##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended September 30, 2006
 or
 o
    
    Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from  to
 Commission File Number 1-8226
 
 Grey Wolf, Inc.
  Texas
(State or jurisdiction of 
incorporation or organization)
    
    74-2144774
(I.R.S. Employer
Identification No.)10370 Richmond Avenue, Suite 600
Houston, Texas
(Address of principal executive offices)
    
    77042
(Zip Code)
 (713) 435-6100
  þ o
  þ o o
  o þ




---



##### 



GREY WOLF, INC. AND SUBSIDIARIES
Table of Contents
 PagePart I.Financial InformationItem 1. Financial StatementsConsolidated Balance Sheets
    
    
    3Consolidated Statements of Operations
    
    
    4Consolidated Statements of Shareholders Equity and Comprehensive Income
    
    
    5Consolidated Statements of Cash Flows
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    18Item 3. Quantitative and Qualitative Disclosure about Market Risk
    
    
    31Item 4. Controls and Procedures
    
    
    32Part II.Other InformationItem 1. Legal Proceedings
    
    
    32Item 1a. Risk Factors
    
    
    32Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    33Item 3. Defaults Upon Senior Securities
    
    
    33Item 4. Submission of Matters to a Vote of Security Holders
    
    
    33Item 5. Other Information
    
    
    33Item 6. Exhibits
    
    
    35Signatures
    
    
    36Certification of CEO Pursuant to Rule 13a-14(a)Certification of CFO Pursuant to Rule 13a-14(a)Certifications Pursuant to Section 1350
  -2-




---



##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES
 
 Consolidated Balance Sheets
  September 30,
    
    
    December 31,2006
    
    
    2005(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    242,849
    
    
    $
    173,145Restricted cash
    
    
    807
    
    
    
    780Accounts receivable, net of allowance of $2,674
    
    
    186,731
    
    
    
    159,438Prepaids and other current assets
    
    
    11,419
    
    
    
    8,010Deferred tax assets
    
    
    6,006
    
    
    
    4,222Total current assets
    
    
    447,812
    
    
    
    345,595Property and equipment:Land, buildings and improvements
    
    
    6,989
    
    
    
    6,530Drilling equipment
    
    
    1,050,565
    
    
    
    934,648Furniture and fixtures
    
    
    4,762
    
    
    
    4,217Total property and equipment
    
    
    1,062,316
    
    
    
    945,395Less: accumulated depreciation
    
    
    (494,101
    )
    
    
    (445,430
    )Net property and equipment
    
    
    568,215
    
    
    
    499,965Rigs held for sale, net
    
    
    
    
    
    
    5,524Goodwill
    
    
    10,377
    
    
    
    10,377Other noncurrent assets, net
    
    
    22,125
    
    
    
    7,574$
    1,048,529
    
    
    $
    869,035LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable-trade
    
    $
    84,492
    
    
    $
    61,087Accrued workers compensation
    
    
    6,001
    
    
    
    6,575Payroll and related employee costs
    
    
    10,043
    
    
    
    12,131Accrued interest payable
    
    
    4,108
    
    
    
    2,156Current income taxes payable
    
    
    14,171
    
    
    
    6,141Other accrued liabilities
    
    
    16,780
    
    
    
    7,059Total current liabilities
    
    
    135,595
    
    
    
    95,149Contingent convertible senior notes
    
    
    275,000
    
    
    
    275,000Other long-term liabilities
    
    
    17,421
    
    
    
    12,403Deferred income taxes
    
    
    125,642
    
    
    
    117,251Commitments and contingent liabilities
    
    
    
    
    
    
    Shareholders equity:Series B Junior Participating Preferred stock; $1 par value;
250,000 shares authorized; none outstanding
    
    
    
    
    
    
    Common stock; $0.10 par value;
shares authorized: 300,000,000; shares issued: 195,018,749
at September 30, 2006 and 192,625,650 at December 31, 2005;
shares outstanding: 188,073,698 at September 30, 2006
and 192,625,650 at December 31, 2005
    
    
    19,502
    
    
    
    19,263Additional paid-in capital
    
    
    381,166
    
    
    
    374,012Treasury stock, at cost: 6,945,051 shares at
September 30, 2006
    
    
    (49,180
    )
    
    
    Retained earnings (deficit)
    
    
    143,383
    
    
    
    (24,043
    )Total shareholders equity
    
    
    494,871
    
    
    
