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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-K þ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended December 31, 2004
 o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission file number 1-8226 (GREY WOLF, INC. LOGO) GREY WOLF, INC.  Texas
    
    74-2144774(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification Number)10370 Richmond Avenue, Suite 600Houston, Texas
    
    77042(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code: 713-435-6100 Securities registered pursuant to Section 12(b) of the Act: Name of each exchangeTitle of each class
    
    on which registeredCommon Stock, par value $0.10
    
    American Stock ExchangeRights to Purchase Junior Participating
    
    American Stock ExchangePreferred Stock, par value $1.00
 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 þ No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K 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. þ Indicate by a check mark whether the registrant is an accelerated filer (as defined in Rule
12b2 of the Act) Yes þ No o. The aggregate market value of the registrants voting stock held
by non-affiliates on June 30, 2004 based upon the closing price on the American Stock Exchange on
that date was approximately $747.7 million. At March 9, 2005, 190,382,741 shares of the Registrants common stock were outstanding. 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
2005 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,
2004, are incorporated by reference into Part III hereof.   -1-




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TABLE OF CONTENTS  PART IItem 1. BusinessItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Submission of Matters to a Vote of Security HoldersPART IIItem 5. Market for Registrants Common Equity and Related Shareholder Matters  and Issuer Purchases of Equity SecuritiesItem 6. Selected Financial DataItem 7. Managements Discussion And Analysis Of Financial Condition And Results Of            OperationsItem 7A. Quantitative and Qualitative Disclosure about Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes In and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPART IIIItem 10. Directors and Executive Officers of the RegistrantItem 11. Executive CompensationItem 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders MattersItem 13. Certain Relationships and Related TransactionsItem 14. Principal Accountant Fees and ServicesPART IVItem 15. Exhibits and Financial Statement SchedulesSIGNATURESExhibit IndexConsent of KPMG LLPCertification of CEO pursuant to Rule 13a-14(a)Certification of CFO pursuant to Rule 13a-14(a)Certification of CEO and CFO pursuant to Section 906    Table of Contents  
 PART I 
 Item 1. Business General Grey Wolf, Inc., a Texas corporation formed in 1980, is a leading provider of contract land
drilling services in the United States. Our customers include independent producers and major oil
and natural gas companies. We conduct all of our operations through our subsidiaries. Our
principal office is located at 10370 Richmond Avenue, Suite 600, Houston, Texas 77042, and our
telephone number is (713) 435-6100. Our website address is www.gwdrilling.com. We make available free of charge through our website our annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as
soon as reasonably practicable after such material is electronically filed with the Securities and
Exchange Commission. Information on our website is not a part of this report. Business Strategy Within the framework of a very cyclical industry, our strategy is to maximize shareholder
value during each phase of an industry cycle. To achieve that strategy, we seek to enter each
phase of our industrys cycles in a stronger position by incorporating the following: Customer and marketing efforts  
    delivering quality, value-added service to our customers;
    maintaining a strong position in certain markets where we operate;
    responding to market conditions by balancing dayrates we receive on our
rigs with the number of rigs we market;
    maintaining a high level of utilization for our marketed rigs;
    using term contracts to provide sufficient cash flow to cover a majority of
the incremental capital expenditures for refurbishments on rigs under term contracts
and to maximize long-term cash flow; Equipment and Operations  
    maintaining a premium fleet of equipment with a bias toward drilling for natural gas;
    enhancing cash flow through our turnkey and trucking operations and use of our top drives;
    controlling costs and exercising capital spending discipline; Growth opportunities  
    searching for new market opportunities 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. Industry Overview According to the Baker Hughes rotary rig count, there were 1,136 land rigs working in the
United States at the peak of the last up cycle in 2001. That number fell to 628 in April 2002, we
believe due to lower commodity prices and the land rig count generally stabilized from April 2002
thru December 2002. Beginning in the first quarter of 2003 the land rig count, per Baker Hughes,
began to increase from an average of 773 rigs working in the first quarter of 2003 to an average of
1,131 rigs working during the fourth quarter of 2004. As of March 4, 2005, the land rig count
climbed to 1,163 rigs working. We believe this increase is due to attractive commodity prices that
our customers are receiving for their production. From the end of 2003 through March 9, 2005, the
average NYMEX near month contract price of natural gas was $6.19 per Mmbtu, while the average NYMEX
near month contract price of West Texas Intermediate Crude was $42.52 per barrel. -2-




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We believe that the industry is at or near full utilization of all currently marketed rigs
readily capable of working. In addition, we believe there is little excess rig capacity in the
market that can be quickly mobilized without significant capital expenditures. The bulk of any
incremental rigs to be added to the market are held by us and two of our largest competitors. Current Conditions and Outlook We believe the outlook for oil and natural gas prices as well as the outlook for land drilling
contractors remains positive as we move through 2005. The land rig count has reached a point that
we believe provides support for increasing dayrates and improved contractual terms. The current
high oil and natural gas commodity prices are providing our customers with the cash flow to pursue
oil and natural gas prospects in the areas where we operate. As of March 9, 2005, commodity prices
remain relatively high with the NYMEX twelve-month strip for natural gas at $7.48 per Mmbtu and the
NYMEX twelve-month strip for oil at $54.14 per barrel. We expect wages and costs to increase in 2005 as a result of this robust demand. We have
already incurred wage increases in the Rocky Mountain Division in late 2004 and have experienced
some escalations in cost during 2004. We also expect that the delivery times for drill pipe and
newly manufactured rig components will lengthen significantly including, for example, delivery
times for mud pumps and draw works. The cost increases and extended delivery times continue to
support a basis for increases in dayrates for 2005. In a tighter market for quality rigs, we are signing an increasing number of term contracts.
We currently have 22 rigs working under term contracts with a term of six months to two years.
Nine more are scheduled to go to work under term contracts by mid-second quarter. We have
approximately 7,600 and 1,200 rig days contracted in 2005 and 2006, respectively, under term
contracts. In addition to our 102 marketed rigs, we have 10 cold-stacked rigs which can be
deployed quickly, and have 15 inventory rigs available for refurbishment and reactivation as demand
dictates. In 2004, we completed a refinancing of our 8 7/8% senior notes with two issues of contingent
convertible senior notes, which significantly reduced our interest expense to $14.8 million for
2004, down from $27.8 million in 2003. The current interest rate on our $125.0 million floating
rate contingent convertible notes is 2.51% per annum and the interest rate on our other contingent
convertible notes instrument is 3.75% per annum. This refinancing also extended our debt maturity
dates (see Note 4 to the consolidated financial statements). We increased our line of credit
facility from $75.0 million to $100.0 million at the end of 2004 and extended the term of this
facility to the end of 2008. We will continue to focus on maintaining a strong balance sheet as
well as higher liquidity and flexibility essential to growth for the future. Operations At March 9, 2005, we had a rig fleet of 127 rigs, 102 of which were marketed, 10 cold-stacked
and 15 held for future refurbishment. Cold-stacked rigs are rigs that are stacked without crews
and are not currently being marketed. We have committed to return two of our ten cold-stacked rigs
to service in approximately mid-2005, both under term contracts with customers. By returning these
two cold-stacked rigs to service with term contracts, we are able to provide sufficient cash flow
to cover the incremental capital expenditures for the required refurbishments. We currently conduct our operations in the following domestic drilling markets:  
    Ark-La-Tex;
    Gulf Coast;
    Mississippi/Alabama;
    South Texas;
    Rocky Mountain; and
    West Texas. We conduct our operations primarily in 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. However, we
continually evaluate opportunities to enter foreign markets in which we can enter term contracts to
support such a commitment. During 2004, approximately 98% of the wells we drilled for our
customers were drilled in search of natural gas. Larger natural gas reserves are -3-




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typically found in deeper geological formations and generally require premium equipment and
quality crews to drill the wells. Ark-La-Tex Division. Our Ark-La-Tex division provides drilling services primarily in
Northeast Texas, Northern Louisiana and Southern Arkansas, and the Mississippi/Alabama market. At
March 9, 2005, we had 20 marketed rigs in this division which consisted of 11 diesel electric rigs
and nine mechanical rigs, including one trailer-mounted rig. Our Ark-La-Tex division also operates
a fleet of trucks which is used exclusively to move our rigs. The Ark-La-Tex division manages the
operations of our West Texas district. We had an average of 20 rigs working in our Ark-La-Tex division during 2004. Daywork
contracts generated approximately 83% of the divisions revenues, while turnkey and footage
contracts generated the remaining 17%. The average revenue per rig day worked by the division
during 2004 was $12,153. Gulf Coast Division. Our Gulf Coast division provides drilling services in Southern Louisiana
and along the upper Texas Gulf Coast. At March 9, 2005, we had 24 marketed rigs in this division
which consist of 19 diesel electric rigs and five mechanical rigs. We had an average of 20 rigs working in our Gulf Coast division during 2004. Daywork
contracts generated approximately 62% of the divisions revenues, while turnkey and footage
contracts generated the remaining 38%. The average revenue per rig day worked by the division
during 2004 was $14,566. South Texas Division. At March 9, 2005, we had 29 marketed rigs in this division. The
marketed rigs consisted of 16 diesel electric rigs, and 13 mechanical rigs. Nine of these marketed
rigs are trailer-mounted, in response to the market demands of this division. The South Texas
division also operates a fleet of trucks which is used exclusively to move our rigs. We had an average of 27 rigs working in our South Texas division during 2004. Daywork
contracts generated approximately 59% of the divisions revenues, while turnkey and footage
contracts generated the remaining 41%. The average revenue per rig day worked by the division
during 2004 was $15,182. Rocky Mountain Division. Our Rocky Mountain division provides drilling services in the market
area which consists of Wyoming, Colorado, northwest Utah and northern New Mexico. We began
operations in the Rocky Mountain market in June 2001 and the Company acquired New Patriot Drilling
Corp. (Patriot) and its ten rigs in April, 2004. We had 17 marketed rigs in this division at
March 9, 2005, which consisted of seven diesel electric rigs and ten mechanical rigs. We had an average of ten rigs working in our Rocky Mountain Division during 2004. Daywork
contracts generated 100% of the revenue in this division and the average revenue per rig day worked
during 2004 was $11,579. West Texas District. Our West Texas district provides drilling services in West Texas,
Southeast New Mexico and the Mid-Continent region. We began operations in West Texas in October
2001. Since that time, we have increased the number of marketed rigs in this district to 11,
including six diesel electric rigs and five mechanical rigs at March 9, 2005. During 2004, we
averaged revenue per rig day worked of $10,157, all of which was under daywork contracts. Cold Stacked Rigs and Rigs Held for Refurbishment At March 9, 2005, we had the ability to return each of our ten cold-stacked rigs to work at an
estimated cost of $1.0 million to $3.0 million per rig, excluding pipe. In addition, at March 9,
2005, we had 15 rigs held for future refurbishment that could be returned to service for an
estimated cost of approximately $5.0 million to $8.0 million per rig, excluding drill pipe and
drill collars. The actual number of rigs reactivated in 2005, if any, and in the future will
depend upon 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. The actual cost of reactivating these rigs would also depend upon the specific
customer requirements and to the extent that we choose to upgrade these rigs. -4-




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Contracts Our contracts for drilling oil and natural 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. Drilling contracts can be for a
single well or multiple wells. The majority of our drilling contracts are typically subject to
termination by the customer on short notice with little or no penalty. 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 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. The dayrate we receive is not
dependent on the usual risks associated with drilling, such as time delays for various reasons,
including stuck drill pipe or blowouts. In addition, our day work contracts generally allow us to
pass crew wage increases to our customers in the form of higher dayrates. We sometimes enter into term contracts to provide drilling services on a daywork basis.
Typically, the length of our term contracts have ranged from six months to two years. They have
usually included a per rig day cancellation fee approximately equal to the dayrate under the
contract less estimated contract drilling operating expenses for the unexpired term of the
contract. We seek term contracts with our customers when we believe that those contracts may
mitigate the financial impact to us of a decline in dayrates during the period in which the term
contract is in effect. During late 2001 and 2002, the use of term contracts enabled us to maintain
dayrates that proved to be higher than was attainable during 2002 and 2003. We also have used term
contracts to contractually assure that we receive sufficient cash flow to recover the costs of
improvements we make to the rigs under the term contract, particularly when those improvements are
requested by the customer. 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 materials required for the well, and are compensated when the contract terms have
been satisfied. Turnkey contracts afford an opportunity to earn a greater financial result than
would normally be available on daywork or footage contracts if the contract can be completed
without complications. The risks to us under a turnkey contract are substantially greater than 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. Footage Contracts. Under footage contracts, we are paid a fixed amount for each foot drilled,
regardless of the time required or certain problems encountered in drilling the well. We typically
pay more of the out-of-pocket costs associated with footage contracts than under daywork contracts.
Similar to a turnkey contract, the risks to us on a footage contract are greater than under a
daywork contract because we assume some 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, and risks associated with subcontractors services, supplies,
cost escalation and personnel. Generally, the overall risk we assume is not as great as under
turnkey contracts. As with turnkey contracts, we manage additional risk through the use of
engineering expertise and bid the footage contracts accordingly. We also maintain insurance
coverage against certain drilling hazards. -5-




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Customers and Marketing Our contract drilling customers include independent producers and major oil and natural gas
companies. In 2004, 32% of our revenue came from major oil and natural gas companies and large
independent producers, while the remaining 68% came from other independents. For the year ended
December 31, 2004, no individual customer accounted for more than 10% of our revenues. 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 natural 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 increasing rig demand. Although neither we, nor the customer, are legally required
to honor these commitments, we generally satisfy such commitments in order to maintain good
long-term customer relations. Insurance Our operations are subject to the many hazards inherent in the drilling business, including,
for example, blowouts, cratering, fires, explosions and adverse weather. These hazards could cause
personal injury, death, 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 comprehensive general liability, workers compensation insurance, property
casualty insurance on our rigs and drilling equipment, and control of well insurance. In
addition, we have commercial excess liability insurance, to cover general liability, auto liability
and workers compensation claims which are higher than the maximum coverage provided under those
policies. The table below and the discussion that follows highlights these coverages as of March
9, 2005. Deductible/Self-InsuredLimit
    
    Aggregate
    
    RetentionCoverage
    
    Per Occurrence
    
    Limit
    
    per OccurrenceWorkers compensation/
employer liability
    
    Statutory(1)/$1.0 million
    
    None
    
    $500,000Automobile liability
    
    $1.0 million
    
    None
    
    $500,000Commercial general
liability
    
    $1.0 million
    
    $1.0 million
    
    $250,000Commercial excess
liability
    
    $10.0 million
    
    $10.0 million
    
    Underlying insuranceCommercial excess
liability
    
    $65.0 million
    
    $65.0 million
    
    Underlying insurance
   (1)
    
    Workers compensation policy limits vary depending on the laws of the particular states in which we operate. Our property casualty insurance coverage for damage to our rigs and drilling equipment is
based on our estimate of the cost of comparable used equipment to replace the insured property.
There is a $125,000 maintenance deductible per occurrence for losses on our rigs. There is a
$25,000 deductible per occurrence on other equipment. We do not have insurance coverage against
loss of earnings resulting from damage to our rigs. -6-




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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 insurance provides $3.0 million 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, with a $150,000 deductible or $20.0
million, with a $225,000 deductible, 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. In addition, there
is a deductible of $850,000 in the aggregate over the policy period, exclusive of the maintenance
deductible. Except for care, custody and control and total loss, an aggregate deductible of
$850,000 per annum is to apply to our property and casualty and control of well insurance
combined, exclusive of maintenance deductibles. No assurances can be given that we will be able to maintain the above-mentioned insurance
types and/or the amounts of coverage that we believe to be adequate. Also, there are no assurances
that these types of coverages will be available in the future. Our insurance may not be sufficient
to protect us against liability for all consequences of well disasters, extensive fire damage,
damage to the environment, damage to producing formations or other hazards. Any rising cost,
changing deductibles, and/or availability of certain types of insurance could have an adverse
effect on our financial condition and results of operations. Increases in deductibles could be
caused by changes in our claims experience. Environmental Regulations Our operations are subject to stringent federal, state and local laws and regulations
governing protection of the environment. These laws and regulations may require acquisition of
permits before drilling commences and may restrict the types, quantities and concentrations of
various substances that can be released into the environment. Planning and implementation of
protective measures are required to prevent accidental discharges. Spills of oil, natural gas
liquids, drilling fluids, and other substances may subject us to penalties and cleanup
requirements. Handling, storage and disposal of both hazardous and non-hazardous wastes are
subject to regulatory requirements. The federal Clean Water Act, as amended by the Oil Pollution Act, the federal Clean Air Act,
the federal Resource Conservation and Recovery Act, and their state counterparts, are the primary
vehicles for imposition of such requirements and for civil, criminal and administrative penalties
and other sanctions for violation of their requirements. In addition, the federal Comprehensive
Environmental Response Compensation and Liability Act and similar state statutes impose strict
liability, without regard to fault or the legality of the original conduct, on certain classes of
persons who are considered responsible for the release of hazardous substances into the
environment. Such liability, which may be imposed for the conduct of others and for conditions
others have caused, includes the cost of remedial action as well as damages to natural resources. Environmental laws and regulations are complex and subject to frequent change that may result
in more stringent and costly requirements. Compliance with applicable requirements has not, to
date, had a material affect on the cost of our operations, earnings or competitive position.
However, compliance with amended, new or more stringent requirements, stricter interpretations of
existing requirements, or the discovery of contamination may cause us to incur additional costs or
subject us to liabilities that may have a material adverse effect on our results of operations and
financial condition. Our business depends on the demand for services from the oil and natural gas exploration and
development industry, and therefore our business can be affected by political developments and
changes in laws and regulations that control or curtail drilling for oil and natural gas for
economic, environmental or other policy reasons. Certain Risks Below we describe the risks and uncertainties that we believe were material to our business as
of March 9, 2005. -7-




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A material or extended decline in expenditures by the oil and natural gas industry, due to a
decline or volatility in oil and natural gas prices, a decrease in demand for oil and natural gas,
an increase in rig supply or other factors, would reduce our revenue and income. As a supplier of land drilling services, our business depends on the level of drilling
activity by oil and natural 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 natural gas prices, current prices and their outlook for future prices. Low oil
and natural gas prices, or the perception among oil and natural gas companies that 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, which in turn could trigger a
writedown of the carrying value of these assets for accounting purposes;
    our ability to maintain or increase our borrowing capacity;
    our ability to obtain additional capital to finance our business and make
acquisitions, and the cost of that capital; and
    our ability to retain skilled rig personnel who we would need in the event
of an increase in the demand for our services. Depending on the market prices of oil and natural gas, oil and natural gas exploration and
production companies may cancel or curtail their drilling programs, thereby reducing demand for our
services. Even during periods when prices for oil and natural gas are high, companies exploring for
oil and natural gas may cancel or curtail their drilling programs for a variety of other reasons
beyond our control. Any reduction in the demand for drilling services may materially erode
dayrates, the prices we receive for our turnkey drilling services and reduce the number of rigs
under contract, any of which could adversely affect our financial results. Oil and natural 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 natural 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 instability in the Middle East, Venezuela and other major producing regions;
    governmental regulations, both domestic and foreign;
    the pace adopted by foreign governments for exploration of their national reserves; and
    the overall supply and demand for oil and natural gas. An economic downturn may adversely affect our business. An economic downturn may cause reduced demand for petroleum-based products and natural gas. In
addition, many oil and natural gas production companies often reduce or delay expenditures to
reduce costs, which in turn may cause a reduction in the demand for our services during these
periods. If the economic environment worsens, our business, financial condition and results of
operations may be adversely impacted. The intense price competition and cyclical nature of our industry could have an adverse effect on
our revenues and profitability. The contract drilling business is highly competitive with numerous industry participants. The
drilling contracts we compete for are usually awarded on the basis of competitive bids. We believe
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 company and the particular drilling rig;
    the offering of ancillary services; and
    the ability to provide drilling equipment adaptable to, and personnel
familiar with, new technologies and drilling techniques. -8-




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While we must generally be competitive in our pricing, our competitive strategy 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 during an industry downturn
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. The contract drilling industry historically has been cyclical and has experienced periods of
low demand, excess rig supply, and low dayrates, followed by periods of high demand, short rig
supply and increasing dayrates. Periods of excess rig supply intensify the competition in our
industry and often result in rigs being idle. There are numerous competitors in each of the
markets in which we compete. In all of those markets, an oversupply 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, by reactivating previously stacked rigs or
purchasing new rigs. An influx of rigs into a market area from any source could rapidly intensify
competition and make any improvement in demand for drilling rigs short-lived. We face competition from competitors with greater resources. Some of our competitors have greater financial and human resources than do we. Their greater
capabilities in these areas may enable them to:  
    build new rigs or acquire and refurbish existing rigs to be able to place
rigs into service more quickly than us in periods of high drilling demand;
    compete more effectively on the basis of price and technology;
    better withstand industry downturns; and
    retain skilled rig personnel. Our drilling operations involve operating hazards which if not adequately insured or indemnified
against could adversely affect our results of operations and financial condition. Our operations are subject to the usual hazards inherent in the land drilling business
including the risks of:  
    blowouts;
    reservoir damage;
    cratering;
    fires, pollution and explosions;
    collapse of the borehole;
    lost or stuck drill strings; and
    damage or loss from natural disasters. If these events occur they can produce substantial liabilities to us which include:  
    suspension of drilling operations;
    damage to the environment;
    damage to, or destruction of, our property and equipment and that of others;
    personal injury and loss of life; and
    damage to producing or potentially productive oil and natural gas
formations through which we drill. 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 risks through insurance coverage. 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. Our insurance or indemnification arrangements may not adequately
protect us against liability from all of the risks of our business. If we were to incur a
significant liability for which we were not fully insured or indemnified, it could adversely affect
our financial position and -9-




