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

                                    FORM 10-K

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

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

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

                          Commission file number 1-8226

                             [GREY WOLF, INC. LOGO]

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

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


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

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

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

<Table>
<Caption>
                                                    Name of each exchange
             Title of each class                     on which registered
             -------------------                   -----------------------

<S>                                                <C>
        COMMON STOCK, PAR VALUE $0.10              AMERICAN STOCK EXCHANGE
   RIGHTS TO PURCHASE JUNIOR PARTICIPATING         AMERICAN STOCK EXCHANGE
      PREFERRED STOCK, PAR VALUE $1.00
</Table>

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

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

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

         At March 14, 2002, 180,795,661 shares of the Registrant's common stock
were outstanding. The aggregate market value of the Registrant's voting stock
held by non-affiliates (based upon the closing price on the American Stock
Exchange on March 14, 2002 of $3.82 was approximately $643.0 million.

         The following documents have been incorporated by reference into the
Parts of this Report indicated: Certain sections of the Registrant's definitive
proxy statement for the Registrant's 2001 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, 2001,
are incorporated by reference into Part III hereof.

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                                     PART I


ITEM 1. BUSINESS

GENERAL

         Grey Wolf, Inc. is a leading provider of contract land drilling
services in the United States with a fleet of 121 rigs at March 14, 2002, of
which 65 rigs are marketed. We have cold-stacked 34 rigs since the third quarter
of 2001, bringing our inventory rig count to 56. Included in the marketed fleet
is one non-owned rig that we operate for a third party. Our customers include
independent producers and major oil and gas companies. We conduct all our
operations through our subsidiaries.

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

BUSINESS STRATEGY

         Within the framework of a very cyclical industry, our strategy is to
maximize shareholder value during periods of increasing demand and mitigate risk
during periods of reduced demand. Our goal is to enter each phase of our
industry's cycles in a stronger position. We attempt to achieve this by:

         o        delivering quality, value-added service to our customers;

         o        maintaining a leading position in our core markets;

         o        responding to market conditions by balancing dayrates with
                  utilization;

         o        maintaining a high level of utilization for our marketed rigs;

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

         o        controlling costs and maintaining capital spending discipline;

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

         o        using term contracts to provide sufficient cash flow to cover
                  incremental capital expenditures for refurbishments on rigs
                  under term contracts;

         o        using term contracts to mitigate the cyclical nature of
                  dayrates;

         o        searching for new market opportunities where we believe our
                  quality fleet of rigs would be able to generate attractive
                  returns; and

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

INDUSTRY OVERVIEW

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

         Since the end of the second quarter of 1999 until the third quarter of
2001, we, as well as the domestic land drilling industry in general, enjoyed
sequential quarter over quarter improvement in operating and financial results.
This improvement was driven by higher oil and natural gas prices which resulted
in higher customer demand as reflected by higher rig counts. The average price
of natural gas for 2000, based upon the New York Mercantile Exchange ("NYMEX")
near month contract, was $4.32 per mmbtu and for the first nine months of 2001
was $4.51. The average NYMEX price of West Texas Intermediate crude for 2000 was
$30.26 per barrel and for the first nine months of 2001 was $27.76. In addition,
the domestic land rig count, as reported by industry sources, was 937 rigs at
the end of 2000 and reached 1,114 rigs during July 2001.

         Beginning in the third quarter of 2001 and continuing into 2002, we
have seen a pronounced decline in customer demand reflected in the domestic land
rig count due to lower commodity prices. Natural gas prices during the fourth
quarter of 2001, based upon the NYMEX near month contract, averaged $2.69 per
mmbtu and for the period from January 1, 2002 through March 14, 2002 averaged
$2.33 per mmbtu. The average NYMEX price of West Texas Intermediate crude was
$20.53 per barrel for the fourth quarter of 2001 and for the period of January
1, 2002 through March 14, 2002 was $20.89. The domestic land



                                       -2-

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rig count decreased from a high of 1,114 rigs during July 2001 to 743 rigs at
the end of 2001 and 625 rigs on March 15, 2002.

         Overall, the land drilling industry is still fragmented and very
competitive. However, there has been significant consolidation within the
industry since 1996 and further consolidation continued in 2001. Based on
industry sources, we believe our combined market share was 20% in our four core
markets at February 28, 2002.

CURRENT CONDITIONS

         The year 2001 was by far the best year in the history of Grey Wolf. We
averaged 85 rigs running for the year and generated earnings before interest,
taxes, depreciation and amortization ("EBITDA") of $174.5 million. Net income
was $68.5 million, or $.38 per diluted share.

         Beginning in the third quarter of 2001, and continuing into 2002, we
have seen a decline in the demand for land drilling services. Our customers, the
exploration and production companies, are faced with lower revenues and cash
flows due to lower commodity prices. The lower commodity prices and reduced
demand for land drilling services has had a negative effect on our business. The
average number of our rigs running has declined from 91 in the third quarter of
2001 to 68 in the fourth quarter of 2001 and to 58 from January 1, 2002 through
March 8, 2002. In addition, our current bid rates without fuel and top drives
have declined approximately 30% to $7,500 to $8,500 per rig day without fuel or
top drives from a range of $10,000 to $13,000 per rig day in October of 2001.

         Lower rig utilization and dayrates have negatively impacted our
margins. Our average operating margin for the third quarter of 2001 was $6,971
per rig day compared to the fourth quarter of 2001 average of $5,337 per rig
day. Our operating margin for the first quarter of 2002 is projected to be
approximately $3,200 per rig day.

         If current market conditions persist or deteriorate further, there will
be an adverse effect on our business and results of operations.

DOMESTIC OPERATIONS

         At March 14, 2002, we had a rig fleet of 121 rigs, 65 of which were
marketed and 56 were held in inventory. Included in the rig fleet is one rig
that we do not own but operate for a third party. We currently conduct our
operations in the following domestic drilling markets:

         o        Ark-La-Tex;

         o        Gulf Coast;

         o        Mississippi/Alabama;

         o        South Texas;

         o        Rocky Mountain; and

         o        West Texas.

         We refer to the Ark-La-Tex, Gulf Coast, Mississippi/Alabama and South
Texas markets as our "core markets," because the majority of our rigs are
located in those markets. We conduct our operations primarily in core domestic
markets which we believe have historically had greater utilization rates and
dayrates than the combined total of all other domestic markets. This is in part
due to the heavy concentration of natural gas reserves in these markets. During
2001, approximately 97% of the wells we drilled for our customers were drilled
in search of natural gas. Larger natural gas reserves are typically found in
deeper geological formations and generally require premium equipment and quality
crews to drill the wells.

         Ark-La-Tex Division. Our Ark-La-Tex division provides drilling services
primarily in the Ark-La-Tex market which consists of Northeast Texas, Northern
Louisiana and Southern Arkansas, and the Mississippi/Alabama market. We
currently have 15 marketed rigs in this division which consist of 11 diesel
electric rigs and four mechanical rigs. Our Ark-La-Tex division also operates a
fleet of 26 trucks which are used exclusively to move our rigs.

         We had an average of 27 rigs working in our Ark-La-Tex division during
2001. Daywork contracts generated approximately 93% of our revenues in this
division, while turnkey and footage contracts generated the remaining 7%. The
average revenue per rig day worked by the division during 2001 was $12,304.
Based on industry sources, we had



                                       -3-

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the third largest number of operating rigs in the Ark-La-Tex market, or a market
share of approximately 14%, as of February 28, 2002.

         Gulf Coast Division. Our Gulf Coast division provides drilling services
in Southern Louisiana and along the upper Texas Gulf Coast. We currently have 18
marketed rigs in this division which consist of 17 diesel electric rigs and one
mechanical rig.

         We had an average of 27 rigs working in our Gulf Coast division during
2001. Daywork contracts generated approximately 78% of our revenues in this
division, while turnkey and footage contracts generated the remaining 22%. The
average revenue per rig day worked by the division during 2001 was $15,138.
Based on industry sources, we had the largest number of operating rigs
in this market, or a market share of approximately 29% as of February 28, 2002.

         South Texas Division. We believe that trailer-mounted rigs and 1,500 to
2,000 horsepower diesel electric rigs are in highest demand in this market.
Trailer-mounted rigs are relatively more mobile than conventional rigs, thus
decreasing the time and expense to the customer of moving the rig to and from
the drillsite. Under ordinary conditions, trailer-mounted rigs are capable of
drilling an average of two 10,000 foot wells per month. We currently have 26
marketed rigs in this division, including one non-owned rig that we operate for
a third party. The marketed rigs consist of 13 diesel electric rigs, eight
mechanical trailer-mounted rigs, and five mechanical rigs. The South Texas
division also operates a fleet of 35 trucks which are used exclusively to move
our rigs.

         We had an average of 30 rigs working in our South Texas division during
2001. Daywork contracts generated approximately 88% of our revenues in this
division, while turnkey and footage contracts generated the remaining 12%. The
average revenue per rig day worked by the division during 2001 was $12,973.
Based on industry sources, we had the second largest number of operating rigs in
this market, or a market share of approximately 21%, as of February 28, 2002.

         Rocky Mountain Division. We began operations in the Rocky Mountain
market in June 2001 under a two-year term contract for our ultra-deep drilling
Rig 558. In October 2001, we deployed a second rig into the market under a
one-year term contract. Both rigs are diesel electric rigs and have been
drilling in Wyoming since inception of operations in this division. These two
term contracts generated 100% of our revenues in this division and the average
revenue per rig day worked by the division during 2001 was $15,574. The presence
of these rigs provide us with an established operating base in this market which
could allow for further expansion opportunities.

         West Texas Division. In May 2001, we signed a two-year term contract
for a 3,000 horsepower rig to drill in West Texas. This rig is being upgraded
from inventory and is expected to go to work in the second quarter of 2002.
Excluding this rig, we currently have four marketed rigs in this division and
all four are diesel electric rigs drilling deep and/or horizontal wells. We
began operations in West Texas in October 2001 for a large independent oil and
gas company on a well to well contract basis. The other three rigs began
operations in either January or February 2002. The presence of these rigs
provide us with an established operating base in this market which could allow
for further expansion opportunities.

CLOSING OF VENEZUELAN OPERATIONS

         During the second quarter of 2001, we moved our five Venezuela rigs to
the United States, and in the third quarter of 2001 sold three of the five rigs
for $1.3 million. We no longer have operations or operating assets in
international markets.

INVENTORY RIGS

         We categorize a rig that is not currently being marketed by us as an
"inventory rig." At March 14, 2002, 56 of our rigs, or approximately 46% of our
rig fleet, were inventory rigs. Within the framework of our business strategy
and as demand warrants, we plan to reactivate inventory rigs. The actual cost to
reactivate these rigs will depend on the specific customer requirements and the
extent to which we choose to upgrade the rigs.

         The actual number of inventory rigs reactivated during 2002, if any,
and in the future will depend on many factors, including our estimation of
existing and anticipated demand and dayrates, our success in bidding for
domestic contracts, including term contracts, and the timing of the
reactivations.



                                       -4-

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CONTRACTS

         Our contracts for drilling oil and gas wells are obtained either
through competitive bidding or as a result of negotiations with customers.
Contract terms offered by us are generally dependent on the complexity and risk
of operations, on-site drilling conditions, type of equipment used and the
anticipated duration of the work to be performed. Generally, domestic drilling
contracts are for a single well. The majority of domestic drilling contracts are
typically subject to termination by the customer on short notice, usually upon
payment of a fee. However, we have entered into a number of term contracts to
provide drilling services on a daywork basis with terms ranging in length from
six months to two years. These term contracts include a per rig day termination
rate approximately equal to our daily margin on each contract. 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 and we
generally bear no part of the usual risks associated with drilling, such as time
delays for various reasons, including stuck drill pipe or blowout.

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

         The risks to us under a turnkey contract are substantially greater than
on a 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 the 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 because we
assume most of the risks associated with drilling operations generally assumed
by the operator in a daywork contract, including the risk of blowout, loss of
hole, stuck drill pipe, machinery breakdowns, abnormal drilling conditions and
risks associated with subcontractors' services, supplies, cost escalation and
personnel. As with turnkey contracts, we manage this additional risk through the
use of engineering expertise and bid the footage contracts accordingly. We also
maintain insurance coverage against certain drilling hazards.

CUSTOMERS AND MARKETING

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

         From time to time we also enter into informal, nonbinding commitments
with our customers to provide drilling rigs for future periods at agreed upon
rates plus fuel and mobilization charges, if applicable, and escalation
provisions. This practice is customary in the land drilling business during
times of tightening rig supply. Although neither we nor



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the customer are legally required to honor these commitments, we strive to
satisfy such commitments in order to maintain good customer relations.

TERM CONTRACTS

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

         We expect that our 21 term contracts will contribute substantially to
our revenues in 2002. An average of approximately 16 rigs and a total of 6,000
days are currently contracted for under term contracts in 2002, which are
expected to generate approximately $83.6 million of revenues for us in 2002. Of
our current term contracts, 11 have contract terms extending into 2003 that
provide for a total of 1,350 days of drilling and revenues of approximately
$20.3 million in 2003.

         We also expect our term contracts to contribute substantially to our
average per rig day operating margin for 2002. Rigs under term contracts are
expected to provide us with an approximate per rig day operating margin of
$7,000 in 2002. We expect that our combined average operating margin will be
approximately $3,200 per rig day in the first quarter of 2002.

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 and commercial contract indemnity, commercial umbrella and
workers' compensation insurance, property casualty insurance on our rigs and
drilling equipment, and "control of well" insurance.

