##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended September 30, 2008
 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 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)10370 Richmond Avenue, Suite 600
Houston, Texas
    
    77042(Address of principal executive offices)
    
    (Zip Code)
 (713) 435-6100
  þ o
  Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o(Do not check if a smaller reporting company)
Smaller reporting company o  o þ




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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 Income
    
    
    5Consolidated Statements of Cash Flows
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2.
    
    Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    17Item 3.
    
    Quantitative and Qualitative Disclosure about Market Risk
    
    
    32Item 4.
    
    Controls and Procedures
    
    
    32Part II.
    
    Other InformationItem 1.
    
    Legal Proceedings
    
    
    33Item 1a.
    
    Risk Factors
    
    
    34Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    36Item 3.
    
    Defaults Upon Senior Securities
    
    
    36Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    36Item 5.
    
    Other Information
    
    
    37Item 6.
    
    Exhibits
    
    
    38Signatures
    
    
    40EX-10.1EX-31.1EX-31.2EX-32.1
  -2-




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##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES  Consolidated Balance Sheets
 September 30,
    
    
    December 31,2008
    
    
    2007(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    290,226
    
    
    $
    247,701Restricted cash
    
    
    867
    
    
    
    847Accounts receivable, net of allowance of $2,922
at September 30, 2008 and $3,169 at December 31, 2007
    
    
    182,217
    
    
    
    176,466Prepaids and other current assets
    
    
    10,585
    
    
    
    13,337Deferred tax assets
    
    
    6,949
    
    
    
    5,145Total current assets
    
    
    490,844
    
    
    
    443,496Property and equipment:Land, buildings and improvements
    
    
    9,630
    
    
    
    8,534Drilling equipment
    
    
    1,463,254
    
    
    
    1,331,401Furniture and fixtures
    
    
    6,043
    
    
    
    5,397Total property and equipment
    
    
    1,478,927
    
    
    
    1,345,332Less: accumulated depreciation
    
    
    (689,046
    )
    
    
    (607,388
    )Net property and equipment
    
    
    789,881
    
    
    
    737,944Goodwill
    
    
    10,377
    
    
    
    10,377Other noncurrent assets, net
    
    
    30,785
    
    
    
    16,153$
    1,321,887
    
    
    $
    1,207,970LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable-trade
    
    $
    63,814
    
    
    $
    52,557Accrued workers compensation
    
    
    6,086
    
    
    
    7,608Payroll and related employee costs
    
    
    16,356
    
    
    
    15,439Accrued interest payable
    
    
    3,325
    
    
    
    2,553Current income taxes payable
    
    
    3,670
    
    
    
    14,705Other accrued liabilities
    
    
    15,138
    
    
    
    11,830Total current liabilities
    
    
    108,389
    
    
    
    104,692Contingent convertible senior notes
    
    
    274,725
    
    
    
    275,000Other long-term liabilities
    
    
    20,563
    
    
    
    18,126Deferred income taxes
    
    
    165,468
    
    
    
    150,643Commitments and contingent liabilities
    
    
    
    
    
    
    Shareholders equity:Series B Junior Participating Preferred stock; $1 par value;
250,000 shares authorized; none outstanding
    
    
    
    
    
    
    Common stock; $0.10 par value;
shares authorized: 500,000,000; shares issued: 198,272,887
at September 30, 2008 and 197,045,996 at December 31, 2007;
shares outstanding: 178,937,722 at September 30, 2008
and 178,345,603 at December 31, 2007
    
    
    19,827
    
    
    
    19,704Additional paid-in capital
    
    
    402,743
    
    
    
    393,894Treasury stock, at cost: 19,335,165 shares at September 30, 2008
and 18,700,393 shares at December 31, 2007
    
    
    (124,767
    )
    
    
    (121,096
    )Retained earnings
    
    
    454,939
    
    
    
    367,007Total shareholders equity
    
    
    752,742
    
    
    
    659,509$
    1,321,887
    
    
    $
    1,207,970
 See accompanying notes to consolidated financial statements
 -3-




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##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES  Consolidated Statements of Operations
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Contract drilling revenue
    
    $
    234,150
    
    
    $
    223,999
    
    
    $
    652,379
    
    
    $
    693,532Costs and expenses:Drilling operations
    
    
    141,341
    
    
    
    136,947
    
    
    
    384,802
    
    
    
    390,207Depreciation and amortization
    
    
    27,744
    
    
    
    24,355
    
    
    
    82,497
    
    
    
    68,166General and administrative
    
    
    7,721
    
    
    