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results of operations. We may be unable to obtain or renew insurance coverage of the type and
amount we desire at reasonable rates. Business acquisitions entail numerous risks and may disrupt our business, dilute shareholder value
or distract management attention. As part of our business strategy, we plan to consider acquisitions of, or significant
investments in, businesses and assets that are complementary to ours. Any acquisition that we
complete could have a material adverse affect on our operating results and/or the price of our
securities. Acquisitions, including our April 2004 acquisition of Patriot, involve numerous
risks, including:  
    unanticipated costs and liabilities;
    difficulty of integrating the operations and assets of the acquired business;
    our ability to properly access and maintain an effective internal control
environment over an acquired company, in order to comply with the recently adopted
public reporting requirements;
    potential loss of key employees and customers of the acquired companies; and
    an increase in our expenses and working capital requirements. We may incur substantial indebtedness to finance future acquisitions and also may issue equity
securities or convertible securities in connection with any such acquisitions. Debt service
requirements could represent a significant burden on our results of operations and financial
condition and the issuance of additional equity could be dilutive to our existing shareholders.
Acquisitions could also divert the attention of our management and other employees from our
day-to-day operations and the development of new business opportunities. Our operations are subject to environmental laws that may expose us to liabilities for
noncompliance, which may adversely affect us. Many aspects of our operations are subject to domestic 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.
Compliance with applicable laws and regulations may require us to incur significant expenses and
capital expenditures which could have a material and adverse effect on our operations by increasing
our expenses and limiting our future contract drilling opportunities. We have had only three profitable years since 1996. We have a history of losses with only three profitable years since 1996. In 1997, we had net
income of $10.2 million, in 2001 we had net income of $68.5 million, and in 2004 we had net income
of $8.1 million. Our ability to achieve profitability in the future will depend on many factors,
but primarily on the number of days our rigs work during any period and the rates we charge our
customers for them during that period. In the years in which we incurred losses, those losses were
primarily due to the fact that the number of days our rigs worked and the rates we were able to
charge customers for the days worked generated insufficient revenue to cover our expenses. In some
years, we have also incurred charges for impairment of our drilling equipment assets that
contributed to our losses in a year. This was the case in 2002, when we incurred a $3.5 million
asset impairment charge and reported a loss of $21.5 million for the year. -10-




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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 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 services, 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, our risk
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. 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 because of increasing
demand for contract drilling services in general. 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 entered into agreements 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 arrangements with equipment manufacturers and suppliers, we cannot assure you
that we will be able to maintain existing arrangements. Shortages of drilling equipment or supplies
could delay and adversely affect our ability to return our cold-stacked rigs and inventory rigs to
service 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 have occurred in the past in our industry during periods of high demand. 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 credit agreement may prohibit us from participation in certain transactions that we may
consider advantageous. Our subsidiary, Grey Wolf Drilling Company L.P., has entered into a credit facility that
contains covenants restricting our ability to undertake many types of transactions and contains
financial ratio covenants when certain conditions are met. These restrictions may limit our ability
to respond to changes in market conditions. Our ability to meet the financial ratio covenants of
our credit agreement and indentures can be affected by events and conditions beyond our control and
we may be unable to meet those tests (see Note 4 to the consolidated financial statements). We may
in the future incur additional indebtedness that may contain additional covenants that may be more
restrictive than our current covenants. Our credit facility contains default terms that effectively cross default with any of our
other debt agreements, including the indentures for our Contingent Convertible Floating Rate Notes
due April 2024 (the Floating Rate Notes) and our 3.75% Contingent Convertible Notes due May 2023
(the 3.75% Notes). Thus, if we breach the covenants in the indentures for our 3.75% Notes and
Floating Rate Notes, it could cause our default under our 3.75% Notes, our Floating Rate Notes, our
credit facility and, possibly, other then outstanding debt obligations owed by us. If the
indebtedness under our credit facility or other indebtedness owed by us is more than $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 indentures covering our 3.75% Notes and our Floating Rate 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. -11-




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We have a significant amount of indebtedness and could incur additional indebtedness, which could
materially and adversely affect our financial condition and results of operations and prevent us
from fulfilling our obligations under the notes and our other outstanding indebtedness. We have now and will continue to have a significant amount of indebtedness. On December 31,
2004, our total long-term indebtedness was approximately $275.0 million in principal amount,
(primarily consisting of $150.0 million in principal amount of our 3.75% Notes and $125.0 million
in principal amount of our Floating Rate Notes). Our substantial indebtedness could:  
    make it more difficult for us to satisfy our obligations with respect to
the 3.75% Notes and the Floating Rate Notes;
    increase our vulnerability to general adverse economic and industry
conditions;
    require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness thereby reducing the availability of our
cash flow to fund working capital, capital expenditures and other general corporate
purposes;
    limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate;
    place us at a competitive disadvantage compared to our competitors that have less debt; and
    limit our ability to borrow additional funds. Neither the indentures governing our 3.75% Notes and our Floating Rate Notes nor the terms of
our 3.75% Notes or our Floating Rate Notes limit our ability to incur additional indebtedness,
including senior indebtedness, or to grant liens on our assets. We and our subsidiaries may incur
substantial additional indebtedness and liens on our assets in the future. The Floating Rate Notes bear interest annually at a rate equal to 3-month LIBOR, adjusted
quarterly, minus a spread of 0.05%. Although the interest rate on the Floating Rate Notes will
never be more 6.00%, we are subject to market risk exposure related to changes in interest rates on
the Floating Rate Notes up to 6.00%. A significant increase in 3-month LIBOR would increase the
interest rate on the Floating Rate Notes and the amount of interest we pay on the Floating Rate
Notes, which may have a material adverse affect on our financial condition and liquidity. Our existing senior indebtedness is, and any senior indebtedness we incur will be, effectively
subordinated to any present or future obligations to secured creditors and liabilities of our
subsidiaries. Substantially all of our assets and the assets of our subsidiaries, including our drilling
equipment and the equity interest in our subsidiaries, are pledged as collateral under our credit
facility. Our credit facility is also secured by our guarantee and the guarantees of our
subsidiaries. The 3.75% Notes and the Floating Rate Notes are, and any senior indebtedness we
incur will be, effectively subordinated to all of our and our subsidiaries existing and future
secured indebtedness, including any future indebtedness incurred under our credit facility. As of
March 9, 2005, we had the ability to borrow approximately $78.7 million under our credit facility
(after reductions for undrawn outstanding standby letters of credit of $21.3 million). In
addition, the 3.75% Notes and the Floating Rate Notes are effectively subordinated to the claims of
all of the creditors, including trade creditors and tort claimants, of our subsidiaries. To service our indebtedness, we will require a significant amount of cash. Our ability to generate
cash depends on many factors beyond our control. Although our operating activities did provide net cash sufficient to pay our debt service
obligations for the year ended December 31, 2004, our cash flow from operating activities was
insufficient to cover our debt service obligations in 2003. We cannot assure you that we will be
able to generate sufficient cash flow in the future. Our ability to make payments on and to
refinance our indebtedness and to fund planned capital expenditures will depend on our ability to
generate cash in the future. This, to a large extent, is subject to general economic, financial,
competitive, regulatory and other factors that are beyond our control. -12-




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Credit ratings affect our ability to obtain financing and the cost of such financing. Our credit ratings affect our ability to obtain financing and the cost of such financing. At
December 31, 2004, our corporate and unsecured debt ratings were rated B1 by Moodys Investors
Service and BB by Standard & Poors Ratings group. In determining our credit ratings, the rating
agencies consider a number of both quantitative and qualitative factors. These factors include
earnings, fixed charges such as interest, cash flows, total debt outstanding, off balance sheet
obligations and other commitments, total capitalization and various ratios calculated from these
factors. The rating agencies also consider predictability of cash flows, business strategy,
industry conditions and contingencies. Lower ratings on our senior unsecured debt could impair our
ability to obtain additional financing and will increase the cost of the financing that we do
obtain. Investors in our common stock should not expect to receive dividend income, and will be dependent
on the appreciation of our common stock to earn a return on their investment. The decision to pay a dividend on our common stock rests with our board of directors and will
depend on our earnings, available cash, capital requirements and financial condition. 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 credit
facility prohibit the payment of dividends without the prior written consent of the lenders.
Investors will likely have to depend on sales of our common stock at appreciated prices, which we
cannot assure, in order to achieve a positive return on their investment in our common stock. Certain provisions of our organizational documents, securities and credit agreement have
anti-takeover effects which may prevent our shareholders from receiving the maximum value for their
shares. Our articles of incorporation, bylaws, securities and credit agreement contain certain
provisions that may delay or prevent entirely a change of control transaction not supported by our
board of directors, or any transaction which may have that general effect. These provisions
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. Additionally, the indentures under which our 3.75% Notes and Floating Rate Notes are issued
require us to offer to repurchase the 3.75% Notes and Floating Rate Notes then outstanding at a
purchase price equal to 100% and 100%, respectively, of the principal amount 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. Furthermore, 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. As of March 9, 2005, 190,382,741 million shares of our common stock were issued and
outstanding. An additional 6.6 million shares of our common stock were issuable upon exercise of
outstanding stock options (of which 3.7 million shares are currently exercisable) and 42.5 million
shares were issuable upon conversion of the 3.75% Notes and the Floating Rate Notes, once a
conversion contingency is met. See Note 4 to the consolidated financial statements for information
on the conditions under which our 3.75% Notes and our Floating Rate Notes become convertible into
our common stock. The market price of our common stock could drop significantly if future sales of
substantial amounts of our common stock occur, if the perception exists that substantial sales may
occur or if our convertible notes become convertible. -13-




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Employees At March 9, 2005, we had approximately 2,900 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 are forward-looking statements, including statements regarding the following:  
    business strategy;
    demand for our services;
    2005 rig activity and financial results;
    projected depreciation expense and interest expense;
    reactivation and cost of reactivation of non-marketed rigs;
    projected dayrates;
    the availability of term contracts;
    rigs expected to be engaged in turnkey and footage operations;
    projected tax benefit rate;
    wage rates and retention of employees;
    sufficiency of our capital resources and liquidity; and
    depreciation and capital expenditures in 2005. Although we believe the forward-looking statements are reasonable, we cannot assure you that
these statements will prove to be correct. We have based these statements on assumptions and
analyses in light of our experience and perception of historical trends, current conditions,
expected future developments and other factors we believe were appropriate when the statements were
made. 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 forward-looking statements are based. 
 Item 2. Properties Drilling Equipment An operating land drilling rig consists of engines, drawworks, mast, substructure, pumps to
circulate drilling fluid, blowout preventers, drill pipe and related equipment. Domestically, land
rigs generally operate with crews of four to six people. Our rig fleet consists of several size rigs 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 Silicon Controlled Rectifier (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. An SCR rigs diesel engines drive alternating current generators and
this alternating current can be transmitted to use for rig lighting and rig quarters or converted
to direct current to drive the direct current motors on the rig. As of March 9, 2005, we owned 12
direct current diesel electric rigs and 53 SCR diesel electric rigs. We also owned at March 9, 2005, 17 mechanical rigs and one diesel electric rig that are
trailer-mounted for greater mobility. We believe that trailer-mounted rigs and 1,500 to 2,000
horsepower diesel electric rigs are in highest demand in the South Texas market. Trailer-mounted
rigs are more mobile than conventional rigs, thus -14-




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##### Table of Contents



decreasing the time and expense to the customer of moving the rig to and from the drill site.
Under ordinary conditions, trailer-mounted rigs are capable of drilling an average of two 10,000
foot wells per month. 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 in the drill string. A top drive also permits rotation of the drill string while
moving 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
9, 2005, we owned 17 top drives. We generally deploy our rig fleet among our divisions and district based on the types of rigs
preferred by our customers for drilling in the geographic markets served by our divisions and
district. The following table summarizes the rigs we own as of March 9, 2005: Maximum Rated Depth Capacity(1)Under
    
    
    10,000
    
    
    15,000
    
    
    20,00010,000
    
    
    to 14,999
    
    
    to 19,999
    
    
    and Deeper
    
    
    TotalMarketedArk-La-TexDiesel Electric
    
    
    
    
    
    
    1
    
    
    
    5
    
    
    
    5
    
    
    
    11Trailer-Mounted
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    1Mechanical
    
    
    
    
    
    
    2
    
    
    
    5
    
    
    
    2
    
    
    
    9Gulf CoastDiesel Electric
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    18
    
    
    
    19Mechanical
    
    
    
    
    
    
    1
    
    
    
    2
    
    
    
    2
    
    
    
    5South TexasDiesel Electric
    
    
    
    
    
    
    1
    
    
    
    6
    
    
    
    8
    
    
    
    15Trailer-Mounted
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    1
    
    
    
    9
    (2)Mechanical
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    1
    
    
    
    5Rocky MountainDiesel Electric
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    5
    
    
    
    7Mechanical
    
    
    3
    
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    10West TexasDiesel Electric
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    4
    
    
    
    6Mechanical
    
    
    
    
    
    
    3
    
    
    
    1
    
    
    
    
    
    
    
    4OtherTrailer-Mounted
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    1Total Marketed
    
    
    3
    
    
    
    29
    
    
    
    24
    
    
    
    46
    
    
    
    102Non-marketedCold-Stacked RigsDiesel Electric
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    2Trailer-Mounted
    
    
    1
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    4Mechanical
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    4Total Cold-Stacked
    
    
    2
    
    
    
    4
    
    
    
    1
    
    
    
    3
    
    
    
    10Rigs Held For
RefurbishmentDiesel Electric
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    4Trailer-Mounted
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    3Mechanical
    
    
    
    
    
    
    4
    
    
    
    4
    
    
    
    
    
    
    
    8Total Held for
Refurbishment
    
    
    
    
    
    
    7
    
    
    
    4
    
    
    
    4
    
    
    
    15Total Non-Marketed
    
    
    2
    
    
    
    11
    
    
    
    5
    
    
    
    7
    
    
    
    25Total Rig Fleet
    
    
    5
    
    
    
    40
    
    
    
    29
    
    
    
    53
    
    
    
    127
    (2) Includes one diesel electric rig. -15-




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##### Table of Contents



Facilities The following table summarizes our significant real estate: Location
    
    Interest
    
    UsesHouston, Texas
    
    Leased
    
    Corporate OfficeAlice, Texas
    
    Owned
    
    Division Office, Rig Yard, Truck YardEunice, Louisiana
    
    Owned
    
    Division Office, Rig YardHaughton, Louisiana
    
    Owned
    
    Rig YardShreveport, Louisiana
    
    Leased
    
    Division OfficeShreveport, Louisiana
    
    Owned
    
    Rig Yard, Truck YardCasper, Wyoming
    
    Leased
    
    Division Office, Rig YardGrand Junction, Colorado
    
    Leased
    
    Division Satellite OfficeMidland, Texas
    
    Leased
    
    District Office
 We lease approximately 22,700 square feet of office space in Houston, Texas for our principal
corporate offices at a cost of approximately $33,100 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. See Note 8  Commitments and Contingencies in Notes to Consolidated
Financial Statements. 
 Item 4. Submission of Matters to a Vote of Security Holders None. 
 PART II 
  Item 5.
    Market for Registrants Common Equity and Related Shareholder Matters

and Issuer Purchases of Equity Securities Market Data Our common stock is listed and traded on the American Stock Exchange (AMEX) under the symbol
GW. As of March 9, 2005, we had 921 shareholders of record. The following table sets forth the
high and low prices of our common stock on the AMEX for the periods indicated: High
    
    
    LowPeriod from January 1, 2005 to March 9, 2005
    
    $
    6.80
    
    
    $
    3.70Year Ended December 31, 2004Quarter ended March 31, 2004
    
    
    4.63
    
    
    
    3.63Quarter ended June 30, 2004
    
    
    4.35
    
    
    
    3.30Quarter ended September 30, 2004
    
    
    4.89
    
    
    
    3.75Quarter ended December 31, 2004
    
    
    5.58
    
    
    
    4.61Year Ended December 31, 2003Quarter ended March 31, 2003
    
    
    4.63
    
    
    
    3.43Quarter ended June 30, 2003
    
    
    4.99
    
    
    
    3.79Quarter ended September 30, 2003
    
    
    4.24
    
    
    
    3.21Quarter ended December 31, 2003
    
    
    3.91
    
    
    
    3.11
 On March 9, 2005, the last reported sales price of our common stock on the AMEX was $6.31 per
share. -16-




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We have never declared or paid cash dividends on our common stock and do not expect to pay
cash dividends in 2005 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
prohibit the payment of dividends without the prior written consent of the lender. On March 31, 2004, we sold $100.0 million of our Floating Rate Notes. On April 27, 2004, we
sold an additional $25.0 million of the Floating Rate Notes when the initial purchasers of the
Floating Rate Notes securities exercised their entire option to purchase additional Floating Rate
Notes which was granted in connection with the first sale of the Floating Rate Notes. The initial
purchasers in both sales of the total of $125.0 million of Floating Rate Notes were Deutsche Bank
Securities Inc. and Credit Suisse First Boston, LLC. The net proceeds to us from the sales of
Floating Rate Notes were $122.2 million, net of the initial purchasers discounts of $2.8 million.
We used the net proceeds to redeem our 8?% Senior Notes Due 2007 and for general corporate
purposes. The Floating Rate Notes were sold in reliance on exemptions from registration under the
Securities Act of 1933 under Section 4(2) of the Securities Act and Rule 144A thereunder. For
additional information about the Floating Rate Notes, including terms of convertibility, see
Managements Discussion and Analysis of Financial Condition and Results of OperationsFloating
Rate Notes. 
 Item 6. Selected Financial Data Years Ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(Amounts in thousands, except per share amounts)Revenues (1)
    
    $
    424,634
    
    
    $
    285,974
    
    
    $
    250,260
    
    
    $
    433,739
    
    
    $
    276,758Net income (loss)
    
    
    8,078
    
    
    
    (30,200
    )
    
    
    (21,476
    )
    
    
    68,453
    
    
    
    (8,523
    )Net income (loss) per
common share- basic and
diluted
    
    
    0.04
    
    
    
    (0.17
    )
    
    
    (0.12
    )
    
    
    0.38
    
    
    
    (0.05
    )Total assets
    
    
    635,876
    
    
    
    532,184
    
    
    
    593,964
    
    
    
    627,900
    
    
    
    513,178Senior and contingent
convertible notes & other
long-term debt
    
    
    275,000
    
    
    
    234,898
    
    
    
    249,613
    
    
    
    250,695
    
    
    
    249,851
   (1)
    
    Presentation revised in 2000-2003 to give effect to reclassification of certain items to
conform to the presentation in 2004. -17-




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##### Table of Contents



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. Overview We are a leading provider of contract land drilling services in the United States with a
fleet, at March 9, 2005, of 127 rigs, of which 102 rigs were marketed. Our customers include
independent producers and major oil and natural gas companies. We conduct substantially all of our
operations through our subsidiaries in the Ark-La-Tex, Gulf Coast, Mississippi/Alabama, South
Texas, West Texas and Rocky Mountain drilling markets. Our drilling contracts generally provide
compensation on a daywork, turnkey or footage basis (see Item 1. Business-Contracts). Our business is cyclical and our financial results depend upon several factors. These factors
include the overall demand for land drilling services, the level of demand for turnkey and footage
services, the demand for deep versus shallow drilling services, the dayrates we receive for our
services and our success drilling turnkey and footage wells. Rig Activity The United States land rig count at March 4, 2005 reached 1,163 rigs, which is higher than the
levels reached during the 2001 up cycle. As a result of this increased demand, we have also seen
an increase in our average rigs worked throughout 2004. Our average working rig count rose
approximately 49% from the first quarter of 2004 to March 9, 2005, including the ten rigs that we
added to our fleet in connection with the acquisition of New Patriot Drilling Corp. (Patriot).
For the week ended March 4, 2005, we had an average of 98 rigs working. The table below shows the average number of land rigs working in the United States according
to the Baker Hughes rotary rig count and the average number of our rigs working. 2003
    
    
    2004
    
    
    2005DomesticLand Rig
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Full
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Full
    
    
    1/1 toCount
    
    Q-1
    
    
    Q-2
    
    
    Q-3
    
    
    Q-4
    
    
    Year
    
    
    Q-1
    
    
    Q-2
    
    
    Q-3
    
    
    Q-4
    
    
    Year
    
    
    3/4Baker Hughes
    
    
    773
    
    
    
    903
    
    
    
    964
    
    
    
    988
    
    
    
    880
    
    
    
    1,002
    
    
    
    1,049
    
    
    
    1,115
    
    
    
    1,131
    
    
    
    1,074
    
    
    
    1,147Grey Wolf
    
    
    59
    
    
    
    60
    
    
    
    62
    
    
    
    62
    
    
    
    61
    
    
    
    65
    
    
    
    86
    
    
    
    94
    
    
    
    96
    
    
    
    85
    
    
    
