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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, 2000

[ ]          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                           SECURITIES EXCHANGE ACT OF 1934

                         COMMISSION FILE NUMBER 1-8226

                                 GREYWOLF 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 12, 2001, 180,415,151 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 12, 2001 of $6.96 was approximately $1.1 billion.

     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, 2000, are
incorporated by reference into Part III hereof.
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                                     PART I

ITEM 1. BUSINESS

GENERAL

     Grey Wolf, Inc. is a leading provider of contract land drilling services in
the United States with a domestic fleet of 121 rigs at March 12, 2001, of which
90 rigs are marketed and 31 rigs are held in inventory. Included in the domestic
and marketed fleet is one non-owned rig that we operate for a third party. We
also maintain a fleet of five inventory rigs in Venezuela, giving us a total
fleet of 126 rigs. Our customers include independent producers and major oil and
gas 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. Our website address is www.gwdrilling.com.

BUSINESS STRATEGY

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

     - delivering quality service to our customers;

     - maintaining a leading position in our core domestic markets;

     - balancing utilization and dayrates while trying to maintain a high level
       of utilization for our marketed rigs;

     - enhancing cash-flow through our turnkey and trucking operations and use
       of our top drives;

     - controlling costs and maintaining capital spending discipline;

     - maintaining a premium fleet of equipment with bias toward deep drilling
       for natural gas;

     - using term contracts to provide enough cash flow to cover incremental
       capital expenditures;

     - 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

     - searching for potential acquisition candidates that we believe would be
       accretive.

     During 2001, it is our goal to improve liquidity and reduce our net debt
position through the execution of our business strategy.

INDUSTRY OVERVIEW

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

     Land drilling was active in 1997 with a domestic rig count, reported by
industry sources, of 850 rigs on December 31, 1997. Also in 1997, the average
price of natural gas, delivered at Henry Hub was approximately $2.49 per mmbtu
and the average price of West Texas Intermediate crude was approximately $20.61
per barrel. However, beginning in late 1997, oil and gas prices begin to drop
and these lower commodity prices extended into 1999. The price of West Texas
Intermediate crude dropped to a low of $10.72 in December 1998 and the price of
natural gas dropped to a low of $1.63 in February 1999. As a result, land
drilling activity declined with a reported historical low domestic rig count of
380 rigs on April 23, 1999.

     Oil and natural gas prices rose sharply in 2000 and 2001. The average price
of natural gas for 2000 was $4.32 per mmbtu and for the period from January 1,
2001 through March 12, 2001 was $6.54. The average

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price of West Texas Intermediate crude for 2000 was $30.26 per barrel and for
the period from January 1, 2001 through March 12, 2001 was $29.24.

     As a result of the increase in commodity prices, the domestic land rig
count climbed to 966 on March 9, 2001. This represents an increase in the
domestic land rig count of 154% since the low in April 1999 and of 14% since
December 31, 1997.

     Overall, the land drilling industry is still fragmented and very
competitive. However, there has been significant consolidation within the
industry since 1996 and further consolidation continues in 2001. Based on
industry sources, we maintained a combined market share of 22% in our four core
domestic markets at March 1, 2001.

IMPROVING CONDITIONS

     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 into 2001. We recorded net income of $5.0 million for the fourth
quarter of 2000, which represented our first profitable quarter since the first
quarter of 1998. This profitable quarter was the result of working more rigs,
higher dayrates and corresponding higher margins.

     The improving business has allowed us to put more of our inventory rigs to
work and maintain a high level of utilization for our marketed rigs. We
currently have 90 marketed rigs and for the period from January 1, 2001 through
March 12, 2001, we averaged 88 rigs working. The average number of rigs working
is up from an average of 83 rigs working during the fourth quarter of 2000 and
an average of 59 rigs working during the fourth quarter of 1999.

     In addition, our current daywork bid rates are $11,500 to $15,000 per day
without fuel and without top drives. This is a 93% increase from the leading
edge bid rates of $6,500 to $7,200 in early March 2000. These bid rates have
also surpassed the high bid rates reached in late 1997 by as much as $4,000 per
day.

     Our margins have been positively impacted by the increase in dayrates and
number of rigs working. We generated a margin of $3,285 per day for the fourth
quarter of 2000 compared to $982 per day for the same period in 1999, an
increase of $2,303 per day, or 235%. The fourth quarter of 2000 margin also
surpassed the fourth quarter of 1997 benchmark margin of $2,495 per day, by $790
per day, or 32%.

     Current market conditions will have to be maintained for us to remain
profitable. 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 12, 2001, we had a total domestic rig fleet of 121 rigs: 90
marketed and 31 inventory. We currently conduct our operations in the following
domestic drilling markets:

     - Ark-La-Tex;

     - Gulf Coast;

     - Mississippi/Alabama;

     - South Texas; and

     - Rocky Mountain.

     We refer to the Ark-La-Tex, Gulf Coast, Mississippi/Alabama and South Texas
markets as our "core domestic markets," because substantially all of our rigs
are located in those markets. We conduct our operations primarily in core
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 2000, approximately 95% of the wells we drilled for our
customers were drilled in search of natural gas. Natural gas reserves are
typically found in deeper

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geological formations and generally require premium equipment and quality crews
to drill the wells. As discussed further below, we entered the Rocky Mountain
market through a long-term contract for our largest rig.

     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. We
currently have 29 marketed rigs in this division which consists of 10 diesel
electric rigs, two mechanical trailer-mounted rigs, and 17 mechanical rigs. Our
Ark-La-Tex division also operates a fleet of 27 trucks which are used
exclusively to move our rigs.

     We had an average of 22 rigs working in our Ark-La-Tex division during
2000. Daywork contracts generated approximately 82% of our revenues in this
division, while turnkey and footage contracts generated the remaining 18%. The
average revenue per rig day worked by the division during 2000 was $8,708. Based
on industry sources, we had the second largest number of operating rigs in the
Ark-La-Tex market, or a market share of approximately 16%, as of March 1, 2001.
At the same date, we had the second-leading position, or a market share of
approximately 21%, in the Mississippi/Alabama market.

     Gulf Coast Division. Our Gulf Coast division provides drilling services in
Southern Louisiana and along the upper Texas Gulf Coast. We currently have 30
marketed rigs in this division which consists of 24 diesel electric rigs, one
mechanical trailer-mounted rig, and five mechanical rigs.

     We had an average of 22 rigs working in our Gulf Coast division during
2000. Daywork contracts generated approximately 57% of our revenues in this
division, while turnkey and footage contracts generated the remaining 43%. The
average revenue per rig day worked by the division during 2000 was $11,901.
Based on industry sources, we had the largest number of operating rigs in this
market, or a market share of approximately 27% as of March 1, 2001.

     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. We currently have 31
marketed rigs in this division, including one non-owned rig that we operate for
a third party. The marketed rigs consist of 14 diesel electric rigs, 11
mechanical trailer-mounted rigs, and six mechanical rigs. The South Texas
division also operates a fleet of 35 trucks which are used exclusively to move
our rigs.

     We had an average of 27 rigs working in our South Texas division during
2000. Daywork contracts generated approximately 73% of our revenues in this
division, while turnkey and footage contracts generated the remaining 27%. The
average revenue per rig day worked by the division during 2000 was $10,106.
Based on industry sources, we had the largest number of operating rigs in this
market, or a market share of approximately 24%, as of March 1, 2001.

     Rocky Mountain Division. In October 2000, we signed a term contract for a
two-year commitment in Wyoming for our ultra-deep drilling rig 558. The rig will
be utilized for drilling operations in the Madden Deep Unit of Wyoming's Wind
River Basin. The start up of drilling operations, which is expected in the
second quarter of 2001, will signal Grey Wolf's entry into the Rocky Mountain
market. The contract is expected to generate revenue of $11.6 million over the
two-year term. We believe this entry provides a solid operating base to pursue
other opportunities in this region and that the Rocky Mountain market fits our
strategic plan of operating in the most prolific U.S. gas markets.

VENEZUELAN OPERATIONS

     The downturn in the industry which began in late 1997 had a negative impact
on the Venezuelan market. As such, in March 1999, our operations in Venezuela
were suspended. To date, there has been little improvement in the Venezuelan
market and our rigs remain idle. We may in the future continue operations in
Venezuela, bring the Venezuelan rigs to the United States or sell the Venezuelan
operations, based upon market conditions and demand.

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INVENTORY RIGS

     We categorize a rig that is not currently being marketed by us as an
"inventory rig." At March 12, 2001, 31 of our domestic rigs, or approximately
26% of our domestic rig fleet, were inventory rigs. We also have five inventory
rigs located in Venezuela.

     Within the framework of our business strategy and as demand warrants, we
plan to reactivate additional inventory rigs. As these rigs are reactivated, we
intend to upgrade the rigs with the latest technology, which could include new
solids control systems, larger mud pumps for better hydraulics, disk brakes, and
digital drilling systems. The actual cost to reactivate these rigs will depend
on the specific customer requirements and the extent to which we choose to
upgrade the rigs. For information concerning our current estimates of the costs
to return our inventory rigs to marketed status, see "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Financial Condition and Liquidity."

     The actual number of inventory rigs reactivated during 2001 and in the
future will depend on many factors, including our estimation of existing and
anticipated demand and dayrates, our success in bidding for domestic contracts,
including term contracts, and the timing of the reactivations.

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. The majority of domestic drilling contracts
are typically subject to termination by the customer on short notice, usually
upon payment of a fee. Recently, however, we have entered into a number of term
contracts to provide drilling services on a daywork basis ranging in length from
six months to two years. These term contracts include a per day termination rate
approximately equal to the daily margin on each contract. 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
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 seek
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.

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     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 typically 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 and major oil
and gas companies. 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 also 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.

     During late 2000 and 2001, we entered into a number of term contracts with
our customers ranging in length from six months to two years. The practical
effect of these term contracts is to protect us for the duration of the contract
from having the rig remain idle and from unexpected declines in dayrates for our
rigs. Conversely, our customers benefit from term contracts by the assured
availability of a rig to meet their drilling schedule, and from contractual
protection against exposure to rapid increases in dayrates under well-by-well
drilling contracts. These term contracts are priced on a fixed, dayrate basis
which allow us to recover the incremental capital expenditures on the rigs under
term contracts and provide an acceptable rate of return on capital employed. We
intend to continue to enter into additional term contracts from time to time
based upon market conditions.