         Our third party liability insurance coverage under our general policies
is $1.0 million per occurrence, with a deductible of $100,000 per occurrence. We
believe that we are adequately insured for public liability and property damage
to others with respect to our operations. However, our insurance may not be
sufficient to protect us against liability for all consequences of well
disasters, extensive fire damage or damage to the environment.

         Our workers' compensation insurance coverage is $1.0 million per
occurrence with a deductible of $250,000 per occurrence. We believe that we are
adequately insured for workers' compensation. However, if significant and
multiple workers' compensation claims are filed, we could incur significant
expenses, which could have an adverse effect on our financial condition and
results of operations.

         We have commercial umbrella, or excess liability insurance, to cover
general liability and workers' compensation claims which are higher than the
maximum coverage provided under those policies. Our excess liability insurance
covers up to a maximum of $75.0 million in the aggregate and have deductibles
per occurrence of $50,000 on the first $10.0 million of coverage and $50,000 on
the remaining $65.0 million of coverage.

         Our insurance coverage for property 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 deductible on rigs of $850,000 in the
aggregate over an eighteen month policy period (with a sublimit of up to
$575,000 per claim in respect of such aggregate



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limit) to be comprised of losses otherwise recoverable thereafter in excess of a
$50,000 maintenance deductible. There is a $10,000 deductible per occurrence on
other equipment.

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

SIGNIFICANT ACQUISITIONS AND SALES

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

CERTAIN RISKS

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

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

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

         o        our revenues, cash flows and earnings;

         o        our customers may seek to terminate, renegotiate or fail to
                  honor our term drilling contracts;

         o        the fair market value of our rig fleet which in turn could
                  trigger a writedown for accounting purposes;

         o        our ability to maintain or increase our borrowing capacity;

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

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

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

         o        weather conditions in the United States and elsewhere;

         o        economic conditions in the United States and elsewhere;

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

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

         o        governmental regulations, both domestic and foreign;

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

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

         o        the overall supply and demand for oil and gas.



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

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

         o        the type and condition of drilling rigs;

         o        the quality of service and experience of rig crews;

         o        the safety record of the rig;

         o        the offering of ancillary services; and

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

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

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

We face competition from competitors with greater resources.

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

         o        better withstand periods of low rig utilization;

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

         o        retain skilled rig personnel; and

         o        build new rigs or acquire and refurbish existing rigs so as to
                  be able to place rigs into service more quickly than us in
                  periods of high drilling demand.

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

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

         o        blowouts;

         o        fires and explosions;

         o        collapse of the borehole;

         o        lost or stuck drill strings; and

         o        damage or loss from natural disasters.

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

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

         o        suspension of drilling operations;

         o        damage to the environment;

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

         o        personal injury and loss of life; and

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



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

Our operations are subject to 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:

         o        environmental quality;

         o        pollution control; and

         o        remediation of environmental contamination.

         Our operations are often conducted in or near ecologically sensitive
areas, such as wetlands which are subject to special protective measures and
which may expose us to additional operating costs and liabilities for
noncompliance with applicable laws. The handling of waste materials, some of
which are classified as hazardous substances, is a necessary part of our
operations. Consequently, our operations are subject to stringent regulations
relating to protection of the environment and waste handling which may impose
liability on us for our own noncompliance and, in addition, that of other
parties without regard to whether we were negligent or otherwise at fault. We
may also be exposed to environmental or other liabilities originating from
businesses and assets which we purchased from others. Compliance with applicable
laws and regulations may 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.

Volatility in oil and gas prices can adversely affect our business.

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

         We believe our operating and financial performance illustrates this
risk. Oil and gas prices generally dropped beginning in late 1997, with
generally lower commodity prices extending well into 1999. Beginning in the
first quarter of 1998, drilling activity in the markets we serve also dropped
significantly, and we experienced significant declines both in the average
number of rigs working and in the rates we could charge for them. During 2000
and the first nine months of 2001, market conditions improved, with higher
commodity prices, dayrates, and rig utilization. However, commodity prices
dropped again in mid-2001 which adversely affected drilling activity and
dayrates. The average number of our rigs working in the third quarter of 2001
was 91 but declined to 68 in the fourth quarter of 2001 and 58 for the period
from January 1, 2002 to March 8, 2002. Our operating margin per rig day was
$6,971 in the third quarter of 2001 but fell to $5,337 in the fourth quarter of
2001 and is projected to be approximately $3,200 for the first quarter of 2002.

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

In addition to trade liabilities, we have $250.0 million of principal amount
indebtedness under our senior notes with semi-annual interest payments of
approximately $11.1 million.

         We are indebted for a total of $250.0 million in principal amount under
our 8 7/8% Senior Notes due 2007. Semi-annual interest payments on the senior
notes of approximately $11.1 million are due on January 1 and July 1 of each
year.


                                       -9-

<PAGE>


Our operating activities provided net cash sufficient to pay our debt service
obligations for the year ended December 31, 2001; however, there can be no
assurances that we will be able to generate sufficient cash flow in the future.

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

         o        oil and gas prices;

         o        demand for our drilling services;

         o        whether our business strategy is successful; and

         o        other financial and business factors that affect us.

         Many of these factors are beyond our control.

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

         o        further diminish our cash balances;

         o        use our existing credit facility;

         o        obtain additional external financing;

         o        refinance our indebtedness; and

         o        sell our assets.

We have had only two profitable years since 1991.

         While we returned to profitability during 2001, we have a history of
losses with our only profitable years since 1991 being 1997 and 2001 in which we
had net income of $10.2 million and $68.5 million, respectively. Whether we are
able to be profitable in the future will depend on many factors, but primarily
on whether we are able to maintain high utilization rates for our rigs and the
rates we charge for them. Whether we can achieve those goals will largely depend
on oil and gas prices which are beyond our control.

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

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

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

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



                                      -10-

<PAGE>



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

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

         o        incur additional indebtedness;

         o        pay dividends or make other restricted payments;

         o        repurchase our equity securities;

         o        sell material assets;

         o        grant or permit liens to exist on our assets;

         o        enter into sale and lease-back transactions;

         o        enter into certain mergers, acquisitions and consolidations;

         o        make certain investments;

         o        enter into transactions with related persons; and

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

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

         Our senior secured credit facility contains default terms that
effectively cross default with the indentures covering our senior notes. If we
breach the covenants in the indentures it could cause our default under our
senior notes, and also under our senior secured credit agreement, and possibly
under other then outstanding debt obligations owed by us or our subsidiaries. If
the indebtedness under our senior secured credit agreement or other indebtedness
owed by us or our subsidiaries is more that $10.0 million and is not paid when
due, or is accelerated by the holders of the debt, then an event of default
under the indenture covering our senior notes would occur. If circumstances
arise in which we are in default under our various credit agreements, our cash
and other assets may be insufficient to repay our indebtedness and that of our
subsidiaries.

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

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

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

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

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



                                      -11-

<PAGE>



consent of the lenders and the terms of the indentures under which our senior
notes are issued also restrict our ability to pay dividends under certain
conditions.

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

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

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

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

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

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

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

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

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

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

         As of March 14, 2002, 180.8 million shares of our common stock were
issued and outstanding. In addition, as of March 14, 2002, we had issued options
to purchase 9.7 million shares of common stock and these options are currently
exercisable for 3.2 million shares of common stock. The market price of our
common stock could drop significantly if future sales of substantial amounts of
our common stock occur, or if the perception exists that substantial sales may
occur.

EMPLOYEES

         At March 14, 2002, we had approximately 1,700 employees. None of our
employees are subject to collective bargaining agreements, and we believe our
employee relations are satisfactory.



                                      -12-

<PAGE>



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:

         o        business strategy;

         o        demand for our services;

         o        2002 rig activity and financial results;

         o        reactivation of inventory rigs;

         o        projected daily margins;

         o        wage rates;

         o        depreciation and capital expenditures in 2002; and

         o        anticipated operating and financial results with respect to
                  our term drilling contracts.

         Although we believe the expectations and beliefs reflected in such
forward-looking statements are reasonable, we can give no assurance that such
expectations will prove to have been correct. Important factors that could cause
actual results to differ materially from our expectations include:

         o        fluctuations in prices and demand for oil and gas;

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

         o        fluctuations in the demand for contract land drilling
                  services;

         o        the existence and competitive responses of our competitors;

         o        attempts by our customers to terminate, renegotiate, or fail
                  to honor term drilling contracts;

         o        technological changes and developments in the industry;

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

         o        U.S. and global economic conditions;

         o        the availability and terms of insurance coverage;

         o        the ability to attract and retain qualified personnel; and

         o        unforeseen operating costs such as cost for environmental
                  remediation and turnkey cost overruns.

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



                                      -13-

<PAGE>


ITEM 2. PROPERTIES

DRILLING EQUIPMENT

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

         Our rig fleet consists of several rig types to meet the demands of our
customers in each of the markets we serve. Our rig fleet consists of two basic
types of drilling rigs, mechanical and diesel electric. Mechanical rigs transmit
power generated by a diesel engine directly to an operation (for example the
drawworks or mud pumps on a rig) through a compound consisting of chains, gears
and hydraulic clutches. Diesel electric rigs are further broken down into two
subcategories, direct current rigs and SCR rigs. Direct current rigs transmit
the power generated by a diesel engine to a direct current generator. This
direct current electrical system then distributes the electricity generated to
direct current motors on the drawworks and mud pumps. 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. We own 12 direct current
diesel electric rigs and 50 SCR diesel electric rigs. We also own 18 mechanical
rigs and one diesel electric rig that are trailer-mounted for greater mobility.

         We also utilize top drives in our drilling operations. A top drive
allows drilling with 90-foot lengths of drill pipe rather than 30-foot lengths,
thus reducing the number of required connections. A top drive also permits
rotation of the drill string while tripping in or out of the hole. These
characteristics increase drilling speed, personnel safety and drilling
efficiency, and reduce the risk of the drill string sticking during operations.
At March 14, 2002, we owned 13 top drives.

         We generally deploy our rig fleet among our divisions based on the
types of rigs preferred by our customers for drilling in the geographic markets
served by our divisions. The following table summarizes the rigs we own as of
March 14, 2002:

<Table>
<Caption>
                                                          Maximum Rated Depth Capacity
                                 ----------------------------------------------------------------------------
                                   Under           10,000'          15,000'        20,000'
                                  10,000'         to 14,999'       to 19,999'      and Deeper           Total
                                 ---------       ------------     ------------     ----------           -----
<S>                              <C>             <C>              <C>              <C>                  <C>
MARKETED
Ark-La-Tex
    Diesel Electric                 --                1                 5                 5               11
    Mechanical                      --                1                 3                --                4
Gulf Coast
    Diesel Electric                 --               --                 1                16               17
    Mechanical                      --               --                 1                --                1
South Texas
    Diesel Electric                 --                1                 4                 7               12(1)
    Trailer-Mounted                 --                8                --                --                8
    Mechanical                      --                4                --                 1                5
Rocky Mountain
    Diesel Electric                 --               --                --                 2                2
West Texas
    Diesel Electric                 --               --                 2                 2                4
                                   ---              ---               ---               ---              ---
Total Marketed                      --               15                16                33               64

INVENTORY
    Diesel Electric                 --               --                --                16               16
    Trailer-Mounted                  2                8                --                 1               11
    Mechanical                      --               14                 9                 6               29
                                   ---              ---               ---               ---              ---
Total Inventory                      2               22                 9                23               56
                                   ---              ---               ---               ---              ---

Total Rig Fleet                      2               37                25                56              120
                                   ===              ===               ===               ===              ===
</Table>

----------

     (1) Excludes one rig which we operate for a third party.



                                      -14-

<PAGE>



FACILITIES

     The following table summarizes our significant real estate:

<Table>
<Caption>
Location                                    Interest                     Uses
--------                                    --------                     ----

<S>                                         <C>           <C>
Houston, Texas...........................   Leased        Executive Offices
Alice, Texas.............................   Owned         Field Office, Rig Yard, Truck Yard
Eunice, Louisiana........................   Owned         Field Office, Rig Yard
Fillmore, Louisiana......................   Owned         Rig Yard
Oklahoma City, Oklahoma..................   Owned         Rig Yard
Shreveport, Louisiana....................   Leased        Field Office
Shreveport, Louisiana....................   Owned         Rig Yard
Casper, Wyoming..........................   Leased        Field Office
Midland, Texas...........................   Leased        Field Office
</Table>

         We lease approximately 22,700 square feet of office space in Houston,
Texas for our principal executive offices at a cost of approximately $39,600 per
month. We believe that all our facilities are in good operating condition and
that they are adequate for their present uses.

ITEM 3. LEGAL PROCEEDINGS

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

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

None.



                                      -15-

<PAGE>


                                     PART II

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

MARKET DATA

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

<Table>
<Caption>
                                                                        High         Low
                                                                      --------     -------

<S>                                                                   <C>          <C>
           Period from January 1, 2002 to March 14, 2002               $4.0700     $2.6900

           Year Ended December 31, 2001:
               Quarter ended March 31, 2001                             6.9600      5.0625
               Quarter ended June 30, 2001                              6.8700      3.7700
               Quarter ended September 30, 2001                         3.7300      1.7500
               Quarter ended December 31, 2001                          3.3100      1.7600

           Year Ended December 31, 2000:
               Quarter ended March 31, 2000                             4.4375      2.8125
               Quarter ended June 30, 2000                              5.3125      3.1250
               Quarter ended September 30, 2000                         5.7500      3.9375
               Quarter ended December 31, 2000                          5.8750      3.6250
</Table>

         We have never declared or paid cash dividends on our common stock and
do not expect to pay cash dividends in 2002 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 and the terms of the Indentures
under which our senior notes are issued also restrict our ability to pay
dividends under certain conditions.