    97
 We are signing an increasing number of term contracts. We currently have 22 rigs working
under term contracts with terms of six months to two years. These rigs are included in the average
rigs working in the table above. In addition, nine more rigs are scheduled to go to work under
term contracts by mid-second quarter and we have a total of approximately 7,600 and 1,200 days
contracted for 2005 and 2006, respectively, under term contracts. Drilling Contract Bid Rates Improvements in the level of land drilling in the United States during 2004 have positively
impacted the dayrates we are receiving for our rigs. Our dayrates rose an average of $1,059 per
day across rigs and all our market regions in the fourth quarter of 2004 over the third quarter.
This compares to an increase of $644 per day between the second and third quarters of 2004. This
latest quarter-to-quarter increase is the largest we have experienced since the second quarter of
2001. As of March 9, 2005, our bid rates have risen to between $10,500 to $17,000 per rig day,
without fuel or top drives. We expect this upward trend in dayrates to continue during 2005;
however, we cannot predict the rate of increase. In addition to our fleet of drilling rigs, we owned 17 top drives at March 9, 2005, for which
our bid rates are up to $2,500 per day, at that date. Bid rates for our top drives are in addition
to the above stated bid rates for our rigs. -18-




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Turnkey and Footage Contract Activity Turnkey and footage work is an important part of our business and operating strategy. Our
engineering and operating expertise allow us to provide this service to our customers and has
historically provided higher revenues and earnings before interest expense, taxes, depreciation and
amortization (EBITDA) per rig day worked than under daywork contracts. A rig day is defined as a
twenty-four hour period in which a rig is under contract and should be earning revenue. However,
we are typically required to bear additional operating costs (such as drill bits) and risk (such as
loss of hole) that would otherwise be assumed by the customer under daywork contracts. In 2004,
our turnkey and footage EBITDA per rig day was $5,990 compared to a daywork EBITDA per rig day of
$2,282, and our turnkey and footage revenue was $32,515 per rig day compared to $11,184 per rig day
for daywork. For the year ended December 31, 2004, turnkey and footage work represented 11% of
total rig days worked compared to 16% of total rig days worked in 2003. This percentage decrease
in 2004 is due to the increase in the number of days worked under daywork contracts. EBITDA generated on turnkey and footage contracts can vary 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 has
historically been lower during periods of overall higher demand. We have not, however, experienced
this typical market reaction thus far in this most recent increase in demand. While overall demand
has been higher as evidenced by the increase in rig count, the demand for our turnkey services has
not significantly declined. First Quarter 2005 Outlook We have prepared an estimate of results for the first quarter of 2005 based upon currently
anticipated levels of drilling activity and dayrates. We expect that for the first quarter we will
have an average of 98 rigs working per day, EBITDA of approximately $40.6 million and net income
per share of approximately $0.07 on a diluted basis, projecting an annual tax rate of approximately
39%. We expect depreciation expense of approximately $14.7 million and interest expense of
approximately $2.6 million in the first quarter of 2005. Capital expenditures for the full year
2005 are currently projected to be $70.0 million to $90.0 million subject to the actual level of
rig activity and the ultimate number of rig reactivations during the year. These projections are
forward-looking statements and while we believe our estimates are reasonable, we can give no
assurance that such expectations or the assumptions that underlie such assumptions will prove to be
correct. We expect to average between seven and nine rigs working under turnkey and footage
contracts during the first quarter of 2005; however, there can be no assurance that we will be able
to maintain the current level of activity or the financial results we have historically derived
from turnkey and footage contracts. See Item 1. Business-Forward-Looking Statements for important
factors that could cause actual results to be different materially from our expectations. Critical Accounting Policies Our consolidated financial statements and accompanying notes to consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements require our management to
make subjective estimates, judgments and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. However, these estimates, judgments and assumptions concern
matters that are inherently uncertain. Accordingly, actual amounts and results could differ from
these estimates made by management, sometimes materially. Critical accounting policies and
estimates are defined as those that are both most important to the portrayal of our financial
condition and operating results and require managements most subjective judgments. The accounting
policies that we believe are critical are property and equipment, impairment of long-lived assets,
goodwill and other intangible assets, revenue recognition, insurance accruals, and income taxes. Property and Equipment. Property and equipment, including betterments and improvements are
stated at cost with depreciation calculated using the straight-line method over the estimated
useful lives of the assets. We make estimates with respect to the useful lives that we believe are
reasonable. However, the cyclical nature of our business or the introduction of new technology in
the industry, could cause us to change our estimates, thus impacting the future calculation of
depreciation. When any asset is tested for recoverability, we also review the remaining useful
life of the asset. Any changes to the estimated useful life resulting from that review are made
prospectively. We expense our maintenance and repair costs as incurred. We estimate the useful
lives of our assets are between three and fifteen years. -19-




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Impairment of Long-Lived Assets. We assess the impairment of our long-lived assets under
Statement of Financial Accounting Standards Board (SFAS) No. 144 Accounting for the Impairment
or Disposal of Long-Lived Assets, whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Such indicators include changes in our business plans, a
change in the physical condition of a long-lived asset or the extent or manner in which it is being
used, or a severe or sustained downturn in the oil and natural gas industry. If we determine that a
triggering event, such as those described previously, has occurred we perform a review of our rig
and rig equipment. Our review is performed by comparing the carrying value of each rig plus the
estimated cost to refurbish or reactivate to the estimated undiscounted future net cash flows for
that rig. If the carrying value plus estimated refurbishment and reactivation cost of any rig is
more than the estimated undiscounted future net cash flows expected to result from the use of the
rig, a write-down of the rig to estimated fair market value must be made. The estimated fair market
value is the amount at which an asset could be bought or sold in a current transaction between
willing parties. Quoted market prices in active markets are the best estimate of fair market value,
however, quoted market prices are generally not available. As a result, fair value must be
determined based upon other valuation techniques. This could include appraisals or present value
calculations. The calculation of undiscounted future net cash flows and fair market value is based
on our estimates and projections. The demand for land drilling services is cyclical and has historically resulted in
fluctuations in rig utilization. The severity and duration of the downturn during 1998 triggered
an asset impairment charge of $93.2 million. We believe the contract drilling industry will
continue to be cyclical and rig utilization will fluctuate. The likelihood of an asset impairment
increases during extended periods of rig inactivity. Each year we evaluate our cold stacked and
inventory rigs and determine our intentions for their future use. This evaluation takes into
consideration, among other things, the physical condition and marketability of the rig, and
projected reactivation or refurbishment cost. To the extent that our estimates of refurbishment
and reactivation cost, undiscounted future net cash flows or fair market value change or there is a
deterioration in the physical condition of the inventory or cold stacked rigs, we could be required
under SFAS No. 144 to record an impairment charge. During the fourth quarter of 2002, we recorded
a pre-tax, non-cash asset impairment charge of $3.5 million after performing such a review. Due to
the deterioration of the physical condition of five of the inventory rigs and changes in market
conditions, it was determined that the rigs, based upon the economics, could no longer be returned
to service at a reasonable cost that would have provided an acceptable return and that the usable
component parts would be included in spare equipment and depreciated over five years. In 2004 and
2003, no impairment of our long-lived assets was recorded as no change in circumstances indicated
that the carrying value of the assets was not recoverable. Below is summary of our rig fleet and
the estimated cost to refurbish and reactivate, excluding drill pipe, by category as of March 9,
2005: EstimatedPer RigRefurbishmentand ReactivationNumber
    
    CostRig Category
    
    Of Rigs
    
    (excluding drill pipe)Marketed
    
    102
    
    N/ACold Stacked
    
    10
    
    $1.03.0 MillionInventory
    
    15
    
    $5.08.0 Million
 The net book value of the inventory rigs at December 31, 2004 was $18.2 million. Goodwill and Other Intangible Assets.During the second quarter of 2004, we completed the
acquisition of Patriot, which was accounted for as a business combination in accordance with SFAS
No. 141, Business Combinations. In conjunction with the purchase price allocation of the Patriot
acquisition we recorded goodwill of $10.4 million and intangible assets of $3.2 million. The
intangible assets represent customer contracts and related relationships acquired and are being
amortized over the useful life of three years. Goodwill represents the excess of costs over the fair value of assets of the business
acquired. None of the goodwill resulting from this acquisition is deductible for tax purposes. We
follow the provisions of SFAS No. 142, Goodwill and Other Intangible Assets. Pursuant to SFAS
No. 142, goodwill and intangible assets acquired in a purchase business combination and determined
to have an indefinite useful life are not amortized, but instead are tested for impairment at least
annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that
intangible assets with estimable useful lives be amortized over their respective estimated useful
lives to -20-




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their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144,
Accounting for Impairment or Disposal of LongLived Assets. Revenue Recognition. Revenues are earned under daywork, turnkey and footage contracts.
Revenue from daywork and footage contracts is recognized when it is realized or realizable and
earned. On daywork contracts, revenue is recognized based on the number of days completed at fixed
rates stipulated by the contract. On footage contracts, revenue is recognized based on the number
of feet that have been drilled at fixed rates stipulated by the contract. Revenue from turnkey
drilling contracts is recognized using the percentage-of-completion method based upon costs
incurred to date compared to our estimate of the total contract costs. Under
percentage-of-completion, we make estimates of the total contract costs to be incurred, and to the
extent these estimates change, the amount of revenue recognized could be affected. The
significance of the accrued turnkey revenue varies from period to period depending on the overall
level of demand for our services and the portion of that demand that is for turnkey services. At
December 31, 2004, there were five turnkey wells in progress versus eight wells at December 31,
2003, with accrued revenue of $10.0 million and $5.0 million, respectively at such dates.
Anticipated losses, if any, on uncompleted contracts are recorded at the time our estimated costs
exceed the contract revenue. All turnkey wells in progress at December 31, 2004 have been
completed and we did not incur any additional losses. Insurance Accruals. We maintain insurance coverage related to workers compensation and
general liability claims up to $1.0 million per occurrence with an aggregate of $1.0 million for
general liability claims. These policies include deductibles of $500,000 per occurrence for
workers compensation coverage and $250,000 per occurrence for general liability coverage. If
losses should exceed the workers compensation and general liability policy amounts, we have excess
liability coverage up to a maximum of $75.0 million. At December 31, 2004 and 2003, we had $11.8
million and $9.4 million, respectively, accrued for losses incurred within the deductible amounts
for workers compensation and general liability claims and for uninsured claims. The amount accrued for the provision for losses incurred varies depending on the number and
nature of the claims outstanding at the balance sheet dates. In addition, the accrual includes
managements estimate of the future cost to settle each claim such as future changes in the
severity of the claim and increases in medical costs. We use third parties to assist us in
developing our estimate of the ultimate costs to settle each claim, which is based upon historical
experience associated with the type of each claim and specific information related to each claim.
The specific circumstances of each claim may change over time prior to settlement and as a result,
our estimates made as of the balance sheet dates may change. Income Taxes. Our deferred tax assets consist primarily of net operating loss carryforwards
(NOLs). The estimated amount of our NOLs at December 31, 2004 are $158.3 million, which
expires from 2010 to 2024. Approximately $7.2 million of these NOLs expire in 2010 and 2011,
while the remaining $151.1 million expire between 2019 and 2024. Deferred tax assets must be
assessed based upon the likelihood of recoverability from future taxable income and to the extent
that recovery is not likely, a valuation allowance is established. At December 31, 2004, we do not
have a valuation allowance as we believe that it is more likely than not that our future taxable
income and reversal of deferred tax liabilities will be sufficient to recover our deferred tax
assets. Our business, however, is extremely cyclical and is highly sensitive to changes in oil and
natural gas prices and demand for our services and there can be no assurances that future economic
or financial developments will not impact our ability to recover our deferred tax assets. In addition, we have $20.9 million in permanent differences which relate to differences
between the financial accounting and tax basis of assets that were purchased in capital stock
acquisitions. The permanent difference will be reduced as the assets are depreciated for financial
accounting purposes on a straight-line basis over the next eight years. As the amortization of
these permanent differences is a fixed amount, our effective tax rate varies widely based upon the
current level of income or loss. See Note 3 to our consolidated financial statements for a
reconciliation of our statutory to effective tax rate. -21-




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Financial Condition and Liquidity The following table summarizes our financial position as of December 31, 2004 and December 31,
2003. December 31, 2004
    
    
    December 31, 2003(In thousands)Amount
    
    
    %
    
    
    Amount
    
    
    %Working capital
    
    $
    118,096
    
    
    
    20
    
    
    $
    71,833
    
    
    
    15Property and equipment, net
    
    
    437,330
    
    
    
    76
    
    
    
    404,278
    
    
    
    84Goodwill
    
    
    10,377
    
    
    
    2
    
    
    
    
    
    
    
    Other noncurrent assets
    
    
    9,489
    
    
    
    2
    
    
    
    5,141
    
    
    
    1Total
    
    $
    575,292
    
    
    
    100
    
    
    $
    481,252
    
    
    
    100Long-term debt
    
    $
    275,000
    
    
    
    48
    
    
    $
    234,898
    
    
    
    49Other long-term liabilities
    
    
    62,810
    
    
    
    11
    
    
    
    50,717
    
    
    
    10Shareholders equity
    
    
    237,482
    
    
    
    41
    
    
    
    195,637
    
    
    
    41Total
    
    $
    575,292
    
    
    
    100
    
    
    $
    481,252
    
    
    
    100
 Significant Changes in Financial Condition The acquisition of Patriot and the refinancing of our remaining 8 7/8% Notes significantly
impacted our balance sheet in 2004. These changes included increases in net property and
equipment, goodwill, other noncurrent assets, deferred income taxes and shareholders equity. On
April 6, 2004, we acquired all the outstanding capital stock and stock equivalents of Patriot by
merger in exchange for $14.2 million in cash and 4,610,480 shares of our common stock valued at
$20.6 million. In addition, we made payments of $14.7 million to retire the outstanding debt of
Patriot. Patriot had a fleet of ten drilling rigs and provided onshore contract land drilling
services to the oil and natural gas industry in the Rocky Mountain region. The fair value of the
property and equipment acquired was $42.4 million while intangible assets acquired were valued at
$3.2 million. The intangible assets represent customer contracts and related customer
relationships acquired and are included in Other noncurrent assets on our consolidated balance
sheet. The intangible assets are included in other noncurrent assets in the table above. We also
recorded goodwill of $10.4 million as a result of the acquisition. Net property and equipment was
also affected by capital expenditures other than for Patriot of $47.0 million and depreciation for
2004 of $54.5 million. In conjunction with the Patriot acquisition, we recorded additional
deferred tax liabilities valued at $6.0 million. This amount is included in Other long-term
liabilities in the table above. On March 31, 2004, we issued $100.0 million aggregate principal amount of Floating Rate
Contingent Convertible Senior Notes due 2024 (the Floating Rate Notes) in a private offering
which yielded net proceeds of $97.8 million. Of the net proceeds, $90.0 million was irrevocably
deposited with the trustee of the 8 7/8% Notes to redeem the outstanding $85.0 million aggregate
principal amount of those notes at 102.9580%, plus accrued interest on April 30, 2004. The
redemption premium of $2.5 million on the 8 7/8% Notes was included in interest expense for the year
ended December 31, 2004. In addition, on April 27, 2004, one of the initial purchasers in our private offering of the
Floating Rate Notes exercised its full option to purchase an additional $25.0 million aggregate
principal amount of the Floating Rate Notes. As a result, we have $125.0 million aggregate
principal amount of the Floating Rate Notes outstanding. The additional Floating Rate Notes have
the same terms as those issued on March 31, 2004 and we will use, or have used, the net proceeds of
approximately $24.4 million for general corporate purposes. The issuance of the Floating Rate
Notes and redemption of the 8 7/8% Notes resulted in an increase in long-term debt of $40.1 million. Working capital increased by $46.3 million from December 31, 2003 to December 31, 2004, due
primarily to an increase in accounts receivable and cash balances partially offset by an increase
in accounts payable balances. These balances have increased because of the increase in rig
activity. Shareholders equity also increased due to the exercise of stock options, which yielded
proceeds of $10.2 million and increased due to net income. -22-




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Floating Rate Notes The Floating Rate Notes bear interest at a per annum rate equal to 3-month LIBOR, adjusted
quarterly, minus a spread of 0.05% but will never be less than zero or more than 6.00%. These
notes mature on April 1, 2024. The Floating Rate Notes are convertible into shares of our common
stock, upon the occurrence of certain events, at a conversion price of $6.51 per share, which is
equal to a conversion rate of approximately 153.6098 shares per $1,000 principal amount of the
Floating Rate Notes, subject to adjustment. The Floating Rate Notes are our general unsecured
senior obligations and are fully and unconditionally guaranteed, on a joint and several basis, by
all our domestic wholly-owned subsidiaries. Non-guarantor subsidiaries are immaterial. The
Floating Rate Notes and the guarantees rank equally with all of our other senior unsecured debt,
including our 3.75% Contingent Convertible Senior Notes due 2023 (the 3.75% Notes). Fees and
expenses of $3.6 million incurred at the time of issuance are being amortized through April 1,
2014, the first date the holders may require us to repurchase the Floating Rate Notes. We may redeem some or all of the Floating Rate Notes at any time on or after April 1, 2014, at
a redemption price equal to 100% of the principal amount of the Floating Rate Notes, plus accrued
but unpaid interest and liquidated damages, if any, to the date of repurchase, payable in cash.
Holders may require us to repurchase all or a portion of the Floating Rate Notes on April 1, 2014
or April 1, 2019, and upon a change of control, as defined in the indenture governing the Floating
Rate Notes, at 100% of the principal amount of the Floating Rate Notes, plus accrued but unpaid
interest and liquidated damages, if any, to the date of repurchase, payable in cash. The Floating Rate Notes are convertible, at the holders option, prior to the maturity date
into shares of our common stock under the following circumstances:  
    during any calendar quarter, if the closing sale price per share of our
common stock for at least 20 trading days in the period of 30 consecutive trading days
ending on the last trading day of the calendar quarter preceding the quarter in which
the conversion occurs, is more than 120% of the conversion price per share, or $7.81
per share, on that 30th trading day;
    if we have called the Floating Rate Notes for redemption;
    during any period that the credit ratings assigned to our senior unsecured
debt (currently the 3.75% Notes) by both Moodys Investors Service (Moodys) and
Standard & Poors Ratings Group (S&P) are reduced below B1 and B+, respectively, or
if neither rating agency is rating our senior unsecured debt;
    during the five trading day period immediately following any nine
consecutive trading day period in which the average trading price per $1,000 principal
amount of the Floating Rate Notes for each day of such period was less than 95% of the
product of the closing sale price per share of our common stock on that day multiplied
by the number of shares of common stock issuable upon conversion of $1,000 principal
amount of the Floating Rate Notes; or
    upon the occurrence of specified corporate transactions, including a change
of control. As of the date of this report, none of the conditions enabling the holders of the Floating
Rate Notes to convert them into shares of our common stock have occurred. At March 9, 2005, the
credit ratings assigned to the Companys senior unsecured debt (currently the 3.75% Notes) by
Moodys Investor Service and Standard and Poors Ratings Group were B1 and BB-, respectively. The
indenture governing the Floating Rate Notes does not contain any restriction on the payment of
dividends, the incurrence of indebtedness or the repurchase of our securities, and does not contain
any financial covenants. 3.75% Notes The 3.75% Notes bear interest at 3.75% per annum and mature on May 7, 2023. The 3.75% Notes
are convertible into shares of our common stock, upon the occurrence of certain events, at a
conversion price of $6.45 per share, which is equal to a conversion rate of approximately 155.0388
shares per $1,000 principal amount of 3.75% Notes, subject to adjustment. We will pay contingent
interest at a rate equal to 0.5% per annum during any six-month period, with the initial six-month
period commencing May 7, 2008, if the average trading price of the 3.75% Notes per $1,000 principal
amount for the five day trading period ending on the third day immediately preceding the first day
of the applicable six-month period equals $1,200 or more. The 3.75% Notes are our general
unsecured senior obligations and are fully and unconditionally guaranteed, on a joint and several
basis, by all of our domestic wholly-owned subsidiaries. Non-guarantor subsidiaries are
immaterial. The 3.75% Notes and the guarantees rank equally with our Floating Rate Notes. Fees
and expenses of approximately $4.0 million incurred at -23-




