##### 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, 2007
 or
 o
    
    Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from  to
 Commission File Number 1-8226
 
 Grey Wolf, Inc.
  Texas
    
    74-2144774(State or jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)10370 Richmond Avenue, Suite 600Houston, Texas
    
    77042(Address of principal executive offices)
    
    (Zip Code)
 (713) 435-6100
  þ o
  þ o o
  o þ




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##### 



GREY WOLF, INC. AND SUBSIDIARIES
Table of Contents
 PagePart I.
    
    Financial InformationItem 1.
    
    Financial StatementsConsolidated Balance Sheets
    
    
    3Consolidated Statements of Operations
    
    
    4Consolidated Statements of Shareholders Equity
and Comprehensive Income
    
    
    5Consolidated Statements of Cash Flows
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2.
    
    Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    17Item 3.
    
    Quantitative and Qualitative Disclosure about Market Risk
    
    
    31Item 4.
    
    Controls and Procedures
    
    
    32Part II.
    
    Other InformationItem 1.
    
    Legal Proceedings
    
    
    33Item 1a.
    
    Risk Factors
    
    
    33Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    33Item 3.
    
    Defaults Upon Senior Securities
    
    
    33Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    33Item 5.
    
    Other Information
    
    
    34Item 6.
    
    Exhibits
    
    
    35Signatures
    
    
    36Certification of CEO Pursuant to Rule 13a-14(a)Certification of CFO Pursuant to Rule 13a-14(a)Certification Pursuant to 18 U.S.C. Section 1350
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##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES
 
 Consolidated Balance Sheets
  September 30,
    
    
    December 31,2007
    
    
    2006(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    255,149
    
    
    $
    229,773Restricted cash
    
    
    847
    
    
    
    817Accounts receivable, net of allowance of $3,169
    
    
    182,103
    
    
    
    206,523Prepaids and other current assets
    
    
    15,324
    
    
    
    7,817Deferred tax assets
    
    
    5,239
    
    
    
    6,916Total current assets
    
    
    458,662
    
    
    
    451,846Property and equipment:Land, buildings and improvements
    
    
    8,050
    
    
    
    7,044Drilling equipment
    
    
    1,303,455
    
    
    
    1,107,457Furniture and fixtures
    
    
    5,262
    
    
    
    4,839Total property and equipment
    
    
    1,316,767
    
    
    
    1,119,340Less: accumulated depreciation
    
    
    (578,249
    )
    
    
    (511,204
    )Net property and equipment
    
    
    738,518
    
    
    
    608,136Goodwill
    
    
    10,377
    
    
    
    10,377Other noncurrent assets, net
    
    
    11,494
    
    
    
    16,625$
    1,219,051
    
    
    $
    1,086,984LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable-trade
    
    $
    66,171
    
    
    $
    85,253Accrued workers compensation
    
    
    7,849
    
    
    
    7,435Payroll and related employee costs
    
    
    11,400
    
    
    
    15,952Accrued interest payable
    
    
    3,934
    
    
    
    2,536Current income taxes payable
    
    
    8,932
    
    
    
    20,641Other accrued liabilities
    
    
    24,197
    
    
    
    15,265Total current liabilities
    
    
    122,483
    
    
    
    147,082Contingent convertible senior notes
    
    
    275,000
    
    
    
    275,000Other long-term liabilities
    
    
    14,599
    
    
    
    9,877Deferred income taxes
    
    
    149,449
    
    
    
    121,231Commitments 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: 500,000,000 at September 30, 2007 and
300,000,000 at December 31, 2006; shares issued: 196,889,691
at September 30, 2007 and 195,228,691 at December 31, 2006;
shares outstanding: 184,277,938 at September 30, 2007
and 185,936,440 at December 31, 2006
    
    
    19,688
    
    
    
    19,523Additional paid-in capital
    
    
    392,001
    
    
    
    383,482Treasury stock, at cost: 12,611,753 shares at September 30, 2007
and 9,292,251 shares at December 31, 2006
    
    
    (87,158
    )
    
    
    (65,119
    )Retained earnings
    
    
    332,989
    
    
    
    195,908Total shareholders equity
    
    
    657,520
    
    
    
