIT Group/Business Credit, Inc. We have never borrowed
under the CIT facility. The CIT facility provides us with the ability to borrow
up to the lesser of $50 million or 50% of the orderly liquidation value as
defined in the CIT facility of marketable drilling rig equipment located in the
48 contiguous states of the United States. The initial term of the CIT facility
is for four years through January 14, 2003, with automatic annual renewals
thereafter unless terminated by the lender on any subsequent anniversary date,
and then only upon 60 days prior notice. The CIT facility provides us with up to
$10,000,000 available for letters of credit with such amounts being reserved
from availability. Interest under the CIT facility accrues at a variable rate,
using (at our election) either the prime interest rate plus 0.25% to 1.50% or
LIBOR plus 1.75% to 3.50%, depending upon our debt service coverage ratio for
the trailing 12 month period. During the first year of the CIT facility, the
interest rate was fixed at LIBOR plus 2.5% or the prime interest rate plus 1%.
Letters of credit accrue a fee of 1.25% per annum. We pay a commitment fee of
0.375% per annum on the average unused portion of the lender's commitments.
Indebtedness under the CIT facility is secured by an exclusive lien security
interest in substantially all of our assets and the assets of our domestic
subsidiaries and by guarantees given by us and certain of our wholly owned
subsidiaries.

         Under the CIT facility the lender's commitments will be reduced by the
amount of net cash proceeds received by us or our subsidiaries from sales or
other dispositions of collateral in excess of $1.0 million individually or $2.0
million in the aggregate in any 12 month period (other than sales or other
dispositions of certain types of inventory, rigs identified in the CIT facility
as equipment held for sale and up to $75.0 million of rigs and accessories). In
addition, mandatory prepayments would be required upon:

         o        the receipt of net proceeds received by us or our subsidiaries
                  from the incurrence of certain other debt or sales of debt or
                  equity securities in a public offering or private placement,
                  or;
         o        the receipt of net cash proceeds by us or our subsidiaries
                  from asset sales (including proceeds from sale of rigs
                  identified in the credit agreement as equipment held for sale
                  but excluding proceeds from dispositions of inventory in the
                  ordinary course of business, and sales of up to $75.0 million
                  of rigs and rig accessories, or;
         o        the receipt of insurance proceeds on our assets in each case
                  to the extent that such proceeds are in excess of $500,000
                  individually or $1.0 million in the aggregate in any twelve
                  month period.

         Among the various covenants that we must satisfy under the CIT facility
are the following two covenants which shall apply whenever our liquidity,
defined as the sum of cash, cash equivalents and availability under the CIT
facility, falls below $25,000,000:

        o         1 to 1 EBITDA coverage of debt service, tested monthly on a
                  trailing 12 month basis; and


                                      -20-
<PAGE>   21
         o        minimum tangible net worth (all as defined in the CIT
                  facility) at the end of each quarter will be the prior year
                  tangible net worth less $30,000,000 adjusted for quarterly
                  tests.

         Additionally, it will be a covenant default if the orderly liquidation
value of our domestic drilling equipment (including inventoried rigs) falls
below $150,000,000. Also, if the two month average rig utilization rate falls
below 45%, the lender will have the option to request one additional appraisal
per year to aid in determining the current orderly liquidation value of the
drilling equipment. While rig utilization for 1999 was below 45%, the lender did
not request an additional appraisal. Prepayment would be required if the orderly
liquidation value falls below the level specified above.

         The CIT facility also contains provisions restricting our ability to,
among other things:


<TABLE>
<S>               <C>
        o         engage in new lines of business unrelated to our current activities;
        o         enter into mergers or consolidations or asset sales or purchases (with specified exceptions);
        o         incur liens or debts or make advances, investments or loans (in each case, with specified exceptions);
        o         pay dividends or redeem stock (except for certain inter-company transfers);
        o         prepay or materially amend any other indebtedness; and
        o         issue any stock (other than common stock).
</TABLE>


         Events of default under the CIT facility include, in addition to
non-payment of amounts due, misrepresentations and breach of loan covenants and
certain other events of default:


<TABLE>
<S>               <C>
        o         default with respect to other indebtedness in excess of $350,000;
        o         judgements in excess of $350,000; or
        o         a change in control (meaning 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)).
</TABLE>


         Senior Notes

         Concurrently with the closing of the acquisition of GWDC in June 1997,
we concluded a public offering of $175.0 million in principal amount of senior
notes and in May 1998, we completed an offering of an additional $75.0 million.
The senior notes bear interest at 87/8% per annum and mature July 1, 2007. The
terms and conditions of these senior notes are substantially identical in all
material respects. The senior notes are general unsecured senior obligations and
are guaranteed, on a joint and several basis, by all of our domestic
wholly-owned subsidiaries.

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

         The indentures for the senior notes permit us and our subsidiaries to
incur additional indebtedness, including senior indebtedness of up to $100.0
million aggregate principal amount which may be secured by liens on all of our
assets of and the assets of our subsidiaries, subject to certain limitations.
The indentures contain other covenants limiting our ability and our subsidiaries
to, among other things, pay dividends or make certain other restricted payments,
make certain investments, incur additional indebtedness, permit liens, incur
dividend and other payment restrictions affecting subsidiaries, enter into
consolidation, merger, conveyance, lease or transfer transactions, make asset
sales, enter into


                                      -21-
<PAGE>   22
transactions with affiliates or engage in unrelated lines of business. These
covenants are subject to certain exceptions and qualifications.

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


                                      -22-
<PAGE>   23
RESULTS OF OPERATIONS

         The following tables highlight rig days worked, revenues and operating
expenses for our domestic and foreign operations for the years ended December
31, 1999, 1998 and 1997.


<TABLE>
<CAPTION>
                                     For the Year Ended December 31, 1999
                                     -------------------------------------
                                      Domestic      Foreign
                                     Operations    Operations      Total
                                     ----------    ----------     --------
                                        (Amounts in thousands, except
                                         averages per rig day worked)
<S>                                  <C>           <C>            <C>
Rig days worked                          16,291          145        16,436

Drilling revenue                       $145,738     $  1,465      $147,203
Operating expenses(1)                   138,221        2,126       140,347
                                       --------     --------      --------
Gross profit (loss)                    $  7,517     $   (661)     $  6,856
                                       ========     ========      ========

Averages per rig day worked:
   Drilling revenue                    $  8,946     $ 10,103      $  8,956
   Operating expenses                     8,485       14,662         8,539
                                       --------     --------      --------
   Gross profit (loss)                 $    461     $ (4,559)     $    417
                                       ========     ========      ========
</TABLE>


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

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

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


<TABLE>
<CAPTION>
                                     For the Year Ended December 31, 1998
                                     -------------------------------------
                                      Domestic      Foreign
                                     Operations    Operations      Total
                                     ----------    ----------     --------
                                        (Amounts in thousands, except
                                         averages per rig day worked)
<S>                                  <C>           <C>            <C>
Rig days worked                          23,575          830        24,405

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

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

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


                                      -23-
<PAGE>   24
COMPARISON OF FISCAL YEAR ENDED DECEMBER 31, 1999 AND 1998

         Revenues decreased approximately $93.8 million, or 39%, to $147.2
million for the year ended December 31, 1999, from $241.0 million for the year
ended December 31, 1998. The decrease is due to a reduction in revenue from
domestic operations of $86.5 million and a decrease in revenue from foreign
operations of $7.2 million. Revenues from domestic operations decreased due to a
reduction in rig days worked of 9,096 and a decrease in the average revenue per
day of $203. The decrease in average revenue per day is due to lower day rates
which were partially offset by an increase in the percentage of turnkey drilling
activity from 12% of total days worked during 1998 to 19% of total days worked
for 1999. Revenue from foreign operations decreased due to a decrease in rig
days worked of 698. The decrease in rig days worked in foreign operations is a
direct result of completing our contracts in Venezuela late in the first quarter
of 1999 and discontinuing all operations in Venezuela thereafter.

         Drilling operating expenses decreased by approximately $51.1 million,
or 27%, to $140.3 million for the year ended December 31, 1999, as compared to
$191.4 million for the year ended December 31, 1998. The decrease is due to a
reduction in operating expenses from domestic operations of $43.8 million and a
decrease in operating expenses from foreign operations of $7.2 million. The
decrease in domestic drilling operating expenses is a direct result of the
decrease in rig days worked of 9,096 which were partially offset by an increase
in operating expense per day of $1,314. The increase in operating expense per
day is a result of the greater percentage of turnkey days discussed previously
as well as fixed overhead items being spread over fewer days worked. The
decrease in operating expenses from foreign operations is a result of
discontinuing Venezuelan operations as discussed above.

         Successfully completed turnkey and footage contracts generally result
in higher effective revenues per day worked than under daywork contracts. Gross
profit margins per day worked on successful turnkey and footage jobs are also
generally greater than under daywork contracts, although we are typically
required to bear additional operating costs (such as fuel costs) that would
typically be paid by the customer under daywork contracts. Revenues, operating
expenses and gross profit (or loss) margins on turnkey and footage contracts are
affected by a number of variables, and include the depth of the well, geological
complexities and the actual difficulties encountered in completing the well.

         Depreciation and amortization expense decreased by $4.1 million, or 11%
to $34.0 million for the year ended December 31, 1999, compared to $38.1 million
for the year ended December 31, 1998. The decrease in depreciation expense is
due to a $6.0 million decrease as a result of the SFAS 121 write-down discussed
below, which was partially offset by an increase in depreciation on 1998
attributable to capital expenditures during 1998 and 1999.

         General and administrative expenses decreased by $2.2 million, or 25%,
to $6.7 million for the year ended December 31, 1999, from $8.9 million for the
same period of 1998 due primarily to our cost cutting measures and the decreased
level of drilling activity.

         During 1998, we recorded a non-cash asset impairment charge of $93.2
million as a result of the application of Statement of Financial Accounting
Standards No. 121 (SFAS No. 121), which requires that long-lived assets and
certain identifiable intangibles held and used by us be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Our review of our long-lived assets indicated
that the carrying value of certain of our foreign and domestic drilling rigs was
more than the estimated undiscounted future net cash flows. As such, under SFAS
No. 121, we wrote-down those assets to their estimated fair market value. The
impairment was recorded based on certain estimates and projections as stipulated
in SFAS No. 121. During 1999, no write-down was necessary as a result of the
application of SFAS No. 121.

         Provision for doubtful accounts decreased $1.1 million, or 67%, to
$577,000 for the year ended December 31, 1999 compared to $1.7 million for the
year ended December 31, 1998. The higher provision for doubtful accounts for the
year ended December 31, 1998 is a direct result of the severity of a downturn in
the oil and gas industry which began in early 1998.

         We recorded $320,000 in 1999 and $1.7 million in 1998 in unusual
charges. Unusual charges in 1999 consist entirely of severance costs, while
unusual charges in 1998 consist of $496,000 in severance costs and $1.2 million
in write-downs associated with international operations.

         Interest expense increased by $2.4 million, or 11%, to $24.1 million
for the year ended December 31, 1999, compared to $21.6 million for the year
ended December 31, 1998. The increase is due to an increase in our average


                                      -24-
<PAGE>   25
outstanding debt balance of $36.7 million to $251.2 million for the year ended
December 31, 1999, from $214.5 million for the year ended December 31, 1998.
This increase in our outstanding debt balance is primarily due to the issuance
of $75.0 million of senior notes during May 1998, of which $30.0 million was
used to repay the indebtedness outstanding under our then-existing credit
facility.

         Other income, net decreased by $2.5 million, or 56%, to $2.0 million
for the year ended December 31, 1999, compared to $4.5 million for the year
ended December 31, 1998. The decrease is primarily due to the $1.8 million gain
recognized during 1998 on the sale of rigs and drilling related equipment of our
Eastern division located in Ohio to Union Drilling, Inc., an affiliate of two of
our directors.

         As discussed previously, during the year ended December 31, 1999, we
wrote off $623,000 in deferred loan costs related to our former credit facility.
This amount, net of $203,000 in related taxes, is classified as an extraordinary
item.