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the time of issuance are being amortized through May 2013, the first date the holders may
require us to repurchase the 3.75% Notes. We may redeem some or all of the 3.75% Notes at any time
on or after May 14, 2008, payable in cash, plus accrued but unpaid interest, including contingent
interest, if any, to the date of redemption at various redemption prices shown in Note 4 to our
consolidated financial statements. Holders may require us to repurchase all or a portion of their 3.75% Notes on May 7, 2013 or
May 7, 2018, and upon a change of control, as defined in the indenture governing the 3.75% Notes,
at 100% of the principal amount of the 3.75% Notes, plus accrued but unpaid interest, including
contingent interest, if any, to the date of repurchase, payable in cash. The 3.75% Notes are convertible, at the holders option, prior to the maturity date into
shares of our common stock in the following circumstances:  
    during any calendar quarter, if the closing sale price per share of our
common stock for at least 20 trading days in the period of 30 consecutive trading days
ending on the last trading day of the calendar quarter preceding the quarter in which
the conversion occurs, is more than 110% of the conversion price per share, or $7.10
per share, on that 30th trading day;
    if we have called the 3.75% Notes for redemption;
    during any period that the credit ratings assigned to the 3.75% Notes by
both Moodys and S&P are reduced below B1 and B+, respectively, or if neither rating
agency is rating the 3.75% Notes;
    during the five trading day period immediately following any nine
consecutive trading day period in which the average trading price per $1,000 principal
amount of the 3.75% Notes for each day of such period was less than 95% of the product
of the closing sale price per share of our common stock on that day multiplied by the
number of shares of common stock issuable upon conversion of $1,000 principal amount of
the 3.75% Notes; or
    upon the occurrence of specified corporate transactions, including a change
of control. The 3.75% Notes did not meet the criteria for conversion into common stock at any time during
the year ended December 31, 2004 or through the date of this report. At March 9, 2005, the credit
ratings assigned to the 3.75% Notes by Moodys and S&P were B1 and BB-, respectively. The
indenture governing the 3.75% Notes does not contain any restriction on the payment of dividends,
the incurrence of indebtedness or the repurchase of our securities, and does not contain any
financial covenants. CIT Facility Our subsidiary Grey Wolf Drilling Company L.P. amended its credit facility in December 2004,
with the CIT Group/Business Credit, Inc. (the CIT Facility) and extended the maturity of the
credit facility until December 31, 2008. The CIT Facility was also increased from $75.0 million to
$100.0 million. It also provides us with the ability to borrow up to the lesser of $100.0 million
or 50% of the Orderly Liquidation Value (as defined in the agreement) of certain drilling rig
equipment located in the 48 contiguous states of the United States of America. The CIT Facility
provides that up to $50.0 million of the $100.0 million is available for letters of credit.
Outstanding letters of credit reduce the amount available for borrowing under the CIT Facility.
The CIT Facility is a revolving facility with automatic renewals after expiration 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 our debt service coverage ratio within a
range of either LIBOR plus 1.75% to 3.50% or prime plus 0.25% to 1.50%. We are required to pay a
commitment fee of 0.5% per annum on the unused portion of the CIT Facility and letters of credit
accrue a fee of 1.25% per annum. The CIT Facility contains affirmative and negative covenants and we are in compliance with
these covenants. Substantially all of our assets, including our drilling equipment, are pledged as
collateral under the CIT Facility which is also secured by a guarantee of Grey Wolf, Inc. and
certain of our wholly-owned subsidiaries guarantees. However, we retain 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 in connection with the sale or exchange of such collateral or relocation of
equipment outside the contiguous 48 states of the United States of America. We currently have no
outstanding balance under the CIT Facility but had $21.3 million of undrawn letters of credit at
March 9, 2005. These standby letters of credit are for the benefit of various insurance companies
as collateral for premiums and retained losses which may become payable under the terms of the
underlying insurance contracts and for other purposes. -24-




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##### Table of Contents



Among the various covenants that we must satisfy under the CIT Facility are the following two
covenants, as defined in the CIT Facility, which apply whenever our liquidity, defined as the sum
of cash, cash equivalents and availability under the CIT Facility, falls below $35.0 million. At
December 31, 2004, our liquidity as defined above was $152.9 million.  
    1 to 1 EBITDA coverage of debt service, tested monthly on a trailing 12
month basis; and
    minimum tangible net worth at the end of each quarter will be at least the
prior year tangible net worth less non-cash write-downs since the prior year-end less
fixed amounts for each quarter end for which the test is calculated. Additionally, if the total amount outstanding under the CIT Facility (including outstanding
letters of credit) exceeds 50% of the orderly liquidation value of our domestic rigs, we are
required to make a prepayment in the amount of the excess. Also, if the average rig utilization
rate falls below 45% for two consecutive months, 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. Average rig utilization is defined as the total number of rigs owned which are
operating under drilling contracts in the 48 contiguous states of the United States of America
divided by the total number of rigs owned, excluding rigs not capable of working without
substantial capital investment. 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 including:  
    default with respect to other indebtedness in excess of $350,000;
    legal judgments in excess of $350,000; or
    a change in control which means that we cease to own 100% of our two
principal subsidiaries, some person or group has either acquired beneficial ownership
of 30% or more of the outstanding common stock of Grey Wolf, Inc. or obtained the power
to elect a majority of our board of directors, or our board of directors ceases to
consist of a majority of continuing directors (as defined by the CIT Facility). Cash Flow The net cash provided by or used in our operating, investing and financing activities is
summarized below (amounts in thousands): Years Ended December 31,2004
    
    
    
    
    
    
    2003
    
    
    
    
    
    
    2002Net cash provided by (used in):Operating activities
    
    $
    45,146
    
    
    
    
    
    
    $
    (7,040
    )
    
    
    
    
    
    $
    36,403Investing activities
    
    
    (74,077
    )
    
    
    
    
    
    
    (33,927
    )
    
    
    
    
    
    
    (21,947
    )Financing activities
    
    
    46,291
    
    
    
    
    
    
    
    (18,582
    )
    
    
    
    
    
    
    (1,224
    )Net increase (decrease) in cash:
    
    $
    17,360
    
    
    
    
    
    
    $
    (59,549
    )
    
    
    
    
    
    $
    13,232
 Our cash flows from operating activities are affected by a number of factors including the
number of rigs working 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, 2004 was $45.1 million compared to cash used in operating activities during
the year ended December 31, 2003 of $7.0 million. This increase in cash flow from operating
activities from 2003 to 2004 is due primarily to an increase in EBITDA as a result of higher
dayrates and rig activity. Our cash flow used in operating activities during the year ended December 31, 2003 was $7.0
million compared to cash generated from operating activities during the year ended December 31,
2002 of $36.4 million. This decrease in cash flow from operating activities from 2002 to 2003 was
principally due to a decrease in EBITDA per rig day between the two periods. This decline was due
in large part to the replacement of expiring term contracts with spot market contracts at lower
rates. Cash flow used in investing activities for the year ended December 31, 2004 primarily
consisted of $28.9 million of cash paid in the Patriot acquisition and $47.0 million of capital
expenditures. For the years ended December 31, 2003 and 2002, cash flow used in investing
activities consisted of capital expenditures of $35.1 -25-




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##### Table of Contents



million and $22.3 million, respectively. Capital expenditures included betterments and
improvements to our rigs, the acquisition of drill pipe and drill collars, the purchase of top
drives, and other capital items. Also included in capital expenditures in 2003 was the cash
purchase of two diesel electric SCR rigs for $9.0 million. Cash flow provided by financing activities for 2004 primarily consisted of the net proceeds of
$122.2 million from the issuance of $125.0 million of Floating Rate Notes on March 31, 2004 and
April 22, 2004, offset by $85.0 million for the redemption of the 8?% Notes on April 30, 2004. In
addition, proceeds from stock option exercises provided $10.2 million in 2004. Cash flow used in
financing activities for the year ended December 2003 consisted of the $165.0 million partial
redemption of the 8?% and the sale of the 3.75% Notes, which yielded net proceeds of $146.6
million. Certain Contractual Commitments The following table summarizes certain of our contractual cash obligations and related
payments due by period at December 31, 2004 (amounts in thousands): Payments Due by Period(1)Less than
    
    
    1-3
    
    
    4-5
    
    
    After 5Contractual Obligation
    
    Total
    
    
    1 year
    
    
    years
    
    
    years
    
    
    years3.75% Notes(2)Principal
    
    $
    150,000
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    150,000Interest
    
    
    104,063
    
    
    
    5,625
    
    
    
    11,250
    
    
    
    11,250
    
    
    
    75,938Floating Rate Notes(2)Principal
    
    
    125,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    125,000Interest(3)
    
    
    44,613
    
    
    
    2,445
    
    
    
    4,889
    
    
    
    4,889
    
    
    
    32,390Operating leases
    
    
    3,472
    
    
    
    726
    
    
    
    1,188
    
    
    
    1,007
    
    
    
    551Total contractual
cash obligations
    
    $
    427,148
    
    
    $
    8,796
    
    
    $
    17,327
    
    
    $
    17,146
    
    
    $
    383,879
   (1)
    
    This assumes no conversion under, or acceleration of maturity dates due to redemption,
breach of, or default under, the terms of the applicable contractual obligation.(2)
    
    See Floating Rate Notes and 3.75% Notes, above, for information relating to covenants,
the breach of which could cause a default under, and acceleration of, the maturity date. Also
see 3.75% Notes and Floating Rate Notes for information related to the holders
conversion rights.(3)
    
    Assumes the 3-month LIBOR at December 31, 2004 of 2.01% minus a spread of 0.05% (1.96%) Our CIT Facility provides up to $50.0 million for the issuance of letters of credit. If
letters of credit which we cause to be issued are drawn upon by the holders of those letters of
credit, then we will become obligated to repay those amounts along with any accrued interest and
fees. Letters of credit issued reduce the amount available for borrowing under the CIT Facility
and, as a result, we had borrowing capacity of $81.2 million at December 31, 2004. The following
table illustrates the undrawn outstanding standby letters of credit at December 31, 2004 and the
potential maturities if drawn upon by the holders (amounts in thousands): Payments Due by Period(1)Potential
    
    Total
    
    
    Less than
    
    
    1-3
    
    
    4-5
    
    
    Over 5Contractual Obligation
    
    Committed
    
    
    1 year
    
    
    years
    
    
    years
    
    
    YearsStandby letters of credit
    
    $
    18,780
    
    
    $
    
    
    
    $
    
    
    
    $
    18,780
    
    
    $
    Total
    
    $
    18,780
    
    
    $
    
    
    
    $
    
    
    
    $
    18,780
    
    
    $
    
   (1)
    
    Assumes no acceleration of maturity date due to breach of, or default under, the potential
contractual obligation. -26-




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##### Table of Contents



Projected Cash Sources and Uses We expect to use cash generated from operations to cover cash requirements, including debt
service on the 3.75% Notes and Floating Rate Notes and capital expenditures in 2005. Capital
expenditures for 2005 are projected to be between $70.0 million and $90.0 million, subject to the
actual level of rig activity and ultimate number of rig reactivations. We will make quarterly
interest payments on the Floating Rate Notes on January 1, April 1, July 1, and October 1 of each
year and semi-annual interest payments of $2.8 million on the 3.75% Notes on May 7 and November 7
of each year through the dates of maturity. To the extent that we are unable to generate
sufficient cash from operations we would be required to use cash on hand or draw on our CIT
Facility. From time to time we also review possible acquisition opportunities. While we currently have
no agreements to acquire additional businesses or equipment, we may enter into such agreements in
the future. Our ability to consummate any such transaction will be dependent in large part on our
ability to fund such a transaction. We cannot give assurance that adequate funding will be
available on satisfactory terms. Results of Operations Our drilling contracts generally provide compensation on either a daywork, turnkey or footage
basis. Successfully completed turnkey and footage contracts generally result in higher revenues
per rig day worked than under daywork contracts. EBITDA per rig 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 drill bits) that would typically be paid by
the customer under daywork contracts. Contract drilling revenues and EBITDA on turnkey and footage
contracts are affected by a number of variables, which include the depth of the well, geological
complexities and the actual difficulties encountered in drilling the well. In the following discussion of the results of our operations and elsewhere in our filings, we
use EBITDA and EBITDA per rig day. EBITDA is a non-GAAP financial measure under the rules and
regulations of the Securities and Exchange Commission (SEC). We believe that our disclosure of
EBITDA per rig day as a measure of rig operating performance allows investors to make a direct
comparison between us and our competitors, without regard to differences in capital structure or to
differences in the cost basis of our rigs and those of our competitors. Investors should be aware,
however, that there are limitations inherent in using this performance measure as a measure of
overall company profitability because it excludes significant expense items such as depreciation
expense and interest expense. An improving trend in EBITDA per rig day may not be indicative of an
improvement in our overall profitability. To compensate for the limitations in utilizing EBITDA
per rig day as an operating measure, our management also uses GAAP measures of performance
including operating income (loss) and net income (loss) to evaluate performance but only with
respect to the company as a whole and not on a per rig basis. In accordance with SEC rules, we
have included below a reconciliation of EBITDA to net income (loss), which is the nearest
comparable financial GAAP measure. 2004
    
    
    2003
    
    
    2002Earnings before interest, taxes, depreciation
and amortization
    
    $
    84,342
    
    
    $
    30,770
    
    
    $
    40,836Depreciation and amortization
    
    
    (55,329
    )
    
    
    (50,521
    )
    
    
    (46,601
    )Interest expense
    
    
    (14,759
    )
    
    
    (27,832
    )
    
    
    (23,928
    )Total income tax (expense) benefit
    
    
    (6,176
    )
    
    
    17,383
    
    
    
    8,217Net income (loss) applicable to common shares
    
    $
    8,078
    
    
    $
    (30,200
    )
    
    $
    (21,476
    )
 -27-




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The following tables highlight rig days worked, contract drilling revenue and EBITDA for our
daywork and turnkey operations for the years ended December 31, 2004, 2003 and 2002. For the Year Ended December 31, 2004Daywork
    
    
    TurnkeyOperations
    
    
    Operations(1)
    
    
    Total(Dollars in thousands, except averages per rig day worked)Rig days worked
    
    
    27,616
    
    
    
    3,561
    
    
    
    31,177Contract drilling revenues
    
    $
    308,851
    
    
    $
    115,783
    
    
    $
    424,634Drilling operations expenses
    
    
    234,630
    
    
    
    93,167
    
    
    
    327,797General and administrative expense(2)
    
    
    11,935
    
    
    
    1,382
    
    
    
    13,317Interest income(2)
    
    
    (691
    )
    
    
    (86
    )
    
    
    (777
    )Gain on sale of assets(2)
    
    
    (34
    )
    
    
    (11
    )
    
    
    (45
    )EBITDA
    
    $
    63,011
    
    
    $
    21,331
    
    
    $
    84,342Averages per rig day worked:Contract drilling revenues
    
    $
    11,184
    
    
    $
    32,515
    
    
    $
    13,620EBITDA
    
    $
    2,282
    
    
    $
    5,990
    
    
    $
    2,705
 For the Year Ended December 31, 2003Daywork
    
    
    TurnkeyOperations
    
    
    Operations(1)
    
    
    Total(Dollars in thousands, except averages per rig day worked)Rig days worked
    
    
    18,700
    
    
    
    3,447
    
    
    
    22,147Contract drilling revenues
    
    $
    178,818
    
    
    $
    107,156
    
    
    $
    285,974Drilling operations expenses
    
    
    158,141
    
    
    
    86,146
    
    
    
    244,287General and administrative expenses(2)
    
    
    10,472
    
    
    
    1,494
    
    
    
    11,966Interest income(2)
    
    
    (812
    )
    
    
    (142
    )
    
    
    (954
    )Gain on sale of assets(2)
    
    
    (69
    )
    
    
    (12
    )
    
    
    (81
    )Other, net(2)
    
    
    (12
    )
    
    
    (2
    )
    
    
    (14
    )EBITDA
    
    $
    11,098
    
    
    $
    19,672
    
    
    $
    30,770Averages per rig day worked:Contract drilling revenues
    
    $
    9,562
    
    
    $
    31,087
    
    
    $
    12,913EBITDA
    
    $
    593
    
    
    $
    5,707
    
    
    $
    1,389
 -28-




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##### Table of Contents



For the Year Ended December 31, 2002Daywork
    
    
    TurnkeyOperations
    
    
    Operations (1)
    
    
    Total(Dollars in thousands, except averages per rig day worked)Rig days worked
    
    
    18,248
    
    
    
    1,832
    
    
    
    20,080Contract drilling revenues
    
    $
    197,594
    
    
    $
    52,666
    
    
    $
    250,260Drilling operations expenses
    
    
    154,458
    
    
    
    42,112
    
    
    
    196,570General and administrative expenses(2)
    
    
    10,493
    
    
    
    807
    
    
    
    11,300Interest income(2)
    
    
    (1,575
    )
    
    
    (157
    )
    
    
    (1,732
    )Gain on sale of assets(2)
    
    
    (117
    )
    
    
    (9
    )
    
    
    (126
    )Provision for asset impairment(2)
    
    
    3,121
    
    
    
    419
    
    
    
    3,540Other, net(2)
    
    
    (118
    )
    
    
    (10
    )
    
    
    (128
    )EBITDA
    
    $
    31,332
    
    
    $
    9,504
    
    
    $
    40,836Averages per rig day worked:Contract drilling revenues
    
    $
    10,828
    
    
    $
    28,748
    
    
    $
    12,463EBITDA
    
    $
    1,717
    
    
    $
    5,188
    
    
    $
    2,034
   (1)
    
    Turnkey operations include the results from turnkey and footage contracts.(2)
    
    These income and expense items are not contract related and are allocated between
daywork and turnkey based upon operating rig days. Comparison of Fiscal Years ended December 31, 2004 and 2003 Our EBITDA increased by $53.6 million, or 174%, to $84.3 million for the year ended December
31, 2004 from $30.8 million for the year ended December 31, 2003. The increase resulted from a
$51.9 million increase in EBITDA from daywork operations and a $1.7 million increase in EBITDA from
turnkey operations. On a per rig day basis, our total EBITDA increased by $1,316, or 95% to $2,705
in 2004 from $1,389 in 2003. This increase included a $1,689 per rig day increase from daywork
operations. Total general and administrative expenses increased by $1.4 million due primarily to
higher payroll costs, professional fees, and costs associated with being a public company. Daywork Operations The increase in EBITDA discussed above was due in part to an increase of 48%, or 8,916 rig
days worked on daywork contracts during 2004 compared to 2003. This increase in days was due to
the acquisition of Patriot and overall higher demand for our services. Higher dayrates in 2004
also contributed to the increase. Contract drilling revenue per rig day increased $1,622, or 17%,
the bulk of which also increased EBITDA per day, which increased by $1,689 per rig day. Overall,
expenses increased as a result of the increase in activity but remained relatively flat on a per
rig day basis. Turnkey Operations Days worked under turnkey contracts increased by 114, or 3%, while EBITDA per rig day
increased by $283, or 5%, to $5,990 for the year ended December 31, 2004, from $5,707 for the year
ended December 31, 2003. The increase in EBITDA per rig day was due to differences in the mix,
success and complexity of the wells drilled in 2004 compared to 2003. Other Depreciation and amortization expense increased by $4.8 million, or 9.5%, to $55.3 million for
the year ended December 31, 2004 compared to $50.5 million for the year ended December 31, 2003.
Depreciation and amortization expense is higher due to the acquisition of Patriot and capital
expenditures during 2004. -29-




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Interest expense decreased by $13.1 million, or 47%, to $14.8 million for 2004 from $27.8
million for 2003. The decrease is due to the issuance of the 3.75% Notes and Floating Rate Notes
and subsequent redemption of our 8 7/8% Notes. This refinancing resulted in substantial interest
savings given the lower interest rate debt outstanding. Our income tax expense increased by $23.6 million to $6.2 million in 2004 from an income tax
benefit of $17.4 million in 2003. The increase is due to the level of income and is also affected
by the annual amortization of $2.8 million in permanent differences related to differences between
the financial accounting and tax basis of assets that were purchased in capital stock acquisitions.
The permanent difference will be reduced as these assets are depreciated for financial accounting
purposes on a straight-line basis over their remaining useful lives of approximately eight years.
As the amortization of these permanent differences is a fixed amount, our book effective tax rate
varies widely based upon the current and projected levels of income or loss. Comparison of Fiscal Years ended December 31, 2003 and 2002 Our EBITDA decreased by $10.1 million, or 25%, to $30.8 million for the year ended December
31, 2003 from $40.8 million for the year ended December 31, 2002. The decrease resulted from a
$20.2 million decrease in EBITDA from daywork operations partially offset by a $10.2 million
increase in EBITDA from turnkey operations. On a per rig day basis, our total EBITDA decreased by
$645, or 32% to $1,389 in 2003 from $2,034 in 2002. This decrease included a $1,124 per rig day
decrease from daywork operations offset by a $519 per rig day increase from turnkey operations.
Total general and administrative expenses increased by $666,000 due primarily to higher payroll
costs, professional fees, increases in insurance costs, and costs associated with being a public
company. Total interest income decreased by $778,000 in 2003 from 2002, due primarily to lower
cash balances in 2003. Daywork Operations Days worked under daywork contracts increased slightly by 452 rig days, or 2%, while EBITDA
per rig day declined by $1,124, or 65%, to $593 for the year ended December 31, 2003, from $1,717
for the year ended December 31, 2002. The decrease in EBITDA per rig day was due primarily to the
expiration at the end of 2002 and in 2003 of term contracts that were replaced with spot market
contracts at lower rates. Turnkey Operations Days worked under turnkey contracts increased by 1,615, or 88%, while EBITDA per rig day
increased by $519, or 10%, to $5,707 for the year ended December 31, 2003, from $5,188 for the year
ended December 31, 2002. The increase in EBITDA per rig day was due to differences in the success
and complexity of the wells drilled in 2003 compared to 2002. Other Depreciation expense increased by $3.9 million, or 8%, to $50.5 million for the year ended
December 31, 2003 compared to $46.6 million for the year ended December 31, 2002. During the
fourth quarter of 2002, we made the decision not to return five rigs to service and reclassified
the component parts of these rigs to spare equipment, shortening the depreciable lives of this
equipment. In addition, depreciation expense is higher due to capital expenditures during 2003. Interest expense increased by $3.9 million, or 16%, to $27.8 million for 2003 from $23.9
million for 2002. Interest expense in 2003 includes approximately $8.5 million of costs associated
with the partial redemption of our 8 7/8% Notes on July 1, 2003 and interest on the $150.0 million
aggregate principal amount of 3.75% Notes issued on May 7, 2003. These costs include a $4.9
million redemption premium for the 8 7/8% Notes, $2.5 million in accelerated amortization of a
pro-rata portion of the previously deferred financing costs on the 8 7/8% Notes, and interest on the
3.75% Notes from May 7, 2003 to June 30, 2003. This additional interest expense was partially

offset by $4.5 million lower interest for the last six months of 2003 due to the lower interest
rate on the 3.75% Notes and $15.0 million reduction in principal amount of total debt outstanding. Our income tax benefit increased by $9.2 million to $17.4 million in 2003 from $8.2 million in
2002. The increase is due to the level of losses and a change in our estimate of available state
tax net operating losses in the fourth quarter of 2003. This change in estimate increased our
income tax benefit by $938,000. Our income tax benefit is also affected by the annual amortization
of $2.8 million in permanent differences related to differences -30-




