<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


For the quarterly period ended                    Commission File Number 1-8226
September 30, 1997    


                         [Grey Wolf, Inc. Logo Omitted]

                                 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 November 11, 1997, was 164,335,391.





                                  Page 1 of 20
<PAGE>   2





                        GREY WOLF, INC. AND SUBSIDIARIES

                                TABLE OF CONTENTS


<TABLE>
<CAPTION>
                                                                                         PAGE
<S>           <C>                                                                        <C>
PART I.       Financial Information
              Item 1.      Financial Statements
                           Consolidated Balance Sheets                                     3
                           Consolidated Statements of Operations                           4
                           Consolidated Statements of Shareholders' Equity                 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                          11

PART II.      Other Information
              Item 1.      Legal Proceedings                                              18
              Item 4.      Submission of Matters to a Vote of Security Holders            18
              Item 5.      Other Information                                              18
              Item 6.      Exhibits and Reports on Form 8-K                               18


              Signatures                                                                  19
</TABLE>



                                       -2-

<PAGE>   3






                        GREY WOLF, INC. AND SUBSIDIARIES

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


<TABLE>
<CAPTION>
                                                                  September 30,   December 31,
                                                                      1997            1996
                                                                    ---------       ---------
                                                                   (Unaudited)
                         ASSETS
<C>                                                                <C>              <C>
     Current assets:
         Cash and cash equivalents                                  $   7,328       $   6,162
         Restricted cash - insurance deposits                             412           1,000
         Accounts receivable, net of allowance of $1,899
           and $1,333, respectively                                    44,070          15,866
         Rig inventory and supplies                                       252             936
         Assets held for sale                                              80             557
         Prepaids and other current assets                              5,144           3,690
                                                                    ---------       ---------
              Total current assets                                     57,286          28,211
                                                                    ---------       ---------

     Property and equipment:
         Land, buildings and improvements                               5,892           4,312
         Drilling and well service equipment                          369,036          95,059
         Furniture and fixtures                                         1,501           1,088
                                                                    ---------       ---------
                                                                      376,429         100,459
         Less: accumulated depreciation and amortization              (23,333)        (11,983)
                                                                    ---------       ---------
              Net property and equipment                              353,096          88,476
                                                                    ---------       ---------

     Other noncurrent assets                                            6,937           1,132
                                                                    ---------       ---------
                                                                    $ 417,319       $ 117,819
                                                                    =========       =========
                         LIABILITIES AND SHAREHOLDERS' EQUITY 

     Current liabilities:
         Current maturities of long-term debt                       $     800       $     613
         Accounts payable - trade                                      22,599          11,826
         Accrued workers' compensation                                  2,968           1,502
         Payroll and related employee costs                             5,953           3,340
         Customer advances                                                346           2,466
         Taxes payable                                                  1,772             845
         Interest payable                                               4,005              --
         Other accrued liabilities                                      1,532           1,424
                                                                    ---------       ---------
              Total current liabilities                                39,975          22,016
                                                                    ---------       ---------

     Senior notes                                                     174,161              --
     Other long-term debt net of current maturities                     1,361          26,846
     Other long-term liabilities and minority interest                  5,266           3,299
     Deferred income taxes                                             46,624             248
     Series A preferred stock - mandatory redeemable                      305             764

     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 151,835,391 and 125,043,234 issued
              and outstanding, respectively                            15,183          12,504
         Additional paid-in capital                                   175,525          99,301
         Cumulative translation adjustments                              (402)           (404)
         Accumulated deficit                                          (40,679)        (46,755)
                                                                    ---------       ---------
              Total shareholders' equity                              149,627          64,646
                                                                    ---------       ---------
                                                                    $ 417,319       $ 117,819
                                                                    =========       =========
</TABLE>

          See accompanying notes to consolidated financial statements.


                                      -3-


<PAGE>   4


                        GREY WOLF, INC. AND SUBSIDIARIES

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


<TABLE>
<CAPTION>
                                                      Three Months Ended            Nine Months Ended
                                                         September 30,                 September 30,
                                                  -------------------------       -------------------------
                                                     1997            1996            1997            1996
                                                  ---------       ---------       ---------       ---------
<S>                                               <C>             <C>             <C>             <C>      
Revenues:
     Contract drilling                            $  63,750       $  22,031       $ 139,796       $  61,316

Costs and expenses:
     Drilling operations                             45,287          18,887         107,419          57,205
     Depreciation and amortization                    7,016           1,159          12,196           3,380
     General and administrative                       2,315             877           5,684           2,672
     Non-recurring charges                               --              --              --             602
                                                  ---------       ---------       ---------       ---------
         Total costs and expenses                    54,618          20,923         125,299          63,859
                                                  ---------       ---------       ---------       ---------

Operating income (loss)                               9,132           1,108          14,497          (2,543)

Other income (expense):
     Interest income                                    459              45             647             149
     Gain on sale of assets                             229              23             583           2,972
     Interest expense                                (3,870)           (322)         (5,405)           (788)
     Minority interest                                    2             (46)            340              51
                                                  ---------       ---------       ---------       ---------
         Other income (expense), net                 (3,180)           (300)         (3,835)          2,384
                                                  ---------       ---------       ---------       ---------

Income (loss) before income taxes                     5,952             808          10,662            (159)

Income taxes                                          3,230              --           4,586              --
                                                  ---------       ---------       ---------       ---------

Net income (loss)                                     2,722             808           6,076            (159)

Series A preferred stock redemption premium              --              --            (240)             --
Series B preferred stock subscription
    dividend requirement                                 --            (100)             --            (400)
                                                  ---------       ---------       ---------       ---------

Net income (loss) applicable to common stock      $   2,722       $     708       $   5,836       $    (559)
                                                  =========       =========       =========       =========

Net income (loss) per common share                $     .02       $     .01       $     .04       $    (.01)
                                                  =========       =========       =========       =========

Weighted average common and common
    equivalent shares outstanding                   151,628          68,853         141,105          48,812
                                                  =========       =========       =========       =========
</TABLE>


          See accompanying notes to consolidated financial statements.