    6,757
    
    
    
    24,554
    
    
    
    21,315Merger activity costs
    
    
    18,327
    
    
    
    
    
    
    
    18,327
    
    
    
    (Gain) loss on sale of assets
    
    
    (11
    )
    
    
    (42
    )
    
    
    39
    
    
    
    (171
    )Total costs and expenses
    
    
    195,122
    
    
    
    168,017
    
    
    
    510,219
    
    
    
    479,517Operating income
    
    
    39,028
    
    
    
    55,982
    
    
    
    142,160
    
    
    
    214,015Other income (expense):Interest income
    
    
    1,656
    
    
    
    3,334
    
    
    
    6,134
    
    
    
    10,086Interest expense
    
    
    (2,564
    )
    
    
    (3,521
    )
    
    
    (8,610
    )
    
    
    (10,451
    )Other income (expense), net
    
    
    (908
    )
    
    
    (187
    )
    
    
    (2,476
    )
    
    
    (365
    )Income before income taxes
    
    
    38,120
    
    
    
    55,795
    
    
    
    139,684
    
    
    
    213,650Income tax expense:Current
    
    
    11,602
    
    
    
    15,205
    
    
    
    38,731
    
    
    
    59,492Deferred
    
    
    2,207
    
    
    
    5,002
    
    
    
    13,021
    
    
    
    18,284Total income tax expense
    
    
    13,809
    
    
    
    20,207
    
    
    
    51,752
    
    
    
    77,776Net income
    
    $
    24,311
    
    
    $
    35,588
    
    
    $
    87,932
    
    
    $
    135,874Net income per common share (Note 2):Basic
    
    $
    0.14
    
    
    $
    0.19
    
    
    $
    0.50
    
    
    $
    0.74Diluted
    
    $
    0.12
    
    
    $
    0.17
    
    
    $
    0.42
    
    
    $
    0.63Weighted average common shares outstanding:Basic
    
    
    176,221
    
    
    
    182,599
    
    
    
    175,999
    
    
    
    182,875Diluted
    
    
    220,595
    
    
    
    226,292
    
    
    
    219,991
    
    
    
    226,533
 See accompanying notes to consolidated financial statements
 -4-




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##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES
 
 Consolidated Statements of Shareholders Equity and Comprehensive Income
 Common Stock
    
    
    Additional
    
    
    Treasury StockNumber of
    
    
    Amount,
    
    
    Paid-in
    
    
    Number of
    
    
    Amount,
    
    
    RetainedShares
    
    
    at $0.10 par value
    
    
    Capital
    
    
    Shares
    
    
    at cost
    
    
    Earnings
    
    
    TotalBalance, December 31, 2006
    
    
    185,936
    
    
    $
    19,523
    
    
    $
    383,482
    
    
    
    9,292
    
    
    $
    (65,119
    )
    
    $
    195,908
    
    
    $
    533,794Adjustment for the adoption
of FASB Interpretation
No. (FIN) 48
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,207
    
    
    
    1,207Exercise of stock options
    
    
    802
    
    
    
    80
    
    
    
    2,785
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,865Tax effect of share-based
payments
    
    
    
    
    
    
    
    
    
    
    749
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    749Issuance of restricted stock,
net of forfeitures
    
    
    1,016
    
    
    
    101
    
    
    
    (101
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation
expense
    
    
    
    
    
    
    
    
    
    
    6,979
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,979Purchase of treasury stock
    
    
    (9,408
    )
    
    
    
    
    
    
    
    
    
    
    9,408
    
    
    
    (55,977
    )
    
    
    
    
    
    
    (55,977
    )Comprehensive net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    169,892
    
    
    
    169,892Balance, December 31, 2007
    
    
    178,346
    
    
    
    19,704
    
    
    
    393,894
    
    
    
    18,700
    
    
    
    (121,096
    )
    
    
    367,007
    
    
    
    659,509Exercise of stock options
    
    
    205
    
    
    
    21
    
    
    
    1,010
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,031Tax effect of share-based
payments
    
    
    
    
    
    
    
    
    
    
    (55
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (55
    )Issuance of common stock
    
    
    43
    
    
    
    4
    
    
    
    271
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    275Issuance of restricted stock,
net of forfeitures
    
    
    979
    
    
    
    98
    
    
    
    (98
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation
expense
    
    
    
    
    
    
    
    
    
    
    7,721
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,721Purchase of treasury stock
    
    
    (635
    )
    
    
    
    
    
    
    
    
    
    
    635
    
    
    