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##### Table of Contents



between the financial accounting and tax basis of assets purchased in capital stock
acquisitions. The permanent differences are amortized as these assets are depreciated for
financial accounting purposes on a straight-line basis over their remaining useful lives of
approximately nine years at December 31, 2003. As the annual amortization of these permanent
differences is a fixed amount, our book effective tax rate can vary widely based upon the current
level of income or loss. 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 of the oil and natural 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 natural gas industry and to
a lesser extent by changes in general inflation. 
 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 the Floating Rate Notes and the CIT Facility. The Floating Rate Notes bear
interest at a per annum rate which is equal to 3-month LIBOR, adjusted quarterly, minus a spread of
0.05%. We had $125.0 million of the Floating Rate Notes outstanding at December 31, 2004. A 1%
change in the interest rate on the Floating Rate Notes would change our interest expense by $1.3
million on an annual basis. However, the annual interest on the Floating Rate Notes will never be
below zero or more than 6.00%, which could yield interest expense ranging from zero to $7.5 million
on an annual basis. Interest on borrowings under the CIT Facility accrues at a variable rate,
using either the prime rate plus 0.25% to 1.50% or LIBOR plus 1.75% to 3.50%, depending upon our
debt service coverage ratio for the trailing 12 month period. We have no outstanding balance under
the CIT Facility at March 9, 2005 and as such have no exposure under this facility to a change in
interest rates. -31-




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##### Table of Contents



Item 8. Financial Statements and Supplementary Data Index to
Consolidated Financial Statements
and Financial Statement Schedule Managements
Report on Internal Control Over Financial Reporting
    
    
    33Reports of Independent Registered Public Accounting Firm
    
    
    34Consolidated Balance Sheets as of December 31, 2004 and 2003
    
    
    36Consolidated Statements of Operations for the Years Ended December 31, 2004, 2003, and 2002
    
    
    37Consolidated Statements of Shareholders Equity and Comprehensive Income (Loss) for the Years Ended December 31, 2004, 2003, and 2002
    
    
    38Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2003, and 2002
    
    
    39Notes to Consolidated Financial Statements
    
    
    40Financial Statement Schedule:Schedule II  Valuation and Qualifying Accounts
    
    
    55
 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. -32-




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##### Table of Contents



MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Our internal control
over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. Our internal control over
financial reporting includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company are being made only in
accordance with authorizations of management and directors of the Company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the Companys assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate. We assessed the effectiveness of our internal control over financial reporting based on the
framework in Internal Control  Integrated Framework issued by the Committee of Sponsoring
Organizations (COSO) of the Treadway Commission. Based on our evaluation under the framework in
Internal Control  Integrated Framework, our management concluded that our internal control over
financial reporting was effective as of December 31, 2004. Our managements assessment of the
effectiveness of our internal control over financial reporting as of December 31, 2004 has been
audited by KPMG LLP, an independent registered public accounting firm, as stated in their report
which is included on page 35. Thomas P. Richards
Chairman, President and Chief Executive Officer David W. Wehlmann
Executive Vice President and Chief Financial Officer -33-




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 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, 2004 and 2003, and the related consolidated statements of
operations, shareholders equity and comprehensive income (loss), and cash flows for each of the
years in the three-year period ended December 31, 2004. In connection with our audits of the
consolidated financial statements, we have also audited the financial statement schedule for the
years ended December 31, 2004, 2003 and 2002. 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 the Standards of the Public Company Accounting
Oversight Board (United States). 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,
2004 and 2003, and the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2004, in conformity with U.S. generally accepted
accounting principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects the information set forth therein. We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of Grey Wolf, Inc.s internal control over
financial reporting as of December 31, 2004, based on criteria established in Internal Control -
Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO), and our report dated March 15, 2005 expressed an unqualified opinion on managements
assessment of, and the effective operation of, internal control over financial reporting. KPMG LLP Houston, Texas
March 15, 2005 -34-




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Directors
of Grey Wolf, Inc.: We have audited managements assessment, included in the accompanying
Managements Report on Internal Control Over Financial Reportingthat Grey Wolf, Inc. maintained effective internal
control over financial reporting as of December 31, 2004, based on criteria established in Internal
ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Grey Wolf, Inc.s management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting. Our responsibility is to express an opinion on managements assessment
and an opinion on the effectiveness of the Companys internal control over financial reporting
based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating managements assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion. A companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys assets that could have
a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate. In our opinion, managements assessment that Grey Wolf, Inc. maintained effective internal
control over financial reporting as of December 31, 2004, is fairly stated, in all material
respects, based on criteria established in Internal ControlIntegrated Frameworkissued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, Grey
Wolf, Inc. maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2004, based on criteria established in Internal ControlIntegrated
Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Grey Wolf, Inc. and
subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of
operations, shareholders equity and comprehensive income (loss), and cash flows for each of the
years in the three-year period ended December 31, 2004, and our
report dated March 15, 2005,
expressed an unqualified opinion on those consolidated financial statements. KPMG LLP Houston, Texas
March 15,2005 -35-




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GREY WOLF, INC. AND SUBSIDIARIES Consolidated Balance Sheets
(Amounts in thousands, except share data) December 31,2004
    
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    71,710
    
    
    $
    54,350Restricted cash  insurance deposits
    
    
    758
    
    
    
    749Accounts receivable, net of allowance
of $2,424 and $2,443, respectively
    
    
    98,065
    
    
    
    60,181Prepaids and other current assets
    
    
    5,097
    
    
    
    4,379Deferred tax assets
    
    
    3,050
    
    
    
    3,106Total current assets
    
    
    178,680
    
    
    
    122,765Property and equipment:Land, buildings and improvements
    
    
    5,061
    
    
    
    5,043Drilling equipment
    
    
    824,901
    
    
    
    738,097Furniture and fixtures
    
    
    3,578
    
    
    
    3,332Total property and equipment
    
    
    833,540
    
    
    
    746,472Less: accumulated depreciation
    
    
    (396,210
    )
    
    
    (342,194
    )Net property and equipment
    
    
    437,330
    
    
    
    404,278Goodwill
    
    
    10,377
    
    
    
    Other noncurrent assets, net
    
    
    9,489
    
    
    
    5,141$
    635,876
    
    
    $
    532,184LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable  trade
    
    $
    40,232
    
    
    $
    27,893Accrued workers compensation
    
    
    4,303
    
    
    
    5,295Payroll and related employee costs
    
    
    8,699
    
    
    
    6,660Accrued interest payable
    
    
    1,516
    
    
    
    4,664Other accrued liabilities
    
    
    5,834
    
    
    
    6,420Total current liabilities
    
    
    60,584
    
    
    
    50,932Senior notes
    
    
    
    
    
    
    84,898Contingent convertible notes
    
    
    275,000
    
    
    
    150,000Other long-term liabilities
    
    
    7,509
    
    
    
    4,115Deferred income taxes
    
    
    55,301
    
    
    
    46,602Commitments 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 190,136,471 and 181,283,431 issued
and outstanding, respectively
    
    
    19,014
    
    
    
    18,129Additional paid-in capital
    
    
    363,148
    
    
    
    330,266Accumulated deficit
    
    
    (144,680
    )
    
    
    (152,758
    )Total shareholders equity
    
    
    237,482
    
    
    
    195,637$
    635,876
    
    
    $
    532,184
 See accompanying notes to consolidated financial statements -36-




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GREY WOLF, INC. AND SUBSIDIARIES Consolidated Statements of Operations
(Amounts in thousands, except per share data) Years Ended December 31,2004
    
    
    2003
    
    
    2002Revenues:Contract drilling
    
    $
    424,634
    
    
    $
    285,974
    
    
    $
    250,260Costs and expenses:Drilling operations
    
    
    327,797
    
    
    
    244,287
    
    
    
    196,570Depreciation and amortization
    
    
    55,329
    
    
    
    50,521
    
    
    
    46,601Provision for asset impairment
    
    
    
    
    
    
    
    
    
    
    3,540General and administrative
    
    
    13,317
    
    
    
    11,966
    
    
    
    11,300Gain on sale of assets
    
    
    (45
    )
    
    
    (81
    )
    
    
    (126
    )Total costs and expenses
    
    
    396,398
    
    
    
    306,693
    
    
    
    257,885Operating income (loss)
    
    
    28,236
    
    
    
    (20,719
    )
    
    
    (7,625
    )Other income (expense):Interest expense
    
    
    (14,759
    )
    
    
    (27,832
    )
    
    
    (23,928
    )Interest income
    
    
    777
    
    
    
    954
    
    
    
    1,732Other, net
    
    
    
    
    
    
    14
    
    
    
    128Other expense, net
    
    
    (13,982
    )
    
    
    (26,864
    )
    
    
    (22,068
    )Income (loss) before income taxes
    
    
    14,254
    
    
    
    (47,583
    )
    
    
    (29,693
    )Income tax expense (benefit)Current
    
    
    200
    
    
    
    (938
    )
    
    
    (1,871
    )Deferred
    
    
    5,976
    
    
    
    (16,445
    )
    
    
    (6,346
    )Total income tax expense (benefit)
    
    
    6,176
    
    
    
    (17,383
    )
    
    
    (8,217
    )Net income (loss)
    
    $
    8,078
    
    
    $
    (30,200
    )
    
    $
    (21,476
    )Net income (loss) per common shareBasic
    
    $
    0.04
    
    
    $
    (0.17
    )
    
    $
    (0.12
    )Diluted
    
    $
    0.04
    
    
    $
    (0.17
    )
    
    $
    (0.12
    )Weighted average common shares outstandingBasic
    
    
    185,868
    
    
    
    181,210
    
    
    
    180,936Diluted
    
    
    187,654
    
    
    
    181,210
    
    
    
    180,936
 See accompanying notes to consolidated financial statements -37-




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##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES Consolidated Statements of Shareholders Equity And Comprehensive Income (Loss)(Amounts in thousands) Series BJuniorParticipatingPreferred
    
    
    
    
    
    
    CommonStock
    
    
    
    
    
    
    Stock
    
    
    Additional$1 par
    
    
    Common
    
    
    $.10 par
    
    
    Paid-inValue
    
    
    Shares
    
    
    Value
    
    
    Capital
    
    
    Deficit
    
    
    TotalBalance, December 31,
2001
    
    
    
    
    
    
    180,726
    
    
    $
    18,073
    
    
    $
    328,306
    
    
    $
    (101,082
    )
    
    $
    245,297Exercise of stock options
    
    
    
    
    
    
    312
    
    
    
    31
    
    
    
    655
    
    
    
    
    
    
    
    686Non-cash compensation
expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    542
    
    
    
    
    
    
    
    542Tax benefit of stock
option exercises
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    209
    
    
    
    
    
    
    
    209Comprehensive net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21,476
    )
    
    
    (21,476
    )Balance, December 31, 2002
    
    
    
    
    
    
    181,038
    
    
    
    18,104
    
    
    
    329,712
    
    
    
    (122,558
    )
    
    
    225,258Exercise of stock options
    
    
    
    
    
    
    245
    
    
    
    25
    
    
    
    343
    
    
    
    
    
    
    
    368Tax benefit of stock
option exercises
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    211
    
    
    
    
    
    
    
    211Comprehensive net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (30,200
    )
    
    
    (30,200
    )Balance, December 31, 2003
    
    
    
    
    
    
    181,283
    
    
    
    18,129
    
    
    
    330,266
    
    
    
    (152,758
    )
    
    
    195,637Non-cash compensation
expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    77
    
    
    
    
    
    
    
    77Exercise of stock options
    
    
    
    
    
    
    4,243
    
    
    
    424
    
    
    
    9,729
    
    
    
    
    
    
    
    10,153Tax benefit of stock
option exercises
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,193
    
    
    
    
    
    
    
    3,193Issuance of common stock
    
    
    
    
    
    
    4,610
    
    
    
    461
    
    
    
    19,883
    
    
    
    
    
    
    
    20,344Comprehensive net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,078
    
    
    
    8,078Balance, December 31, 2004
    
    
    
    
    
    
    190,136
    
    
    $
    19,014
    
    
    $
    363,148
    
    
    $
    (144,680
    )
    
    $
    237,482
 See accompanying notes to consolidated financial statements -38-




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GREY WOLF, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows
(Amounts in thousands) Years Ended December 31,2004
    
    
    2003
    
    
    2002Cash flows from operating activities:Net income (loss)
    
    $
    8,078
    
    
    $
    (30,200
    )
    
    $
    (21,476
    )Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:Depreciation and amortization
    
    
    55,329
    
    
    
    50,521
    
    
    
    46,601Provision for asset impairment
    
    
    
    
    
    
    
    
    
    
    3,540Non-cash compensation expense
    
    
    77
    
    
    
    
    
    
    
    542Provision for doubtful accounts
    
    
    
    
    
    
    
    
    
    
    700Gain on sale of assets
    
    
    (45
    )
    
    
    (81
    )
    
    
    (126
    )Foreign exchange gain
    
    
    
    
    
    
    (14
    )
    
    
    (128
    )Deferred income taxes
    
    
    2,778
    
    
    
    (16,656
    )
    
    
    (6,555
    )Accretion of debt discount
    
    
    102
    
    
    
    285
    
    
    
    86Tax benefit of stock options exercises
    
    
    3,193
    
    
    
    211
    
    
    
    209(Increase) decrease in restricted cash
    
    
    (9
    )
    
    
    35
    
    
    
    100(Increase) decrease in accounts receivable
    
    
    (34,128
    )
    
    
    (13,147
    )
    
    
    19,840(Increase) decrease in other current assets
    
    
    (718
    )
    
    
    (961
    )
    
    
    (1,691
    )Increase (decrease) in accounts payable trade
    
    
    9,596
    
    
    
    8,476
    
    
    
    (1,590
    )Increase (decrease) in accrued workers compensation
    
    
    2,402
    
    
    
    (326
    )
    
    
    273Increase (decrease) in other current liabilities
    
    
    (3,442
    )
    
    
    (8,660
    )
    
    
    (4,997
    )Increase in other
    
    
    1,933
    
    
    
    3,477
    
    
    
    1,075Cash provided by (used in) operating activities
    
    
    45,146
    
    
    
    (7,040
    )
    
    
    36,403Cash flows from investing activities:Property and equipment additions
    
    
    (46,951
    )
    
    
    (35,102
    )
    
    
    (22,335
    )Payments to acquire New Patriot Drilling Corp.
    
    
    (28,906
    )
    
    
    
    
    
    
    Proceeds from sales of equipment
    
    
    1,780
    
    
    
    1,175
    
    
    
    388Cash used in investing activities
    
    
    (74,077
    )
    
    
    (33,927
    )
    
    
    (21,947
    )Cash flows from financing activities:Net proceeds from long-term debt
    
    
    122,187
    
    
    
    146,625
    
    
    
    Repayments of long-term debt
    
    
    (85,000
    )
    
    
    (165,000
    )
    
    
    (1,910
    )Financing costs
    
    
    (1,049
    )
    
    
    (575
    )
    
    
    Proceeds from exercise of stock options
    
    
    10,153
    
    
    
    368
    
    
    
    686Cash provided by (used in) financing activities
    
    
    46,291
    
    
    
    (18,582
    )
    
    
    (1,224
    )Net increase (decrease) in cash and cash equivalents
    
    
    17,360
    
    
    
    (59,549
    )
    
    
    13,232Cash and cash equivalents, beginning of year
    
    
    54,350
    
    
    
    113,899
    
    
    
    100,667Cash and cash equivalents, end of year
    
    $
    71,710
    
    
    $
    54,350
    
    
    $
    113,899Supplemental Cash Flow DisclosureCash paid for interest:
    
    $
    15,872
    
    
    $
    30,510
    
    
    $
    22,817Cash paid for (refund of) taxes:
    
    $
    
    
    
    $
    (879
    )
    
    $
    (1,822
    )
 See accompanying notes to consolidated financial statements -39-




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##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Summary of Significant Accounting Policies Nature of Operations. 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 natural gas
industry. Grey Wolf, Inc., through its subsidiaries, currently conducts operations primarily in
Alabama, Arkansas, Colorado, Louisiana, Mississippi, New Mexico, Oklahoma, Texas and Wyoming. 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 are stated at cost. Depreciation is
calculated using the straight-line method over the estimated useful lives of the assets, between
three and fifteen years. Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of. The Company reviews
its long-lived assets for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Impairment of assets to be held and used is
determined by a comparison of the carrying amount of an asset to undiscounted future net cash flows
expected to be generated by an asset. If such assets are considered to be impaired, the impairment
to be recognized is measured by an amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. During the fourth quarter of 2002, we recorded a pretax
non-cash asset impairment charge of $3.5 million (see Note 11). Goodwill and Intangible Assets.Goodwill represents the excess of costs over the fair value
of assets of a business acquired. The Company follows the provisions of SFAS No. 142, Goodwill
and Other Intangible Assets. Pursuant to SFAS No. 142, goodwill and intangible assets acquired in
a purchase business combination and determined to have an indefinite useful life are not amortized,
but instead are tested for impairment at least annually in accordance with the provisions of SFAS
No. 142. SFAS No. 142 also requires that intangible assets with estimable useful lives be
amortized over their respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 144, Accounting for Impairment or Disposal of
Long-Lived Assets. The Companys intangible assets represent customer contracts and related
relationships acquired and are being amortized over the useful life of three years. Revenue Recognition. Contract drilling revenues are earned under daywork, turnkey and footage
contracts. Revenue from daywork and footage contracts is recognized when it is realized or
realizable and earned. On daywork contracts revenue is recognized based on the number of days
completed at fixed rates stipulated by the contract. On footage contracts revenue is recognized
based on the number of feet that have been drilled at fixed rates stipulated by the contract.
Revenue from turnkey drilling contracts is recognized 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. Accounts
Receivable. Trade accounts receivable are recorded at the
invoiced amount and do not bear interest. The allowance for doubtful
accounts represents the Companys estimate of the amount of
probable credit losses existing in the Companys accounts
receivable. The Company determines the allowance based on a review of
customer balances and the deemed probability of collection. This
review consists of analyzing the age of individual balances, payment
history of customers and other known factors. Earnings per Share. Basic earnings per share (EPS) is based on the weighted average shares
outstanding, during the applicable period, without any dilutive effects considered. Diluted
earnings per share reflects any dilution from all outstanding options and shares issuable upon the
conversion of the 3.75% Contingent Convertible Senior Notes due May 2023 (the 3.75% Notes) and
the Floating Rate Contingent Convertible Senior Notes due April 2024 (the Floating Rate Notes).
In September 2004, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 04-08,
The Effect of Contingently Convertible Debt on Diluted Earnings Per Share. The Issue states that
Contingently Convertible Debt instruments should be included in diluted earnings per share
regardless of whether contingent features in such instruments have been met. The following is a
reconciliation of basic and diluted weighted average common shares outstanding (in thousands): -40-




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##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2004
    
    
    2003
    
    
    2002Weighted average common shares
outstanding  basic
    
    
    185,868
    
    
    
    181,210
    
    
    
    180,936Effect of dilutive securities:Options  treasury stock method
    
    
    1,786
    
    
    
    
    
    
    
    3.75% Contingent Convertible
Senior Notes  if converted method
    
    
    
    
    
    
    
    
    
    
    Floating Rate Contingent Convertible
Senior Notes  if converted method
    
    
    
    
    
    
    
    
    
    
    Weighted average common shares
outstanding  diluted
    
    
    187,654
    
    
    
    181,210
    
    
    
    180,936
 In 2004, the Company has excluded approximately 23.3 million shares and 19.2 million shares
issuable upon conversion of the 3.75% Notes and Floating Rate Notes, respectively (see Note 4) as
the inclusion of these shares would not be dilutive at the level of income in 2004. The Company
also excluded approximately 900,000 options in 2004 as the option prices were greater than the
market price of the underlying common stock and, therefore, the effect would be anti-dilutive. The
Company incurred net losses for the years ended December 31, 2003 and 2002 and has, therefore,
excluded 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, 2003 included the 23.3 million shares issuable upon conversion of the 3.75%
Notes. In addition to those securities, options to purchase 10.2 million shares and 8.7 million
shares for the years ended December 31, 2003 and 2002, respectively were excluded from the diluted
EPS calculation. Income Taxes. The Company records deferred tax liabilities utilizing an asset and liability
approach. This method gives consideration to the future tax consequences associated with
differences between the financial accounting and tax basis of assets and liabilities. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. The Company and its domestic subsidiaries file a
consolidated federal income tax return. Stock-Based Compensation. In December 2002, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standard (SFAS) No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure, which amends SFAS No. 123, Accounting for Stock-Based
Compensation, by providing alternative methods of transition for a voluntary change to the fair
value method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends
the provisions of SFAS No. 123 to require more prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results of operations. The Company has adopted the more
prominent disclosures required by SFAS No. 148; however, as permitted under SFAS No. 123, the
Company continues to apply Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations in accounting for its stock option plans
(see Recent Accounting Pronouncements for future changes). These plans are more fully described
in Note 5. -41-




