DAILEY CORP, S-1/A, 1996-06-07

DAILEY CORP
S-1/A, 1996-06-07
OIL & GAS FIELD SERVICES, NEC

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 7, 1996

REGISTRATION NUMBER 333-04593
================================================================================

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

AMENDMENT NO. 1

FORM S-1

REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

DAILEY PETROLEUM SERVICES CORP.
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C> <C>
DELAWARE 1389 76-0503351
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)

</TABLE>

2507 NORTH FRAZIER
P.O. BOX 1863
CONROE, TEXAS 77305
(713) 350-3399
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)

WILLIAM D. SUTTON
SENIOR VICE PRESIDENT AND GENERAL COUNSEL
DAILEY CORPORATION
2507 NORTH FRAZIER
P.O. BOX 1863
CONROE, TEXAS 77305
(713) 350-3399
(Name, address, including zip code, and telephone number, including area code,
of agent for service)

Copies to:
<TABLE>
<S> <C>
ROBERT F. GRAY, JR. NICK D. NICHOLAS
FULBRIGHT & JAWORSKI L.L.P. PORTER & HEDGES, L.L.P.
1301 MCKINNEY, SUITE 5100 700 LOUISIANA, 35TH FLOOR
HOUSTON, TEXAS 77010-3095 HOUSTON, TEXAS 77002-2764
(713) 651-5151 (713) 226-0600
</TABLE>

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act of 1933 registration statement number
of the earlier effective registration statement for the same
offering. / / ______

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act of 1933 registration statement number of the earlier effective
registration statement for the same offering. / / ______

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.

================================================================================
<PAGE> 2

DAILEY PETROLEUM SERVICES CORP.

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

CROSS-REFERENCE SHEET
(PURSUANT TO ITEM 501(B) OF REGULATION S-K)

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

<TABLE>
<CAPTION>
FORM S-1 ITEM AND CAPTION LOCATION OR PROSPECTUS CAPTION
------------------------------------------- -------------------------------------------
<S> <C> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of
Prospectus.............................. Facing page of Registration Statement;
Cross Reference Sheet; Outside Front Cover
Page of Prospectus

2. Inside Front and Outside Back Cover Pages
of Prospectus........................... Inside Front Cover and Outside Back Cover
Pages of Prospectus

3. Summary Information, Risk Factors.......... Prospectus Summary; The Company; Risk
Factors

4. Use of Proceeds............................ Use of Proceeds; Management's Discussion
and Analysis of Financial Condition and
Results of Operations

5. Determination of Offering Price............ Underwriting

6. Dilution................................... Risk Factors; Dilution

7. Selling Security Holders................... *

8. Plan of Distribution....................... Outside Front Cover Page of Prospectus;
Underwriting

9. Description of Securities to Be
Registered.............................. The Offering; Description of Capital Stock

10. Interests of Named Experts and Counsel..... Experts; Legal Matters

11. Information with Respect to the
Registrant.............................. Outside Front Cover Page of Prospectus;
Prospectus Summary; Risk Factors; The
Company; Use of Proceeds; Dividend
Policy; Capitalization; Selected
Consolidated Financial Data;
Management's Discussion and Analysis of
Financial Condition and Results of
Operations; Business and Properties;
Management; Certain Relationships and
Related Transactions; Security Ownership
of Management and Principal Stockholder;
Description of Capital Stock; Shares
Eligible for Future Sale; Consolidated
Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities
Act Liabilities......................... *
</TABLE>

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

* Item is omitted either because it is inapplicable or the answer thereto is
negative.
<PAGE> 3

***************************************************************************
* *
* INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A *
* REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED *
* WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT *
* BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE *
* REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT *
* CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY *
* NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH *
* SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO *
* REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH *
* STATE. *
* *
***************************************************************************

SUBJECT TO COMPLETION, DATED JUNE 7, 1996

PROSPECTUS
4,000,000 SHARES

DAILEY PETROLEUM SERVICES CORP.

CLASS A COMMON STOCK
---------------------

All of the shares of Class A Common Stock, par value $.01 per share ("Class
A Common Stock"), offered hereby (the "Offering") are being sold by Dailey
Petroleum Services Corp. ("Dailey" or the "Company"). Prior to the Offering,
there has been no public market for the Class A Common Stock. The Company has
applied for listing of the Class A Common Stock on the Nasdaq National Market
under the symbol "DALY", subject to official notice of issuance. It is currently
anticipated that the initial public offering price will be between $
and $ per share. See "Underwriting" for factors to be considered in
determining the initial public offering price.

The Company's authorized capital stock includes Class A Common Stock and
Class B Common Stock, par value $.01 per share ("Class B Common Stock" and,
collectively with the Class A Common Stock, the "Common Stock"). The Class A
Common Stock is substantially identical to the Class B Common Stock, except with
respect to voting rights. The Class A Common Stock is entitled to one vote per
share and the Class B Common Stock is entitled to seven votes per share. See
"Description of Capital Stock".

---------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY POTENTIAL INVESTORS.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
---------------------------------------------------------------
<S> <C> <C> <C>
Per Share......................... $ $ $
Total (3)......................... $ $ $
</TABLE>

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

(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting".

(2) Before deducting expenses payable by the Company, estimated to be
$ .

(3) The Company has granted the several Underwriters a 30-day option to purchase
up to an aggregate of 600,000 additional shares of Class A Common Stock on
the same terms and conditions as set forth above solely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to Public, Underwriting Discount, and Proceeds to Company will be
$ , $ and $ , respectively. See "Underwriting".
---------------------
The shares of Class A Common Stock are offered by the several Underwriters,
subject to prior sale when, as and if issued to and accepted by the
Underwriters. The Underwriters reserve the right to reject orders in whole or
part. It is expected that delivery of the shares of Class A Common Stock will be
made against payment therefor in New York, New York on or about ,
1996.
---------------------
JEFFERIES & COMPANY, INC. SOUTHCOAST CAPITAL
CORPORATION

, 1996
<PAGE> 4

(GRAPHICS TO BE PROVIDED)

Prior to the Offering, the Company has not been subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). The Company intends to furnish its stockholders with annual reports
containing audited consolidated financial statements reported on by independent
public accountants following the end of each fiscal year and such interim
reports as it may determine to be necessary or desirable.

IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS A COMMON
STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN
THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.

2
<PAGE> 5

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements, including the notes thereto,
appearing elsewhere in this Prospectus. References in this Prospectus to the
"Company" or "Dailey" shall mean Dailey Petroleum Services Corp., its
predecessors and its and their subsidiaries, unless the context otherwise
requires. Unless otherwise noted herein, the information contained in this
Prospectus gives effect to the Reorganization and assumes the Underwriters'
over-allotment option will not be exercised.

THE COMPANY

Dailey Petroleum Services Corp. provides directional drilling services and
designs, manufactures and rents technologically-advanced downhole tools for oil
and gas drilling and workover applications. Founded in 1945 as a rental tool
Company, the Company began offering directional drilling services in 1984 and
currently provides such services in the Gulf of Mexico, the United States Gulf
Coast region, and most recently, Venezuela and the Austin Chalk formation in
Texas and Louisiana. The Company's directional drilling services include
computer-aided planning of optimum well path and drilling procedures, on-site
supervision, measurement-while-drilling ("MWD") services and sourcing and supply
of MWD equipment and related drilling tools.

The Company offers an array of downhole tools, which it selectively markets
in every major oil and gas exploration and production region in the world.
Dailey introduced its first drilling jar to the oil and gas industry in 1965 and
currently is the leading supplier of drilling jars to the rental tool market
worldwide. In addition to drilling jars, the Company's other downhole tools
include hydraulic fishing jars, coiled tubing jars, MWD equipment, downhole
drilling motors, thrusters for directional drilling and drilling shock
absorbers. The Company manufactures certain of its tools, purchases others, and
obtains others through third-party rentals.

Recent advances in directional drilling technologies combined with advances
in the identification and location of oil and gas reserves have made many
marginal or otherwise uneconomical reservoirs economically feasible to produce.
In many oilfield applications, directional drilling techniques, which include
directional and horizontal drilling, extended-reach drilling and short-radius
drilling, offer significant economic advantages over conventional drilling, such
as reduced drilling time and expense, accelerated production rates and enhanced
reservoir recovery. The Company offers drilling services for directional and
horizontal applications and offers its downhole tools for all advanced drilling
techniques. The Company responds to its customers' needs by providing quality
drilling services and highly-reliable downhole tools capable of improving
drilling efficiency, reducing the risk that expensive drilling components will
be lost downhole and enhancing overall exploration and development economics.

Dailey traditionally has marketed its downhole tools directly to the
end-user through its direct sales force and agents, rather than rely on
third-party distribution of its products and subcontracting of its services. The
Company believes this strategy has resulted in higher profit margins and intends
to continue this marketing strategy. The Company also believes that this direct
interaction with the end-user assists it in identifying demand for new and
improved products and better enables it to design and develop such products in a
timely manner.

The Company believes that its reputation for quality and reliability has
resulted in worldwide industry recognition of the Dailey(R) name. Furthermore,
the proprietary designs of many of the Company's principal products, its ability
to attract and retain highly-qualified and experienced personnel, and its
ability to design, develop and market new and complementary products and
services are believed by the Company to be important competitive advantages.

3
<PAGE> 6

BUSINESS STRATEGY

The Company's strategy is to broaden the scope of the premium downhole
tools and services it provides to the oil and gas industry. The Company believes
this strategy is responsive to its customers' preferences to purchase as many
products and services as possible from a single provider and that the ability to
offer related services enhances the Company's marketing of its downhole tools.
The Company intends to implement this strategy by (i) expanding its directional
drilling services and related product offerings, (ii) introducing new products
and services through technological innovation and (iii) acquiring complementary
businesses and assets.

Expand Directional Drilling Services and Related Product Offerings. The
Company's immediate strategy is to implement a significant expansion of its
directional drilling business, both in the geographic scope and in types of
drilling services it offers. Directional drilling services are becoming
increasingly important to the Company's business because a growing percentage of
the Company's downhole tools are rented in connection with providing such
services.

Introduce New Products and Services through Technological Innovation. The
Company believes that its emphasis on distribution of its downhole tools
directly to its customers has enhanced its ability to identify, design, develop
and market to these customers new products and improved products that are
responsive to its customers' needs. Dailey will continue to emphasize direct
interaction with its customers as a method of identifying new product
opportunities to keep pace with changing drilling technology trends and as a
means of refining its existing downhole tools to protect and expand its
reputation for quality downhole tools and directional drilling services.

Acquire Complementary Businesses and Assets. The Company is actively
seeking strategic acquisitions that will provide additional and complementary
products and services. The Company believes that acquisition candidates are
available that will allow Dailey to increase market share for its downhole tools
in existing markets, add new and complementary products and services and expand
marketing and distribution channels for its downhole tools and directional
drilling services. The directional drilling services industry recently has
experienced consolidation in response to increased demand for companies offering
a full range of advanced drilling tools and services. The Company believes that
this trend will continue and will present opportunities for Dailey to increase
the breadth and geographic scope of its directional drilling services through
strategic acquisitions. In addition, the Company believes that it can expand the
scope of the products and services it offers through the purchase or manufacture
of complementary tools and technology and by hiring experienced service
personnel.

4
<PAGE> 7

THE OFFERING

<TABLE>
<S> <C>
Class A Common Stock............................. 4,000,000 shares
Common Stock outstanding after the Offering:
Class A Common Stock(1)(2)..................... 4,360,000 shares
Class B Common Stock(2)........................ 5,000,000 shares
Use of Proceeds.................................. Of the net proceeds from the Offering, the
Company intends to use approximately $15.0
million for capital expenditures for
downhole tools; approximately $12.0
million for repayment of indebtedness to
the Company's principal stockholder; and
the balance to fund acquisitions of
complementary businesses and assets and
for working capital and other general
corporate purposes. See "Use of Proceeds".
Nasdaq National Market Symbol.................... DALY
</TABLE>

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

(1) Includes 360,000 shares to be issued on completion of the Offering as
restricted stock awards to certain key employees pursuant to the Company's
1996 Key Employee Stock Plan, but excludes 540,000 additional shares
reserved for issuance under such plan. Also excludes 100,000 shares reserved
for issuance under the Company's 1996 Non-Employee Director Stock Plan. See
"Management -- 1996 Key Employee Stock Plan" and "Management -- 1996
Non-Employee Director Stock Plan".

(2) Class A Common Stock is substantially identical to Class B Common Stock
except with respect to voting rights. Each share of Class A Common Stock
entitles the holder thereof to one vote per share, and each share of Class B
Common Stock entitles the holder thereof to seven votes per share in all
matters submitted to the stockholders for a vote. See "Risk
Factors -- Special Voting Rights of Class B Common Stock; Relationship with
Lawrence Industries" and "Certain Relationships and Related Transactions".
In addition, shares of Class B Common Stock may be converted into an equal
number of shares of Class A Common Stock at any time upon election of the
holder thereof. Shares of Class B Common Stock convert automatically into an
equal number of shares of Class A Common Stock in the event such shares of
Class B Common Stock are transferred to a person or entity that is not a
member of the Lawrence Group (as defined in the Company's Restated
Certificate of Incorporation). See "Description of Capital Stock -- Class A
and B Common Stock".

PRINCIPAL STOCKHOLDER

Prior to the Offering, the Company was wholly-owned by a wholly-owned
subsidiary of Lawrence Industries, Inc. References in this Prospectus to
"Lawrence" shall mean Lawrence Industries, Inc. and its subsidiaries, other than
the Company. Following the Offering, Lawrence will own 100% of the Company's
outstanding Class B Common Stock, which will represent 53% of the total
outstanding Common Stock (50% if the Underwriters' over-allotment option is
exercised in full) and 89% of the total voting power of the Company's
outstanding Common Stock (88% if the Underwriters' over-allotment option is
exercised in full) and thus will be able to elect the Company's directors and
control its management. See "Risk Factors -- Special Voting Rights of Class B
Common Stock; Relationship with Lawrence Industries", "The Company" and "Certain
Relationships and Related Transactions".

5
<PAGE> 8

SUMMARY CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data for each of the fiscal
years in the five-year period ended April 30, 1996, have been derived from
audited consolidated financial statements of the Company. The Consolidated
Statement of Operations Data for the years ended April 30, 1994, 1995 and 1996,
and the Consolidated Balance Sheet Data as of April 30, 1996, are derived from
the Company's audited consolidated financial statements appearing elsewhere in
this Prospectus. This information should be read in conjunction with "Selected
Consolidated Financial Data", "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
of the Company and the notes thereto, included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
FISCAL YEAR ENDED APRIL 30,
-----------------------------------------------------------------------
1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Rental income................................... $ 30,591 $ 28,746 $ 32,393 $ 36,691 $ 42,987
Sales of products and services.................. 11,180 8,742 11,422 12,172 15,952
---------- ---------- ---------- ---------- ----------
Total revenues................................ 41,771 37,488 43,815 48,863 58,939
Cost of rentals and services:
Cost of rentals................................. 26,268 25,078 27,384 29,685 33,019
Cost of products and services................... 5,116 4,003 5,124 6,889 7,927
---------- ---------- ---------- ---------- ----------
Total cost of rentals and services............ 31,384 29,081 32,508 36,574 40,946
Selling, general and administrative expenses...... 7,422 6,783 7,085 9,607 12,083
Research and development expenses................. 1,224 1,262 736 775 728
---------- ---------- ---------- ---------- ----------
Operating income.................................. 1,741 362 3,486 1,907 5,182
Interest expense, net............................. 29 285 513 1,001 863
Other (income) expense, net....................... 78 (435) (225) 190 39
Foreign exchange (gain) loss...................... 111 228 122 (90) 239
---------- ---------- ---------- ---------- ----------
Income before income taxes and extraordinary
item............................................ 1,523 284 3,076 806 4,041
Income tax expense................................ 1,101 898 1,075 838 1,427
Extraordinary income(1)........................... 1,535 -- -- -- --
---------- ---------- ---------- ---------- ----------
Net income (loss)................................. $ 1,957 $ (614) $ 2,001 $ (32) $ 2,614
========== ========== ========== ========== ==========
Earnings (loss) per share(2)...................... $ .37 $ (.11) $ .37 $ (.01) $ --
Pro forma earnings per share(3)................... -- -- -- -- $ .41
Average common and common equivalent shares
outstanding(3).................................. 5,360,000 5,360,000 5,360,000 5,360,000 6,360,000
OTHER DATA:
Depreciation and amortization..................... $ 3,600 $ 4,114 $ 4,323 $ 5,428 $ 5,726
</TABLE>

<TABLE>
<CAPTION>
AS OF APRIL 30, 1996
--------------------------
ACTUAL AS ADJUSTED(4)
------- --------------
(IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Total assets.............................................................................. $55,878 $ 80,568
Working capital........................................................................... 7,477 32,827
Long-term debt, less current portion and long-term debt payable to affiliate.............. 6,866 6,866
Long-term debt payable to affiliate, less current portion................................. 1,100 --
Stockholders' equity...................................................................... 35,641 62,091
</TABLE>

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

(1) Relates to proceeds received by the Company in settlement of a lawsuit.

(2) Adjusted to give effect to the Reorganization. See "The
Company -- Reorganization; Relationship with Lawrence".

(3) The average number of shares outstanding at April 30, 1992 through 1996 have
been adjusted to give pro forma effect to the Reorganization and the
issuance of an aggregate of 360,000 restricted shares of Class A Common
Stock to Messrs. Farr, Sutton and Tighe immediately following consummation
of the Offering. The average number of shares outstanding at April 30, 1996,
also gives pro forma effect to the number of shares whose proceeds are
deemed to be used to repay the $10.0 million promissory note declared and
paid as a dividend on June , 1996. See "The Company", "Dividend Policy"
and "Management -- 1996 Key Employee Stock Plan".

(4) As adjusted to give effect to the sale of 4,000,000 shares of Class A Common
Stock offered hereby at an assumed offering price of $10.00 per share and
the application of a portion of the net proceeds therefrom to repay
indebtedness to affiliates, as described under "Use of Proceeds".

6
<PAGE> 9

RISK FACTORS

Prospective Purchasers of the Class A Common Stock offered hereby should
consider carefully the following factors as well as the other information
provided elsewhere in this Prospectus before deciding to invest in the Class A
Common Stock offered hereby.

DEPENDENCE ON VOLATILE OIL AND GAS INDUSTRY

Demand for the Company's downhole tools and directional drilling services
depends to a large extent upon the level of exploration and production activity
in the oil and gas industry and the industry's willingness to spend capital on
drilling operations, which in turn depends in part on oil and gas prices,
expectations about future prices, the cost of exploring for, producing and
delivering oil and gas, the discovery rate of new oil and gas reserves, domestic
and international political, military, regulatory and economic conditions and
the ability of oil and gas companies to raise capital. Prices for oil and gas
historically have been extremely volatile and have reacted to changes in the
supply of and demand for oil and natural gas, domestic and worldwide economic
conditions and political instability in oil producing countries. No assurance
can be given that current levels of oil and gas activities will be maintained or
that demand for the Company's downhole tools and directional drilling services
will reflect the level of such activities. Prices for oil and natural gas are
expected to continue to be volatile and affect the demand for and pricing of the
Company's directional drilling services and downhole tools. A material decline
in oil or natural gas prices or activities could materially adversely affect the
demand for the Company's directional drilling services and downhole tools and,
therefore, the Company's results of operations.

COMPETITION

The markets for the Company's directional drilling services and downhole
tools are highly competitive and characterized by continual changes in
technology. Many of the Company's existing and potential competitors have
substantially greater marketing, distribution, financial and technical resources
than the Company. There can be no assurance that the Company's directional
drilling services and downhole tool rentals will continue at current volumes or
prices if its current competitors or new market entrants introduce new products
or services with better features, performance, price or other characteristics
than the Company's products and services. Competitive pressures or other factors
also may result in significant price competition that could have a material
adverse effect on the Company's results of operations. Furthermore, the
competition among directional drilling service companies to employ the most
reputable, qualified and experienced directional drilling personnel is intense.
There can be no assurance that the Company will be able to continue to recruit
and retain highly-qualified directional drillers. Any difficulty in recruiting
or retaining such directional drilling personnel could have a material adverse
effect on the Company's results of operations. See "Business and
Properties -- Competition".

TECHNOLOGICAL EVOLUTION AND PRODUCT OBSOLESCENCE

The markets for directional drilling services and specialized downhole
drilling and fishing tools used in oil and gas drilling and workover
applications are characterized by continual technological developments that have
resulted in, and likely will continue to result in, substantial improvements in
the scope and quality of directional drilling services and product function and
performance. Whether the Company can develop and produce successfully, on a
timely basis, new and enhanced downhole tools that embody new technology, meet
evolving industry standards and practice, and achieve levels of capability and
price that are acceptable to its customers, will be significant factors in
determining the Company's ability to compete. There can be no assurance that the
Company will not encounter resource constraints or technical or other
difficulties that could delay introduction of new products and services in the
future. If the Company is unable, for technological or other reasons, to develop
and commercialize competitive products in a timely manner in response to changes
in the directional drilling industry or rental tool industry or changes in
technology, its business and operating results will be materially and adversely
affected. In addition, the Company's continuing development of new products
inherently carries the risk of inventory obsolescence with respect to its older
products. See "Business and Properties -- Research and Development".

7
<PAGE> 10

INTELLECTUAL PROPERTY

Certain features of the Company's downhole tools have been granted United
States and foreign patent protection, or have patent applications pending. In
addition, both the Dailey trademark and servicemark are registered in the United
States and various foreign countries. The loss or abandonment of such trademarks
and servicemarks could have a material adverse effect on the Company's results
of operations and financial condition. There can be no assurance that the
Company's patents will prove enforceable, that any patents for which the Company
has made application will be issued, or that competitors will not develop
functionally similar products outside the protection of any patents the Company
has or may obtain. Furthermore, after Dailey's patents expire, the Company's
competitors could develop products substantially similar to the Company's
downhole tools. Litigation resulting in the invalidation of certain of the
Company's patents, or a ruling that the Company's products infringe patents held
by others, could have a material adverse effect on the Company's results of
operations and financial condition. See "Business and Properties -- Intellectual
Property".

LIQUIDITY AND WORKING CAPITAL REQUIREMENTS; UNCERTAINTY IN OBTAINING FINANCING

While the Company's operations have generated positive cash flow in each of
the past five years, the Company's future cash flow is subject to a number of
variables, including the level of domestic and worldwide oil and gas exploration
and development activity, and the Company can provide no assurance that its cash
flow from operations, net proceeds of the Offering and its borrowing capacity
will be sufficient to fund its anticipated capital expenditures and working
capital requirements. During the past several years, the Company has funded its
working capital requirements through cash generated from operations, its credit
facility, asset sales and, when necessary, advances from Lawrence. Upon
completion of the Offering, it is anticipated that Lawrence will no longer be a
source of advances for funding the Company's working capital requirements. The
Company currently has a $3.0 million revolving credit facility, of which
approximately $1.3 million was drawn by the Company as of April 30, 1996. The
Company may in the future seek financing from third parties in addition to its
existing credit facility to fund such expenditures and requirements. However,
there can be no assurance that additional financing will be available to the
Company on economically acceptable terms. See "Management's Discussion and
Analysis of Financial Conditions and Results of Operations -- Liquidity and
Capital Resources".

ACQUISITION STRATEGY

The Company anticipates that a substantial portion of the net proceeds from
the Offering may be used to finance expansion through acquisitions of existing
businesses. See "Use of Proceeds". Nevertheless, there can be no assurance that
attractive acquisitions will be available to the Company at reasonable prices or
that any acquisition achieved ultimately will prove to be a successful
undertaking by the Company. The Company may be required to incur substantial
indebtedness to finance future acquisitions and also may issue equity securities
or convertible securities in connection with such acquisitions. Such additional
debt service requirements may represent a significant burden on the Company's
results of operations and financial condition. The issuance of additional equity
or convertible securities could result in significant additional dilution to
stockholders and result in significant additional shares available for future
resale. There also can be no assurance that the Company will successfully
integrate the operations and assets of any acquired business with its own or
that the Company's management will be able to manage effectively the increased
size of the Company or operate a new line of business. Any inability on the part
of the Company to integrate and manage acquired businesses could have a
materially adverse effect on the Company's results of operations and financial
condition.

DEPENDENCE ON KEY PERSONNEL; ABILITY TO ATTRACT AND RETAIN QUALIFIED
PROFESSIONALS

The Company believes that its success will depend to a significant extent
upon the continued services of certain key individuals, particularly J. D.
Lawrence, Chairman of the Board, James F. Farr, President and Chief Executive
Officer, William D. Sutton, Senior Vice President, General Counsel and Secretary
and David T. Tighe, Senior Vice-President -- Finance, Chief Financial Officer
and Treasurer. Prior to the Offering, the

8
<PAGE> 11

Company will enter into employment agreements with these individuals. The loss
of the services of any of these individuals could have a material adverse effect
on the Company. See "Management".

The directional drilling services offered by the Company require it to
recruit and retain highly-qualified drilling consultants with extensive industry
experience. The Company believes that its success also will depend to a
significant extent upon its continued ability to recruit and retain such
drilling consultants, and in this regard, there can be no assurance that the
Company's efforts will be successful. See "Business and
Properties -- Competition".

DEPENDENCE ON LIMITED NUMBER OF PRODUCT LINES

In fiscal 1996, the Company derived approximately 57% of its total revenues
from drilling jar rentals and related products. A sustained decrease in demand
for these products and services, whether caused by declines in drilling
activity, technological innovations or other competitive factors, could
adversely affect the Company's operating performance. The Company's future
success will depend upon continued demand for its drilling jars, and its ability
to enhance its existing products and services, develop additional products and
services, and supply its products and services to meet industry demands. See
"Business and Properties -- Directional Drilling Services and Related Products"
and "Business and Properties -- Rental Products".

OPERATING RISKS AND INSURANCE

The operations of the Company's customers are subject to hazards inherent
in the oil and gas industry, such as fires, explosions, craterings, blowouts and
oil spills, which can cause serious personal injury or loss of life, damage to
or destruction of property, equipment, the environment and marine life, and
suspension of operations. In addition, the Company's customers that are engaged
in the drilling and workover business may be subject to claims for loss of oil
and gas production and damages to formations. If a catastrophic event were to
occur at a location where the Company's products or services are being provided,
the Company could be named as a defendant or third-party defendant in lawsuits
asserting potentially large claims. See "Business and Properties -- Operating
Risks and Insurance".

The Company maintains insurance coverage that it believes to be customary
in the industry against certain of these hazards, however, such insurance
provides for substantial deductibles and premium adjustments based on claims
experience and excludes coverage for damages resulting from environmental damage
and pollution or breach of contract or claims based on alleged fraud or
deceptive trade practices. Insurance cannot provide complete protection against
casualty losses. There can be no assurance that the Company will be able to
maintain adequate insurance in the future at rates it considers reasonable or
that insurance will continue to be available on terms as favorable as those of
its existing arrangements. A claim or suit against the Company in excess of the
coverage limits maintained by the Company or for which the Company is not
insured could have a material adverse effect on the Company's financial
condition and results of operations. See "Business and Properties -- Operating
Risks and Insurance".

VENDOR SUPPLY INTERRUPTION; RELIANCE ON CERTAIN SUPPLIERS

The Company assembles all of, and manufactures a portion of the components
for, its downhole tools. The manufacturing processes performed by the Company
require a ready supply of high-quality, special alloy steel. Consistent with the
recent upturn in the demand for steel and other raw materials used in the oil
and gas industry, the Company has begun to experience longer lead times for
delivery of raw materials, primarily steel, which requires the Company to
predict further in advance its needs for such materials. While the Company has
not experienced significant supply or quality control problems to date with its
various suppliers of steel and other raw materials, any supply or quality
control problems could significantly affect the Company's ability to meet
production schedules and commitments, which could have a material adverse effect
on the Company's results of operations. See "Business and Properties -- Raw
Materials".

Most of the Company's downhole tools incorporate certain products or
technology supplied in part by third parties. Although the Company is not
presently experiencing and does not anticipate any significant supply or quality
control problems with its vendors, such problems, if they were to occur, could
have a material

9
<PAGE> 12

adverse effect on the Company's ability to meet future production and sales
commitments, which could adversely affect the Company's results of operations.
In addition, during the past five years, one vendor has been the Company's only
supplier of filters that go into the Company's hydraulic downhole tools. The
Company has not identified alternative suppliers for such filters. To date, the
Company has not experienced supply problems with this vendor. However, any
difficulty with such supplier combined with any difficulty in finding and
utilizing alternative sources for these filters could have a material adverse
effect on the Company's results of operations. See "Business and
Properties -- Manufacturing".

The Company purchases all of its MWD units used in connection with its
directional drilling services from a single supplier. The Company believes that
reliable MWD units are available for third party purchase from only a few
vendors worldwide. Although the Company has not experienced significant supply
or quality control problems to date with its supplier, there can be no assurance
that the Company will be able to purchase reliable, high-quality MWD units from
other vendors at competitive prices and terms. Any difficulty in obtaining MWD
units from its supplier, as a result of manufacturing delays or other reasons,
could have a material adverse effect on the Company's results of operation and
financial condition. See "Business and Properties -- Directional Drilling
Services and Related Products".

RISK OF INTERNATIONAL OPERATIONS

The Company's international operations, which accounted for approximately
42% of its total revenues in fiscal 1996, are subject to special risks inherent
in doing business outside the United States, including governmental instability,
war and other international conflicts, civil and labor disturbances,
requirements of local ownership, partial or total expropriation,
nationalization, currency devaluation, foreign exchange controls, and foreign
laws and policies, each of which may limit the movement of assets or funds or
result in the deprivation of contract rights or the taking of property without
fair compensation. Collections and recovery of rental tools from international
customers and agents may prove more difficult due to the uncertainties of
foreign law and judicial procedure. The Company may therefore experience
significant difficulty resulting from the political or judicial climate in
countries in which it operates. From time to time the United States has passed
laws and imposed regulations prohibiting or restricting trade with certain
nations. There can be no assurance that future laws and regulations will not
limit materially the Company's international business. See "Business and
Properties -- International Operations".

FOREIGN EXCHANGE RISK

Although most of the Company's international revenues are derived from
transactions denominated in United States dollars, the Company has and likely
will continue to conduct, some business in currencies other than the United
States dollar. Accordingly, its profitability has been and will continue to be
affected by fluctuations in foreign exchange rates. Foreign currency translation
gains and losses during each of fiscal 1994, 1995 and 1996 netted to a $122,000
loss, a $90,000 gain and a $239,000 loss, respectively. The Company believes
that revenues from transactions denominated in foreign currencies will increase
as a percentage of total revenues due to continued expansion of the Company's
international operations, primarily in Venezuela. See "Management's Discussion
and Analysis of Results of Operations and Financial Condition -- Inflation and
Foreign Exchange".

CREDIT RISK FROM SALES ARRANGEMENTS

In various international markets, the Company utilizes independent
international agents to market its downhole tools, who in some cases also are
responsible for the collection of, and remittance to Dailey of, the accounts
receivable from Dailey's customers in these markets. The inability of the
Company's international agents to remit accounts receivable on a timely basis,
or a significant number of payment defaults by certain of the Company's
independent agents, could have a material adverse effect on the Company's
results of operations.

10
<PAGE> 13

SPECIAL VOTING RIGHTS OF CLASS B COMMON STOCK; RELATIONSHIP WITH LAWRENCE

Each share of Class A Common Stock is entitled to one vote and each share
of Class B Common Stock is entitled to seven votes, with both classes of Common
Stock voting together as a single class. Upon completion of this Offering,
Lawrence, which is owned by the Chairman of the Board of the Company and trusts
for his family, will beneficially own all of the Class B Common Stock, and will
thereby control approximately 89% of the combined voting power of the
outstanding Common Stock (88% if the Underwriters' over-allotment option is
exercised in full). Accordingly, Lawrence and, indirectly, the Company's
Chairman of the Board will be in a position to elect the Company's board of
directors and otherwise control the business policies of the Company. The
Company and Lawrence have entered into various ongoing contractual arrangements
including a Tax Allocation Agreement, Registration Rights Agreement and
arrangements governing the leasing by the Company of its executive offices and
certain service, storage and other facilities from Lawrence. See "Certain
Relationships and Related Transactions" and "Description of Capital
Stock -- Class A and B Common Stock".

ABSENCE OF PRIOR PUBLIC MARKET AND DETERMINATION OF OFFERING PRICE

Prior to the Offering, there has been no public market for the Class A
Common Stock. Although application has been made for listing of the Class A
Common Stock on the Nasdaq National Market, there can be no assurance that an
active trading market will develop or continue upon completion of the Offering.
The initial public offering price of the Class A Common Stock will be determined
by negotiations between the Company and the representatives of the Underwriters
(the "Representatives") and may not be indicative of the market price of the
Class A Common Stock after the Offering. For a discussion of the factors to be
considered in determining the initial public offering price, see "Underwriting".
The market price of the Class A Common Stock could be subject to significant
fluctuations in response to variations in quarterly and yearly operating
results, the success of the Company's business strategy, general trends in the
oil and gas industry, competition, product obsolescence, changes in federal
regulations affecting the Company or the oil and gas industry and other factors.
In addition, the stock market in recent years has experienced extreme price and
volume fluctuations that often have been unrelated or disproportionate to the
operating performance of affected companies. Such broad fluctuations could
affect adversely the market price of the Class A Common Stock. See
"Underwriting".