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 2000 of the cost of comparable
used equipment to replace the insured property. There is a deductible on rigs of
$850,000 in the aggregate over an eighteen month policy period (with a sublimit
of up to $575,000 per claim 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

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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.

     We also maintain insurance coverage to protect against certain hazards
inherent in our turnkey and footage 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

     Over the period from August 1996 through February 1998, we completed 13
transactions acquiring 100 land drilling rigs, of which 67 were marketed and 33
were inventoried at the time of acquisition. During that same period of time,
the Company sold six land drilling rigs and its 65% joint venture interest in
nine additional rigs.

     Murco Acquisition. Included in the transactions discussed above is the
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.

     Sale of Eastern Division Assets. Also included in the transactions
discussed above is the sale of the 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. Low oil and gas
prices, or the perception among oil and gas companies that future prices are
likely to decline, can materially and adversely affect us in many ways,
including:

     - our revenues, cash flows and earnings;

     - the fair market value of our rig fleet;

     - our ability to maintain or increase our borrowing capacity;

     - our ability to obtain additional capital to finance our business and make
       acquisitions, and the cost of that capital; and

     - our ability to retain skilled rig personnel who we would need in the
       event of an upturn in the demand for our services.

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     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:

     - weather conditions in the United States and elsewhere;

     - economic conditions in the United States and elsewhere;

     - actions by OPEC, the Organization of Petroleum Exporting Countries;

     - political stability in the Middle East and other major producing regions;

     - governmental regulations, both domestic and foreign;

     - the pace adopted by foreign governments for exploration of their national
       reserves;

     - the price of foreign imports of oil and gas; and

     - the overall supply and demand for oil and gas.

  We operate in a highly competitive, fragmented industry in which price
competition is intense.

     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:

     - the type and condition of drilling rigs;

     - the quality of service and experience of rig crews;

     - the safety record of the rig;

     - the offering of ancillary services; and

     - the ability to provide drilling equipment adaptable to, and personnel
       familiar with, new technologies and drilling techniques.

     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 is less effective as lower demand for drilling
services intensifies price competition and makes it more difficult for us to
compete on the basis of factors other than price. In all of the markets in which
we compete an over supply of rigs can cause greater price competition.

     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 influx 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 with greater resources.

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

     - better withstand periods of low rig utilization;

     - compete more effectively on the basis of price and technology;

     - retain skilled rig personnel; and

     - 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
       demand.

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

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

     - blowouts;

     - fires and explosions;

     - collapse of the borehole;

     - lost or stuck drill strings; and

     - damage or loss from natural disasters.

     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:

     - suspension of drilling operations;

     - damage to the environment;

     - damage to, or destruction of our property and equipment and that of
       others;

     - personal injury and loss of life; and

     - damage to producing or potentially productive oil and gas formations
       through which we drill.

     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 may 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:

     - environmental quality;

     - pollution control; and

     - remediation of environmental contamination.

     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 with
applicable laws. 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 other 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

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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.

  Recent improvements in demand for our rigs may not be sustained.

     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 average number of rigs
working and in the rates we could charge for them. The average number of our
rigs working in our core domestic markets was 87 during the first quarter of
1998 but declined to an average of 45 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.

     While market conditions have improved in 2000 and into 2001, future demand
for our rigs may decline and we can offer you no assurance otherwise. If
drilling activity increases further 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 principal amount
 indebtedness under our senior notes with semi-annual interest payments of
 approximately $11.1 million.

     We are indebted for a total of $250.0 million in principal amount under our
8 7/8% 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.
Although market conditions have improved considerably and our operating
activities provided net cash sufficient to pay our debt service obligations for
the year ended December 31, 2000, there can be no assurances that current market
conditions will continue or that we will be able to generate sufficient cash
flow in the future.

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

     - oil and gas prices;

     - demand for our drilling services;

     - whether our business strategy is successful;

     - levels of interest rates; and

     - other financial and business factors that affect us.

     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:

     - further diminish our cash balances;

     - use our existing credit facility;

     - obtain additional external financing;

     - refinance our indebtedness; and

     - sell our assets.

                                        10
<PAGE>   11

 We have had only one profitable year since 1991.

     While we returned to profitability during the fourth quarter of 2000, 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 remain
profitable in the future will depend on many factors, but primarily on whether
we are able to maintain high 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:

     - incur additional indebtedness;

     - pay dividends or make other restricted payments;

     - sell material assets;

     - grant or permit liens to exist on our assets;

     - enter into sale and lease-back transactions;

     - enter into certain mergers, acquisitions and consolidations;

     - make certain investments;

     - enter into transactions with related persons; and

     - engage in lines of business unrelated to our core land drilling business.

     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

                                        11
<PAGE>   12

covenants of our credit agreement 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 our senior notes,
and also under our senior secured credit agreement, and possibly under 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.

  We could be adversely affected if shortages of equipment, supplies or
personnel occur.

     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
equipment manufacturers and suppliers 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
inventory rigs and obtain contracts for our marketed 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 are occurring 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.

  Our existing dividend policy and contractual restrictions limit our ability to
pay dividends.

     We have never declared a cash dividend on our common stock and do not
expect to pay cash dividends on our common stock for the foreseeable future. We
expect that all cash flow generated from our operations in the foreseeable
future will be retained and used to develop or expand our business, pay debt
service and reduce outstanding indebtedness. Furthermore, the terms of our
senior secured credit facility prohibit the payment of dividends without the
prior written consent of the lenders and the terms of the indentures under which
our senior notes are issued also restrict our ability to pay dividends under
certain conditions.

 Certain provisions of our organizational documents, securities and credit
 agreements have anti-takeover effects which may prevent our shareholders from
 receiving the maximum value for their shares.

     Our articles of incorporation, bylaws and securities and credit agreements
contain certain provisions intended to delay or prevent entirely a change of
control transaction not supported by our board of directors, or which may have
that general effect. These measures include:

     - classification of our board of directors into three classes, with each
       class serving a staggered three year term;

     - giving our board of directors the exclusive authority to adopt, amend or
       repeal our bylaws and thus prohibiting shareholders from doing so;

     - requiring our shareholders to give advance notice of their intent to
       submit a proposal at the annual meeting; and

     - limiting the ability of our shareholders to call a special meeting and
       act by written consent.

                                        12
<PAGE>   13

     Additionally, the indentures under which our senior notes are issued,
require us to offer to repurchase all senior notes then outstanding at a
purchase price equal to 101% of the principal amount of the senior notes plus
accrued and unpaid interest to the date of purchase in the event that we become
subject to a change of control, as defined in the indentures. This feature of
the indentures could also have the effect of discouraging potentially attractive
change of control offers.

     In addition, we have adopted a shareholder rights plan which may have the
effect of impeding a hostile attempt to acquire control of us.

 Large amounts of our common stock may be resold into the market in the future
 which could cause the market price of our common stock to drop significantly,
 even if our business is doing well.

     If we issue a significant amount of common stock, convertible preferred
stock or warrants, the market price of our common stock may be adversely
affected.

     As of March 12, 2001, 180.4 million shares of our common stock were issued
and outstanding. Of these shares, 137.9 million or 76.4% are freely tradeable.
The remaining 42.5 million shares, or 23.6% of our issued and outstanding common
stock are restricted shares, but are available for resale in the public market
under our currently effective registration statements or exemptions from the
registration requirements of the Securities and Exchange Commission. In
addition, as of March 12, 2001, we had issued options to purchase 7.8 million
shares of common stock and these options are currently exercisable for 3.5
million shares of common stock. The market price of our common stock could drop
significantly if future sales of substantial amounts of our common stock occur,
or if the perception exists that substantial sales may occur.

EMPLOYEES

     At March 12, 2001, we had approximately 2,300 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. All statements
other than statements of historical facts included in this report including,
without limitation, statements regarding our business strategy, plans,
objectives, capital expenditures and beliefs of management for future operations
and results, are forward-looking statements. Although we believe the
expectations and beliefs reflected in such forward-looking statements are
reasonable, we can give no assurance that such expectations will prove to have
been correct. Important factors that could cause actual results to differ
materially from our expectations include:

     - fluctuations in prices and demand for oil and gas;

     - fluctuations in levels of oil and gas exploration and development
       activities;

     - fluctuations in the demand for contract land drilling services;

     - the existence and competitive responses of our competitors;

     - technological changes and developments in the industry;

     - the existence of operating risks inherent in the contract land drilling
       industry; and

     - U.S. and global economic conditions.

     Our forward-looking statements speak only as of the date specified in such
statements or, if no date is stated, as of the date of this report. Grey Wolf
expressly disclaims any obligation or undertaking to release publicly any
updates or revisions to any forward-looking statement contained in this report
to reflect any change in our expectations or with regard to any change in
events, conditions or circumstances on which our

                                        13
<PAGE>   14

forward-looking statements are based. Please refer to "Certain Risks" listed
above for additional information concerning risk factors that could cause actual
results to differ from the forward looking statements.

ITEM 2. PROPERTIES

DRILLING EQUIPMENT

     A land drilling rig consists of engines, drawworks, a mast, substructure,
pumps to circulate drilling fluid, blowout preventers, drill 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.

     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, mechanical and 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 rigs' 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 19 mechanical
rigs and one diesel electric rig that are trailer-mounted for greater mobility.

     We also utilize top drives in our drilling operations. A top drive allows
drilling with 90-foot lengths of drill pipe rather than 30-foot lengths, thus
reducing the number of required connections. A top drive also permits rotation
of the drill string while tripping in or out of the hole. These characteristics
increase drilling speed, personnel safety and drilling efficiency, and reduce
the risk of the drill string sticking during operations. At March 12, 2001, we
owned 10 top drives and expect delivery of two additional top drives by the end
of the first quarter of 2001.