         On March 14, 2002, the last reported sales price of our common stock on
the AMEX was $3.82 per share.

ITEM 6. SELECTED FINANCIAL DATA

<Table>
<Caption>
                                                         (Amounts in thousands, except per share amounts)

                                                                       Years Ended December 31,
                                            ------------------------------------------------------------------------
                                               2001           2000            1999            1998            1997
                                            ---------      ---------       ---------       ---------       ---------

<S>                                         <C>            <C>             <C>             <C>             <C>
REVENUES                                    $ 421,501      $ 269,334       $ 147,203       $ 240,979       $ 215,923

NET INCOME (LOSS)                              68,453         (8,523)        (41,262)        (83,213)         10,218

NET INCOME (LOSS) PER COMMON SHARE
    - BASIC AND DILUTED:                          .38           (.05)           (.25)           (.50)            .07

TOTAL ASSETS                                  623,876        510,866         452,846         501,303         533,752

SENIOR NOTES & OTHER LONG-TERM DEBT           250,695        249,851         249,962         250,527         176,225

SERIES A PREFERRED STOCK - MANDATORILY
    REDEEMABLE                                     --             --              --             305             305
</Table>



                                      -16-

<PAGE>


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS

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

GENERAL

         We are a leading provider of contract land drilling services in the
United States with a fleet of 121 rigs, of which 65 rigs are currently marketed.
We recently cold-stacked 34 rigs, bringing our inventory rig count to 56.
Included in the marketed fleet is one non-owned rig that we operate for a third
party.

Rig Activity

         Since the end of the second quarter of 1999 we, as well as the domestic
land drilling industry in general, enjoyed sequential quarter over quarter
improvement in operating and financial results. This improvement was driven by
higher oil and natural gas prices which resulted in higher customer demand as
reflected by higher rig counts. However, we saw a pronounced decline in customer
demand reflected in the number of rigs running due to lower commodity prices
beginning late in the third quarter of 2001. This trend has continued into the
first quarter of 2002. At March 14, 2002, we had 56 rigs working. The table
below shows the average number of our rigs working in our operating markets
during the periods indicated:

<Table>
<Caption>
   1999                              2000                                                 2001                               2002
   ----          ---------------------------------------------        ---------------------------------------------          ----

   Full                                                   Full                                                 Full         Q-1 to
   Year          Q-1       Q-2        Q-3       Q-4       Year        Q-1        Q-2       Q-3       Q-4       Year          Date
   ----          ---       ---        ---       ---       ----        ---        ---       ---       ---       ----         -----

<S>             <C>       <C>       <C>       <C>        <C>         <C>       <C>       <C>       <C>        <C>           <C>
    45            61        65        77        83         71          88        92        91        68         85            58
</Table>

Drilling Contract Bid Rates

         Dayrates are driven by utilization and with the declining number of
rigs running, we have also seen a drop in dayrates. Our current daywork bid
rates are between $7,500 and $8,500 per rig day without fuel or top drives. This
is a decline from the leading edge bid rates of $10,000 to $13,000 per rig day
in October 2001 and from the high of $13,500 to $17,000 per rig day in April
2001. We currently own 13 top drives for which our current bid rates are $1,500
per rig day. Bid rates for our top drives reached $2,000 per rig day in
mid-2001. Bid rates for our top drives are in addition to the above stated bid
rates for our rigs.

Term Contracts

         An integral part of our strategy in 2001 was to seek out long term
contracts with our customers to help ensure an income stream in the event of
lower commodity prices, to recover capital costs of refurbishment plus an
acceptable return, and to be able to give our customers a dedicated rig for
their drilling programs at a competitive rate. All nine of the rigs returned to
service in 2001 and the one rig to be returned to service in 2002 were
reactivated under term contracts. These term contracts have original terms
ranging in length from one to two years and contain termination provisions which
require our customers, upon cancellation of a contract, to pay an amount that
approximates our operating margin for the remaining days under the contract.

         Twenty rigs are currently working under term contracts and one
additional rig will go to work under a term contract in the second quarter of
2002. We expect that our 21 term contracts will contribute substantially to our
revenues in 2002. An average of approximately 16 rigs and a total of 6,000 days
are currently contracted for under term contracts in 2002, which are expected to
generate approximately $83.6 million of revenues for us in 2002. Of our current
term contracts, 11 have contract terms extending into 2003 that provide for a
total of 1,350 days of drilling and revenues of approximately $20.3 million in
2003.



                                      -17-

<PAGE>



         We also expect our term contracts to contribute substantially to our
average per rig day operating margin for 2002. Rigs under term contracts are
expected to provide us with an approximate operating margin of $7,000 per rig
day in 2002. We expect that our combined average operating margin will be
approximately $3,200 per rig day in the first quarter of 2002.

         As discussed previously, we have seen a weakening in demand and believe
that our current term contracts will mitigate a portion of the financial risk
associated with this lower demand.

Turnkey and Footage Contract Activity

         Revenue generated from turnkey and footage contracts was approximately
12% of total revenue in the fourth quarter of 2001, compared with 15% during the
third quarter of 2001 and 18% during the fourth quarter of 2000. For the years
ended December 31, 2001 and 2000, turnkey and footage contracts represented 14%
and 30% of total revenue, respectively. The percentage of days worked on turnkey
and footage contracts was 5% of total days worked in the fourth quarter of 2001
compared to 7% in the third quarter of 2001 and 18% for the year ended December
31, 2000. We expect that turnkey and footage contracts will represent
approximately 7% to 10% of the total days worked in 2002.

         Turnkey and footage contracts generated earnings before interest,
income taxes, depreciation and amortization ("EBITDA") of $2.7 million in the
fourth quarter of 2001 compared to $5.4 million in the third quarter of 2001.
For the years ended December 31, 2001 and 2000, turnkey and footage contracts
generated EBITDA of $16.5 million and $9.6 million, respectively. For the fourth
quarter of 2001, our turnkey operating margin was $8,717 per rig day, which was
69% greater than the $5,151 daywork margin per rig day.

         The revenue and EBITDA generated on turnkey and footage contracts
varies widely based upon a number of factors, including the location of the
contracted work as well as the depth and level of complexity of the wells
drilled. The demand for drilling services under turnkey and footage contracts
has historically been greater during periods of overall lower demand. There can
be no assurance that we will be able to maintain the current level of revenue or
EBITDA derived from turnkey and footage contracts.

New Markets

         We began operations in the Rocky Mountain market in June 2001 under a
two-year term contract for our ultra-deep drilling Rig 558. In October 2001, we
deployed a second rig into the market under a one-year term contract.

         In May 2001, we signed a two-year term contract for a 3,000 horsepower
rig to drill in West Texas. This rig is being upgraded from inventory and is
expected to go to work in the second quarter of 2002. Excluding this rig, we
currently have four marketed rigs in this market. One rig began operations in
October 2001 on a well to well contract basis. The other three rigs began
operations in either January or February 2002. Two of these three rigs are
working under existing term contracts and the other rig is working on a well to
well contract basis.

         The presence of these rigs provide us with established operating bases
in these two markets which could provide further expansion opportunities.

Closing of Venezuelan Operations

         During the second quarter of 2001, we moved our five Venezuela rigs to
the United States, and in the third quarter of 2001 sold three of the five rigs
for $1.3 million. We no longer have operations or operating assets in the
international markets.

Critical Accounting Policy

         We assess the impairment of long-lived assets whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. The primary factor that we consider important which could trigger
an impairment review would be significant negative industry or economic trends.
If a review of the Company's long-lived assets indicated that the carrying value
of certain drilling rigs was more than the estimated undiscounted future net
cash flows, a write-down of the assets to their estimated fair market value
would have to be made. The estimation of undiscounted future net cash flows
and fair market value would be based on certain estimates and projections as
stipulated in Statement of Financial Accounting Standards Board No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets".

         During the year ended December 31, 1998, we recorded a pretax unusual
charge of $93.2 million for asset impairment as a result of such a review. As of
December 31, 2001, net long-lived assets amounted to $448.7 million.

Financial Results

         The year ending December 31, 2001 was the best year in the Company's
history. Net income for 2001 was $68.5 million compared with a net loss of $8.5
million for 2000. Revenue for 2001 was $421.5 million compared with $269.3
million for the year 2000. EBITDA for 2001 and 2000 was $174.5 million and $47.9
million, respectively.

         As a result of the recent decline in demand, however, our financial
results declined in the fourth quarter of 2001. Net income for the fourth
quarter of 2001 was $9.0 million compared with net income of $25.4 million for
the third



                                      -18-

<PAGE>



quarter of 2001. Revenues for the fourth quarter of 2001 and third quarter of
2001 were $86.3 million and $125.1 million, respectively. EBITDA was $30.6
million for the fourth quarter of 2001 compared with $55.9 million for the third
quarter of 2001.

         Our operating margin for the quarter ended December 31, 2001 was $5,337
per rig day, down $1,634 per rig day, or 23% from the third quarter 2001
operating margin of $6,971 per rig day. The fourth quarter 2001 daily operating
margin was $5,337, which was $2,052 per rig day, or 62% greater than the fourth
quarter 2000 operating margin of $3,285 per rig day. Our margin for the years
ended December 31, 2001 and 2000 was $5,963 per rig day and $2,150 per rig day,
respectively. This represents an improvement of $3,813 per rig day, or 177% year
over year.

Financial Outlook and Strategy

         Based on currently anticipated levels of activity and dayrates, we
expect to generate an operating margin of approximately $3,200 per rig day for
the first quarter of 2002. This operating margin level should generate EBITDA of
approximately $14.8 million for the quarter and the resultant net loss per share
is expected to be approximately $.01 on a diluted basis, assuming an effective
tax benefit rate of approximately 25%. We expect depreciation expense of
approximately $11.3 million in the first quarter of 2002.

         Capital expenditures for all of 2002 are projected to be approximately
$22.5 million. Our capital expenditures during 2002 will largely be based upon
our number of rigs working. It is our strategy to control capital expenditures
while maintaining our equipment. We will continue to reduce costs quickly on
rigs added to inventory, but intend to retain our experienced toolpushers and
drillers as we did in the last down cycle. The recent up cycle proved there was
a tremendous need for experienced personnel and our decision to retain them
during the last downturn provided a long-term advantage by allowing us to enter
into term contracts. We currently have no plans to cut wages. It is important to
note, however, that due to current economic conditions and recent events, the
cost of our insurance coverages are expected to escalate at the next renewal
dates in mid-2002 and mid-2003. The anticipated increases in the cost of
insurance, which are not yet determinable, could have an adverse effect on our
financial position and results of operations.

         We believe that higher dayrates across our fleet of rigs are more
beneficial than maintaining higher utilization by discounting prices. We also
believe that customers prefer to make the decision of which contractor to use
based upon safety, quality of service, and value added as opposed to price
considerations alone. Our strategy remains unchanged and that is to provide the
greatest value for our customers in order to obtain the highest rates for our
rigs throughout the cycles of our industry.

FINANCIAL CONDITION AND LIQUIDITY

         The following table summarizes our financial position as of December
31, 2001 and December 31, 2000.

<Table>
<Caption>
                                                     December 31, 2001                December 31, 2000
                                                   --------------------             ---------------------
                                                                        (In thousands)

                                                   Amount            %              Amount           %
                                                   ------           ---             ------          ---

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

         Working capital                          $ 113,163          20            $  60,029         13
         Property and equipment, net                448,660          79              386,861         85
         Other noncurrent assets                      5,744           1                6,658          2
                                                  ---------         ---            ---------        ---
                  Total                           $ 567,567         100            $ 453,548        100
                                                  =========         ===            =========        ===

         Long-term debt                           $ 250,695          44            $ 249,851         55
         Other long-term liabilities                 71,575          13               30,281          7
         Shareholders' equity                       245,297          43              173,416         38
                                                  ---------         ---            ---------        ---
                  Total                           $ 567,567         100            $ 453,548        100
                                                  =========         ===            =========        ===
</Table>

         The significant changes in our financial position from December 31,
2000 to December 31, 2001 are the increases in working capital of $53.1 million,
net property and equipment of $61.8 million, other long-term liabilities



                                      -19-

<PAGE>



of $41.3 million, and shareholders' equity of $71.9 million. The increase in
working capital is primarily due to a $5.8 million increase in accounts
receivable and $47.5 million increase in cash which is due to increases in
dayrates and drilling activity year over year. The increase in net property and
equipment is primarily due to $104.7 million of capital expenditures, $55.5
million of which related to rig upgrades and reactivation offset by $41.4
million in depreciation expense. Other long-term liabilities increased primarily
as the result of a higher deferred income tax liability of $38.6 million due to
higher earnings. Shareholders' equity increased primarily due to net income of
$68.5 million.

Senior Notes

         In June 1997 and May 1998, the Company concluded public offerings of
$175.0 million and $75.0 million, respectively, in principal amount of the
senior notes. The senior notes ("Notes") bear interest at 8 7/8% per annum and
mature July 1, 2007. The Notes are general unsecured senior obligations of the
Company and are fully and unconditionally guaranteed, on a joint and several
basis, by all domestic wholly-owned subsidiaries of the Company. In addition,
non-guarantor subsidiaries are immaterial.

