<PAGE>   1
================================================================================

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


                                    FORM 10-Q


               QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934


<TABLE>
<S>                                                              <C>
For the quarterly period ended September 30, 1999                Commission File Number 1-8226
</TABLE>


                                [GREY WOLF LOGO]

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


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


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

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


         Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                                 Yes [X] No [ ]


         The number of shares of the Registrant's Common Stock, par value $.10
per share, outstanding at October 26, 1999, was 165,159,391.

================================================================================


<PAGE>   2


                        GREY WOLF, INC. AND SUBSIDIARIES

                                TABLE OF CONTENTS


<TABLE>
<CAPTION>
                                                                                                                     PAGE
                                                                                                                     ----
<S>                                                                                                                  <C>
PART I.       Financial Information
              Item 1.      Financial Statements
                           Consolidated Balance Sheets                                                                 3
                           Consolidated Statements of Operations                                                       4
                           Consolidated Statements of Shareholders' Equity and Comprehensive Income                    5
                           Consolidated Statements of Cash Flows                                                       6
                           Notes to Consolidated Financial Statements                                                  7
              Item 2.      Management's Discussion and Analysis of Financial
                             Condition and Results of Operations                                                      12
              Item 3.      Quantitative and Qualitative Disclosure about Market Risk                                  21

PART II.      Other Information
              Item 1.      Legal Proceedings                                                                          22
              Item 2.      Changes in Securities and Use of Proceeds                                                  22
              Item 3.      Defaults Upon Senior Securities                                                            22
              Item 4.      Submission of Matters to a Vote of Security Holders                                        22
              Item 5.      Other Information                                                                          22
              Item 6.      Exhibits and Reports on Form 8-K                                                           23


              Signatures                                                                                              24
</TABLE>


                                       -2-

<PAGE>   3

                        GREY WOLF, INC. AND SUBSIDIARIES

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


<TABLE>
<CAPTION>
                                                                          September 30,  December 31,
                                                                             1999           1998
                                                                          ------------   -----------
                                                                          (Unaudited)
<S>                                                                       <C>            <C>
                                    ASSETS
Current assets:
    Cash and cash equivalents                                              $  20,753      $  45,895
    Restricted cash - insurance deposits                                         762            762
    Accounts receivable, net of allowance of $1,466
      and $1,106,  respectively                                               27,302         30,598
    Prepaids and other current assets                                          2,550          3,426
                                                                           ---------      ---------
         Total current assets                                                 51,367         80,681
                                                                           ---------      ---------

Property and equipment:
    Land, buildings and improvements                                           5,035          5,538
    Drilling equipment                                                       563,978        561,850
    Furniture and fixtures                                                     2,049          1,920
                                                                           ---------      ---------
         Total property and equipment                                        571,062        569,308
    Less: accumulated depreciation and amortization                         (181,756)      (157,992)
                                                                           ---------      ---------
         Net property and equipment                                          389,306        411,316

Other noncurrent assets                                                        8,121          9,306
                                                                           ---------      ---------
                                                                           $ 448,794      $ 501,303
                                                                           =========      =========

             LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
    Current maturities of long-term debt                                   $   1,033      $   1,162
    Accounts payable                                                          12,928         13,761
    Accrued workers' compensation                                              3,318          4,503
    Payroll and related employee costs                                         3,859          3,672
    Accrued interest payable                                                   5,634         11,096
    Other accrued liabilities                                                  2,505          1,998
                                                                           ---------      ---------
         Total current liabilities                                            29,277         36,192
                                                                           ---------      ---------

Senior notes                                                                 249,333        249,268
Long-term debt, net of current maturities                                        645          1,259
Other long-term liabilities                                                    1,974          1,460
Deferred income taxes                                                         33,920         46,128
Series A preferred stock - mandatorily redeemable                                 --            305

Commitments and contingent liabilities                                            --             --

Shareholders' equity:
    Series B preferred stock, $1 par value; 10,000 shares
      authorized; none outstanding                                                --             --
    Common stock, $.10 par value; 300,000,000 shares
      authorized; 165,159,391 and 165,065,391 issued
      and outstanding, respectively                                           16,516         16,506
    Additional paid-in capital                                               270,519        270,389
    Cumulative comprehensive income adjustments                                 (454)          (454)
    Accumulated deficit                                                     (152,936)      (119,750)
                                                                           ---------      ---------
         Total shareholders' equity                                          133,645        166,691
                                                                           ---------      ---------
                                                                           $ 448,794      $ 501,303
                                                                           =========      =========
</TABLE>

          See accompanying notes to consolidated financial statements.


                                      -3-
<PAGE>   4

                        GREY WOLF, INC. AND SUBSIDIARIES

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


<TABLE>
<CAPTION>
                                                             Three Months Ended            Nine Months Ended
                                                                September 30,                September 30,
                                                          ------------------------      ------------------------
                                                            1999           1998           1999            1998
                                                          ---------      ---------      ---------      ---------
<S>                                                       <C>            <C>            <C>            <C>
Revenues:
     Contract drilling                                    $  33,992      $  56,637      $  95,420      $ 196,110

Costs and expenses:
     Drilling operations                                     33,101         47,113         93,884        151,043
     Depreciation and amortization                            8,532          9,714         24,741         27,708
     General and administrative                               1,824          2,035          5,170          7,053
     Provision for doubtful accounts                            185             --            335            700
     Unusual charges                                             --            272            320            302
                                                          ---------      ---------      ---------      ---------
         Total costs and expenses                            43,642         59,134        124,450        186,806
                                                          ---------      ---------      ---------      ---------

Operating income (loss)                                      (9,650)        (2,497)       (29,030)         9,304

Other income (expense):
     Interest expense                                        (6,013)        (6,054)       (18,023)       (15,599)
     Interest income                                            326            562          1,180          1,346
     Gain (loss) on sale of assets                              275            624            535          2,358
     Other, net                                                 (25)           (52)          (108)          (145)
                                                          ---------      ---------      ---------      ---------
         Other income (expense), net                         (5,437)        (4,920)       (16,416)       (12,040)
                                                          ---------      ---------      ---------      ---------

Income (loss) before income taxes                           (15,087)        (7,417)       (45,446)        (2,736)

Income tax expense (benefit)                                 (3,627)        (2,029)       (12,680)           894
                                                          ---------      ---------      ---------      ---------

Income (loss) before extraordinary item                     (11,460)        (5,388)       (32,766)        (3,630)

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

Net income (loss)                                         $ (11,460)     $  (5,388)     $ (33,186)     $  (3,630)
                                                          =========      =========      =========      =========

Basic and diluted net income (loss) per common share:
     Before extraordinary item                            $    (.07)     $    (.03)     $    (.20)     $    (.02)
     Extraordinary item, net of tax                              --             --             --             --
                                                          ---------      ---------      ---------      ---------
Basic and diluted net income (loss) per
     common share                                         $    (.07)     $    (.03)     $    (.20)     $    (.02)
                                                          =========      =========      =========      =========

Basic weighted average shares outstanding                   165,127        165,010        165,090        164,903
                                                          =========      =========      =========      =========

Diluted weighted average shares outstanding                 165,127        165,010        165,090        164,903
                                                          =========      =========      =========      =========
</TABLE>


          See accompanying notes to consolidated financial statements.