    369,232$
    1,048,529
    
    
    $
    869,035
 See accompanying notes to consolidated financial statements
 -3-




---



##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES
 
 Consolidated Statements of Operations
 
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Contract drilling revenue
    
    $
    242,728
    
    
    $
    181,523
    
    
    $
    705,197
    
    
    $
    492,830Costs and expenses:Drilling operations
    
    
    131,577
    
    
    
    109,027
    
    
    
    383,722
    
    
    
    298,798Depreciation and amortization
    
    
    18,700
    
    
    
    15,676
    
    
    
    54,047
    
    
    
    44,810General and administrative
    
    
    6,249
    
    
    
    4,206
    
    
    
    17,428
    
    
    
    11,685(Gain) loss on sale of assets
    
    
    (839
    )
    
    
    73
    
    
    
    (10,376
    )
    
    
    (5
    )Gain on insurance proceeds
    
    
    
    
    
    
    
    
    
    
    (4,159
    )
    
    
    Total costs and expenses
    
    
    155,687
    
    
    
    128,982
    
    
    
    440,662
    
    
    
    355,288Operating income
    
    
    87,041
    
    
    
    52,541
    
    
    
    264,535
    
    
    
    137,542Other income (expense):Interest income
    
    
    3,199
    
    
    
    1,030
    
    
    
    8,380
    
    
    
    2,186Interest expense
    
    
    (3,514
    )
    
    
    (2,910
    )
    
    
    (10,150
    )
    
    
    (8,330
    )Other expense, net
    
    
    (315
    )
    
    
    (1,880
    )
    
    
    (1,770
    )
    
    
    (6,144
    )Income before income taxes
    
    
    86,726
    
    
    
    50,661
    
    
    
    262,765
    
    
    
    131,398Income tax expense (benefit):Current
    
    
    31,434
    
    
    
    (1,724
    )
    
    
    88,732
    
    
    
    2,645Deferred
    
    
    30
    
    
    
    20,606
    
    
    
    6,607
    
    
    
    46,297Total income tax expense
    
    
    31,464
    
    
    
    18,882
    
    
    
    95,339
    
    
    
    48,942Net income
    
    $
    55,262
    
    
    $
    31,779
    
    
    $
    167,426
    
    
    $
    82,456Net income per common share (Note 2):Basic
    
    $
    0.29
    
    
    $
    0.17
    
    
    $
    0.87
    
    
    $
    0.43Diluted
    
    $
    0.25
    
    
    $
    0.14
    
    
    $
    0.74
    
    
    $
    0.37Weighted average common shares outstanding:Basic
    
    
    190,391
    
    
    
    191,939
    
    
    
    191,795
    
    
    
    191,010Diluted
    
    
    233,945
    
    
    
    236,008
    
    
    
    235,557
    
    
    
    235,103
 See accompanying notes to consolidated financial statements
 -4-




---



##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES
 
 Consolidated Statements of Shareholders Equity and Comprehensive Income
  Common Stock
    
    
    Additional
    
    
    Treasury Stock
    
    
    RetainedNumber of
    
    
    Amount,
    
    
    Paid-in
    
    
    Number of
    
    
    Amount,
    
    
    EarningsShares
    
    
    at $0.10 par value
    
    
    Capital
    
    
    Shares
    
    
    at cost
    
    
    (Deficit)
    
    
    TotalBalance, December
31, 2004
    
    
    190,136
    
    
    $
    19,014
    
    
    $
    363,148
    
    
    
    
    
    
    $
    
    
    
    $
    (144,680
    )
    
    $
    237,482Exercise of
stock options
    
    
    2,292
    
    
    
    229
    
    
    
    7,844
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,073Tax benefit of
stock option
exercises
    
    
    
    
    
    
    
    
    
    
    2,842
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,842Issuance of
restricted
stock, net of
forfeitures
    
    
    198
    
    
    
    20
    
    
    
    (20
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock-based
compensation
expense
    
    
    
    
    
    
    
    
    
    
    198
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    198Comprehensive net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    120,637
    
    
    
    120,637Balance, December 31, 2005
    
    
    192,626
    
    
    
    19,263
    
    
    
    374,012
    
    
    
    
    
    
    
    
    
    
    
    (24,043
    )
    
    
    369,232Exercise of stock options
    
    
    786
    
    
    
    78
    
    
    
    2,626
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,704Tax benefit of
stock option
exercises
    
    
    
    
    
    
    
    
    
    
    1,190
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,190Issuance of
restricted
stock, net of
forfeitures
    
    
    1,607
    
    
    
    161
    
    
    
    (161
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock-based
compensation
expense
    