                                      -4-



<PAGE>   5






                        GREY WOLF, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                             (Amounts in thousands)
                                   (Unaudited)


<TABLE>
<CAPTION>
                                          Series B
                                          Preferred        Common
                                           Stock           Stock        Additional                     Cumulative
                                           $1 par         $.10 par       Paid-in                       Translation
                                           Value            Value        Capital         Deficit       Adjustments         Total
                                          ---------       ---------      ---------       ---------     -----------       ---------
<S>                                       <C>             <C>            <C>             <C>               <C>           <C>      
Balance, December 31, 1995                $   4,000       $   3,867      $  46,458       $ (34,631)             --       $  19,694

    Issuance of shares in
    merger transactions                          --           7,885         41,673              --              --          49,558

    Exercise of stock options                    --              20            188              --              --             208

    Redemption of Series A
    preferred stock                              --              --            (13)             --              --             (13)

    Series B preferred stock
       dividend requirement                     400              --             --            (400)             --              --

    Rescission of series B preferred
       stock subscription                    (4,400)             --             --              --              --          (4,400)

    Net loss                                     --              --             --            (159)             --            (159)

    Unrealized translation loss                  --              --             --              --            (404)           (404)
                                          ---------       ---------      ---------       ---------       ---------       ---------

Balance, September 30, 1996               $      --       $  11,772      $  88,306       $ (35,190)      $    (404)      $  64,484
                                          =========       =========      =========       =========       =========       =========


Balance, December 31, 1996                $      --       $  12,504      $  99,301       $ (46,755)      $    (404)      $  64,646

    Issuance of shares in
       Flournoy acquisition                      --           1,243         29,823              --              --          31,066

    Exercise of stock options                    --              36            441              --              --             477

    Redemption of Series A
       preferred stock                           --              --           (240)             --              --            (240)

    Issuance of shares in
    Grey Wolf merger                             --           1,400         46,200              --              --          47,600

    Unrealized translation
    gain                                         --              --             --              --               2               2

    Net income                                   --              --             --           6,076              --           6,076
                                          ---------       ---------      ---------       ---------       ---------       ---------

Balance, September 30, 1997               $      --       $  15,183      $ 175,525       $ (40,679)      $    (402)      $ 149,627
                                          =========       =========      =========       =========       =========       =========
</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,
                                                                          -------------------------
                                                                             1997            1996
                                                                          ---------       ---------
<S>                                                                       <C>             <C>       
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income (loss)                                                      $   6,076       $    (159)
   Adjustments to reconcile net income (loss) to
      net cash used in operating activities:
      Depreciation and amortization                                          12,196           3,380
      Provision for deferred income taxes                                     2,220              --
      Gain on sale of assets                                                   (583)         (2,972)
      Provision for doubtful accounts                                          (200)            200
   Net effect of changes in assets and liabilities
      related to operating accounts                                         (11,171)            691
                                                                          ---------       ---------
      Cash provided by operating activities                                   8,538           1,140
                                                                          ---------       ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Property and equipment additions                                        (152,677)         (6,532)
   Proceeds from sale of property and equipment                               2,793           4,397
                                                                          ---------       ---------
      Cash used in investing activities                                    (149,884)         (2,135)
                                                                          ---------       ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from Senior notes                                               174,161              --
   Proceeds from long-term debt                                              22,978           5,869
   Repayments of long-term debt                                             (49,319)         (2,725)
   Senior notes financing costs                                              (5,086)             --
   Proceeds from issuance of common stock                                        --          24,558
   Proceeds from exercise of stock options                                      477             208
   Redemption of Series A Preferred Stock                                      (699)           (149)
   Rescission of Series B preferred stock subscriptions                          --          (4,400)
                                                                          ---------       ---------
      Cash provided by financing activities                                 142,512          23,361
                                                                          ---------       ---------

EFFECTS OF EXCHANGE RATE CHANGES ON CASH                                         --            (144)

NET INCREASE IN CASH AND CASH EQUIVALENTS                                     1,166          22,222
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                6,162           1,859
                                                                          ---------       ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD                                  $   7,328       $  24,081
                                                                          =========       =========

SUPPLEMENTAL CASH FLOW DISCLOSURE

CASH PAID FOR INTEREST:                                                   $   2,045       $     463
                                                                          =========       =========
CASH PAID FOR TAXES:                                                      $   1,579       $      --
                                                                          =========       =========

NON CASH TRANSACTIONS:
   Issuance of common stock for Oliver/Mullen rigs
      Change in property and equipment additions                                          $  25,000
         Change in issuance of common stock                                                  25,000
   Issuance of common stock in Flournoy transaction
      Change in property and equipment additions                          $  40,503
      Change in issuance of common stock                                     31,066
      Change in deferred tax liability                                        9,437
   Issuance of common stock for Grey Wolf acquisition
      Change in property and equipment additions                             85,842
      Change in issuance of common stock                                     47,600
      Change in deferred tax liability                                       34,720
         Change in other assets                                                 167
         Change in long-term debt                                             1,043
      Change in assets and liabilities related to operating accounts          2,646
</TABLE>


          See accompanying notes to consolidated financial statements.



                                      -6-


<PAGE>   7




                        GREY WOLF, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
(1)      GENERAL

         On July 14, 1997, by written consent, the Board of Directors and
certain shareholders of DI Industries, Inc., representing approximately 52.2% of
the issued and outstanding shares of DI Industries, Inc.'s common stock at June
30, 1997, approved an amendment to the corporate charter to change the name of
the company from DI Industries, Inc. to "Grey Wolf, Inc." The Articles of
Amendment effecting the amendment were filed with the Texas Secretary of State
on September 18, 1997.

         The accompanying unaudited consolidated financial statements have been
prepared by Grey Wolf, Inc. (the "Company" or "Grey Wolf") in accordance with
the rules and regulations of the Securities and Exchange Commission 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, 1997, and
the results of operations and cash flows for the periods indicated. All
significant intercompany transactions have been eliminated. The results of
operations for the three months and nine months ended September 30, 1997 and
1996 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, 1996.