                                      -4-
<PAGE>   5


                        GREY WOLF, INC. AND SUBSIDIARIES

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


<TABLE>
<CAPTION>
                                                 Common                                   Cumulative
                                                 Stock       Additional                  Comprehensive
                                   Common       $.10 par      Paid-in                       Income
                                   Shares         Value       Capital        Deficit      Adjustments       Total
                                  ---------     ---------    ----------     ---------    -------------    ---------
<S>                               <C>           <C>          <C>            <C>          <C>              <C>
Balance, December 31, 1997          164,746     $  16,474     $ 269,733     $ (36,537)     $    (454)     $ 249,216

    Exercise of stock options           319            32           656            --             --            688

    Comprehensive income -
       net loss                          --            --            --        (3,630)            --         (3,630)
                                  ---------     ---------     ---------     ---------      ---------      ---------

Balance, September 30, 1998
    (unaudited)                     165,065     $  16,506     $ 270,389     $ (40,167)     $    (454)     $ 246,274
                                  =========     =========     =========     =========      =========      =========

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

    Exercise of stock options            94            10           130            --             --            140

    Comprehensive income -
       net loss                          --            --            --       (33,186)            --        (33,186)
                                  ---------     ---------     ---------     ---------      ---------      ---------

Balance, September 30, 1999
    (unaudited)                     165,159     $  16,516     $ 270,519     $(152,936)     $    (454)     $ 133,645
                                  =========     =========     =========     =========      =========      =========
</TABLE>

          See accompanying notes to consolidated financial statements.


                                      -5-
<PAGE>   6

                        GREY WOLF, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Amounts in thousands)
                                   (Unaudited)


<TABLE>
<CAPTION>
                                                                  Nine Months Ended
                                                                     September 30,
                                                               ------------------------
                                                                  1999           1998
                                                               ---------      ---------
<S>                                                            <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income (loss)                                           $ (33,186)     $  (3,630)
   Adjustments to reconcile net income (loss) to
      net cash provided by (used in) operating activities:
      Depreciation and amortization                               24,741         27,708
      Deferred income taxes                                      (12,005)           879
      Gain on sale of assets                                        (535)        (2,358)
      Foreign exchange loss                                          108            149
      Provision for doubtful accounts                                335            700
      Extraordinary item, net of tax                                 420             --
   Net effect of changes in assets and liabilities
      related to operating accounts                               (1,631)        (1,891)
                                                               ---------      ---------
      Cash provided by (used in) operating activities            (21,753)        21,557
                                                               ---------      ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Property and equipment additions                               (2,748)      (112,141)
   Proceeds from sale of property and equipment                    1,033          4,016
                                                               ---------      ---------
      Cash used in investing activities                           (1,715)      (108,125)
                                                               ---------      ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from senior notes                                         --         75,000
   Proceeds from long-term debt                                      161         30,599
   Repayments of long-term debt                                     (838)       (30,993)
   Financing costs                                                  (832)        (3,595)
   Proceeds from exercise of stock options                           140            688
   Redemption of Series A Preferred stock                           (305)            --
                                                               ---------      ---------
      Cash provided by (used in) financing activities             (1,674)        71,699
                                                               ---------      ---------

NET DECREASE IN CASH AND CASH EQUIVALENTS                        (25,142)       (14,869)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                    45,895         53,626
                                                               ---------      ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD                       $  20,753      $  38,757
                                                               =========      =========

SUPPLEMENTAL CASH FLOW DISCLOSURE

CASH PAID FOR INTEREST:                                        $  23,488      $  17,804
                                                               =========      =========
CASH PAID FOR TAXES:                                           $      --      $      --
                                                               =========      =========

NON CASH TRANSACTIONS:
   Murco Acquisition
      Change in property and equipment additions               $      --      $  20,873
      Change in deferred tax liability                                --         20,873
</TABLE>


          See accompanying notes to consolidated financial statements.


                                      -6-
<PAGE>   7


                        GREY WOLF, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


(1)      GENERAL

         The accompanying unaudited consolidated financial statements have been
prepared by Grey Wolf, Inc. (the "Company" or "Grey Wolf") and include the
accounts of the Company and its majority-owned subsidiaries. In the opinion of
management, the accompanying unaudited consolidated financial statements contain
all adjustments, which are of a normal recurring nature, necessary to present
fairly the Company's financial position as of September 30, 1999 and the results
of operations and cash flows for the periods indicated. All significant
intercompany transactions have been eliminated. The results of operations for
the nine months ended September 30, 1999 and 1998 are not necessarily indicative
of the results for any other period or for the year as a whole. These
consolidated financial statements should be read in conjunction with the
Company's audited consolidated financial statements and notes thereto included
in the Company's Annual Report on Form 10-K for the year ended December 31,
1998.

(2)      SIGNIFICANT ACCOUNTING POLICIES

Earnings Per Share

         In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings per Share," basic earnings per share is based on weighted
average shares outstanding without any dilutive effects considered and diluted
earnings per share reflects dilution from all contingently issuable shares,
including options, warrants and convertible preferred stock. A reconciliation of
the weighted average common shares outstanding on a basic and diluted basis is
as follows:

<TABLE>
<CAPTION>
                                        THREE MONTHS ENDED      NINE MONTHS ENDED
                                           SEPTEMBER 30,          SEPTEMBER 30,
                                        -------------------     -------------------
                                         1999         1998        1999        1998
                                        -------     -------     -------     -------
                                                       (In thousands)
<S>                                     <C>         <C>         <C>         <C>
Weighted average common
    shares outstanding                  165,127     165,010     165,090     164,903

Effective of dilutive securities:
    Options - treasury stock method          --          --          --          --
    Redeemable preferred stock               --          --          --          --
    Warrants                                 --          --          --          --
                                        -------     -------     -------     -------
                                             --          --          --          --
                                        -------     -------     -------     -------
Weighted average common shares
    outstanding - diluted               165,127     165,010     165,090     164,903
                                        =======     =======     =======     =======
</TABLE>


         Securities excluded from the computation of diluted earnings per share
for the three and nine month periods ended September 30, 1999 and 1998 that
could potentially dilute basic earnings per share in the future were options to
purchase 7.2 million shares and 5.8 million shares, respectively. Also excluded
are 490,000 warrants to issue shares and 245,000 shares for conversion of
redeemable preferred stock for 1998. Since the Company incurred a loss for all
periods disclosed, such dilutive securities were excluded as they would be
anti-dilutive to basic earnings per share.