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GREY WOLF, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Accordingly, no compensation expense has been recognized for stock option grants as all
options granted had an exercise price equal to the market value of the underlying common stock on
the date of grant. Had compensation expense for the stock option grants been determined on the
fair value at the grant dates consistent with the method of SFAS No. 123, the Companys net income
(loss) and income (loss) per share would have been adjusted to the pro forma amounts indicated
below (amounts in thousands, except per share amounts): 2004
    
    
    
    
    
    
    2003
    
    
    
    
    
    
    2002Net income (loss), as reported
    
    $
    8,078
    
    
    
    
    
    
    $
    (30,200
    )
    
    
    
    
    
    $
    (21,476
    )Add: Stock-based employee compensation
expense included in reporting net
income (loss), net of related tax effects
    
    
    52
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    407Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects
    
    
    (2,082
    )
    
    
    
    
    
    
    (2,523
    )
    
    
    
    
    
    
    (2,249
    )Pro forma net income (loss)
    
    $
    6,048
    
    
    
    
    
    
    $
    (32,723
    )
    
    
    
    
    
    $
    (23,318
    )Income (loss) per share  basic and dilutedAs reported
    
    $
    0.04
    
    
    
    
    
    
    $
    (0.17
    )
    
    
    
    
    
    $
    (0.12
    )Pro forma
    
    $
    0.03
    
    
    
    
    
    
    $
    (0.18
    )
    
    
    
    
    
    $
    (0.13
    )
 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 weighted
average fair value per share of stock options granted was $3.92 in 2004, $2.36 in 2003 and $1.80 in
2002. The key input variables used in valuing the options granted in 2004, 2003 and 2002 were:
risk-free interest rate based on five-year Treasury strips of 3.36% to 3.67% in 2004, 2.89%
to 3.35% in 2003, and 2.62% in 2002; dividend yield of zero in each year; stock price volatility of
55% to 56% for 2004 and 66% to 71% for 2003 and 75% for 2002, respectively; and expected option
lives of five years for each year presented. 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 8 7/8% Senior Notes at December 31, 2003 was $87.6
million, compared to the face value of $85.0 million. The fair value of the 3.75% Contingent
Convertible Senior Notes was $154.2 million and $141.2 million at December 31, 2004 and 2003,
respectively versus a face value of $150.0 million. The fair value of the Floating Rate Notes was
$131.1 million at December 31, 2004 versus a face value of $125.0 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 which are used as collateral for letters of credit securing insurance deposits and other
purposes. The carrying value of the investments approximates the current market value. Use of Estimates. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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. -42-




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GREY WOLF, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Concentrations of Credit Risk. Substantially all of the Companys contract drilling
activities are conducted with major and independent oil and natural 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 shareholders. Recent Accounting Pronouncements. In January 2003, the FASB issued FIN 46, Consolidation of
Variable Interest Entities. In December 2003, the FASB issued a revised version of FIN 46. FIN
46 clarifies existing accounting literature regarding the consolidation of entities in which a
company holds a controlling financial interest. A majority voting interest in an entity has
generally been considered indicative of a controlling financial interest. FIN 46 specifies other
factors (variable interests) which must be considered when determining whether a company holds a
controlling financial interest in, and therefore must consolidate, an entity (variable interest
entities). The provisions of FIN 46, as revised, are effective for the first reporting period
ending after March 15, 2004. The Company adopted FIN 46 on March 31, 2004. The adoption of FIN 46
did not have a material effect on the Companys financial position or results of operations for the
year ended December 31, 2004. In October 2004, the FASB ratified the consensus reached by the Emerging Issues Task Force
(EITF) in EITF Issue No. 04-08, The Effect of Contingently Convertible Debt on Diluted Earnings
per Share. The Issue states that Contingently Convertible Debt instruments should be included in
diluted earnings per share regardless of whether contingent features in such instruments have been
met. The Issue is effective for reporting periods ending after December 15, 2004. The Company
adopted EITF No. 04-08 on December 31, 2004 (see Earnings per Share in Note 1). In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, which
amends APB Opinion No. 29. The guidance in APB 29, Accounting for Nonmonetary Transactions, is
based on the principle that exchanges of nonmonetary assets should be measured based on the fair
value of the assets exchanged. The amendment made by SFAS 153 eliminates the exception for
exchanges of similar productive assets and replaces it with a broader exception for exchanges of
nonmonetary assets that do not have commercial substance. The provisions of the statement are
effective for exchanges taking place in fiscal periods beginning after June 15, 2005. The Company
will adopt the standard as the effective date and believes it will not have a material impact on
the financial statements. In December 2004, FASB issued SFAS No. 123 (Revised 2004), Share-Based Payment (SFAS
123R). This standard requires expensing of stock options and other share-based payments and
supersedes SFAS No. 123, which had allowed companies to choose between expensing stock options or
showing proforma disclosure only. This standard is effective for the Company as of July 1, 2005
and will apply to all awards granted, modified, cancelled or repurchased after that date as well as
the unvested portion of prior awards. The Company will adopt the standard as of the effective
date. The Company is currently evaluating the total effect on the financial statements and the
method to use when valuing stock options. Reclassification.Certain cash flow amounts in 2003 and 2002 have been reclassified to
conform to the presentation in 2004. In addition, certain balance sheet amounts have been
reclassified in 2003 to conform to the presentation in 2004. (2) Acquisitions and Intangible Assets On April 6, 2004, the Company acquired all of the outstanding capital stock and stock
equivalents of New Patriot Drilling Corp. (Patriot) by merger. The Company recorded all revenue
and expenses since that date. Patriot had a fleet of ten drilling rigs and provided onshore
contract land drilling services to the oil and natural gas -43-




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GREY WOLF, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS industry in the Rocky Mountain region. This acquisition allowed the Company to expand its presence
in this region with large natural gas reserves. The aggregate purchase price for Patriot was $49.5 million, including $14.2 million in cash,
$14.7 million in cash to retire the outstanding debt of Patriot and 4,610,480 shares of the
Companys common stock valued at $20.6 million. The value of the common stock issued was
determined based upon the average market price of the Companys common stock over the five day
period beginning two days before and ending two days after the signing of the agreement and plan of
merger. The purchase price was allocated among assets acquired and liabilities assumed based on their
fair market value at the date of acquisition. The purchase price allocation is as follows (in
thousands): Current assets
    
    $
    3,992Property and equipment
    
    
    42,384Intangible assets
    
    
    3,200Goodwill
    
    
    10,377Total assets acquired
    
    
    59,953Current liabilities
    
    
    (4,490
    )Deferred tax liabilities
    
    
    (5,977
    )Total liabilities assumed
    
    
    (10,467
    )Net assets acquired
    
    $
    49,486
 Goodwill represents the excess of costs over the fair value of assets of the business
acquired. At June 30, 2004, the Company had goodwill of $9.2 million. Goodwill increased to $10.4
million at September 30, 2004 due to working capital adjustments per the terms of the purchase and
sales agreement. None of the goodwill resulting from this acquisition is deductible for tax
purposes. The Company follows the provisions of SFAS No. 142, Goodwill and Other Intangible
Assets. Pursuant to SFAS No. 142, goodwill and intangible assets acquired in a purchase business
combination and determined to have an indefinite useful life are not amortized, but instead are
tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS
No. 142 also requires that intangible assets with estimable useful lives be amortized over their
respective estimated useful lives to their estimated residual values, and reviewed for impairment
in accordance with SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets. The
intangible assets represent customer contracts and related relationships acquired and are being
amortized over the useful life of three years. Amortization expenses related to these intangible
assets was $781,000 and accumulated amortization was $781,000 at December 31, 2004. Amortization
expense related to these intangible assets over the next five fiscal years will be: 2005  $1.1
million; 2006  $1.1 million; 2007  $219,000; 2008  $0; and 2009  $0. The net balance of these
intangible assets was included in net other noncurrent assets on the consolidated balance sheets. On June 4, 2003, the Company purchased two working rigs for an aggregate of $9.0 million in
cash. One of the rigs purchased is a 1,200 horsepower diesel electric SCR rig capable of drilling
to 17,000 feet and the other is a 1,000 horsepower diesel electric SCR rig capable of drilling to
15,000 feet. -44-




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GREY WOLF, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (3) Income Taxes The Company and its U.S. subsidiaries file a consolidated federal income tax return. The
components of the provision for income taxes consisted of the following (amounts in thousands): For the Years Ended December 31,2004
    
    
    2003
    
    
    2002CurrentFederal
    
    $
    125
    
    
    $
    
    
    
    $
    (1,871
    )Foreign
    
    
    75
    
    
    
    
    
    
    
    State
    
    
    
    
    
    
    (938
    )
    
    
    $
    200
    
    
    $
    (938
    )
    
    $
    (1,871
    )DeferredFederal
    
    $
    6,082
    
    
    $
    (14,958
    )
    
    $
    (7,080
    )State
    
    
    (106
    )
    
    
    (1,487
    )
    
    
    734$
    5,976
    
    
    $
    (16,445
    )
    
    $
    (6,346
    )
 Deferred income taxes are determined based upon the difference between the carrying
amount of assets and liabilities for financial reporting purposes and amounts used for income tax
purposes, and net operating loss and tax credit carryforwards. The tax effects of the Companys
temporary differences and carryforwards are as follows (amounts in thousands): December 31,2004
    
    
    2003Deferred tax assets
Net operating loss carryforwards
    
    $
    49,013
    
    
    $
    47,964Tax credit carryforwards
    
    
    139
    
    
    
    14Workers compensation accruals
    
    
    4,395
    
    
    
    3,501Other
    
    
    1,847
    
    
    
    1,41155,394
    
    
    
    52,890Deferred tax liabilities
Depreciation
    
    
    107,645
    
    
    
    96,386Net deferred tax liability
    
    $
    52,251
    
    
    $
    43,496
 At December 31, 2004 and 2003, the Company had U.S. net operating loss (NOL) carryforwards
of $158.3 million and $161.0 million, respectively, which expire at various times from 2010 through
2024. The NOL carryforwards are subject to annual limitations as a result of the changes in
ownership of the Company in 1989, 1994 and 1996. Management believes it is more likely than not
that future earnings and reversal of deferred tax liabilities will be sufficient to permit the
Company to realize its deferred tax assets. 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. -45-




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GREY WOLF, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following summarizes the differences between the federal statutory tax rate of 35%
(amounts in thousands): For the Years Ended December 31,2004
    
    
    2003
    
    
    2002Income tax expense (benefit) at statutory rate
    
    $
    4,989
    
    
    $
    (16,654
    )
    
    $
    (10,393
    )Increase (decrease) in taxes resulting from:Permanent differences, primarily due to
basis differences in assets that
were purchased in capital stock
acquisitions
    
    
    1,179
    
    
    
    1,208
    
    
    
    1,707State taxes, net
    
    
    (69
    )
    
    
    (1,576
    )
    
    
    477Other
    
    
    77
    
    
    
    (361
    )
    
    
    (8
    )Income tax expense (benefit)
    
    $
    6,176
    
    
    $
    (17,383
    )
    
    $
    (8,217
    )
  (4)
    Long-Term DebtLong-term debt consists of the following (amounts in thousands): December 31,2004
    
    
    2003Senior notes due July 2007, general unsecured senior
obligations guaranteed by the Companys domestic
subsidiaries, bearing interest at 8 7/8% per annum
payable semi-annually
    
    $
    
    
    
    $
    84,898Contingent convertible senior notes due May 2023,
general unsecured senior obligations guaranteed by
the Companys domestic subsidiaries, bearing interest
at 3.75% per annum payable semi-annually
    
    
    150,000
    
    
    
    150,000Floating rate contingent convertible senior notes due
April 2024
general unsecured senior obligations guaranteed by the
Companys domestic subsidiaries, bearing interest of
no less than zero or more than 6.00% per annum
payable semi-annually
    
    
    125,000
    
    
    
    275,000
    
    
    
    234,898Less current maturities
    
    
    
    
    
    
    Long-term debt
    
    $
    275,000
    
    
    $
    234,898
 Floating Rate Notes On March 31, 2004, the Company issued $100.0 million aggregate principal amount of Floating
Rate Notes in a private offering that yielded net proceeds of approximately $97.8 million. On
April 27, 2004, one of the initial purchasers in the Companys private offering of the Floating
Rate Notes exercised its full option to purchase an additional $25.0 million aggregate principal
amount of the Floating Rate Notes with the same terms. This yielded net proceeds of $24.4 million.
The Floating Rate Notes bear interest at a per annum rate equal to 3-month LIBOR, adjusted quarterly, minus a spread of 0.05%. The interest rate at December 31, 2004 was
1.96%. The per annum interest rate will never be less than zero or more than 6.00%. The Floating
Rate Notes mature on April 1, 2024. The Floating Rate Notes are convertible into shares of the
Companys common stock, upon the occurrence of certain events, at a conversion price of $6.51 per
share, which is equal to a conversion rate of approximately 153.6098 -46-




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GREY WOLF, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS shares per $1,000 principal amount of the Floating Rate Notes, subject to adjustment. The Floating
Rate 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. Non-guarantor subsidiaries are immaterial. The Floating Rate Notes and the
guarantees rank equally with all of the Companys other senior unsecured debt, including the
Companys 3.75% Notes. Fees and expenses of approximately $3.6 million incurred at the time of
issuance are being amortized through April 1, 2014, the first date the holders may require the
Company to repurchase the Floating Rate Notes. The Company may redeem some or all of the Floating Rate Notes at any time on or after April 1,
2014, at a redemption price equal to 100% of the principal amount of the Floating Rate Notes, plus
accrued but unpaid interest and liquidated damages, if any, to the date of repurchase, payable in
cash. Holders may require the Company to repurchase all or a portion of the Floating Rate Notes on
April 1, 2014 or April 1, 2019, and upon a change of control, as defined in the indenture governing
the Floating Rate Notes, at 100% of the principal amount of the Floating Rate Notes, plus accrued
but unpaid interest and liquidated damages, if any, to the date of repurchase, payable in cash. The Floating Rate Notes are convertible, at the holders option, prior to the maturity date
into shares of the Companys common stock under the following circumstances:  
    during any calendar quarter, if the closing sale price per share of the
Companys common stock for at least 20 trading days in the period of 30 consecutive
trading days ending on the last trading day of the calendar quarter preceding the
quarter in which the conversion occurs, is more than 120% of the conversion price per
share ($7.81 per share) on that 30th trading day;
    if the Company has called the Floating Rate Notes for redemption;
    during any period that the credit ratings assigned to the Companys senior
unsecured debt (currently the 3.75% Notes) by both Moodys Investors Service
(Moodys) and Standard & Poors Ratings Group (S&P) are reduced below B1 and B+,
respectively, or if neither rating agency is rating the Companys senior unsecured
debt;
    during the five day trading period immediately following any nine
consecutive trading period in which the average trading price per $1,000 principal
amount of the Floating Rate Notes for each day of such period was less than 95% of the
product of the closing sale price per share of the Companys common stock on that day
multiplied by the number of shares of common stock issuable upon conversion of $1,000
principal amount of the Floating Rate Notes; or
    upon the occurrence of specified corporate transactions, including a change
of control. The Floating Rate Notes did not meet the criteria for conversion into common stock at any time
during the year ended December 31, 2004. At March 9, 2005, the credit ratings assigned to the
Companys senior unsecured debt (currently the 3.75% Notes) by Moodys Investor Service and
Standard and Poors Ratings Group were B1 and BB-, respectively. The indenture governing the
Floating Rate Notes does not contain any restriction on the payment of dividends, the incurrence of
indebtedness or the repurchase of the Companys securities, and does not contain any financial
covenants. 3.75% Contingent Convertible Senior Notes due May 2023 On May 7, 2003, the Company issued $150.0 million aggregate principal amount of the 3.75%
Notes in a private offering that yielded net proceeds of $146.6 million. The 3.75% Notes bear
interest at 3.75% per annum and mature on May 7, 2023. The 3.75% Notes are convertible, upon the
occurrence of certain events, at a conversion price of $6.45 per share, which is equal to a
conversion rate of approximately 155.0388 shares per $1,000 principal amount of the 3.75% Notes,
subject to adjustment. The Company will pay contingent interest at a rate equal to 0.50% per annum
during any six-month period, with the initial six-month period commencing May 7, 2008, if the
average trading price of the 3.75% Notes per $1,000 principal amount for the five day trading
period ending on the third day immediately preceding the first day of the applicable six-month
period equals $1,200 or more. The 3.75% Notes are general unsecured senior obligations of the
Company and are fully and unconditionally guaranteed, on a -47-




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GREY WOLF, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS joint and several basis, by all domestic wholly-owned subsidiaries of the Company. Non-guarantor
subsidiaries are immaterial. The 3.75% Notes and the guarantees rank equally with the Companys
Floating Rate Notes due April 2024. Fees and expenses of $4.0 million incurred at the time of
issuance are being amortized through May 2013, the first date the holders may require the Company
to repurchase the 3.75% Notes. The Company may redeem some or all of the 3.75% Notes at any time on or after May 14, 2008, at
a redemption price shown below, payable in cash, plus accrued but unpaid interest, including
contingent interest, if any, to the date of redemption: RedemptionPeriod
    
    PriceMay 14, 2008 through May 6, 2009
    
    
    101.88
    %May 7, 2009 through May 6, 2010
    
    
    101.50
    %May 7, 2010 through May 6, 2011
    
    
    101.13
    %May 7, 2011 through May 6, 2012
    
    
    100.75
    %May 7, 2012 through May 6, 2013
    
    
    100.38
    %May 7, 2013 and thereafter
    
    
    100.00
    %
 Holders may require the Company to repurchase all or a portion of the 3.75% Notes on May 7,
2013 or May 7, 2018, and upon a change of control, as defined in the indenture governing the 3.75%
Notes, at 100% of the principal amount of the 3.75% Notes, plus accrued but unpaid interest,
including contingent interest, if any, to the date of repurchase, payable in cash. The 3.75% Notes are convertible, at the holders option, prior to the maturity date into
shares of the Companys common stock under the following circumstances:  
    during any calendar quarter, if the closing sale price per share of the
Companys common stock for at least 20 trading days in the period of 30 consecutive
trading days ending on the last trading day of the calendar quarter preceding the
quarter in which the conversion occurs, is more than 110% of the conversion price per
share ($7.10 per share) on that 30th trading day;
    if the Company has called the 3.75% Notes for redemption;
    during any period that the credit ratings assigned to the 3.75% Notes by
both Moodys Investors Service and Standard & Poors Ratings Group are reduced below B1
and B+, respectively, or if neither rating agency is rating the 3.75% Notes;
    during the five trading day period immediately following any nine
consecutive trading day period in which the average trading price per $1,000 principal
amount of the 3.75% Notes for each day of such period was less than 95% of the product
of the closing sale price per share of the Companys common stock on that day multiplied by the number of shares of common stock issuable
upon conversion of $1,000 principal amount of the 3.75% Notes; or
    upon the occurrence of specified corporate transactions, including a change
of control. The 3.75% Notes did not meet the criteria for conversion into common stock at any time during
the year ended December 31, 2004. At March 9, 2005, the credit ratings assigned to the 3.75% Notes
by Moodys Investor Service and Standard & Poors Ratings Group were B1 and BB-, respectively. The
indenture governing the 3.75% Notes does not contain any restriction on the payment of dividends,
the incurrence of indebtedness or the repurchase of the Companys securities, and does not contain
any financial covenants. 8 7/8% Notes due July 2007 On July 1, 2003, the Company used $146.6 million of net proceeds from the issuance of the
3.75% Notes plus $30.6 million of available cash to redeem $165.0 million aggregate principal
amount of the 8 7/8% Senior Notes due July 2007 (the 8 7/8% Notes), previously outstanding at
102.9580%, plus accrued interest. The redemption -48-