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

         The indentures for the Notes permit us and our subsidiaries to incur
additional indebtedness, including senior indebtedness of up to $100.0 million
aggregate principal amount which may be secured by liens on all of our assets
and the assets of our subsidiaries, subject to certain limitations. The
indentures contain other covenants limiting our ability and our subsidiaries to,
among other things, pay dividends or make certain other restricted payments,
make certain investments, incur additional indebtedness, permit liens, incur
dividend and other payment restrictions affecting subsidiaries, enter into
consolidation, merger, conveyance, lease or transfer transactions, make asset
sales, enter into transactions with affiliates or engage in unrelated lines of
business. These covenants are subject to certain exceptions and qualifications.
The indentures consider non-compliance with the limitations events of default.
In addition to non-payment of interest and principal amounts, the indentures
also consider default with respect to other indebtedness in excess of $10.0
million an event of default. In the event of a default, the principal and
interest could be accelerated upon written notice by 25% or more of the holders
of our senior notes. We are in compliance with these covenants.

         We owe a total of $250.0 million in principal amount under our senior
notes. While the principal is not due until 2007, semi-annual interest payments
of approximately $11.1 million are due on January 1 and July 1 of each year. For
the year ended December 31, 2001, our operating activities and financing
activities provided cash, while our investing activities consumed cash. To the
extent we are unable to generate cash flow sufficient to pay debt service and
meet our other cash needs, including capital expenditures, we would be required
to use our cash on hand. At March 14, 2002, our cash balance was $99.2 million.

CIT Facility

         In December 2001, we amended our $50.0 million credit facility with the
CIT Group/Business Credit, Inc. (the "CIT Facility") to increase the amount
available under the facility to $75.0 million. The term of the CIT Facility was
also extended to January 2006 from January 2003. The CIT Facility provides us
with the ability to borrow up to the lesser of $75.0 million or 50% of the
orderly liquidation value (as defined in the agreement) of certain drilling rig
equipment located in the 48 contiguous United States. The CIT Facility is a
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 3.5% or
prime plus 0.25% to 1.5%. The CIT Facility provides up to $10.0 million
available for letters of credit. We are required to pay a commitment fee of
0.375% per annum on the unused portion of the CIT Facility and letters of credit
accrue a fee of 1.25% per annum. In addition, the CIT Facility contains certain
affirmative and negative covenants and we are in compliance with these
covenants. Substantially all of our assets, including its drilling equipment,
are pledged as collateral under the CIT Facility and it is also secured by our
guarantees and certain of our wholly-owned subsidiaries guarantees. We, however,
retain the option, subject to a minimum appraisal



                                      -20-

<PAGE>



value, under the CIT Facility to extract $75.0 million of the equipment out of
the collateral pool for other purposes. We currently have no borrowings
outstanding under the CIT facility and had $7.4 million outstanding under
letters of credit at December 31, 2001. Any outstanding letters of credit reduce
the amount available for borrowing under the CIT facility.

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

         o        the receipt of net proceeds received by us or our subsidiaries
                  from the incurrence of certain other debt or sales of debt or
                  equity securities in a public offering or private placement,
                  or;

         o        the receipt of net cash proceeds by us or our subsidiaries
                  from asset sales (including proceeds from sale of rigs
                  identified in the credit agreement as equipment held for sale
                  but excluding proceeds from dispositions of inventory in the
                  ordinary course of business, and sales of up to $75.0 million
                  of rigs and rig accessories, or;

         o        the receipt of insurance proceeds on our assets in each case
                  to the extent that such proceeds are in excess of $500,000
                  individually or $1.0 million in the aggregate in any twelve
                  month period.

         Among the various covenants that we must satisfy under the CIT facility
are the following two covenants which apply whenever our liquidity, defined as
the sum of cash, cash equivalents and availability under the CIT facility, falls
below $25.0 million.

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

         o        minimum tangible net worth (all as defined in the CIT
                  facility) at the end of each quarter will be at least the
                  prior year tangible net worth less $30.0 million adjusted for
                  quarterly tests.

         Additionally, it will be a covenant default if the orderly liquidation
value of our domestic drilling equipment (including inventoried rigs) falls
below $150.0 million. Also, if the two month average rig utilization rate falls
below 45%, the lender will have the option to request one additional appraisal
per year to aid in determining the current orderly liquidation value of the
drilling equipment. Prepayment would be required if the orderly liquidation
value falls below the level specified above.

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

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

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

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

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

         o        prepay or materially amend any other indebtedness; and

         o        issue any stock (other than common stock).

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

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

         o        judgements in excess of $350,000; or

         o        a change in control (meaning that we cease to own 100% of our
                  two principal subsidiaries, some person or group has either
                  acquired beneficial ownership of 30% or more of the Company or
                  obtained the power to elect a majority of our board of
                  directors or our board of directors ceases to consist of a
                  majority of "continuing directors" (as defined by the CIT
                  facility).



                                      -21-

<PAGE>



Certain Contractual Commitments

         The following table summarizes our contractual cash obligations and
related payments due by period at December 31, 2001 (amounts in thousands):

<Table>
<Caption>
                                                                Payments Due by Period(1)
                                         -------------------------------------------------------------------
                                                      Less than          1-3           4-5           After 5
     Contractual Obligation              Total         1 year           years         years           years
     ----------------------              -----        ---------         -----         -----          -------

<S>                                    <C>             <C>            <C>            <C>            <C>
Senior notes(2)
     Principal                         $ 250,000       $     --       $     --       $     --       $ 250,000
     Interest                            133,124         22,187         66,563         22,187          22,187
Capital lease obligations                  1,712            543            976            193              --
Operating leases                           1,884            632          1,118            134              --
                                       ---------       --------       --------       --------       ---------
Total contractual cash obligations     $ 386,720       $ 23,362       $ 68,657       $ 22,514       $ 272,187
                                       =========       ========       ========       ========       =========
</Table>

----------

     (1) Assumes no acceleration of maturity dates due to redemption or to
         breach of, or default under, the terms of the applicable contractual
         obligation.

     (2) See "Senior Notes", above, for information relating to certain
         financial ratio covenants and certain other covenants the breach of
         which could cause a default under, and acceleration of the maturity
         date of, the Senior Notes.

         If we choose to borrow under our $75.0 million CIT Facility, under
which no amounts are currently outstanding, or if standby letters of credit
which we cause to be issued are drawn upon by the holders of those standby
letters of credit, then we will become obligated to repay those amounts along
with any accrued interest and fees. The following table sets forth the potential
maturities of these obligations assuming we had borrowed the maximum amount
currently available under the CIT Facility at December 31, 2001, and illustrates
the current outstanding letters of credit at December 31, 2001(amounts in
thousands):

<Table>
<Caption>
                                                       Amount of Commitment Expiration Per Period(1)
                                           ---------------------------------------------------------------------
            Potential                        Total      Less than           1-3              4-5          Over 5
      Commercial Commitment                Committed      1 year           years            years          years
      ---------------------                ---------    ---------          -----            -----         ------

<S>                                       <C>           <C>              <C>             <C>             <C>
Line of credit (2)                        $   67,593    $       --       $       --      $    67,593     $       --
Standby letters of credit (3)                  7,407         5,426            1,981               --             --
                                          ----------    ----------       ----------      -----------     ----------
Total commercial commitments              $   75,000    $    5,426       $    1,981      $    67,593     $       --
                                          ==========    ==========       ==========      ===========     ==========
</Table>

----------

     (1) Assumes no acceleration of maturity date due to breach of, or default
         under, the commercial commitment.

     (2) See "CIT Facility", above, for information relating to financial
         covenants and other certain covenants that could cause the maturity
         date under the CIT Facility to be accelerated. However, we currently
         have no amounts outstanding. If amounts were outstanding we would have
         to pay interest on these amounts based upon the terms of the CIT
         Facility.

     (3) The CIT Facility provides up to $10.0 million available for letters of
         credit at any given time. Amount shown represents current outstanding
         letters of credit.

Cash Flow

         The net cash provided by or used in our operating, investing and
financing activities is summarized below (amounts in thousands):

<Table>
<Caption>
                                                                           Years Ended December 31,
                                                                ----------------------------------------------
                                                                   2001              2000              1999
                                                                ----------         ---------         ---------

<S>                                                             <C>                <C>               <C>
Net cash provided by (used in):
    Operating activities                                        $  148,135         $  15,812         $ (17,470)
    Investing activities                                          (101,123)          (38,536)           (5,808)
    Financing activities                                               491            53,793            (2,117)
                                                                ----------         ---------         ---------
Net increase (decrease) in cash:                                $   47,503         $  31,069         $ (25,395)
                                                                ==========         =========         =========
</Table>



                                      -22-

<PAGE>


         Our cash flows from operating activities are affected by a number of
factors including the number of rigs under contract, whether the contracts are
daywork, footage, or turnkey, and the rate received for these services. Our cash
flow generated from operating activities during the year ended December 31, 2001
was $150.5 million (before changes in operating assets and liabilities) compared
to cash generated from operating activities during the year ended December 31,
2000 of $27.2 million (before changes in operating assets and liabilities). This
change is principally due to an 18% increase in operating days and a 177%
increase in our per rig day operating margins between the two periods. Our cash
flows from operating activities were also impacted by changes in operating
assets and liabilities which used $2.4 million and $11.3 million in cash flow
for the years ended December 31, 2001 and 2000, respectively. Our cash flow
generated from operating activities during the year ended December 31, 2000 was
$27.2 million (before changes in operating assets and liabilities) compared to
cash used in operating activities during the year ended December 31, 1999 of
$21.9 million (before changes in operating assets and liabilities). This change
is principally due to a 59% increase in operating days and an increase in our
per rig day operating margins between the two periods. Our cash flows from
operating activities were also impacted by changes in operating assets and
liabilities which used $11.3 million and provided $4.4 million in cash flow for
the years ended December 31, 2000 and 1999, respectively.

         Cash flow used in investing activities for the year ended December 31,
2001 primarily consisted of $103.0 million of capital expenditures for
reactivating rigs, drill pipe and collars, top drives, and other capital items.
Our cash flow used in investing activities for the year ended December 31, 2000
primarily consisted of $38.7 million of capital expenditures for reactivating
rigs, top drives, and other capital items. Cash flow used in investing
activities for the year ended December 31, 1999, primarily consisted of capital
expenditures on our working rigs.

         Cash flow provided by financing activities for the year ended December
31, 2001 consisted principally of $1.7 million from stock option exercises
partially offset by $911,000 for repayment of long-term lease obligations. Cash
flow provided by financing activities for the year ended December 31, 2000
consisted principally of net proceeds of $51.6 million and $3.2 million from the
sale of common stock and from stock option exercises, respectively, partially
offset by $1.1 million repayment of long-term lease obligations. Cash flow used
in financing activities for the year ended December 31, 1999 primarily consisted
of financing costs of $861,000 related to our senior secured revolving credit
facility, $1.1 million repayment of long-term lease obligations, and $305,000
for the redemption of all outstanding shares of Series A Preferred Stock.



                                      -23-

<PAGE>



RESULTS OF OPERATIONS

         The following tables highlight rig days worked, contract drilling
revenues and drilling operating expenses for our daywork and turnkey operations
for the years ended December 31, 2001, 2000 and 1999.

<Table>
<Caption>
                                                        For the Year Ended December 31, 2001
                                             ---------------------------------------------------------
                                                    Daywork          Turnkey
                                                  Operations      Operations(2)        Total
                                                  ----------      -------------      ---------
                                             (Dollars in thousands, except averages per rig day worked)

<S>                                                <C>              <C>              <C>
Rig days worked                                       28,766            2,158           30,924

Contract drilling revenue                          $ 363,984        $  57,517        $ 421,501
Drilling operating expenses(1)                       196,728           40,362          237,090
                                                   ---------        ---------        ---------
Operating margin (loss)                            $ 167,256        $  17,155        $ 184,411
                                                   =========        =========        =========

Averages per rig day worked:
     Contract drilling revenue                     $  12,653        $  26,657        $  13,630
     Drilling operating expenses                       6,839           18,707            7,667
                                                   ---------        ---------        ---------
     Operating margin (loss)                       $   5,814        $   7,950        $   5,963
                                                   =========        =========        =========
</Table>


<Table>
<Caption>
                                                      For the Year Ended December 31, 2000
                                           ---------------------------------------------------------
                                                    Daywork          Turnkey
                                                  Operations      Operations(2)        Total
                                                  ----------      -------------      ---------
                                           (Dollars in thousands, except averages per rig day worked)

<S>                                                <C>              <C>              <C>
Rig days worked                                       21,533            4,574           26,107

Contract drilling revenue                          $ 187,408        $  81,926        $ 269,334
Drilling operating expenses(1)                       141,891           71,398          213,289
                                                   ---------        ---------        ---------
Operating margin (loss)                            $  45,517        $  10,528        $  56,045
                                                   =========        =========        =========

Averages per rig day worked:
     Contract drilling revenue                     $   8,703        $  17,911        $  10,317
     Drilling operating expenses                       6,585           15,610            8,167
                                                   ---------        ---------        ---------
     Operating margin (loss)                       $   2,118        $   2,301        $   2,150
                                                   =========        =========        =========
</Table>


<Table>
<Caption>
                                                      For the Year Ended December 31, 1999
                                           ---------------------------------------------------------
                                                    Daywork          Turnkey
                                                  Operations      Operations(2)        Total
                                                  ----------      -------------      ---------
                                           (Dollars in thousands, except averages per rig day worked)

<S>                                                <C>              <C>              <C>
Rig days worked                                       13,250             3,186           16,436

Contract drilling revenue                          $  89,863         $  57,340        $ 147,203
Drilling operating expenses(1)                        94,706            46,218          140,924
                                                   ---------         ---------        ---------
Operating margin (loss)                            $  (4,843)        $  11,122        $   6,279
                                                   =========         =========        =========


Averages per rig day worked:
     Drilling revenue                              $   6,782         $  17,997        $   8,956
     Operating expenses                                7,148            14,507            8,574
                                                   ---------         ---------        ---------
     Operating margin (loss)                       $    (366)        $   3,490        $     382
                                                   =========         =========        =========
</Table>

----------

     (1) Drilling operating expenses exclude depreciation, general and
         administrative expenses, and unusual charges.

