##### 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, 2006
 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.
  Texas
    
    74-2144774(State or jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)10370 Richmond Avenue, Suite 600Houston, Texas
    
    77042(Address of principal executive offices)
    
    (Zip Code)
 (713) 435-6100
  þ o
  o o o
  o þ




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##### 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
    
    
    17Item 3.
    
    Quantitative and Qualitative Disclosure about Market Risk
    
    
    30Item 4.
    
    Controls and Procedures
    
    
    30Part II.
    
    Other InformationItem 1.
    
    Legal Proceedings
    
    
    31Item 1A.
    
    Risk Factors
    
    
    31Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    31Item 3.
    
    Defaults Upon Senior Securities
    
    
    31Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    31Item 5.
    
    Other Information
    
    
    32Item 6.
    
    Exhibits
    
    
    34Certification of CEO pursuant to Rule 13a-14aCertification of CFO pursuant to Rule 13a-14aCertification Pursuant to Section 906
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##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES
 
 Consolidated Balance Sheets
  June 30,
    
    
    December 31,2006
    
    
    2005(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    236,870
    
    
    $
    173,145Restricted cash
    
    
    797
    
    
    
    780Accounts receivable, net of allowance of $2,674
    
    
    181,302
    
    
    
    159,438Prepaids and other current assets
    
    
    8,125
    
    
    
    8,010Deferred tax assets
    
    
    4,808
    
    
    
    4,222Total current assets
    
    
    431,902
    
    
    
    345,595Property and equipment:Land, buildings and improvements
    
    
    6,856
    
    
    
    6,530Drilling equipment
    
    
    998,260
    
    
    
    934,648Furniture and fixtures
    
    
    4,560
    
    
    
    4,217Total property and equipment
    
    
    1,009,676
    
    
    
    945,395Less: accumulated depreciation
    
    
    (476,302
    )
    
    
    (445,430
    )Net property and equipment
    
    
    533,374
    
    
    
    499,965Rigs held for sale, net
    
    
    
    
    
    
    5,524Goodwill
    
    
    10,377
    
    
    
    10,377Other noncurrent assets, net
    
    
    19,283
    
    
    
    7,574$
    994,936
    
    
    $
    869,035LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable-trade
    
    $
    61,103
    
    
    $
    61,087Accrued workers compensation
    
    
    7,633
    
    
    
    6,575Payroll and related employee costs
    
    
    11,295
    
    
    
    12,131Accrued interest payable
    
    
    2,461
    
    
    
    2,156Current income taxes payable
    
    
    8,361
    
    
    
    6,141Other accrued liabilities
    
    
    13,563
    
    
    
    7,059Total current liabilities
    
    
    104,416
    
    
    
    95,149Contingent convertible senior notes
    
    
    275,000
    
    
    
    275,000Other long-term liabilities
    
    
    14,674
    
    
    
    12,403Deferred income taxes
    
    
    124,414
    
    
    
    117,251Commitments 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: 300,000,000;
shares issued: 194,773,771 at June 30, 2006 and
192,625,650 at December 31, 2005;
shares outstanding: 193,380,771 at June 30, 2006
and 192,625,650 at December 31, 2005
    
    
    19,478
    
    
    
    19,263Additional paid-in capital
    
    
    379,189
    
    
    
    374,012Treasury stock, at cost: 1,393,000 shares at June 30, 2006
    
    
    (10,356
    )
    
    
    Retained earnings (deficit)
    
    
    88,121
    
    
    
    (24,043
    )Total shareholders equity
    
    
    476,432
    
    
    
    369,232$
    994,936
    
    
    $
    869,035
 See accompanying notes to consolidated financial statements
 -3-




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GREY WOLF, INC. AND SUBSIDIARIES
 
 Consolidated Statements of Operations
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Contract drilling revenue
    
    $
    239,590
    
    
    $
    161,315
    
    
    $
    462,469
    
    
    $
    311,307Costs and expenses:Drilling operations
    
    
    129,285
    
    
    
    96,836
    
    
    
    252,145
    
    
    
