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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 
 FORM 10-Q/A (Amendment No. 2) 
 þ
    
    Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
 For the quarterly period ended March 31, 2004
 or o
    
    Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
 For the transition period from  to
 Commission File Number 1-8226 (GREY WOLF, INC. LOGO) Grey Wolf, Inc.  Texas
    
    74-2144774(State or jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification number)10370 Richmond Avenue, Suite 600Houston, Texas
    
    77042(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (713) 435-6100 Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes þ No Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes þ No The number of shares of the Registrants common stock, par value $.10 per
share, outstanding at May 3, 2004, was 186,302,991.    -1-




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Explanatory Note 
 
 Grey Wolf, Inc.
(the Registrant) is filing this Amendment No. 2 (the
Amendment) to its Quarterly Report on Form 10-Q for the three month period
ended March 31, 2004 (the Quarterly Report) to a) amend and revise Items 1 and 2
to provide additional or clarifying disclosure, b) add clarifying disclosure in Item 2.
Critical Accounting Policies, c) amend Item 2 by replacing the presentation of operating margin with the
presentation of earnings before interest, taxes, depreciation and amortization
(EBITDA) as a non-GAAP financial measure and d) amend Item 1 to reclassify Gain on Sale of Assets
from "Other Income (Expense)" to "Costs and Expenses" in the Consolidated Statements of Operations. This Amendment continues to speak
as of the date of the original filing of the Quarterly Report, and the
Registrant has not updated the disclosures contained herein to reflect any
events that occurred at a later date.




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GREY WOLF, INC. AND SUBSIDIARIES
Table of Contents  
 PagePart I.Financial InformationItem 1. Financial StatementsConsolidated Balance Sheets
    
    
    3Consolidated Statements of Operations
    
    
    4Consolidated Statements of Shareholders Equity
and Comprehensive Loss
    
    
    5Consolidated Statements of Cash Flows
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    16Item 3. Quantitative and Qualitative Disclosure about Market Risk
    
    
    29Item 4. Controls and Procedures
    
    
    29Part II.Other InformationItem 1. Legal Proceedings
    
    
    30Item 2 Changes in Securities and Use of Proceeds
    
    
    30Item 3. Defaults Upon Senior Securities
    
    
    30Item 4. Submission of Matters to a Vote of Security Holders
    
    
    30Item 5. Other Information
    
    
    31Item 6. Exhibits and Reports on Form 8-K
    
    
    32Signatures
    
    
    34Certification of CEO pursuant to Rule 13a-14aCertification of CFO pursuant to Rule 13a-14aCertification pursuant to Section 906
  -2-




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GREY WOLF, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Amounts in thousands, except share data) March 31,
    
    December 31,2004
    
    2003(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    59,150
    
    
    $
    54,350Restricted cash
    
    
    90,759
    
    
    
    749Accounts receivable, net of allowance of $2,443
    
    
    64,776
    
    
    
    60,181Prepaids and other current assets
    
    
    4,028
    
    
    
    4,379Total current assets
    
    
    218,713
    
    
    
    119,659Property and equipment:Land, buildings and improvements
    
    
    5,043
    
    
    
    5,043Drilling equipment
    
    
    742,186
    
    
    
    738,097Furniture and fixtures
    
    
    3,427
    
    
    
    3,332Total property and equipment
    
    
    750,656
    
    
    
    746,472Less: accumulated depreciation
    
    
    (354,960
    )
    
    
    (342,194
    )Net property and equipment
    
    
    395,696
    
    
    
    404,278Other noncurrent assets
    
    
    7,709
    
    
    
    5,141$
    622,118
    
    
    $
    529,078LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Current maturities of senior notes
    
    $
    84,905
    
    
    $
    Accounts payable-trade
    
    
    27,324
    
    
    
    27,893Accrued workers compensation
    
    
    5,302
    
    
    
    5,295Payroll and related employee costs
    
    
    7,527
    
    
    
    6,660Accrued interest payable
    
    
    6,697
    
    
    
    4,664Other accrued liabilities
    
    
    6,133
    
    
    
    6,420Total current liabilities
    
    
    137,888
    
    
    
    50,932Senior notes
    
    
    
    
    
    
    84,898Contingent convertible senior debt
    
    
    250,000
    
    
    
    150,000Other long-term liabilities
    
    
    3,832
    
    
    
    4,115Deferred income taxes
    
    
    40,139
    
    
    
    43,496Commitments 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; 181,673,111 and 181,283,431 issuedand outstanding, respectively
    
    
    18,168
    
    
    
    18,129Additional paid-in capital
    
    
    331,280
    
    
    
    330,266Accumulated deficit
    
    
    (159,189
    )
    
    
    (152,758
    )Total shareholders equity
    
    
    190,259
    
    
    
    195,637$
    622,118
    
    
    $
    529,078
 See accompanying notes to consolidated financial statements -3-




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GREY WOLF, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Amounts in thousands, except per share data)
(Unaudited) Three Months EndedMarch 31,2004
    
    2003Revenues:Contract drilling
    
    $
    75,200
    
    
    $
    62,387Costs and expenses:Drilling operations
    
    
    62,537
    
    
    
    55,285Depreciation
    
    
    12,972
    
    
    
    12,291General and administrative
    
    
    3,140
    
    
    
    3,246Gain on sale of assets
    
    
    (11
    )
    
    
    (21
    )Total costs and expenses
    
    
    78,638
    
    
    
    70,801Operating loss
    
    
    (3,438
    )
    
    
    (8,414
    )Other income (expense):Interest income
    
    
    166
    
    
    
    289Interest expense
    
    
    (6,166
    )
    
    
    (6,037
    )Other, net
    
    
    
    
    
    
    14Other expense, net
    
    
    (6,000
    )
    
    
    (5,734
    )Loss before income taxes
    
    
    (9,438
    )
    
    
    (14,148
    )Income tax benefit:Current
    
    
    
    
    
    
    Deferred
    
    
    (3,007
    )
    
    
    (4,527
    )Total income tax benefit
    
    
    (3,007
    )
    
    
    (4,527
    )Net loss
    
    $
    (6,431
    )
    
    $
    (9,621
    )Basic and diluted net loss per common share
    
    $
    (0.04
    )
    
    $
    (0.05
    )Basic and diluted weighted average
common shares outstanding
    
    
    181,456
    
    
    
    181,104
 See accompanying notes to consolidated financial statements -4-




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GREY WOLF, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders Equity and Comprehensive Loss
(Amounts in thousands) CommonStock
    
    AdditionalCommon
    
    $.10 Par
    
    Paid-inShares
    
    Value
    
    Capital
    
    Deficit
    
    TotalBalance, December 31, 2002
    
    
    181,038
    
    
    $
    18,104
    
    
    $
    329,712
    
    
    $
    (122,558
    )
    
    $
    225,258Exercise of stock options
    
    
    245
    
    
    
    25
    
    
    
    343
    
    
    
    
    
    
    
    368Tax benefit of stock
option exercises
    
    
    
    
    
    
    
    
    
    
    211
    
    
    
    
    
    
    
    211Comprehensive net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (30,200
    )
    
    
    (30,200
    )Balance, December 31, 2003
    
    
    181,283
    
    
    
    18,129
    
    
    
    330,266
    
    
    
    (152,758
    )
    
    
    195,637Exercise of stock options
    
    
    390
    
    
    
    39
    
    
    
    587
    
    
    
    
    
    
    
    626Tax benefit of stock
option exercises
    
    
    
    
    
    
    
    
    
    
    350
    
    
    
    
    
    
    
    350Non-cash compensation
expense
    
    
    
    
    
    
    
    
    
    
    77
    
    
    
    
    
    
    
    77Comprehensive net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,431
    )
    
    
    (6,431
    )Balance, March 31, 2004
(Unaudited)
    
    
    181,673
    
    
    $
    18,168
    
    
    $
    331,280
    
    
    $
    (159,189
    )
    
    $
    190,259
 See accompanying notes to consolidated financial statements. -5-




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GREY WOLF INC, AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited) 
 Three Months EndedMarch 31,2004
    
    2003Cash flows from operating activities:Net loss
    
    $
    (6,431
    )
    
    $
    (9,621
    )Adjustments to reconcile net loss to net cash
cash used in operating activities:Depreciation
    
    
    12,972
    
    
    
    12,291Deferred income taxes
    
    
    (3,357
    )
    
    
    (4,684
    )Gain on sale of assets
    
    
    (11
    )
    
    
    (21
    )Foreign exchange gain
    
    
    
    
    
    
    (14
    )Non-cash compensation expense
    
    
    77
    
    
    
    Accretion of debt discount
    
    
    7
    
    
    
    21Tax benefit of stock option exercises
    
    
    350
    
    
    
    157Net effect of changes in assets and liabilities
related to operating accounts
    
    
    (7,481
    )
    
    
    (6,108
    )Cash used in operating activities
    
    
    (3,874
    )
    
    
    (7,979
    )Cash flows from investing activities:Property and equipment additions
    
    
    (4,496
    )
    
    
    (2,804
    )Proceeds from sale of property and equipment
    
    
    117
    
    
    
    114Cash used in investing activities
    
    
    (4,379
    )
    
    
    (2,690
    )Cash flows from financing activities:Proceeds from long-term debt
    
    
    97,750
    
    
    
    Irrevocable deposit for redemption
of long-term debt
    
    
    (85,000
    )
    
    
    Financing costs
    
    
    (323
    )
    
    
    Proceeds from exercise of stock options
    
    
    626
    
    
    
    204Cash provided by financing activities
    
    
    13,053
    
    
    
    204Net increase (decrease) in cash and cash equivalents
    
    
    4,800
    
    
    
    (10,465
    )Cash and cash equivalents, beginning of period
    
    
    54,350
    
    
    
    113,899Cash and cash equivalents, end of period
    
    $
    59,150
    
    
    $
    103,434Supplemental cash flow disclosure:Cash paid for interest
    
    $
    3,911
    
    
    $
    11,221Cash paid for taxes
    
    $
    
    
    