                                        14
<PAGE>   15

     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, which excludes
the one non-owned rig we operate for a third party, as of March 12, 2001:

<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>
MARKETED
Ark-La-Tex
  Diesel Electric...................     --            1             5            4         10
  Trailer-Mounted...................     --            2            --           --          2
  Mechanical........................     --            6             7            4         17
Gulf Coast
  Diesel Electric...................     --           --             1           23         24
  Trailer-Mounted...................     --            1            --           --          1
  Mechanical........................     --            1             2            2          5
South Texas
  Diesel Electric...................     --            1             6            6         13
  Trailer-Mounted...................      2            9            --           --         11
  Mechanical........................     --            6            --           --          6
                                        ---          ---           ---          ---        ---
          Total Marketed............      2           27            21           39         89
INVENTORY
Domestic
  Diesel Electric...................     --           --             2           13         15
  Trailer-Mounted...................      1            2            --            1          4
  Mechanical........................     --            6             4            2         12
Venezuela
  Trailer-Mounted...................     --            2            --           --          2
  Mechanical........................     --            3            --           --          3
                                        ---          ---           ---          ---        ---
          Total Inventory...........      1           13             6           16         36
                                        ---          ---           ---          ---        ---
Total Rig Fleet.....................      3           40            27           55        125
                                        ===          ===           ===          ===        ===
</TABLE>

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.

                                        15
<PAGE>   16

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

     None.

                                        16
<PAGE>   17

                                    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, 2001 to March 12, 2001...............    $6.9600    $5.0625
Year Ended December 31, 2000:
  Quarter ended March 31, 2000..............................     4.4375     2.8125
  Quarter ended June 30, 2000...............................     5.3125     3.1250
  Quarter ended September 30, 2000..........................     5.7500     3.9375
  Quarter ended December 31, 2000...........................     5.8750     3.6250
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
</TABLE>

     We have never declared or paid cash dividends on our common stock and do
not expect to pay cash dividends in 2001 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 12, 2001, the last reported sales price of our common stock on the
AMEX was $6.96 per share.

ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                        YEARS ENDED DECEMBER 31,
                                           ---------------------------------------------------
                                             2000       1999       1998       1997      1996
                                           --------   --------   --------   --------   -------
                                            (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                        <C>        <C>        <C>        <C>        <C>
REVENUES.................................  $269,334   $147,203   $240,979   $215,923   $81,767
NET INCOME (LOSS)........................    (8,523)   (41,262)   (83,213)    10,218   (11,722)
NET INCOME (LOSS) PER COMMON SHARE
  -- BASIC AND DILUTED:..................      (.05)      (.25)      (.50)       .07      (.18)
TOTAL ASSETS.............................   510,866    452,846    501,303    533,752   117,819
SENIOR NOTES & OTHER LONG-TERM DEBT......   249,851    249,962    250,527    176,225    26,846
SERIES A PREFERRED STOCK -- MANDATORILY
  REDEEMABLE.............................        --         --        305        305       764
</TABLE>

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.

                                        17
<PAGE>   18

GENERAL

     We are a leading provider of contract land drilling services in the United
States with a domestic fleet of 121 rigs at March 12, 2001, of which 90 rigs are
marketed and 31 rigs are held in inventory. Included in the domestic and
marketed fleet is one non-owned rig that we operate for a third party. We also
maintain a fleet of five inventory rigs in Venezuela, giving us a total fleet of
126 rigs.

  Rig Activity

     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 the average number of our rigs working also declined. However,
activity began improving at the end of the second quarter of 1999 and that trend
has continued into 2001.

     The table below shows the average number of our rigs working in our core
domestic markets during the periods indicated:

<TABLE>
<CAPTION>
1998               1999                           2000               2001
----   ----------------------------   ----------------------------   -----
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
----   ---   ---   ---   ---   ----   ---   ---   ---   ---   ----   -----
<S>    <C>   <C>   <C>   <C>   <C>    <C>   <C>   <C>   <C>   <C>    <C>
72..   44    33    44    59    45     61    65    77    83    71     88
</TABLE>

     We reactivated 24 drilling rigs since December 31, 1999 bringing our
current marketed rig count to 90 rigs. For the period from January 1, 2001 to
March 12, 2001 we had an average of 88 rigs working. This compares to an average
of 83 rigs working in the fourth quarter of 2000 and 59 rigs working in the
fourth quarter of 1999. In addition, work is currently underway to reactivate
four rigs, which will increase the number of marketed rigs to 94 during the
second quarter of 2001.

  Drilling Contract Bid Rates

     In addition to increasing rig activity, there have been significant
increases in the dayrates we receive for our services. Our current daywork bid
rates are $11,500 to $15,000 per day without fuel and without top drives. This
is a 93% increase from the leading edge bid rates of $6,500 to $7,200 per day in
early March 2000 and a 23% increase from the leading edge bid rates of $9,500 to
$12,000 per day in October 2000. Current bid rates have also surpassed the high
bid rates reached in late 1997 and early 1998 by as much as $4,000 per day.
These bid rates will be realized in our financial results during the third
quarter of 2001. Since December 31, 1999, we purchased seven top drives and are
expecting delivery of two additional top drives by the end of the first quarter
of 2001. The current bid rates for our top drives are $2,000 to $2,500 per day.

  Entry into Rocky Mountain Market

     We signed a term contract for a two-year commitment in Wyoming for our
ultra-deep drilling rig 558 at a rate of $15,900 per day without fuel but
including a top drive. The rig will be utilized for drilling operations in the
Madden Deep Unit of Wyoming's Wind River Basin. The start up of drilling
operations, which is expected in the second quarter of 2001, will signal Grey
Wolf's entry into the Rocky Mountain market. The contract is expected to
generate revenue of $11.6 million over the two year term. We believe this entry
also provides a solid operating base to pursue other opportunities in this
region and that the Rocky Mountain market fits our strategic plan of operating
in the most prolific U.S. gas markets.

  Term Contracts

     Demand for our premium drilling equipment and competent personnel continues
to be strong and our customers are recognizing the value of having committed
rigs for their drilling programs. We believe committing a certain number of our
rigs under term contracts allows us to obtain higher than current market
dayrates. These term contracts also protect us for the duration of the contract
from having the rig remain idle and from unexpected declines in dayrates for our
rigs. Our objective with term contracts is to generate enough

                                        18
<PAGE>   19

cash flow to recover the incremental capital expenditures and provide a an
acceptable rate of return on capital employed.

     In addition to the term contract in Wyoming discussed previously, we have
entered into 14 other term contracts with terms ranging from six months to two
years at rates ranging from $9,500 per day to $15,700 per day without fuel and
without top drives. All 15 term contracts are expected to generate total revenue
of $87.5 million and an average daily operating margin of approximately $6,000.
We earned revenue of approximately $3.2 million from the 15 term contracts in
2000 and expect the remaining $84.3 million of revenue to be earned as follows:
$39.1 million in 2001, $33.1 million in 2002 and $12.1 million in 2003.

  Turnkey and Footage Contract Activity

     Revenue generated from turnkey and footage contracts was approximately 18%
of total revenue for the fourth quarter of 2000 compared to 33% for the third
quarter of 2000. For the years ended December 31, 2000 and 1999, turnkey and
footage revenue represented 30% and 39% of total revenue, respectively. The
percentage of days worked on turnkey and footage contracts declined in the
fourth quarter of 2000 to 12% of the total days worked when compared to 21% for
the third quarter of 2000 and 19% for the year ended December 31, 1999.
Consistent with the fourth quarter of 2000, we expect that turnkey and footage
contracts will continue to represent approximately 12% to 15% of the total days
worked in 2001.

     Turnkey and footage contracts generated earnings before interest, income
taxes, depreciation and amortization, provision for asset impairment and unusual
charges ("EBITDA") of $1.8 million in the fourth quarter of 2000 and $2.0
million in the third quarter of 2000. For the years ended December 31, 2000 and
1999, turnkey and footage contracts generated EBITDA of $9.6 million and $10.6
million, respectively.

     The revenue and EBITDA generated on turnkey or footage contracts varies
widely based upon a number of factors, including the location of the contracted
work as well as the depth and level of complexity of the wells drilled. 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 revenue derived from
turnkey and footage contracts.

  Financial Results

     We recorded net income of $5.0 million for the fourth quarter of 2000,
which represented our first profitable quarter since the first quarter of 1998.
These results compare to net losses of $2.3 million for the third quarter of
2000 and $8.1 million for the fourth quarter of 1999. Our improvement in the
fourth quarter of 2000 was the direct result of working more rigs and obtaining
higher dayrates, as discussed above.

     The increase in the number of rigs working and higher dayrates positively
impacted our margins. We generated a margin of $3,285 per day for the fourth
quarter of 2000 compared to $982 per day for the same period in 1999, an
increase of $2,303 per day, or 235%.

                                        19
<PAGE>   20

FINANCIAL CONDITION AND LIQUIDITY

     The following table summarizes our financial position at December 31, 2000
and 1999.

<TABLE>
<CAPTION>
                                                      DECEMBER 31, 2000    DECEMBER 31, 1999
                                                      ------------------   ------------------
                                                        AMOUNT       %       AMOUNT       %
                                                      ----------   -----   ----------   -----
                                                              (AMOUNTS IN THOUSANDS)
<S>                                                   <C>          <C>     <C>          <C>
Working capital.....................................   $ 60,029      13     $ 16,353       4
Property and equipment, net.........................    386,861      85      384,361      94
Other noncurrent assets.............................      6,658       2        7,847       2
                                                       --------     ---     --------     ---
          Total.....................................   $453,548     100     $408,561     100
                                                       ========     ===     ========     ===
Long-term debt......................................   $249,851      55     $249,962      61
Other long-term liabilities.........................     30,281       7       33,022       8
Shareholders' equity................................    173,416      38      125,577      31
                                                       --------     ---     --------     ---
          Total.....................................   $453,548     100     $408,561     100
                                                       ========     ===     ========     ===
</TABLE>

     The significant changes in our financial position from December 31, 1999 to
December 31, 2000 are the increases in working capital and shareholders' equity
of $43.7 million and $47.8 million, respectively. The increase in working
capital is primarily due to a $31.1 million increase in our cash balance as the
result of a common stock offering which yielded net proceeds of $51.6 million
and a $24.8 million increase in our accounts receivable balance due to the
increase in operating activity. The increase in cash and accounts receivable
were partially offset by increases in accounts payable and accrued liabilities
of $12.6 million also due to the increase in operating activity. Shareholders'
equity increased primarily as a result of the stock offering noted above and
proceeds received from stock option exercises of $4.7 million partially offset
by our net loss of $8.5 million.

