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 September 30, 2002 Commission File Number 1-8226

[GREY WOLF, INC. LOGO]

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

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

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

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

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

Yes [X] No [ ]

The number of shares of the Registrant's Common Stock, par value $.10
per share, outstanding at November 7, 2002, was 181,032,811.

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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

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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 September 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 nine months ended September 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 each of the three month periods
ended September 30, 2002, June 30, 2002 and March 31, 2002 and has, therefore,
excluded options to purchase 8.8 million, 8.8

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GREY WOLF, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

million and 9.0 million common shares, respectively, from the computation of
diluted earnings per share as the effect would be antidilutive.

Options to purchase 4.1 million common shares for the three months
ended September 30, 2001 and 998,500 common shares in each of the three month
periods 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 nine months ended September 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 a 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

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GREY WOLF, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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 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 nine months ended
September 30, 2002.

In April, 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment to FASB Statement 13, and Technical
Corrections". SFAS No. 145 is effective for fiscal years beginning after May 15,
2002. Under the provisions of this statement, gains and losses from
extinguishment of debt generally will no longer be classified as extraordinary
items. In addition, this statement eliminates an inconsistency between the
required accounting for sale-leaseback transactions and the required accounting
for certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This statement also makes various technical
corrections, clarifies meanings, or describes their applicability under changed
conditions. The Company does not expect the adoption of SFAS No. 145 to have a
material effect on its financial position or results of operations.

In July 2002, the FASB issued SFAS No. 146, "Accounting for Cost
Associated with Exit or Disposal Activities". SFAS No. 146 is effective for exit
or disposal activities that are initiated after December 31, 2002. The Statement
addresses financial accounting and reporting for costs associated with exit or
disposal activities and requires companies to recognize costs associated with
exit or disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. SFAS No. 146 nullifies Emerging Issues
Task Force Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." The Company does not expect the adoption of
SFAS No. 146 to have a material effect on its financial position or results of
operations.

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 and 2001. These reimbursements are now included in
contract drilling revenues on the income statement versus previously being
recorded net of the incurred expenses in drilling operations expenses.

(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.

(4) LONG-TERM DEBT

The Company has $250.0 million in principal amount of senior notes
("Notes") outstanding at September 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

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GREY WOLF, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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 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.

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 financing costs which have been
deferred and 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
states of the United States of America. 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 3.50% or
prime plus 0.25% to 1.50%. 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.

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 outstanding balance under the CIT Facility and had $7.4
million outstanding under letters of credit at September 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 nine months ended September
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 $189,000 and $1.6 million for the nine
months ended September 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

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GREY WOLF, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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.

(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 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. In addition, the Company recognized
approximately $26,000 of non-cash compensation expense during the three months
ended June 30, 2002. 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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(8) CONCENTRATIONS

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.

For the three months ended September 30, 2002, the Company had two
customers which represented approximately 11% and 10% of total revenue. For the
nine months ended September 30, 2002, the Company had one customer which
represented approximately 11% of total revenue. There were no customers with
revenue greater than 10% for the quarter and year-to-date periods ended
September 30, 2001.

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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 71 rigs are currently marketed.
Included in the marketed rig fleet is one non-owned rig that we operate for a
third party.

Rig Activity

Demand for land drilling rigs began to decline 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 November 7, 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 generally driven by utilization and, with the decline in
the number of rigs running, we also saw a drop in dayrates. From the high
leading edge bid rates of $13,500 to $17,000 per rig day in April 2001, our
daywork bid rates declined to a range between $7,500 and $8,500 per rig day
without fuel or top drives and remained there from early February 2002 into
September 2002. Recently, however, we have seen a further slight decline in our
dayrate bid rates. Our current daywork bid rates are between $7,000 and $8,500
per rig day without fuel or top drives.

We currently own 14 top drives for which our current bid rates are
approximately $1,500 per rig day. Bid rates for our top drives are in addition
to the above stated bid rates 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. During late
2001 and thus far during 2002, the use of term contracts has enabled us to
maintain higher margins than would otherwise be attainable during the current
downturn. Recently, however, our margins have declined as higher rate term
contracts and spot market contracts have been replaced by lower spot market rate
contracts. If current market conditions do not improve as our remaining term
contracts expire, there will be a further decline in our operating margin as
rigs go to work under current spot market rate contracts at lower rates.

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In early November 2002, we received thirty day written notice of early
termination of one term contract. However, our 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. We have approximately 1,000 rig days
contracted under term contracts for the fourth quarter of 2002 and approximately
1,000 rig days contracted in 2003, of which 450 are in the first quarter.

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 third quarter of 2002, our turnkey operating
margin was $4,189 per rig day compared to a daywork operating margin of $1,980
per rig day.