    189,771Depreciation and amortization
    
    
    18,199
    
    
    
    14,832
    
    
    
    35,347
    
    
    
    29,134General and administrative
    
    
    5,862
    
    
    
    3,557
    
    
    
    11,179
    
    
    
    7,479Gain on sale of assets
    
    
    (22
    )
    
    
    (60
    )
    
    
    (9,537
    )
    
    
    (78
    )Gain on insurance proceeds
    
    
    (4,159
    )
    
    
    
    
    
    
    (4,159
    )
    
    
    Total costs and expenses
    
    
    149,165
    
    
    
    115,165
    
    
    
    284,975
    
    
    
    226,306Operating income
    
    
    90,425
    
    
    
    46,150
    
    
    
    177,494
    
    
    
    85,001Other income (expense):Interest income
    
    
    3,065
    
    
    
    724
    
    
    
    5,181
    
    
    
    1,156Interest expense
    
    
    (3,367
    )
    
    
    (2,821
    )
    
    
    (6,636
    )
    
    
    (5,420
    )Other expense, net
    
    
    (302
    )
    
    
    (2,097
    )
    
    
    (1,455
    )
    
    
    (4,264
    )Income before income taxes
    
    
    90,123
    
    
    
    44,053
    
    
    
    176,039
    
    
    
    80,737Income tax expense:Current
    
    
    28,398
    
    
    
    3,197
    
    
    
    57,298
    
    
    
    4,369Deferred
    
    
    3,810
    
    
    
    13,223
    
    
    
    6,577
    
    
    
    25,691Total income tax expense
    
    
    32,208
    
    
    
    16,420
    
    
    
    63,875
    
    
    
    30,060Net income
    
    $
    57,915
    
    
    $
    27,633
    
    
    $
    112,164
    
    
    $
    50,677Net income per common share (Note 2):Basic
    
    $
    0.30
    
    
    $
    0.14
    
    
    $
    0.58
    
    
    $
    0.27Diluted
    
    $
    0.25
    
    
    $
    0.12
    
    
    $
    0.49
    
    
    $
    0.23Weighted average common shares outstanding:Basic
    
    
    192,475
    
    
    
    190,799
    
    
    
    192,508
    
    
    
    190,537Diluted
    
    
    236,748
    
    
    
    234,938
    
    
    
    236,374
    
    
    
    234,642
 See accompanying notes to consolidated financial statements
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GREY WOLF, INC. AND SUBSIDIARIES
 
 Consolidated Statements of Shareholders Equity and Comprehensive Income
  Common Stock
    
    
    Additional
    
    
    Treasury Stock
    
    
    RetainedNumber of
    
    
    Amount,
    
    
    Paid-in
    
    
    Number of
    
    
    Amount,
    
    
    EarningsShares
    
    
    at $0.10 par value
    
    
    Capital
    
    
    Shares
    
    
    at cost
    
    
    (Deficit)
    
    
    TotalBalance, December 31, 2004
    
    
    190,136
    
    
    $
    19,014
    
    
    $
    363,148
    
    
    
    
    
    
    $
    
    
    
    $
    (144,680
    )
    
    $
    237,482Exercise of stock options
    
    
    2,292
    
    
    
    229
    
    
    
    7,844
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,073Tax benefit of stock
option exercises
    
    
    
    
    
    
    
    
    
    
    2,842
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,842Issuance of restricted
stock, net of forfeitures
    
    
    198
    
    
    
    20
    
    
    
    (20
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation
expense
    
    
    
    
    
    
    
    
    
    
    198
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    198Comprehensive net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    120,637
    
    
    
    120,637Balance, December 31, 2005
    
    
    192,626
    
    
    
    19,263
    
    
    
    374,012
    
    
    
    
    
    
    
    
    
    
    
    (24,043
    )
    
    
    369,232Exercise of stock options
    
    
    602
    
    
    
    60
    
    
    
    2,281
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,341Tax benefit of stock
option exercises
    
    
    
    
    
    
    
    
    
    
    857
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    857Issuance of restricted
stock, net of forfeitures
    
