e10vq

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


þ		Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2006


o		Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File Number 1-8226

Grey Wolf, Inc.

(Exact name of registrant as specified in its charter)


Texas		74-2144774
(State or jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

10370 Richmond Avenue, Suite 600
Houston, Texas		77042
(Address of principal executive offices)		(Zip Code)

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).


Yes o		No þ

The number of shares of the registrant’s common stock, par value $0.10 per share, outstanding at May 1, 2006, was 194,458,833.

grey wolf, inc. and subsidiaries

Consolidated Balance Sheets

(Amounts in thousands, except share data)


	March 31			December 31,
	2006			2005
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	214,861		$	173,145
Restricted cash		788			780
Accounts receivable, net of allowance of $2,674		183,481			159,438
Prepaids and other current assets		5,388			8,010
Deferred tax assets		4,379			4,222

Total current assets		408,897			345,595

Property and equipment:
Land, buildings and improvements		6,728			6,530
Drilling equipment		951,155			934,648
Furniture and fixtures		4,336			4,217

Total property and equipment		962,219			945,395
Less: accumulated depreciation		(458,668	)		(445,430	)

Net property and equipment		503,551			499,965

Rigs held for sale, net		—			5,524
Goodwill		10,377			10,377
Other noncurrent assets, net		19,764			7,574

	$	942,589		$	869,035


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable-trade	$	47,420		$	61,087
Accrued workers’ compensation		6,668			6,575
Payroll and related employee costs		6,407			12,131
Accrued interest payable		2,323			2,156
Current income taxes payable		33,973			6,141
Other accrued liabilities		10,804			7,059

Total current liabilities		107,595			95,149

Contingent convertible senior notes		275,000			275,000
Other long-term liabilities		13,989			12,403
Deferred income taxes		120,175			117,251

Commitments and contingent liabilities		—			—

Shareholders’ equity:
Series B Junior Participating Preferred stock, $1 par value; 250,000 shares authorized; none outstanding		—			—
Common stock, $0.10 par value; 300,000,000 shares authorized; 194,454,249 and 192,625,650 issued and outstanding, respectively		19,446			19,263
Additional paid-in capital		376,178			374,012
Retained earnings (deficit)		30,206			(24,043	)

Total shareholders’ equity		425,830			369,232

	$	942,589		$	869,035

See accompanying notes to consolidated financial statements

-3-

grey wolf, inc. and subsidiaries

Consolidated Statements of Operations

(Amounts in thousands, except per share data)

(Unaudited)


	Three Months Ended
	March 31,
	2006			2005
Contract drilling revenue	$	222,879		$	149,992

Costs and expenses:
Drilling operations		122,860			92,935
Depreciation and amortization		17,148			14,302
General and administrative		5,317			3,922
Gain on sale of assets		(9,515	)		(18	)

Total costs and expenses		135,810			111,141


Operating income		87,069			38,851

Other income (expense):
Interest income		2,116			432
Interest expense		(3,269	)		(2,599	)

Other expense, net		(1,153	)		(2,167	)


Income before income taxes		85,916			36,684

Income tax expense:
Current		28,900			1,172
Deferred		2,767			12,468

Total income tax expense		31,667			13,640


Net income	$	54,249		$	23,044


Net income per common share (Note 2):
Basic	$	0.28		$	0.12

Diluted	$	0.24		$	0.10


Weighted average common shares outstanding:
Basic		192,541			190,273

Diluted		236,001			234,344

See accompanying notes to consolidated financial statements

-4-

GREY WOLF, INC. AND SUBSIDIARIES

Consolidated Statements of Shareholders’ Equity and Comprehensive Income

(Amounts in thousands)


			Common
			Stock,		Additional
	Common		$0.10 Par		Paid-in			Retained Earnings
	Shares		Value		Capital			(Deficit)			Total
Balance, December 31, 2004		190,136		19,014		363,148			(144,680	)		237,482

Exercise of stock options		2,292		229		7,844			—			8,073

Tax benefit of stock option exercises		—		—		2,842			—			2,842

Issuance of restricted stock		198		20		(20	)		—			—

Stock-based compensation expense		—		—		198			—			198

Comprehensive net income		—		—		—			120,637			120,637


Balance, December 31, 2005		192,626		19,263		374,012			(24,043	)		369,232

Exercise of stock options		290		29		967			—			996

Tax benefit of stock option exercises		—		—		403			—			403

Issuance of restricted stock		1,539		154		(154	)		—			—

Stock-based compensation expense		—		—		950			—			950

Comprehensive net income		—		—		—			54,249			54,249


Balance, March 31, 2006 (Unaudited)		194,455	$	19,446	$	376,178		$	30,206		$	425,830

See accompanying notes to consolidated financial statements

-5-

grey wolf, inc. and subsidiaries

Consolidated Statements of Cash Flows

(Amounts in thousands)

(Unaudited)


	Three Months Ended
	March 31,
	2006			2005
Cash flows from operating activities:
Net income	$	54,249		$	23,044
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		17,148			14,302
Deferred income taxes		2,767			12,027
Gain on sale of assets		(9,515	)		(18	)
Stock-based compensation expense		950			37
Excess tax benefit of stock option exercises		(225	)		446
Net effect of changes in assets and liabilities related to operating accounts		138			(9,704	)

Cash provided by operating activities		65,512			40,134


Cash flows from investing activities:
Property and equipment additions		(27,985	)		(24,848	)
Proceeds from sale of property and equipment		15,641			529
Deposits for new rig purchases		(12,673	)		—

Cash used in investing activities		(25,017	)		(24,319	)


Cash flows from financing activities:
Proceeds from exercise of stock options		996			1,321
Excess tax benefit of stock option exercises		225			—

Cash provided by financing activities		1,221			1,321


Net increase in cash and cash equivalents		41,716			17,136
Cash and cash equivalents, beginning of period		173,145			71,710

Cash and cash equivalents, end of period	$	214,861		$	88,846


Supplemental cash flow disclosure:
Cash paid for interest	$	2,887		$	769

Cash paid for taxes	$	625		$	170

See accompanying notes to consolidated financial statements

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GREY WOLF, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

(1)

General

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

The accompanying unaudited consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and include the accounts of the Company and its subsidiaries. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, which are of a normal recurring nature, necessary to present fairly the Company’s financial position as of March 31, 2006 and the results of operations and cash flows for the periods indicated. All intercompany transactions have been eliminated. The results of operations for the three months ended March 31, 2006 are not necessarily indicative of the results for any other period or for the year as a whole. Additionally, pursuant to the rules and regulations of the Securities and Exchange Commission, certain information and footnote disclosures normally included in annual financial statements in accordance with U.S. GAAP have been omitted. Therefore, these consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2005.

(2)

Significant Accounting Policies

Earnings Per Share

Basic earnings per share (“EPS”) is based on the weighted average number of common shares outstanding during the applicable period and excludes the nonvested portion of restricted stock. The computation of diluted earnings per share is based on the weighted average number of common shares outstanding during the period plus, when their effect is dilutive, incremental shares consisting of shares subject to stock options, restricted stock and shares issuable upon conversion of the Floating Rate Contingent Convertible Senior Notes due 2024 (the “Floating Rate Notes”) and the 3.75% Contingent Convertible Senior Notes due 2023 (the “3.75% Notes”) (collectively referred to as the “Contingent Convertible Senior Notes”).

Consistent with the provisions of Emerging Issues Task Force (“EITF”) Issue No. 04-08, “The Effect of Contingently Convertible Instruments on Diluted Earnings per Share,” the Company accounts for the Contingent Convertible Senior Notes using the “if converted” method set forth in the Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 128 “Earnings Per Share” for calculating diluted earnings per share. Under the “if converted” method, the after-tax effect of interest expense related to the Contingent Convertible Senior Notes is added back to net income, and the convertible debt is assumed to have been converted to common equity at the beginning of the period and is added to outstanding shares.