    $
    26
 See accompanying notes to consolidated financial statements -6-




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GREY WOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (1) General Grey Wolf, Inc. (the Company or Grey Wolf) is a Texas corporation
formed in 1980. Grey Wolf 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. 
 The accompanying unaudited consolidated financial statements have been
prepared by the Company in accordance with accounting principles generally
accepted in the United States of America (U.S. GAAP) and include the accounts
of the Company and its majority-owned subsidiaries. In the opinion of
management, the accompanying unaudited consolidated financial statements
contain all adjustments, which are of a normal recurring nature, necessary to
present fairly the Companys financial position as of March 31, 2004 and the
results of operations and cash flows for the periods indicated. All
significant intercompany transactions have been eliminated. The results of
operations for the three month period ended March 31, 2004 and 2003 are not
necessarily indicative of the results for any other period or for the year as a
whole. Additionally, pursuant to the rules and regulations of the Securities
and Exchange Commission, certain information and footnote disclosures normally
included in annual financial statements in accordance with U.S. GAAP have been
omitted. Therefore, these consolidated financial statements should be read in
conjunction with the Companys audited consolidated financial statements and
notes thereto included in the Companys Annual Report on Form
10-K/A for the year
ended December 31, 2003. 
 (2) Significant Accounting Policies Earnings Per Share Basic earnings per share (EPS) is based on the weighted average shares
outstanding, during the applicable period, without any dilutive effects
considered. Diluted earnings per share reflects dilution from all outstanding
options and shares issuable upon the conversion of the Floating Rate Contingent
Convertible Senior Notes due 2024 (the Floating Rate Notes) and the 3.75%
Contingent Convertible Senior Notes due 2023 (the 3.75% Notes) once a
contingency has been met. The following is a reconciliation of basic and
diluted weighted average common shares outstanding: Three Months EndedMarch 31,2004
    
    2003(In thousands)(Unaudited)Weighted average common shares
outstanding  basic
    
    
    181,456
    
    
    
    181,104Effect of dilutive securities
    
    
    
    
    
    
    Weighted average common shares
outstanding  diluted
    
    
    181,456
    
    
    
    181,104
 In 2004, the Company has excluded approximately 23.3 million shares and
15.4 million shares issuable upon conversion of the 3.75% Notes and Floating
Rate Notes, respectively, as none of the contingencies have been met (see Note
4). The Company incurred net losses for the three month periods ended March
31, 2004 and 2003 and has excluded options to purchase 10.9 million shares and
10.7 million shares, respectively, from the computation of diluted EPS as the
effect would be anti-dilutive. If -7-




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GREY WOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) the Company had not incurred a net loss, the number of shares to include in the
weighted average common shares outstanding would be based upon the Treasury
stock method. Stock-Based Compensation In December 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 148, Accounting for
Stock-Based Compensation-Transition and Disclosure, which amends SFAS No. 123,
Accounting for Stock-Based Compensation, by providing alternative methods of
transition for a voluntary change to the fair value method of accounting for
stock-based employee compensation. In addition, SFAS No. 148 amends the
provisions of SFAS No. 123 to require more prominent disclosures in both annual
and interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results of
operations. The Company has adopted the more prominent disclosures required by
SFAS No. 148 as of March 31, 2003; however, as permitted under SFAS No. 123,
the Company continues to apply Accounting Principles Board (APB) Opinion No.
25, Accounting for Stock Issued to Employees, and related interpretations in
accounting for its stock option plans. These plans are more fully described in
Note 7. Accordingly, no compensation expense has been recognized for stock option
grants as all options granted had an exercise price equal to the market value
of the underlying common stock on the date of grant. Had compensation expense
for the stock option grants been determined on the fair value at the grant
dates consistent with the method of SFAS No. 123, the Companys net loss and
net loss per share would have been adjusted to the pro forma amounts indicated
below: Three Months EndedMarch 31,2004
    
    2003(Unaudited)Net loss, as reported
    
    $
    (6,431
    )
    
    $
    (9,621
    )Add: Stock-based employee compensation
expense included in reporting net
loss, net of related tax effects
    
    
    52
    
    
    
    Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects
    
    
    (581
    )
    
    
    (925
    )Pro forma net loss
    
    $
    (6,960
    )
    
    $
    (10,546
    )Loss per share  basic and dilutedAs reported
    
    $
    (0.04
    )
    
    $
    (0.05
    )Pro forma
    
    $
    (0.04
    )
    
    $
    (0.06
    )
 For purposes of determining compensation expense 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 granted in 2004 and 2003 were: risk-free interest rate based on
five-year Treasury strips of 3.67% in 2004 and 2.89% in 2003; dividend yield of
zero in each year; stock price volatility of 56% in 2004 and 71% in 2003; and
expected option lives of five years for each year presented. -8-




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GREY WOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) 
 Recent Accounting Pronouncement 
 
 In January 2003, the FASB issued FIN 46, Consolidation of Variable
Interest Entities. In December 2003, the FASB issued a revised version of FIN
46. FIN 46 clarifies existing accounting literature regarding the consolidation
of entities in which a company holds a controlling financial interest. A
majority voting interest in an entity has generally been considered indicative
of a controlling financial interest. FIN 46 specifies other factors (variable
interests) which must be considered when determining whether a company holds a
controlling financial interest in, and therefore must consolidate, an entity
(variable interest entities). The provisions of FIN 46, as revised, are
effective for the first reporting period ending after March 15, 2004. The
provisions of FIN 46 did not have an effect on the Companys consolidated
financial statements for the quarter ending March 31, 2004. 
 (3) Accounting for Income Taxes The Company records deferred taxes 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. (4) Long-Term Debt Long-term debt consists of the following (amounts in thousands): 
 March 31,
    
    December 31,2004
    
    2003(Unaudited)87⁄8% Senior Notes due July 2007
    
    $
    84,905
    
    
    $
    84,8983.75% Contingent Convertible
Senior Notes due May 2023
    
    
    150,000
    
    
    
    150,000Floating Rate Contingent Convertible
Senior Notes due April 2024
    
    
    100,000
    
    
    
    334,905
    
    
    
    234,898Less current maturities
    
    
    (84,905
    )
    
    
    Long-term debt
    
    $
    250,000
    
    
    $
    234,898
 
 Floating Rate Notes On March 31, 2004, the Company issued $100.0 million aggregate principal
amount of Floating Rate Notes in a private offering that yielded net proceeds
of approximately $97.8 million. The Floating Rate Notes bear interest at a per
annum rate equal to 3-month LIBOR, adjusted quarterly, minus a spread of 0.05%
but will never be less than zero or more than 6.00%. These Notes mature on
April 1, 2024. The Floating Rate Notes are convertible into shares of the
Companys common stock, upon the occurrence of certain events, at a conversion
price of $6.51 per share, which is equal to a conversion rate of approximately
153.6098 shares per $1,000 principal amount of the Floating Rate Notes, subject
to adjustment. The Floating Rate Notes are general unsecured senior
obligations of the Company and are fully and unconditionally guaranteed, on a
joint and several basis, by all domestic wholly-owned subsidiaries of the
Company. Non-guarantor subsidiaries are immaterial. The Floating Rate Notes
and -9-




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GREY WOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) the guarantees rank equally with all of the Companys other senior unsecured
debt, including the Companys 3.75% Notes. Fees and expenses of approximately
$2.6 million incurred at the time of issuance are being amortized through April
1, 2014, the first date the holders may require the Company to repurchase the
Floating Rate Notes. The Company may redeem some or all of the Floating Rate Notes at any time
on or after April 1, 2014, at a redemption price equal to 100% of the principal
amount of the Floating Rate Notes, plus accrued but unpaid interest and
liquidated damages, if any, to the date of repurchase, payable in cash.
Holders may require the Company to repurchase all or a portion of the Floating
Rate Notes on April 1, 2014 or April 1, 2019, and upon a change of control, as
defined in the indenture governing the Floating Rate Notes, at 100% of the
principal amount of the Floating Rate Notes, plus accrued but unpaid interest
and liquidated damages, if any, to the date of repurchase, payable in cash. The Floating Rate Notes are convertible, at the holders option, prior to
the maturity date into shares of the Companys common stock under the following
circumstances:  
    
    during any calendar quarter, if the closing sale price per
share of the Companys common stock for at least 20 trading days in
the period of 30 consecutive trading days ending on the last trading
day of the calendar quarter preceding the quarter in which the
conversion occurs, is more than 120% of the conversion price per
share ($7.81 per share) on that 30th trading day;
    
    if the Company has called the Floating Rate Notes for
redemption;
    
    during any period that the credit ratings assigned to the
Companys senior unsecured debt by both Moodys Investors Service
(Moodys) and Standard & Poors Ratings Group (S&P) are reduced
below B1 and B+, respectively, or if neither rating agency is rating
the Companys senior unsecured debt;
    
    during the five trading day period immediately following any
nine consecutive trading day period in which the average trading
price per $1,000 principal amount of the Floating Rate Notes for
each day of such period was less than 95% of the product of the
closing sale price per share of the Companys common stock on that
day multiplied by the number of shares of common stock issuable upon
conversion of $1,000 principal amount of the Floating Rate Notes; or
    
    upon the occurrence of specified corporate transactions,
including a change of control. As of March 31, 2004, none of the conditions enabling the holders of the
Floating Rate Notes to convert them into shares of the Companys common stock
have occurred. The indenture governing the Floating Rate Notes does not
contain any restriction on the payment of dividends, the incurrence of
indebtedness or the repurchase of the Companys securities, and does not
contain any financial covenants. 3.75% Notes On May 7, 2003, the Company issued $150.0 million aggregate principal
amount of 3.75% Notes in a private offering that yielded net proceeds of
$146.6 million. The 3.75% Notes bear interest at 3.75% per annum and mature on
May 7, 2023. The 3.75% Notes are convertible into shares of the Companys
common stock, upon the occurrence of certain events, at a conversion price of
$6.45 per share, which is equal to a conversion rate of approximately 155.0388
shares per $1,000 principal amount of the 3.75% Notes, subject to adjustment.
The Company will pay contingent interest at a rate equal to 0.50% per annum
during any six-month period, with the initial six-month period commencing May
7, 2008, if the average trading price of the 3.75% Notes per $1,000 principal
amount for the five day trading period ending on the third day immediately
preceding the first day of the applicable six-month period equals $1,200 or
more. The 3.75% Notes are general unsecured senior obligations of the Company
and are fully and unconditionally guaranteed, on a joint and several basis, by all
domestic wholly-owned subsidiaries of the Company. Non-guarantor subsidiaries
are immaterial. The 3.75% Notes and the guarantees rank equally with the
Floating Rate Notes. Fees and expenses of $3.9 million incurred at the time of
issuance are being amortized through May 2013, the first date the holders may
require the Company to repurchase the 3.75% Notes. -10-




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GREY WOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) The Company may redeem some or all of the 3.75% Notes at any time on or
after May 14, 2008, at a redemption price shown below, payable in cash, plus
accrued but unpaid interest, including contingent interest, if any, to the date
of redemption: RedemptionPeriod
    