                                      -7-
<PAGE>   8

                        GREY WOLF, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


Foreign Currency

         Venezuela has a highly inflationary economy as defined by SFAS No. 52
"Foreign Currency Translation." As such, the Company's functional currency is
the U.S. dollar. Accordingly, monetary assets and liabilities denominated in
foreign currency are re-measured to U.S. dollars at the rate of exchange in
effect at the end of the period, items of income and expense and other
non-monetary amounts are re-measured at historical rates. Gains or losses on
foreign currency re-measurement are included in other income (expense), net in
the consolidated statement of operations. During the nine month periods ended
September 30, 1999 and 1998, the Company recognized foreign exchange losses of
$108,000 and $149,000, respectively.

New Accounting Pronouncement

         In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," amended by
SFAS No. 137, with an effective date for fiscal years beginning after June 15,
2000. SFAS No. 133 establishes accounting and reporting standards for derivative
instruments and hedging activities that require an entity to recognize all
derivatives as an asset or liability measured at its fair value. The Company
believes that the adoption of the provisions of SFAS No. 133 will not have a
material impact on the Company's financial position or results of operations.

(3)      ACCOUNTING FOR INCOME TAXES

         The Company follows SFAS No. 109, "Accounting for Income Taxes," which
requires the balance sheet approach to income tax accounting, whereby deferred
income taxes are provided at the balance sheet date for (a) differences existing
in the tax basis of assets and liabilities and their financial statement
carrying amounts plus (b) operating loss and tax credit carryforwards.

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

(4)      LONG-TERM DEBT

         On January 14, 1999, the Company entered into a senior secured
revolving credit facility with the CIT Group/Business Credit, Inc. (the "CIT
Facility"), replacing its previous $50.0 million facility. The CIT Facility
provides the Company with the ability to borrow up to the lesser of $50.0
million or 50% of the orderly liquidation value (as defined in the agreement) of
marketable drilling rig equipment located in the 48 contiguous United States.
The CIT Facility is a four year revolving facility with periodic interest
payments at a floating rate based upon the Company's debt service coverage ratio
within a range of either LIBOR plus 1.75% to 3.5% or prime plus .25% to 1.5%.
During the first year of the CIT Facility the interest rate is fixed at LIBOR
plus 2.5% or prime plus 1.0%. The Company is required to pay a commitment fee of
0.375% per annum on the unused portion of the CIT Facility. In addition, the CIT
Facility contains certain affirmative and negative covenants including a minimum
appraisal value of the drilling rigs and related equipment plus certain
financial covenants which take effect if the Company's cash on hand and
borrowing capacity under the CIT Facility falls below $25.0 million.
Substantially all of the Company's assets, including its drilling equipment,


                                      -8-
<PAGE>   9

                        GREY WOLF, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


are pledged as collateral under the CIT Facility. The Company, however, retains
the option, subject to a minimum appraisal value, under the CIT Facility to
extract $75.0 million of the equipment out of the collateral pool for other
purposes. The Company currently has no borrowings outstanding under the CIT
Facility.

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

         The Company has $175.0 million and $75.0 million in principal amount of
senior notes ("Notes") outstanding at September 30, 1999. The Notes were issued
in June 1997 and May 1998, respectively, bear interest at 87/8% per annum and
mature July 1, 2007. The Notes are general unsecured senior obligations of the
Company and are guaranteed, on a joint and several basis, by all domestic
wholly-owned subsidiaries of the Company. All fees and expenses incurred at the
time of issuance are being amortized over the life of the Notes.

         Except as discussed below, the Notes are not redeemable at the option
of the Company prior to July 1, 2002. On or after such date, the Company shall
have the option to redeem the Notes in whole or in part during the twelve months
beginning July 1, 2002 at 104.4375%, beginning July 1, 2003 at 102.9580%,
beginning July 1, 2004 at 101.4792% and beginning July 1, 2005 and thereafter at
100.0000% together with any interest accrued and unpaid to the redemption date.
However, at any time during the first 36 months after the issue date, the
Company may at its option, redeem up to a maximum of 30% of the aggregate
principal amount with the net cash proceeds of one or more equity offerings at a
redemption price equal to 108.875% of the principal amount thereof, plus accrued
and unpaid interest thereon to the redemption date, provided that at least
$170.0 million aggregate principal amount shall remain outstanding immediately
after the occurrence of any such redemption. Upon a Change of Control as defined
in the Indentures, each holder of the Notes will have the right to require the
Company to repurchase all or any part of such holder's Notes at a purchase price
equal to 101.000% of the aggregate principal amount thereof, plus accrued and
unpaid interest to the date of purchase.

(5)      SEGMENT AND GEOGRAPHIC INFORMATION

         Effective January 1, 1998, the Company adopted SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS No.
131 establishes new standards for segment reporting based on the way management
organizes segments within a company for making operating decisions and assessing
performance. The Company manages its business as two reportable segments;
domestic operations and foreign operations. Although the Company provides
contract drilling services in several markets domestically, these operations
have been aggregated into one reportable segment based on the similarity of
economic characteristics among all markets including the nature of the services
provided and the type of customers of such services.

         The following table sets forth the Company's operations based on the
geographic areas in which it operates.


                                      -9-
<PAGE>   10

                        GREY WOLF, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


<TABLE>
<CAPTION>
                                    THREE MONTHS ENDED            NINE MONTHS ENDED
                                        SEPTEMBER 30,                SEPTEMBER 30,
                                 ------------------------      ------------------------
                                   1999           1998           1999           1998
                                 ---------      ---------      ---------      ---------
                                       (In thousands)               (In thousands)
<S>                              <C>            <C>            <C>            <C>
Revenues:
     Domestic                    $  33,992      $  54,263      $  93,956      $ 189,404
     Foreign                            --          2,374          1,464          6,706
                                 ---------      ---------      ---------      ---------
                                 $  33,992      $  56,637      $  95,420      $ 196,110
                                 =========      =========      =========      =========

Operating income (loss):
     Domestic                    $  (9,473)     $  (2,225)     $ (27,997)     $  10,734
     Foreign                          (177)          (272)        (1,033)        (1,430)
                                 ---------      ---------      ---------      ---------
                                 $  (9,650)     $  (2,497)     $ (29,030)     $   9,304
                                 =========      =========      =========      =========

Total assets:
     Domestic                    $ 439,841      $ 588,318      $ 439,841      $ 588,318
     Foreign                         8,953         19,076          8,953         19,076
                                 ---------      ---------      ---------      ---------
                                 $ 448,794      $ 607,394      $ 448,794      $ 607,394
                                 =========      =========      =========      =========
</TABLE>

         For the three and nine months ended September 30, 1999, operating loss
above includes provision for doubtful accounts from domestic operations of
$185,000 and $335,000, respectively. In addition, for the nine months ended
September 30, 1999, operating loss above includes unusual charges of $320,000.
There were no such items recorded in foreign operations.

