prospectus/proxy statement relating to the proposed merger. The prospectus/proxy statement for our special meeting of shareholders to approve the merger was mailed beginning on October 30, 2008, to shareholders of record at the close of business on October 27, 2008, the record date for the special meeting. Our special meeting of shareholders is scheduled for December 9, 2008. Upon consummation of the proposed merger, we may be required to pay Basic a fee of $ 25.0 million.
New Rig Purchases
In September 2007, we entered into three-year term contracts with two exploration and production companies to deploy two new 1,500 horsepower built-for-purpose rigs. These rigs are designed to drill multiple wells from a single well site location. One of these rigs began working in July 2008 and the remaining rig is expected to be delivered and begin working in the fourth quarter of 2008. The expected purchase price per rig is approximately $22.2 million, and these rigs will be deployed in the Rocky Mountain market. The Company expects to recover the majority of the cost of the capital expended for these rigs over their initial term contracts. With the addition of these rigs, our fleet is expected to total 123 rigs by the end of 2008. Rig Activity
The land rig count per Baker Hughes has continued to increase from a low in 2007 of 1,610 rigs to 1,887 rigs on October 31, 2008. The influx of newly-built land drilling rigs during the last two years created some excess capacity in the land drilling market. This new build activity, which has pressured the average number of rigs we have working, has lessened considerably during the first nine months of 2008. Our term contract portfolio has partially protected us from the declines in the land drilling market and bolstered our results. Oil and natural gas prices have pulled back from their second-quarter peaks, with 12-month strips at $71.07 per barrel and $7.17 per mmbtu at October 31, 2008, respectively. Given the current economic conditions and global financial crisis, coupled with announced budget reductions by a number of E&P companies, we anticipate a decrease in demand for land drilling moving into 2009. We are well-positioned with our premium equipment, strong portfolio of term contracts and strong balance sheet to weather a slowdown in drilling activity.
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.

                       2006                                   2007                                                       2008
    Domestic
    Land Rig           Full                                                             Full                                               10/1 -
      Count            Year          Q-1          Q-2          Q-3          Q-4         Year          Q-1          Q-2          Q-3         10/31
Baker Hughes           1,535        1,626        1,653        1,691        1,705        1,669        1,690        1,775        1,886        1,882
Grey Wolf                108          110          104          104          103          105          100          105          112          114