(2)      NET INCOME (LOSS) PER COMMON SHARE

         The following table presents the weighted average number of shares of
common stock and common stock equivalents outstanding for the three months and
nine months ended September 30, 1997 and 1996.


<TABLE>
<CAPTION>
                                                      Three Months Ended       Nine Months Ended
                                                        September 30,             September 30,
                                                    1997         1996         1997         1996
                                                   -------      -------      -------      -------
                                                                    (In thousands)
<S>                                                <C>           <C>         <C>           <C>   
Weighted average shares of common
    stock outstanding                              151,628       68,853      141,105       48,812
Stock options (treasury method)                         --           --           --           --
                                                   -------      -------      -------      -------
                                                   151,628       68,853      141,105       48,812
                                                   =======      =======      =======      =======
</TABLE>


         Stock options are not included in the computation for the three months
and nine months ended September 30, 1997 and 1996, since such inclusion would be
antidilutive or not significant to the computation.

(3)      ACCOUNTING FOR INCOME TAXES

         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. The Company recorded a current tax provision of $2.4 million and a
deferred tax provision of $2.2 million for the nine months ended September 30,
1997.

         The Company accounts for income taxes based upon Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," which
requires recognition of deferred income tax 

                                      -7-
<PAGE>   8

                        GREY WOLF, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


liabilities and assets for the expected future tax consequences of events that
have been recognized in the Company's financial statements or tax returns.
Deferred income taxes reflect the gross tax effect of (a) temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and tax reporting purposes, and (b) operating loss carryforwards.

(4)      SIGNIFICANT TRANSACTIONS

         On January 31, 1997, the Company acquired the operating assets of
Flournoy Drilling Company ("Flournoy") for 12.4 million shares of the Company's
common stock and $800,000 in cash. The assets acquired included 13 drilling
rigs, 17 rig hauling trucks, a yard and office facility in Alice, Texas, and
various other equipment and drill pipe. The Company agreed to issue additional
shares of common stock to Flournoy's shareholders if, and to the extent that on
January 31, 1998, the aggregate market value of one-half of the shares received
by the Flournoy shareholders less any shares sold, plus the gross proceeds from
certain sales of common stock received in the transaction by the Flournoy
shareholders prior to January 31, 1998, is, in total, less than $12.4 million.

         In May 1997, the Company increased its inventory of rigs held for
refurbishment by purchasing three rigs in three separate transactions for an
aggregate purchase price of $6.9 million in cash. One of the rigs was purchased
from an affiliate of one of the Company's directors.

         In June 1997, the Company purchased three additional rigs to add to its
inventory of rigs to be refurbished for $8.9 million. These rigs were also
purchased from an affiliate of one of the Company's directors.

         On June 27, 1997, the Company acquired all of the outstanding capital
stock of Grey Wolf Drilling Company ("GWDC") by merger in exchange for $61.6
million cash and 14.0 million shares of the Company's common stock. Transaction
costs of approximately $0.4 million were incurred in connection with the merger.
GWDC operated 18 large premium drilling rigs in South Louisiana and along the
upper Texas Gulf Coast. The merger was accounted for using purchase accounting
and as such, all revenues and expenses were recorded by the Company beginning
from the date of acquisition.

         In July 1997, the Company purchased one operating rig for $2.4 million
in cash. In August 1997, the Company purchased six idle drilling rigs and
related equipment from Cactus Drilling Company, a division of Kaiser-Francis Oil
Company, for $25.4 million (the "Kaiser-Francis Rig Purchase"). These rigs will
be refurbished and placed into service in the future as warranted by demand.

         On September 15, 1997, the Company entered into a definitive agreement
to acquire substantially all of the operating assets of Justiss Drilling Company
(the "Justiss Acquisition"), a division of Justiss Oil Company, Inc. The assets
include a fleet of 12 operating drilling rigs and related equipment which are
currently operating in the Company's Ark-La-Tex and Gulf Coast markets. The
total purchase price for the Justiss Acquisition is $36.1 million in cash of
which $28.6 million was paid on October 21, 1997, upon delivery of nine of the
12 rigs to be acquired. The remaining three rigs were purchased and the balance
of the purchase price ($7.5 million) was paid in November 1997, as each rig
completed a turnkey drilling contract. The Company borrowed $28.0 million under
its bank credit facility for the first nine rigs and the November purchases were
funded from the Company's stock offering (discussed below).

         On November 3, 1997, the Company closed an offering of 25.0 million
shares of the Company's common stock (the "Offering"). The Company sold 12.5
million newly issued common shares and certain 


                                      -8-
<PAGE>   9

                        GREY WOLF, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

selling shareholders sold 12.5 million additional shares at $8.00 per share. The
Company received proceeds, net of underwriting discounts, of $95.0 million. The
Company estimates that expenses of the Offering will approximate $0.6 million.
The proceeds of the Offering were used to pay down the bank credit facility and
will be used for ongoing rig refurbishment and for general corporate purposes.

         The September 30, 1997 consolidated balance sheet includes the effect
of the Flournoy acquisition, the GWDC merger, the issuance of the Notes (defined
herein) and the May, June, July and Kaiser-Francis stacked rig purchases. The
following unaudited pro forma consolidated financial data for the nine months
ended September 30, 1997, includes the historical results of the Company for the
nine months ended September 30, 1997, and gives effect to the Flournoy
Acquisition, the GWDC merger, the Justiss Acquisition and issuance of the Notes
as if they occurred on January 1, 1996. The following unaudited pro forma
consolidated financial data for the year ended December 31, 1996, includes the
historical results of the Company for the year ended December 31, 1996, and
gives effect to each of the above transactions as well as the previously
disclosed merger, acquisition and sale transactions which occurred before
December 31, 1996, as if they occurred on January 1, 1996. The May, June, July
and Kaiser-Francis rig purchases have no historical operations as the rigs have
been stacked and the impact on the unaudited pro forma consolidated financial
data is not material and has not been presented.