         For the nine months ended September 30, 1998, operating income above
includes provision for doubtful accounts from domestic operations of $700,000.
For the three and nine months ended September 30, 1998, operating income (loss)
from domestic operations above includes unusual charges of $127,000 and
$157,000, respectively. Unusual charges related to foreign operations were
$145,000 for the three and nine months ended September 30, 1998.

(6)      COMMITMENTS AND CONTINGENT LIABILITIES

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

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


                                      -10-
<PAGE>   11

                        GREY WOLF, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


(7)      UNUSUAL CHARGES

         During the nine months ended September 30, 1999, the Company recorded
unusual charges of $320,000. These unusual charges consist entirely of severance
costs incurred due to reductions in personnel at both the division and corporate
levels. All severance costs recorded by the Company have been paid.

         During the three and nine months ended September 30, 1998, the Company
recorded unusual charges of $272,000 and $302,000, respectively. These charges
consisted of $127,000 and $157,000, respectively, of severance costs paid and
$145,000 in write-downs associated with international operations.


                                      -11-
<PAGE>   12

                        GREY WOLF, INC. AND SUBSIDIARIES

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS


         The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto of Grey Wolf, Inc. ("Grey
Wolf" or the "Company") included elsewhere herein and the Company's audited
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1998.

GENERAL

         Grey Wolf is a leading provider of contract land drilling services in
the United States with a domestic fleet of 120 rigs, 108 of which are
marketable. Of the 108 marketable rigs, 64 rigs are currently marketed while 44
are cold-stacked. A cold-stacked rig is one which is not currently being
marketed, has no personnel assigned to it and has virtually no ongoing direct
costs. The Company has an inventory of 17 non-marketed rigs (12 domestically and
five in Venezuela) that are being held for refurbishment or return to service as
demand for the Company's services warrants.

         The Company's rig utilization for the third quarter of 1999 increased
to 40% from 31% in the second quarter of 1999. Utilization for the first 22 days
of the fourth quarter of 1999 is higher still at approximately 55%. The increase
in rig utilization for the third quarter of 1999 marks the first
quarter-over-quarter increase since the fourth quarter of 1997. From the first
quarter of 1998 through the second quarter of 1999, the Company experienced
declining utilization and dayrates, reflecting the general decline in domestic
land drilling activity over the same period. In April 1999, the domestic land
drilling rig count reached a historical low of 380 rigs according to the
Baker-Hughes rig count. During this extended period of lower utilization and
dayrates, the Company took numerous steps to minimize cost and conserve cash.
The Company cold- stacked a total of 49 rigs, five of which have since been
returned to marketable status. Overhead was reduced at both the division and
corporate level and the Company used components from spare equipment or cold-
stacked rigs instead of buying new replacement parts.

         The recent increase in demand for the Company's rigs and upward
movement in dayrates has allowed the Company to return 30 additional rigs to
work, including five of the 49 which had been cold-stacked. The recent increases
in land drilling activity and demand for the Company's services may represent,
the Company believes, the early stages of a recovery over the long term in the
land drilling business. These improved conditions are, however, recent
developments and substantial additional, sustained improvements will be required
for the Company to produce positive cash flow from operations and return to
profitability. A continuation of current levels of utilization or a further
decline could have a material adverse effect on the Company's financial
condition and results of operations and may in the future affect its ability to
meet its debt service requirements. See "Current Outlook."


                                      -12-
<PAGE>   13


FINANCIAL CONDITION AND LIQUIDITY

         The following table summarizes the Company's financial position at
September 30, 1999 and as of December 31, 1998.

<TABLE>
<CAPTION>
                                 SEPTEMBER 30, 1999          DECEMBER 31, 1998
                                ---------------------      --------------------
                                     (UNAUDITED)
                                                 (IN THOUSANDS)

                                 Amount         %          Amount          %
                                --------     --------     --------     --------
<S>                             <C>          <C>          <C>          <C>
Working capital                 $ 22,090            5       44,489           10
Property and equipment, net      389,306           93      411,316           88
Other noncurrent assets            8,121            2        9,306            2
                                --------     --------     --------     --------
         Total                  $419,517          100     $465,111          100
                                ========     ========     ========     ========

Long-term debt                  $249,978           59     $250,527           54
Other long-term liabilities       35,894            9       47,893           10
Shareholders' equity             133,645           32      166,691           36
                                --------     --------     --------     --------
         Total                  $419,517          100     $465,111          100
                                ========     ========     ========     ========
</TABLE>

         The significant changes in the Company's financial position from
December 31, 1998 to September 30, 1999 are the decreases in working capital and
shareholders' equity of $22.4 million and $33.0 million, respectively, which are
primarily due to the overall decline in the Company's operating activity along
with a decline in the price received for the Company's services, which resulted
in the net loss reported in 1999.

         Throughout 1998, the Company maintained a senior secured revolving
credit facility with a syndicate of commercial banks (the "Former Credit
Facility"). The Former Credit Facility provided the Company with the ability to
borrow up to $50.0 million from time to time prior to April 30, 2000, subject to
certain reductions. Effective January 14, 1999, the Company terminated the
Former Credit Facility and entered into a more flexible agreement with The CIT
Group/Business Credit, Inc. (the "CIT Facility"). As such, in January 1999, the
Company recorded an extraordinary item of $420,000, net of tax benefit of
$203,000, to write off deferred loan costs associated with the termination of
the Former Credit Facility.