     On April 4, 2000, we completed an offering of 13,000,000 shares of our
common stock which yielded us net proceeds of $51.6 million. The shares were
purchased by the underwriter for $4.00 per share and the underwriter advised us
that the shares were resold to the public at a price of $4.125 per share. The
net proceeds from the issuance of the shares of common stock have been and are
expected to continue to be used to purchase top drive units, for capital
expenditures to return some of our rigs to marketed status when market
conditions justify their reactivation and for general corporate purposes,
including working capital.

     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, 2000, our operating activities and financing
activities provided net cash, while our investing activities consumed net cash.
Although we anticipate generating sufficient cash flow, 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 use our cash
on hand. However, it is our goal to improve liquidity and reduce our net debt
position during 2001. At March 12, 2001, our cash balance was $42.9 million.

     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,
                                                     --------------------------------
                                                       2000       1999        1998
                                                     --------   ---------   ---------
<S>                                                  <C>        <C>         <C>
Net cash provided by (used in):
  Operating activities.............................  $ 15,812   $ (17,470)  $  30,799
  Investing activities.............................   (39,199)     (6,011)   (109,908)
  Financing activities.............................    54,456      (1,914)     71,378
                                                     --------   ---------   ---------
Net increase (decrease) in cash:...................  $ 31,069   $ (25,395)  $  (7,731)
                                                     ========   =========   =========
</TABLE>

                                        20
<PAGE>   21

     Our cash flows from operating activities are affected by a number of
factors including the number of rigs under contract, whether the contracts are
daywork, footage, or turnkey, and the rate received for these services. Our cash
flow generated from operating activities during the year ended December 31, 2000
was $27.2 million (before changes in operating assets and liabilities) compared
to cash used in operating activities during the year ended December 31, 1999 of
$21.9 million (before changes in operating assets and liabilities). This change
is principally due to a 59% increase in operating days and an increase in per
day gross profit margins between the two periods. Our cash flows from operating
activities were also impacted by changes in operating assets and liabilities
which used $11.3 million and provided $4.4 million in cash flow for the years
ended December 31, 2000 and 1999, respectively. Our cash flows used in operating
activities in 1999 (before changes in operating assets and liabilities) were
lower than the cash flow provided by operating activities in 1998 of $20.2
million (before changes in operating assets and liabilities) due primarily to an
overall decrease in operating activity in 1999 versus 1998. In 1999, cash flows
provided by operating activities impacted by changes in operating assets and
liabilities were also lower than the same cash flows in 1998 of $10.6 million.

     Cash flow used in investing activities for the year ended December 31, 2000
primarily consisted of $39.3 million of capital expenditures for reactivating
rigs, rig maintenance, and top drives. Cash flow used in investing activities
for the year ended December 31, 1999, primarily consisted of capital
expenditures for rig maintenance. Cash flow used in investing activities for the
year ended December 31, 1998 included the cash portion of the Murco Acquisition
of $60.8 million, as well as capital expenditures of $49.1 million for rig
refurbishments, drill pipe, and other capital maintenance.

     Cash flow provided by financing activities for the year ended December 31,
2000 consisted principally of net proceeds of $51.6 million and $3.2 million
from the sale of common stock and from stock option exercises, respectively,
partially offset by $397,000 net repayment of long-term lease obligations. Cash
flow used in financing activities for the year ended December 31, 1999 primarily
consisted of financing costs of $861,000 related to our senior secured revolving
credit facility, net repayments of long-term lease obligations of $896,000, and
$305,000 for the redemption of all outstanding shares of Series A preferred
stock. Cash flow provided by financing activities for the year ended December
31, 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.

     Capital expenditures for the year ended December 31, 2000 were $39.2
million. Capital expenditures for 2001, including the cost of four top drives,
maintenance capital, replacement drill pipe, large hauling trucks, and other
equipment and upgrades, are anticipated to be between $30.0 million and $35.0
million. In addition, we will expend capital on inventory rigs that we
reactivate. We currently anticipate reactivating between eight and twelve rigs
in 2001. Work is currently underway to reactivate four inventory rigs that will
go to work under term contracts. The total capital cost of reactivating
inventory rigs is dependent upon the extent of upgrades, customer requirements
and the ultimate number of rigs reactivated. Each of our inventory rigs can be
brought into service for a capital investment of between $1.5 million and $4.5
million, including drill pipe, depending upon upgrades and customer
requirements. These costs also include upgrades of the solids control systems as
well as other upgrades to the latest technology.

CERTAIN CREDIT ARRANGEMENTS

     During the year ended December 31, 2000 our principal credit arrangements
(other than customary trade credit and capital leases) consisted of a senior
secured revolving credit facility and our 8 7/8% Senior Notes due 2007.

  CIT Facility

     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
certain drilling rig equipment located in the 48 contiguous United States.
The CIT Facility is a four year revolving facility with automatic renewals

                                        21
<PAGE>   22

thereafter unless terminated by the lender on any subsequent anniversary date
and then only upon 60 days prior notice. Periodic interest payments are due 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%. The CIT
Facility provides up to $10.0 million available for letters of credit. The
Company is required to pay a commitment fee of 0.375% per annum on the unused
portion of the CIT Facility and letters of credit accrue a fee of 1.25% per
annum. In addition, the CIT Facility contains certain affirmative and negative
covenants. Substantially all of the Company's assets, including its drilling
equipment, are pledged as collateral under the CIT Facility and it is also
secured by our guarantees and certain of our wholly-owned subsidiaries
guarantees. 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 and had $5.7 million
outstanding under letters of credit at December 31, 2000.

     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:

     - 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;

     - 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;

     - 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 $25.0 million.

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

     - 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 $30.0
       million 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 $150.0 million. 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. 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:

     - engage in new lines of business unrelated to our current activities;

     - enter into mergers or consolidations or asset sales or purchases (with
       specified exceptions);

     - incur liens or debts or make advances, investments or loans (in each
       case, with specified exceptions);

     - pay dividends or redeem stock (except for certain inter-company
       transfers);

     - prepay or materially amend any other indebtedness; and

     - issue any stock (other than common stock).

                                        22
<PAGE>   23

     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:

     - default with respect to other indebtedness in excess of $350,000;

     - judgements in excess of $350,000; or

     - 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).

  Senior Notes

     In June 1997 and May 1998, the Company concluded public offerings of $175.0
million and $75.0 million, respectively, in principal amount of the senior
notes. The senior notes ("Notes") bear interest at 8 % per annum and mature July
1, 2007. The Notes are general unsecured senior obligations of the Company and
are fully and unconditionally guaranteed, on a joint and several basis, by all
domestic wholly-owned subsidiaries of the Company. In addition, non-guarantor
subsidiaries are immaterial. All fees and expenses incurred at the time of
issuance are being amortized over the life of the Notes.

     The Notes are not redeemable at the option of the Company prior to July 1,
2002. On or after such date, the Company will have the option to redeem the
Notes in whole or in part during the twelve months beginning July 1, 2002 at
104.4375%, beginning July 1, 2003 at 102.9580%, beginning July 1, 2004 at
101.4792% and beginning July 1, 2005 and thereafter at 100.0000% together with
any interest accrued and unpaid to the redemption date. Upon a change of control
as defined in the indentures, each holder of the Notes will have the right to
require the Company to repurchase all or any part of such holder's Notes at a
purchase price equal to 101% of the aggregate principal amount thereof, plus
accrued and unpaid interest to the date of purchase.

     The indentures for the 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 transactions with affiliates or engage in unrelated lines of
business. These covenants are subject to certain exceptions and qualifications.

RESULTS OF OPERATIONS

     The following tables highlight rig days worked, contract drilling revenues
and drilling operating expenses for our daywork and turnkey operations for the
years ended December 31, 2000, 1999 and 1998.

<TABLE>
<CAPTION>
                                                        FOR THE YEAR ENDED DECEMBER 31, 2000
                                                       ---------------------------------------
                                                         DAYWORK        TURNKEY
                                                       OPERATIONS    OPERATIONS(2)     TOTAL
                                                       -----------   -------------   ---------
                                                            (AMOUNTS IN THOUSANDS, EXCEPT
                                                            AVERAGES PER RIG DAY WORKED)
<S>                                                    <C>           <C>             <C>
Rig days worked......................................     21,533          4,574        26,107
Contract drilling revenue............................   $187,408        $81,926      $269,334
Drilling operating expenses(1).......................    141,799         71,398       213,197
                                                        --------        -------      --------
Gross profit (loss)..................................   $ 45,609        $10,528      $ 56,137
                                                        ========        =======      ========
Averages per rig day worked:
  Contract drilling revenue..........................   $  8,703        $17,911      $ 10,317
  Drilling operating expenses........................      6,585         15,610         8,167
                                                        --------        -------      --------
  Gross profit (loss)................................   $  2,118        $ 2,301      $  2,150
                                                        ========        =======      ========
</TABLE>

                                        23
<PAGE>   24

<TABLE>
<CAPTION>
                                                        FOR THE YEAR ENDED DECEMBER 31, 1999
                                                       ---------------------------------------
                                                         DAYWORK        TURNKEY
                                                       OPERATIONS    OPERATIONS(2)     TOTAL
                                                       -----------   -------------   ---------
                                                            (AMOUNTS IN THOUSANDS, EXCEPT
                                                            AVERAGES PER RIG DAY WORKED)
<S>                                                    <C>           <C>             <C>
Rig days worked......................................     13,250          3,186        16,436
Contract drilling revenue............................   $ 89,863        $57,340      $147,203
Drilling operating expenses(1).......................     94,129         46,218       140,347
                                                        --------        -------      --------
Gross profit (loss)..................................   $ (4,266)       $11,122      $  6,856
                                                        ========        =======      ========
Averages per rig day worked:
  Drilling revenue...................................   $  6,782        $17,997      $  8,956
  Operating expenses.................................      7,104         14,507         8,539
                                                        --------        -------      --------
  Gross profit (loss)................................   $   (322)       $ 3,490      $    417
                                                        ========        =======      ========
</TABLE>

<TABLE>
<CAPTION>
                                                        FOR THE YEAR ENDED DECEMBER 31, 1998
                                                       ---------------------------------------
                                                         DAYWORK        TURNKEY
                                                       OPERATIONS    OPERATIONS(2)     TOTAL
                                                       -----------   -------------   ---------
                                                            (AMOUNTS IN THOUSANDS, EXCEPT
                                                            AVERAGES PER RIG DAY WORKED)
<S>                                                    <C>           <C>             <C>
Rig days worked......................................     22,648          3,582        26,230
Contract drilling revenue............................   $188,719        $52,260      $240,979
Drilling operating expenses(1).......................    150,857         40,560       191,417
                                                        --------        -------      --------
Gross profit (loss)..................................   $ 37,862        $11,700      $ 49,562
                                                        ========        =======      ========
Averages per rig day worked:
  Contract drilling revenue..........................   $  8,333        $14,590      $  9,187
  Drilling operating expenses........................      6,661         11,324         7,298
                                                        --------        -------      --------
  Gross profit (loss)................................   $  1,672        $ 3,266      $  1,889
                                                        ========        =======      ========
</TABLE>

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

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

(2) Turnkey operations include the results from turnkey and footage contracts.