POSSIBLE ANTI-TAKEOVER EFFECTS

The Company's Restated Certificate of Incorporation and Amended Bylaws (the
"Bylaws") include a number of provisions that may have the effect of encouraging
persons considering unsolicited tender offers or other unilateral takeover
proposals to negotiate with the Board of Directors rather than pursue
non-negotiated takeover attempts. These provisions may have the effect of
delaying, deferring or preventing a change in control of the Company whether or
not such person chooses to negotiate with the Board of Directors. The provisions
include super-majority stockholder approval for certain mergers with, and sales
of substantially all of the Company's assets to, third parties, authorized
"blank check" preferred stock, a classified Board of Directors and restrictions
on removal of directors. In addition, the Restated Certificate of Incorporation
provides for two classes of stock, Class A Common Stock, which is entitled to
one vote per share, and Class B Common Stock, which is entitled to seven votes
per share. The Class B Common Stock converts automatically into an equal number
of shares of Class A Common Stock upon the transfer of such shares to a member
outside the Lawrence Group. See "Description of Capital Stock".

ADVERSE EFFECT ON MARKET PRICE OF SHARES ELIGIBLE FOR FUTURE SALE

Immediately following the Offering, there will be outstanding 4,360,000
shares of Class A Common Stock (4,960,000 shares if the Underwriters'
overallotment option is exercised in full), which includes 360,000 shares of
restricted stock issued immediately following the Offering to certain executive
officers pursuant to the 1996 Key Employee Stock Plan. In addition, an
additional 640,000 unissued shares of Class A Common Stock have been reserved
for issuance pursuant to the 1996 Key Employee Stock Plan and 1996 Non-Employee
Director Stock Option Plan. The Company also will have outstanding 5,000,000
shares of Class B

11
<PAGE> 14

Common Stock, which converts into an equal number of shares of Class A Common
Stock at any time at the election of Lawrence and automatically upon the
transfer of such shares to any person or entity that is not a member of the
Lawrence Group (as defined in the Restated Certificate of Incorporation). The
4,000,000 shares of Class A Common Stock offered hereby will be eligible for
resale in the public market without restriction under the Securities Act, except
to the extent that any such shares are acquired by affiliates of the Company.
The shares of Class A Common Stock held by the Company's affiliates and the
shares of Class A Common Stock issuable upon conversion of shares of Class B
Common Stock will be subject to resale in accordance with Rule 144 under the
Securities Act. Sales of a substantial number of shares of Class A Common Stock
may adversely affect the market price of the Class A Common Stock. The Company,
Lawrence and Messrs. Farr, Sutton and Tighe have agreed that they will not,
without the prior written consent of the Representatives, offer for sale, sell
or otherwise dispose of any shares of Common Stock (other than pursuant to
existing employee benefit plans or outstanding options) or securities
convertible into or exchangeable for Common Stock or grant options, rights or
warrants with respect to any shares of Common Stock (other than the grant of
options pursuant to option plans existing on the date hereof), for a period of
180 days after the date of this Prospectus.

The Company also is obligated, upon the written request of Lawrence, on up
to two separate occasions, to file a registration statement under the Securities
Act registering a minimum of 500,000 shares of Common Stock owned by Lawrence,
which may be in the form of an underwritten offering. Additionally, if the
Company proposes to register any of its securities under the Securities Act for
its own account or for the account of other security holders, Lawrence is
entitled to notice of such registration and is entitled to include all or a
portion of its holdings of the Company's securities in such registration,
subject to certain exceptions and limitations, including the right of the
underwriters (if any) of any such offering to exclude for marketing reasons some
or all of such securities from such registration. No prediction can be made as
to the effect, if any, that the sale of shares or the availability of shares for
sale will have on the market price of the Class A Common Stock prevailing from
time to time. Nevertheless, sales of substantial amounts of Common Stock in the
public market could adversely affect prevailing market prices and the ability of
the Company to raise equity capital in the future. See "Description of Capital
Stock -- Registration Rights Agreement" and "Shares Eligible for Future Sale".

BENEFITS OF THE OFFERING TO LAWRENCE

Lawrence will benefit from the Offering, principally through the increased
liquidity of its holdings, which results from the creation of a public market
for Class A Common Stock, into which Class B Common Stock is convertible at any
time by Lawrence and automatically upon transfer to a person or entity who is
not a member of the Lawrence Group, and through the potential unrealized gains
in the value of the Class B Common Stock held by it. Based upon the difference
between an assumed initial public offering price of $ per share of
Class A Common Stock and the average price per share of Class B Common Stock
paid by Lawrence prior to the Offering; Lawrence will have potential unrealized
gains of $ per share, or an aggregate of $ million. See "Dilution".

DILUTION

A purchaser of Class A Common Stock in the Offering will experience an
immediate and substantial dilution in the net tangible book value of its shares
of $ per share. See "Dilution".

ABSENCE OF DIVIDENDS

The Company expects to retain cash generated from operations to support its
cash needs and does not anticipate the payment of any dividends on the Common
Stock for the foreseeable future. In addition, the Company's loan agreement with
its bank prohibits the payment of dividends. See "Dividend Policy".

12
<PAGE> 15

THE COMPANY
HISTORY

Dailey Petroleum Services Corp. provides directional drilling services and
designs, manufactures and rents technologically-advanced downhole tools for oil
and gas drilling and workover applications. The Company began operations in the
rental tool business in 1945 as Dailey Oil Tools, Inc., and in 1984 changed its
name to Dailey Petroleum Services Corp. References to the "Company" or "Dailey"
in this Prospectus relate to the business now carried on by the Company and its
subsidiaries and previously carried on by their predecessors.

The Company's executive offices are located in Conroe, Texas, approximately
50 miles north of Houston, Texas. The Company's address is 2507 North Frazier,
P.O. Box 1863, Conroe, Texas 77305, and its telephone number is (713) 350-3399.

REORGANIZATION; RELATIONSHIP WITH LAWRENCE

Prior to June 1996, Dailey was a wholly-owned subsidiary of Lawrence
Industries, Inc. On June 6, 1996, Lawrence reorganized its ownership of Dailey
into a holding company structure pursuant to a forward triangular merger of
Dailey Petroleum Services Corp. into a newly-formed, indirect wholly-owned
subsidiary, which took the name Dailey Petroleum Services Corp., (the
"Reorganization"). The Company's Restated Certificate of Incorporation provides
for two classes of common stock, Class A Common Stock and Class B Common Stock.
See "Description of Capital Stock -- Class A and B Common Stock". Following the
Reorganization, all of Dailey's issued and outstanding capital stock, which
consists entirely of Class B Common Stock, has been held by Lawrence through its
wholly-owned subsidiary, Dailey Holdings Inc. References in this Prospectus to
Lawrence's ownership in, and control of, the Company relate to Lawrence's
ownership of Dailey's capital stock through this subsidiary.

Upon completion of the Offering, Lawrence will own all of the outstanding
Class B Common Stock and will own approximately 53% (50% if the Underwriters'
over-allotment option is exercised in full) of the outstanding Common Stock.
Substantially all of the common stock of Lawrence is owned by the Chairman of
the Board of the Company. Lawrence is engaged in various business activities not
related to the oil and gas industry. The Company's operations do not compete
with any of Lawrence's activities. The Company has entered into several
arrangements with Lawrence, including agreements under which the Company leases
certain office space and manufacturing and service facilities from, and provides
certain services to, Lawrence as well as a Registration Rights Agreement and Tax
Allocation Agreement. See "Certain Relationships and Related Transactions" and
"Description of Capital Stock -- Registration Rights".

USE OF PROCEEDS

The net proceeds to the Company from the Offering are estimated to be
approximately $ (approximately $ if the Underwriters'
over-allotment option is exercised in full), assuming an initial public offering
price of $ per share (the midpoint of the initial public offering price
range) and after deducting the underwriting discount and estimated offering
expenses payable by the Company.

The Company intends to use approximately $15.0 million of the net proceeds
from the Offering to increase its fleet of downhole tools. The Company also
intends to use approximately $12.0 million to repay a promissory note and
long-term debt to Lawrence, including accrued interest thereon. The promissory
note was incurred in connection with a dividend declared and paid to Lawrence on
June , 1996, accrues interest at the prime rate and is payable upon demand.
The long-term debt to Lawrence relates to advances by Lawrence to the Company
for additional working capital and general corporate purposes and is payable in
consecutive monthly installments through December 1998 of $55,000 plus accrued
interest then due. It bears interest at 8.0% per annum.

The remaining net proceeds from the Offering are expected to be used by the
Company to fund the expansion of the Company's products and services through
acquisitions of complementary businesses or assets and for working capital and
general corporate purposes. Although the Company routinely evaluates acquisition

13
<PAGE> 16

opportunities, it does not have any current understanding, arrangement or
agreement to acquire any businesses or assets. There can be no assurance that
attractive acquisition candidates will be available to the Company at prices it
believes to be reasonable, or that any acquisition achieved will ultimately
prove to be a successful undertaking by the Company. Pending application of the
net proceeds from the Offering, the Company will invest such net proceeds in
short-term, interest-bearing, investment grade securities.

DIVIDEND POLICY

Other than the dividend of $10.0 million in the form of a promissory note
to a subsidiary of Lawrence declared and paid on June , 1996, the Company has
not declared or paid any dividends during the period beginning on May 1, 1994,
and ending on the date of this Prospectus. The Company's loan agreement with its
bank prohibits the payment of dividends, except for the dividend paid on June
, 1996. See "Management's Discussion and Analysis of Financial Condition and
Results of Operation -- Liquidity and Capital Resources".

The Company does not anticipate that cash dividends will be paid in the
foreseeable future. The Company presently intends to retain any future earnings
to finance the expansion and continuing development of its business. The
declaration and payment in the future of any cash dividends will be at the
election of the Company's Board of Directors and will depend upon the earnings,
capital requirements and financial position of the Company, future loan
covenants, general economic conditions and other pertinent factors. The
Company's dividend policy will be reviewed by the Board of Directors at such
future time as may be appropriate in light of relevant factors at the time.

The Company's Restated Certificate of Incorporation requires that any
dividend declared on either shares of Class A Common Stock or shares of Class B
Common Stock must be declared on shares of Class A Common Stock and shares of
Class B Common Stock alike as if all such shares were of the same class and
series.

DILUTION

The net tangible book value of the Company at April 30, 1996, was $
million, or $ per share of Common Stock. After giving effect to the
sale by the Company of the shares of Class A Common Stock offered
hereby (at an assumed initial public offering price of $ per share and
after deducting the estimated offering expenses and underwriting discounts
payable by the Company), the pro forma net tangible book value at such date
would have been $ million, or $ per share of Common Stock.
This represents an immediate increase in net tangible book value of $
per share to Lawrence and an immediate dilution of $ per share to new
investors purchasing shares in the Offering.

14
<PAGE> 17

CAPITALIZATION

The following table sets forth as of April 30, 1996, the consolidated
long-term debt and capitalization of the Company and its subsidiaries and as
adjusted to reflect the issuance of the Class A Common Stock offered hereby and
the application of $12.0 million of the estimated net proceeds to repay notes
and long-term debt to affiliates, as described under "Use of Proceeds". The
information was derived from, and is qualified by reference to, the consolidated
financial statements of the Company, including the notes thereto, included
elsewhere in this Prospectus. This information should be read in conjunction
with such financial statements, including the notes thereto, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
APRIL 30, 1996
--------------------------
ACTUAL AS ADJUSTED(1)
------- --------------
<S> <C> <C>
(IN THOUSANDS)
Current portion of long-term debt:
Bank loan(2).............................................. $ 2,967 $ 2,967
Indebtedness to affiliate(3).............................. 660 --
Other..................................................... 71 71
------- --------
Total current debt..................................... $ 3,698 $ 3,038
Long-term debt:
Bank loan(2).............................................. 6,777 6,777
Indebtedness to affiliate(3).............................. 1,100 --
Other..................................................... 89 89
------- --------
Total long-term debt................................... $ 7,966 $ 6,866
------- --------
Total debt........................................ $11,664 $ 9,904
Stockholders' equity:
Preferred stock, no par value, 5,000,000 shares
authorized; none issued and outstanding................ -- --
Class A common stock, $.01 par value, 20,000,000 shares
authorized; none issued and outstanding (4,360,000
shares, as adjusted)(4)................................ -- 44
Class B common stock, $.01 par value, 10,000,000 shares
authorized; (5,000,000 shares issued and
outstanding)........................................... 50 50
Paid-in capital........................................... 4,559 40,965
Retained earnings......................................... 31,032 21,032
------- --------
Total stockholders' equity........................ 35,641 62,091
------- -----------
Total capitalization........................................ $47,305 $ 71,995
======= ===========
</TABLE>

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

(1) As adjusted to reflect net proceeds from the Offering and application of a
portion thereof to repay indebtedness to affiliate as described under "Use
of Proceeds".

(2) The Company currently makes scheduled payments of approximately $139,000 per
month, plus accrued interest, on this debt.

(3) The Company makes scheduled payments of approximately $55,000 per month,
plus accrued interest, on this debt. Excludes a $10.0 million note to a
subsidiary of Lawrence issued in connection with the dividend declared and
paid on June , 1996. The Company intends to repay these notes utilizing a
portion of the proceeds from the Offering. See "Use of Proceeds".

(4) Includes 360,000 shares of restricted stock to be issued to certain
executive officers of the Company immediately following the Offering
pursuant to the 1996 Key Employee Stock Plan, but excludes 640,000
additional shares reserved for issuance pursuant to the 1996 Key Employee
Stock Plan and the 1996 Non-Employee Director Stock Option Plan. See
"Management -- Key Employee Director Stock Plan".

15
<PAGE> 18

SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data for each of the fiscal
years in the five-year period ended April 30, 1996, have been derived from
audited consolidated financial statements of the Company. The Consolidated
Statement of Operations Data for the years ended April 30, 1994, 1995 and 1996
and the Consolidated Balance Sheet Data as of April 30, 1995 and 1996 are
derived from the Company's audited consolidated financial statements appearing
elsewhere in this Prospectus. This information should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements of the Company and the
notes thereto, included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
FISCAL YEAR ENDED APRIL 30,
-----------------------------------------------------------------------
1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Rental income.................................... $ 30,591 $ 28,746 $ 32,393 $ 36,691 $ 42,987
Sales of products and services................... 11,180 8,742 11,422 12,172 15,952
------- ------- ------- ------- -------
Total revenues................................. 41,771 37,488 43,815 48,863 58,939
Cost of rentals and services:
Cost of rentals.................................. 26,268 25,078 27,384 29,685 33,019
Cost of products and services.................... 5,116 4,003 5,124 6,889 7,927
------- ------- ------- ------- -------
Total cost of rentals and services............. 31,384 29,081 32,508 36,574 40,946
Selling, general and administrative expenses....... 7,422 6,783 7,085 9,607 12,083
Research and development expenses.................. 1,224 1,262 736 775 728
------- ------- ------- ------- -------
Operating income................................... 1,741 362 3,486 1,907 5,182
Interest expense, net.............................. 29 285 513 1,001 863
Other (income) expense, net........................ 78 (435) (225) 190 39
Foreign exchange (gain) loss....................... 111 228 122 (90) 239
------- ------- ------- ------- -------
Income before income taxes and extraordinary
item............................................. 1,523 284 3,076 806 4,041
Income tax expense................................. 1,101 898 1,075 838 1,427
Extraordinary income(1)............................ 1,535 -- -- -- --
------- ------- ------- ------- -------
Net income (loss).................................. $ 1,957 $ (614) $ 2,001 $ (32) $ 2,614
======= ======= ======= ======= =======
Earnings (loss) per share(2)....................... $ .37 $ (.11) $ .37 $ (.01) $ --
Pro forma earnings per share....................... -- -- -- -- $ .41
Average common and common equivalent shares
outstanding(3)................................... 5,360,000 5,360,000 5,360,000 5,360,000 6,360,000
OTHER DATA:
Depreciation and amortization...................... $ 3,600 $ 4,114 $ 4,323 $ 5,428 $ 5,726
CONSOLIDATED BALANCE SHEET DATA:
Total assets....................................... $ 49,895 $ 45,523 $ 53,621 $ 54,408 $ 55,878
Working capital.................................... 4,056 2,588 10,542 6,405 7,477
Long-term debt, less current portion and long-term
debt payable to affiliate........................ 1,671 1,676 1,036 8,604 6,866
Long-term debt payable to affiliate, less current
portion.......................................... 2,000 2,000 813 1,760 1,100
Stockholders' equity............................... 31,672 31,058 33,059 33,027 35,641
</TABLE>

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

(1) Relates to proceeds received by the Company in settlement of a lawsuit.

(2) Adjusted to give effect to the Reorganization. See "The
Company -- Reorganization; Relationship with Lawrence".

16
<PAGE> 19

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

The Company provides directional drilling services and designs,
manufactures and rents technologically-advanced downhole tools for oil and gas
drilling and workover applications. Demand for the Company's directional
drilling services and downhole tools depends primarily upon the level of
exploration and production activity in the oil and gas industry, which in turn
depends in part on oil and gas prices, expectations about future prices, the
cost of exploring for, producing and delivering oil and gas, the discovery rate
of new oil and gas reserves, domestic and international, political, military and
regulatory and economic conditions and the ability of oil and gas companies to
raise capital.

During the past five years, the Company has experienced significant growth
in revenues relating to its directional drilling services. The Company believes
this growth is consistent with trends in the oil and gas industry towards use of
technologically-advanced directional drilling services in order to develop
reservoirs that otherwise would have been marginal or uneconomical using
conventional drilling methods. Historically, the Company has provided drilling
services primarily for directionally drilled wells in the Gulf of Mexico and the
United States Gulf Coast region. During fiscal 1995, the Company expanded its
directional drilling operations into Venezuela, and in fiscal 1996, began
offering its services in the Austin Chalk. Contemporaneously with its expansion
into the Austin Chalk, the Company began providing horizontal drilling services.
The Company believes that its plans to continue expansion as well as these
industry trends will contribute to the continued growth of its directional
drilling services.

The Company also believes that rentals of its downhole tools will benefit
from the industry trend toward the use of directional drilling techniques. In
many oilfield applications, directional drilling techniques offer significant
economic advantages over conventional drilling, such as reduced drilling time
and expense, accelerated production rates and enhanced reservoir recovery. The
Company believes that its directional drilling services are becoming
increasingly important to the Company's business, in part because a growing
percentage of the Company's downhole tools are rented in connection with its
drilling services.

RESULTS OF OPERATIONS

The Company derives rental income from its fleet of downhole tools, and to
a lesser extent, third-party rentals. The Company typically charges its
customers a per-day rental rate for downhole tools, except for its downhole
drilling motors, which are rented at an hourly rate. In international markets,
the Company also often charges its customers a refurbishment charge, which is
included in its rental revenues.

The Company derives revenues from sales of products and services through
its directional drilling services, lost-in-hole revenues and sales of its
mechanical drilling jars. The services of Dailey's directional drillers and MWD
technicians are billed on a per person/per day basis for the time on assignment
at the customer's drill site. Although the Company considers rentals of its
downhole drilling motors and MWD equipment to be a significant part of its
directional drilling services, revenue from such rentals is recorded as rental
income for financial statement purposes. The Company's lost-in-hole revenues
consist of replacement charges that Dailey's customers contractually are
required to pay each time a Dailey downhole tool is lost in hole. The Company
sells mechanical drilling jars in a limited number of international markets,
primarily to state-owned oil and gas companies.

The operating costs associated with the Company's rentals consist primarily
of expenses associated with depreciation, transportation, and maintenance and
repair and related direct overhead. The costs associated with the Company's
sales of products and services consist primarily of the undepreciated portion of
the capitalized cost of its downhole tools sold or lost in hole and the salaries
and related costs associated with the Company's directional drillers and MWD
technicians.

Year Ended April 30, 1996 Compared to the Year Ended April 30, 1995

Rental Income. Rental income for the year ended April 30, 1996, was $43.0
million, an increase of 17% from $36.7 million for the year ended April 30,
1995. This increase was due primarily to an increase in demand for the Company's
directional drilling services and related products in Venezuela, the Gulf of
Mexico and the

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<PAGE> 20

United States Gulf Coast region, which resulted in a $4.2 million increase in
rental of MWD equipment, downhole motors and other directional drilling tools.
During fiscal 1996, the Company purchased and began to utilize additional MWD
equipment in Venezuela. The Company also experienced increased demand for its
directional drilling services in the Gulf of Mexico and the United States Gulf
Coast region due to escalating gas prices and a corresponding increase in
drilling activity. In addition, rental income from the Company's drilling jars
and slingers increased $1.4 million due primarily to an increase in demand in
Latin America and to a slight increase in pricing worldwide. Also in fiscal
1996, the Company increased its distribution of fishing jars in the United
States Gulf Coast region and expanded distribution of fishing jars into the
North Sea, which resulted in an increase in rental income of $1.0 million.

Sales of Products and Services. Sales of products and services for the year
ended April 30, 1996, were $16.0 million, an increase of 31% from $12.2 million
for the year ended April 30, 1995. This increase was due primarily to an
increase in export sales of mechanical drilling jars of approximately $1.6
million and to an increase in lost-in-hole revenues of $1.2 million. The
increase in lost-in-hole revenues is consistent with increased rental activity
during the year. The increase also is attributable to an increase in demand for
the Company's directional drilling services in the Gulf of Mexico, the United
States Gulf Coast region and Venezuela.

Cost of Rentals. Cost of rentals for the year ended April 30, 1996, was
$33.0 million, an increase of 11% from $29.7 million for the year ended April
30, 1995. This increase was due primarily to the variable costs associated with
an increase in rental activity, such as tool repair costs, agent commissions and
third party tool charges. The increase is also attributed to an increase in
import duties and fees of approximately $600,000 associated with the importation
of directional drilling tools to Venezuela. The Company expenses import duties
and fees as incurred instead of capitalizing them as part of the cost of the
tool. As a percentage of rental income, cost of rentals decreased from 81% in
fiscal 1995 to 77% in fiscal 1996, which reflects the fixed nature of the
Company's cost base.

Cost of Products and Services. Cost of products and services for the year
ended April 30, 1996, was $7.9 million, an increase of 15% from $6.9 million for
the year ended April 30, 1995. This increase was due primarily to an increase in
personnel costs associated with an increase in directional drilling services in
the Gulf of Mexico, the United States Gulf Coast region and Venezuela. The
increase also is attributable to the write-off of the net book value of products
lost in hole and the cost of drilling jars sold during the year.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $12.1 million for the year ended April 30, 1996, an
increase of 26% from $9.6 million for the year ended April 30, 1995. This
increase was due primarily to an increase in personnel costs associated with
bonuses and raises paid during the year as well as additional personnel, an
increase in travel and business development costs associated with higher levels
of international business and an increase in legal expenses associated with
litigation involving the Company's enforcement of its intellectual property.

Research and Development Expenses. Research and development expenses for
the year ended April 30, 1996, were $728,000, a decrease of 6% from $775,000 for
the year ended April 30, 1995, as the level of the Company's research and
development activity remained relatively constant between the two years.

Interest Expense -- Nonaffiliates. Interest expense to nonaffiliates for
the year ended April 30, 1996, was $785,000, a decrease of 7% from $841,000 for
the year ended April 30, 1995. The decrease was due primarily to the repayment
throughout fiscal 1996 of an aggregate of $1.3 million in principal on the
Company's bank debt, which was partially offset by advances in the second half
of fiscal 1996 of $1.3 million against the revolving line of credit associated
with the Company's bank debt.

Interest Expense -- Affiliate. Interest expense to affiliate for the year
ended April 30, 1996, was $182,000, a decrease of 17% from $220,000 for the year
ended April 30, 1995. The decrease is due to the repayment of $660,000 of
principal during the year.

Foreign Exchange (Gain) Loss. Foreign exchange losses of $239,000 in fiscal
1996 compared to gains of $90,000 for the year ended April 30, 1995, were due
primarily to unfavorable exchange fluctuations during fiscal 1996 with the
British pound and the Dutch guilder.

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<PAGE> 21

Other (income) expense, net. Other expense for the year ended April 30,
1996, was $39,000, a decrease of 79% from $190,000 for the year ended April 30,
1995. This decrease was due primarily to the write-off of obsolete inventory in
fiscal 1995.

Income Tax Expense. Provision for income taxes for the year ended April 30,
1996, was $1.4 million, an increase of 70% from $838,000 for the year ended
April 30, 1995. The increase was due primarily to an increase in income in
countries in which the Company was subject to income or withholding taxes, which
resulted in the effective tax rate decreasing from 104% to 35% from fiscal 1995
to 1996. In fiscal 1996, the Company recorded a deferred tax asset related to
net operating loss carryforwards, which resulted in a decrease in the effective
tax rate. This decrease was predominantly offset by a gain for tax purposes
related to the dissolution of a real estate partnership, which resulted in an
increase in the effective tax rate.

Year Ended April 30, 1995 Compared to the Year Ended April 30, 1994

Rental Income. Rental income for the year ended April 30, 1995, was $36.7
million, an increase of 13% from $32.4 million for the year ended April 30,
1994. This increase was due primarily to the acquisition of MWD equipment and
related equipment, which resulted in an increase in rental revenues of $3.4
million. Distribution of these products was limited to the Gulf of Mexico and
United States Gulf Coast region in fiscal 1995. Rental income from the Company's
other products increased slightly due to an increase in demand for the hydraulic
fishing jar in the United States Gulf Coast region and to a moderate increase in
pricing for the Company's primary product line, the drilling jar.

Sales of Products and Services. Sales of products and services for the year
ended April 30, 1995, were $12.2 million, an increase of 7% from $11.4 million
for the year ended April 30, 1994. This increase was due primarily to an
increase in demand for the Company's directional drilling services in the Gulf
of Mexico as escalating gas prices resulted in increased drilling in that
region. Sales of mechanical drilling jars decreased slightly due to a decrease
in sales to Iran, which were suspended during the year due to lack of timely
payment. Lost-in-hole revenues increased slightly due to increased rental
activity, which resulted in a corresponding increase in tools lost downhole.

Cost of Rentals. Cost of rentals for the year ended April 30, 1995, was
$29.7 million, an increase of 8% from $27.4 million for the year ended April 30,
1994. This increase in cost of rentals was due primarily to costs associated
with the routine repair and maintenance of the Company's rental tool fleet, and
to a full year of personnel expense and depreciation expense in fiscal 1995
associated with the initial purchase of MWD equipment hiring of related
personnel during fiscal 1994. As a percentage of rental income, cost of rentals
decreased to 81% for the year ended April 30, 1995, as compared to 85% for the
prior period, reflecting the fixed nature of the Company's cost base.

Cost of Products and Services. Cost of products and services for the year
ended April 30, 1995, was $6.9 million, an increase of 34% from $5.1 million for
the year ended April 30, 1994. This increase was due primarily to start-up costs
of approximately $800,000 associated with the introduction of directional
drilling services in Venezuela and to additional operating costs associated with
the expansion of directional drilling services in the Gulf of Mexico. The
increase is also attributed to the write-off of the net book value of MWD
equipment lost in hole during the year.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended April 30, 1995, were $9.6 million, an
increase of 36% from $7.1 million for the year ended April 30, 1994. This
increase was due primarily to an increase in personnel costs and an increase in
costs associated with the outsourcing of data processing services. The increase
also was due to an increase in lease expense associated with the corporate
headquarters and an increase in legal fees.

Research and Development Expenses. Research and development expenses for
the year ended April 30, 1995 were $775,000, an increase of 5% from $736,000 for
the year ended April 30, 1994, which reflects the relatively constant level of
research and development activity between the years.

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<PAGE> 22

Interest Expense -- Nonaffiliates. Interest expense to nonaffiliates for
the year ended April 30, 1995 was $841,000, an increase of 60% from $527,000 for
the year ended April 30, 1994, which was primarily due to the a full year of
accruals of interest from the Company's bank loan incurred in December 1993.

Interest Expense -- Affiliate. Interest expense to affiliate for the year
ended April 30, 1995 was $220,000, an increase of 156% from $86,000 for the year
ended April 30, 1994. The increase was due to the conversion of a non-interest
bearing loan from an affiliate in December 1993 to a term loan with interest at
8.0%, which resulted in twelve months of interest accrued in 1995 compared to
five months in 1994.

Foreign Exchange(Gain) Loss. Foreign exchange gains for the year ended
April 30, 1995 were $90,000 compared to a loss of $122,000 for the year ended
April 30, 1994. The increase is due primarily to favorable exchange fluctuations
between the United States dollar and the British pound and Dutch guilder.

Other (income) expense, net. Other expense for the year ended April 30,
1995, was $190,000 compared to income of $225,000 for the year ended April 30,
1994. The loss in 1995 was due primarily to the write-off of approximately
$60,000 of obsolete inventory. The gain in fiscal 1994 was due primarily to the
recognition of gains on the sale of excess machinery and equipment consistent
with the Company's decision to outsource manufacturing of many of the components
of its rental tools.

Income Tax Expense. Provision for income taxes was $838,000 for the year
ended April 30, 1995, a decrease of 22% from $1.1 million for the year ended
April 30, 1994. The decrease was primarily due to a decrease in income in
certain foreign tax jurisdictions in which the Company was subject to income and
withholding taxes. The effective tax rate increased from 35% to 104% due
primarily to the Company's inability to offset foreign losses with United States
income in 1995.

INFLATION AND FOREIGN EXCHANGE

Inflation has not had a significant impact on the Company's comparative
results of operations. For the year ended April 30, 1996, transactions conducted
in United States dollars accounted for approximately 90% of the Company's total
revenues. The Company believes that the percentage of its total revenues
relating to transactions conducted in foreign currencies will increase due to
continued expansion of the Company's international operations, primarily in
Venezuela. The Company seeks to protect itself from fluctuations in foreign
currencies by accelerating conversion of such currencies into United States
dollars and by continual evaluation of the Company's level of operations in such
markets.

LIQUIDITY AND CAPITAL RESOURCES

Working Capital. At April 30, 1996, the Company had $2.0 million in cash
and cash equivalents. For the year ended April 30, 1996, the Company had net
income of $2.6 million and cash provided by operating activities of $4.9
million. Other sources of cash included $2.6 million from revenue-producing
tools lost in hole, abandoned and sold and $1.3 million from advances under the
revolving line of credit discussed below. The Company's principal uses of cash
for the year were to fund $6.9 million for the addition of downhole tools and
$2.0 million for the repayment of long-term debt, including $660,000 to
Lawrence. During the past several years, the Company has funded its working
capital requirements through cash generated from operations, its credit
facilities, and, when necessary, advances from Lawrence. Upon completion of the
Offering it is anticipated that Lawrence will no longer be a source of revenues
for meeting the Company's working capital requirements.

Credit Facilities. At April 30, 1996, the Company had $9.7 million of bank
debt outstanding pursuant to an amended and restated credit agreement dated
December 13, 1995, as amended on June 5, 1996 (the "Credit Agreement"). The
Credit Agreement provides for a term loan and a revolving credit facility. At
April 30, 1996, the outstanding principal balance of the term loan was $8.4
million and the outstanding principal balance of advances made pursuant to the
revolving line of credit was $1.3 million. Principal payments on the term loan
are approximately $139,000 monthly through December 1999, with increasing
principal payments until maturity on December 1, 2000. The obligation of the
bank to make revolving credit advances terminates in December 1996. Interest on
the term loan was fixed at 7.9% pursuant to an interest rate swap agreement.
Interest on revolving credit advances will fluctuate at the bank's prime rate in
effect from time to time or at LIBOR-based rate plus 2.0%. At April 30, 1996,
the average interest rate on revolving

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<PAGE> 23

advances was 7.4%. Borrowings under the revolving credit facility are limited to
the lesser of $3.0 million or a loan formula based upon the level of the
Company's eligible accounts receivable. The Company also may cause the bank to
issue letters of credit on the undrawn amount not to exceed $500,000. The
outstanding undrawn amount at any time of all letters of credit issued pursuant
to the Credit Agreement reduces the Company's ability to borrow funds pursuant
to the revolving line of credit. At April 30, 1996, there were no outstanding
letters of credit. The obligations of the Company to the bank are collateralized
by substantially all of the Company's property, equipment, inventory,
intellectual property and receivables. The Credit Agreement contains certain
restrictive covenants and customary events of default and conditions to the
bank's obligation to make advances to the Company. On June 5, 1996, the Credit
Agreement was amended so that the Reorganization would not violate certain of
these requirements. The Credit Agreement also is collateralized by certain real
estate owned by Lawrence, which the bank has agreed to release upon closing of
the Offering.

Advances from Lawrence. At April 30, 1996, the Company had approximately
$1.8 million outstanding under an intercompany note due to Lawrence. Principal
payments on the note of $55,000 plus interest at 8.0% on the unpaid balance are
due monthly with the final payment due at maturity on December 1, 1998. In
addition, on June , 1996, the Company declared and paid a dividend to Lawrence
of $10.0 million in the form of a demand promissory note accruing interest at
its bank's prime rate. The Company intends to repay these notes utilizing a
portion of the proceeds from the Offering. See "Use of Proceeds".

Capital Expenditures. The Company anticipates that it will have capital
expenditures of approximately $16.0 million in the fiscal year ending April 30,
1997, $15.0 million of which are expected to relate to certain downhole tools,
primarily MWD equipment, drilling jars and fishing jars. The Company believes it
has available resources through internally generated cash flow, the existing
Credit Agreement and the net proceeds of the Offering to fund its operations for
at least 12 months following the Offering.