- 7 -

GREY WOLF, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

The following is a reconciliation of the components of the basic and diluted earnings per share calculations for the applicable periods:


	Three Months Ended
	March 31,
	2006		2005
	(In thousands, except per share amounts)
Numerator:
Net income	$	54,249	$	23,044

Add interest expense on contingent convertible senior notes, net of related tax effects		1,902		1,495

Adjusted net income–diluted	$	56,151	$	24,539


Denominator:
Weighted average common shares outstanding		192,541		190,273

Effect of dilutive securities:
Options – treasury stock method		893		1,614
Restricted stock – treasury stock method		110		—
Contingent convertible senior notes		42,457		42,457

Weighted average common shares outstanding-diluted		236,001		234,344


Earnings per common share:
Basic	$	0.28	$	0.12

Diluted	$	0.24	$	0.10

For the three months ended March 31, 2006 and 2005, 1,736,699 shares of restricted stock and 199,950 shares of restricted stock, respectively, were excluded from the computation of basic EPS as the restricted stock vesting conditions had not been met. Also, for the three months ended March 31, 2006, no stock options or shares of restricted stock were excluded from the computation of diluted EPS as being anti-dilutive. For the three months ended March 31, 2005, 904,160 stock options to purchase common shares and 124,413 shares of restricted stock, each calculated on a weighted-average basis, were excluded from the computation of diluted EPS as the effects of these securities were anti-dilutive.

Share-Based Payment Arrangements

At March 31, 2006, the Company had stock-based compensation plans with employees and directors, which are more fully described in Note 7. Prior to January 1, 2006, the Company accounted for those plans under the recognition and measurement provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations, as permitted by SFAS No. 123, “Accounting for Stock-Based Compensation”. Accordingly, no stock-based employee compensation expense was recognized, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Effective January 1, 2006, the Company adopted the fair value provisions of SFAS No. 123(R), “Share-Based Payment”, using the modified-prospective transition method. Under that transition method, compensation expense

- 8 -

GREY WOLF, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

recognized for the three months ended March 31, 2006 includes: (a) compensation expense for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R). Costs related to unearned restricted stock awards which were previously presented separately within shareholders’ equity, are now included in additional paid-in capital. Results for prior periods have not been restated. The Company records compensation expense over the requisite service period using the straight-line method. The fair value of each stock option was estimated on the date of grant using the Black-Scholes-Merton option-valuation model. The key input variables used in valuing the options granted for the three months ended March 31, 2006 were: risk-free interest rate based on three-year Treasury strips of 4.89%; dividend yield of zero; stock price volatility of 39% based on historical volatility of the Company’s stock with consideration given to implied volatilities from traded options on the Company’s stock; and expected option lives of three years based on historical stock option exercise data and future expectations.

Prior to the adoption of SFAS No.123(R), the Company presented tax benefits of deductions resulting from the exercise of stock options as operating cash flows in the Consolidated Statement of Cash Flows. SFAS No. 123(R) requires the cash flows from the tax benefits resulting from tax deductions in excess of the tax benefit associated with compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows. The $225,000 excess tax benefit for the three months ended March 31, 2006, classified as a financing cash inflow would have been classified as an operating cash inflow if the Company had not adopted SFAS No. 123(R).

A summary of the Company’s stock option activity as of March 31, 2006, and changes during the three months then ended is presented below:



						Weighted-Average
				Weighted-Average		Remaining		Aggregate Intrinsic
	Shares			Exercise Price		Contractual Life⁽¹⁾		Value
	(in thousands)							(in thousands)
Outstanding at January 1, 2006		4,253		$	3.83
Granted		340			7.34
Exercised		(290	)		3.44
Forfeited		(33	)		4.67

Outstanding at March 31, 2006		4,270		$	4.12		6.44	$	14,157

Exercisable at March 31, 2006		2,395		$	3.69		5.30	$	8,972


(1)		Represents weighted average remaining contractual life in years.

The weighted-average grant-date fair value of options granted during the three months ended March 31, 2006 and March 31, 2005 was $2.35 and $2.97, respectively. The total intrinsic value of options exercised during the three months ended March 31, 2006 and March 31, 2005 was $1.2 million and $1.3 million, respectively.

As of March 31, 2006, there was $4.2 million of total unrecognized compensation cost related to outstanding stock options. That cost is expected to be recognized over a weighted-average period of 2.5

- 9 -

GREY WOLF, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

years. The amount of stock options expensed for the three months ended March 31, 2006 was $568,000.

A summary of the status of the Company’s shares of restricted stock as of March 31, 2006, and changes during the three months ended March 31, 2006 is presented below:


				Weighted-Average
				Grant-Date Fair
	Shares			Value
	(in thousands)
Non-vested at January 1, 2006		198		$	5.73
Granted		1,551			7.34
Forfeited		(12	)		5.60

Non-vested at March 31, 2006		1,737		$	7.17

As of March 31, 2006, there was $8.8 million of total unrecognized compensation cost related to shares of restricted stock. That cost is expected to be recognized over a weighted-average period of 3.0 years. The amount of shares of restricted stock expensed for the three months ended March 31, 2006 was $382,000. The weighted-average grant-date fair value per share of restricted stock granted during the three months ended March 31, 2005 was $5.60. No shares vested during the three months ended March 31, 2006 and 2005.

The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock options granted for the three months ended March 31, 2005.


	Three Months
	Ended
	March 31,
	2005
Net income, as reported	$	23,044
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		23
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(603	)

Pro forma net income	$	22,464

Basic earnings per share
As reported	$	0.12
Pro forma	$	0.12
Diluted earnings per share
As reported	$	0.10
Pro forma	$	0.10

For purposes of determining compensation expense using the provisions of SFAS No. 123, the fair value of option grants was determined using the Black-Scholes-Merton option-valuation model. The key input variables used in valuing the options granted in 2005 were: risk-free interest rate based on five-

- 10 -

GREY WOLF, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

year Treasury strips of 3.86% to 4.46%; dividend yield of zero; stock price volatility of 53% to 57%; and expected option lives of five years.

Recent Accounting Pronouncements

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”. This Statement replaces APB Opinion No. 20, “Accounting Changes,” and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements,” and changes the requirements of accounting for and reporting of a change in accounting principle. SFAS No. 154 requires, among other things, retrospective application of a voluntary change in accounting principle. Previously, voluntary changes in accounting principle were accounted for by including a one-time cumulative effect in the period of change. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company adopted this standard as of the effective date and there was no material impact on the consolidated financial statements as a result of this adoption.

(3)

Accounting for Income Taxes

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

The Company currently believes that it is more likely than not that future earnings and reversal of deferred tax liabilities will be sufficient to permit the Company to utilize its deferred tax assets recorded at March 31, 2006.

(4)

Long-Term Debt

Long-term debt consists of the following (amounts in thousands):


	March 31,		December 31,
	2006		2005
3.75% Contingent Convertible Senior Notes due May 2023	$	150,000	$	150,000
Floating Rate Contingent Convertible Senior Notes due April 2024		125,000		125,000

		275,000		275,000

Less current maturities		—		—

Long-term debt	$	275,000	$	275,000

Floating Rate Notes

The Floating Rate Contingent Convertible Senior Notes due April 2024 (the “Floating Rate Notes”) bear interest at a per annum rate equal to 3-month LIBOR, adjusted quarterly, minus a spread of 0.05%. The per annum interest rate will never be less than zero or more than 6.00%. For the three months ended March 31, 2006, the interest rate on the Floating Rate Notes was 4.53%. The Floating Rate

- 11 -

GREY WOLF, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

Notes mature on April 1, 2024 and are convertible into shares of the Company’s common stock, upon the occurrence of certain events, at a conversion price of $6.51 per share. The Floating Rate Notes are general unsecured senior obligations of the Company and are fully and unconditionally guaranteed, on a joint and several basis, by all domestic wholly-owned subsidiaries of the Company. Non-guarantor subsidiaries are not significant.

The Company may redeem some or all of the Floating Rate Notes at any time on or after April 1, 2014, at a redemption price equal to 100% of the principal amount of the Floating Rate Notes, plus accrued but unpaid interest and liquidated damages, if any, to the date of repurchase, payable in cash. Holders may require the Company to repurchase all or a portion of the Floating Rate Notes on April 1, 2014 or April 1, 2019, and upon a change of control, as defined in the indenture governing the Floating Rate Notes, at 100% of the principal amount of the Floating Rate Notes, plus accrued but unpaid interest and liquidated damages, if any, to the date of repurchase, payable in cash.

The Floating Rate Notes did not meet the criteria for conversion into common stock at any time during the quarter ended March 31, 2006.