    
    
    
    
    
    
    
    
    
    3,499
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,499Purchase of treasury stock
    
    
    (6,945
    )
    
    
    
    
    
    
    
    
    
    
    6,945
    
    
    
    (49,180
    )
    
    
    
    
    
    
    (49,180
    )Comprehensive net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    167,426
    
    
    
    167,426Balance, September 30, 2006 (Unaudited)
    
    
    188,074
    
    
    $
    19,502
    
    
    $
    381,166
    
    
    
    6,945
    
    
    $
    (49,180
    )
    
    $
    143,383
    
    
    $
    494,871
 See accompanying notes to consolidated financial statements
 -5-




---



##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES
 
 Consolidated Statements of Cash Flows
 
 Nine Months EndedSeptember 30,2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    167,426
    
    
    $
    82,456Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    54,047
    
    
    
    44,810Deferred income taxes
    
    
    6,607
    
    
    
    43,489Gain on sale of assets
    
    
    (10,376
    )
    
    
    (5
    )Gain on insurance proceeds
    
    
    (4,159
    )
    
    
    Stock-based compensation expense
    
    
    3,499
    
    
    
    139Excess tax benefit of stock option exercises
    
    
    (818
    )
    
    
    2,808Net effect of changes in assets and liabilities
related to operating accounts
    
    
    16,570
    
    
    
    (23,826
    )Cash provided by operating activities
    
    
    232,796
    
    
    
    149,871Cash flows from investing activities:Property and equipment additions
    
    
    (132,067
    )
    
    
    (99,229
    )Proceeds from sale of property and equipment
    
    
    19,554
    
    
    
    1,402Insurance proceeds
    
    
    11,076
    
    
    
    Deposits for new rig purchases
    
    
    (15,997
    )
    
    
    Cash used in investing activities
    
    
    (117,434
    )
    
    
    (97,827
    )Cash flows from financing activities:Proceeds from exercise of stock options
    
    
    2,704
    
    
    
    8,020Excess tax benefit of stock option exercises
    
    
    818
    
    
    
    Purchase of treasury stock
    
    
    (49,180
    )
    
    
    Cash (used in) provided by financing activities
    
    
    (45,658
    )
    
    
    8,020Net increase in cash and cash equivalents
    
    
    69,704
    
    
    
    60,064Cash and cash equivalents, beginning of period
    
    
    173,145
    
    
    
    71,710Cash and cash equivalents, end of period
    
    $
    242,849
    
    
    $
    131,774Supplemental cash flow disclosure:Cash paid for interest
    
    $
    7,580
    
    
    $
    5,734Cash paid for taxes
    
    $
    79,477
    
    
    $
    2,510
 See accompanying notes to consolidated financial statements
 -6-




---



##### Table of Contents



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




---



##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES  Notes to Consolidated Financial Statements
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands, except per share amounts)Numerator:Net income
    
    $
    55,262
    
    
    $
    31,779
    
    
    $
    167,426
    
    
    $
    82,456Add interest expense on contingent
convertible senior notes,
net of related tax effects
    
    
    2,114
    
    
    
    1,703
    
    
    
    6,051
    
    
    
    4,821Adjusted net incomediluted
    
    $
    57,376
    
    
    $
    33,482
    
    
    $
    173,477
    
    
    $
    87,277Denominator:Weighted average common
shares outstandingbasic
    
    
    190,391
    
    
    
    191,939
    
    
    
    191,795
    
    
    
    191,010Effect of dilutive securities:Options  treasury stock method
    
    
    746
    
    
    
    1,562
    
    
    
    948
    
    
    
    1,603Restricted stock  treasury stock
method
    
    
    351
    
    
    
    50
    
    
    
    357
    
    
    
    33Contingent convertible senior notes
    
    
    42,457
    
    
    
    42,457
    
    
    
    42,457
    
    
    
    42,457Weighted average common shares
outstandingdiluted
    
    
    233,945
    
    
    
    236,008
    
    
    
    235,557
    
    
    
    235,103Earnings per common share:Basic
    
    $
    0.29
    
    
    $
    0.17
    
    
    $
    0.87
    
    
    $
    0.43Diluted
    
    $
    0.25
    
    
    $
    0.14
    
    
    $
    0.74
    
    
    $
    0.37
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Basic earnings per share:Unvested restricted stock
    
    
    1,805,533
    
    
    
    197,750
    
    
    
    1,805,533
    
    
    
    197,750Diluted earnings per share:Anti-dilutive stock options
    
    
    1,037,409
    
    
    