Future Acquisitions. The Company's business strategy is to broaden the
scope of the premium downhole tools and services it provides to the oil and gas
industry by expanding its directional drilling services and product lines, by
introducing new products and services through technological innovation and by
acquiring complementary businesses and assets. In connection with any future
acquisition, the Company may use a portion of the proceeds from the Offering
and, in addition, may be required to incur substantial indebtedness to finance
such acquisition and may also issue equity securities or convertible securities.
Although the Company routinely evaluates potential acquisition candidates, it
currently does not have any understanding, contract or agreement to acquire any
businesses or assets. See "Use of Proceeds".

Interest Rate Swap Agreement. In December 1993, the Company entered into an
interest rate swap agreement, which converted the interest rate on the term
portion of the Note from a floating rate of prime plus one-half of one percent
to a fixed rate of 7.9%. The financial impact of the swap was to increase
interest expense during fiscal 1994 by $24,000 and decrease interest expense in
fiscal 1995 and 1996 by $57,000 and $120,000, respectively. The Company has no
immediate plans to prepay the term portion of the Credit Agreement or unwind the
swap agreement.

Income Taxes. In fiscal 1997, the Company will no longer be included in the
federal tax return of Lawrence. Accordingly, the Company has recognized an
allocation of Lawrence's net operating loss carryforwards in the amount of $4.6
million, which will expire in 2004 through 2010. The Company has net deferred
tax assets at April 30, 1996 of $1.8 million.

NEW ACCOUNTING PRONOUNCEMENTS

In March 1995, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("SFAS 121"). SFAS 121 requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. SFAS 121 is effective for fiscal years beginning after December 15,
1995. The Company believes that the adoption of SFAS 121 will not have a
material impact on its consolidated financial statements.

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In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS
123 establishes alternative methods of accounting and disclosure for employee
stock-based compensation arrangements. In connection with establishing its 1996
Key Employee Stock Plan and its 1996 Non-Employee Director Stock Plan, the
Company has elected to use the "intrinsic value based method" of accounting for
its employee stock option plan. This method does not result in the recognition
of compensation expense when employee stock option are granted if the exercise
price of the options equals or exceeds the fair market value of the stock at the
date of grant. The Company will adopt the disclosure requirements of SFAS 123
when it becomes effective in 1996.

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BUSINESS AND PROPERTIES

GENERAL

Dailey Petroleum Services Corp. provides directional drilling services and
designs, manufactures and rents technologically-advanced downhole tools for oil
and gas drilling and workover applications. Founded in 1945 as a rental tool
Company, the Company began offering directional drilling services in 1984 and
currently provides such services in the Gulf of Mexico, the United States Gulf
Coast region, and most recently, Venezuela and the Austin Chalk. The Company's
directional drilling services include computer-aided planning of optimum well
path and drilling procedures, on-site supervision, MWD services and sourcing and
supply of MWD equipment and related drilling tools.

Recent advances in directional drilling technologies combined with advances
in the identification and location of oil and gas reserves have made many
marginal or otherwise uneconomical reservoirs economically feasible to produce.
In many oilfield applications, directional drilling techniques, which include
directional and horizontal drilling, extended-reach drilling and short-radius
drilling, offer significant economic advantages over conventional drilling, such
as reduced drilling times and expense, accelerated production rates and enhanced
reservoir recovery. These technologically-advanced drilling techniques include
directional and horizontal drilling, extended-reach drilling and short-radius
drilling. The Company offers drilling services for directional and horizontal
applications and offers its downhole tools for all advanced drilling techniques.
The Company responds to its customers' needs by providing quality drilling
services and highly-reliable downhole tools capable of improving drilling
efficiency, reducing the risk that expensive drilling components will be lost
downhole and enhancing overall exploration and development economics.

STRATEGY

The Company's strategy is to broaden the scope of the premium downhole
tools and services it provides to the oil and gas industry. The Company believes
this strategy is responsive to its customers' preference to purchase as many
products and services as possible from a single provider and that the ability to
offer related services enhances the Company's marketing of its downhole tools.
The Company intends to implement this strategy by (i) expanding its directional
drilling services and related product offerings, (ii) introducing new products
and services through technological innovation and (iii) acquiring complementary
businesses and assets.

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<PAGE> 26

the Company's business because a growing percentage of the Company's downhole
tools are rented in connection with providing such services.

DEMAND FOR DIRECTIONAL DRILLING SERVICES AND RENTAL PRODUCTS

Demand for the Company's directional drilling services and downhole tools
is affected by the worldwide level of, and trends in, oil and gas drilling
activity, which historically has experienced significant volatility. Demand for
the Company's directional drilling services depends upon the number of wells
being drilled using technologically-advanced directional drilling techniques,
such as directional and horizontal drilling, extended-reach drilling and
short-radius drilling. Demand for the Company's drilling tools depends primarily
upon the number of oil and gas wells being drilled, the drilling method employed
and the depth and drilling conditions of such wells. Demand for the Company's
fishing tools depends primarily upon the level of remedial or "workover"
activity in existing oil and gas fields where those products are offered and, to
a lesser extent, on the level of drilling activity in those areas.

DIRECTIONAL DRILLING SERVICES AND RELATED PRODUCTS

The Company began offering directional drilling services in 1984, primarily
along the Texas and Louisiana Gulf Coast, and has since steadily expanded both
its directional drilling technical capabilities and the geographic areas in
which its services are regularly offered. In fiscal 1995, the Company began
providing its drilling services in international markets by expanding into
Venezuela. In fiscal 1996, the Company began providing directional and
horizontal drilling services in the Austin Chalk. The directional drilling
services offered by the Company consist of well planning, on-site supervisory
services to maximize drilling efficiency, MWD services and equipment, downhole
motors and post-well analysis. The Company plans to continue the expansion of
its drilling services both domestically and internationally. In addition, the
Company expects to keep pace with continually evolving directional drilling
techniques by developing or acquiring extended-reach and short-radius drilling
capabilities.

The skill, experience and reputation of a service company's directional
drillers are the primary competitive factors in the directional drilling
services market. Because of this, the competition among directional drilling
service companies to employ the most reputable, qualified and experienced
directional drilling personnel is intense. In addition, the breadth of tools and
services offered as well as price are important competitive factors. The Company
believes that the quality and experience of its directional drillers provide it
with a competitive advantage. The Company believes that it is able to recruit
and retain highly-qualified directional drillers because of its reputation in
the industry for stability and quality, because it offers

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<PAGE> 27

competitive compensation and because it provides a reliable, experienced support
staff. As of May 17, 1996, the Company employed 76 individuals in connection
with its directional drilling services. These employees include 26 directional
drillers, five of whom are located in Venezuela, with an average of 14 years of
industry experience and four years of service with the Company, and 50
individuals providing support for these individuals, with an average of 17 years
of industry experience and three years of service with the Company.

Measurement-While-Drilling Services

The steering tools utilized by directional drillers typically consist of
either wireline steering tools or more advanced MWD equipment. MWD equipment
provides a directional driller with more extensive and advanced information to
"steer" the drill bit, including inclination, azimuth, tool face and temperature
plus magnetic or gravity tool face updates in steering or rotary drilling modes.
MWD units also can provide gamma ray logging.

The Company purchases its MWD units from a single outside vendor. Reliable
MWD units currently are available for third-party purchase worldwide from only a
few independent suppliers. The Company began purchasing MWD units offering
traditional MWD services from its current supplier and offering such systems and
services to its customers in fiscal 1994. The Company believes that its MWD unit
competes favorably with respect to reliability and performance with MWD units
developed in-house by fully-integrated service companies and the other reliable
MWD units currently available for third-party purchase. While the Company has
not experienced significant supply or quality control problems to date with its
supplier, no assurances can be made that its supplier will continue to be able
to supply the Company with MWD units or that the Company will be able to
purchase such products and services at competitive prices and comparable quality
from the other known vendors of MWD units. Any difficulty in obtaining MWD units
and related support services from its supplier could have a material adverse
effect on the Company's results of operation.

The most advanced guidance equipment also is capable of providing
logging-while-drilling ("LWD") information, which includes resistivity sensors
and other more sophisticated variations such as density and porosity sensors.
Currently, the Company believes guidance systems capable of providing LWD
information are not available for third-party purchase and are owned only by
large, diversified oil service companies that have developed such capabilities
in-house. The Company has been able to obtain access to LWD equipment on a very
limited basis in situations where the Company's customer can rent such equipment
directly from a supplier of such products. The Company believes that LWD
equipment may be available for purchase in the future and intends to purchase
such equipment if, and when, reliable equipment is offered; however, it has no
current understanding, agreement or contract to do so and no assurances can be
given that LWD equipment will become available for third-party purchase or that
such equipment will be made available to the Company at competitive prices.

As of the date of this Prospectus, the Company believes that its inventory
of MWD units is insufficient to meet current demand for such systems. Utilizing
proceeds from the Offering, the Company intends to purchase additional MWD
systems to be used in domestic and international markets. See "Use of Proceeds"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources".

Drilling Motors

Directional drilling typically is conducted using a downhole drilling motor
attached to the drill bit and powered by the circulation of drilling fluids from
the surface, unlike conventional rotary drilling techniques in which the drill
bit is turned by rotating the drillstring from the surface. The Company
designed, developed and introduced its own downhole motor, the Dailey Positive
Displacement Drilling Motor. Improved versions of this motor are offered for
rental in connection with directional drilling services provided by the Company,
rather than to third parties providing directional drilling services.

New Markets and Applications

The Company's growth strategy includes the geographic expansion of its
directional drilling services and the addition of highly-specialized processes
such as extended-reach and short-radius drilling. Implementation

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<PAGE> 28

of this strategy began with expansion into Venezuela in fiscal 1995 and into the
Austin Chalk during the most recent fiscal year. Contemporaneously with its
entry into the Austin Chalk, the Company began providing horizontal drilling
services. The Company intends to implement this strategy further by expanding
into new international and domestic markets where the Company has enjoyed
established name recognition and distribution networks.

RENTAL PRODUCTS

Drilling Jars and Related Jar Products

The Company believes it has become the worldwide leader in premium drilling
jar products due primarily to superior design features, many of which are
proprietary in nature. These design features, the Company believes, enable its
drilling jars to deliver performance superior to competing jars over longer
periods of time in their intended operating environments.

A drilling jar is an impact tool that is placed in the lower section of a
drillstring as part of the bottomhole assembly. Activated from the surface, the
drilling jar delivers a sharp, powerful impact to free the drillstring should it
become lodged in the hole. The potential risks of the drillstring becoming stuck
in the hole include interruption of the drilling process, loss of drillstring
components and loss of the well. Drilling jars must be capable of reliably
delivering frequent and consistent impacts to the drillstring, sometimes over a
period of many days. As a result, reliability and consistent performance and
service by qualified personnel are key criteria in a customer's selection of
drilling jars.

Drilling jars and jar slingers generally are used in drilling applications
where there is significant risk of, or cost associated with, the bottomhole
assembly of the drillstring becoming stuck in the well bore. As the risk or
potential cost of a stuck drillstring increases, the likelihood that the
operator of the well will employ a drilling jar typically increases. Drilling
applications where drilling jars are used regularly include high cost wells,
wells drilled using directional or horizontal techniques, deeper wells, and
wells penetrating unstable geologic formations that increase the risk of well
bore collapse. Drilling jars generally are considered essential components in
most directional drilling bottomhole assemblies.

The Company's line of drilling jars includes three products: the mechanical
Dailey L.I. Rotary Drilling Jar (the "L.I. Jar"), the Dailey Hydraulic Drilling
Jar (the "Dailey Hydraulic Jar") and the Dailey No-Torque Jar (the "DNT Jar").
The Company believes that the designs of its three drilling jars allow it to
offer a drilling jar compatible with virtually any drilling condition a customer
may encounter. For the three fiscal years ended April 30, 1996, revenues from
the Company's drilling jars and related products constituted 71%, 63% and 57%,
respectively, of the Company's total revenues during such periods.

The Company offers its drilling jars in several outside diameter sizes and
can be incorporated into bottomhole assemblies utilizing most industry-standard
drill collar sizes. The Company also provides customers with computer-aided
analyses of optimal drilling jar placement in the bottom hole assembly to
maximize drilling jar performance.

Dailey Hydraulic Jar. Introduced in 1986 in response to the growing use of
directional and horizontal drilling techniques, the Dailey Hydraulic Jar
generally is suited for use in all directional drilling applications. Unlike
mechanical jars, such as the L.I. Jar, the Dailey Hydraulic Jar does not require
rotation of the drillstring to adjust the force of impact delivered. This
adjustment feature provides more reliable control of the tool in highly deviated
or directionally drilled wells where rotating the drillstring is complicated by
increased torque and drag resulting from greater contact of the drillstring with
the walls of the well bore.

Hydraulic drilling jars generally are more susceptible to failure caused by
heat than are mechanical drilling jars. Heat reduces the viscosity of internal
hydraulic fluids which diminishes the performance of a hydraulic drilling jar
and, at higher temperatures, may render the tool ineffective. The sources of
heat affecting hydraulic drilling jars are the internal heat generated by the
tool in operation and ambient heat downhole. As a result of its patented design,
the Dailey Hydraulic Jar is capable of operating for substantially longer
periods of time without failure induced by internally generated heat. The
Company believes this and other design

26
<PAGE> 29

features enable the Dailey Hydraulic Jar to provide more consistent performance
than competing hydraulic jars.

L.I. Jar. The Company introduced the L.I. Jar in 1965. Although most
commonly employed in conventional, "straight hole" drilling or in wells where
the well bore deviates only slightly from vertical, the L.I. Jar also is capable
of effective operation in highly deviated drilling applications. The degree of
upward or downward force delivered by the L.I. Jar to the drillstring when
triggered can be adjusted from the surface while the tool remains downhole. The
L.I. Jar is a self-cocking (up or down) jar that trips immediately after
applying the required pull or weight. Because of its entirely mechanical
mechanism and rugged construction, the L.I. Jar is known for its reliability and
ability to deliver consistently the desired force of impact. The L.I. Jar is
able to withstand extreme temperatures and can be adapted for geothermal
drilling. Although patent protection for the L.I. Jar expired in 1983, it
continues to be one of the most widely used mechanical drilling jars in the oil
and gas drilling industry worldwide.

DNT Jar. Like the Dailey Hydraulic Jar, the DNT Jar is designed primarily
for use in directional drilling applications. The DNT Jar was introduced in 1987
and is used by customers who prefer a mechanical jar instead of a hydraulic jar.
Although the DNT Jar's impact force cannot be adjusted while downhole as can the
Dailey Hydraulic and L.I. Jars, its mechanism enables it to be reliably and
consistently activated in directionally or horizontally drilled wells where
temperatures are so great that hydraulic drilling jars would fail or be
impaired. The DNT Jar features a patented mechanism that enables an operator to
trigger the tool without affecting drillstring torque. Like all of Dailey's
drilling jars, the DNT Jar is a self-cocking jar that trips immediately after
being triggered.

Hydraulic Fishing Jar and Related Tools

Fishing operations generally are classified as either "open hole" or "cased
hole," including "through tubing" fishing. Open hole operations usually are
associated with drilling and are directed toward removing stuck drilling
equipment, bits, drill pipe or bottomhole assemblies from the well bore in order
to proceed with drilling operations. Cased hole operations usually are
associated with existing wells in which production casing has been set and
cemented. Workover rigs and rigs utilizing coiled tubing routinely are used to
keep the well operating at expected levels of performance. The Company
manufactures a range of sizes of jars used for fishing operations whether
employing a workover rig or coiled tubing rig. During fiscal 1996, the Company
introduced its patented, double-acting, hydraulic coiled tubing jar (the "Dailey
Coiled Tubing Jar"), which was designed and developed through the Company's
research and development program. The Company believes that the Dailey Coiled
Tubing Jar was the first double-acting, hydraulic coiled tubing jar introduced
for commercial operation in the oil and gas industry.

The Dailey Hydraulic Fishing Jar (the "Dailey Fishing Jar"), Dailey Coiled
Tubing Jar, Dailey Bumper Subs and Dailey HyPulse(R) Jar Slingers contain
certain patented and proprietary features. Since fishing jars deliver only an
upward blow when triggered, operators often utilize a bumper sub, which delivers
a downward impact. Operators utilize fishing jar slingers to magnify the impact
of the hydraulic fishing jar. Like the Dailey Hydraulic Jar, the Dailey Fishing
Jar incorporates a patented hydraulic chamber design that reduces
internally-generated heat. The Company believes that this characteristic and
other proprietary designs and manufacturing features make the Dailey Fishing Jar
a reliable product, capable of operating for longer periods of time than
competing hydraulic fishing jars.

As of the date of this Prospectus, the Company believes that its current
inventory of Dailey Fishing Jars and Dailey Coiled Tubing Jars is insufficient
to meet current demand for such products. Utilizing proceeds from the Offering,
the Company intends to manufacture additional jars to be used in international
and domestic markets.

Other Products

In connection with its directional drilling services, the Company owns and
leases certain non-proprietary drilling tools that it leases to operators as
components of the bottom hole assembly, such as non-magnetic drill

27
<PAGE> 30

collars and stabilizers, string stabilizers, near bit stabilizers, various short
drill collars and select heavyweight drill pipe. The Company believes that
owning and leasing an inventory of such products allows the Company to increase
the profitability of its directional drilling services.

MARKETING AND DISTRIBUTION

The Company traditionally has marketed its directional drilling services in
the Gulf of Mexico, the United States Gulf Coast region and Venezuela. During
the past year, the Company began offering its directional drilling services in
the Austin Chalk. Marketing for the Company's directional drilling services is
conducted entirely through the Company's direct sales force located in the
Company's principal offices in Conroe, Texas, and in its district offices
located at Conroe, Texas; Corpus Christi, Texas; Houma, Louisiana and Venezuela.
The Company's sales representatives have extensive experience in directional
drilling and monitor the latest drilling tool developments and drilling
techniques.

The Company typically provides its directional drilling services on a
per-day basis. The Company's directional drillers, at least one of whom is
always present during a directional drilling project, are billed separately to
customers at a per-day rate. The Company's MWD units, downhole motors and
related products, if requested by the customer, are billed to customers at a
per-day rental rate. The Company considers its directional drilling services to
be an integral part of its distribution efforts for its downhole tools.

The Company markets its downhole tools primarily to major oil companies,
independent oil and gas exploration companies, drilling contractors, and
drilling services consultants. In international markets, state-owned oil and gas
companies also are a significant customer group.

Fishing tools generally are rented or consigned on a long-term basis to
fishing services companies. In order to protect the proprietary nature of its
tools, the Company has made a strategic decision not to sell its fishing tools
to fishing service companies. Rather, the Company rents its fishing tools to the
fishing services companies or directly to the well operator. Although the
Company believes its marketing strategy has allowed it to earn higher margins on
its fishing tools while at the same time reducing the ultimate cost to the
customer, the Company believes that this strategy has limited its ability to
increase market share since fishing service companies generally prefer to
purchase their fishing tools rather than rent from third parties.

Domestic marketing of the Company's downhole tools is conducted by the
Company's direct sales force located in the Company's principal offices in
Conroe, Texas, and in five principal sales offices located at Conroe; Corpus
Christi, Texas; Houma, Louisiana; Bakersfield, California; and Anchorage,
Alaska. The Company's service representatives are trained in the basic
maintenance and operation of each of its downhole tools. Likewise, the sales
representatives have extensive personal experience in directional drilling and
monitor the latest drilling tool developments and directional drilling
techniques.

International marketing of the Company's downhole tools is conducted
through either the Company's direct sales force or through independent
international agents. Internationally, the Company determines its method of
marketing its downhole tools on a region-by-region and country-by-country basis.
The factors that the Company considers when determining whether to operate
through a direct sales force or through independent agents include political and
economic stability in the country and region, logistics in providing the
Company's downhole tools to the customer, market size, foreign taxes, labor laws
and import and export procedures. In countries where management believes
drilling activity is likely to remain high for a sustained period, the Company
is most likely to market and distribute its rental tools through a direct sales
force rather than through international agents, if practical. In such instances,
the Company leases facilities to accommodate administrative, marketing,
distribution, and tool maintenance functions similar to its district facilities
in the United States.

All pricing and rental terms and conditions of rental are established by
the Company and may not be varied by international agents without approval of
the Company. International agents typically offer other products and services
but are contractually prohibited from offering competing products unless the
Company does not offer the particular tool or size of tool in the agent's
territory.

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<PAGE> 31

The Company does not believe that any one customer accounted for more than
10% of the Company's revenues during any of the Company's three most recent
fiscal years.

INTERNATIONAL OPERATIONS

The Company's international operations accounted for approximately 46%, 39%
and 42% of total revenues for fiscal 1994, 1995 and 1996, respectively. As of
April 30, 1996, the Company had international product and equipment sales or
service operations in approximately 25 countries. See Note 13 of notes to
consolidated financial statements of the Company contained elsewhere in this
Prospectus for additional information regarding foreign and domestic revenues.

The Company currently utilizes 13 international agents responsible for
international marketing. International agents also perform maintenance of the
Company's downhole tools in their custody at their own facilities. International
marketing and distribution is organized into four major regions: Europe and
Western Africa, Middle East and Eastern Africa, Asia and Latin America. Each
region is further divided into multiple and sometimes overlapping international
agent territories, generally based on political boundaries. Regional supervisors
are assigned by the Company to oversee international agent operations within
each of the Company's four international regions, particularly with respect to
proper maintenance and redressing of tools and to provide sales support and
technical assistance to customers.

Dailey's international operations are subject to special considerations
inherent in doing business outside the United States, including political
instability, war, civil disturbances and governmental activities, which may
limit or disrupt markets, restrict the movement of funds or result in the
deprivation of contract rights or the taking of property without fair
compensation. Government-owned petroleum companies located in some of the
countries in which Dailey operates have adopted, or are subject to, policies
that mandate that preference be given to companies that are majority-owned by
local nationals. In addition, the Company conducts a portion of its
international operations in currencies other than the United States dollar. See
"Management's Discussion and Analysis of Financial Condition -- Results of
Operations".

ARRANGEMENTS WITH CUSTOMERS

The Company typically charges is directional drilling services customers a
per-day rate for each directional driller and MWD technician provided by the
Company. Domestically, the Company separately charges its customers a per-day
rental rate for MWD units and related equipment utilized by the customer.
Downhole drilling motors provided by the Company are billed based upon an hourly
rate.

The Company's international directional drilling operations currently are
limited to Venezuela. The Company charges for its services based upon a per-well
basis, which charge includes an estimate of the number of days the Company's
directional drillers and MWD technicians will be on-site as well as an estimate
of the MWD equipment and related tools that will be utilized in drilling the
applicable well. In situations where the Company is subcontracting its services
to another directional drilling company, it receives a per day charge for its
services, in some cases subject to a maximum possible charge.

The Company chooses to offer its downhole tools primarily for rental in
order to protect its proprietary designs and assure quality control in their
maintenance and operation. The Company believes that a substantial portion of
the drilling jars in use worldwide are rented rather than purchased by the
end-user.

The Company typically rents its drilling tools by the day on a per-rig
basis. Because many customers prefer to have additional or substitute tools of
varying sizes on site, the Company classifies its drilling tools as either
"operational" or "standby" for purposes of calculating rental charges. Daily
rental rates for standby tools generally are less than standard rates for
operational tools, although in some international markets the same daily rent is
charged for operational and standby tools. In some domestic market areas, the
Company supplies standby tools at no additional charge.

In international markets, the Company generally receives a standard
inspection charge for drilling tools actually used and returned. Additional
charges are assessed for parts damaged beyond normal wear. A substantial
replacement or "lost-in-hole" charge is made for tools that are lost or
abandoned. Rental rates for

29
<PAGE> 32

operational and standby tools, damage charges and lost-in-hole charges vary by
product, domestic or international location, and local competitive conditions.
Longer-term tool rental contracts are negotiated, particularly with major oil
companies or with operators drilling a multiple well program.

The Company occasionally offers its L.I. Jar and spare parts for sale in
certain international markets. Sales are generally confined to national oil
companies of countries where political risks, governmental restrictions, or
other operating conditions are such that the Company has chosen not to establish
rental operations, either directly or through agents.

MANUFACTURING

The manufacturing processes generally required to produce the Company's
downhole tools are machining, fabrication, assembly of components manufactured
by the Company or outside suppliers, and quality control testing. The Company's
downhole tools are manufactured primarily from bars and tubes of high grade
alloy and stainless steel made to the Company's proprietary metallurgical
specifications and various seal materials. While the Company chooses to purchase
some raw materials and component parts from single vendors, management believes
that the raw materials and component parts used in its tools are generally
available from multiple sources at competitive prices.

Prior to fiscal 1994, the majority of the component parts for the Company's
downhole tools were manufactured by Company personnel at locations owned or
leased by the Company, while only certain specialized manufacturing operations
were outsourced to third parties. Beginning in 1991, the Company made a
strategic decision to increase the proportion of the components of its various
downhole tools that were manufactured by outside third parties; however,
assembly of the Company's downhole tools is still done entirely in-house.
Pursuant to this strategy, the Company attempts to outsource those manufacturing
processes that can be performed more efficiently and cost effectively by outside
third parties while still satisfying Dailey's rigid quality control standards.
In order to safeguard the proprietary nature of its various downhole tools, the
Company does not outsource the manufacture of proprietary components and
maintains a policy of manufacturing at least one aspect of each of its downhole
tools in-house. The Company believes that its manufacturing capabilities and
arrangements are sufficient in order to meet the demand and timing needs of the
Company's customers for the next 12 months. Machining of larger components and
spare parts, including the most complex components, is done by the Company at
its manufacturing plant in Conroe, Texas. The Company uses independent machine
shops to produce many of the smaller spare parts, which the Company believes can
be more competitively machined by such independent shops. During the past five
years, one vendor has been the Company's only supplier of filters that go into
the Company's hydraulic downhole tools. The Company has not identified alternate
suppliers of such filters. To date, the Company has not experienced significant
supply problems with this vendor.

Quality control is stressed throughout the manufacturing process to produce
downhole tools meeting the Company's high standards for reliability and
performance. Quality control inspections are conducted by specially trained
personnel. Steel bars and tubes are inspected and tested for compliance with the
Company's metallurgical specifications. Each part, whether produced by the
Company or others, is individually inspected for conformity with design
specifications. Each critical component is also inspected for cracking by
magnetic particle inspection. Upon final assembly, drilling and fishing jars are
repeatedly triggered in specially designed test racks to assure proper
performance before shipment.

All of the Company's downhole tools except the Company's drilling motors
are currently assembled at its plant in Conroe, Texas. Drilling motors are
assembled at the Company's Houston, Texas facilities. The Company believes that
it has sufficient manufacturing capacity to accommodate anticipated demand for
its downhole tools without expanding its manufacturing facilities in the United
States.

MAINTENANCE

Maintenance of the Company's downhole tools is conducted in the United
States at six of the Company's facilities, each of which is specially equipped
for that purpose. In the United Kingdom, Colombia and Venezuela, maintenance is
conducted by Company personnel, and elsewhere by the Company's

30
<PAGE> 33

international agents who are subject to periodic quality control inspection and
supervision by Company personnel. The Company's emphasis on quality control also
is applied to maintenance of its downhole tools. Upon return to the Company's
district service and distribution facility, each tool is activated repeatedly in
a test rack to detect performance deficiencies. The tool is then disassembled,
metallic parts are inspected, non-metallic parts are replaced as needed, and
moving parts are examined for excessive wear. The tool is then reassembled,
painted "Dailey blue", the characteristic blue color associated with Dailey
products, and returned to the rental fleet.

RAW MATERIALS

The manufacturing processes performed in house by the Company require a
ready supply of high-quality, special alloy steel and other raw materials. The
Company purchases its raw materials from various vendors, none of which supplied
more than 30% of the Company's supply of steel during fiscal year 1996.
Consistent with the recent upturn in the demand for steel and other raw
materials used in the oil and gas industry, the Company has begun to experience
longer lead times for delivery of raw materials, primarily steel, which requires
the Company to predict further in advance its needs for such materials. Although
the Company typically places orders for its steel at least three months in
advance and usually stores with a third party a reserve supply of steel adequate
to cover the Company's demand for steel for at least one month, any prolonged
disruption in steel supply could affect the Company's ability to meet production
schedules and commitments, which could have a material adverse effect on the
Company's financial condition and results of operations.

INTELLECTUAL PROPERTY

The Company believes that the proprietary aspects of many of its downhole
tools provide it with certain competitive advantages. In particular, the Company
believes that the trademarks and servicemarks protecting the Dailey name in
domestic and international markets are of primary importance. The Company relies
on a combination of patents, trade secrets, trademarks and servicemarks and
copyrights to protect its proprietary technologies and intellectual properties.
Dailey owns numerous patents in the United States and other countries.

The markets for the Company's downhole tools are characterized by continual
technological developments that have resulted in, and will likely continue to
result in, improvements in product function and performance. The Company
believes that its success will depend on its ability to respond to technological
developments on a timely basis, either internally or through strategic alliances
or acquisitions. Current competitors or new market entrants may develop new
technologies, products, services or standards that could render the Company's
products and services obsolete. Furthermore, after Dailey's patents expire, the
Company's competitors could develop products substantially similar to the
Company's downhole tools. In this regard, the Company maintains an engineering
staff in Conroe, Texas, which is responsible for designing and developing new
products and improvements to existing products.

The Company holds approximately 22 patents in the United States and
numerous counterparts in other countries and has approximately 46 trademarks and
servicemarks registered in the United States and other countries. Patents
protect features of the Dailey Hydraulic Jar, Dailey Fishing Jar, DNT Jar,
R.A.M. Shock Absorber and Dailey Drilling Motor. The L.I. Jar has not been
protected by patent since 1983. Certain features of other products offered by
the Company have been granted United States and foreign national patent
protection, or have patent applications pending. Many of the Company's
competitors also have obtained or applied for patent protection for competing
products offered by them. There is no assurance that the Company's patents will
prove enforceable, that any patents will be issued for which the Company has
made application or that competitors will not be able to develop functionally
similar downhole tools not violating any patents the Company has or may obtain.

The Company regards its patents, trademarks and servicemarks, know-how and
proprietary information to be of significant value and vigorously protects its
intellectual property rights, by litigation if necessary. The Company also
believes that its engineering, manufacturing, and technical knowledge and
experience are

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<PAGE> 34

important to its competitive position. Although the Company does not consider
its business to be wholly dependent on any single patent or trademark, the loss
of patent protection for the Dailey Hydraulic Jar or Dailey Hydraulic Fishing
Jar could have a material adverse effect on the Company.

RESEARCH AND DEVELOPMENT

The Company conducts its research and development ("R&D") activities
through its engineering department and believes that its engineering facilities
in Conroe, Texas are fully equipped to enable the Company to take a new product
from design through the evaluation and prototype manufacturing stages. The
Company's engineering department employs approximately eleven individuals,
including four design engineers, three draftsmen and one project research
analyst. The Company's design engineers have an average of 25 years industry
experience and have been employed by the Company for an average of nine years.
The Company's R&D expenditures during the three fiscal years ended April 30,
1996, were $736,000, $775,000 and $728,000, respectively, and it has budgeted
$1.0 million for fiscal 1997 expenditures.

The Company's engineering department works closely with its marketing
department when developing and evaluating new downhole tools and enhancements to
existing downhole tools. The Company believes its direct interaction with its
customers has enhanced Dailey's ability to identify and determine demand for new
products and improved products. Potential ideas and concepts are most often
introduced to the engineering department by the Company's marketing personnel
based upon requests from and needs of the Company's customers.

In connection with its R&D efforts, the Company recently introduced its
newest downhole tool, the Dailey Coiled Tubing Jar, which the Company believes
was the first double-acting, hydraulic coiled tubing jar introduced for
commercial operation in the oil and gas industry.

OPERATING RISKS AND INSURANCE

The operations of the Company's customers are subject to hazards inherent
in the oil and gas industry, such as blowouts, explosions, craterings, fires and
oil spills, that can cause personal injury or loss of life, damage to or
destruction of property, equipment, the environment and marine life, and
suspension of operations. In addition, claims for loss of oil and gas production
and damage to formations can occur in the workover process. If a serious
accident were to occur where the Company's downhole tools are used or its
directional drilling services are being provided, it could result in the Company
being named as a defendant in lawsuits asserting potentially large claims.

As protection against operating hazards, the Company maintains insurance
coverage that it believes to be customary in the industry against these hazards,
and whenever possible, obtains agreements from customers providing for
indemnification against liability. The Company maintains general liability
insurance in the primary amount of $1.0 million, policies to cover its
buildings, equipment and other property with aggregate coverage limits of $27.7
million, as well as worker's compensation, auto, crime and political risk
insurance. The Company also is insured under an umbrella liability policy with a
coverage limits of $5.0 million in the aggregate. Most of the Company's policies
provide for coverage on a per-occurrence basis, rather than a claim basis. The
Company's policies generally exclude coverage for losses and liabilities
relating to environmental damage or pollution, breach of contract or fraud or
deceptive practices. The Company does not maintain professional liability
insurance.

Although historically the Company's insurance coverage has greatly exceeded
the amount of its claims, and management believes that the Company's insurance
coverage is adequate for its present operations, a successful liability claim
for which the Company is underinsured or uninsured could have a material adverse
effect on the Company. The Company often is required to indemnify major
customers pursuant to master service agreements.