    
    1,546
    
    
    
    155
    
    
    
    (155
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation
expense
    
    
    
    
    
    
    
    
    
    
    2,194
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,194Purchase of treasury stock
    
    
    (1,393
    )
    
    
    
    
    
    
    
    
    
    
    1,393
    
    
    
    (10,356
    )
    
    
    
    
    
    
    (10,356
    )Comprehensive net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    112,164
    
    
    
    112,164Balance, June 30, 2006
(Unaudited)
    
    
    193,381
    
    
    $
    19,478
    
    
    $
    379,189
    
    
    
    1,393
    
    
    $
    (10,356
    )
    
    $
    88,121
    
    
    $
    476,432
 See accompanying notes to consolidated financial statements
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GREY WOLF, INC. AND SUBSIDIARIES
 
 Consolidated Statements of Cash Flows
   Six Months EndedJune 30,2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    112,164
    
    
    $
    50,677Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    35,347
    
    
    
    29,134Deferred income taxes
    
    
    6,577
    
    
    
    24,163Gain on sale of assets
    
    
    (9,537
    )
    
    
    (78
    )Gain on insurance proceeds
    
    
    (4,159
    )
    
    
    Stock-based compensation expense
    
    
    2,194
    
    
    
    83Excess tax benefit of stock option exercises
    
    
    (416
    )
    
    
    1,528Net effect of changes in assets and liabilities
related to operating accounts
    
    
    (7,504
    )
    
    
    2,351Cash provided by operating activities
    
    
    134,666
    
    
    
    107,858Cash flows from investing activities:Property and equipment additions
    
    
    (77,130
    )
    
    
    (62,407
    )Proceeds from sale of property and equipment
    
    
    17,052
    
    
    
    437Insurance proceeds
    
    
    9,409
    
    
    
    Deposits for new rig purchases
    
    
    (12,673
    )
    
    
    Cash used in investing activities
    
    
    (63,342
    )
    
    
    (61,970
    )Cash flows from financing activities:Proceeds from exercise of stock options
    
    
    2,341
    
    
    
    4,777Excess tax benefit of stock option exercises
    
    
    416
    
    
    
    Purchase of treasury stock
    
    
    (10,356
    )
    
    
    Cash (used in) provided by financing activities
    
    
    (7,599
    )
    
    
    4,777Net increase in cash and cash equivalents
    
    
    63,725
    
    
    
    50,665Cash and cash equivalents, beginning of period
    
    
    173,145
    
    
    
    71,710Cash and cash equivalents, end of period
    
    $
    236,870
    
    
    $
    122,375Supplemental cash flow disclosure:Cash paid for interest
    
    $
    5,901
    
    
    $
    4,575Cash paid for taxes
    
    $
    54,180
    
    
    $
    254
 See accompanying notes to consolidated financial statements
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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
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands, except per share amounts)Numerator:Net income
    
    $
    57,915
    
    
    $
    27,633
    
    
    $
    112,164
    
    
    $
    50,677Add interest expense on contingent
convertible senior notes,
net of related tax effects
    
    
    2,035
    
    
    
    1,623
    
    
    
    3,937
    
    
    
    3,118Adjusted net incomediluted
    
    $
    59,950
    
    
    $
    29,256
    
    
    $
    116,101
    
    
    $
    53,795Denominator:Weighted average common
shares outstanding
    
    
    192,475
    
    
    
    190,799
    
    
    
    192,508
    
    
    
    190,537Effect of dilutive securities:Options  treasury stock method
    
    
    1,204
    
    
    
    1,633
    
    
    
    1,048
    
    
    
    1,624Restricted stock  treasury stock method
    
    
    612
    
    
    
    49
    
    
    
    361
    
    
    
    24Contingent convertible senior notes
    
    
    42,457
    
    
    
    42,457
    
    
    
    42,457
    
    
    
    42,457Weighted average common shares
outstanding-diluted
    
    
    236,748
    
    
    
    234,938
    
    
    
    236,374
    
    
    