         The CIT Facility provides the Company with the ability to borrow up to
the lessor of $50.0 million or 50% of the orderly liquidation value ("OLV"), as
defined in the CIT Facility, of marketable drilling rig equipment located in the
48 contiguous United States. The initial term of the CIT Facility is for four
years expiring January 14, 2003, with automatic annual renewals thereafter
unless terminated by the lender on any subsequent anniversary date and then only
upon 60 days prior notice. The CIT Facility provides the borrower with up to
$10,000,000 available for letters of credit. The amounts used for letters of
credit decrease the borrowing base of the CIT Facility by the amount of such
letters of credit. Interest under the CIT Facility accrues at a variable rate,
using (at the Company's election) either prime plus 0.25% to 1.50% or LIBOR plus
1.75% to 3.50%, depending upon the Company's debt service coverage ratio for the
trailing 12 month period. During the first year of the CIT Facility, the
interest rate is fixed at LIBOR plus 2.50% or prime plus 1.00%. Letters of
credit accrue a fee of 1.25% per annum and the borrower pays a commitment fee of
0.375% per annum on the average unused portion of the lender's commitments.
Indebtedness under the CIT Facility is secured by an exclusive security interest
in substantially all of the Company's and its domestic subsidiaries' assets and
by guarantees of the Company and certain of its wholly-owned subsidiaries. The
Company, however, retains the option, subject to a minimum appraisal value, to
extract $75.0 million of the equipment out of the collateral pool for other
purposes. To date, there have been no borrowings under the CIT Facility.

         Among the various covenants that must be satisfied by the Company under
the CIT Facility are the following two covenants which shall apply whenever the
Company's liquidity, defined as the sum of cash, cash equivalents and
availability under the CIT Facility, falls below $25,000,000: (i) 1 to 1 EBITDA
coverage of


                                      -13-
<PAGE>   14

debt service, tested monthly on a trailing 12 month basis and (ii) minimum
tangible net worth (as defined in the CIT Facility) at the end of each quarter
will be the prior year tangible net worth less $30,000,000 adjusted for
quarterly tests. Additionally, it will be a default if the OLV of the domestic
drilling equipment (including inventoried rigs) falls below $150,000,000. Also,
if the two month average rig utilization falls below 45%, the lender will have
the option to request one additional appraisal per year to aid in determining
the current OLV of the drilling equipment. While rig utilization thus far during
1999 has been below 45%, the lender has not requested an additional appraisal.

         The net cash provided by or used in the operating, investing and
financing activities of the Company is summarized below:

<TABLE>
<CAPTION>
                                           NINE MONTH PERIODS ENDED
                                                SEPTEMBER 30,
                                           ------------------------
                                             1999           1998
                                           ---------      ---------
                                               (In thousands)
<S>                                        <C>            <C>
Net cash provided by (used in):
     Operating activities                  $ (21,753)     $  21,557
     Investing activities                     (1,715)      (108,125)
     Financing activities                     (1,674)        71,699
                                           ---------      ---------
Net decrease in cash:                      $ (25,142)     $ (14,869)
                                           =========      =========
</TABLE>

         The Company's cash flows from operating activities are affected by a
number of factors including the number of rigs under contract and whether the
contracts are daywork, footage or turnkey, and the rate received for these
services. The Company's cash flow used in operating activities during the first
nine months of 1999 was $20.1 million compared to cash generated from operating
activities during the first nine months of 1998 of $23.4 million. This change is
due to 48% fewer operating days and a decrease in per day gross profit margins
between the two periods. Cash used in operations due to changes in working
capital requirements during the first nine months of 1999 was $1.6 million
compared to $1.9 million for the first nine months of 1998.

         During the nine months ended September 30, 1999, the Company's cash
used in investing activities was negligible as a result of cost cutting measures
employed to conserve cash. Investing activities during the nine months ended
September 30, 1998 consisted primarily of the cash portion of the Murco
acquisition of $60.8 million and capital expenditures for rig refurbishments and
capital maintenance of approximately $45.4 million.

         Cash flow used in financing activities for the nine months ended
September 30, 1999 consisted principally of capital lease payments, credit line
financing costs and the redemption of all remaining Series A preferred stock,
while cash provided by financing activities for the nine month period ended
September 30, 1998 consisted principally of net proceeds of $72.0 million from
the May 1998 $75.0 million senior note offering.

Current Outlook

         Beginning in the first quarter of 1998 and continuing through the
second quarter of 1999, overall demand for land drilling services deteriorated
and the Company's rig utilization was negatively impacted. Rig utilization since
the end of the second quarter of 1999 has improved. The Company's utilization in
its core domestic markets over the period through October 22, 1999 is as
follows:


                                      -14-
<PAGE>   15


<TABLE>
<CAPTION>
                                             1998                                 1999
                                 -----------------------------       ----------------------------
                                 Q-1     Q-2      Q-3      Q-4       Q-1       Q-2     Q-3    Oct
                                 ---     ---      ---      ---       ---       ---     ---    ---
<S>                              <C>      <C>     <C>      <C>       <C>       <C>     <C>    <C>
         Domestic Markets        81%      71%      59%      49%       39%       31%     40%    55%
</TABLE>

         After an extended period of declines, the total U.S. land drilling
count has risen over the past several months from the historic low of 380
reported on April 23, 1999, to 622 reported on October 22, 1999, a 64% increase.
Grey Wolf's rig count has increased approximately 88% during the same period.
For the first three weeks of the fourth quarter of 1999, the Company had an
average of 60 rigs working (55% utilization). We believe the Company's greater
percentage increase in working rigs over the period is attributable to the
Company's ability to return rigs to work quickly as a result of not reducing
wages and thus being able to retain key operating personnel.

         In addition to the increase in rig utilization, there has also been a
modest increase in the dayrates the Company receives for its services from a low
bid range of $5,500 to $6,500 per day to leading edge bid rates today ranging
from $5,800 to $7,200. The Company's third quarter of 1999 utilization of 40%
compares favorably to the prior quarter utilization of 31% and earnings before
interest, taxes, depreciation and amortization ("EBITDA") for the third quarter,
while negative, were $1.9 million better than EBITDA in the prior quarter.

         Although current industry conditions remain somewhat depressed, the
increases in rig utilization and dayrates is encouraging. Gas prices and demand
remain strong and coupled with the current level of oil prices, oil and gas
company cash flows should continue to improve and drilling activity should
increase accordingly. Based on the Company's current level of utilization and
dayrates, results for the fourth quarter of 1999, should be better than those of
the third quarter. If current levels of utilization and dayrates are sustained
through the fourth quarter of 1999, the Company believes that it may be able to
attain slightly positive EBITDA during the fourth quarter.