COMPARISON OF FISCAL YEARS ENDED DECEMBER 31, 2000 AND 1999

     Contract drilling revenue increased approximately $122.1 million, or 83%,
to $269.3 million for the year ended December 31, 2000, from $147.2 million for
the year ended December 31, 1999. The increase is due to an increase in total
rig days worked of 9,671 days, or 59%, and an increase in the total average
revenue per day of $1,361, or 15%. The increase in the total days worked is the
result of increases in both daywork and turnkey drilling activity while the
increase in the total average revenue per day is due primarily to higher
dayrates received from daywork operations.

     Drilling operating expenses increased by approximately $72.9 million, or
52%, to $213.2 million for the year ended December 31, 2000, as compared to
$140.3 million for the year ended December 31, 1999. The increase is the direct
result of the overall increased level of activity from both daywork and turnkey
operations discussed above and increases in wages. Operating expenses on a per
day basis, however, decreased due to overhead items being spread over more days
worked and a decrease in the percentage of turnkey days worked to total days
worked from 19.4% in 1999 to 17.5% in 2000. Increases in crew wages of 5% on
July 1, 2000 and 14% on August 31, 2000 were for the most part passed on to
customers through higher dayrates.

     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

                                        24
<PAGE>   25

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 increased by $2.8 million, or 8%, to
$36.8 million for the year ended December 31, 2000 compared to $34.0 million for
the year ended December 31, 1999. The increase is primarily due to additional
depreciation attributable to capital expenditures during the last half of 1999
and during the year ended December 31, 2000.

     General and administrative expenses increased by $1.5 million, or 22%, to
$8.1 million for the year ended December 31, 2000 compared to $6.7 million for
the year ended December 31, 1999, due primarily to the increased level of our
operating activity.

     During the year ended December 31, 1999, we recorded $320,000 in unusual
charges. These unusual charges consisted entirely of severance costs.

     The difference in interest expense for the years ended December 31, 2000
and 1999 is negligible as the average outstanding debt balance was virtually the
same.

     Interest income increased by $1.6 million, or 103%, to $3.1 million for the
year ended December 31, 2000, from $1.5 million for the year ended December 31,
1999 due primarily to higher cash balances. Cash balances were higher as a
result of the issuance of 13.0 million shares of common stock on April 4, 2000
which netted the Company $51.6 million.

     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 the
$203,000 in related taxes, is classified as an extraordinary item.

COMPARISON OF FISCAL YEARS ENDED DECEMBER 31, 1999 AND 1998

     Contract drilling 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 total
rig days worked of 9,794 days, or 37%, and a decrease in the total average
revenue per day of $231, or 3%. The decrease in total rig days worked is due
primarily to a reduction of 9,398 days from daywork operations. The decrease in
average revenue per day is due to lower dayrates 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.

     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 in drilling
operating expenses is a direct result of the decrease in rig days worked of
9,794 which were partially offset by an increase in operating expense per day of
$1,241. 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.

     We completed our contracts in Venezuela late in the first quarter of 1999
and suspended operations in Venezuela thereafter. As a result, total contract
drilling revenue from foreign operations declined to $1.5 million for the year
ended December 31, 1999 compared to $8.7 million for the year ended December 31,
1998. In addition, drilling operating expenses from foreign operations decreased
to $2.1 million for the year ended December 31, 1999 compared to $9.4 million
for the year ended December 31, 1998.

     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.

                                        25
<PAGE>   26

     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 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.

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

     Although we suspended operations in Venezuela in the first quarter of 1999,
historically, operations were performed there by us 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

                                        26
<PAGE>   27

currency hedging arrangements and have not during the three-year period ending
December 31, 2000 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, 2000 and 1999, we recognized foreign exchange losses of
$30,000, 120,000 and $178,000, respectively.

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. On March 12, 2001
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.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                                    INDEX TO
                       CONSOLIDATED FINANCIAL STATEMENTS
                        AND FINANCIAL STATEMENT SCHEDULE

<TABLE>
<S>                                                           <C>
Independent Auditors' Report................................   28
Consolidated Balance Sheets as of December 31, 2000 and
  1999......................................................   29
Consolidated Statements of Operations for the Years Ended
  December 31, 2000, 1999, and 1998.........................   30
Consolidated Statements of Shareholders' Equity and
  Comprehensive Income for the Years Ended December 31,
  2000, 1999, and 1998......................................   31
Consolidated Statements of Cash Flows for the Years Ended
  December 31, 2000, 1999, and 1998.........................   32
Notes to Consolidated Financial Statements..................   33
Financial Statement Schedule:
  Schedule II -- Valuation and Qualifying Accounts..........   44
</TABLE>

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

                                        27
<PAGE>   28

                          INDEPENDENT AUDITORS' REPORT

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

     We have audited the accompanying consolidated balance sheets of Grey Wolf,
Inc. and Subsidiaries as of December 31, 2000 and 1999, 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, 2000. In connection with our audits of the consolidated financial
statements, we have also audited the financial statement schedule for the years
ended December 31, 2000, 1999 and 1998. 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 auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

     In our opinion, 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, 2000 and 1999, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States of America. 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 12, 2001

                                        28
<PAGE>   29

                        GREY WOLF, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                   (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)

                                     ASSETS

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              ---------------------
                                                                2000        1999
                                                              ---------   ---------
<S>                                                           <C>         <C>
Current assets:
  Cash and cash equivalents.................................  $  51,569   $  20,500
  Restricted cash -- insurance deposits.....................        859         762
  Accounts receivable, net of allowance of $1,800 and
    $1,708, respectively....................................     61,729      37,002
  Prepaids and other current assets.........................      3,190       2,374
                                                              ---------   ---------
         Total current assets...............................    117,347      60,638
Property and equipment:
  Land, buildings and improvements..........................      5,103       5,041
  Drilling equipment........................................    606,762     568,012
  Furniture and fixtures....................................      2,464       2,227
                                                              ---------   ---------
         Total property and equipment.......................    614,329     575,280
  Less: accumulated depreciation and amortization...........   (227,468)   (190,919)
                                                              ---------   ---------
         Net property and equipment.........................    386,861     384,361
Other noncurrent assets.....................................      6,658       7,847
                                                              ---------   ---------
                                                              $ 510,866   $ 452,846
                                                              =========   =========

                       LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
  Current maturities of long-term debt......................  $     545   $     831
  Accounts payable -- trade.................................     24,447      21,231
  Accrued workers' compensation.............................      4,805       3,072
  Payroll and related employee costs........................      6,795       3,455
  Accrued interest payable..................................     11,167      11,177
  Other accrued liabilities.................................      9,559       4,519
                                                              ---------   ---------
         Total current liabilities..........................     57,318      44,285
                                                              ---------   ---------
Senior notes................................................    249,440     249,354
Long-term debt, net of current maturities...................        411         608
Other long-term liabilities.................................      2,158       2,252
Deferred income taxes.......................................     28,123      30,770
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; 179,880,591 and 165,166,891 issued and
    outstanding, respectively...............................     17,988      16,516
  Additional paid-in capital................................    325,417     270,527
  Cumulative translation adjustments........................       (454)       (454)
  Accumulated deficit.......................................   (169,535)   (161,012)
                                                              ---------   ---------
         Total shareholders' equity.........................    173,416     125,577
                                                              ---------   ---------
                                                              $ 510,866   $ 452,846
                                                              =========   =========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                        29
<PAGE>   30

                        GREY WOLF, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                YEARS ENDED DECEMBER 31,
                                                            ---------------------------------
                                                              2000        1999        1998
                                                            ---------   ---------   ---------
<S>                                                         <C>         <C>         <C>
Revenues:
  Contract drilling.......................................  $ 269,334   $ 147,203   $ 240,979
Costs and expenses:
  Drilling operations.....................................    213,197     140,347     191,417
  Depreciation and amortization...........................     36,768      34,003      38,069
  General and administrative..............................      8,131       6,678       8,880
  Provision for asset impairment..........................         --          --      93,193
  Provision for doubtful accounts.........................         92         577       1,723
  Unusual charges.........................................         --         320       1,722
                                                            ---------   ---------   ---------
          Total costs and expenses........................    258,188     181,925     335,004
                                                            ---------   ---------   ---------
Operating income (loss)...................................     11,146     (34,722)    (94,025)
Other income (expense):
  Interest expense........................................    (23,936)    (24,054)    (21,621)
  Interest income.........................................      3,090       1,522       1,946
  Gain on sale of assets..................................         69         556       2,709
  Other, net..............................................        (30)       (120)       (173)
                                                            ---------   ---------   ---------
          Other income (expense), net.....................    (20,807)    (22,096)    (17,139)
                                                            ---------   ---------   ---------
Loss before income taxes..................................     (9,661)    (56,818)   (111,164)
Income tax benefit........................................     (1,138)    (15,976)    (27,951)
                                                            ---------   ---------   ---------
Loss before extraordinary item............................     (8,523)    (40,842)    (83,213)
Extraordinary item, net of tax of $203....................         --        (420)         --
                                                            ---------   ---------   ---------
Net loss applicable to common stock.......................  $  (8,523)  $ (41,262)  $ (83,213)
                                                            =========   =========   =========
Basic and diluted net loss per common share...............  $    (.05)  $    (.25)  $    (.50)
                                                            =========   =========   =========
Basic and diluted weighted average shares outstanding.....    175,866     165,108     164,944
                                                            =========   =========   =========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                        30
<PAGE>   31