    (3,671
    )
    
    
    
    
    
    
    (3,671
    )Comprehensive net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    87,932
    
    
    
    87,932Balance, September 30, 2008
(unaudited)
    
    
    178,938
    
    
    $
    19,827
    
    
    $
    402,743
    
    
    
    19,335
    
    
    $
    (124,767
    )
    
    $
    454,939
    
    
    $
    752,742
 See accompanying notes to consolidated financial statements
 -5-




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GREY WOLF, INC. AND SUBSIDIARIES
 
 Consolidated Statements of Cash Flows
 Nine Months EndedSeptember 30,2008
    
    
    2007Cash flows from operating activities:Net income
    
    $
    87,932
    
    
    $
    135,874Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    82,497
    
    
    
    68,166Deferred income taxes
    
    
    13,021
    
    
    
    18,284(Gain) loss on sale of assets
    
    
    39
    
    
    
    (171
    )Stock-based compensation expense
    
    
    7,721
    
    
    
    5,072Excess tax benefit of stock option exercises
and vested restricted stock
    
    
    (174
    )
    
    
    (708
    )Net effect of changes in assets and liabilities
related to operating accounts
    
    
    4,320
    
    
    
    9,163Cash provided by operating activities
    
    
    195,356
    
    
    
    235,680Cash flows from investing activities:Property and equipment additions
    
    
    (131,930
    )
    
    
    (190,131
    )Deposits for new rig purchases
    
    
    (20,617
    )
    
    
    (4,726
    )Proceeds from sale of property and equipment
    
    
    2,182
    
    
    
    3,019Cash used in investing activities
    
    
    (150,365
    )
    
    
    (191,838
    )Cash flows from financing activities:Proceeds from exercise of stock options
    
    
    1,031
    
    
    
    2,865Excess tax benefit of stock option exercises
and vested restricted stock
    
    
    174
    
    
    
    708Purchase of treasury stock
    
    
    (3,671
    )
    
    
    (22,039
    )Cash used in financing activities
    
    
    (2,466
    )
    
    
    (18,466
    )Net increase in cash and cash equivalents
    
    
    42,525
    
    
    
    25,376Cash and cash equivalents, beginning of period
    
    
    247,701
    
    
    
    229,773Cash and cash equivalents, end of period
    
    $
    290,226
    
    
    $
    255,149Supplemental cash flow disclosure:Cash paid for interest
    
    $
    7,193
    
    
    $
    8,434Cash paid for taxes
    
    $
    51,000
    
    
    $
    55,601
 See accompanying notes to consolidated financial statements
 -6-




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GREY WOLF, INC. AND SUBSIDIARIES  Notes to Consolidated Financial Statements
 (1) General
   (2) Significant Accounting Policies
 Earnings Per Share
   -7-




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GREY WOLF, INC. AND SUBSIDIARIES  Notes to Consolidated Financial Statements
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In thousands, except per share amounts)Numerator:Net income
    
    $
    24,311
    
    
    $
    35,588
    
    
    $
    87,932
    
    
    $
    135,874Add interest expense on contingent
convertible senior notes,
net of related tax effects
    
    
    1,573
    
    
    
    2,094
    
    
    
    5,012
    
    
    
    6,227Adjusted net incomediluted
    
    $
    25,884
    
    
    $
    37,682
    
    
    $
    92,944
    
    
    $
    142,101Denominator:Weighted average common
shares outstandingbasic
    
    
    176,221
    
    
    
    182,599
    
    
    
    175,999
    
    
    
    182,875Effect of dilutive securities
Optionstreasury stock method
    
    
    869
    
    
    
    548
    
    
    
    687
    
    
    
    660Restricted stocktreasury stock method
    
    
    1,087
    
    
    
    688
    
    
    
    861
    
    
    
    541Contingent convertible senior notes
    
    
    42,418
    
    
    
    42,457
    
    
    
    42,444
    
    
    
    42,457Weighted average common shares
outstandingdiluted
    
    
    220,595
    
    
    
    226,292
    
    
    
    219,991
    
    
    
    226,533Earnings per common share:Basic
    
    $
    0.14
    
    
    $
    0.19
    
    
    $
    0.50
    
    
    $
    0.74Diluted
    
    $
    0.12
    
    
    $
    0.17
    
    
    $
    0.42
    
    
    $
    0.63
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2008
    
    2007
    
    2008
    
    2007Basic earnings per share:Unvested restricted stock
    
    
    2,709
    
    
    
    2,311
    
    
    
    2,706
    
    
    