    234,642Earnings per common share:Basic
    
    $
    0.30
    
    
    $
    0.14
    
    
    $
    0.58
    
    
    $
    0.27Diluted
    
    $
    0.25
    
    
    $
    0.12
    
    
    $
    0.49
    
    
    $
    0.23
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Basic earnings per share:Unvested restricted stock
    
    
    1,744,791
    
    
    
    188,250
    
    
    
    1,744,791
    
    
    
    188,250Diluted earnings per share:Anti-dilutive stock options
    
    
    377,339
    
    
    
    
    
    
    
    488,884
    
    
    
    452,080Anti-dilutive restricted stock
    
    
    
    
    
    
    5,302
    
    
    
    
    
    
    
    64,858Total anti-dilutive shares
excluded from
the computation of diluted earnings
per share
    
    
    377,339
    
    
    
    5,302
    
    
    
    488,884
    
    
    
    516,938
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GREY WOLF, INC. AND SUBSIDIARIES  Notes to Consolidated Financial Statements
 Share-Based Payment Arrangements
    -9-




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GREY WOLF, INC. AND SUBSIDIARIES  Notes to Consolidated Financial Statements
  Weighted-Weighted-
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateExercise
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Price
    
    
    Life
    
    
    Value(in thousands)
    
    
    
    
    
    
    (in years)
    
    
    (in thousands)Outstanding at January 1, 2006
    
    
    4,253
    
    
    $
    3.83Granted
    
    
    341
    
    
    
    7.34Exercised
    
    
    (602
    )
    
    
    3.90Forfeited
    
    
    (38
    )
    
    
    4.58Outstanding at June 30, 2006
    
    
    3,954
    
    
    $
    4.11
    
    
    
    6.24
    
    
    $
    14,192Exercisable at June 30, 2006
    
    
    2,053
    
    
    $
    3.60
    
    
    
    4.96
    
    
    $
    8,411
    Weighted-AverageGrant-Date FairShares
    
    
    Value(in thousands)Non-vested at January 1, 2006
    
    
    198
    
    
    $
    5.73Granted
    
    
    1,577
    
    
    
    7.34Forfeited
    
    
    (31
    )
    
    
    6.57Non-vested at June 30, 2006
    
    
    1,744
    
    
    $
    7.17
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GREY WOLF, INC. AND SUBSIDIARIES  Notes to Consolidated Financial Statements
  Three Months
    
    
    Six MonthsEnded
    
    
    EndedJune 30,
    
    
    June 30,2005
    
    
    2005Net income, as reported
    
    $
    27,633
    
    
    $
    50,677Add: Stock-based employee compensation expense included
in reported net income, net of related tax effects
    
    
    29
    
    
    
    52Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects
    
    
    (570
    )
    
    
    (1,174
    )Pro forma net income
    
    $
    27,092
    
    
    $
    49,555Basic earnings per shareAs reported
    
    $
    0.14
    
    
    $
    0.27Pro forma
    
    $
    0.14
    
    
    $
    0.26Diluted earnings per shareAs reported
    
    $
    0.12
    
    
    $
    0.23Pro forma
    
    $
    0.12
    
    
    $
    0.22
  Recent Accounting Pronouncements
   -11-




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GREY WOLF, INC. AND SUBSIDIARIES  Notes to Consolidated Financial Statements
 (3) Accounting for Income Taxes
   (4) Long-Term Debt
  June 30,
    
    
    December 31,2006
    
    
    20053.75% Contingent Convertible
Senior Notes due May 2023
    
    $
    150,000
    
    
    $
    150,000Floating Rate Contingent Convertible
Senior Notes due April 2024
    
    
    125,000
    
    
    
    125,000275,000
    
    
    
    275,000Less current maturities
    
    
    
    
    
    
    Long-term debt
    
    $
    275,000
    
    
    $
    275,000
 Floating Rate Notes
    -12-




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GREY WOLF, INC. AND SUBSIDIARIES  Notes to Consolidated Financial Statements
 3.75% Notes
    CIT Facility
   -13-