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<PAGE> 35

COMPETITION

All of the Company's products and services are offered in
highly-competitive markets in which many of the Company's competitors are
divisions or subsidiaries of larger, better capitalized corporations. In
directional drilling services, the Company believes that the principal
competitive factor is the availability of qualified experienced directional
drilling personnel, particularly personnel with whom the customer has had
satisfactory experience, and to a lesser extent, breadth of products and
services offered, price and technology. Because of this, the competition among
directional drilling service companies to employ the most reputable, qualified
and experienced directional drilling personnel is intense. The Company believes
that it is able to recruit and retain highly-qualified directional drillers
because of its reputation in the industry for stability and quality and because
it offers competitive wages and a reliable, experienced support staff. The
Company believes its directional drilling personnel have excellent
qualifications and experience, and is seeking additional personnel to enhance
its competitive position in the directional drilling services industry. The
Company believes that its principal competition in the directional drilling
services industry is comprised of fully-integrated service companies such as
Anadrill/Schlumberger, Baker-INTEQ, Halliburton Energy Services and Sperry-Sun,
and smaller, independent companies that offer only directional drilling services
or only a limited line of additional products and services. The Company believes
that its ability to recruit and retain highly qualified directional drillers,
and in turn, offer its customers more personalized, high quality service, allows
it to compete with the larger fully-integrated service companies with respect to
customers that emphasize service and quality over price. The Company believes
that the primary competitive advantages of the fully-integrated service
companies are their ability to offer lower prices in certain areas and to offer
certain technology, such as LWD services, which smaller directional drilling
service companies, such as Dailey, currently do not offer.

The Company believes its primary competitive advantages with respect to
downhole tools are the dependability and performance characteristics of its
drilling tools that the Company believes has resulted in worldwide recognition
of the Dailey name, proprietary designs for many of its principal drilling
tools, its ability to design, develop and market new and complementary products
and services and its knowledgeable sales and technical service personnel. The
Company does not generally emphasize price as a competitive feature of its
drilling tools. Many of Dailey's competitors offer broader lines of drilling
products and services with larger and broader distribution networks than does
the Company. In addition, the Company competes with numerous smaller suppliers
of specialty drilling and fishing tools. The principal competitive factors
affecting the Company's drilling tools are reliability and performance,
availability of appropriate tools, technical support and price.

The Company competes with manufacturers and owners of drilling tools. These
competitors include Houston Engineers, a subsidiary of Wilson Industries, Inc.,
Weir-Houston, Baker Hughes, Bowen, Weatherford Enterra, Inc. and Griffith Tool
Company, a subsidiary of Dreco Energy Services Limited. The Company has
experienced some loss of drilling jar market share in certain international
markets over the past several years due to increasing price competition.

The Company's three principal competitors with respect to fishing tools are
Anadrill/Schlumberger, Bowen and Houston Engineers. Management expects
competition and customer price pressures to continue for the foreseeable future
with respect to its downhole tools and its directional drilling services.

EMPLOYEES

At April 30, 1996, the Company had 313 employees, of which 47 persons were
employed in domestic sales and marketing, nine in foreign sales and marketing,
12 in engineering and research and development, 100 in administrative and
clerical capacities (21 relating to directional drilling operations), 32 in
manufacturing, 58 in tool maintenance and 55 in directional drilling.
Approximately 84% of the Company's employees are located in the United States.
The Company considers its employee relations to be excellent. The Company has no
collective bargaining agreements.

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REGULATION

Various federal, state and local laws and regulations covering the release
of materials into the environment, or otherwise relating to the protection of
the public health and the environment, affect the Company's and its customers'
domestic operations, expenses and costs. The trend in environmental regulation
has been to place more restrictions and limitations on activities that may
impact the environment, such as emissions of pollutants, generation and disposal
of wastes, and use and handling of chemical substances. Increasingly strict
environmental restrictions and limitations, as well as the obligation to
remediate existing contamination, have resulted in increased operating costs for
the Company and other similar businesses throughout the United States, and it is
possible that the costs of compliance with environmental laws and regulations
will continue to increase, both for the Company and its customers. In this
regard, the Resource Conservation and Recovery Act ("RCRA"), a federal statute
governing the disposal of solid and hazardous wastes, includes a statutory
exemption that allows oil and gas exploration and production wastes to be
classified as non-hazardous waste. A similar exemption is contained in many of
the state counterparts to RCRA. If oil and gas exploration and production wastes
were required to be managed and disposed of as hazardous waste, either as a
result of change in RCRA or the imposition of more stringent state regulations,
domestic oil and gas producers, including many of the Company's customers, could
be required to incur substantial obligations with respect to such wastes.
Because of the potential impact on the Company's customers, any regulatory
changes that impose additional restrictions or requirements on the disposal of
oil and gas wastes could adversely affect demand for the Company's products and
services. In addition, the Company is subject to laws and regulations concerning
occupational health and safety. The Company's international operations also are
subject to international laws respecting environmental and worker safety matters
in the countries in which they operate. The Company believes that it is in
substantial compliance with the requirements of environmental and occupational
health and safety laws and regulations, but inasmuch as such laws and
regulations are frequently changed, the Company is unable to predict the
ultimate impact of such laws and regulations on the Company's business. Any
violation of such laws could subject the Company to fines, penalties or other
liabilities.

Capital expenditures for property, plant and equipment for environmental
control facilities during fiscal 1996 were not material. Based on the Company's
experience to date, the Company currently does not anticipate any material
adverse effect on its results of operations or financial condition as a result
of future compliance with existing environmental laws and regulations
controlling the discharge of materials into the environment. However, future
events, such as changes in existing laws and regulations or their
interpretation, more vigorous enforcement policies of regulatory agencies, or
stricter or different interpretations of existing laws and regulations, may
require additional expenditures by the Company, which may be material.

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PROPERTIES

The following table summarizes the Company's significant owned and leased
properties as of April 30, 1996:

<TABLE>
<CAPTION>
LOCATION OF FACILITY PROPERTY INTEREST USES
---------------------------------------- ------------------ ------------------------------
<S> <C> <C>
Conroe, Texas........................... Leased(1) Corporate Offices,
Sales, Manufacturing,
Maintenance, R&D

Aberdeen, Scotland...................... Leased Sales, Maintenance

Anchorage, Alaska....................... Owned Sales, Maintenance

Anaco, Venezuela........................ Leased Sales, Maintenance

Bakersfield, California................. Leased Sales

Bogota, Colombia........................ Leased Sales, Maintenance

Cabimas, Venezuela...................... Leased Sales, Maintenance

Corpus Christi, Texas................... Owned Sales, Maintenance

Houma, Louisiana........................ Owned Sales, Maintenance

Houston, Texas.......................... Owned Directional Drilling Office,
Sales, Maintenance

Lafayette, Louisiana.................... Owned Sales, Maintenance
</TABLE>

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

(1) Leased from Lawrence. See "Certain Relationships and Related Transactions".

The Company considers all of its facilities to be in good operating
condition and adequate for their present uses. The Company believes that it has
sufficient manufacturing, maintenance, service and storage capacity to meet its
current and anticipated requirements. The Company also utilizes properties
provided by its international agents, which the Company currently does not
lease.

LEGAL PROCEEDINGS

The Company is not a party to, nor is any of its property the subject of,
any pending legal proceedings, other than ordinary routine litigation incidental
to its business, including litigation relating to the Company's intellectual
property, and which is believed to be either covered by insurance or not
material in amount.

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<PAGE> 38

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

In connection with the Offering, the Board of Directors of the Company will
be expanded to six positions. The Company's Restated Certificate of
Incorporation provides for the classification of the Board of Directors into
three classes of directors, with the term of each class expiring at successive
annual stockholders' meetings. At and after the 1997 annual meeting of
stockholders, all nominees of the class standing for election will be elected
for three-year terms. It is intended that the directors named below will
constitute the Board of Directors of the Company at the time of the closing of
the Offering.

Set forth below is the name, age as of June 7, 1996, and position of each
of the directors, executive officers and other significant employees of the
Company as they will exist at the closing of the Offering, and, with respect to
each director, the year of expiration of his initial term of office. The Company
intends to add two additional outside directors as soon as possible after the
Offering. It is expected that such directors will be members of the Audit and
Compensation Committees and serve for terms expiring in 1997.

<TABLE>
<CAPTION>
YEAR TERM
AS DIRECTOR
NAME AGE POSITION WILL EXPIRE
- ----------------------------------- --- ----------------------------------- -----------
<S> <C> <C> <C>
J. D. Lawrence..................... 50 Chairman of the Board of Directors 1999

James F. Farr(1)(2)................ 39 President, Chief Executive Officer 1999
and Director

William D. Sutton(1)(2)............ 42 Senior Vice President, General 1998
Counsel, Secretary and Director

David T. Tighe(2).................. 44 Senior Vice President -- Finance, 1998
Chief Financial Officer, Treasurer
and Director

John E. Blacklaws.................. 39 President -- Production Services

Benjamin A. Brooks, Jr............. 42 Vice President -- Manufacturing,
Production Services

Dwight A. Goolsbay................. 35 Vice President -- MWD Services

Cecil W. Harvey.................... 59 President -- Directional Drilling

Gary P. Hertfelder................. 41 Vice President -- Engineering/R&D

Martin Lyons....................... 46 Senior Vice
President -- Directional Drilling
and Marketing

James G. Matlock................... 52 President -- Dailey Oil Tools

James J. Orr....................... 53 Vice President -- Domestic
Directional Drilling and Marketing

James J. Percle.................... 40 Vice President -- Business
Development
</TABLE>

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

(1) Member of the Audit Committee of the Board of Directors.

(2) Member of the Executive Committee of the Board of Directors.

All officers of the Company are elected by the Board of Directors of the
Company and hold office until the earlier of their resignation, removal or other
termination. All of the executive officers listed above will enter into
employment agreements with the Company prior to closing of the Offering pursuant
to which they hold their current positions. See "-- Employment Agreements".

J. D. Lawrence has been a director of the Company since 1973, and Chairman
of the Board of Directors since June 1989. He has been employed by the Company
since 1968, serving as its President from 1982 to

36
<PAGE> 39

1989 and as a Vice President from 1973 to 1982. Mr. Lawrence is Chairman of the
Board of Directors, President and the sole director of Lawrence.

James F. Farr has been President of the Company since December 1990, its
Chief Executive Officer since August 1991, and a director of the Company since
September 1991. As International Manager from October 1989 to December 1990, he
was responsible for all international activities, including the marketing,
distribution and sale of the Company's products and services, and developing and
maintaining the Company's relationships with its agents. From August 1988 to
October 1989, Mr. Farr served as Managing Director of Dailey International,
Inc., the Company's wholly-owned subsidiary, and as Region Manager for Europe
and West Africa, with responsibility for the Company's facilities in the United
Kingdom as well as marketing operations in Europe and West Africa. From 1975 to
August 1988, he served the Company in various managerial, marketing and
operating capacities.

William D. Sutton has been Senior Vice President, General Counsel and
Secretary since 1984, and a director of the Company since September 1991. He has
served as the Company's Secretary and General Counsel since 1980. He also served
as a director of the Company from 1979 to 1990, and as a Vice President from
1982 to 1984. Prior to joining the Company in 1979, Mr. Sutton was an attorney
in private practice.

David T. Tighe has been Senior Vice President -- Finance and Treasurer of
the Company since May 1988. He become a director of the Company in September
1991. From 1985 to April 1988, he served as Corporate Controller. From 1984 to
1985, he was the Company's Assistant Controller. Prior to joining the Company in
1984, Mr. Tighe, a certified public accountant, was Controller of Carolina
International, Inc. from 1982 to 1984 and Tandem Industries, Inc. from 1980 to
1982.

John E. Blacklaws has been President of the Company's Production Services
since September 1994, with responsibility for the Company's manufacturing,
engineering, domestic field repairs, and management of inventory. From November
1990 to September 1994, he was Vice President for the manufacturing and
production division in Houston, Texas. From March 1989 to November 1990, he was
Manager of Manufacturing Technical Services with quality control
responsibilities at the Company's Houston facility and in the field.

Benjamin A. Brooks, Jr. was named Vice President -- Manufacturing,
Production Services in May 1996. From June 1994 to April 1996 he served the
Company as Western Hemisphere Manager and was responsible for the sales and
operations of Dailey Oil Tools, Inc. in North, Central, and South America. Prior
to joining Dailey, Mr. Brooks worked in manufacturing, engineering and marketing
positions of internationally known downhole drilling tool companies, both
domestically and abroad. From 1989 to 1994, Mr. Brooks was the President and
owner of B.A. Brooks Interests Inc. Mr. Brooks is a Registered Professional
Engineer in the State of Texas.

Dwight A. Goolsbay has been Vice President -- MWD Services since May 1996.
As an MWD Product Manager between December 1993 and May 1996, he was responsible
for managing Dailey's entry into the domestic and international MWD services
business. From October 1990 to December 1993, he was a drilling motor product
engineer and assisted with development and expansion of the drilling motor
product line. Prior to joining the Company in 1990, Mr. Goolsbay was the
Oklahoma City District Manager for Halliburton Drilling Systems, Inc. -- MWD
Division. From 1985 to 1987, he was U.S. Operations Coordinator for Drilex
Systems, Inc. in Houston, Texas.

Cecil W. Harvey has been President of Dailey Drilling Systems since
December 1993 and General Manager of Dailey Directional from December 1990 to
December 1993. From May 1989 to December 1990, he was Vice
President -- Marketing with responsibility for the Company's domestic and
international downhole tool marketing, rental, sale, distribution and service
operations. From July 1987 to May 1989, he was Vice President of Dailey
Directional. From 1985 to July 1987, he was District Manager for the Company's
Lafayette, Louisiana directional drilling operations. From 1983 to 1985, Mr.
Harvey was the United States Operations Manager of AMF Scientific Drilling
Control in Houston, Texas with responsibilities for its directional drilling,
steering tool and survey operations.

37
<PAGE> 40

Gary P. Hertfelder was named Vice President Engineering/R&D in December
1994. From February 1994 to December 1994, he served the Company as Vice
President Engineering/Operations of environmental remediation technology
division which focused on applying oil and gas industry technologies, including
horizontal drilling techniques, for remediation of petroleum contaminated sites.
As Special Projects Manager, from May 1993 to February 1994, he was responsible
for identifying new products and technologies. From November 1992 to May 1993,
he was Marketing Manager responsible for development of marketing strategies. As
International Technical Manager, from November 1991 to November 1992, he was
responsible for worldwide customer technical support concerning Company products
and services. He joined the Company in November 1987 as Technical Services
Engineer and served in this capacity to November 1991. Prior to joining Dailey,
Mr. Hertfelder was employed by several oil and gas exploration companies
including Union Oil Company of California, Grace Petroleum Company and Collet
Oil Ventures, Inc., in various drilling and production engineering capacities.
Mr. Hertfelder is a Registered Petroleum Engineer in Texas.

Martin Lyons was named Senior Vice President Directional Drilling &
Marketing in May 1996. From December 1993 through May 1996, he served as Vice
President Directional Drilling, responsible for management of all the Company's
domestic directional drilling sales and operations. His duties during this time
period also included operations and capital budgeting for all domestic
directional drilling operations. During the time period of August 1990 to
December 1993 he functioned as Western Division Manager and was responsible for
the Gulf Coast directional drilling and sales operations west of the Sabine
River. From August of 1989 to August of 1990 Mr. Lyons was a Senior Technical
Sales Representative in the Houston, Texas market. Prior to joining Dailey, Mr.
Lyons was employed by Helmer Directional Drilling, Inc. were he held the
positions of Office Manager and Directional Drilling Supervisor.

James G. Matlock has been President of Dailey Oil Tools since September
1994. From February 1994 to September 1994, he was Vice President Operations,
Corporate Offices, Conroe, Texas, responsible for all Dailey Oil Tools
operations, both domestic and international. From July 1993 to January 1994, he
was International Operations Manager, Corporate offices, Conroe, Texas,
responsible for all phases of international operations. From May 1992 to July
1993, he was Eastern Hemisphere Manager, stationed in Aberdeen, responsible for
all countries in Europe, Middle East, West Africa and the Far East. From October
1989 to April 1992, he was Regional Manager Europe/West Africa, stationed in
Aberdeen. From March 1988 to September 1989, he was Regional Manager, Middle
East. Prior to joining Dailey, he was International Operations Manager from 1973
to September 1989 at various locations for Dresser Industries and Hughes Tool
Co.

James J. Orr has been Vice President -- Domestic Directional Drilling and
Marketing since May 1996, and Vice President -- Drilling Motors and MWD Services
since December 1993 and was responsible for managing Dailey's entry into the
domestic and international drilling motor and MWD business. From November 1989
to December 1993, he was Drilling Motor Development Manager assisting in the
design, development and expansion of the drilling motor product line. Prior to
joining Dailey in 1989, Mr. Orr was Gulf Coast Regional Manager for Drilex
Systems, Inc., responsible for sales and operations from 1986 to 1989. From 1983
to 1986 he was Senior Technical Sales and Operations Representative for the
Hughes Tool Company's Drilling Motor Program.

James J. Percle joined the Company as Vice President -- Business
Development in May 1996. He has served as an officer and in managerial positions
with oilfield service companies from 1975 through the present, the most recent
being from December 1986 to November 1995 as Director and Chief Operating
Officer and President of Enterra International Limited.

COMMITTEES

Pursuant to the Company's Bylaws, the Board has established standing Audit,
Compensation and Executive Committees. The Audit Committee recommends to the
Board the selection and discharge of the Company's independent auditors, reviews
the professional services performed by, and the independence of, the auditors,
reviews the plan and results of the auditing engagement and the amount of fees
charged for audit services performed by the auditors, and evaluates the
Company's system of internal accounting controls. The

38
<PAGE> 41

Compensation Committee recommends to the Board the compensation to be paid to
the Company's directors, executive officers and key employees and administers
the compensation plans for the Company's executive officers. The Executive
Committee acts on behalf of the Board between regularly scheduled meetings of
the Board.

COMPENSATION OF DIRECTORS

Employee Directors of the Company do not receive any additional
compensation for their services as a director of the Company. The Company
intends to pay an annual retainer of $15,000 to each non-employee director. In
addition, each non-employee director will receive $1,000 for each Board of
Directors meeting attended and $750 for each committee meeting attended. The
Company will also pay reasonable out-of-pocket expenses incurred by non-employee
directors to attend Board of Directors and committee meetings. Non-employee
directors also will be entitled to receive options pursuant to the 1996
Non-Employee Director Stock Plan. See "-- 1996 Non-Employee Director Stock
Plan".

COMPENSATION OF EXECUTIVE OFFICERS

The Company did not have a compensation committee prior to the Offering.
During fiscal 1996, compensation levels were determined by the Company's Board
of Directors, each of the members of which are officers of the Company. The
following Summary Compensation Table sets forth information with respect to the
President and Chief Executive Officer of the Company and the other four
most-highly compensated officers of the Company for the fiscal year ended April
30, 1996:

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
FOR THE YEAR ENDED
APRIL 30, 1996
ANNUAL COMPENSATION
--------------------------------------
OTHER
ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION(1) COMPENSATION(2)
- --------------------------------------- -------- -------- --------------- ---------------
<S> <C> <C> <C> <C>
J. D. Lawrence......................... $296,532(3) $ 73,280 -- $ 2,326
Chairman of the Board

James F. Farr.......................... 248,651 55,500 -- 571
President and Chief Executive Officer

Cecil W. Harvey........................ 112,441 19,520 -- 3,906
Vice President-Directional Drilling

William D. Sutton...................... 230,896 55,260 -- 824
Senior Vice President, General
Counsel and Secretary

David T. Tighe......................... 148,671 54,960 -- 901
Senior Vice President-Finance, Chief
Financial Officer and Treasurer
</TABLE>

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

(1) Amounts exclude the value of perquisites and personal benefits because the
aggregate amount thereof did not exceed the lesser of $50,000 or 10% of the
total annual salary and bonus reported for each Executive Officer.

(2) Represents payments for premiums for group term life insurance on behalf of
such individual.

(3) Effective upon the closing of the Offering, Mr. Lawrence's salary will be
reduced to $100,000, subject to subsequent adjustment in the discretion of
the Compensation Committee of the Board of Directors. See "-- Employment
Agreements" below.

39
<PAGE> 42

EMPLOYMENT AGREEMENTS

Each of Messrs. Lawrence, Farr, Sutton and Tighe (collectively, the
"Executive Officers") will enter into an employment agreement (collectively, the
"Executive Employment Agreements") with the Company prior to consummation of the
Offering. Each of the Executive Employment Agreements has an initial term
through April 30, 1999. The Executive Employment Agreements provide for a
minimum annual salary during the term of the Executive Employment Agreements of
approximately $100,000, $240,000, $228,000 and $180,000 for Messrs. Lawrence,
Farr, Sutton and Tighe, respectively. The Executive Employment Agreements also
provide for the grant of 120,000 shares of restricted Class A Common Stock to
each of the Executive Officers and the grant of options to each of the same
individuals to purchase 71,712 additional shares, at the closing of the
Offering. Such restricted stock and options vest over a period of three years.
See "-- 1996 Key Employee Stock Plan." The Executive Employment Agreements also
provide for certain automobile allowances, employee benefits, vacation and
reimbursement of expenses.

The Executive Employment Agreements may be terminated (i) by the Company
with or without cause (as hereinafter defined); (ii) by the Executive Officer's
resignation; (iii) upon the death of the Executive Officer or (iv) upon the
disability of the Executive Officer. Under the Executive Employment Agreements,
"cause" is defined to mean any of the following events: (i) an act or acts of
personal dishonesty taken by the Executive Officer and intended to result in
substantial personal enrichment of the Executive Employee at the expense of the
Company; (ii) repeated violations by the Executive Officer of his obligations
under the Executive Employment Agreement that are demonstrably willful on the
Executive Officer's part, and for which the Executive Officer has received more
than one written warning that specifies each of the Executive Officer's
violations; and (iii) the conviction of the Executive Employee of a felony.

If the Company terminates the Executive Employment Agreement for any reason
other than for "cause" and such termination is not within one year of a Change
in Control (as hereinafter defined), the Company is required to pay to the
Executive Officer an amount equal to the greater of (i) his total Base Salary
(as defined in the Executive Employment Agreement) for the remainder of the
Employment Period (as defined in the Executive Employment Agreement) or (ii) the
greater of (a) three months of his Base Salary or (b) one month of Base Salary
for each full year of service completed with the Company as of the date of
termination. If the Company terminates the Executive Employment Agreement for
any reason other than for "cause" and such termination occurs within one year of
a change in control, or if the Executive Officer terminates the Agreement for
Good Cause (as defined in the Executive Employment Agreement) and such
termination occurs within one year of a Change in Control, the Company is
required to pay to the Executive Officer an amount equal to the greater of (i)
his total Base Salary for the remainder of the Employment Period, (ii) two times
the greater of (a) his annualized Base Salary in effect upon the occurrence of
the Change in Control and (b) his annualized Base Salary in effect on the date
notice of termination is received, and (iii) one month of Base Salary for each
full year of service completed with the Company as of the date of termination.
Under the Executive Employment Agreements, a Change in Control occurs when (i)
any person (other than those persons who own more than 10% of the combined
voting power of the Company's outstanding securities on the date of the
Executive Employment Agreements) becomes the beneficial owner, directly or
indirectly, of 30% or more of the combined voting power of the Company's then
outstanding voting securities or (ii) individuals who at the beginning of any
period of two consecutive years constitute the Company's Board of Directors
cease for any reason to constitute a majority of such Board of Directors at any
time during such two-year period.

Each Executive Officer has agreed that for the term of his Executive
Employment Agreement and (i) perpetually after termination for whatever reason,
he will not, directly or indirectly, disclose confidential information and (ii)
for a period of two years following termination for whatever reason, he will not
participate in any business in any geographic region in which the Company
conducts business that is in competition with the Company or employ any of the
Company's employees, induce any of the Company's employees to leave their
employment or in any way interfere with the employee relations of the Company.

It is expected that each of Messrs. Blacklaws, Brooks, Goolsbay, Harvey,
Hertfelder, Lyons, Matlock, Orr and Percle will enter into an employment
agreement with the Company prior to the closing of the Offering

40
<PAGE> 43

providing for an initial term through April 30, 1999. Such employment agreements
are substantially similar to the Executive Employee Agreements with respect to
non-competition and confidentiality. The agreements provide for initial grants
of stock options to purchase 17,999 shares of Class A Common Stock pursuant to
the 1996 Plan, which will vest on the first, second and third anniversary of the
date of such grants in 33.3% increments. The agreements do not have provisions
regarding Changes in Control.

1996 KEY EMPLOYEE STOCK PLAN

The Company has established a stock option and restricted stock plan, the
Dailey Petroleum Services Corp. 1996 Key Employee Stock Plan (the "1996 Plan"),
pursuant to which incentive and non-qualified options to purchase shares of
Class A Common Stock and awards of restricted shares of Class A Common Stock
will be available for future grants.

The 1996 Plan is designed to provide certain key employees, including
officers and employee-directors of the Company, with additional incentives to
promote the success of the Company's business and to enhance the Company's
ability to attract and retain the services of qualified persons. The 1996 Plan
will be administered by the Compensation Committee or such other committee of no
less than two persons (the "Committee") appointed by the Board of Directors.
Each Committee member must be a "disinterested person", as defined in Rule 16b-3
("Rule 16b-3") promulgated under the Exchange Act and an "outside director" as
defined under Section 422(m) of the Internal Revenue Code of 1986, as amended
(the "Code"). Under the Plan, options to purchase Class A Common Stock and
restricted stock awards up to an aggregate of 900,000 shares of Class A Common
Stock may be granted by the Committee.

The maximum number of shares subject to options that may be issued to, and
the maximum number shares subject to restricted stock awards that may be granted
to, any employee during any year is 120,000 and 120,000 shares, respectively.
The exercise price of an option granted pursuant to the 1996 Plan may not be
less than the fair market value of the Class A Common Stock on the date of
grant. In the case of a grant of an option designated as an "Incentive Option"
to an employee who owns more than ten percent of the total combined voting power
of all classes of Common Stock (a "10% Stockholder"), the exercise price of each
such option under the 1996 Plan may not be less than 110% of the fair market
value of the Class A Common Stock on the date of the grant. No option may be
granted under the 1996 Plan with a duration of more than ten years. In the case
of a 10% Stockholder, no option designated as an "Incentive Option" may be
granted with a duration of more than five years. Options designated as
"Incentive Options" under the 1996 Plan may be treated as such only to the
extent that the aggregate fair market value of the stock with respect to which
options are exercisable for the first time by the option holder in any calendar
year, under the 1996 Plan or any other incentive stock option plan of the
Company, does not exceed $100,000 valued as of the date of grant.

Under the 1996 Plan, the Committee may issue shares of restricted stock to
employees for no payment by the employee or for a payment below the fair market
value on the date of grant. The restricted stock is subject to certain
restrictions described in the 1996 Plan, with no restrictions continuing for
more than ten years from the date of the award. The 1996 Plan may be amended by
the Board of Directors without any requirement of stockholder approval, except
as required by Rule 16b-3 to obtain the benefits under such Rule and the
incentive option rules of the Code.

To date, no options or restricted stock awards have been granted under the
1996 Plan. Immediately following the Offering, the Company intends to grant
qualified options exercisable for 377,127 shares of Class A Common Stock to
various executive officers at the initial public offering price, which will vest
over three years in 33.3% increments. In addition, the Company intends to grant
to each of Messrs. Farr, Sutton and Tighe restricted stock awards in the amount
of 120,000 immediately following the Offering. These executive officers will not
be required to make any payment for these restricted stock awards or grants of
qualified options, which will vest over three years in 33.3% increments.
Restrictions on transfer and forfeiture provisions upon termination of
employment will apply to the restricted stock covered by these awards for a
period of up to one year, after which time the restrictions will lapse and all
of the stock will be owned by the employees free of further restrictions under
the 1996 Plan.

41
<PAGE> 44

1996 NON-EMPLOYEE DIRECTOR STOCK PLAN

The Company has established the Dailey Petroleum Services Corp. 1996
Non-Employee Director Stock Plan (the "1996 Director Plan"), pursuant to which
options to purchase shares of Class A Common Stock will be available for future
grant to non-employee directors. The 1996 Director Plan is designed to enhance
the Company's ability to attract and retain the services of qualified persons as
directors and to provide such directors with a direct proprietary interest in
the success of the Company. The 1996 Director Plan will be administered by the
Board of Directors of the Company. Under the 1996 Director Plan, an aggregate of
100,000 shares of Class A Common Stock will be reserved for grant of options to
purchase Class A Common Stock. The exercise price of an option granted pursuant
to the 1996 Director Plan may not be less than the fair market value of the
Class A Common Stock on the date of grant. No option may be granted under such
Plan with a duration of more than ten years. The 1996 Director Plan generally
may be amended by the Board of Directors without any requirement of stockholder
approval except to the extent required by Rule 16b-3 to qualify for the benefits
of such Rule. To date, no options have been granted under the 1996 Director
Plan. As soon as two outside directors are appointed after the Offering, the
Company intends to grant options to each non-employee director to acquire 10,000
shares of Class A Common Stock at an exercise price equal to the initial public
offering price for Class A Common Stock set forth on the cover page of this
Prospectus. In addition, options to acquire 10,000 shares automatically will be
granted after each annual meeting of stockholders to each director who served as
a director during the preceding six months and who will continue to serve as a
director. Options granted under the Director Plan vest after the first
anniversary from the date of grant.

401(K) PLAN

The Company's employees were eligible to participate in a defined
contribution retirement plan (the "Lawrence Plan") that complies with Section
401(k) of the Code and that was adopted by Lawrence for its employees and the
employees of its subsidiaries. After the Offering, the Company's employees will
continue to participate in the Lawrence Plan. Pursuant to the Lawrence Plan, the
Company provides matching contributions up to 50% of the employee's contribution
up to 2% of the employee's compensation.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Prior to the Offering, the Company has been a wholly-owned subsidiary of
Lawrence and historically has entered into certain transactions and agreements
with Lawrence. The Company intends that the terms of any future transactions and
agreements between the Company and Lawrence will be at least as favorable as
could be obtained from third parties. The Company's Directors will be advised in
advance of any such proposed transactions that are material to the Company and
will evaluate their terms and provisions in accordance with its fiduciary duties
under state and federal law. Depending upon the size and nature of the
transaction, in any such review the Board may rely upon management's knowledge,
utilize outside experts or consultants, secure appraisals, refer to industry
statistics or prices or take such other actions as are appropriate under the
circumstances.

PRINCIPAL STOCKHOLDER

Upon completion of the Offering, Lawrence will beneficially own all of the
outstanding Class B Common Stock, which will constitute 53% of the Company's
Common Stock (approximately 50% if the Underwriters' over-allotment option is
exercised in full) and 89% of the voting power of the Common Stock (88% if the
Underwriters' over-allotment option is exercised in full). All of the capital
stock of Lawrence is beneficially owned by Mr. Lawrence and Mr. Lawrence's
family. Accordingly, Mr. Lawrence will be in a position to elect the directors
of the Company and control all matters relating to management of the Company,
including corporate strategy, acquisition or disposition of assets, issuances of
Common Stock or other securities and payment of dividends. Mr. Lawrence is the
Chairman of the Company's Board of Directors and the sole director of Lawrence.
Upon completion of the Offering, Messrs. Farr, Sutton and Tighe, each of whom is
a director and officer of the Company, will resign all positions currently held
by them as officers of Lawrence or as officers and directors of Lawrence
subsidiaries other than the Company, except that Mr. Sutton will remain

42
<PAGE> 45

a director and minority shareholder of First Surety Title Company, Inc., an
affiliate of Lawrence, which from time to time may provide services to the
Company.

The Company and Lawrence have entered into certain contractual arrangements
with respect to their relationship after the Offering is consummated. These
agreements were reached in anticipation of the Offering and are not the result
of arm's-length negotiation between independent parties. Copies of such
agreements are included as exhibits to the Registration Statement of which this
Prospectus is a part, and the following descriptions are qualified in their
entirety by reference to such agreements.

During the past several years, the Company has funded certain of its
working capital requirements through advances from Lawrence, which have been
evidenced by a note to Lawrence with an outstanding balance of $1.8 million at
April 30, 1996. The Company intends to repay such note utilizing a portion of
the net proceeds from the Offering. See "Management's Discussion and Analysis of
Results of Operations and Financial Condition -- Liquidity and Capital
Resources".

During fiscal 1996, the Company's Chairman of the Board repaid
approximately $87,000 relating to a loan made by the Company in June 1994. Such
loan was evidenced by a promissory note in the principal amount of $75,000,
accrued interest at a rate of 8% and was repayable on demand.

During the year ended April 30, 1996, the Company paid a salary of
$206,406, including bonuses, to the daughter of the Chairman of the Board. This
employment arrangement was terminated on April 30, 1996, and the Company does
not anticipate paying any salaries or bonuses to such individual in the future.
In addition, during the fiscal years ended April 30, 1994, 1995 and 1996, the
Company purchased office supplies totaling $131,901, $136,588 and $114,041,
respectively, from a company owned and controlled by the Chairman's wife.

LEASE AGREEMENTS

The Company maintains executive offices in a building located in Conroe,
Texas and occupies four adjacent manufacturing and maintenance research and
development, and storage facilities, all of which are owned by Lawrence. During
fiscal 1994, 1995 and 1996 the Company incurred rent expense of $1,029,000,
$1,244,000 and $1,306,000, respectively, relating to such properties. Prior to
completion of the Offering, the Company will enter into a new lease agreement
with Lawrence relating to the executive office building and a separate lease
agreement relating to the adjacent facilities.