    2,179Diluted earnings per share:Anti-dilutive stock options
    
    
    16
    
    
    
    1,288
    
    
    
    938
    
    
    
    1,288Anti-dilutive restricted stock
    
    
    2
    
    
    
    10
    
    
    
    133
    
    
    
    4Total anti-dilutive securities excluded from the
computation of diluted earnings per share
    
    
    18
    
    
    
    1,298
    
    
    
    1,071
    
    
    
    1,292
 -8-




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GREY WOLF, INC. AND SUBSIDIARIES  Notes to Consolidated Financial Statements
 Share-Based Payment Arrangements
   Recent Accounting Pronouncements
    -9-




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GREY WOLF, INC. AND SUBSIDIARIES  Notes to Consolidated Financial Statements
  (3) Accounting for Income Taxes
    -10-




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GREY WOLF, INC. AND SUBSIDIARIES  Notes to Consolidated Financial Statements
 (4) Long-Term Debt
  September 30,
    
    
    December 31,2008
    
    
    20073.75% Contingent Convertible
Senior Notes due May 2023
    
    $
    149,725
    
    
    $
    150,000Floating Rate Contingent Convertible
Senior Notes due April 2024
    
    
    125,000
    
    
    
    125,000274,725
    
    
    
    275,000Less current maturities
    
    
    
    
    
    
    Long-term debt
    
    $
    274,725
    
    
    $
    275,000
 3.75% Notes
     -11-




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##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES  Notes to Consolidated Financial Statements
  Floating Rate Notes
    CIT Facility
  -12-




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GREY WOLF, INC. AND SUBSIDIARIES  Notes to Consolidated Financial Statements
    (5) Segment Information
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007RevenueUnited States
    
    $
    227,641
    
    
    $
    220,713
    
    
    $
    633,104
    
    
    $
    690,062Mexico
    
    
    6,509
    
    
    
    3,286
    
    
    
    19,275
    
    
    
    3,470Total revenue
    
    $
    234,150
    
    
    $
    223,999
    
    
    $
    652,379
    
    
    $
    693,532Operating IncomeUnited States
    
    $
    37,999
    
    
    $
    56,473
    
    
    $
    139,035
    
    
    $
    215,233Mexico
    
    
    1,029
    
    
    
    (491
    )
    
    
    3,125
    
    
    
    (1,218
    )Total operating income
    
    $
    39,028
    
    
    $
    55,982
    
    
    $
    142,160
    
    
    $
    214,015
 -13-




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GREY WOLF, INC. AND SUBSIDIARIES  Notes to Consolidated Financial Statements
 (6)
Termination of Merger Agreement with Basic Energy Services, Inc.
(Basic)
  (7) Approval of Merger Agreement with Precision Drilling Trust (Precision)
  (8) Contingencies
 Howard G.
Ahrens, On Behalf of Itself and All Others Similarly Situated vs. Grey Wolf, Inc., Frank M. Brown,
William T. Donovan, Thomas P. Richards, Robert E. Rose, Trevor Turbidy, Steven A. Webster, and
William R. Zeigler
 H. Alan Caplan v. Steven A. Webster, William R. Ziegler, Frank M. Brown, William T. Donovan, Thomas
P. Richards, Robert E. Rose, Trevor Turbidy and Grey Wolf, Inc.
 Charles J. Crane Derivatively On Behalf of Grey Wolf vs. Thomas P. Richards, William R.
Ziegler, William T. Donovan, Steven A. Webster, Robert E. Rose, Frank M. Brown, Trevor M. Turbidy;
Precision Drilling Trust, Precision Drilling Corporation, and Precision Lobos Corporation
 -14-




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GREY WOLF, INC. AND SUBSIDIARIES  Notes to Consolidated Financial Statements
   (9) Capital Stock and Option Plans
  
    
    incentive stock options;
    
    non-statutory stock options;
    
    restricted shares; and
    
    other stock-based and cash awards.
     -15-




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GREY WOLF, INC. AND SUBSIDIARIES  Notes to Consolidated Financial Statements
 (10) Treasury Stock
   (11) Concentrations
   (12) Insurance Recoveries
  -16-




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
  Overview
   Termination of Merger Agreement with Basic Energy Services, Inc. (Basic)
  Approval of Merger Agreement with Precision Drilling Trust (Precision)
    -17-




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New Rig Purchases
  Rig Activity
   2006
    
    2007
    
    2008DomesticLand Rig
    
    Full
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Full
    
    
    
    
    
    
    
    
    
    
    
    
    