    533,794$
    1,219,051
    
    
    $
    1,086,984
 See accompanying notes to consolidated financial statements
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GREY WOLF, INC. AND SUBSIDIARIES
 
 Consolidated Statements of Operations
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Contract drilling revenue
    
    $
    223,999
    
    
    $
    242,728
    
    
    $
    693,532
    
    
    $
    705,197Costs and expenses:Drilling operations
    
    
    136,947
    
    
    
    131,577
    
    
    
    390,207
    
    
    
    383,722Depreciation and amortization
    
    
    24,355
    
    
    
    18,700
    
    
    
    68,166
    
    
    
    54,047General and administrative
    
    
    6,757
    
    
    
    6,249
    
    
    
    21,315
    
    
    
    17,428Gain on sale of assets
    
    
    (42
    )
    
    
    (839
    )
    
    
    (171
    )
    
    
    (10,376
    )Gain on insurance proceeds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,159
    )Total costs and expenses
    
    
    168,017
    
    
    
    155,687
    
    
    
    479,517
    
    
    
    440,662Operating income
    
    
    55,982
    
    
    
    87,041
    
    
    
    214,015
    
    
    
    264,535Other income (expense):Interest income
    
    
    3,334
    
    
    
    3,199
    
    
    
    10,086
    
    
    
    8,380Interest expense
    
    
    (3,521
    )
    
    
    (3,514
    )
    
    
    (10,451
    )
    
    
    (10,150
    )Other expense, net
    
    
    (187
    )
    
    
    (315
    )
    
    
    (365
    )
    
    
    (1,770
    )Income before income taxes
    
    
    55,795
    
    
    
    86,726
    
    
    
    213,650
    
    
    
    262,765Income tax expense:Current
    
    
    15,205
    
    
    
    31,434
    
    
    
    59,492
    
    
    
    88,732Deferred
    
    
    5,002
    
    
    
    30
    
    
    
    18,284
    
    
    
    6,607Total income tax expense
    
    
    20,207
    
    
    
    31,464
    
    
    
    77,776
    
    
    
    95,339Net income
    
    $
    35,588
    
    
    $
    55,262
    
    
    $
    135,874
    
    
    $
    167,426Net income per common share (Note 2):Basic
    
    $
    0.19
    
    
    $
    0.29
    
    
    $
    0.74
    
    
    $
    0.87Diluted
    
    $
    0.17
    
    
    $
    0.25
    
    
    $
    0.63
    
    
    $
    0.74Weighted average common shares outstanding:Basic
    
    
    182,599
    
    
    
    190,391
    
    
    
    182,875
    
    
    
    191,795Diluted
    
    
    226,292
    
    
    
    233,945
    
    
    
    226,533
    
    
    
    235,557
 See accompanying notes to consolidated financial statements
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GREY WOLF, INC. AND SUBSIDIARIES
 
 Consolidated Statements of Shareholders Equity and Comprehensive Income
  Common Stock
    
    
    Additional
    
    
    Treasury Stock
    
    
    RetainedNumber of
    
    
    Amount,
    
    
    Paid-in
    
    
    Number of
    
    
    Amount,
    
    
    EarningsShares
    
    
    at $0.10 par value
    
    
    Capital
    
    
    Shares
    
    
    at cost
    
    
    (Deficit)
    
    
    TotalBalance, December 31, 2005
    
    
    192,626
    
    
    $
    19,263
    
    
    $
    374,012
    
    
    
    
    
    
    $
    
    
    
    $
    (24,043
    )
    
    $
    369,232Exercise of stock options
    
    
    905
    
    
    
    90
    
    
    
    3,062
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,152Tax benefit of stock
option exercises
    
    
    
    
    
    
    
    
    
    
    1,330
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,330Issuance of restricted stock,
net of forfeitures
    
    
    1,697
    
    
    
    170
    
    
    
    (170
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation
expense
    
    
    
    
    
    
    
    
    
    
    5,248
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,248Purchase of treasury stock
    
    
    (9,292
    )
    
    
    
    
    
    
    
    
    
    
    9,292
    
    
    
    (65,119
    )
    
    
    
    
    
    
    (65,119
    )Comprehensive net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    219,951
    
    
    
    219,951Balance, December 31, 2006
    
    
    185,936
    
    
    