The Office Lease Agreement will be for a five-year term effective as of May
1996, and covers all of the 64,368 square feet of office space in the Conroe
building, as well as the use of access roads and an adjacent outdoor parking
lot. Rent is payable monthly at the rate of $48,276 per month for the first two
years of the lease, $51,226 per month for the third year, $52,781 per month for
the fourth year and $54,390 per month for the fifth year. Additionally, the
Company will pay utilities, janitorial, security, maintenance, and personal
property taxes. The landlord will pay the real property taxes and pay for
extended coverage insurance. The Company has the option to extend the lease for
five years with monthly rent subject to annual increases based upon the
proportion that annual increases in the United States Consumer Price Index for
All Urban Consumers in Houston, Texas bears to that when the leased term
commenced.

The Service Center Lease Agreement will be for a five-year term effective
as of May 1996. This lease covers the combined square feet of the district
facility building, 31,316 square feet; the manufacturing building, 31,373 square
feet; the open storage building, 17,000 square feet and the separator building,
1,530 square feet. The use of access roads and immediately surrounding grounds
is also included. Rent is $28,000 per month for all four buildings. The company
has an option to extend the lease for five years with monthly rent subject to
annual increases based upon the proportion that annual increases in the United
States Consumer Price Index for All Urban Consumers in Houston, Texas bears to
that when the lease term commenced.

RELATIONSHIP AGREEMENT

Under the terms of a relationship agreement to be entered into prior to the
Offering between the Company and Lawrence (the "Relationship Agreement"), the
Company will agree to provide to Lawrence

43
<PAGE> 46

and its affiliates, upon their request and on an as-available basis, various
administrative and management services including cash management, accounting,
tax, data processing, human resources, and legal services. Lawrence will pay for
such services at rates calculated to recover the Company's reasonable direct
costs of providing such services. The Relationship Agreement also will provide
that Lawrence will render to the Company management and technical consulting
services when requested by the Company. In return, the Company will pay Lawrence
$250,000 per year for the term of the Relationship Agreement. The Relationship
Agreement will commence upon the closing of the Offering and terminate on April
30, 1999, subject to earlier termination in the event of a material breach by
either party. The Relationship Agreement will allow Lawrence to obtain, as
needed, but subject to the Company's own requirements, services that
historically have been provided to Lawrence or its affiliates by Dailey
personnel.

The Company from time to time has utilized aircraft owned by a Lawrence
subsidiary. The Relationship Agreement will provide that the Company may charter
such aircraft from Lawrence or its subsidiaries, subject to availability, at
rates not exceeding those generally available for charter of substantially
similar aircraft in the Houston, Texas, metropolitan area. The Relationship
Agreement also will contemplate that the Company may, from time to time, rent
equipment or vehicles to Lawrence on an as-available basis at fair market rental
rates mutually agreed upon by the Company and Lawrence.

In addition, under the Relationship Agreement, Lawrence and the Company
have agreed to reimburse each other for the costs of certain insurance policies
purchased by one party on behalf of the other.

Pursuant to the Relationship Agreement, Lawrence must indemnify, defend and
hold harmless the Company and its directors, officers and employees from and
against any loss, liability or claim, including, without limitation, those
attributable to the negligence of the Company or Lawrence, arising out of or
relating to the Relationship Agreement and the acts or omissions of the Company
or Lawrence thereunder. During the past three years, the Company and Lawrence
have reimbursed each other for the costs of products and services that will be
governed by the Relationship Agreement following the Offering. As of April 30,
1996, Lawrence owed the Company approximately $436,000, net, for such products
and services.

TAX ALLOCATION AGREEMENT

For taxable periods ending on or before the closing of the Offering, the
Company will be included in the consolidated federal income tax returns filed by
Lawrence as the common parent for itself, its subsidiaries and affiliated
companies. Pursuant to the Tax Allocation Agreement to be entered into by the
Company and Lawrence prior to the Offering, the Company will pay to Lawrence an
amount equal to the federal income tax computed on the Company's (and its
subsidiaries) taxable income on a separate-company basis less any tax credits
generated by the Company or its subsidiaries. The Company will pay such amount
even if the consolidated federal income tax return to which such payment relates
does not set forth a net consolidated tax liability. Lawrence will not make any
payment to the Company for any of the Company's net operating losses or tax
credits, even if such net operating losses or tax credits have been used by
Lawrence to reduce its separate federal income tax liability. While the Company
is jointly and severally liable for federal income tax imposed on the Lawrence
consolidated group while the Company is a member, the Tax Allocation Agreement
will impose an indemnity on Lawrence in favor of the Company for any federal
income tax relating to members of the Lawrence Group other than the Company and
its subsidiaries, including any such tax related to or arising as a result of
the Offering.

The Tax Allocation Agreement will apply to the Company for all years in
which the Company is or was included in the Lawrence consolidated federal income
tax return. The Tax Allocation Agreement will apply to Lawrence and the Company
in a comparable manner to the extent a state or other taxing jurisdiction
requires or permits a consolidated, combined or unitary tax return to be filed
by Lawrence and its affiliates and such return includes the Company.

CONFLICTS OF INTEREST

The nature of the businesses presently conducted by the Company and
Lawrence is sufficiently different that conflicts of interest are unlikely to
arise in most operating circumstances. Lawrence may engage in similar

44
<PAGE> 47

lines of business as a result of the Company's expansion of its business or by
Lawrence's acquisition of other businesses. Thus, although Lawrence has no
current intention of doing so, there can be no assurance that Lawrence will not
engage in business competitive with that conducted by the Company.

Conflicts of interest also could arise, for example, with respect to
certain matters such as the dual status of J. D. Lawrence as sole director of
Lawrence and Chairman of the Board of Directors of the Company, additional
issuances of voting securities by the Company, acquisitions or dispositions of
assets, the election of new or additional directors, or the appropriateness of
paying dividends. As described above and under "Description of Capital
Stock -- Registration Rights", the Company and Lawrence will become party to a
number of contractual arrangements that could give rise to conflicts of
interest. Such conflicts could involve, for example, insurance matters, lease
disputes, charges for administrative services, aircraft charters, tax matters
and registration rights. Additional or modified agreements, arrangements and
transactions may be negotiated among the Company, Lawrence and their respective
subsidiaries after the closing of the Offering. Any such conflicts or additional
agreements, arrangements or transactions are expected to be resolved on a
negotiated basis. Lawrence will be the majority stockholder of the Company
following the Offering and consequently such negotiations will not be at arm's
length.

CERTAIN ROYALTIES

In 1986, the Company purchased the design, patents and rights to certain
hydraulic tools and entered into a royalty agreement with an individual who
later became an officer of the Company. The royalty expires in fiscal 1999 and
fiscal 2003 as to the covered hydraulic drilling and fishing jars, respectively.
This individual resigned from the Company in 1994. Royalty agreements were
executed between the Company and the royalty owner in 1993 and 1994 on newly
issued methods and apparatus patents related to a double-acting drilling
accelerator and improvements to hydraulic drilling jars. Upon expiration of the
patents, no royalties will be required. For the fiscal years ended April 30,
1994, 1995 and 1996, payments to the prior officer were $466,000, $826,000 and
$843,000, respectively. See Note 9 to the notes to the consolidated financial
statements elsewhere in this Prospectus.

45
<PAGE> 48

SECURITY OWNERSHIP OF MANAGEMENT AND
PRINCIPAL STOCKHOLDER

The following table sets forth certain information regarding the beneficial
ownership of the Class A Common Stock and Class B Common Stock as of the date of
this Prospectus, and as adjusted to reflect the sale of the Class A Common Stock
in the Offering, by (i) each director and director nominee of the Company, (ii)
each named executive officer, (iii) each person known or believed by the Company
to own beneficially 5% or more of either the Class A Common Stock or Class B
Common Stock and (iv) all directors and executive officers as a group. Unless
otherwise indicated, each person has sole voting and dispositive power with
respect to such shares.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
PRIOR TO THE OFFERING(1) AFTER THE OFFERING(1)
------------------------------------ ---------------------------------------
CLASS A CLASS B CLASS A CLASS B
NAME AND ADDRESS OF COMMON COMMON COMMON COMMON
BENEFICIAL OWNER STOCK STOCK PERCENT(2) STOCK STOCK PERCENT(2)(3)
- ----------------------------------- --------- --------- ---------- ------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Lawrence(4)........................ * 5,000,000 100% * 5,000,000 53%
J.D. Lawrence(5)................... * 5,000,000 100% * 5,000,000 53%
James F. Farr...................... * * -- 120,000(6) * 1%
Cecil W. Harvey.................... * * -- * * --
William D. Sutton.................. * * -- 120,000(6) * 1%
David T. Tighe..................... * * -- 120,000(6) * 1%
--------- --------- --- ------- --------- ---
All executive officers and
directors as a group (5
Persons)......................... * 5,000,000 100% 360,000 5,000,000 57%
</TABLE>

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

* Less than 1%.

(1) The Securities and Exchange Commission (the "Commission") has defined
beneficial ownership to include sole or shared voting or investment power
with respect to a security or the right to acquire beneficial ownership of
a security within 60 days. The number of shares indicated are owned with
sole voting and investment power unless otherwise noted.

(2) Percent based upon both Class A Common Stock and Class B Common Stock.

(3) Assumes no exercise of the Underwriters' over-allotment option. In the event
that the Underwriters' over-allotment option is exercised in full, Lawrence
will beneficially own approximately 50% of the Common Stock then
outstanding. Furthermore, following the Offering, Lawrence will own 89% of
the voting power of the Company (88% if the Underwriters' over-allotment
option is exercised in full). See "Description of Capital Stock -- Class A
and B Common Stock".

(4) Represents shares owned by Dailey Holdings Inc. ("Dailey Holdings"), a
wholly-owned subsidiary of Lawrence. The executive offices of Dailey
Holdings and Lawrence are located at 2507 North Frazier, P.O. Box 1803,
Conroe, Texas 77305.

(5) Includes 5,000,000 shares of Class B Common Stock held by Lawrence through
Dailey Holdings. Mr. Lawrence and trusts for his children own all of the
voting stock of Lawrence. Because of these relationships, Mr. Lawrence may
be deemed to be the beneficial owner of all shares of Class B Common Stock
owned by Lawrence.

(6) Immediately following the Offering, each of Messrs. Farr, Sutton and Tighe
will be granted 120,000 shares of restricted Class A Common Stock, which
will vest over a three-year period in 33.3% increments.

46
<PAGE> 49

DESCRIPTION OF CAPITAL STOCK

The following is a summary of certain provisions of the Company's Restated
Certificate of Incorporation and the Amended Bylaws (the "Bylaws") of the
Company, which are included as exhibits to the registration statement of which
this Prospectus forms a part.

AUTHORIZED AND OUTSTANDING CAPITAL STOCK

The Restated Certificate of Incorporation provides for authorized capital
stock of 35,000,000 shares, consisting of 20,000,000 shares of Class A Common
Stock, 10,000,000 shares of Class B Common Stock and 5,000,000 shares of
preferred stock, par value $.01 per share ("Preferred Stock"). Upon the
consummation of the Offering, 4,000,000 shares of Class A Common Stock
(4,600,000 shares if the Underwriters' over-allotment option is exercised in
full), and 5,000,000 shares of Class B Common Stock and no shares of Preferred
Stock will be outstanding. In addition, immediately following the Offering,
360,000 shares of Class A Common Stock will be issued to certain key employees
at the Company pursuant to restricted stock awards under the 1996 Plan. A total
of 640,000 additional shares of Class A Common Stock will be reserved for grants
of options and restricted stock awards under the 1996 Plan and the 1996 Director
Plan.

CLASS A AND B COMMON STOCK

Voting

Holders of Class A Common Stock are entitled to one vote per share. Holders
of Class B Common Stock are entitled to seven votes per share. All actions
submitted to a vote of stockholders are voted on by holders of Class A Common
Stock and Class B Common Stock voting together as a single class, except as
otherwise required by law. Holders of the Company's Common Stock are not
entitled to cumulative voting in the election of directors.

Conversion

Class A Common Stock has no conversion rights. A holder of Class B Common
Stock may convert its Class B Common Stock into Class A Common Stock at any time
at the ratio of one share of Class A Common Stock for each share of Class B
Common Stock. Shares of Class B Common Stock immediately and automatically
convert into an equal number of Class A Common Stock on the sale or transfer of
such shares to a person or entity not a member of the "Lawrence Group". The
"Lawrence Group" is comprised of Lawrence, James D. Lawrence, his spouse,
children, grandchildren, nieces and nephews (collectively, the "Lawrence
Family"), trusts or other entities controlled by, or for the benefit of, any
member of the Lawrence Family or any other affiliate of Lawrence or the Lawrence
Family.

Dividends

Holders of Class A Common Stock and Class B Common Stock are entitled to
receive dividends payable in cash or property other than Common Stock on an
equal basis, if and when such dividends are declared by the Board of Directors
from funds legally available, subject to any preference in favor of outstanding
preferred shares, if any. In the case of any dividend payable in Common Stock,
all holders of Common Stock shall receive the same dividend, with the holders of
Class A Common Stock receiving shares of Class A Common Stock and the holders of
Class B Common Stock receiving shares of Class A Common Stock or Class B Common
Stock, as determined by the Board of Directors when declaring such dividend.

Liquidation

In the event of liquidation, holders of Class A Common Stock and Class B
Common Stock share with each other on a ratable basis as a single class in the
net assets of the Company available for distribution after payment or provision
for liabilities of the Company and payment of the liquidation preference, if
any, on any outstanding preferred shares.

47
<PAGE> 50

Other Terms

Neither the Class A Common Stock nor the Class B Common Stock may be
subdivided, consolidated, reclassified or otherwise changed unless
contemporaneously therewith the other class of shares is subdivided,
consolidated, reclassified or otherwise changed in the same proportion and in
the same manner. In any merger, consolidation, reorganization, or other business
combination, the consideration to be received per share by holders of either
Class A Common Stock or Class B Common Stock must be identical to that received
by holders of the other class of Common Stock, except that any securities
received by holders of the Class A Common Stock or Class B Common Stock may
differ as to voting rights only to the extent that voting rights now differ
between Class A and Class B Common Stock. Holders of Common Stock are not
entitled to preemptive rights and neither the Class A Common Stock nor the Class
B Common Stock is subject to redemption.

The rights, preferences and privileges of holders of Common Stock are
subject to, and may be adversely affected by, the rights of the holders of
shares of any series of Preferred Stock that the Company may designate and issue
in the future.

PREFERRED STOCK

The Board of Directors of the Company is empowered, without approval of the
stockholders, to authorize the issuance of Preferred Stock in one or more
series, to establish the number of shares to be included in each such series,
and to fix the rights, powers, preferences and limitations of each series. As a
result, the Board of Directors has the power to afford the holders of any series
of Preferred Stock preferences, powers and rights, voting or otherwise, senior
to or greater than the rights of holders of Common Stock. The ability of the
Board Directors to establish such rights, powers and preferences and to issue
the Preferred Stock could be used as an anti-takeover device without further
action on the part of the holders of Common Stock. The Company has no present
plans to issue any Preferred Stock.

SPECIAL PROVISIONS OF THE RESTATED CERTIFICATE OF INCORPORATION

Super-Majority Provisions

The Restated Certificate of Incorporation provides that no agreement of
merger or consolidation, agreement governing the sale of substantially all of
the Company's assets, or agreement or plan governing liquidation of the Company
that are required by Delaware law to be submitted to the stockholders of the
Corporation for approval or rejection pursuant to Subchapter IX or X of the
General Corporation Law of the State of Delaware shall be approved without the
affirmative vote of the holders of at least 66 2/3% of the voting power of all
shares of the Corporation entitled to vote thereon. This provision of the
Restated Certificate of Incorporation may delay or hinder the ability of the
Company to enter into certain transactions that a majority of the stockholders
believe to be in the best interests of the Company and the stockholders.

Limitation of Director Liability

The General Corporation Law of the State of Delaware (the "GCLD")
authorizes corporations to limit or eliminate the personal liability of
directors to corporations and their stockholders for monetary damages for breach
of directors' fiduciary duty of care. Although this law does not change
directors' duty of care, it enables corporations to limit available relief to
equitable remedies such as injunction or rescission. The Restated Certificate of
Incorporation limits the liability of directors to the Company or its
stockholders to the fullest extent permitted by Delaware law. Specifically,
directors of the Company will not be personally liable for monetary damages for
breach of a director's fiduciary duty as a director, except for liability: (i)
for any breach of the director's duty of loyalty to the Company or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) for unlawful
payments of dividends or unlawful stock repurchases or redemptions or (iv) for
any transaction from which the director derived an improper personal benefit.

48
<PAGE> 51

Indemnification

The Restated Certificate of Incorporation contains provisions requiring the
indemnification of the Company's directors and officers to the fullest extent
permitted by the General Corporation Law of the State of Delaware, including
circumstances in which indemnification is otherwise discretionary. The Company
also has entered into indemnification agreements with each of its current
directors and executive officers and intends to enter into similar agreements
with individuals who become directors and officers after the closing of the
Offering. The Company believes that these provisions and agreements are
necessary to attract and retain qualified persons as directors and officers.

Classified Board of Directors; Removal of Directors

The Restated Certificate of Incorporation provides that the Board of
Directors shall be divided into three classes, the members of which will serve
staggered three-year terms. The Company believes that staggered terms of
directors could help to assure the continuity and stability of the Board's and
the Company's business strategies and policies as determined by the Board of
Directors.

The classification of directors will make changing the composition of the
Board of Directors more difficult. At least two annual meetings of stockholders
will be required to effect a change in a majority of the Board of Directors.
Such a delay may ensure that the Company's directors, if confronted by a
stockholder attempting to force a proxy contest, a tender or exchange offer or
an extraordinary corporate transaction, would have sufficient time to review the
proposal as well as any available alternatives to the proposal and to act in
what they believe to be in the best interest of the stockholders. The
classification provisions will apply to every election of directors, however,
regardless of whether a change in the composition of the Board of Directors
would be beneficial to the Company and its stockholders and whether a majority
of the Company's stockholders believes that such a change would be desirable.

The classification provisions also could discourage a third party from
initiating a proxy contest, making a tender or exchange offer or otherwise
attempting to obtain control of the Company, even though such an attempt might
be beneficial to the Company and its stockholders. Accordingly, stockholders
could be deprived of certain opportunities to sell their shares of Common Stock
at a higher market price than might otherwise be the case.

In addition, the Restated Certificate of Incorporation provides that
directors may be removed from office only "for cause" (as defined therein).
Subject to rights of any holders of preferred stock, newly created directors and
vacancies on the Board of Directors will be filled solely by the remaining
directors then in office.

Advance Notice Provisions for Certain Stockholder Actions

The Bylaws establish an advance notice procedure with regard to the
nomination, other than by or at the direction of the Board or a committee
thereof, of candidates for election as directors (the "Nomination Procedure")
and with regard to certain matters to be brought before an annual meeting of
stockholders of the Company (the "Business Procedure").

Under the Business Procedure, a stockholder seeking to have any business
conducted at an annual meeting must give prior written notice, in proper form,
to the Secretary of the Company. The requirements as to the form and timing of
that notice are specified in the Bylaws. If the Chairman or other officer
presiding at a meeting determines that other business was not properly brought
before such meeting in accordance with the Business Procedure, such business
will not be conducted at the meeting.

The Nomination Procedure requires that a stockholder give prior written
notice, in proper form, of a planned nomination for the Board to the Secretary
of the Company. The requirements as to the form and timing of that notice are
specified in the Bylaws. If the election inspectors determine that a person was
not nominated in accordance with the Nomination Procedure, such person will not
be eligible for election as a director.

49
<PAGE> 52

Although the Bylaws do not give the Board any power to approve or
disapprove stockholder nominations for the election of directors or of any other
business desired by stockholders to be conducted at an annual or any other
meeting, the Bylaws (i) may have the effect of precluding a nomination for the
election of directors or precluding the conduct of business at a particular
annual meeting if the proper procedures are not followed, or (ii) may discourage
or deter a third party from conducting a solicitation of proxies to elect its
own slate of directors or otherwise attempting to obtain control of the Company,
even if the conduct of such solicitation or such attempt might be beneficial to
the Company and its stockholders.

REGISTRATION RIGHTS AGREEMENT

Pursuant to the terms of the Registration Rights Agreement, upon the
request of Lawrence (or certain assignees) for a period of ten years, the
Company will register, on up to two occasions, the sale of a minimum of 500,000
shares of Common Stock beneficially owned by Lawrence which Lawrence (or such
assignees) requests to be registered under the Securities Act and applicable
state securities laws. The Company will become obligated to register the sale of
Common Stock on one additional occasion if Mr. Lawrence dies during the term of
the Registration Rights Agreement and Lawrence previously has exhausted its two
demand registrations. The Company's obligations are subject to certain
limitations relating to the timing and size of registrations and other similar
matters. In addition, the Company will not be obligated to register the Common
Stock when in the good faith judgment of its Board of Directors such
registration would materially adversely affect a pending or proposed public
offering of the Company's securities or certain other transactions. The Company
also is obligated to offer Lawrence and certain assignees the right to include
shares of Common Stock owned by it in certain registration statements filed by
the Company. The Company will indemnify Lawrence and each underwriter of Common
Stock, including the officers, directors and controlling persons of such
underwriters, for certain liabilities in connection with any such offering,
other than liabilities resulting or arising from untrue statements or omissions
made in conformity with information furnished to the Company in writing by
Lawrence or such underwriter. The Company is obligated to pay all expenses
incidental to such registration of Common Stock owned by Lawrence, excluding
fees of counsel to Lawrence, underwriters' discounts and commissions, and
transfer taxes.

DELAWARE ANTI-TAKEOVER LAW

As a Delaware corporation, the Company is subject to Section 203 of the
GCLD. In general, Section 203 prohibits the Company from engaging in a "business
combination" (as defined therein) with an "interested stockholder" (defined
generally as a person owning 15% or more of a corporation's outstanding voting
stock) for three years following the time such person became an interested
stockholder unless (i) before such person became an interested stockholder, the
board of directors of the corporation approved the transaction in which the
interested stockholder became an interested stockholder or approved the business
combination; (ii) upon consummation of the transaction that resulted in the
stockholder becoming an interested stockholder, the interested stockholder owns
at least 85% of the voting stock of the corporation outstanding at the time the
transaction commenced (excluding stock held by directors who are also officers
of the corporation and by employee stock plans that do not provide employees
with the rights to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer); or (iii) following the
transaction in which such person became an interested stockholder, the business
combination is approved by the board of directors of the corporation and
authorized at a meeting of stockholders by the affirmative vote of the holders
of two-thirds of the outstanding voting stock of the corporation not owned by
the interested stockholder. Under Section 203, the restrictions described above
also do not apply to certain business combinations proposed by an interested
stockholder following the announcement or notification of one of certain
extraordinary transactions involving the corporation and a person who had not
been an interested stockholder during the previous three years or who became an
interested stockholder with the approval of a majority of the corporation's
directors, if such extraordinary transaction is approved or not opposed by a
majority of the directors who were directors prior to any person becoming an
interested stockholder during the previous three years or were recommended for
election or elected to succeed such directors by a majority of such directors.

50
<PAGE> 53

TRANSFER AGENT

The transfer agent and registrar for the Common Stock is KeyCorp
Shareholder Services, Inc., Houston, Texas.

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of the Offering, Lawrence will own approximately 53% of the
outstanding Common Stock (50% if the Underwriters' over-allotment option is
exercised in full). In addition, the Executive Officers will own an aggregate of
360,000 shares of Class A Common Stock (the "Restricted Shares") pursuant to
restricted stock awards under the 1996 Plan. The Company, Lawrence and the
Executive Officers have agreed pursuant to a "lock-up" agreement that they will
not, without the prior written consent of the Representatives (defined under
"Underwriting"), offer, sell, contract to sell or grant any option to purchase
or otherwise dispose of any shares of Common Stock or any options exercisable
for Common Stock for a period of 180 days after the date of this Prospectus. See
"Underwriting".

Upon completion of the Offering, the Company will have 9,360,000 shares of
Common Stock outstanding (9,960,000 shares if the Underwriters' over-allotment
option is exercised in full). Of these shares, the 4,000,000 shares of Class A
Common Stock sold in the Offering (4,600,000 shares if the Underwriters' over-
allotment option is exercised in full) will be freely tradeable in the public
market without restriction by persons other than affiliates of the Company. The
5,000,000 shares of Class B Common Stock outstanding, which are owned by
Lawrence, will be "restricted securities" within the meaning of Rule 144 under
the Securities Act. Consequently, such shares may not be resold unless they are
registered under the Securities Act or resold pursuant to an applicable
exemption from registration under the Securities Act, such as Rule 144. Lawrence
has the right to require the Company to register such shares under the
Securities Act. See "Description of Capital Stock -- Registration Rights".

The Company plans to register the one million shares of Class A Common
Stock available for issuance pursuant to the 1996 Plan and the 1996 Director
Plan. Class A Common Stock acquired pursuant to such plans shall be available
for sale in the open market by holders who are not affiliates of the Company and
subject to volume and other limitations of Rule 144 by holders who are
affiliates of the Company. Furthermore, shares of restricted stock issued
pursuant to the 1996 Plan, such as the Restricted Shares, will be subject to
vesting requirements and will not be tradeable until vested. See
"Management -- 1996 Key Employee Stock Plan".

The Company believes that all of the outstanding shares of Class A Common
Stock, except for the Restricted Stock, will be immediately tradeable in
accordance with the provisions of Rule 144 upon expiration of the lock-up
agreements described above. In general, under Rule 144 as currently in effect, a
person (or persons whose shares are required to be aggregated) who has been
deemed to have beneficially owned, for at least two years, shares of Common
Stock that have not been registered under the Securities Act or that were
acquired from an "affiliate" of the Company, is entitled to sell within any
three-month period a number of shares of Common Stock that does not exceed the
greater of 1% of the number of then outstanding shares of the respective class
of Common Stock (44,360 shares for Class A Common Stock upon completion of the
Offering if the Underwriters' over-allotment option is not exercised) and the
average weekly reported trading volume in the respective class of Common Stock
during the four calendar weeks preceding such sale. Sales under Rule 144 also
are subject to certain notice and manner-of-sale requirements and to the
availability of current public information about the Company. A person (or
persons whose shares are aggregated) who is not an "affiliate" of the Company
during the three months prior to resale and who has been deemed to have
beneficially owned such shares for at least three years is entitled to sell such
shares under Rule 144 without regard to the requirements discussed above.

The Company, Lawrence and the Executive Officers have agreed, pursuant to
"lock up" agreements, that they will not, without the prior written consent of
the Representatives, offer for sale, sell or otherwise dispose of any shares of
Common Stock (other than shares of Class A Common Stock issued pursuant to the
1996 Plan and 1996 Director Plan) or securities convertible into or exchangeable
for Common Stock or sell or grant

51
<PAGE> 54

options, rights or warrants with respect to any shares of Common Stock (other
than the grant of options pursuant to the 1996 Plan and 1996 Director Plan) for
a period of 180 days after the date of this Prospectus.

Prior to the Offering, there has been no public market for the Class A
Common Stock and no prediction can be made as to the effect, if any, that sales
of shares of Common Stock or the availability of such shares for sale will have
on the market price of the Class A Common Stock prevailing from time to time.
Nevertheless, sales of substantial amounts of Common Stock in the public market
could adversely affect prevailing market prices.

UNDERWRITING

Subject to the terms and conditions set forth in the Underwriting
Agreement, the Company has agreed to sell to the Underwriters named below (the
"Underwriters"), for whom Jefferies & Company, Inc. and Southcoast Capital
Corporation are acting as representatives (the "Representatives"), and the
Underwriters have severally agreed to purchase, the number of shares of Class A
Common Stock set forth opposite their respective names in the table below at the
public offering price less the underwriting discount set forth on the cover page
of this Prospectus:

<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
-------------------------------------------------------------------------- ----------
<S> <C>
Jefferies & Company, Inc..................................................
Southcoast Capital Corporation............................................

---------
Total........................................................... 4,000,000
=========
</TABLE>

The Underwriting Agreement provides that the obligation of the Underwriters
to purchase the shares of Class A Common Stock offered hereby is subject to
certain conditions. The Underwriters are committed to purchase all of the shares
of Class A Common Stock offered hereby (other than those covered by the over-
allotment option described below), if any are purchased.

The Underwriters propose to offer the shares of Class A Common Stock to the
public initially at the public offering price set forth on the cover page of
this Prospectus and to certain dealers at such price less a concession not in
excess of per share. The Underwriters may allow and such dealers may
reallow, a discount not in excess of per share to certain other
dealers. After the initial public offering of the Class A Common Stock, the
public offering price, the concession to selected dealers and the reallowance to
other dealers, may be changed by the Representatives.

The Company has granted the Underwriters an option, exercisable for 30 days
from the date of this Prospectus, to purchase up to 600,000 additional shares of
Class A Common Stock at the initial public offering price, less the underwriting
discount. To the extent such option is exercised, each Underwriter will become
obligated, subject to certain conditions, to purchase additional shares of Class
A Common Stock proportionate to such Underwriter's initial commitment as
indicated in the preceding table. The Underwriters may exercise such right of
purchase only for the purpose of covering over-allotments, if any, made in
connection with the shares of Class A Common Stock offered by this Prospectus.

The Company, Lawrence and the Executive Officers have agreed not to offer
for sale, sell or otherwise dispose of any shares of Common Stock or any
securities convertible into or exchangeable for shares of Common Stock for a
period of 180 days from the date of this Prospectus, without the prior written
consent of the Representatives.

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<PAGE> 55

The Representatives have informed the Company that they do not expect the
Underwriters to confirm sales of shares of Class A Common Stock offered by this
Prospectus to any accounts over which they exercise discretionary authority.

At the request of the Company, the Underwriters have reserved up to 100,000
shares of the Class A Common Stock offered hereby for sale at the initial public
offering price to employees of the Company and certain other persons designated
by the Company who have expressed an interest in purchasing Class A Common
Stock. The number of shares of Class A Common Stock available to the general
public will be reduced to the extent these persons purchase the reserved shares.

The Company has agreed to indemnify the Underwriters against certain
liabilities that may be incurred in connection with the Offering, including
liabilities under the Securities Act, or to contribute to payments that the
Underwriters may be required to make in respect thereof.

Prior to the Offering, there has been no public trading market for the
Class A Common Stock and there can be no assurance that an active trading market
will develop or be sustained upon the completion of the Offering. The initial
public offering price of the Class A Common Stock will be determined by
negotiations between the Company and the Representatives. The material factors
considered in determining such public offering price will be the history of and
the prospects for the industry in which the Company competes, an assessment of
the Company's management, the Company's past and present operations, the
Company's past and present earnings and the trend of its earnings, the general
condition of the securities markets at the time of the Offering and the
price-earnings ratios and market prices of publicly traded securities of
companies that the Company and the Representatives believe to be comparable to
the Company.

Pursuant to a letter agreement between the Company and Jefferies & Company,
Inc., Jefferies & Company, Inc. has acted and will continue to act as a
financial advisor to the Company in connection with the acquisition of, merger
or other combination with certain potential acquisition targets. If the Company
completes a transaction with any such target, the Company will pay Jefferies &
Company, Inc. certain usual and customary fees for such services. The Company
has not paid Jefferies & Company, Inc. and is not obligated to pay Jefferies &
Company, Inc., any compensation for services rendered under this agreement to
date.

LEGAL MATTERS

In connection with the Class A Common Stock offered hereby, the validity of
the shares being offered will be passed upon for the Company by Fulbright &
Jaworski L.L.P., Houston, Texas. Certain legal matters will be passed upon for
the Underwriters by Porter & Hedges, L.L.P., Houston, Texas.

EXPERTS

The consolidated financial statements of the Company (including the related
consolidated financial statement schedule) at April 30, 1995 and 1996, and for
each of the three years in the period ended April 30, 1996, appearing in this
Prospectus and Registration Statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their reports thereon appearing elsewhere
herein, and are included in reliance upon such reports given upon the authority
of such firm as experts in accounting and auditing.

53
<PAGE> 56

AVAILABLE INFORMATION

The Company has filed with the Commission a Registration Statement on Form
S-1 (the "Registration Statement") under the Securities Act with respect to the
Class A Common Stock offered by this Prospectus. This Prospectus, which
constitutes a part of the Registration Statement, does not contain all of the
information contained in the Registration Statement and the exhibits and
schedules thereto, certain portions of which are omitted as permitted by the
rules and regulations of the Commission. For further information with respect to
the Company and the Class A Common Stock offered by this Prospectus, reference
is made to the Registration Statement, including the exhibits thereto.
Statements contained in this Prospectus as to the contents of any contract or
other documents filed as an exhibit to the Registration Statement are not
necessarily complete, and in each instance reference is hereby made to the copy
of such contract or other documents filed as an exhibit to the Registration
Statement, each statement being qualified in all respects by such reference.

The Registration Statement and the exhibits and schedules thereto may be
inspected, without charge, at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549, at the Commission's Regional Offices at 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661, and Seven World Trade Center, 13th Floor,
New York, New York 10048 and on the Internet at http://www.sec.gov. Copies of
such materials can be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, at
prescribed rates.

54
<PAGE> 57

CONSOLIDATED FINANCIAL STATEMENTS

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Report of Independent Auditors......................................................... F-2
Consolidated Financial Statements
Consolidated Balance Sheets............................................................ F-3
Consolidated Statements of Operations.................................................. F-4
Consolidated Statements of Stockholders' Equity........................................ F-5
Consolidated Statements of Cash Flows.................................................. F-6
Notes to Consolidated Financial Statements............................................. F-7
</TABLE>

F-1
<PAGE> 58

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders

of Dailey Petroleum Services Corp.