    
    
    
    
    671,725
    
    
    
    Anti-dilutive restricted stock
    
    
    
    
    
    
    5,429
    
    
    
    
    
    
    
    135,144Total anti-dilutive securities excluded from the
computation of diluted earnings per share
    
    
    1,037,409
    
    
    
    5,429
    
    
    
    671,725
    
    
    
    135,144
 -8-




---



##### Table of Contents



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




---



##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES  Notes to Consolidated Financial Statements
  Weighted-AverageWeighted-
    
    
    RemainingAverage
    
    
    Contractual
    
    
    AggregateShares
    
    
    Exercise Price
    
    
    Life
    
    
    Intrinsic Value(in thousands)
    
    
    
    
    
    (in years)
    
    
    (in thousands)Outstanding at January 1, 2006
    
    
    4,253
    
    
    $
    3.83Granted
    
    
    341
    
    
    
    7.34Exercised
    
    
    (786
    )
    
    
    3.44Forfeited
    
    
    (58
    )
    
    
    4.37Outstanding at September 30, 2006
    
    
    3,750
    
    
    $
    4.22
    
    
    
    6.23
    
    
    $
    9,236Exercisable at September 30, 2006
    
    
    1,874
    
    
    $
    3.77
    
    
    
    5.07
    
    
    $
    5,456
    Weighted-AverageGrant-DateShares
    
    
    Fair Value(in thousands)Non-vested at January 1, 2006
    
    
    198
    
    
    $
    5.73Granted
    
    
    1,672
    
    
    
    7.34Forfeited
    
    
    (64
    )
    
    
    6.87Non-vested at September 30, 2006
    
    
    1,806
    
    
    $
    7.18
  -10-




---



##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES  Notes to Consolidated Financial Statements
   Three Months
    
    
    Nine MonthsEnded
    
    
    EndedSeptember 30,
    
    
    September 30,2005
    
    
    2005Net income, as reported
    
    $
    31,779
    
    
    $
    82,456Add: Stock-based compensation expense included
in reported net income, net of related tax effects
    
    
    35
    
    
    
    87Deduct: Total stock-based compensation expense
determined under fair value based method for all awards,
net of related tax effects
    
    
    (542
    )
    
    
    (1,664
    )Pro forma net income
    
    $
    31,272
    
    
    $
    80,879Basic earnings per shareAs reported
    
    $
    0.17
    
    
    $
    0.43Pro forma
    
    $
    0.16
    
    
    $
    0.42Diluted earnings per shareAs reported
    
    $
    0.14
    
    
    $
    0.37Pro forma
    
    $
    0.14
    
    
    $
    0.36
  Recent
Accounting Pronouncements
  -11-




---



##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES  Notes to Consolidated Financial Statements
   (3) Accounting for Income Taxes
   -12-




---



##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES  Notes to Consolidated Financial Statements
 (4) Long-Term Debt
  September 30,
    
    
    December 31,2006
    
    
    20053.75% Contingent Convertible
Senior Notes due May 2023
    
    $
    150,000
    
    
    $
    150,000Floating Rate Contingent Convertible
Senior Notes due April 2024
    
    
    125,000
    
    
    
    125,000275,000
    
    
    
    275,000Less current maturities
    
    
    
    
    
    
    Long-term debt
    
    $
    275,000
    
    
    $
    275,000
 3.75% Notes
     -13-




---



##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES  Notes to Consolidated Financial Statements
 Floating Rate Notes
    CIT Facility
   -14-




---



##### Table of Contents



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




---



##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES  Notes to Consolidated Financial Statements
  (8) Treasury Stock
  (9) Concentrations
   (10) Goodwill and Intangible Assets
  (11) Insurance Proceeds
  -16-




---



##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES  Notes to Consolidated Financial Statements
  (12) Insurance Receivable
  (13) Sale of Rigs and Spare Equipment
   -17-




---



##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES  Managements Discussion and Analysis of Financial  Condition and Results of Operations
  Overview
    Rig Activity
  2004
    
    2005
    
    2006DomesticLand Rig
    
    Full
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Full
    
    
    
    
    
    
    
    
    
    
    
    
    
    10/1 -Count
    
    Year
    
    Q-1
    
    Q-2
    
    Q-3
    
    Q-4
    
    Year
    
    Q-1
    
    Q-2
    
    Q-3
    
    10/31Baker
Hughes
    
    
    1,074
    
    
    
    1,153
    
    
    