    19,523
    
    
    
    383,482
    
    
    
    9,292
    
    
    
    (65,119
    )
    
    
    195,908
    
    
    
    533,794Adjustment for the adoption
of FASB Interpretation
No. (FIN) 48
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,207
    
    
    
    1,207Exercise of stock options
    
    
    802
    
    
    
    80
    
    
    
    2,785
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,865Tax effect of share-based
payments
    
    
    
    
    
    
    
    
    
    
    747
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    747Issuance of restricted stock,
net of forfeitures
    
    
    859
    
    
    
    85
    
    
    
    (85
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    5,072
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,072Purchase of treasury stock
    
    
    (3,319
    )
    
    
    
    
    
    
    
    
    
    
    3,319
    
    
    
    (22,039
    )
    
    
    
    
    
    
    (22,039
    )Comprehensive net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    135,874
    
    
    
    135,874Balance, September 30, 2007
(Unaudited)
    
    
    184,278
    
    
    $
    19,688
    
    
    $
    392,001
    
    
    
    12,611
    
    
    $
    (87,158
    )
    
    $
    332,989
    
    
    $
    657,520
 See accompanying notes to consolidated financial statements
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GREY WOLF, INC. AND SUBSIDIARIES
 
 Consolidated Statements of Cash Flows
   Nine Months EndedSeptember 30,2007
    
    
    2006Cash flows from operating activities:Net income
    
    $
    135,874
    
    
    $
    167,426Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    68,166
    
    
    
    54,047Deferred income taxes
    
    
    18,284
    
    
    
    6,607Gain on sale of assets
    
    
    (171
    )
    
    
    (10,376
    )Gain on insurance proceeds
    
    
    
    
    
    
    (4,159
    )Stock-based compensation expense
    
    
    5,072
    
    
    
    3,499Excess tax benefit of stock option exercises
and vested restricted stock
    
    
    (708
    )
    
    
    (818
    )Net effect of changes in assets and liabilities
related to operating accounts
    
    
    9,163
    
    
    
    16,570Cash provided by operating activities
    
    
    235,680
    
    
    
    232,796Cash flows from investing activities:Property and equipment additions
    
    
    (190,131
    )
    
    
    (132,067
    )Proceeds from sale of property and equipment
    
    
    3,019
    
    
    
    19,554Insurance proceeds
    
    
    
    
    
    
    11,076Deposits for new rig purchases
    
    
    (4,726
    )
    
    
    (15,997
    )Cash used in investing activities
    
    
    (191,838
    )
    
    
    (117,434
    )Cash flows from financing activities:Proceeds from exercise of stock options
    
    
    2,865
    
    
    
    2,704Excess tax benefit of stock option exercises
and vested restricted stock
    
    
    708
    
    
    
    818Purchase of treasury stock
    
    
    (22,039
    )
    
    
    (49,180
    )Cash used in financing activities
    
    
    (18,466
    )
    
    
    (45,658
    )Net increase in cash and cash equivalents
    
    
    25,376
    
    
    
    69,704Cash and cash equivalents, beginning of period
    
    
    229,773
    
    
    
    173,145Cash and cash equivalents, end of period
    
    $
    255,149
    
    
    $
    242,849Supplemental cash flow disclosure:Cash paid for interest
    
    $
    8,434
    
    
    $
    7,580Cash paid for taxes
    
    $
    55,601
    
    
    $
    79,477
 See accompanying notes to consolidated financial statements
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GREY WOLF, INC. AND SUBSIDIARIES
 
 Notes to Consolidated Financial Statements
  (1)
    
    General
   (2)
    
    Significant Accounting Policies
 Earnings Per Share
   -7-




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GREY WOLF, INC. AND SUBSIDIARIESNotes to Consolidated Financial Statements
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(In thousands, except per share amounts)Numerator:Net income
    
    $
    35,588
    
    
    $
    55,262
    
    
    $
    135,874
    
    
    $
    167,426Add interest expense on contingent
convertible senior notes,
net of related tax effects
    
    
    2,094
    
    
    
    2,114
    
    
    
    6,227
    
    
    
