GREY WOLF INC - 10-Q Quarterly Report

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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 AND EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002 Commission File Number 1-8226

[LOGO]

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

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

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

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

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

Yes [X] No [ ]

The number of shares of the Registrant's Common Stock, par value $.10
pr share, outstanding at August 9, 2002, was 181,010,811.

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GREY WOLF, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

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GREY WOLF, INC. AND SUBSIDIARIES

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

See accompanying notes to consolidated financial statements

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GREY WOLF, INC. AND SUBSIDIARIES

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

See accompanying notes to consolidated financial statements

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GREY WOLF, INC. AND SUBSIDIARIES

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

See accompanying notes to consolidated financial statements.

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GREY WOLF INC, AND SUBSIDIARIES

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

See accompanying notes to consolidated financial statements

-6-

GREY WOLF, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(1) GENERAL

Grey Wolf, Inc. (the "Company" or "Grey Wolf") is a Texas corporation formed in
1980. Grey Wolf is a holding company with no independent assets or operations,
but through its subsidiaries is engaged in the business of providing onshore
contract drilling services to the oil and gas industry.

The accompanying unaudited consolidated financial statements have been
prepared by the Company in accordance with accounting principles generally
accepted in the United States of America ("U.S. GAAP") 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 June 30, 2002 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 and six months ended June 30, 2002 and 2001 are not necessarily
indicative of the results for any other period or for the year as a whole.
Additionally, pursuant to the rules and regulations of the Securities and
Exchange Commission, certain information and footnote disclosures normally
included in annual financial statements prepared in accordance with U.S. GAAP
have been omitted. Therefore 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, 2001.

(2) SIGNIFICANT ACCOUNT POLICIES

Earnings Per Share

Basic earnings per share ("EPS") is based on weighted average shares
outstanding without any dilutive effects considered. Diluted earnings per share
reflects dilution from all contingently issuable shares, including options..

A reconciliation of the weighted average common shares outstanding on a
basic and diluted basis is as follows:

The Company incurred a net loss for the three months ended June 30,
2002 and March 31, 2002 and has, therefore, excluded options to purchase 8.8
million and 9.0 million common shares, respectively, from the computation of
diluted earnings per share as the effect would be antidilutive.

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GREY WOLF, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Options to purchase 998,500 shares in each of the three months ended
June 30, 2001 and March 31, 2001 were not included in the computation of diluted
EPS because the options' exercise price was greater than the average market
price of the common shares.

Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of

The Company accounts for long-lived assets in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." This statement
requires that long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by an asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by an
amount by which the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.

We assess the impairment of long-lived assets whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. The primary factor that we consider important which could trigger
an impairment review would be significant negative industry or economic trends.
If a review of the Company's long-lived assets indicated that the carrying value
of certain drilling rigs was more than the estimated undiscounted future net
cash flows, a write-down of the assets to their estimated fair market value
would have to be made. The estimation of undiscounted future net cash flows and
fair market value would be based on certain estimates and projections as
stipulated in SFAS No. 144.

Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 142, "Goodwill and Other Intangible Assets," which changes how goodwill
and other intangible assets are accounted for subsequent to their initial
recognition. Under this standard, goodwill and other intangible assets having
identifiable useful lives are no longer amortized, but are subjected to periodic
assessments of impairment. SFAS No. 142 is effective for fiscal years beginning
after December 15, 2001 and had no impact on the Company's financial position or
results of operations for the six months ended June 30, 2002.

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which addressed financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This statement applies to all entities that
have legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development or normal use of the
asset. SFAS 143 is effective for fiscal years beginning after June 15, 2002. The
Company does not expect the adoption of SFAS 143 to have significant impact on
its financial condition or results of operations.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
While SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," it retains many
of the fundamental provisions of that statement. SFAS No. 144 also supersedes
the accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and

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GREY WOLF, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Transactions," for the disposal of a segment of a business. SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001 and interim periods
within those fiscal years. The Company adopted SFAS No. 144 for our fiscal year
beginning January 1, 2002 and the adoption of the provisions of SFAS No. 144 had
no impact on the Company's financial position or results of operations for the
six months ended June 30, 2002.

Reclassification

In accordance with Emerging Issues Task Force Issue No. 01-14, "Income
Statement Characterization of Reimbursements Received for Out-of-Pocket Expenses
Incurred," the Company has revised the presentation of reimbursements received
for certain expenses in 2002. These reimbursements are now included in contract
drilling revenue on the income statement versus previously being recorded net of
the incurred expenses in drilling operations expenses. The reimbursements
received in 2001 have also been reclassified for consistency of presentation.