3.75% Notes

The 3.75% Contingent Convertible Senior Notes due May 2023 (the “3.75% Notes”) bear interest at 3.75% per annum and mature on May 7, 2023. The 3.75% Notes are convertible into shares of the Company’s common stock, upon the occurrence of certain events, at a conversion price of $6.45 per share. The Company will be required to pay contingent interest at a rate equal to 0.50% per annum commencing May 7, 2008 upon the occurrence of certain events. The 3.75% Notes are general unsecured senior obligations of the Company and are fully and unconditionally guaranteed, on a joint and several basis, by all domestic wholly-owned subsidiaries of the Company. Non-guarantor subsidiaries are not significant.

The Company may redeem in cash some or all of the 3.75% Notes at any time on or after May 14, 2008, at various redemption prices depending upon the date redeemed plus accrued but unpaid interest, including contingent interest. Holders may require the Company to repurchase all or a portion of the 3.75% Notes on May 7, 2013 or May 7, 2018, and upon a change of control, as defined in the indenture governing the 3.75% Notes, at 100% of the principal amount of the 3.75% Notes, plus accrued but unpaid interest, including contingent interest, if any, to the date of repurchase, payable in cash.

As of October 1, 2005 and through March 31, 2006, the 3.75% Notes were convertible into shares of the Company’s common stock because one of the triggering events permitting note holders to convert their 3.75% Notes occurred during the third and fourth quarters of 2005. The triggering event was that the closing price per share of the Company’s common stock exceeded 110% of the conversion price ($7.10 per share) of the 3.75% Notes for at least 20 trading days in the period of 30 consecutive trading days ended on both September 30, 2005 and December 31, 2005. As of March 31, 2006, none of the note holders had exercised their right to convert the 3.75% Notes into shares of the Company’s common stock.

The 3.75% Notes ceased being convertible after March 31, 2006 because this triggering event was not met during the first quarter of 2006.

CIT Facility

The Company’s subsidiary Grey Wolf Drilling Company L.P. has a $100.0 million credit facility with the CIT Group/Business Credit, Inc. (the “CIT Facility”) which expires December 31, 2008. The CIT Facility provides the Company with the ability to borrow up to the lesser of $100.0 million or 50% of

- 12 -

GREY WOLF, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

the Orderly Liquidation Value (as defined in the agreement) of certain drilling rig equipment located in the 48 contiguous states of the United States of America. Periodic interest payments are due at a floating rate based upon the Company’s debt service coverage ratio within a range of either LIBOR plus 1.75% to 3.50% or prime plus 0.25% to 1.50%. The CIT Facility provides up to $50.0 million available for letters of credit. The Company is required to pay a quarterly commitment fee of 0.50% per annum on the unused portion of the CIT Facility and letters of credit accrue a fee of 1.25% per annum. The CIT Facility contains affirmative and negative covenants and the Company is in compliance with these covenants. Substantially all of the Company’s assets, including its drilling equipment, are pledged as collateral under the CIT Facility which is also guaranteed by the Company and certain of the Company’s wholly-owned subsidiaries.

The CIT Facility allows the Company to repurchase shares of its common stock, pay dividends to its shareholders, and make prepayments on the 3.75% Notes and the Floating Rate Notes. However, as defined by the CIT Facility, all of the following conditions must be met to enable the Company to make payments for any of the above-mentioned reasons: (i) payments may not exceed $150.0 million in the aggregate, (ii) no Default or Event of Default shall exist at the time of any such payments, (iii) at least $35.0 million of Availability (availability under the CIT Facility plus cash on hand) exists immediately after any such payments, and (iv) the Company must provide CIT Group/Business Credit, Inc. three Business Days prior written notice of any such payments.

The Company currently has no outstanding balance under the CIT Facility and had $26.9 million of undrawn, standby letters of credit at March 31, 2006. These standby letters of credit are for the benefit of various insurance companies as collateral for premiums and losses which may become payable under the terms of the underlying insurance contracts. Outstanding letters of credit reduce the amount available for borrowing under the CIT Facility.

(5)

Segment Information

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

(6)

Contingencies

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

(7)

Capital Stock and Option Plans

The 2003 Incentive Plan (the “2003 Plan”) was approved by shareholders in May 2003. The 2003 Plan authorizes the grant of the following equity-based awards:

	•		incentive stock options;

	•		non-statutory stock options;

	•		restricted shares; and

	•		other stock-based and cash awards.

- 13 -

GREY WOLF, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

The 2003 Plan replaced the Company’s 1996 Employee Stock Option Plan (the “1996 Plan”) but all outstanding options previously granted will continue to be exercisable subject to the terms and conditions of such grants. The 1996 Plan allowed for grants of non-statutory options to purchase shares of the Company’s common stock, but no further grants of common stock will be made under the 1996 Plan. The 2003 Plan reserves a maximum of 17.0 million shares of the Company’s common stock underlying all equity-based awards, but is reduced by the number of shares subject to previous grants under the 1996 Plan. At March 31, 2006, there were 3.9 million shares of the Company’s common stock available for grant under the 2003 Plan until March 2013. Prior to 2003, the Company also granted options under stock option agreements with its directors that are outside of the 1996 Plan and the 2003 Plan. At March 31, 2006, these individuals had options outstanding to purchase an aggregate of 850,500 shares of the Company’s common stock.

The exercise price of stock options approximates the fair market value of the stock at the time the option is granted. A portion of the outstanding options became exercisable upon issuance and the remaining become exercisable in varying increments over three to five year periods. The options expire on the tenth anniversary of the date of grant.

As of March 31, 2006, the Company had 1.7 million shares of restricted common stock outstanding (net of cancellations of 11,950 shares during the three months ended March 31, 2006) under the 2003 Plan, which vest over periods from three to five years. Each share of restricted common stock entitles the holder to one vote and the shares are only restricted due to vesting conditions. As discussed in Note 2, the Company records expense for the value of these shares on a straight-line basis over the vesting period in accordance with SFAS No. 123(R).

(8)

Concentrations

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

For the three months ended March 31, 2006 there was one customer representing approximately 11% of the Company’s revenue. For the three months ended March 31, 2005 there were no customers representing greater than 10% of the Company’s revenue.

(9)

Goodwill and Intangible Assets

The Company follows the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets.” Pursuant to SFAS No. 142, goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead are tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets.” The intangible assets represent customer contracts and related relationships acquired and are being amortized over the useful life of three years. Amortization expense related to these intangible assets was $267,000 for the three months ended March 31, 2006. Accumulated amortization was $2.1 million at March 31, 2006. Amortization expense

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GREY WOLF, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

related to these intangible assets over the next five fiscal years will be: 2006 — $1.1 million; 2007 — $219,000; and thereafter — $0. The $1.1 million net balance of these intangible assets was included in net other noncurrent assets on the consolidated balance sheet.

(10)

Sale of Rigs

On January 3, 2006, the Company completed the sale of five of its rigs formerly held for refurbishment to a private company. The Company received $15.3 million in cash in exchange for the five rigs, which resulted in a pre-tax gain of $9.4 million during the three months ended March 31, 2006.

(11)

Subsequent Event

During the first quarter of 2006, the Company experienced a fire on one of its 2,000 horsepower diesel electric rigs, which was drilling under a daywork contract in South Louisiana. The fire resulted in a total loss of the rig and one of the Company’s top drives which was being used on this rig. On April 6, 2006, the Company filed a claim with its insurance carriers to recoup this loss and expects to receive proceeds of approximately $11.1 million during the second quarter of 2006. As of March 31, 2006, the net book value of the rig and top drive, which was a combined $6.9 million at the time of the loss, was written off and an insurance receivable was recorded for the same amount. Upon receipt of the insurance proceeds, the Company will realize a gain for the proceeds received in excess of $6.9 million.

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GREY WOLF, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial

Condition and Results of Operations

The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere herein and with our audited consolidated financial statements and accompanying notes included in our annual report on Form 10-K for the year ended December 31, 2005.

Overview

We are a leading provider of contract oil and gas land drilling services in the United States with a fleet, at May 1, 2006, of 114 rigs, of which 111 are marketed. Our customers include independent producers and major oil and gas companies. We conduct our operations through our subsidiaries in what we believe to be the best natural gas producing regions in the United States.

Our business is cyclical and our financial results depend upon several factors. These factors include the overall demand for land drilling services, the dayrates we receive for our services, the level of demand for turnkey and footage services, our success drilling turnkey and footage wells and the demand for deep versus shallow drilling services.

We make available free of charge through our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission. Information on our website is not a part of this report. Our website address is www.gwdrilling.com.