                        GREY WOLF, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                            AND COMPREHENSIVE INCOME
                             (AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                            SERIES B JUNIOR                                                        CUMULATIVE
                             PARTICIPATING                  COMMON       ADDITIONAL               COMPREHENSIVE
                            PREFERRED STOCK   COMMON        STOCK         PAID-IN                    INCOME
                             $1 PAR VALUE     SHARES    $.10 PAR VALUE    CAPITAL      DEFICIT     ADJUSTMENTS     TOTAL
                            ---------------   -------   --------------   ----------   ---------   -------------   --------
<S>                         <C>               <C>       <C>              <C>          <C>         <C>             <C>
Balance, December 31,
  1997....................         --         164,746      $16,474        $269,733    $ (36,537)      $(454)      $249,216
  Exercise of stock
    options...............         --            319            32             656           --          --            688
  Comprehensive 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 net
    loss..................         --             --            --              --      (41,262)         --        (41,262)
                                  ---         -------      -------        --------    ---------       -----       --------
Balance, December 31,
  1999....................         --         165,167       16,516         270,527     (161,012)       (454)       125,577
  Issuance of common
    stock.................         --         13,000         1,300          50,334           --          --         51,634
  Exercise of stock
    options...............         --          1,714           172           3,047           --          --          3,219
  Tax benefit of stock
    option exercises......         --             --            --           1,509           --          --          1,509
  Comprehensive net
    loss..................         --             --            --              --       (8,523)         --         (8,523)
                                  ---         -------      -------        --------    ---------       -----       --------
Balance, December 31,
  2000....................         --         179,881      $17,988        $325,417    $(169,535)      $(454)      $173,416
                                  ===         =======      =======        ========    =========       =====       ========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                        31
<PAGE>   32

                        GREY WOLF, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                  YEARS ENDED DECEMBER 31,
                                                              --------------------------------
                                                                2000       1999        1998
                                                              --------   ---------   ---------
<S>                                                           <C>        <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss..................................................  $ (8,523)  $ (41,262)  $ (83,213)
  Adjustments to reconcile net loss to net cash provided by
     (used in) operating activities:
     Depreciation and amortization..........................    36,768      34,003      38,069
     Provision for asset impairment.........................        --          --      93,193
     Provision for doubtful accounts........................        92         577       1,723
     Extraordinary item, net of taxes.......................        --         420          --
     Gain on sale of assets.................................       (69)       (556)     (2,709)
     Foreign exchange loss..................................        30         120         178
     Deferred income taxes..................................    (2,647)    (15,155)    (27,033)
  Tax benefit of stock option exercises.....................     1,509          --          --
  (Increase) decrease in restricted cash....................       (97)         --        (312)
  (Increase) decrease in accounts receivable................   (24,819)     (6,788)     24,014
  (Increase) decrease in other current assets...............      (816)        527       3,585
  Increase (decrease) in accounts payable trade.............     3,216       7,345     (15,616)
  Increase (decrease) in accrued workers' compensation......     1,733      (1,431)      1,825
  Increase (decrease) in customer advances..................       702          --        (478)
  Increase (decrease) in other current liabilities..........     7,638       2,242      (1,327)
  Increase (decrease) in other..............................     1,095       2,488      (1,100)
                                                              --------   ---------   ---------
     Cash provided by (used in) operating activities........    15,812     (17,470)     30,799
                                                              --------   ---------   ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Property and equipment additions..........................   (39,275)     (7,065)   (114,294)
  Proceeds from sales of equipment..........................        76       1,054       4,386
                                                              --------   ---------   ---------
     Cash used in investing activities......................   (39,199)     (6,011)   (109,908)
                                                              --------   ---------   ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from senior notes................................        --          --      75,000
  Proceeds from long-term debt..............................       663         203      30,620
  Repayments of long-term debt..............................    (1,060)     (1,099)    (31,304)
  Issuance of common stock..................................    51,634          --          --
  Financing costs...........................................        --        (861)     (3,626)
  Proceeds from exercise of stock options...................     3,219         148         688
  Redemption of Series A Preferred stock....................        --        (305)         --
                                                              --------   ---------   ---------
     Cash provided by (used in) financing activities........    54,456      (1,914)     71,378
                                                              --------   ---------   ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........    31,069     (25,395)     (7,731)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................    20,500      45,895      53,626
                                                              --------   ---------   ---------
CASH AND CASH EQUIVALENTS, END OF YEAR......................  $ 51,569   $  20,500   $  45,895
                                                              ========   =========   =========
SUPPLEMENTAL CASH FLOW DISCLOSURE
CASH PAID FOR INTEREST:.....................................  $ 22,667   $  22,625   $  17,955
                                                              ========   =========   =========
CASH PAID FOR (REFUND OF) TAXES:............................  $     --   $     (15)  $  (1,985)
                                                              ========   =========   =========
NON CASH TRANSACTIONS:
  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.

                                        32
<PAGE>   33

                        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 a holding company with no independent assets or
operations but through its subsidiaries is engaged in the business of providing
onshore contract drilling services to the oil and gas industry. Grey Wolf, Inc.,
through its subsidiaries, currently conducts operations in Alabama, Arkansas,
Louisiana, Mississippi, Texas and Wyoming 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, 2000, 1999 and
1998, the Company recognized foreign exchange losses of $30,000, $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.

     Earnings per Share. Basic earnings per share is based on weighted average
shares outstanding without any dilutive effects considered and diluted earnings
per share reflects dilution from all contingently issuable shares, including
options, warrants and convertible preferred stock. The Company incurred net
losses for the years ended December 31, 2000, 1999, and 1998 and have,
therefore, excluded certain securities from the computation of diluted earnings
per share as the effect would be anti-dilutive. Securities excluded from the
computation of diluted earnings per share for the year ended December 31, 2000,
1999 and 1998 were options to purchase 7.3 million shares, 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.

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

     The Company and its domestic subsidiaries file a consolidated federal
income tax return. The Company's foreign subsidiaries file tax returns in the
country where they are domiciled. The Company records current income taxes based
on its estimated tax liability in the United States and foreign countries for
the period.

     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, 2000 and 1999 was
$243.8 million and $225.0 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 $859,000 at December 31, 2000 and
$762,000 at December 31, 1999, 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 major and 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. 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 2000,
1999, and 1998 comprehensive income consisted only of net 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 No. 133 standardizes the accounting 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. The Company will adopt
SFAS No. 133 for our fiscal year beginning January 1, 2001 and the Company
believes that the adoption of the provisions of SFAS No. 133 will not have a
material impact on the Company's financial position or results of operations.

     The Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements" in
December 1999. SAB No. 101 summarizes the SEC staff's views in applying
generally accepted principles to selected revenue recognition issues. The SEC
has recently issued a document to address significant implementation issues
related to SAB No. 101. The Company has evaluated the impact of SAB No. 101 on
its activities and is in compliance with the guidance set forth in SAB No. 101.
                                        34
<PAGE>   35
                        GREY WOLF, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(2) SIGNIFICANT PROPERTY TRANSACTIONS

     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.

     The Murco acquisition was accounted for using purchase accounting. As such,
all revenues and expenses were recorded by the Company beginning at the date of
acquisition.

     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.

(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,
                                                       ---------------------------------
                                                         2000        1999        1998
                                                       ---------   ---------   ---------
<S>                                                    <C>         <C>         <C>
Current
  Federal...........................................   $     --    $     --    $   (935)
  State.............................................         --          --          --
  Foreign...........................................         --          --          17
                                                       --------    --------    --------
                                                             --          --        (918)
                                                       ========    ========    ========
Deferred
  Federal...........................................     (1,366)    (15,460)    (23,377)
  State.............................................        228        (516)     (3,656)
                                                       --------    --------    --------
                                                       $ (1,138)   $(15,976)   $(27,033)
                                                       ========    ========    ========
</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

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

loss and tax credit carryforwards. The tax affects of the Company's temporary
differences and carryforwards and tax benefits from stock option exercises are
as follows (amounts in thousands):

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                               -----------------
                                                                2000      1999
                                                               -------   -------
<S>                                                            <C>       <C>
Deferred tax assets
  Net operating loss carryforwards..........................   $43,917   $38,469
  Tax credit carryforwards..................................        14     2,414
  Workers compensation accruals.............................     2,711     2,044
  Other.....................................................       679       409
                                                               -------   -------
                                                                47,321    43,336
  Valuation allowance.......................................        --    (2,400)
                                                               -------   -------
                                                                47,321    40,936
Deferred tax liabilities
  Depreciation and amortization.............................    75,444    71,706
                                                               -------   -------
Net deferred tax liability..................................   $28,123   $30,770
                                                               =======   =======
</TABLE>

     At December 31, 2000 and 1999, the Company had U.S. net operating loss
("NOL") carryforwards of $143.7 million and $130.9 million, respectively, which
expire at various times through 2020. In addition, the Company had investment
tax credit carryforwards ("ITC") of approximately $2.4 million which expired in
2000. The NOL carryforwards 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 transactions 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,
                                                       ---------------------------------
                                                         2000        1999        1998
                                                       ---------   ---------   ---------
<S>                                                    <C>         <C>         <C>
Income tax expense (benefit) at statutory rate......   $ (3,381)   $(19,886)   $(38,908)
Increase (decrease) in taxes resulting from:
  Expiration of NOL carryforwards...................        830       2,479          --
  Permanent differences, primarily due to basis
     differences in acquired assets.................      1,226       1,127      10,004
  Loss of foreign deductions........................        250         426       3,040
  State taxes (net).................................        148        (336)     (2,376)
  Other.............................................       (211)        214         289
                                                       --------    --------    --------
Income tax expense (benefit)........................   $ (1,138)   $(15,976)   $(27,951)
                                                       ========    ========    ========
</TABLE>

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(4) LONG-TERM DEBT

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

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              -------------------
                                                                2000       1999
                                                              --------   --------
<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..............................................  $249,440   $249,354
Capital leases, secured by transportation and other
  equipment, bearing interest at 10% to 14%.................       956      1,439
                                                              --------   --------
                                                               250,396    250,793
Less current maturities.....................................       545        831
                                                              --------   --------
Long-term debt..............................................  $249,851   $249,962
                                                              ========   ========
</TABLE>

     In June 1997 and May 1998, the Company concluded public offerings of $175.0
million and $75.0 million, respectively, in principal amount of the senior
notes. The senior notes ("Notes") bear interest at 8 % per annum and mature July
1, 2007. The Notes are general unsecured senior obligations of the Company and
are fully and unconditionally guaranteed, on a joint and several basis, by all
domestic wholly-owned subsidiaries of the Company. In addition, non-guarantor
subsidiaries are immaterial. All fees and expenses incurred at the time of
issuance are being amortized over the life of the Notes.