         The Company continues to conserve cash by using components from spare
equipment inventory or cold stacked rigs instead of buying new replacement
parts. Capital expenditures for the nine months ended September 30, 1999 were
approximately $3.8 million and capital expenditures for the rest of the year are
estimated to be approximately $3.3 million. Included in the Company's capital
expenditures of approximately $2.5 million for the third quarter of 1999 was the
initial expenditure of approximately $900,000 to purchase two top drive units
for delivery in the fourth quarter, with an additional payment of approximately
$2.0 million expected to be made in the fourth quarter of 1999. Demand for top
drive units is growing in land drilling and the Company expects to buy or rent
additional top drive units as required to meet customer demand. The Company has
redeployed five of its domestic cold-stacked rigs for an aggregate capital
investment of $200,000. If demand warrants, the Company currently believes that
it can return the Company's next 20 cold-stacked rigs to marketed condition for
estimated capital expenditures of approximately $2.0 million, which would bring
the Company's marketed rig count to 85 rigs. To bring to marketed status the
next 15 rigs, increasing marketed rigs to 100, would require an estimated $4.6
million to $5.9 million. An estimated $10.0 million would be required to return
the Company's final eight cold-stacked rigs to marketed status. The actual cost
of returning cold-stacked rigs to marketed status will depend on the extent to
which component parts are used from the cold-stacked rigs and the extent to
which the Company chooses to upgrade the cold-stacked rigs before returning them
to service.

         The Company believes that current cash balances, and to the extent
required, borrowings under the CIT Facility, will be sufficient to fund the
Company's anticipated cash requirements and capital expenditures for the
remainder of 1999 and for 2000.


                                      -15-
<PAGE>   16

Inflation and Changing Prices

         Contract drilling revenues do not necessarily track the changes in
general inflation as they tend to respond to the level of activity on the part
of the oil and gas industry in combination with the supply of equipment and the
number of competing companies. Capital and operating costs are influenced to a
larger extent by specific price changes in the oil and gas industry and to a
lesser extent by changes in general inflation.

Foreign Exchange

         Although the Company discontinued its operations in Venezuela in the
first quarter of 1999, historically, operations were performed there by the
Company pursuant to drilling contracts under which payments to the Company were
denominated in United States Dollars but payable in Venezuelan currency at a
floating exchange rate. Additionally, the Company's subsidiaries operating in
Venezuela have historically been required to maintain cash balances in
Venezuelan currency. The Company has not, during the nine months ended September
30, 1999, entered into any currency hedges to protect it from foreign currency
losses. During the nine months ended September 30, 1999, the Company recognized
foreign exchange losses of $108,000. (See Note 2 "Significant Accounting
Policies - Foreign Currency" to the Consolidated Financial Statements).

Other

         The Company has not paid any cash dividends on its common stock and
does not anticipate paying dividends on the common stock at any time in the
foreseeable future. Furthermore, the CIT Facility prohibits the payment of cash
dividends without the consent of the participating lenders.

         The Company is a holding company. Substantially all of its operations
are conducted through, and substantially all of its assets consist of equity
interests in, its subsidiaries, including the guarantors of the Company's 87/8%
Senior Notes due 2007. As a holding company, the Company's liquidity is
dependent on the operations of its subsidiaries. Certain financing arrangements
that the Company and its subsidiaries are party to may restrict the Company's
ability to access funds from its subsidiaries.


                                      -16-
<PAGE>   17

RESULTS OF OPERATIONS

Comparison of the Three Months Ended September 30, 1999 and 1998

          The following tables highlight rig days worked, revenues and operating
expenses, for the Company's domestic and foreign operations for the three months
ended September 30, 1999 and 1998.

<TABLE>
<CAPTION>
                                      THREE MONTHS ENDED                  THREE MONTHS ENDED
                                      SEPTEMBER 30, 1999                  SEPTEMBER 30, 1998
                             ----------------------------------   ---------------------------------
                              DOMESTIC     FOREIGN                 DOMESTIC     FOREIGN
                             OPERATIONS   OPERATIONS     TOTAL    OPERATIONS   OPERATIONS    TOTAL
                             ----------   ----------    -------   ----------   ----------   -------
                                    (In thousands, except rig days worked and averages per day)
<S>                          <C>          <C>           <C>       <C>          <C>          <C>
Rig days worked                  4,023          --        4,023       5,916         223       6,139
Drilling revenues              $33,992     $    --      $33,992     $54,265     $ 2,372     $56,637
Operating expenses(1)           33,030          71       33,101      44,894       2,219      47,113
                               -------     -------      -------     -------     -------     -------
Gross profit (loss)            $   962     $   (71)     $   891     $ 9,371     $   153     $ 9,524
                               =======     =======      =======     =======     =======     =======

Average per rig day worked
   Drilling revenue            $ 8,449     $    --      $ 8,449     $ 9,173     $10,637     $ 9,226
   Operating expenses            8,210          --        8,228       7,589       9,951       7,674
                               -------     -------      -------     -------     -------     -------
   Gross profit                $   239     $    --      $   221     $ 1,584     $   686     $ 1,552
                               =======     =======      =======     =======     =======     =======
</TABLE>

----------------------

(1) Operating expenses exclude depreciation and amortization, general and
administrative expenses, provision for doubtful accounts and unusual charges.

         Revenues decreased approximately $22.6 million, or 40%, to $34.0
million for the three months ended September 30, 1999, from $56.6 million for
the three months ended September 30, 1998. This decrease is primarily due to a
decrease in revenue from domestic operations of $20.3 million which is the
result of a decrease in rig days worked of 1,893 or 32%, and a decrease in the
average revenue per day of $724. The decrease in average revenue per day is due
to lower dayrates partially offset by an increase in the percentage of turnkey
drilling activity from 16% of total days worked during the three months ended
September 30, 1998 to 20% for the same period in the current year. The remaining
decrease in revenue is due to a $2.4 million decrease in revenue from foreign
operations which is a direct result of the Company completing its contracts in
Venezuela late in the first quarter of 1999 and discontinuing operations in
Venezuela thereafter.

         Drilling operating expenses decreased by approximately $14.0 million,
or 30 %, to $33.1 million for the three months ended September 30, 1999, as
compared to $47.1 million for the three months ended September 30, 1998. The
decrease is primarily due to an $11.9 million decrease in drilling operating
expenses from domestic operations due to the decreased level of activity
discussed above, partially offset by an increase in operating expense per day of
$621. The increase in operating expense per day is a result of the increase in
the percentage of turnkey days worked discussed above as well as fixed overhead
costs being spread over fewer rig days worked. The remaining decrease in
operating expenses of $2.2 million is due to a decrease in operating expenses
from foreign operations resulting from discontinuing Venezuelan operations as
discussed above.

         Turnkey contracts generally result in higher effective revenues per day
worked than dayrate contracts. Gross profit margins per day worked on successful
turnkey jobs are also generally better than under dayrate contracts, although
the Company typically is required to bear additional operating costs (such as
fuel costs) that would typically be paid by the customer under dayrate
contracts. Revenues, operating expenses and, thus, gross profit (or loss)
margins on turnkey contracts are affected by a number of variables, and include
the depth of the well, geological complexities and the actual difficulties
encountered in drilling the well.