Rig Activity

With historically strong commodity prices funding our customers’ drilling programs, we believe the market for land rigs continues to be exceptional and demand exceeds the available supply of rigs. The land rig count at April 28, 2006, per the Baker Hughes rotary rig count, is over 1,480 rigs. Our average rigs working has also continued to escalate because of this demand. For the week ended April 28, 2006, we had an average of 109 rigs working. The table below shows the average number of land rigs working in the United States according to the Baker Hughes rotary rig count and the average number of our rigs working.


	2004		2005										2006
Domestic
Land Rig	Full										Full				4/1
Count	Year		Q-1		Q-2		Q-3		Q-4		Year		Q-1		to 4/28
Baker Hughes		1,074		1,153		1,218		1,307		1,375		1,263		1,417		1,480

Grey Wolf		85		98		99		103		108		102		109		109

During the first quarter of 2006, we sold five of our rigs previously available for refurbishment for $15.3 million in cash, resulting in a pre-tax gain of $9.4 million. These five rigs had not worked for several years.

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Term Contracts

We continue to enter into long-term contracts and, as of May 1, 2006, have 73 rigs working under such contracts. The Company has approximately 18,700 days or an average of 68 rigs contracted for the remaining three quarters of 2006, 11,900 days or an average of 33 rigs committed under term contracts in 2007, and 3,600 days or an average of 10 rigs committed in 2008. These contracts range in length from one to three years but end at various times over this period providing an opportunity to reprice at then-current market rates. The average increase in the contracted revenue per day on long-term contracts renewed during the past few months is approximately $5,800. These contracts should provide revenue of $435.9 million in 2006 and $244.0 million in 2007.

Our term contracts typically include a per day rig cancellation fee approximately equal to the dayrate under the contract less estimated operating expenses for the unexpired term of the contract. In addition, we are able to pass the cost of any labor increases on to our customers through our dayrates on all daywork contracts, including term contracts.

Drilling and Contract Rates

Improvements in the level of land drilling in the United States, spurred by strong commodity prices, positively impacted the dayrates we are currently receiving for our rigs. Our dayrates rose an average of $1,500 per rig day, or 10% across all rigs and market areas in the first quarter of 2006 from the fourth quarter of 2005. A rig day is defined as a twenty-four hour period in which a rig is under contract and should be earning revenue. As of May 1, 2006, our leading edge rates have risen to between $18,500 and $26,000 per rig day, without fuel or top drives.

In addition to our fleet of drilling rigs, we owned 16 top drives at May 1, 2006, for which our rates are up to $3,000 per rig day, at that date. Rates for our top drives are in addition to the above stated rates for our rigs.

Turnkey and Footage Contract Activity

Turnkey and footage work is an important part of our business and operating strategy. Our engineering and operating expertise allow us to provide this service to our customers and has historically provided higher revenues and earnings before interest expense, taxes, depreciation and amortization (“EBITDA”) per rig day worked than under daywork contracts. However, under turnkey and footage contracts we are typically required to bear additional operating costs (such as drill bits) and risk (such as loss of hole) that would otherwise be assumed by the customer under daywork contracts. For the quarter ended March 31, 2006, our turnkey and footage EBITDA was $19,294 per rig day, compared to daywork EBITDA of $9,820 per rig day. For the quarter ended March 31, 2006, turnkey and footage work represented 11% of total days worked compared to 11% of total days worked during the fourth quarter of 2005 and 9% in the first quarter of 2005.

EBITDA generated on turnkey and footage contracts can vary widely based upon a number of factors, including the location of the contracted work, the depth and level of complexity of the wells drilled and the ultimate success of drilling the well. The demand for drilling services under turnkey and footage contracts has historically been lower during periods of overall higher rig demand. While overall rig demand has been higher as evidenced by the increase in rig count, the demand for turnkey services has not declined.

Financial Outlook

We believe the outlook for oil and natural gas prices, as well as the outlook for land drilling contractors, remains positive. As of May 1, 2006 the NYMEX twelve-month strip for oil was $76.35 per barrel. Gas prices showed some decline in the past months because of the warm winter experienced in the

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United States, but have recently rebounded with the corresponding strip for natural gas at $9.12 per MMBTU.

We anticipate that the fundamentals reflected in these strong commodity prices will contribute to the continued strength and duration of the energy cycle, benefiting the land drilling industry. We will continue to focus on maintaining a strong balance sheet by reducing our net debt position (debt less cash) as well as making investment decisions that we believe provide quality returns and enhance shareholder value.

Strong demand has made it imperative to retain experienced crews so that we provide superior service to our customers and operate our rigs safely and efficiently. As a result, beginning in May 2006, we are providing a wage increase totaling approximately $540 per day to rig-based personnel. This wage increase will be contractually passed through to all our daywork customers in the form of higher dayrates.

We will recognize a gain in the second quarter of 2006 for insurance proceeds received in excess of the net book value written off in the first quarter of 2006 following an extensive fire that destroyed a 2,000 horsepower rig in March. The total amount of proceeds expected to be received is approximately $11.1 million. The rig will be replaced at a cost of approximately $11.0 million by using spare components and new components to construct a 2,000 horsepower diesel electric rig expected to be placed into service by the end of this year.

The current market conditions are also leading us and some drilling contractors to invest in new drilling rigs. There is limited manufacturing capability for new rigs, and therefore we expect the number of new builds to be brought to market in 2006 will also be limited. We have entered into agreements to purchase four new drilling rigs that will be delivered late in 2006 and have signed three-year term contracts with customers to operate these rigs. These term contracts are expected to provide solid returns on the capital invested and, in the aggregate, fully recover, after operating expenses, the purchase price of the rigs over their term.

After the loss of the rig in March, our rig fleet includes 111 marketed rigs and three rigs available for refurbishment. We intend to reactivate all three of our remaining rigs available for refurbishment in 2006, significantly upgrading each at an average capital expenditure of approximately $11.8 million. These three 3,000 horsepower rigs have been committed under term contracts with one expected to begin operations in the second quarter and the other two in the third quarter. It is expected in the aggregate that the term contracts will recover, after projected operating expense, all of the incremental capital expended in their redeployment. Our marketed rig fleet will total 119 rigs following the reactivation of the three rigs available for refurbishment, the replacement of the 2,000 horsepower rig, and the delivery of four new rigs in 2006 that are on order as previously announced.

We may need to purchase drill pipe for these rigs based upon inventory levels at the time of reactivation. The cost of drill pipe, at current prices, could range from $700,000 to $1.5 million for each rig. As dayrates increase and demand within the industry continues to strengthen, the cost of equipment we purchase and services we obtain may continue to increase as we move through 2006.

Based on anticipated levels of activity and dayrates the Company expects to average 109 rigs working and to generate EBITDA of approximately $107.8 million during the second quarter of 2006. Depreciation expense of approximately $17.6 million and interest expense of approximately $3.5 million is anticipated. Net income per share is expected to be approximately $0.24 on a diluted basis, using a tax rate of approximately 37% based upon the expected net income of $54.5 million for the quarter. These projected results include an approximate after-tax gain of $2.5 million related to insurance proceeds expected to be received to recover the loss of the rig damaged by fire. We expect to average 12 rigs working under turnkey and footage contracts during the second quarter of 2006; however, there can be no assurance that we will be able to maintain the current level of activity or EBITDA derived from turnkey and footage contracts.

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These projections are forward-looking statements and while we believe our estimates are reasonable, we can give no assurance that such expectations or the assumptions that underlie such assumptions will prove to be correct.

Critical Accounting Policies

Our consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements require our management to make subjective estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. However, these estimates, judgments and assumptions concern matters that are inherently uncertain. Accordingly, actual amounts and results could differ from these estimates made by management, sometimes materially. Critical accounting policies and estimates are defined as those that are both most important to the portrayal of our financial condition and operating results and require management’s most subjective judgments. The accounting policies that we believe are critical are property and equipment, impairment of long-lived assets, goodwill and other intangible assets, revenue recognition, insurance accruals, and income taxes.

Property and Equipment

Property and equipment, including betterments and improvements, are stated at cost with depreciation calculated using the straight-line method over the estimated useful lives of the assets. We make estimates with respect to the useful lives that we believe are reasonable. However, the cyclical nature of our business or the introduction of new technology in the industry could cause us to change our estimates, thus impacting the future calculation of depreciation. When any asset is tested for recoverability, we also review the remaining useful life of the asset. Any changes to the estimated useful life resulting from that review are made prospectively. We expense our maintenance and repair costs as incurred. We estimate that the useful lives of our assets are between three and 15 years.