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



                                      -24-

<PAGE>



         Successfully completed turnkey and footage contracts generally result
in higher effective revenues per rig day worked than under daywork contracts.
Operating margins 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 drilling mud costs) that
would typically be paid by the customer under daywork contracts. Revenues,
operating expenses and gross profit (or loss) margins on turnkey and footage
contracts are affected by a number of variables, and include the depth of the
well, geological complexities and the actual difficulties encountered in
completing the well.

COMPARISON OF FISCAL YEARS ENDED DECEMBER 31, 2001 AND 2000

         Contract drilling revenue increased approximately $152.2 million, or
56%, to $421.5 million for the year ended December 31, 2001, from $269.3 million
for the year ended December 31, 2000. The increase is due to an increase in
total rig days worked of 4,817 days, or 18%, and an increase in the total
average revenue per rig day of $3,313, or 32%. The increase in the total days
worked is the result of a 34% increase in daywork drilling activity partially
offset by a 53% decrease in turnkey drilling activity. The increase in the
total average revenue per rig day is due to higher dayrates received from both
daywork and turnkey operations.

         Drilling operating expenses increased by approximately $23.8 million,
or 11%, to $237.1 million for the year ended December 31, 2001, as compared to
$213.3 million for the year ended December 31, 2000. The increase is the direct
result of the overall increased level of activity from daywork operations and
increases in wages partially offset by a decreased level of activity from
turnkey operations discussed above. Operating expenses on a per rig day basis,
however, decreased due to overhead items being spread over more days worked and
a decrease in the percentage of turnkey days worked to total days worked from
18% in 2000 to 7% in 2001. The decrease in operating expenses on a per rig day
basis was partially offset by wage increases of 5% on July 1, 2000, 14% on
August 31, 2000, and 12% on June 1, 2001.

         Depreciation expense increased by $4.7 million, or 13%, to $41.4
million for the year ended December 31, 2001 compared to $36.8 million for the
year ended December 31, 2000. The increase is primarily due to additional
depreciation attributable to capital expenditures during the year ended December
31, 2001.

         General and administrative expenses increased by $1.8 million, or 22%,
to $9.9 million for the year ended December 31, 2001 compared to $8.1 million
for the year ended December 31, 2000, due primarily to the increased level of
our operating activity and accrual of performance based compensation.

         The difference in interest expense for the years ended December 31,
2001 and 2000 is negligible as the average outstanding debt balance was
virtually the same and the largest component of our debt structure is our senior
notes which carry interest at a fixed rate.

         Interest income decreased by $649,000, or 21%, to $2.4 million for the
year ended December 31, 2001, from $3.1 million for the year ended December 31,
2000 due to lower interest rates in 2001 partially offset by higher cash
balances. Cash balances were higher as a result of the issuance of 13.0 million
shares of common stock on April 4, 2000 and due to higher drilling activity and
dayrates in 2001.

         Net other expenses increased by $416,000 to $446,000 for the year ended
December 31, 2001 from $30,000 for the same period of 2000 due primarily to the
realization of $454,000 in previously unrealized foreign currency translation
losses as a result of moving our Venezuela rigs to the United States. We no
longer have operations or operating assets in the Venezuela market.

COMPARISON OF FISCAL YEARS ENDED DECEMBER 31, 2000 AND 1999

         Contract drilling revenue increased approximately $122.1 million, or
83%, to $269.3 million for the year ended December 31, 2000, from $147.2 million
for the year ended December 31, 1999. The increase is due to an increase in
total rig days worked of 9,671 days, or 59%, and an increase in the total
average revenue per rig day of $1,361, or 15%. The increase in the total days
worked is the result of a 63% increase in daywork drilling activity and a 44%
increase in turnkey drilling activity, while the increase in the total average
revenue per rig day is due primarily to higher dayrates received from daywork
operations.



                                      -25-

<PAGE>



         Drilling operating expenses increased by approximately $72.4 million,
or 51%, to $213.3 million for the year ended December 31, 2000, as compared to
$140.9 million for the year ended December 31, 1999. The increase is the direct
result of the overall increased level of activity from both daywork and turnkey
operations discussed above and increases in wages. Operating expenses on a per
rig day basis, however, decreased due to overhead items being spread over more
days worked and a decrease in the percentage of turnkey days worked to total
days worked from 19% in 1999 to 18% in 2000. Increases in crew wages of 5% on
July 1, 2000 and 14% on August 31, 2000 offset a portion of the decrease.

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

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

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

         The difference in interest expense for the years ended December 31,
2000 and 1999 is negligible as the average outstanding debt balance was
virtually the same and the largest component of our debt structure is our senior
notes which carry interest at a fixed rate.

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

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

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 gas industry in combination with the supply of equipment and the number of
competing companies. Capital and operating costs are influenced to a larger
extent by specific price changes in the oil and gas industry and to a lesser
extent by changes in general inflation.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

          Interest Rate Risk. We are subject to market risk exposure related to
changes in interest rates on our CIT facility. Interest on borrowings under the
CIT facility accrues at a variable rate, using (at our election) either the
prime rate plus 0.25% to 1.50% or LIBOR plus 1.75% to 3.5%, depending upon our
debt service coverage ratio for the trailing 12 month period. On March 14, 2002
we had no outstanding balance under the CIT facility and as such have no
exposure at this time to a change in interest rates.



                                      -26-

<PAGE>



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


                                    INDEX TO
                        CONSOLIDATED FINANCIAL STATEMENTS
                        AND FINANCIAL STATEMENT SCHEDULE


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

Consolidated Balance Sheets as of December 31, 2001 and 2000....................................................29

Consolidated Statements of Operations for the Years
         Ended December 31, 2001, 2000, and 1999................................................................30

Consolidated Statements of Shareholders' Equity and Comprehensive Income
         for the Years Ended December 31, 2001, 2000, and 1999..................................................31

Consolidated Statements of Cash Flows for the Years
         Ended December 31, 2001, 2000, and 1999................................................................32

Notes to Consolidated Financial Statements......................................................................33

Financial Statement Schedule:
          Schedule II - Valuation and Qualifying Accounts.......................................................43
</Table>


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



                                      -27-

<PAGE>



INDEPENDENT AUDITORS' REPORT


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

         We have audited the accompanying consolidated balance sheets of Grey
Wolf, Inc. and Subsidiaries as of December 31, 2001 and 2000, and the related
consolidated statements of operations, shareholders' equity and comprehensive
income, and cash flows for each of the years in the three-year period ended
December 31, 2001. In connection with our audits of the consolidated financial
statements, we have also audited the financial statement schedule for the years
ended December 31, 2001, 2000 and 1999. These consolidated financial statements
and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedule based on our audits.

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

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Grey Wolf,
Inc. and Subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects the information set forth therein.



                                    KPMG LLP

Houston, Texas
January 25, 2002



                                      -28-

<PAGE>



                        GREY WOLF, INC. AND SUBSIDIARIES

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


<Table>
<Caption>
                                                                                             December 31,
                                                                                      ---------------------------
                                                                                        2001               2000
                                                                                      ---------         ---------
<S>                                                                                   <C>               <C>
                                          ASSETS

Current assets:
    Cash and cash equivalents                                                         $  99,072         $  51,569
    Restricted cash - insurance deposits                                                    884               859
    Accounts receivable, net of allowance
       of $1,800                                                                         67,574            61,729
    Prepaids and other current assets                                                     1,942             3,190
                                                                                      ---------         ---------
       Total current assets                                                             169,472           117,347

Property and equipment:
    Land, buildings and improvements                                                      5,137             5,103
    Drilling equipment                                                                  703,076           606,762
    Furniture and fixtures                                                                2,978             2,464
                                                                                      ---------         ---------
       Total property and equipment                                                     711,191           614,329
    Less: accumulated depreciation                                                     (262,531)         (227,468)
                                                                                      ---------         ---------
       Net property and equipment                                                       448,660           386,861

Other noncurrent assets                                                                   5,744             6,658
                                                                                      ---------         ---------

                                                                                      $ 623,876         $ 510,866
                                                                                      =========         =========


                           LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
    Current maturities of long-term debt                                              $     543         $     545
    Accounts payable - trade                                                             19,770            24,447
    Accrued workers' compensation                                                         4,595             4,805
    Payroll and related employee costs                                                    7,654             6,795
    Accrued interest payable                                                             11,228            11,167
    Other accrued liabilities                                                            12,519             9,559
                                                                                      ---------         ---------
       Total current liabilities                                                         56,309            57,318
                                                                                      ---------         ---------

Senior notes                                                                            249,526           249,440
Long-term debt, net of current maturities                                                 1,169               411
Other long-term liabilities                                                               4,868             2,158
Deferred income taxes                                                                    66,707            28,123

Commitments and contingent liabilities                                                       --                --

Shareholders' equity:
    Series B Junior Participating Preferred stock,
        $1 par value; 250,000 shares authorized, none outstanding                            --                --
    Common stock, $.10 par value; 300,000,000 shares
       authorized; 180,726,061 and 179,880,591 issued and
       outstanding, respectively                                                         18,073            17,988
    Additional paid-in capital                                                          328,306           325,417
    Cumulative translation adjustments                                                       --              (454)
    Accumulated deficit                                                                (101,082)         (169,535)
                                                                                      ---------         ---------
          Total shareholders' equity                                                    245,297           173,416
                                                                                      ---------         ---------

                                                                                      $ 623,876         $ 510,866
                                                                                      =========         =========
</Table>


          See accompanying notes to consolidated financial statements.



                                      -29-

<PAGE>

                        GREY WOLF, INC. AND SUBSIDIARIES

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


<Table>
<Caption>
                                                                      Years Ended December 31,
                                                            ------------------------------------------
                                                               2001            2000            1999
                                                            ----------      ----------      ----------
<S>                                                         <C>             <C>             <C>
Revenues:
    Contract drilling                                       $  421,501      $  269,334      $  147,203

Costs and expenses:
    Drilling operations                                        236,395         213,197         140,347
    Depreciation                                                41,425          36,768          34,003
    General and administrative                                   9,932           8,131           6,678
    Provision for doubtful accounts                                695              92             577
    Unusual charges                                                 --              --             320
                                                            ----------      ----------      ----------
          Total costs and expenses                             288,447         258,188         181,925
                                                            ----------      ----------      ----------

Operating income (loss)                                        133,054          11,146         (34,722)

Other income (expense):
    Interest expense                                           (24,091)        (23,936)        (24,054)
    Interest income                                              2,441           3,090           1,522
    Gain on sale of assets                                         348              69             556
    Other, net                                                    (446)            (30)           (120)
                                                            ----------      ----------      ----------
          Other income (expense), net                          (21,748)        (20,807)        (22,096)
                                                            ----------      ----------      ----------

Income (loss) before income taxes                              111,306          (9,661)        (56,818)

Income tax expense (benefit)
    Current                                                      2,977              --              --
    Deferred                                                    39,876          (1,138)        (15,976)
                                                            ----------      ----------      ----------
          Total income tax expense (benefit)                    42,853          (1,138)        (15,976)

Income (loss) before extraordinary item                         68,453          (8,523)        (40,842)

Extraordinary item, net of tax of $203                              --              --            (420)
                                                            ----------      ----------      ----------

Net income (loss)                                           $   68,453      $   (8,523)     $  (41,262)
                                                            ==========      ==========      ==========

Basic net income (loss) per common share                    $     0.38      $     (.05)     $     (.25)
                                                            ==========      ==========      ==========

Diluted net income (loss) per common share                  $     0.38      $     (.05)     $     (.25)
                                                            ==========      ==========      ==========

Basic weighted average common shares outstanding               180,502         175,866         165,108
                                                            ==========      ==========      ==========

Diluted weighted average common shares outstanding             182,447         175,866         165,108
                                                            ==========      ==========      ==========
</Table>


          See accompanying notes to consolidated financial statements.