    1,218
    
    
    
    1,307
    
    
    
    1,375
    
    
    
    1,263
    
    
    
    1,417
    
    
    
    1,512
    
    
    
    1,603
    
    
    
    1,621Grey Wolf
    
    
    85
    
    
    
    98
    
    
    
    99
    
    
    
    103
    
    
    
    108
    
    
    
    102
    
    
    
    109
    
    
    
    108
    
    
    
    107
    
    
    
    109
 Term Contracts
  -18-




---



##### Table of Contents



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




---



##### Table of Contents



Financial Outlook
      -20-




---



##### Table of Contents



Critical Accounting Policies
  Property and Equipment
  Impairment of Long-Lived Assets
   -21-




---



##### Table of Contents



Goodwill
   Revenue Recognition
  Insurance Accruals
  -22-




---



##### Table of Contents



Income Taxes
   Financial Condition and Liquidity
  September 30, 2006
    
    
    December 31, 2005(Unaudited)(Dollars in thousands)Amount
    
    
    %
    
    
    Amount
    
    
    %Working capital
    
    $
    312,217
    
    
    
    34
    
    
    $
    250,446
    
    
    
    32Property and equipment, net
    
    
    568,215
    
    
    
    62
    
    
    
    499,965
    
    
    
    65Goodwill
    
    
    10,377
    
    
    
    1
    
    
    
    10,377
    
    
    
    1Other
noncurrent assets, net
    
    
    22,125
    
    
    
    3
    
    
    
    13,098
    
    
    
    2Total
    
    $
    912,934
    
    
    
    100
    
    
    $
    773,886
    
    
    
    100Long-term debt
    
    $
    275,000
    
    
    
    30
    
    
    $
    275,000
    
    
    
    35Other long-term liabilities
    
    
    143,063
    
    
    
    16
    
    
    
    129,654
    
    
    
    17Shareholders equity
    
    
    494,871
    
    
    
    54
    
    
    
    369,232
    
    
    
    48Total
    
    $
    912,934
    
    
    
    100
    
    
    $
    773,886
    
    
    
    100
 -23-




---



##### Table of Contents



Significant Changes in Financial Condition
    Long Term Debt
 3.75% Notes
    -24-




---



##### Table of Contents



Floating Rate Notes
    CIT Facility
   -25-




---



##### Table of Contents



Cash Flow
  Nine Months EndedSeptember 30,2006
    
    
    2005(In thousands)(Unaudited)Net cash provided by (used in):Operating activities
    
    $
    232,796
    
    
    $
    149,871Investing activities
    
    
    (117,434
    )
    
    
    (97,827
    )Financing activities
    
    
    (45,658
    )
    
    
    8,020Net increase in cash
    
    $
    69,704
    
    
    $
    60,064
    -26-




---



##### Table of Contents



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




---



##### Table of Contents



Reconciliation of Non-GAAP Financial Measures
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands)(Unaudited)Earnings before interest expense, taxes,
depreciation and amortization
    
    $
    108,940
    
    
    $
    69,247
    
    
    $
    326,962
    
    
    $
    184,538Depreciation and amortization
    
    
    (18,700
    )
    
    
    (15,676
    )
    
    
    (54,047
    )
    
    
    (44,810
    )Interest expense
    
    
    (3,514
    )
    
    
    (2,910
    )
    
    
    (10,150
    )
    
    
    (8,330
    )Total income tax expense
    
    
    (31,464
    )
    
    
    (18,882
    )
    
    
    (95,339
    )
    
    
    (48,942
    )Net income applicable to common shares
    
    $
    55,262
    
    
    $
    31,779
    
    
    $
    167,426
    
    
    $
    82,456
 Comparison of the Three Months Ended September 30, 2006 and 2005
  Three Months Ended
    
    
    Three Months EndedSeptember 30, 2006
    
    
    September 30, 2005Daywork
    
    
    Turnkey
    
    
    
    
    
    
    Daywork
    
    
    TurnkeyOperations
    
    
    Operations(1)
    
    
    Total
    
    
    Operations
    
    
    Operations(1)
    
    
    Total(Dollars in thousands except averages per rig day worked)(Unaudited)Rig days worked
    
    
    8,933
    
    
    
    929
    
    
    
    9,862
    
    
    
    8,574
    
    
    
    890
    
    
    
    9,464Contract drilling revenues
    
    $
    192,445
    
    
    $
    50,283
    
    
    $
    242,728
    
    
    $
    142,937
    
    
    $
    38,586
    
    
    $
    181,523Drilling operations expenses
    
    
    (93,924
    )
    