Impairment of Long-Lived Assets

We assess the impairment of our long-lived assets under the Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Such indicators include changes in our business plans, a change in the physical condition of a long-lived asset or the extent or manner in which it is being used, or a severe or sustained downturn in the oil and gas industry. If we determine that a triggering event, such as those described previously, has occurred, we perform a review of our rigs and rig equipment. Our review is performed by comparing the carrying value of each rig, plus the estimated cost to refurbish or reactivate, to the estimated undiscounted future net cash flows for that rig. If the carrying value plus estimated refurbishment and reactivation cost of any rig is more than the estimated undiscounted future net cash flows expected to result from the use of the rig, a write-down of the rig to estimated fair market value must be made. The estimated fair market value is the amount at which an asset could be bought or sold in a current transaction between willing parties. Quoted market prices in active markets are the best estimate of fair market value, however, quoted market prices are generally not available. As a result, fair value must be determined based upon other valuation techniques. This could include appraisals or present value calculations. The calculation of undiscounted future net cash flows and fair market value is based on our estimates and projections.

The demand for land drilling services is cyclical and has historically resulted in fluctuations in rig utilization. We believe the contract drilling industry will continue to be cyclical and rig utilization will fluctuate. The likelihood of an asset impairment increases during extended periods of low rig utilization. Each year we evaluate our rigs held for refurbishment and determine our intentions for their future use. This evaluation takes into consideration, among other things, the physical condition and marketability of the rig, and projected reactivation or refurbishment cost. To the extent that our estimates of refurbishment

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and reactivation cost, undiscounted future net cash flows or fair market value change or there is a deterioration in the physical condition of the rigs held for refurbishment, we could be required under SFAS No. 144 to record an impairment charge. In 2005, we decided to utilize the component parts of seven rigs previously held for refurbishment as spare equipment. There was no impairment as a result of this decision. During the first three months of 2006, no impairment of our long-lived assets was recorded as no change in circumstances indicated that the carrying value of the assets was not recoverable.

In addition to our 111 marketed rigs, we have three rigs being refurbished at May 1, 2006. The estimated average per rig cost to reactivate these rigs is $11.8 million, excluding drill pipe. We may also need to purchase drill pipe for these rigs based upon inventory levels at the time of reactivation. The cost of drill pipe, at current prices, could range from $700,000 to $1.5 million for each rig. The net book value of the rigs being refurbished at March 31, 2006 was $10.0 million.

Goodwill and Other Intangible Assets

During the second quarter of 2004, we completed the acquisition of New Patriot Drilling Corp. (“Patriot”), which was accounted for as a business combination in accordance with SFAS No. 141, “Business Combinations.” In conjunction with the purchase price allocation of the Patriot acquisition, we recorded goodwill of $10.4 million and intangible assets of $3.2 million. The intangible assets represent customer contracts and related relationships acquired and are being amortized over the useful life of three years.

Goodwill represents the excess of costs over the fair value of assets of businesses acquired. None of the goodwill resulting from this acquisition is deductible for tax purposes. We follow the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets.” Pursuant to SFAS No. 142, goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead are tested for impairment at least annually in accordance with the provisions of this Statement. SFAS No. 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets.” During the first three months of 2006, no impairment of our goodwill and intangible assets was recorded.

Revenue Recognition

Revenues are earned under daywork, turnkey and footage contracts. Revenue from daywork and footage contracts is recognized when it is realized or realizable and earned. On daywork contracts, revenue is recognized based on the number of days completed at fixed rates stipulated by the contract. On footage contracts revenue is recognized based on the number of feet that have been drilled at fixed rates stipulated by the contract. Revenue from turnkey drilling contracts is recognized using the percentage-of-completion method based upon costs incurred to date compared to our estimate of the total contract costs. Under the percentage-of-completion method, we make estimates of the total contract costs to be incurred, and to the extent these estimates change, the amount of revenue recognized could be affected. The significance of the accrued turnkey revenue varies from period to period depending on the overall level of demand for our services and the portion of that demand that is for turnkey services. At March 31, 2006, there were eight turnkey wells in progress versus nine wells at March 31, 2005, with accrued revenue of $13.7 million and $13.8 million, respectively at such dates. Anticipated losses, if any, on uncompleted contracts are recorded at the time our estimated costs exceed the contract revenue.

Insurance Accruals

We maintain insurance coverage related to workers’ compensation and general liability claims up to $1.0 million per occurrence with an aggregate of $2.0 million for general liability claims. These policies include deductibles of $500,000 per occurrence for workers’ compensation coverage and

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$250,000 per occurrence for general liability coverage. If losses should exceed the workers’ compensation and general liability policy amounts, we have excess liability coverage up to a maximum of $100.0 million. At March 31, 2006 and December 31, 2005, we had $18.4 million and $18.1 million, respectively, accrued for losses incurred within the deductible amounts for workers’ compensation and general liability claims and for uninsured claims. These amounts are included in current accrued workers’ compensation and other long-term liabilities on the balance sheet.

The amount accrued for the provision for losses incurred varies depending on the number and nature of the claims outstanding at the balance sheet dates. In addition, the accrual includes management’s estimate of the future cost to settle each claim such as future changes in the severity of the claim and increases in medical costs. We use third parties to assist us in developing our estimate of the ultimate costs to settle each claim, which is based upon historical experience associated with the type of each claim and specific information related to each claim. The specific circumstances of each claim may change over time prior to settlement and as a result, our estimates made at the balance sheet dates may change.

Income Taxes

We are subject to income and other similar taxes in all areas in which we operate. When recording income tax expense, certain estimates are required because: (a) income tax returns are generally filed months after the close of our annual accounting period; (b) tax returns are subject to audit by taxing authorities and audits can often take years to complete and settle; and (c) future events often impact the timing of when we recognize income tax expenses and benefits. We have deferred tax assets mostly relating to workers compensation liabilities. We routinely evaluate all deferred tax assets to determine the likelihood of their realization. We have not recorded a valuation allowance as of March 31, 2006 and 2005.

In addition, as of March 31, 2006 and 2005 we had $17.4 million and $20.2 million, respectively, in permanent differences which relate to differences between the financial accounting and tax basis of assets that were purchased in capital stock acquisitions. The permanent differences will be reduced as the assets are depreciated for financial accounting purposes on a straight-line basis over the next seven years. As the amortization of these permanent differences is a fixed amount, our effective tax rate varies widely based upon the current level of income or loss.

Financial Condition and Liquidity

The following table summarizes our financial position as of March 31, 2006 and December 31, 2005.


	March 31, 2006				December 31, 2005
	(Unaudited)
	(Dollars in thousands)
	Amount		%		Amount		%
Working capital	$	301,302		36	$	250,446		32
Property and equipment, net		503,551		61		499,965		65
Goodwill		10,377		1		10,377		1
Other noncurrent assets		19,764		2		13,098		2

Total	$	834,994		100	$	773,886		100


Long-term debt	$	275,000		33	$	275,000		35
Other long-term liabilities		134,164		16		129,654		17
Shareholders’ equity		425,830		51		369,232		48

Total	$	834,994		100	$	773,886		100

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Significant Changes in Financial Condition

The significant changes in our financial position from December 31, 2005 to March 31, 2006 are an increase in working capital of $50.9 million and an increase in shareholders’ equity of $56.6 million. The increase in working capital is primarily the result of higher balances in cash and cash equivalents, accounts receivable, as well as lower accounts payable, partially offset by higher current income taxes payable. The increase in cash and cash equivalents is due to more rigs working and increased dayrates as well as to the proceeds from the sale of five of our rigs previously held for refurbishment during the first quarter of 2006. The increase in accounts receivable is due to more rigs working, increased dayrates and the receivable recorded in the first quarter of 2006 in connection with a portion of the insurance proceeds that are to be collected during the second quarter of 2006 related to the loss of one of our rigs and top drives. The accounts payable balance is lower due primarily to the timing of payments made on our trade payables. The increase in current income taxes payable is due to the accrual of current income taxes for 2005 as well as the first quarter of 2006. The increase in shareholders’ equity is primarily due to the net income for the period.