COMPARISON OF FISCAL YEAR ENDED DECEMBER 31, 1998 AND 1997

         Contract drilling revenues increased approximately $25.1 million, or
12%, to $241.0 million for the year ended December 31, 1998 compared to $215.9
million for the year ended December 31, 1997. This increase is due to an
increase in revenue from domestic operations of $22.9 million and an increase in
revenue from foreign operations of $2.2 million. Revenues from domestic
operations increased due to an increase in rig days worked of 1,812 and an
increase in average revenue per rig day worked of $266. The increase in
operating days is due to the acquisition of 54 operating rigs during 1997 and
January of 1998. The increase in average revenue per rig day worked of $266 is
due to a 19% increase in the average revenue per rig day worked from turnkey
contracts as well as a 4% increase in average revenue per rig day worked from
daywork contracts. While average revenue per rig day worked increased in 1998
compared to 1997, average revenue per rig day worked in the fourth quarter of
1998 was below the 1997 average, reflecting the decline in drilling activity
that continued into 1999. Revenue from foreign operations increased due to an
increase in average revenue per rig day worked of $2,493, while rig days worked
remained relatively flat.

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

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

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

         As discussed previously, during 1998, we recorded pretax unusual
charges of $94.9 million ($71.0 million after tax or $.43 per share). There were
no such unusual charges recorded in 1997. The unusual charges consisted of a
$93.2 million asset impairment, $0.5 million in severance costs, and $1.2
million in write-downs associated with international operations. The asset
impairment charge was required by Statement of Financial Accounting Standards
No. 121 which requires that long-lived assets held and used by us be reviewed
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. The then existing downturn in the oil and gas
industry, due to the magnitude and duration, qualified as such an event. In
addition, we recorded a provision for doubtful accounts during 1998 of $1.7
million compared to a reversal of provision for doubtful accounts of $200,000 in
1997. The


                                      -25-
<PAGE>   26
severance cost, write-downs associated with international operations and the
provision for doubtful accounts are also associated with the downturn in the oil
services industry in 1998.

         Interest expense increased by $12.9 million, or 147%, to $21.6 million
for the year ended December 31,1998, compared to $8.7 million for the year ended
December 31, 1997. The increase is due to an increase in our average outstanding
debt balance of $112.1 million to $214.5 million for the year ended December 31,
1998 from $102.4 for the year ended December 31, 1997. This increase in the
outstanding debt balance is primarily due to the issuance of $175.0 million of
senior notes during June 1997 to complete our GWDC merger and to continue
refurbishment of the rigs purchased in 1997 and the issuance of $75 million of
senior notes in May 1998 of which $30.0 million was used to repay the
indebtedness incurred under the then-existing credit facility to partially
finance the acquisition of Murco.

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

INFLATION AND CHANGING PRICES

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

FOREIGN EXCHANGE

         Our Venezuelan operations during 1997, 1998 and early 1999 often
performed services pursuant to drilling contracts under which payments to us
were denominated in United States Dollars but were payable in Venezuelan
currency at a floating exchange rate. We are not a party to any currency hedging
arrangements and have not during the three-year period ending December 31, 1999
entered into any currency hedges to protect us from foreign currency losses.
Instead, we have attempted to manage assets in foreign countries to minimize our
exposure to currency fluctuations. During the years ended December 31, 1999 and
1998, we recognized foreign exchange losses of $120,000 and $178,000, while in
1997, $50,000 was recorded as a decrease in shareholders' equity due to a
devaluation of the Venezuelan Bolivar.

YEAR 2000 COMPLIANCE

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

         We have undertaken various initiatives intended to ensure that our
computer equipment and software will function properly with respect to dates in
the year 2000 and thereafter. For this purpose, the term "computer equipment and
software" includes systems that are commonly thought of as information
technology systems, including accounting, data processing, telephone systems and
other miscellaneous systems, as well as systems that are not commonly thought of
as information technology systems, such as alarm systems, sprinkler systems, fax
machines, or other miscellaneous systems. These systems may contain imbedded
technology, which complicated our year 2000 identification, assessment,
remediation, and testing efforts.

         Through March 1, 2000, we have experienced no significant operational
problems related to year 2000 issues and we presently believe that the year 2000
issues will not pose significant operational problems for us in the future.
However, there can be no assurance that as yet undiscovered year 2000 issues of
other entities will not have a material adverse impact on our systems or results
of operations.

         As of December 31, 1999, we had incurred costs of approximately $75,000
related to our Year 2000 identification, assessment, remediation, and testing
efforts consisting primarily of upgrades to existing software. We


                                      -26-
<PAGE>   27
estimate that the future costs associated with the year 2000 issue will not be
material, and as such will not have a significant impact on our financial
position or operating results.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

          Interest Rate Risk. We are subject to market risk exposure related to
changes in interest rates on our CIT facility. Interest on borrowings under the
CIT facility accrues at a variable rate, using (at our election) either the
prime rate plus 0.25% to 1.50% or LIBOR plus 1.75% to 3.5%, depending upon our
debt service coverage ratio for the trailing 12 month period. March 3, 2000 we
had no outstanding balance under the CIT facility and as such have no exposure
at this time to a change in the interest rate.

         Foreign Currency Exchange Rate Risk. We have historically conducted
business in Venezuela and remain somewhat sensitive to fluctuations in foreign
currency exchange rates. See Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Foreign Exchange."


                                      -27-
<PAGE>   28
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


                                    INDEX TO
                        CONSOLIDATED FINANCIAL STATEMENTS
                        AND FINANCIAL STATEMENT SCHEDULE


<TABLE>
<S>                                                                                                            <C>
Independent Auditors' Report....................................................................................29

Consolidated Balance Sheets as of December 31, 1999 and 1998....................................................30

Consolidated Statements of Operations for the Years
         Ended December 31, 1999, 1998, and 1997................................................................31

Consolidated Statements of Shareholders' Equity and Comprehensive Income
         for the Years Ended December 31, 1999, 1998 and 1997...................................................32

Consolidated Statements of Cash Flows for the Years
         Ended December 31, 1999, 1998, and 1997................................................................33

Notes to Consolidated Financial Statements......................................................................35

Financial Statement Schedule:
          Schedule II - Valuation and Qualifying Accounts.......................................................47
</TABLE>


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


                                      -28-
<PAGE>   29
INDEPENDENT AUDITORS' REPORT


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

         We have audited the accompanying consolidated balance sheets of Grey
Wolf, Inc. and Subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of operations, shareholders' equity and comprehensive
income, and cash flows for each of the years in the three-year period ended
December 31, 1999. In connection with our audits of the consolidated financial
statements, we have also audited the financial statement schedule for the years
ended December 31, 1999, 1998 and 1997. These consolidated financial statements
and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedule based on our audits.

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

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Grey Wolf,
Inc. and Subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects the information set forth
therein.




                                    KPMG LLP


Houston, Texas
February 8, 2000


                                      -29-
<PAGE>   30
                        GREY WOLF, INC. AND SUBSIDIARIES

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


<TABLE>
<CAPTION>
                                                                                         December 31,
                                                                                   ------------------------
                                                                                     1999           1998
                                                                                   ---------      ---------
<S>                                                                                <C>            <C>
                                          ASSETS
Current assets:
    Cash and cash equivalents                                                      $  20,500      $  45,895
    Restricted cash - insurance deposits                                                 762            762
    Accounts receivable, net of allowance
       of $1,708 and $1,106, respectively                                             37,002         30,598
    Prepaids and other current assets                                                  2,374          3,426
                                                                                   ---------      ---------
       Total current assets                                                           60,638         80,681

Property and equipment:
    Land, buildings and improvements                                                   5,041          5,538
    Drilling equipment                                                               568,012        561,850
    Furniture and fixtures                                                             2,227          1,920
                                                                                   ---------      ---------
       Total property and equipment                                                  575,280        569,308
    Less: accumulated depreciation and amortization                                 (190,919)      (157,992)
                                                                                   ---------      ---------
       Net property and equipment                                                    384,361        411,316

Other noncurrent assets                                                                7,847          9,306
                                                                                   ---------      ---------
                                                                                   $ 452,846      $ 501,303
                                                                                   =========      =========

                           LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
    Current maturities of long-term debt                                           $     831      $   1,162
    Accounts payable - trade                                                          21,231         13,761
    Accrued workers' compensation                                                      3,072          4,503
    Payroll and related employee costs                                                 3,455          3,672
    Accrued interest payable                                                          11,177         11,096
    Other accrued liabilities                                                          4,519          1,998
                                                                                   ---------      ---------
       Total current liabilities                                                      44,285         36,192
                                                                                   ---------      ---------

Senior notes                                                                         249,354        249,268
Long-term debt, net of current maturities                                                608          1,259
Other long-term liabilities                                                            2,252          1,460
Deferred income taxes                                                                 30,770         46,128
Series A preferred stock - mandatorily redeemable                                       --              305

Commitments and contingent liabilities                                                  --             --

Shareholders' equity:
    Series B Junior Participating Preferred stock, $1 par value;
       250,000 shares authorized, none outstanding                                      --             --
    Common stock, $.10 par value; 300,000,000 shares
       authorized; 165,166,891 and 165,065,391 issued and
       outstanding, respectively                                                      16,516         16,506
    Additional paid-in capital                                                       270,527        270,389
    Cumulative translation adjustments                                                  (454)          (454)
    Accumulated deficit                                                             (161,012)      (119,750)
                                                                                   ---------      ---------
          Total shareholders' equity                                                 125,577        166,691
                                                                                   ---------      ---------
                                                                                   $ 452,846      $ 501,303
                                                                                   =========      =========
</TABLE>


          See accompanying notes to consolidated financial statements.


                                      -30-
<PAGE>   31
                        GREY WOLF, INC. AND SUBSIDIARIES

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


<TABLE>
<CAPTION>
                                                                               Years Ended December 31,
                                                                        --------------------------------------
                                                                          1999           1998           1997
                                                                        --------       --------       --------
<S>                                                                     <C>            <C>            <C>
Revenues:
    Contract drilling                                                   $147,203       $240,979       $215,923

Costs and expenses:
    Drilling operations                                                  140,347        191,417        162,752
    Depreciation and amortization                                         34,003         38,069         20,957
    General and administrative                                             6,678          8,880          8,081
    Provision for asset impairment                                          --           93,193           --
    Provision for doubtful accounts                                          577          1,723           (200)
    Unusual charges                                                          320          1,722           --
                                                                        --------       --------       --------
       Total costs and expenses                                          181,925        335,004        191,590
                                                                        --------       --------       --------
Operating income (loss)                                                  (34,722)       (94,025)        24,333

Other income (expense):
    Interest expense                                                     (24,054)       (21,621)        (8,748)
    Interest income                                                        1,522          1,946          1,248
    Gain on sale of assets                                                   556          2,709          1,692
    Other, net                                                              (120)          (173)           324
                                                                        --------       --------       --------
          Other income (expense), net                                    (22,096)       (17,139)        (5,484)
                                                                        --------       --------       --------
Income (loss) before income taxes                                        (56,818)      (111,164)        18,849

Income tax expense (benefit)                                             (15,976)       (27,951)         8,631
                                                                        --------       --------       --------
Income (loss) before extraordinary item                                  (40,842)       (83,213)        10,218

Extraordinary item, net of tax of $203                                      (420)          --             --
                                                                        --------       --------       --------
Net income (loss)                                                        (41,262)       (83,213)        10,218

Series A preferred stock redemption premium                                 --             --             (240)
                                                                        --------       --------       --------
Net income (loss) applicable to common stock                            $(41,262)      $(83,213)      $  9,978
                                                                        ========       ========       ========
Basic net income (loss) per common share                                $   (.25)      $   (.50)      $    .07
                                                                        ========       ========       ========
Basic weighted average shares outstanding                                165,108        164,944        145,854
                                                                        ========       ========       ========
Diluted net income (loss) per common share                              $   (.25)      $   (.50)      $    .07
                                                                        ========       ========       ========
Diluted weighted average shares outstanding                              165,108        164,944        149,724
                                                                        ========       ========       ========
</TABLE>


          See accompanying notes to consolidated financial statements.