We have audited the accompanying consolidated balance sheets of Dailey
Petroleum Services Corp., a Delaware corporation, (as further discussed in Note
1) as of April 30, 1995 and 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended April 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Dailey Petroleum Services Corp. (as further discussed in Note 1) at April 30,
1995 and 1996, and the consolidated results of its operations and its cash flows
for each of the three years in the period ended April 30, 1996, in conformity
with generally accepted accounting principles.

Houston, Texas

June , 1996

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

The foregoing report is in the form that will be signed upon completion of
the reorganization of the capital accounts of the Company as described in Note 1
to the consolidated financial statements.

ERNST & YOUNG LLP

Houston, Texas

June 5, 1996

F-2
<PAGE> 59

DAILEY PETROLEUM SERVICES CORP.

CONSOLIDATED BALANCE SHEETS

(NOTE 1)
APRIL 30, PROFORMA
---------------- 1996
1995 1996 -----------
------- ------- (UNAUDITED)
<S> <C> <C> <C>
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents................................... $ 1,796 $ 1,967 $ 1,967
Accounts receivable, net (Note 2)........................... 14,064 16,306 16,306
Accounts receivable from officers and affiliates............ 150 436 436
Prepaid expenses............................................ 489 422 422
Deferred income taxes....................................... 392 389 389
Other current assets........................................ 422 153 153
------- ------- -------
Total current assets................................ 17,313 19,673 19,673
Revenue-producing tools and inventory, net (Note 3)........... 29,983 29,208 29,208
Property and equipment, net (Note 4).......................... 5,451 5,121 5,121
Property and equipment held for sale, net..................... 762 205 205
Deferred income taxes......................................... 565 1,384 1,384
Intangibles and other assets.................................. 334 287 287
------- ------- -------
Total assets........................................ $54,408 $55,878 $55,878
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities (Note 5)........... $ 7,681 $ 6,749 $ 6,749
Accounts payable to affiliates.............................. 252 -- --
Dividend payable............................................ -- -- 10,000
Income taxes payable........................................ 1,008 1,749 1,749
Short-term debt (Note 7).................................... -- 1,300 1,300
Current portion of long-term debt (Note 7).................. 1,307 1,738 1,738
Current portion of indebtedness to affiliate (Notes 6 and
7)....................................................... 660 660 660
------- ------- -------
Total current liabilities........................... 10,908 12,196 22,196
Long-term debt (Note 7)....................................... 8,604 6,866 6,866
Long-term indebtedness to affiliate (Notes 6 and 7)........... 1,760 1,100 1,100
Other noncurrent liabilities.................................. 109 75 75
Commitments and contingencies (Note 10)
Stockholders' equity (Note 1):
Preferred stock............................................. -- -- --
Common stock................................................ 50 50 50
Paid-in capital............................................. 4,559 4,559 4,559
Retained earnings........................................... 28,418 31,032 21,032
------- ------- -------
Total stockholders' equity.......................... 33,027 35,641 25,641
------- ------- -------
Total liabilities and stockholders' equity.......... $54,408 $55,878 $55,878
======= ======= =======
</TABLE>

See accompanying notes.

F-3
<PAGE> 60

DAILEY PETROLEUM SERVICES CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
---------------------------------
1994 1995 1996
------- ------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Rental income................................................ $32,393 $36,691 $42,987
Sales of products and services............................... 11,422 12,172 15,952
------- ------- -------
43,815 48,863 58,939
Costs and expenses:
Cost of rentals.............................................. 27,384 29,685 33,019
Cost of products and services................................ 5,124 6,889 7,927
Selling, general and administrative.......................... 7,085 9,607 12,083
Research and development..................................... 736 775 728
------- ------- -------
40,329 46,956 53,757
------- ------- -------
Operating income............................................... 3,486 1,907 5,182
Other (income) expense:
Interest income.............................................. (100) (60) (104)
Interest expense -- nonaffiliates............................ 527 841 785
Interest expense -- affiliate................................ 86 220 182
Foreign exchange (gain) loss................................. 122 (90) 239
Other, net................................................... (225) 190 39
------- ------- -------
Income before income taxes..................................... 3,076 806 4,041
Provision for income taxes (Note 8)............................ 1,075 838 1,427
------- ------- -------
Net income (loss).............................................. $ 2,001 $ (32) $ 2,614
======= ======= =======
Earnings (loss) per share...................................... $ .37 $ (.01) --
======= ======= =======
Proforma earnings per share (Note 1)........................... $ .41
=======
</TABLE>

See accompanying notes.

F-4
<PAGE> 61

DAILEY PETROLEUM SERVICES CORP.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
CLASS CLASS
A B TOTAL
PREFERRED COMMON COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK STOCK STOCK CAPITAL EARNINGS EQUITY
------ ------ ----- ------ ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at May 1, 1993 --
as restated -- (Note 1).......... -- -- $50 $4,559 $26,449 $31,058
Net income....................... -- -- -- -- 2,001 2,001
------ ------ ---- ------ ------- -------
Balance at April 30, 1994.......... -- -- 50 4,559 28,450 33,059
Net loss......................... -- -- -- -- (32) (32)
------ ------ ---- ------ ------- -------
Balance at April 30, 1995.......... -- -- 50 4,559 28,418 33,027
Net income....................... -- -- -- -- 2,614 2,614
------ ------ ---- ------ ------- -------
Balance at April 30, 1996.......... -- -- $50 $4,559 $31,032 $35,641
====== ====== ==== ====== ======= =======
</TABLE>

See accompanying notes.

F-5
<PAGE> 62

DAILEY PETROLEUM SERVICES CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
----------------------------------
1994 1995 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss).......................................... $ 2,001 $ (32) $ 2,614
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization............................ 4,323 5,428 5,726
Deferred income taxes.................................... (470) (487) (816)
Provision for doubtful accounts receivable............... 184 321 256
(Gain) loss on sale and disposition of property and
equipment............................................. (533) (9) 6
Changes in operating assets and liabilities:
Accounts receivable -- trade.......................... (3,877) (663) (2,498)
Accounts receivable -- officers and affiliates........ -- (150) (286)
Prepaid expenses and other............................ (73) (3) 347
Accounts payable and accrued liabilities.............. 826 2,458 (932)
Accounts payable to affiliates........................ 52 (561) (252)
Income taxes payable.................................. (190) (319) 741
-------- -------- --------
Net cash provided by operating activities.................. 2,243 5,983 4,906

INVESTING ACTIVITIES:
Additions to revenue-producing tools and inventory......... (9,816) (13,396) (11,702)
Inventory transferred to cost of rentals................... 4,285 4,739 5,050
Revenue-producing tools lost in hole, abandoned, and
sold..................................................... 1,432 2,073 2,551
Additions to property and equipment........................ (1,316) (1,619) (883)
Proceeds from sale of property and equipment............... 880 473 916
-------- -------- --------
Net cash used in investing activities...................... (4,535) (7,730) (4,068)

FINANCING ACTIVITIES:
Proceeds from the issuance of debt......................... 5,670 -- 1,300
Payments on long-term debt................................. (261) (1,074) (1,967)
-------- -------- --------
Net cash provided by (used in) financing activities........ 5,409 (1,074) (667)
-------- -------- --------
Increase (decrease) in cash and cash equivalents........... 3,117 (2,821) 171
Cash and cash equivalents at beginning of year............. 1,500 4,617 1,796
-------- -------- --------
Cash and cash equivalents at end of year................... $ 4,617 $ 1,796 $ 1,967
======== ======== ========
</TABLE>

See accompanying notes.

F-6
<PAGE> 63

DAILEY PETROLEUM SERVICES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1996

1. ORGANIZATION

The accompanying financial statements reflect the operations of Dailey
Petroleum Services Corp., a Delaware corporation, which was merged with Dailey
Corporation (which changed its name to Dailey Petroleum Services Corp.) in June
1996. Dailey Corporation or new Dailey Petroleum Services Corp. had no separate
legal status or existence as of April 30, 1996. New Dailey Petroleum Services
Corp. and its predecessor, Dailey Petroleum Services Corp., are hereinafter
referred to as the "Company" or "Dailey."

The Company provides directional drilling services and designs,
manufactures and rents technologically-advanced downhole tools for oil and gas
drilling and workover applications. Founded in 1945 as a rental tool company,
Dailey began offering directional drilling services in 1984 and currently
provides such services in the Gulf of Mexico, the United States Gulf Coast
region, and most recently, Venezuela and the Austin Chalk formation in Texas and
Louisiana. The Company operates in one business segment.

Prior to May 1996, Dailey was a wholly owned subsidiary of Lawrence
Industries, Inc. ("Lawrence"). With the intent of filing a public offering of
4,000,000 shares of Class A Common Stock of Dailey (the "Offering") in May 1996,
Lawrence reorganized its ownership of the Company into a holding company
structure through a forward triangular merger of Dailey Petroleum Services Corp,
into a newly-formed, wholly-owned indirect subsidiary of Lawrence, Dailey
Corporation (the "Reorganization"). The effect of the forward triangular merger
has been reflected retroactively in the accompanying financial statements.

Dailey's Restated Certificate of Incorporation provides for three classes
of stock: Class A Common Stock, $.01 par (20,000,000 shares authorized, no
shares issued or outstanding) ("Class A Common Stock"), Class B Common Stock,
$.01 par (10,000,000 shares authorized, 5,000,000 shares issued and outstanding)
("Class B Common Stock"), and Preferred Stock, $.01 par (5,000,000 shares
authorized, no shares issued or outstanding). The Board of Directors is
empowered to authorize the issuance of Preferred Stock in one or more series and
to fix the rights, powers, preferences and limitations of each series. A holder
of Class B Common Stock may convert its Class B Common Stock into Class A Common
Stock at any time at the ratio of one share of Class A Common Stock for each
share of Class B Common Stock. In the event of liquidation, holders of Class A
Common Stock and Class B Common Stock share with each other on a ratable basis
as a single class in the net assets of the Company available for distribution.
In addition, shares of Class B Common Stock convert automatically into a like
number of shares of Class A Common Stock upon the sale or transfer of such
shares to a person or entity that is not a member of the Lawrence Group (as
defined in the Company's Restated Certificate of Incorporation).

The Company intends to use $10.0 million of the proceeds from the Offering
to repay a promissory note, which was incurred in connection with a dividend
declared on June , 1996. The promissory note accrues interest at the prime
rate and is payable upon demand. Accordingly, the accompanying pro forma
consolidated balance sheet as of April 30, 1996, retroactively reflects the
dividend and resulting decrease in retained earnings. In the accompanying
statements of operations and retained earnings pro forma per share data is
included which gives effect to the number of shares whose proceeds would be used
to pay the dividend (the $10.0 million dividend would require an additional one
million shares assuming a $10.00 per share Offering price, thus earnings per
share for the year ending April 30, 1996, are based on 6,360,000 shares of
Common Stock outstanding).

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
transactions and balances are eliminated in consolidation.

F-7
<PAGE> 64

DAILEY PETROLEUM SERVICES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company has historically had significant transactions with Lawrence
which are reflected in the accompanying financial statements on the basis
established between the Company and Lawrence. See Notes 6, 7, 8 and 10.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

The Company considers all investments with a maturity of three months or
less when purchased to be cash and cash equivalents.

Accounts Receivable

Accounts receivable are net of allowances for doubtful accounts of
$1,356,000 in 1995 and $1,325,000 in 1996.

Revenue-Producing Tools and Inventory

Revenue-producing tools and inventory are stated at cost utilizing the
first-in, first-out method. Revenue-producing tools are depreciated on the
straight-line method over their estimated useful lives of 5 to 7 years. Tools
lost in hole and billed to customers and tools abandoned are included in sales
of products and services and the related write-off of the tools' net book values
are included in costs of products and services in the accompanying consolidated
statements of operations.

Tools manufactured and assembled are transferred to revenue-producing tools
as completed at the total cost of components, subassemblies, expendable parts,
direct labor and indirect costs of each tool. For U.S. locations and
international distribution centers, components, subassemblies and expendable
parts are capitalized as inventory and expensed as tools are repaired and
maintained. Components, subassemblies and expendable parts are expensed when
shipped to all international locations other than distribution centers.

Property and Equipment

Property and equipment are stated at cost. Depreciation is calculated
primarily on the straight-line method over the estimated useful lives of 5 to 30
years for buildings and improvements, 3 to 10 years for machinery and equipment,
4 to 10 years for furniture and fixtures and 3 to 7 years for other property and
equipment.

Maintenance and repairs are charged to expense as incurred. Major repairs
and improvements are capitalized and depreciated. The cost and accumulated
depreciation of property and equipment retired or otherwise disposed of are
removed from the related accounts and any gain or loss is recognized in
operations.

Intangible Assets

Patents and other intangibles are amortized over 13 to 40 years and had a
net book value of $203,000 and $180,000 at April 30, 1995 and 1996,
respectively.

F-8
<PAGE> 65

DAILEY PETROLEUM SERVICES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Impairment of Long-Lived Assets

In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121").
SFAS 121 requires that long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. SFAS 121 is
effective for fiscal years beginning after December 15, 1995. The Company
believes that the adoption of SFAS 121 in the first quarter of fiscal 1997 will
not have a material impact on its consolidated financial statements.

Stock Based Compensation

In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS
123 establishes alternative methods of accounting and disclosure for employee
stock-based compensation arrangements. In connection with the Offering and
establishment of its "1996 Key Employee Stock Plan" and its "1996 Non-Employee
Director Stock Plan", the Company has elected to use the "intrinsic value based
method" of accounting for its stock option plans. This method does not result in
the recognition of compensation expense when employee stock options are granted
if the exercise price of the option equals or exceeds the fair market value of
the stock at the date of grant.

Income Taxes

The Company is included in the consolidated U.S. federal income tax return
of Lawrence for taxable periods ending on or before the closing of the Offering.
The Company and its subsidiaries file separate state and foreign income tax
returns. The accompanying consolidated financial statements reflect the income
tax provisions of the Company on a separate return basis with no U.S. federal
tax operating loss, tax credit, or foreign credit carryforwards generated prior
to May 1, 1988 allocated to the Company by Lawrence.

Pursuant to the Tax Allocation Agreement to be entered into by the Company
and Lawrence, the Company will pay to Lawrence an amount equal to the federal
income tax computed on the Company's (and its subsidiaries) taxable income less
any tax credits generated by the Company or its subsidiaries. The Company will
pay such amount even if the consolidated federal income tax return to which the
payment relates does not have a consolidated tax liability. Lawrence will not
make any payment to the Company for any of the Company's net operating losses or
tax credits, even if such net operating losses or tax credits have been used by
Lawrence to reduce its separate federal income tax liability.

The Tax Allocation Agreement will apply to the Company for all years in
which the Company (or any predecessor) is or was included in the Lawrence
consolidated federal income tax return. To the extent a state or other taxing
jurisdiction requires or permits a consolidated, combined or unitary tax return
to be filed by Lawrence and its affiliates and such return includes the Company,
the principles expressed with respect to the consolidated federal tax allocation
will apply.

The accompanying consolidated financial statements reflect deferred income
taxes on the liability method. Under this method, deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities and are measured using the enacted tax rates
and laws in effect. An impairment evaluation, with reserves recorded as
necessary for any tax benefit not expected to be realized, is required of
deferred tax assets. A current tax expense or benefit is recognized for
estimated taxes payable or refundable for the current year.

Foreign Currency Translation

The U.S. dollar is the functional currency for all operations. Accordingly,
foreign currency translation gains and losses are recognized in the consolidated
statements of operations.

F-9
<PAGE> 66

DAILEY PETROLEUM SERVICES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Reclassifications

Certain reclassifications have been made to the 1994 and 1995 financial
statements to conform to the current year presentation.

3. REVENUE-PRODUCING TOOLS AND INVENTORY

<TABLE>
<CAPTION>
APRIL 30,
---------------------
1995 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Revenue-producing tools................................................ $ 45,963 $ 48,024
Accumulated depreciation............................................... (27,196) (29,740)
-------- --------
18,767 18,284
Inventory:
Components, subassemblies and expendable parts....................... 9,031 9,096
Rental tools and expendable parts under production................... 1,171 1,058
Raw materials........................................................ 1,014 770
-------- --------
11,216 10,924
-------- --------
Revenue-Producing Tools and Inventory........................ $ 29,983 $ 29,208
======== ========
</TABLE>

4. PROPERTY AND EQUIPMENT

<TABLE>
<CAPTION>
APRIL 30,
---------------------
1995 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land................................................................... $ 1,383 $ 1,071
Buildings and improvements............................................. 5,732 5,838
Machinery and equipment................................................ 14,727 15,377
Furniture and fixtures................................................. 1,402 1,390
Other.................................................................. 499 593
-------- --------
23,743 24,269
Accumulated depreciation............................................... (18,292) (19,148)
-------- --------
Property and Equipment....................................... $ 5,451 $ 5,121
======== ========
</TABLE>

5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

<TABLE>
<CAPTION>
APRIL 30,
-----------------
1995 1996
------ ------
(IN THOUSANDS)
<S> <C> <C>
Trade accounts payable..................................................... $4,289 $2,601
Accrued salaries and vacation.............................................. 1,222 1,778
Agent commissions payable.................................................. 1,021 774
Accrued expenses and other................................................. 1,149 1,596
------ ------
Accounts Payable and Accrued Liabilities......................... $7,681 $6,749
====== ======
</TABLE>

6. RELATED PARTY TRANSACTIONS

The accompanying consolidated statements of operations include annual
rental charges from Lawrence for a corporate office facility and a manufacturing
and service center facility. See Note 10.

F-10
<PAGE> 67

DAILEY PETROLEUM SERVICES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The affiliate balances, other than the amounts included in long-term debt,
are non-interest bearing and have no fixed repayment terms.

The Company provided Lawrence and certain of its affiliates with various
administrative and management services including cash management, accounting,
tax, data processing, human resources and legal services in 1994, 1995 and 1996.
The Company also utilized from time to time aircraft owned by another Lawrence
subsidiary. The Company historically has not charged Lawrence for these
administrative and management services or reimbursed Lawrence for the use of
aircraft. The effect of not recording the fair values of these services rendered
less services received is not significant.

The Company participates in the "Lawrence Companies Retirement Plan", a
defined contribution pension plan, covering all Dailey employees. Contributions
are determined as 50% of the employee's contribution up to 2% of the employee's
total compensation. Amounts charged to pension costs and contributed to the plan
in 1994, 1995 and 1996 totaled $149,000, $152,000 and $178,000, respectively.

7. BORROWING ARRANGEMENTS

Long-term debt consisted of the following:

<TABLE>
<CAPTION>
APRIL 30,
-------------------
1995 1996
------- -------
<S> <C> <C>
(IN THOUSANDS)
Note payable to a bank:
Monthly interest payments at a fixed rate of 7.9% (See below);
monthly principal payments of $138,889 through December
1999, with increasing principal payments through the
maturity date of December 2000.............................. $ 9,667 $ 8,444
Note payable to affiliates:
Monthly principal payments of $55,000 plus interest at 8.0%,
with the final payment due December 1998.................... 2,420 1,760
Other notes payable.............................................. 244 160
------- -------
12,331 10,364
Less current portion of long-term debt........................... 1,967 2,398
------- -------
Total long-term debt................................... $10,364 $ 7,966
======= =======
</TABLE>

Principal payments of long-term debt are due as follows:

<TABLE>
<CAPTION>
(IN
THOUSANDS)
<S> <C>
1997............................................................... $ 2,398
1998............................................................... 2,371
1999............................................................... 2,151
2000............................................................... 1,889
2001............................................................... 1,555
-------
$10,364
=======
</TABLE>

The note payable to a bank includes, among other things, provisions
relative to maintenance of working capital balances, limitations on additional
borrowing, debt coverage requirements and restrictions on payment of dividends.
The note payable to a bank is collateralized by a majority of the Company's
assets and a portion of other notes payable is collateralized by equipment
purchased.

F-11
<PAGE> 68

DAILEY PETROLEUM SERVICES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In conjunction with $10.0 million in borrowings and to limit interest rate
exposure, the Company entered into an interest rate swap, which converted the
floating interest rate to a fixed rate of 7.9% and matures in December 2000.

Interest paid during the years ended April 30, 1994, 1995 and 1996 amounted
to $442,000, $1,128,000 and $956,000, respectively.

In December 1995, the Company entered into a $3.0 million revolving credit
facility with a bank which provides interest at the prime rate with an option to
convert to a LIBOR-based rate plus 2.0%. At April 30, 1996, the Company had
outstanding borrowings of $1,300,000 at 7.4% against the line of credit which is
due in December 1996. The obligations of the Company to the bank are
collateralized by substantially all of the Company's property, equipment,
inventory, intellectual property and receivables. The credit facility contains
certain restrictive covenants and customary events of default and conditions to
the bank's obligation to make advances to the Company.

8. INCOME TAXES

<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
----------------------------
1994 1995 1996
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Income (loss) before income taxes:
U.S. operations................................................ $ 130 $1,443 $4,072
Foreign operations............................................. 2,946 (637) (31)
------ ------ ------
Income (loss) before income taxes...................... $3,076 $ 806 $4,041
====== ====== ======
Income tax provision (benefit):
U.S. current................................................... $ 653 $ 737 $ 941
Foreign current................................................ 892 588 1,302
U.S. deferred.................................................. (470) (487) (816)
------ ------ ------
Income tax provision (benefit)......................... $1,075 $ 838 $1,427
====== ====== ======
</TABLE>

Deferred income taxes arise from temporary differences between the tax
basis of assets and liabilities and their reported amounts in the financial
statements. A summary of the components of deferred tax liabilities and assets
are as follows:

<TABLE>
<CAPTION>
APRIL 30,
-----------------
1995 1996
------ ------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Revenue-producing tools and property and equipment............... $ 918 $ 662
------ ------
Total deferred tax liabilities........................... 918 662
Deferred tax assets:
Net operating loss carryforward.................................. -- 1,547
Provision for doubtful accounts receivable....................... 461 504
Uniform capitalization costs..................................... 1,483 1,053
Vacation and workers' compensation accruals...................... 392 389
------ ------
Total deferred tax assets................................ 2,336 3,493
Valuation allowance for deferred tax assets........................ (461) (1,058)
------ ------
1,875 2,435
------ ------
Net deferred tax assets............................................ $ 957 $1,773
====== ======
</TABLE>

F-12
<PAGE> 69

DAILEY PETROLEUM SERVICES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The difference between the United States statutory rate and the Company's
effective income tax rate is reconciled as follows:

<TABLE>
<CAPTION>
APRIL 30,
-------------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
United States statutory rate................................ 34.0% 34.0% 34.0%
Increases (reductions) in tax rate resulting from:
Meals and entertainment................................... 0.9 10.7 2.2
Dissolution of partnership................................ -- -- 20.0
Benefit of net operating loss carryforward................ -- -- (23.2)
Foreign losses............................................ -- 41.4 2.6
Other..................................................... -- 17.9 (.3)
---- ----- ----
Effective income tax rate......................... 34.9% 104.0% 35.3%
==== ===== ====
</TABLE>

Subsequent to the Offering, the Company will file U.S. federal income tax
returns on a stand alone basis. The Company and Lawrence are jointly and
severally liable with respect to taxes related to periods prior to the Offering.
Prior to the Offering, the Company and Lawrence will enter into a Tax Allocation
Agreement, pursuant to which Lawrence will agree to indemnify the Company with
respect to any federal or state taxes unrelated to Dailey for periods prior to
the Offering.

For income tax reporting at April 30, 1996, the Company has net operating
loss carryforwards of approximately $4,550,000, expiring in 2004 through 2010.
The valuation allowance relates to deferred tax assets established under SFAS
No. 109 for the provision for doubtful accounts receivable of $504,000 and net
operating loss carryforwards of $554,000. No other valuation allowances were
considered necessary. The change in the valuation allowance during fiscal 1996
is primarily due to net operating loss carryforwards. Based upon prior earnings
history, it is expected that future taxable income will be more than sufficient
to utilize the remaining deductible temporary differences.

No provision is made for U.S. income taxes applicable to undistributed
earnings of foreign subsidiaries that are indefinitely reinvested in foreign
operations.

Income taxes paid during 1994, 1995 and 1996 were $1,056,000, $917,000 and
$538,000, respectively.

9. ROYALTIES

In 1986, the Company purchased the design, patents and rights to certain
hydraulic tools and entered into a royalty agreement with the seller which
expires in 1999 and 2003 as to the covered hydraulic drilling and fishing jars,
respectively. Royalty agreements were executed between the Company and the
royalty owner in 1993 and 1994 on newly issued methods and apparatus patents
related to a double-acting drilling accelerator and improvements to hydraulic
drilling jars. In March 1994, the royalty agreements were amended to cap
royalties at 5.0% of annual net rental revenues derived from the hydraulic
drilling and fishing jars and double-acting drilling accelerators through
December 1999, with the royalty percentage decreasing to 4.0% from January 2000
to expiration of the applicable patents. Upon expiration of the patents, no
royalties will be required. The amended agreement also revised the 1.0% royalty
paid on net lost-in-hole revenue for the original hydraulic drilling jar patent
to the 2.0% provided in subsequent royalty agreements. In consideration for the
execution of the amendment to the royalty agreement, the Company agreed to pay
the owner of the royalty $250,000 in royalties. The $250,000, net of imputed
interest, was recorded as an expense at April 30, 1994, and subsequent to that
date, the Company arranged for the payment of this amount through a note
payable. For the years ended April 30, 1994, 1995 and 1996, the accompanying
consolidated statements of operations include royalty expense of $466,000,
$826,000 and $843,000, respectively, excluding the $250,000

F-13
<PAGE> 70

DAILEY PETROLEUM SERVICES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

related to the amended royalty agreement. The owner of the royalty was an
officer of the Company until October 1994.

10. COMMITMENTS AND CONTINGENCIES

The Company leases office space, transportation equipment, and other
property under noncancelable operating leases with third parties and a corporate
office facility and manufacturing and service center facility with Lawrence. See
Note 6. Future minimum lease commitments under noncancelable operating leases at
April 30, 1996 are as follows:

<TABLE>
<CAPTION>
THIRD PARTY LAWRENCE TOTAL
----------- -------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
1997................................................ $ 372 $ 450 $ 822
1998................................................ 181 -- 181
1999................................................ 181 -- 181
2000................................................ 181 -- 181
2001................................................ 181 -- 181
Thereafter.......................................... 634 -- 634
---- ------ ------
$ 1,730 $ 450 $2,180
==== ====== ======
</TABLE>

Rental expense under operating leases with third parties, inclusive of
month-to-month rentals, totaled $1,329,000, $1,700,000 and $2,436,000 in 1994,
1995 and 1996, respectively, and with Lawrence totaled $1,029,000, $1,244,000
and $1,306,000 in 1994, 1995 and 1996, respectively and are included in selling
general and administrative expenses and cost of rentals.

The Company is the defendant in various legal proceedings and claims which
arise in the ordinary course of its business. In the opinion of management, the
amount of ultimate liability with respect to these actions will not materially
affect the consolidated financial statements of the Company. The Company is also
the plaintiff in certain actions defending its patents and proprietary designs.

11. CONCENTRATIONS OF CREDIT RISK AND FAIR VALUES OF FINANCIAL INSTRUMENTS

The Company is subject to credit risk and other risks inherent in
international operations. Generally, in excess of 50% of the Company's
receivables are due from oil and gas exploration companies and drilling
contractors operating in countries other than the United States and from the
Company's international agents. United States receivables are generally due from
major oil and gas exploration and drilling contractors throughout the oil field
areas of the United States. The Company routinely monitors its cash and
receivable positions with customers and international agents.

The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:

Cash and cash equivalents: The carrying amount reported in the balance
sheet for cash and cash equivalents approximates its fair value.

Long- and short-term debt and interest rate swap: The carrying amounts
of the Company's borrowings under its short-term revolving note payable
approximates fair value. The fair values of the Company's long-term debt
and interest rate swap are estimated using discounted cash flow analyses,
based on the Company's current incremental borrowing rates for similar
types of borrowing arrangements.

F-14
<PAGE> 71

DAILEY PETROLEUM SERVICES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The carrying amounts and fair value of the Company's financial instruments
are as follows:

<TABLE>
<CAPTION>
APRIL 30, 1995 APRIL 30, 1996
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and cash equivalents...................... $ 1,796 $ 1,796 $ 1,967 $ 1,967
Short-term debt................................ -- -- 1,300 1,300
Long-term debt, including interest rate swap... 12,331 11,833 10,364 10,316
</TABLE>

12. SUBSEQUENT EVENT

Subsequent to April 30, 1996, and effective with the completion of a public
offering, the Board of Directors will adopt the "1996 Key Employee Stock Plan"
and the "1996 Non-Employee Director Stock Plan." The Company's "1996 Key
Employee Stock Plan," a non compensatory plan, authorized the grant of options
or restricted stock for Class A Common Stock to management personnel for up to
900,000 shares of the Company's Common Stock. The Company intends to grant
options totalling 341,129 shares contemporaneously with the offering to various
executive officers at the initial public offering price, which will vest over
three years. In addition, immediately following the Offering the Company will
grant to key officers restricted stock awards totalling 360,000 shares of Class
A Common Stock, which will vest over three years and not require any payment by
the key officers. The "1996 Non-Employee Director Stock Plan," a compensatory
plan, has 100,000 shares authorized for the granting of options to outside
directors.

13. INDUSTRY SEGMENT AND DOMESTIC AND INTERNATIONAL OPERATIONS

The Company operates in one business segment, providing directional
drilling services and technologically-advanced downhole tools for oil and gas
drilling and workover applications.

Export revenues to unaffiliated customers included in domestic sales were
$1,003,000, $274,000 and $1,833,000 in 1994, 1995 and 1996, respectively.

Revenues by geographic area are as follows:

<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
-----------------------------
1994 1995 1996
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Domestic................................................ $23,736 $29,607 $34,370
Europe.................................................. 6,198 7,090 7,349
Africa.................................................. 1,565 1,446 2,059
Latin America........................................... 6,712 6,024 11,032
Middle East............................................. 984 511 563
Asia.................................................... 4,620 4,185 3,566
------- ------- -------
Total......................................... $43,815 $48,863 $58,939
======= ======= =======
</TABLE>

F-15
<PAGE> 72

DAILEY PETROLEUM SERVICES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Operating income (loss) by geographic area is as follows:

<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
-----------------------------
1994 1995 1996
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Domestic................................................ $ 2,781 $ 3,639 $ 8,025
Europe.................................................. 2,368 2,512 2,424
Africa.................................................. 419 286 860
Latin America........................................... 2,758 812 1,434
Middle East............................................. 236 (15) 413
Asia.................................................... 2,078 1,645 916
Corporate............................................... (7,154) (6,972) (8,890)
------- ------- -------
Total......................................... $ 3,486 $ 1,907 $ 5,182
======= ======= =======
</TABLE>

Identifiable assets by geographic area are as follows:

<TABLE>
<CAPTION>
APRIL 30,
------------------
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Domestic.......................................................... $31,955 $30,931
Europe............................................................ 7,328 7,617
Africa............................................................ 1,418 1,631
Latin America..................................................... 5,091 7,972
Middle East....................................................... 342 242
Asia.............................................................. 4,098 3,620
Corporate......................................................... 4,176 3,865
------- -------
Total................................................... $54,408 $55,878
======= =======
</TABLE>

F-16
<PAGE> 73

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

NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFERING OTHER
THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS, AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED ON
AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES IN ANY STATE
TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
STATE. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED OR INCORPORATED BY REFERENCE HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO ITS DATE.

---------------------
TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 7
The Company........................... 13
Use of Proceeds....................... 13
Dividend Policy....................... 14
Dilution.............................. 14
Capitalization........................ 15
Selected Consolidated Financial
Data................................ 16
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 17
Business and Properties............... 23
Management............................ 36
Certain Relationships and Related
Transactions........................ 42
Security Ownership of Management and
Principal Stockholder............... 46
Description of Capital Stock.......... 47
Shares Eligible for Future Sale....... 51
Underwriting.......................... 52
Legal Matters......................... 53
Experts............................... 53
Available Information................. 54
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>

---------------------
UNTIL , 1996 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING),
ALL DEALERS EFFECTING TRANSACTIONS IN THE CLASS A COMMON STOCK OFFERED HEREBY,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.

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

4,000,000 SHARES

[LOGO]

DAILEY

PETROLEUM SERVICES CORP.

CLASS A COMMON STOCK
PROSPECTUS
JEFFERIES & COMPANY, INC.

SOUTHCOAST CAPITAL
CORPORATION
, 1996

- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 74

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The estimated expenses in connection with the Offering are:

<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee........................ $15,862
NASD Filing Fee............................................................ 5,100
Nasdaq National Market Listing Fee......................................... *
Legal Fees and Expenses.................................................... *
Accounting Fees and Expenses............................................... *
Blue Sky Fees and Expenses (including legal fees).......................... *
Printing Expenses.......................................................... *
Transfer Agent and Registrar Fees.......................................... *
Miscellaneous.............................................................. *
-------
TOTAL............................................................ $ *
=======
</TABLE>

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

* to be filed by amendment

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Under Delaware law, a corporation may include provisions in its certificate
of incorporation that will relieve its directors of monetary liability for
breaches of their fiduciary duty to the corporation, except under certain
circumstances, including a breach of the director's duty of loyalty, acts or
omissions of the director not in good faith or which involve intentional
misconduct or a knowing violation of law, the approval of an improper payment of
a dividend or an improper purchase by the corporation of stock or any
transaction from which the director derived an improper personal benefit. The
Restated Certificate of Incorporation provides that the Company's directors are
not liable to the Company or its stockholders for monetary damages for breach of
their fiduciary duty, subject to the described exceptions specified by Delaware
law.