Floating Rate Notes

The Floating Rate Notes bear interest at a per annum rate equal to 3-month LIBOR, adjusted quarterly, minus a spread of 0.05% but will never be less than zero or more than 6.00%. For the three months ended March 31, 2006, the interest rate on the Floating Rate Notes was 4.53%. For the second quarter of 2006, the interest rate has been set at 4.94%. These notes mature on April 1, 2024. The Floating Rate Notes are convertible into shares of our common stock, upon the occurrence of certain events, at a conversion price of $6.51 per share. The Floating Rate Notes are general unsecured senior obligations and are fully and unconditionally guaranteed, on a joint and several basis, by all our domestic wholly-owned subsidiaries. Non-guarantor subsidiaries are not significant.

We may redeem some or all of the Floating Rate Notes at any time on or after April 1, 2014, at a redemption price equal to 100% of the principal amount of the Floating Rate Notes, plus accrued but unpaid interest and liquidated damages, if any, to the date of repurchase, payable in cash. Holders may require us to repurchase all or a portion of the Floating Rate Notes on April 1, 2014 or April 1, 2019, and upon a change of control, as defined in the indenture governing the Floating Rate Notes, at 100% of the principal amount of the Floating Rate Notes, plus accrued but unpaid interest and liquidated damages, if any, to the date of repurchase, payable in cash.

As of the date of this report, none of the conditions enabling the holders of the Floating Rate Notes to convert them into shares of our common stock have occurred.

3.75% Notes

The 3.75% Notes bear interest at 3.75% per annum and mature on May 7, 2023. The 3.75% Notes are convertible into shares of our common stock, upon the occurrence of certain events, at a conversion price of $6.45 per share. We will be required to pay contingent interest at a rate equal to 0.50% per annum commencing May 7, 2008, upon the occurrence of certain events. The 3.75% Notes are general unsecured senior obligations and are fully and unconditionally guaranteed, on a joint and several basis, by all of our domestic wholly-owned subsidiaries. Non-guarantor subsidiaries are not significant.

We may redeem in cash some or all of the 3.75% Notes at any time on or after May 14, 2008, at various redemption prices depending upon the date redeemed plus accrued but unpaid interest, including contingent interest. Holders may require us to repurchase all or a portion of their 3.75% Notes on May 7, 2013 or May 7, 2018, and upon a change of control, as defined in the indenture governing the 3.75% Notes, at 100% of the principal amount of the 3.75% Notes, plus accrued but unpaid interest, including contingent interest, if any, to the date of repurchase, payable in cash.

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As of October 1, 2005, and through the first quarter of 2006, the 3.75% Notes were convertible into shares of our common stock because one of the triggering events permitting note holders to convert their 3.75% Notes occurred during the third and fourth quarters of 2005. The triggering event was that the closing price per share of our common stock exceeded 110% of the conversion price ($7.10 per share) of the 3.75% Notes for at least 20 trading days in the period of 30 consecutive trading days ended on both September 30, 2005 and December 31, 2005. As of March 31, 2006, none of the note holders had exercised their right to convert the 3.75% Notes into shares of our common stock. The 3.75% Notes ceased being convertible after March 31, 2006 because this triggering event was not met during the first quarter of 2006.

CIT Facility

Our subsidiary Grey Wolf Drilling Company L.P. has a $100.0 million credit facility with the CIT Group/Business Credit, Inc. (the “CIT Facility”) which expires December 31, 2008. The CIT Facility provides us with the ability to borrow up to the lesser of $100.0 million or 50% of the Orderly Liquidation Value (as defined in the agreement) of certain drilling rig equipment located in the 48 contiguous states of the United States of America. Periodic interest payments are due at a floating rate based upon our debt service coverage ratio within a range of either LIBOR plus 1.75% to 3.50% or prime plus 0.25% to 1.50%. The CIT Facility provides up to $50.0 million available for letters of credit. We are required to pay a quarterly commitment fee of 0.50% per annum on the unused portion of the CIT Facility and letters of credit accrue a fee of 1.25% per annum. The CIT Facility contains affirmative and negative covenants and we are in compliance with these covenants. Substantially all of our assets, including our drilling equipment, are pledged as collateral under the CIT Facility which is also secured by a guarantee of Grey Wolf, Inc. and guarantees of certain of our wholly-owned subsidiaries.

The CIT Facility allows us to repurchase shares of our common stock, pay dividends to our shareholders, and make prepayments on the 3.75% Notes and the Floating Rate Notes. However, as defined by the CIT Facility, all of the following conditions must be met to enable us to make payments for any of the above-mentioned reasons: (i) payments may not exceed $150.0 million in the aggregate, (ii) no Default or Event of Default shall exist at the time of any such payments, (iii) at least $35.0 million of Availability (availability under the CIT Facility plus cash on hand) exists immediately after any such payments, and (iv) we must provide CIT Group/Business Credit, Inc. three Business Days prior written notice of any such payments.

As of the date of this report, we did not have an outstanding balance under the CIT Facility and had $26.9 million of undrawn, standby letters of credit. These standby letters of credit are for the benefit of various insurance companies as collateral for premiums and losses which may become payable under the terms of the underlying insurance contracts. Outstanding letters of credit reduce the amount available for borrowing under the CIT facility.

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Cash Flow

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


	Three Months Ended
	March 31,
	2006			2005
	(In thousands)
	(Unaudited)
Net cash provided by (used in):

Operating activities	$	65,512		$	40,134
Investing activities		(25,017	)		(24,319	)
Financing activities		1,221			1,321

Net increase in cash	$	41,716		$	17,136

Our cash flows from operating activities are affected by a number of factors including the number of rigs working under contract, whether the contracts are daywork, footage, or turnkey, and the rate received for these services. Our cash flow from operating activities provided $65.5 million and $40.1 million during the first three months of 2006 and 2005, respectively. The increase in cash flow from operating activities for the three months ended March 31, 2006 compared to the three months ended March 31, 2005 is due primarily to an increase in EBITDA and net income as a result of higher dayrates and rig activity.

Cash flow used in investing activities for the three months ended March 31, 2006 consisted of $28.0 million of capital expenditures, $15.6 million in proceeds from the sale of property and equipment, and $12.7 million in deposits for new rig purchases. Capital expenditures in 2006 included costs for the reactivation of two rigs held for refurbishment. The $15.6 million in proceeds from the sale of property and equipment was primarily the result of the sale of five of our rigs previously available for refurbishment in the first quarter of 2006. For the three months ended March 31, 2005, cash flow used in investing activities consisted primarily of $24.8 million of capital expenditures. Capital expenditures in 2005 included costs for the reactivation of four rigs that were available for refurbishment. Capital expenditures in 2006 and 2005 also included betterments and improvements to our rigs, the acquisition of drill pipe and collars, and other capital items.

Cash flow provided by financing activities for the three months ended March 31, 2006 consisted primarily of proceeds of $996,000 from the exercise of stock options. Cash flow provided by financing activities for the three months ended March 31, 2005 primarily consisted of the net proceeds of $1.3 million from the exercise of stock options.

Projected Cash Sources and Uses

We expect to use cash generated from operations to cover cash requirements, including debt service on the 3.75% Notes and Floating Rate Notes and capital expenditures in 2006. We will make quarterly interest payments on the Floating Rate Notes on January 1, April 1, July 1 and October 1 of each year and semi-annual interest payments of $2.8 million on the 3.75% Notes on May 7 and November 7 of each year through the dates of maturity. To the extent that we are unable to generate sufficient cash from operations we would be required to use cash on hand or draw on our CIT Facility.

Capital expenditures for 2006 are projected to be between $200.0 million and $210.0 million, subject to the actual level of rig activity and the ultimate number of new rig purchases and rig reactivations. We expect to spend approximately $35.4 million to reactivate all three of our remaining 3,000 horsepower rigs held for refurbishment during 2006. Each is expected to be significantly upgraded.

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One of these rigs is expected to start work in the second quarter of 2006 and the other two in the third quarter. We have obtained long-term contracts for these rigs which, in the aggregate, are expected to generate revenue of approximately $55.7 million over the term of the contracts. We believe that this revenue will be sufficient to recover, after operating expenses, our capital cost of refurbishing the rig.

We also expect to spend approximately $60.0 million to purchase four new 1,500 horsepower drilling rigs to be delivered late in 2006. We have obtained long-term contracts on each of these rigs which, in the aggregate, are expected to generate revenue of approximately $104.4 million over the term of the contracts. We believe that this revenue will be sufficient to recover, after operating expenses, the purchase price of these rigs.

