GREY WOLF INC, 424B1, 1997-10-29

GREY WOLF INC
424B1, 1997-10-29
DRILLING OIL & GAS WELLS

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<PAGE> 1
Filed pursuant to Rule 424(b)(1)
Registration No. 333-36593

25,000,000 Shares

GREY WOLF, INC.

[GREY WOLF LOGO] Common Stock
($.10 par value)
------------------
Of the 25,000,000 shares (the "Shares") of common stock, par value $.10 per
share ("Common Stock"), of Grey Wolf, Inc. (formerly DI Industries, Inc.) being
offered hereby (the "Offering"), 12,500,000 shares are being sold by Grey Wolf,
Inc. ("Grey Wolf" or the "Company") and 12,500,000 shares are being sold by the
Selling Shareholders named under "Principal and Selling Shareholders." The
Company will not receive any of the proceeds from the sale of Shares by the
Selling Shareholders.
The Common Stock is traded on the American Stock Exchange ("AMEX") under the
symbol "GW." On October 28, 1997, the last reported sale price of the Common
Stock on the AMEX was $8.1875 per share. See "Price Range of Common Stock and
Dividend Policy."
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH
AN INVESTMENT IN THE SHARES, SEE "RISK FACTORS" BEGINNING ON PAGE 11 HEREIN.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS COMPANY(1) SHAREHOLDERS
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Per Share............................ $8.00 $0.40 $7.60 $7.60
Total(2)............................. $200,000,000 $10,000,000 $95,000,000 $95,000,000
</TABLE>

(1) Before deducting expenses payable by the Company estimated at $600,000.

(2) The Company and the Selling Shareholders have granted the Underwriters
options, exercisable for 30 days from the date of this Prospectus, to
purchase a maximum of 1,875,000 additional shares from the Company and
1,875,000 shares from the Selling Shareholders to cover
over-allotments of Shares. If the options are exercised in full, the total
Price to Public will be $230,000,000, Underwriting Discounts and Commissions
will be $11,500,000, Proceeds to Company will be $109,250,000 and Proceeds
to Selling Shareholders will be $109,250,000.

The Shares are offered by the several Underwriters when, as and if
delivered to and accepted by the Underwriters and subject to their right to
reject orders in whole or in part. It is expected that the Shares will be ready
for delivery on or about November 3, 1997, against payment in immediately
available funds.
CREDIT SUISSE FIRST BOSTON
BT ALEX. BROWN
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
HOWARD, WEIL, LABOUISSE, FRIEDRICHS
INCORPORATED

JOHNSON RICE & COMPANY L.L.C.
Prospectus dated October 29, 1997
<PAGE> 2

[GRAPHICS INCLUDE A MAP SHOWING THE GEOGRAPHIC EXTENT OF THE COMPANY'S
MARKET AREAS. THE MARKET AREAS DEPICTED ARE: THE ARK-LA-TEX (NORTHEAST TEXAS,
SOUTHERN ARKANSAS AND NORTHERN LOUISIANA); SOUTH TEXAS; GULF COAST (SOUTHEAST
TEXAS AND SOUTHERN LOUISIANA) AND VENEZUELA.]

[GRAPHICS INCLUDE A BAR CHART SHOWING THE GROWTH RATE IN THE COMPANY'S
DOMESTIC RIG FLEET ON A MONTHLY BASIS, FROM 45 MARKETED RIGS AND 27 RIGS IN
INVENTORY IN JANUARY 1997 TO 100 MARKETED RIGS AND 27 RIGS IN INVENTORY IN
SEPTEMBER 1997. AN ADJACENT TABLE SHOWS THE COMPANY'S CURRENT RIG FLEET AS
FOLLOWS: ARK-LA-TEX REGION 21; SOUTH TEXAS REGION 30; GULF COAST REGION 37;
VENEZUELA 6; OTHER DOMESTIC 16; INVENTORY 23; AND 133 RIGS IN TOTAL.]

[A SECOND BAR CHART DEPICTS THE GROWTH IN AVERAGE DAY RATES RECEIVED BY THE
COMPANY IN ITS THREE CORE DOMESTIC MARKETS, THE ARK-LA-TEX, GULF COAST AND SOUTH
TEXAS MARKETS. THE GRAPH SHOWS GENERALLY RISING AVERAGE DAY RATES OVER THE EIGHT
MONTH PERIOD FROM $5,596 IN JANUARY TO $7,732 IN AUGUST 1997.]

The areas depicted on this map are referred to in this Prospectus as the
Company's Ark-La-Tex, South Texas, Gulf Coast and Venezuela markets.

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES OFFERED
HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE SHORT
COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
<PAGE> 3

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information included elsewhere in this Prospectus and incorporated herein by
reference, and by the consolidated financial statements, including the notes
thereto, incorporated by reference in this Prospectus. Unless otherwise
indicated, all information in this Prospectus assumes there will be no exercise
of the Underwriters' over-allotment options. Unless the context indicates
otherwise, references in this Prospectus to "Grey Wolf" or the "Company" mean
Grey Wolf, Inc. and its subsidiaries and predecessors. In September 1997, the
Company changed its corporate name from DI Industries, Inc. to Grey Wolf, Inc.
Unless otherwise indicated, the information contained herein gives effect to the
acquisition of substantially all of the operating assets of Justiss Drilling
Company (the "Justiss Acquisition"), which is described herein.

THE COMPANY

The Company is a leading provider of contract land drilling services in the
U.S. with a domestic fleet of 127 rigs. In addition to its domestic operations,
the Company operates a fleet of six rigs in Venezuela, giving the Company a
total of 133 rigs, 110 of which are currently marketed. The Company believes it
has the largest fleet of drilling rigs in its Gulf Coast and South Texas markets
and the second largest fleet in its Ark-La-Tex market. The Company has an
inventory of 23 non-marketed rigs that it intends to refurbish and reactivate
during the remainder of 1997 and 1998 to meet demand for quality drilling assets
in its core domestic markets or internationally.

The Company focuses on its three core domestic drilling markets as it
believes these markets have historically maintained higher utilization rates and
day rates than other domestic markets. Internationally, the Company concentrates
its efforts in Venezuela, where the Company intends to increase its market
presence and is currently bidding on a number of potential drilling projects.

BUSINESS STRATEGY

In April 1996, the Company initiated a reorganization of its operations
that consisted of replacing substantially all of the senior management and the
members of the Board of Directors of the Company and implementing a new business
strategy. This business strategy seeks to achieve increased cash flow and
earnings through:

(1) focusing on core markets and establishing leading positions in
these markets;

(2) refurbishing and reactivating inventoried rigs to satisfy
increases in demand;

(3) acquiring land drilling businesses and assets to capitalize on
anticipated improvements in the industry and

(4) attracting and retaining qualified personnel to support the
Company's increased level of operations.

Focus on Core Markets. The Company believes it currently has the leading
market position in its Gulf Coast and South Texas markets, and the second
leading market position in its Ark-La-Tex market. By focusing on its core
markets and establishing leading positions in these markets, the Company is able
to achieve economies of scale and provide an infrastructure to acquire,
refurbish and reactivate rigs in these markets in a cost-effective manner.

Refurbishment and Reactivation of Inventoried Rigs. Since the beginning of
the fourth quarter of 1996, the Company has refurbished and reactivated 17 rigs
and an additional nine rigs are planned for refurbishment and reactivation
during the remainder of 1997, eight of which are currently being refurbished.
The Company estimates that the nine rigs it plans to refurbish during the
remainder of 1997 can be reactivated for service at an average cost of
approximately $1.7 million per rig, including the cost of new drill pipe, which
is well below the current cost of construction for new drilling rigs with
comparable capabilities. The remaining 14 rigs in the Company's inventory are
planned for refurbishment and reactivation during 1998.
3
<PAGE> 4

Acquisitions. The Company has aggressively implemented its new business
strategy by acquiring 90 land drilling rigs in 12 transactions since August
1996. Five of these acquisitions were of companies with long operating histories
in the Company's Ark-La-Tex, Gulf Coast and South Texas markets. The other
acquisitions have provided the Company with additional inventory of drilling
rigs suited for refurbishment and reactivation in the Company's core domestic
markets or internationally. The following table summarizes the Company's
acquisitions since August 1996:

<TABLE>
<CAPTION>
NUMBER OF RIGS ACQUIRED
AND STATUS UPON ACQUISITION
--------------------------------
DATE TRANSACTION MARKETED INVENTORIED TOTAL
---- ----------- -------- ----------- -----
<S> <C> <C> <C> <C>
October-November 1997(1) Justiss Acquisition 12(1) -- 12
Kaiser-Francis Rig
August 1997 Purchase -- 6 6
June 1997 GWDC Acquisition 18 -- 18
January 1997 Flournoy Acquisition 13 -- 13
December 1996 Diamond M Acquisition 10 -- 10
October 1996 Mesa Acquisition 3 3 6
August 1996 RTO/LRAC Acquisition -- 18 18
Various Additional Rig Purchases 1 6 7
-- -- --
57 33 90
== == ==
</TABLE>

- ---------------

(1) Nine of the 12 rigs which the Company contracted to purchase in the Justiss
Acquisition were acquired on October 21, 1997. The remaining three rigs are
expected to be purchased by the end of November 1997, as each completes a
turnkey drilling contract for a well in progress.

Attracting and Retaining Qualified Personnel. The Company believes that its
executive management and operating personnel are among the most experienced and
highly skilled professionals in the contract drilling industry. Thomas P.
Richards, the Company's President and CEO, has 31 years of contract drilling
industry experience and the Company's four Senior Vice Presidents have an
average of 23 years of related experience. Many of the Company's operating
personnel joined the Company in connection with acquisitions completed since
August 1996, bringing to the Company additional customer relationships and
operating experience in their markets. The Company's ability to retain these
employees and attract additional quality employees has allowed the Company to
expand its operations and customer base significantly while ensuring quality
service to its customers.

RIG FLEET

The Company has assembled a fleet of quality drilling rigs to meet the
needs of its customers in each of the markets it serves. The following table
sets forth certain information with respect to the drilling rigs owned by the
Company after giving pro forma effect to the Justiss Acquisition:

<TABLE>
<CAPTION>
DIESEL
DIVISION ELECTRIC MECHANICAL TOTAL
-------- -------- ---------- -----
<S> <C> <C> <C>
Ark-La-Tex(1)(2).................................... 9 17 26
South Texas(1)...................................... 10 23 33
Gulf Coast(1)(3).................................... 19 10 29
Venezuela........................................... -- 6 6
Indrillers.......................................... 1 9 10
Eastern............................................. -- 6 6
Inventory........................................... 19 4 23
-- -- ---
58 75 133
== == ===
</TABLE>

- ---------------

(1) One of the Company's core domestic markets.

(2) Includes two mechanical rigs remaining to be purchased in the Justiss
Acquisition.

(3) Includes one mechanical rig remaining to be purchased in the Justiss
Acquisition.
4
<PAGE> 5

INDUSTRY OVERVIEW

The domestic land drilling industry is undergoing a period of rapid
consolidation. The Company believes that from January 1, 1996 through September
30, 1997 there have been at least 34 completed or pending transactions involving
the acquisition of a combined total of approximately 466 rigs, the majority of
which were acquired by six land rig companies including the Company. Recent and
pending transactions by the Company accounted for 12 of these transactions
involving the acquisition of 90 rigs, of which 57 were actively marketed at the
time of acquisition and 33 were inventoried for later refurbishment.

Industry sources estimate that the supply of domestic land drilling rigs
available for work in the U.S. has declined from over 5,000 rigs in 1982 to
1,400 rigs currently. The Company believes the demand for land drilling rigs in
the Company's core markets has increased over the past 12 months principally due
to improved oil and gas drilling and production economics resulting from
increased use of 3-D seismic, directional drilling and enhanced recovery
techniques. For the first six months of 1997, industry sources estimate that the
average active domestic land rig count was 750 as compared to 652 for the full
year 1996, and 626 for the first six months of 1996. The Company's utilization
rates in its three core domestic markets averaged over 97% for the first nine
months of 1997. By increasing the size of its rig fleet through acquisitions and
refurbishments, the Company has increased its market share in its three core
domestic markets during a period of rapidly rising demand and day rates for land
drilling rigs in those key markets. The Company's larger fleet of marketable
rigs, higher rig utilization rates and increasing day rates have significantly
improved the Company's financial performance since the third quarter of 1996.

RECENT AND PENDING ACQUISITIONS

The Company has entered into a series of transactions since August 1996
that have significantly increased the size of its rig fleet, refocused its
operations, established its market position with the largest or second largest
rig fleet in its core domestic markets and positioned the Company to benefit
from anticipated increases in demand in the land drilling industry. The most
significant acquisition transactions are:

- The Justiss Acquisition. On September 15, 1997, the Company entered into
a definitive agreement to acquire substantially all of the operating
assets of Justiss Drilling Company ("Justiss"), a division of Justiss Oil
Company, Inc. The assets include a fleet of 12 operating drilling rigs
and related equipment which are currently operating in the Company's
Ark-La-Tex and Gulf Coast markets. The total purchase price for the
Justiss Acquisition is $36.1 million in cash of which $28.6 million was
paid on October 21, 1997 upon delivery of nine of the 12 rigs to be
acquired. The remaining three rigs are expected to be purchased and the
balance of the purchase price paid ($7.5 million) by the end of November
1997, as each rig completes a turnkey drilling contract for a well in
progress. The closing of the Justiss Acquisition with respect to the
remaining three rigs is subject to the satisfaction of certain conditions
to closing. Accordingly, there can be no assurance that the purchase of
the remaining rigs will be completed.

- Kaiser-Francis Rig Purchase. In August 1997, the Company acquired six
drilling rigs and related drilling equipment from Kaiser-Francis Oil
Company for a cash purchase price of $25.4 million (the "Kaiser-Francis
Rig Purchase"). Five of the six rigs are currently held in inventory for
refurbishment and one is currently being refurbished.

- GWDC Acquisition. In June 1997, the Company acquired Grey Wolf Drilling
Company ("GWDC") which owned a fleet of 18 operating drilling rigs and
related assets located in the Company's Gulf Coast market (the "GWDC
Acquisition"). The consideration for the GWDC Acquisition consisted of
$61.6 million in cash and 14.0 million shares of Common Stock. The GWDC
Acquisition established the Company's presence in its Gulf Coast market
and provided the Company with additional infrastructure to facilitate
reactivation of its rigs held in inventory.

- Flournoy Acquisition. In January 1997, the Company acquired the operating
assets of Flournoy Drilling Company, which included 13 operating land
drilling rigs and other assets located in the Company's South Texas
market, in exchange for 12.4 million shares of Common Stock and $800,000
5
<PAGE> 6

in cash (the "Flournoy Acquisition"). As a result of the Flournoy Acquisition,
the Company believes it is currently the largest land drilling contractor in its
South Texas market.

- Diamond M Acquisition. In December 1996, the Company acquired the assets
of Diamond M Onshore, Inc. for $26.0 million in cash (the "Diamond M
Acquisition"). The assets consisted of ten operating land drilling rigs
and other related assets located in South Texas.

- Mesa Acquisition. In October 1996, the Company acquired six diesel
electric SCR drilling rigs, three of which were operating, from Mesa
Drilling, Inc. ("Mesa") in exchange for 5.5 million shares of Common
Stock (the "Mesa Acquisition"). The Mesa Acquisition established the
Company's presence in South Texas.

- RTO/LRAC Acquisition. In August 1996, the Company acquired 18 land
drilling rigs in exchange for 39.4 million shares of Common Stock (the
"RTO/LRAC Acquisition"). These 18 rigs provided the Company with a supply
of additional rigs suitable for refurbishment and reactivation.

In addition to these transactions, the Company completed five additional
acquisitions during the second and third quarters of 1997 that added a total of
seven drilling rigs to the Company's fleet, one of which was operating and six
of which were added to the Company's inventory of rigs held for refurbishment
(the "Additional Rig Purchases"). See "Business -- Recent and Pending
Acquisitions."

RECENT OPERATING PERFORMANCE

On October 22, 1997, the Company announced operating results for the third
quarter of 1997. The Company reported net income of $2.7 million, or $.02 per
common share, for the three months ended September 30, 1997, compared with net
income of $808,000, or $.01 per common share, for the third quarter of 1996.
Revenues were $63.8 million and $22.0 million for the three months ended
September 30, 1997 and 1996, respectively. For the nine months ended September
30, 1997, the Company reported net income of $6.1 million, or $.04 per common
share, compared with a net loss of $159,000, or $.01 per common share, for the
nine months of 1996. Revenues for the first nine months of 1997 were $139.8
million compared with $61.3 million for the first nine months of 1996. EBITDA
(as defined below) for the three months and nine months ended September 30,
1997, was $16.1 million and $26.7 million, respectively. These results are
subject to review and final audit for the year ended December 31, 1997. If audit
adjustments are necessary, audited results could differ materially from these
quarterly results. For the third quarter of 1997, the Company maintained a
utilization rate of 84% for its marketed rigs. The Company's rig fleet operated
a total of 7,011 rig days in the third quarter of 1997 compared with 2,847 rig
days for the third quarter of 1996. For the first nine months of 1997, the
Company's fleet operated a total of 15,992 rig days compared to 8,228 rig days
for the nine months ended September 30, 1996. The average revenues per rig day
for the third quarter of 1997 were $9,093. The Company's third quarter results
include the results from the 18 rigs acquired in the GWDC Acquisition and an
additional seven rigs that have been refurbished and reactivated in its core
markets.
6
<PAGE> 7

THE OFFERING

Shares of Common Stock Offered by the
Company................................. 12,500,000

Shares of Common Stock Offered by
Selling Shareholders.................... 12,500,000

Shares of Common Stock to be Outstanding
after the Offering...................... 164,335,391(1)

Use of Proceeds......................... The net proceeds of the Offering
will be used: (i) to repay
indebtedness incurred under the
Company's revolving line of credit
to finance substantially all of the
purchase price for nine rigs
acquired at the initial closing of
the Justiss Acquisition in October
1997; (ii) to pay the purchase
price for the remaining three rigs
expected to be acquired in the
Justiss Acquisition or, if any of
the rigs are purchased before the
closing of the Offering, to repay
additional indebtedness incurred
under the Company's revolving line
of credit for the purchases; (iii)
for capital expenditures for the
refurbishment of rigs and (iv) for
general corporate purposes, which
may include future acquisitions.

American Stock Exchange Symbol.......... GW
- ---------------

(1) Based on shares outstanding at September 30, 1997. Does not include: (i)
5,557,400 shares issuable upon exercise of stock options outstanding; (ii)
489,600 shares issuable upon exercise of outstanding warrants; (iii) 244,800
shares issuable upon conversion of Series A Preferred Stock and (iv) the
number of shares, if any, that may be contingently issuable in connection
with the Flournoy Acquisition in the event of a significant decline in the
price of the Common Stock. See "Shares Available for Future Sale."
7
<PAGE> 8

SUMMARY FINANCIAL AND OPERATING DATA

The following summary financial data, except for the Other Financial Data
and the Drilling Rig Activity Data, for the years ended and as of December 31,
1996 and 1995 have been derived from the audited consolidated financial
statements of the Company. This data should be read in conjunction with such
consolidated financial statements and the notes thereto which are incorporated
by reference in this Prospectus. The following summary financial data for the
six-month periods ended June 30, 1997 and 1996 and as of June 30, 1997 have been
derived from the unaudited consolidated financial statements of the Company
which are incorporated by reference in this Prospectus, and which include all
adjustments, consisting of normal recurring adjustments, that the Company
considers necessary for a fair presentation of its financial position and
results of operations for these periods. Operating results for the six-month
period ended June 30, 1997 are not necessarily indicative of the results that
may be expected for the entire year. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."

The pro forma data in the table should be read in conjunction with the
unaudited pro forma consolidated financial data and the notes thereto included
elsewhere in this Prospectus. The pro forma financial data does not purport to
represent what the Company's financial condition or results of operations
actually would have been had the Transactions (as defined in Unaudited Pro Forma
Consolidated Financial Data) in fact occurred on the assumed dates or to project
the Company's financial condition or results of operations for any future period
or date. See "Unaudited Pro Forma Consolidated Financial Data."

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
-------------------------------- -----------------------------------
HISTORICAL HISTORICAL
PRO FORMA(1) ----------------- PRO FORMA(2) --------------------
1997 1997 1996 1996 1996 1995
------------ ------- ------- ------------ -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND DRILLING RIG ACTIVITY
DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................... $119,201 $76,046 $39,285 $218,840 $ 81,767 $ 94,709
Drilling operations costs... 96,635 62,132 38,318 192,885 80,388 93,825
Depreciation and
amortization............. 13,376 5,180 2,221 28,649 4,689 4,832
General and
administrative........... 4,248 3,369 1,795 7,659 4,274 3,555
Provision for asset
impairment(3)............ -- -- -- -- -- 5,290
Non-recurring charges(4).... -- -- 602 6,131 6,131 --
-------- ------- ------- -------- -------- --------
Operating income (loss)..... 4,942 5,365 (3,651) (16,484)(8) (13,715)(8) (12,793)
Interest expense(5)......... 8,078 1,535 466 16,159 1,220 1,472
Other income, net........... 1,484 880 3,150 1,719 4,058 1,590
-------- ------- ------- -------- -------- --------
Income (loss) from
continuing operations.... (1,652) 4,710 (967) (30,924) (10,877) (12,675)
Loss from discontinued
operations(6)............ -- -- -- -- -- (772)
-------- ------- ------- -------- -------- --------
Income (loss) before income
taxes.................... (1,652) 4,710 (967) (30,924) (10,877) (13,447)
Income taxes................ -- 1,356 -- 845 845 --
-------- ------- ------- -------- -------- --------
Net income (loss)........... $ (1,652) $ 3,354 $ (967) $(31,769) $(11,722) $(13,447)
======== ======= ======= ======== ======== ========
Net income (loss) applicable
to common shares......... $ (1,892) $ 3,114 $(1,267) $(31,782) $(12,137) $(13,447)
======== ======= ======= ======== ======== ========
Net income (loss) per common
share.................... $ (.01) $ .02 $ (.03) $ (.19) $ (.18) $ (.35)
======== ======= ======= ======== ======== ========
Weighted average common and
common equivalent shares
outstanding.............. 164,040 135,756 38,682 163,969 67,495 38,669
======== ======= ======= ======== ======== ========
OTHER FINANCIAL DATA (UNAUDITED):
EBITDA(7)................... $ 18,318 $10,545 $ (828) $ 18,296(8) $ (2,895)(8) $ (2,671)
</TABLE>

8
<PAGE> 9

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
------------------------------ ------------------------------
HISTORICAL HISTORICAL
PRO FORMA(1) --------------- PRO FORMA(2) ---------------
1997 1997 1996 1996 1996 1995
------------ ------ ------ ------------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
DRILLING RIG ACTIVITY DATA (UNAUDITED)(9):
Average utilization rate of
drilling rigs available for
service...................... 77% 74% 63% 81% 63% 66%
Average revenues per day(10).... $8,018 $8,473 $7,459 $8,296 $7,610 $7,739
Drilling rigs available for
service -- end of period..... 101 88 49 96 52 58
Inventoried drilling rigs -- end
of period.................... 32 26 7 35 25 22
</TABLE>

<TABLE>
<CAPTION>
HISTORICAL
--------------------------------
PRO FORMA(11) DECEMBER 31,
JUNE 30, JUNE 30, -------------------
1997 1997 1996 1995
------------- --------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................. $ 87,317 $ 56,817 $ 6,195 $ 7,503
Property and equipment, net................. 372,542 308,642 88,476 25,910
Total assets................................ 513,481 419,081 117,819 57,783
Long-term debt net of current maturities.... 176,211 176,211 26,846 11,146
Series A preferred stock -- mandatory
redeemable............................... 305 305 764 900
Shareholders' equity........................ 240,885 146,485 64,646 19,694
</TABLE>

- ------------------------------------

(1) Gives effect to (i) the Offering and application of the net proceeds
therefrom to repay all amounts outstanding under the Bank Credit Facility
(as defined herein) assumed to be borrowed to consummate the Justiss
Acquisition, (ii) the issuance of the Senior Notes (as defined herein) and
application of the net proceeds therefrom to consummate the GWDC
Acquisition and repay all amounts then outstanding under the Bank Credit
Facility and (iii) the consummation of the Flournoy Acquisition and the
GWDC Acquisition as if such acquisitions had occurred as of January 1,
1996 for the pro forma statement of operations data, other financial data
and drilling rig activity data. The Kaiser-Francis Rig Purchase and the
Additional Rig Purchases have no pro forma effect on statement of
operations data because the rigs had no material operations or costs for
the period presented.

(2) Gives effect to (i) the Offering and the application of the net proceeds
therefrom to repay all amounts outstanding under the Bank Credit Facility
assumed to be borrowed to consummate the Justiss Acquisition, (ii) the
issuance of the Senior Notes and application of the net proceeds therefrom
to consummate the GWDC Acquisition and repay all amounts then outstanding
under the Bank Credit Facility and (iii) the consummation of the
Transactions as if they had occurred as of January 1, 1996 for the pro
forma statement of operations data, other financial data and drilling rig
activity data. The Kaiser-Francis Rig Purchase and the Additional Rig
Purchases have no pro forma effect on statement of operations data because
the rigs had no material operations or costs for the period presented.