<TABLE>
<CAPTION>
                                                  For the Nine  For the Year
                                                  Months Ended     Ended
                                                  September 30,  December 31,
                                                     1997           1996
                                                   ---------      ---------
                                                     Amounts in thousands, 
                                                 except per in share amounts)
<S>                                                <C>            <C>
Total revenues                                     $ 188,093      $ 218,840
Net income (loss) applicable
    to common stock                                    2,340        (31,782)

Net income (loss) per common share                       .01           (.19)
</TABLE>


(5)      LONG-TERM DEBT

         On December 31, 1996, the Company closed a $35.0 million reducing
revolving line of credit (the "Facility") with a group of banks. On April 30,
1997, the Facility was amended and restated to increase the line of credit to
$50.0 million and to revise certain other terms and covenants, including the
elimination of mandatory $5.0 million reductions in the line in January 1998 and
1999 and a conversion of the interest rate to a sliding variable rate based on
certain financial ratios of either LIBOR plus 1.75% to 2.5% or prime plus .75%
to 1.5%. The Facility is secured by substantially all the Company's assets and
calls for quarterly interest payments on the outstanding balance. At September
30, 1997 and December 31, 1996, $0.0 and $26.0 million, respectively, were
outstanding under the line of credit. The Facility contains customary
affirmative and negative covenants with which the Company was in compliance at
September 30, 1997.

         On June 27, 1997, the Company issued $175.0 million of senior notes
(the "Notes") receiving gross proceeds of $174.1 million. The Notes bear
interest at 8 7/8% per annum payable semiannually and mature on July 1, 2007.
The Notes are general unsecured senior obligations of the Company and are
guaranteed by the Company's domestic subsidiaries. Proceeds from the Notes were
used to fund the cash portion of the GWDC merger, to repay the outstanding
Facility balance of $47.0 million and to fund the inventory rig purchases. In
connection with the issuance of the Notes, the Company paid approximately $5.1
million in underwriting and financing costs which will be amortized over the
life of the Notes.

                                      -9-
<PAGE>   10

                        GREY WOLF, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

         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 $120.0
million aggregate principal amount shall remain outstanding immediately after
the occurrence of any such redemption.

(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.

         In connection with the GWDC merger, a $5.0 million escrow fund was
established to provide a source of payment for the net costs to the Company, if
any, for any eventual settlement by, or the payment of a monetary court judgment
against, the Company arising out of a case pending against GWDC at the time of
the GWDC merger. The source of the escrow fund was the cash consideration that
would have otherwise been payable by the Company to GWDC's shareholders. The
litigation, was styled TEPCO, Inc. ("TEPCO") v. Grey Wolf Drilling (Cause No.
96-49194) and filed in the 164th Judicial District Court of Harris County,
Texas. TEPCO alleged that Grey Wolf breached contractual obligations it owed to
TEPCO by failing to drill an oil and gas well or wells for it in the Treasure
Isle Field, located in Galveston, Texas. TEPCO also alleged that it lost rights
under an oil and gas lease it had under an alleged agreement with Mobil
Producing Texas and New Mexico, Inc., causing plaintiff to suffer money damages.
Grey Wolf had filed a counterclaim in the lawsuit for approximately $154,000 for
recovery of unpaid invoices, and interest, for services rendered or materials
provided by Grey Wolf in connection with the drilling of two wells for TEPCO
which were completed before Grey Wolf ceased performing work for TEPCO. This
case was settled in August 1997 for $2.5 million which was paid from the escrow
fund in October 1997, and the remaining $2.5 million less applicable expenses
will be distributed to the former GWDC shareholders.

         Substantially all of the Company's contract drilling activities are
conducted with independent and major oil and gas companies in the United States
or with national petroleum companies in Venezuela. 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.

(7)      SUBSEQUENT EVENT

         On November 13, 1997, the Company announced the sale of its 65%
interest in INDRILLERS, L.L.C. ("Indrillers") and certain related drilling
assets to Dart Energy Corporation ("Dart") in exchange for $1.65 million in cash
and title to a 1,200 horsepower SCR rig previously held by Indrillers. In
connection with the sale, Dart also received an option to acquire the Company's
Michigan real estate for $100,000. After the sale, the Company's rig fleet
totals 124. The Company estimates a gain of approximately $500,000 will be
recorded during the fourth quarter of 1997.



                                      -10-
<PAGE>   11





                        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.

GENERAL

         The Company's operations have been and will continue to be
significantly affected by the new management team installed in 1996, the
implementation of a new business strategy in April 1996 and the major
transactions which have transformed the Company into the second largest domestic
land drilling contractor. Since the implementation of this business strategy,
the Company has acquired 90 drilling rigs and now has the largest or second
largest active rig fleet in each of its three core domestic markets, the
Ark-La-Tex, South Texas and Gulf Coast markets. The Company's rig fleet now
consists of 133 rigs (including the Justiss Acquisition), of which 112 are
currently marketed by the Company. Refurbishment and reactivation of the
Company's inventory rigs is also a key element of the Company's business
strategy. Since the beginning of the fourth quarter of 1996, the Company has
refurbished 19 rigs at a cost of $31.8 million. Of the Company's current
inventory of 21 rigs, eight are currently undergoing refurbishment and the
Company presently intends to begin refurbishment of one additional rig during
the remainder of 1997 and 12 rigs in 1998. The Company estimates costs for
pending and planned refurbishments for these nine rigs in 1997 will total $16.3
million, of which $3.1 million had been expended through September 30, 1997. The
Company estimates that $22.0 million will be expended during 1998 for rig
refurbishment. By increasing the size of its rig fleet through acquisitions and
refurbishments, the Company has increased its market share in its three core
domestic markets during a period of rapidly rising demand and day rates for land
drilling rigs in those key markets. The combined effect of the Company's larger
fleet of marketable rigs, higher rig utilization rates and increasing day rates
has significantly improved the Company's financial performance since the third
quarter of 1996 despite increased drilling operations costs, including wages and
benefits, and debt service over the same period. Although the Company has not
had a profitable full year since 1991, during the first nine months of 1997 the
Company had net income of $6.1 million compared to a $159,000 loss during the
first nine months of 1996.