    6,051Adjusted net incomediluted
    
    $
    37,682
    
    
    $
    57,376
    
    
    $
    142,101
    
    
    $
    173,477Denominator:Weighted average common
shares outstandingbasic
    
    
    182,599
    
    
    
    190,391
    
    
    
    182,875
    
    
    
    191,795Effect of dilutive securitiesOptionstreasury stock method
    
    
    548
    
    
    
    746
    
    
    
    660
    
    
    
    948Restricted stocktreasury stock method
    
    
    688
    
    
    
    351
    
    
    
    541
    
    
    
    357Contingent convertible senior notes
    
    
    42,457
    
    
    
    42,457
    
    
    
    42,457
    
    
    
    42,457Weighted average common shares
outstandingdiluted
    
    
    226,292
    
    
    
    233,945
    
    
    
    226,533
    
    
    
    235,557Earnings per common share:Basic
    
    $
    0.19
    
    
    $
    0.29
    
    
    $
    0.74
    
    
    $
    0.87Diluted
    
    $
    0.17
    
    
    $
    0.25
    
    
    $
    0.63
    
    
    $
    0.74
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006Basic earnings per share:Unvested restricted stock
    
    
    2,358,705
    
    
    
    1,805,533
    
    
    
    2,358,705
    
    
    
    1,805,533Diluted earnings per share:Anti-dilutive stock options
    
    
    1,287,613
    
    
    
    1,037,409
    
    
    
    1,288,013
    
    
    
    671,725Anti-dilutive restricted stock
    
    
    10,000
    
    
    
    
    
    
    
    3,553
    
    
    
    Total anti-dilutive shares excluded from the
computation of diluted earnings per share
    
    
    1,297,613
    
    
    
    1,037,409
    
    
    
    1,291,566
    
    
    
    671,725
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GREY WOLF, INC. AND SUBSIDIARIESNotes to Consolidated Financial Statements
 Share-Based Payment Arrangements
   Recent Accounting Pronouncements
  -9-




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GREY WOLF, INC. AND SUBSIDIARIESNotes to Consolidated Financial Statements
     (3)
    
    Accounting for Income Taxes
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GREY WOLF, INC. AND SUBSIDIARIESNotes to Consolidated Financial Statements
 (4)
    
    Long-Term Debt
  September 30,
    
    
    December 31,2007
    
    
    20063.75% 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
     Floating Rate Notes
  -11-




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GREY WOLF, INC. AND SUBSIDIARIESNotes to Consolidated Financial Statements
     CIT Facility
   -12-




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##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIESNotes to Consolidated Financial Statements
   (5)
    
    Segment Information
   -13-




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GREY WOLF, INC. AND SUBSIDIARIESNotes to Consolidated Financial Statements
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006RevenueUnited States
    
    $
    220,713
    
    
    $
    242,728
    
    
    $
    690,062
    
    
    $
    705,197Mexico
    
    
    3,286
    
    
    
    
    
    
    
    3,470
    
    
    
    Total revenue
    
    $
    223,999
    
    
    $
    242,728
    
    
    $
    693,532
    
    
    $
    705,197Operating IncomeUnited States
    
    $
    56,473
    
    
    $
    87,041
    
    
    $
    215,233
    
    
    $
    264,535Mexico
    
    
    (491
    )
    
    
    
    
    
    
    (1,218
    )
    
    
    Total operating income
    
    $
    55,982
    
    
    $
    87,041
    
    
    $
    214,015
    
    
    $
    264,535
 As of
    
    
    As ofSeptember 30,
    
    
    December 31,2007
    
    
    2006AssetsUnited States
    
    $
    1,205,184
    
    
    $
    1,086,984Mexico
    
    
    13,867
    
    
    
    Total assets
    
    $
    1,219,051
    
    
    $
    1,086,984
 (6)
    
    Contingencies
  (7)
    
    Capital Stock and Option Plans
  
    
    incentive stock options;
    
    non-statutory stock options;
    
    restricted shares; and
    
    other stock-based and cash awards.
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GREY WOLF, INC. AND SUBSIDIARIESNotes to Consolidated Financial Statements
     (8)
    
    Treasury Stock
   (9)
    
    Concentrations
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GREY WOLF, INC. AND SUBSIDIARIESNotes to Consolidated Financial Statements
 (10)
    