(3) Represents impairment to certain drilling rigs and equipment caused by
market indications that the carrying amounts were not recoverable. See
note 1 to the Company's consolidated financial statements incorporated by
reference in this Prospectus.

(4) For the six months ended June 30, 1996, represents employment severance
costs for the Company's former President and Chief Executive Officer. For
the year ended December 31, 1996, primarily represents such employment
severance costs and costs to exit the Argentine and Mexican markets. See
note 11 to the Company's consolidated financial statements incorporated by
reference in this Prospectus.

(5) Pro forma interest expense reflects the Senior Notes bearing interest at
an annual rate of 8 7/8%, but does not give effect to interest earned on
proceeds of the Senior Notes offering prior to application thereof.

(6) To account for the discontinued operations of DI Energy, Inc. effective
April 1, 1995.

(7) EBITDA (operating income (loss) before depreciation and amortization,
provision for asset impairment and non-recurring charges) is presented
here to provide additional information about the Company's operations.
EBITDA should not be considered as an alternative to net income, as
determined in accordance with generally accepted accounting principles
("GAAP"), as an indicator of the Company's operating performance or as an
alternative to cash flows (as determined in accordance with GAAP) as a
better measure of liquidity.
(Notes continued on following page)
9
<PAGE> 10

(8) Includes $8.1 million of operating losses related to the Company's
operations in Argentina and Mexico which have since been discontinued.

(9) Excludes the Company's workover rigs.

(10) Represents total contract drilling revenues divided by the total number of
rig days worked by the Company's drilling rig fleet operated during the
period.

(11) Pro forma balance sheet data gives effect to the following as if they
occurred on June 30, 1997: (i) the Justiss Acquisition; (ii) the
Kaiser-Francis Rig Purchase; (iii) the Additional Rig Purchases and (iv)
the Offering and application of the net proceeds therefrom to repay all
amounts then outstanding under the Bank Credit Facility.
10
<PAGE> 11

RISK FACTORS

Prospective investors should carefully evaluate all of the information
contained and incorporated by reference in this Prospectus and, in particular,
the following before making an investment in the Shares:

DEPENDENCE ON OIL AND GAS INDUSTRY; INDUSTRY CONDITIONS

The Company's current business and operations are substantially dependent
upon conditions in the oil and gas industry and, specifically, the exploration
and production expenditures of oil and gas companies. The demand for contract
land drilling and related services is directly influenced by oil and gas prices,
expectations about future prices, the cost of producing and delivering oil and
gas, government regulations, local and international political and economic
conditions, including the ability of the Organization of Petroleum Exporting
Countries ("OPEC") to set and maintain production levels and prices, the level
of production by non-OPEC countries and the policies of the various governments
regarding exploration and development of their oil and gas reserves. There can
be no assurance that current levels of oil and gas exploration expenditures will
be maintained or that demand for the Company's services will reflect the level
of such expenditures.

HISTORY OF LOSSES FROM OPERATIONS

Although the Company had net income of $6.1 million for the first nine
months of 1997, the Company has a history of losses and has not had a profitable
full year since 1991. The Company incurred net losses of $11.7 million and $13.4
million for the years ended December 31, 1996 and 1995, respectively, and $2.2
million for nine months ended December 31, 1994. The calendar year 1996 loss
includes non-recurring charges of $6.1 million while the 1995 loss includes a
provision for asset impairment of $5.3 million. Profitability in the future will
depend upon many factors, but largely upon utilization rates and day rates for
the Company's drilling rigs. There can be no assurance that current utilization
rates and day rates will not decline or that the Company will not experience
losses.

DEPENDENCE ON KEY PERSONNEL; NEW BUSINESS STRATEGY

Since April 1996, the Company has hired a majority of its current senior
management team. In addition, in August 1996, the shareholders of the Company
elected a Board of Directors comprised of five members, all but one of whom were
elected for the first time. In connection with the Flournoy Acquisition, another
new member was added to the Company's Board of Directors effective January 31,
1997 and two additional new members were added to the Company's Board of
Directors in connection with the GWDC Acquisition in June 1997. The Company
believes that its operations are dependent upon a small group of relatively new
management personnel, the loss of any one of whom could have a material adverse
effect on the Company's financial condition and results of operations. Material
changes in the Company's management and business strategy have only recently
occurred. The Company is therefore unable to predict the effect of these changes
on the Company's financial condition and results of operations. The Company's
ability to meet its substantially increased debt service and principal payments
will depend, in part, on the success of the Company's new business strategy.
There can be no assurance these material changes in the Company's management and
business strategy will result in the improvement of the Company's financial
condition and results of operations.

COMPETITION

The land drilling industry is a highly competitive and cyclical business
characterized by high capital and maintenance costs. Drilling contracts are
usually awarded on a competitive bid basis and, while an operator may consider
factors such as quality of service and type and location of equipment as well as
the ability to provide ancillary services, price and rig availability are the
primary factors in determining which contractor is awarded a job. An
increasingly important competitive factor in the land drilling industry is the
ability to provide drilling equipment adaptable to, and personnel familiar with,
new technologies and drilling techniques as they become available. The land
drilling business is also highly fragmented. As a result, even though the
Company has the largest or second largest rig fleet in its three core domestic
markets, the Company estimates that its market share represents only 15% to 30%
of the overall market share in each of these three core

11
<PAGE> 12

markets. Certain of the Company's competitors have greater financial and human
resources than the Company, which may enable them to better withstand periods of
low rig utilization, to compete more effectively on the basis of price and
technology, to build new rigs or acquire existing rigs and to provide rigs more
quickly than the Company in periods of high rig utilization. A number of the
Company's competitors have also announced plans to refurbish and reactivate rigs
from their inventory of stacked rigs. The deployment of these additional rigs to
the Company's core markets could further intensify competition based on pricing
and rig availability. There can be no assurance that the Company will be able to
compete successfully against its competitors in the future or that the level of
competition will allow the Company to obtain adequate margins from its drilling
services.

RISKS ASSOCIATED WITH TURNKEY DRILLING

Contract drilling services performed under turnkey drilling contracts have
historically represented, and are expected to continue to represent, a
significant component of the Company's revenues. Under a turnkey drilling
contract, the Company contracts to drill a well to a contract depth under
specified conditions for a fixed price. In addition, the Company provides
technical expertise and engineering services, as well as most of the equipment
required for the well, and is compensated when the contract terms have been
satisfied. On a turnkey well, the Company often subcontracts for related
services and manages the drilling process. The risks to the Company on a turnkey
drilling contract are substantially greater than on a well drilled on a daywork
basis because the Company assumes most of the risks associated with drilling
operations generally assumed by the operator in a daywork contract, including
risk of blowout, loss of hole, stuck drill string, machinery breakdowns,
abnormal drilling conditions and risks associated with subcontractors' services,
supplies and personnel. Although the Company has obtained insurance coverage in
the past to reduce certain of the risks inherent in turnkey drilling operations,
there can be no assurance that such coverage will be obtained or available in
the future. The occurrence of an uninsured or under-insured loss could have a
material adverse effect on the Company's financial position and results of
operations.

OPERATING HAZARDS AND INSURANCE

The Company's operations are subject to the many hazards inherent in the
land drilling business, including blowouts, cratering, fires, explosions, loss
of hole, lost or stuck drill strings and damage or loss from adverse weather.
These hazards could also cause personal injury and loss of life, substantial
damage to the environment, suspension of drilling operations or serious damage
to or destruction of the property and equipment involved and damage to producing
formations and surrounding areas. The Company maintains insurance coverage
against some but not all operating hazards. However, such insurance may not be
sufficient to protect the Company against liability for all consequences of well
disasters such as personal injury, damage to the Company's rigs, damage to the
property of others or damage to the environment. The insurance maintained by the
Company is subject to substantial deductibles and provides for premium
adjustments based on claims. In view of difficulties that may be encountered in
renewing such insurance at reasonable rates, no assurance can be given that the
Company will be able to maintain the type and amount of coverage that it
considers adequate. The occurrence of a significant event for which the Company
is not fully insured could have a material adverse effect on the Company's
financial position and results of operations. See "Business -- Insurance."

RISKS OF ACQUISITION STRATEGY

As a key component of its new business strategy, the Company has pursued
and intends to continue to pursue acquisitions of complementary assets and
businesses. Certain risks are inherent in an acquisition strategy, such as
increasing leverage and debt service requirements and combining disparate
company cultures and facilities, which could adversely affect the Company's
operating results. The success of any completed acquisition will depend in part
on the Company's ability to integrate effectively the acquired business into the
Company. The process of integrating such acquired businesses may involve
unforeseen difficulties and may require a disproportionate amount of
management's attention and the Company's financial and other resources. Possible
future acquisitions may be for purchase prices significantly higher than those
paid for recent and pending acquisitions. No assurance can be given that the
Company will be able to continue to identify additional suitable acquisition
opportunities, negotiate acceptable terms, obtain financing for acquisi-

12
<PAGE> 13

tions on satisfactory terms or successfully acquire identified targets. The
Company's failure to achieve consolidation savings, to incorporate the acquired
businesses and assets into its existing operations successfully or to minimize
any unforeseen operational difficulties could have a material adverse effect on
the Company's financial condition and results of operations. See
"Business -- Recent and Pending Transactions."

SHORTAGES OF EQUIPMENT, SUPPLIES AND PERSONNEL

There is a general shortage of drilling equipment and supplies which the
Company believes may intensify. The costs and delivery times of equipment and
supplies are substantially greater than in prior periods and are currently
escalating. Accordingly, in 1996 the Company formed an alliance with a drill
pipe manufacturer that enables the Company to take delivery through 1998 of
29,300 joints of drill pipe in commonly used diameters at fixed prices plus
possible escalations for increases in the manufacturer's cost of raw materials.
As is common in the industry, the drill pipe supply alliance is not a formal
contractual agreement but represents an informal arrangement in which both
parties undertake to satisfy the supply objectives of the alliance. Due in part
to its alliance arrangement, the Company is not currently experiencing any
material shortages of, or material price increases in, drill pipe. The Company
believes that the alliance may reduce, but not eliminate, its exposure to price
increases and supply shortages of drill pipe. The Company and its supplier under
the drill pipe supply alliance have entered into a formal contractual
arrangement for the purchase and supply of an average quarterly quantity of
3,750 joints of drill pipe (a total of 15,000 joints) during 1999 at prices
based on the supplier's price list as of February 1997 less 5% (the "Drill Pipe
Agreement"). If the Company's source of supply through the alliance and the
Drill Pipe Agreement becomes unavailable or insufficient for any reason
(including by reason of additional rig acquisitions), the Company will likely
experience substantial delays in, and material price increases for, obtaining
substitute or additional supplies for drill pipe. Additionally, the Company may
be subject to shortages and price increases with respect to quantities in excess
of, and varieties of drill pipe not covered by, the alliance and the Drill Pipe
Agreement. Although the Company has formed similar informal supply alliances
with manufacturers and suppliers of other equipment and supplies, and is
attempting to establish arrangements to assure adequate availability of certain
other necessary equipment and supplies on satisfactory terms, there can be no
assurance that it will be able to do so. Shortages by the Company of drilling
equipment or supplies could delay and adversely affect its ability to refurbish
its inventory rigs and obtain contracts for its marketable rigs, which could
have a material adverse effect on its financial condition and results of
operations. See "Business -- Equipment and Supplies."

The demand for, and wage rates of, qualified rig crews have begun to rise
in the land drilling industry in response to the increasing number of active
rigs in service. Although the Company has not encountered material difficulty in
hiring and retaining qualified rig crews, such shortages have in the past
occurred in the industry and are again arising as demand for land drilling
services increases. The Company may experience shortages of qualified personnel
to operate its rigs, which could have a material adverse effect on the Company's
financial condition and results of operations.

GOVERNMENTAL REGULATIONS

13
<PAGE> 14

impose strict liability, rendering a party liable for environmental damage
without regard to negligence or fault on the part of such party. Such laws and
regulations may expose the Company to liability for the conduct of, or
conditions caused by, others or for acts of the Company which were in compliance
with all applicable laws at the time such acts were performed. The Company may
also be exposed to environmental or other liabilities originating from
businesses and assets subsequently acquired by the Company. Compliance with such
laws and regulations may require significant capital expenditures. Although such
compliance costs to date have not had a material effect on the Company,
application of these requirements or the adoption of new requirements could have
a material adverse effect on the Company. In addition, the modification or
judicial interpretations of existing laws or regulations or the adoption of new
laws or regulations curtailing exploratory or development drilling for oil and
gas for economic, environmental or other reasons could have a material adverse
effect on the Company's operations by limiting future contract drilling
opportunities.

RISKS OF INTERNATIONAL OPERATIONS

The Company derives revenues from international operations. The Company's
current international operations are conducted only in Venezuela. Risks
associated with operating in international markets include foreign exchange
restrictions and currency fluctuations, foreign taxation, political instability,
foreign and domestic monetary and tax policies, expropriation, nationalization,
nullification, modification or renegotiation of contracts, war and civil
disturbances or other risks that may limit or disrupt markets. Additionally, the
ability of the Company to compete in the international drilling markets may be
adversely affected by foreign government regulations that favor or require the
awarding of such contracts to local contractors, or by regulations requiring
foreign contractors to employ citizens of, or purchase supplies from, a
particular jurisdiction. Furthermore, the Company's foreign subsidiaries may
face governmentally imposed restrictions from time to time on their ability to
transfer funds to the Company. No predictions can be made as to what foreign
governmental regulations may be applicable to the Company's operations in the
future. The Company is currently marketing six rigs in Venezuela, two of which
are under contract. In addition, the Company has expended $3.3 million for
capital improvements to these rigs in 1997. There can be no assurance that these
marketing efforts and capital improvements will improve the Company's operating
performance or generate contracts for the Company's rigs in Venezuela. See
"Business -- Foreign Operations -- Venezuela Division" for a discussion of
certain management, operating and financial reporting deficiencies relating to
the Company's operations in Venezuela prior to 1997.

SIGNIFICANT LEVERAGE AND DEBT SERVICE REQUIREMENTS

On June 27, 1997, the Company issued $175.0 million of 8 7/8% Senior Notes
due 2007 in an underwritten public offering (the "Senior Notes"). Additionally,
the Company has a $50.0 million amended and restated senior secured revolving
credit facility with a syndicate of commercial banks (the "Bank Credit
Facility") under which no indebtedness was outstanding at June 30, 1997, due to
the repayment of all amounts then outstanding from the net proceeds of the
Senior Notes offering. At June 30, 1997, the Company had approximately $176.8
million in total long-term indebtedness and $146.5 million in shareholders'
equity. The Company borrowed $28.0 million under the Bank Credit Facility in
October 1997 to close the purchase of the first nine rigs of a total of 12 rigs
to be acquired in the Justiss Acquisition. The Company may borrow up to an
additional $7.4 million to finance the purchase of the remaining three rigs
unless any of the three remaining rigs are purchased after the closing of the
Offering, in which event Offering proceeds will be used to purchase the rigs. It
is anticipated that the entire amount outstanding under the Bank Credit Facility
immediately following the closing of the Offering will be repaid from the net
proceeds of the Offering. The Company expects, however, to continue to borrow
under the Bank Credit Facility and possible future credit arrangements in order
to finance possible future acquisitions and for general corporate purposes.

The level of the Company's indebtedness could have several important
effects on its future operations, including, among others, (i) its ability to
obtain additional financing for working capital, acquisitions, capital
expenditures, general corporate and other purposes may be limited, (ii) a
substantial portion of the Company's cash flow from operations will be dedicated
to the payment of principal and interest on its indebtedness, thereby reducing
funds available for other purposes and (iii) the Company's significant leverage
could make it more vulnerable to economic downturns in the industry. The
Company's ability to meet its debt service obligations and reduce its total
indebtedness will be dependent upon the Company's future performance,

14
<PAGE> 15

which will be subject to the success of its business strategy, general economic
conditions, industry cycles, levels of interest rates, and financial, business
and other factors affecting the operations of the Company, many of which are
beyond its control. There can be no assurance that the Company's business will
generate sufficient cash flow from operations to meet debt service requirements
and payments of principal, and if the Company is unable to do so, it may be
required to sell assets, to refinance all or a portion of its indebtedness,
including the Senior Notes, or to obtain additional financing. There can be no
assurance that any such refinancing would be possible or that any additional
financing could be obtained.

RESTRICTIONS IMPOSED BY TERMS OF INDEBTEDNESS

The indenture under which the Senior Notes were issued (the "Indenture")
contains covenants restricting or limiting the ability of the Company and
certain of its subsidiaries to, among other things: (i) incur additional
indebtedness; (ii) pay dividends or make other restricted payments; (iii) make
asset dispositions; (iv) permit liens; (v) enter into sale and leaseback
transactions; (vi) enter into certain mergers, acquisitions and consolidations;
(vii) make certain investments; (viii) enter into transactions with related
persons and (ix) engage in unrelated lines of business.

In addition, the loan agreement setting forth the terms of the Bank Credit
Facility (the "Bank Credit Agreement") contains certain other and more
restrictive covenants than those contained in the Indenture. These covenants may
adversely affect the Company's ability to pursue its acquisition and rig
refurbishment strategies and limit its flexibility in responding to changing
market conditions. The Bank Credit Agreement also requires the Company to
maintain specific financial ratios and satisfy certain financial condition
tests. The Company's ability to meet those financial ratios and financial
condition tests can be affected by events beyond its control, and there can be
no assurance that the Company will meet those tests. The Bank Credit Agreement
contains default terms that effectively cross default with the Indenture.
Accordingly, the breach by the Company or its subsidiaries of the covenants
contained in the Indenture likely will result in a default under not only the
Indenture but also the Bank Credit Facility, and possibly certain other then
outstanding debt obligations of the Company or its subsidiaries. If the
indebtedness under the Bank Credit Facility or other indebtedness of the Company
or its subsidiaries is in excess of $10.0 million and is not paid when due or is
accelerated by the holders thereof, an event of default under the Indenture
would occur. In any such case there can be no assurance that the Company's
assets would be sufficient to repay in full all of the Company's and its
subsidiaries' indebtedness, including the Senior Notes.

QUALIFICATION OF THE GWDC ACQUISITION AS A REORGANIZATION FOR U.S. FEDERAL
INCOME TAX PURPOSES

The GWDC Acquisition is intended to qualify as a tax free reorganization
under Sections 368(a)(1)(A) and 368(a)(2)(D) of the Internal Revenue Code of
1986, as amended (the "Code"), with respect to Common Stock received by GWDC
shareholders. A principal condition for such qualification is that the former
shareholders of GWDC will satisfy the continuity of proprietary interest
standard with respect to Common Stock received in the GWDC Acquisition. Thus,
under present Internal Revenue Service ("IRS") guidelines, dispositions of
Common Stock by GWDC shareholders during the five years following the GWDC
Acquisition could cause the IRS to assert that the GWDC Acquisition does not
qualify as a tax free reorganization. The Company has no contractual agreements
with GWDC shareholders preventing the disposition of their shares. If the GWDC
Acquisition fails to qualify as a tax free reorganization for failure to meet
the continuity of interest standard or for any other reason, the receipt of
Common Stock will be taxable to the GWDC shareholders at the time of the GWDC
Acquisition, and GWDC will be deemed to have sold all of its assets in a taxable
exchange triggering a corporate tax liability to GWDC estimated to be in excess
of $30.0 million. The Company's wholly-owned subsidiary, Grey Wolf Drilling
Company (formerly Drillers, Inc.), as the surviving corporation of the GWDC
Acquisition, would be liable for any such corporate tax which, if imposed, would
have a material adverse effect on the financial condition of the Company.

SHARES ELIGIBLE FOR FUTURE SALE

In addition to the shares of Common Stock to be sold by the Selling
Shareholders, approximately 44.4% of the outstanding Common Stock is available
for resale by selling shareholders under an effective shelf

15
<PAGE> 16

registration statement (the "Resale Shelf") under the Securities Act of 1933, as
amended (the "Securities Act"). Approximately 16.4% of the outstanding Common
Stock is not covered by the Resale Shelf, but is available for resale under
Rules 144 and 145 under the Securities Act and is covered, to a substantial
extent, by currently unexercised registration rights. An additional 5,557,400
shares are issuable upon exercise of options and 489,600 shares are issuable
upon the exercise of warrants. Future sales of substantial amounts of Common
Stock in the public market, or the perception that such sales may occur, could
adversely affect prevailing market prices of the Common Stock. See "Shares
Available for Future Sale."

SIGNIFICANT CUSTOMER

During the six months ended June 30, 1997, the largest customer for the
Company's contract drilling services accounted for approximately 17% of total
revenues. While the Company does not currently expect any material reduction in
the number of its rigs operating for such customer, and believes that it could
successfully remarket any rigs engaged in drilling operations on behalf of such
customer that might be discontinued, there can be no assurance that such
customer or any of the Company's other principal customers will continue to
employ the Company's services or that the loss of any of such customers or
adverse developments affecting any of such customers would not have a material
adverse effect on the Company's financial condition and results of operations.

FORWARD-LOOKING STATEMENTS

This Prospectus contains, or incorporates by reference, certain statements
that may be deemed "forward-looking statements" within the meaning of Section
27A of the Securities Act and Section 21E of the Securities Exchange Act of
1934, as amended (the "Exchange Act"). All statements, other than statements of
historical facts so included in this Prospectus that address activities, events
or developments that the Company intends, expects, projects, believes or
anticipates will or may occur in the future, including, without limitation:
statements regarding the Company's business strategy, plans and objectives;
statements expressing beliefs and expectations regarding future rig utilization
rates, day rates and other events and conditions that may influence the land rig
drilling market and the Company's performance in the future; statements
concerning future rig refurbishment plans, including the anticipated level of
capital expenditures for, and the nature and scheduling of, rig refurbishment;
statements regarding future redeployment of the Company's rigs to different
markets and trends in the land drilling business and other such matters are
forward-looking statements. Such statements are based on certain assumptions and
analyses made by management of the Company in light of its experience and its
perception of historical trends, current conditions, expected future
developments and other factors it believes to be appropriate. The
forward-looking statements included in this Prospectus are also subject to a
number of material risks and uncertainties. Important factors that could cause
actual results to differ materially from the Company's expectations are
discussed herein under the captions "Risk Factors" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations." Prospective
investors are cautioned that such forward-looking statements are not guarantees
of future performance and that actual results, developments and business
decisions may differ from those envisaged by such forward-looking statements.

16
<PAGE> 17

USE OF PROCEEDS

The net proceeds to the Company from the Offering are estimated to be $94.4
million, after deducting underwriting discounts, commissions and fees and
expenses of the Offering payable by the Company. The Company intends to use the
net proceeds of the Offering as follows: (i) approximately $28.0 million to
repay indebtedness incurred under the Bank Credit Facility to finance
substantially all of the purchase price for nine rigs acquired at the initial
closing of the Justiss Acquisition in October 1997; (ii) approximately $7.5
million for the aggregate purchase price of the remaining three rigs expected to
be acquired in the Justiss Acquisition or, if any of the rigs are purchased
before the closing of the Offering, to repay additional indebtedness incurred
under the Bank Credit Facility for the purchases; (iii) approximately $43.0
million for planned refurbishment of rigs and (iv) the remainder for general
corporate purposes, which may include future acquisitions. As of September 30,
1997, the Company had no indebtedness outstanding under the Bank Credit
Facility. On October 21, 1997, the Company borrowed $28.0 million under the Bank
Credit Facility to pay substantially all the $28.6 million purchase price for
the first nine rigs acquired in the Justiss Acquisition. The Company may borrow
up to an additional $7.4 million under the Bank Credit Facility for the
aggregate purchase price of the three rigs yet to be purchased from Justiss in
the event that any of the rigs are acquired before the closing of the Offering.
All indebtedness outstanding under the Bank Credit Facility immediately
following the closing of the Offering will be repaid from the net proceeds of
the Offering. The Bank Credit Facility matures on April 30, 2000. Interest under
the Bank Credit Facility accrues at variable rates with respect to each advance
under the facility based on one of two interest rate options available to the
Company. The $28.0 million in principal amount of outstanding indebtedness under
the Bank Credit Facility currently bears interest at 8.125% per annum. The
actual amount to be expended for rig refurbishments will depend on a number of
factors, including market conditions, management's assessment of existing and
anticipated demand and day rates for land drilling rigs in the Company's
domestic and Venezuelan markets and the Company's success in bidding for
drilling contracts. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Certain Credit Arrangements."