     The Notes are not redeemable at the option of the Company prior to July 1,
2002. On or after such date, the Company shall have the option to redeem the
Notes in whole or in part during the twelve months beginning July 1, 2002 at
104.4375%, beginning July 1, 2003 at 102.9580%, beginning July 1, 2004 at
101.4792% and beginning July 1, 2005 and thereafter at 100.0000% together with
any interest accrued and unpaid to the redemption date. Upon a change of control
as defined in the indentures, each holder of the Notes will have the right to
require the Company to repurchase all or any part of such holder's Notes at a
purchase price equal to 101% of the aggregate principal amount thereof, plus
accrued and unpaid interest to the date of purchase.

     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
certain drilling rig equipment located in the 48 contiguous United States. The
CIT Facility is a four year revolving facility with automatic renewals
thereafter unless terminated by the lender on any subsequent anniversary date
and then only upon 60 days prior notice. Periodic interest payments are due 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%. The CIT
Facility provides up to $10.0 million available for letters of credit. The
Company is required to pay a commitment fee of 0.375% per annum on the unused
portion of the CIT Facility and letters of credit accrue a fee of 1.25% per
annum. In addition, the CIT Facility contains certain affirmative and negative
covenants. Substantially all of the Company's assets, including its drilling
equipment, are pledged as collateral under the CIT Facility and is also secured
by our guarantees and certain of our wholly-owned subsidiaries guarantees. 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 and had $5.7 million outstanding under
letters of credit at December 31, 2000.

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     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
Company's previous facility.

     The Company capitalized interest of $874,000 for the year ended December
31, 1998. Annual maturities of the debt outstanding at December 31, 2000 for the
next five years are as follows (amounts in thousands): 2001 -- $545;
2002 -- $200; 2003 -- $144; 2004 -- $67; 2005 $-0- and thereafter $249,440.

(5) CAPITAL STOCK AND STOCK OPTION PLANS

     On April 4, 2000, the Company completed an offering of 13,000,000 shares of
its common stock which yielded net proceeds to the Company of $51.6 million. The
shares were purchased by the underwriter for $4.00 per share and the underwriter
advised the Company that the shares were resold to the public at a price of
$4.125 per share. The proceeds from the issuance of the shares of common stock,
net of offering costs have been and are expected to continue to be used to
purchase top drive units, for capital expenditures to return some of the
Company's rigs to marketed status when market conditions justify their
reactivation and for general corporate purposes, including working capital.

     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") was canceled in March 1999 but prior to that date,
reserved 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") reserved
250,000 shares of common stock for issuance upon the exercise of options and
provided for the automatic grant of options to purchase shares of common stock
to any non-employee who became a director of the Company. The 1987 Director Plan
was canceled in June 1997. 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, 2000, options under the
1996 Plan to purchase 3,527,525 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 1,850,000 shares
outstanding for other Stock Option Agreements between the Company and its'
executive officers and directors. A portion of the outstanding options became
exercisable upon issuance and the remaining become exercisable in varying
increments over three to five-year periods. The majority of the options expire
on the tenth anniversary of the date of grant. Stock option activity for all
plans was as follows (number of shares in thousands):

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
                                                              NUMBER         OPTION
                                                             OF SHARES    PRICE RANGE
                                                             ---------   --------------
<S>                                                          <C>         <C>
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
                                                                (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
  Granted..................................................    2,031     $3.06 -- $ 4.50
  Exercised................................................     (308)    $ .69 -- $ .938
                                                                (690)    $1.00 -- $ 1.75
                                                                (665)    $2.50 -- $ 2.88
                                                                 (51)    $3.13 -- $ 4.06
  Cancelled................................................      (88)    $ .69 -- $ .938
                                                                 (70)    $3.06 -- $ 4.06
                                                                 (10)    $8.25

Outstanding December 31, 2000..............................    1,928     $ .69 -- $ 1.00
                                                               1,840     $1.13 -- $ 1.75
                                                               2,506     $2.56 -- $ 3.13
                                                               1,044     $4.06 -- $ 4.50

Exercisable December 31, 2000..............................    2,771     $ .69 -- $ 4.38
</TABLE>

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     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>
                                                         2000       1999       1998
                                                       --------   --------   --------
<S>                                                    <C>        <C>        <C>
Net loss
  As reported........................................  $ (8,523)  $(41,262)  $(83,213)
  Pro forma..........................................  $ (9,432)  $(42,623)  $(84,563)
Loss per share -- basic and diluted
  As reported........................................  $  (0.05)  $   (.25)  $   (.50)
  Pro forma..........................................  $  (0.05)  $   (.26)  $   (.51)
</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 67%; and expected option lives of five
years.

(6) SEGMENT AND GEOGRAPHIC INFORMATION

     The Company manages its business as two reportable segments; domestic
operations and foreign operations. Although the Company provides contract
drilling services in several markets domestically, these operations have been
aggregated into one reportable segment based on the similarity of economic
characteristics among all markets including the nature of the services provided
and the type of customers of such services.

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

<TABLE>
<CAPTION>
                                                       FOR THE YEARS ENDED DECEMBER 31,
                                                       ---------------------------------
                                                         2000        1999        1998
                                                       ---------   ---------   ---------
<S>                                                    <C>         <C>         <C>
Revenues:
  Domestic...........................................  $269,334    $145,739    $232,276
  Foreign............................................        --       1,464       8,703
                                                       --------    --------    --------
                                                       $269,334    $147,203    $240,979
                                                       ========    ========    ========
Operating income (loss):
  Domestic...........................................  $ 11,831    $(33,534)   $(85,013)
  Foreign............................................      (685)     (1,188)     (9,012)
                                                       --------    --------    --------
                                                       $ 11,146    $(34,722)   $(94,025)
                                                       ========    ========    ========
Total assets:
  Domestic...........................................   506,999    $448,469    $489,543
  Foreign............................................     3,867       4,377      11,760
                                                       --------    --------    --------
                                                       $510,866    $452,846    $501,303
                                                       ========    ========    ========
</TABLE>

     During 2000, operating income (loss) above includes provisions for doubtful
accounts from domestic operations of $92,000.

     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).

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     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 2000, 1999 and 1998
were $0, $257,000 and $2.5 million, respectively, while depreciation expense was
$385,000, $437,000 and $743,000, respectively.

(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 current or former directors.
Total purchases during 2000 and 1999 were $6,000 and $784,000, respectively. The
Company also performed contract drilling services, in the normal course of
business, for an affiliate of one of the Company's directors. Total revenues
recognized during 2000 was $2.2 million.

     One of the Company's directors is a partner in a law firm that performed
legal services for the Company. During 2000, 1999 and 1998, the Company paid the
firm $0, $41,000 and $8,000.

     During 1998, the Company sold its Eastern Division assets to Union
Drilling, Inc., an affiliate of two 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,
2000: 2001 -- $554,000; 2002 -- $596,000; 2003 -- $583,000; 2004 -- $501,000 and
2005 -- $131,000.

     Lease payments under operating leases for 2000, 1999, and 1998 were
approximately $589,000, $556,000, and $458,000, respectively.

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

(9) CONTINGENCIES

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

     Substantially all of the Company's contract drilling activities are
conducted with independent and major oil and gas 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. The Company matches 100% of the first 3% of
individual employee contributions and 50% of the next 3% of individual employee
contributions. Employer matching contributions under the plan totaled $1.0
million, $771,000 and $1.4 million for the years ended December 31, 2000, 1999
and 1998, respectively. Participants vest in employer matching contributions
over a five year period based upon service with the Company.

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(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, were not 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.

(12) QUARTERLY FINANCIAL DATA (UNAUDITED)

     Summarized quarterly financial data for years ended December 31, 2000, 1999
and 1998 are set forth below (amounts in thousands, except per share amounts).

<TABLE>
<CAPTION>
                                                           QUARTER ENDED
                                             ------------------------------------------
                                              MARCH       JUNE     SEPTEMBER   DECEMBER
                                               2000       2000       2000        2000
                                             --------   --------   ---------   --------
<S>                                          <C>        <C>        <C>         <C>
Revenues...................................  $ 58,709   $ 54,937   $ 73,373    $ 82,315
Gross profit (loss)(1).....................     8,674      8,589     13,693      25,181
Operating income (loss)....................    (2,069)    (2,376)     2,369      13,222
Operating income (loss) before income
  taxes....................................    (7,788)    (7,435)    (2,655)      8,217
Net income (loss)..........................    (5,692)    (5,472)    (2,331)      4,972
Net income (loss) per common share
  -- basic and diluted.....................      (.03)      (.03)      (.01)        .03
</TABLE>

<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>

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<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>

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

(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).