                                      -31-
<PAGE>   32
                        GREY WOLF, INC. AND SUBSIDIARIES

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



<TABLE>
<CAPTION>
                                      Series B
                                       Junior
                                    Participating
                                      Preferred                 Common                                    Cumulative
                                        Stock                    Stock       Additional                  Comprehensive
                                       $1 par       Common     $.10 par      Paid-in                        Income
                                        Value       Shares       Value        Capital       Deficit       Adjustments     Total
                                      ---------     -------    ---------     ----------    ---------     -------------  ---------
<S>                                   <C>           <C>        <C>           <C>           <C>           <C>            <C>
Balance, December 31, 1996                 --       125,043    $  12,504     $  99,301     $ (46,755)    $    (404)     $  64,646

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

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

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

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

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

    Comprehensive income:
       Unrealized translation loss         --          --           --            --            --             (50)           (50)
       Net income                          --          --           --            --          10,218          --           10,218
                                      ---------     -------    ---------     ---------     ---------     ---------      ---------
    Total comprehensive income             --          --           --            --          10,218           (50)        10,168
                                      ---------     -------    ---------     ---------     ---------     ---------      ---------
Balance, December 31, 1997                 --       164,746       16,474       269,733       (36,537)         (454)       249,216

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

    Comprehensive income - net loss        --          --           --            --         (83,213)         --          (83,213)
                                      ---------     -------    ---------     ---------     ---------     ---------      ---------
Balance, December 31, 1998                 --       165,065       16,506       270,389      (119,750)         (454)       166,691

    Exercise of stock options              --           102           10           138          --            --              148

    Comprehensive income - net loss        --          --           --            --         (41,262)         --          (41,262)
                                      ---------     -------    ---------     ---------     ---------     ---------      ---------
Balance, December 31, 1999                 --       165,167    $  16,516     $ 270,527     $(161,012)    $    (454)     $ 125,577
                                      =========     =======    =========     =========     =========     =========      =========
</TABLE>


          See accompanying notes to consolidated financial statements.


                                      -32-
<PAGE>   33
                        GREY WOLF, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Amounts in thousands)


<TABLE>
<CAPTION>
                                                                               Years Ended December 31,
                                                                       ---------------------------------------
                                                                         1999           1998            1997
                                                                       ---------      ---------      ---------
<S>                                                                    <C>            <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net income (loss)                                                  $ (41,262)     $ (83,213)     $  10,218
    Adjustments to reconcile net income (loss) to net cash
    provided by (used in) operating activities:
       Depreciation and amortization                                      34,003         38,069         20,957
       Provision for asset impairment                                       --           93,193           --
       Provision for doubtful accounts                                       577          1,723           (200)
       Extraordinary item, net of taxes                                      420           --             --
       Gain on sale of assets                                               (556)        (2,709)        (1,692)
       Foreign exchange loss                                                 120            178           --
       Deferred income taxes                                             (15,155)       (27,033)         7,864
    (Increase) decrease in restricted cash                                  --             (312)           550
    (Increase) decrease in accounts receivable                            (6,788)        24,014        (28,336)
    (Increase) decrease in other current assets                              527          3,585         (1,064)
    Increase (decrease) in accounts payable trade                          7,345        (15,616)         8,783
    Increase (decrease) in accrued workers' compensation                  (1,431)         1,825            201
    Increase (decrease) in customer advances                                --             (478)        (2,841)
    Increase (decrease) in other current liabilities                       2,242         (1,327)         7,208
    Increase (decrease) in  minority interest                               --             --           (1,197)
    Increase (decrease) in other                                           2,488         (1,100)         1,332
                                                                       ---------      ---------      ---------
       Cash provided by (used in) operating activities                   (17,470)        30,799         21,783
                                                                       ---------      ---------      ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Property and equipment additions                                      (7,065)      (114,294)      (218,723)
    Proceeds from sales of equipment                                       1,054          4,386          5,382
                                                                       ---------      ---------      ---------
       Cash used in investing activities                                  (6,011)      (109,908)      (213,341)
                                                                       ---------      ---------      ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Proceeds from senior notes                                              --           75,000        174,161
    Proceeds from long-term debt                                             203         30,620         52,811
    Repayments of long-term debt                                          (1,099)       (31,304)       (78,141)
    Proceeds from sale of common stock                                      --             --           94,274
    Financing costs                                                         (861)        (3,626)        (5,086)
    Proceeds from exercise of stock options                                  148            688          1,702
    Redemption of Series A Preferred stock                                  (305)          --             (699)
                                                                       ---------      ---------      ---------
       Cash provided by (used in)  financing activities                   (1,914)        71,378        239,022
                                                                       ---------      ---------      ---------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                     (25,395)        (7,731)        47,464
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                              45,895         53,626          6,162
                                                                       ---------      ---------      ---------
CASH AND CASH EQUIVALENTS, END OF YEAR                                 $  20,500      $  45,895      $  53,626
                                                                       =========      =========      =========
</TABLE>


          See accompanying notes to consolidated financial statements.


                                      -33-
<PAGE>   34
                        GREY WOLF, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Amounts in thousands)


<TABLE>
<CAPTION>
                                                                                 Years Ended December 31,
                                                                      -------------------------------------------
                                                                        1999             1998               1997
                                                                      -------           -------            ------
<S>                                                                   <C>               <C>                <C>
SUPPLEMENTAL CASH FLOW DISCLOSURE
CASH PAID FOR INTEREST:                                               $22,625           $17,955            $2,572
                                                                      =======           =======            ======
CASH PAID FOR (REFUND OF) TAXES:                                      $   (15)          $(1,985)           $1,999
                                                                      =======           =======            ======


NON CASH TRANSACTIONS:

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

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

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


          See accompanying notes to consolidated financial statements.


                                      -34-
<PAGE>   35
                        GREY WOLF, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(1)    Summary of Significant Accounting Policies

         Nature of Operations. Grey Wolf, Inc. is a Texas corporation formed in
1980. Grey Wolf, Inc. is engaged in the business of providing onshore contract
drilling services to the oil and gas industry. Grey Wolf, Inc. and its
subsidiaries currently conduct operations in Alabama, Arkansas, Louisiana,
Mississippi and Texas and had operations in Venezuela until mid 1999, when
international operations were shut down. The consolidated financial statements
include the accounts of Grey Wolf, Inc. and its majority-owned subsidiaries
("the Company" or "Grey Wolf"). All significant intercompany accounts and
transactions are eliminated in consolidation.

         Property and Equipment. Property and equipment is stated at cost.
Depreciation is calculated using the straight-line method over the estimated
useful lives of the assets, between three and fifteen years. Effective January
1, 1998, the Company changed the depreciable lives of the majority of its
drilling rigs from 12 to 15 years to better reflect the useful lives of the
Company's refurbished and upgraded rig fleet.

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

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

         Foreign Currency Translation. Venezuela has a highly inflationary
economy as defined by Statement of Financial Accounting Standards No. 52,
"Foreign Currency Translation." As such, the Company's functional currency is
the U.S. dollar. Accordingly, monetary assets and liabilities denominated in
foreign currency are re-measured to U.S. dollars at the rate of exchange in
effect at the end of the period, items of income and expense and other
non-monetary amounts are re-measured at historical rates. Gains or losses on
foreign currency re-measurement are included in other income (expense), net in
the consolidated statement of operations. During the years ended December 31,
1999 and 1998, the Company recognized foreign exchange losses of $120,000 and
$178,000, respectively. Prior to 1998, assets and liabilities of foreign
subsidiaries were translated into United States dollars at the applicable rate
of exchange in effect at the end of the period reported. Revenues and expenses
were translated at the applicable weighted average rates of exchange in effect
during the period reported. Translation adjustments were reflected as a separate
component of shareholders' equity. Any transaction gains and losses were
included in net income. During 1997, the Company recorded unrealized translation
losses of $50,000 as a reduction of shareholders' equity.

         Income (Loss) per Share. Basic earnings per share is based on weighted
average shares outstanding without any dilutive effects considered. Diluted
earnings per share reflects dilution from all contingently issuable shares,
including options, warrants and convertible preferred stock. During 1999 and
1998, the Company's diluted earnings per share excludes all contingently
issuable shares as they were antidilutive. A reconciliation of the weighted
average common shares outstanding on a basic and diluted basis is as follows (in
thousands):


                                      -35-
<PAGE>   36
                        GREY WOLF, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
                                                                        1999              1998               1997
                                                                       -------           -------           -------
<S>                                                                    <C>               <C>               <C>
Weighted average common shares
    outstanding - Basic                                                165,108           164,944           145,854

Effect of dilutive securities:
    Options                                                                 -                 -              2,883
    Redeemable preferred stock                                              -                 -                329
    Warrants                                                                -                 -                658
                                                                       -------           -------           -------
                                                                            -                 -              3,870
                                                                       -------           -------           -------
Weighted average common shares
    outstanding - Diluted                                              165,108           164,944           149,724
                                                                       =======           =======           =======
</TABLE>

         Securities excluded from the computation of diluted earnings per share
for the years ended December 31, 1999 and 1998 that could potentially dilute
basic earnings per share in the future were options to purchase 5.7 million
shares and 5.3 million shares, respectively. Also excluded for the year ended
December 31, 1998 are 489,600 warrants to issue shares and 244,800 shares for
conversion of Mandatorily Redeemable Series A Preferred Stock. Since the Company
incurred a loss for the years ended December 31, 1999 and 1998, such diluted
securities were excluded as they would be anti-dilutive to basic earnings per
share.

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

         Interest Capitalization. Interest is capitalized on rig refurbishments
during the refurbishment period. Interest is capitalized to the rigs using an
allocation method based on the Company's actual interest cost. Total interest
capitalized for the years ended December 31, 1999, 1998 and 1997 was $0,
$874,000 and $1.8 million, respectively.

         Fair Value of Financial Instruments. The carrying amount of the
Company's cash and short-term investments approximates fair value because of the
short maturity of those instruments. The carrying amount of the Company's credit
facility approximates fair value as the interest is indexed to the prime rate or
LIBOR. The fair value of the senior notes at December 31, 1999 and 1998 was
$225.0 million and $203.0 million, respectively, compared to the carrying value
of $250 million. Fair value was estimated based on quoted market prices.

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

         Restricted Cash. Restricted cash consists of investments in interest
bearing certificates of deposit totaling $762,000 at December 31, 1999 and 1998,
as collateral for a letter of credit securing insurance deposits. The carrying
value of the investments approximates the current market value.

         Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires the use of certain
estimates and assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities. Actual results could
differ from those estimates.

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

         Comprehensive Income. During the first quarter of 1998, the Company
adopted Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income", which established standards for reporting and display of
comprehensive income and its components. Comprehensive income includes all
changes in a company's equity during the period that result from transactions
and other economic events, other than transactions with its stockholders. During
1999 and 1998 comprehensive income consisted only of net losses. In 1997, in
addition to net income, comprehensive income of the Company includes cumulative
translation losses.

         Recent Accounting Pronouncements. SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, was issued by the Financial
Accounting Standards Board in June 1998. SFAS 133 standardizes the accounting


                                      -36-
<PAGE>   37
                        GREY WOLF, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


for derivative instruments, including derivative instruments embedded in other
contracts. Under the standard, entities are required to carry all derivative
instruments in the statement of financial position at fair value. The accounting
for changes in the fair value (i.e. gains or losses) of a derivative instrument
depends on whether it has been designated and qualifies as part of a hedging
relationship and, if so, on the reason for holding it. If specified conditions
are met entities may elect to designate a derivative instrument as a hedge of
exposures to changes in fair values, cash flows, or foreign currencies. If the
hedged exposure is a fair value exposure, the gain or loss on the derivative
instrument is recognized in earnings and the period of change together with the
offsetting loss or gain on the hedge item attributable to the risk being hedged.
If the hedged exposure is a cash flow exposure, the effective portion of the
gain or loss on the derivative instrument is reported initially as a component
or other comprehensive income (outside earnings) and subsequently reclassified
into earnings when the forecasted transaction affects earnings. Any amounts
excluded from the assessment of hedge effectiveness, as well as the ineffective
portion of the gain or loss, is reported in earnings immediately. Accounting for
foreign currency hedges is similar to the accounting for fair value and cash
flow hedges. If the derivative instrument is not designated as a hedge, the gain
or loss is recognized in earnings in the period of change.