         Although equipment and supplies used in the Company's business are
generally available from multiple sources, there is a general shortage of
drilling equipment and supplies. The Company believes these shortages may
intensify. The costs and delivery times of equipment and supplies are
substantially greater than in prior periods and are currently escalating. In
response to this trend, the Company in 1996 formed an alliance with a major
drill pipe manufacturer. The alliance enables the Company to take delivery
through 1998 of 29,300 joints of drill pipe in commonly used diameters at fixed
prices plus possible escalations for increases in the manufacturer's cost of raw
materials. As is common in the industry, the drill pipe supply alliance is not a
formal contractual agreement but represents an informal arrangement in which
both parties undertake to satisfy the supply objectives of the alliance. Due in
part to its alliance arrangement, the Company is not currently experiencing any
material shortages of, or material price increases in, drill pipe. The Company
and its supplier under the drill pipe supply alliance have entered into a formal
contractual arrangement for the purchase and supply of an average quarterly
quantity of 3,750 joints of drill pipe (a total of 15,000 joints) during 1999 at
prices based on the supplier's price list as of February 1997 less 5%. The
Company has formed similar informal supply alliances with manufacturers and
suppliers of other equipment and supplies, and is attempting to establish
arrangements to assure adequate availability of certain other necessary drilling
equipment and supplies on satisfactory terms, but there can be no assurance that
it will be able to do so. Accordingly, there can be no assurance that the
Company will not experience shortages of, or material price increases in,
drilling equipment and supplies, including drill pipe, in the future. Any such
shortages could delay and adversely affect the Company's ability to refurbish
its rigs held in inventory and obtain contracts for its marketable rigs.



                                      -11-
<PAGE>   12

FINANCIAL CONDITION AND LIQUIDITY

         During the first nine months of 1997, the Company funded its activities
through a combination of cash generated from operations, borrowings under the
Company's bank credit facility (the "Facility"), the issuance of common stock
and the issuance of $175.0 million senior notes (the "Notes") discussed below.
On April 30, 1997, the Facility was amended and restated to increase the line of
credit to $50.0 million and reduce the interest rate by approximately 0.5% per
annum.

         The following table summarizes the Company's financial position at
September 30, 1997 and as of December 31, 1996.

<TABLE>
<CAPTION>
                                September 30, December 31, 
                                   1997          1996
                                 --------      --------
                                (unaudited)
                                     (In thousands)
<S>                              <C>           <C>
Working capital                  $ 17,311      $  6,195
Property and equipment, net       353,096        88,476
Other noncurrent assets             6,937         1,132
                                 --------      --------
      Total                      $377,344        95,803
                                 ========      ========

Long-term debt                   $175,522      $ 26,846
Other long-term liabilities        52,195         4,311
Shareholders' equity              149,627        64,646
                                 --------      --------
      Total                      $377,344      $ 95,803
                                 ========      ========
</TABLE>


         The significant changes in the Company's financial position from
December 31, 1996 to September 30, 1997, are primarily due to the acquisition of
Flournoy Drilling Company ("Flournoy"), the merger with Grey Wolf Drilling
Company ("GWDC"), the closing of the $175.0 million Notes offering discussed
further below, and the acquisition of a total of 13 additional drilling rigs.

         On January 31, 1997, the Company acquired the operating assets of
Flournoy for 12.4 million shares of the Company's common stock and $800,000 in
cash. The assets acquired included 13 drilling rigs, 17 rig hauling trucks, a
yard and office facility in Alice, Texas and various other equipment and drill
pipe. The acquisition was accounted for using purchase accounting and as such,
all revenues and expenses were recorded by the Company beginning from the date
of acquisition.

         On June 27, 1997, the Company acquired all of the outstanding capital
stock of GWDC by merger in exchange for $61.6 million in cash and 14,000,000
shares of the Company's common stock. Grey Wolf operated 18 large premium
drilling rigs in South Louisiana and along the upper Texas Gulf Coast. In
connection with the merger, Drillers, Inc., the Company's domestic operating
subsidiary, changed its name to "Grey Wolf Drilling Company." The merger was
accounted for using purchase accounting and as such, all revenues and expenses
were recorded by the Company beginning from the date of acquisition.

         Also on June 27, 1997, the Company closed a $175.0 million Notes
offering resulting in gross proceeds of $174.1 million. A portion of the
proceeds from the offering were used to fund the cash portion of the GWDC
merger, pay off the outstanding balance under the Facility of $47.0 million and
to purchase three additional drilling rigs for $8.9 million. The remaining
proceeds were used to fund the Company's capital requirements as discussed below
and additional rig purchases. The Notes bear interest at 8 7/8% per annum
payable semiannually and mature on July 1, 2007. The Notes are guaranteed by the
domestic subsidiaries of the Company.

         During May, June, July and August 1997, the Company completed the
purchase of 13 drilling rigs at a total cost of $43.6 million. All but one of
these rigs were added to the Company's inventory of rigs to be refurbished.



                                      -12-
<PAGE>   13

Operating Activities

         During the first nine months of 1997, the Company generated cash
earnings (net income plus depreciation plus deferred taxes) of $19.7 million.
These cash earnings funded an $11.2 million increase in working capital
resulting in cash provided by operating activities of $8.5 million.

Investing Activities

         During the nine months ended September 30, 1997, the Company invested
$149.9 million in fixed assets, net of asset sales. The cash portion of the GWDC
merger, including transaction costs, accounted for $62.0 million and the
acquisition of 13 additional stacked rigs in May, June, July and August
accounted for $43.6 million. Additionally, rig refurbishments consisted of $28.6
million and $10.1 million was spent to acquire drill pipe and other drilling
related equipment. In addition, the acquisition of Flournoy and the merger with
GWDC resulted in $40.5 million and $85.8 million, respectively, in non-cash
additions to property and equipment.

Financing Activities

         During the first nine months of 1997, cash provided by financing
activities totaled $142.5 million consisting principally of net proceeds from
the issuance of Notes of $169.1 million and borrowings and repayments under the
Facility. These borrowings were used to fund the cash portion of the GWDC
merger, working capital requirements and capital expenditures discussed above.
The Company had cash and cash equivalents at September 30, 1997, of $7.3
million.