    10/1 -Count
    
    Year
    
    Q-1
    
    Q-2
    
    Q-3
    
    Q-4
    
    Year
    
    Q-1
    
    Q-2
    
    Q-3
    
    10/31Baker
Hughes
    
    
    1,535
    
    
    
    1,626
    
    
    
    1,653
    
    
    
    1,691
    
    
    
    1,705
    
    
    
    1,669
    
    
    
    1,690
    
    
    
    1,775
    
    
    
    1,886
    
    
    
    1,882Grey Wolf
    
    
    108
    
    
    
    110
    
    
    
    104
    
    
    
    104
    
    
    
    103
    
    
    
    105
    
    
    
    100
    
    
    
    105
    
    
    
    112
    
    
    
    114
 -18-




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Term Contracts
   Drilling Contract Rates
   Turnkey Contract Activity
 Reconciliation of
Non-GAAP Financial Measures
 -19-




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Stock Repurchase Program
   Financial Outlook
      Critical Accounting Policies
  -20-




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Property and Equipment
  Impairment of Long-Lived Assets
    Goodwill
   -21-




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Revenue Recognition
  Insurance Accruals
   Income Taxes
  -22-




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Financial Condition and Liquidity
  September 30, 2008
    
    
    December 31, 2007(Unaudited)(Dollars in thousands)Amount
    
    
    %
    
    
    Amount
    
    
    %Working capital
    
    $
    382,455
    
    
    
    31
    
    
    $
    338,804
    
    
    
    31Property and equipment, net
    
    
    789,881
    
    
    
    65
    
    
    
    737,944
    
    
    
    67Goodwill
    
    
    10,377
    
    
    
    1
    
    
    
    10,377
    
    
    
    1Other noncurrent assets, net
    
    
    30,785
    
    
    
    3
    
    
    
    16,153
    
    
    
    1Total
    
    $
    1,213,498
    
    
    
    100
    
    
    $
    1,103,278
    
    
    
    100Long-term debt
    
    $
    274,725
    
    
    
    23
    
    
    $
    275,000
    
    
    
    25Other long-term liabilities
    
    
    186,031
    
    
    
    15
    
    
    
    168,769
    
    
    
    15Shareholders equity
    
    
    752,742
    
    
    
    62
    
    
    
    659,509
    
    
    
    60Total
    
    $
    1,213,498
    
    
    
    100
    
    
    $
    1,103,278
    
    
    
    100
 Significant Changes in Financial Condition
    -23-




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Long-Term Debt
  3.75% Notes
     -24-




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##### Table of Contents



Floating Rate Notes
    CIT Facility
   -25-




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##### Table of Contents



Cash Flow
  Nine Months EndedSeptember 30,2008
    
    
    2007(In thousands)(Unaudited)Net cash provided by (used in):Operating activities
    
    $
    195,356
    
    
    $
    235,680Investing activities
    
    
    (150,365
    )
    
    
    (191,838
    )Financing activities
    
    
    (2,466
    )
    
    
    (18,466
    )Net increase in cash
    
    $
    42,525
    
    
    $
    25,376
    -26-




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Projected Cash Sources and Uses
    Inflation and Changing Prices
  Results of Operations
  -27-




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##### Table of Contents



Reconciliation of Non-GAAP Financial Measures
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(Dollars in thousands)(Unaudited)Earnings before interest expense, income taxes,
depreciation and amortization(1)
    
    $
    68,428
    
    
    $
    83,671
    
    
    $
    230,791
    
    
    $
    292,267Depreciation and amortization
    
    
    (27,744
    )
    
    
    (24,355
    )
    
    
    (82,497
    )
    
    
    (68,166
    )Interest expense
    
    
    (2,564
    )
    
    
    (3,521
    )
    
    
    (8,610
    )
    
    
    (10,451
    )Total income tax expense
    
    
    (13,809
    )
    
    
    (20,207
    )
    
    
    (51,752
    )
    
    
    (77,776
    )Net income applicable to common shares
    
    $
    24,311
    
    
    $
    35,588
    
    
    $
    87,932
    
    
    $
    135,874
 
 (1)
    
    We incurred $18.3 million in costs during the third quarter of 2008 in connection with
merger activities with Basic and Precision. -28-




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##### Table of Contents



Comparison of the Three Months Ended September 30, 2008 and 2007
  Three Months Ended
    
    
    Three Months EndedSeptember 30, 2008
    
    
    September 30,2007Daywork
    
    
    Turnkey
    
    
    
    
    