Term Contracts
We endeavor to enter into term contracts to provide drilling services on a daywork basis. Typically, the length of our term contracts ranges from six months to three years. They usually include a per rig day cancellation fee approximately equal to the dayrate under the contract less estimated contract drilling operating expenses for the unexpired term of the contract. In addition, we are able to pass most increases in labor costs on to our customers through our dayrates on all daywork contracts, including term contracts. We seek term contracts with our customers when we believe that those contracts may mitigate the financial impact to us of a potential decline in dayrates during the period in which the term contract is in effect. This provides greater stability to our business and allows us to plan and manage our business more efficiently. We also have used term contracts to contractually assure that we receive sufficient cash flow to recover substantially all of the costs of improvements we make to the rigs under the term contract, particularly when those improvements are requested by the customer.
During mid-2008, we saw greater interest in term contracts from our customers, as evidenced by the recent increase in our term contract portfolio. At September 30, 2008, we had approximately 26,100 rig days contracted under term contracts, as compared with approximately 25,000 rig days under term contract at September 30, 2007. Our rig days under contract at September 30, 2008 are approximately equivalent to an average of 68 rigs working under term contracts for the remaining quarter in 2008 and an average of 44 rigs working for 2009. Our term contracts are expected to provide revenue of approximately $448.8 million for all of 2008 and $342.3 million in 2009. At October 31, 2008, we had 72 rigs working under term contracts, representing 59% of our total rig fleet.
Drilling Contract Rates
The demand for our services increased throughout the year, as indicated in the increase in the land rig count and our average rigs working. As previously mentioned however, given the recent declines in commodity prices and the current economic conditions, we expect demand for land drilling to soften. This may result in decreasing dayrates and declining total active rig counts. Our leading edge spot-market daywork bid rates currently range from approximately $17,000 to $ 22,000 per rig day, without fuel or top drives. These rates reflect an approximate $500 per rig day increase related to a crew wage increase effective August 6, 2008. Without the effect of the wage increase our leading edge rates have decreased $1,500 to $2,000 per rig day from July 2008. A rig day is defined as a twenty-four hour period in which a rig is under contract and should be earning revenue.
In addition to our fleet of drilling rigs, we owned 33 top drives at October 31, 2008. Top drive utilization for the month of October 2008 was 79%. Rates are as high as $3,300 per rig day. These rates are in addition to the above stated rates for our rigs.
Turnkey Contract Activity
Turnkey 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, income taxes, depreciation and amortization ("EBITDA") per rig day worked than under daywork contracts (see discussion under Reconciliation of Non-GAAP Financial Measures regarding the use of EBITDA and EBITDA per rig day). However, under turnkey 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 September 30, 2008, our turnkey EBITDA was $8,584 per rig day, compared to daywork EBITDA of $6,504 per rig day, and our turnkey revenue per rig day was $54,625 compared to $20,338 per rig day for daywork. For the quarter ended September 30, 2008, turnkey work represented 7% of total days worked compared to 7% in the second quarter of 2008 and 9% in the third quarter of 2007. Turnkey EBITDA represented 9% of total company EBITDA in the third quarter of 2008, compared to 14% in the second quarter of 2008 and 12% in the third quarter 2007. EBITDA generated on turnkey 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.
Stock Repurchase Program
We may from time to time make purchases of common stock up to $150.0 million in open market or in privately negotiated block-trade transactions. As of October 31, 2008, we have repurchased 19.0 million shares at a total cost of $121.9 million, exclusive of other direct costs, under the program. The number of shares to be purchased and the timing of purchases will be based on a number of factors: the price of the common stock, general market conditions, available cash and alternate investment opportunities. We may terminate the stock repurchase program prior to completion.
The merger agreement that we entered into with Precision prevents us from making stock repurchases. This will be in effect unless and until the merger agreement is terminated.
Financial Outlook
As noted, we anticipate a decline in demand for land drilling rigs moving into 2009. However, our average rigs working remains at its highest level in our history and dayrates have remained constant with the rates we began to realize in July 2008.
The ability to provide equipment that addresses the challenges of deep, directional or multi-well site drilling is critical to meeting our customers' needs in the most active domestic land drilling markets. Additionally, our fleet is well suited to these drilling opportunities given the recent acquisition of new rigs and substantial rig upgrades completed over the past three to four years.
Oil and natural gas prices are down substantially in recent months. However, natural gas decline rates are steeper than ever in the United States and Canada and we believe it will take more rigs running to meet the United States' long-term natural gas requirements.
During the fourth quarter of 2008, we expect to average 108 to 112 rigs working, with seven to nine of these rigs performing turnkey services. In addition, average daywork EBITDA per rig day, before the effect of any merger-related expenses, is expected to remain relatively consistent with the third quarter of 2008. Depreciation expense of approximately $28.2 million, interest expense of approximately $3.0 million and an effective tax rate of approximately 37% are expected for the fourth quarter of 2008.
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 expectations 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 requires 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 relate to property and equipment, impairment of long-lived assets, goodwill, 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 estimate that the useful lives of our assets are between three and 20 years. Our maintenance and repair costs are expensed as incurred.
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 (if any), 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 and we believe these fluctuations will continue in the future. The likelihood of an asset impairment increases during extended periods of low rig utilization.
Each year we evaluate our rigs available for refurbishment, if any, 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 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 available for refurbishment, we could be required under SFAS No. 144 to record an impairment charge. During the first nine months of 2008, 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.
Goodwill
During 2004, we completed the acquisition of New Patriot Drilling Corp., which was accounted for as a business combination in accordance with SFAS No. 141, "Business Combinations." In conjunction with the purchase price allocation for this acquisition, we recorded goodwill of $10.4 million.
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. During the first nine months of 2008, no impairment of our goodwill was recorded. Revenue Recognition
Revenues are earned under daywork and turnkey contracts. Revenue from daywork 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. For certain contracts, we receive lump-sum fees for mobilization of equipment. Mobilization fees and the related costs are deferred and amortized over the contract term. 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 timing of our turnkey projects, the overall level of demand for our services and the portion of that demand that is for turnkey services. At September 30, 2008, there were nine turnkey wells in progress versus seven wells at September 30, 2007, with accrued revenue of $16.0 million and $10.6 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 $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 September 30, 2008 and December 31, 2007, we had $23.6 million and $19.9 million, respectively, accrued for losses incurred within the deductible amounts for workers' compensation, 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 on 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 and stock-based compensation awards. We routinely evaluate all deferred tax assets to determine the likelihood of their realization.

