##### 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 June 30, 2005
 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 1-822
 
 Grey Wolf, Inc.
  Texas
(State or jurisdiction of
incorporation or organization)
    
    74-2144774
(I.R.S. Employer
Identification No.)
 10370 Richmond Avenue, Suite 600
Houston, Texas
(Address of principal executive offices)
    
    77042
(Zip Code)
 (713) 435-6100
  þ o
  þ o




---



##### Table of Contents



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
    
    
    18Item 3. Quantitative and Qualitative Disclosure about Market Risk
    
    
    32Item 4. Controls and Procedures
    
    
    32Part II.Other InformationItem 1. Legal Proceedings
    
    
    33Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    33Item 3. Defaults Upon Senior Securities
    
    
    33Item 4. Submission of Matters to a Vote of Security Holders
    
    
    33Item 5. Other Information
    
    
    33Item 6. Exhibits
    
    
    34Certification of CEO pursuant to Rule 13a-14aCertification of CFO pursuant to Rule 13a-14aCertification of Chairman, President and CEO, Exec. VP and CFO pursuant to Section 906
 -2-




---



##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES
 
 Consolidated Balance Sheets
  June 30,
    
    December 31,2005
    
    2004(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    122,375
    
    
    $
    71,710Restricted cash
    
    
    767
    
    
    
    758Accounts receivable, net of allowance of $2,674
and $2,424, respectively
    
    
    121,088
    
    
    
    98,065Prepaids and other current assets
    
    
    5,713
    
    
    
    5,097Deferred tax assets
    
    
    27,727
    
    
    
    3,050Total current assets
    
    
    277,670
    
    
    
    178,680Property and equipment:Land, buildings and improvements
    
    
    5,064
    
    
    
    5,061Drilling equipment
    
    
    886,147
    
    
    
    824,901Furniture and fixtures
    
    
    3,693
    
    
    
    3,578Total property and equipment
    
    
    894,904
    
    
    
    833,540Less: accumulated depreciation
    
    
    (424,125
    )
    
    
    (396,210
    )Net property and equipment
    
    
    470,779
    
    
    
    437,330Goodwill
    
    
    10,377
    
    
    
    10,377Other noncurrent assets, net
    
    
    8,538
    
    
    
    9,489$
    767,364
    
    
    $
    635,876LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable-trade
    
    $
    56,793
    
    
    $
    40,232Accrued workers compensation
    
    
    5,997
    
    
    
    4,303Payroll and related employee costs
    
    
    9,142
    
    
    
    8,699Accrued interest payable
    
    
    1,930
    
    
    
    1,516Other accrued liabilities
    
    
    12,359
    
    
    
    5,834Total current liabilities
    
    
    86,221
    
    
    
    60,584Contingent convertible senior notes
    
    
    275,000
    
    
    
    275,000Other long-term liabilities
    
    
    7,455
    
    
    
    7,509Deferred income taxes
    
    
    104,141
    
    
    
    55,301Commitments 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; 300,000,000
shares
authorized; 191,710,252 and 190,136,471
issued and outstanding, respectively
    
    
    19,171
    
    
    
    19,014Additional paid-in capital
    
    
    370,361
    
    
    
    363,148Unearned restricted stock awards
    
    
    (982
    )
    
    
    Accumulated deficit
    
    
    (94,003
    )
    
    
    (144,680
    )Total shareholders equity
    
    
    294,547
    
    
    
    237,482$
    767,364
    
    
    $
    635,876
 See accompanying notes to consolidated financial statements
 -3-




---



##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES
 
 Consolidated Statements of Operations
 
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Revenues:Contract drilling
    
    $
    161,315
    
    
    $
    103,750
    
    
    $
    311,307
    
    
    $
    178,950Costs and expenses:Drilling operations
    
    
    96,836
    
    
    
    84,509
    
    
    
    189,771
    
    
    
    147,046Depreciation and amortization
    
    
    14,832
    
    
    
    14,091
    
    
    
    29,134
    
    
    
    27,063General and administrative
    
    
    3,557
    
    
    
    3,167
    
    
    
    7,479
    
    
    
    6,307Gain on sale of assets
    
    
    (60
    )
    
    
    (7
    )
    
    
    (78
    )
    
    
    (18
    )Total costs and expenses
    
    
    115,165
    
    
    
    101,760
    
    
    
    226,306
    
    
    