    
    Daywork
    
    
    TurnkeyOperations
    
    
    Operations
    
    
    Total
    
    
    Operations
    
    
    Operations
    
    
    Total(Dollars in thousands except averages per rig day worked)(Unaudited)Rig days worked
    
    
    9,563
    
    
    
    726
    
    
    
    10,289
    
    
    
    8,784
    
    
    
    830
    
    
    
    9,614Contract drilling revenues
    
    $
    194,492
    
    
    $
    39,658
    
    
    $
    234,150
    
    
    $
    178,411
    
    
    $
    45,588
    
    
    $
    223,999Drilling operations expenses
    
    
    (109,589
    )
    
    
    (31,752
    )
    
    
    (141,341
    )
    
    
    (101,634
    )
    
    
    (35,313
    )
    
    
    (136,947
    )General and administrative
expenses
    
    
    (7,215
    )
    
    
    (506
    )
    
    
    (7,721
    )
    
    
    (6,256
    )
    
    
    (501
    )
    
    
    (6,757
    )Interest income
    
    
    1,532
    
    
    
    124
    
    
    
    1,656
    
    
    
    3,043
    
    
    
    291
    
    
    
    3,334Gain (loss) on sale of assets
    
    
    10
    
    
    
    1
    
    
    
    11
    
    
    
    37
    
    
    
    5
    
    
    
    42Merger activity costs
    
    
    (17,034
    )
    
    
    (1,293
    )
    
    
    (18,327
    )
    
    
    
    
    
    
    
    
    
    
    EBITDA
    
    $
    62,196
    
    
    $
    6,232
    
    
    $
    68,428
    
    
    $
    73,601
    
    
    $
    10,070
    
    
    $
    83,671Average per rig day worked:Contract drilling revenues
    
    $
    20,338
    
    
    $
    54,625
    
    
    $
    22,757
    
    
    $
    20,311
    
    
    $
    54,925
    
    
    $
    23,299EBITDA
    
    $
    6,504
    
    
    $
    8,584
    
    
    $
    6,651
    
    
    $
    8,379
    
    
    $
    12,133
    
    
    $
    8,703
  Daywork Operations
  Turnkey Operations
  -29-




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Other
    Comparison of the Nine Months Ended September 30, 2008 and 2007
  Nine Months Ended
    
    
    Nine Months EndedSeptember 30, 2008
    
    
    September 30, 2007Daywork
    
    
    Turnkey
    
    
    
    
    
    
    Daywork
    
    
    TurnkeyOperations
    
    
    Operations
    
    
    Total
    
    
    Operations
    
    
    Operations
    
    
    Total(Dollars in thousands except averages per rig day worked)(Unaudited)Rig days worked
    
    
    26,958
    
    
    
    1,995
    
    
    
    28,953
    
    
    
    26,802
    
    
    
    2,210
    
    
    
    29,012Contract drilling revenues
    
    $
    542,473
    
    
    $
    109,906
    
    
    $
    652,379
    
    
    $
    572,000
    
    
    $
    121,532
    
    
    $
    693,532Drilling operations expenses
    
    
    (302,769
    )
    
    
    (82,033
    )
    
    
    (384,802
    )
    
    
    (302,259
    )
    
    
    (87,948
    )
    
    
    (390,207
    )General and administrative
expenses
    
    
    (23,065
    )
    
    
    (1,489
    )
    
    
    (24,554
    )
    
    
    (19,873
    )
    
    
    (1,442
    )
    
    
    (21,315
    )Interest income
    
    
    5,714
    
    
    
    420
    
    
    
    6,134
    
    
    
    9,307
    
    
    
    779
    
    
    
    10,086Gain (loss) on sale of assets
    
    
    (38
    )
    
    
    (1
    )
    
    
    (39
    )
    
    
    147
    
    
    
    24
    
    
    
    171Merger activity costs
    
    
    (17,034
    )
    
    
    (1,293
    )
    
    
    (18,327
    )
    
    
    
    
    
    
    
    
    
    
    EBITDA
    
    $
    205,281
    
    
    $
    25,510
    
    
    $
    230,791
    
    
    $
    259,322
    
    
    $
    32,945
    
    
    $
    292,267Average per rig day worked:Contract drilling revenues
    
    $
    20,123
    
    
    $
    55,091
    
    
    $
    22,532
    
    
    $
    21,342
    
    
    $
    54,992
    
    
    $
    23,905EBITDA
    
    $
    7,615
    
    
    $
    12,787
    
    
    $
    7,971
    
    
    $
    9,675
    
    
    $
    14,907
    
    
    $
    10,074
  -30-




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Daywork Operations
  Turnkey Operations
  Other
    -31-