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<PAGE> 18

CAPITALIZATION

The historical data presented below sets forth the cash and cash
equivalents, short-term debt and capitalization of the Company as of June 30,
1997. The pro forma data gives effect to acquisitions occurring subsequent to
June 30, 1997 and financing related thereto, and the pro forma as adjusted data
gives effect to the Offering and the application of the net proceeds therefrom
as described under "Use of Proceeds." This table should be read in conjunction
with the consolidated financial statements and the notes thereto incorporated by
reference herein and the pro forma consolidated financial data and the notes
thereto included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
JUNE 30, 1997
------------------------------------
PRO FORMA
HISTORICAL PRO FORMA AS ADJUSTED
---------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents............................. $ 54,294 $ 25,794 $ 84,794
======== ======== ========
Current maturities of long-term debt.................. $ 582 $ 582 $ 582
Long-term debt, net of current maturities:
Bank Credit Facility(1)............................. -- 35,400 --
8 7/8% Senior Notes due 2007(2)..................... 174,139 174,139 174,139
Other............................................... 2,072 2,072 2,072
-------- -------- --------
Total long-term debt, net of current
maturities(1)............................. 176,211 211,611 176,211
Series A preferred stock -- mandatory redeemable...... 305 305 305
Shareholders' equity:
Common stock, $.10 par value per share.............. 15,154 15,154 16,404
Additional paid-in capital.......................... 175,136 175,136 268,286
Cumulative translation adjustments.................. (404) (404) (404)
Accumulated deficit................................. (43,401) (43,401) (43,401)
-------- -------- --------
Total shareholders' equity.................. 146,485 146,485 240,885
-------- -------- --------
Total capitalization........................ $323,583 $358,983 $417,983
======== ======== ========
</TABLE>

- ------------------------------------

(1) On October 21, 1997, the Company borrowed $28.0 million under the Bank
Credit Facility to pay substantially all of the $28.6 million purchase price
for the first nine rigs acquired in the Justiss Acquisition. The Company may
to borrow up to an additional $7.4 million under the Bank Credit Facility
for the aggregate purchase price of the three rigs yet to be purchased from
Justiss in the event that any of the rigs are acquired before the closing of
the Offering. If any of the remaining rigs are purchased after the closing
of the Offering, net proceeds of the Offering will be used to pay the
purchase price for the rigs. All indebtedness outstanding under the Bank
Credit Facility immediately after the closing of the Offering will be repaid
from the net proceeds of the Offering.

(2) Issued to the public at approximately 99.5% of face value.

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<PAGE> 19

DILUTION

The pro forma net tangible book value of the Company as of June 30, 1997
(adjusted to reflect the Justiss Acquisition, the Kaiser-Francis Rig Purchase
and the Additional Rig Purchases as if they had occurred on June 30, 1997) was
$146.5 million or approximately $.96 per share of Common Stock. Net tangible
book value per share represents the amount of the Company's total assets, less
its total liabilities and intangible assets, divided by the number of shares of
Common Stock outstanding. After giving effect to the sale by the Company of 12.5
million shares of Common Stock in the Offering at an offering price of $8.00 per
share and the application of the estimated net proceeds therefrom to repay the
Bank Credit Facility, the pro forma net tangible book value of the Company at
June 30, 1997 would have been $240.9 million or $1.47 per share. This represents
an immediate increase in the pro forma net tangible book value of $.51 per share
to the Company's existing shareholders and an immediate dilution in the pro
forma net tangible book value of $6.53 per share to new investors purchasing
Shares in the Offering. The following table illustrates the dilution to new
investors purchasing Shares in the Offering:

<TABLE>
<S> <C> <C>
Offering price(1)........................................... $8.00
Pro forma net tangible book value per share at June 30,
1997................................................... $.96
Increase per share attributable to sales of Shares by the
Company in the Offering................................ .51
----
Pro forma net tangible book value per share after the
Offering.................................................. $1.47
-----
Dilution in pro forma net tangible book value per share to
new investors............................................. $6.53
=====
</TABLE>

- ------------------------------------

(1) Before deducting underwriting commissions and discounts and estimated
offering expenses payable by the Company.

19
<PAGE> 20

PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY

The Common Stock is listed and traded on the AMEX under the symbol "GW."
During the periods below prior to September 19, 1997, the Company's corporate
name was DI Industries, Inc. and the Common Stock was listed on the AMEX under
the Symbol "DRL." The following table sets forth the high and low closing prices
of the Common Stock on the AMEX for the periods indicated:

<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
1995
First Quarter............................................. $0.9375 $0.6250
Second Quarter............................................ 1.0000 0.6875
Third Quarter............................................. 0.8125 0.6250
Fourth Quarter............................................ 0.8750 0.6250
1996
First Quarter............................................. $0.6875 $0.4375
Second Quarter............................................ 1.8750 0.6875
Third Quarter............................................. 1.8750 1.1250
Fourth Quarter............................................ 3.0000 1.5000
1997
First Quarter............................................. $3.5000 $2.4375
Second Quarter............................................ 4.4375 2.4375
Third Quarter............................................. 7.9375 4.3125
Fourth Quarter (through October 28, 1997)................. 9.8750 7.8750
</TABLE>

On October 1, 1997, there were 745 holders of record of Common Stock. The
closing price of the Common Stock on the AMEX on October 28, 1997 was $8.1875.

The Company has never declared or paid cash dividends on its Common Stock
and does not expect to pay cash dividends in 1997 or for the foreseeable future.
The Company anticipates that all cash flow generated from operations in the
foreseeable future will be retained and used to develop or expand the Company's
business and reduce outstanding indebtedness. Any future payment of cash
dividends will depend upon the Company's results of operations, financial
condition, cash requirements and other factors deemed relevant by the Board of
Directors.

The terms of the Company's Bank Credit Facility prohibit the payment of
dividends without the prior written consent of the banks and the terms of the
Indenture under which the Senior Notes are issued also restrict the Company's
ability to pay dividends under certain conditions.

20
<PAGE> 21

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA

The following unaudited pro forma consolidated balance sheet as of June 30,
1997 includes the historical consolidated balance sheet of the Company as of
June 30, 1997 and gives effect to the following as if they occurred as of June
30, 1997: (i) the Justiss Acquisition; (ii) the Kaiser-Francis Rig Purchase;
(iii) the Additional Rig Purchases and (iv) the application of the estimated net
proceeds from the Offering (after deducting underwriting discounts and
commissions and estimated expenses of the Offering) to repay amounts outstanding
under the Bank Credit Facility that are assumed to be borrowed to fund the cash
purchase price of the Justiss Acquisition. The following unaudited pro forma
consolidated statements of operations for the six months ended June 30, 1997
include the historical results of the Company for the six months ended June 30,
1997 and give effect to the Justiss Acquisition, the Flournoy Acquisition, the
issuance of the Senior Notes, the GWDC Acquisition and the Offering as if they
occurred on January 1, 1996. The following unaudited pro forma consolidated
statements of operations for the year ended December 31, 1996 include the
historical results of the Company for the year ended December 31, 1996 and give
effect to each of the above transactions and the sale of the Company's workover
division (the "Western Sale"), the RTO/LRAC Acquisition, the Mesa Acquisition,
and the Diamond M Acquisition (collectively the "Transactions") all which
occurred before December 31, 1996, as if they occurred on January 1, 1996. The
Kaiser-Francis Rig Purchase and the Additional Rig Purchases had no material
historical operations or costs during the periods presented and have not been
presented. The basis of presentation and the pro forma adjustments are described
in the accompanying notes.

The following unaudited pro forma consolidated statements of operations are
not necessarily indicative of the actual results of operations that would have
been reported if the events described above had occurred on the dates noted
above nor do they purport to indicate the results of the Company's future
operations. Furthermore, the pro forma results do not give effect to all cost
savings or incremental costs that may occur as a result of the integration and
consolidation of the acquisitions, mergers and sale of assets. In the opinion of
management, all adjustments necessary to present fairly such pro forma financial
statements have been made.

The unaudited pro forma consolidated financial information should be read
in conjunction with "Capitalization," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated financial
statements and the notes thereto incorporated by reference herein.

21
<PAGE> 22

GREY WOLF, INC.

UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
(IN THOUSANDS)

ASSETS

<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents........................... $ 54,294 $(27,800)(a) $ 84,794
(700)(b)
94,400(c)
(35,400)(d)
Accounts receivable, net of allowance............... 42,813 42,813
Rig inventory and supplies.......................... 428 428
Assets held for sale................................ 542 542
Prepaids and other current assets................... 5,867 5,867
-------- -------- --------
Total current assets........................ 103,944 30,500 134,444
-------- -------- --------
Property and equipment:
Land, buildings and improvements.................... 5,844 5,844
Drilling and well service equipment................. 317,740 27,800(a) 381,640
36,100(b)
Furniture and fixtures.............................. 1,407 1,407
Accumulated depreciation and amortization........... (16,349) (16,349)
-------- -------- --------
Net property and equipment.................. 308,642 63,900 372,542
-------- -------- --------
Other noncurrent assets............................... 6,495 6,495
-------- -------- --------
$419,081 $ 94,400 $513,481
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt................ $ 582 $ $ 582
Accounts payable -- trade........................... 23,614 23,614
Accrued workers' compensation....................... 3,693 3,693
Payroll and related employee costs.................. 5,285 5,285
Customer advances................................... 935 935
Taxes payable....................................... 1,045 1,045
Other accrued liabilities........................... 11,973 11,973
-------- -------- --------
Total current liabilities................... 47,127 47,127
-------- -------- --------
8 7/8% Senior Notes................................... 174,139 174,139
Long-term debt net of current maturities.............. 2,072 35,400(b) 2,072
(35,400)(d)
Other long-term liabilities and minority interest..... 3,598 3,598
Deferred income taxes................................. 45,355 45,355
Series A preferred stock-mandatory redeemable......... 305 305
Shareholders' equity:
Common stock, $.10 par value per share.............. 15,154 1,250(c) 16,404
Additional paid-in capital.......................... 175,136 93,150(c) 268,286
Cumulative translation adjustments.................. (404) (404)
Accumulated deficit................................. (43,401) (43,401)
-------- -------- --------
Total shareholders' equity.................. 146,485 94,400 240,885
-------- -------- --------
$419,081 $ 94,400 $513,481
======== ======== ========
</TABLE>

See accompanying notes to unaudited pro forma consolidated financial data.

22
<PAGE> 23

GREY WOLF, INC.

UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
HISTORICAL
-------------------------------------------------
FLOURNOY GWDC JUSTISS PRO FORMA
COMPANY ACQUISITION ACQUISITION ACQUISITION ADJUSTMENTS PRO FORMA
------- ----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Contract drilling......... $76,046 $3,871 $29,001 $10,283 $119,201
Costs and expenses:
Drilling operations....... 62,132 3,098 22,203 7,890 $ 1,312(e) 96,635
Depreciation and
amortization........... 5,180 138 1,321 903 5,834(f) 13,376
General and
administrative......... 3,369 250 2,121 573 (2,065)(e)(g) 4,248
------- ------ ------- ------- ------- --------
Total costs and
expenses........ 70,681 3,486 25,645 9,366 5,081 114,259
------- ------ ------- ------- ------- --------
Operating income (loss)..... 5,365 385 3,356 917 (5,081) 4,942
------- ------ ------- ------- ------- --------
Other income (expense):
Interest income........... 188 -- 20 -- 208
Gain on sale of assets.... 354 -- 576 -- 930
Interest expense.......... (1,535) (7) (65) -- (6,471)(h) (8,078)
Minority interest &
other.................. 338 -- 8 -- 346
------- ------ ------- ------- ------- --------
Other income
(expense),
net............. (655) (7) 539 -- (6,471) (6,594)
------- ------ ------- ------- ------- --------
Income (loss) before income
taxes..................... 4,710 378 3,895 917 (11,552) (1,652)
Income taxes................ 1,356 -- 1,574 -- (2,930)(i) --
------- ------ ------- ------- ------- --------
Net income (loss)........... 3,354 378 2,321 917 (8,622) (1,652)
Series A preferred stock
redemption premium........ (240) -- -- -- (240)
------- ------ ------- ------- ------- --------
Net income (loss) applicable
to common shares.......... $ 3,114 $ 378 $ 2,321 $ 917 $(8,622) $ (1,892)
======= ====== ======= ======= ======= ========
Net income (loss) per common
share..................... $ .02 $ (.01)
======= ========
Weighted average common and
common equivalent shares
outstanding............... 135,756 164,040
======= ========
</TABLE>

See accompanying notes to unaudited pro forma consolidated financial data.

23
<PAGE> 24

GREY WOLF, INC.

UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS HISTORICAL
HISTORICAL ------------------------ -----------------------------------------------------
---------- WESTERN RTO/LRAC MESA DIAMOND M FLOURNOY GWDC
COMPANY SALE ACQUISITION ACQUISITION ACQUISITION ACQUISITION ACQUISITION
---------- -------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Contract drilling............. $ 81,767 $(3,206)(j) $ -- $4,693 $22,675 $42,850 $56,537
Costs and expenses:
Drilling operations........... 80,388 (3,029)(j) 84(k) 3,428 19,405 33,970 44,735
Depreciation and
amortization................ 4,689 (117)(j) -- -- 759 1,655 2,163
General and administrative.... 4,274 (254)(j) -- -- 476 2,994 4,036
Non-recurring charges......... 6,131 -- -- -- -- -- --
-------- ------- ---- ------ ------- ------- -------
Total costs and
expenses.............. 95,482 (3,400) 84 3,428 20,640 38,619 50,934
-------- ------- ---- ------ ------- ------- -------
Operating income (loss)......... (13,715) 194 (84) 1,265 2,035 4,231 5,603
-------- ------- ---- ------ ------- ------- -------
Other income (expense):
Interest income............... 505 -- -- -- -- -- 2
Interest expense.............. (1,220) 4(j) -- -- -- (87) (394)
Gain (loss) on sale of
assets...................... 3,078 (2,775)(j) -- -- -- -- 368
Minority interest and other... 475 -- -- -- -- -- 66
-------- ------- ---- ------ ------- ------- -------
Other income (expense),
net................... 2,838 (2,771) -- -- -- (87) 42
-------- ------- ---- ------ ------- ------- -------
Income (loss) before income
taxes......................... (10,877) (2,577) (84) 1,265 2,035 4,144 5,645
Income taxes.................... 845 -- -- -- -- -- 2,265
-------- ------- ---- ------ ------- ------- -------
Net income (loss)............... (11,722) (2,577) (84) 1,265 2,035 4,144 3,380
Series A preferred stock
redemption premium............ (13) -- -- -- -- -- --
Series B preferred stock
subscription dividend
requirement................... (402) -- 402(l) -- -- -- --
-------- ------- ---- ------ ------- ------- -------
Net income (loss) applicable to
common shares................. $(12,137) $(2,577) $318 $1,265 $ 2,035 $ 4,144 $ 3,380
======== ======= ==== ====== ======= ======= =======
Net income (loss) per common
share......................... $ (.18)
========
Weighted average common and
common equivalent shares
outstanding................... 67,495
========

<CAPTION>
HISTORICAL
-----------
JUSTISS PRO FORMA PRO
ACQUISITION ADJUSTMENTS FORMA
----------- ----------- --------
<S> <C> <C> <C>
Revenues:
Contract drilling............. $13,524 $218,840
Costs and expenses:
Drilling operations........... 11,280 $ 2,624(e) 192,885
Depreciation and
amortization................ 1,598 17,902(f) 28,649
General and administrative.... 700 (4,567)(e)(g) 7,659
Non-recurring charges......... -- 6,131
------- -------- --------
Total costs and
expenses.............. 13,578 15,959 235,324
------- -------- --------
Operating income (loss)......... (54) (15,959) (16,484)
------- -------- --------
Other income (expense):
Interest income............... -- 507
Interest expense.............. -- (14,462)(h) (16,159)
Gain (loss) on sale of
assets...................... -- 671
Minority interest and other... -- 541
------- -------- --------
Other income (expense),
net................... -- (14,462) (14,440)
------- -------- --------
Income (loss) before income
taxes......................... (54) (30,421) (30,924)
Income taxes.................... -- (2,265)(i) 845
------- -------- --------
Net income (loss)............... (54) (28,156) (31,769)
Series A preferred stock
redemption premium............ -- (13)
Series B preferred stock
subscription dividend
requirement................... -- --
------- -------- --------
Net income (loss) applicable to
common shares................. $ (54) $(28,156) $(31,782)
======= ======== ========
Net income (loss) per common
share......................... $ (.19)
========
Weighted average common and
common equivalent shares
outstanding................... 163,969
========
</TABLE>

See accompanying notes to unaudited pro forma consolidated financial data.

24
<PAGE> 25

GREY WOLF, INC.

NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA

(1) Basis of Presentation

The following sets forth the assumptions used in preparing the Company's
unaudited pro forma consolidated balance sheet as of June 30, 1997 and unaudited
pro forma consolidated statements of operations for the six months ended June
30, 1997 and for the year ended December 31, 1996.

The unaudited pro forma consolidated financial data should be read in
conjunction with (i) the consolidated financial statements of the Company as of
and for the six months ended June 30, 1997 (unaudited) and for the year ended
December 31, 1996 and the notes thereto incorporated by reference herein and
(ii) the financial statements of GWDC as of and for the six months ended April
30, 1997 and for the year ended October 31, 1996 and the notes thereto,
incorporated by reference herein. Pro forma financial data are not necessarily
indicative of future operations of the Company due to numerous factors,
including changes in utilization rates for drilling rigs, changes in the rates
received for drilling services and future equipment sales and acquisitions.

(2) Adjustment to the Historical Financial Statements

The unaudited pro forma consolidated balance sheet data assume the Justiss
Acquisition, the Kaiser-Francis Rig Purchase and the Additional Rig Purchases
occurred on June 30, 1997. The remaining Transactions occurred prior to June 30,
1997, and are included in the Company's historical balance sheet as of June 30,
1997. The unaudited pro forma consolidated statement of operations data for the
six months ended June 30, 1997 assume the Justiss Acquisition, Flournoy
Acquisition and the GWDC Acquisition occurred on January 1, 1996 while all the
other Transactions are included in historical results for the period. The
unaudited pro forma consolidated statement of operations data for the year ended
December 31, 1996 assume all of the Transactions occurred on January 1, 1996.
The Kaiser-Francis Rig Purchase and the Additional Rig Purchases have no
historical operations as the rigs have been stacked and the impact on the pro
forma statement of operations is not material and has not been presented.

The following assumptions and pro forma adjustments have been made with
respect to the historical balance sheet of the Company:

(a) To reflect the Kaiser-Francis Rig Purchase and the July portion of
the Additional Rig Purchases for cash.

(b) To reflect the consummation of the Justiss Acquisition; assumes
that the cash purchase price would be funded by borrowings under the Bank
Credit Facility and available cash.

(d) To reflect the payoff of the Bank Credit Facility with proceeds
from the Offering.

The following assumptions and pro forma adjustments have been made to the
historical statements of operations of the Company:

(e) To reclassify $1.3 million for the six months ended June 30, 1997
and approximately $2.6 million for the year ended December 31, 1996 of
GWDC's general and administrative expenses to operating costs to conform to
the Company's presentation of expenses.

25
<PAGE> 26

(f) To reflect the additional depreciation expense for the six months
ended June 30, 1997 for the assets acquired in the Flournoy Acquisition
($221,000), the GWDC Acquisition (approximately $4.9 million) and the
Justiss Acquisition ($701,000) and the additional depreciation expense for
the year ended December 31, 1996 associated with the assets acquired in the
Mesa Acquisition ($648,000), the Diamond M Acquisition (approximately $2.7
million), the Flournoy Acquisition (approximately $2.7 million), the GWDC
Acquisition (approximately $10.3 million) and the Justiss Acquisition ($1.6
million). Pro forma depreciation was calculated on a straight line basis
over twelve years, which is the estimated useful lives of the assets.

(g) To reflect, for the six months ended June 30, 1997, (i) the
elimination of $67,000 of general and administrative expenses of Flournoy
Drilling Company ("Flournoy") for the cost of the founder and president of
Flournoy and one other employee who did not join the Company, (ii) the
reclassification of $1.3 million of general and administrative expenses of
GWDC to drilling operations costs (see note (e) above) and the elimination
of general and administrative expenses for the cost of the president and
other employees of GWDC who did not join the Company ($114,000) and (iii)
$573,000 for the elimination of general and administrative expenses of
Justiss Drilling Company for the cost of employees and office expenses that
will not be absorbed by the Company. To reflect, for the year ended
December 31, 1996, (i) the elimination of $217,000 of general and
administrative expenses of Diamond M Onshore, Inc. ("Diamond M") allocated
by its parent, less the additional general and administrative expenses
estimated by the Company for an additional employee; (ii) the elimination
of $800,000 of general and administrative expenses of Flournoy for the cost
of the founder and president of Flournoy and one other employee who did not
join the Company; (iii) the reclassification of approximately $2.6 million
of general and administrative expenses of GWDC to drilling operations costs
(see note (e) above) and the elimination of general and administrative
expenses for the cost of the president and other employees of GWDC who did
not join the Company ($226,000) and (iv) $700,000 for the elimination of
general and administrative expenses of Justiss Drilling Company for the
cost of employees and office expenses that will not be absorbed by the
Company.

(h) To reflect, for the year ended December 31, 1996, (i) the
elimination of $87,000 of interest expense on the debt that was repaid by
the Company at the closing of the Flournoy Acquisition, (ii) the additional
interest expense for the Senior Notes and (iii) the reduction of interest
expense associated with the retirement of the Company's outstanding
long-term debt under the Bank Credit Facility.

(i) To eliminate the historical income tax expense of the Company and
the income tax expense of GWDC in order to conform to the Company's pro
forma income tax position.

(j) To reflect the sale of the operational assets of the Company's
Western Division on the revenues and expenses of the Company.

(k) To adjust operating expense for the estimated cost to store the
rigs acquired in the RTO/LRAC Acquisition.

(l) To provide for the liquidation of the Series B preferred stock
subscription and related dividend requirement in connection with the
RTO/LRAC Acquisition. See notes 5 and 7 of the Company's consolidated
financial statements incorporated by reference herein.

26
<PAGE> 27

SELECTED FINANCIAL DATA

The following selected financial data, except for the Other Financial Data
and the Drilling Rig Activity Data, for the years ended and as of December 31,
1996 and 1995 and for the nine-months ended December 31, 1994 have been derived
from the audited consolidated financial statements of the Company incorporated
by reference herein. This data should be read in conjunction with such
consolidated financial statements and the notes thereto. The selected financial
data for the six-month periods ended June 30, 1997 and 1996, as of June 30, 1997
and for the twelve-month period ended December 31, 1994 have been derived from
the unaudited consolidated financial statements of the Company which have been
incorporated by reference in this Prospectus, and which include all adjustments,
consisting of normal recurring adjustments, that the Company considers necessary
for a fair presentation of its financial position and results of operations for
these periods. Operating results for the six-month period ended June 30, 1997
are not necessarily indicative of the results that may be expected for the
entire year. The selected financial data as of December 31, 1994, and for the
years ended and as of June 30, 1994 and 1993 have been derived from audited
consolidated financial statements of the Company which are not incorporated by
reference herein. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED NINE MONTHS YEAR ENDED
JUNE 30, DECEMBER 31, ENDED MARCH 31,
------------------ -------------------------------- DECEMBER 31, -----------------
1997 1996 1996 1995 1994 1994(1) 1994(1) 1993
-------- ------- -------- -------- -------- ------------ ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND DRILLING RIG ACTIVITY DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.............................. $ 76,046 $39,285 $ 81,767 $ 94,709 $ 65,393 $ 50,987 $67,855 $62,242
Drilling operations costs............. 62,132 38,318 80,388 93,825 62,929 48,988 62,574 57,583
Depreciation and amortization......... 5,180 2,221 4,689 4,832 3,247 2,377 3,523 3,448
General and administrative............ 3,369 1,795 4,274 3,555 3,007 2,074 2,910 4,498
Provision for asset impairment(2)..... -- -- -- 5,290 -- -- -- --
Non-recurring charges(3).............. -- 602 6,131 -- -- -- -- --
-------- ------- -------- -------- -------- -------- ------- -------
Operating income (loss)............... 5,365 (3,651) (13,715)(6) (12,793) (3,790) (2,452) (1,152) (3,287)
Interest expense...................... 1,535 466 1,220 1,472 404 332 257 --
Other income (expense), net........... 880 3,150 4,058 1,590 637 524 25 (100)
-------- ------- -------- -------- -------- -------- ------- -------
Income (loss) from continuing
operations.......................... 4,710 (967) (10,877) (12,675) (3,557) (2,260) (1,384) (3,387)
Income (loss) from discontinued
operations(4)....................... -- -- -- (772) 55 51 (1,274) 60
-------- ------- -------- -------- -------- -------- ------- -------
Income (loss) before income taxes..... 4,710 (967) (10,877) (13,447) (3,502) (2,209) (2,658) (3,327)
Income taxes.......................... 1,356 -- 845 -- -- -- -- 168
-------- ------- -------- -------- -------- -------- ------- -------
Net income (loss)..................... 3,354 (967) (11,722) (13,447) (3,502) (2,209) (2,658) (3,495)
Series A preferred stock redemption
premium............................. 240 -- 13 -- -- -- -- --
Series B preferred stock subscription
dividend............................ -- 300 402 -- -- -- -- --
-------- ------- -------- -------- -------- -------- ------- -------
Net income (loss) applicable to common
shares.............................. $ 3,114 $(1,267) $(12,137) $(13,447) $ (3,502) $ (2,209) $(2,658) $(3,495)
======== ======= ======== ======== ======== ======== ======= =======
Income (loss) per share -- continuing
operations.......................... $ .02 $ (.03) $ (.18) $ (.33) $ (.09) $ (.06) $ (.04) $ (.09)
Loss per share -- discontinued
operations(4)....................... -- -- -- (.02) -- -- (.03) --
-------- ------- -------- -------- -------- -------- ------- -------
Net income (loss) per common share.... $ .02 $ (.03) $ (.18) $ (.35) $ (.09) $ (.06) $ (.07) $ (.09)
======== ======= ======== ======== ======== ======== ======= =======
Weighted average common and common
equivalent shares outstanding....... 135,756 38,682 67,495 38,669 38,607 38,641 38,416 38,416
OTHER FINANCIAL DATA (UNAUDITED):
EBITDA(5)............................. $ 10,545 $ (828) $ (2,895)(6) $ (2,671) $ (543) $ (75) $ 2,371 $ 161
DRILLING RIG ACTIVITY DATA
(UNAUDITED)(7):
Average utilization rate of drilling
rigs available for service.......... 74% 63% 63% 66% 51% 58% 51% 48%
Average revenues per day(8)........... $ 8,473 $ 7,459 $ 7,610 $ 7,739 $ 8,520 $ 9,609 $ 9,102 $ 7,746
Drilling rigs available for
service -- end of period............ 88 49 52 58 57 57 57 46
Inventoried drilling rigs -- end of
period.............................. 26 7 25 22 13 13 13 14
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
JUNE 30, ------------------------------ ------------------
1997 1996 1995 1994(1) 1994(1) 1993
------------- -------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA(9):
Working capital................................ $ 56,817 $ 6,195 $ 7,503 $12,462 $ 9,053 $ 7,507
Property and equipment, net.................... 308,642 88,476 25,910 30,786 19,797 21,199
Total assets................................... 419,081 117,819 57,783 62,860 46,524 48,074
Long-term debt net of current maturities....... 176,211 26,846 11,146 10,224 198 223
Series A preferred stock -- mandatory
redeemable................................... 305 764 900 1,900 -- --
Shareholders' equity........................... 146,485 64,646 19,694 29,141 31,150 33,808
</TABLE>

(See notes on following page)

27
<PAGE> 28

- ------------------------------------

(1) During 1994, the Company changed its fiscal year end from March 31 to
December 31.