(3) ACCOUNTING FOR INCOME TAXES

The Company records deferred taxes utilizing an asset and liability
approach. This method gives consideration to the future tax consequences
associated with differences between the financial accounting and tax basis of
assets and liabilities. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.

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

(4) LONG-TERM DEBT

The Company has $250.0 million in principal amount of senior notes
("Notes") outstanding at June 30, 2002. The Notes, issued in June 1997 and May
1998, bear interest at 8?% per annum and mature July 1, 2007. The Notes are
general unsecured senior obligations of the Company and are fully and
unconditionally guaranteed, on a joint and several basis, by all domestic
wholly-owned subsidiaries of the Company. Non-guarantor subsidiaries are
immaterial. All fees and expenses incurred at the time of issuance are being
amortized and discounts are being accreted over the life of the Notes.

The Company has the option to redeem the Notes in whole or in part
during the twelve month periods 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 100.0000% together with any interest accrued and
unpaid to the redemption date. Upon a change of control as defined in the
indentures, each holder of the Notes will have the right to require the Company
to repurchase all or any part of such holder's Notes at a purchase price equal
to 101% of the aggregate principal amount thereof, plus accrued and unpaid
interest to the date of purchase.

In December 2001, the Company amended its $50.0 million credit facility
with the CIT Group/Business Credit, Inc. (the "CIT Facility") to increase the
amount available under the facility to $75.0 million. In conjunction with this
amendment, the Company incurred $280,000 in deferred financing costs which will
be amortized over the remaining life of the CIT Facility. The term of the CIT
Facility was also extended to January 2006 from January 2003. The CIT Facility
provides the Company with the ability to borrow up to the lesser of $75.0
million or 50% of the orderly liquidation value (as defined in the agreement) of
certain drilling rig equipment located in the 48 contiguous United States. The
CIT facility is a revolving facility with automatic renewals after expiration
unless terminated by the lender on any subsequent anniversary date and then only
upon 60 days prior notice. Periodic interest payments are due at a floating rate
based upon the Company's debt service coverage ratio within a range of either
LIBOR plus 1.75% to 3.5% or prime plus 0.25% to 1.5%. The CIT Facility provides
up to $10.0 million available for letters of credit. The Company is required to
pay a commitment fee of 0.375% per annum on the unused portion of the CIT
Facility and letters of credit accrue a fee of 1.25% per annum.

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GREY WOLF, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The CIT Facility contains certain affirmative and negative covenants
and the Company is in compliance with these covenants. Substantially all of the
Company's assets, including its drilling equipment, are pledged as collateral
under the CIT Facility which is also secured by the Company's guarantees and
certain of the Company's wholly-owned subsidiaries guarantees. The Company,
however, retains the option, subject to a minimum appraisal value, under the CIT
Facility to extract $75.0 million of the equipment out of the collateral pool in
connection with the sale or exchange of such collateral or relocation of
equipment outside the contiguous 48 States of the United States of America. The
Company currently has no borrowings outstanding under the CIT Facility and had
$7.4 million outstanding under letters of credit at June 30, 2002. These letters
of credit are for the benefit of various insurance companies as collateral for
premiums and retained losses which may become payable under the terms of the
underlying insurance contracts. Outstanding letters of credit reduce the amount
available for borrowing under the CIT facility.

The Company had non-cash activities for the six months ended June 30,
2002 and 2001 related to vehicle additions under capital leases. The non-cash
amounts excluded from cash used in investing activities and cash provided by
financing activities was $127,000 and $1.1 million for the six months ended June
30, 2002 and 2001, respectively.

(5) SEGMENT INFORMATION AND ACCUMULATED COMPREHENSIVE INCOME

The Company manages its business as one reportable segment. Although
the Company provides contract drilling services in several markets domestically,
these operations have been aggregated into one reportable segment based on the
similarity of economic characteristics among all markets, including the nature
of the services provided and the type of customers of such services.

Prior to the third quarter of 2001, the Company managed its business as
two reportable segments; domestic operations and foreign operations. Late in the
first quarter of 1999, we suspended all operations in Venezuela but retained the
option to begin operations at any time. However, during the second quarter of
2001, the Company exited the Venezuela market and, as a result, realized
$454,000 of previously unrealized foreign currency translation losses.

(6) COMMITMENTS AND CONTINGENT LIABILITIES

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

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

(7) STOCK OPTION PLANS AND SEVERANCE

On November 13, 2001, the Company amended all outstanding stock option
agreements issued under the 1996 Employee Stock Option Plan and certain stock
option agreements issued to executive officers and directors. Based upon the
occurrence of certain events ("triggering events"), the amendments provide for
accelerated vesting of options and extension of the period in which a current
employee option

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GREY WOLF, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

holder has to exercise his options. The provisions of the amendments provide for
accelerated vesting of options after termination of employment of a current
option holder within one year of a change of control of the Company (as defined
in the amendments). Triggering events that cause an extension of the exercise
period, but not longer than the remaining original exercise period, include
termination of employment as a result of any reason not defined as termination
for cause, voluntary resignation, or retirement in the amendments.