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Item 3. Quantitative and Qualitative Disclosure about Market Risk
 Interest Rate Risk
  
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control over Financial Reporting
  -32-




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##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
 Howard G.
Ahrens, On Behalf of Itself and All Others Similarly Situated vs. Grey Wolf, Inc., Frank M. Brown,
William T. Donovan, Thomas P. Richards, Robert E. Rose, Trevor Turbidy, Steven A. Webster, and
William R. Zeigler
 H. Alan Caplan v. Steven A. Webster, William R. Ziegler, Frank M. Brown, William T. Donovan, Thomas
P. Richards, Robert E. Rose, Trevor Turbidy and Grey Wolf, Inc.
 Charles J. Crane Derivatively On Behalf of Grey Wolf vs. Thomas P. Richards, William R.
Ziegler, William T. Donovan, Steven A. Webster, Robert E. Rose, Frank M. Brown, Trevor M. Turbidy;
Precision Drilling Trust, Precision Drilling Corporation, and Precision Lobos Corporation
  -33-




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##### Table of Contents



Item 1a. Risk Factors
  The recent financial crisis and falling commodity prices are likely to adversely affect demand for
our contract drilling services and may increase our credit risk of customer non-payment.
  Risks Relating to the Proposed Merger with Precision
 Failure to complete our proposed merger with Precision could negatively impact our stock price and
future business and financial results because of, among other things, the disruption that would
occur as a result of uncertainties relating to a failure to complete the merger.
  While the proposed merger is pending, we will be subject to business uncertainties and contractual
restrictions that could adversely affect our business.
  -34-




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We will incur significant transaction costs in connection with the proposed merger.
  The merger agreement limits our ability to pursue an alternative acquisition proposal and may
require us to pay a termination fee of up to $64.0 million if we do.
   Uncertainties associated with the proposed merger may cause us to lose key employees.
  The anticipated benefits of the proposed merger may not be realized.
  -35-




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##### Table of Contents



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  Total Number of
    
    ApproximateShares
    
    Dollar Value ofPurchased as
    
    Shares that MayTotal Number
    
    Average
    
    Part of Publicly
    
    Yet be Purchasedof Shares
    
    Price Paid per
    
    Announced
    
    Under thePeriod
    
    Purchased(1)
    
    Share
    
    Program
    
    Program(2)July 1, 2008 to July 31, 2008
    
    
    20
    
    
    $
    8.82
    
    
    
    
    
    
    $
    28,070August 1, 2008 to August 31, 2008
    
    
    4
    
    
    $
    8.61
    
    
    
    
    
    
    $
    28,070September 1, 2008 to September 30, 2008
    
    
    1
    
    
    $
    8.11
    
    
    
    
    
    
    $
    28,070
 
 (1)
    
    Our employees may elect to have shares of common stock withheld to cover payroll taxes
when shares of restricted stock vest. We then pay the taxes on their behalf and hold the
shares withheld as treasury stock. We had approximately 25,000 of such treasury share
purchases during the three months ended September 30, 2008. These share repurchases are not
covered under a publicly announced program.(2)
    
    On May 25, 2006, we announced that our Board of Directors approved a plan authorizing
the repurchase of up to $100.0 million of common stock in open market or in privately
negotiated block-trade transactions. On September 25, 2007, we announced that our Board of
Directors authorized a $50.0 million increase in our common stock repurchase program for a
total of $150.0 million. The number of shares to be purchased and the timing of purchases
will be based on several factors, including the price of the common stock, general market
conditions, available cash and alternate investment opportunities. The stock repurchase
program is subject to termination prior to completion. We are prevented from repurchasing
shares of common stock unless and until the termination of the merger agreement with
Precision. 
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  (i)
    
    The proposal to approve the adjournment of the special meeting to July 31, 2008, to
solicit additional proxies to approve our proposed merger:
 For
    
    
    38,144,105Against
    
    
    104,332,193Abstaining
    
    
    537,815Broker Non-Votes
    
    
    301
 (ii)
    
    The proposal to approve the Agreement and Plan of Merger dated as of April 20, 2008, by
and among the Company, Basic and Horsepower Holdings, Inc., pursuant to which the Company
and Basic will merge with and into Horsepower Holdings, Inc.:
 For
    