                                      -30-
<PAGE>

                        GREY WOLF, INC. AND SUBSIDIARIES

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


<Table>
<Caption>
                                    Series B
                                     Junior
                                  Participating
                                    Preferred                   Common                               Cumulative
                                      Stock                     Stock      Additional               Comprehensive
                                      $1 par       Common      $.10 par     Paid-in                    Income
                                      Value        Shares       Value       Capital      Deficit     Adjustments      Total
                                  -------------  ----------   ----------   ----------   ----------  -------------   ----------
<S>                               <C>            <C>          <C>          <C>          <C>         <C>             <C>

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

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

    Comprehensive net loss                  --           --           --           --      (41,262)           --       (41,262)
                                    ----------   ----------   ----------   ----------   ----------    ----------    ----------

Balance, December 31, 1999                  --      165,167       16,516      270,527     (161,012)         (454)      125,577

    Issuance of common stock                --       13,000        1,300       50,334           --            --        51,634

    Exercise of stock options               --        1,714          172        3,047           --            --         3,219

    Tax benefit of stock
       option exercises                     --           --           --        1,509           --            --         1,509

    Comprehensive net loss                  --           --           --           --       (8,523)           --        (8,523)
                                    ----------   ----------   ----------   ----------   ----------    ----------    ----------

Balance, December 31, 2000                  --      179,881       17,988      325,417     (169,535)         (454)      173,416

    Exercise of stock options               --          845           85        1,597           --            --         1,682

    Tax benefit of stock
       option exercises                     --           --           --        1,292           --            --         1,292

    Cumulative foreign
       translation losses                   --           --           --           --           --           454           454
    Net income                              --           --           --           --       68,453            --        68,453
                                    ----------   ----------   ----------   ----------   ----------    ----------    ----------
    Comprehensive net income                --           --           --           --       68,453           454        68,907
                                    ----------   ----------   ----------   ----------   ----------    ----------    ----------

Balance, December 31, 2001                  --      180,726   $   18,073   $  328,306   $ (101,082)   $       --    $  245,297
                                    ==========   ==========   ==========   ==========   ==========    ==========    ==========
</Table>



          See accompanying notes to consolidated financial statements.


                                      -31-
<PAGE>

                        GREY WOLF, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Amounts in thousands)


<Table>
<Caption>
                                                                          Years Ended December 31,
                                                                 ------------------------------------------
                                                                    2001            2000            1999
                                                                 ----------      ----------      ----------
<S>                                                              <C>             <C>             <C>

CASH FLOWS FROM OPERATING ACTIVITIES:
    Net income (loss)                                            $   68,453      $   (8,523)     $  (41,262)
    Adjustments to reconcile net income (loss) to
    net cash provided by (used in) operating activities:
       Depreciation                                                  41,425          36,768          34,003
       Provision for doubtful accounts                                  695              92             577
       Extraordinary item, net of taxes                                  --              --             420
       Gain on sale of assets                                          (348)            (69)           (556)
       Foreign exchange loss                                            446              30             120
       Deferred income taxes                                         38,584          (2,647)        (15,155)
    Tax benefit of stock option exercises                             1,292           1,509              --
    (Increase) decrease in restricted cash                              (25)            (97)             --
    (Increase) decrease in accounts receivable                       (6,540)        (24,819)         (6,788)
    (Increase) decrease in other current assets                       1,248            (816)            527
    Increase (decrease) in accounts payable trade                    (4,677)          3,216           7,345
    Increase (decrease) in accrued workers' compensation               (210)          1,733          (1,431)
    Increase (decrease) in customer advances                            (28)            702              --
    Increase (decrease) in other current liabilities                  3,916           7,638           2,242
    Increase (decrease) in other                                      3,904           1,095           2,488
                                                                 ----------      ----------      ----------
       Cash provided by (used in) operating activities              148,135          15,812         (17,470)
                                                                 ----------      ----------      ----------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Property and equipment additions                               (102,950)        (38,612)         (6,862)
    Proceeds from sales of equipment                                  1,827              76           1,054
                                                                 ----------      ----------      ----------
       Cash used in investing activities                           (101,123)        (38,536)         (5,808)
                                                                 ----------      ----------      ----------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Repayments of long-term debt                                       (911)         (1,060)         (1,099)
    Financing costs                                                    (280)             --            (861)
    Issuance of common stock                                             --          51,634              --
    Proceeds from exercise of stock options                           1,682           3,219             148
    Redemption of Series A Preferred stock                               --              --            (305)
                                                                 ----------      ----------      ----------
       Cash provided by (used in)  financing activities                 491          53,793          (2,117)
                                                                 ----------      ----------      ----------


NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                 47,503          31,069         (25,395)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                         51,569          20,500          45,895
                                                                 ----------      ----------      ----------
CASH AND CASH EQUIVALENTS, END OF YEAR                           $   99,072      $   51,569      $   20,500
                                                                 ==========      ==========      ==========


SUPPLEMENTAL CASH FLOW DISCLOSURE

CASH PAID FOR INTEREST:                                          $   22,750      $   22,667      $   22,625
                                                                 ==========      ==========      ==========
CASH PAID FOR (REFUND OF) TAXES:                                 $    3,019      $       --      $      (15)
                                                                 ==========      ==========      ==========
</Table>

          See accompanying notes to consolidated financial statements.


                                      -32-
<PAGE>

                        GREY WOLF, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(1)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         Nature of Operations. Grey Wolf, Inc. is a Texas corporation formed in
1980. Grey Wolf, Inc. is a holding company with no independent assets or
operations but through its subsidiaries is engaged in the business of providing
onshore contract drilling services to the oil and gas industry. Grey Wolf, Inc.,
through its subsidiaries, currently conducts operations in Alabama, Arkansas,
Louisiana, Mississippi, Texas and Wyoming and had operations in Venezuela until
mid 1999, when international operations were shut down. The consolidated
financial statements include the accounts of Grey Wolf, Inc. and its
majority-owned subsidiaries (the "Company" or "Grey Wolf"). All significant
intercompany accounts and transactions are eliminated in consolidation.

         Property and Equipment. Property and equipment is stated at cost.
Depreciation is calculated using the straight-line method over the estimated
useful lives of the assets, between three and fifteen years.

         Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed
Of. The Company accounts for long- lived assets in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." This statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to 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.

         We assess the impairment of long-lived assets whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. The primary factor that we consider important which could
trigger an impairment review would be significant negative industry or
economic trends. If a review of the Company's long-lived assets indicated
that the carrying value of certain drilling rigs was more than the
estimated undiscounted future net cash flows, a write-down of the assets
to their estimated fair market value would have to be made. The estimation
of undiscounted future net cash flows and fair market value would be based
on certain estimates and projections as stipulated in SFAS No. 121.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" supersedes SFAS No. 121 for fiscal years beginning after December 15,
2001, but it retains may of the fundamental provisions of that statement.

         During the year ended December 31, 1998, we recorded a pretax
unusual charge of $93.2 million for asset impairment as a result of such a
review. As of December 31, 2001, net long-lived assets amounted to
$448.7 million.

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

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

         Earnings per Share. Basic earnings per share is based on weighted
average shares outstanding without any dilutive effects considered. Diluted
earnings per share reflects dilution from all contingently issuable shares,
including options, warrants and convertible securities. The following is a
reconciliation of basic and diluted weighted average shares outstanding (in
thousands):

<Table>
<Caption>
                                                   2001         2000         1999
                                                 --------     --------     --------
<S>                                              <C>          <C>          <C>

Weighted average common shares
    outstanding - basic                           180,502      175,866      165,108

Effect of dilutive securities:
    Options - Treasury Stock Method                 1,945           --           --
                                                 --------     --------     --------
Weighted average common shares
    outstanding - diluted                         182,447      175,866      165,108
                                                 ========     ========     ========
</Table>


                                      -33-
<PAGE>

                        GREY WOLF, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


          Options to purchase 4.1 million shares for the three months ended
December 31, 2001 and September 30, 2001 and 998,500 shares for the three months
ended June 30, 2001 and March 31, 2001 were not included in the computation of
diluted EPS because the options' exercise price was greater than the average
market price of the common shares. The Company incurred net losses for the years
ended December 31, 2000, and 1999 and has, therefore, excluded certain
securities from the computation of diluted earnings per share as the effect
would be anti-dilutive. Securities excluded from the computation of diluted
earnings per share for the years ended December 31, 2000 and 1999 were options
to purchase 7.3 million shares and 5.7 million shares, respectively.

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

         Fair Value of Financial Instruments. The carrying amount of the
Company's cash and short-term investments approximates fair value because of the
short maturity of those instruments. The carrying amount of the Company's credit
facility approximates fair value as the interest is indexed to the prime rate or
LIBOR. The fair value of the senior notes at December 31, 2001 and 2000 was
$245.0 million and $243.8 million, respectively, compared to the carrying value
of $250 million. Fair value was estimated based on quoted market prices.

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

         Restricted Cash. Restricted cash consists of investments in interest
bearing certificates of deposit totaling $884,000 at December 31, 2001 and
$859,000 at December 31, 2000, as collateral for a letter of credit securing
insurance deposits. The carrying value of the investments approximates the
current market value.

         Use of Estimates. The preparation of financial statements in conformity
with 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.

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

         Comprehensive Income. Comprehensive income includes all changes in a
company's equity during the period that result from transactions and other
economic events, other than transactions with its stockholders.

         Recent Accounting Pronouncements. In June 2001, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standard ("SFAS") No. 142, "Goodwill and Other Intangible Assets," which changes
how goodwill and other intangible assets are accounted for subsequent to their
initial recognition. Under this standard, goodwill and other intangible assets
having identifiable useful lives are no longer amortized, but are subjected to
periodic assessments of impairment. SFAS No. 142 is effective for fiscal years
beginning after December 15, 2001. The adoption of SFAS 142 will not have a
material impact on the Company's financial position or results of operation.

         In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which addressed financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the



                                      -34-
<PAGE>

                        GREY WOLF, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


associated asset retirement costs. This statement applies to all entities that
have legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development or normal use of the
asset. SFAS 143 is effective for fiscal years beginning after June 15, 2002. The
Company does not expect the adoption of SFAS 143 to have a significant impact on
its financial condition or results of operations.

         In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Live Assets," which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
While SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," it retains many
of the fundamental provisions of that statement. SFAS No. 144 also supersedes
the accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations- Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," for the disposal of a segment of a business. SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001 and interim periods
within those fiscal years. The adoption of SFAS No. 144 will not have a
significant impact on the Company's financial condition or results of
operations.

(2)      SIGNIFICANT PROPERTY TRANSACTIONS

         During the second quarter of 2001, the Company moved its five Venezuela
rigs to the United States and in the third quarter of 2001 sold three of the
five rigs for $1.3 million. This sale resulted in a gain of approximately
$602,000. As a result of moving its Venezuela rigs to the United States, the
Company realized $454,000 of previously unrealized foreign currency translation
losses during the second quarter of 2001.

(3)      INCOME TAXES

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

<Table>
<Caption>
                                             For the Years Ended December 31,
                                           ------------------------------------
                                             2001          2000          1999
                                           --------      --------      --------
<S>                                        <C>           <C>           <C>
     Current
            Federal                        $  1,870      $     --      $     --
            State                             1,107            --            --
                                           --------      --------      --------
                                              2,977            --            --
                                           ========      ========      ========
     Deferred
            Federal                          38,557        (1,366)      (15,460)
            State                             1,319           228          (516)
                                           --------      --------      --------
                                           $ 39,876      $ (1,138)     $(15,976)
                                           ========      ========      ========
</Table>

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

<Table>
<Caption>
                                                           December 31,
                                                      ---------------------
                                                        2001         2000
                                                      --------     --------
<S>                                                   <C>          <C>
     Deferred tax assets
            Net operating loss carryforwards          $ 10,549     $ 43,917
            Tax credit carryforwards                     1,885           14
            Workers compensation accruals                3,345        2,711
            Other                                          187          679
                                                      --------     --------
                                                        15,966       47,321

     Deferred tax liabilities
            Depreciation                                82,673       75,444
                                                      --------     --------

     Net deferred tax liability                       $ 66,707     $ 28,123
                                                      ========     ========
</Table>



                                      -35-
<PAGE>

                        GREY WOLF, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         At December 31, 2001 and 2000, the Company had U.S. net operating loss
("NOL") carryforwards of $51.1 million and $143.7 million, respectively, which
expire at various times through 2020. The NOL carryforwards are subject to
annual limitations as a result of the changes in ownership of the Company in
1989, 1994 and 1996.

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

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

<Table>
<Caption>
                                                                  For the Years Ended December 31,
                                                                 -----------------------------------
                                                                   2001         2000          1999
                                                                 --------     --------      --------
<S>                                                              <C>          <C>           <C>

     Income tax expense (benefit) at statutory rate              $ 38,957     $ (3,381)     $(19,886)

     Increase (decrease) in taxes resulting from:
            Expiration of NOL carryforwards                            --          830         2,479
            Permanent differences, primarily due to
                 basis differences in acquired assets               1,320        1,226         1,127
            Loss of foreign deductions                                 95          250           426
            State taxes (net)                                       1,576          148          (336)
            Other                                                     905         (211)          214
                                                                 --------     --------      --------
     Income tax expense (benefit)                                $ 42,853     $ (1,138)     $(15,976)
                                                                 ========     ========      ========
</Table>

(4)      LONG-TERM DEBT

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

<Table>
<Caption>
                                                                                 December 31,
                                                                            ---------------------
                                                                              2001         2000
                                                                            --------     --------
<S>                                                                         <C>          <C>
     $250,000 senior notes due 2007,
        general unsecured senior obligations guaranteed by the
        Company's domestic subsidiaries, bearing interest
        at 8 7/8% per annum payable semiannually                            $249,526     $249,440

     Capital leases, secured by transportation equipment,
        bearing interest at 10% to 14%                                         1,712          956
                                                                            --------     --------
                                                                             251,238      250,396

     Less current maturities                                                     543          545
                                                                            --------     --------
     Long-term debt                                                         $250,695     $249,851
                                                                            ========     ========
</Table>

         In June 1997 and May 1998, the Company concluded public offerings of
$175.0 million and $75.0 million, respectively, in principal amount of the
senior notes. The senior notes ("Notes") bear interest at 8 7/8% per annum and
mature July 1, 2007. The Notes are general unsecured senior obligations of the
Company and are fully and unconditionally guaranteed, on a joint and several
basis, by all domestic wholly-owned subsidiaries of the Company. In addition,
non-guarantor subsidiaries are immaterial. All fees and expenses incurred at the
time of issuance are being amortized over the life of the Notes.