         We will adopt SFAS 133 for our fiscal year beginning January 1, 2001.
We have not determined the impact that SFAS 133 will have on our financial
statements and believe that the determination will not be meaningful until
closer to the date

(2)      SIGNIFICANT PROPERTY TRANSACTIONS

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

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

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

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

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

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


                                      -37-
<PAGE>   38
                        GREY WOLF, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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

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

         Since late 1996, all but nine of the idle rigs acquired in the above
transactions have been refurbished and are ready for service. These remaining
nine rigs are included in the Company's inventory of twelve rigs to be
refurbished as market conditions improve. Each of the Company's acquisitions
have been accounted for using purchase accounting. As such all revenues and
expenses have been recorded by the Company beginning at the date of acquisition.

         The following unaudited pro forma consolidated financial data for the
year ended December 31, 1998 includes the historical results of the Company for
the year ended December 31, 1998, and gives effect to the acquisition of Murco
and related borrowings under the bank credit facility, as if they had occurred
on January 1, 1998. Inventory rig purchases had no historical operations as the
rigs had been stacked and the impact on the unaudited pro forma consolidated
financial data is not material and has not been presented (amounts in
thousands).


<TABLE>
<CAPTION>
                                                                                 For the Year
                                                                              Ended December 31,
                                                                                     1998
                                                                              ------------------
<S>                                                                           <C>
       Total Revenues                                                         $      243,052
       Net income (loss) applicable
              to common stock                                                        (83,151)
       Net income (loss) per basic
              and diluted share                                                         (.50)
</TABLE>


(3)      INCOME TAXES

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


<TABLE>
<CAPTION>
                     For the Years Ended December 31,
                   ------------------------------------
                     1999          1998          1997
                   --------      --------      --------
<S>                <C>           <C>           <C>
Current
       Federal     $   --        $   (935)     $    949
       State           --            --             108
       Foreign         --              17          (290)
                   --------      --------      --------
                       --            (918)          767
                   ========      ========      ========
Deferred
       Federal      (15,460)      (23,377)        6,654
       State           (516)       (3,656)        1,210
       Foreign         --            --            --
                   --------      --------      --------
                   $(15,976)     $(27,033)     $  7,864
                   ========      ========      ========
</TABLE>


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


                                      -38-
<PAGE>   39
                        GREY WOLF, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
                                                 December 31,
                                            ----------------------
                                              1999          1998
                                            --------      --------
<S>                                         <C>           <C>
Deferred tax assets
       Net operating loss carryforwards     $ 38,469      $ 18,502
       Tax credit carryforwards                2,414         2,414
       Workers compensation accruals           2,044         2,281
       Other                                     409           423
                                            --------      --------
                                              43,336        23,620
       Valuation allowance                    (2,400)       (2,400)
                                            --------      --------
                                              40,936        21,220
Deferred tax liabilities
       Depreciation and amortization          71,706        67,348
                                            --------      --------

Net deferred tax liability                  $ 30,770      $ 46,128
                                            ========      ========
</TABLE>


       At December 31, 1999 and 1998, the Company had U.S. net operating loss
("NOL") carryforwards of $130.9 million and $69.4 million, respectively, which
expire at various times through 2019. In addition, the Company had investment
tax credit carryforwards ("ITC") of approximately $2.4 million which expire in
2000. The NOL and ITC carryfowards are subject to annual limitations as a result
of the changes in ownership of the Company in 1989, 1994 and 1996.

       For financial reporting purposes, approximately $21.0 million of the NOL
carryforwards was utilized to offset the book versus tax basis differential in
the recording of the assets acquired in the Mergers and the Mesa acquisition
prior to 1999.

       The following summarizes the differences between the federal statutory
tax rate of 35% (amounts in thousands):


<TABLE>
<CAPTION>
                                                       For the Years Ended December 31,
                                                     ------------------------------------
                                                       1999          1998          1997
                                                     --------      --------      --------
<S>                                                  <C>           <C>           <C>
Income tax expense (benefit) at statutory rate       $(19,886)     $(38,908)     $  6,597

Increase (decrease) in taxes resulting from:
       Expiration of NOL carryforwards                  2,479          --            --
       Permanent differences, primarily due to
            basis differences in acquired assets        1,127        10,004           838
       Loss of foreign deductions                         426         3,040           292
       State taxes (net)                                 (336)       (2,376)          857
       Other                                              214           289            47
                                                     --------      --------      --------
Income tax expense (benefit)                         $(15,976)     $(27,951)     $  8,631
                                                     ========      ========      ========
</TABLE>


                                      -39-
<PAGE>   40
                        GREY WOLF, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(4)    LONG-TERM DEBT

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


<TABLE>
<CAPTION>
                                                                        December 31,
                                                                   ---------------------
                                                                     1999         1998
                                                                   --------     --------
<S>                                                                <C>          <C>
$250,000 senior notes due 2007,
   general unsecured senior obligations guaranteed by the
   Company's domestic subsidiaries, bearing interest
   at 8 7/8% per annum payable semiannually                        $249,354     $249,268

Capital leases, secured by transportation and other equipment,
   bearing interest at 10% to 14%                                     1,439        2,421
                                                                   --------     --------
                                                                    250,793      251,689

Less current maturities                                                 831        1,162
                                                                   --------     --------
Long-term debt                                                     $249,962     $250,527
                                                                   ========     ========
</TABLE>


             Concurrently with the closing of the GWDC merger in June 1997, the
Company concluded a public offering of $175.0 million in principal amount of
senior notes. The senior notes bear interest at 87/8% per annum and mature July
1, 2007. The net proceeds from the sale of the Notes were used (i) to pay the
cash portion of the GWDC merger, (ii) to repay the Company's then outstanding
balance under its revolving line of credit from its commercial banks, (iii) to
pay the purchase price for the Kaiser-Francis Rig Purchase and the additional
rig purchases and (iv) for capital expenditures to refurbish certain of the
Company's rigs and for other general corporate purposes. The senior notes are
general unsecured senior obligations of the Company and are guaranteed, on a
joint and several basis, by all domestic wholly-owned subsidiaries of the
Company.

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

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

         Effective January 14, 1999, the Company terminated its senior secured
revolving credit facility ("the Bank Credit Facility") with a syndicate of
commercial banks. The Bank Credit Facility provided the Company with the ability
to borrow up to $50.0 million from time to time prior to April 30, 2000, subject
to the certain reductions with up to $5.0 million of such amount available for
letters of credit. Interest under the Bank Credit Facility accrued at a sliding
variable rate based on certain financial ratios of either LIBOR plus 1.75% to
2.5% or prime plus 0.75% to 1.5%. The Company paid commitment fees of 0.5% on
the unused portion of the Bank Credit Facility. The Bank Credit Facility was
secured by substantially all of the Company's assets and called for quarterly
interest payments on the outstanding balance. At December 31, 1998 and 1997,
there were no borrowings outstanding under the Bank Credit Facility.


                                      -40-
<PAGE>   41
                        GREY WOLF, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         Also on January 14, 1999, the Company entered into a new senior secured
revolving credit facility with The CIT Group/Business Credit, Inc. ("the CIT
Facility"), replacing its prior $50.0 million facility. The CIT Facility
provides the Company with the ability to borrow up to the lesser of $50.0
million or 50% of the orderly liquidation value (as defined in the agreement) of
marketable drilling rig equipment located in the 48 contiguous United States.
The CIT Facility is a four year revolving facility with periodic interest
payments at a floating rate based upon the Company's debt service coverage ratio
within a range of either LIBOR plus 1.75% to 3.5% or prime plus 0.25% to 1.5%.
During the first year of the CIT Facility the interest rate is fixed at LIBOR
plus 2.5% or prime plus 1%. The Company is required to pay a commitment fee of
0.375% per annum on the unused portion of the CIT Facility. In addition, the CIT
Facility contains certain affirmative and negative covenants including a minimum
appraisal value of the drilling rigs and related equipment plus certain
financial covenants which take effect if the Company's cash on hand and
borrowing capacity under the CIT Facility falls below $25.0 million.
Substantially all of the Company's assets, including its drilling equipment, are
pledged as collateral under the CIT Facility. The Company, however, retains the
option, subject to a minimum appraisal value, under the CIT Facility to extract
$75.0 million of the equipment out of the collateral pool for other purposes.
The Company currently has no borrowings outstanding under the CIT facility.

         With the closing of the CIT Facility the Company recognized a non-cash
extraordinary loss of $420,000, net of applicable tax benefit of $203,000,
related to the write-off of deferred financing costs associated with the Bank
Credit Facility.

         Annual maturities of the debt outstanding at December 31, 1999 for the
next five years are as follows (amounts in thousands): 2000 - $831; 2001 - $516;
2002 - $79; 2003 - $13; 2004 - $-0- and thereafter $249,354.

(5)      CAPITAL STOCK AND STOCK OPTION PLANS

         On November 3, 1997, the Company closed an offering of 25.0 million
shares of its common stock. The Company sold 12.5 million newly issued common
shares and certain shareholders sold 12.5 million additional shares at $8.00 per
share. The Company received proceeds, net of underwriting discount, of
approximately $95.0 million. Other costs incurred to complete the offering were
approximately $722,000 and were recorded as a reduction of additional paid-in
capital. The proceeds of the offering were used to pay down the Bank Credit
Facility and to complete the Murco Acquisition.

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

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

         The Company's 1982 Stock Option and Long-term Incentive Plan for Key
Employees ("the 1982 Plan") reserves 2,500,000 shares of the Company's common
stock for issuance upon the exercise of options. At December 31, 1998 options to
purchase 1,893,100 shares of common stock were available for grant under the
1982 Plan. The Company's 1987 Stock Option Plan for Non-Employee Directors ("the
1987 Director Plan") reserves 250,000 shares of common stock for issuance upon
the exercise of options and provides for the automatic grant of options to
purchase shares of common stock to any non-employee who becomes a director of
the Company. Options under the 1987 Director Plan to purchase 212,800 shares of
common stock were available for grant until June 30, 1997 when the plan was
canceled. The Company's 1996 Employee Stock Option Plan ("the 1996 Plan")
reserves 10,000,000 shares of the Company's common stock for issuance upon the
exercise of options. At December 31, 1999, options under the 1996 Plan to


                                      -41-
<PAGE>   42
                        GREY WOLF, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


purchase 4,940,975 shares of common stock were available for grant until July
29, 2006. The exercise price of stock options under the 1982 Plan, the 1987
Director Plan and the 1996 Plan approximates the fair market value of the stock
at the time the option is granted. The Company has 2,435,000 shares reserved for
other Incentive Stock Option Agreements between the Company and its' executive
officers and directors. One million five hundred thousand of the shares are
reserved for the Company's Chief Executive Officer and 500,000 are reserved for
one of the Company's directors. The options become exercisable in varying
increments over four to five-year periods and the majority of the options expire
on the tenth anniversary of the date of grant. The remaining shares are reserved
for non-employee directors and are immediately exercisable upon issuance. Stock
option activity for all plans was as follows (number of shares in thousands):


<TABLE>
<CAPTION>
                                                     Number                            Option
                                                    of Shares                        Price Range
                                                    ---------                    -------------------
<S>                                                 <C>                          <C>
           Outstanding December 31, 1996                  276                    $ 0.69    -  $ 1.00
                                                        3,758                    $ 1.13    -  $ 1.63
                                                          475                    $ 2.56    -  $ 2.88

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

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

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

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

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

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

                 Granted                                2,429                    $ .938    -  $ 1.50

                 Exercised                                (24)                   $  .69    -  $ 1.00
                                                          (78)                   $ 1.25    -  $ 1.50

                 Canceled                                 (21)                   $  .69    -  $ 1.00
                                                         (362)                   $ 1.25    -  $ 1.50
</TABLE>


                                      -42-
<PAGE>   43
                        GREY WOLF, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<S>                                                     <C>                      <C>
                                                         (204)                   $ 2.56    -  $ 3.69
                                                         (193)                   $ 4.06

           Outstanding December 31, 1999                2,325                    $  .69    -  $ 1.00
                                                        2,528                    $ 1.13    -  $ 1.75
                                                        1,340                    $ 2.50    -  $ 3.69
                                                          966                    $ 4.06    -  $ 4.38
                                                           10                    $ 8.25

           Exercisable December 31, 1999                3,396                    $  .69    -  $ 8.25
</TABLE>


          The Company applies APB Opinion 25 and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been recognized.
Had compensation cost for the Company's three stock-based compensation plans
been determined on the fair value at the grant dates for awards under those
plans consistent with the method of SFAS No. 123, the Company's net loss and
loss per share would have been adjusted to the pro forma amounts indicated below
(amounts in thousands, except per share amounts):


<TABLE>
<CAPTION>
                                                            1999         1998         1997
                                                          --------     --------     -------
<S>                                                       <C>          <C>          <C>
         Net income (loss)
             As reported                                  $(41,262)    $(83,213)    $10,218
             Pro forma                                    $(42,623)    $(84,563)    $ 9,531
         Earnings (loss) per share - basic and diluted
             As reported                                  $   (.25)    $   (.50)    $   .07
             Pro forma                                    $   (.26)    $   (.51)    $   .06
</TABLE>


         For purposes of determining compensation costs using the provisions of
SFAS No. 123, the fair value of option grants was determined using the
Black-Scholes option-valuation model. The key input variables used in valuing
the options were: risk-free interest rate based on the five-year Treasury
strips; dividend yield of zero; stock price volatility of 65%; and expected
option lives of five years.