    
    38,733,169Against
    
    
    103,773,423Abstaining
    
    
    507,522Broker Non-Votes
    
    
    300
 -36-




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##### Table of Contents



Item 5. Other Information
  
    
    proposed merger with Precision;
    
    business strategy;
    
    demand for our services;
    
    spending by our customers;
    
    projected rig activity;
    
    increases in rig supply and its effects on us;
    
    projected dayrates;
    
    projected interest expense;
    
    projected tax rate;
    
    rigs expected to be engaged in turnkey operations;
    
    cost of building new rigs, delivery times and deployment destinations of these rigs;
    
    the ability to recover the purchase price of rigs from term contracts;
    
    the availability and financial terms of term contracts;
    
    wage rates and retention of employees;
    
    sufficiency of our capital resources and liquidity;
    
    projected depreciation and capital expenditures;
    
    future common stock repurchases by us;
    
    projected sources and uses of cash; and
    
    matters discussed in Item 2 under the caption Financial Outlook.
  
    
    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;
    
    our proposed merger with Precision may not be completed or the anticipated benefits
of the merger may not be realized; and
    
    weather conditions.
  -37-




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##### Table of Contents



Item 6. Exhibits
 2.1
    
    Agreement and Plan of Merger, dated August 24, 2008, by and among Grey Wolf,
Inc., Precision Drilling Trust, Precision Drilling Corporation and Precision Lobos
Corporation (incorporated hereby reference to Exhibit 2.1 to Form 8-K filed August 27,
2008).2.2
    
    Agreement and Plan of Merger, dated
April 20, 2008, by and among Grey Wolf, Inc., Basic Energy Services,
Inc., and Horsepower Holdings, Inc. (incorporated by reference to
Exhibit 2.1 to Form 8-K filed April 22, 2008).3.1
    
    Amended and Restated Articles of Incorporation of Grey Wolf, Inc. (incorporated
herein by reference to Exhibit 3.1 to Form 8-K filed May 21, 2007).3.2
    
    By-Laws of Grey Wolf, Inc., as amended (incorporated herein by reference to
Exhibit 99.1 to Form 8-K dated March 23, 1999).4.1
    
    Rights Agreement dated as of September 21, 1998 by and between the Company and
American Stock Transfer and Trust Company as Rights Agent (incorporated herein by
reference to Exhibit 4.1 to Form 8-K filed September 22, 1998).4.2
    
    Indenture, dated as of May 7, 2003, relating to the 3.75% Contingent
Convertible Senior Notes due 2023 between the Company, the Guarantors, and JPMorgan
Chase Bank, a New York Banking Corporation, as Trustee (incorporated herein by
reference to Exhibit 4.2 to the Companys Registration Statement on Form S-3 No.
333-106997 filed July 14, 2003).4.3
    
    Supplemental Indenture, dated as of May 22, 2003, relating to the 3.75%
Contingent Convertible Senior Notes due 2023 between the Company, the Guarantors, and
JPMorgan Chase Bank, a New York Banking Corporation, as Trustee (incorporated herein by
reference to Exhibit 4.3 to the Companys Registration Statement on Form S-3 No.
333-106997 filed July 14, 2003).4.4
    
    Indenture, dated as of March 31, 2004, relating to the Floating Rate Contingent
Convertible Senior Notes Due 2024 between the Company, the Guarantors, and J.P. Morgan
Chase Bank, a New York banking corporation, as Trustee (incorporated by reference to
Exhibit 4.1 to Form 10-Q dated May 5, 2004).4.5
    
    Registration Rights 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 (incorporated by reference to Exhibit 4.2 to the
Quarterly Report on Form 10-Q filed May 5, 2004).4.6
    
    Second Supplemental Indenture, dated as of March 31, 2004, relating to the
3.75% Contingent Convertible Senior Notes due 2023 between the Company, the Guarantors,
and JP Morgan Chase Bank, a New York Banking Corporation, as Trustee (incorporated by
reference to Exhibit 4.3 to the Quarterly Report on Form 10-Q filed May 5, 2004).*10.1
    
    Seventh Amendment to the Loan Agreement dated September 30, 2008 by and between
Grey Wolf Drilling Company, L.P. (as borrower), Grey Wolf, Inc. and various subsidiaries
(as guarantor) and the CIT Business Credit, Inc. (as agent) and various financial
institutions (as lenders).* 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)
 -38-




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** 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.
 
 *
    
    Filed herewith**
    
    Furnished, not filed, in accordance with Item 601(b)(32) of Regulation S-K. -39-




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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:  November  4,  2008
    By:
    /s/ David W. WehlmannDavid W. WehlmannExecutive Vice President and
Chief Financial Officer -40-