    PriceMay 14, 2008 through May 6, 2009
    
    
    101.88
    %May 7, 2009 through May 6, 2010
    
    
    101.50
    %May 7, 2010 through May 6, 2011
    
    
    101.13
    %May 7, 2011 through May 6, 2012
    
    
    100.75
    %May 7, 2012 through May 6, 2013
    
    
    100.38
    %May 7, 2013 and thereafter
    
    
    100.00
    %
 Holders may require the Company to repurchase all or a portion of the
3.75% Notes on May 7, 2013 or May 7, 2018, and upon a change of control, as
defined in the indenture governing the 3.75% Notes, at 100% of the principal
amount of the 3.75% Notes, plus accrued but unpaid interest, including
contingent interest, if any, to the date of repurchase, payable in cash. The 3.75% Notes are convertible, at the holders option, prior to the
maturity date into shares of the Companys common stock under the following
circumstances:  
    
    during any calendar quarter, if the closing sale price per
share of the Companys common stock for at least 20 trading days in
the period of 30 consecutive trading days ending on the last trading
day of the calendar quarter preceding the quarter in which the
conversion occurs, is more than 110% of the conversion price per
share ($7.10 per share) on that 30th trading day;
    
    if the Company has called the 3.75% Notes for redemption;
    
    during any period that the credit ratings assigned to the
3.75% Notes by both Moodys and S&P are reduced below B1 and B+,
respectively, or if neither rating agency is rating the 3.75% Notes;
    
    during the five trading day period immediately following any
nine consecutive trading day period in which the average trading
price per $1,000 principal amount of the 3.75% Notes for each day of
such period was less than 95% of the product of the closing sale
price per share of the Companys common stock on that day multiplied
by the number of shares of common stock issuable upon conversion of
$1,000 principal amount of the 3.75% Notes; or
    
    upon the occurrence of specified corporate transactions,
including a change of control. The 3.75% Notes were not convertible during the quarter ended March 31,
2004. At March 31, 2004, the credit ratings assigned to the 3.75% Notes by
Moodys and S&P were B1 and BB-, respectively. The indenture governing the
3.75% Notes does not contain any restriction on the payment of dividends, the
incurrence of indebtedness or the repurchase of the Companys securities, and
does not contain any financial covenants. -11-




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GREY WOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) 87⁄8% Senior Notes At March 31, 2004, the Company had $85.0 million in principal amount of
87⁄8% Senior Notes due July 2007 (the 87⁄8% Notes) outstanding. The 87⁄8% Notes
bear interest at 87⁄8% per annum with an original maturity on July 1, 2007. The
87⁄8% Notes are general unsecured senior obligations of the Company and are fully
and unconditionally guaranteed, on a joint and several basis, by all domestic
wholly-owned subsidiaries of the Company. Non-guarantor subsidiaries are
immaterial. On March 31, 2004, $90.0 million of the $97.8 million of net proceeds
received from the issuance of the Floating Rate Notes was irrevocably deposited
with the trustee for the 87⁄8% Notes to redeem the remaining $85.0 million
aggregate principal amount of those notes at 102.9580%, plus accrued interest
to the redemption date. On April 30, 2004, the cash deposited with the trustee
was used to redeem the $85.0 million aggregate principal amount of the 87⁄8%
Notes. At March 31, 2004, $84.9 million, which is net of the remaining
original issue discount, is included as current maturities of senior notes and
$90.0 million is included in restricted cash on the consolidated balance sheet.
The redemption premium of $2.5 million is included in interest expense during
the quarter ended March 31, 2004 and the remaining $1.1 million of deferred
financing costs associated with the 87⁄8% Notes will be accelerated and amortized
through the redemption date of April 30, 2004. On July 1, 2003, the $146.6 million of net proceeds from the issuance of
the 3.75% Notes plus $30.6 million of available cash were used to redeem $165.0
million aggregate principal amount of 87⁄8% Notes previously outstanding at
102.9580%, plus accrued interest. The redemption premium of $4.9 million was
included in interest expense in the second quarter of 2003. Amortization of
the previously deferred financing costs associated with the partial redemption
of the 87⁄8% Notes on July 1, 2003 was accelerated and approximately $2.5 million
was recognized in interest expense in the quarter ended June 30, 2003. CIT Facility The Companys subsidiary Grey Wolf Drilling Company L.P. has a $75.0
million credit facility with the CIT Group/Business Credit, Inc. (the CIT
Facility) which expires during January 2006. 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 states of the United States of
America. The CIT Facility is a revolving facility with automatic renewals
after expiration unless terminated by the lender on any subsequent anniversary
date and then only upon 60 days prior notice. Periodic interest payments are
due at a floating rate based upon the Companys debt service coverage ratio
within a range of either LIBOR plus 1.75% to 3.50% or prime plus 0.25% to
1.50%. The CIT Facility provides up to $20.0 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. The CIT Facility contains affirmative and negative covenants and the
Company is in compliance with these covenants. Substantially all of the
Companys assets, including its drilling equipment, are pledged as collateral
under the CIT Facility which is also secured by a guarantee of Grey Wolf, Inc.
and certain of the Companys 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 in connection with the sale or exchange of such collateral or
relocation of equipment outside the contiguous 48 states of the United States
of America. -12-




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GREY WOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Among the various covenants that must be satisfied under the CIT Facility
are the following two covenants which apply whenever the Companys liquidity,
defined as the sum of cash, cash equivalents
and availability under the CIT Facility, falls below $25.0 million. At March
31, 2004 our liquidity, as defined above, was $117.8 million.  
    
    1 to 1 EBITDA coverage of debt service, tested monthly on a
trailing 12 month basis; and
    
    minimum tangible net worth (all as defined in the CIT
Facility) at the end of each quarter will be at least the prior year
tangible net worth less $30.0 million adjusted for quarterly tests. Additionally, if the total amount outstanding under the CIT Facility
(including outstanding letters of credit) exceeds 50% of the orderly
liquidation value of our domestic rigs, we are required to make a prepayment in
the amount of the excess. Also, if the average rig utilization rate falls
below 45% for two consecutive months, the lender will have the option to
request one additional appraisal per year to aid in determining the current
orderly liquidation value of the drilling equipment. Average rig utilization
is defined as the total number of rigs owned which are operating under drilling
contracts in the 48 contiguous states of the United States of America divided
by the total number of rigs owned, excluding rigs not capable of working
without substantial capital investment. Events of default under the CIT
Facility include, in addition to non-payment of amounts due, misrepresentations
and breach of loan covenants and certain other events including:  
    
    default with respect to other indebtedness in excess of $350,000;
    
    judgments in excess of $350,000; or
    
    a change in control which means that we cease to own 100% of
our two principal subsidiaries, some person or group has either
acquired beneficial ownership of 30% or more of the Company or
obtained the power to elect a majority of our board of directors, or
our board of directors ceases to consist of a majority of
continuing directors (as defined by the CIT Facility). The Company currently has no outstanding balance under the CIT Facility
and had $16.4 million of undrawn standby letters of credit at March 31, 2004.
These standby letters of credit are for the benefit of various insurance
companies as collateral for premiums and retained losses which may become
payable under the terms of the underlying insurance contracts and for other
purposes. Outstanding letters of credit reduce the amount available for
borrowing under the CIT facility. (5) Segment Information 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. (6) 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. -13-




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GREY WOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (7) Stock Option Plans and Severance The 2003 Incentive Plan (the 2003 Plan) was approved by shareholders in
May 2003. The 2003 Plan authorizes the grant of the following equity-based
awards:  
    
    incentive stock options;
    
    non-statutory stock options;
    
    restricted shares; and
    
    other stock-based and cash awards. The 2003 Plan replaced the Companys 1996 Employee Stock Option Plan (the
1996 Plan); provided, however that outstanding options previously granted
under the 1996 Plan shall continue to be exercisable subject to the terms and
conditions of such grants. The 1996 Plan allowed for grants of non-statutory
options to purchase common stock, but no further grants of common stock will be
made under the 1996 Plan. The 2003 Plan reserves a maximum of 17.0 million
shares of the Companys common stock underlying all equity-based awards, but is
reduced by the shares of common stock subject to previous grants under the 1996
Plan. At March 31, 2004, there were 5.4 million shares of common stock
available for grant under the 2003 Plan until March 2013. Prior to 2003, the
Company also granted options under stock option agreements with its chief
executive officer and directors that are outside of the 2003 Plan and the 1996
Plan. At March 31, 2004, these individuals had options outstanding to purchase
an aggregate of 2.0 million shares of common stock. The exercise price of stock options approximates the fair market value of
the stock at the time the option is granted. A portion of the outstanding
options became exercisable upon issuance and the remaining become exercisable
in varying increments over three to five-year periods. The options expire on
the tenth anniversary of the date of grant. On November 13, 2001, the Company amended all outstanding stock option
agreements issued under the 1996 Plan and certain 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 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 amendments). 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 amendments. In accordance with APB No. 25, the amendments to the stock option
agreements create a new measurement date of November 13, 2001. APB No. 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 price of the options. During the three months ended March 31, 2004, the Company recognized
non-cash compensation expense of approximately $77,000 as a result of the
termination of employment of several individuals. These amounts have been
included in general and administrative expenses on the consolidated statement
of operations. -14-




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GREY WOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (8) Concentrations 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. For the quarter ended March 31, 2004, the Company had one customer which
represented approximately 11% of revenue. There were no customers with revenue
greater than 10% for the same period in 2003. (9) Subsequent Events On April 6, 2004, the Company acquired all of the outstanding capital
stock and stock equivalents of New Patriot Drilling Corp. (Patriot) by merger
in exchange for $15.8 million in cash and 4,610,480 shares of the Companys
common stock. In addition, the Company made payments of $14.7 million to
retire the outstanding debt of Patriot. The cash consideration is subject to
final adjustment for changes in Patriots working capital. Patriot had a fleet
of ten drilling rigs and provided onshore contract land drilling services to
the oil and gas industry in the Rocky Mountain region. On April 27, 2004, one of the initial purchasers in the Companys private
offering of the Floating Rate Notes exercised its full option to purchase an
additional $25.0 million aggregate principal amount of the Floating Rate Notes.
As a result, we have $125.0 million aggregate principal amount of the Floating
Rate Notes outstanding as of the date of this report. The additional Floating
Rate Notes will have the same terms as those issued on March 31, 2004 and the
Company plans to use the net proceeds of $24.4 million for general corporate
purposes. -15-