    Insurance Recoveries
     (11)
    
    Asset Sales
  -16-




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GREY WOLF, INC. AND SUBSIDIARIES  Managements Discussion and Analysis of Financial  Condition and Results of Operations
  Overview
    New Rig Purchases and Reactivations
   -17-




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Rig Activity
  Domestic
    
    2005
    
    2006
    
    2007Land 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
    
    
    1,263
    
    
    
    1,417
    
    
    
    1,512
    
    
    
    1,603
    
    
    
    1,609
    
    
    
    1,535
    
    
    
    1,626
    
    
    
    1,653
    
    
    
    1,691
    
    
    
    1,685Grey Wolf
    
    
    102
    
    
    
    109
    
    
    
    108
    
    
    
    107
    
    
    
    110
    
    
    
    108
    
    
    
    110
    
    
    
    104
    
    
    
    104
    
    
    
    103
 Term Contracts
     -18-




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Drilling and Contract Rates
   Turnkey Contract Activity
 Reconciliation of
Non-GAAP Financial Measures
  Financial Outlook
  -19-




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Critical Accounting Policies
  Property and Equipment
  Impairment of Long-Lived Assets
  -20-




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Goodwill
   Revenue Recognition
  -21-




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Insurance Accruals
   Income Taxes
    -22-




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Financial Condition and Liquidity
  September 30, 2007
    
    
    December 31, 2006(Unaudited)(Dollars in thousands)Amount
    
    
    %
    
    
    Amount
    
    
    %Working capital
    
    $
    336,179
    
    
    
    31
    
    
    $
    304,764
    
    
    
    32Property and equipment, net
    
    
    738,518
    
    
    
    67
    
    
    
    608,136
    
    
    
    65Goodwill
    
    
    10,377
    
    
    
    1
    
    
    
    10,377
    
    
    
    1Other noncurrent assets, net
    
    
    11,494
    
    
    
    1
    
    
    
    16,625
    
    
    
    2Total
    
    $
    1,096,568
    
    
    
    100
    
    
    $
    939,902
    
    
    
    100Long-term debt
    
    $
    275,000
    
    
    
    25
    
    
    $
    275,000
    
    
    
    29Other long-term liabilities
    
    
    164,048
    
    
    
    15
    
    
    
    131,108
    
    
    
    14Shareholders equity
    
    
    657,520
    
    
    
    60
    
    
    
    533,794
    
    
    
    57Total
    
    $
    1,096,568
    
    
    
    100
    
    
    $
    939,902
    
    
    
    100
 Significant Changes in Financial Condition
    -23-




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Long-Term Debt
  3.75% Notes
     Floating Rate Notes
   -24-




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CIT Facility
    -25-




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Cash Flow
  Nine Months EndedSeptember 30,2007
    
    
    2006(In thousands)(Unaudited)Net cash provided by (used in):Operating activities
    
    $
    235,680
    
    
    $
    232,796Investing activities
    
    
    (191,838
    )
    
    
    (117,434
    )Financing activities
    
    
    (18,466
    )
    
    
    (45,658
    )Net increase in cash
    
    $
    25,376
    
    
    $
    69,704
    Projected Cash Sources and Uses
  -26-




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Inflation and Changing Prices
  Results of Operations
  -27-




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##### Table of Contents



Reconciliation of Non-GAAP Financial Measures
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Dollars in thousands)(Unaudited)Earnings before interest expense, taxes,
depreciation and amortization
    
    $
    83,671
    
    
    $
    108,940
    
    
    $
    292,267
    
    
    $
    326,962Depreciation and amortization
    
    
    (24,355
    )
    
    
    (18,700
    )
    
    
    (68,166
    )
    
    
    (54,047
    )Interest expense
    
    
    (3,521
    )
    
    
    (3,514
    )
    
    
    (10,451
    )
    
    
    (10,150
    )Total income tax expense
    
    
    (20,207
    )
    
    
    (31,464
    )
    
    
    (77,776
    )
    
    
    (95,339
    )Net income applicable to common shares
    
    $
    35,588
    
    
    $
    55,262
    
    
    $
    135,874
    
    
    $
    167,426
 -28-




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##### Table of Contents



Comparison of the Three Months Ended September 30, 2007 and 2006
  Three Months Ended
    