    180,398Operating income (loss)
    
    
    46,150
    
    
    
    1,990
    
    
    
    85,001
    
    
    
    (1,448
    )Other income (expense):Interest income
    
    
    724
    
    
    
    170
    
    
    
    1,156
    
    
    
    336Interest expense
    
    
    (2,821
    )
    
    
    (3,908
    )
    
    
    (5,420
    )
    
    
    (10,074
    )Other expense, net
    
    
    (2,097
    )
    
    
    (3,738
    )
    
    
    (4,264
    )
    
    
    (9,738
    )Net income (loss) before income taxes
    
    
    44,053
    
    
    
    (1,748
    )
    
    
    80,737
    
    
    
    (11,186
    )Income tax expense (benefit):Current
    
    
    3,197
    
    
    
    
    
    
    
    4,369
    
    
    
    Deferred
    
    
    13,223
    
    
    
    (266
    )
    
    
    25,691
    
    
    
    (3,273
    )Total income tax expense (benefit)
    
    
    16,420
    
    
    
    (266
    )
    
    
    30,060
    
    
    
    (3,273
    )Net income (loss)
    
    $
    27,633
    
    
    $
    (1,482
    )
    
    $
    50,677
    
    
    $
    (7,913
    )Net income (loss) per common share (Note 2):Basic
    
    $
    0.14
    
    
    $
    (0.01
    )
    
    $
    0.27
    
    
    $
    (0.04
    )Diluted
    
    $
    0.12
    
    
    $
    (0.01
    )
    
    $
    0.23
    
    
    $
    (0.04
    )Weighted average common shares outstanding:Basic
    
    
    190,799
    
    
    
    186,073
    
    
    
    190,537
    
    
    
    183,765Diluted
    
    
    234,938
    
    
    
    186,073
    
    
    
    234,642
    
    
    
    183,765
 See accompanying notes to consolidated financial statements
 -4-




---



##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES
 
 Consolidated Statements of Shareholders Equity and Comprehensive Income
  CommonStock,
    
    Additional
    
    UnearnedCommon
    
    $0.10 Par
    
    Paid-in
    
    Restricted
    
    AccumulatedShares
    
    Value
    
    Capital
    
    Stock Awards
    
    Deficit
    
    TotalBalance, December 31, 2003
    
    
    181,283
    
    
    $
    18,129
    
    
    $
    330,266
    
    
    $
    
    
    
    $
    (152,758
    )
    
    $
    195,637Exercise of stock options
    
    
    4,243
    
    
    
    424
    
    
    
    9,729
    
    
    
    
    
    
    
    
    
    
    
    10,153Tax benefit of stock
option exercises
    
    
    
    
    
    
    
    
    
    
    3,193
    
    
    
    
    
    
    
    
    
    
    
    3,193Non-cash compensation
expense
    
    
    
    
    
    
    
    
    
    
    77
    
    
    
    
    
    
    
    
    
    
    
    77Issuance of common stock
    
    
    4,610
    
    
    
    461
    
    
    
    19,883
    
    
    
    
    
    
    
    
    
    
    
    20,344Comprehensive net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,078
    
    
    
    8,078Balance, December 31, 2004
    
    
    190,136
    
    
    
    19,014
    
    
    
    363,148
    
    
    
    
    
    
    
    (144,680
    )
    
    
    237,482Exercise of stock options
    
    
    1,385
    
    
    
    138
    
    
    
    4,639
    
    
    
    
    
    
    
    
    
    
    
    4,777Tax benefit of stock
option exercises
    
    
    
    
    
    
    
    
    
    
    1,528
    
    
    
    
    
    
    
    
    
    
    
    1,528Issuance of restricted stock
    
    
    189
    
    
    
    19
    
    
    
    1,046
    
    
    
    (1,065
    )
    
    
    
    
    
    
    Amortization of restricted
stock awards
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    83
    
    
    
    
    
    
    
    83Comprehensive net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,677
    
    
    
    50,677Balance, June 30, 2005
(Unaudited)
    
    
    191,710
    
    
    $
    19,171
    
    
    $
    370,361
    
    
    $
    (982
    )
    
    $
    (94,003
    )
    
    $
    294,547
 See accompanying notes to consolidated financial statements
 -5-




---



##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES
 
 Consolidated Statements of Cash Flows
 
 Six Months EndedJune 30,2005
    
    2004Cash flows from operating activities:Net income (loss)
    