We follow the provisions of FASB Interpretation No. ("FIN") 48, "Accounting for Uncertainty in Income Taxes." As of September 30, 2008, we had $1.5 million of unrecognized tax benefits, all of which could have an impact on the effective tax rate, net of federal tax benefits, if recognized. Our policy is to accrue interest and penalties associated with uncertain tax positions in income tax expense. At September 30, 2008, there was $421,000 of interest and penalties accrued in connection with uncertain tax positions. The tax years that remain open to examination by the major taxing jurisdictions to which we are subject range from 1996 to 2007. We have identified our major taxing jurisdictions as the United States, and the states of Texas, Louisiana and Colorado. Financial Condition and Liquidity
The following table summarizes our financial condition as of September 30, 2008 and December 31, 2007.

                                      September 30, 2008              December 31, 2007
                                         (Unaudited)
                                                       (Dollars in thousands)
                                      Amount            %             Amount           %
   Working capital                $      382,455          31       $     338,804        31
   Property and equipment, net           789,881          65             737,944        67
   Goodwill                               10,377           1              10,377         1
   Other noncurrent assets, net           30,785           3              16,153         1

   Total                          $    1,213,498         100       $   1,103,278       100


   Long-term debt                 $      274,725          23       $     275,000        25
   Other long-term liabilities           186,031          15             168,769        15
   Shareholders' equity                  752,742          62             659,509        60

   Total                          $    1,213,498         100       $   1,103,278       100

Significant Changes in Financial Condition The significant changes in our financial condition from December 31, 2007 to September 30, 2008 are an increase in working capital of $43.7 million, an increase in net property and equipment of $51.9 million, and an increase in shareholders' equity of $93.2 million.
The increase in working capital is primarily the result of higher balances in cash and cash equivalents and a lower current income taxes payable balance being partially offset by an increase in trade accounts payable. The increase in cash and cash equivalents is due primarily to net income for the first nine months of 2008 and to a higher accounts payable balance. The decrease in the current income taxes balance is due to the timing of tax payments made in 2008. The increase in accounts payable is primarily due to the timing of payments made for capital expenditures and operating costs.
The increase in net property and equipment is primarily due to capital expenditures made during 2008. Capital expenditures of $131.9 million in 2008 included costs for betterments and improvements to our rigs, new rig purchases, the acquisition of drill pipe and drill collars, top drive purchases, and other capital items. The increase in shareholders' equity is primarily due to net income for the period.

Long-Term Debt
As of September 30, 2008, our $274.7 million of long-term debt consists of $149.7 million of 3.75% Contingent Convertible Senior Notes due 2023 (the "3.75% Notes") and $125.0 million of Floating Rate Contingent Convertible Senior Notes due 2024 (the "Floating Rate Notes"). 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 on March 31, 2009. 3.75% Notes . . .