    
    Three Months EndedSeptember 30, 2007
    
    
    September 30, 2006Daywork
    
    
    Turnkey
    
    
    
    
    
    
    Daywork
    
    
    TurnkeyOperations
    
    
    Operations
    
    
    Total
    
    
    Operations
    
    
    Operations
    
    
    Total(Dollars in thousands except averages per rig day worked)(Unaudited)Rig days worked
    
    
    8,784
    
    
    
    830
    
    
    
    9,614
    
    
    
    8,933
    
    
    
    929
    
    
    
    9,862Contract drilling revenues
    
    $
    178,411
    
    
    $
    45,588
    
    
    $
    223,999
    
    
    $
    192,445
    
    
    $
    50,283
    
    
    $
    242,728Drilling operations
expenses
    
    
    (101,634
    )
    
    
    (35,313
    )
    
    
    (136,947
    )
    
    
    (93,924
    )
    
    
    (37,653
    )
    
    
    (131,577
    )General and administrative
expenses
    
    
    (6,256
    )
    
    
    (501
    )
    
    
    (6,757
    )
    
    
    (5,688
    )
    
    
    (561
    )
    
    
    (6,249
    )Interest income
    
    
    3,043
    
    
    
    291
    
    
    
    3,334
    
    
    
    2,899
    
    
    
    300
    
    
    
    3,199Gain on sale of assets
    
    
    37
    
    
    
    5
    
    
    
    42
    
    
    
    763
    
    
    
    76
    
    
    
    839EBITDA
    
    $
    73,601
    
    
    $
    10,070
    
    
    $
    83,671
    
    
    $
    96,495
    
    
    $
    12,445
    
    
    $
    108,940Average per rig day
worked:Contract drilling revenues
    
    $
    20,311
    
    
    $
    54,925
    
    
    $
    23,299
    
    
    $
    21,543
    
    
    $
    54,126
    
    
    $
    24,612EBITDA
    
    $
    8,379
    
    
    $
    12,133
    
    
    $
    8,703
    
    
    $
    10,802
    
    
    $
    13,396
    
    
    $
    11,046
  Daywork Operations
  Turnkey Operations
  -29-




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Other
   Comparison of the Nine Months Ended September 30, 2007 and 2006
  Nine Months Ended
    
    
    Nine Months EndedSeptember 30, 2007
    
    
    September 30, 2006Daywork
    
    
    Turnkey
    
    
    
    
    
    
    Daywork
    
    
    TurnkeyOperations
    
    
    Operations
    
    
    Total
    
    
    Operations
    
    
    Operations
    
    
    Total(Dollars in thousands except averages per rig day worked)(Unaudited)Rig days worked
    
    
    26,802
    
    
    
    2,210
    
    
    
    29,012
    
    
    
    26,319
    
    
    
    3,129
    
    
    
    29,448Contract drilling revenues
    
    $
    572,000
    
    
    $
    121,532
    
    
    $
    693,532
    
    
    $
    535,065
    
    
    $
    170,132
    
    
    $
    705,197Drilling operations
expenses
    
    
    (302,259
    )
    
    
    (87,948
    )
    
    
    (390,207
    )
    
    
    (268,340
    )
    
    
    (115,382
    )
    
    
    (383,722
    )General and administrative
expenses
    
    
    (19,873
    )
    
    
    (1,442
    )
    
    
    (21,315
    )
    
    
    (15,642
    )
    
    
    (1,786
    )
    
    
    (17,428
    )Interest income
    
    
    9,307
    
    
    
    779
    
    
    
    10,086
    
    
    
    7,495
    
    
    
    885
    
    
    
    8,380Gain on sale of assets
    
    
    147
    
    
    
    24
    
    
    
    171
    
    
    
    9,250
    
    
    
    1,126
    
    
    
    10,376Gain on insurance proceeds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,675
    
    
    
    484
    
    
    