         On November 3, 1997, the Company closed an offering of 25.0 million
shares of the Company's common stock (the "Offering"). The Company sold 12.5
million newly issued common shares and certain selling shareholders sold 12.5
million additional shares at $8.00 per share. The Company received proceeds, net
of underwriting discounts, of $95.0 million. The Company estimates that expenses
of the Offering will approximate $0.6 million. The proceeds of the Offering were
used to pay off the outstanding balance under the Facility and will be used for
ongoing rig refurbishment and for general corporate purposes.

Future Activities

         The Company anticipates substantial funding requirements in connection
with its rig refurbishment program during the fourth quarter of 1997 and in
1998. The Company currently has eight rigs under refurbishment and will begin
additional refurbishments of one rig during the remainder of 1997 and 12 rigs in
1998. The Company estimates costs for pending and planned refurbishments for
these nine rigs will total $16.3 million during 1997, of which $3.1 million had
been expended through September 30, 1997. The Company estimates that $22.0
million will be expended during 1998 for rig refurbishments. These estimates are
based on deployment of all rigs undergoing or planned for refurbishment to the
Company's three core domestic markets at an estimated average refurbishment cost
of $1.7 million per rig, including the cost of a new drill string. If the
Company instead chooses to refurbish rigs for service in the Venezuelan or other
international markets, it is estimated that the average refurbishment cost of
such rigs will be $12.0 million per rig, including the cost of a new drill
string, transportation and importation duties. Overall estimated capital
expenditures for rig refurbishments would be correspondingly increased by the
incremental refurbishment cost of rigs destined for international markets.

         The Company believes that the balance of the net proceeds from the
recently closed Offering remaining after the repayment of the Facility, the cash
flow from operations, and to the extent required, further borrowings under the
Facility, will be sufficient to fund the Company's refurbishment program and
meet its other anticipated capital expenditures for the remainder of 1997 and
1998.

         The Company continues to actively review possible acquisition
opportunities. While the Company has no agreements to acquire additional
businesses or equipment, suitable opportunities may arise in the 


                                      -13-
<PAGE>   14

future. The timing or success of any acquisition effort and the size of the
associated potential capital commitments cannot be predicted at this time. The
ability of the Company to consummate any such transaction will be dependent in
large part on its ability to fund such transaction. There can be no assurance
that adequate funding will be available on terms satisfactory to the Company.

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

         Venezuelan operations are often performed by the Company pursuant to
drilling contracts under which payments to the Company are denominated in United
States Dollars but are payable in Venezuelan currency at a floating exchange
rate. Although the Company's Venezuelan contracts usually allow the Company to
exchange up to 35% of payments made to it in Venezuelan currency for United
States Dollars for a limited period of time following the payment and at the
official Venezuelan exchange rate in effect at the time the payment was made to
the Company (thus offering limited protection against adverse currency
fluctuation), the Company is typically subject to the risk of adverse currency
fluctuations with respect to the balance of such payments. Additionally, a
significant portion of costs and expenses relating to the Company's
international operations are comprised of goods and services procured in the
respective foreign countries and paid for in the respective countries'
currencies. Accordingly, management expects that the Company's subsidiaries
operating in Venezuela will be required to maintain significant cash balances in
Venezuelan currency. The Company has not during the three-year period ended
December 31, 1996, entered into any currency hedges to protect it from foreign
currency losses. Instead, the Company attempts to manage assets in foreign
countries to minimize its exposure to currency fluctuations. Despite these
efforts, however, the Company remains subject to the risk of foreign currency
losses. During 1996, $404,000 was recorded as a decrease to shareholders' equity
due to a devaluation of the Venezuelan Bolivar.

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

Recent Accounting Pronouncements

         In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per
Share." SFAS 128 specifies the compilation, presentation and disclosure
requirements for earnings per share for entities with publicly held common stock
or potential common stock. The requirements of this statement will be effective
for fiscal years ending after December 15, 1997. Management does not believe
that the implementation of SFAS 128 will have a material effect on its financial
statements.

RESULTS OF OPERATIONS

Comparison of the Three Months Ended September 30, 1997 and 1996

          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, 1997 and 1996.



                                      -14-
<PAGE>   15


<TABLE>
<CAPTION>

                                           THREE MONTHS ENDED                      THREE MONTHS ENDED
                                           SEPTEMBER 30, 1997                       SEPTEMBER 30, 1996
                                 -------------------------------------      ------------------------------------
                                  DOMESTIC      FOREIGN                      DOMESTIC     FOREIGN
                                 OPERATIONS    OPERATIONS       TOTAL       OPERATIONS   OPERATIONS      TOTAL
                                 ----------    ----------     --------      ----------   ----------     --------
                                       (In thousands, except rig days worked and average revenue per day)
<S>                              <C>           <C>            <C>           <C>           <C>           <C>     
Rig days worked                     6,935            76          7,011         2,076           771         2,847
Drilling revenues                $ 63,152      $    598       $ 63,750      $ 14,368      $  7,663      $ 22,031
Operating expenses(1)              44,150         1,137         45,287        12,605         6,282        18,887
                                 --------      --------       --------      --------      --------      --------
Gross profit (loss)              $ 19,002      $   (539)      $ 18,463      $  1,763      $  1,381      $  3,144
                                 ========      ========       ========      ========      ========      ========

Averages per rig day worked
   Drilling revenue              $  9,106      $  7,868       $  9,093      $  6,921      $  9,939      $  7,738
   Operating expenses               6,366        14,961          6,459         6,072         8,148         6,634
                                 --------      --------       --------      --------      --------      --------
   Gross profit (loss)           $  2,740      $ (7,093)      $  2,634      $    849      $  1,791      $  1,104
                                 ========      ========       ========      ========      ========      ========
</TABLE>

(1) Operating expenses exclude depreciation and amortization and general and
    administrative expenses.