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##### Table of Contents



GREY WOLF INC. AND SUBSIDIARIES
Managements Discussion and Analysis of Financial
Condition and Results of Operations 
 The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto of Grey Wolf, Inc. included
elsewhere herein and with our audited consolidated financial statements and
accompanying notes included in our Annual Report on Form 10-K/A (Amendment No. 2) for the year
ended December 31, 2003. 
 Overview 
 We are a leading provider of contract land drilling services in the United
States with a fleet, at May 3, 2004, of 127 rigs, of which 95 rigs were
marketed. Our customers include independent producers and major oil and gas
companies. We conduct all of our operations through our subsidiaries in the
Ark-La-Tex, Gulf Coast, Mississippi/Alabama, South Texas, West Texas and Rocky
Mountain drilling markets. 
 Our business is cyclical and our financial results depend upon several
factors. These factors include the overall demand for land drilling services,
the level of demand for turnkey and footage services, the demand for deep
versus shallow drilling services, the dayrates we receive for our services and
our success drilling turnkey and footage wells. 
 We make available free of charge through our website our annual reports on
Form 10-K and 10K/A, quarterly reports on Form 10-Q and10-Q/A, current reports
on Form 8-K, and all amendments to those reports as soon as reasonably
practicable after such material is electronically filed with the Securities and
Exchange Commission. Information on our website is not a part of this report.
Our website address is www.gwdrilling.com. 
 Rig Activity 
 The number of our rigs working increased modestly in the first quarter of
2003 and remained relatively stable throughout 2003. During the first quarter
of 2004 and continuing through May 3, 2004, we saw an increase in our average
rigs working. In addition, on April 6, 2004, we increased our presence in the
Rocky Mountain market by acquiring New Patriot Drilling Corp. (Patriot) and
its fleet of 10 rigs in Wyoming and Colorado. For the week ending April 29,
2004, we had an average of 83 rigs working, including eight rigs acquired from
Patriot. 
 The table below shows the average number of land rigs working in the
United States according to the Baker Hughes rotary rig count and the average
number of our rigs working. 2002
    
    2003
    
    2004Domestic
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Q-2Land Rig
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Full
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Full
    
    
    
    
    
    toCount
    
    Q-1
    
    Q-2
    
    Q-3
    
    Q-4
    
    Year
    
    Q-1
    
    Q-2
    
    Q-3
    
    Q-4
    
    Year
    
    Q-1
    
    4/29Baker Hughes
    
    
    679
    
    
    
    683
    
    
    
    722
    
    
    
    723
    
    
    
    695
    
    
    
    773
    
    
    
    903
    
    
    
    964
    
    
    
    988
    
    
    
    880
    
    
    
    1,002
    
    
    
    1,039Grey Wolf
    
    
    56
    
    
    
    54
    
    
    
    55
    
    
    
    54
    
    
    
    55
    
    
    
    59
    
    
    
    60
    
    
    
    62
    
    
    
    62
    
    
    
    61
    
    
    
    65
    
    
    
    80
 -16-




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Drilling Contract Bid Rates 
 Dayrates are generally driven by the number of rigs working, or
utilization. Our daywork bid rates ranged between $7,000 and $8,500 per rig
day during the first quarter of 2003 and increased to $8,000 to $9,500 per rig
day for the remainder of 2003 and the beginning of the first quarter of 2004.
With the increase in the land rig count that began during the first quarter of
2004, however, our bid rates rose to between $8,000 to $13,000 per rig day
without fuel or top drives. We believe that the bulk of this increase in
dayrates will be reflected in our financial results in the third quarter of
2004. 
 
 In addition to our fleet of drilling rigs, at May 3, 2004, we owned 15 top
drives for which our current bid rates ranged from $1,300 to $2,000 per day, at
that date. Bid rates for our top drives are in addition to the above stated
bid rates for our rigs. 
 Turnkey and Footage Contract Activity 
 Turnkey and footage work continues to be an important part of our business
and operating strategy. Our engineering and operating expertise allow us to
provide this service to our customers and has historically provided higher
revenues and EBITDA (earnings before interest, taxes, deprecation and
amortization) per rig day worked than under daywork contracts. However, we are
typically required to bear additional operating costs (such as drill bits) and
risk (such as loss of hole) that would otherwise be assumed by the customer
under daywork contracts. For the quarter ended March 31, 2004, our turnkey and
footage EBITDA per rig day was $4,144 compared to a daywork EBITDA per rig day
of $1,181, and our turnkey and footage revenue was $27,175 per rig day compared
to $10,042 per rig day for daywork. For the quarter ended March 31, 2004,
turnkey and footage work represented 39% of our EBITDA and 15% of total days
worked compared to 55% of our EBITDA and 20% of total days worked during the
fourth quarter of 2003. Total turnkey EBITDA for the fourth quarter of 2003
was a record and the total turnkey EBITDA for the first quarter of 2004 is
representative of historical levels. A rig day is defined as a twenty-four
hour period in which a rig is under contract and should be earning revenue. 
 
 The EBITDA generated on turnkey and footage contracts vary widely based
upon a number of factors, including the location of the contracted work as well
as the depth and level of complexity of the wells drilled. The demand for
drilling services under turnkey and footage contracts has historically been
greater during periods of overall lower demand. While overall demand has been
higher as evidenced by the increase in rig count, the demand for turnkey
services has not declined. We believe this is due in large part to current
daywork rates which have only modestly increased despite the increase in rig
count. 
 Financial Outlook 
 We believe the outlook for the future of natural gas exploration and
production remains positive. Natural gas and oil prices remain at attractive
levels, in our opinion, with the twelve-month strips for natural gas and oil at
$6.31 per mmbtu and $35.99 per barrel, respectively, at May 3, 2004. The
twelve-month strip represents the average price of monthly futures contracts
expiring over the next twelve months on the New York Mercantile
Exchange (NYMEX). 
 We believe that several factors have adversely impacted this current
upcycle. These factors include the expansion of the overall land rig fleet
during the last upcycle in 2000 and 2001, the focus on market share versus
higher dayrates, and the general lack of deep drilling. However, we believe
that we will see a renewed commitment by operators to drilling deeper prospects
in order to find meaningful -17-




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reserves. We also believe demand continues to
improve and the current land rig count, which is up 19% from a year ago, is
sufficient to support further modest increases in dayrates. 
 We believe we are ready to respond to continued increases in demand. At
May 3, 2004 we had 17 cold-stacked rigs, which could be reactivated, as demand
dictated, for an estimated $3.5 million to
$4.0 million in the aggregate. This would increase our marketed rig count
to 112 rigs. In addition, at May 3, 2004 we had 15 inventory rigs that were
available for refurbishment and reactivation should the demand arise. 
 
 The acquisition of Patriot has allowed us to expand our presence in the
active Rocky Mountain market and we have reduced our ongoing interest expense
with the refinancing of the remainder of our 87⁄8% Senior Notes due 2007 (the
87⁄8% Notes). In the last year, we have reduced our annual interest expense by
approximately $15.4 million from approximately $24.0 million to approximately
$8.6 million going forward at interest rates in effect as of May 3, 2004. 
 
 As of May 3, 2004, we expected to generate a net loss per share of
approximately $.02 on a diluted basis, using a tax benefit rate of
approximately 26% for the second quarter of 2004. That estimate was based upon
levels of activity and dayrates anticipated at that time. We expect
depreciation expense of approximately $14.0 million and interest expense of
approximately $4.0 million in the second quarter of 2004. Projected interest
expense for the second quarter of 2004 includes approximately $1.8 million for
the accelerated amortization of the previously deferred financing costs,
original issue discount on the 87⁄8% Senior Notes and interest expense on the 87⁄8%
Senior Notes from April 1, 2004 to April 29, 2004. 
 These projections are forward-looking statements and while we believe our
estimates are reasonable, we can give no assurance that such expectations or
the assumptions that underlie such assumptions will prove to be correct. We
expect to average between eight and 11 rigs working under turnkey and footage
contracts during the second quarter of 2004; however, there can be no assurance
that we will be able to maintain the current level of activity or operating
margins derived from turnkey and footage contracts. Critical Accounting Policies Our consolidated financial statements and accompanying notes have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements require
our management to make subjective estimates, judgments and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses.
However, these estimates, judgments and assumptions concern matters that are
inherently uncertain. Accordingly, actual amounts and results could differ from
these estimates made by management, sometimes materially. Critical accounting
policies and estimates are defined as those that are both most important to the
portrayal of our financial condition and operating results and require
managements most subjective judgments. The accounting policies that we
believe are critical are property and equipment, impairment of long-lived
assets, revenue recognition, insurance accruals, and income taxes. 
 Property and Equipment. Property and equipment, including betterments and
improvements are stated at cost with depreciation calculated using the
straight-line method over the estimated useful lives of the assets. We make
estimates with respect to the useful lives that we believe are reasonable.
However, the cyclical nature of our business or the introduction of new
technology in the industry, could cause us to change our estimates, thus
impacting the future calculation of depreciation. When any asset is tested for
recoverability, we also review the remaining useful life of the asset. Any
changes to the estimated useful life resulting from that review are made
prospectively. We 
 -18-




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expense our maintenance and repair costs as incurred. We
estimate the useful lives of our assets are between three and fifteen years. 
 Impairment of Long-Lived Assets. We assess the impairment of our
long-lived assets under Statement of Financial Accounting Standards Board
(SFAS) No. 144 Accounting for the Impairment or Disposal of Long-Lived
Assets, whenever events or changes in circumstances indicate that the carrying
value may not be recoverable. Such indicators include changes in our business
plans, a change in the physical condition of a long-lived asset or the extent
or manner in which it is being used, or a severe
or sustained downturn in the oil and gas industry. If we determine that a
triggering event, such as those described previously, has occurred we perform a
review of our rig and rig equipment. Our review is performed by comparing the
carrying value of each rig plus the estimated cost to refurbish or reactivate
to the estimated undiscounted future net cash flows for that rig. If the
carrying value plus estimated refurbishment and reactivation cost of any rig is
more than the estimated undiscounted future net cash flows expected to result
from the use of the rig, a write-down of the rig to estimated fair market value
must be made. The estimated fair market value is the amount at which an asset
could be bought or sold in a current transaction between willing parties.
Quoted market prices in active markets are the best estimate of fair market
value, however, quoted market prices are generally not available. As a result,
fair value must be determined based upon other valuation techniques. This could
include appraisals or present value calculations. The calculation of
undiscounted future net cash flows and fair market value is based on our
estimates and projections. 
 