(6)      SEGMENT AND GEOGRAPHIC INFORMATION

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


                                      -43-
<PAGE>   44
                        GREY WOLF, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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


<TABLE>
<CAPTION>
                                 For the Years Ended December 31,
                             ---------------------------------------
                               1999           1998           1997
                             ---------      ---------      ---------
<S>                          <C>            <C>            <C>
Revenues:
   Domestic                  $ 145,739      $ 232,276      $ 209,423
   Foreign                       1,464          8,703          6,500
                             ---------      ---------      ---------
                             $ 147,203      $ 240,979      $ 215,923
                             =========      =========      =========

Operating income (loss):
   Domestic                  $ (33,534)     $ (85,013)     $  26,822
   Foreign                      (1,188)        (9,012)        (2,489)
                             ---------      ---------      ---------
                             $ (34,722)     $ (94,025)     $  24,333
                             =========      =========      =========

Total assets:
   Domestic                  $ 448,469      $ 489,543      $ 515,683
   Foreign                       4,377         11,760         18,069
                             ---------      ---------      ---------
                             $ 452,846      $ 501,303      $ 533,752
                             =========      =========      =========
</TABLE>


       During 1999, operating income (loss) above includes unusual charges from
domestic operations of $320,000 and provisions for doubtful accounts from
domestic operations of $577,000 (See Note 11).

    During 1998, operating income (loss) above includes provisions for asset
impairments from domestic and foreign operations of $87.4 million and $5.8
million, respectively; unusual charges from domestic and foreign operations of
$525,000 and $1.2 million, respectively; and provisions for doubtful accounts
from domestic and foreign operations of $1.6 million and $137,000, respectively
(See Note 11 for additional information).

         Capital expenditures related to foreign operations in 1999, 1998 and
1997 were $257,000, $2.5 million and $3.6 million, respectively, while
depreciation expense was $437,000, $ 743,000 and $455,000, respectively.

         During the years ended December 31, 1999 and 1998, no customer
accounted for 10% or more of the Company's consolidated revenues. During the
year ended December 31, 1997, one domestic customer accounted for 10% of the
Company's consolidated revenues.

(7)      RELATED-PARTY TRANSACTIONS

         From time to time, in the normal course of business, the Company
purchases equipment from affiliates of two of the Company's directors. Total
purchases during 1999 and 1998 were $784,000 and $898,000.

         One of the Company's directors is a partner in a law firm that
performed legal services for the Company. During 1999, 1998 and 1997, the
Company paid the firm $41,000, $8,000 and $41,000, respectively.

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

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

(8)      LEASE COMMITMENTS

         Aggregate minimum lease payments required under noncancellable
operating leases having terms greater than one year are as follows as of
December 31, 1999: 2000 - $505,000; 2001 - $454,000; 2002 - $170,000; 2003 -
$83,000 and 2004 - $4,000.

         Lease payments under operating leases for 1999, 1998, and 1997 was
approximately $556,000, $458,000, and $268,000, respectively.


                                      -44-
<PAGE>   45
                        GREY WOLF, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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

(9)      CONTINGENCIES

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

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

(10)     EMPLOYEE BENEFIT PLAN

         The Company has a defined contribution employee benefit plan covering
substantially all of its employees. Prior to 1997, the Company matched
individual employee contributions up to 2% of the employee's compensation.
Effective January 1, 1997, the Company increased the matching provisions to
include matching 100% of the first 3% of individual employee contributions and
50% of the next 3% of individual employee contributions. Other provisions of the
plan were also amended. Employer matching contributions under the plan totaled
$771,000, $1.4 million, and $852,000 for the years ended December 31, 1999, 1998
and 1997, respectively. Participants vest in employer matching contributions
over a five year period based upon service with the Company.

(11)     PROVISION FOR ASSET IMPAIRMENT AND UNUSUAL CHARGES

         During the year ended December 31, 1999, the Company recorded pre-tax
unusual charges of $320,000 which consisted entirely of severance costs for
employees terminated during 1999.

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

         The non-cash asset impairment charge of $93.2 million was recorded in
accordance with Statement of Financial Accounting Standards No. 121, which
requires that long-lived assets and certain identifiable intangibles held and
used by the Company be reviewed for impairment whenever events or changes in
circumstance indicate that the carrying amount of an asset may not be
recoverable. The Company's review of its long-lived assets indicated that the
carrying value of certain of the Company's foreign and domestic drilling rigs
was more than the estimated undiscounted future net cash flows. As such, under
SFAS No. 121, the Company wrote-down those assets to their estimated fair market
value. Undiscounted future net cash flows were calculated on a rig by rig basis
using projected future utilization and day rates over the estimated useful lives
of the rigs. Fair market value was based on an appraisal performed by an
independent appraiser retained by the lender in connection with the CIT
Facility. The effect of this write-down is an after-tax charge of $69.8 million,
or $0.42 per share in 1998, and a reduction of approximately $6.0 million per
year in depreciation expense in future years. The impairment was recorded based
on certain estimates and projections as stipulated in SFAS No. 121.


                                      -45-
<PAGE>   46
                        GREY WOLF, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(12)     QUARTERLY FINANCIAL DATA (UNAUDITED)

         Summarized quarterly financial data for years ended December 31, 1999,
1998 and 1997 are set forth below (amounts in thousands, except per share
amounts).


<TABLE>
<CAPTION>
                                                         Quarter Ended
                                      --------------------------------------------------
                                        March         June        September     December
                                        1999          1999          1999          1999
                                      --------      --------      ---------     --------
<S>                                   <C>           <C>           <C>           <C>
Revenues                              $ 37,680      $ 23,748      $ 33,992      $ 51,783
Gross profit (loss) (1)                  1,855        (1,210)          891         5,320
Operating loss                          (7,902)      (11,478)       (9,650)       (5,692)
Loss before income taxes               (13,458)      (16,901)      (15,087)      (11,372)
Loss before extraordinary item          (9,069)      (12,237)      (11,460)       (8,076)
Net loss                                (9,489)      (12,237)      (11,460)       (8,076)
Net loss per common share - basic
     and diluted                          (.06)         (.07)         (.07)         (.05)
</TABLE>


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


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

---------------------

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


                                      -46-
<PAGE>   47
                                                                     SCHEDULE II


                        GREY WOLF, INC. AND SUBSIDIARIES

                        VALUATION AND QUALIFYING ACCOUNTS
                                 (In thousands)


<TABLE>
<CAPTION>
                                                                     Balance at  Additions   Collections   Balance at
                                                                     Beginning   Charged to      and         End
                                                                     of Period   Allowance    Write-Offs   of Period
                                                                     ---------   ---------    ----------   ---------
<S>                                                                  <C>         <C>          <C>          <C>
Year Ended December 31, 1997
     Allowance for doubtful accounts receivable                       $ 1,333     $  (200)     $   (80)     $ 1,053
                                                                      =======     =======      =======      =======
Year Ended December 31, 1998
     Allowance for doubtful accounts receivable                       $ 1,053     $ 1,723      $(1,670)     $ 1,106
                                                                      =======     =======      =======      =======
Year Ended December 31, 1999
     Allowance for doubtful accounts receivable                       $ 1,106     $   577      $    25      $ 1,708
                                                                      =======     =======      =======      =======
</TABLE>


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

     None.


                                      -47-
<PAGE>   48
                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information required by this item as to our directors and executive
officers is hereby incorporated by reference to such information appearing under
the captions "Election of Directors" and "Executive Officers" in our definitive
proxy statement for our 2000 Annual Meeting of Shareholders and is to be filed
with the Securities and Exchange Commission ("the Commission") pursuant to the
Securities Exchange Act of 1934 within 120 days of the end of our fiscal year on
December 31, 1999.

ITEM 11.  EXECUTIVE COMPENSATION

     The information required by this item as to the compensation of our
management is hereby incorporated by reference to such information appearing
under the caption "Executive Compensation" in our definitive proxy statement for
our 2000 Annual Meeting of Shareholders and is to be filed with the Commission
pursuant to the Securities Exchange Act of 1934 within 120 days of the end of
our fiscal year on December 31, 1999.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required by this item as to the ownership by our management
and others of our securities is hereby incorporated by reference to such
information appearing under the caption "Nominees for Director" and "Certain
Shareholders" in our definitive proxy statement for our 2000 Annual Meeting of
Shareholders and is to be filed with the Commission pursuant to the Securities
Exchange Act of 1934 within 120 days of the end of our fiscal year on December
31, 1999.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required by this item as to certain business relationships
and transactions with our management and other parties related to us is hereby
incorporated by reference to such information appearing under the caption
"Certain Transactions" in our definitive proxy statement for our 2000 Annual
Meeting of Shareholders and is to be filed with the Commission pursuant to the
Securities Exchange Act of 1934 within 120 days of the end of our fiscal year on
December 31, 1999.