         Revenues increased approximately $41.8 million, or 189%, to $63.8
million for the three months ended September 30, 1997, from $22.0 million for
the three months ended September 30, 1996. The increase is due to an increase in
revenue from domestic operations of $48.8 million partially offset by a decrease
in revenue from foreign operations of $7.1 million. Revenues from domestic
operations increased due to an increase in rig days worked of 4,859, and an
increase in the average revenue per day of $2,185. The increase in domestic days
worked is a result of an increase in the number of rigs owned and available for
service to 96 at September 30, 1997, compared to 48 at September 30, 1996. The
increase in rigs available for service is principally the result of the
acquisitions completed in 1996 and the first half of 1997 in which the Company
added 44 working rigs. In addition, 19 refurbished rigs were placed in service
since the beginning of the fourth quarter of 1996. Increases in domestic average
revenue per day are a result of the overall increase in demand for land drilling
rigs. Rig days worked in domestic operations consisted of 2,862 days worked in
the Company's South Texas division, 1,721 days worked in the Company's Gulf
Coast division, 1,675 days worked in the Company's Ark-La-Tex division, and 677
days worked in all other domestic divisions of the Company. Revenue from foreign
operations decreased due to a decrease in rig days worked of 695 and a decrease
in average revenue per day of $2,071. The decrease in days worked is primarily a
result of the Company withdrawing from Mexico and Argentina during the fourth
quarter of 1996, and the decrease in activity in Venezuela due to the expiration
of four labor contracts and the relocation of the rigs within Venezuela.

         Drilling operating expenses increased by approximately $26.4 million,
or 140%, to $45.3 million for the three months ended September 30, 1997, as
compared to $18.9 million for the three months ended September 30, 1996. The
increase is due to a $31.5 million increase in drilling operating expenses from
domestic operations partially offset by a decrease of $5.1 million in drilling
operating expenses from foreign operations. The increase in domestic drilling
operating expenses is a direct result of the increase in the number of rigs
owned and available for service and the corresponding 4,859 increase in the days
worked. The decrease in drilling operating expenses from foreign operations is
due to fewer rigs operating as a result of the Company's withdrawal from Mexico
and Argentina and decreased activity in Venezuela as discussed above.

         Depreciation and amortization expense increased by $5.9 million, or
505%, to $7.0 million for the three months ended September 30, 1997, compared to
$1.2 million for the three months ended September 30, 1996. The increase is
primarily due to additional depreciation associated with the acquisition of the
additional operating rigs noted above and 19 rigs refurbished from inventory and
placed in service since the beginning of the fourth quarter of 1996 and the
first three quarters of 1997.

         General and administrative expense increased by $1.4 million or 164%,
to $2.3 million for the three months ended September 30, 1997, from $877,000 for
the same period of 1996 due primarily to (i) higher 


                                      -15-
<PAGE>   16

payroll costs associated with new management and increased corporate staff, (ii)
higher professional fees due to the Company's increased activity, and (iii)
higher insurance expense due to an increase in the number of rigs as well as an
increase in employee related insurance coverage.

         Interest expense increased by $3.5 million or 1,102%, to $3.9 million
for the three months ended September 30, 1997, compared to $322,000 for the
three months ended September 30, 1996. The increase is due to a $156.5 million
increase in the average outstanding debt balance to $176.5 million for the three
months ended September 30, 1997, from $20.0 million for the three months ended
September 30, 1996.

         Other income, net increased by $668,000 to $690,000 for the three
months ended September 30, 1997, as compared to $22,000 for the three months
ended September 30, 1996. The increase is mainly due to interest income earned
on higher cash reserves derived from the proceeds on the debt offering.

         For the three months ended September 30, 1997, the Company provided
income tax expense of $3.2 million. This expense is the result of the Company's
profitable operations and the resulting taxable income. The Company had no
taxable income for the 1996 year-to-date period.

Comparison of the Nine Months Ended September 30, 1997 and 1996

          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, 1997 and 1996.


<TABLE>
<CAPTION>
                                           NINE MONTHS ENDED                           NINE MONTHS ENDED
                                           SEPTEMBER 30, 1997                          SEPTEMBER 30, 1996
                                --------------------------------------     -------------------------------------
                                 DOMESTIC      FOREIGN                      DOMESTIC      FOREIGN
                                OPERATIONS    OPERATIONS       TOTAL       OPERATIONS    OPERATIONS      TOTAL
                                ----------    ----------      --------     ----------    ----------     --------
                                         (In thousands, except rig days worked and average revenue per day)
<S>                              <C>           <C>            <C>           <C>           <C>           <C>     
Rig days worked                    15,346           646         15,992         5,033         3,195         8,228
Drilling revenues                $134,716      $  5,080       $139,796      $ 36,680      $ 24,636      $ 61,316
Operating expenses(1)             101,840         5,579        107,419        34,029        23,176        57,205
                                 --------      --------       --------      --------      --------      --------
Gross profit (loss)              $ 32,876      $   (499)      $ 32,377      $  2,651      $  1,460      $  4,111
                                 ========      ========       ========      ========      ========      ========

Averages per rig day worked
   Drilling revenue              $  8,779      $  7,864       $  8,742      $  7,288      $  7,711      $  7,452
   Operating expenses               6,636         8,636          6,717         6,761         7,254         6,952
                                 --------      --------       --------      --------      --------      --------
   Gross profit (loss)           $  2,143      $   (772)      $  2,025      $    527      $    457      $    500
                                 ========      ========       ========      ========      ========      ========
</TABLE>

(1) Operating expenses for depreciation and amortization and general and
    administrative expenses.