    $
    50,677
    
    
    $
    (7,913
    )Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Depreciation and amortization
    
    
    29,134
    
    
    
    27,063Deferred income taxes
    
    
    24,163
    
    
    
    (3,675
    )Gain on sale of assets
    
    
    (78
    )
    
    
    (18
    )Amortization of restricted stock awards
    
    
    83
    
    
    
    Non-cash compensation expense
    
    
    
    
    
    
    77Accretion of debt discount
    
    
    
    
    
    
    102Tax benefit of stock option exercises
    
    
    1,528
    
    
    
    402Net effect of changes in assets and liabilities
related to operating accounts
    
    
    2,351
    
    
    
    (10,647
    )Cash provided by operating activities
    
    
    107,858
    
    
    
    5,391Cash flows from investing activities:Cash paid for acquisition, net of cash acquired
    
    
    
    
    
    
    (28,488
    )Property and equipment additions
    
    
    (62,407
    )
    
    
    (18,229
    )Proceeds from sale of property and equipment
    
    
    437
    
    
    
    272Cash used in investing activities
    
    
    (61,970
    )
    
    
    (46,445
    )Cash flows from financing activities:Net proceeds from long-term debt
    
    
    
    
    
    
    122,187Repayments of long-term debt
    
    
    
    
    
    
    (85,000
    )Financing costs
    
    
    
    
    
    
    (391
    )Proceeds from exercise of stock options
    
    
    4,777
    
    
    
    733Cash provided by financing activities
    
    
    4,777
    
    
    
    37,529Net increase (decrease) in cash and cash equivalents
    
    
    50,665
    
    
    
    (3,525
    )Cash and cash equivalents, beginning of period
    
    
    71,710
    
    
    
    54,350Cash and cash equivalents, end of period
    
    $
    122,375
    
    
    $
    50,825Supplemental cash flow disclosure:Cash paid for interest
    
    $
    4,575
    
    
    $
    11,909Cash paid for taxes
    
    $
    254
    
    
    $
    
 See accompanying notes to consolidated financial statements
 -6-




---



##### Table of Contents



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




---



##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES
 Notes to Consolidated Financial Statements
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004(In thousands, except per share amounts)Numerator:Net income (loss)
    
    $
    27,633
    
    
    $
    (1,482
    )
    
    $
    50,677
    
    
    $
    (7,913
    )Add interest expense on contingent
convertible senior notes,
net of related tax effects
    
    
    1,623
    
    
    
    
    
    
    
    3,118
    
    
    
    Adjusted net income-diluted
    
    $
    29,256
    
    
    $
    (1,482
    )
    
    $
    53,795
    
    
    $
    (7,913
    )Denominator:Weighted average common
shares outstanding
    
    
    190,799
    
    
    
    186,073
    
    
    
    190,537
    
    
    
    183,765Effect of dilutive securities:Options  treasury stock method
    
    
    1,633
    
    
    
    
    
    
    
    1,624
    
    
    
    Restricted stock  treasury stock method
    
    
    49
    
    
    
    
    
    
    
    24
    
    
    
    Contingent convertible senior notes
    
    
    42,457
    
    
    
    
    
    
    
    42,457
    
    
    
    Weighted average common shares
outstanding-diluted
    
    
    234,938
    
    
    
    186,073
    
    
    
    234,642
    
    
    
    183,765Earnings per common share:Basic
    
    $
    0.14
    
    
    $
    (0.01
    )
    
    $
    0.27
    
    
    $
    (0.04
    )Diluted
    
    $
    0.12
    
    
    $
    (0.01
    )
    
    $
    0.23
    
    
    $
    (0.04
    )
  Stock-Based Compensation
  -8-




---



##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES
 Notes to Consolidated Financial Statements
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004(In thousands, except per share amounts)Net income (loss), as reported
    
    $
    27,633
    
    
    $
    (1,482
    )
    
    $
    50,677
    
    
    $
    (7,913
    )Add: Stock-based employee
compensation expense included
in reported net income (loss), net of
related tax effects
    
    
    29
    
    
    
    
    
    
    
    52
    
    
    
    52Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects
    
    
    (570
    )
    
    
    (803
    )
    
    
    (1,174
    )
    
    
    (1,274
    )Pro forma net income (loss)
    