 The demand for land drilling services is cyclical and has historically
resulted in fluctuations in rig utilization. The severity and duration of the
downturn during 1998 triggered an asset impairment charge of $93.2 million. We
believe the contract drilling industry will continue to be cyclical and rig
utilization will fluctuate. The likelihood of an asset impairment increases
during extended periods of rig inactivity. Each year we evaluate our cold
stacked and inventory rigs and determine our intentions for their future use.
This evaluation takes into consideration, among other things, the physical
condition and marketability of the rig, and projected reactivation or
refurbishment cost. To the extent that our estimates of refurbishment and
reactivation cost, undiscounted future net cash flows or fair market value
change or there is a deterioration in the physical condition of the inventory
or cold stacked rigs, we could be required under SFAS No. 144 to record an
impairment charge. During the fourth quarter of 2002, we recorded a pre-tax,
non-cash asset impairment charge of $3.5 million after performing such a
review. Due to the deterioration of the physical condition of five of the
inventory rigs and changes in market conditions, it was determined that the
rigs, based upon the economics, could no longer be returned to service at a
reasonable cost that would have provided an acceptable return and that the
usable component parts would be included in spare equipment and depreciated
over five years. In the first quarter of 2004, no impairment of our
long-lived assets was recorded as no change in circumstances indicated that the
carrying value of the assets was not recoverable. Below is summary of our rig
fleet and the estimated cost to refurbish and reactive by category as of May 3,
2004: 
 EstimatedPer RigRefurbishmentNumber
    
    And ReactivationRig Category
    
    Of Rigs
    
    CostMarketed
    
    
    85
    
    
    
    N/ACold Stacked
    
    
    17
    
    
    $0.10.2 MillionInventory
    
    
    15
    
    
    $4.55.5 Million 
 
 The net book value of the inventory rigs at March 31, 2004 was $19.3 million. 
 
 Revenue Recognition. Revenues are earned under daywork, turnkey and
footage contracts. Revenue from daywork and footage contracts is recognized
when it is realized or realizable and earned. On daywork contracts revenue is
recognized based on the number of days completed at fixed rates stipulated by
the contract. On footage contracts revenue is recognized based on the number
of feet that have been drilled at fixed rates stipulated by the contract.
Revenue from turnkey drilling contracts is recognized using the
percentage-of-completion method based upon costs incurred to date compared to
our estimate of the total contract costs. Under percentage-of-completion, we
make estimates of the total contract costs to be incurred, and to the extent
these estimates change, the amount of revenue
recognized could be affected. The significance of the accrued turnkey
revenue varies from period to period
 -19-




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depending on the overall level of demand
for our services and the portion of that demand that is for turnkey services.
At March 31, 2004, there were seven turnkey wells in progress versus eight
wells at December 31, 2003, with accrued revenue of $4.6 million and $5.0
million, respectively at such dates. Anticipated losses, if any, on
uncompleted contracts are recorded at the time our estimated costs exceed the
contract revenue. Insurance Accruals. We maintain insurance coverage related to workers
compensation and general liability claims up to $1.0 million per occurrence
with an aggregate of $2.0 million for general liability claims. These policies
include deductibles of $350,000 per occurrence for workers compensation
coverage and $250,000 per occurrence for general liability coverage. If losses
should exceed the workers compensation and general liability policy amounts,
we have excess liability coverage up to a maximum of $75.0 million. At March
31, 2004 and December 31, 2003, we had $9.1 million and $9.4 million,
respectively, accrued for losses incurred within the deductible amounts for
workers compensation and general liability claims. 
 The amount accrued for the provision for losses incurred varies depending
on the number and nature of the claims outstanding at the balance sheet dates.
In addition, the accrual includes managements estimate of the future cost to
settle each claim such as future changes in the severity of the claim and
increases in medical costs. We use third parties to assist us in developing
our estimate of the ultimate costs to settle each claim, which is based upon
historical experience associated with the type of each claim and specific
information related to each claim. The specific circumstances of each claim
may change over time prior to settlement and as a result, our estimates made as
of the balance sheet dates may change. 
 Income Taxes.Our deferred tax assets consist primarily of net operating
loss carryforwards (NOLs). The estimated amount of our NOLs included in
our deferred tax assets at March 31, 2004 are $143.9 million, which expires
from 2010 to 2024. Approximately $7.2 million of these NOLs expire in 2010
and 2011, while the remaining $136.7 million expire between 2019 and 2024.
Deferred tax assets must be assessed based upon the likelihood of
recoverability from future taxable income and to the extent that recovery is
not likely, a valuation allowance is established. At March 31, 2004, we do not
have a valuation allowance as we believe that it is more likely than not that
our future taxable income and reversal of deferred tax liabilities will be
sufficient to recover our deferred tax assets. Our business, however, is
extremely cyclical and is highly sensitive to changes in oil and natural gas
prices and demand for our services and there can be no assurances that future
economic or financial developments will not impact our ability to recover our
deferred tax assets. 
 In addition, we have $23.0 million in permanent differences which relate
to differences between the financial accounting and tax basis of assets that
were purchased in capital stock acquisitions. The permanent difference will be
reduced as the assets are depreciated for financial accounting purposes on a
straight-line basis over the next nine years. As the amortization of these
permanent differences is a fixed amount, our effective tax rate varies widely
based upon the current level of income or loss. 
 -20-




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Financial Condition and Liquidity The following table summarizes our financial position as of March 31, 2004
and December 31, 2003. March 31, 2004
    
    December 31, 2003(Unaudited)(Dollars in thousands)Amount
    
    %
    
    Amount
    
    %Working capital
    
    $
    80,825
    
    
    
    17
    
    
    $
    68,727
    
    
    
    14Property and equipment, net
    
    
    395,696
    
    
    
    82
    
    
    
    404,278
    
    
    
    85Other noncurrent assets
    
    
    7,709
    
    
    
    1
    
    
    
    5,141
    
    
    
    1Total
    
    $
    484,230
    
    
    
    100
    
    
    $
    478,146
    
    
    
    100Long-term debt
    
    $
    250,000
    
    
    
    52
    
    
    $
    234,898
    
    
    
    49Other long-term liabilities
    
    
    43,971
    
    
    
    9
    
    
    
    47,611
    
    
    
    10Shareholders equity
    
    
    190,259
    
    
    
    39
    
    
    
    195,637
    
    
    
    41Total
    
    $
    484,230
    
    
    
    100
    
    
    $
    478,146
    
    
    
    100
 Significant Changes in Financial Condition The significant changes in our financial position from March 31, 2004 to
December 31, 2003 are an increase in working capital of $12.1 million and an
increase in long-term debt of $15.1 million. The increase in working capital
and long-term debt is a result of the issuance of $100.0 million aggregate
principal amount of Floating Rate Contingent Convertible Senior Notes due 2024
(the Floating Rate Notes), offset by the redemption of the remaining $85.0
million aggregate principal amount of our 87⁄8% Notes. Working capital is also
higher due to higher accounts receivable balances due to increased rig
activity. 
 On March 31, 2004, we issued $100.0 million aggregate principal amount of
Floating Rate Notes in a private offering which yielded net proceeds of $97.8
million. Of the net proceeds, $90.0 million was irrevocably deposited with the
trustee of the 87⁄8% Notes to redeem the $85.0 million aggregate principal amount
of those notes at 102.9580%, plus accrued interest. On April 30, 2004, the
cash deposited with the trustee was used to redeem the $85.0 million aggregate
principal amount of the 87⁄8% Senior Notes. As a result, $84.9 million, net of
the remaining original issue discount, is included as current maturities of
senior notes and $90.0 million is included in restricted cash on the
consolidated balance sheet at March 31, 2004. The redemption premium of $2.5
million on the 87⁄8% Notes is included in the accrued interest balance and
interest expense as of and for the quarter ended March 31, 2004. The issuance
of the Floating Rate Notes and redemption of the 87⁄8% Notes results in an
increase in long-term debt of $15.0 million. 
 
 On April 27, 2004, one of the initial purchasers in our private offering
of the Floating Rate Notes exercised its full option to purchase an additional
$25.0 million aggregate principal amount of the Floating Rate Notes. As a
result, as of May 3, 2004, we had $125.0 million aggregate principal amount of
the Floating Rate Notes outstanding. The additional Floating Rate Notes will
have the same terms as those issued on March 31, 2004 and we will use the net
proceeds of approximately $24.4 million for general corporate purposes. 
 Floating Rate Notes The Floating Rate Notes bear interest at a per annum rate equal to 3-month
LIBOR, adjusted quarterly, minus a spread of 0.05% but will never be less than
zero or more than 6.00%. These notes mature on April 1, 2024. The Floating
Rate Notes are convertible into shares of our common stock, upon the occurrence
of certain events, at a conversion price of $6.51 per share, which is equal to
a conversion -21-




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rate of approximately 153.6098 shares per $1,000 principal amount of the
Floating Rate Notes, subject to adjustment. The Floating Rate Notes are our
general unsecured senior obligations and are fully and unconditionally
guaranteed, on a joint and several basis, by all our domestic wholly-owned
subsidiaries. Non-guarantor subsidiaries are immaterial. The Floating Rate
Notes and the guarantees rank equally with all of our other senior unsecured
debt, including our 3.75% Notes. Fees and expenses of $2.6 million incurred at
the time of issuance are being amortized through April 1, 2014, the first date
the holders may require us to repurchase the Floating Rate Notes. We may redeem some or all of the Floating Rate Notes at any time on or
after April 1, 2014, at a redemption price equal to 100% of the principal
amount of the Floating Rate Notes, plus accrued but unpaid interest and
liquidated damages, if any, to the date of repurchase, payable in cash.
Holders may require us to repurchase all or a portion of the Floating Rate
Notes on April 1, 2014 or April 1, 2019, and upon a change of control, as
defined in the indenture governing the Floating Rate Notes, at 100% of the
principal amount of the Floating Rate Notes, plus accrued but unpaid interest
and liquidated damages, if any, to the date of repurchase, payable in cash. The Floating Rate Notes are convertible, at the holders option, prior to
the maturity date into shares of our common stock under the following
circumstance  
    
    during any calendar quarter, if the closing sale price per
share of our common stock for at least 20 trading days in the period
of 30 consecutive trading days ending on the last trading day of the
calendar quarter preceding the quarter in which the conversion
occurs, is more than 120% of the conversion price per share ($7.81
per share) on that 30th trading day;
    
    if we have called the Floating Rate Notes for redemption;
    
    during any period that the credit ratings assigned to our
senior unsecured debt by both Moodys Investors Service (Moodys)
and Standard & Poors Ratings Group (S&P) are reduced below B1 and
B+, respectively, or if neither rating agency is rating our senior
unsecured debt;
    
    during the five trading day period immediately following any
nine consecutive trading day period in which the average trading
price per $1,000 principal amount of the Floating Rate Notes for
each day of such period was less than 95% of the product of the
closing sale price per share of our common stock on that day
multiplied by the number of shares of common stock issuable upon
conversion of $1,000 principal amount of the Floating Rate Notes; or
    
    upon the occurrence of specified corporate transactions,
including a change of control. 
 As of May 3, 2004, none of the conditions enabling the holders of the
Floating Rate Notes to convert them into shares of our common stock have
occurred. The indenture governing the Floating Rate Notes does not contain any
restriction on the payment of dividends, the incurrence of indebtedness or the
repurchase of our securities, and does not contain any financial covenants. 
 -22-