In accordance with Accounting Principles Board Opinion 25 ("APB 25"),
the amendments to the stock option agreements create a new measurement date of
November 13, 2001. APB 25 requires the Company to determine the intrinsic value
of the options at the measurement date and recognize non-cash compensation
expense upon the occurrence of a triggering event. The amount of compensation
expense that would be recognized upon the occurrence of a triggering event is
the difference between the fair market value of the Company's stock on the
measurement date and the original exercise price of the options.

During the three months ended March 31, 2002, a triggering event
occurred when an officer's employment terminated. As a result, the Company
recognized approximately $515,000 of non-cash compensation expense along with
approximately $330,000 of severance cost. These amounts have been included in
general and administrative expenses on the consolidated statement of operations.

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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. included
elsewhere herein and with our audited consolidated financial statements and
notes thereto included in our Annual Report on Form 10-K for the year ended
December 31, 2001.

GENERAL

We are a leading provider of contract land drilling services in the
United States with a fleet of 121 rigs, of which 69 rigs are currently marketed.
Included in the marketed rig fleet is one non-owned rig that we operate for a
third party.

Rig Activity

The domestic land drilling industry saw a pronounced decline in
customer demand reflected in the number of rigs running due to lower oil and
natural gas prices beginning late in the third quarter of 2001. Since the end of
the first quarter of 2002, however, rigs counts have stabilized and our rig
count has averaged between 50 to 59 rigs working each week. At August 9, 2002,
we had 54 rigs working. The table below shows the average number of our rigs
working in our operating markets during the periods indicated:

Drilling Contract Bid Rates

Dayrates are driven by utilization and, with the decline in the number
of rigs running, we also saw a drop in dayrates. Our current daywork bid rates
are between $7,500 and $8,500 per rig day without fuel or top drives. This is a
decline from the high leading edge bid rates of $13,500 to $17,000 per rig day
in April 2001. Our daywork bid rates have remained steady since early February
2002 as a result of the relatively stable utilization.

We currently own 14 top drives for which our current bid rates are
$1,500 per rig day. Bid rates for our top drives are in addition to the above
stated bid rate for our rigs.

Term Contracts

An integral part of our strategy during the last upturn in the business
cycle was to seek out long term contracts with our customers to help ensure an
income stream in the event of a cyclical downturn in our markets. We currently
have rigs working under 14 term contracts with original terms ranging in length
from one year to two years. Three of these term contracts will end during the
fourth quarter of 2002 and five will be completed at the end of the year. We
have approximately 2,350 rig days contracted under term contracts for the
remaining two quarters of 2002 and approximately 1,200 rig days contracted in
2003. These term contracts contain termination provisions which require our
customers, upon cancellation of a contract, to pay an amount that approximates
our operating margin for the remaining days under the contract.

-12-

As discussed previously, we have seen a weakening in demand since late
in the third quarter of 2001 and believe that our current term contracts
mitigate a portion of the financial risk associated with this lower demand.
However, if spot market prices don't improve, as these rigs roll off term
contracts onto spot market pricing, average daily margins will decline.

Turnkey and Footage Contract Activity

During all phases of the industry cycle, turnkey work continues to be
an important part of our business strategy. Our engineering and operating
experience allows us to provide this service to our customers and has
historically provided higher margins than would otherwise have been obtainable
under daywork contracts. During the second quarter of 2002, our turnkey
operating margin was $7,267 per rig day, which was 197% greater than the $2,445
daywork margin per rig day.

Revenue generated from turnkey and footage contracts was approximately
22% of total revenue in the second quarter of 2002 compared with 12% during the
first quarter of 2002 and 11% during the second quarter of 2001. The percentage
of days worked on turnkey and footage contracts was 9% of total days worked in
the second quarter of 2002 compared to 5% during the first quarter of 2002 and
7% in the second quarter of 2001. Turnkey and footage contracts generated
earnings before interest, income taxes, depreciation and amortization ("EBITDA")
of $2.9 million in the second quarter of 2002 compared to $1.3 million in the
first quarter of 2002 and $4.5 million in the second quarter of 2001.

The revenue and EBITDA generated on turnkey and footage contracts
varies widely based upon a number of factors, including the location of the
contracted work as well as the depth and level of complexity of the wells
drilled. The demand for drilling services under turnkey and footage contracts
has historically been greater during periods of overall lower demand. There can
be no assurance that we will be able to maintain the current level of revenue or
EBITDA derived from turnkey and footage contracts.