In addition, our projected capital expenditures for 2006 include costs for betterments and improvements to our rigs, the acquisition of drill pipe and drill collars, the purchase of top drives, and other capital items.

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 natural gas industry, demand for drilling services and to a lesser extent by changes in general inflation. Our daywork contracts generally allow us to pass wage increases, the most significant component of our operating costs, on to our daywork customers in the form of higher dayrates.

Results of Operations

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

Reconciliation of Non-GAAP Financial Measures

In the following discussion of the results of our operations and elsewhere in this filing, we use EBITDA and EBITDA per rig day. EBITDA is a non-GAAP financial measure under the rules and regulations of the Securities and Exchange Commission (“SEC”). We believe that our disclosure of EBITDA per rig day as a measure of rig operating performance allows investors to make a direct comparison between us and our competitors, without regard to differences in capital structure or to differences in the cost basis of our rigs and those of our competitors. Investors should be aware, however, that there are limitations inherent in using this performance measure as a measure of overall company profitability because it excludes significant expense items such as depreciation expense and interest expense. An improving trend in EBITDA per rig day may not be indicative of an improvement in our overall profitability. To compensate for the limitations in utilizing EBITDA per rig day as an operating measure, our management also uses GAAP measures of performance including operating income (loss) and net income (loss) to evaluate performance but only with respect to the company as a whole and not on a per rig basis. In accordance with SEC rules, we have included below a reconciliation of EBITDA to net income, which is the nearest comparable GAAP financial measure.

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							Projected
							Three Months
	Three Months Ended						Ending
	March 31,						June 30,
	2006			2005			2006
				(In thousands)
				(Unaudited)
Earnings before interest expense, taxes, depreciation and amortization	$	106,333		$	53,585		$	107,800
Depreciation and amortization		(17,148	)		(14,302	)		(17,550	)
Interest expense		(3,269	)		(2,599	)		(3,450	)
Total income tax expense		(31,667	)		(13,640	)		(32,290	)

Net income	$	54,249		$	23,044		$	54,510

Comparison of the Three Months Ended March 31, 2006 and 2005

The following table highlights rig days worked, contract drilling revenues, and EBITDA for our daywork and turnkey operations for the three months ended March 31, 2006 and 2005.


				Three Months Ended									Three Months Ended
				March 31, 2006									March 31, 2005
	Daywork			Turnkey						Daywork			Turnkey
	Operations			Operations⁽¹⁾			Total			Operations			Operations⁽¹⁾			Total
	(Dollars in thousands except averages per rig day worked)
	(Unaudited)
Rig days worked		8,706			1,080			9,786			7,990			836			8,826

Contract drilling revenues	$	164,367		$	58,512		$	222,879		$	113,624		$	36,368		$	149,992
Drilling operations expenses		(84,481	)		(38,379	)		(122,860	)		(66,446	)		(26,489	)		(92,935	)
General and administrative expenses		(4,741	)		(576	)		(5,317	)		(3,562	)		(360	)		(3,922	)
Interest income		1,882			234			2,116			395			37			432
Gain on sale of assets		8,468			1,047			9,515			16			2			18

EBITDA	$	85,495		$	20,838		$	106,333		$	44,027		$	9,558		$	53,585


Average per rig day worked:
Contract drilling revenues	$	18,880		$	54,178		$	22,775		$	14,221		$	43,502		$	16,994
EBITDA	$	9,820		$	19,294		$	10,866		$	5,510		$	11,433		$	6,071


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

Our EBITDA increased by $52.7 million, or 98%, to $106.3 million for the quarter ended March 31, 2006 from $53.6 million for the quarter ended March 31, 2005. The increase resulted from a $41.4 million increase in EBITDA from daywork operations and a $11.3 million increase in EBITDA from turnkey operations. On a per rig day basis, our EBITDA increased by $4,795 per rig day, or 79%, to $10,866 in the first quarter of 2006 from $6,071 for the same period in 2005. This increase included a $4,310 per rig day increase from daywork operations and a $7,861 per rig day increase from turnkey operations. Total general and administrative expenses increased by $1.4 million due primarily to the expensing of stock options and restricted stock in the first quarter of 2006 as well as to higher payroll and long-term incentive costs. Total interest income increased by $1.7 million due to higher cash balances and higher interest rates during the first quarter of 2006 compared with the same period in 2005. Gain on sale of assets increased by $9.5 million during the first quarter of 2006 compared to the first quarter of

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2005 due primarily to the sale of five of our rigs previously available for refurbishment in January of 2006.

Daywork Operations

The increase in daywork EBITDA discussed above was due in part to an increase of 716 rig days worked on daywork contracts in the first quarter of 2006 when compared with the first quarter of 2005. This 9% increase in rig days worked was due to overall higher demand for our services. Higher dayrates in the first quarter of 2006 versus the same period in 2005 contributed more significantly to the increase. Contract drilling revenue per rig day increased $4,659, or 33%. This increase includes an approximate $500 average per rig day wage increase that went into effect on June 1, 2005 which was contractually passed on to our customers in the form of higher dayrates. Expenses increased overall, and on a per rig day basis, due to higher activity levels as well as several other factors, including the above-mentioned wage increase and the retention and incentive program implemented in November 2005 to retain experienced personnel.

Turnkey Operations

Turnkey EBITDA was higher in the first quarter of 2006 due to higher revenue on a per rig day basis. Increasing daywork dayrates are considered in our turnkey bid process and resulted in price increases for our turnkey operations. These price increases, which were due in part to the wage increase discussed above that took effect on June 1, 2005, resulted in the higher revenue. Also, differences in the complexity and success of the wells drilled between the two periods contributed to the increased EBITDA.

Other

Depreciation and amortization expense increased by $2.8 million, or 20%, to $17.1 million for the three months ended March 31, 2006, compared to $14.3 million for the three months ended March 31, 2005. Depreciation and amortization expense is higher due to capital expenditures made during 2005 and the first three months of 2006, including the cost to refurbish rigs.

Interest income increased by $1.7 million to $2.1 million for the three months ended March 31, 2006 from $432,000 for the same period in 2005. This increase is due to higher cash balances and higher interest rates when comparing the two periods.

Interest expense increased by $670,000, or 26%, to $3.3 million in the first quarter of 2006 from $2.6 million in the first quarter of 2005. This increase is due primarily to a higher interest rate on our Floating Rate Notes during the three months ended March 31, 2006 compared to the three months ended March 31, 2005.

Our income tax expense increased by $18.1 million to $31.7 million for the three months ended March 31, 2006 compared to $13.6 million for the same period in 2005. The increase is due to the increased level of income. The Company also utilized all of its remaining net operating loss carryforwards in 2005 for federal tax purposes which has caused a significant increase in current versus deferred tax expense.

Item 3. Quantitative and Qualitative Disclosure about Market Risk

Interest Rate Risk. We are subject to market risk exposure related to changes in interest rates on the Floating Rate Notes and the CIT Facility. The Floating Rate Notes bear interest at a per annum rate which is equal to 3-month LIBOR, adjusted quarterly, minus a spread of 0.05%. We had $125.0 million of the Floating Rate Notes outstanding at March 31, 2006. A 1% change in the interest rate on the Floating Rate Notes would change our interest expense by $1.3 million on an annual basis. However, the

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annual interest on the Floating Rate Notes will never be below zero or more than 6.00%, which could yield interest expense ranging from zero to $7.5 million on an annual basis. Interest on borrowings under the CIT Facility accrues at a variable rate, using either the prime rate plus 0.25% to 1.50% or LIBOR plus 1.75% to 3.50%, depending upon our debt service coverage ratio for the trailing 12 month period. We have no outstanding balance under the CIT Facility at May 1, 2006 and as such have no exposure under this facility to a change in interest rates.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2006, under the supervision and with participation of management, including the Chief Executive Officer and Chief Financial Officer. Our disclosure controls and procedures are designed to ensure that the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act is accumulated and communicates to the issuer’s management including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these controls and procedures are effective.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are involved in litigation incidental to the conduct of our business, none of which management believes is, individually or in the aggregate, material to our consolidated financial condition or results of operations. See Note 6 — Contingencies in Notes to Consolidated Financial Statements.

Item 1a. Risk Factors

None.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

None.