Section 145 of the General Corporation Law of the State of Delaware grants
to the Company the authority to indemnify each officer and director of the
Company against liabilities and expenses incurred by reason of the fact that he
is or was an officer or director of the Company if he acted in good faith and in
a manner he reasonably believed to be in or not opposed to the best interests of
the Company and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The Bylaws provide for
indemnification of each officer and director of the Company to the fullest
extent permitted by Delaware law.

Section 145 of the General Corporation Law of the State of Delaware also
allows the Company to purchase and maintain insurance on behalf of any person
who is or was an officer or director of the Company against liability asserted
against or incurred by him in any such capacity, whether or not the Company
would have the authority to indemnify such officer or director against such
liability under the provisions of Section 145. The Company has purchased and
maintains a directors' and officers' liability policy for such purposes.

The Company's Amended Bylaws (the "Bylaws") provide for the indemnification
of its officers and directors and the advancement to them of expenses in
connection with proceedings and claims, to the fullest extent permitted under
the General Corporation Law of the State of Delaware. Such indemnification may
be made even though directors and officers would not otherwise be entitled to
indemnification under other provisions by the Bylaws.

The above discussion of the General Corporation Law of the State of
Delaware and of the Restated Certificate of Incorporation and Bylaws is not
intended to be exhaustive and is qualified in its entirety by such statute and
the Restated Certificate of Incorporation and Bylaws.

II-1
<PAGE> 75

Reference is made to the form of Underwriting Agreement filed as Exhibit
1.1 to the Registration Statement for certain provisions regarding the
indemnification of the Company, its officers and directors and any controlling
persons by the Underwriters against certain liabilities for information
furnished by the Underwriters.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Registrants
pursuant to the foregoing provisions, the Registrants have been informed that in
the opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and therefore is unenforceable.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

On May 21, 1996, in connection with the Reorganization, the Registrant
issued 1,000 shares of Class B Common Stock to Dailey Holdings Inc., a Delaware
corporation and wholly-owned subsidiary of Lawrence Industries, Inc. On June 3,
1996, the Registrant issued an additional 4,999,000 shares of Class B Common
Stock to Dailey Holdings Inc. All of the shares of capital stock of the
Registrant's predecessor, which were held by Lawrence Industries, Inc., were
then exchanged for additional shares of Dailey Holdings Inc. See "The
Company -- Reorganization; Relationship with Lawrence". The aggregate
consideration paid for these shares was, in effect, all of the capital stock of
the Registrant's predecessor. The sale of such securities was exempt from
registration under the Securities Act pursuant to Section 4(2) of the Securities
Act.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) Exhibits:

<TABLE>
<S> <C>
+1.1 -- Form of Underwriting Agreement.
**2.1 -- Plan and Agreement of Merger by and between Dailey Petroleum Services
Corp., Dailey Corporation and Dailey Holdings Inc., dated May 31,
1996.
**3.1 -- Restated Certificate of Incorporation of the Company.
+3.2 -- Amended Bylaws of the Company.
+4.1 -- Form of Class A Common Stock Certificate.
4.2 -- See Exhibits 3.1 and 3.2 for provisions of the Restated Certificate
of Incorporation and Amended Bylaws of the Company defining the
rights of the holders of Common Stock.
**4.3 -- Second Amended and Restated Loan Agreement by and between Dailey
Petroleum Services Corp. and First Interstate Bank of Texas, N.A.,
dated December 13, 1995, as amended by First Amendment thereto dated
June 5, 1996.
**4.4 -- Revolving Credit Note in favor of First Interstate Bank of Texas,
N.A., dated December 13, 1995.
**4.5 -- Second Amended and Restated Subordination Agreement by and among
Lawrence Industries, Inc., First Interstate Bank of Texas, N.A. and
Dailey Petroleum Services Corp., dated December 13, 1995.
**4.6 -- Second Amended and Restated Commercial Security Agreement by and
between First Interstate Bank of Texas, N.A. and Dailey Petroleum
Services Corp., dated December 13, 1995.
**4.7 -- Second Amended Notice of Security Interest in Intellectual Property
in Favor of First Interstate Bank of Texas, N.A., dated December 13,
1995.
**4.8 -- Term Note in favor of First Interstate Bank of Texas, N.A., dated
December 1, 1993.
+5.1 -- Opinion of Fulbright & Jaworski L.L.P.
</TABLE>

II-2
<PAGE> 76

<TABLE>
<S> <C>
+10.1 -- Form of Relationship Agreement by and between the Company and
Lawrence Industries, Inc.
**10.2 -- Form of Office Lease Agreement by and between the Company as lessee
and Lawrence International, Inc. as lessor
**10.3 -- Form of Service Center Lease Agreement by and between the Company as
lessee and Lawrence International, Inc. as lessor
+10.4 -- Form of Registration Rights Agreement by and between the Company and
Lawrence
+10.5 -- Form of Employment Agreement by and between the Company and certain
senior executive officers
**10.6 -- Dailey Petroleum Services Corp. 1996 Key Employee Stock Plan
**10.7 -- Dailey Petroleum Services Corp. 1996 Non-Employee Director Stock Plan
10.8 -- Second Amended and Restated Loan Agreement by and between Dailey
Petroleum Services Corp. and First Interstate Bank of Texas, N.A.,
dated December 13, 1995, as amended by the First Amendment dated June
5, 1996 (set forth as Exhibit 4.3)
**10.10 -- Form of Tax Allocation Agreement
**10.11 -- Form of Indemnification Agreement
*21.1 -- List of subsidiaries of the Company
**23.1 -- Consent of Ernst & Young LLP
+23.2 -- Consent of Fulbright & Jaworski L.L.P. (included in Exhibit 5.1)
**24.1 -- Powers of Attorney from certain members of the Board of Directors of
the Company (contained on page II-5)
**27.1 -- Financial Data Schedule
</TABLE>

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

* Previously filed.

** Filed herewith.

+ To be filed by amendment.

(b) Financial Statement Schedules:

The following financial statement schedule is included in Part II of this
Registration Statement, can be found on the page indicated and should be read in
conjunction with the financial statements and notes thereto:

<TABLE>
<CAPTION>
ITEM PAGE
------------------------------------------------------------------------------ ----
<S> <C>
Report of Independent Auditors on Schedule.................................... S-1
Schedule II -- Valuation and Qualifying Accounts.............................. S-2
</TABLE>

All other financial statement schedules for which provision is made in the
applicable accounting regulations of the Commission are omitted because they are
not required under the related instructions, are inapplicable or the required
information is included elsewhere in the financial statements.

ITEM 17. UNDERTAKINGS.

The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the foregoing
provisions may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the Securities Act or otherwise, the

II-3
<PAGE> 77

Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. If a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.

The undersigned Registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
the Registration Statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of the
Registration Statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

II-4
<PAGE> 78

SIGNATURES

Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Houston, State of Texas,
on June 7, 1996.

DAILEY PETROLEUM SERVICES CORP.

By: /s/ JAMES F. FARR
--------------------------------
James F. Farr
President and Chief Executive
Officer

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints James F. Farr and William D. Sutton, and
each of them, his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to file the same and all
exhibits thereto, and all documents in connection therewith, with the Securities
and Exchange Commission, granting said attorney-in-fact and agent, and each of
them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent or either of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.

Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- -------------------------------------------- ------------------------------ ---------------
<S> <C> <C>
/s/ J. D. LAWRENCE Chairman of the Board June 7, 1996
- --------------------------------------------
J. D. Lawrence

/s/ JAMES F. FARR President and Chief Executive June 7, 1996
- -------------------------------------------- Officer and Director
James F. Farr (Principal Executive
Officer)

/s/ WILLIAM D. SUTTON Senior Vice President, General June 7, 1996
- -------------------------------------------- Counsel, Secretary and
William D. Sutton Director

/s/ DAVID T. TIGHE Senior Vice President, June 7, 1996
- -------------------------------------------- Finance, Chief Financial
David T. Tighe Officer, Treasurer and
Director (Principal
Financial Officer and
Principal Accounting
Officer)
</TABLE>

II-5
<PAGE> 79

REPORT OF INDEPENDENT AUDITORS ON SCHEDULE

To the Board of Directors and Stockholders

of Dailey Petroleum Services Corp.

We have audited the consolidated financial statements of Dailey Petroleum
Services Corp., a Delaware corporation, (as further discussed in Note 1 to the
consolidated financial statements) as of April 30, 1995 and 1996, and for each
of the three years in the period ended April 30, 1996, and have issued our
report thereon dated June , 1996 (included elsewhere in this Registration
Statement). Our audits also included the financial statement schedule listed in
Item 16(b) of this Registration Statement. This schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion based
on our audits.

In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.

Houston, Texas

June , 1996

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

The foregoing report is in the form that will be signed upon completion of
the reorganization of the capital accounts of the Company as described in Note 1
to the consolidated financial statements included elsewhere in this Registration
Statement.

ERNST & YOUNG LLP

Houston, Texas

June 5, 1996

S-1
<PAGE> 80

DAILEY PETROLEUM SERVICES CORP.

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
ADDITIONS
-------------------
CHARGED
BALANCE TO CHARGED
AT COSTS TO BALANCE
BEGINNING AND OTHER AT END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS WRITE-OFFS PERIOD
----------------------- --------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
1994 Allowance for Bad Debt $1,301,000 $184,000 0 $(175,000) $1,310,000
========== ======= == ========= ==========
Inventory Reserve $ 973,000 0 0 $ (21,000) $ 952,000
========== ======= == ========= ==========
1995 Allowance for Bad Debt $1,310,000 $321,000 0 $(275,000) $1,356,000
========== ======= == ========= ==========
Inventory Reserve $ 952,000 0 0 $ (60,000) $ 892,000
========== ======= == ========= ==========
1996 Allowance for Bad Debt $1,356,000 $256,000 0 $(287,000) $1,325,000
========== ======= == ========= ==========
Inventory Reserve $ 892,000 0 0 $ (88,000) $ 804,000
========== ======= == ========= ==========
</TABLE>

S-2
<PAGE> 81

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
- -------------------- ------------------------------------------------------------------------
<S> <C>
+1.1 -- Form of Underwriting Agreement.
**2.1 -- Plan and Agreement of Merger by and between Dailey Petroleum Services
Corp., Dailey Corporation and Dailey Holdings Inc., dated May 31,
1996.
**3.1 -- Restated Certificate of Incorporation of the Company.
+3.2 -- Amended Bylaws of the Company.
+4.1 -- Form of Class A Common Stock Certificate.
4.2 -- See Exhibits 3.1 and 3.2 for provisions of the Restated Certificate
of Incorporation and Amended Bylaws of the Company defining the
rights of the holders of Common Stock.
**4.3 -- Second Amended and Restated Loan Agreement by and between Dailey
Petroleum Services Corp. and First Interstate Bank of Texas, N.A.,
dated December 13, 1995, as amended by First Amendment thereto dated
June 5, 1996.
**4.4 -- Revolving Credit Note in favor of First Interstate Bank of Texas,
N.A., dated December 13, 1995.
**4.5 -- Second Amended and Restated Subordination Agreement by and among
Lawrence Industries, Inc., First Interstate Bank of Texas, N.A. and
Dailey Petroleum Services Corp., dated December 13, 1995.
**4.6 -- Second Amended and Restated Commercial Security Agreement by and
between First Interstate Bank of Texas, N.A. and Dailey Petroleum
Services Corp., dated December 13, 1995.
**4.7 -- Second Amended Notice of Security Interest in Intellectual Property
in Favor of First Interstate Bank of Texas, N.A., dated December 13,
1995.
**4.8 -- Term Note in favor of First Interstate Bank of Texas, N.A., dated
December 1, 1993.
+5.1 -- Opinion of Fulbright & Jaworski L.L.P.
+10.1 -- Form of Relationship Agreement by and between the Company and
Lawrence Industries, Inc.
**10.2 -- Form of Office Lease Agreement by and between the Company as lessee
and Lawrence International, Inc. as lessor
**10.3 -- Form of Service Center Lease Agreement by and between the Company as
lessee and Lawrence International, Inc. as lessor
+10.4 -- Form of Registration Rights Agreement by and between the Company and
Lawrence
+10.5 -- Form of Employment Agreement by and between the Company and certain
senior executive officers
**10.6 -- Dailey Petroleum Services Corp. 1996 Key Employee Stock Plan
**10.7 -- Dailey Petroleum Services Corp. 1996 Non-Employee Director Stock
Option Plan
10.8 -- Second Amended and Restated Loan Agreement by and between Dailey
Petroleum Services Corp. and First Interstate Bank of Texas, N.A.,
dated December 13, 1995, as amended by the First Amendment dated June
5, 1996 (set forth as Exhibit 4.3)
**10.10 -- Form of Tax Allocation Agreement
**10.11 -- Form of Indemnification Agreement
*21.1 -- List of subsidiaries of the Company
</TABLE>

<PAGE> 82

<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
- -------------------- ------------------------------------------------------------------------
<S> <C>
**23.1 -- Consent of Ernst & Young LLP

+23.2 -- Consent of Fulbright & Jaworski L.L.P. (included in Exhibit 5.1)

**24.1 -- Powers of Attorney from certain members of the Board of Directors of
the Company (contained on page II-5)

**27.1 -- Financial Data Schedule
</TABLE>

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

* Previously filed.

** Filed herewith.

+ To be filed by amendment.

<PAGE> 1

PLAN AND AGREEMENT OF MERGER

This Plan and Agreement of Merger (this "Plan") dated May 31, 1996,
is made and entered into pursuant to Section 251 of the General Corporation Law
of the State of Delaware (the "GCLD"), by and between DAILEY CORPORATION, a
Delaware corporation (the "Surviving Corporation"), DAILEY PETROLEUM SERVICES
CORP., a Delaware corporation (the "Merged Corporation", and together with the
Surviving Corporation, collectively the "Constituent Corporations"), and DAILEY
HOLDINGS INC., a Delaware corporation and holder of all of the issued and
outstanding capital stock of the Surviving Corporation ("Holdings").

W I T N E S S E T H :

WHEREAS, the Surviving Corporation is a corporation duly organized and
existing under the laws of the State of Delaware, having been incorporated on
May 20, 1996 and having outstanding capital stock of 5,000,000 shares of Class
B Common Stock, $.01 par value (the "Common Stock of the Surviving
Corporation"), all of which shares are issued and outstanding in the name of
Holdings;

WHEREAS, the Merged Corporation is a corporation duly organized and
existing under the laws of the State of Delaware, having been incorporated on
June 13, 1984, as "Dailey, Inc.", and having changed its name to "Dailey
Petroleum Services Corp." on June 13, 1984, and having an outstanding capital
stock of 2,000 shares of common stock, $1.00 par value (the "Common Stock of
the Merged Corporation"), all of which shares are issued and outstanding in the
name of Lawrence Industries, Inc.;

WHEREAS, the respective Boards of Directors of the Merged Corporation
and the Surviving Corporation deem it advisable and in the best interests of
both corporations that the Merged Corporation be merged with and into the
Surviving Corporation as authorized by the GCLD under and pursuant to the terms
and conditions set forth herein, and the Boards of Directors of the Merged
Corporation and the Surviving Corporation have duly approved this Plan; and

WHEREAS, the Merged Corporation and the Surviving Corporation intend
for this merger to be a merger within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended;

NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements herein contained, and for the purpose of setting forth
the terms and conditions of this merger, the mode of carrying the same into
effect and such other details and provisions as are deemed necessary or
desirable, the parties hereto have agreed and do hereby agree, subject to the
approval or adoption of this Plan by the requisite vote of the stockholders of
the Merged Corporation and by the requisite vote of the stockholders of the
Surviving Corporation, and subject to the conditions set forth herein, as
follows:
<PAGE> 2
ARTICLE I
Merger and Name of Surviving Corporation

At the Effective Time of the Merger (as hereinafter defined), the
Merged Corporation shall be merged with and into the Surviving Corporation,
which shall not be a new corporation, which shall continue its corporate
existence as a Delaware corporation to be governed by the laws of the State of
Delaware, which shall continue to be named "Dailey Corporation" and which shall
maintain a registered office in the State of Delaware at Corporation Trust
Center, 1209 Orange Street, Wilmington, Delaware 19801.

ARTICLE II
Terms and Conditions of Merger

The terms and conditions of the merger are (in addition to those set
forth elsewhere in this Plan) as follows:

(a) At the Effective Time of the Merger:

(1) The Constituent Corporations shall be a
single corporation, which shall be the Surviving Corporation.

(2) The separate existence of the Merged
Corporation shall cease.

(3) The Surviving Corporation shall thereupon and
thereafter possess all of the rights, privileges, powers and
franchises as well of a public as of a private nature, and be
subject to all the restrictions, disabilities and duties of
each Constituent Corporation; and all and singular, the
rights, privileges, powers and franchises of each Constituent
Corporation, and all property, real, personal and mixed, and
all debts due to either Constituent Corporation on whatever
account, as well for stock subscriptions as all other things
in action or belonging to each Constituent Corporation shall
be vested in the Surviving Corporation; and all property,
rights, privileges, powers and franchises, and all and every
other interest shall be thereafter as effectually the property
of the Surviving Corporation as they were of the respective
Constituent Corporations, and the title to any real estate
vested by deed or otherwise in either Constituent Corporation
shall not revert or be in any way impaired by reason of the
merger; but all rights of creditors and all liens upon any
property of either Constituent Corporation shall be preserved
unimpaired, and all debts, liabilities and duties (including
duties to any dissenting stockholder of either of the
Constituent Corporations) of the respective Constituent
Corporations shall thenceforth attach to the Surviving
Corporation and may be enforced against it to the same extent
as if said debts, liabilities and duties had been incurred or
contracted by it. Specifically, but not by way of limitation,
any action or proceeding whether civil, criminal or
administrative, pending by or against either Constituent
Corporation shall be

2
<PAGE> 3
prosecuted as if the merger had not taken place, or the
Surviving Corporation may be substituted in such action or
proceeding.

(4) All corporate acts, plans, policies,
contracts, approvals and authorizations of the Merged
Corporation and its stockholders, Board of Directors,
committees elected or appointed by the Board of Directors,
officers and agents, which were valid and effective
immediately prior to the Effective Time of the Merger shall be
taken for all purposes as the acts, plans, policies,
contracts, approvals and authorizations of the Surviving
Corporation and shall be as effective and binding thereon as
the same were with respect to the Surviving Corporation. The
employees of the Merged Corporation shall become the employees
of the Surviving Corporation and continue to be entitled to
the same rights and benefits which they enjoyed as employees
of the Merged Corporation.

(5) The assets, liabilities, reserves and
accounts of each Constituent Corporation shall be recorded on
the books of the Surviving Corporation at the amounts at which
they, respectively, shall then be carried on the books of such
Constituent Corporation subject to such adjustments or
eliminations of intercompany items as may be appropriate in
giving effect to the merger.

(b) The Board of Directors, and the members thereof, of
the Surviving Corporation immediately prior to the Effective Time of
the Merger shall be deemed to have resigned or been removed at the
Effective Time of the Merger, and the Board of Directors, and the
members thereof, of the Merged Corporation immediately prior to the
Effective Time of the Merger shall be deemed elected to the Board of
Directors of the Surviving Corporation at the Effective Time of the
Merger. The officers of the Surviving Corporation immediately prior
to the Effective Time of the Merger shall be deemed to have resigned
or been removed at the Effective Time of the Merger, and each of the
officers of the Merged Corporation immediately prior to the Effective
Time of the Merger shall be deemed elected, at the Effective Time of
the Merger, to an office of the Surviving Corporation having exactly
the same title, position, responsibilities, duties, authority, and
other terms as the office which such officer held with the Merged
Corporation immediately prior to the Effective Time of the Merger.

ARTICLE III
Capitalization and Conversion of Shares

The total authorized capital stock of the Surviving Corporation shall
be as set forth in the Restated Certificate of Incorporation of the Surviving
Corporation, that is, 20,000,000 shares of Class A Common Stock, par value $.01
per share, 10,000,000 shares of Class B Common Stock, par value $.01 per share,
and 5,000,000 shares of Preferred Stock, par value $.01 per share.

3
<PAGE> 4
The manner and basis of converting the shares of the Constituent
Corporations and the mode of carrying the merger into effect shall be that, as
of the Effective Time of the Merger, (i) each share of the Surviving
Corporation issued and outstanding immediately prior to the Effective Time of
the Merger shall continue to be issued and outstanding without conversion or
alteration of any kind, and (ii) each share of the Merged Corporation shall be
converted automatically into one share of the common stock, par value $.01 per
share, of Holdings.

From and after the Effective Time of the Merger, the holder of shares
in the Surviving Corporation and the Merged Corporation may submit the
certificate or certificates representing such shares to the Surviving
Corporation and to Holdings, respectively, in order to receive the
consideration specified in the preceding paragraph.

ARTICLE IV
Certificate of Incorporation and Bylaws

(a) The Certificate of Incorporation of the Surviving Corporation
as existing and constituted immediately prior to the Effective Time of the
Merger shall be the Certificate of Incorporation of the surviving corporation.

(b) The bylaws of the Surviving Corporation as existing and
constituted immediately prior to the Effective Time of the Merger shall be the
bylaws of the surviving corporation.

ARTICLE V
Other Provisions with Respect to Merger

(a) This Plan shall be submitted to the stockholders of the Merged
Corporation and the stockholders of the Surviving Corporation as provided by
the GCLD. After the approval or adoption thereof by the stockholders of the
Merged Corporation and the stockholders of the Surviving Corporation in
accordance with the requirements of the GCLD, all required documents shall be
executed, filed and recorded and all required acts shall be done in order to
accomplish the merger under the provisions of the GCLD.

(b) This Plan may be terminated at any time prior to the Effective
Time of the Merger, whether before or after action thereon by the stockholders
of the Merged Corporation or the stockholders of the Surviving Corporation, by
mutual consent of the Constituent Corporations, expressed by action of their
respective Boards of Directors.

(c) Each Constituent Corporation shall bear and pay all costs and
expenses incurred by it or on its behalf (including without limitation fees and
expenses of financial consultants, accountants and counsel) in connection with
the consummation of the merger.

4
<PAGE> 5
ARTICLE VI
Approval and Effective Time of the Merger

(a) Subject to the following actions having been taken, the merger
shall become effective on the occurrence of the following events:

(1) this Plan shall be adopted and approved on behalf of
the Merged Corporation and on behalf of the Surviving Corporation in
accordance with the GCLD; and

(2) a Certificate of Merger, setting forth the
information required by, and executed and verified in accordance with,
the GCLD, shall be filed in the office of the Secretary of State of
the State of Delaware (the particular time and date at which such
filing and recording shall be accomplished being herein referred to as
the "Effective Time of the Merger").

(b) If at any time the Surviving Corporation shall consider or be
advised that any further assignment or assurance in law or other action is
necessary or desirable to vest, perfect or confirm, of record or otherwise, in
the Surviving Corporation the title to any property or rights of the Merged
Corporation acquired or to be acquired by or as a result of the merger, the
proper officers and directors of the Merged Corporation and the Surviving
Corporation, respectively, shall be and they hereby are severally and fully
authorized to execute and deliver such deeds, assignments and assurances in law
and take such other action as may be necessary or proper in the name of the
Merged Corporation or the Surviving Corporation to vest, perfect or confirm
title to such property or rights in the Surviving Corporation and otherwise
carry out the purposes of this Plan.

(c) For the convenience of the parties and to facilitate the
filing and recording of this Plan, any number of counterparts hereof may be
executed, and each such counterpart shall be deemed to be an original
instrument.

(d) This Plan and the legal relations between the parties hereto
shall be governed by and construed in accordance with the laws of the State of
Delaware.

(e) This Plan cannot be altered or amended except pursuant to an
instrument in writing signed on behalf of the parties hereto.

5
<PAGE> 6
IN WITNESS WHEREOF, this Plan is executed by the Merged Corporation,
the Surviving Corporation and Holdings as of the date first written above.

DAILEY CORPORATION,
a Delaware corporation

/s/ WILLIAM D. SUTTON
-----------------------------------
William D. Sutton, Secretary

DAILEY PETROLEUM SERVICES CORP.,
a Delaware corporation

/s/ WILLIAM D. SUTTON
-----------------------------------
William D. Sutton, Secretary

DAILEY HOLDINGS INC.,
a Delaware corporation

/s/ WILLIAM D. SUTTON
-----------------------------------
William D. Sutton, Secretary

<PAGE> 1
STATE OF DELAWARE PAGE 1

OFFICE OF THE SECRETARY OF STATE

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

I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY
CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE RESTATED CERTIFICATE OF
"DAILEY CORPORATION", CHANGING ITS NAME FROM "DAILEY CORPORATION" TO "DAILEY
PETROLEUM SERVICES CORP.", FILED IN THIS OFFICE ON THE SIXTH DAY OF JUNE, A.D.
1996, AT 1:01 O'CLOCK P.M.

A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE
COUNTY RECORDER OF DEEDS FOR RECORDING.

[GREAT SEAL OF THE STATE OF DELAWARE]

/s/ EDWARD J. FREEL
------------------------------------
Edward J. Freel, Secretary of State

AUTHENTICATION:
2625481 8100 7976104
DATE:
960164913 06-06-96
<PAGE> 2

DAILEY CORPORATION

RESTATED CERTIFICATE OF INCORPORATION

The present name of the Corporation is Dailey Corporation. Its
original Certificate of Incorporation was filed with the Secretary of State of
the State of Delaware on May 20, 1996, under the name Dailey Corporation. This
Restated Certificate of Incorporation amends and restates the Corporation's
original Certificate of Incorporation. This Restated Certificate of
Incorporation was duly adopted in accordance with Sections 242 and 245 of the
General Corporation Law of the State of Delaware. Upon the filing of this
Restated Certificate of Incorporation with the Secretary of State of the State
of Delaware, the original Certificate of Incorporation of the Corporation shall
be amended and superseded; thenceforth, this Restated Certificate of
Incorporation, including the amendments made hereby, shall be the Certificate
of Incorporation of the Corporation, but the original date of incorporation of
the Corporation shall remain May 20, 1996.

ARTICLE 1

The name of the Corporation is Dailey Petroleum Services Corp.

ARTICLE 2

The address of the registered office of the Corporation in the State
of Delaware is 1209 Orange Street, in the City of Wilmington, County of New
Castle. The name of its registered agent at that address is The Corporation
Trust Company.

ARTICLE 3

The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.

ARTICLE 4

The total number of shares of stock of all classes which the
Corporation has authority to issue is 35,000,000 shares, of which 20,000,000
shares shall be Class A Common Stock, with a par value of $.01 per share
("Class A Common Stock"), 10,000,000 shares shall be Class B Common Stock, with
a par value of $.01 per share ("Class B Common Stock"), and 5,000,000 shares
shall be Preferred Stock, with a par value of $.01 per share ("Preferred
Stock").

<PAGE> 3
The designations and the powers, preferences and rights, and the
qualifications, limitations or restrictions of the shares of each class of
stock are as follows:

PREFERRED STOCK

Preferred Stock may be issued from time to time by the Board of
Directors as shares of one or more series. Subject to the provisions hereof
and the limitations prescribed by law, the Board of Directors is hereby vested
with the authority and is expressly authorized, prior to issuance, by adopting
resolutions providing for the issuance of, or providing for a change in the
number of, shares of any particular series and, if and to the extent from time
to time required by law, by filing a certificate pursuant to the General
Corporation Law of the State of Delaware (or other law hereafter in effect
relating to the same or substantially similar subject matter), to establish or
change the number of shares to be included in each such series and to fix the
designation and powers, preferences and rights and the qualifications and
limitations or restrictions thereof relating to the shares of each such series,
all to the maximum extent permitted by the General Corporation Law of the State
of Delaware as in effect on the date hereof or as hereafter amended. The
vested authority of the Board of Directors with respect to each series shall
include, but not be limited to, the determination of the following:

(a) the distinctive serial designation of such series and
the number of shares constituting such series (provided that the
aggregate number of shares constituting all series of Preferred Stock
shall not exceed 5,000,000);

(b) The annual dividend rate, if any, on shares of such
series and the preferences, if any, over any other series (or of any
other series over such series) with respect to dividends, and whether
dividends shall be cumulative and, if so, from which date or dates;

(c) whether the shares of such series shall be redeemable
and, if so, the terms and conditions of such redemption, including the
date or dates upon and after which such shares shall be redeemable,
and the amount per share payable in case of redemption, which amount
may vary under different conditions and at different redemption dates;

(d) the obligation, if any, of the Corporation to
purchase or redeem shares of such series pursuant to a sinking fund or
purchase fund and, if so, the terms of such obligation;

(e) whether shares of such series shall be convertible
into, or exchangeable for, shares of stock of any other class or
classes, any stock of any series of the same class or any other class
or classes or any evidences of indebtedness and, if so, the terms and
conditions of such conversion or exchange, including the price or
prices or the rate or rates of conversion or exchange and the terms of
adjustment, if any;

2
<PAGE> 4
(f) whether the shares of such series shall have voting
rights in addition to the voting rights provided by law, and, if so,
the terms of such voting rights, including, without limitation,
whether such shares shall have the right to vote with the Class A
Common Stock and Class B Common Stock on issues on an equal, greater
or lesser basis;

(g) the rights of the shares of such series in the event
of a voluntary or involuntary liquidation, dissolution, winding up or
distribution of assets of the Corporation;

(h) whether the shares of such series shall be entitled
to the benefit of conditions and restrictions upon (i) the creation of
indebtedness of the Corporation or any subsidiary, (ii) the issuance
of any additional stock (including additional shares of such series or
of any other series) or (iii) the payment of dividends or the making
of other distributions on the purchase, redemption or other
acquisition by the Corporation or any subsidiary of any outstanding
stock of the Corporation; and

(i) any other relative, rights, powers, preferences,
qualifications, limitations or restrictions thereof, including, but
not limited to, any that may be determined in connection with the
adoption of any stockholder rights plan after the date hereof,
relating to any such series.

Except where otherwise set forth in the resolution or resolutions
adopted by the Board of Directors providing for the issuance of any series of
Preferred Stock, the number of shares comprising such series may be increased
or decreased (but not below the number of shares then outstanding) from time to
time by like action of the Board of Directors. The shares of Preferred Stock
of any one series shall be identical with the other shares in the same series
in all respects except as to the dates from and after which dividends thereon
shall cumulate, if cumulative.

Shares of any series of Preferred Stock that have been redeemed
(whether through the operation of a sinking fund or otherwise) or purchased by
the Corporation, or which, if convertible or exchangeable, have been converted
into, or exchanged for, shares of stock of any other class or classes or any
evidences of indebtedness shall have the status of authorized and unissued
shares of Preferred Stock and may be reissued as a part of the series of which
they were originally a part or may be reclassified and reissued as part of a
new series of Preferred Stock to be created by resolution or resolutions of the
Board of Directors or as part of any other series of Preferred Stock, all
subject to the conditions or restrictions on issuance set forth in the
resolution or resolutions adopted by the Board of Directors providing for the
issuance of any series of Preferred Stock and to any filing required by law.

The number of authorized shares of Preferred Stock may be increased or
decreased by the affirmative vote of the holders of a majority of the stock of
the Corporation entitled to vote without the separate vote of holders of
Preferred Stock as a class.

3
<PAGE> 5
CLASS A COMMON STOCK AND CLASS B COMMON STOCK

Subject to all of the rights of the Preferred Stock, and except as may
be expressly provided with respect to the Preferred Stock herein, by law or by
the Board of Directors pursuant to this Article 4:

(a) dividends may be declared and paid or set apart for
payment upon Class A Common Stock and Class B Common Stock out of any
assets or funds of the Corporation legally available for the payment
of dividends and may be payable in cash, stock or otherwise; provided,
however, that any dividend declared on either shares of Class A Common
Stock shares of Class B Common Stock shall be declared on shares of
Class A Common Stock and shares of Class B Common Stock alike as if
all such shares were of the same class and series;

(b) the holders of Class A Common Stock and Class B
Common Stock shall have the exclusive right to vote for the election
of directors (other than in the case of newly created directorships
and vacancies, which shall be filled solely by the remaining directors
as set forth in Article 6 hereof) and on all other matters requiring
stockholder action, with each share of Class A Common Stock entitling
the holder thereof to one (1) vote on any matter submitted to the
stockholders for a vote, and each share of Class B Common Stock
entitling the holder thereof to seven (7) votes on any matter
submitted to the stockholders for a vote, provided that such holder of
the Class B Common Stock is a member of the Lawrence Group (as
hereinafter defined); and every reference in this Restated Certificate
of Incorporation or the Bylaws of the Corporation, as in effect from
time to time, to a majority or other portion of stock shall refer to
such majority or other proportion of the votes of such stock;
provided, however, that, except as required by law, holders of Class A
Common Stock and Class B Common Stock shall, on every matter submitted
to the stockholders for a vote, vote as a single class, and in no
case, except as required by law, shall the holders of Class A Common
Stock or Class B Common Stock be entitled to vote separately as a
class, and provided that the number of authorized shares of any class
or classes of stock may be increased or decreased (but not below the
number of shares thereof then outstanding) by the affirmative vote of
a majority of the votes of the voting stock of the Corporation; and as
used in this Restated Certificate of Incorporation, the "Lawrence
Group" shall mean Lawrence Industries, Inc., a Delaware corporation,
and its subsidiaries and affiliates (collectively, "Lawrence
Industries"), James D. Lawrence, his spouse, children, grandchildren,
nieces and nephews (collectively, the "Lawrence Family"), trusts or
other entities controlled by, or for the benefit of, any member of the
Lawrence Family or any other affiliate of Lawrence Industries or the
Lawrence Family;

4
<PAGE> 6
(c) upon any merger, consolidation, reorganization, or
other business combination of the Corporation and any other entity,
the consideration to be received per share by the holders of the Class
A Common Stock and Class B Common Stock as a result of such merger,
consolidation, reorganization, or other business combination shall be
identical, except that the voting rights of any securities received by
holders of Class A Common Stock may differ from the voting rights of
any securities received by holders of Class B Common Stock to the
extent that the voting rights differ between shares of Class A Common
Stock and shares of Class B Common Stock;

(d) neither the outstanding shares of Class A Common
Stock nor the outstanding shares of Class B Common Stock may be
subdivided, consolidated, reclassified or otherwise changed unless
contemporaneously therewith the outstanding shares of the other class
of common stock are subdivided, consolidated, reclassified or
otherwise changed in the same proportion and in the same manner; and

(e) upon the voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, the net assets of the
Corporation shall be distributed pro rata to the holders of Class A
Common Stock and Class B Common Stock, without distinction as to
class, in accordance with the number of shares held by each such
holder.