(2) Represents impairment to certain drilling rigs and equipment caused by
market indications that the carrying amounts were not recoverable. See note
1 to the Company's consolidated financial statements incorporated by
reference herein.

(3) For the six months ended June 30, 1996, represents employment severance
costs for the Company's former President and Chief Executive Officer. For
the year ended December 31, 1996, primarily represents such employment
severance costs and costs to exit the Argentine and Mexican markets. See
note 11 to the Company's consolidated financial statements incorporated by
reference herein.

(4) To account for the discontinued operations of DI Energy, Inc. effective
April 1, 1995.

(5) EBITDA (operating income (loss) before depreciation and amortization,
provision for asset impairment and non-recurring charges) is presented here
to provide additional information about the Company's operations. EBITDA
should not be considered as an alternative to net income, as determined in
accordance with GAAP, as an indicator of the Company's operating
performance or as an alternative to cash flows (as determined in accordance
with GAAP) as a better measure of liquidity.

(6) Includes $8.1 million of operating losses related to the Company's
operations in Argentina and Mexico which have since been discontinued.

(7) Excludes the Company's workover rigs.

(8) Represents total contract drilling revenues divided by the total number of
rig days worked by the Company's drilling rig fleet operated during the
period.

(9) Except for shareholders' equity, these items have been restated to account
for the discontinued operations of DI Energy, Inc. effective April 1, 1995.

28
<PAGE> 29

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 the Company incorporated
by reference herein.

GENERAL

The Company's operations have been and will continue to be significantly
affected by the new management team installed in 1996, the implementation of a
new business strategy in April 1996 and the major transactions that have been
consummated by the Company since August 1996. The Company believes it has the
largest fleet of drilling rigs in its Gulf Coast and South Texas markets and the
second largest fleet in its Ark-La-Tex market. Since the implementation of its
new business strategy, the Company has acquired 90 drilling rigs and now has the
largest or second largest active rig fleet in each of its three core domestic
markets, the Ark-La-Tex, South Texas and Gulf Coast markets. The Company's rig
fleet now consists of 133 rigs (including the Justiss Acquisition), of which 110
are currently marketed by the Company. Refurbishment and reactivation of the
Company's inventory rigs is also a key element of the Company's business
strategy. Since the beginning of the fourth quarter of 1996, the Company has
refurbished 17 rigs at a cost of $26.3 million. Of the Company's current
inventory of 23 rigs, eight rigs are undergoing refurbishment and the Company
presently intends to begin refurbishment of an additional rig during the
remainder of 1997 and 14 rigs in 1998. The Company estimates total costs for
pending and planned refurbishments will total $38.0 million during 1997, of
which $21.0 million had been expended at August 31, 1997. The Company estimates
that $25.4 million will be expended during 1998 for rig refurbishment. By
increasing the size of its rig fleet through acquisitions and refurbishments,
the Company has increased its market share in its three core domestic markets
during a period of rapidly rising demand and day rates for land drilling rigs in
those key markets. The combined effect of the Company's larger fleet of
marketable rigs, higher rig utilization rates and increasing day rates has
significantly improved the Company's financial performance since the third
quarter of 1996 despite increased drilling operations costs, including wages and
benefits, and debt service over the same period. Although the Company has not
had a profitable full year since 1991, during the first nine months of 1997 the
Company had net income of $6.1 million compared to a $159,000 loss during the
first nine months of 1996.

FINANCIAL CONDITION AND LIQUIDITY

During the first six months of 1997, the Company funded its activities
through a combination of cash generated from operations, borrowings under the
Bank Credit Facility, the issuance of Common Stock and the issuance of $175.0
million aggregate principal amount of Senior Notes. On April 30, 1997, the Bank
Credit Facility was amended and restated to increase the line of credit to $50.0
million and reduce the interest rate by approximately 0.5% per annum.

The following table summarizes the Company's financial position as of June
30, 1997 and as of December 31, 1996 and 1995:

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, DECEMBER 31,
1997 1996 1995
-------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Working capital..................................... $ 56,817 $ 6,195 $ 7,503
Property and equipment, net......................... 308,642 88,476 25,910
Other noncurrent assets............................. 6,495 1,132 277
-------- ------- -------
Total..................................... $371,954 $95,803 $33,690
======== ======= =======
Long-term debt net of current maturities............ $176,211 $26,846 $11,146
Other long-term liabilities......................... 49,258 4,311 2,850
Shareholders' equity................................ 146,485 64,646 19,694
-------- ------- -------
Total..................................... $371,954 $95,803 $33,690
======== ======= =======
</TABLE>

29
<PAGE> 30

The significant changes in the Company's financial position from December
31, 1996 to June 30, 1997, are primarily due to the acquisition of Flournoy, the
merger with GWDC and the closing of the $175.0 million Senior Notes offering.
See "-- Certain Credit Arrangements -- Senior Notes" and "Business -- Recent and
Pending Transactions."

The Company's cash and cash equivalents increased by $4.3 million for the
year ended December 31, 1996 from $1.9 million as of December 31, 1995 to $6.2
million as of December 31, 1996. This increase was primarily the result of $39.4
million provided by financing activities partially offset by $1.4 million used
by operating activities and $33.5 million used in investing activities.

Operating Activities

During the year ended December 31, 1996, the Company used a net of $1.4
million of cash to fund operating activities. This was the result of $7.3
million of cash used in operations, partially offset by changes in working
capital items that provided $5.9 million of cash. Operating cash losses of $8.4
million were generated from the Company's Argentine and Mexican divisions. Cash
provided from working capital items primarily included (i) collections of
accounts receivable of $3.3 million, (ii) monetization of inventory and assets
held for sale totaling $3.0 million and (iii) the receipt of customer advances
at the end of 1996 of $2.4 million, which were partially offset by payments of
$1.9 million for workers' compensation and $1.2 million of other current
liabilities.

During the first six months of 1997, the Company used a net of $0.9 million
of cash to fund operating activities. While the Company generated cash from
operations of $8.9 million, working capital requirements increased by $9.8
million due to recent acquisitions. In certain of these acquisitions, the
Company purchased drilling rigs and certain other related equipment which
required working capital to operate.

Investing Activities

During 1996, the Company invested $33.5 million in fixed assets net of
asset sales. The major components of these additions were the Diamond M
Acquisition for $26.0 million, $2.4 million for rig refurbishments and $5.1
million for other asset additions. Non-cash transactions accounted for an
additional $32.8 million in property and equipment additions. The Company
completed the RTO/LRAC Acquisition in exchange for approximately 39.4 million
shares of Common Stock valued at $25.0 million. In addition, the Company
completed the Mesa Acquisition in exchange for approximately 5.5 million shares
of Common Stock valued at $7.5 million.

During the six months ended June 30, 1997, the Company invested $98.6
million in fixed assets, net of asset sales. The cash portion of the price for
the GWDC Acquisition, including transaction costs, accounted for $62.0 million
and the acquisition of six additional stacked rigs in May and June accounted for
$15.8 million. Additionally, $9.4 million was spent on rig refurbishments and
$5.5 million was spent to acquire drill pipe and other drilling related
equipment. In addition, the acquisition of Flournoy and the merger with GWDC
resulted in $40.5 million and $85.8 million, respectively, in non-cash additions
to property and equipment.

Financing Activities

During 1996, the Company raised $39.4 million from financing activities.
The Company borrowed $31.5 million during the year, including $24.0 million
borrowed under the Bank Credit Facility for the Diamond M Acquisition. The
Company also completed private placements of a total of approximately 41.2
million shares of Common Stock for $29.1 million in cash. The Company made
repayments of debt totaling $16.5 million during the year.

During the first six months of 1997, the Company obtained a net of $147.7
million from financing activities, consisting principally of net proceeds of
$169.1 million from the issuance of Senior Notes and borrowings and repayments
under the Bank Credit Facility. These borrowings were used to fund the cash

30
<PAGE> 31

portion of the GWDC Acquisition, working capital requirements and capital
expenditures discussed above. The Company had cash and cash equivalents of $54.3
million at June 30, 1997.

Future Activities

The Company anticipates substantial funding requirements in connection with
its rig refurbishment program during the fourth quarter of 1997 and in 1998. The
Company currently has eight rigs under refurbishment and will begin
refurbishment of an additional rig during the remainder of 1997 and 14 rigs in
1998. The Company estimates total costs for pending and planned refurbishment
will total $38.0 million during 1997, of which $21.0 million had been expended
at August 31, 1997. The Company estimates that $25.4 million will be expended
during 1998 for rig refurbishments. These estimates are based on deployment of
all rigs undergoing or planned for refurbishment to the Company's three core
domestic markets at an estimated average refurbishment cost of $1.7 million per
rig, including the cost of a new drill string. If the Company instead chooses to
refurbish rigs for service in the Venezuelan or other international markets, it
is estimated that the average refurbishment cost of such rigs will be $12.0
million per rig, including the cost of a new drill string. Overall estimated
capital expenditures for rig refurbishments would be correspondingly increased
by the incremental refurbishment cost of rigs destined for international
markets.

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

The Company continues to actively review possible acquisition
opportunities. While the Company has no agreements to acquire additional
businesses or equipment, other than the Justiss Acquisition, suitable
opportunities may arise in the future. The timing or success of any acquisition
effort and the size of the associated potential capital commitments cannot be
predicted at this time. The ability of the Company to consummate any such
transaction will be dependent in large part on its ability to fund such
transaction. There can be no assurance that adequate funding will be available
on terms satisfactory to the Company.

RESULTS OF OPERATIONS

Comparison of Six Months Ended June 30, 1997 and 1996

<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1996
--------------------------------- ---------------------------------
DOMESTIC FOREIGN DOMESTIC FOREIGN
OPERATIONS OPERATIONS TOTAL OPERATIONS OPERATIONS TOTAL
---------- ---------- ------- ---------- ---------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER DAY AVERAGES)
<S> <C> <C> <C> <C> <C> <C>
Rig days worked....................... 8,405 570 8,975 2,927 2,340 5,267

Drilling revenues..................... $71,564 $4,482 $76,046 $22,312 $16,973 $39,285
Operating expenses(1)................. 57,690 4,442 62,132 21,869 16,449 38,318
------- ------ ------- ------- ------- -------
Gross profit (loss)................... $13,874 $ 40 $13,914 $ 443 $ 524 $ 967
======= ====== ======= ======= ======= =======
Average per rig day worked:
Drilling revenue.................... $ 8,514 $7,863 $ 8,473 $ 7,623 $ 7,253 $ 7,459
Operating expenses(1)............... 6,864 7,793 6,923 7,471 7,029 7,275
------- ------ ------- ------- ------- -------
Gross profit (loss)................. $ 1,650 $ 70 $ 1,550 $ 152 $ 224 $ 184
======= ====== ======= ======= ======= =======
</TABLE>

- ------------------------------------

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

Revenues increased approximately $36.7 million, or 94%, to $76.0 million
for the six months ended June 30, 1997, from $39.3 million for the six months
ended June 30, 1996. The increase was due to an increase in revenue from
domestic operations of $49.2 million partially offset by a decrease in revenue
from foreign operations of $12.5 million. Revenues from domestic operations
increased due to an increase in rig days

31
<PAGE> 32

worked of 5,478, and an increase in the average revenue per day of $891. The
increase in domestic days worked was a result of an increase in the number of
rigs owned and available for service to 64 at June 30, 1997, as compared to 31
at June 30, 1996. The increase in rigs available for service was principally the
result of the acquisitions completed in 1996 and the first quarter of 1997 in
which the Company added 26 working rigs. In addition, eight rigs refurbished
from inventory were placed in service during the fourth quarter of 1996 and the
first half of 1997. Rig days worked in domestic operations consisted of 4,902
days worked in the Company's South Texas Division, 2,545 days worked in the
Company's Ark-La-Tex Division and 958 days worked in all other domestic
divisions of the Company. The Company's Gulf Coast Division was formed upon
closing of the GWDC Acquisition on June 27, 1997 and, accordingly, no
significant rig days were worked during either period. Revenue from foreign
operations decreased due to a decrease in rig days worked of 1,770 partially
offset by an increase in average revenue per day of $610. The decrease in days
worked was primarily a result of the Company withdrawing from Mexico and
Argentina during the fourth quarter of 1996, the decrease in activity in
Venezuela due to the expiration of four labor contracts and the relocation of
the division office within Venezuela. Increases in domestic and foreign average
revenue per day are a result of the overall increase in demand for land drilling
rigs.

Drilling operating expenses increased by approximately $23.8 million, or
62%, to $62.1 million for the six months ended June 30, 1997, as compared to
$38.3 million for the six months ended June 30, 1996. The increase was due to a
$35.8 million increase in drilling operating expenses from domestic operations
partially offset by a decrease of $12.0 million in drilling operating expenses
from foreign operations. The increase in domestic drilling operating expenses
was a direct result of the number of rigs owned and available for service and
the corresponding 5,478 increase in the days worked. In addition, the 1997
period included a non-recurring charge of $0.9 million to transport three rigs
from Argentina to the United States. The decrease in drilling operating expenses
from foreign operations was due to fewer rigs operating as a result of the
Company's withdrawal from Mexico and Argentina and decreased activity in
Venezuela as discussed above.

Depreciation and amortization expenses increased by $3.0 million, or 133%,
to $5.2 million for the six months ended June 30, 1997, as compared to $2.2
million for the six months ended June 30, 1996. The increase was primarily due
to additional depreciation associated with the acquisition in late 1996 of 13
additional operating rigs, the acquisition of 13 operating rigs in January 1997
and eight rigs refurbished from inventory and placed in service during the
fourth quarter of 1996 and the first half of 1997.

General and administrative expenses increased by $1.6 million, or 88%, to
$3.4 million for the six months ended June 30, 1997, from $1.8 million for the
same period of 1996 due primarily to (i) higher payroll costs associated with
new management and increased corporate staff, (ii) higher professional fees due
to the Company's increased activity and (iii) higher insurance expense due to an
increase in the number of rigs as well as an increase in employee related
insurance coverage.

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

Interest expense increased by $1.1 million, or 229%, to $1.5 million for
the six months ended June 30, 1997, as compared to $466,000 for the six months
ended June 30, 1996. The increase was due to a $24.7 million increase in the
average outstanding debt balance to $37.1 million for the six months ended June
30, 1997 from $12.4 million for the six months ended June 30, 1996.

Other income net decreased by $2.3 million to $880,000 for the six months
ended June 30, 1997, as compared to $3.2 million for the six months ended June
30, 1996. The decrease was primarily due to the gain recognized on the sale of
the Company's well servicing division during the second quarter of 1996.

For the six months ended June 30, 1997, income tax expense was $1.4 million
as a result of the Company's profitable operations and the resulting taxable
income. The Company had no taxable income for the first half of 1996.

The Company had net income of $3.4 million for the six months ended June
30, 1997 as compared to a net loss of $1.0 million for the six months ended June
30, 1996.

32
<PAGE> 33

Comparison of Years Ended December 31, 1996 and 1995

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
---------------------------------- ----------------------------------
DOMESTIC FOREIGN DOMESTIC FOREIGN
OPERATIONS OPERATIONS TOTAL OPERATIONS OPERATIONS TOTAL
---------- ---------- -------- ---------- ---------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER DAY AVERAGES)
<S> <C> <C> <C> <C> <C> <C>
Rig days worked..................... 7,050 3,694 10,744 6,289 5,405 11,694
Drilling revenues................... $ 52,495 $ 29,272 $ 81,767 $ 44,797 $ 45,698 $ 90,495
Export sales........................ -- -- -- -- 4,214 4,214
Operating expenses(1)............... 49,431 30,957 80,388 40,867 48,277 89,144
Export sales expenses............... -- -- -- -- 4,681 4,681
-------- -------- -------- -------- -------- --------
Gross profit (loss)................. $ 3,064 $ (1,685) $ 1,379 $ 3,930 $ (3,046) $ 884
======== ======== ======== ======== ======== ========
Average per rig day worked:
Drilling revenue.................. $ 7,446 $ 7,924 $ 7,610 $ 7,123 $ 8,455 $ 7,739
Operating expenses(1)............. 7,011 8,380 7,482 6,498 8,932 7,623
-------- -------- -------- -------- -------- --------
Gross profit (loss)............... $ 435 $ (456) $ 128 $ 625 $ (477) $ 116
======== ======== ======== ======== ======== ========
</TABLE>

- ------------------------------------

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

Revenues decreased approximately $12.9 million, or 13.6%, to $81.8 million
for the year ended December 31, 1996 from $94.7 million for the year ended
December 31, 1995. This decrease was primarily due to a decrease in revenues
from foreign operations of $20.6 million where rig utilization decreased by
1,711 days. Revenues generated in the Mexican and Argentine markets decreased by
$17.3 million to $11.3 million for the year ended December 31, 1996, compared to
$28.6 million for the year ended December 31, 1995, due to a decline in average
revenues per day, lower rig utilization and the Company's ultimate withdrawal
from these markets. Revenues generated in Venezuela increased slightly to $18.0
million for the year ended December 31, 1996 from $17.1 million for the year
ended December 31, 1995. The increase was due to increases in day rates received
because the number of rig days worked decreased by 360 days caused by the
non-renewal of several drilling contracts for which the Company was unable to
obtain replacement contracts from the same or other customers. The remainder of
the decrease in revenues from foreign operations was due to $4.2 million in
non-recurring export sales during the year ended December 31, 1995. The decrease
in revenues from foreign operations was partially offset by a $7.7 million
increase in revenues from domestic operations to $52.5 million for the year
ended December 31, 1996, as compared to $44.8 million for the year ended
December 31, 1995. Domestic rig utilization improved by 7.0% in 1996, and
average revenues per day increased by 5.0%, due to an overall improvement in the
domestic contract drilling market.

Drilling operating expenses decreased by $13.4 million, or 14.3%, to $80.4
million for the year ended December 31, 1996, from $93.8 million for the year
ended December 31, 1995. The decrease was due to a $22.0 million decrease in
foreign drilling expenses, which was partially offset by a $8.6 million increase
in drilling expenses from domestic operations. Drilling expenses associated with
the Company's Mexican and Argentine operations decreased by $16.0 million to
$15.3 million for the year ended December 31, 1996 from $31.3 million for the
year ended December 31, 1995. This decrease was due to the lower utilization in,
and the Company's ultimate withdrawal from, those markets. Drilling operating
expenses included $1.0 million in mobilization costs to transport the Company's
drilling rigs from Mexico to the United States. Drilling expenses in Venezuela
decreased by $1.3 million to $15.7 million for the year ended December 31, 1996
from $17.0 million for the year ended December 31, 1995 primarily because of
lower rig utilization in 1996. Also contributing to the decrease in operating
expenses from foreign operations was $4.7 million in costs related to
non-recurring export sales for the year ended December 31, 1995. Drilling
expenses from domestic operations increased $8.6 million to $49.4 million for
the year ended December 31, 1996, from $40.9 million for the year ended December
31, 1995. This increase was primarily due to increased utilization and, to a
lesser extent, increased direct labor costs.

33
<PAGE> 34

Depreciation and amortization expenses decreased by $143,000, or 3%, to
$4.7 million for the year ended December 31, 1996 from $4.8 million for the year
ended December 31, 1995. The decrease in depreciation expense was primarily
attributable to the decrease in the depreciable asset base resulting from the
$5.3 million impairment provision recorded in the fourth quarter of 1995 as a
result of the Company's adoption of SFAS 121, as described below. While the
RTO/LRAC Acquisition, which occurred in August 1996, increased the Company's
asset base, no depreciation expense will be recorded until the acquired rigs are
placed in service. Only one of these rigs was placed in service in late 1996.

During the year ended December 31, 1996, the Company recorded non-recurring
charges of $6.1 million which included $1.1 million in employment severance
costs, $4.6 million in costs to exit the Argentine and Mexican markets and
approximately $400,000 of other non-recurring charges. The employment severance
costs includes $602,000 in contractual severance pay to be paid over a two-year
period to the Company's former President and Chief Executive Officer and the
transfer to him of certain drilling equipment with a net book value of $535,000
in settlement of a dispute over options to purchase Common Stock. As a result of
the Company's desire to redeploy assets to more productive markets, the Company
decided in late 1996 to withdraw from both the Argentine and Mexican markets and
has recorded estimated exit costs of $1.3 million for Mexico, which primarily
consist of the forfeiture of a performance bond and other costs to be incurred
to close the office, and exit costs of $800,000 for Argentina, which primarily
consist of costs expected to be incurred during the period necessary to exit the
market and close the office. Additionally, in 1996, the Company agreed to sell
three of the six drilling rigs and certain other assets located in Argentina for
$1.5 million. As a result, the Company recorded a write down of rig equipment
and other assets of $2.5 million. The remaining Argentine drilling rigs have
been returned to the United States where they are expected to be refurbished and
returned to service. Mobilization costs will be expensed as incurred in 1997.

General and administrative expenses increased by $719,000 to $4.3 million
for the year ended December 31, 1996, from $3.6 million for the year ended
December 31, 1995, due to increased payroll cost associated with the new
management members and the increased corporate staff, legal fees associated with
unsuccessful litigation to recover amounts the Company believed it was owed and
other professional fees.

Interest expense decreased by $252,000 for the year ended December 31,
1996, primarily as a result of lower average outstanding debt levels during 1996
in the United States and lower outstanding levels on an overdraft facility in
Argentina. The consolidated average debt balances during 1996 and 1995 were
$13.7 million and $15.0 million, respectively. Interest rates during these
periods remained relatively unchanged.

Other income, net increased $2.5 million to $4.1 million in 1996 from $1.6
million in 1995 primarily as a result of a $2.8 million gain recorded in
connection with the sale of its Western Division in the second quarter of 1996.

The Company's income tax expense of $845,000 in 1996 was solely
attributable to Venezuelan income taxes.

The Company had a net loss of $11.7 million in 1996 as compared to a net
loss of $13.4 million in 1995. The Company's net loss in 1995 includes net
losses from discontinued operations of $772,000 incurred in connection with the
sale of oil and gas properties, for which there was no similar transaction in
1996.

34
<PAGE> 35

Comparison of Year Ended December 31, 1995 to Twelve Months Ended December 31,
1994

<TABLE>
<CAPTION>
YEAR ENDED TWELVE-MONTH PERIOD ENDED
DECEMBER 31, 1995 DECEMBER 31, 1994(1)
----------------------------------- -----------------------------------
DOMESTIC FOREIGN DOMESTIC FOREIGN
OPERATIONS OPERATIONS TOTAL OPERATIONS OPERATIONS TOTAL
---------- ---------- ------- ---------- ---------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER DAY AVERAGES)
<S> <C> <C> <C> <C> <C> <C>
Rig days worked............ 6,289 5,405 11,694 6,246 1,209 7,455

Drilling revenues.......... $44,797 $45,698 $90,495 $49,530 $13,983 $63,513
Export sales............... -- 4,214 4,214 -- 1,880 1,880
Operating expenses(2)...... 40,867 48,277 89,144 47,722 13,204 60,926
Export sales expenses...... -- 4,681 4,681 -- 2,147 2,147
------- ------- ------- ------- ------- -------
Gross profit (loss)........ $ 3,930 $(3,046) $ 884 $ 1,808 $ 512 $ 2,320
======= ======= ======= ======= ======= =======
Average per rig day worked:
Drilling revenue......... $ 7,123 $ 8,455 $ 7,739 $ 7,930 $11,566 $ 8,520
Operating expenses(2).... 6,498 8,932 7,623 7,640 10,921 8,173
------- ------- ------- ------- ------- -------
Gross profit (loss)...... $ 625 $ (477) $ 116 $ 290 $ 645 $ 347
======= ======= ======= ======= ======= =======
</TABLE>

- ------------------------------------

(1) Effective December 31, 1994, the Company changed its fiscal year end from
March 31 to December 31.