    $
    27,092
    
    
    $
    (2,285
    )
    
    $
    49,555
    
    
    $
    (9,135
    )Basic earnings per shareAs reported
    
    $
    0.14
    
    
    $
    (0.01
    )
    
    $
    0.27
    
    
    $
    (0.04
    )Pro Forma
    
    $
    0.14
    
    
    $
    (0.01
    )
    
    $
    0.26
    
    
    $
    (0.05
    )Diluted earnings per shareAs reported
    
    $
    0.12
    
    
    $
    (0.01
    )
    
    $
    0.23
    
    
    $
    (0.04
    )Pro Forma
    
    $
    0.12
    
    
    $
    (0.01
    )
    
    $
    0.22
    
    
    $
    (0.05
    )
  Recent Accounting Pronouncements
   -9-




---



##### Table of Contents



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




---



##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES
 Notes to Consolidated Financial Statements
 (4) Long-Term Debt
  June 30,
    
    December 31,2005
    
    20043.75% Contingent ConvertibleSenior Notes due May 2023
    
    $
    150,000
    
    
    $
    150,000Floating Rate Contingent ConvertibleSenior Notes due April 2024
    
    
    125,000
    
    
    
    125,000275,000
    
    
    
    275,000Less current maturities
    
    
    
    
    
    
    Long-term debt
    
    $
    275,000
    
    
    $
    275,000
 Floating Rate Notes
    
    
    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
 -11-




---



##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES
 Notes to Consolidated Financial Statements
 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 3.75%
Notes by both Moodys Investors Service (Moodys) and Standard & Poors Ratings Group
(S&P) are reduced below B1 and B+, respectively, or if neither rating agency is
rating the Companys 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 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.
  3.75% Notes
  -12-




---



##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES
 Notes to Consolidated Financial Statements
  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
    %
   
    
    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.
  -13-




---



##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES
 Notes to Consolidated Financial Statements
 8
7/8% Senior Notes due 2007
 7/8 7/8 7/8 7/8
 CIT Facility
    
    
    1 to 1 EBITDA coverage of debt service, tested monthly on a trailing 12
month basis; and
    
    minimum tangible net worth (as defined in the CIT Facility) at the end of
each quarter will be at least the prior year tangible net worth less non-cash
write-downs since the prior year-end and less fixed amounts for each quarter end for
which the test is calculated.
  -14-




---



##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES
 Notes to Consolidated Financial Statements
  
    
    default with respect to other indebtedness in excess of $350,000;
    
    legal judgments in excess of $350,000; or
    
    a change in control which means that the Company ceases to own 100% of its
two principal subsidiaries, some person or group that has either acquired beneficial
ownership of 30% or more of the Company or obtained the power to elect a majority of
the Companys board of directors, or the Companys board of directors ceases to consist
of a majority of continuing directors (as defined by the CIT Facility).
  (5) Segment Information
  (6) Contingencies
  (7) Capital Stock and Option Plans
  
    
    incentive stock options;
    
    non-statutory stock options;
    
    restricted shares; and
    
    other stock-based and cash awards.
  -15-




---



##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES
 Notes to Consolidated Financial Statements
    (8) Concentrations
   (9) Acquisition and Intangible Assets
   -16-




---



##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES
 Notes to Consolidated Financial Statements
  Current assets
    
    $
    3,992Property and equipment
    
    
    42,384Intangible assets
    
    
    3,200Goodwill
    
    
    10,377Total assets acquired
    
    
    59,953Current liabilities
    
    
    (4,490
    )Deferred tax liabilities
    
    
    (5,977
    )Total liabilities assumed
    
    
    (10,467
    )Net asset acquired
    
    $
    49,486
   -17-




---



##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES
 
 Managements
Discussion and Analysis of Financial
 Condition and Results of Operations
  Overview
    Rig Activity
  2003
    
    2004
    
    2005DomesticLand Rig
    
    Full
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Full
    
    
    
    
    
    
    
    
    
    July 1 Count
    
    Year
    
    Q-1
    
    Q-2
    
    Q-3
    
    Q-4
    
    Year
    
    Q-1
    
    Q-2
    
    July 29Baker
Hughes
    
    
    880
    
    
    
    1,002
    
    
    
    1,049
    
    
    
    1,115
    
    
    
    1,131
    
    
    
    1,074
    
    
    
    1,153
    
    
    