Rocky Mountain and West Texas Markets

We began operations in the Rocky Mountain market in June 2001 and began
operations in the West Texas market during October 2001. We currently have two
marketed rigs in the Rocky Mountain market and have five marketed rigs in the
West Texas market. The presence of these rigs provide us with established
operating bases in these two markets which could provide further expansion
opportunities.

Critical Accounting Policy

We assess the impairment of long-lived assets whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. The primary factor that we consider important which could trigger
an impairment review would be significant negative industry or economic trends.
If a review of the Company's long-lived assets indicated that the carrying value
of certain drilling rigs was more than the estimated undiscounted future net
cash flows, a write-down of the assets to their fair market value would have to
be made. The estimation of undiscounted future net cash flows and fair market
value would be based on certain estimates and projections as stipulated in
Statement of Financial Accounting Standards Board No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." As of June 30, 2002, net
long-lived assets amounted to $432.8 million.

Financial Results

Our net loss for the second quarter of 2002 was $4.0 million compared
to net income of $20.7 million for the second quarter of 2001 and net loss of
$2.2 million for the first quarter of 2002. Revenues for the second quarter of
2002, second quarter of 2001, and first quarter of 2002 were $62.9 million,
$115.0 million, and $64.9 million, respectively. EBITDA for the second quarter
of 2002, second quarter of 2001 and first quarter 2002 was $11.4 million, $50.7
million, and $14.0 million, respectively.

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Our operating margin for the quarter ended June 30, 2002 was $2,863 per
rig day, compared to $3,415 per rig day for the first quarter of 2002. The
decrease in the operating margin for the second quarter of 2002 is primarily a
result of rigs completing term contracts and going to work under contracts at
current spot market rates. In addition, our operating margins continue to be
adversely affected by the cost of retaining experienced toolpushers and drillers
and the cost of not reducing wages of rig personnel as many of our competitors
have done.

Financial Outlook and Strategy

We believe that commodity prices are at attractive levels but, our
customers remain cautious. We believe this is due to uncertainty over near-term
natural gas prices and recent economic events. Based upon the New York
Mercantile Exchange ("NYMEX"), the twelve month strip for natural gas was $3.39
per mmbtu and for West Texas Intermediate Crude was $25.49 per barrel at August
9, 2002. While leading edge bid rates and rig counts have remained relatively
stable, we have not seen any strong indications that the market conditions will
improve in the near term. Yet, we believe, the fundamentals remain favorable for
a longer term increase in activity.

Our focus remains on cost control and capital spending discipline,
balanced with our desire to protect our equipment and retain our experienced
toolpushers and drillers. Highly skilled crews enhance the safety, efficiency
and value of our operations, which allowed us to enter into long-term contracts
in the last up cycle.

Based on currently anticipated levels of activity and dayrates, we
expect to generate an operating margin of approximately $2,100 per rig day for
the third quarter of 2002. This operating margin level should generate EBITDA of
approximately $8.5 million. Net loss per share is expected to be approximately
$0.04 on a diluted basis, projecting an annual tax benefit rate between 23% and
28%. We expect depreciation expense of approximately $11.7 million in the third
quarter of 2002.

Capital expenditures for the second quarter of 2002 were $3.7 million,
which includes $1.5 million for rig upgrades. Capital expenditures for all of
2002 are projected to be approximately $22.5 million. Our capital expenditures
during 2002 will largely be based upon the level of drilling activity.

FINANCIAL CONDITION AND LIQUIDITY

The following table summarizes our financial position as of June 30,
2002 and December 31, 2001.

-14-

The significant changes in our financial position from December 31,
2001 to June 30, 2002 are the increases in working capital of $11.1 million, the
decrease in net property and equipment of $15.8 million and the decrease in
shareholders' equity of $4.8 million. The increase in working capital is due to
numerous factors. Dayrates and drilling activity declined, which primarily led
to a decrease in the accounts payable balance of $9.4 million and a decrease in
the accounts receivable balance of $24.4 million. However, cash and cash
equivalents increased by $19.0 million due to the monetization of receivable
balances and the other accrued liabilities balance was lower by $5.4 million due
to the reduction of capital expenditure accruals. The decrease in net property
and equipment was due to $22.9 million of depreciation expense partially offset
by $7.7 million of capital expenditures. Shareholders' equity decreased due
primarily to a net loss of $6.2 million for the six months ended June 30, 2002
partially offset by stock option exercises.