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

Revenues increased $29.3 million, or 44.8%, to $94.7 million for the fiscal
year ended December 31, 1995 from $65.4 million for the twelve months ended
December 31, 1994. This increase was primarily due to the expansion of the
Company's operations in Argentina, Mexico and Venezuela. Revenues from the
Company's foreign operations increased by $34.0 million to $49.9 million for the
year ended December 31, 1995 from $15.9 million for the twelve months ended
December 31, 1994. This increase was due to an increase in rig days worked from
1,209 during 1994 to 5,405 during 1995, partially offset by a decrease in
average revenues per day from $11,566 to $8,455. The increase in rig days worked
was primarily due to the inclusion of Venezuelan operations for a full twelve
months in 1995 as compared to only four months in 1994 as the Venezuelan
operating company was acquired effective September 1, 1994. The addition of four
rigs to the Argentine market and three rigs to the Mexican market also
contributed to the increase in rig days worked. International export revenues
for the year ended December 31, 1995 were $4.2 million and resulted from
materials sold for export to Costa Rica. The increase in revenue from foreign
operations was partially offset by a decrease in revenue from domestic
operations of $4.7 million to $44.8 million for the year ended December 31, 1995
from $49.5 million for the twelve months ended December 31, 1994. This decrease
was due to an $807 decrease in average revenues per day from $7,930 during 1994
to $7,123 during 1995.

Drilling operating expenses and export sales expenses increased $30.7
million, or 48.8%, to $93.8 million for the year ended December 31, 1995, from
$63.1 million for the twelve months ended December 31, 1994. Operating expenses
for the Company's foreign operations increased $37.6 million for the year ended
December 31, 1995, as compared to the 1994 twelve month period as a result of
the expansion of the Company's Argentine drilling rig fleet and acquisition of
the Venezuelan operating company discussed above, the start-up costs on the four
rigs added to the Company's Argentine operations and higher than expected
repairs, maintenance and rig move costs experienced on all Argentine rigs during
1995. International export operating and other expenses for the year ended
December 31, 1995 were $4.7 million, primarily representing costs of materials
sold for export to Costa Rica. Domestic operating expenses decreased by $6.9
million for the year ended December 31, 1995 as compared to the twelve months
ended December 31, 1994. This decrease in costs from domestic operations of
approximately $500,000 was due to a change in the mix of the Company's rig
utilization from higher cost markets to lower cost markets and a change in the
type of work from a greater percentage of turnkey projects in 1994 to a greater
percentage of daywork in 1995.

In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for

35
<PAGE> 36

Long-Lived Assets to Be Disposed Of," effective for years beginning after
December 15, 1995. As the FASB encouraged earlier application, the Company
adopted the provisions of SFAS No. 121 during the fourth quarter of 1995. This
new accounting standard requires certain assets to be reviewed for impairment
whenever events or circumstances indicate the carrying amount may not be
recoverable. The Company has provided a non-cash impairment provision of $5.3
million for certain drilling rigs and equipment due to market indications that
the carrying amounts were not fully recoverable. Net realizable value was
determined based upon appraisal, comparable sales data and management estimates.

Depreciation and amortization expenses increased $1.7 million, or 54.8%, to
$4.8 million for the year ended December 31, 1995, from $3.1 million for the
twelve months ended December 31, 1994. This increase was due to the acquisition
of drilling equipment for foreign operations.

General and administrative expenses increased approximately $500,000 to
$2.9 million for the year ended December 31, 1995 from $2.4 million for the
twelve months ended December 31, 1994 primarily due to the expanded scope of the
Company's foreign operations.

Interest expense increased $1.0 million to $1.4 million for the year ended
December 31, 1995 from $425,000 for the twelve months ended December 31, 1994.
The increase was due to an increase in borrowings for expansion in foreign
markets. The consolidated average debt balances during the year ended December
31, 1995, and the twelve months ended December 31, 1994 were $15.0 million and
$7.5 million, respectively. Interest rates during these periods remained
relatively unchanged.

Other income, net increased $1.0 million from $637,000 in 1994 to $1.6
million in 1995, primarily due to a foreign currency gain of $888,000 for the
year ended December 31, 1995 attributable to currency exchange transactions
associated with the Company's Venezuelan operations.

The net loss from discontinued operations was $772,000 for the year ended
December 31, 1995 as compared to net income of $55,000 for the twelve months
ended December 31, 1994. The net loss in 1995 consisted primarily of a non-cash
provision resulting from the disposal of the Company's oil and gas properties.
On June 7, 1995, the Company entered into an agreement to sell its producing oil
and gas properties, effective April 1, 1995, for a cash sales price of $4.2
million, subject to certain adjustments. The sale was closed on August 9, 1995.
Proceeds from this transaction were used to pay off the Company's production
term note which had an outstanding balance of approximately $1.5 million and to
purchase two certificates of deposit totaling approximately $1.4 million as
collateral for two letters of credit that were then outstanding under the
Company's revolving line of credit, with the remainder of the proceeds,
approximately $1.3 million, used for working capital purposes.

The Company had a net loss of $13.4 million in 1995 as compared to a loss
of $3.5 million for the twelve months ended December 31, 1994.

CERTAIN CREDIT ARRANGEMENTS

The Company's principal credit arrangements (other than customary trade
credit and capital leases) consist of the Bank Credit Facility and its
recently-issued Senior Notes.

Bank Credit Facility

The Bank Credit Facility is a senior secured revolving credit facility from
three commercial banks under which the Company and its principal domestic
subsidiary, Grey Wolf Drilling Company (formerly Drillers, Inc.) are
co-borrowers. The Bank Credit Facility provides the borrowers with the ability
to borrow up to $50.0 million from time to time prior to April 30, 2000, subject
to the reductions described below, with up to $5.0 million of such amount
available for letters of credit. Interest under the Bank Credit Facility accrues
at a variable rate, using (at the borrowers' election) either the agent bank's
base rate plus a margin ranging from 0.75% to 1.50%, depending upon the
Company's debt to EBITDA ratio for the trailing 12 month period, or a rate based
on the interbank Eurodollar market plus a margin ranging from 1.75% to 2.50%,
depending upon the Company's debt to EBITDA ratio for the trailing 12 month
period. Letters of credit accrue a fee of 0.25% per annum. The borrowers pay a
commitment fee of 0.5% per annum on the average unused portion of the

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lenders' commitments. Indebtedness under the Bank Credit Facility is secured by
a security interest in substantially all of the Company's and its domestic
subsidiaries' assets and by guarantees of certain of its wholly-owned
subsidiaries.

The lenders' commitments will be reduced by the amount of net cash proceeds
received by the Company or its subsidiaries from sales of collateral in excess
of $1.0 million individually or $2.0 million in the aggregate in any twelve
month period. In addition, mandatory prepayments would be required upon (i) the
receipt of net proceeds received by the Company or its subsidiaries from the
incurrence of certain other debt or sales of debt or equity securities in a
public offering or private placement, or (ii) the receipt of net cash proceeds
received by the Company or its subsidiaries from asset sales (including proceeds
from sales of rigs identified in the credit agreement as equipment held for
sales but excluding proceeds from dispositions of inventory in the ordinary
course of business, certain licenses of intellectual property and certain
inter-company transfers) or the receipt of insurance proceeds on assets of the
borrowers, in each case in this clause (ii) to the extent that such proceeds are
in excess of $500,000 individually or $1.0 million in the aggregate in any
twelve month period. The final maturity date of the Bank Credit Facility is
April 30, 2000.

Among the various covenants that must be satisfied by the Company under the
Bank Credit Agreement are the following five financial covenants pursuant to
which the Company may not permit: (i) working capital (as defined in the Bank
Credit Agreement) to be less than $5.0 million on the last day of any fiscal
quarter; (ii) consolidated net worth to be less than the sum of $60.0 million
plus (a) 50% of the Company's consolidated net income, if positive, for the
period from January 1, 1997, to the final day of the most recent period for
which consolidated financial information of the Company is available and (b) 50%
of the increase to shareholders' equity of the Company attributable to the
issuance of Common Stock; (iii) the ratio of (a) the appraised fair market value
of domestic rigs and related equipment to (b) the lenders' commitments to be
less than 2 to 1; (iv) the ratio of consolidated debt to total capitalization to
exceed 0.6 to 1 and (v) the ratio of consolidated EBITDA to consolidated
interest expense for the most recent quarter to be less than 2.5 to 1 through
December 31, 1997 and less than 3 to 1 thereafter.

The Bank Credit Agreement also contains provisions restricting the ability
of the Company and its subsidiaries to, among other things, (i) engage in new
lines of business unrelated to their current activities, (ii) enter into mergers
or consolidations or asset sales or purchases (with specified exceptions), (iii)
incur liens or debts or make advances, investments or loans (in each case, with
specified exceptions), (iv) pay dividends or redeem stock (except for certain
inter-company transfers), (v) prepay or materially amend any other indebtedness
and (vi) issue any stock (other than Common Stock).

Events of default under the Bank Credit Facility include, in addition to
non-payment of amounts due, misrepresentation and breach of loan covenants and
certain other events of default, (i) default with respect to other indebtedness
in excess of $350,000, (ii) judgments in excess of $350,000 and (iii) a change
of control (meaning that (a) the Company ceases to own 100% of its two principal
subsidiaries, (b) some person or group (other than persons named in clause (d)
below) has either acquired beneficial ownership of 30% or more of the Company or
obtained the power to elect a majority of the Company's board of directors, (c)
the Company's board of directors ceases to consist of a majority of "continuing
directors" (as defined in the Bank Credit Agreement) or (d) Norex Drilling Ltd.,
Somerset Drilling Associates, L.L.C. ("SDA")and Somerset Capital Partners
("SCP") cease to own or control at least 25% of the Company).

Senior Notes

Concurrently with the closing of the GWDC Acquisition, the Company
concluded a public offering of $175.0 million in principal amount of the Senior
Notes. The net proceeds from the sale of the Senior Notes were used (i) to pay
the cash portion of the GWDC Acquisition price, (ii) to repay the Company's then
outstanding balance under its revolving line of credit from its commercial
banks, (iii) to pay the purchase price for the Kaiser-Francis Rig Purchase and
the Additional Rig Purchases and (iv) for capital expenditures to refurbish
certain of the Company's rigs and for other general corporate purposes. The
Senior Notes are general unsecured senior obligations of the Company and are
guaranteed, on a joint and several basis, by all domestic wholly-owned
subsidiaries of the Company.

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<PAGE> 38

The Senior Notes will be redeemable, at the Company's option, in whole or
in part from time to time on or after July 1, 2002, at redemption prices
decreasing from 104.4375% in 2002 to 100% in 2005 and thereafter, plus accrued
and unpaid interest to the redemption date. In the event the Company consummates
one or more Qualified Equity Offerings (as defined in the Indenture) on or prior
to July 1, 2000, the Company at its option may use all or a portion of the net
cash proceeds from such Qualified Equity Offerings to redeem up to 30% of the
aggregate principal amount of the Senior Notes at a redemption price equal to
108.875% of the aggregate principal amount thereof, together with accrued and
unpaid interest to the date of redemption, provided that at least $120.0 million
aggregate principal amount of Senior Notes remains outstanding immediately after
such redemption. Although the Offering qualifies as a Qualified Equity Offering,
the Company does not intend to use proceeds of the Offering to repay any portion
of the Senior Notes. Upon a Change of Control, as defined in the Indenture, each
holder of Senior Notes will have the right to require the Company to repurchase
all or any part of such holder's Senior Notes at a purchase price equal to 101%
of the aggregate principal amount thereof, plus accrued and unpaid interest to
the date of purchase.

The Indenture permits the Company and its 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 the assets of the
Company and its subsidiaries, subject to certain limitations. The Indenture
contains other covenants limiting the ability of the Company and its
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 and
engage in unrelated lines of business. These covenants are subject to certain
exceptions and qualifications.

INFLATION AND CHANGING PRICES

Contract drilling revenues do not necessarily track the changes in general
inflation as they tend to respond to the level of activity on the part of the
oil and gas industry in combination with the supply of equipment and the number
of competing companies. Capital and operating costs are influenced to a larger
extent by specific price changes in the oil and gas industry and to a lesser
extent by changes in general inflation.

FOREIGN EXCHANGE

Venezuelan operations are often performed by the Company pursuant to
drilling contracts under which payments to the Company are denominated in United
States Dollars but are payable in Venezuelan currency at a floating exchange
rate. Although the Company's Venezuelan contracts usually allow the Company to
exchange up to 35% of payments made to it in Venezuelan currency for United
States Dollars for a limited period of time following the payment and at the
official Venezuelan exchange rate in effect at the time the payment was made to
the Company (thus offering limited protection against adverse currency
fluctuation), the Company is typically subject to the risk of adverse currency
fluctuations with respect to the balance of such payments. Additionally, a
significant portion of costs and expenses relating to the Company's
international operations are comprised of goods and services procured in the
respective foreign countries and paid for in the respective countries'
currencies. Accordingly, management expects that the Company's subsidiaries
operating in Venezuela will be required to maintain significant cash balances in
Venezuelan currency. The Company is not a party to any currency hedging
arrangements and has not during the three-year period ended December 31, 1996 or
during the six month period ended June 30, 1997 entered into any currency hedges
to protect it from foreign currency losses. Instead, the Company attempts to
manage assets in foreign countries to minimize its exposure to currency
fluctuations. Despite these efforts, however, the Company remains subject to the
risk of foreign currency losses. During the year ended December 31, 1995,
however, the Company realized currency gains of $888,000 and, in 1996, $404,000
was recorded as a decrease to shareholders' equity due to a devaluation of the
Venezuelan Bolivar.

FORWARD-LOOKING INFORMATION

The Management's Discussion and Analysis of Financial Condition and Results
of Operations ("MD&A") contains "forward-looking statements" within the meaning
of Section 27A of the Securities Act

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<PAGE> 39

and Section 21E of the Exchange Act. All statements other than statements of
historical facts included in the MD&A including, without limitation, statements
regarding the Company's operating strategy, plans, objectives and beliefs of
management for future operations, planned rig refurbishments and the anticipated
closing and methods of financing the Justiss Acquisition are forward-looking
statements. Although the Company believes the expectations and beliefs reflected
in such forward-looking statements are reasonable, it can give no assurance that
such expectations will prove to have been correct. See "Risk Factors" for a
discussion of important factors that could cause actual results to differ
materially from the Company's expectations. Also, see "Forward-Looking
Statements."

RECENT ACCOUNTING PRONOUNCEMENTS

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

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<PAGE> 40

BUSINESS

GENERAL

BUSINESS STRATEGY

(1) focusing on core markets and establishing leading positions in
these markets;

(2) refurbishing and reactivating inventoried rigs to satisfy
increases in demand;

(3) acquiring land drilling businesses and assets to capitalize on
anticipated improvements in the industry and

(4) attracting and retaining qualified personnel to support the
Company's increased level of operations.

Acquisitions. The Company has aggressively implemented its new operating
strategy by acquiring 90 land drilling rigs in 12 transactions since August
1996. Five of these acquisitions were of companies with long operating histories
in the Company's Ark-La-Tex, Gulf Coast and South Texas markets. The other
acquisitions have provided the Company with additional inventory of drilling
rigs suited for refurbishment and reactivation in the Company's core domestic
markets or Venezuela.

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<PAGE> 41

experience. Many of the Company's operating personnel joined the Company in
connection with acquisitions completed since August 1996, bringing to the
Company additional customer relationships and operating experience in their
markets. The Company's ability to retain these employees and to attract
additional quality employees has allowed the Company to expand its operations
and customer base significantly while ensuring quality service to its customers.

INDUSTRY OVERVIEW

Industry sources estimate that the supply of domestic land drilling rigs
available for work in the U.S. has declined from over 5,000 rigs in 1982 to
1,400 rigs currently. The Company believes the demand for land drilling rigs in
the Company's core markets has increased over the past twelve months principally
due to improved oil and gas drilling and production economics resulting from
increased use of 3-D seismic, directional drilling and enhanced recovery
techniques. For the first six months of 1997, industry sources estimate that the
average active domestic land rig count was 750 as compared to 652 for the full
year 1996, and 626 for the first six months of 1996. The Company's utilization
rates in its three core domestic markets averaged over 97% for the first nine
months of 1997. By increasing the size of its rig fleet through acquisitions and
refurbishments, the Company has increased its market share in its three core
domestic markets during a period of rapidly rising demand and day rates for land
drilling rigs in those key markets. The Company's larger fleet of marketable
rigs, higher rig utilization rates and increasing day rates have significantly
improved the Company's financial performance since the third quarter of 1996.

RECENT AND PENDING ACQUISITIONS

The Justiss Acquisition. On September 15, 1997, the Company entered into a
definitive agreement to acquire substantially all of the operating assets of
Justiss. The assets include a fleet of 12 operating drilling rigs and related
equipment which are currently operating in the Company's Ark-La-Tex and Gulf
Coast markets. The total purchase price for the Justiss Acquisition is $36.1
million in cash of which $28.6 million was paid on October 21, 1997 upon
delivery of nine of the 12 rigs to be acquired. The remaining three rigs are
expected to be purchased and the balance of the purchase price paid ($7.5
million) by the end of November 1997 as each rig completes a turnkey drilling
contract for a well in progress. Approximately 180 former rig-based employees of
Justiss have been hired by the Company and the Company expects that it will
offer employment to approximately 60 additional rig-based Justiss employees as
the remaining three rigs are purchased. The closing of the Justiss Acquisition
with respect to the remaining three rigs is subject to the satisfaction of
certain conditions to closing. Accordingly, there can be no assurance that the
purchase of the remaining rigs will be completed.

Kaiser-Francis Rig Purchase. On August 21, 1997, the Company acquired six
drilling rigs and related drilling equipment from Kaiser-Francis Oil Company for
a cash purchase price of $25.4 million. The rigs consisted of four 2,000
horsepower SCR rigs, one 1,000 horsepower SCR rig and one 1,000 horsepower
mechanical rig. The 2,000 horsepower rigs are rated for drilling to 25,000 feet
while the 1,000 horsepower rigs are rated for drilling to 15,000 feet. Five of
the six rigs are currently held in inventory for refurbishment and one is
currently being refurbished. The purchase price for the Kaiser-Francis Rig
Purchase was paid from the net proceeds of the Senior Notes offering.

GWDC Acquisition. On June 27, 1997, the Company acquired GWDC which owned a
fleet of 18 operating drilling rigs and related assets located in the Company's
Gulf Coast market. Sixteen of the rigs acquired in the GWDC Acquisition are
rated to drill to depths of 20,000 feet or greater. The consideration for the
GWDC Acquisition consisted of $61.6 million in cash and 14.0 million shares of
Common Stock valued by the Company at $47.6 million under the purchase method of
accounting. The GWDC Acquisition established

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<PAGE> 42

the Company's presence in its Gulf Coast market and provided the Company with
additional infrastructure to facilitate reactivation of its rigs held in
inventory.

Flournoy Acquisition. On January 31, 1997, the Company acquired the
operating assets of Flournoy for approximately 12.4 million shares of Common
Stock and cash of approximately $800,000, which was utilized to repay certain
indebtedness of Flournoy. The assets acquired included 13 operating land
drilling rigs, 17 rig hauling trucks, a yard and office facility in Alice, Texas
and various other equipment and drill pipe. Under the purchase method of
accounting, the Company valued the Common Stock issued in the Flournoy
Acquisition at $31.1 million. The Company agreed to issue additional shares of
Common Stock to Flournoy's shareholders if, and to the extent that, on January
31, 1998 the aggregate market value of one-half of the shares received by the
Flournoy shareholders, plus the gross proceeds from certain sales of Common
Stock received in the transaction by the Flournoy shareholders prior to January
31, 1998, is, in total, less than $12.4 million.

Diamond M Acquisition. On December 31, 1996, the Company acquired the
assets of Diamond M for $26.0 million in cash. The assets acquired consisted of
ten operating land drilling rigs, all of which are currently operating in South
Texas, 19 rig hauling trucks, a yard and office facility in Alice, Texas and
various other drill pipe and equipment.

Mesa Acquisition. On October 3, 1996, the Company acquired six diesel
electric SCR rigs, three of which were operating, from Mesa in exchange for 5.5
million shares of Common Stock. The Mesa Acquisition established the Company's
presence in South Texas. Under the purchase method of accounting, the Company
valued the Common Stock issued in the Mesa Acquisition transaction at $7.5
million.

RTO/LRAC and Somerset Acquisitions. On August 29, 1996, the Company
completed the RTO/LRAC Acquisition in which approximately 39.4 million shares of
Common Stock were exchanged for 18 deep drilling land rigs which were added to
the Company's rigs held for refurbishment and reactivation. The rigs acquired in
the RTO/LRAC Acquisition include five 3,000 horsepower and nine 2,000 horsepower
land rigs rated for depths of 25,000 feet or greater. Contemporaneously with the
closing of the RTO/LRAC Acquisition, the Company completed a transaction in
which it issued approximately 39.4 million shares of Common Stock for $25.0
million in cash (the "Somerset Acquisition"). Under the purchase method of
accounting, the Company valued the Common Stock issued in the RTO/LRAC
Acquisition and the Somerset Acquisition at $25.0 million and $24.6 million,
respectively. The recipients of the shares issued in the RTO/LRAC and Somerset
Acquisitions were also issued warrants to acquire up to an aggregate of 3.4
million shares of Common Stock (the "Shadow Warrants"), exercisable upon the
occurrence of certain events. As of May 30, 1997, approximately 2.9 million of
the Shadow Warrants had been terminated unexercised. The $25.0 million capital
infusion from the Somerset Acquisition was used for rig fleet refurbishment,
debt repayment and general corporate purposes.

Additional Rig Purchases. In addition to the acquisitions described above,
the Company completed five additional acquisitions during the second and third
quarter of 1997 that added a total of seven drilling rigs to the Company's
fleet, one of which was operating and six of which were added to the Company's
rigs held for refurbishment.

DOMESTIC OPERATIONS

Giving effect to the Justiss Acquisition, the Company has a total domestic
rig fleet of 127 rigs, 104 of which are being actively marketed and 23 of which
are held in inventory for refurbishment and reactivation. See "-- Rig Inventory
and Refurbishments." The following table summarizes the Company's domestic rig
fleet, by horsepower rating and drive system:

<TABLE>
<CAPTION>
HORSEPOWER RATING DIESEL ELECTRIC MECHANICAL TOTAL
----------------- --------------- ---------- -----
<S> <C> <C> <C>
300-999...................................... 1 44 45
1,000-1,999................................... 24 25 49
2,000-4,000................................... 33 -- 33
-- -- ---
Total............................... 58 69 127
== == ===
</TABLE>

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<PAGE> 43

The Company's domestic drilling operations are conducted through five
operating divisions in the United States organized by geographic area. The
market area covered by each of the Company's divisions is depicted on the map
located in the inside front cover of this Prospectus.

Ark-La-Tex Division. The Ark-La-Tex Division provides drilling services
primarily in Northeast Texas, Northern Louisiana and Southern Arkansas, and
currently markets a fleet of 26 rigs. The majority of drilling in the Ark-La-Tex
market is directed to three of the five principal target geologic formations in
the region, generally located at depths ranging from 8,900 to 13,000 feet. For
these target formations, 450 to 1,000 horsepower mechanical rigs are typically
utilized in the Ark-La-Tex market. Nineteen of the division's rigs are suited
for drilling to these depths, 17 of which are mechanical, one of which is a
diesel electric and one is an SCR rig. The other two principal geologic targets
in the market, the Austin Chalk and Pinnacle Reef formations, are located at
substantially greater depths, typically from 15,500 to 22,000 feet. The Company
has seven marketable rigs suitable for these drilling targets. Two of these deep
drilling rigs are 1,500 horsepower diesel electric rigs capable of drilling to
20,000 feet. Four of these deep drilling rigs are 2,000 horsepower diesel
electric rigs having a depth rating of 25,000 feet. The seventh rig is a 3,000
horsepower diesel electric SCR rig with a depth rating of 30,000 feet.

During 1996 (and excluding any pro forma effect of the Justiss
Acquisition), approximately 42% of the division's revenues were generated from
daywork contracts, 3% from footage contracts and 55% from turnkey contracts. For
the first half of 1997, the percentage of its contract revenues provided by
daywork, footage and turnkey contracts was 59%, 6% and 35%, respectively. The
average revenues per rig day worked for the division during 1996 and the first
half of 1997 were $7,707 and $8,527, respectively, and for the same periods its
average rig utilization rates were 86% and 93%, respectively.