                                      -48-
<PAGE>   49
                                     PART IV

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

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

         1. AND 2. FINANCIAL STATEMENTS AND SCHEDULE

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

         3.  EXHIBITS

<TABLE>
<CAPTION>
             Exhibit No.            Documents
             -----------            ---------
<S>                           <C>   <C>
               2.1            --    Agreement and Plan of Merger dated May 7, 1996, among DI Industries, Inc., DI
                                    Merger Sub, Inc., Roy T. Oliver, Inc. and Land Rig Acquisition Corp. (incorporated
                                    herein by reference to Exhibit 2.1 to Registration Statement No. 333-6077).
               2.1.1          --    Amendment to Agreement and Plan of Merger dated May 7, 1996, among DI
                                    Industries, Inc., DI Merger Sub, Inc., Roy T. Oliver, Jr., Mike L. Mullen, R.T.
                                    Oliver, Inc. and Land Rig Acquisition Corp. (incorporated herein by reference to
                                    Exhibit 2.1.1 to Registration Statement No. 333-6077).
               2.1.2          --    Second Amendment and Plan of Merger dated July 26, 1996, among DI Industries,
                                    Inc., DI Merger Sub, Inc., Roy T. Oliver, Jr., Mike L. Mullen, R.T. Oliver, Inc. and
                                    Land Rig Acquisition Corp. (incorporated herein by reference to Exhibit 2.1.2 to
                                    Amendment No. 1 to Registration Statement No. 333-6077).
               2.2            --    Agreement and Plan of Merger dated May 7, 1996, among DI Industries, Inc. and
                                    Somerset Investment Corp. (incorporated herein by reference to Exhibit 2.2 to
                                    Registration Statement No. 333-6077).
               2.2.1          --    Amendment to Agreement and Plan of Merger dated May 7, 1996, among DI
                                    Industries, Inc. and Somerset Investment Corp. (incorporated herein by reference
                                    to Exhibit 2.2.1 to Registration Statement No. 333-6077).
               2.2.2          --    Second Amendment to Agreement and Plan of Merger dated July 26, 1996, among
                                    DI Industries, Inc. and Somerset Investment Corp. (incorporated herein by reference
                                    to Exhibit 2.2.2 to Amendment No. 1 to Registration Statement No. 333-6077).
               2.3            --    Asset Purchase Agreement dated October 3, 1996, by and between the DI
                                    Industries, Inc. and Meritus, Inc., a Texas corporation, Mesa Rig 4 L.L.C., a Texas
                                    limited liability company, Mesa Venture, a Texas general partnership and Mesa
                                    Drilling, Inc., a Texas corporation (incorporated by reference to Exhibit 2.1 to
                                    Registration no. 333-14783).
               2.4.1          --    Asset Purchase Agreement dated November 12, 1996, between Diamond M
                                    Onshore, Inc. and Drillers, Inc. (the Asset Purchase Agreement") (incorporated
                                    herein by reference to Exhibit 2.1 to Form 8-K dated December 30, 1996).
               2.4.2          --    Letter Agreement dated December 31, 1996, between Diamond M Onshore and
                                    Drillers, Inc. amending the Asset Purchase Agreement (incorporated herein by
                                    reference to Exhibit 2.2 to Form 8-K dated December 30, 1996).
               2.5            --    Asset Purchase Agreement dated December 31, 1996, between Flournoy Drilling
                                    Company and Drillers, Inc. (incorporated herein by reference to Exhibit 2.1 to Form
                                    8-K filed January 31, 1997).
</TABLE>


                                      -49-
<PAGE>   50
<TABLE>
<S>                           <C>   <C>
                2.6           --    Agreement and Plan of Merger dated March 7, 1997, by and among DI Industries,
                                    Inc., Drillers Inc., and Grey Wolf Drilling Company including form of Escrow
                                    Agreement, form of Trust Under Grey Wolf Drilling Company Deferred
                                    Corporation Plan, and form of Grey Wolf Drilling Company Deferred
                                    Compensation Plan (incorporated herein by reference to Exhibit 10.1 to Form 8-K
                                    filed March 10, 1997).
                2.7           --    Voting and Support Agreement dated March 7, 1997, of Sheldon B. Lubar
                                    (incorporated herein by reference to Exhibit
                                    10.2 to Form 8-K dated March 10, 1997).
                2.8           --    Voting and Support Agreement dated March 7, 1997, of Felicity Ventures, Ltd.
                                    (incorporated herein by reference to Exhibit
                                    10.3 to Form 8-K dated March 10, 1997).
                2.9           --    Voting and Support Agreement dated March 7, 1997, of James K.B. Nelson
                                    (incorporated herein by reference to Exhibit
                                    10.4 to Form 8-K dated March 10, 1997).
                2.10          --    Indemnification Agreement dated as of March 6, 1997, by and between Grey Wolf
                                    Drilling Company and James K.B. Nelson (incorporated herein by reference to
                                    Exhibit 10.5 to Form 8-K dated March 10, 1997).
                2.11          --    Indemnification Agreement dated as of March 6, 1997, by and between Grey Wolf
                                    Drilling Company and Tom L. Ferguson (incorporated herein by reference to
                                    Exhibit 10.8 to Form 8-K dated March 10, 1997).
                2.12          --    Indemnification Agreement dated as of March 6, 1997, by and between Grey Wolf
                                    Drilling Company and Janet V. Campbell (incorporated herein by reference to
                                    Exhibit 10.10 to Form 8-K dated March 10, 1997).
                2.13          --    Indemnification Agreement dated as of March 6, 1997, by and between Grey Wolf
                                    Drilling Company and Sheldon B. Lubar (incorporated herein by reference to
                                    Exhibit 10.11 to Form 8-K dated March 10, 1997).
                2.14          --    Indemnification Agreement dated as of March 6, 1997, by and between Grey Wolf
                                    Drilling Company and Robert P. Probst (incorporated herein by reference to Exhibit
                                    10.12 to Form 8-K dated March 10, 1997).
                2.15          --    Indemnification Agreement dated as of March 6, 1997, by and between Grey Wolf
                                    Drilling Company and Uriel E. Dutton (incorporated herein by reference to Exhibit
                                    10.13 to Form 8-K dated March 10, 1997).
                3.1           --    Articles of Incorporation of Grey Wolf, Inc., as amended (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           --    Form of Trust Indenture, dated June 20, 1997, relating to the senior notes due 2007
                                    of the Company and Texas Commerce Bank National Association, as Trustee
                                    (incorporated herein by reference to Exhibit 4.2 to the Company's Registration
                                    Statement on Form S-3 No. 333-26519 filed June 24, 1997).
                4.2           --    Form of Trust Indenture, dated May 8, 1998, relating to the senior notes due 2007
                                    by and among the Company, the Guarantors, and Chase Bank of Texas, National
                                    Association, as Trustee (incorporated herein by reference to Exhibit 4.3 to Form 8-
                                    K filed May 21, 1998).
                4.3           --    Rights Agreement dated as of September 21, 1998 by and between the Company
                                    and American Stock Transfer and Trust Company as Rights Agent (incorporated
                                    herein by reference to Exhibit 4.1 to Form 8-K filed September 22, 1998).
               10.1           --    Shareholders' Agreement dated May 7, 1996, among Somerset Drilling Associates,
                                    L.L.C., Roy T. Oliver, Jr., U.S. Rig and Equipment, Inc., Mike Mullen Energy
                                    Equipment Resource, Inc., GCT Investments, Inc., Mike L. Mullen, Norex Drilling
                                    Ltd., and Pronor Holdings, Ltd. (incorporated herein by reference to Exhibit 10.9
                                    to Registration Statement No. 333-6077).
</TABLE>


                                      -50-
<PAGE>   51
<TABLE>
<S>                           <C>   <C>
             10.1.1           --    Amendment to Shareholders' Agreement dated May 7, 1996, among Somerset
                                    Drilling Associates, L.L.C., Somerset Capital Partners, Roy T. Oliver, Jr., U.S. Rig
                                    and Equipment, Inc., Mike Mullen Energy Equipment Resource, Inc., GCT
                                    Investments, Inc., Mike L. Mullen, Norex Drilling Ltd., and Pronor Holdings, Ltd.
                                    (incorporated herein by reference to Exhibit 10.9.1 to Registration Statement No.
                                    333-6077).
             10.2             --    Form of Shadow Warrant to be issued to the shareholders of Somerset Investment
                                    Corporation. (incorporated herein by reference to Exhibit 10.10 to Registration
                                    Statement No. 333-6077).
             10.3             --    Form of Shadow Warrant to be issued to the shareholders of R.T. Oliver, Inc. And
                                    Land Rig Acquisition Corporation (incorporated herein by reference to Exhibit
                                    10.11 to Registration Statement No. 333-6077).
             10.4             --    Registration Rights Agreement dated May 7, 1996, among Somerset Drilling
                                    Associates, L.L.C., Roy T. Oliver, Jr., U.S. Rig and Equipment, Inc., Mike Mullen
                                    Energy Equipment Resource, Inc., GCT Investments, Inc., Norex Drilling Ltd., and
                                    Pronor Holdings, Ltd. (incorporated herein by reference to Exhibit 10.12 to
                                    Registration Statement No. 333-6077)
             10.4.1           --    Amendment to Registration Rights Agreement dated May 7, 1996, among Somerset
                                    Drilling Associates, L.L.C., Somerset Capital Partners, Roy T. Oliver, Jr., U.S. Rig
                                    and Equipment, Inc., Mike Mullen Energy Equipment Resource, Inc., GCT
                                    Investments, Inc., Norex Drilling Ltd., and Pronor Holdings, Ltd. (incorporated
                                    herein by reference to Exhibit 10.12.1 to Registration Statement No. 333-6077).
             10.4.2           --    Second Amendment to Registration Rights Agreement dated July 26, 1996, among
                                    Somerset Drilling Associates, L.L.C., Somerset Capital partners, Roy T. Oliver, Jr.,
                                    U.S. Rig and Equipment, Inc., Mike Mullen Energy Equipment Resource, Inc.,
                                    GCT Investments, Inc., Norex Drilling Ltd., and Pronor Holdings, Ltd.
                                    (incorporated herein by reference to Exhibit 10.4.2 to Amendment No. 1 to
                                    Registration Statement No. 333-6077).
             10.5             --    Investment Monitoring Agreement dated May 7, 1996, among Grey Wolf, Inc.,
                                    Somerset Capital Partners and Somerset Drilling Associates, L.L.C. (incorporated
                                    herein by reference to Exhibit 10.13 to Registration Statement No. 333-6077).
             10.6             --    Form of Non-Competition Agreement to be executed among Grey Wolf, Inc., Roy
                                    T. Oliver, Jr., U.S. Rig and Equipment, Inc., Mike L. Mullen and Mike Mullen
                                    Energy Equipment Resource, Inc. (incorporated herein by reference to Exhibit
                                    10.14 to Registration Statement No. 333-6077).
             10.7             --    Employment Agreement dated September 3, 1996, by and between the Company
                                    and Thomas P. Richards (incorporated herein by reference to Exhibit 10.1 to
                                    Registration Statement No. 333-14783).
             10.8             --    Form of Non-Qualified Stock Option Agreement dated September 3, 1996, by and
                                    between the Company and Thomas P. Richards (incorporated herein by reference
                                    to Exhibit 10.2 to Registration Statement No. 333-14783).
             10.11            --    Employment Agreement dated September 17, 1996, by and between the Company
                                    and Forrest M. Conley, Jr. (incorporated herein by reference to Exhibit 10.11 to
                                    Post Effective Amendment No. 1 to Registration Statement No. 333-14783).
             10.12            --    Form of Incentive Stock Option Agreement dated September 17, 1996, by and
                                    between the Company and Forrest M. Conley, Jr. (incorporated herein by reference
                                    to Exhibit 10.12 to Post Effective Amendment No. 1 to Registration Statement No.
                                    333-14783).
             10.13            --    Employment Agreement dated September 3, 1996, by and between the Company
                                    and Ronnie E. McBride (incorporated herein by reference to Exhibit 10.13 to Post
                                    Effective Amendment No. 1 to Registration Statement No. 333-14783).
             10.14            --    Form of Incentive Stock Option Agreement dated September 3, 1996, by and
                                    between the Company and Ronnie E. McBride (incorporated herein by reference
                                    to Exhibit 10.14 to Post Effective Amendment No. 1 to Registration Statement No.
                                    333-14783).
</TABLE>