    
    (37,653
    )
    
    
    (131,577
    )
    
    
    (80,857
    )
    
    
    (28,170
    )
    
    
    (109,027
    )General and administrative
expenses
    
    
    (5,688
    )
    
    
    (561
    )
    
    
    (6,249
    )
    
    
    (3,822
    )
    
    
    (384
    )
    
    
    (4,206
    )Interest income
    
    
    2,899
    
    
    
    300
    
    
    
    3,199
    
    
    
    933
    
    
    
    97
    
    
    
    1,030Gain (loss) on sale of assets
    
    
    763
    
    
    
    76
    
    
    
    839
    
    
    
    (63
    )
    
    
    (10
    )
    
    
    (73
    )EBITDA
    
    $
    96,495
    
    
    $
    12,445
    
    
    $
    108,940
    
    
    $
    59,128
    
    
    $
    10,119
    
    
    $
    69,247Average per rig day worked:Contract drilling revenues
    
    $
    21,543
    
    
    $
    54,126
    
    
    $
    24,612
    
    
    $
    16,671
    
    
    $
    43,355
    
    
    $
    19,180EBITDA
    
    $
    10,802
    
    
    $
    13,396
    
    
    $
    11,046
    
    
    $
    6,896
    
    
    $
    11,370
    
    
    $
    7,317
 
 (1)
    
    Turnkey operations include the results from turnkey and footage contracts. -28-




---



##### Table of Contents



Daywork Operations
  Turnkey Operations
  Other
   -29-




---



##### Table of Contents



Comparison of the Nine Months Ended September 30, 2006 and 2005
  Nine Months Ended
    
    
    Nine Months EndedSeptember 30, 2006
    
    
    September 30, 2005Daywork
    
    
    Turnkey
    
    
    
    
    
    
    Daywork
    
    
    TurnkeyOperations
    
    
    Operations(1)
    
    
    Total
    
    
    Operations
    
    
    Operations(1)
    
    
    Total(Dollars in thousands except averages per rig day worked)(Unaudited)Rig days worked
    
    
    26,319
    
    
    
    3,129
    
    
    
    29,448
    
    
    
    24,907
    
    
    
    2,431
    
    
    
    27,338Contract drilling revenues
    
    $
    535,065
    
    
    $
    170,132
    
    
    $
    705,197
    
    
    $
    386,113
    
    
    $
    106,717
    
    
    $
    492,830Drilling operations expenses
    
    
    (268,340
    )
    
    
    (115,382
    )
    
    
    (383,722
    )
    
    
    (223,215
    )
    
    
    (75,583
    )
    
    
    (298,798
    )General and administrative
expenses
    
    
    (15,642
    )
    
    
    (1,786
    )
    
    
    (17,428
    )
    
    
    (10,676
    )
    
    
    (1,009
    )
    
    
    (11,685
    )Interest income
    
    
    7,495
    
    
    
    885
    
    
    
    8,380
    
    
    
    2,001
    
    
    
    185
    
    
    
    2,186Gain (loss) on sale of assets
    
    
    9,250
    
    
    
    1,126
    
    
    
    10,376
    
    
    
    9
    
    
    
    (4
    )
    
    
    5Gain on insurance proceeds
    
    
    3,675
    
    
    
    484
    
    
    
    4,159
    
    
    
    
    
    
    
    
    
    
    
    EBITDA
    
    $
    271,503
    
    
    $
    55,459
    
    
    $
    326,962
    
    
    $
    154,232
    
    
    $
    30,306
    
    
    $
    184,538Average per rig day worked:Contract drilling revenues
    
    $
    20,330
    
    
    $
    54,373
    
    
    $
    23,947
    
    
    $
    15,502
    
    
    $
    43,898
    
    
    $
    18,027EBITDA
    
    $
    10,316
    
    
    $
    17,724
    
    
    $
    11,103
    
    
    $
    6,192
    
    
    $
    12,466
    
    
    $
    6,750
 
 (1)
    
    Turnkey operations include the results from turnkey and footage contracts.  Daywork Operations
  -30-




---



##### Table of Contents



Turnkey Operations
  Other
    
 Item 3. Quantitative and Qualitative Disclosure about Market Risk
 Interest Rate Risk.
 -31-




---



##### Table of Contents



Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control over Financial Reporting
  