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



                                      -36-
<PAGE>

                        GREY WOLF, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


all or any part of such holder's Notes at a purchase price equal to 101% of the
aggregate principal amount thereof, plus accrued and unpaid interest to the date
of purchase.

         In December 2001, we amended our $50.0 million credit facility with the
CIT Group/Business Credit, Inc. (the "CIT Facility") to increase the amount
available under the facility to $75.0 million. In conjunction with this
amendment, we incurred $280,000 in deferred financing costs which will be
amortized over the remaining life of the CIT Facility. The term of the CIT
Facility was also extended to January 2006 from January 2003. The CIT Facility
provides the Company with the ability to borrow up to the lesser of $75.0
million or 50% of the orderly liquidation value (as defined in the agreement) of
certain drilling rig equipment located in the 48 contiguous United States. The
CIT Facility is a 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 3.5% or prime plus 0.25% to 1.5%. The CIT Facility provides
up to $10.0 million available for letters of credit. The Company is required to
pay a commitment fee of 0.375% per annum on the unused portion of the CIT
Facility and letters of credit accrue a fee of 1.25% per annum. In addition, the
CIT Facility contains certain affirmative and negative covenants. Substantially
all of the Company's assets, including its drilling equipment, are pledged as
collateral under the CIT Facility and is also secured by our guarantees and
certain of our wholly-owned subsidiaries guarantees. The Company, however,
retains the option, subject to a minimum appraisal value, under the CIT Facility
to extract $75.0 million of the equipment out of the collateral pool for other
purposes. The Company currently has no borrowings outstanding under the CIT
facility and had $7.4 million outstanding under letters of credit at December
31, 2001.

         In 1999, the Company recognized a non-cash extraordinary loss of
$420,000, net of applicable tax benefit of $203,000, related to the write-off of
deferred financing costs associated with the Company's previous facility.

         The Company had non-cash activities for the years ended December 31,
2001, 2000, and 1999 related to vehicle additions under capital leases. The
non-cash amounts excluded from cash used in investing activities and cash
provided by financing activities was $1.8 million, $663,000, and $203,000 for
the years ended December 31, 2001, 2000, and 1999, respectively.

         Annual maturities of the debt outstanding at December 31, 2001 for the
next five years are as follows: 2002 - $543,000; 2003 - $513,000; 2004 -
$463,000; 2005 - $193,000; 2006 $-0- and thereafter $250,000,000.

(5)      CAPITAL STOCK AND STOCK OPTION PLANS

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

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

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



                                      -37-
<PAGE>

                        GREY WOLF, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         The Company's 1982 Stock Option and Long-term Incentive Plan for Key
Employees (the "1982 Plan") was canceled in March 1999; however, prior to that
date, reserved 2,500,000 shares of the Company's common stock for issuance upon
the exercise of options. The Company's 1987 Stock Option Plan for Non-Employee
Directors (the "1987 Director Plan") reserved 250,000 shares of common stock for
issuance upon the exercise of options and provided for the automatic grant of
options to purchase shares of common stock to any non-employee who became a
director of the Company. The 1987 Director Plan was canceled in June 1997. The
Company's 1996 Employee Stock Option Plan (the "1996 Plan") reserves 10,000,000
shares of the Company's common stock for issuance upon the exercise of options.
At December 31, 2001, options under the 1996 Plan to purchase 2,512,065 shares
of common stock were available for grant until July 29, 2006. The exercise price
of stock options under the 1982 Plan, the 1987 Director Plan and the 1996 Plan
approximates the fair market value of the stock at the time the option is
granted. The Company has 1,781,750 shares outstanding for other Stock Option
Agreements between the Company and its' executive officers and directors. A
portion of the outstanding options became exercisable upon issuance and the
remaining become exercisable in varying increments over three to five-year
periods. The 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 create 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. As a result of
the requirements of APB 25, the Company would have to recognize $7.0 million of
compensation expense if a triggering event were to occur for all outstanding
options under the amended agreements at December 31, 2001. This amount will
decrease for every option that is exercised or cancelled between the measurement
date and a triggering event.

         Subsequent to December 31, 2001, a triggering event occurred when an
officer's employment terminated. As a result, the Company will recognize
approximately $515,000 of non-cash compensation expense along with approximately
$330,000 of severance cost in the first quarter of 2002.



                                      -38-
<PAGE>

                        GREY WOLF, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         Stock option activity for all plans was as follows (number of shares in
thousands):

<Table>
<Caption>
                                                      Number                            Option
                                                    of Shares                         Price Range
                                                    ---------                     ------------------
<S>                                                 <C>                           <C>

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

                 Granted                                2,429                     $.938    -   $1.50

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

                 Canceled                                 (21)                    $ .69    -   $1.00
                                                         (362)                    $1.25    -   $1.50
                                                         (204)                    $2.56    -   $3.69
                                                         (193)                    $4.06

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

                 Granted                                2,031                     $3.06    -   $4.50

                 Exercised                               (308)                    $ .69    -   $.938
                                                         (690)                    $1.00    -   $1.75
                                                         (665)                    $2.50    -   $2.88
                                                          (51)                    $3.13    -   $4.06

                 Cancelled                                (88)                    $ .69    -   $.938
                                                          (70)                    $3.06    -   $4.06
                                                          (10)                    $8.25

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

                 Granted                                   75                     $2.41    -   $2.72
                                                        1,074                     $6.32    -   $6.37

                 Exercised                               (256)                    $ .69    -   $.938
                                                         (211)                    $1.13    -   $1.63
                                                         (321)                    $2.56    -   $3.06
                                                          (58)                                 $4.06

                 Cancelled                                 (6)                    $.938    -   $1.00
                                                          (99)                    $2.88    -   $4.06
                                                           (4)                                 $6.32
</Table>



                                      -39-
<PAGE>

                        GREY WOLF, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


<Table>
<S>                                                 <C>                       <C>          <C>
           Outstanding December 31, 2001                1,665                     $ .69        $.938
                                                        1,629                     $1.25        $1.75
                                                        2,170                     $2.41        $3.13
                                                          978                     $4.06        $4.50
                                                        1,070                     $6.32        $6.37

           Exercisable December 31, 2001                3,157                     $ .69        $4.50
</Table>

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

<Table>
<Caption>
                                                          2001           2000            1999
                                                       ----------     ----------      ----------
<S>                                                    <C>            <C>             <C>
     Net income (loss)
         As reported                                   $   68,453     $   (8,523)     $  (41,262)
         Pro forma                                     $   67,337     $   (9,432)     $  (42,623)
     Income (loss) per share - basic and diluted
         As reported                                   $      .38     $     (.05)     $     (.25)
         Pro forma                                     $      .37     $     (.05)     $     (.26)
</Table>

         For purposes of determining compensation costs using the provisions of
SFAS No. 123, the fair value of option grants was determined using the
Black-Scholes option-valuation model. The key input variables used in valuing
the options were: risk-free interest rate based on the five-year Treasury
strips; dividend yield of zero; stock price volatility of 75%; and expected
option lives of five years.

(6)      SEGMENT INFORMATION AND ACCUMULATED COMPREHENSIVE INCOME

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

         Prior to the third quarter of 2001, the Company managed its business as
two reportable segments; domestic operations and foreign operations. Late in the
first quarter of 1999, we suspended all operations in Venezuela but retained the
option to begin operations at any time. However, during the second quarter of
2001, the Company moved its five Venezuela rigs to the United States and in the
third quarter of 2001 sold three of the five rigs for $1.3 million. This sale
resulted in a gain of approximately $602,000. As a result of moving the
Venezuela rigs to the United States, the Company realized $454,000 of previously
unrealized foreign currency translation losses during the second quarter of
2001.

(7)      RELATED-PARTY TRANSACTIONS

         During 2001, the Company purchased equipment for $119,000 from an
affiliate of the Chairman, President and Chief Executive Officer of the Company.
The Company also performed contract drilling services for an affiliate of one of
the Company's directors. Total revenues recognized from this affiliated Company
during 2001 and 2000 were $6.0 million and $2.2 million, respectively.

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



                                      -40-
<PAGE>

                        GREY WOLF, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(8)      LEASE COMMITMENTS

         Aggregate minimum lease payments required under noncancellable
operating leases having terms greater than one year are as follows as of
December 31, 2001: 2002 - $632,000; 2003 - $608,000; 2004 - $510,000; 2005 -
$134,000 and 2006 - $0.

         Lease payments under operating leases for 2001, 2000, and 1999 were
approximately $618,000, $589,000, and $556,000, respectively.

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

(9)      CONTINGENCIES

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

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

(10)     EMPLOYEE BENEFIT PLAN

         The Company has a defined contribution employee benefit plan covering
substantially all of its employees. The Company matches 100% of the first 3% of
individual employee contributions and 50% of the next 3% of individual employee
contributions. Employer matching contributions under the plan totaled $1.3
million, $1.0 million and $771,000 million for the years ended December 31,
2001, 2000 and 1999, respectively. Participants vest in employer matching
contributions over a five year period based upon service with the Company.

(11)     UNUSUAL CHARGES

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



                                      -41-
<PAGE>

                        GREY WOLF, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(12)     QUARTERLY FINANCIAL DATA (UNAUDITED)

         Summarized quarterly financial data for years ended December 31, 2001,
2000 and 1999 are set forth below (amounts in thousands, except per share
amounts).

<Table>
<Caption>
                                                                Quarter Ended
                                           -------------------------------------------------------
                                             March           June        September       December
                                              2001           2001           2001           2001
                                           ----------     ----------     ----------     ----------
<S>                                        <C>            <C>            <C>            <C>

     Revenues                              $   97,632     $  112,423     $  125,119     $   86,327
     Gross Profit(1)                           39,624         53,008         58,481         33,993
     Operating income                          27,534         40,381         45,559         19,580
     Income before income taxes                22,270         34,553         40,268         14,215
     Net income                                13,362         20,732         25,378          8,981
     Net income per common share
          - basic and diluted                     .07            .11            .14            .05
</Table>

<Table>
<Caption>
                                                                Quarter Ended
                                           -------------------------------------------------------
                                             March           June        September       December
                                              2000           2000           2000           2000
                                           ----------     ----------     ----------     ----------
<S>                                        <C>            <C>            <C>            <C>

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

<Table>
<Caption>
                                                                Quarter Ended
                                           -------------------------------------------------------
                                             March           June        September       December
                                              1999           1999           1999           1999
                                           ----------     ----------     ----------     ----------
<S>                                        <C>            <C>            <C>            <C>

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

----------

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



                                      -42-
<PAGE>

                                                                     SCHEDULE II

                        GREY WOLF, INC. AND SUBSIDIARIES

                        VALUATION AND QUALIFYING ACCOUNTS
                                 (In thousands)

<Table>
<Caption>
                                                                Balance at    Additions   Collections   Balance at
                                                                Beginning    Charged to      and            End
                                                                of Period     Allowance   Write-Offs     of Period
                                                                ----------   ----------   -----------   ----------
<S>                                                             <C>          <C>          <C>           <C>

     Year Ended December 31, 1999
          Allowance for doubtful accounts receivable             $  1,106     $    577     $     25      $  1,708
                                                                 ========     ========     ========      ========

     Year Ended December 31, 2000
          Allowance for doubtful accounts receivable             $  1,708     $     92     $     --      $  1,800
                                                                 ========     ========     ========      ========

     Year Ended December 31, 2001
          Allowance for doubtful accounts receivable             $  1,800     $    695     $   (695)     $  1,800
                                                                 ========     ========     ========      ========
</Table>



                                      -43-
<PAGE>

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

     None.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information required by this item as to 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 2002 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, 2001.

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 2002 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, 2001.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required by this item as to the ownership by our management
and others of our securities is hereby incorporated by reference to such
information appearing under the caption "Nominees for Director" and "Ownership
by Management and Certain Shareholders" in our definitive proxy statement for
our 2002 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, 2001.

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 2002 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, 2001.



                                      -44-
<PAGE>

                                     PART IV

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

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

         1. AND 2. FINANCIAL STATEMENTS AND SCHEDULE

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

         3. EXHIBITS

<Table>
<Caption>
             Exhibit No.            Documents
             -----------            ---------

<S>                           <C>
              3.1             --    Articles of Incorporation of Grey Wolf, Inc., as amended (incorporated herein by
                                    reference to Exhibit 3.1 to Form 10-Q dated May 12, 1999).

              3.2             --    By-Laws of Grey Wolf, Inc., as amended (incorporated herein by reference to
                                    Exhibit 99.1 to Form 8-K dated March 23, 1999).

              4.1             --    Form of Trust Indenture, dated June 27, 1997, relating to the senior notes due 2007
                                    of the Company and Texas Commerce Bank National Association, as Trustee
                                    (incorporated herein by reference to Exhibit 4.2 to the Company's Registration
                                    Statement on Form S-3 No. 333-26519 filed June 24, 1997).

              4.2             --    Supplemental Indenture (to the Trust Indenture dated June 27, 1997), dated as of
                                    March 31, 1998, among the Company, the New Guarantor, the Existing Guarantors,
                                    and Chase Bank of Texas National Association, as Trustee.  (incorporated herein
                                    by reference to Exhibit 4.5 to Form 8-K filed May 21, 1998).

              4.3             --    Second Supplemental Indenture (to the Trust Indenture dated June 27, 1997), dated
                                    as of May 8, 1998, by and among the Company, the Guarantors, and Chase Bank
                                    of Texas, National Association, as Trustee (incorporated herein by reference to
                                    Exhibit 4.5 to Form 8-K filed May 21, 1998).