                                      -17-
<PAGE>   18

         Depreciation and amortization expense decreased by $1.2 million, or
12%, to $8.5 million for the three months ended September 30, 1999, compared to
$9.7 million for the three months ended September 30, 1998. The decrease is
primarily due to the SFAS 121 write-down of assets of $93.2 million that the
Company recorded in the fourth quarter of 1998.

         General and administrative expenses decreased by $211,000 or 10%, to
$1.8 million for the three months ended September 30, 1999, from $2.0 million
for the same period of 1998 due primarily to the Company's cost cutting measures
and the decreased level of activity.

         During the three months ended September 30, 1998, the Company recorded
$272,000 in unusual charges which consisted of $127,000 in severance costs and
$145,000 in write-downs associated with international operations.

         The difference in interest expense for the three months ended September
30, 1999 as compared to the same period in 1998 is negligible as the average
outstanding debt balance has remained relatively constant since June 1998.

         Other income, net decreased by $558,000 to $576,000 for the three
months ended September 30, 1999, as compared to $1.1 million for the three
months ended September 30, 1998. The decrease is primarily due to the gain on
the sale of non-strategic excess drilling equipment in 1998 being greater than
that in 1999.

Comparison of the Nine Months Ended September 30, 1999 and 1998

          The following tables highlight rig days worked, revenues and operating
expenses, for the Company's domestic and foreign operations for the nine months
ended September 30, 1999 and 1998.

<TABLE>
<CAPTION>
                                        NINE MONTHS ENDED                     NINE MONTHS ENDED
                                       SEPTEMBER 30, 1999                    SEPTEMBER 30, 1998
                              ------------------------------------    ------------------------------------
                               DOMESTIC     FOREIGN                    DOMESTIC    FOREIGN
                              OPERATIONS   OPERATIONS      TOTAL      OPERATIONS  OPERATIONS       TOTAL
                              ----------   ----------     --------    ----------  ----------      --------
                                        (In thousands, except rig days worked and averages per day)
<S>                           <C>          <C>            <C>         <C>         <C>             <C>
Rig days worked                  10,874          145        11,019       20,475          622        21,097

Drilling revenues              $ 93,956     $  1,464      $ 95,420     $189,406     $  6,704      $196,110
Operating expenses(1)            91,806        2,078        93,884      143,990        7,053       151,043
                               --------     --------      --------     --------     --------      --------
Gross profit (loss)            $  2,150     $   (614)     $  1,536     $ 45,416     $   (349)     $ 45,067
                               ========     ========      ========     ========     ========      ========

Average per rig day worked
   Drilling revenue            $  8,640     $ 10,097      $  8,660     $  9,251     $ 10,778      $  9,296
   Operating expenses             8,443       14,331         8,520        7,032       11,339         7,159
                               --------     --------      --------     --------     --------      --------
   Gross profit (loss)         $    197     $ (4,234)     $    140     $  2,219     $   (561)     $  2,137
                               ========     ========      ========     ========     ========      ========
</TABLE>

---------------------

(1) Operating expenses exclude depreciation and amortization, general and
administrative expenses, provision for doubtful accounts and unusual charges.

         Revenues decreased approximately $100.7 million, or 51%, to $95.4
million for the nine months ended September 30, 1999, from $196.1 million for
the nine months ended September 30, 1998. The decrease is due to a reduction in
revenue from domestic operations of $95.5 million and a decrease in revenue from
foreign operations of $5.2 million. Revenues from domestic operations decreased
due to a reduction in rig days worked of 9,601 and a decrease in the average
revenue per day of $611. The decrease in average revenue per day is due to lower
dayrates partially offset by an increase in the percentage of turnkey drilling
activity from 11% of total days worked during the first nine months of 1998 to
20% of total days worked for the same period in 1999. Revenue from foreign
operations decreased due to a decrease in rig days worked of 477. The decrease
in rig days worked is a direct result of the Company's completing its contracts
late in the first quarter of 1999 and discontinuing all operations in Venezuela
thereafter.


                                      -18-
<PAGE>   19


         Drilling operating expenses decreased by approximately $57.2 million,
or 38%, to $93.9 million for the nine months ended September 30, 1999, as
compared to $151.0 million for the nine months ended September 30, 1998. The
decrease is primarily due to a $52.2 million decrease in drilling operating
expenses from domestic operations. The decrease in domestic drilling operating
expenses is a direct result of the decrease in rig days worked of 9,601
partially offset by an increase in operating expense per day of $1,411. The
increase in operating expense per day is a result of the greater percentage of
turnkey days discussed previously as well as fixed overhead items being spread
over fewer days. The remaining decrease in operating expenses of $5.0 million is
due to a decrease in operating expense from foreign operations resulting from
discontinuing Venezuelan operations as discussed above.

         Turnkey contracts generally result in higher effective revenues per day
worked than under dayrate contracts. Gross profit margins per day worked on
successful turnkey jobs are also generally better than under dayrate contracts,
although the Company typically is required to bear additional operating costs
(such as fuel costs) that would typically be paid by the customer under dayrate
contracts. Revenues, operating expenses and, thus, gross profit (or loss)
margins on turnkey contracts are affected by a number of variables, and include
the depth of the well, geological complexities and the actual difficulties
encountered in completing the well.

         Depreciation and amortization expense decreased by $3.0 million, or
11%, to $24.7 million for the nine months ended September 30, 1999, compared to
$27.7 million for the nine months ended September 30, 1998. The decrease is
primarily due to the SFAS 121 write-down as discussed previously.

         General and administrative expense decreased by $1.9 million, or 27 %,
to $5.2 million for the nine months ended September 30, 1999, from $7.1 million
for the same period of 1998 due primarily to the Company's cost cutting measures
and the decreased level of activity.

         During the nine month periods ended September 30, 1999 and 1998, the
Company recorded $320,000 and $302,000 in unusual charges, respectively. Unusual
charges in 1999 consist entirely of severance costs while unusual charges in
1998 consist of $157,000 in severance costs and $145,000 in write-downs
associated with international operations.

         Interest expense increased by $2.4 million or 16%, to $18.0 million for
the nine months ended September 30, 1999, compared to $15.6 million for the nine
months ended September 30, 1998. The increase is due to an increase in the
average outstanding debt balance of $36.7 million to $251.4 million for the nine
months ended September 30, 1999 from $214.7 million for the nine months ended
September 30, 1998. This increase in the outstanding debt balance is primarily
due to the issuance of $75.0 million of senior notes during May 1998 of which
$30.0 million was used to repay the indebtedness outstanding under the Former
Credit Facility.