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1a. Risk Factors
  -32-




---



##### Table of Contents



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  Total Number of
    
    ApproximateShares
    
    Dollar Value of SPurchased as
    
    hares that MayTotal Number
    
    Average Price
    
    Part of Publicly
    
    Yet be Purchasedof Shares
    
    Paid per
    
    Announced
    
    Under thePeriod
    
    Purchased
    
    Share
    
    Program
    
    Program(1)May 25, 2006 to May 31, 2006
    
    
    600
    
    
    $
    7.75
    
    
    
    600
    
    
    $
    95,348June 1, 2006 to June 30, 2006
    
    
    793
    
    
    $
    7.19
    
    
    
    793
    
    
    $
    89,644July 1, 2006 to July 31, 2006
    
    
    570
    
    
    $
    6.90
    
    
    
    570
    
    
    $
    85,710August 1, 2006 to August 31, 2006
    
    
    422
    
    
    $
    7.20
    
    
    
    422
    
    
    $
    82,672Sept 1, 2006 to Sept 20, 2006
    
    
    4,560
    
    
    $
    6.99
    
    
    
    4,560
    
    
    $
    50,820
 
 (1)
    
    On May 25, 2006, the Company announced that its Board of Directors approved a plan
authorizing the repurchase of up to $100.0 million of Grey Wolf common stock in open market or
in privately-negotiated block-trade transactions. The number of shares to be purchased and the
timing of purchases will be based on several factors, including the price of the common stock,
general market conditions, available cash and alternate investment opportunities. There is no
expiration date for the stock repurchase program, but it is subject to termination prior to
completion. 
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
    
    business strategy;
    
    demand for our services;
    
    spending by our customers;
    
    projected rig activity;
    
    projected dayrates;
    
    projected interest expense;
    
    projected tax rate;
    
    rigs expected to be engaged in turnkey and footage operations;
    
    reactivation, timing and cost of reactivation of rigs available for refurbishment;
    
    cost of building new rigs and delivery times of these rigs;
    
    the ability to recover our refurbishment costs or the purchase price of
rigs from term contracts;
    
    the availability and financial terms of term contracts;
    
    wage rates and retention of employees;
 -33-




---



##### Table of Contents




    
    sufficiency of our capital resources and liquidity;
    
    projected depreciation and capital expenditures; and
    
    projected sources and uses of cash.
  
    
    fluctuations in prices and demand for oil and natural gas;
    
    fluctuations in levels of oil and natural gas exploration and development activities;
    
    fluctuations in demand for contract land drilling services;
    
    fluctuations in interest rates;
    
    the existence and competitive responses of our competitors;
    
    uninsured or underinsured casualty losses;
    
    technological changes and developments in the industry;
    
    the existence of operating risks inherent in the contract land drilling industry;
    
    U.S. and global economic conditions;
    
    the availability and terms of insurance coverage;
    
    the ability to attract and retain qualified personnel;
    
    unforeseen operating costs such as cost for environmental remediation and
turnkey cost overruns; and
    
    weather conditions.
  -34-




---



##### Table of Contents



Item 6. Exhibits
 3.1
    
    Articles of Incorporation of Grey Wolf, Inc., as amended (incorporated herein
by reference to Exhibit 3.1 to Form 10-Q dated May 12, 1999).3.2
    
    By-Laws of Grey Wolf, Inc., as amended (incorporated herein by reference to
Exhibit 99.1 to Form 8-K dated March 23, 1999).4.1
    
    Rights Agreement dated as of September 21, 1998 by and between the Company and
American Stock Transfer and Trust Company as Rights Agent (incorporated herein by
reference to Exhibit 4.1 to Form 8-K filed September 22, 1998).4.2
    
    Indenture, dated as of May 7, 2003, relating to the 3.75% Contingent
Convertible Senior Notes due 2023 between the Company, the Guarantors, and JPMorgan
Chase Bank, a New York Banking Corporation, as Trustee (incorporated herein by
reference to Exhibit 4.2 to the Companys Registration Statement on Form S-3 No.
333-106997 filed July 14, 2003).4.3
    
    Supplemental Indenture, dated as of May 22, 2003, relating to the 3.75%
Contingent Convertible Senior Notes due 2023 between the Company, the Guarantors, and
JPMorgan Chase Bank, a New York Banking Corporation, as Trustee (incorporated herein by
reference to Exhibit 4.3 to the Companys Registration Statement on Form S-3 No.
333-106997 filed July 14, 2003).4.4
    