             *4.4             --    Third Supplemental Indenture (to the Trust Indenture dated June 27, 1997), dated
                                    as of January 4, 1999, among the Company, the New Guarantors, the Existing
                                    Guarantors, and Chase Bank of Texas, National Association, as Trustee.

              4.5             --    Form of Trust Indenture, dated May 8, 1998, relating to the senior notes due 2007
                                    by and among the Company, the Guarantors, and Chase Bank of Texas, National
                                    Association, as Trustee (incorporated herein by reference to Exhibit 4.3 to Form
                                    8-K filed May 21, 1998).

             *4.6             --    Supplemental Indenture (to the Trust Indenture dated May 8, 1998), dated as of
                                    January 4, 1999, among the Company, the New Guarantors, the Existing Guarantors
                                    and Chase Bank of Texas, National Association, as Trustee.

              4.7             --    Rights Agreement dated as of September 21, 1998 by and between the Company
                                    and American Stock Transfer and Trust Company as Rights Agent (incorporated
                                    herein by reference to Exhibit 4.1 to Form 8-K filed September 22, 1998).

             10.1             --    Indemnification Agreement dated as of March 6, 1997, by and between Grey Wolf
                                    Drilling Company and James K.B. Nelson (incorporated herein by reference to
                                    Exhibit 10.5 to Form 8-K dated March 10, 1997).

             10.2             --    Form of Non-Qualified Stock Option Agreement dated September 3, 1996, by and
                                    between the Company and Thomas P. Richards (incorporated herein by reference
                                    to Exhibit 10.2 to Registration Statement No. 333-14783).

             10.3             --    Form of Incentive Stock Option Agreement dated September 3, 1996, by and
                                    between the Company and Ronnie E. McBride (incorporated herein by reference
                                    to Exhibit 10.14 to Post Effective Amendment No. 1 to Registration Statement No.
                                    333-14783).

             10.4             --    Form of Non-Qualified Stock Option Agreement dated September 3, 1996, by and
                                    between the Company and Ronnie E. McBride. (incorporated herein by reference
</Table>



                                      -45-
<PAGE>

<Table>
<S>                           <C>
                                    to Exhibit 10.15 to Post Effective Amendment No. 1 to Registration Statement No.
                                    333-14783).

             10.5             --    Grey Wolf, Inc. 1996 Employee Stock Option Plan (incorporated herein by
                                    reference to Grey Wolf, Inc. 1996 Annual Meeting of Shareholders definitive proxy
                                    materials).

             10.6             --    Grey Wolf Inc. Amendment to 1996 Employee Stock Option Plan (incorporated
                                    herein by reference to Grey Wolf, Inc. 1999 Annual Meeting of Shareholders
                                    definitive proxy materials filed April 9, 1999).

             10.7             --    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.)

             10.8             --    Form of Incentive Stock Option Agreement dated March 17, 1997, by and between
                                    the Company and Gary D. Lee (incorporated by reference to DI Industries, inc.
                                    Annual Report of Form 10-K for the year ended December 31, 1996.)

             10.9             --    Form of Incentive Stock Option Agreement dated February 10, 1998, by and
                                    between the Company and David W. Wehlmann (incorporated herein by reference
                                    to Grey Wolf, Inc. Annual Report on Form 10-K for the year ended December 31,
                                    1997.)

            10.10             --    Revolving Credit Agreement dated as of January 14, 1999 among Grey Wolf
                                    Drilling Company LP (as borrower), Grey Wolf, Inc. (as guarantor), The CIT
                                    Group/Business Credit, Inc. (as agent) and various financial institutions (as
                                    lenders).  (incorporated herein by reference to Exhibit 10.1 to Form 8-K dated
                                    January 26, 1999.)

           *10.11             --    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).

            10.12             --    Non-Qualified Stock Option Agreement dated January 16, 1999, by and between
                                    the Company and Edward S. Jacob, III. (incorporated herein by reference to Grey
                                    Wolf, Inc. Annual Report on Form 10-K for the year ended December 31, 1999.)

           *10.13             --    Form of Amendment to Non-Qualified Stock Option Agreements dated November
                                    13, 2001, by and between the Company and Thomas P. Richards.

           *10.14             --    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.

           *10.15             --    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, Merrie S. Costley, and Donald J.
                                    Guedry, Jr.

           *10.16             --    Grey Wolf, Inc. Executive Severance Plan effective November 15, 2001.

           *10.17             --    Amended and Restated Employment Agreement dated November 13, 2001, by and
                                    between the Company and Thomas P. Richards.

           *10.18             --    Amended and Restated Employment Agreement dated November 13, 2001, by and
                                    between the Company and David W. Wehlmann.

           *10.19             --    Amended and Restated Employment Agreement dated November 13, 2001, by and
                                    between the Company and Edward S. Jacob III.

           *10.20             --    Amended and Restated Employment Agreement dated November 13, 2001, by and
                                    between the Company and Gary D. Lee.

           *10.21             --    Amended and Restated Employment Agreement dated November 13, 2001, by and
                                    between the Company and Ronne E. McBride.

           *10.22             --    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.

           *21.1              --    List of Subsidiaries of Grey Wolf, Inc.

           *23.1              --    Consent of KPMG LLP
</Table>

----------

* Filed herewith

                  (b)      Reports on Form 8-K

                           None



                                      -46-
<PAGE>

                                   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 15th day of
March, 2002

                                Grey Wolf, Inc.



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




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


<Table>
<Caption>
Signatures and Capacities                                                                               Date
-------------------------                                                                               ----
<S>                                                                                                  <C>

  By:   /s/ Thomas P. Richards                                                                        March 15, 2002
        --------------------------------------------------------------------
        Thomas P. Richards, Chairman, President and Chief Executive Officer
        (Principal Executive Officer)

  By:   /s/ David W. Wehlmann                                                                         March 15, 2002
        --------------------------------------------------------------------
        David W. Wehlmann, Senior Vice President and Chief Financial Officer

  By:   /s/ Merrie S. Costley                                                                         March 15, 2002
        --------------------------------------------------------------------
        Merrie S. Costley, Vice President and Controller

  By:   /s/ William R. Ziegler                                                                        March 15, 2002
        --------------------------------------------------------------------
        William R. Ziegler, Director

  By:   /s/ Frank M. Brown                                                                            March 15, 2002
        --------------------------------------------------------------------
        Frank M. Brown, Director

  By:   /s/  William T. Donovan                                                                       March 15, 2002
        --------------------------------------------------------------------
        William T. Donovan, Director

  By:   /s/ James K. B. Nelson                                                                        March 15, 2002
        --------------------------------------------------------------------
        James K. B. Nelson, Director

  By:   /s/ Robert E. Rose                                                                            March 15, 2002
        --------------------------------------------------------------------
        Robert E. Rose, Director

  By:   /s/ Steven A. Webster                                                                         March 15, 2002
        --------------------------------------------------------------------
        Steven A. Webster, Director
</Table>


                                      -47-
<PAGE>


                               INDEX TO EXHIBITS

<Table>
<Caption>
    EXHIBIT
    NUMBER                     DESCRIPTION
    -------                    -----------
<S>                      <C>

         3.1             --    Articles of Incorporation of Grey Wolf, Inc., as amended (incorporated herein by
                               reference to Exhibit 3.1 to Form 10-Q dated May 12, 1999).

         3.2             --    By-Laws of Grey Wolf, Inc., as amended (incorporated herein by reference to
                               Exhibit 99.1 to Form 8-K dated March 23, 1999).

         4.1             --    Form of Trust Indenture, dated June 27, 1997, relating to the senior notes due 2007
                               of the Company and Texas Commerce Bank National Association, as Trustee
                               (incorporated herein by reference to Exhibit 4.2 to the Company's Registration
                               Statement on Form S-3 No. 333-26519 filed June 24, 1997).

         4.2             --    Supplemental Indenture (to the Trust Indenture dated June 27, 1997), dated as of
                               March 31, 1998, among the Company, the New Guarantor, the Existing Guarantors,
                               and Chase Bank of Texas National Association, as Trustee.  (incorporated herein
                               by reference to Exhibit 4.5 to Form 8-K filed May 21, 1998).

         4.3             --    Second Supplemental Indenture (to the Trust Indenture dated June 27, 1997), dated
                               as of May 8, 1998, by and among the Company, the Guarantors, and Chase Bank
                               of Texas, National Association, as Trustee (incorporated herein by reference to
                               Exhibit 4.5 to Form 8-K filed May 21, 1998).

        *4.4             --    Third Supplemental Indenture (to the Trust Indenture dated June 27, 1997), dated
                               as of January 4, 1999, among the Company, the New Guarantors, the Existing
                               Guarantors, and Chase Bank of Texas, National Association, as Trustee.

         4.5             --    Form of Trust Indenture, dated May 8, 1998, relating to the senior notes due 2007
                               by and among the Company, the Guarantors, and Chase Bank of Texas, National
                               Association, as Trustee (incorporated herein by reference to Exhibit 4.3 to Form
                               8-K filed May 21, 1998).

        *4.6             --    Supplemental Indenture (to the Trust Indenture dated May 8, 1998), dated as of
                               January 4, 1999, among the Company, the New Guarantors, the Existing Guarantors
                               and Chase Bank of Texas, National Association, as Trustee.

         4.7             --    Rights Agreement dated as of September 21, 1998 by and between the Company
                               and American Stock Transfer and Trust Company as Rights Agent (incorporated
                               herein by reference to Exhibit 4.1 to Form 8-K filed September 22, 1998).

        10.1             --    Indemnification Agreement dated as of March 6, 1997, by and between Grey Wolf
                               Drilling Company and James K.B. Nelson (incorporated herein by reference to
                               Exhibit 10.5 to Form 8-K dated March 10, 1997).

        10.2             --    Form of Non-Qualified Stock Option Agreement dated September 3, 1996, by and
                               between the Company and Thomas P. Richards (incorporated herein by reference
                               to Exhibit 10.2 to Registration Statement No. 333-14783).

        10.3             --    Form of Incentive Stock Option Agreement dated September 3, 1996, by and
                               between the Company and Ronnie E. McBride (incorporated herein by reference
                               to Exhibit 10.14 to Post Effective Amendment No. 1 to Registration Statement No.
                               333-14783).

        10.4             --    Form of Non-Qualified Stock Option Agreement dated September 3, 1996, by and
                               between the Company and Ronnie E. McBride. (incorporated herein by reference
</Table>


<PAGE>

<Table>
<S>                       <C>
                                to Exhibit 10.15 to Post Effective Amendment No. 1 to Registration Statement No.
                                333-14783).

         10.5             --    Grey Wolf, Inc. 1996 Employee Stock Option Plan (incorporated herein by
                                reference to Grey Wolf, Inc. 1996 Annual Meeting of Shareholders definitive proxy
                                materials).

         10.6             --    Grey Wolf Inc. Amendment to 1996 Employee Stock Option Plan (incorporated
                                herein by reference to Grey Wolf, Inc. 1999 Annual Meeting of Shareholders
                                definitive proxy materials filed April 9, 1999).

         10.7             --    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.)

         10.8             --    Form of Incentive Stock Option Agreement dated March 17, 1997, by and between
                                the Company and Gary D. Lee (incorporated by reference to DI Industries, inc.
                                Annual Report of Form 10-K for the year ended December 31, 1996.)

         10.9             --    Form of Incentive Stock Option Agreement dated February 10, 1998, by and
                                between the Company and David W. Wehlmann (incorporated herein by reference
                                to Grey Wolf, Inc. Annual Report on Form 10-K for the year ended December 31,
                                1997.)

        10.10             --    Revolving Credit Agreement dated as of January 14, 1999 among Grey Wolf
                                Drilling Company LP (as borrower), Grey Wolf, Inc. (as guarantor), The CIT
                                Group/Business Credit, Inc. (as agent) and various financial institutions (as
                                lenders).  (incorporated herein by reference to Exhibit 10.1 to Form 8-K dated
                                January 26, 1999.)

       *10.11             --    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).

        10.12             --    Non-Qualified Stock Option Agreement dated January 16, 1999, by and between
                                the Company and Edward S. Jacob, III. (incorporated herein by reference to Grey
                                Wolf, Inc. Annual Report on Form 10-K for the year ended December 31, 1999.)

       *10.13             --    Form of Amendment to Non-Qualified Stock Option Agreements dated November
                                13, 2001, by and between the Company and Thomas P. Richards.

       *10.14             --    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.

       *10.15             --    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, Merrie S. Costley, and Donald J.
                                Guedry, Jr.

       *10.16             --    Grey Wolf, Inc. Executive Severance Plan effective November 15, 2001.

       *10.17             --    Amended and Restated Employment Agreement dated November 13, 2001, by and
                                between the Company and Thomas P. Richards.

       *10.18             --    Amended and Restated Employment Agreement dated November 13, 2001, by and
                                between the Company and David W. Wehlmann.

       *10.19             --    Amended and Restated Employment Agreement dated November 13, 2001, by and
                                between the Company and Edward S. Jacob III.

       *10.20             --    Amended and Restated Employment Agreement dated November 13, 2001, by and
                                between the Company and Gary D. Lee.

       *10.21             --    Amended and Restated Employment Agreement dated November 13, 2001, by and
                                between the Company and Ronne E. McBride.

       *10.22             --    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.

       *21.1              --    List of Subsidiaries of Grey Wolf, Inc.

       *23.1              --    Consent of KPMG LLP
</Table>

----------

* Filed herewith