         Revenues increased approximately $78.5 million, or 128%, to $139.8
million for the nine months ended September 30, 1997, from $61.3 million for the
nine months ended September 30, 1996. The increase is due to an increase in
revenue from domestic operations of $98.0 million partially offset by a decrease
in revenue from foreign operations of $19.5 million. Revenues from domestic
operations increased due to an increase in rig days worked of 10,313, and an
increase in the average revenue per day of $1,491. The increase in domestic days
worked is a result of an increase in the number of rigs owned and available for
service to 96 at September 30, 1997, compared to 48 at September 30, 1996. The
increase in rigs available for service is principally the result of the
acquisitions completed in 1996 and the first half of 1997 in which the Company
added 44 working rigs. In addition, 19 rigs refurbished from inventory were
placed in service since the beginning of the fourth quarter of 1996. Rig days
worked in domestic operations consisted of 7,764 days worked in the Company's
South Texas division, 1,721 days worked in the Company's Gulf Coast division,
4,226 days worked in the Company's Ark-La-Tex division, and 1,635 days worked in
all other domestic divisions of the Company. Revenue from foreign operations
decreased due to a decrease in rig days worked of 2,549 partially offset by an
increase in average revenue per day of $153. The decrease in days worked is
primarily a result of the Company withdrawing from Mexico and Argentina during
the fourth 

                                      -16-
<PAGE>   17



quarter of 1996, the decrease in activity in Venezuela due to the
expiration of four labor contracts and the relocation of the drilling rigs
within Venezuela. Increases in domestic and foreign average revenue per day are
a result of the overall increase in demand for land drilling rigs.

         Drilling operating expenses increased by approximately $50.2 million,
or 87.8%, to $107.4 million for the nine months ended September 30, 1997, as
compared to $57.2 million for the nine months ended September 30, 1996. The
increase is due to a $67.8 million increase in drilling operating expenses from
domestic operations partially offset by a decrease of $17.6 million in drilling
operating expenses from foreign operations. The increase in domestic drilling
operating expenses is a direct result of the increase in the number of rigs
owned and available for service and the corresponding 10,313 increase in the
days worked. In addition, the 1997 period includes a non-recurring charge of
$0.9 million to transport three rigs from Argentina to the United States. The
decrease in drilling operating expenses from foreign operations is due to fewer
rigs operating as a result of the Company's withdrawal from Mexico and Argentina
and decreased activity in Venezuela as discussed above.

         Depreciation and amortization expense increased by $8.8 million, or
261%, to $12.2 million for the nine months ended September 30, 1997, compared to
$3.4 million for the nine months ended September 30, 1996. The increase is
primarily due to additional depreciation associated with the acquisition of the
additional operating rigs noted above and 19 rigs refurbished from inventory and
placed in service since the beginning of the fourth quarter of 1996 and the
first three quarters of 1997.

         General and administrative expense increased by $3.0 million, or 113%,
to $5.7 million for the nine months ended September 30, 1997, from $2.7 million
for the same period of 1996 due primarily to (i) higher payroll costs associated
with new management and increased corporate staff, (ii) higher professional fees
due to the Company's increased activity, and (iii) higher insurance expense due
to an increase in the number of rigs as well as an increase in employee related
insurance coverage.

         During the first nine months of 1996, the Company incurred $602,000 in
non-recurring charges relating to the contractual severance to be paid over a
two-year period to the Company's former president and chief executive officer.

         Interest expense increased by $4.6 million or 586%, to $5.4 million for
the nine months ended September 30, 1997, compared to $788,000 for the nine
months ended September 30, 1996. The increase is due to an $87.9 million
increase in the average outstanding debt balance to $101.9 million for the nine
months ended September 30, 1997, from $14.0 million for the nine months ended
September 30, 1996.

         Other income net decreased by $1.6 million to $1.6 million for the nine
months ended September 30, 1997, as compared to $3.2 million for the nine months
ended September 30, 1996. The decrease is primarily due to the gain recognized
on the sale of the Company's well servicing division during the second quarter
of 1996.

         For the nine months ended September 30, 1997, the Company provided
income tax expense of $4.6 million. This expense is the result of the Company's
profitable operations and the resulting taxable income. The Company had no
taxable income for the first nine months of 1996.







                                      -17-
<PAGE>   18

PART II.  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

         Note 4 of the "Notes to Consolidated Financial Statements" is
incorporated herein by reference.

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

         On July 14, 1997, by written consent, the Board of Directors and
certain shareholders of DI Industries, Inc., who owned shares which represented
52.2% of the issued and outstanding shares of DI Industries, Inc.'s common stock
at June 30, 1997, approved an amendment to the corporate charter to change the
name of the company from DI Industries, Inc. to "Grey Wolf, Inc." The Articles
of Amendment effecting the amendment were filed with the Texas Secretary of
State on September 18, 1997.

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, 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 Management's Discussion and Analysis of Financial Condition and
Results of Operations and in the Company's final prospectus dated October 29,
1997 for the common stock offering under the caption "Risk Factors."

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

         A current report on Form 8-K (Item 5), was filed with the Securities
and Exchange Commission ("SEC") on August 21, 1997. This current report reported
the acquisition of six idle drilling rigs and related drilling equipment from
Cactus Drilling Company, a division of Kaiser-Francis Oil Company for $25.4
million in cash.

         A current report on Form 8-K (Item 5) was filed with the SEC on
September 19, 1997. This current report reported the signing of a definitive
agreement to acquire 12 rigs from Justiss Drilling Company.

         A current report on Form 8-K (Item 5) was filed with the SEC on
September 30, 1997. This current report reported the filing of a registration
statement to register 25,000,000 shares of common stock.

         A current report on Form 8-K (Item 5) was filed with the SEC on October
6, 1997. This current report updated the description of the Company's capital
stock.

         A current report on Form 8-K (Item 5) was filed with the SEC on October
22, 1997. This current report reported the closing of the Justiss Acquisition
and the Company's third quarter results.

Exhibits:



             Exhibit
             Number                         Description
             ------                         -----------
              11.1      Computation of Net Income (Loss) Per Common Stock Share.

              27.0      Financial Data Schedule


                                      -18-
<PAGE>   19

                                   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 12, 1997                           By:      /s/ T. Scott O'Keefe
                                                           --------------------
                                                           T. Scott O'Keefe
                                                           Senior Vice President
                                                           and Chief Financial 
                                                           Officer



Date: November 12, 1997                           By:      /s/ David W. Wehlmann
                                                           ---------------------
                                                           David W. Wehlmann
                                                           Vice President and 
                                                           Controller






                                      -19-
<PAGE>   20
                               INDEX TO EXHIBITS

             Exhibit
             Number                         Description
             ------                         -----------
              11.1      Computation of Net Income (Loss) Per Common Stock Share.

              27.0      Financial Data Schedule




                                      -20-