    1,218
    
    
    
    1,272Grey Wolf
    
    
    61
    
    
    
    65
    
    
    
    86
    
    
    
    94
    
    
    
    96
    
    
    
    85
    
    
    
    98
    
    
    
    99
    
    
    
    101
 Term Contracts
   -18-




---



##### Table of Contents



Drilling and Contract Rates
    Turnkey and Footage Contract Activity
   Financial Outlook
  -19-




---



##### Table of Contents



Critical Accounting Policies
  Property and Equipment
  -20-




---



##### Table of Contents



Impairment of Long-Lived Assets
   EstimatedPer Rig RefurbishmentNumber
    
    and Reactivation CostRig Category
    
    Of Rigs
    
    (excluding drill pipe)Marketed
    
    
    106
    
    
    
    N/ARigs being refurbished
    
    
    4
    
    
    $3.0 million - $6.8 millionAvailable for refurbishment
    
    
    17
    
    
    $5.0 million - $11.0 million
 -21-




---



##### Table of Contents



Goodwill and Other Intangible Assets
   Revenue Recognition
  Insurance Accruals
   -22-




---



##### Table of Contents



Income Taxes
   Financial Condition and Liquidity
  June 30, 2005
    
    December 31, 2004(Unaudited)(Dollars in thousands)Amount
    
    %
    
    Amount
    
    %Working capital
    
    $
    191,449
    
    
    
    28
    
    
    $
    118,096
    
    
    
    20Property and equipment, net
    
    
    470,779
    
    
    
    69
    
    
    
    437,330
    
    
    
    76Goodwill
    
    
    10,377
    
    
    
    2
    
    
    
    10,377
    
    
    
    2Other noncurrent assets
    
    
    8,538
    
    
    
    1
    
    
    
    9,489
    
    
    
    2Total
    
    $
    681,143
    
    
    
    100
    
    
    $
    575,292
    
    
    
    100Long-term debt
    
    $
    275,000
    
    
    
    40
    
    
    $
    275,000
    
    
    
    48Other long-term liabilities
    
    
    111,596
    
    
    
    17
    
    
    
    62,810
    
    
    
    11Shareholders equity
    
    
    294,547
    
    
    
    43
    
    
    
    237,482
    
    
    
    41Total
    
    $
    681,143
    
    
    
    100
    
    
    $
    575,292
    
    
    
    100
 Significant Changes in Financial Condition
  -23-




---



##### Table of Contents



Floating Rate Notes
    
    
    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 the 3.75% Notes by
both Moodys Investors Service (Moodys) and Standard & Poors Ratings Group (S&P)
are reduced below B1 and B+, respectively, or if neither rating agency is rating our
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 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.
  -24-




---



##### Table of Contents



3.75% Notes
    
    
    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.
  -25-




---



##### Table of Contents



CIT Facility
    
    
    1 to 1 EBITDA coverage of debt service, tested monthly on a trailing 12
month basis; and
    
    minimum tangible net worth (as defined in the CIT Facility) at the end of
each quarter will be at least the prior year tangible net worth less non-cash
write-downs since the prior year-end and less fixed amounts for each quarter end for
which the test is calculated.
  
    
    default with respect to other indebtedness in excess of $350,000;
    
    legal judgments in excess of $350,000; or
    
    a change in control which means that we cease to own 100% of our two
principal subsidiaries, some person or group has either acquired beneficial ownership
of 30% or more of the Company or obtained the power to elect a majority of our board of
directors, or our board of directors ceases to consist of a majority of continuing
directors (as defined by the CIT Facility).
  -26-




---



##### Table of Contents



Cash Flow
  Six Months EndedJune 30,2005
    
    2004(In thousands)(Unaudited)Net cash provided by (used in):Operating activities
    
    $
    107,858
    
    
    $
    5,391Investing activities
    
    
    (61,970
    )
    
    
    (46,445
    )Financing activities
    
    
    4,777
    
    
    
    37,529Net increase (decrease) in cash
    
    $
    50,665
    
    
    $
    (3,525
    )
   7/8
 Projected Cash Sources and Uses
   -27-




---



##### Table of Contents



Inflation and Changing Prices
  Other
  Results of Operations
  Reconciliation of Non-GAAP Financial Measures
  -28-