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3.75% Notes The 3.75% Notes bear interest at 3.75% per annum and mature on May 7,
2023. The 3.75% Notes are convertible into shares of our common stock, upon
the occurrence of certain events, at a conversion price of $6.45 per share,
which is equal to a conversion rate of approximately 155.0388 shares per $1,000
principal amount of 3.75% Notes, subject to adjustment. We will pay contingent
interest at a rate equal to 0.5% per annum during any six-month period, with
the initial six-month period commencing May 7, 2008, if the average trading
price of the 3.75% Notes per $1,000 principal amount for the five day trading
period ending on the third day immediately preceding the first day of the
applicable six-month period equals $1,200 or more. The 3.75% Notes are our
general unsecured senior obligations and are fully and unconditionally
guaranteed, on a joint and several basis, by all of our domestic wholly-owned
subsidiaries. Non-guarantor subsidiaries are immaterial. The 3.75% Notes and
the guarantees rank equally with our Floating Rate Notes. Fees and expenses of
approximately $3.9 million incurred at the time of issuance are being amortized
through May 2013, the first date the holders may require us to repurchase the
3.75% Notes. We may redeem some or all of the 3.75% Notes at any time on or
after May 14, 2008, payable in cash, plus accrued but unpaid interest,
including contingent interest, if any, to the date of redemption at various
redemption prices shown in Note 4 to our consolidated financial statements. Holders may require us to repurchase all or a portion of their 3.75% Notes
on May 7, 2013 or May 7, 2018, and upon a change of control, as defined in the
indenture governing the 3.75% Notes, at 100% of the principal amount of the
3.75% Notes, plus accrued but unpaid interest, including contingent interest,
if any, to the date of repurchase, payable in cash. The 3.75% Notes are convertible, at the holders option, prior to the
maturity date into shares of our common stock in the following circumstances:  
    
    during any calendar quarter, if the closing sale price per
share of our common stock for at least 20 trading days in the period
of 30 consecutive trading days ending on the last trading day of the
calendar quarter preceding the quarter in which the conversion
occurs, is more than 110% of the conversion price per share ($7.10
per share) on that 30th trading day;
    
    if we have called the 3.75% Notes for redemption;
    
    during any period that the credit ratings assigned to the
3.75% Notes by both Moodys and S&P are reduced below B1 and B+,
respectively, or if neither rating agency is rating the 3.75% Notes;
    
    during the five trading day period immediately following any
nine consecutive trading day period in which the average trading
price per $1,000 principal amount of the 3.75% Notes for each day of
such period was less than 95% of the product of the closing sale
price per share of our common stock on that day multiplied by the
number of shares of common stock issuable upon conversion of $1,000
principal amount of the 3.75% Notes; or
    
    upon the occurrence of specified corporate transactions,
including a change of control. 
 The 3.75% Notes did not meet the criteria for conversion into common stock
at any time during the quarter ended March 31, 2004 or through May 3, 2004. At
May 3, 2004, the credit ratings assigned to the 3.75% Notes by Moodys and S&P
were B1 and BB-, respectively. The indenture governing the 3.75% Notes does
not contain any restriction on the payment of dividends, the incurrence of
indebtedness or the repurchase of our securities, and does not contain any
financial covenants. 
 -23-




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87⁄8% Notes At March 31, 2004, we had $85.0 million in principal amount of 87⁄8% Notes
outstanding. The 87⁄8% Notes bore interest at 87⁄8% per annum with an original
maturity on July 1, 2007. The 87⁄8% Notes were our general unsecured senior
obligations and were fully and unconditionally guaranteed, on a joint and
several basis, by all our domestic wholly-owned subsidiaries. On March 31, 2004, $90.0 million of the $97.8 million of net proceeds
received from the issuance of the Floating Rate Notes was irrevocably deposited
with the trustee for the 87⁄8% Notes to redeem all of these outstanding notes
that remained at 102.9580%, plus accrued interest. On April 30, 2004, the
$85.0 million aggregate principal amount of the 87⁄8% Notes were redeemed. CIT Facility Our subsidiary Grey Wolf Drilling Company L.P. has entered into a $75.0
million credit facility with the CIT Group/Business Credit, Inc. (the CIT
Facility) which expires during January 2006. 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 states of the United States of America.
The CIT Facility is a revolving facility with automatic renewals after
expiration unless terminated by the lender on any subsequent anniversary date
and then only upon 60 days prior notice. Periodic interest payments are due at
a floating rate based upon our debt service coverage ratio within a range of
either LIBOR plus 1.75% to 3.50% or prime plus 0.25% to 1.50%. The CIT
Facility provides up to $20.0 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. The CIT Facility contains affirmative and negative covenants and we are in
compliance with these covenants. Substantially all of our assets, including
our drilling equipment, are pledged as collateral under the CIT Facility which
is also secured by a guarantee of Grey Wolf, Inc. and certain of our
wholly-owned subsidiaries guarantees. However, we retain the option, subject
to a minimum appraisal value, under the CIT Facility to extract $75.0 million
of the equipment out of the collateral pool in connection with the sale or
exchange of such collateral or relocation of equipment outside the contiguous
48 states of the United States of America. 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. At March 31, 2004, our liquidity as defined above
was $117.8 million.  
    
    1 to 1 EBITDA coverage of debt service, tested monthly on a
trailing 12 month basis; and
    
    minimum tangible net worth (as defined in the CIT Facility)
at the end of each quarter will be at least the prior year tangible
net worth less $30.0 million adjusted for quarterly tests. Additionally, if the total amount outstanding under the CIT Facility
(including outstanding letters of credit) exceeds 50% of the orderly
liquidation value of our domestic rigs, we are required to make a prepayment in
the amount of the excess. Also, if the average rig utilization rate falls
below 45% for two consecutive months, the lender will have the option to
request one additional appraisal per year to aid in determining the current
orderly liquidation value of the drilling equipment. Average rig utilization
is defined as the total number of rigs owned which are operating under drilling
contracts in the 48 contiguous states of the United States of America divided
by the total number of rigs owned, excluding rigs not capable of working
without substantial capital investment. -24-




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Events of default under the CIT Facility include, in addition to
non-payment of amounts due, misrepresentations and breach of loan covenants and
certain other events including:  
    
    default with respect to other indebtedness in excess of $350,000;
    
    judgments in excess of $350,000; or
    
    a change in control which means that we cease to own 100% of
our two principal subsidiaries, some person or group has either
acquired beneficial ownership of 30% or more of the outstanding
common stock of Grey Wolf, Inc. or obtained the power to elect a
majority of our board of directors, or our board of directors ceases
to consist of a majority of continuing directors (as defined by
the CIT Facility). We currently have no outstanding balance under the CIT Facility but had
$16.4 million of undrawn letters of credit at May 3, 2004. These standby
letters of credit are for the benefit of various insurance companies as
collateral for premiums and retained losses which may become payable under the
terms of the underlying insurance contracts and for other purposes.
Outstanding letters of credit reduce the amount available for borrowing under
the CIT facility. Certain Contractual Commitments The following table summarizes certain of our contractual cash obligations
and related payments due by period at March 31, 2004 (unaudited) (amounts in
thousands): Payments Due by Period(1)Less than
    
    1-3
    
    4-5
    
    After 5Contractual Obligation
    
    Total
    
    1 year
    
    years
    
    years
    
    yearsFloating Rate Notes(2)Principal
    
    $
    100,000
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    100,000Interest(3)
    
    
    21,200
    
    
    
    1,060
    
    
    
    2,120
    
    
    
    2,120
    
    
    
    15,9003.75% Notes(2)Principal
    
    
    150,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    150,000Interest
    
    
    109,688
    
    
    
    5,625
    
    
    
    11,250
    
    
    
    11,250
    
    
    
    81,5638 7/8% Notes(4)Principal
    
    
    85,000
    
    
    
    85,000
    
    
    
    
    
    
    
    
    
    
    
    Interest
    
    
    5,008
    
    
    
    5,008
    
    
    
    
    
    
    
    
    
    
    
    Operating leases
    
    
    3,313
    
    
    
    528
    
    
    
    948
    
    
    
    928
    
    
    
    909Total contractualcash obligations
    
    $
    474,209
    
    
    $
    97,221
    
    
    $
    14,318
    
    
    $
    14,298
    
    
    $
    348,372
   (1)
    
    This assumes no conversion, acceleration of maturity dates due to
redemption, breach of, or default under, the terms of the applicable
contractual obligation, except as described under 87⁄8% Notes. (2)
    
    See 87⁄8% Notes, 3.75% Notes, and Floating Rate Notes above,
for information relating to covenants, the breach of which could cause
a default under, and acceleration of the maturity date. Also see
3.75% Notes and Floating Rate Notes for information related to the
holders conversion rights. (3)
    
    Assumes the current 3-month LIBOR of 1.11% minus a spread of 0.05%.(4)
    
    Represents redemption of $85.0 million on April 30, 2004, including
the redemption premium of $2.5 million and accrued interest to the
redemption date of $2.5 million. -25-




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Our CIT Facility provides up to $20.0 million for the issuance of letters
of credit. If letters of credit which we cause to be issued are drawn upon by
the holders of those letters of credit, then we will become obligated to repay
those amounts along with any accrued interest and fees. Letters of credit
issued reduce the amount available for borrowing under the CIT Facility and, as
a result, we had borrowing capacity of $58.6 million at March 31, 2004. The
following table illustrates the undrawn outstanding standby letters of credit
at March 31, 2004 and the potential maturities if drawn upon by the holders
(unaudited) (amounts in thousands): Payments Due by Period (1)Potential
    
    Total
    
    Less than
    
    1-3
    
    4-5
    
    Over 5Contractual Obligation
    
    Committed
    
    1 year
    
    years
    
    years
    
    yearsStandby letters of credit
    
    $
    16,445
    
    
    $
    
    
    
    $
    16,445
    
    
    $
    
    
    
    $
    Total
    
    $
    16,445
    
    
    $
    
    
    
    $
    16,445
    
    
    $
    
    
    
    $
    
   (1)
    
    Assumes no acceleration of maturity date due to breach of, or default
under, the potential contractual obligation. Cash Flow The net cash provided by or used in our operating, investing and financing
activities is summarized below: Three Months EndedMarch 31,2004
    
    2003(In thousands)(Unaudited)Net cash provided by (used in):Operating activities
    
    $
    (3,874
    )
    
    $
    (7,979
    )Investing activities
    
    
    (4,379
    )
    