    Indenture, dated as of March 31, 2004, relating to the Floating Rate Contingent
Convertible Senior Notes Due 2024 between the Company, the Guarantors, and J.P. Morgan
Chase Bank, a New York banking corporation, as Trustee (incorporated by reference to
Exhibit 4.1 to Form 10-Q dated May 5, 2004).4.5
    
    Registration Rights Agreement as of March 31, 2004 by and between Grey Wolf,
Inc., the Guarantors, and the Initial Purchasers of the Floating Rate Contingent
Convertible Senior Notes due 2024 (incorporated by reference to Exhibit 4.2 to the
Quarterly Report on Form 10-Q filed May 5, 2004).4.6
    
    Second Supplemental Indenture, dated as of March 31, 2004, relating to the
3.75% Contingent Convertible Senior Notes due 2023 between the Company, the Guarantors,
and JP Morgan Chase Bank, a New York Banking Corporation, as Trustee (incorporated by
reference to Exhibit 4.3 to the Quarterly Report on Form 10-Q filed May 5, 2004).* 31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a)* 31.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a)**32.1
    
    Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 of Thomas P. Richards, Chairman, President
and Chief Executive Officer and David W. Wehlmann, Executive Vice President and Chief
Financial Officer.
 
 *
    
    Filed herewith**
    
    Furnished, not filed, in accordance with Item 601(b)(32) of Regulation S-K. -35-




---



##### Table of Contents



SIGNATURES
 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 GREY WOLF, INC.Date: November 7, 2006
    By:
    /s/ David W. WehlmannDavid W. WehlmannExecutive Vice President and
Chief Financial Officer Date: November 7, 2006
    By:
    /s/ Kent D. CauleyKent D. CauleyVice President and Controller -36-




---



##### Table of Contents



EXHIBIT
INDEX
 EXHIBITS
    

DESCRIPTION
OF EXHIBIT3.1
    
    Articles of Incorporation of Grey Wolf, Inc., as amended (incorporated herein
by reference to Exhibit 3.1 to Form 10-Q dated May 12, 1999).3.2
    
    By-Laws of Grey Wolf, Inc., as amended (incorporated herein by reference to
Exhibit 99.1 to Form 8-K dated March 23, 1999).4.1
    
    Rights Agreement dated as of September 21, 1998 by and between the Company and
American Stock Transfer and Trust Company as Rights Agent (incorporated herein by
reference to Exhibit 4.1 to Form 8-K filed September 22, 1998).4.2
    
    Indenture, dated as of May 7, 2003, relating to the 3.75% Contingent
Convertible Senior Notes due 2023 between the Company, the Guarantors, and JPMorgan
Chase Bank, a New York Banking Corporation, as Trustee (incorporated herein by
reference to Exhibit 4.2 to the Companys Registration Statement on Form S-3 No.
333-106997 filed July 14, 2003).4.3
    
    Supplemental Indenture, dated as of May 22, 2003, relating to the 3.75%
Contingent Convertible Senior Notes due 2023 between the Company, the Guarantors, and
JPMorgan Chase Bank, a New York Banking Corporation, as Trustee (incorporated herein by
reference to Exhibit 4.3 to the Companys Registration Statement on Form S-3 No.
333-106997 filed July 14, 2003).4.4
    
    Indenture, dated as of March 31, 2004, relating to the Floating Rate Contingent
Convertible Senior Notes Due 2024 between the Company, the Guarantors, and J.P. Morgan
Chase Bank, a New York banking corporation, as Trustee (incorporated by reference to
Exhibit 4.1 to Form 10-Q dated May 5, 2004).4.5
    
    Registration Rights Agreement as of March 31, 2004 by and between Grey Wolf,
Inc., the Guarantors, and the Initial Purchasers of the Floating Rate Contingent
Convertible Senior Notes due 2024 (incorporated by reference to Exhibit 4.2 to the
Quarterly Report on Form 10-Q filed May 5, 2004).4.6
    
    Second Supplemental Indenture, dated as of March 31, 2004, relating to the
3.75% Contingent Convertible Senior Notes due 2023 between the Company, the Guarantors,
and JP Morgan Chase Bank, a New York Banking Corporation, as Trustee (incorporated by
reference to Exhibit 4.3 to the Quarterly Report on Form 10-Q filed May 5, 2004).* 31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a)* 31.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a)**32.1
    
    Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 of Thomas P. Richards, Chairman, President
and Chief Executive Officer and David W. Wehlmann, Executive Vice President and Chief
Financial Officer.
 
 *
    
    Filed herewith**
    
    Furnished, not filed, in accordance with Item 601(b)(32) of Regulation S-K.