South Texas Division. The South Texas Division markets a fleet of 33 rigs
consisting of 15 trailer mounted rigs with rated depth capacities ranging from
9,500 to 14,000 feet, ten diesel electric SCR rigs with rated depth capacities
from 12,000 to 25,000 feet and eight conventional mechanical rigs with rated
depth capacities ranging from 10,000 to 14,000 feet. The Company believes that
trailer mounted rigs and 1,500 to 2,000 horsepower diesel electric SCR rigs are
in highest demand in this market. Trailer mounted rigs are relatively more
mobile than conventional rigs, thus decreasing the time and expense to the
customer of moving the rig to and from the drillsite. Under ordinary conditions,
the Company's trailer mounted rigs are capable of drilling an average of two
10,000 foot wells per month. The Company believes it operates the largest
trailer mounted rig fleet in this market. The South Texas Division also operates
a fleet of 35 trucks, which are used exclusively to move the Company's rigs.
Most drilling in this market is for natural gas at depths ranging from 10,000 to
15,000 feet.

During 1996, approximately 75% of the division's revenues were generated
from daywork contracts, 14% from footage contracts and 11% from turnkey
contracts. For the first half of 1997, the percentage of its contract revenues
provided by daywork, footage and turnkey contracts was 51%, 19% and 30%,
respectively. The average revenues per rig day worked for the division during
1996 and the first half of 1997 were $5,668 and $8,941, respectively, and for
the same periods its average rig utilization rates were 85% and 97%,
respectively.

Gulf Coast Division. The Gulf Coast Division's drilling services are
provided to operators in South Louisiana and along the upper Texas Gulf Coast.
The Gulf Coast Division's rig fleet consists of 29 drilling rigs, including ten
diesel electric rigs with rated depth capacities of 20,000 to 25,000 feet, nine
diesel electric SCR rigs with rated depth capacities of 15,000 to 30,000 feet
and ten mechanical rigs with rated depth capacities of 10,000 to 20,000 feet.

This division's rig fleet is comprised primarily of rigs acquired in the
GWDC Acquisition. During GWDC's fiscal year ended October 31, 1996,
approximately 48% of its revenues were generated from daywork contracts, 10%
from footage contracts and 42% from turnkey contracts. For the first six months
of fiscal 1997, the percentage of its contract revenues provided by daywork,
footage and turnkey contracts was 65%, 3% and 32%, respectively. The average
revenues per rig day worked for GWDC during fiscal 1996 and the first six months
of fiscal 1997 were $9,558 and $9,587, respectively, and for the same periods
its average rig utilization rates were 95% and 98%, respectively.

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<PAGE> 44

Eastern Division. The Eastern Division markets a fleet of six rigs,
primarily in Ohio. The Eastern Division principally drills gas wells at depths
of 7,000 feet or less using air drilling techniques. This division typically
contracts to drill packages of several wells.

During 1996, approximately 30% of the division's revenues were generated
from daywork contracts and 70% from footage contracts. For the first half of
1997, the percentage of its contract revenues provided by daywork and footage
contracts was 12% and 88%, respectively. The average revenues per rig day worked
for the division during 1996 and the first half of 1997 were $4,976 and $5,005,
respectively, and for the same periods its average rig utilization rates were
72% and 66%, respectively.

INDRILLERS Division. In 1996, the Company and Dart Energy Corp. ("Dart")
formed INDRILLERS in which the Company has a 65% economic interest and Dart has
a 35% economic interest. Rights to manage the company are shared equally. This
division drills oil and gas wells principally in Michigan, at depths of 1,000 to
16,000 feet. Nine of the ten rigs in this division have depth ratings ranging
from 5,000 to 10,000 feet, and one is rated to 17,000 feet.

During 1996, approximately 62% of the division's revenues were generated
from daywork contracts, 22% from footage contracts and 16% from turnkey
contracts. For the first half of 1997, the percentage of its contract revenues
provided by daywork, footage and turnkey contracts was 63%, 18% and 19%,
respectively. The average revenues per rig day worked for the division during
1996 and the first quarter of 1997, were $5,981 and $5,538, respectively, and
for the same periods its average rig utilization rates were 31% and 20%,
respectively.

FOREIGN OPERATIONS

Venezuela Division. The Company began operating in Venezuela in 1994, and
has upgraded the performance capabilities of its rig fleet in Venezuela and is
intensifying its marketing efforts there in response to increased demand for
land rig drilling services. The Company currently has two rigs working in
Venezuela and is actively marketing its four remaining rigs. The Company
believes this demand has resulted principally from changes in Venezuelan
government policies and legislation encouraging private sector participation in
oil and gas exploration and production. In recent years, the Venezuelan national
oil company, Petroleos de Venezuela, S.A. ("PDVSA"), has permitted international
oil companies to enter into operating agreements with one of PDVSA's three main
operating subsidiaries to rehabilitate, reactivate and develop certain of its
older fields. Additionally, the Venezuelan government has enacted legislation
enabling multinational oil companies to conduct exploration and development
operations in Venezuela through production sharing arrangements with PDVSA and
its subsidiaries. Through August 1997, eight large undeveloped properties have
been awarded to multinational oil companies for development through production
sharing arrangements. In June 1997, PDVSA awarded operating agreements to
private companies for the rehabilitation, reactivation and development of 18
additional areas. The new operating agreements (referred to by PDVSA as the
"Third Operating Round") cover 12 areas described by PDVSA as "onshore"
locations covering a combined area of approximately 2,600 square kilometers
(approximately 1,000 square miles). The Company believes that the Third
Operating Round operations will require drilling and workover rigs with depth
ratings ranging from 4,000 to 18,000 feet.

Drilling contractors operating in Venezuela generally obtain contracts
through a bidding process open only to drilling contractors previously approved
for inclusion on the "bid list" of the customer and PDVSA. Drilling contracts
are sometimes awarded on a long-term basis, for periods of up to 24 months. In
the Company's experience, bid specifications for Venezuelan drilling contracts
typically require premium quality, intermediate and deep drilling rigs with
1,500 to 3,000 horsepower ratings equipped with top drive mechanisms. The
Company believes that 3,000 horsepower rigs are currently in highest demand, but
it anticipates that demand for intermediate capacity 1,500 to 2,000 horsepower
rigs may improve in response to the Third Operating Round.

In 1996, the Company identified certain management and operating
deficiencies that contributed to reduced operations and profits, and the removal
of the Company from PDVSA's bid list due to the failure of the Company's
Venezuelan subsidiary to file statutorily required financial reports with the
Venezuelan

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<PAGE> 45

government. To address these problems, the Company recently replaced its local
management with new management having substantial experience with competing
drilling contractors in Venezuela. The Company has since been restored to
PDVSA's bid list.

The Venezuela Division is currently marketing four land drilling rigs with
rated depths of 10,000 to 15,000 feet and two workover rigs, of which two
drilling rigs are under contract and the remainder are idle. To improve the
marketability of its existing Venezuela rig fleet, the Company recently
completed $3.3 million of capital improvements to its rigs. The Venezuela
Division generally provides its drilling services under daywork contracts and
workover services under hourly contracts. Hourly contracts call for the Company
to provide a rig and crew, for which it is paid on an hourly basis.
Historically, the Venezuela Division has contracted to provide crews to man rigs
owned by the customer, and may do so in the future.

Further expansion of the Company's drilling fleet in Venezuela will depend
primarily on whether the Company is successful in obtaining long-term drilling
contracts in that market, and on a variety of other factors including market
conditions, and management's assessment of existing and future demand and day
rates. Should the Company be awarded long-term drilling contracts requiring
additional drilling rigs, management expects that inventory rigs or active rigs
from its domestic fleet will be refurbished and upgraded to meet the premium
quality rig specifications typically required by such long-term international
drilling contracts.

Other Foreign Operations. Foreign operations contributed approximately 36%,
53% and 21% of the Company's operating revenues for the years ended December 31,
1996 and 1995 and for the nine month period ended December 31, 1994,
respectively, but accounted for approximately 71%, 68% and 15%, respectively, of
the Company's total losses from continuing operations for the same three
periods. For each of the same periods, the Company's foreign operations were
conducted principally in Mexico and South America.

Consistent with the Company's decision to redeploy its rigs to more
productive markets, the Company has withdrawn from both the Argentine and
Mexican markets. All four of the Company's drilling rigs previously located in
Mexico have been returned to the United States. Of the four repatriated rigs,
three have been refurbished and placed in service in the Company's Ark-La-Tex or
South Texas Divisions and one is held for sale. In April 1997, the Company sold
three of its six drilling rigs and certain other assets located in Argentina for
$1.5 million. The remaining three rigs have been returned to the United States
for refurbishment and reactivation.

Although management has determined to concentrate its foreign operations in
Venezuela, the Company will, from time to time, consider expansion into
additional selected international markets as bidding opportunities arise.

RIG INVENTORY AND REFURBISHMENTS

The Company currently has an inventory of 23 rigs, or approximately 17% of
its rig fleet, which are suitable for refurbishment and reactivation to meet
future demand. The Company considers "inventory rigs" to be rigs that are not
working, are not actively marketed and that require capital expenditures to
return them to service. Management believes that the demand for land drilling
rigs in the Company's Ark-La-Tex, Gulf Coast, South Texas and Venezuelan markets
has improved sufficiently to justify a program to restore certain of its
inventory rigs to marketable condition.

Since the beginning of the fourth quarter of 1996, the Company completed
the refurbishment of 17 rigs at an aggregate cost of approximately $26.3
million. Of these 17 recently refurbished rigs, 13 were diesel electric SCR
inventory rigs rated at 1,000, 2,000 and 3,000 horsepower with depth ratings of
15,000 to 30,000 feet. The other four refurbished rigs were previously marketed
rigs that were returned to the U.S. following the Company's withdrawal from the
Argentine and Mexican markets. These four rigs are mechanical rigs, rated at 750
to 1,000 horsepower with rated drilling capacities of 9,500 to 15,000 feet,
respectively. All 17 recently refurbished rigs are now assigned to the Company's
Ark-La-Tex, Gulf Coast, and South Texas Divisions.

45
<PAGE> 46

The Company is currently refurbishing eight rigs from its inventory, of
which seven are diesel electric SCR rigs and one is a mechanical rig. The
mechanical rig is rated at 900 horsepower with a depth rating of 10,000 feet.
The diesel electric SCR rigs undergoing refurbishment are rated at 1,000 to
4,000 horsepower with depth ratings of 15,000 to 40,000 feet. The Company
presently anticipates that the refurbished rigs will be deployed to the
Company's Ark-La-Tex, South Texas and Gulf Coast markets.

The Company plans to commence refurbishment of an additional inventory rig
during the fourth quarter of 1997 and its remaining 14 inventory rigs during
1998. The actual number of rig refurbishments completed by the Company will
depend on many factors, including management's assessment of existing and
anticipated demand and day rates, the Company's success in bidding for foreign
and domestic drilling contracts and possible future acquisitions of rigs. All
rigs currently proposed to be refurbished during the fourth quarter of 1997 and
1998 are expected to be reactivated for service in the Company's three core
domestic markets. If, however, the Company is successful in obtaining long-term
drilling contracts in Venezuela or other South American countries, certain of
the Company's inventory rigs or active rigs may be refurbished and mobilized for
service in those foreign markets. Refurbishment costs for rigs to be deployed by
the Company in its core domestic markets are estimated to average approximately
$1.6 million per rig for rigs refurbished in 1997 through August 31, 1997 and
$1.7 million per rig for those refurbished in the remainder of 1997 and in 1998.
Refurbishment costs for 2,000 to 3,000 horsepower rigs for the Venezuelan market
are estimated to average approximately $12.0 million per rig, in each case
including the cost of a new drill string.

RIG FLEET

A land drilling rig consists of engines, drawworks, a mast, substructure,
pumps to circulate drilling fluid, blowout preventers, drill string and related
equipment. The actual drilling capacity of a rig may be less than its rated
drilling capacity due to numerous factors, including the length of its drill
string. The intended well depth and the drill site conditions determine the
drill string length and other equipment needed to drill a well. Generally, land
rigs operate domestically with crews of five to six persons and in Venezuela
with crews of ten to 12 persons.

The Company's rig fleet consists of several rig types to meet the demands
of its customers in each of the markets it serves. The Company's rig fleet
consists of two basic types of drilling rigs, the mechanical and the diesel
electric. Mechanical rigs transmit power generated by a diesel engine directly
to an operation (for example the drawworks or mud pumps on a rig) through a
compound consisting of chains, gears and hydraulic clutches. Diesel electric
rigs are further broken down into two subcategories, direct current rigs and SCR
rigs. Direct current rigs transmit the power generated by a diesel engine to a
direct current generator. This direct current electrical system then distributes
the electricity generated to direct current motors on the drawworks and mud
pumps. An SCR rig's diesel engines drive alternating current generators and this
alternating current can be transmitted to use for rig lighting and rig quarters
or converted to direct current to drive the direct current motors on the rig.

46
<PAGE> 47
The following table further sets forth certain information regarding the
rigs owned and operated by the Company as of October 22, 1997, and includes data
for the rigs to be acquired in the Justiss Acquisition which will be assigned to
the Ark-La-Tex and Gulf Coast Divisions:

<TABLE>
<CAPTION>
MAXIMUM
RATED
YEAR BUILT/ HORSEPOWER DRILLING
RIG NO. REBUILT DRAWWORKS DRIVE SYSTEM(1) RATING DEPTH STATUS(2)
- ------- ----------- --------- --------------- ---------- --------- ---------
(IN FEET)
<S> <C> <C> <C> <C> <C> <C>
Ark-La-Tex Division (26 rigs)
1 1957/1980 Brewster N-85 Mechanical 1,000 15,000 Active
2 1957/1981 Brewster N-85 Mechanical 1,000 15,000 Active
3 1960/1982 Continental-Emsco A-550 Mechanical 700 12,500 Active
6 1957/1980 Brewster N-85 Mechanical 1,000 15,000 Active
7 1978 National 55 Mechanical 700 12,500 Active
10 1964/1989 Gardner-Denver 800 Mechanical 1,000 15,000 Active
11 1980 Gardner-Denver 800 Mechanical 1,000 15,000 Active
12 1980 Gardner-Denver 700 Mechanical 800 12,500 Active
13 1981 Brewster N-75B Mechanical 1,000 12,500 Active
15 1965/1989 National 610 Mechanical 750 12,500 Active
19 1981/1997 National 80-B Mechanical 1,000 15,000 Active
39 1980/1989 Gardner-Denver 800 Diesel Electric 1,000 15,000 Active
40 1979 Gardner-Denver 1100E Diesel Electric 1,500 20,000 Active
42 1981 Continental-Emsco Elec. II Diesel Electric SCR 2,000 25,000 Active
44 1982 Gardner-Denver 1500E Diesel Electric 2,000 25,000 Active
48 1981/1997 Ideco E-3000 Diesel Electric SCR 3,000 30,000 Active
75 1982/1996 Continental-Emsco D-3E Diesel Electric SCR 1,000 15,000 Active
79 1981/1997 National 110 UE Diesel Electric SCR 1,500 20,000 Active
80 1982/1997 Oilwell E-2000 Diesel Electric SCR 2,000 25,000 Active
82 1981/1997 Oilwell E-2000 Diesel Electric SCR 2,000 25,000 Active
610(3) 1979/1990 Gardner-Denver 500 Mechanical 800 10,000 Active
634 1979/1996 Continental-Emsco D-2 Mechanical 800 12,500 Active
642 1955/1992 Brewster N-45 Mechanical 450 8,000 Active
643(3) 1960/1996 Brewster N-45 Mechanical 450 8,000 Active
646 1983/1996 Continental-Emsco D-2 Mechanical 800 12,500 Active
648 1981/1997 Wilson 75 Mechanical 900 11,000 Active

South Texas Division (33 rigs)
16 1981/1997 Oilwell 760E Diesel Electric SCR 1,000 15,000 Active
31 1980/1997 Cabot 750 Mechanical 750 9,500 Active
33 1981/1992 National 80 UE Diesel Electric SCR 1,000 14,000 Active
34 1981/1992 Superior 700 UE Diesel Electric SCR 700 12,000 Active
37 1981/1992 Continental-Emsco Elec. II Diesel Electric SCR 2,000 25,000 Active
38 1981 Oilwell 840E Diesel Electric SCR 1,500 20,000 Active
43 1981 Ideco E-1200 Diesel Electric SCR 1,200 17,000 Active
70 1981/1997 Ideco BIR 800 Mechanical 900 10,000 Active
86 1981/1997 National 1320 UE Diesel Electric SCR 2,000 25,000 Active
301 1990 Mid-Continent U-36A Mechanical 900 12,000 Active
302 1964/1988 RMI 750 Mechanical 900 10,500 Active
303 1966/1995 Brewster N-75 Mechanical 1,000 14,000 Active
304 1969/1975 Cabot 750 Mechanical 750 9,500 Active
305 1973/1990 Cabot 1000 Mechanical 1,000 13,000 Active
306 1990/1997 RMI 1000 Mechanical 1,000 13,500 Active
307 1993/1995 Ideco E-1200 Diesel Electric SCR 1,200 17,000 Active
308 1975/1992 Ideco BIR 800 Mechanical 900 10,000 Active
309 1976/1990 Gardner-Denver 500 Mechanical 800 10,000 Active
310 1980/1995 Brewster N-46 Mechanical 850 12,000 Active
311 1981/1996 Ideco BIR 800 Mechanical 900 10,000 Active
312 1982 Gardner-Denver 1100E Diesel Electric SCR 1,500 20,000 Active
314 1996 Cabot 750 Mechanical 750 9,500 Active
454 1981/1997 Ideco BIR 800 Mechanical 900 10,000 Active
840 1981/1994 Oilwell 840E Diesel Electric SCR 1,500 20,000 Active
851 1982/1994 National 80-B Mechanical 1,000 14,000 Active
859 1978/1991 Brewster N-75 Mechanical 1,000 14,000 Active
860 1976/1995 Cabot 750 Mechanical 750 9,500 Active
861 1978/1993 Cabot 900 Mechanical 900 11,000 Active
862 1976 Cabot 900 Mechanical 900 11,000 Active
863 1978/1988 Cabot 1000 Mechanical 1,000 13,000 Active
864 1975/1994 Cabot 1000 Mechanical 1,000 13,000 Active
865 1979/1993 Cabot 1200 Mechanical 1,200 14,000 Active
866 1982/1993 Cabot 1200 Mechanical 1,200 14,000 Active
</TABLE>

47
<PAGE> 48
<TABLE>
<CAPTION>
MAXIMUM
RATED
YEAR BUILT/ HORSEPOWER DRILLING
RIG NO. REBUILT DRAWWORKS DRIVE SYSTEM(1) RATING DEPTH STATUS(2)
- ------- ----------- --------- --------------- ---------- --------- ---------
(IN FEET)
<C> <S> <C> <C> <C> <C> <C>
Gulf Coast Division (29 rigs)
77 1981/1997 Gardner-Denver 1100E Diesel Electric SCR 1,500 20,000 Active
83 1981/1997 Continental Emsco C-2-E Diesel Electric SCR 2,000 25,000 Active
85 1981/1997 National 1320 UE Diesel Electric SCR 2,000 25,000 Active
90 1980/1997 National 1625 DE Diesel Electric SCR 3,000 30,000 Active
91 1980/1997 National 1625 UE Diesel Electric SCR 3,000 30,000 Active
502 1987 Continental-Emsco C-II Diesel Electric 2,000 25,000 Active
503 1991 National 1320 UE Diesel Electric 2,000 25,000 Active
504 1990 National 110 M Mechanical 1,500 20,000 Active
505 1995 National 1320 UE Diesel Electric 2,000 25,000 Active
506 1977 Continental-Emsco C-II Diesel Electric 2,000 25,000 Active
507 1979 Continental-Emsco C-II Diesel Electric 2,000 25,000 Active
508 1981 Continental-Emsco C-II Diesel Electric 2,000 25,000 Active
509 1982 Continental-Emsco C-II Diesel Electric 2,000 25,000 Active
510 1983 Continental-Emsco C-I Mechanical 1,500 20,000 Active
511 1984 National 110 M Mechanical 1,500 20,000 Active
514 1990 National 110 UE Diesel Electric SCR 1,500 20,000 Active
515 1990 Oilwell 760 E Diesel Electric SCR 1,000 15,000 Active
516 1990 Oilwell 760 E Diesel Electric SCR 1,000 15,000 Active
517 1990 Oilwell 860 M Mechanical 1,500 20,000 Active
518 1991 Continental-Emsco C-I-II Diesel Electric 1,500 20,000 Active
519 1991 Continental-Emsco C-I-II Diesel Electric 1,500 20,000 Active
520 1995 Oilwell 840 E Diesel Electric SCR 1,500 20,000 Active
521 1997 National 1320 UE Diesel Electric 2,000 25,000 Active
609 1981/1994 Continental-Emsco D-2 Mechanical 800 12,500 Active
611(3) 1965/1993 National 80-B Mechanical 1,000 15,000 Active
627 1967/1994 National 80-B Mechanical 1,000 15,000 Active
641 1983/1992 Continental-Emsco D-2 Mechanical 800 12,500 Active
644 1984 National 80-B Mechanical 1,000 15,000 Active
1981/1997 Continental-Emsco D-1 Mechanical 550 10,000 Active
Eastern Division (6 rigs)
202 1981 Wilson Mogul 42 Mechanical-Air 450 8,000 Active
203 1980 Wilson Mogul 42 Mechanical-Air 450 8,000 Active
204 1979 Wilson Mogul 42 Mechanical-Air 450 6,500 Active
208 1980 Wilson Mogul 42 Mechanical-Air 450 6,500 Active
211 1971/1985 Wilson Mogul 42 Mechanical 450 6,500 Active
215 1980 Wilson Mogul 42 Mechanical-Air 450 6,500 Active
INDRILLERS Division (10 rigs)
1 1980 Challenger 320 Mechanical 350 5,000 Active
2 1979 Ideco H-47 Mechanical 300 7,000 Idle
3 1980 Challenger 320 Mechanical 350 5,000 Active
4 1980 Challenger 320 Mechanical 350 5,000 Idle
5 1980 Ideco BIR 800 Mechanical 900 10,000 Idle
41 1981 Ideco E-1200 Diesel Electric SCR 1,200 17,000 Active
53 1976 Cabot 550 Mechanical 450 6,500 Idle
56 1980 Ideco DIR 700 Mechanical 700 8,500 Idle
57 1977 Ideco BIR 550 Mechanical 450 6,500 Idle
58 1977 Ideco DIR 700 Mechanical 700 8,500 Active
Venezuelan Division (6 rigs)
407 1980 Cooper LTO 350 Mechanical-WO 350 14,000 Idle
423 1981/1996 Mid-Continent 712-U Mechanical 1,500 15,000 Idle
441 1980 Wilson Mogul 42 Mechanical-WO 350 12,000 Idle
451 1981 Cabot 900 Mechanical 900 10,000 Active
452 1975/1994 Cabot 900 Mechanical 900 10,000 Active
453 1982/1994 Ideco H-35 Mechanical 450 10,000 Idle
Rigs held in inventory (23 rigs)
14 1981 Superior 1000 UE Diesel Electric SCR 1,000 15,000 Inventory
17 1981 Superior 1000 UE Diesel Electric SCR 1,000 15,000 Inventory
18 1981 National 80B Mechanical 1,000 15,000 Inventory
45 1981 Ideco E-2100 Diesel Electric SCR 2,000 25,000 Inventory
47 1982 Ideco E-1200 Diesel Electric SCR 1,200 17,000 Inventory
49 1982 Ideco E-1200 Diesel Electric SCR 1,200 17,000 Inventory
76 1982 Continental-Emsco D-3-E Diesel Electric SCR 1,000 15,000 Inventory
78 1981 Oilwell E-2000 Diesel Electric SCR 2,000 25,000 Inventory
81 1981 Oilwell E-2000 Diesel Electric SCR 2,000 25,000 Inventory
84 1982 Oilwell E-2000 Diesel Electric SCR 2,000 25,000 Inventory
87 1979 National 1320 UE Diesel Electric SCR 2,000 25,000 Inventory
88 1981 Continental-Emsco C-3-E Diesel Electric SCR 3,000 30,000 Inventory
89 1981 Oilwell E-3000 Diesel Electric SCR 3,000 30,000 Inventory
92 1980/1981 National 1625 DE Diesel Electric SCR 3,000 30,000 Inventory
</TABLE>

48
<PAGE> 49
<TABLE>
<CAPTION>
MAXIMUM
RATED
YEAR BUILT/ HORSEPOWER DRILLING
RIG NO. REBUILT DRAWWORKS DRIVE SYSTEM(1) RATING DEPTH STATUS(2)
- ------- ----------- --------- --------------- ---------- --------- ---------
(IN FEET)
<C> <S> <C> <C> <C> <C> <C>
97 1981 National 1320 UE Diesel Electric SCR 2,000 25,000 Inventory
98 1981 Gardner-Denver 1500E Diesel Electric SCR 2,000 25,000 Inventory
99 1981 Gardner-Denver 1500E Diesel Electric SCR 2,000 25,000 Inventory
455 1981 Ideco BIR 800 Mechanical 900 10,000 Inventory
473 1981/1994 Cabot 900 Mechanical 900 10,000 Inventory
558 1982 Dreco 4000-E Diesel Electric SCR 4,000 40,000 Inventory
95 1981 Gardner-Denver 3000E Diesel Electric SCR 3,000 30,000 Inventory
94 1981 Oilwell E-2000 Diesel Electric SCR 2,000 25,000 Inventory
96 1981 National 110 M Mechanical 1,500 20,000 Inventory
</TABLE>

- ------------------------------------

(1) "SCR" means a power transmission system which rectifies alternating current
power to direct current power" and "WO" means a workover rig.