Senior Notes

In June 1997 and May 1998, the Company concluded public offerings of
$175.0 million and $75.0 million, respectively, in principal amount of senior
notes. The senior notes ("Notes") bear interest at 87/8% per annum and mature
July 1, 2007. The Notes are general unsecured senior obligations of the Company
and are fully and unconditionally guaranteed, on a joint and several basis, by
all domestic wholly-owned subsidiaries of the Company. Non-guarantor
subsidiaries are immaterial.

The Company has 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. Upon a change of control as defined in the indentures,
each holder of the Notes will have the right to require the Company to
repurchase all or any part of such holder's Notes at a purchase price equal to
101% of the aggregate principal amount thereof, plus accrued and unpaid interest
to the date of purchase. We may also, from time-to-time, seek to retire the
Notes through open market purchases and privately-negotiated transactions.

The indentures for the Notes permit us and our subsidiaries to incur
additional indebtedness, including senior indebtedness of up to $100.0 million
aggregate principal amount which may be secured by liens on all of our assets
and the assets of our subsidiaries, subject to certain limitations. The
indentures contain other covenants limiting our ability and our subsidiaries to,
among other things, pay dividends or make certain other restricted payments,
make certain investments, incur additional indebtedness, permit liens, incur
dividend and other payment restrictions affecting subsidiaries, enter into
consolidation, merger, conveyance, lease or transfer transactions, make asset
sales, enter into transactions with affiliates or engage in unrelated lines of
business. These covenants are subject to certain exceptions and qualifications.
The indentures consider non-compliance with the limitations events of default.
In addition to non-payment of interest and principal amounts, the indentures
also consider default with respect to other indebtedness in excess of $10.0
million an event of default. In the event of a default, the principal and
interest could be accelerated upon written notice by 25% or more of the holders
of our senior notes. We are in compliance with these covenants.

We owe a total of $250.0 million in principal amount under our senior
notes. While the principal is not due until 2007, semi-annual interest payments
of approximately $11.1 million are due on January 1 and July 1 of each year. For
the six months ended June 30, 2002, our operating activities and financing
activities provided cash, while our investing activities consumed cash. To the
extent we are unable to generate cash flow sufficient to pay debt service and
meet our other cash needs, including capital expenditures, we would be required
to use our cash on hand. At August 9, 2002, our cash balance was $108.6 million.

-15-

CIT Facility

In December 2001, we amended our $50.0 million credit facility with the
CIT Group/Business Credit, Inc. (the "CIT Facility") to increase the amount
available under the facility to $75.0 million. The term of the CIT Facility was
also extended to January 2006 from January 2003. The CIT Facility provides us
with the ability to borrow up to the lesser of $75.0 million or 50% of the
orderly liquidation value (as defined in the agreement) of certain drilling rig
equipment located in the 48 contiguous United States. The CIT Facility is a
revolving facility with automatic renewals after expiration unless terminated by
the lender on any subsequent anniversary date and then only upon 60 days prior
notice. Periodic interest payments are due at a floating rate based upon our
debt service coverage ratio within a range of either LIBOR plus 1.75% to 3.5% or
prime plus 0.25% to 1.5%. The CIT Facility provides up to $10.0 million
available for letters of credit. We are required to pay a commitment fee of
0.375% per annum on the unused portion of the CIT Facility and letters of credit
accrue a fee of 1.25% per annum.

The CIT Facility contains certain affirmative and negative covenants
and we are in compliance with these covenants. Substantially all of our assets,
including its drilling equipment, are pledged as collateral under the CIT
Facility and it is also secured by our guarantees and certain of our
wholly-owned subsidiaries guarantees. We, however, retain the option, subject to
a minimum appraisal value, under the CIT Facility to extract $75.0 million of
the equipment out of the collateral pool in connection with the sale or exchange
of such collateral or relocation of equipment outside the contiguous 48 states
of the United States of America. We currently have no borrowings outstanding
under the CIT facility and had $7.4 million outstanding under letters of credit
at June 30, 2002. These letters of credit are for the benefit of various
insurance companies as collateral for premiums and retained losses which may
become payable under the terms of the underlying insurance contracts.
Outstanding letters of credit reduce the amount available for borrowing under
the CIT facility.

Among the various covenants that we must satisfy under the CIT Facility
are the following two covenants which apply whenever our liquidity, defined as
the sum of cash, cash equivalents and availability under the CIT Facility, falls
below $25.0 million.

o 1 to 1 EBITDA coverage of debt service, tested monthly on a
trailing 12 month basis; and

o minimum tangible net worth (all as defined in the CIT
Facility) at the end of each quarter will be at least the
prior year tangible net worth less $30.0 million adjusted for
quarterly tests.