---



##### Table of Contents



ProjectedThreeMonthsThree Months Ended
    
    Six Months Ended
    
    EndingJune 30,
    
    June 30,
    
    September 30,2005
    
    2004
    
    2005
    
    2004
    
    2005(In thousands)(Unaudited)Earnings before interest expense,
taxes, depreciation and
amortization
    
    $
    61,706
    
    
    $
    16,251
    
    
    $
    115,291
    
    
    $
    25,951
    
    
    $
    65,996Depreciation and amortization
    
    
    (14,832
    )
    
    
    (14,091
    )
    
    
    (29,134
    )
    
    
    (27,063
    )
    
    
    (15,360
    )Interest expense
    
    
    (2,821
    )
    
    
    (3,908
    )
    
    
    (5,420
    )
    
    
    (10,074
    )
    
    
    (2,955
    )Total income tax (expense)
benefit
    
    
    (16,420
    )
    
    
    266
    
    
    
    (30,060
    )
    
    
    3,273
    
    
    
    (17,761
    )Net income (loss) applicable to
common shares
    
    $
    27,633
    
    
    $
    (1,482
    )
    
    $
    50,677
    
    
    $
    (7,913
    )
    
    $
    29,920
 Comparison of the Three Months Ended June 30, 2005 and 2004
  Three Months Ended
    
    Three Months EndedJune 30, 2005
    
    June 30, 2004Daywork
    
    Turnkey
    
    
    
    
    
    Daywork
    
    TurnkeyOperations
    
    Operations(1)
    
    Total
    
    Operations
    
    Operations(1)
    
    Total(Dollars in thousands except averages per rig day worked)(Unaudited)Rig days worked
    
    
    8,343
    
    
    
    705
    
    
    
    9,048
    
    
    
    6,752
    
    
    
    1,058
    
    
    
    7,810Contract drilling revenues
    
    $
    129,552
    
    
    $
    31,763
    
    
    $
    161,315
    
    
    $
    68,894
    
    
    $
    34,856
    
    
    $
    103,750Drilling operations expenses
    
    
    (75,911
    )
    
    
    (20,925
    )
    
    
    (96,836
    )
    
    
    (54,879
    )
    
    
    (29,630
    )
    
    
    (84,509
    )General and administrative
expenses
    
    
    (3,292
    )
    
    
    (265
    )
    
    
    (3,557
    )
    
    
    (2,777
    )
    
    
    (390
    )
    
    
    (3,167
    )Interest income
    
    
    673
    
    
    
    51
    
    
    
    724
    
    
    
    147
    
    
    
    23
    
    
    
    170Gain on sale of assets
    
    
    56
    
    
    
    4
    
    
    
    60
    
    
    
    6
    
    
    
    1
    
    
    
    7EBITDA
    
    $
    51,078
    
    
    $
    10,628
    
    
    $
    61,706
    
    
    $
    11,391
    
    
    $
    4,860
    
    
    $
    16,251Average per rig day worked:Contract drilling revenues
    
    $
    15,528
    
    
    $
    45,054
    
    
    $
    17,829
    
    
    $
    10,203
    
    
    $
    32,945
    
    
    $
    13,284EBITDA
    
    $
    6,122
    
    
    $
    15,075
    
    
    $
    6,820
    
    
    $
    1,687
    
    
    $
    4,594
    
    
    $
    2,081
 
 (1)
    
    Turnkey operations include the results from turnkey and footage contracts.  -29-




---



##### Table of Contents



Daywork Operations
  Turnkey Operations
  Other
    -30-




---



##### Table of Contents



Comparison of the Six Months Ended June 30, 2005 and 2004
  Six Months Ended
    
    Six Months EndedJune 30, 2005
    
    June 30, 2004Daywork
    
    Turnkey
    
    
    
    
    
    Daywork
    
    TurnkeyOperations
    
    Operations(1)
    
    Total
    
    Operations
    
    Operations(1)
    
    Total(Dollars in thousands except averages per rig day worked)(Unaudited)Rig days worked
    
    
    16,332
    
    
    
    1,541
    
    
    
    17,873
    
    
    
    11,792
    
    
    
    1,964
    
    
    
    13,756Contract drilling revenues
    
    $
    243,176
    
    
    $
    68,131
    
    
    $
    311,307
    
    
    $
    119,528
    
    
    $
    59,422
    
    
    $
    178,950Drilling operations
expenses
    
    
    (142,357
    )
    
    
    (47,414
    )
    