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GREY WOLF, INC. AND SUBSIDIARIES  Notes to Consolidated Financial Statements
   (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.
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GREY WOLF, INC. AND SUBSIDIARIES  Notes to Consolidated Financial Statements
   (8) Treasury Stock
  (9) Concentrations
   (10) Goodwill and Intangible Assets
  -15-




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GREY WOLF, INC. AND SUBSIDIARIES  Notes to Consolidated Financial Statements
  (11) Sale of Rigs
  (12) Insurance Proceeds
  -16-




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GREY WOLF, INC. AND SUBSIDIARIES
 
 Managements Discussion and Analysis of Financial
 Condition and Results of Operations
  Overview
    Rig Activity
  2004
    
    2005
    
    2006DomesticLand Rig
    
    Full
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Full
    
    
    
    
    
    
    
    
    
    7/1Count
    
    Year
    
    Q-1
    
    Q-2
    
    Q-3
    
    Q-4
    
    Year
    
    Q-1
    
    Q-2
    
    to 7/31Baker
Hughes
    
    
    1,074
    
    
    
    1,153
    
    
    
    1,218
    
    
    
    1,307
    
    
    
    1,375
    
    
    
    1,263
    
    
    
    1,417
    
    
    
    1,512
    
    
    
    1,566Grey Wolf
    
    
    85
    
    
    
    98
    
    
    
    99
    
    
    
    103
    
    
    
    108
    
    
    
    102
    
    
    
    109
    
    
    
    108
    
    
    
    108
 Term Contracts
  -17-




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Drilling and Contract Rates
   Turnkey and Footage Contract Activity
   Financial Outlook
  -18-




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Critical Accounting Policies
  -19-




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Property and Equipment
  Impairment of Long-Lived Assets
    -20-




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Goodwill and Other Intangible Assets
   Revenue Recognition
  Insurance Accruals
   -21-




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Income Taxes
   Financial Condition and Liquidity
  June 30, 2006
    
    
    December 31, 2005(Unaudited)(Dollars in thousands)Amount
    
    
    %
    
    
    Amount
    
    
    %Working capital
    
    $
    327,486
    
    
    
    37
    
    
    $
    250,446
    
    
    
    32Property and equipment, net
    
    
    533,374
    
    
    
    60
    
    
    
    499,965
    
    
    
    65Goodwill
    
    
    10,377
    
    
    
    1
    
    
    
    10,377
    
    
    
    1Other noncurrent assets
    
    
    19,283
    
    
    
    2
    
    
    
    13,098
    
    
    
    2Total
    
    $
    890,520
    
    
    
    100
    
    
    $
    773,886
    
    
    
    100Long-term debt
    
    $
    275,000
    
    
    
    31
    
    
    $
    275,000
    
    
    
    35Other long-term liabilities
    
    
    139,088
    
    
    
    16
    
    
    
    129,654
    
    
    
    17Shareholders equity
    
    
    476,432
    
    
    
    53
    
    
    
    369,232
    
    
    
    48Total
    
    $
    890,520
    
    
    
    100
    
    
    $
    773,886
    
    
    
    100
 Significant Changes in Financial Condition
  -22-




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Floating Rate Notes
    3.75% Notes
     -23-




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CIT Facility
    -24-




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Cash Flow
  Six Months EndedJune 30,2006
    
    
    2005(In thousands)(Unaudited)Net cash provided by (used in):Operating activities
    
    $
    134,666
    
    
    $
    107,858Investing activities
    
    
    (63,342
    )
    
    
    (61,970
    )Financing activities
    
    
    (7,599
    )
    
    
    4,777Net increase in cash
    
    $
    63,725
    
    
    $
    50,665
    Projected Cash Sources and Uses
  -25-




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Inflation and Changing Prices
  Results of Operations
  Reconciliation of Non-GAAP Financial Measures
  -26-




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands)(Unaudited)Earnings before interest expense, taxes,
depreciation and amortization
    
    $
    111,689
    
    
    $
    61,706
    
    
    $
    218,022
    
    
    $
    115,291Depreciation and amortization
    
    
    (18,199
    )
    
    
    (14,832
    )
    