(2) The Company considers a rig that is presently working to be an "active" rig.
Rigs that are not working but which are currently being actively marketed
are viewed as "idle." "Inventory" rigs are rigs that are not working, are
not currently being actively marketed and will require additional capital
expenditures to reactivate them for service.

(3) Rigs remaining to be acquired in the Justiss Acquisition.

CONTRACTS

The Company's contracts for drilling oil and gas wells are obtained either
through competitive bidding or as a result of negotiations with customers.
Contract terms offered by the Company are generally dependent on the complexity
and risk of operations, on-site drilling conditions, type of equipment used and
the anticipated duration of the work to be performed. Generally, domestic
drilling contracts are for a single well, while foreign drilling contracts are
for multiple wells. The contracts typically obligate the Company to pay certain
operating expenses, including wages of drilling personnel, maintenance expenses,
incidental rig supplies, equipment and local office facilities. Domestic
drilling contracts are typically subject to termination by the customer on short
notice, usually upon payment of a fee. Foreign drilling contracts generally
require longer notice periods for termination and also may require that the
customer pay for the mobilization and demobilization costs.

The Company's drilling contracts generally provide for compensation on
either a daywork, turnkey or footage basis. See "-- Domestic Operations" for the
percentage of revenues by contract type for each domestic division.

Daywork Contracts. Under daywork drilling contracts, the Company provides a
drilling rig with required personnel to the operator, who supervises the
drilling of the well. The Company is paid based on a negotiated fixed rate per
day while the rig is utilized. Daywork drilling contracts generally specify the
type of equipment to be used, the size of the hole and the depth of the well.
Under a daywork drilling contract, the customer bears a large portion of
out-of-pocket costs of drilling and the Company generally bears no part of the
usual capital risks associated with oil and gas exploration (such as time delays
for various reasons, including stuck drill pipe and blowout).

Turnkey Contracts. Under a turnkey contract, the Company contracts to drill
a well to an agreed-upon depth under specified conditions for a fixed price,
regardless of the time required or the problems encountered in drilling the
well. The Company provides technical expertise and engineering services, as well
as most of the equipment required for the well, and is compensated when the
contract terms have been satisfied. Turnkey contracts afford an opportunity to
earn a higher return than would normally be available on daywork or footage
contracts if the contract can be completed successfully without complications.

The risks to the Company under a turnkey contract are substantially greater
than on a well drilled on a daywork basis because the Company assumes most of
the risks associated with drilling operations generally assumed by the operator
in a daywork contract, including the risk of blowout, loss of hole, stuck drill
pipe, machinery breakdowns, abnormal drilling conditions and risks associated
with subcontractors' services, supplies, cost escalation and personnel. The
Company employs or contracts for engineering expertise to

49
<PAGE> 50

analyze seismic, geologic and drilling data to identify and reduce many of the
drilling risks assumed by the Company. Management uses the results of this
analysis to evaluate the risks of a proposed contract and seeks to account for
such risks in its bid preparation. The Company believes that its operating
experience, qualified drilling personnel, risk management program, internal
engineering expertise and access to proficient third party engineering
contractors have allowed it to reduce the risks inherent in turnkey drilling
operations. The Company also maintains insurance coverage against some but not
all drilling hazards.

Footage Contracts. Under footage contracts, the Company is paid a fixed
amount for each foot drilled, regardless of the time required or the problems
encountered in drilling the well. The Company pays more of the out-of-pocket
costs associated with footage contracts compared with daywork contracts. Similar
to a turnkey contract, the risks to the Company on a footage contract are
greater because it assumes most of the risks associated with drilling operations
generally assumed by the operator in a daywork contract, including the risk of
blowout, loss of hole, stuck drill pipe, machinery breakdowns, abnormal drilling
conditions and risks associated with subcontractors' services, supplies, cost
escalation and personnel. As with turnkey contracts, the Company manages this
additional risk through the use of engineering expertise and bids the footage
contracts accordingly. The Company also maintains insurance coverage against
certain drilling hazards.

CUSTOMERS AND MARKETING

The Company's contract drilling customers include independent producers,
major oil companies and national petroleum companies. One unaffiliated customer
accounted for 17% of the Company's revenues for the six months ended June 30,
1997.

The Company primarily markets its drilling rigs on a regional basis through
employee salesmen. These salesmen utilize personal contacts and industry
periodicals and publications to determine which operators are planning to drill
oil and gas wells in the immediate future. Once the Company has been placed on
the "bid list" for an operator, the Company will typically be given the
opportunity to bid on all future wells for that operator in the area.

The Company from time to time enters into informal, nonbinding commitments
with its customers to provide drilling rigs for future periods at agreed upon
rates plus fuel and mobilization charges, if applicable, and escalation
provisions. This practice is customary in the land drilling business during
times of tightening rig supply. Although neither the Company nor the customer is
legally required to honor these commitments, the Company strives to satisfy such
commitments in order to maintain good customer relations.

COMPETITION

The land drilling industry has recently experienced a period of
consolidation. All of the Company's markets, however, continue to be highly
competitive and fragmented among several drilling contractors. Competition is
generally based on price, workforce experience, equipment suitability and
availability, reputation, expertise and financial capability. The Company
believes that in each of its markets, it has a significant presence in terms of
equipment and workforce experience. However, even though the Company has the
largest or second largest rig fleet in its three core domestic markets, the
Company estimates that its market share represents only 15% to 30% of the
overall market share in each of these three core markets. In addition, several
of the Company's competitors have greater financial and other resources than the
Company and may commit more capital and human resources than the Company to
these important factors. If demand for drilling rigs increases in the future,
rig and crew availability may become more critical competitive factors. A number
of the Company's competitors have also announced plans to refurbish and
reactivate rigs from their inventory of stacked rigs. The deployment of these
additional rigs to the Company's core markets could further intensify
competition based on pricing and rig availability. Although competition is
primarily on a regional basis, rigs can be moved from one region to another in
response to changes in levels of drilling activity, subject to crew
availability, mobilization expenses and the suitability of the rigs for drilling
under conditions in another region.

50
<PAGE> 51

EQUIPMENT AND SUPPLIES

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

REGULATION

Many aspects of the Company's operations are affected by domestic and
foreign political developments and are subject to numerous laws and regulations
that may relate directly or indirectly to the contract drilling industry. For
example, drilling operations are subject to extensive and evolving laws and
regulations governing environmental quality, pollution control, remediation of
contamination and preservation of natural resources. Such laws and regulations
pertain, among other things, to air emissions, waste management, spills and
other discharges, wetlands and endangered species protection and cleanup of
contamination. The Company's operations are often conducted in or near
ecologically sensitive areas such as wetlands which are subject to protective
measures. The handling of waste materials, some of which are classified as
hazardous substances, is a routine part of the Company's operations.
Consequently, the regulations applicable to the Company's operations include
those with respect to containment, disposal and control of the discharge of
hazardous oilfield waste and other nonhazardous waste material into the
environment, requiring removal and cleanup under certain circumstances, or
otherwise relating to the protection of the environment. Laws and regulations
protecting the environment have become more stringent in recent years and may in
certain circumstances impose strict liability, rendering a party liable for
environmental damage without regard to negligence or fault on the part of such
party. Such laws and regulations may expose the Company to liability for the
conduct of, or conditions caused by, others or for acts of the Company which
were in compliance with all applicable laws at the time such acts were
performed. The Company may also be exposed to environmental or other liabilities
originating from businesses and assets subsequently acquired by the Company.
Compliance with such laws and regulations may require significant capital
expenditures. Although such compliance costs to date have not had a material
effect on the Company, application of these requirements or the adoption of new
requirements could have a material adverse effect on the Company. In addition,
the modification or judicial interpretation of existing laws or regulations or
the adoption of new laws or regulations curtailing exploratory or development
drilling for oil and gas for economic, environmental or other reasons could have
a material adverse effect on the Company's operations by limiting future
contract drilling opportunities.

Environmental regulation has led to higher drilling costs, a more difficult
and lengthy well permitting process and, in general, has adversely affected many
oil companies' drilling decisions. The primary environmental statutory and
regulatory programs that affect the Company's operations include those
summarized below.

51
<PAGE> 52

Oil Pollution Act and Clean Water Act. The Oil Pollution Act of 1990
("OPA") amends certain provisions of the Federal Water Pollution Control Act of
1972, commonly referred to as the Clean Water Act ("CWA"), and other statutes as
they pertain to the prevention of and response to hazardous substances and oil
spills into navigable waters. OPA requires responsible parties to maintain proof
of financial responsibility to cover some portion of the cost of a potential
spill and to prepare an oil spill contingency plan. Under OPA, a person owning
or operating a facility or equipment from which there is a discharge or threat
of a discharge of oil into or upon navigable waters or adjoining shorelines is
liable as a "responsible party" for removal costs and damages. Many of the
Company's activities are conducted in or near ecologically sensitive areas, such
as wetlands, coastal environment and inland waterways. An oil spill in a wetland
or inland waterway could produce substantial damage to the environment,
including wildlife and natural resources, and result in material liability.
Federal law imposes strict, joint and several liability on facility owners for
containment and clean-up costs and certain other damages, including natural
resource damages, arising from a spill as well as civil and criminal penalties
for violation of regulatory requirements.

The CWA also regulates the discharge of pollutants to surface water and the
discharge of dredged or fill material to wetlands areas.

Superfund. The Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA"), commonly referred to as the "Superfund" law, imposes
strict, joint and several liability on certain classes of persons with respect
to the release or threatened release of a hazardous substance to the
environment. These persons include: (i) the current owner and operator of a
facility from which hazardous substances are released; (ii) owners and operators
of a facility at the time any hazardous substances were disposed; (iii)
generators of hazardous substances who arranged for treatment or disposal at or
transport to such facility and (iv) transporters who selected the facility for
treatment or disposal of hazardous substances. The Company may be responsible
under CERCLA for all or part of the costs to clean up sites at which hazardous
substances have been released. To date, however, the Company has not been named
a potentially responsible party under CERCLA or any similar state Superfund
laws.

Hazardous Waste Disposal. The Company's operations involve the generation
or handling of materials that are classified as hazardous waste, and that are
subject to the Federal Resource Conservation and Recovery Act ("RCRA") and
comparable state statutes. The Environmental Protection Agency and various state
agencies have imposed strict requirements regulating the treatment, storage,
transport and disposal of hazardous wastes.

NORM. Oil and gas exploration and production activities have been
identified as generators of naturally-occurring radioactive materials ("NORM").
The generation, handling and disposal of NORM waste due to oil and gas
exploration and production activities is currently regulated in various states
including Louisiana and Texas. The Company does not believe that its compliance
with such regulations will have a material effect on its operations or financial
condition, but there can be no assurance in this regard.

Occupational Safety and Health. The Occupational Safety and Health Act of
1970, as amended, ("OSHA") establishes employer responsibilities including
maintenance of a workplace free of recognized hazards likely to cause death or
serious injury, compliance with standards promulgated by the Occupational Safety
and Health Administration, and various recordkeeping, disclosure and procedural
requirements. Such requirements include, for example, the Hazard Communication
Standard which applies to all private-sector employers including those in the
oil and gas exploration and production industry, and requires such employers to
assess chemical hazards, obtain and maintain certain written descriptions of
these hazards, develop a hazard communication program and train employees to
work safely with chemicals on site. Failure to comply with the requirements of
OSHA may result in administrative, civil and criminal penalties. The Company
believes it is in substantial compliance with OSHA requirements and does not
believe it will be required to expend material amounts by reason of such
requirements. However, the Company is unable to predict the ultimate cost of
compliance with these changing requirements.

Frost Laws. The operations of the Company's Eastern Division and INDRILLERS
Division are limited during April and May of each year due to the "frost laws"
of the states in which they operate. These frost laws restrict the movement of
equipment on public roads during these months.

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<PAGE> 53

LEGAL PROCEEDINGS

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 financial condition or results of
operations.

In connection with the GWDC Acquisition, a $5.0 million escrow fund was
established to provide a source of payment for the net costs to the Company, if
any, for any eventual settlement by, or the payment of a monetary court judgment
against, the Company arising out of a case pending against GWDC at the time of
the GWDC Acquisition. The source of the escrow fund was the cash consideration
that would have otherwise been payable by the Company to GWDC's shareholders.
The litigation, which was styled TEPCO, Inc. v. Grey Wolf Drilling (Cause No.
96-49194) in the 164th Judicial District Court of Harris County, Texas, was
settled in August 1997 for $2.5 million which will be paid from the escrow fund.

INSURANCE

The Company's operations are subject to the many hazards inherent in the
drilling business, including, for example, blowouts, cratering, fires,
explosions and adverse weather. These hazards could cause personal injury,
suspend drilling operations or seriously damage or destroy the equipment
involved and could cause substantial damage to producing formations and
surrounding areas. Damage to the environment could also result from the
Company's operations, particularly through oil spillage and extensive,
uncontrolled fires. As a protection against operating hazards, the Company
maintains insurance coverage, including property casualty insurance on its rigs
and drilling equipment, comprehensive general liability and commercial contract
indemnity (including a separate policy for foreign liability), commercial
umbrella and workers' compensation insurance and "control of well" insurance.

The Company's insurance coverage for property damage to its rigs and
drilling equipment is based on the Company's estimate, as of June 1997, of the
cost of comparable used equipment to replace the insured property. There is an
annual aggregate deductible on rigs of $500,000 to be comprised of losses
otherwise recoverable thereafter in excess of a $50,000 maintenance deductible.
There is a $10,000 deductible per occurrence on equipment.

The Company's third party liability insurance coverage under each of the
general and foreign policies is $1.0 million per occurrence, with a deductible
of $50,000 per occurrence and annual maximum coverage of $2.0 million. The
commercial umbrella limit is $50.0 million per occurrence. The Company believes
that it is adequately insured for public liability and property damage to others
with respect to its operations. However, such insurance may not be sufficient to
protect the Company against liability for all consequences of well disasters,
extensive fire damage or damage to the environment.

The Company also maintains insurance coverage to protect against certain
hazards inherent in its turnkey contract drilling operations. This insurance
covers "control of well" (including blowouts above and below the surface),
cratering, seepage and pollution and care, custody and control. The Company's
current insurance provides $500,000 coverage per occurrence for care, custody
and control, and coverage per occurrence for control of well, cratering, seepage
and pollution associated with drilling operations of either $10.0 million or
$20.0 million, depending upon the area in which the well is drilled and its
target depth. Each form of coverage provides for a deductible for the account of
the Company, as well as a maximum limit of liability. Each casualty is an
occurrence, and there may be more than one such occurrence on a well, each of
which would be subject to a separate deductible.

53
<PAGE> 54

FACILITIES

The following table summarizes the Company's significant owned and leased
properties:

<TABLE>
<CAPTION>
LOCATION INTEREST USES
-------- -------- ----
<S> <C> <C>
Houston, Texas........................... Leased Executive Offices
Houston, Texas........................... Owned Rig Yard
Alice, Texas............................. Owned Field Office, Rig Yard, Truck Yard
Duson, Louisiana......................... Owned Rig Yard
Eunice, Louisiana........................ Owned Field Office
Fillmore, Louisiana...................... Owned Field Office
Oklahoma City, Oklahoma.................. Owned Rig Yard
Mt. Pleasant, Michigan................... Owned Field Office, Rig Yard
Midvale, Ohio............................ Owned Field Office, Rig Yard
</TABLE>

The Company leases approximately 19,400 square feet of office space for its
principal executive offices at a cost of approximately $25,000 per month. The
Company considers all of its facilities to be in good operating condition and
adequate for their present uses.

EMPLOYEES

At September 15, 1997, the Company had approximately 2,400 employees and
Justiss had approximately 250 rig-based employees, substantially all of whom the
Company presently expects to employ following the Justiss Acquisition. None of
the Company's employees are subject to collective bargaining agreements, and
management believes its employee relations are satisfactory.

54
<PAGE> 55

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The table and descriptions below set forth certain information regarding
the Company's executive officers and directors:

<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH THE COMPANY
---- --- ----------------------------
<S> <C> <C>
Thomas P. Richards..................... 54 President and Chief Executive Officer
T. Scott O'Keefe....................... 41 Senior Vice President, Chief Financial Officer
and Secretary
Terrell L. Sadler...................... 48 Senior Vice President -- Domestic Operations
Ronnie E. McBride...................... 47 Senior Vice President -- Domestic Operations
Forrest M. Conley, Jr.................. 50 Senior Vice President -- International
Operations
David W. Wehlmann...................... 38 Vice President and Controller
Gary D. Lee............................ 51 Vice President -- Human Resources
John D. Peterson, Jr................... 43 Vice President
Donald J. Guedry, Jr................... 41 Treasurer
Ivar Siem.............................. 51 Chairman of the Board and Director
William R. Ziegler..................... 55 Vice Chairman of the Board and Director
William T. Donovan..................... 45 Director
Lucien Flournoy........................ 78 Director
Peter M. Holt.......................... 49 Director
James K. B. Nelson..................... 69 Director
Roy T. Oliver, Jr...................... 45 Director
Steven A. Webster...................... 46 Director
</TABLE>

Thomas P. Richards joined the Company in September 1996 as President and
Chief Executive Officer. Mr. Richards was with Diamond Offshore Drilling, Inc.
("Diamond Offshore") from September 1990 until September 1996. He started as
Senior Vice President of Diamond M, a subsidiary of Diamond Offshore, in 1990
and was serving as Senior Vice President of Worldwide Operations when he left
Diamond Offshore in 1996. Mr. Richards served as Vice President -- Land for
Penrod Drilling Corporation from January 1989 until September 1990 when Diamond
M Corporation purchased substantially all of Penrod's land drilling assets. From
February 1974 until December 1988, Mr. Richards owned and served as President
and Chief Executive Officer of Richards Drilling Company, a land drilling
contractor based in Bay City, Texas.

T. Scott O'Keefe was appointed Senior Vice President and Chief Financial
Officer of the Company in September 1996. During the period beginning in April
1996 and ending with such appointment, Mr. O'Keefe provided consulting services
to the Company. Prior to joining the Company, he was Vice President and Chief
Financial Officer of Convest Energy Corporation ("Convest") for six years.
Convest is a publicly held oil and gas exploration and production company. From
1985 to 1989, Mr. O'Keefe was employed in various financial management
capacities with Convest or its affiliates. Mr. O'Keefe is a certified public
accountant.

Terrell L. Sadler joined the Company in 1989 as the Ark-La-Tex District
Manager. He was promoted to Vice President -- Mid Continent Division in November
1994, and became Vice President -- Domestic Drilling in April 1996. Mr. Sadler
was promoted to Senior Vice President -- Domestic Operations in September 1996.

Ronnie E. McBride joined the Company in September 1996 as Senior Vice
President -- Domestic Operations. Mr. McBride was the Vice President of Turnkey
Services at Diamond Offshore from December 1995 until September 1996. He served
as Operational Manager of Diamond M from October 1991 until March 1993, at which
time he was promoted to Vice President -- Onshore Operations and served in this
position until December 1995. Prior to October 1991, Mr. McBride was Vice
President -- Operations for Harkins & Company for four years until it was
acquired by Diamond M.

55
<PAGE> 56

Forrest M. Conley, Jr. joined the Company in September 1996 as Senior Vice
President -- International Operations. Mr. Conley has twenty-six years of
drilling industry experience. From May 1993 until joining the Company, he was
with Noble Drilling Corporation -- Triton Engineering where he served as
Manager -- Sales and Marketing, Manager -- International Marketing and most
recently as the Vice President and General Manager of Triton International.
Previously, he was General Manager of ENSCO Tool & Supply's West Africa division
from December 1991 until May 1993.

David W. Wehlmann joined the Company in July 1996 as Vice President and
Controller. From November 1994 until he joined the Company, Mr. Wehlmann was
Vice President and Chief Accounting Officer of EnerVest Management Company,
L.C., a privately-held oil and gas property acquisition and management company.
Mr. Wehlmann was Controller of Convest from April 1991 to November 1994. Mr.
Wehlmann is a certified public accountant.

Gary D. Lee joined the Company in March 1997 as Vice President -- Human
Resources. For the past 15 years, he was with Diamond Offshore where from 1990
until March 1997, he served as Vice President -- Human Resources.

John D. Peterson, Jr. became Vice President of the Company upon the closing
of the GWDC Acquisition. Mr. Peterson was Secretary-Treasurer of GWDC from April
1990 until closing. Mr. Peterson held various positions with GWDC from March
1982 to March 1990. Mr. Peterson is a certified public accountant.

Donald J. Guedry, Jr. has been the Company's Treasurer since October 1996.
During the seven years prior to joining the Company, Mr. Guedry served in
various treasury management positions for Weatherford Enterra, Inc. and a
predecessor company.

Ivar Siem has been Chairman of the Board since August 1995 and was
President and Chief Executive Officer from April 1996 through August 1996. He
has been an international consultant in energy, technology and finance since
1985. He is a member of the board of directors of several privately held and
publicly traded companies, including: Chairman of the Board of Blue Dolphin
Energy Company, an oil and gas pipeline and exploration company, since 1989;
Chairman of the Board of Directors of Seateam Technology ASA, a provider of
subsea surveys and support for the offshore oil and gas industry, since January
1997; director of Norex Industries, Inc., a company with investments in the oil
and gas, cruise and shipping industries ("Norex"), since 1992; and director of
DSND ASA, a Norwegian service company that operates specialty vessels and
provides subsea engineering services, since 1993.

William R. Ziegler has been a director of the Company since August 1996 and
is currently Vice Chairman of the Board of Directors. He has been a partner of
the law firm of Parson & Brown LLP since June 1994. Prior to that time he was a
partner in the law firm of Whitman Breed Abbott & Morgan and a predecessor firm
for over five years. Mr. Ziegler is a director of Falcon Drilling Company, Inc.,
a general partner of Somerset Capital Partners, the managing member of Somerset
Drilling Associates, L.L.C., and a director of Geokinetics, Inc., which provides
3-D seismic acquisition and geophysical services to the oil and gas industry.

William T. Donovan became a director of the Company following closing of
the GWDC Acquisition. Since 1980, Mr. Donovan has been a Principal and Managing
Director of Lubar & Co., a private investment and venture capital firm. Mr.
Donovan also serves as President and Chief Financial Officer of Christiana
Companies, Inc. and as a director of various private industrial companies. Prior
to joining Lubar & Co., Mr. Donovan was an officer with Manufacturers Hanover
Trust Company from 1976 to 1980, where he specialized in merger acquisition
financing.

Lucien Flournoy became a director of the Company in January 1997 in
connection with the Company's purchase of the operating assets of Flournoy. Mr.
Flournoy has over 50 years of experience in the land drilling business. He
founded Flournoy in 1950 and had served as its President and a Director from
that time until Flournoy was acquired by the Company on January 31, 1997.

Peter M. Holt has been a director of the Company since August 1996. He has
been the President, Chief Executive Officer and principal owner of Holt
Companies for over 13 years. Holt Companies is comprised of two Caterpillar
dealerships in central/south Texas and western Ohio and various other business
interests.

56
<PAGE> 57

James K. B. Nelson became a director of the Company upon closing of the
GWDC Acquisition. He joined GWDC in 1960 and has served as President and Chief
Executive Officer of GWDC since 1978. He began his career in the oil field
drilling industry as a roughneck in 1946.

Roy T. Oliver, Jr. has been a director of the Company since August 1996. He
has been the Chairman of the Board and Chief Executive Officer of U.S. Rig &
Equipment, Inc., an Oklahoma corporation, a worldwide supplier of drilling
equipment, since its organization in 1982.

Steven A. Webster has been a director of the Company since August 1996. He
has been the Chairman of the Board and Chief Executive Officer of Falcon
Drilling Company, Inc., a marine oil and gas drilling contractor, since 1988. He
serves as a director of Crown Resources Corporation, (a mining company), Trust
Manager of Camden Property Trust, a general partner of Somerset Capital
Partners, the managing member of Somerset Drilling Associates, L.L.C., Chairman
of the Board of Carrizo Oil & Gas, Inc., an independent oil and gas exploration
company, and a director of Geokinetics, Inc., which provides 3-D seismic
acquisition and geophysical services to the oil and gas industry.

CERTAIN TRANSACTIONS

The Company has in the past, and may in the future, purchase rigs and
related equipment from its affiliates. The Company believes that the prices paid
in such transactions have been and will be no less favorable than in comparable
transactions with unaffiliated third parties in arms' length transactions.
Included among the Additional Rig Purchases were two transactions in which the
Company purchased four rigs for addition to its inventory of rigs held for
refurbishment and reactivation from R.T. Oliver, Inc., a company controlled by
director Roy T. Oliver, Jr. The aggregate purchase price for rigs purchased from
R.T. Oliver, Inc. was $10.6 million.