Additionally, if the total amount outstanding under the CIT Facility
(including outstanding letters of credit) exceeds 50% of the orderly liquidation
value of our domestic rigs, we are required to make a prepayment in the amount
of the excess. Also, if the average rig utilization rate falls below 45% for two
consecutive months, the lender will have the option to request one additional
appraisal per year to aid in determining the current orderly liquidation value
of the drilling equipment. Average rig utilization is defined as the total
number of rigs owned which are operating under drilling contracts in the 48
contiguous states of the United States of America divided by the total number of
rigs owned, excluding rigs not capable of working without substantial capital
investment.

Events of default under the CIT Facility include, in addition to
non-payment of amounts due, misrepresentations and breach of loan covenants and
certain other events of default:

o default with respect to other indebtedness in excess of
$350,000;

o judgments in excess of $350,000; or

o a change in control (meaning that we cease to own 100% of our
two principal subsidiaries, some person or group has either
acquired beneficial ownership of 30% or more of the Company or
obtained the power to elect a majority of our board of
directors or our board of directors ceases to consist of a
majority of "continuing directors", all as defined by the CIT
Facility.

-16-

Certain Contractual Commitments

The following table summarizes our contractual cash obligations and
related payments due by period at June 30, 2002 (amounts in thousands):

- ----------

(1) Assumes no acceleration of maturity dates due to redemption or to
breach of, or default under, the terms of the applicable contractual
obligation.

(2) See "Senior Notes", above, for information relating to certain
financial ratio covenants and certain other covenants the breach of
which could cause a default under, and acceleration of the maturity
date of, the Senior Notes.

If we choose to borrow under our $75.0 million CIT Facility, under
which no amounts are currently outstanding, or if standby letters of credit
which we cause to be issued are drawn upon by the holders of those standby
letters of credit, then we will become obligated to repay those amounts along
with any accrued interest and fees. The following table sets forth the potential
maturities of these obligations assuming we had borrowed the maximum amount
currently available under the CIT Facility at June 30, 2002, and illustrates the
current outstanding letters of credit at June 30, 2002 (amounts in thousands):

(1) Assumes no acceleration of maturity date due to breach of, or default
under, the potential contractual obligation.

(2) See "CIT Facility", above, for information relating to financial
covenants and other certain covenants that could cause the maturity
date under the CIT Facility to be accelerated. However, we currently
have no amounts outstanding. If amounts were outstanding we would have
to pay interest on these amounts based upon the terms of the CIT
Facility.

(3) The CIT Facility provides up to $10.0 million available for letters of
credit at any given time. Amount shown represents current outstanding
letters of credit.

-17-

Cash Flow

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

Our cash flows from operating activities are affected by a number of
factors including the number of rigs under contract, whether the contracts are
daywork, footage, or turnkey, and the rate received for these services. Our cash
flow generated from operating activities during the first six months of 2002 and
2001 was $17.2 million (before changes in operating assets and liabilities) and
$76.2 million (before changes in operating assets and liabilities),
respectively. This change is principally due to a 39% decrease in operating days
and a 45% decrease in per rig day operating margins between the two periods. Our
cash flows from operating activities were also impacted by changes in operating
assets and liabilities which provided $8.2 million and used $22.9 million in
cash flow for the six months ended June 30, 2002 and 2001, respectively.

Cash flow used in investing activities for the six months ended June
30, 2002 primarily consisted of $7.0 million of capital expenditures for rig
upgrades and other capital items. Cash flow used in investing activities for the
six month period ended June 30, 2001 primarily consisted of $43.3 million of
capital expenditures for reactivating rigs, the purchase of top drives and other
capital items.

Cash flow provided by financing activities for the six months ended
June 30, 2002 consisted principally of $654,000 from stock option exercises.
Cash flow provided by financing activities for the six months ended June 30,
2001 primarily consisted of $1.6 million from stock option exercises.

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.

Other

We have not paid any cash dividends on our common stock and do not
anticipate paying dividends on the common stock at any time in the foreseeable
future. Furthermore, the CIT Facility prohibits the payment of cash dividends
without the consent of the participating lenders.

-18-

RESULTS OF OPERATIONS

Our drilling contracts generally provide compensation on either a
daywork, turnkey or footage basis. However, successfully completed turnkey and
footage contracts generally result in higher effective revenues per rig day
worked than under daywork contracts. Operating margins per rig day worked on
successful turnkey and footage jobs are also generally greater than under
daywork contracts, although we are typically required to bear additional
operating costs (such as drilling mud costs) that would typically be paid by the
customer under daywork contracts. Contract drilling revenues, drilling operating
expenses and operating margins or losses on turnkey and footage contacts are
affected by a number of variables, and include the depth of the well, geological
complexities and the actual difficulties encountered in drilling the well.