    
    (35,347
    )
    
    
    (29,134
    )Interest expense
    
    
    (3,367
    )
    
    
    (2,821
    )
    
    
    (6,636
    )
    
    
    (5,420
    )Total income tax expense
    
    
    (32,208
    )
    
    
    (16,420
    )
    
    
    (63,875
    )
    
    
    (30,060
    )Net income applicable to common shares
    
    $
    57,915
    
    
    $
    27,633
    
    
    $
    112,164
    
    
    $
    50,677
 Comparison of the Three Months Ended June 30, 2006 and 2005
  Three Months Ended
    
    
    Three Months EndedJune 30, 2006
    
    
    June 30, 2005Daywork
    
    
    Turnkey
    
    
    
    
    
    
    Daywork
    
    
    TurnkeyOperations
    
    
    Operations(1)
    
    
    Total
    
    
    Operations
    
    
    Operations(1)
    
    
    Total(Dollars in thousands except averages per rig day worked)(Unaudited)Rig days worked
    
    
    8,679
    
    
    
    1,120
    
    
    
    9,799
    
    
    
    8,343
    
    
    
    705
    
    
    
    9,048Contract drilling revenues
    
    $
    178,253
    
    
    $
    61,337
    
    
    $
    239,590
    
    
    $
    129,552
    
    
    $
    31,763
    
    
    $
    161,315Drilling operations expenses
    
    
    (89,935
    )
    
    
    (39,350
    )
    
    
    (129,285
    )
    
    
    (75,911
    )
    
    
    (20,925
    )
    
    
    (96,836
    )General and administrative
expenses
    
    
    (5,213
    )
    
    
    (649
    )
    
    
    (5,862
    )
    
    
    (3,292
    )
    
    
    (265
    )
    
    
    (3,557
    )Interest income
    
    
    2,714
    
    
    
    351
    
    
    
    3,065
    
    
    
    673
    
    
    
    51
    
    
    
    724Gain on sale of assets
    
    
    19
    
    
    
    3
    
    
    
    22
    
    
    
    56
    
    
    
    4
    
    
    
    60Gain on insurance proceeds
    
    
    3,675
    
    
    
    484
    
    
    
    4,159
    
    
    
    
    
    
    
    
    
    
    
    EBITDA
    
    $
    89,513
    
    
    $
    22,176
    
    
    $
    111,689
    
    
    $
    51,078
    
    
    $
    10,628
    
    
    $
    61,706Average per rig day worked:Contract drilling revenues
    
    $
    20,538
    
    
    $
    54,765
    
    
    $
    24,450
    
    
    $
    15,528
    
    
    $
    45,054
    
    
    $
    17,829EBITDA
    
    $
    10,314
    
    
    $
    19,800
    
    
    $
    11,398
    
    
    $
    6,122
    
    
    $
    15,075
    
    
    $
    6,820
 
 (1)
    
    Turnkey operations include the results from turnkey and footage contracts.  -27-




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Daywork Operations
  Turnkey Operations
  Other
    -28-




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Comparison of the Six Months Ended June 30, 2006 and 2005
  Six Months Ended
    
    
    Six Months EndedJune 30, 2006
    
    
    June 30, 2005Daywork
    
    
    Turnkey
    
    
    
    
    
    
    Daywork
    
    
    TurnkeyOperations
    
    
    Operations(1)
    
    
    Total
    
    
    Operations
    
    
    Operations(1)
    
    
    Total(Dollars in thousands except averages per rig day worked)(Unaudited)Rig days worked
    
    
    17,386
    
    
    
    2,200
    
    
    
    19,586
    
    
    
    16,332
    
    
    
    1,541
    
    
    
    17,873Contract drilling revenues
    
    $
    342,620
    
    
    $
    119,849
    
    
    $
    462,469
    
    
    $
    243,176
    
    
    $
    68,131
    
    
    $
    311,307Drilling operations
expenses
    
    
    (174,416
    )
    
    
    (77,729
    )
    
    
    (252,145
    )
    
    
    (142,357
    )
    
    
    (47,414
    )
    