    
    (189,771
    )
    
    
    (96,951
    )
    
    
    (50,095
    )
    
    
    (147,046
    )General and
administrative expenses
    
    
    (6,854
    )
    
    
    (625
    )
    
    
    (7,479
    )
    
    
    (5,535
    )
    
    
    (772
    )
    
    
    (6,307
    )Interest income
    
    
    1,068
    
    
    
    88
    
    
    
    1,156
    
    
    
    288
    
    
    
    48
    
    
    
    336Gain on sale of assets
    
    
    72
    
    
    
    6
    
    
    
    78
    
    
    
    15
    
    
    
    3
    
    
    
    18EBITDA
    
    $
    95,105
    
    
    $
    20,186
    
    
    $
    115,291
    
    
    $
    17,345
    
    
    $
    8,606
    
    
    $
    25,951Average per rig day
worked:Contract drilling revenues
    
    $
    14,890
    
    
    $
    44,212
    
    
    $
    17,418
    
    
    $
    10,136
    
    
    $
    30,256
    
    
    $
    13,009EBITDA
    
    $
    5,823
    
    
    $
    13,099
    
    
    $
    6,451
    
    
    $
    1,471
    
    
    $
    4,382
    
    
    $
    1,887
 
 (1)
    
    Turnkey operations include the results from turnkey and footage contracts.  Daywork Operations
  Turnkey Operations
  -31-




---



##### Table of Contents



Other
  7 8 7 8
  
 Item 3. Quantitative and qualitative disclosure about market risk
 Interest Rate Risk.
 
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  -32-




---



##### Table of Contents



Changes in Internal Control over Financial Reporting
  
  
 Item 1. Legal Proceedings
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  Director
    
    For
    
    WithheldSteven A. Webster
    
    
    142,906,915
    
    
    
    35,808,845William R. Ziegler
    
    
    173,396,338
    
    
    
    5,319,422
 
 Item 5. Other Information
  
    
    business strategy;
    
    demand for our services;
    
    2005 rig activity and financial results;
    
    projected depreciation expense and interest expense;
    
    rigs expected to be engaged in turnkey and footage operations;
    
    reactivation, timing and cost of reactivation of non-marketed rigs;
    
    projected dayrates;
    
    the availability and financial terms of term contracts;
 -33-




---



##### Table of Contents




    
    projected tax rate;
    
    wage rates and retention of employees;
    
    sufficiency of our capital resources and liquidity; and
    
    depreciation and capital expenditures in 2005.
  
    
    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.
  
 Item 6. Exhibits
 3.1
    
    Articles of Incorporation of Grey Wolf, Inc., as amended (incorporated herein
by reference to Exhibit 3.1 to Form 10-Q dated May 12, 1999).3.2
    
    By-Laws of Grey Wolf, Inc., as amended (incorporated herein by reference to
Exhibit 99.1 to Form 8-K dated March 23, 1999).4.1
    
    Rights Agreement dated as of September 21, 1998 by and between the Company and
American Stock Transfer and Trust Company as Rights Agent (incorporated herein by
reference to Exhibit 4.1 to Form 8-K filed September 22, 1998).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).
 -34-




---



##### Table of Contents



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 June 30, 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 June 30, 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 June 30, 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).*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.
 
 *
    
    Filed herewith -35-




---



##### 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 4, 2005
    
    
    
    
    
    By:
    
    /s/ David W. WehlmannDavid W. WehlmannExecutive Vice President andChief Financial OfficerDate: August 4, 2005
    
    
    
    
    
    By:
    
    /s/ Kent D. CauleyKent D. CauleyVice President and Controller
 -36-




---



##### Table of Contents



Exhibit Index
 3.1
    
    Articles of Incorporation of Grey Wolf, Inc., as amended (incorporated herein
by reference to Exhibit 3.1 to Form 10-Q dated May 12, 1999).3.2
    
    By-Laws of Grey Wolf, Inc., as amended (incorporated herein by reference to
Exhibit 99.1 to Form 8-K dated March 23, 1999).4.1
    
    Rights Agreement dated as of September 21, 1998 by and between the Company and
American Stock Transfer and Trust Company as Rights Agent (incorporated herein by
reference to Exhibit 4.1 to Form 8-K filed September 22, 1998).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 June 30, 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 June 30, 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 June 30, 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).*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.
 
 *
    
    Filed herewith -37-