Comparison of the Three Months Ended June 30, 2002 and 2001

The following table highlights rig days worked, contract drilling
revenue and drilling operating expenses for our daywork and turnkey operations
for the three months ended June 30, 2002 and 2001.

- ---------

(1) Drilling operating expenses exclude depreciation and general and
administrative expenses.

(2) Turnkey operations include the results from turnkey and footage
contracts.

Total contract drilling revenue decreased approximately $52.1 million,
or 45%, to $62.9 million for the three months ended June 30, 2002, from $115.0
million for the three months ended June 30, 2001. This decrease is primarily the
result of a decrease in total rig days worked of 3,398, or 41% and a decrease in
the total average revenue per rig day of $1,063 due to the current downturn. The
decrease in the total rig days worked consists of 3,262 less rig days under
daywork contracts and 136 fewer rig days under turnkey contracts. Daywork
average revenue per rig day is $2,329 lower primarily due to lower dayrates and
rigs completing term contracts which were at higher rates. Turnkey average
revenue per rig day was higher by $10,179 due to the nature of the wells drilled
during the second quarter of 2002.

Total drilling operating expenses decreased by approximately $13.3
million, or 21%, to $48.7 million for the three months ended June 30, 2002, as
compared to $62.0 million for the three months ended June 30, 2001. The decrease
is primarily a result of the decreased level of activity from daywork operations
and turnkey operations.

-19-

Drilling operating expenses on a per rig day basis increased overall
principally due to a wage increase of 12% effective June 1, 2001, the retention
of our experienced toolpushers and drillers during this recent downturn, the
cost of cold-stacking rigs, and overhead and other fixed costs being spread over
less days. Turnkey expenses were also higher due to the size and complexity of
turnkey wells drilled.

Depreciation expense increased by $1.2 million, or 11%, to $11.5
million for the three months ended June 30, 2002, compared to $10.4 million for
the three months ended June 30, 2001. The increase is primarily due to increased
depreciation attributable to equipment purchased during the year ended December
31, 2001.

General and administrative expenses increased by $489,000, or 22% to
$2.8 million for the three months ended June 30, 2002, from $2.3 million for the
same period of 2001. This increase is due primarily to higher insurance costs
and higher professional fees.

Interest income decreased by $102,000, or 18%, to $463,000 for the
three months ended June 30, 2002 from $565,000 for the same period of 2001 due
primarily to a decrease in interest rates partially offset by higher cash
balances in 2002.

The difference in interest expense for the three month periods ended
June 30, 2002 and 2001 is negligible as the average outstanding debt balance was
virtually the same and the largest component of our debt structure is our senior
notes which carry interest at a fixed rate.

Net other income (expense) increased by $523,000 to income of $77,000
for the three months ended June 30, 2002 compared to expense of $446,000 for the
three months ended June 30, 2001. The expense in 2001 related to the realization
of $454,000 of previously unrealized foreign currency translation losses as a
result of moving our Venezuela rigs to the United States.

Comparison of the Six Months Ended June 30, 2002 and 2001

The following tables highlight rig days worked, contract drilling
revenue and drilling operating expenses for our daywork and turnkey operations
for the six months ended June 30, 2002 and 2001.

- ---------
(1) Drilling operating expenses exclude depreciation and general and
administrative expenses.

(2) Turnkey operations include the results from turnkey and footage
contracts.

-20-

Total contract drilling revenue decreased approximately $88.3 million,
or 41% to $127.8 million for the six months ended June 30, 2002, from $216.1
million for the six months ended June 30, 2001. This decrease is the result of a
decrease in total rig days worked of 6,303 or 39%, and a decrease in the total
average revenue per rig day of $476 due to the current downturn. The decrease in
the total rig days worked consists of 5,760 less rig days under daywork
contracts and 543 fewer rig days under turnkey contracts. The decrease in the
daywork average revenue per rig day is primarily due to lower dayrates. Turnkey
average revenue per rig day was higher by $9,232 due to the nature of the wells
drilled during the first six months of 2002.

Total drilling operating expenses decreased by approximately $27.1
million, or 22% to $96.4 million for the six months ended June 30, 2002, as
compared to $123.5 million for the six months ended June 30, 2001. The decrease
is primarily a result of a decreased level of activity from daywork operations
and turnkey operations.

Drilling operating expenses on a per rig day basis increased overall
principally due to a wage increase of 12% effective June 1, 2001, the retention
of our experienced toolpushers and drillers during this recent downturn, the
cost of cold-stacking rigs, and overhead and other fixed costs being spread over
less days. Turnkey expenses were also higher due to the size and complexity of
turnkey wells drilled.