    
    (189,771
    )General and
administrative expenses
    
    
    (9,954
    )
    
    
    (1,225
    )
    
    
    (11,179
    )
    
    
    (6,854
    )
    
    
    (625
    )
    
    
    (7,479
    )Interest income
    
    
    4,596
    
    
    
    585
    
    
    
    5,181
    
    
    
    1,068
    
    
    
    88
    
    
    
    1,156Gain on sale of assets
    
    
    8,487
    
    
    
    1,050
    
    
    
    9,537
    
    
    
    72
    
    
    
    6
    
    
    
    78Gain on insurance proceeds
    
    
    3,675
    
    
    
    484
    
    
    
    4,159
    
    
    
    
    
    
    
    
    
    
    
    EBITDA
    
    $
    175,008
    
    
    $
    43,014
    
    
    $
    218,022
    
    
    $
    95,105
    
    
    $
    20,186
    
    
    $
    115,291Average per rig day
worked:Contract drilling revenues
    
    $
    19,707
    
    
    $
    54,477
    
    
    $
    23,612
    
    
    $
    14,890
    
    
    $
    44,212
    
    
    $
    17,418EBITDA
    
    $
    10,066
    
    
    $
    19,552
    
    
    $
    11,132
    
    
    $
    5,823
    
    
    $
    13,099
    
    
    $
    6,451
 
 (1)
    
    Turnkey operations include the results from turnkey and footage contracts.  Daywork Operations
  -29-




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Turnkey Operations
  Other
    
 Item 3. Quantitative and Qualitative Disclosure about Market Risk
 Interest Rate Risk.
 
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  -30-




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Changes in Internal Control over Financial Reporting
  
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1a. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  ApproximateDollar Value ofTotal Number
    
    Shares that Mayof Shares
    
    Yet beTotal Number
    
    Average
    
    Purchased as
    
    Purchasedof Shares
    
    Price Paid
    
    Part of Publicly
    
    Under thePeriod
    
    Purchased
    
    per Share
    
    Announced Program
    
    Program(1)May 25, 2006 to May 31, 2006
    
    
    600
    
    
    $
    7.75
    
    
    
    600
    
    
    $
    95,348June 1, 2006 to June 30, 2006
    
    
    793
    
    
    $
    7.19
    
    
    
    793
    
    
    $
    89,644
 
 (1)
    
    On May 25, 2006, the Company announced that its Board of Directors approved a plan
authorizing the repurchase of up to $100.0 million of Grey Wolf common stock in open market or
in privately negotiated block-trade transactions. 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. There is no
expiration date for the stock repurchase program, but it is subject to termination prior to
completion. 
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  -31-




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##### Table of Contents



Director
    
    For
    
    
    WithheldFrank M. Brown
    
    
    167,111,013
    
    
    
    4,808,579William T. Donovan
    
    
    165,723,428
    
    
    
    6,196,164Thomas P. Richards
    
    
    169,027,082
    
    
    
    2,892,510
 
 Item 5. Other Information
  
    
    business strategy;
    
    demand for our services;
    
    spending by our customers;
    
    2006 rig activity;
    
    projected interest expense;
    
    projected tax rate;
    
    rigs expected to be engaged in turnkey and footage operations;
    
    reactivation, timing and cost of reactivation of rigs available for refurbishment;
    
    cost of building new rigs and delivery times of these rigs;
    
    projected dayrates;
    
    the ability to recover our refurbishment costs or 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;
    
    depreciation and capital expenditures in 2006; and
    
    projected sources and uses of cash.
  
    
    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.
 -32-




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-33-




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##### Table of Contents



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).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).* 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**
    
    Furnished, not filed, in accordance with Item 601(b)(32) of Regulation S-K. -34-




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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 4, 2006
    
    
    
    By:
    
    /s/ David W. Wehlmann

David W. WehlmannExecutive Vice President andChief Financial OfficerDate: August 4, 2006
    
    
    
    By:
    
    /s/ Kent D. Cauley

Kent D. CauleyVice President and Controller
 -35-




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##### Table of Contents



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