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GREY WOLF, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS premium of $4.9 million was included in interest expense in the second quarter of 2003.
Amortization of the previously deferred financing costs associated with the partial redemption of
the 8 7/8% Notes on July 1, 2003 was accelerated and approximately $2.5 million in additional interest
expense was recognized in the quarter ended June 30, 2003. On March 31, 2004, $90.0 million of the $97.8 million of net proceeds received from the
issuance of the Floating Rate Notes was irrevocably deposited with the trustee for the 8 7/8% Notes to
redeem the remaining $85.0 million aggregate principal amount of those notes at 102.9580%, plus
accrued interest. On April 30, 2004, the cash deposited with the trustee was used to redeem the
$85.0 million aggregate principal amount of the 8 7/8% Notes. The redemption premium of $2.5 million
is included in interest expense during the quarter ended March 31, 2004 and the remaining $1.1
million of deferred financing costs associated with the 8 7/8% Notes was accelerated and amortized
through the redemption date of April 30, 2004. CIT Facility The Companys subsidiary Grey Wolf Drilling Company L.P. has a $100.0 million credit facility
with the CIT Group/Business Credit, Inc. (the CIT Facility) which was amended in December 2004
and expires December 31, 2008. The CIT Facility provides the Company with the ability to borrow up
to the lesser of $100.0 million or 50% of the Orderly Liquidation Value (as defined in the
agreement) of certain drilling rig equipment located in the 48 contiguous states of the United
States of America. The CIT Facility is a revolving facility with automatic renewals after
expiration 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 3.50% or prime plus 0.25%
to 1.50%. The CIT Facility provides up to $50.0 million available for letters of credit. The
Company is required to pay a quarterly Commitment Fee of 0.5% per annum on the unused portion of
the CIT Facility and letters of credit accrue a fee of 1.25% per annum. The CIT Facility contains affirmative and negative covenants and the Company is in compliance
with these covenants. Substantially all of the Companys assets, including its drilling equipment,
are pledged as collateral under the CIT Facility which is also secured by a guarantee of Grey Wolf,
Inc. and guarantees of certain of the Companys wholly-owned subsidiaries. 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 in connection with the sale or exchange of such collateral or relocation of equipment outside the contiguous 48
states of the United States of America. Among the various covenants that the Company must satisfy under the CIT Facility are the
following two covenants (as defined in the CIT Facility) which apply whenever the Companys
liquidity, defined as the sum of cash, cash equivalents and availability under the CIT Facility,
falls below $35.0 million. At December 31, 2004, the Companys liquidity as defined above was
$152.9 million.  
    1 to 1 EBITDA coverage of debt service, tested monthly on a trailing 12
month basis; and
    minimum tangible net worth (as defined in the CIT Facility) at the end of
each quarter will be at least the prior year tangible net worth less non-cash
write-downs since the prior year-end and less fixed amounts for each quarter end for
which the test is calculated. Additionally, if the total amount outstanding under the CIT Facility (including outstanding
letters of credit) exceeds 50% of the Orderly Liquidation Value of our domestic rigs, we are
required to make a prepayment in the amount of the excess. Also, if the average rig utilization
rate falls below 45% for two consecutive months, 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. Average rig utilization is defined as the total number of rigs owned which are
operating under drilling contracts in the 48 contiguous states of the United States of America
divided by the total number of rigs owned, excluding rigs not capable of working without
substantial capital investment. -49-




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GREY WOLF, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 including:  
    default with respect to other indebtedness in excess of $350,000;
    legal judgments in excess of $350,000; or
    a change in control which means that we cease to own 100% of our two
principal subsidiaries, some person or group has either acquired beneficial ownership
of 30% or more of the Company or obtained the power to elect a majority of our board of
directors, or our board of directors ceases to consist of a majority of continuing
directors (as defined by the CIT Facility). The Company currently has no outstanding balance under the CIT Facility and had $18.8 million
of undrawn standby letters of credit at December 31, 2004. These standby letters of credit are for
the benefit of various insurance companies as collateral for premiums and retained losses which may
become payable under the terms of the underlying insurance contracts and for other purposes.
Outstanding letters of credit reduce the amount available for borrowing under the CIT facility. Non-Cash Activities During 2004, the Company issued 4.6 million shares related to the Patriot acquisition (see Note 2).
The non-cash amount excluded from the cash flow statement for this common stock issuance was $20.6
million. The Company also had non-cash activities for the year ended December 31, 2002 related to
vehicle additions under capital leases. The non-cash amount excluded from cash used in investing
activities and cash provided by financing activities were $199,000 for the year ended December 31,
2002. (5) Capital Stock and Stock Option Plans 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 2003 Incentive Plan (the 2003 Plan) was approved by shareholders in May 2003. The 2003
Plan authorizes the grant of the following equity-based awards:  
    incentive stock options;
    non-statutory stock options;
    restricted shares; and
    other stock-based and cash awards. The 2003 Plan replaced the Companys 1996 Employee Stock Option Plan (the 1996 Plan);
provided, however that outstanding options previously granted shall continue to be exercisable
subject to the terms and conditions of such grants. The 1996 Plan allowed for grants of
non-statutory options to purchase common stock, but no further grants of common stock will be made
under the 1996 Plan. The 2003 Plan reserves a maximum of 17.0 million shares of the Companys
common stock underlying all equity-based awards, but is reduced by the shares of -50-




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GREY WOLF, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS common stock subject to previous grants under the 1996 Plan. At December 31, 2004, there were 6.0
million shares of common stock available for grant under the 2003 Plan until March 2013. Prior to
2003, the Company also granted options under stock option agreements with its chief executive
officer and directors that are outside of the 2003 Plan. At December 31, 2004, these individuals
had options outstanding to purchase an aggregate of 926,000 shares of common stock. The exercise price of stock options approximates the fair market value of the stock at the
time the option is granted. 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
options expire on the tenth anniversary of the date of grant. On November 13, 2001, the Company amended all outstanding stock option agreements issued under
the 1996 Employee Stock Option Plan and certain outstanding stock option agreements issued to
executive officers and directors. Based upon the occurrence of certain events (triggering
events), the amendments provide for accelerated vesting of options and the extension of the period
in which a current employee option holder has to exercise his options. The provisions of the
amendments provide for accelerated vesting of options after termination of employment of a current
option holder within one year of a change of control of the Company (as defined in the amendment).
Triggering events that cause an extension of the exercise period, but not longer than the remaining original exercise period, include termination of employment as a result of any reason not
defined as termination for cause, voluntary resignation, or retirement in the amendment. In accordance with Accounting Principles Board Opinion 25 (APB 25), the amendments to the
stock option agreements created a new measurement date of November 13, 2001. APB 25 requires the
Company to determine the intrinsic value of the options at the measurement date and recognize
non-cash compensation expense upon the occurrence of a triggering event. The amount of
compensation expense that would be recognized upon the occurrence of a triggering event is the
difference between the fair market value of the Companys stock on the measurement date and the
original exercise prices of the options. In March 2002, a triggering event occurred when an officers employment terminated. As a
result, the Company recognized approximately $515,000 of non-cash compensation expense along with
approximately $330,000 of severance cost. In addition, the Company recognized approximately
$27,000 of non-cash compensation expense during the remainder of 2002 and approximately $77,000
during 2004. These amounts have been included in general and administrative expenses on the
consolidated statement of operations. Stock option activity for all stock options issued as of December 31, 2004, 2003 and 2002 was
as follows (number of shares in thousands): 2004
    
    
    2003
    
    
    2002Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageNo. of
    
    
    Exercise
    
    
    No. of
    
    
    Exercise
    
    
    No. of
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    Price
    
    
    Shares
    
    
    PriceOutstanding  beginning of
the year
    
    
    10,209
    
    
    $
    3.09
    
    
    
    8,721
    
    
    $
    2.85
    
    
    
    7,512
    
    
    $
    2.85Granted
    
    
    1,224
    
    
    
    3.92
    
    
    
    2,161
    
    
    
    3.91
    
    
    
    2,302
    
    
    
    2.88Exercised
    
    
    (4,243
    )
    
    
    2.39
    
    
    
    (246
    )
    
    
    1.50
    
    
    
    (312
    )
    
    
    2.20Cancelled
    
    
    (696
    )
    
    
    3.97
    
    
    
    (427
    )
    
    
    3.43
    
    
    
    (781
    )
    
    
    3.16Outstanding  end of year
    
    
    6,494
    
    
    $
    3.60
    
    
    
    10,209
    
    
    $
    3.09
    
    
    
    8,721
    
    
    $
    2.85
 The Company had stock options exercisable at December 31, 2004 of 2.7 million with a range of
exercise prices from $0.69 to $6.37. At December 31, 2003 and 2002, there were 5.4 million stock
options exercisable, with a range of exercise prices from $0.69 to $6.37, and 4.0 million stock
options exercisable from $0.69 to $6.37, respectively. -51-




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GREY WOLF, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes information about stock options outstanding at December 31,
2004: WeightedAverage
    
    
    WeightedRemaining
    
    
    AverageNumber
    
    
    Contractual
    
    
    ExerciseRange of Exercise Prices
    
    Outstanding
    
    
    Life(1)
    
    
    Price$0.69 to $1.63
    
    
    640
    
    
    
    3.53
    
    
    $
    1.16$2.54 to $4.38
    
    
    4,863
    
    
    
    7.30
    
    
    
    3.40$4.50 to $6.37
    
    
    991
    
    
    
    6.10
    
    
    
    6.166,494
    
    
    
    6.75
    
    
    $
    3.60
   (1)
    
    Represents weighted average remaining contractual life in years. (6) Segment Information The Company manages its business as one reportable segment. Although the Company provides
contract drilling services in several markets, 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. (7) Related-Party Transactions The Company performed contract drilling services for affiliates of one of the Companys
directors. Total revenues recognized from these affiliates during 2004, 2003 and 2002 were $4.7
million, $4.1 million and $3.4 million, respectively. (8) Commitments and Contingencies Operating Leases The Company occupies various facilities and leases certain equipment under various lease
agreements. The minimum rental commitments under non-cancelable operating leases, with lease terms
in excess of one year subsequent to December 31, 2004 are as follows (in thousands). Year
    
    Amount2005
    
    $
    726,0002006
    
    
    622,0002007
    
    
    566,0002008
    
    
    530,0002009
    
    
    477,000Thereafter
    
    
    551,000$
    3,472,000
 Lease expense under operating leases for 2004, 2003 and 2002 were approximately $774,000,
$718,000 and $680,000, respectively. 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. -52-




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GREY WOLF, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (9) 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 $1.1 million, $873,000, and $1.3 million for the years ended December 31, 2004, 2003
and 2002, respectively. Upon reaching the service requirements to join the plan, participants
immediately vest in employer matching contributions. (10) Concentrations For the three months ended December 31, 2004, the Company had one customer which represented
approximately 12% of total revenue. For the year ended December 31, 2002, the Company also had one
customer which represented approximately 11% of total revenue. There were no customers with
revenue greater than 10% for the years ended December 31, 2004 and 2003. (11) Asset Impairment During the fourth quarter of 2002, the Company recorded a pre-tax non-cash asset impairment
charge of $3.5 million in accordance with SFAS No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets. Due to the deterioration of the physical condition of five of our inventory
rigs and changes in market conditions, it was determined that the rigs based on the economics,
could no longer be returned to service at a reasonable cost that would have provided an acceptable
return, and that the usable component parts would be included in spare equipment and depreciated
over five years. As such, an asset impairment charge was recorded to write the rigs down to the
fair market value of the useable component parts and the Company revised the number of drilling
rigs in its fleet. The fair market value was based on an appraisal obtained from a third party
appraiser. (12) Quarterly Financial Data (unaudited) Summarized quarterly financial data for years ended December 31, 2004, 2003 and 2002 are set
forth below (amounts in thousands, except per share amounts). Quarter EndedMarch
    
    
    June
    
    
    September
    
    
    December2004
    
    
    2004
    
    
    2004
    
    
    2004Contract drilling revenues
    
    $
    75,200
    
    
    $
    103,750
    
    
    $
    116,290
    
    
    $
    129,394Operating income (loss)
    
    
    (3,438
    )
    
    
    1,990
    
    
    
    11,199
    
    
    
    18,485Income (loss) before income taxes
    
    
    (9,438
    )
    
    
    (1,748
    )
    
    
    9,173
    
    
    
    16,267Net income (loss)
    
    
    (6,431
    )
    
    
    (1,482
    )
    
    
    5,462
    
    
    
    10,529Net income (loss) per common
share- basic
    
    $
    (0.04
    )
    
    $
    (0.01
    )
    
    $
    0.03
    
    
    $
    0.06- diluted
    
    $
    (0.04
    )
    
    $
    (0.01
    )
    
    $
    0.03
    
    
    $
    0.05
 -53-




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GREY WOLF, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Quarter EndedMarch
    
    
    June
    
    
    September
    
    
    December2003
    
    
    2003
    
    
    2003
    
    
    2003Contract drilling revenues
    
    $
    62,387
    
    
    $
    66,949
    
    
    $
    72,383
    
    
    $
    84,255Operating income (loss)
    
    
    (8,414
    )
    
    
    (7,820
    )
    
    
    (7,681
    )
    
    
    3,196Loss before income taxes
    
    
    (14,148
    )
    
    
    (21,921
    )
    
    
    (11,183
    )
    
    
    (331
    )Net income (loss)
    
    
    (9,621
    )
    
    
    (14,185
    )
    
    
    (6,950
    )
    
    
    556Net income (loss) per
common share- basic and diluted
    
    $
    (0.05
    )
    
    $
    (0.08
    )
    
    $
    (0.04
    )
    
    $
    0.00
 Quarter EndedMarch
    
    
    June
    
    
    September
    
    
    December2002
    
    
    2002
    
    
    2002
    
    
    2002Contract drilling revenues
    
    $
    64,912
    
    
    $
    62,854
    
    
    $
    61,118
    
    
    $
    61,376Operating income (loss)
    
    
    2,714
    
    
    
    (101
    )
    
    
    (3,025
    )
    
    
    (7,213
    )Loss before income taxes
    
    
    (2,756
    )
    
    
    (5,544
    )
    
    
    (8,626
    )
    
    
    (12,767
    )Net loss
    
    
    (2,177
    )
    
    
    (4,048
    )
    
    
    (6,131
    )
    
    
    (9,120
    )Net loss per common share- basic and diluted
    
    $
    (0.01
    )
    
    $
    (0.02
    )
    
    $
    (0.03
    )
    
    $
    (0.05
    )
 -54-




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##### Table of Contents



Schedule II GREY WOLF, INC. AND SUBSIDIARIES Valuation and Qualifying Accounts(In thousands) Additions
    
    
    DeductionsBalance at
    
    
    Charged to
    
    
    From
    
    
    Balance atBeginning
    
    
    Bad Debt
    
    
    Bad Debt
    
    
    Endof Period
    
    
    Allowance
    
    
    Allowance
    
    
    of PeriodYear Ended December 31, 2002Allowance for doubtful accounts receivable
    
    $
    1,800
    
    
    $
    700
    
    
    $
    
    
    
    $
    2,500Year Ended December 31, 2003Allowance for doubtful accounts receivable
    
    $
    2,500
    
    
    $
    
    
    
    $
    (57
    )
    
    $
    2,443Year Ended December 31, 2004Allowance for doubtful accounts receivable
    
    $
    2,443
    
    
    $
    
    
    
    $
    (19
    )
    
    $
    2,424
 -55-




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Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure None. 
 Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures We
evaluated the effectiveness of the design and operation of our
disclosure controls and procedures as of December 31, 2004. Our
disclosure controls and procedures are designed to ensure
that the information required to be disclosed by us in the reports that we file or submit under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and
forms. Based on this evaluation, the Chief Executive Officer and
Chief Financial Officer have concluded that these controls and
procedures are effective. Managements Report on Internal Control Over Financial Reporting Managements
Report is included in Item 8 of this report on page 33 and is
incorporated herein by reference. Changes in Internal Controls There have been no significant changes in our internal control over financial reporting that
have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting. 
 Item 9B. Other Information None 
 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 Directors and
Executive Officers in our definitive proxy statement for our 2005 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, 2004. 
 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 2005 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, 2004. -56-




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##### Table of Contents



Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters 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, Ownership by Management and Certain Shareholders and Executive
Compensation Plans in our definitive proxy statement for our 2005 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, 2004. 
 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 2005 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, 2004. 
 Item 14. Principal Accountant Fees and Services The information required by this item as to accounting fees and services is hereby
incorporated by reference to such information appearing under the caption Registered Public
Accountants in our definitive proxy statement for our 2005 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, 2004. 
 PART IV 
 Item 15. Exhibits and Financial Statement Schedules (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 ExhibitNo.
    
    
    
    Documents2.1
    
    
    
    Agreement and Plan of Merger between Grey Wolf, Inc. and New
Patriot Drilling Corp. dated March 5, 2004 (incorporated by
reference to Exhibit 99 to Grey Wolfs Form 8-K dated March 8,
2004.3.1
    
    
    
    Articles of Incorporation of Grey Wolf, Inc., as amended
(incorporated herein by reference to Exhibit 3.1 to Form 10-Q dated
May 12, 1999).3.2
    
    
    
    By-Laws of Grey Wolf, Inc., as amended (incorporated herein by
reference to Exhibit 99.1 to Form 8-K dated March 23, 1999).4.1
    
    
    
    Rights Agreement dated as of September 21, 1998 by and between the
Company and American Stock Transfer and Trust Company as Rights
Agent (incorporated herein by reference to Exhibit 4.1 to Form 8-K
filed September 22, 1998).
 -57-




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ExhibitNo.
    
    
    
    Documents4.2
    
    
    
    Indenture, dated as of May 7, 2003, relating to the 3.75%
Contingent Convertible Senior Notes due 2023 between the Company,
the Guarantors, and JPMorgan Chase Bank, a New York Banking
Corporation, as Trustee (incorporated herein by reference to
Exhibit 4.2 to the Companys Registration Statement on Form S-3 No.
333-106997 filed July 14, 2003).4.3
    
    
    
    Supplemental Indenture, dated as of May 22, 2003, relating to the
3.75% Contingent Convertible Senior Notes due 2023 between the
Company, the Guarantors, and JPMorgan Chase Bank, a New York
Banking Corporation, as Trustee (incorporated herein by reference
to Exhibit 4.3 to the Companys Registration Statement on Form S-3
No. 333-106997 filed July 14, 2003).4.4
    
    
    
    Indenture, dated as of March 31, 2004, relating to the Floating
Rate Contingent Convertible Senior Notes Due 2024 between the
Company, the Guarantors, and J.P. Morgan Chase Bank, a New York
banking corporation, as Trustee (incorporated by reference to
Exhibit 4.1 to Form 10-Q dated May 5, 2004).4.5
    
    
    
    Registration Rights Agreements as
of March 31, 2004 by and between Grey Wolf, Inc., the Guarantors, and
the Initial Purchasers of the Floating Rate Contingent Convertible
Senior Notes due 2024 (incorporated by reference to Exhibit 4.2 to
the Quarterly Report on Form 10-Q filed May 5, 2004).4.6
    
    
    
    Second Supplemental Indenture,
dated as of March 31, 2004, relating to the 3.75% Contingent
Convertible Senior Notes due 2023 between the Company, the
Guarantors, and JPMorgan Chase Bank, a New York Banking Corporation,
as Trustee (incorporated by reference to Exhibit 4.3 to the Quarterly
Report on Form 10-Q filed May 5, 2004).+10.1
    
    
    
    Form of Non-Qualified Stock Option Agreement dated September 3,
1996, by and between the Company and Thomas P. Richards
(incorporated herein by reference to Exhibit 10.2 to Registration
Statement on Form S-3 No. 333-14783 filed October 24, 1996).+10.2
    
    
    
    DI Industries, Inc. 1996 Employee Stock Option Plan (incorporated
herein by reference to DI Industries, Inc. 1996 Annual Meeting of
Shareholders definitive proxy materials filed August 2, 1996).+10.3
    
    
    
    Grey Wolf Inc. Amendment to 1996 Employee Stock Option Plan
(incorporated herein by reference to Exhibit 4.3 to Grey Wolf Inc.'s
Registration Statement on Form
S-8 No. 333-41334 filed July 13, 2000).+10.4
    
    
    
    Grey Wolf, Inc. Second Amendment to 1996 Employee Stock Option Plan
dated May 14, 2002 (incorporated herein by reference to Exhibit 4.6
to Grey Wolf, Inc. Registration Statement on Form S-8 No. 333-90888
filed June 21, 2002).+10.5
    
    
    
    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).+10.6
    
    
    
    Form of Incentive Stock Option Agreement dated March 17, 1997, by
and between the Company and Gary D. Lee (incorporated by reference
to Exhibit 10.32 to the DI Industries, Inc. Annual Report of Form 10-K for the year
ended December 31, 1996 filed March 27, 1997).+10.7
    
    
    
    Form of Non-Qualified Stock Option Agreement dated February 10,
1998, by and between the Company and David W. Wehlmann
(incorporated herein by reference to Exhibit 10.35 to the Grey Wolf, Inc. Annual Report
on Form 10-K for the year ended December 31, 1997 filed
March 30, 1998).+10.8
    
    
    
    Non-Qualified Stock Option Agreement dated January 16, 1999, by and
between the Company and Edward S. Jacob, III. (incorporated herein
by reference to Exhibit 10.33 to the Grey Wolf, Inc. Annual Report on Form 10-K for the
year ended December 31, 1999 filed March 7, 2000).+10.9
    
    
    
    Form of Amendment to Non-Qualified Stock Option Agreements dated
November 13, 2001, by and between the Company and Thomas P.
Richards (incorporated herein by reference to Exhibit 10.13 to the Grey Wolf, Inc.
Annual Report on Form 10-K for the year ended December 31,
2001 filed March 15, 2002).+10.10
    
    
    
    Form of Amendment to Non-Qualified Stock Option Agreement dated
November 13, 2001, by and among the Company (f.k.a. DI Industries,
Inc.), Thomas P. Richards and Richards Brothers Interests, L.P
(incorporated herein by reference to Exhibit 10.14 to the Grey Wolf, Inc. Annual Report
on Form 10-K for the year ended December 31, 2001 filed
March 15, 2002).
 -58-




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##### Table of Contents



ExhibitNo.
    