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Item 5. Other Information

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts included in this report are forward-looking statements, including statements regarding the following:

	•		business strategy;

	•		demand for our services;

	•		spending by our customers;

	•		2006 rig activity and financial results;

	•		projected depreciation expense and interest expense;

	•		rigs expected to be engaged in turnkey and footage operations;

	•		reactivation, timing and cost of reactivation of rigs available for refurbishment;

	•		cost of building new rigs and delivery of these rigs;

	•		projected dayrates;

	•		the ability to recover our refurbishment costs or the purchase price of rigs from term contracts;

	•		the availability and financial terms of term contracts;

	•		projected tax rate;

	•		expected insurance proceeds;

	•		wage rates and retention of employees;

	•		sufficiency of our capital resources and liquidity; and

	•		depreciation and capital expenditures in 2006.

Although we believe the forward-looking statements are reasonable, we cannot assure you that these statements will prove to be correct. We have based these statements on assumptions and analyses in light of our experience and perception of historical trends, current conditions, expected future developments and other factors we believe are appropriate when the statements are made. Important factors that could cause actual results to differ materially from our expectations include:

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

	•		fluctuations in levels of oil and natural gas exploration and development activities;

	•		fluctuations in demand for contract land drilling services;

	•		fluctuations in interest rates;

	•		the existence and competitive responses of our competitors;

	•		uninsured or underinsured casualty losses;

	•		technological changes and developments in the industry;

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

	•		U.S. and global economic conditions;

	•		the availability and terms of insurance coverage;

	•		the ability to attract and retain qualified personnel;

	•		unforeseen operating costs such as cost for environmental remediation and turnkey cost overruns; and

	•		weather conditions.

Our forward-looking statements speak only as of the date specified in such statements or, if no date is stated, as of the date of this report. Grey Wolf, Inc. expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement contained in this report to reflect any change in our expectations or with regard to any change in events, conditions or circumstances on which our forward-looking statements are based. Please refer to our Annual Report on Form 10-K for the year ended December 31, 2005 filed with the Securities and Exchange Commission for additional information concerning risk factors that could cause actual results to differ from the forward-looking statements.

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Item 6. Exhibits

	3.1	Articles of Incorporation of Grey Wolf, Inc., as amended (incorporated herein by reference to Exhibit 3.1 to Form 10-Q dated May 12, 1999).

	3.2	By-Laws of Grey Wolf, Inc., as amended (incorporated herein by reference to Exhibit 99.1 to Form 8-K dated March 23, 1999).

	4.1	Rights Agreement dated as of September 21, 1998 by and between the Company and American Stock Transfer and Trust Company as Rights Agent (incorporated herein by reference to Exhibit 4.1 to Form 8-K filed September 22, 1998).

	4.2	Indenture, dated as of May 7, 2003, relating to the 3.75% Contingent Convertible Senior Notes due 2023 between the Company, the Guarantors, and JPMorgan Chase Bank, a New York Banking Corporation, as Trustee (incorporated herein by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-3 No. 333-106997 filed July 14, 2003).

	4.3	Supplemental Indenture, dated as of May 22, 2003, relating to the 3.75% Contingent Convertible Senior Notes due 2023 between the Company, the Guarantors, and JPMorgan Chase Bank, a New York Banking Corporation, as Trustee (incorporated herein by reference to Exhibit 4.3 to the Company’s Registration Statement on Form S-3 No. 333-106997 filed July 14, 2003).

	4.4	Indenture, dated as of March 31, 2004, relating to the Floating Rate Contingent Convertible Senior Notes Due 2024 between the Company, the Guarantors, and J.P. Morgan Chase Bank, a New York banking corporation, as Trustee (incorporated by reference to Exhibit 4.1 to Form 10-Q dated May 5, 2004).

	4.5	Registration Rights Agreement as of March 31, 2004 by and between Grey Wolf, Inc., the Guarantors, and the Initial Purchasers of the Floating Rate Contingent Convertible Senior Notes due 2024 (incorporated by reference to Exhibit 4.2 to the Quarterly Report on Form 10-Q filed May 5, 2004).

	4.6	Second Supplemental Indenture, dated as of March 31, 2004, relating to the 3.75% Contingent Convertible Senior Notes due 2023 between the Company, the Guarantors, and JP Morgan Chase Bank, a New York Banking Corporation, as Trustee (incorporated by reference to Exhibit 4.3 to the Quarterly Report on Form 10-Q filed May 5, 2004).

^*31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a)

^*31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a)

^* 32.1		Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Thomas P. Richards, Chairman, President and Chief Executive Officer and David W. Wehlmann, Executive Vice President and Chief Financial Officer.


*		Filed herewith

- 30 -

Index to Exhibits

	3.1	Articles of Incorporation of Grey Wolf, Inc., as amended (incorporated herein by reference to Exhibit 3.1 to Form 10-Q dated May 12, 1999).

	3.2	By-Laws of Grey Wolf, Inc., as amended (incorporated herein by reference to Exhibit 99.1 to Form 8-K dated March 23, 1999).

	4.1	Rights Agreement dated as of September 21, 1998 by and between the Company and American Stock Transfer and Trust Company as Rights Agent (incorporated herein by reference to Exhibit 4.1 to Form 8-K filed September 22, 1998).

	4.2	Indenture, dated as of May 7, 2003, relating to the 3.75% Contingent Convertible Senior Notes due 2023 between the Company, the Guarantors, and JPMorgan Chase Bank, a New York Banking Corporation, as Trustee (incorporated herein by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-3 No. 333-106997 filed July 14, 2003).

	4.3	Supplemental Indenture, dated as of May 22, 2003, relating to the 3.75% Contingent Convertible Senior Notes due 2023 between the Company, the Guarantors, and JPMorgan Chase Bank, a New York Banking Corporation, as Trustee (incorporated herein by reference to Exhibit 4.3 to the Company’s Registration Statement on Form S-3 No. 333-106997 filed July 14, 2003).

	4.4	Indenture, dated as of March 31, 2004, relating to the Floating Rate Contingent Convertible Senior Notes Due 2024 between the Company, the Guarantors, and J.P. Morgan Chase Bank, a New York banking corporation, as Trustee (incorporated by reference to Exhibit 4.1 to Form 10-Q dated May 5, 2004).

	4.5	Registration Rights Agreement as of March 31, 2004 by and between Grey Wolf, Inc., the Guarantors, and the Initial Purchasers of the Floating Rate Contingent Convertible Senior Notes due 2024 (incorporated by reference to Exhibit 4.2 to the Quarterly Report on Form 10-Q filed May 5, 2004).

	4.6	Second Supplemental Indenture, dated as of March 31, 2004, relating to the 3.75% Contingent Convertible Senior Notes due 2023 between the Company, the Guarantors, and JP Morgan Chase Bank, a New York Banking Corporation, as Trustee (incorporated by reference to Exhibit 4.3 to the Quarterly Report on Form 10-Q filed May 5, 2004).

^* 31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a)

^*31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a)

^* 32.1		Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Thomas P. Richards, Chairman, President and Chief Executive Officer and David W. Wehlmann, Executive Vice President and Chief Financial Officer.


*		Filed herewith



Date: May 5, 2006	By:	/s/ David W. Wehlmann

		David W. Wehlmann
		Executive Vice President and
		Chief Financial Officer


Date: May 5, 2006	By:	/s/ Kent D. Cauley

		Kent D. Cauley
		Vice President and Controller

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			Page
Part I.	Financial Information

	Item 1.	Financial Statements

		Consolidated Balance Sheets	3

		Consolidated Statements of Operations	4

		Consolidated Statements of Shareholders’ Equity and Comprehensive Income	5

		Consolidated Statements of Cash Flows	6

		Notes to Consolidated Financial Statements	7

	Item 2.	Management’s Discussion and Analysis of Financial

		Condition and Results of Operations	16

	Item 3.	Quantitative and Qualitative Disclosure about Market Risk	27

	Item 4.	Controls and Procedures	28

Part II.	Other Information

	Item 1.	Legal Proceedings	28

	Item 1A.	Risk Factors	28

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28

	Item 3.	Defaults Upon Senior Securities	28

	Item 4.	Submission of Matters to a Vote of Security Holders	28

	Item 5.	Other Information	29

	Item 6.	Exhibits	30
Certification of CEO pursuant to Rule 13a-14(a)
Certification of CFO pursuant to Rule 13a-14(a)
Certification pursuant to 18 U.S.C. Section 1350