                                        43
<PAGE>   44

                                                                     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, 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
                                                       ======       ======       =======       ======
Year Ended December 31, 2000
  Allowance for doubtful accounts receivable.......    $1,708       $   92       $    --       $1,800
                                                       ======       ======       =======       ======
</TABLE>

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

     None.

                                        44
<PAGE>   45

                                    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 2001 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, 2000.

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, 2000.

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 2001 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, 2000.

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 2001 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, 2000.

                                        45
<PAGE>   46

                                    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
        -------                                   ---------
<C>                      <S>
          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>

                                        46
<PAGE>   47

<TABLE>
<CAPTION>
        EXHIBIT
          NO.                                     DOCUMENTS
        -------                                   ---------
<C>                      <S>
          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).
</TABLE>

                                        47
<PAGE>   48

<TABLE>
<CAPTION>
        EXHIBIT
          NO.                                     DOCUMENTS
        -------                                   ---------
<C>                      <S>
          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).
         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).
</TABLE>

                                        48
<PAGE>   49

<TABLE>
<CAPTION>
        EXHIBIT
          NO.                                     DOCUMENTS
        -------                                   ---------
<C>                      <S>
         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).
         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.)
</TABLE>

                                        49
<PAGE>   50

<TABLE>
<CAPTION>
        EXHIBIT
          NO.                                     DOCUMENTS
        -------                                   ---------
<C>                      <S>
         10.22           -- Form of Shareholder Agreement entered into January 31,
                            1997, by Grey Wolf, Inc., Drillers, Inc., and Lucien
                            Flournoy, Maxine E. Flournoy, Betty Louise Flournoy
                            Fields, Helen Ruth Flournoy Pope, Mary Anne Flournoy
                            Guthrie, F.C. West, Gregory M. Guthrie, Byron W. Fields,
                            John B. Pope, the Flournoy First, Second and Third Fields
                            Grandchild Trusts, the Flournoy First, Second and Third
                            Pope Grandchild Trusts, and the Flournoy First, Second,
                            Third, Fourth and Fifth Guthrie Grandchild Trusts
                            (incorporated herein by reference to Exhibit 10.22 to
                            Amendment No. 2 to Registration Statement No. 333-20423).
         10.23           -- Drillers Inc. 1982 Stock Option and Long-Term Incentive
                            Plan for Key Employees (incorporated by reference to
                            Drillers Inc. 1982 Annual Meeting definitive proxy
                            solicitation materials.)
         10.24           -- Grey Wolf, Inc. 1987 Stock Option Plan for Non-Employee
                            Directors. (incorporated by reference to Grey Wolf, Inc.
                            1987 Annual Meeting definitive proxy solicitation
                            materials.)
         10.25           -- Form of Non-Qualified Stock Option Agreement dated
                            December 16, 1996, by and between the Company and Forrest
                            M. Conley, Jr. (incorporated by reference to DI
                            Industries, Inc. Annual Report on Form 10-K for the year
                            ended December 31, 1996.)
         10.26           -- Employment Agreement dated March 17, 1997, by and between
                            the Company and Gary D. Lee. (incorporated by reference
                            to DI Industries, Inc. Annual Report of Form 10-K for the
                            year ended December 31, 1996.)
         10.27           -- Form of Incentive Stock Option Agreement dated March 17,
                            1997, by and between the Company and Gary D. Lee
                            (incorporated by reference to DI Industries, inc. Annual
                            Report of Form 10-K for the year ended December 31,
                            1996.)
         10.28           -- Stock Purchase Agreement by and among Grey Wolf Drilling
                            Company, Grey Wolf, Inc., Murco Drilling Corporation, et
                            al., dated December 30, 1997. (incorporated by reference
                            to Exhibit 10.1 to Form 8-K dated February 5, 1998)
         10.29           -- Employment Agreement dated January 1, 1998, by and
                            between the Company and David W. Wehlmann (incorporated
                            herein by reference to Grey Wolf, Inc. Annual Report on
                            Form 10-K for the year ended December 31, 1997.)
         10.30           -- Form of Incentive Stock Option Agreement dated February
                            10, 1998, by and between the Company and David W.
                            Wehlmann (incorporated herein by reference to Grey Wolf,
                            Inc. Annual Report on Form 10-K for the year ended
                            December 31, 1997.)
         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.
                            (incorporated herein by reference to Grey Wolf, Inc.
                            Annual Report on Form 10-K for the year ended December
                            31, 1999.)
         10.33           -- Non-Qualified Stock Option Agreement dated January 16,
                            1999, by and between the Company and Edward S. Jacob,
                            III. (incorporated herein by reference to Grey Wolf, Inc.
                            Annual Report on Form 10-K for the year ended December
                            31, 1999.)
</TABLE>

                                        50
<PAGE>   51

<TABLE>
<CAPTION>
        EXHIBIT
          NO.                                     DOCUMENTS
        -------                                   ---------
<C>                      <S>
         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
</TABLE>

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

* Filed herewith

          (b) Reports on Form 8-K

              None

                                        51
<PAGE>   52

                                   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 20th day of
March, 2001

                                            GREY WOLF, INC.

                                            By:    /s/ DAVID W. WEHLMANN
                                              ----------------------------------
                                                      David W. Wehlmann,
                                                  Senior Vice President and
                                                   Chief Financial 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                                    CAPACITIES                     DATE
                     ----------                                    ----------                     ----
<C>                                                    <S>                                 <C>

             By: /s/ THOMAS P. RICHARDS                Chairman, President and Chief         March 20, 2001
  -------------------------------------------------      Executive Officer
                 Thomas P. Richards                      (Principal Executive Officer)

              By: /s/ DAVID W. WEHLMANN                Senior Vice President and Chief       March 20, 2001
  -------------------------------------------------      Financial Officer
                  David W. Wehlmann

              By: /s/ MERRIE S. COSTLEY                Vice President and Controller         March 20, 2001
  -------------------------------------------------
                  Merrie S. Costley

             By: /s/ WILLIAM R. ZIEGLER                Director                              March 20, 2001
  -------------------------------------------------
                 William R. Ziegler

               By: /s/ FRANK M. BROWN                                                        March 20, 2001
  -------------------------------------------------
                   Frank M. Brown

             By: /s/ WILLIAM T. DONOVAN                Director                              March 20, 2001
  -------------------------------------------------
                 William T. Donovan

             By: /s/ JAMES K. B. NELSON                Director                              March 20, 2001
  -------------------------------------------------
                 James K. B. Nelson

             By: /s/ ROY T. OLIVER, JR.                Director                              March 20, 2001
  -------------------------------------------------
                 Roy T. Oliver, Jr.

              By: /s/ STEVEN A. WEBSTER                Director                              March 20, 2001
  -------------------------------------------------
                  Steven A. Webster
</TABLE>

                                        52
<PAGE>   53

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
        EXHIBIT
          NO.                                     DOCUMENTS
        -------                                   ---------
<C>                      <S>
          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).
          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).
</TABLE>
<PAGE>   54

<TABLE>
<CAPTION>
        EXHIBIT
          NO.                                     DOCUMENTS
        -------                                   ---------
<C>                      <S>
          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>
<PAGE>   55

<TABLE>
<CAPTION>
        EXHIBIT
          NO.                                     DOCUMENTS
        -------                                   ---------
<C>                      <S>
         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).
</TABLE>
<PAGE>   56

<TABLE>
<CAPTION>
        EXHIBIT
          NO.                                     DOCUMENTS
        -------                                   ---------
<C>                      <S>
         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).
         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.)
</TABLE>
<PAGE>   57

<TABLE>
<CAPTION>
        EXHIBIT
          NO.                                     DOCUMENTS
        -------                                   ---------
<C>                      <S>
         10.24           -- Grey Wolf, Inc. 1987 Stock Option Plan for Non-Employee
                            Directors. (incorporated by reference to Grey Wolf, Inc.
                            1987 Annual Meeting definitive proxy solicitation
                            materials.)
         10.25           -- Form of Non-Qualified Stock Option Agreement dated
                            December 16, 1996, by and between the Company and Forrest
                            M. Conley, Jr. (incorporated by reference to DI
                            Industries, Inc. Annual Report on Form 10-K for the year
                            ended December 31, 1996.)
         10.26           -- Employment Agreement dated March 17, 1997, by and between
                            the Company and Gary D. Lee. (incorporated by reference
                            to DI Industries, Inc. Annual Report of Form 10-K for the
                            year ended December 31, 1996.)
         10.27           -- Form of Incentive Stock Option Agreement dated March 17,
                            1997, by and between the Company and Gary D. Lee
                            (incorporated by reference to DI Industries, inc. Annual
                            Report of Form 10-K for the year ended December 31,
                            1996.)
         10.28           -- Stock Purchase Agreement by and among Grey Wolf Drilling
                            Company, Grey Wolf, Inc., Murco Drilling Corporation, et
                            al., dated December 30, 1997. (incorporated by reference
                            to Exhibit 10.1 to Form 8-K dated February 5, 1998)
         10.29           -- Employment Agreement dated January 1, 1998, by and
                            between the Company and David W. Wehlmann (incorporated
                            herein by reference to Grey Wolf, Inc. Annual Report on
                            Form 10-K for the year ended December 31, 1997.)
         10.30           -- Form of Incentive Stock Option Agreement dated February
                            10, 1998, by and between the Company and David W.
                            Wehlmann (incorporated herein by reference to Grey Wolf,
                            Inc. Annual Report on Form 10-K for the year ended
                            December 31, 1997.)
         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.
                            (incorporated herein by reference to Grey Wolf, Inc.
                            Annual Report on Form 10-K for the year ended December
                            31, 1999.)
         10.33           -- Non-Qualified Stock Option Agreement dated January 16,
                            1999, by and between the Company and Edward S. Jacob,
                            III. (incorporated herein by reference to Grey Wolf, Inc.
                            Annual Report on Form 10-K for the year ended December
                            31, 1999.)
         16.1            -- Change in Certifying Accountant. (incorporated by
                            reference to Exhibit 16.1 to 8-K filed on October 2,
                            1996)
        *21.1            -- List of Subsidiaries of Grey Wolf, Inc.
        *23.1            -- Consent of KPMG LLP
</TABLE>

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* Filed herewith