                                      -51-
<PAGE>   52
<TABLE>
<S>                           <C>   <C>
               10.15          --    Form of Non-Qualified Stock Option Agreement dated September 3, 1996, by and
                                    between the Company and Ronnie E. McBride. (incorporated herein by reference
                                    to Exhibit 10.15 to Post Effective Amendment No. 1 to Registration Statement No.
                                    333-14783).
               10.16          --    Grey Wolf, Inc.  1996 Employee Stock Option Plan (incorporated herein by
                                    reference to Grey Wolf, Inc. 1996 Annual Meeting of Shareholders definitive proxy
                                    materials).
               10.17          --    Stock Purchase Agreement dated as of December 28, 1996, between Grey Wolf,
                                    and Wexford Special Situations 1996, L.P., Wexford-Euris Special Situations 1996,
                                    L.P., Wexford Special Situations 1996 Institutional, L.P. and Wexford Special
                                    Situations 1996 Limited (incorporated herein by reference to Exhibit 10.1 to Form
                                    8-K dated December 30, 1996).
               10.18          --    Amended and Restated Senior Secured Revolving Credit Agreement dated as of
                                    April 30, 1997 among DI Industries, Inc. and Drillers, Inc. (as borrowers), DI
                                    International, Inc. (as guarantor), Bankers Trust Company, as Agent, \ING (US)
                                    Capital Corporation, as Co-agent, and various financial institutions, as Lenders.
                                    (incorporated herein by reference to Exhibit 10.1 to Registration Statement No.
                                    333-26519).
               10.19          --    Amendment to the Credit Facility dated June 6, 1997 (incorporated herein by
                                    reference to Exhibit 10.2 to Amendment No. 1 to Registration Statement No. 333-
                                    26519).
               10.20          --    Amendment to Credit Facility dated June 23, 1997. (incorporated herein by
                                    reference to Grey Wolf, Inc. Annual Report on Form 10-K for the year ended
                                    December 31, 1997.)
               10.22          --    Form of Shareholder Agreement entered into January 31, 1997, by Grey Wolf, Inc.,
                                    Drillers, Inc., and Lucien Flournoy, Maxine E. Flournoy, Betty Louise Flournoy
                                    Fields, Helen Ruth Flournoy Pope, Mary Anne Flournoy Guthrie, F.C. West,
                                    Gregory M. Guthrie, Byron W. Fields, John B. Pope, the Flournoy First, Second
                                    and Third Fields Grandchild Trusts, the Flournoy First, Second and Third Pope
                                    Grandchild Trusts, and the Flournoy First, Second, Third, Fourth and Fifth Guthrie
                                    Grandchild Trusts (incorporated herein by reference to Exhibit 10.22 to
                                    Amendment No. 2 to Registration Statement No. 333-20423).
               10.23          --    Drillers Inc. 1982 Stock Option and Long-Term Incentive Plan for Key Employees
                                    (incorporated by reference to Drillers Inc. 1982 Annual Meeting definitive proxy
                                    solicitation materials.)
               10.24          --    Grey Wolf, Inc. 1987 Stock Option Plan for Non-Employee Directors.
                                    (incorporated by reference to  Grey Wolf, Inc. 1987 Annual Meeting definitive
                                    proxy solicitation materials.)
               10.25         --     Form of Non-Qualified Stock Option Agreement dated December 16, 1996, by and
                                    between the Company and Forrest M. Conley, Jr. (incorporated by reference to DI
                                    Industries, Inc. Annual Report on Form 10-K for the year ended December 31,
                                    1996.)
               10.26          --    Employment Agreement dated March 17, 1997, by and between the Company and
                                    Gary D. Lee. (incorporated by reference to DI Industries, Inc. Annual Report of
                                    Form 10-K for the year ended December 31, 1996.)
               10.27          --    Form of Incentive Stock Option Agreement dated March 17, 1997, by and between
                                    the Company and Gary D. Lee (incorporated by reference to DI Industries, inc.
                                    Annual Report of Form 10-K for the year ended December 31, 1996.)
               10.28          --    Stock Purchase Agreement by and among Grey Wolf Drilling Company, Grey
                                    Wolf, Inc., Murco Drilling Corporation, et al., dated December 30, 1997.
                                    (incorporated by reference to Exhibit 10.1 to Form 8-K dated February 5, 1998)
               10.29          --    Employment Agreement dated January 1, 1998, by and between the Company and
                                    David W. Wehlmann (incorporated herein by reference to Grey Wolf, Inc. Annual
                                    Report on Form 10-K for the year ended December 31, 1997.)
               10.30          --    Form of Incentive Stock Option Agreement dated February 10, 1998, by and
                                    between the Company and David W. Wehlmann (incorporated herein by reference
</TABLE>


                                      -52-
<PAGE>   53
<TABLE>
<S>                           <C>   <C>
                                    to Grey Wolf, Inc. Annual Report on Form 10-K for the year ended December 31,
                                    1997.)
               10.31          --    Revolving Credit Agreement dated as of January 14, 1999 among Grey Wolf
                                    Drilling Company LP (as borrower), Grey Wolf, Inc. (as guarantor), The CIT
                                    Group/Business Credit, Inc. (as agent) and various financial institutions (as
                                    lenders).  (incorporated herein by reference to Exhibit 10.1 to Form 8-K dated
                                    January 26, 1999.)
              *10.32          --    Employment Agreement dated January 16, 1999, by and between the Company and Edward
                                    S. Jacob, III.
              *10.33          --    Form of Non-Qualified Stock Option Agreement dated January 16, 1999, by and between the
                                    Company and Edward S. Jacob, III.
               16.1           --    Change in Certifying Accountant. (incorporated by reference to Exhibit 16.1 to 8-K
                                    filed on October 2, 1996)
              *21.1           --    List of Subsidiaries of Grey Wolf, Inc.
              *23.1           --    Consent of KPMG LLP
              *27.            --    Financial Data Schedule
</TABLE>


---------------
* Filed herewith

                 (b)   Reports on Form 8-K

                       None


                                      -53-
<PAGE>   54
                                   SIGNATURES


                 Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, this
7th day of March, 2000

                                 Grey Wolf, Inc.



                                 By:  /s/ THOMAS  P. RICHARDS
                                    --------------------------------------------
                                     Thomas P. Richards, Chairman, President and
                                     Chief Executive Officer




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


<TABLE>
<CAPTION>
Signatures and Capacities                                                                                 Date
-------------------------                                                                            --------------
<S>                                                                                                  <C>
  By:    /s/ THOMAS P. RICHARDS                                                                      March 7, 2000
        ------------------------------------------------------------------------
        Thomas P. Richards, Chairman, President and Chief Executive Officer
        (Principal Executive Officer)

  By:    /s/ DAVID W. WEHLMANN                                                                       March 7, 2000
        ------------------------------------------------------------------------
        David W. Wehlmann, Senior Vice President and Chief Financial Officer

  By:   /s/ MERRIE S. COSTLEY                                                                        March 7, 2000
        ------------------------------------------------------------------------
        Merrie S. Costley, Vice President and Controller

  By:    /s/  WILLIAM R. ZIEGLER                                                                     March 7, 2000
        ------------------------------------------------------------------------
        William R. Ziegler, Director

  By:    /s/  WILLIAM T. DONOVAN                                                                     March 7, 2000
        ------------------------------------------------------------------------
        William T. Donovan, Director

  By:                                                                                                March 7, 2000
        ------------------------------------------------------------------------
        James K. B. Nelson, Director

  By:   /s/ ROY T. OLIVER, JR.                                                                       March 7, 2000
        ------------------------------------------------------------------------
        Roy T. Oliver, Jr., Director

  By:                                                                                                March 7, 2000
        ------------------------------------------------------------------------
        Ivar Siem, Director

  By:                                                                                                March 7, 2000
        ------------------------------------------------------------------------
        Steven A. Webster, Director
</TABLE>