    
    (2,690
    )Financing activities
    
    
    13,053
    
    
    
    204Net increase (decrease) in cash
    
    $
    4,800
    
    
    $
    (10,465
    )
 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 used in operating activities during the first three months of 2004
and 2003 was $3.9 million and $8.0 million, respectively. The reduction in
cash flow used in operating activities from the first quarter of 2003 to the
first quarter of 2004 is due primarily to an increase in rig activity partially
offset by the $5.0 million in redemption premium and accrued interest on the
87⁄8% Notes which was irrevocably deposited with the trustee. 
 Cash flow used in investing activities for the three months ended March
31, 2004 and 2003, respectively, primarily consisted of $4.5 million and $2.8
million of capital expenditures, respectively. These capital expenditures
included betterments and improvements to our rigs, the acquisition of drill
pipe and collars, and other capital items. 
 Cash flow provided by financing activities for the three months ended
March 31, 2004 primarily consisted of the net proceeds of $97.8 million from
the issuance of $100.0 million of Floating Rate Notes on March 31, 2004, offset
by $85.0 million irrevocably deposited with the trustee of the
87⁄8% Notes for
redemption on April 30, 2004. Cash flow provided by financing activities for
the three months ended March 31, 2004 also included $626,000 from stock option
exercises. Cash flow provided by financing activities for the three months
ended March 31, 2003 consisted of $204,000 from stock option exercises. -26-




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Projected Cash Sources We expect to use cash generated from operations to cover cash
requirements, including debt service on the Floating Rate Notes and 3.75% Notes
and capital expenditures in 2004. Capital expenditures for 2004 are projected
to be between $30.0 million and $34.0 million, subject to the actual level of
rig activity and exclusive of the cost for the acquisition of Patriot. We will
make quarterly interest payments on the Floating Rate Notes on January 1, April
1, July 1, and October 1 of each year and semi-annual interest payments of $2.8
million on the 3.75% Notes on May 7 and November 7 of each year through the
dates of maturity. To the extent that we are unable to generate sufficient
cash from operations we would be required to use cash on hand or draw on our
CIT Facility. At May 3, 2004, our cash and cash equivalent balance was
approximately $53.6 million. From time to time we also review possible acquisition opportunities.
While we currently have no agreements to acquire additional businesses or
equipment, we may enter into such agreements in the future. Our ability to
consummate any such transaction will be dependent in large part on our ability
to fund such a transaction. Depending on the size of a transaction, we may
need to obtain funding through the capital markets. We cannot give assurance
that adequate funding will be available on satisfactory terms. Inflation and Changing Prices Contract drilling revenues do not necessarily track the changes in general
inflation as they tend to respond to the level of activity on the part of the
oil and gas industry in combination with the supply of equipment and the number
of competing companies. Capital and operating costs are influenced to a larger
extent by specific price changes in the oil and gas industry and to a lesser
extent by changes in general inflation. Other We have not paid any cash dividends on our common stock and do not
anticipate paying dividends on the common stock at any time in the foreseeable
future. Furthermore, the CIT Facility prohibits the payment of cash dividends
without the consent of the participating lenders. Results of Operations 
 Our drilling contracts generally provide compensation on either a daywork,
turnkey or footage basis. Successfully completed turnkey and footage contracts
generally result in higher revenues per rig day worked than under daywork
contracts. EBITDA per rig day worked on successful turnkey and footage jobs
are also generally greater than under daywork contracts, although we are
typically required to bear additional operating costs (such as drill bits) that
would typically be paid by the customer under daywork contracts. Contract
drilling revenuesand EBITDA on turnkey and footage contacts are affected by a
number of variables, which include the depth of the well, geological
complexities and the actual difficulties encountered in drilling the well. 
 
 In the following discussion of the results of our operations and elsewhere
in our filings, we use EBITDA and EBITDA per rig day. EBITDA is a non-GAAP
(general accepted accounting principle) financial measure under Regulation G
of the rules and regulations of the Securities and Exchange Commission. In
accordance with Regulation G, we have included below a reconciliation of EBITDA
to net income (loss), which is the nearest comparable financial measure. 
 
 We believe that our disclosure of EBITDA per rig day as a measure of rig
operating performance allows investors to make a direct comparison between us
and our competitors, without regard to differences in capital structure or to
differences in the cost basis of our rigs and those of our competitors.
Investors should be aware, however, that there are limitations inherent in
using this performance measure as a measure of overall company
profitability because it excludes significant expense items such as
depreciation expense and interest expense. An improving trend in EBITDA per
rig day may not be indicative of an improvement in our overall profitability.
To compensate for the limitations in utilizing EBITDA per rig day as an
operating measure, our management also uses GAAP measures of performance
including operating income (loss) and net income (loss) to evaluate performance
but only with respect to the company as a whole and not on a per rig basis. 
 
 Three Months EndedMarch 31,2004
    
    2003Earnings before interest, taxes,depreciation and amortization
    
    $
    9,700
    
    
    $
    4,180Depreciation
    
    
    12,972
    
    
    
    12,291Interest expense
    
    
    6,166
    
    
    
    6,037Total income tax expense (benefit)
    
    
    (3,007
    )
    
    
    (4,527
    )Net income (loss) applicable to
common shares
    
    $
    (6,431
    )
    
    $
    (9,621
    )
 
 -27-




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Comparison of the Three Months Ended March 31, 2004 and 2003 
 The following table highlights rig days worked, contract drilling revenue
and EBITDA for our daywork and turnkey operations for the three months ended
March 31, 2004 and 2003. 
 Three Months Ended
    
    
    
    
    
    
    
    
    
    Three Months EndedMarch 31, 2004
    
    
    
    
    
    
    
    
    
    March 31, 2003Daywork
    
    Turnkey
    
    
    
    
    
    Daywork
    
    TurnkeyOperations
    
    Operations(1)
    
    Total
    
    Operations
    
    Operations(1)
    
    Total(Dollars in thousands except averages per rig day worked)(Unaudited)Rig days worked
    
    
    5,042
    
    
    
    904
    
    
    
    5,946
    
    
    
    4,608
    
    
    
    664
    
    
    
    5,272Contract drilling revenue
    
    $
    50,634
    
    
    $
    24,566
    
    
    
    75,200
    
    
    $
    42,647
    
    
    $
    19,740
    
    
    $
    62,387Drilling operating expenses
    
    
    42,072
    
    
    
    20,465
    
    
    
    62,537
    
    
    
    38,248
    
    
    
    17,037
    
    
    
    55,285General and administrative
expenses
    
    
    2,758
    
    
    
    382
    
    
    
    3,140
    
    
    
    2,901
    
    
    
    345
    
    
    
    3,246Interest income
    
    
    (141
    )
    
    
    (25
    )
    
    
    (166
    )
    
    
    (253
    )
    
    
    (36
    )
    
    
    (289
    )Gain on sale of assets
    
    
    (9
    )
    
    
    (2
    )
    
    
    (11
    )
    
    
    (18
    )
    
    
    (3
    )
    
    
    (21
    )Other, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12
    )
    
    
    (2
    )
    
    
    (14
    )EBITDA
    
    $
    5,954
    
    
    $
    3,746
    
    
    $
    9,700
    
    
    $
    1,781
    
    
    $
    2,399
    
    
    $
    4,180Average per
rig day worked:Contract drilling revenue
    
    $
    10,042
    
    
    $
    27,175
    
    
    $
    12,647
    
    
    $
    9,255
    
    
    $
    29,729
    
    
    $
    11,834EBITDA
    
    $
    1,181
    
    
    $
    4,144
    
    
    $
    1,631
    
    
    $
    387
    
    
    $
    3,613
    
    
    $
    793
   
 (1)
    
    Turnkey operations include the results from
turnkey and footage contracts.(2)
    
    These income and expense items are not contract related and are
allocated between daywork and turnkey based upon operating rig days. 
 
 Our EBITDA increased by $5.5 million, or 132%, to $9.7 million for the
quarter ended March 31, 2004 from $4.2 million for the quarter ended March 31,
2003. 
 
 The increase resulted from a $4.2 million increase in EBITDA from
daywork operations and a $1.4 million increase in EBITDA from turnkey
operations. On a per rig day basis, our EBITDA increased by $838 per rig day,
or 106% to $1,631 in the first quarter of 2004 from $793 for the same period in
2003. This increase included a $794 per rig day increase from daywork
operations and a $531 per rig day increase from turnkey operations. 
 -28-




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##### Table of Contents



Daywork Operations 
 The increase in EBITDA discussed above was due in part to an increase of
9%, or 434 rig days worked in the first quarter of 2004 when compared with the
first quarter of 2003. Higher dayrates in the first quarter of 2004 versus the
same period in 2003 also contributed to the increase. Contract drilling
revenue per rig day increased $787, or 9%, the bulk of the increase falling
straight through to EBITDA per day which also increased by 205%, or $794 per
rig day. 
 Turnkey Operations 
 The increase in turnkey EBITDA was partially due to an increase of 240 rig
days worked, or 36% in the first quarter of 2004 compared to the first quarter
of 2003. The increase in the number of rig days worked under turnkey contracts
resulted in an increase in contract drilling revenue and drilling operating
expenses. Contract drilling revenue and EBITDA, on a per rig day basis varied
from 2003 due to the differences in the complexity and success of the wells
drilled. 
 Other Depreciation expense increased by $681,000, or 6%, to $13.0 million for
the three months ended March 31, 2004, compared to $12.3 million for the three
months ended March 31, 2003. Depreciation expense is higher due to capital
expenditures during the 2003 and 2004. Interest expense increased slightly in 2004 from 2003 due to the $2.5
million redemption premium on the 8?% Senior Notes. This redemption premium
was included after the funds to redeem the remaining balance on the 8?% Senior
Notes were irrevocably deposited with the trustee. Interest expense in 2004
would have been lower excluding this redemption premium due to lower interest
rates as the result of the partial redemption of our 8?% Notes on July 1, 2003
and the issuance of $150.0 million aggregate principal amount of the 3.75%
Notes on May 7, 2003. 
 Our income tax benefit decreased by $1.5 million to $3.0 million for the
three months ended March 31, 2004 from $4.5 million for the same period in
2003. The decrease is due to the level of losses
and is also affected by the annual amortization of $2.8 million in
permanent differences related to differences between the financial accounting
and tax basis of assets purchased in capital stock acquisitions. The permanent
difference will be reduced as these assets are depreciated for financial
accounting purposes on a straight-line basis over their remaining useful lives
of approximately nine years. As the amortization of these permanent
differences is a fixed amount, our book effective tax rate varies widely based
upon the current and projected levels of income or loss. 
 