Revenue generated from turnkey and footage contracts was approximately
22% of total revenue in the third quarter of 2002 and second quarter of 2002 and
15% during the third quarter of 2001. The percentage of days worked on turnkey
and footage contracts was 11% of total days worked in the third quarter of 2002
compared to 9% during the second quarter of 2002 and 7% in the third quarter of
2001. Turnkey and footage contracts generated earnings before interest, income
taxes, depreciation and amortization ("EBITDA") of $2.1 million in the third
quarter of 2002 compared to $2.9 million in the second quarter of 2002 and $5.4
million in the third 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.

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 No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets."

Financial Results

Our net loss for the third quarter of 2002 was $6.1 million compared to
net income of $25.4 million for the third quarter of 2001 and net loss of $4.0
million for the second quarter of 2002. Revenues for the third quarter of 2002,
third quarter of 2001, and second quarter of 2002 were $61.1 million, $128.0
million, and $62.9 million, respectively. EBITDA for the third quarter of 2002,
third quarter of 2001 and second quarter 2002 was $8.8 million, $55.9 million,
and $11.4 million, respectively.

Our operating margin for the quarter ended September 30, 2002 was
$2,225 per rig day, compared to $2,863 per rig day for the second quarter of
2002. The decrease in the operating margin for the third quarter of 2002 is
primarily a result of higher dayrate term and spot market contracts expiring and
being replaced by lower dayrate spot market contracts. Also contributing to the
decline was a lower operating margin on turnkey jobs reflecting a change in the
type and complexity of wells drilled.

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Financial Outlook and Strategy

While commodity prices are at attractive levels, we have not seen any
strong indications that the market conditions will improve in the near term. We
believe our customers remain cautious as a result of the uncertainty over
near-term natural gas prices, storage levels, and demand recovery. Based upon
the New York Mercantile Exchange ("NYMEX"), the twelve month strip for natural
gas was $3.85 per mmbtu and for West Texas Intermediate Crude was $24.13 per
barrel at November 7, 2002. If the current commodity prices hold and our
customers gain confidence in the outlook for these prices, we believe the demand
for drilling rigs should increase in 2003.

Our focus remains on controlling costs, while maintaining our equipment
and improving operating efficiency and thereby creating superior value for our
customers and shareholders. Our fleet of premium equipment and our experienced
personnel enabled us to return rigs to work in a safe and efficient manner in
the last up cycle. We have the ability to return 29 cold-stacked rigs to work
for approximately $3.0 to $4.0 million in the aggregate, excluding drill pipe
and collars, which would bring our total marketed fleet to 100 rigs.

Based on currently anticipated levels of activity and dayrates for the
fourth quarter of 2002, we expect to generate an operating margin of
approximately $1,700 per rig day. This operating margin level should generate
EBITDA of approximately $6.3 million. Net loss per share is expected to be
approximately $0.05 on a diluted basis, based on a projected annual tax benefit
rate between 27% and 30%. We expect depreciation expense of approximately $11.9
million in the fourth quarter of 2002.

Capital expenditures for the third quarter of 2002 were $8.6 million,
and for the first three quarters of 2002 were $16.3 million. Capital
expenditures for all of 2002 are projected to be approximately $22.5 million.

FINANCIAL CONDITION AND LIQUIDITY

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

-15-

The significant changes in our financial position from December 31,
2001 to September 30, 2002 are the increases in working capital of $5.8 million,
the decrease in net property and equipment of $19.2 million and the decrease in
shareholders' equity of $11.0 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 $4.5 million and a decrease in
the net accounts receivable balance of $21.2 million. However, cash and cash
equivalents increased by $11.1 million due primarily to the collection of
receivable balances which was partially offset by our semi-annual interest
payment on our Senior Notes on July 1, 2002. The other accrued liabilities
balance was lower by $5.1 million due to the reduction of capital expenditure
accruals at September 30, 2002 compared to December 31, 2001. The decrease in
net property and equipment was due to $34.7 million of depreciation expense
partially offset by $16.3 million of capital expenditures. Shareholders' equity
decreased due primarily to a net loss of $12.4 million for the nine months ended
September 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
ability 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 nine months ended September 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 November 7, 2002, our cash balance was $113.2
million.

-16-

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 states of United States of America. 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 3.50% or prime plus 0.25% to 1.50%. 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 our 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 outstanding balance under
the CIT facility and had $7.4 million outstanding under letters of credit at
September 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.)

-17-

Certain Contractual Commitments

The following table summarizes our contractual cash obligations and
related payments due by period at September 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 September 30, 2002, and
illustrates the current outstanding letters of credit at September 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.

-18-

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 nine months of 2002
and 2001 was $20.6 million (before changes in operating assets and liabilities)
and $125.4 million (before changes in operating assets and liabilities),
respectively. The decrease in cash flow generated from operating activities is
principally due to a 39% decrease in operating days and a 54% 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 $5.4 million and used $32.8 million in cash flow for the nine
months ended September 30, 2002 and 2001, respectively.