                                      -54-
<PAGE>   55
                                 EXHIBIT INDEX


<TABLE>
<CAPTION>
             Exhibit No.            Documents
             -----------            ---------
<S>                           <C>   <C>
                2.1           --    Agreement and Plan of Merger dated May 7, 1996, among DI Industries, Inc., DI
                                    Merger Sub, Inc., Roy T. Oliver, Inc. and Land Rig Acquisition Corp. (incorporated
                                    herein by reference to Exhibit 2.1 to Registration Statement No. 333-6077).
              2.1.1           --    Amendment to Agreement and Plan of Merger dated May 7, 1996, among DI
                                    Industries, Inc., DI Merger Sub, Inc., Roy T. Oliver, Jr., Mike L. Mullen, R.T.
                                    Oliver, Inc. and Land Rig Acquisition Corp. (incorporated herein by reference to
                                    Exhibit 2.1.1 to Registration Statement No. 333-6077).
              2.1.2           --    Second Amendment and Plan of Merger dated July 26, 1996, among DI Industries,
                                    Inc., DI Merger Sub, Inc., Roy T. Oliver, Jr., Mike L. Mullen, R.T. Oliver, Inc. and
                                    Land Rig Acquisition Corp. (incorporated herein by reference to Exhibit 2.1.2 to
                                    Amendment No. 1 to Registration Statement No. 333-6077).
                2.2           --    Agreement and Plan of Merger dated May 7, 1996, among DI Industries, Inc. and
                                    Somerset Investment Corp. (incorporated herein by reference to Exhibit 2.2 to
                                    Registration Statement No. 333-6077).
              2.2.1           --    Amendment to Agreement and Plan of Merger dated May 7, 1996, among DI
                                    Industries, Inc. and Somerset Investment Corp. (incorporated herein by reference
                                    to Exhibit 2.2.1 to Registration Statement No. 333-6077).
              2.2.2           --    Second Amendment to Agreement and Plan of Merger dated July 26, 1996, among
                                    DI Industries, Inc. and Somerset Investment Corp. (incorporated herein by reference
                                    to Exhibit 2.2.2 to Amendment No. 1 to Registration Statement No. 333-6077).
                2.3           --    Asset Purchase Agreement dated October 3, 1996, by and between the DI
                                    Industries, Inc. and Meritus, Inc., a Texas corporation, Mesa Rig 4 L.L.C., a Texas
                                    limited liability company, Mesa Venture, a Texas general partnership and Mesa
                                    Drilling, Inc., a Texas corporation (incorporated by reference to Exhibit 2.1 to
                                    Registration no. 333-14783).
              2.4.1           --    Asset Purchase Agreement dated November 12, 1996, between Diamond M
                                    Onshore, Inc. and Drillers, Inc. (the Asset Purchase Agreement") (incorporated
                                    herein by reference to Exhibit 2.1 to Form 8-K dated December 30, 1996).
              2.4.2           --    Letter Agreement dated December 31, 1996, between Diamond M Onshore and
                                    Drillers, Inc. amending the Asset Purchase Agreement (incorporated herein by
                                    reference to Exhibit 2.2 to Form 8-K dated December 30, 1996).
                2.5           --    Asset Purchase Agreement dated December 31, 1996, between Flournoy Drilling
                                    Company and Drillers, Inc. (incorporated herein by reference to Exhibit 2.1 to Form
                                    8-K filed January 31, 1997).
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                2.6           --    Agreement and Plan of Merger dated March 7, 1997, by and among DI Industries,
                                    Inc., Drillers Inc., and Grey Wolf Drilling Company including form of Escrow
                                    Agreement, form of Trust Under Grey Wolf Drilling Company Deferred
                                    Corporation Plan, and form of Grey Wolf Drilling Company Deferred
                                    Compensation Plan (incorporated herein by reference to Exhibit 10.1 to Form 8-K
                                    filed March 10, 1997).
                2.7           --    Voting and Support Agreement dated March 7, 1997, of Sheldon B. Lubar
                                    (incorporated herein by reference to Exhibit
                                    10.2 to Form 8-K dated March 10, 1997).
                2.8           --    Voting and Support Agreement dated March 7, 1997, of Felicity Ventures, Ltd.
                                    (incorporated herein by reference to Exhibit
                                    10.3 to Form 8-K dated March 10, 1997).
                2.9           --    Voting and Support Agreement dated March 7, 1997, of James K.B. Nelson
                                    (incorporated herein by reference to Exhibit
                                    10.4 to Form 8-K dated March 10, 1997).
                2.10          --    Indemnification Agreement dated as of March 6, 1997, by and between Grey Wolf
                                    Drilling Company and James K.B. Nelson (incorporated herein by reference to
                                    Exhibit 10.5 to Form 8-K dated March 10, 1997).
                2.11          --    Indemnification Agreement dated as of March 6, 1997, by and between Grey Wolf
                                    Drilling Company and Tom L. Ferguson (incorporated herein by reference to
                                    Exhibit 10.8 to Form 8-K dated March 10, 1997).
                2.12          --    Indemnification Agreement dated as of March 6, 1997, by and between Grey Wolf
                                    Drilling Company and Janet V. Campbell (incorporated herein by reference to
                                    Exhibit 10.10 to Form 8-K dated March 10, 1997).
                2.13          --    Indemnification Agreement dated as of March 6, 1997, by and between Grey Wolf
                                    Drilling Company and Sheldon B. Lubar (incorporated herein by reference to
                                    Exhibit 10.11 to Form 8-K dated March 10, 1997).
                2.14          --    Indemnification Agreement dated as of March 6, 1997, by and between Grey Wolf
                                    Drilling Company and Robert P. Probst (incorporated herein by reference to Exhibit
                                    10.12 to Form 8-K dated March 10, 1997).
                2.15          --    Indemnification Agreement dated as of March 6, 1997, by and between Grey Wolf
                                    Drilling Company and Uriel E. Dutton (incorporated herein by reference to Exhibit
                                    10.13 to Form 8-K dated March 10, 1997).
                3.1           --    Articles of Incorporation of Grey Wolf, Inc., as amended (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           --    Form of Trust Indenture, dated June 20, 1997, relating to the senior notes due 2007
                                    of the Company and Texas Commerce Bank National Association, as Trustee
                                    (incorporated herein by reference to Exhibit 4.2 to the Company's Registration
                                    Statement on Form S-3 No. 333-26519 filed June 24, 1997).
                4.2           --    Form of Trust Indenture, dated May 8, 1998, relating to the senior notes due 2007
                                    by and among the Company, the Guarantors, and Chase Bank of Texas, National
                                    Association, as Trustee (incorporated herein by reference to Exhibit 4.3 to Form 8-
                                    K filed May 21, 1998).
                4.3           --    Rights Agreement dated as of September 21, 1998 by and between the Company
                                    and American Stock Transfer and Trust Company as Rights Agent (incorporated
                                    herein by reference to Exhibit 4.1 to Form 8-K filed September 22, 1998).
               10.1           --    Shareholders' Agreement dated May 7, 1996, among Somerset Drilling Associates,
                                    L.L.C., Roy T. Oliver, Jr., U.S. Rig and Equipment, Inc., Mike Mullen Energy
                                    Equipment Resource, Inc., GCT Investments, Inc., Mike L. Mullen, Norex Drilling
                                    Ltd., and Pronor Holdings, Ltd. (incorporated herein by reference to Exhibit 10.9
                                    to Registration Statement No. 333-6077).
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<PAGE>   57
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             10.1.1           --    Amendment to Shareholders' Agreement dated May 7, 1996, among Somerset
                                    Drilling Associates, L.L.C., Somerset Capital Partners, Roy T. Oliver, Jr., U.S. Rig
                                    and Equipment, Inc., Mike Mullen Energy Equipment Resource, Inc., GCT
                                    Investments, Inc., Mike L. Mullen, Norex Drilling Ltd., and Pronor Holdings, Ltd.
                                    (incorporated herein by reference to Exhibit 10.9.1 to Registration Statement No.
                                    333-6077).
               10.2           --    Form of Shadow Warrant to be issued to the shareholders of Somerset Investment
                                    Corporation. (incorporated herein by reference to Exhibit 10.10 to Registration
                                    Statement No. 333-6077).
               10.3           --    Form of Shadow Warrant to be issued to the shareholders of R.T. Oliver, Inc. And
                                    Land Rig Acquisition Corporation (incorporated herein by reference to Exhibit
                                    10.11 to Registration Statement No. 333-6077).
               10.4           --    Registration Rights Agreement dated May 7, 1996, among Somerset Drilling
                                    Associates, L.L.C., Roy T. Oliver, Jr., U.S. Rig and Equipment, Inc., Mike Mullen
                                    Energy Equipment Resource, Inc., GCT Investments, Inc., Norex Drilling Ltd., and
                                    Pronor Holdings, Ltd. (incorporated herein by reference to Exhibit 10.12 to
                                    Registration Statement No. 333-6077)
             10.4.1           --    Amendment to Registration Rights Agreement dated May 7, 1996, among Somerset
                                    Drilling Associates, L.L.C., Somerset Capital Partners, Roy T. Oliver, Jr., U.S. Rig
                                    and Equipment, Inc., Mike Mullen Energy Equipment Resource, Inc., GCT
                                    Investments, Inc., Norex Drilling Ltd., and Pronor Holdings, Ltd. (incorporated
                                    herein by reference to Exhibit 10.12.1 to Registration Statement No. 333-6077).
             10.4.2           --    Second Amendment to Registration Rights Agreement dated July 26, 1996, among
                                    Somerset Drilling Associates, L.L.C., Somerset Capital partners, Roy T. Oliver, Jr.,
                                    U.S. Rig and Equipment, Inc., Mike Mullen Energy Equipment Resource, Inc.,
                                    GCT Investments, Inc., Norex Drilling Ltd., and Pronor Holdings, Ltd.
                                    (incorporated herein by reference to Exhibit 10.4.2 to Amendment No. 1 to
                                    Registration Statement No. 333-6077).
               10.5           --    Investment Monitoring Agreement dated May 7, 1996, among Grey Wolf, Inc.,
                                    Somerset Capital Partners and Somerset Drilling Associates, L.L.C. (incorporated
                                    herein by reference to Exhibit 10.13 to Registration Statement No. 333-6077).
               10.6           --    Form of Non-Competition Agreement to be executed among Grey Wolf, Inc., Roy
                                    T. Oliver, Jr., U.S. Rig and Equipment, Inc., Mike L. Mullen and Mike Mullen
                                    Energy Equipment Resource, Inc. (incorporated herein by reference to Exhibit
                                    10.14 to Registration Statement No. 333-6077).
               10.7           --    Employment Agreement dated September 3, 1996, by and between the Company
                                    and Thomas P. Richards (incorporated herein by reference to Exhibit 10.1 to
                                    Registration Statement No. 333-14783).
               10.8           --    Form of Non-Qualified Stock Option Agreement dated September 3, 1996, by and
                                    between the Company and Thomas P. Richards (incorporated herein by reference
                                    to Exhibit 10.2 to Registration Statement No. 333-14783).
               10.11          --    Employment Agreement dated September 17, 1996, by and between the Company
                                    and Forrest M. Conley, Jr. (incorporated herein by reference to Exhibit 10.11 to
                                    Post Effective Amendment No. 1 to Registration Statement No. 333-14783).
               10.12          --    Form of Incentive Stock Option Agreement dated September 17, 1996, by and
                                    between the Company and Forrest M. Conley, Jr. (incorporated herein by reference
                                    to Exhibit 10.12 to Post Effective Amendment No. 1 to Registration Statement No.
                                    333-14783).
               10.13          --    Employment Agreement dated September 3, 1996, by and between the Company
                                    and Ronnie E. McBride (incorporated herein by reference to Exhibit 10.13 to Post
                                    Effective Amendment No. 1 to Registration Statement No. 333-14783).
               10.14          --    Form of Incentive Stock Option Agreement dated September 3, 1996, by and
                                    between the Company and Ronnie E. McBride (incorporated herein by reference
                                    to Exhibit 10.14 to Post Effective Amendment No. 1 to Registration Statement No.
                                    333-14783).
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<PAGE>   58
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               10.15          --    Form of Non-Qualified Stock Option Agreement dated September 3, 1996, by and
                                    between the Company and Ronnie E. McBride. (incorporated herein by reference
                                    to Exhibit 10.15 to Post Effective Amendment No. 1 to Registration Statement No.
                                    333-14783).
               10.16          --    Grey Wolf, Inc.  1996 Employee Stock Option Plan (incorporated herein by
                                    reference to Grey Wolf, Inc. 1996 Annual Meeting of Shareholders definitive proxy
                                    materials).
               10.17          --    Stock Purchase Agreement dated as of December 28, 1996, between Grey Wolf,
                                    and Wexford Special Situations 1996, L.P., Wexford-Euris Special Situations 1996,
                                    L.P., Wexford Special Situations 1996 Institutional, L.P. and Wexford Special
                                    Situations 1996 Limited (incorporated herein by reference to Exhibit 10.1 to Form
                                    8-K dated December 30, 1996).
               10.18          --    Amended and Restated Senior Secured Revolving Credit Agreement dated as of
                                    April 30, 1997 among DI Industries, Inc. and Drillers, Inc. (as borrowers), DI
                                    International, Inc. (as guarantor), Bankers Trust Company, as Agent, \ING (US)
                                    Capital Corporation, as Co-agent, and various financial institutions, as Lenders.
                                    (incorporated herein by reference to Exhibit 10.1 to Registration Statement No.
                                    333-26519).
               10.19          --    Amendment to the Credit Facility dated June 6, 1997 (incorporated herein by
                                    reference to Exhibit 10.2 to Amendment No. 1 to Registration Statement No. 333-
                                    26519).
               10.20          --    Amendment to Credit Facility dated June 23, 1997. (incorporated herein by
                                    reference to Grey Wolf, Inc. Annual Report on Form 10-K for the year ended
                                    December 31, 1997.)
               10.22          --    Form of Shareholder Agreement entered into January 31, 1997, by Grey Wolf, Inc.,
                                    Drillers, Inc., and Lucien Flournoy, Maxine E. Flournoy, Betty Louise Flournoy
                                    Fields, Helen Ruth Flournoy Pope, Mary Anne Flournoy Guthrie, F.C. West,
                                    Gregory M. Guthrie, Byron W. Fields, John B. Pope, the Flournoy First, Second
                                    and Third Fields Grandchild Trusts, the Flournoy First, Second and Third Pope
                                    Grandchild Trusts, and the Flournoy First, Second, Third, Fourth and Fifth Guthrie
                                    Grandchild Trusts (incorporated herein by reference to Exhibit 10.22 to
                                    Amendment No. 2 to Registration Statement No. 333-20423).
               10.23          --    Drillers Inc. 1982 Stock Option and Long-Term Incentive Plan for Key Employees
                                    (incorporated by reference to Drillers Inc. 1982 Annual Meeting definitive proxy
                                    solicitation materials.)
               10.24          --    Grey Wolf, Inc. 1987 Stock Option Plan for Non-Employee Directors.
                                    (incorporated by reference to  Grey Wolf, Inc. 1987 Annual Meeting definitive
                                    proxy solicitation materials.)
               10.25         --     Form of Non-Qualified Stock Option Agreement dated December 16, 1996, by and
                                    between the Company and Forrest M. Conley, Jr. (incorporated by reference to DI
                                    Industries, Inc. Annual Report on Form 10-K for the year ended December 31,
                                    1996.)
               10.26          --    Employment Agreement dated March 17, 1997, by and between the Company and
                                    Gary D. Lee. (incorporated by reference to DI Industries, Inc. Annual Report of
                                    Form 10-K for the year ended December 31, 1996.)
               10.27          --    Form of Incentive Stock Option Agreement dated March 17, 1997, by and between
                                    the Company and Gary D. Lee (incorporated by reference to DI Industries, inc.
                                    Annual Report of Form 10-K for the year ended December 31, 1996.)
               10.28          --    Stock Purchase Agreement by and among Grey Wolf Drilling Company, Grey
                                    Wolf, Inc., Murco Drilling Corporation, et al., dated December 30, 1997.
                                    (incorporated by reference to Exhibit 10.1 to Form 8-K dated February 5, 1998)
               10.29          --    Employment Agreement dated January 1, 1998, by and between the Company and
                                    David W. Wehlmann (incorporated herein by reference to Grey Wolf, Inc. Annual
                                    Report on Form 10-K for the year ended December 31, 1997.)
               10.30          --    Form of Incentive Stock Option Agreement dated February 10, 1998, by and
                                    between the Company and David W. Wehlmann (incorporated herein by reference
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<PAGE>   59
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<S>                           <C>   <C>
                                    to Grey Wolf, Inc. Annual Report on Form 10-K for the year ended December 31,
                                    1997.)
               10.31          --    Revolving Credit Agreement dated as of January 14, 1999 among Grey Wolf
                                    Drilling Company LP (as borrower), Grey Wolf, Inc. (as guarantor), The CIT
                                    Group/Business Credit, Inc. (as agent) and various financial institutions (as
                                    lenders).  (incorporated herein by reference to Exhibit 10.1 to Form 8-K dated
                                    January 26, 1999.)
              *10.32          --    Employment Agreement dated             , by and between the Company and Edward
                                    S. Jacob, III.
              *10.33          --    Form of Incentive Stock Option Agreement dated             , by and between the
                                    Company and Edward S. Jacob, III.
               16.1           --    Change in Certifying Accountant. (incorporated by reference to Exhibit 16.1 to 8-K
                                    filed on October 2, 1996)
              *21.1           --    List of Subsidiaries of Grey Wolf, Inc.
              *23.1           --    Consent of KPMG LLP
              *27.            --    Financial Data Schedule
</TABLE>


---------------
* Filed herewith

                 (b)   Reports on Form 8-K

                       None