Depreciation and amortization expense increased by $2.8 million, or
14%, to $22.9 million for the six months ended June 30, 2002 compared to $20.1
million for the six months ended June 30, 2001. The increase is primarily due to
increased depreciation attributable to equipment purchased during the year ended
December 31, 2001.

General and administrative expense increased by $1.4 million or 29%, to
$6.0 million for the six months ended June 30, 2002 from $4.6 million for the
same period of 2001. This increase is due primarily to one-time charges of
$330,000 for severance costs and $515,000 of non-cash compensation expense
related to stock options as a result of the termination of employment of an
officer in the first quarter of 2002. The increase is also due to higher
insurance costs and higher professional fees.

Interest income decreased by $339,000, or 27% to $904,000 for the six
months ended June 30, 2002, from $1.2 million for the same period of 2001 due
primarily to lower interest rates partially offset by higher cash balances in
2002.

The difference in interest expense for the six month periods ended June
30, 2002 and 2001 is negligible as the average outstanding debt was virtually
the same and the largest component of our debt structure is our senior notes
which carry interest at a fixed rate.

Net other income (expense) increased by $579,000 to income of $131,000
for the six months ended June 30, 2002, from expense of $448,000 for the same
period of 2001. The expense in 2001 related to the realization of $454,000 of
previously unrealized foreign currency translation losses as a result of moving
our Venezuela rigs to the United States.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Interest Rate Risk. We are subject to market risk exposure related to
changes in interest rates on the CIT Facility. Interest on borrowings under the
CIT Facility accrues at a variable rate, using either the prime rate plus 0.25%
to 1.50% or LIBOR plus 1.75% to 3.50%, depending upon our debt service coverage
ratio for the trailing 12 month period. On August 9, 2002, we had no outstanding
balance under the CIT Facility and as such have no exposure at this time to a
change in interest rates.

-21-

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

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

On May 14, 2002, the annual meeting of our shareholders was held and
the holders of our common stock elected Steven A. Webster and William R. Ziegler
as Class III Directors. The Class III Directors will hold office until the
Annual Meeting in 2005 or until their respective successors are elected and
qualified. The following details the number of votes for the election of these
directors and the number of votes withheld.

The holders of our common stock also approved and adopted an amendment
to increase the number of options available under the Company's 1996 Employee
Stock Option Plan. The following details the number of votes.

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 are
forward-looking statements, including statements regarding the following:

o business strategy;

o demand for our services;

o 2002 rig activity and financial results;

o reactivation of non-marketed rigs;

o projected dayrates and daily margins;

o wage rates and retention of employees;

o sufficiency of our capital resources and liquidity;

o depreciation and capital expenditures in 2002; and

o anticipated operating and financial results with respect to
our term drilling contracts.

-22-

Although we believe the expectations and beliefs reflected in such
forward-looking statements are reasonable, we can give no assurance that such
expectations will prove to have been correct. Important factors that could cause
actual results to differ materially from our expectations include:

o fluctuations in prices and demand for oil and natural gas;

o fluctuations in levels of oil and gas exploration and
development activities;

o fluctuations in demand for contract land drilling services;

o the existence and competitive responses of our competitors;

o technological changes and developments in the industry;

o the existence of operating risks inherent in the contract land
drilling industry;

o U.S. and global economic conditions;

o the availability and terms of insurance coverage;

o the ability to attract and retain qualified personnel; and

o unforeseen operating costs such as cost for environmental
remediation and turnkey cost overruns.

Our forward-looking statements speak only as of the date specified in
such statements or, if no date is stated, as of the date of this report. Grey
Wolf, Inc. expressly disclaims any obligation or undertaking to release publicly
any updates or revisions to any forward-looking statement contained in this
report to reflect any change in our expectations or with regard to any change in
events, conditions or circumstances on which our forward looking statements are
based. Please refer to our Annual Report on Form 10-K for the year ended
December 31, 2001 for additional information concerning risk factors that could
cause actual results to differ from the forward looking statements.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

10.1 Amended and Restated Employment Agreement dated
November 13, 2001, by and between the Company and
Thomas P. Richards (typographical error corrected
from previous version filed with Grey Wolf, Inc.
Annual Report on Form 10-K for the year ended
December 31, 2001.)

99.1 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.

99.2 Certification pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 of David W. Wehlmann.

(b) Reports on Form 8-K

None

-23-

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.

GREY WOLF, INC.

Date: August 14, 2002 By: /s/ David W. Wehlmann
-------------------------------
David W. Wehlmann
Senior Vice President and
Chief Financial Officer

Date: August 14, 2002 By: /s/ Merrie S. Costley
-------------------------------
Merrie S. Costley
Vice President and Controller

-24-

EXHIBIT INDEX