For the year ended December 31, 1996 and the six months ended June 30,
1997, the Company has made purchases of rig equipment from a company controlled
by one of its directors, Peter M. Holt, totaling $36,259 and $209,193,
respectively.

57
<PAGE> 58

PRINCIPAL AND SELLING SHAREHOLDERS

The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of September 30, 1997 and as adjusted
to reflect the sale by the Company and the Selling Shareholders of the Shares
offered hereby (assuming no exercise of the Underwriters' over-allotment
option), by: (i) each person who is known by the Company to own beneficially
more than 5% of the Company's Common Stock, (ii) each of the Company's
directors, (iii) each of the Company's executive officers and (iv) all directors
and executive officers of the Company as a group:

<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES
BENEFICIALLY
OWNED(1)
SHARES BENEFICIALLY ------------------------
OWNED PRIOR NUMBER OF PRIOR TO AFTER THE
TO THE OFFERING(1) SHARES OFFERED(2) THE OFFERING OFFERING
------------------- ----------------- ------------ ---------
<S> <C> <C> <C> <C>
Somerset Capital Partners(3).............. 35,423,978(4) 5,527,000 23.3% 18.2%
Somerset Drilling Associates, L.L.C....... 29,962,223(4) 5,527,000 19.7% 14.9%
254 Franklin Street
Buffalo, New York 14202
U.S. Rig & Equipment, Inc. ............... 2,660,002(4) 633,000 1.8% 1.2%
6601 SW 29th Street
Oklahoma City, Oklahoma 73179
Norex Industries, Inc.(5)................. 17,685,605 2,759,000 11.7% 9.1%
Norex Drilling, Ltd. ..................... 17,685,605 2,759,000 11.7% 9.1%
Post Office Box HM 429
Hamilton, HM, BX, Bermuda
Flournoy Family Properties, Ltd.(6) ...... 4,500,000 801,000 3.0% 2.3%
Officers and Directors(7)
Thomas P. Richards(8)................... 700,000 * *
T. Scott O'Keefe........................ 57,500 * *
Terrell L. Sadler....................... 123,400 * *
Ronnie E. McBride....................... 130,000 * *
Forrest M. Conley, Jr................... 30,000 * *
David W. Wehlmann....................... 4,000 * *
Gary D. Lee............................. 1,000 * *
Donald J. Guedry........................ 4,000 * *
John D. Peterson, Jr.................... -- -- --
Ivar Siem(9)............................ 18,251,605 2,759,000 12.0% 9.4%
William R. Ziegler(10).................. 35,503,978(4) 5,527,000 23.4% 18.2%
William T. Donovan...................... 585,938 * *
Lucien Flournoy(11)..................... 5,132,055 801,000 3.4% 2.6%
Peter M. Holt........................... 175,000 * *
James K. B. Nelson...................... 4,694,091 3.1% 2.9%
Roy T. Oliver, Jr.(12).................. 14,890,614(4) 3,413,000 9.8% 7.0%
Steven A. Webster(10)................... 35,499,978(4) 5,527,000 23.4% 18.2%
Directors and Executive Officers as a
group (17 persons named
above)(7)-(12)....................... 80,359,181 12,500,000 52.3% 40.8%
</TABLE>

- ---------------

* Less than 1%.

(1) To the Company's knowledge, the persons named in the table have sole voting
and investment power with respect to all shares of Common Stock shown as
beneficially owned by them, subject to community property laws where
applicable and the information contained in the footnotes to this table.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting and investment power
with respect to securities. Shares of Common Stock issuable upon

58
<PAGE> 59

exercise of stock options exercisable within 60 days of September 30, 1997
are deemed outstanding and to be beneficially owned by the person holding
such option for purposes of computing such person's percentage ownership,
but are not deemed outstanding for the purpose of computing the percentage
ownership of any other person.

(2) The following Selling Shareholders are offering the number of shares
indicated in the Offering: Somerset Drilling Associates, L.L.C., 5,527,000;
U.S. Rig & Equipment, Inc., 633,000; Norex Drilling, Ltd., 2,759,000;
Flournoy Family Properties, Ltd., 801,000; and Roy T. Oliver, Jr.,
2,780,000.

(3) Shares beneficially owned prior to the Offering includes 29,962,223 shares
that are held by Somerset Drilling Associates, L.L.C., an affiliate of
Somerset Capital Partners. Number of shares offered includes 5,527,000
shares that are offered by Somerset Drilling Associates, L.L.C. Certain
affiliates and employees of Donaldson, Lufkin & Jenrette Securities
Corporation, one of the underwriters of the Offering, own indirectly
4,890,326 shares of Common Stock, including 892,857 shares anticipated to
be offered in the Offering, through their interests in Somerset Drilling
Associates, L.L.C. See "Underwriting."

(4) Does not include shares of Common Stock that may be acquired upon the
exercise of warrants to purchase Common Stock. The right to exercise such
warrants are contingent upon the occurrence of events not within the
control of the holder of such warrants.

(5) Shares beneficially owned prior to the Offering includes 17,685,605 shares
owned by Norex Drilling, Ltd., an affiliate of Norex. Number of shares
offered includes 2,759,000 shares that are offered by Norex Drilling, Ltd.

(6) Shares beneficially owned are held of record by Lucien Flournoy and Maxine
Flournoy, as general partners of Flournoy Family Properties, Ltd. ("FFP"),
for the account of FFP.

(7) Shares beneficially owned prior to the Offering for certain officers and
directors include the following options to purchase Common Stock: Mr.
Richards, 700,000; Mr. O'Keefe, 37,500; Mr. Sadler, 123,400; Mr. McBride,
130,000; Mr. Conley, 30,000; Mr. Wehlmann, 4,000; Mr. Guedry, 4,000; Mr.
Siem, 566,000; Mr. Ziegler, 75,000; Mr. Holt, 75,000; Mr. Oliver, 75,000;
Mr. Webster, 75,000.

(8) Shares beneficially owned prior to the Offering includes 400,000 shares
which a limited partnership affiliated with Mr. Richards has the right to
acquire upon exercise of stock options. Mr. Richards disclaims beneficial
ownership of these shares.

(9) Shares beneficially owned prior to the Offering includes 17,685,605 shares
beneficially owned by Norex, an affiliate of Mr. Siem. Number of shares
offered includes 2,759,000 shares offered by Norex Drilling, Ltd., an
affiliate of Mr. Siem. Mr. Siem disclaims beneficial ownership of all such
shares.

(10) Shares beneficially owned prior to the Offering includes 35,423,978 shares
beneficially owned by Somerset Capital Partners, an affiliate of Mr.
Ziegler and Mr. Webster. Number of shares offered includes 5,527,000 shares
offered by Somerset Drilling Associates, L.L.C., an affiliate of Mr.
Ziegler and Mr. Webster. Mr. Ziegler and Mr. Webster disclaim beneficial
ownership of all such shares.

(11) Shares beneficially owned prior to the Offering includes 4,500,000 shares
owned by Flournoy Family Properties, Ltd. and 75,594 shares owned by Maxine
Flournoy, affiliates of Mr. Flournoy. Number of shares offered includes
801,000 shares offered by Flournoy Family Properties, Ltd. Mr. Flournoy
disclaims beneficial ownership of all such shares.

(12) Shares beneficially owned prior to the Offering includes 2,660,002 shares
owned by U.S. Rig & Equipment, Inc., an affiliate of Mr. Oliver and 27,876
shares owned by Mr. Oliver's minor children. Number of shares offered
includes 633,000 shares that are offered by U.S. Rig & Equipment, Inc. Mr.
Oliver disclaims beneficial ownership of all such shares.

59
<PAGE> 60

SHARES AVAILABLE FOR FUTURE SALE

As of September 30, 1997, the Company had 151,835,391 shares of Common
Stock outstanding, 244,800 shares of Common Stock issuable upon conversion of
the Company's Series A Convertible Redeemable Preferred Stock, par value $1.00
per share (the "Series A Preferred"), and 6,047,000 shares issuable upon the
exercise of outstanding warrants and options. Certain shares of outstanding
Common Stock (the "Restricted Shares") may only be sold subject to certain
restrictions imposed by Rules 144 and 145 under the Securities Act. However,
certain of the Restricted Shares may currently be sold by shareholders of the
Company pursuant to the Resale Shelf. The Restricted Shares may also become
eligible for sale pursuant to Rules 144 and 145 under the Securities Act.
Substantially all the Restricted Shares that are not covered by the Resale Shelf
benefit from currently unexercised registration rights, although the Company
may, pursuant to certain of its registration rights agreements, limit the
timing, volume or manner of sale of such shares or halt selling of such shares
altogether for a limited period of time. In connection with the Offering, the
Company, the Selling Shareholders and certain other shareholders of the Company
have agreed with the representatives of the Underwriters, subject to certain
exceptions, not to offer to sell, sell, contract to sell, announce their
intention to sell, pledge, grant any option for the sale of or otherwise dispose
of, directly or indirectly, or file with the Commission a registration statement
under the Securities Act relating to any Common Stock or any securities
convertible or exercisable into or exchangeable for any Common Stock, without
the prior written consent of Credit Suisse First Boston Corporation, for a
period of 120 days from the date of this Prospectus. The following table sets
forth certain information regarding the shares of Common Stock currently
outstanding:

<TABLE>
<CAPTION>
RESTRICTED SHARES(1)
--------------------------------------------
OFFERED COVERED BY NOT COVERED BY UNRESTRICTED
HELD BY HEREBY(2) RESALE SHELF RESALE SHELF(3) SHARES(4) TOTAL
------- ---------- ------------ ---------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Selling Shareholders.............. 12,500,000 40,168,892 14,926,605 -- 67,595,497
All other shareholders............ -- 27,311,026 10,025,376 46,903,492 84,239,894
---------- ---------- ---------- ---------- -----------
Total................... 12,500,000 67,479,918 24,951,981 46,903,492 151,835,391
========== ========== ========== ========== ===========
</TABLE>

- ---------------

(1) Excludes shares issuable upon conversion of the Series A Preferred or the
exercise of warrants or options.

(2) Excludes 1,875,000 shares that may be sold upon exercise of the
Underwriters' option to cover over-allotments.

(3) Substantially all the shares benefit from currently unexercised registration
rights.

(4) Currently tradeable without restriction.

The Company also has outstanding three registration statements on Form S-8
to register the issuance of up to an aggregate of 9,750,000 shares of Common
Stock upon the exercise of options outstanding under the Company's 1982 Stock
Option and Long-Term Incentive Plan for Key Employees, 1987 Stock Option Plan
for Non-Employee Directors and 1996 Employee Stock Option Plan (collectively,
the "Option Plans"). At present, there are outstanding under the Option Plans or
otherwise options to purchase a total of 5,557,400 shares of Common Stock, of
which options to purchase 1,922,200 shares are currently exercisable. Shares
issued upon the exercise of such options will generally be available for
immediate resale, subject to the restrictions of Rule 144 as to sales by
affiliates of the Company. The shares of Common Stock issuable upon conversion
of the Series A Preferred will be subject to the applicable restrictions of Rule
144. In connection with the Flournoy Acquisition, the company is contingently
obligated to issue additional shares of Common Stock to the shareholders of
Flournoy in the event of a significant decline in the price of the Company's
Common Stock. The Company estimates that no additional shares would be issuable
to the Flournoy shareholders unless the price of the Company's Common Stock
declines below $0.50 per share before January 31, 1998.

60
<PAGE> 61

UNDERWRITING

Under the terms and subject to the conditions contained in an Underwriting
Agreement dated October 29, 1997 (the "Underwriting Agreement"), the
Underwriters named below (the "Underwriters"), for whom Credit Suisse First
Boston Corporation, BT Alex. Brown Incorporated, Donaldson, Lufkin & Jenrette
Securities Corporation, Howard, Weil, Labouisse, Friedrichs Incorporated, and
Johnson Rice & Company L.L.C. are acting as representatives (the
"Representatives"), have severally but not jointly agreed to purchase from the
Company and the Selling Shareholders the following respective numbers of shares
of Common Stock:

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ----------
<S> <C>
Credit Suisse First Boston Corporation...................... 4,160,000
BT Alex. Brown Incorporated................................. 4,160,000
Donaldson, Lufkin & Jenrette Securities Corporation......... 4,160,000
Howard, Weil, Labouisse, Friedrichs Incorporated............ 4,160,000
Johnson Rice & Company L.L.C. .............................. 4,160,000
Gaines, Berland Inc. ....................................... 175,000
Invemed Associates, Inc. ................................... 350,000
Jefferies & Company, Inc. .................................. 350,000
Lehman Brothers Inc. ....................................... 350,000
Merit Capital Associates, Inc. ............................. 175,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated.......... 350,000
Morgan Keegan & Company, Inc. .............................. 175,000
Prime Charter Ltd. ......................................... 175,000
Prudential Securities Incorporated.......................... 350,000
Rauscher Pierce Refsnes, Inc. .............................. 175,000
Raymond James & Associates, Inc. ........................... 175,000
Salomon Brothers Inc ....................................... 350,000
Sanders Morris Mundy........................................ 175,000
Schroder & Co. Inc. ........................................ 350,000
Charles Schwab & Co., Inc. ................................. 350,000
Simmons & Company International............................. 175,000
----------
Total............................................. 25,000,000
==========
</TABLE>

The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will be obligated to purchase all of the shares of Common Stock
offered hereby (other than those shares covered by the over-allotment option
described below), if any are purchased. The Underwriting Agreement provides
that, in the event of a default by an Underwriter, in certain circumstances the
purchase commitments of the non-defaulting Underwriters may be increased or the
Underwriting Agreement may be terminated.

The Company and the Selling Shareholders have granted to the Underwriters
options, expiring at the close of business on the 30th day after the date of
this Prospectus, to purchase up to 1,875,000 additional shares from the Company
and an aggregate of up to 1,875,000 additional shares from the Selling
Shareholders at the initial public offering price less the underwriting
discounts and commissions, all as set forth on the cover page of this
Prospectus. Such options may be exercised only to cover over-allotments in the
sale of the Shares. To the extent such option is exercised, each Underwriter
will become obligated, subject to certain conditions, to purchase approximately
the same percentage of the additional shares of Common Stock as it was obligated
to purchase pursuant to the Underwriting Agreement.

The Company and the Selling Shareholders have been advised by the
Representatives that the Underwriters propose to offer the Shares offered hereby
to the public initially at the public offering price set forth on the cover page
of this Prospectus and to certain dealers at such price less a concession of
$.24 per

61
<PAGE> 62

share, and the Underwriters and such dealers may allow a discount of $.10 per
share on sales to certain other dealers. After the initial public offering, the
public offering price and concession and discount to dealers may be changed by
the Representatives.

Bankers Trust Company, an affiliate of BT Alex. Brown Incorporated, will
receive greater than 10% of the net proceeds of the Offering as repayment of
indebtedness owed to it by the Company. Accordingly, the Offering is being
conducted pursuant to the provisions of Rule 2710(c)(8) of the Conduct Rules of
the National Association of Securities Dealers, Inc. (the "NASD").

As of September 25, 1997, certain affiliates and employees of Donaldson,
Lufkin & Jenrette Securities Corporation owned indirectly through Somerset
Drilling Associates, L.L.C. 4,890,326 shares of Common Stock in the aggregate,
which represented 3.22% of the outstanding shares of Common Stock of the Company
on such date, of which 892,857 shares are anticipated to be sold in the
Offering. See "Principal and Selling Shareholders."

The Company and the Selling Shareholders have agreed that they will not
offer, sell, contract to sell, announce their intention to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Commission a
registration statement under the Securities Act relating to any additional
shares of Common Stock of securities convertible into or exchangeable or
exercisable for any shares of Common Stock without the prior written consent of
Credit Suisse First Boston Corporation for a period of 120 days from the date of
this Prospectus, except (i) sales of Shares offered in the Offering, (ii)
issuances of Common Stock by the Company pursuant to the exercise of employee
stock options outstanding on the date of this Prospectus or (iii) issuances of
Common Stock in specified acquisitions.

The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including civil liabilities under the
Securities Act, or contribute to payments which the Underwriters may be required
to make in respect thereof.

The Representatives, on behalf of the Underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Exchange Act.
Over-allotment involves syndicate sales in excess of the offering size, which
creates a syndicate short position. Stabilizing transactions permit bids to
purchase the underlying security so long as the stabilizing bids do not exceed a
specified maximum. Syndicate covering transactions involve purchases of the
Common Stock in the open market after the distribution has been completed in
order to cover syndicate short positions. Penalty bids permit the
Representatives to reclaim a selling concession from a syndicate member when the
Common Stock originally sold by such syndicate member is purchased in a
syndicate covering transaction to cover syndicate short positions. Such
stabilizing transactions, syndicate covering transactions and penalty bids may
cause the price of the Common Stock to be higher than it would otherwise be in
the absence of such transactions. These transactions may be effected on the AMEX
or otherwise and, if commenced, may be discontinued at any time.

NOTICE TO CANADIAN RESIDENTS

RESALE RESTRICTIONS

The distribution of the Shares in Canada is being made only on a private
placement basis exempt from the requirement that the Company prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of Shares are effected. Accordingly, any resale of the Shares in Canada
must be made in accordance with applicable securities laws, which will vary
depending on the relevant jurisdiction, and which may require resales to be made
in accordance with available statutory exemptions or pursuant to a discretionary
exemption granted by the applicable Canadian securities regulatory authority.
Purchasers are advised to seek legal advice prior to any resale of the Shares.

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REPRESENTATIONS OF PURCHASERS

Each purchaser of Shares in Canada who receive a purchase confirmation will
be deemed to represent to the Company, the Selling Shareholders and the dealer
from whom such purchase confirmation is received that (i) such purchaser is
entitled under applicable provincial securities laws to purchase such Shares
without the benefit of a prospectus qualified under such securities laws, (ii)
where required by law, that such purchaser is purchasing as principal and not as
agent and (iii) such purchaser has reviewed the text above under "-- Resale
Restrictions."

RIGHTS OF ACTION (ONTARIO PURCHASERS)

The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
section 32 of the Regulation under the Securities Act (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available, including
common law rights of action for damages or rescission or rights of action under
the civil liability provisions of the U.S. federal securities laws.

ENFORCEMENT OF LEGAL RIGHTS

All of the Company's directors and officers, the experts named herein and
the Selling Shareholders may be located outside of Canada and, as a result, it
may not be possible for Canadian purchasers to effect service of process within
Canada upon the issuer or such persons. All or a substantial portion of the
assets of the Company and such persons may be located outside of Canada and, as
a result, it may not be possible to satisfy a judgment against the issuer or
such persons in Canada or to enforce a judgment obtained in Canadian courts
against such issuer or persons outside of Canada.

NOTICE TO BRITISH COLUMBIA RESIDENTS

A purchaser of Shares to whom the Securities Act (British Columbia) applies
is advised that such purchaser is required to file with the British Columbia
Securities Commission a report within ten days of the sale of any Shares
acquired by such purchaser pursuant to this Offering. Such report must be in the
form attached to British Columbia Securities Commission Blanket Order BOR
#95/17, a copy of which may be obtained from the Company. Only one such report
must be filed in respect of Shares acquired on the same date and under the same
prospectus exemption.

TAXATION AND ELIGIBILITY FOR INVESTMENT

Canadian purchasers of Shares should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the Shares in
the particular circumstances and with respect to the eligibility of the Shares
for investment by the purchaser under the relevant Canadian legislation.

LEGAL MATTERS

The legality of the Shares being offered hereby will be passed upon for the
Company by Porter & Hedges, L.L.P., Houston, Texas. Certain legal matters in
connection with the Offering will be passed upon for the Underwriters by Akin,
Gump, Strauss, Hauer & Feld, L.L.P.

EXPERTS

The consolidated financial statements of the Company as of December 31,
1996, and for the year then ended have been incorporated by reference herein and
in the Registration Statement in reliance on the report of KPMG Peat Marwick
LLP, independent certified public accountants, incorporated by reference herein,
and upon the authority of said firm as experts in accounting and auditing.

The financial statements incorporated in this Prospectus by reference as of
and for the year ended December 31, 1995, and the nine month period ended
December 31, 1994, have been audited by Deloitte &

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Touche LLP, independent auditors, as stated in their reports, which are
incorporated herein by reference, and have been so incorporated in reliance upon
the reports of such firm given upon their authority as experts in accounting and
auditing.

The audited financial statements of Grey Wolf Drilling Company incorporated
by reference in this Prospectus and elsewhere in the Registration Statement to
the extent and for the periods indicated in their report have been audited by
Arthur Andersen LLP, independent public accountants, and are incorporated by
reference herein in reliance upon the authority of said firm as experts in
accounting and auditing in giving said report.

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Exchange
Act, and, in accordance therewith, files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). The
Registration Statement (defined herein), as well as such reports, proxy
statements and other information filed by the Company with the Commission can be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at
its regional offices located at Seven World Trade Center, 13th Floor New York,
New York 10048 and at 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of such material can also be obtained at prescribed rates
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. The Commission maintains a site on the World Wide Web
that contains certain documents filed with the Commission electronically. The
address of such site is http://www.sec.gov and the Registration Statement may be
inspected at such site. The Common Stock is listed and traded on the AMEX and
certain of the Company's reports, proxy statements and other information can be
inspected at the offices of the AMEX, 86 Trinity Place, New York, New York
10006.

The Company has filed with the Commission a Registration Statement on Form
S-3 (together with any amendments or supplements thereto, the "Registration
Statement") under the Securities Act with respect to the Common Stock offered
hereby. This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits thereto, certain parts of which are
omitted in accordance with the rules and regulations of the Commission. For
further information with respect to the Company and the Common Stock, reference
is made to the Registration Statement and the exhibits thereto. Statements
contained in this Prospectus (or in any document incorporated into this
Prospectus by reference) as to the contents of any contract or other document
referred to herein (or therein) are not necessarily complete, and in each
instance reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement. Each such statement is qualified in
its entirety by such reference.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents or portions of documents, which have been filed by
the Company with the Commission pursuant to the Exchange Act (Commission File
No. 1-8226) or the Securities Act, are incorporated herein by reference and made
a part of this Prospectus:

1. Annual Report on Form 10-K for the fiscal year ended December 31,
1996.

2. Quarterly Reports on Form 10-Q for the quarters ended March 31, 1997
and June 30, 1997.

3. Definitive Proxy Statement for the 1997 Annual Meeting of
Shareholders held May 14, 1997.

4. The description of Common Stock contained in the Current Report on
Form 8-K filed October 6, 1997.

5. Definitive Information Statement pursuant to Section 14(c) of the
Exchange Act filed August 22, 1997.

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<PAGE> 65

6. Current Reports on Form 8-K filed: January 13, 1997, February 3, 1997
(as amended by Form 8-K/A filed April 15, 1997); March 10, 1997; May
16, 1997; August 22, 1997; and September 19, 1997; September 30,
1997, October 6, 1997, and October 22, 1997.

7. The historical financial statements of Grey Wolf Drilling Company
contained in the prospectus dated June 23, 1997 relating to the
Company's registration statement on Form S-3 (Registration
Statement No. 333-26519).

All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the Offering shall be deemed to be incorporated by reference
into this Prospectus and to be a part hereof from the respective dates of filing
of such documents.

Any statement contained in a document or information incorporated or deemed
to be incorporated herein by reference shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any subsequently filed document that also is, or is
deemed to be, incorporated herein by reference, modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.

The Company undertakes to provide, without charge, to each person,
including any beneficial owner, to whom a copy of this Prospectus is delivered,
upon the written or oral request of such person, a copy of any and all of the
documents or information referred to above that have been or may be incorporated
by reference in this Prospectus (excluding exhibits to such documents unless
such exhibits are specifically incorporated by reference). Requests should be
directed to the corporate secretary, Grey Wolf, Inc., 10370 Richmond Avenue,
Suite 600, Houston, Texas 77042-4136, telephone (713) 435-6100.

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NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING SHAREHOLDERS OR ANY
UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE.

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TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 11
Forward-Looking Statements............ 16
Use of Proceeds....................... 17
Capitalization........................ 18
Dilution.............................. 19
Price Range of Common Stock and
Dividend Policy..................... 20
Unaudited Pro Forma Consolidated
Financial Data...................... 21
Selected Financial Data............... 27
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 29
Business.............................. 40
Management............................ 55
Principal and Selling Shareholders.... 58
Shares Available for Future Sale...... 60
Underwriting.......................... 61
Notice to Canadian Residents.......... 62
Legal Matters......................... 63
Experts............................... 63
Available Information................. 64
Incorporation of Certain Documents by
Reference........................... 64
</TABLE>

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[GREY WOLF, INC. LOGO]

GREY WOLF, INC.
25,000,000 Shares
Common Stock
($.10 par value)

PROSPECTUS

CREDIT SUISSE FIRST BOSTON

BT ALEX. BROWN

DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION

HOWARD, WEIL,
LABOUISSE, FRIEDRICHS
INCORPORATED

JOHNSON RICE & COMPANY L.L.C.

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