 Item 3. Quantitative and Qualitative Disclosure About Market Risk 
 Interest Rate Risk.We are subject to market risk exposure related to
changes in interest rates on the Floating Rate Notes and the CIT Facility. The
Floating Rate Notes bear interest at a per annum rate which equal to 3-month
LIBOR, adjusted quarterly, minus a spread of 0.05%. We had $100.0 million of
the Floating Rate Notes outstanding at March 31, 2004 and the interest rate was
1.06% at that date. A 1% change in the interest rate on the Floating Rate
Notes would change our interest expense by $1.0 million on an annual basis.
However, the annual interest on the Floating Rate Notes will never be below
zero or more than 6.00%, which could yield interest ranging from zero to $6.0
million on an annual basis. Interest on borrowings under the CIT Facility
accrues at a variable rate, using either the prime rate plus 0.25% to 1.50% or
LIBOR plus 1.75% to 3.50%, depending upon our debt service coverage ratio for
the trailing 12 month period. As of May 3, 2004 we had no outstanding balance
under the CIT Facility and as such have no exposure under this facility at this
time to a change in interest rates. 
 
 Item 4. Controls and Procedures As of March 31, 2004, we carried out an evaluation, under the supervision
and with the participation of management, including our Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation
of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15.
Based upon that evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures are effective.
Disclosure controls and procedures are controls and procedures that are
designed to ensure that information required to be disclosed in our reports
filed or submitted under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the Securities and Exchange
Commissions rules and forms. There have been no significant changes in our internal control over
financial reporting that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting. -29-




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##### Table of Contents



PART II. OTHER INFORMATION 
 Item 1. Legal Proceedings We are involved in litigation incidental to the conduct of our business,
none of which management believes is, individually or in the aggregate,
material to our consolidated financial condition or results of operations. See
Note 6  Contingencies in Notes to Consolidated Financial Statements. 
 Item 2. Changes in Securities and Use of Proceeds None 
 Item 3. Defaults Upon Senior Securities None 
 Item 4. Submission of Matters to a Vote of Security Holders None. -30-




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##### Table of Contents



Item 5. Other Information 
 This Quarterly Report on Form 10-Q/A
(Amendment No. 2) contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. All
statements other than statements of historical facts included in this report
are forward-looking statements, including statements regarding the following: 
  
    
    business strategy;
    
    demand for our services;
    
    2004 rig activity and financial results;
    
    rigs expected to be engaged in turnkey and footage operations;
    
    reactivation and cost of reactivation of non-marketed rigs;
    
    projected dayrates;
    
    projected interest expense;
    
    projected tax benefit rate;
    
    wage rates and retention of employees;
    
    sufficiency of our capital resources and liquidity; and
    
    depreciation and capital expenditures in 2004. Although we believe the forward-looking statements are reasonable, we
cannot assure you that these statements will prove to be correct. We have
based these statements on assumptions and analyses in light of our experience
and perception of historical trends, current conditions, expected future
developments and other factors we believe are appropriate when the statements
are made. Important factors that could cause actual results to differ
materially from our expectations include:  
    
    fluctuations in prices and demand for oil and natural gas;
    
    fluctuations in levels of oil and natural gas exploration and development activities;
    
    fluctuations in demand for contract land drilling services;
    
    fluctuations in interest rates;
    
    the existence and competitive responses of our competitors;
    
    uninsured or underinsured casualty losses;
    
    technological changes and developments in the industry;
    
    the existence of operating risks inherent in the contract land drilling industry;
    
    U.S. and global economic conditions;
    
    the availability and terms of insurance coverage;
    
    the ability to attract and retain qualified personnel;
    
    unforeseen operating costs such as cost for environmental
remediation and turnkey cost overruns; and
    
    weather conditions. 
 Our forward-looking statements speak only as of the date specified in such
statements or, if no date is stated, as of the date of this report. Grey Wolf,
Inc. 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 our Form 10-K/A filed with the Securities and Exchange
Commission on August 9, 2004 for additional information concerning risk factors
that could cause actual results to differ from the forward-looking statements. 
 -31-




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##### Table of Contents






Item 6. Exhibits and Reports on Form 8-K



| | (a) |  | Exhibits
| | --- |  | --------

2.1
    
    Agreement and Plan of Merger among Grey Wolf,
Inc., Grey Wolf Drilling Company, L.P., Grey Wolf Holdings
Company, and New Patriot Drilling Corp
(incorporated herein by reference to Exhibit 10.1 to the
Companys Form 8-K filed April 7, 2004).*4.1
    
    Indenture, dated as of March 31, 2004, relating
to the Floating Rate Contingent Convertible Senior Notes due
2024 between the Company, the Guarantors, and JPMorgan Chase
Bank, a New York banking corporation, as Trustee.*4.2
    
    Registration Rights Agreement as of March 31,
2004 by and between Grey Wolf, Inc., the Guarantors, and the
Initial Purchasers of the Floating Rate Contingent Convertible
Senior Notes due 2024.*4.3
    
    Second Supplemental Indenture, dated as of March
31, 2004, relating to the 3.75% Contingent Convertible Senior
Notes due 2023 between the Company, the Guarantors, and
JPMorgan Chase Bank, a New York Banking Corporation, as
Trustee.*10.1
    
    Third Amendment to Loan Agreement as of May 1,
2003, by and among Grey Wolf Drilling Company L.P. (as
borrower), Grey Wolf, Inc. and various subsidiaries (as
guarantors) and the CIT Group/Business Credit, Inc. and
various financial institutions (as lenders).*10.2
    
    Fourth Amendment to Loan Agreement as of March
31, 2004, by and among Grey Wolf Drilling Company L.P. (as
borrower), Grey Wolf, Inc. and various subsidiaries (as
guarantors) and the CIT Group/Business Credit, Inc. and
various financial institutions (as lenders).**31.1
    
    Certification of Chief Executive Officer pursuant to Rule
13a-14(a)**31.2
    
    Certification of Chief Financial Officer pursuant to Rule
13a-14(a)**32.1
    
    Certification pursuant to 18 U.S.C. Section 1350
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 of Thomas P. Richards, Chairman, President and Chief
Executive Officer and David W. Wehlmann, Executive Vice
President and Chief Financial Officer.
 *   Previously filed. ** Filed herewith. -32-




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##### Table of Contents



(b)
    
    Reports on Form 8-K  1.
    
    We furnished a Report on Form 8-K under Item 12
with the Securities and Exchange Commission on February 2,
2004 with regard to our press release announcing operating
results for the quarter and year ended December 31, 2003.2.
    
    We filed a Report on Form 8-K under Item 5 with
the Securities and Exchange Commission on March 8, 2004 with
regard to our press release announcing the signing of a merger
agreement to acquire New Patriot Drilling Corp.3.
    
    We filed a Report on Form 8-K under Item 5 with
the Securities and Exchange Commission on March 25, 2004 with
regard to our press release, pursuant to Rule 135c under the
Securities Act of 1933, announcing the private offering of
$100.0 million aggregate principal amount of floating rate
contingent convertible senior notes due 2024 in a private
offering.4.
    
    We filed a Report on Form 8-K under Item 5 with
the Securities and Exchange Commission on March 31, 2004 with
regard to our press release, pursuant to Rule 135c under the
Securities Act of 1933, announcing the closing of our
previously announced private offering of $100.0 million
aggregate principal amount of floating rate contingent
convertible senior notes due 2024.5.
    
    We filed a Report on Form 8-K under Item 5 with
the Securities and Exchange Commission on April 7, 2004 with
regard to our press release announcing the closing of the
previously announced acquisition of New Patriot Drilling Corp.6.
    
    We filed a Report on Form 8-K under Item 5 with
the Securities and Exchange Commission on April 22, 2004 with
regard to our press release, pursuant to Rule 135c under the
Securities Act of 1933, announcing that one of the initial
purchasers in our previously announced private offering of
100.0 million aggregate principal amount of floating rate
contingent convertible senior notes due 2024 has exercised its
full option to purchase an additional $25.0 million aggregate
principal amount of the notes.7.
    
    We furnished a Report on Form 8-K under Item 12
with the Securities and Exchange Commission on April 27, 2004
with regard to our press release announcing operating results
for the quarter ended March 31, 2004. -33-




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##### Table of Contents



SIGNATURES Pursuant to the requirements 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. 
 GREY WOLF, INC.Date: August 10, 2004
    By:
    /s/David W. WehlmannDavid W. WehlmannExecutive Vice President and
Chief Financial OfficerDate: August 10, 2004
    By:
    /s/Merrie S. CostleyMerrie S. CostleyVice President and Controller 
 -34-




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##### Table of Contents



INDEX TO EXHIBITS
  Exhibit Description2.1
    
    Agreement and Plan of Merger among Grey Wolf,
Inc., Grey Wolf Drilling Company, L.P., Grey Wolf Holdings
Company, and New Patriot Drilling Corp
(incorporated herein by reference to Exhibit 10.1 to the
Companys Form 8-K filed April 7, 2004).*4.1
    
    Indenture, dated as of March 31, 2004, relating
to the Floating Rate Contingent Convertible Senior Notes due
2024 between the Company, the Guarantors, and JPMorgan Chase
Bank, a New York banking corporation, as Trustee.*4.2
    
    Registration Rights Agreement as of March 31,
2004 by and between Grey Wolf, Inc., the Guarantors, and the
Initial Purchasers of the Floating Rate Contingent Convertible
Senior Notes due 2024.*4.3
    
    Second Supplemental Indenture, dated as of March
31, 2004, relating to the 3.75% Contingent Convertible Senior
Notes due 2023 between the Company, the Guarantors, and
JPMorgan Chase Bank, a New York Banking Corporation, as
Trustee.*10.1
    
    Third Amendment to Loan Agreement as of May 1,
2003, by and among Grey Wolf Drilling Company L.P. (as
borrower), Grey Wolf, Inc. and various subsidiaries (as
guarantors) and the CIT Group/Business Credit, Inc. and
various financial institutions (as lenders).*10.2
    
    Fourth Amendment to Loan Agreement as of March
31, 2004, by and among Grey Wolf Drilling Company L.P. (as
borrower), Grey Wolf, Inc. and various subsidiaries (as
guarantors) and the CIT Group/Business Credit, Inc. and
various financial institutions (as lenders).**31.1
    
    Certification of Chief Executive Officer pursuant to Rule
13a-14(a)**31.2
    
    Certification of Chief Financial Officer pursuant to Rule
13a-14(a)**32.1
    
    Certification pursuant to 18 U.S.C. Section 1350
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 of Thomas P. Richards, Chairman, President and Chief
Executive Officer and David W. Wehlmann, Executive Vice
President and Chief Financial Officer.


*   Previously filed.

** Filed herewith.