    4,159EBITDA
    
    $
    259,322
    
    
    $
    32,945
    
    
    $
    292,267
    
    
    $
    271,503
    
    
    $
    55,459
    
    
    $
    326,962Average per rig day
worked:Contract drilling revenues
    
    $
    21,342
    
    
    $
    54,992
    
    
    $
    23,905
    
    
    $
    20,330
    
    
    $
    54,373
    
    
    $
    23,947EBITDA
    
    $
    9,675
    
    
    $
    14,907
    
    
    $
    10,074
    
    
    $
    10,316
    
    
    $
    17,724
    
    
    $
    11,103
  -30-




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




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##### Table of Contents



Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control over Financial Reporting
  -32-




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##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1a. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  Total Number of
    
    
    ApproximateShares
    
    Dollar Value ofPurchased as
    
    Shares that MayTotal Number of
    
    
    Average
    
    
    Part of Publicly
    
    Yet be PurchasedShares
    
    Price Paid
    
    Announced
    
    Under thePeriod
    
    Purchased(1)
    
    per Share
    
    Program
    
    Program(2)January 1, 2007 to January 31, 2007
    
    
    1,219
    
    
    $
    6.59
    
    
    
    1,219
    
    
    $
    27,161February 1, 2007 to February 28, 2007
    
    
    97
    
    
    $
    6.62
    
    
    
    
    
    
    $
    27,161March 1, 2007 to March 31, 2007
    
    
    426
    
    
    $
    6.51
    
    
    
    425
    
    
    $
    24,408April 1, 2007 to April 30, 2007
    
    
    3
    
    
    $
    6.87
    
    
    
    
    
    
    $
    24,408May 1, 2007 to May 31, 2007
    
    
    4
    
    
    $
    7.93
    
    
    
    
    
    
    $
    24,408June 1, 2007 to June 30, 2007
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    24,408July 1, 2007 to July 31, 2007
    
    
    
    
    
    $
    8.07
    
    
    
    
    
    
    $
    24,408August 1, 2007 to August 31, 2007
    
    
    1,517
    
    
    $
    6.68
    
    
    
    1,514
    
    
    $
    14,290September 1, 2007 to September 30,
2007
    
    
    54
    
    
    $
    6.49
    
    
    
    54
    
    
    $
    63,939
 
 (1)
    
    Our employees elected to have shares of stock withheld to cover payroll taxes when
shares of restricted stock vest. We then pay the taxes on their behalf and hold the shares
withheld as treasury stock. We had approximately 108,000 of such treasury share purchases
during the nine months ended September 30, 2007. These share repurchases are not covered
under a publicly announced program.(2)
    
    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. On September 25, 2007, the Company
announced that its Board of Directors authorized a $50.0 million increase in the Companys
common stock repurchase program for a total of $150.0 million. 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. The stock repurchase program is subject to termination prior to completion. 
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  -33-




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Item 5. Other Information
  
    
    business strategy;
    
    demand for our services;
    
    spending by our customers;
    
    projected rig activity;
    
    increases in rig supply and its effects on us;
    
    projected dayrates;
    
    projected interest expense;
    
    projected tax rate;
    
    rigs expected to be engaged in turnkey operations;
    
    cost of building new rigs, delivery times and deployment destinations of these rigs;
    
    the ability to recover the purchase price of rigs from term contracts;
    
    the availability and financial terms of term contracts;
    
    wage rates and retention of employees;
    
    sufficiency of our capital resources and liquidity;
    
    projected depreciation and capital expenditures;
    
    future common stock repurchases by us; 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-




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##### Table of Contents



Item 6. Exhibits
 3.1
    
    Articles of Incorporation of Grey Wolf, Inc., as amended (incorporated herein
by reference to Exhibit 3.1 to Form 8-K filed May 21, 2007).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-




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##### Table of Contents



SIGNATURES
 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 GREY WOLF, INC.Date: November 5, 2007
    By:
    /s/ David W. WehlmannDavid W. WehlmannExecutive Vice President and

Chief Financial OfficerDate: November 5, 2007
    By:
    /s/ Kent D. CauleyKent D. CauleyVice President and Controller -36-




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##### Table of Contents



EXHIBIT INDEX
 Exhibits
    
    DESCRIPTION OF EXHIBITS3.1
    
    Articles of Incorporation of Grey Wolf, Inc., as amended (incorporated herein
by reference to Exhibit 3.1 to Form 8-K filed May 21, 2007).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.