    
    
    Documents+10.11
    
    
    
    Form of Amendment to Non-Qualified Stock Option Agreements dated
November 13, 2001, by and between the Company and each of David W.
Wehlmann, Edward S. Jacob III, Gary D. Lee, Ronnie E. McBride, Kent
D. Cauley, and Donald J. Guedry, Jr. (incorporated herein by
reference to Exhibit 10.15 to the Grey Wolf, Inc. Annual Report on Form 10-K for the
year ended December 31, 2001 filed March 15, 2002).+10.12
    
    
    
    Grey Wolf, Inc. Executive Severance Plan effective November 15,
2001 (incorporated herein by reference to Exhibit 10.16 to the Grey Wolf, Inc. Annual
Report on Form 10-K for the year ended December 31, 2001
filed March 15, 2002).+10.13
    
    
    
    Amended and Restated Employment Agreement dated November 13, 2001,
by and between the Company and Thomas P. Richards (incorporated
herein by reference to Exhibit 10.17 to the Grey Wolf, Inc. Annual Report on Form 10-K
for the year ended December 31, 2001 filed March 15, 2002).+10.14
    
    
    
    Amended and Restated Employment Agreement dated November 13, 2001,
by and between the Company and David W. Wehlmann (incorporated
herein by reference to Exhibit 10.18 to the Grey Wolf, Inc. Annual Report on Form 10-K
for the year ended December 31, 2001 filed March 15, 2002).+10.15
    
    
    
    Amended and Restated Employment Agreement dated November 13, 2001,
by and between the Company and Edward S. Jacob III (incorporated
herein by reference to Exhibit 10.19 to the Grey Wolf, Inc. Annual Report on Form 10-K
for the year ended December 31, 2001 filed March 15, 2002).+10.16
    
    
    
    Amended and Restated Employment Agreement dated November 13, 2001,
by and between the Company and Gary D. Lee (incorporated herein by
reference to Exhibit 10.20 to the Grey Wolf, Inc. Annual Report on Form 10-K for the
year ended December 31, 2001 filed March 15, 2002).+10.17
    
    
    
    Employment Agreement effective March 31, 2003 by and between the
Company and William E. Chiles (incorporated herein by reference to
Exhibit 10.1 to the Grey Wolf, Inc. Quarterly Report on From 10-Q for the quarter ended
March 31, 2003 filed April 30, 2003).+10.18
    
    
    
    Form of Non-Qualified Stock Option Agreement dated as of February
13, 2002, by and between the Company and each of Frank M. Brown,
William T. Donovan, James K.B. Nelson, Robert E. Rose, Steven A.
Webster, and William R. Ziegler (incorporated herein by reference
to Exhibit 10.22 to the Grey Wolf, Inc. Annual Report on Form 10-K for the year ended
December 31, 2001 filed March 15, 2002).+10.19
    
    
    
    Grey Wolf, Inc. 2003 Incentive Plan (incorporated herein by
reference to Appendix A to the Grey Wolf, Inc. 2003 Annual Meeting of Shareholders
definitive proxy materials filed March 28, 2003).+10.20
    
    
    
    Anticipated compensation of officers and directors for 2005
(incorporated by reference to Grey Wolf, Inc. current Report on
From 8-K filed February 22, 2005).+10.21
    
    
    
    Form of Non-Qualified Stock Option Agreement under the Grey Wolf,
Inc. 2003 Incentive Plan (incorporated by reference to Exhibit 10.1
to the Grey Wolf,
Inc. current Report on Form 8-K filed February 22, 2005).+10.22
    
    
    
    Form of Restricted Stock Agreement (incorporated by reference to
Exhibit 10.2 to the Grey Wolf, Inc. current Report on Form 8-K filed February 22,
2005).10.23
    
    
    
    Revolving Credit Agreement dated as of January 14, 1999 among Grey
Wolf Drilling Company LP (as borrower), Grey Wolf, Inc. (as
guarantor), The CIT Group/Business Credit, Inc. (as agent) and
various financial institutions (as lenders) (incorporated herein
by reference to Exhibit 10.1 to Grey Wolf, Inc. current report
on Form 8-K dated January 26, 1999).10.24
    
    
    
    First Amendment to Loan Agreement dated as of December 20, 2001, by
and among Grey Wolf Drilling Company, LP (as borrower) and Grey
Wolf, Inc. (as guarantor) and the CIT Group/Business Credit, Inc.
(as agent) and various financial institutions (as lenders)
(incorporated herein by reference to Exhibit 10.11 to the Grey Wolf, Inc. Annual Report
on Form 10-K for the year ended December 31, 2001 filed
March 15, 2002).
 -59-




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##### Table of Contents



ExhibitNo.
    
    
    
    Documents10.25
    
    
    
    Second Amendment to Loan Agreement dated as of February 7, 2003 by
and among Grey Wolf Drilling Company L.P. (as borrower), Grey Wolf,
Inc. and various subsidiaries (as guarantors) and the CIT
Group/Business Credit, Inc. and various financial institutions (as
lenders) (incorporated herein by reference to Exhibit 10.24 to the Grey Wolf, Inc.
Annual Report on Form 10-K for the year ended December 31,
2002 filed March 6, 2003).10.26
    
    
    
    Third Amendment to Loan Agreement
as of May 1, 2003, by and among Grey Wolf Drilling Company L.P.
(as borrower), Grey Wolf, Inc. and various subsidiaries (as
guarantors) and the CIT Group/Business Credit, Inc. and various
financial institutions (as lenders) (incorporated by reference to
Exhibit 10.1 to the Quarterly Report on Form 10-Q filed
May 5, 2004).10.27
    
    
    
    Fourth Amendment to Loan Agreement
as of March 31, 2004, by and among Grey Wolf Drilling Company
L.P. (as borrower), Grey Wolf, Inc. and various subsidiaries (as
guarantors) and the CIT Group/Business Credit, Inc. and various
financial institutions (as lenders) (incorporated by reference to
Exhibit 10.2 to the Quarterly Report on Form 10-Q filed
May 5, 2004).10.28
    
    
    
    Fifth Amendment to the Loan
Agreement, dated December 31, 2004, by and among Grey Wolf
Drilling Company, L.P. (as borrower), Grey Wolf, Inc. and various
subsidiaries (as guarantor) and the CIT Business Credit, Inc. (as
agent) and various financial institutions (as lenders) (incorporated
by reference to Exhibit 10.6 to the current report on Form 8-K
filed January 6, 2005).21.1
    
    
    
    List of Subsidiaries of Grey Wolf, Inc. (incorporated herein by
reference to Exhibit 21.1 to the Grey Wolf, Inc. Annual Report on From 10-K for the
year ended December 31, 2003 filed February 17, 2004).*23.1
    
    
    
    Consent of Independent Registered Public Accounting Firm, KPMG LLP*31.1
    
    
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a).*31.2
    
    
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a).**32.1
    
    
    
    Certification pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Thomas
P. Richards, Chairman, President and Chief Executive Officer and
David W. Wehlmann, Executive Vice President and Chief Financial
Officer.
   +
    
    Management contract, compensation plan or arrangement*
    
    Filed herewith**
    
    Furnished, not filed, pursuant to Item 101(b) (32) of Regulation S-K. -60-




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##### Table of Contents



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 16th day of March, 2005. Grey Wolf, Inc.By:
    
    /s/ David W. WehlmannDavid W. Wehlmann, Executive Vice President andChief 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. Signatures and Capacities
    
    
    
    DateBy:
    
    /s/ Thomas P. Richards
    
    
    
    March 16, 2005Thomas P. Richards, Chairman, President and Chief Executive Officer
(Principal Executive Officer)By:
    
    /s/ David W. Wehlmann
    
    
    
    March 16, 2005David W. Wehlmann, Executive Vice President and Chief Financial OfficerBy:
    
    /s/ Kent D. Cauley
    
    
    
    March 16, 2005Kent D. Cauley, Vice President and ControllerBy:
    
    /s/ William R. Ziegler
    
    
    
    March 16, 2005William R. Ziegler, DirectorBy:
    
    /s/ Frank M. Brown
    
    
    
    March 16, 2005Frank M. Brown, DirectorBy:
    
    /s/ William T. Donovan
    
    
    
    March 16, 2005William T. Donovan, DirectorBy:
    
    /s/ James K. B. Nelson
    
    
    
    March 16, 2005James K. B. Nelson, DirectorBy:
    
    /s/ Robert E. Rose
    
    
    
    March 16, 2005Robert E. Rose, DirectorBy:
    
    /s/ Steven A. Webster
    
    
    
    March 16, 2005Steven A. Webster, Director
 -61-




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##### Table of Contents



Exhibit Index ExhibitNo.
    
    
    
    Documents2.1
    
    
    
    Agreement and Plan of Merger between Grey Wolf, Inc. and New
Patriot Drilling Corp. dated March 5, 2004 (incorporated by
reference to Exhibit 99 to Grey Wolfs Form 8-K dated March 8,
2004.3.1
    
    
    
    Articles of Incorporation of Grey Wolf, Inc., as amended
(incorporated herein by reference to Exhibit 3.1 to Form 10-Q dated
May 12, 1999).3.2
    
    
    
    By-Laws of Grey Wolf, Inc., as amended (incorporated herein by
reference to Exhibit 99.1 to Form 8-K dated March 23, 1999).4.1
    
    
    
    Rights Agreement dated as of September 21, 1998 by and between the
Company and American Stock Transfer and Trust Company as Rights
Agent (incorporated herein by reference to Exhibit 4.1 to Form 8-K
filed September 22, 1998).




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##### Table of Contents



ExhibitNo.
    
    
    
    Documents4.2
    
    
    
    Indenture, dated as of May 7, 2003, relating to the 3.75%
Contingent Convertible Senior Notes due 2023 between the Company,
the Guarantors, and JPMorgan Chase Bank, a New York Banking
Corporation, as Trustee (incorporated herein by reference to
Exhibit 4.2 to the Companys Registration Statement on Form S-3 No.
333-106997 filed July 14, 2003).4.3
    
    
    
    Supplemental Indenture, dated as of May 22, 2003, relating to the
3.75% Contingent Convertible Senior Notes due 2023 between the
Company, the Guarantors, and JPMorgan Chase Bank, a New York
Banking Corporation, as Trustee (incorporated herein by reference
to Exhibit 4.3 to the Companys Registration Statement on Form S-3
No. 333-106997 filed July 14, 2003).4.4
    
    
    
    Indenture, dated as of March 31, 2004, relating to the Floating
Rate Contingent Convertible Senior Notes Due 2024 between the
Company, the Guarantors, and J.P. Morgan Chase Bank, a New York
banking corporation, as Trustee (incorporated by reference to
Exhibit 4.1 to Form 10-Q dated May 5, 2004).4.5
    
    
    
    Registration Rights Agreements as
of March 31, 2004 by and between Grey Wolf, Inc., the Guarantors, and
the Initial Purchasers of the Floating Rate Contingent Convertible
Senior Notes due 2024 (incorporated by reference to Exhibit 4.2 to
the Quarterly Report on Form 10-Q filed May 5, 2004).4.6
    
    
    
    Second Supplemental Indenture,
dated as of March 31, 2004, relating to the 3.75% Contingent
Convertible Senior Notes due 2023 between the Company, the
Guarantors, and JPMorgan Chase Bank, a New York Banking Corporation,
as Trustee (incorporated by reference to Exhibit 4.3 to the Quarterly
Report on Form 10-Q filed May 5, 2004).+10.1
    
    
    
    Form of Non-Qualified Stock Option Agreement dated September 3,
1996, by and between the Company and Thomas P. Richards
(incorporated herein by reference to Exhibit 10.2 to Registration
Statement on Form S-3 No. 333-14783 filed October 24, 1996).+10.2
    
    
    
    DI Industries, Inc. 1996 Employee Stock Option Plan (incorporated
herein by reference to DI Industries, Inc. 1996 Annual Meeting of
Shareholders definitive proxy materials filed August 2, 1996).+10.3
    
    
    
    Grey Wolf Inc. Amendment to 1996 Employee Stock Option Plan
(incorporated herein by reference to Exhibit 4.3 to Grey Wolf Inc.'s
Registration Statement on Form
S-8 No. 333-41334 filed July 13, 2000).+10.4
    
    
    
    Grey Wolf, Inc. Second Amendment to 1996 Employee Stock Option Plan
dated May 14, 2002 (incorporated herein by reference to Exhibit 4.6
to Grey Wolf, Inc. Registration Statement on Form S-8 No. 333-90888
filed June 21, 2002).+10.5
    
    
    
    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).+10.6
    
    
    
    Form of Incentive Stock Option Agreement dated March 17, 1997, by
and between the Company and Gary D. Lee (incorporated by reference
to Exhibit 10.32 to the DI Industries, Inc. Annual Report of Form 10-K for the year
ended December 31, 1996 filed March 27, 1997).+10.7
    
    
    
    Form of Non-Qualified Stock Option Agreement dated February 10,
1998, by and between the Company and David W. Wehlmann
(incorporated herein by reference to Exhibit 10.35 to the Grey Wolf, Inc. Annual Report
on Form 10-K for the year ended December 31, 1997 filed
March 30, 1998).+10.8
    
    
    
    Non-Qualified Stock Option Agreement dated January 16, 1999, by and
between the Company and Edward S. Jacob, III. (incorporated herein
by reference to Exhibit 10.33 to the Grey Wolf, Inc. Annual Report on Form 10-K for the
year ended December 31, 1999 filed March 7, 2000).+10.9
    
    
    
    Form of Amendment to Non-Qualified Stock Option Agreements dated
November 13, 2001, by and between the Company and Thomas P.
Richards (incorporated herein by reference to Exhibit 10.13 to the Grey Wolf, Inc.
Annual Report on Form 10‐K for the year ended December 31,
2001 filed March 15, 2002).+10.10
    
    
    
    Form of Amendment to Non-Qualified Stock Option Agreement dated
November 13, 2001, by and among the Company (f.k.a. DI Industries,
Inc.), Thomas P. Richards and Richards Brothers Interests, L.P
(incorporated herein by reference to Exhibit 10.14 to the Grey Wolf, Inc. Annual Report
on Form 10-K for the year ended December 31, 2001 filed
March 15, 2002).




---



##### Table of Contents



ExhibitNo.
    
    
    
    Documents+10.11
    
    
    
    Form of Amendment to Non-Qualified Stock Option Agreements dated
November 13, 2001, by and between the Company and each of David W.
Wehlmann, Edward S. Jacob III, Gary D. Lee, Ronnie E. McBride, Kent
D. Cauley, and Donald J. Guedry, Jr. (incorporated herein by
reference to Exhibit 10.15 to the Grey Wolf, Inc. Annual Report on Form 10-K for the
year ended December 31, 2001 filed March 15, 2002).+10.12
    
    
    
    Grey Wolf, Inc. Executive Severance Plan effective November 15,
2001 (incorporated herein by reference to Exhibit 10.16 to the Grey Wolf, Inc. Annual
Report on Form 10-K for the year ended December 31, 2001
filed March 15, 2002).+10.13
    
    
    
    Amended and Restated Employment Agreement dated November 13, 2001,
by and between the Company and Thomas P. Richards (incorporated
herein by reference to Exhibit 10.17 to the Grey Wolf, Inc. Annual Report on Form 10-K
for the year ended December 31, 2001 filed March 15, 2002).+10.14
    
    
    
    Amended and Restated Employment Agreement dated November 13, 2001,
by and between the Company and David W. Wehlmann (incorporated
herein by reference to Exhibit 10.18 to the Grey Wolf, Inc. Annual Report on Form 10-K
for the year ended December 31, 2001 filed March 15, 2002).+10.15
    
    
    
    Amended and Restated Employment Agreement dated November 13, 2001,
by and between the Company and Edward S. Jacob III (incorporated
herein by reference to Exhibit 10.19 to the Grey Wolf, Inc. Annual Report on Form 10-K
for the year ended December 31, 2001 filed March 15, 2002).+10.16
    
    
    
    Amended and Restated Employment Agreement dated November 13, 2001,
by and between the Company and Gary D. Lee (incorporated herein by
reference to Exhibit 10.20 to the Grey Wolf, Inc. Annual Report on Form 10-K for the
year ended December 31, 2001 filed March 15, 2002).+10.17
    
    
    
    Employment Agreement effective March 31, 2003 by and between the
Company and William E. Chiles (incorporated herein by reference to
Exhibit 10.1 to the Grey Wolf, Inc. Quarterly Report on From 10-Q for the quarter ended
March 31, 2003 filed April 30, 2003).+10.18
    
    
    
    Form of Non-Qualified Stock Option Agreement dated as of February
13, 2002, by and between the Company and each of Frank M. Brown,
William T. Donovan, James K.B. Nelson, Robert E. Rose, Steven A.
Webster, and William R. Ziegler (incorporated herein by reference
to Exhibit 10.22 to the Grey Wolf, Inc. Annual Report on Form 10-K for the year ended
December 31, 2001 filed March 15, 2002).+10.19
    
    
    
    Grey Wolf, Inc. 2003 Incentive Plan (incorporated herein by
reference to Appendix A to the Grey Wolf, Inc. 2003 Annual Meeting of Shareholders
definitive proxy materials filed March 28, 2003).+10.20
    
    
    
    Anticipated compensation of officers and directors for 2005
(incorporated by reference to Grey Wolf, Inc. current Report on
From 8-K filed February 22, 2005).+10.21
    
    
    
    Form of Non-Qualified Stock Option Agreement under the Grey Wolf,
Inc. 2003 Incentive Plan (incorporated by reference to Exhibit 10.1
to the Grey Wolf,
Inc. current Report on Form 8-K filed February 22, 2005).+10.22
    
    
    
    Form of Restricted Stock Agreement (incorporated by reference to
Exhibit 10.2 to the Grey Wolf, Inc. current Report on Form 8-K filed February 22,
2005).10.23
    
    
    
    Revolving Credit Agreement dated as of January 14, 1999 among Grey
Wolf Drilling Company LP (as borrower), Grey Wolf, Inc. (as
guarantor), The CIT Group/Business Credit, Inc. (as agent) and
various financial institutions (as lenders) (incorporated herein
by reference to Exhibit 10.1 to Grey Wolf, Inc. current report
on Form 8-K dated January 26, 1999).10.24
    
    
    
    First Amendment to Loan Agreement dated as of December 20, 2001, by
and among Grey Wolf Drilling Company, LP (as borrower) and Grey
Wolf, Inc. (as guarantor) and the CIT Group/Business Credit, Inc.
(as agent) and various financial institutions (as lenders)
(incorporated herein by reference to Exhibit 10.11 to the Grey Wolf, Inc. Annual Report
on Form 10‐K for the year ended December 31, 2001 filed
March 15, 2002).




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##### Table of Contents



ExhibitNo.
    
    
    
    Documents10.25
    
    
    
    Second Amendment to Loan Agreement dated as of February 7, 2003 by
and among Grey Wolf Drilling Company L.P. (as borrower), Grey Wolf,
Inc. and various subsidiaries (as guarantors) and the CIT
Group/Business Credit, Inc. and various financial institutions (as
lenders) (incorporated herein by reference to Exhibit 10.24 to the Grey Wolf, Inc.
Annual Report on Form 10-K for the year ended December 31,
2002 filed March 6, 2003).10.26
    
    
    
    Third Amendment to Loan Agreement
as of May 1, 2003, by and among Grey Wolf Drilling Company L.P.
(as borrower), Grey Wolf, Inc. and various subsidiaries (as
guarantors) and the CIT Group/Business Credit, Inc. and various
financial institutions (as lenders) (incorporated by reference to
Exhibit 10.1 to the Quarterly Report on Form 10-Q filed
May 5, 2004).10.27
    
    
    
    Fourth Amendment to Loan Agreement
as of March 31, 2004, by and among Grey Wolf Drilling Company
L.P. (as borrower), Grey Wolf, Inc. and various subsidiaries (as
guarantors) and the CIT Group/Business Credit, Inc. and various
financial institutions (as lenders) (incorporated by reference to
Exhibit 10.2 to the Quarterly Report on Form 10-Q filed
May 5, 2004).10.28
    
    
    
    Fifth Amendment to the Loan
Agreement, dated December 31, 2004, by and among Grey Wolf
Drilling Company, L.P. (as borrower), Grey Wolf, Inc. and various
subsidiaries (as guarantor) and the CIT Business Credit, Inc. (as
agent) and various financial institutions (as lenders) (incorporated
by reference to Exhibit 10.6 to the current report on Form 8-K
filed January 6, 2005).21.1
    
    
    
    List of Subsidiaries of Grey Wolf, Inc. (incorporated herein by
reference to Exhibit 21.1 to the Grey Wolf, Inc. Annual Report on From 10-K for the
year ended December 31, 2003 filed February 17, 2004).*23.1
    
    
    
    Consent of Independent Registered Public Accounting Firm, KPMG LLP*31.1
    
    
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a).*31.2
    
    
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a).**32.1
    
    
    
    Certification pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Thomas
P. Richards, Chairman, President and Chief Executive Officer and
David W. Wehlmann, Executive Vice President and Chief Financial
Officer.
   +
    
    Management contract, compensation plan or arrangement*
    
    Filed herewith**
    
    Furnished, not filed, pursuant to Item 101(b) (32) of Regulation S-K.