Cash flow used in investing activities for the nine months ended
September 30, 2002 primarily consisted of $15.4 million of capital expenditures
for sustaining our fleet of rigs, rig upgrades and other capital items. Cash
flow used in investing activities for the nine month period ended September 30,
2001 primarily consisted of $69.5 million of capital expenditures for sustaining
our fleet of rigs, reactivating rigs, the purchase of top drives and other
capital items.

Cash flow provided by financing activities for the nine months ended
September 30, 2002 consisted principally of $656,000 from stock option exercises
partially offset by $421,000 repayment of capital lease obligations. Cash flow
provided by financing activities for the nine months ended September 30, 2001
primarily consisted of $1.6 million from stock option exercises partially offset
by $731,000 repayment of capital lease obligations.

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.

-19-

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 drill bits) 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, which include the depth of the well,
geological complexities and the actual difficulties encountered in drilling the
well.

Comparison of the Three Months Ended September 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 September 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 $155.2 million,
or 45% to $188.9 million for the nine months ended September 30, 2002, from
$344.1 million for the nine months ended September 30, 2001. This decrease is
the result of a decrease in total rig days worked of 9,607 or 39%, and a
decrease in the total average revenue per rig day of $1,414 due to the current
downturn. The decrease in the total rig days worked consists of 9,015 fewer rig
days under daywork contracts and 592 fewer rig days under turnkey contracts. The
decline in the total average revenue per day was due primarily to the decrease
in the daywork average revenue per rig day. This was the result of lower
dayrates and rigs rolling off higher rate term contracts onto lower rate spot
contracts. Turnkey average

-21-

revenue per rig day was higher due to the nature of the wells drilled during the
first nine months of 2002 when compared to the same period in 2001.

Total drilling operating expenses decreased by approximately $46.9
million, or 24% to $146.2 million for the nine months ended September 30, 2002,
as compared to $193.0 million for the nine months ended September 30, 2001. The
decrease is a result of the 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 greater overall depth
and complexity of turnkey wells drilled.

Depreciation and amortization expense increased by $4.3 million, or
14%, to $34.7 million for the nine months ended September 30, 2002 compared to
$30.4 million for the nine months ended September 30, 2001. The increase is
primarily due to increased depreciation attributable to equipment purchased and
placed into service during the year ended December 31, 2001 and the first nine
months of 2002.

General and administrative expense increased by $1.3 million or 18%, to
$8.5 million for the nine months ended September 30, 2002 from $7.2 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 $479,000 or 26% to $1.3 million for the
nine months ended September 30, 2002, from $1.8 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 nine month periods ended
September 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 $587,000 to income of $139,000
for the nine months ended September 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. We currently have no outstanding balance
under the CIT Facility and as such have no exposure at this time to a change in
interest rates.

-22-

ITEM 4. CONTROLS AND PROCEDURES

Within 90 days prior to the filing date of this report, we carried out
an evaluation, under the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective. Disclosure controls and
procedures are controls and procedures that are designed to ensure that
information required to be disclosed in our reports filed or submitted under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms.

There have been no significant changes in our internal controls or in
other factors that could significantly affect internal controls subsequent to
the date we carried out this evaluation.

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 the
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

None

ITEM 5. OTHER INFORMATION

This Quarterly Report on Form 10-Q contains "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All
statements other than statements of historical facts included in this report 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 and cost of 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.

-23-

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;

o weather conditions.

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

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, Chairman, President and Chief
Executive Officer.

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, Senior Vice President and Chief
Financial Officer.

(b) Reports on Form 8-K

None

-24-

SIGNATURES

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

GREY WOLF, INC.

Date: November 13, 2002 By: /s/ David W. Wehlmann
------------------------------------
David W. Wehlmann
Senior Vice President and
Chief Financial Officer

Date: November 13, 2002 By: /s/ Merrie S. Costley
------------------------------------
Merrie S. Costley
Vice President and Controller

-25-

CERTIFICATIONS

I, Thomas P. Richards, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Grey Wolf, Inc.;

2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:

(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;

(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and

(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):

(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and

(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.

Date: November 13, 2002 By: /s/ Thomas P. Richards
------------------------------------
Thomas P. Richards
Chairman, President and Chief
Executive Officer

-26-

CERTIFICATIONS

I, David W. Wehlmann, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Grey Wolf, Inc.;

2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:

(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;

(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and

(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):

(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and

(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.

Date: November 13, 2002 By: /s/ David W. Wehlmann
------------------------------------
David W. Wehlmann
Senior Vice President and Chief
Financial Officer

-27-

EXHIBIT INDEX