         Other income, net decreased by $2.0 million to $1.6 million for the
nine months ended September 30, 1999, as compared to $3.6 million for the nine
months ended September 30, 1998. The decrease is primarily due to the $1.8
million gain recognized during 1998 on the sale of the rigs and drilling related
equipment of the Company's Eastern division located in Ohio to Union Drilling,
Inc., an affiliate of two of the Company's directors.

         During the nine months ended September 30, 1999, the Company wrote off
$623,000 in deferred loan costs related to its Former Credit Facility. This
amount net of the $203,000 in related taxes is classified as an extraordinary
item.

YEAR 2000 COMPLIANCE

         The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Computer
equipment, software and other devices with imbedded technology that are
time-sensitive may recognize a date using "00" as the year 1900 rather than the
year 2000. This could


                                      -19-
<PAGE>   20

result in a system failure causing disruptions of administrative operations,
including, among other things, temporary inability to process data.

         The Company has undertaken various initiatives intended to ensure that
its computer equipment and software will function properly with respect to dates
in the year 2000 and thereafter. For this purpose, the term "computer equipment
and software" includes systems that are commonly thought of as information
technology ("IT") systems, including accounting, data processing, telephone
systems and other miscellaneous systems, as well as systems that are not
commonly thought of as IT systems, such as alarm systems, sprinkler systems, fax
machines, or other miscellaneous systems. Both IT and non-IT systems may contain
imbedded technology, which complicates the Company's Year 2000 identification,
assessment, remediation, and testing efforts. Based upon its identification and
assessment efforts to date, the Company believes that certain of the computer
equipment and software it currently uses have required some replacement or
modification. In addition, in the ordinary course of replacing computer
equipment and software, the Company attempts to obtain replacements that it
believes are Year 2000 compliant. Utilizing both internal and external resources
to identify and assess needed Year 2000 remediation, the Company currently
believes that its Year 2000 identification, assessment and remediation efforts
are complete and that its testing efforts have been completed.

         The Company has mailed letters to its significant vendors and
customers. In addition, the Company has verbally communicated with many
strategic vendors and customers to determine the extent to which interfaces with
such entities are vulnerable to Year 2000 issues and whether the products
purchased from or by such entities are Year 2000 compliant.

         As of September 30, 1999, the Company had incurred costs of
approximately $78,000 related to its Year 2000 identification, assessment,
remediation, and testing efforts consisting of upgrades to existing software.
The Company estimates that the future costs associated with the Year 2000 issue
will not be material, and as such will not have a significant impact on the
Company's financial position or operating results.

         The Company presently believes that the Year 2000 issues will not pose
significant operational problems for the Company. However, if all Year 2000
issues are not properly identified, or assessment, remediation, and testing are
not effected timely with respect to Year 2000 problems that are identified,
there can be no assurance that the Year 2000 issue will not materially adversely
impact the Company's results of operations or adversely affect the Company's
relationships with customers, vendors, or others. Additionally, there can be no
assurance that the Year 2000 issues of other entities will not have a material
adverse impact on the Company's systems or results of operations.

         In the event the Company's key vendors do not achieve Year 2000
compliance, the Company could experience delays in delivery of supplies or
services to its drilling rigs resulting in less efficient operations, temporary
work stoppages or the loss of potential future contracts. If the Company's
customers do not achieve Year 2000 compliance, the Company's cash flow could be
negatively impacted due to customers' inability to process invoices and issue
checks. While the Company believes its accounting systems are Year 2000
compliant, in the event that they are not, a significant increase in manpower
may be required to generate financial reports and process invoices for payment.

         A contingency plan has been developed for dealing with the most
reasonably likely worst case scenario. The contingency plan includes an analysis
of operational problems and costs (including loss of revenues) that would be
reasonably likely to result from the failure by the Company and certain third
parties to complete efforts to achieve Year 2000 compliance on a timely basis.
However, the contingency plan will be continually refined as the Company obtains
additional information regarding the Year 2000 condition of its operations and
the operations of its business partners. It is unlikely that any contingency
plan will fully address all events that may arise.


                                      -20-
<PAGE>   21

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

         Interest Rate Risk. The Company is subject to market risk exposure
related to changes in interest rates on the CIT Facility. Interest on borrowings
under the CIT Facility accrues at a variable rate, using either the prime rate
plus 0.25% to 1.50% or LIBOR plus 1.75% to 3.5%, depending upon the Company's
debt service coverage ratio for the trailing 12 month period. At September 30,
1999 and as of October 26, 1999, the Company had no outstanding balance under
the CIT Facility and as such has no exposure at this time to a change in the
interest rate.

         Foreign Currency Exchange Rate Risk. The Company is sensitive to
fluctuations in foreign currency exchange rates as they relate to its business
in Venezuela. See Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Foreign Exchange.


                                      -21-
<PAGE>   22


PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

         The Company is involved in litigation incidental to the conduct of its
business, none of which management believes is, individually or in aggregate,
material to the Company's consolidated financial condition or results of
operations. See Note 6 - Commitments and Contingent Liabilities.

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

         None

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

         None

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

         None

ITEM 5.  OTHER INFORMATION

         This Quarterly Report on Form 10-Q contains "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All
statements other than statements of historical facts included in this report
including, without limitation, statements regarding the Company's business
strategy, plans, objectives, capital expenditures and beliefs of management for
future operations and results , are forward-looking statements. Although the
Company believes the expectations and beliefs reflected in such forward-looking
statements are reasonable, it can give no assurance that such expectations will
prove to have been correct. Important factors that could cause actual results to
differ materially from the Company's expectations ("Cautionary Statements") are
discussed in "Risk Factors" in the Company's registration statement on Form S-3
filed with the Securities and Exchange Commission on October 6, 1999.


                                      -22-
<PAGE>   23


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

Exhibits:

<TABLE>
<CAPTION>
    Exhibit
     Number         Description
    -------         -----------
<S>                 <C>
      27.0          Financial Data Schedule
</TABLE>


                                      -23-
<PAGE>   24

                                   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 1, 1999     By: /s/ David W. Wehlmann
                               ---------------------------------------
                               David W. Wehlmann
                               Senior Vice President and Chief Financial Officer



Date: November 1, 1999     By: /s/ Merrie S. Costley
                               ---------------------------------------
                               Merrie S. Costley
                               Vice President and Controller


                                      -24-
<PAGE>   25

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
    Exhibit
     Number         Description
    -------         -----------
<S>                 <C>
      27.0          Financial Data Schedule
</TABLE>