CONVERSION OF CLASS B COMMON STOCK TO CLASS A COMMON STOCK

Each share of Class B Common Stock may be converted, at any time and
at the election of the holder, into one share of Class A Common Stock. In
addition, each share of Class B Common Stock shall be converted automatically
into one share of Class A Common Stock at the time it is sold, transferred or
otherwise disposed of to any third party other than a member of the Lawrence
Group. Upon any conversion of the Class B Common Stock into Class A Common
Stock, the holder thereof shall be entitled to only one (1) vote per share on
any matter submitted to the stockholders for a vote.

DENIAL OF PREEMPTIVE RIGHTS AND CUMULATIVE VOTING

No holder of any stock of the Corporation shall be entitled as such,
as a matter of right, to subscribe for or purchase any part of any new or
additional issue of stock of any class whatsoever of the Corporation, or of
securities convertible into stock of any class whatsoever, whether now or
hereafter authorized, or whether issued for cash or other consideration or by
way of dividend.

No holder of any stock of the Corporation shall have the right of
cumulative voting at any election of directors or upon any other matter.

5
<PAGE> 7
ARTICLE 5

The Corporation is to have perpetual existence.

ARTICLE 6

All power of the Corporation shall be vested in and exercised by or
under the direction of the Board of Directors except as otherwise provided
herein or required by law.

For the management of the business and for the conduct of the affairs
of the Corporation, and in further creation, definition, limitation and
regulation of the power of the Corporation and of its directors and
stockholders, it is further provided:

Section 1. Elections of Directors. Elections of Directors need not
be by written ballot unless the Bylaws of the Corporation shall so provide.

Section 2. Number, Election and Terms of Directors. Except as
otherwise fixed pursuant to the provisions of Article 4 hereof relating to the
rights of the holders of any class or series of stock having a preference over
the Class A Common Stock and Class B Common Stock as to dividends or upon
liquidation to elect additional directors under specified circumstances, the
number of directors of the Corporation shall be fixed from time to time by or
in the manner provided by the Bylaws; provided that such number shall not be
less than three nor more than twelve. The directors, other than those who may
be elected by the holders of any class or series of stock having preference
over the Class A Common Stock and Class B Common Stock as to dividends or upon
liquidation, shall be classified, with respect to the time for which they
severally hold office, into three classes, each as nearly equal in number as
possible, as shall be provided in the manner specified in the Bylaws, one class
(Class I) to hold office initially for a term expiring at the annual meeting of
stockholders to be held in 1997, another class (Class II) to hold office
initially for a term expiring at the annual meeting of stockholders to be held
in 1998, and another class (Class III) to hold office initially for a term
expiring at the annual meeting of stockholders to be held in 1999, with the
members of each class to hold office until their successors are duly elected
and qualified or until their earlier resignation or removal. At each annual
meeting of the stockholders of the Corporation, the successors to the class of
directors whose term expires at that meeting shall be elected to hold office
for a term expiring at the annual meeting of stockholders to be held in the
third year following the year of their election.

Section 3. Stockholder Nomination of Director Candidates. Advance
notice of nominations for the election of Directors, other than by the Board of
Directors or a Committee thereof, shall be given in the manner provided in the
Bylaws.

Section 4. Newly Created Directorships and Vacancies. Except as
otherwise fixed pursuant to the provisions of Article 4 hereof relating to the
rights of the holders of any class or series of stock having a preference over
Class A Common Stock and Class B Common Stock as to dividends or upon
liquidation to elect directors under

6
<PAGE> 8
specified circumstances, newly created directorships resulting from any
increase in the number of directors and any vacancies on the Board of Directors
resulting from death, resignation, disqualification, removal or other cause
shall be filled solely by the affirmative vote of not less than two-thirds of
the remaining directors then in office, even though less than a quorum of the
Board of Directors. Any director elected to fill a vacancy resulting from
death, resignation, disqualification, removal or other cause shall hold office
for the remainder of the full term of the class of directors in which the
vacancy occurred and until such director's successor shall have been elected
and qualified or until his or her earlier resignation or removal. Newly
created directorships shall be within such class of directors as shall be
required to maintain, as nearly as possible, an equal number of directors in
each class. Any director elected to fill a newly created directorship shall
hold office for the term of the class in which such directorship has been
created and until such director's successor shall have been elected and
qualified or until his or her earlier resignation or removal. No decrease in
the number of directors constituting the Board of Directors shall shorten the
term of any incumbent director.

Section 5. Removal of Directors. Subject to the rights of any class
or series of stock having preference over Class A Common Stock and Class B
Common Stock as to dividends or upon liquidation to elect directors under
specified circumstances, any director may be removed from office only for
cause. Except as may otherwise be provided by law, cause for removal shall be
construed to exist only if during a director's term as a director of the
Corporation: (a) the director whose removal is proposed has been convicted of a
felony by a court of competent jurisdiction and such conviction is no longer
subject to direct appeal; (b) such director has been adjudicated by a court of
competent jurisdiction to be liable for gross negligence, recklessness or
misconduct in the performance of his or her duty to the Corporation in a manner
of substantial importance to the Corporation and such adjudication is no longer
subject to direct appeal; or (c) such director has been adjudicated by a court
of competent jurisdiction to be mentally incompetent, which mental incompetency
directly affects his or her ability as a director of the Corporation, and such
adjudication is no longer subject to direct appeal.

Section 6. Stockholder Action. Any action required or permitted to
be taken by the stockholders of the Corporation at any annual or special
meeting may be taken without a meeting, without prior written notice and
without a vote if a consent or consents in writing setting forth the action so
taken shall be signed by the holders of outstanding voting stock of the
Corporation having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted and shall be delivered to the
Corporation by delivery to its registered office in Delaware, its principal
place of business or the Secretary of the Corporation. Except as otherwise
required by law and subject to the rights of holders of any class or series of
stock having a preference over Class A Common Stock and Class B Common Stock as
to dividends or upon liquidation, special meetings of stockholders of the
Corporation may be called only by the Chairman of the Board, the Chief
Executive Officer or the Board of Directors pursuant to a resolution approved
by a majority of the entire Board of Directors.

7
<PAGE> 9
Section 7. Bylaw Amendments. The Board of Directors shall have the
power to make, alter, amend and repeal the Bylaws (except so far as the Bylaws
adopted by the stockholders shall otherwise provide). Any Bylaws made by the
Board of Directors under the powers conferred hereby may be altered, amended or
repealed by the directors or by the stockholders; provided, however, that the
Bylaws shall not be altered, amended or repealed and no provision inconsistent
therewith shall be adopted (i) by stockholder action without the affirmative
vote of the holders of at least 66-2/3% of the voting power of all the shares
of the Corporation entitled to vote generally in the election of directors,
voting together as a single class or (ii) by director action without the
affirmative vote of not less than two-thirds of the directors then in office.

Section 8. Liability of Directors.

A. No director of the Corporation shall be liable to the
Corporation or any of its stockholders for monetary damages for breach
of fiduciary duty as a director; provided that this Article 6 shall
not eliminate or limit the liability of a director of the Corporation:
(i) for any breach of the director's duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omissions not in
good faith or that involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the General Corporation
Law of the State of Delaware, or (iv) for any transaction from which
the director derived an improper personal benefit.

B. If the General Corporation Law of the State of
Delaware hereafter is amended to authorize the further elimination or
limitation of the liability of directors of the Corporation, then the
liability of a director of the Corporation shall be limited to the
fullest extent permitted by the General Corporation Law of the State
of Delaware, as so amended, and such limitation of liability shall be
in addition to, and not in lieu of, the limitation on the liability of
a director of the Corporation provided by the provisions of this
Section 8 of this Article 6.

C. Any repeal or modification of this Section 8 of this
Article 6 shall be prospective only and shall not adversely affect any
right or protection of a director of the Corporation existing at the
time of such repeal or modification.

D. The Corporation shall be obligated at all times to
maintain the effectiveness of Bylaw provisions providing for the
mandatory indemnification of the directors of the Corporation to the
maximum extent permitted by the General Corporation Law of the State
of Delaware.

Section 9. Fundamental Changes. No agreement of merger or
consolidation that is required by Delaware law to be submitted to the
stockholders of the Corporation for approval or rejection pursuant to
Subchapter IX of the General Corporation Law of the State of Delaware shall
approved without the affirmative vote of the holders of at least 66-2/3% of the
voting power of all shares of the Corporation entitled to vote thereon. No
resolution authorizing the sale, lease or exchange of all or substantially all
of the property or assets of the Corporation or the liquidation or winding up
of the Corporation shall be adopted by the stockholders pursuant to Subchapter
X of the General Corporation Law of the State of Delaware without the
affirmative vote of the

8
<PAGE> 10
holders of at least 66-2/3% of the voting power of all shares of the
Corporation entitled to vote thereon.

Section 10. Amendment. Notwithstanding anything contained in this
Restated Certificate of Incorporation to the contrary, the affirmative vote of
the holders of at least 66-2/3% of the voting power of all shares of the
Corporation entitled to vote generally in the election of directors, voting
together as a single class, shall be required to alter, amend, adopt any
provision inconsistent with, or repeal, this Article 6 or any provision hereof.

ARTICLE 7

The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Restated Certificate of Incorporation, in the
manner now or hereafter prescribed by statute and this Restated Certificate of
Incorporation, and all rights conferred upon stockholders herein are granted
subject to this reservation.

THE UNDERSIGNED, being an authorized officer of the Corporation,
pursuant to the General Corporation Law of the State of Delaware, does make
this Certificate, hereby declaring that this is my act and deed and the facts
stated herein are true. Accordingly, I have hereunto set my hand this 6th
day of June, 1996.

/s/ WILLIAM D. SUTTON
-----------------------------------
William D. Sutton,
Secretary

<PAGE> 1

SECOND AMENDED AND RESTATED LOAN AGREEMENT

BY AND BETWEEN

DAILEY PETROLEUM SERVICES CORP.

AND

FIRST INTERSTATE BANK OF TEXAS, N.A.

DECEMBER 13, 1995
<PAGE> 2
TABLE OF CONTENTS

<TABLE>
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ARTICLE 1. DEFINITIONS AND GENERAL RULES . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.1 General Rules . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.2 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

ARTICLE 2. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . 15
Section 2.1 Corporate Authority . . . . . . . . . . . . . . . . . . . . . . . 15
Section 2.2 Financial Statements . . . . . . . . . . . . . . . . . . . . . . 16
Section 2.3 Governmental Approvals . . . . . . . . . . . . . . . . . . . . . 16
Section 2.4 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 2.5 No Event of Default . . . . . . . . . . . . . . . . . . . . . . . 16
Section 2.6 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 2.7 Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 2.8 Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 2.9 Tax Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 2.10 Liens and Security Interests . . . . . . . . . . . . . . . . . . 17
Section 2.11 Availability of Records . . . . . . . . . . . . . . . . . . . . 18
Section 2.12 Regulations U and X . . . . . . . . . . . . . . . . . . . . . . 18
Section 2.13 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Section 2.14 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Section 2.15 Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Section 2.16 Environmental Condition of the Property . . . . . . . . . . . . 19
Section 2.17 Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 2.18 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

ARTICLE 3. THE CREDIT FACILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 3.1 Term Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 3.2 Revolving Line of Credit . . . . . . . . . . . . . . . . . . . . 21
Section 3.3 Advances and Letters of Credit . . . . . . . . . . . . . . . . . 22
Section 3.4 Conversions and Renewals . . . . . . . . . . . . . . . . . . . . 23
Section 3.5 Loan Formula . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Section 3.6 Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Section 3.7 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Section 3.8 Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Section 3.9 Computation of Fees and Interest . . . . . . . . . . . . . . . . 26
Section 3.10 Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Section 3.11 No Default . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 3.12 Certain Agreements Regarding Letters of Credit . . . . . . . . . 27
Section 3.13 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 3.14 Illegality . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Section 3.15 Increased Cost and Reduced Return . . . . . . . . . . . . . . . 29
Section 3.16 Funding Losses . . . . . . . . . . . . . . . . . . . . . . . . . 30
Section 3.17 Eurodollar Rate Protection . . . . . . . . . . . . . . . . . . . 31
</TABLE>

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<TABLE>
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ARTICLE 4. CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Section 4.1 Conditions Precedent to the Initial Revolving Credit Loan
or Letter of Credit . . . . . . . . . . . . . . . . . . . . . 31
Section 4.2 Additional Conditions Precedent to the Loan . . . . . . . . . . . 32

ARTICLE 5. AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Section 5.1 Financial Statements . . . . . . . . . . . . . . . . . . . . . . 33
Section 5.2 Payment of Obligations . . . . . . . . . . . . . . . . . . . . . 35
Section 5.3 Notice; Litigation . . . . . . . . . . . . . . . . . . . . . . . 35
Section 5.4 Maintenance of Corporate Existence and Properties . . . . . . . 35
Section 5.5 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Section 5.6 Payment of Taxes . . . . . . . . . . . . . . . . . . . . . . . . 36
Section 5.7 Accounts Receivable. . . . . . . . . . . . . . . . . . . . . . . 36
Section 5.8 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . 36
Section 5.9 Inspection . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Section 5.10 Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Section 5.11 Current Ratio . . . . . . . . . . . . . . . . . . . . . . . . . 36
Section 5.12 Indebtedness Ratio . . . . . . . . . . . . . . . . . . . . . . . 36
Section 5.13 Working Capital . . . . . . . . . . . . . . . . . . . . . . . . 36
Section 5.14 Tangible Net Worth . . . . . . . . . . . . . . . . . . . . . . . 37
Section 5.15 Debt Service Coverage Ratio . . . . . . . . . . . . . . . . . . 37
Section 5.16 Revenue Producing Assets . . . . . . . . . . . . . . . . . . . . 37
Section 5.17 Environmental Compliance . . . . . . . . . . . . . . . . . . . . 37
Section 5.18 Notification of Releases of Hazardous Materials . . . . . . . . 37
Section 5.19 Environmental Indemnification . . . . . . . . . . . . . . . . . 37
Section 5.20 Chattel Paper . . . . . . . . . . . . . . . . . . . . . . . . . 38

ARTICLE 6. NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Section 6.1 Limitations on Indebtedness . . . . . . . . . . . . . . . . . . . 39
Section 6.2 Limitations on Liens . . . . . . . . . . . . . . . . . . . . . . 39
Section 6.3 Limitations on Contingent Liabilities . . . . . . . . . . . . . . 39
Section 6.4 Loans, Advances and Investments . . . . . . . . . . . . . . . . . 39
Section 6.5 Limitations on Fundamental Changes; Disposition of Assets . . . . 40
Section 6.6 Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Section 6.7 ERISA Compliance . . . . . . . . . . . . . . . . . . . . . . . . 40
Section 6.8 Nature of Business . . . . . . . . . . . . . . . . . . . . . . . 41
Section 6.9 Transactions with Affiliates and Other Persons . . . . . . . . . 41
Section 6.10 Subordinated Indebtedness . . . . . . . . . . . . . . . . . . . 41

ARTICLE 7. DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Section 7.1 Events of Default . . . . . . . . . . . . . . . . . . . . . . . . 41
Section 7.2 Optional Acceleration . . . . . . . . . . . . . . . . . . . . . . 43
Section 7.3 Automatic Acceleration . . . . . . . . . . . . . . . . . . . . . 43
Section 7.4 Additional Remedies . . . . . . . . . . . . . . . . . . . . . . . 44

ARTICLE 8. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Section 8.1 No Waiver; Cumulative Remedies . . . . . . . . . . . . . . . . . 44
Section 8.2 Survival of Agreements . . . . . . . . . . . . . . . . . . . . . 44
</TABLE>

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<TABLE>
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Section 8.3 Successors . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Section 8.4 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Section 8.5 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Section 8.6 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Section 8.7 Expenses; Documentary Taxes . . . . . . . . . . . . . . . . . . . 46
Section 8.8 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Section 8.9 Participations . . . . . . . . . . . . . . . . . . . . . . . . . 47
Section 8.10 Controlling Document . . . . . . . . . . . . . . . . . . . . . . 48
Section 8.11 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Section 8.12 Table of Contents; Descriptive Headings . . . . . . . . . . . . 48
Section 8.13 Waivers and Release of Claims . . . . . . . . . . . . . . . . . 48
Section 8.14 Grant of Security Interest; Ratification of Documents . . . . . 48
Section 8.15 Restatement and Amendment . . . . . . . . . . . . . . . . . . . 49
Section 8.16 No Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Section 8.17 Acknowledgement . . . . . . . . . . . . . . . . . . . . . . . . 49
SECTION 8.18 GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . . 49
SECTION 8.19 SUBMISSION TO JURISDICTION . . . . . . . . . . . . . . . . . . . 49
Section 8.20 Arbitration Program . . . . . . . . . . . . . . . . . . . . . . 50
SECTION 8.21 NO ORAL AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . 50
</TABLE>

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<PAGE> 5
SECOND AMENDED AND RESTATED LOAN AGREEMENT

This SECOND AMENDED AND RESTATED LOAN AGREEMENT is entered into as of
December 13, 1995, by and between DAILEY PETROLEUM SERVICES CORP., a Delaware
corporation (the "Borrower"), and FIRST INTERSTATE BANK OF TEXAS, N.A., a
national banking association (the "Bank").

WHEREAS, the Borrower and the Bank entered into an Amended and
Restated Loan Agreement dated as of December 1, 1993 (the "Prior Loan
Agreement") whereby, upon the terms and conditions therein stated, the Bank
agreed to make available to the Borrower a credit facility to refinance certain
indebtedness, to expand the Borrower's Revenue Producing Assets and for working
capital and other general corporate purposes; and

WHEREAS, the Borrower has requested that the Bank amend and restate
the Prior Loan Agreement to (i) make available to the Borrower an additional
revolving credit facility and (ii) to modify and amend certain other provisions
of the Prior Loan Agreement; and

WHEREAS, the Prior Loan Agreement is being amended and restated by
this Agreement in order to reflect the agreements of the parties hereto and to
make the requested amendments on the terms and conditions set forth herein; and

WHEREAS, this Agreement does not extinguish the obligations of the
Borrower under, or discharge or release the liens and security interests of,
the Prior Loan Agreement, the Term Note, the Loan Documents (as defined in the
Prior Loan Agreement) or any other document executed in connection with,
evidencing, securing or pertaining to the Prior Loan Agreement and the Term
Note; and nothing contained in this Agreement shall be construed as a
substitution or novation of the Indebtedness under the Prior Loan Agreement,
the Term Note or the instruments securing same, all of which shall remain in
full force and effect except as modified hereby or by any other instruments
executed in connection with this Agreement;

NOW, THEREFORE, to induce the Bank to extend credit and financial
accommodations to the Borrower and in consideration of the mutual agreements,
provisions and covenants contained herein and such other good and valuable
considerations, the receipt and sufficiency of which are acknowledged hereby,
the parties hereto hereby agree to amend and restate the Prior Loan Agreement
as follows:

ARTICLE 1. DEFINITIONS AND GENERAL RULES. The following definitions and
general rules will apply hereto:

Section 1.1 General Rules. For the purposes of this Agreement:

(a) The terms defined in this Article 1, unless the
context requires otherwise, will have the meanings applied to them in Section 1
and will include the plural as well as the singular. Additional definitions
may be found in the preamble and throughout this Agreement;

(b) All accounting terms not otherwise defined herein
will have the meanings assigned to them in accordance with GAAP; and
<PAGE> 6
(c) The words "herein," "hereof," "hereunder" and words
of similar import refer to this Agreement as a whole and not to a particular
article, section, paragraph or other subdivision.

Section 1.2 Definitions. As used in this Agreement, the following
terms will have the following meanings unless the context requires otherwise:

Accounts means with respect to any Person all of such Person's
accounts, chattel paper, contract rights, instruments and retail installment
contracts arising out of goods sold or leased (and in each case actually
delivered) or for services rendered by such Person.

Affiliate of any Person means any Person that, directly or
indirectly, controls or is controlled by or is under common control with such
Person. For the purposes of this definition, "control" (including, with
correlative meanings, the terms "controlled by" and "under common control
with"), as used with respect to any Person, means the possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of such Person, whether through ownership of voting securities or by
contract or otherwise.
Affiliate Subordinated Indebtedness means the Indebtedness of
the Borrower from the Junior Creditor that is subordinated to the prior payment
of the Obligations to the Bank pursuant to the terms and conditions of the
Affiliate Subordination Agreement.

Affiliate Subordination Agreement means that certain Amended
and Restated Subordination Agreement dated as of December 1, 1993 by and among
the Bank, the Borrower and the Junior Creditor, as the same may be amended or
modified at any time or from time to time.

Agreement means this second amended and restated loan
agreement as originally executed or hereafter renewed, extended, modified or
amended.

Applicable Margin means (i) with respect to Prime Rate Loans,
zero percent (0%); and (ii) with respect to Eurodollar Rate Loans, two percent
(2%).

Assignment of Leases means (i) that certain Assignment of
Leases and Rents, executed effective as of December 1, 1993, by International
and Borrower to the Bank, filed for record on December 2, 1993 in the office of
the County Clerk of Montgomery County, Texas under County Clerk's File No.
9364358, and (ii) one or more other assignments of leases and rents in form and
substance acceptable to the Bank, in each case as the same may be renewed,
modified, extended, supplemented or rearranged, at any time or from time to
time.

Basic Rate means the variable per annum rate of interest at
all times equal to one-half of one percent (1/2%) plus the Prime Rate, such
Basic Rate to change when and as the Prime Rate changes.

Borrowing means a borrowing hereunder consisting of Revolving
Credit Loans made to and the issuance of Letters of Credit for the account of
the Borrower on the same day by the Bank pursuant to Section 3.2 of this
Agreement.

-2-
<PAGE> 7
Business Day means (i) a day (other than Saturday, Sunday or a
legal holiday) on which banks in Houston, Texas, are open for business, and
(ii) if the applicable Business Day relates to any Eurodollar Rate Loan, a day
which is a "Business Day" described in clause (i) hereof and which is also a
day for trading by and between banks in the London interbank Eurodollar market.

Capital Lease means any lease of any property (whether real,
personal or mixed) that, in conformity with GAAP, should be accounted for as a
capital lease on the balance sheet of a Person.

Cash Equivalents mean any of the following: (a) securities
with maturities of one hundred eighty (180) days or less from the date of
acquisition thereof issued or fully guaranteed or insured as to payment of
principal and interest by the United States or any agency thereof, (b)
certificates of deposit and bankers acceptances with maturities of one hundred
eighty (180) days or less from the date of acquisition thereof issued by, and
deposit accounts at, any commercial bank having capital and surplus equal to or
greater than $250,000,000 and whose letters of credit are rated at least A-1 by
Standard & Poor's Corporation or P-1 by Moody's Investors Service, Inc., (c)
commercial paper of a domestic issuer rated at least either A-1 by Standard &
Poor's Corporation or P-1 by Moody's Investors Service, Inc. with maturities
of one hundred eighty (180) days or less from the date of acquisition thereof,
(d) money market mutual funds which are only allowed to purchase the types of
securities described in clause (a) of this definition, (e) repurchase
agreements with a term of thirty (30) days or less and entered into with a
commercial bank meeting the requirements of clause (b) of this definition and
which repurchase agreements are secured by first a security interest on
obligations of the type described in clause (a) of this definition that have a
market value (exclusive of accrued interest) at least equal to the amount of
each respective repurchase agreement, and (f) securities (other than "margin
stock" as such term is defined in Regulation U) rated at least either BBB by
Moody's Investors Service, Inc. or BBB by Standard & Poor's Corporation with
maturities of one hundred eighty (180) days or less from the date of
acquisition thereof.

Cash Flow means, for any period, the sum of: (i) the Net
Income for such period, plus (ii) to the extent that any of the items referred
to in any of clauses (A) through (B) below were deducted in calculating such
Net Income: (A) interest expense of such Person and its Subsidiaries for such
period, and (B) depreciation and amortization expense of such Person and its
Subsidiaries for such period.

CERCLA means the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, 42 U.S.C. Section 9601, et seq., as
amended.

Chattel Paper means a writing or writings which evidence both
a monetary obligation and a security interest in or a lease of specific goods,
including, without limitation, short-term rental agreements relating to
downhole drilling tools and other equipment.

Closing Date means the date on which all of the conditions
precedent stated in Article 4 hereof have been met to the Bank's satisfaction
or waived by the Bank in writing (and which in any event must occur no later
than December 31, 1995).

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<PAGE> 8
Code means the Internal Revenue Code of 1986, as amended from
time to time, any predecessor statute and any statute enacted in replacement
thereof.

Collateral means the properties and assets described in
Section 3.10 hereof.

Contingent Liabilities means any and all liabilities of a
Person, direct or indirect, for or in connection with the obligations, stock or
payment of dividends of any other Person, whether such liabilities arise by
guaranty, endorsement, agreement to purchase or repurchase, agreement to lease,
agreement to supply or advance funds (including, without limitation, agreements
to maintain working capital, solvency or other balance sheet conditions or
agreements to purchase stock or make capital contributions) or otherwise;
provided, however, that agreements to purchase or repurchase goods or services
and agreements to lease property entered into in the ordinary course of a
Person's business shall not be deemed to be "Contingent Liabilities."

Conversion Date means any date on which the Borrower elects to
convert a Prime Rate Loan to a Eurodollar Rate Loan or a Eurodollar Rate Loan
to a Prime Rate Loan.

Credit Exposure means the sum of the undrawn amount of any
Letters of Credit then outstanding plus the aggregate amount of drafts paid
under Letters of Credit for which the Bank has not been reimbursed.

Current Assets means at any date all assets of a Person that,
in accordance with GAAP, would be included as current assets on a balance sheet
of such Person on such date.

Current Liabilities means at any date all liabilities of a
Person that, in accordance with GAAP, would be included as current liabilities
on a balance sheet of such Person on such date.

Debt Service means, at any date, current maturities of
long-term Indebtedness (including, without limitation, Subordinated
Indebtedness), plus interest expense, in each instance determined in accordance
with GAAP.

Deed of Trust means (i) that certain Deed of Trust, Security
Agreement, and Financing Statement, executed effective as of December 1, 1993
by International and the Borrower in favor of P. Michael Wells, Jr., Trustee,
for the benefit of the Bank, filed for record on December 2, 1993 in the office
of the County Clerk of Montgomery County, Texas under County Clerk's File No.
9364357, and (ii) one or more other deeds of trust, security agreements and
financing statements in form and substance acceptable to the Bank, in each
case, as the same may be renewed, modified, extended, supplemented or
rearranged, at any time or from time to time.

Default means any event specified in Section 7.1 of this
Agreement, regardless of whether any requirement for the giving of notice or
the lapse of time has been satisfied.

Default Rate means the lesser of (i) a rate that is five
percentage points above the Prime Rate, as it varies, or (ii) the Maximum Rate,
as it varies.

Eligible Accounts means, at any time, the amount equal to the
aggregate unpaid amount of a Person's Accounts for which invoices have been
issued and payment for which is

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<PAGE> 9
due within 60 days, less any down payments; provided, however, there shall be
excluded from Eligible Accounts (without duplication and only to the extent
otherwise included in Eligible Accounts):

(i) any amount billed and remaining unpaid more
than 120 days from issuance (or any amount remaining unpaid more than
90 days from the due date in the case of instruments, lease agreements
and chattel paper),

(ii) any amount due from suppliers of materials or
inventory to a Person but only to the extent that such Person is
indebted to such suppliers with respect to materials or supplies
purchased by such Person from such suppliers,

(iii) any Account in which the Bank does not have a
valid and perfected first priority lien, mortgage or security
interest,

(iv) any Account arising from sales to or services
rendered for any Subsidiary or Affiliate of such Person,

(v) any Account arising from sales or leases to
or services rendered for any Governmental Authority (unless such
Governmental Authority is a Governmental Authority of the United
States of America and such Governmental Authority has properly
acknowledged the Bank's first priority security interests in such
Accounts to the satisfaction of the Bank with appropriate assignments,
to the Bank, and the Bank preapproves the same in its reasonable
discretion),

(vi) any Account arising from sales on a "sale or
return", "sale on approval" (as such terms are defined in the UCC),
consignment, or guaranteed sale basis,

(vii) any contra account and any Account which is
or may be subject to a right of setoff, claim or defense,

(viii) any Account of a Person due from a customer
whose principal place of business is located outside the United States
of America, and any Foreign Account of a Person,

(ix) any Account owed by an account debtor to a
Person, if more than twenty-five percent (25%) of the balances then
outstanding on accounts owed by such account debtor and any Affiliate
of the account debtor to such Person have remained unpaid for more
than one hundred twenty (120) days from the dates of their original
invoices (or have remained unpaid for more than ninety (90) days from
the due date in the case of instruments, lease agreements and chattel
paper),

(x) the amount of all discounts, allowances,
rebates, credits and adjustments claimed and available to such
Accounts,

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<PAGE> 10
(xi) the amount billed for or representing
retainage, if any, until all prerequisites to the immediate payment of
retainage have been satisfied,

(xii) any Account which, when aggregated with all
other Accounts of the same account debtor, constitutes more than 10%
of such Person's total Eligible Accounts before deductions made
pursuant to this clause, and

(xiii) any Account reasonably rejected by the Bank
as unsuitable (the Bank to advise the Borrower which accounts are
rejected with 10 days advance notice).

Eligible Foreign Accounts means, at any time, the amount equal
to the aggregate unpaid amount (without duplication) of a Person's (a) Accounts
due from a customer whose principal place of business is located outside of the
United States of America and (b) Foreign Accounts; provided that such Accounts
and Foreign Accounts are due from and payable by the foreign subsidiaries of
Texaco, Inc., Shell Oil Company, British Petroleum Company, Halliburton
Company, Weatherford International, Inc., Dresser Industries, Inc.,
Schlumberger, Ltd., Conoco, Inc., Amoco Corporation, Phillips Petroleum
Company, Atlantic Ritchfield Company, Chevron Corporation, Mobil Corporation,
Exxon Corporation or Baker Hughes, Inc. and otherwise meet the requirements of
Eligible Accounts (other than clauses (iii) and (viii) of the definition of
Eligible Accounts).

Eligible L/C-Backed Accounts means, at any time, the amount
equal to the aggregate unpaid amount of a Person's Accounts that meet the
requirements of Eligible Accounts (other than clauses (iii) and (viii) of the
definition of Eligible Accounts) and that are 100% backed by irrevocable
letters of credit (y) that are issued or confirmed by a bank (an "Approved
Issuer") that is organized under the laws of the United States of America or a
State thereof and has capital and surplus in excess of $250,000,000, and are
otherwise in from, scope and substance acceptable to the Bank (including,
without limitation, expiration dates and conditions, if any, to the right of
the beneficiary to draw drafts thereunder), and (z) that have been transferred
or assigned to the Bank, as applicable, so as to perfect a first priority
security interest therein in favor of the Bank, including, without limitation,
delivery of the original letters of credit and any and all amendments thereto
to the Bank.

Environmental Indemnity means one or more Environmental Risk
Agreements in form and substance acceptable to the Bank, to be executed on
behalf of the Borrower and International, and covering the Pledged Real
Property, as the same may be renewed, modified, extended, supplemented or
rearranged, at any time or from time to time.

Environmental Laws means any and all laws, subsequent
enactments, amendments and modifications, including without limitation,
federal, state and local laws, statutes, ordinances, rules, regulations,
permits, licenses, approvals, interpretations and orders of courts or
Governmental Authorities relating to the protection of human health or the
environment, including, but not limited to, requirements pertaining to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transportation, handling, reporting, licensing, permitting, investigation or
remediation of Hazardous Materials.

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<PAGE> 11
Environmental Questionnaire means one or more environmental
questionnaires in form and substance acceptable to the Bank, to be executed on
behalf of International, and covering the Pledged Real Property, as the same
may be renewed, modified, extended, supplemented or rearranged, at any time or
from time to time.

EPA means the United States Environmental Protection Agency,
and any successor agency.

ERISA means the Employment Retirement Income Security Act of
1974, as amended from time to time, and any regulation promulgated thereunder.

Eurocurrency Liabilities has the meaning assigned to such term
in Regulation D of the Federal Reserve Board, as in effect from time to time.

Eurodollar Rate means, for each Interest Period for any
Eurodollar Rate Loan, an interest rate per annum (rounded upward, if necessary,
to the nearest one-sixteenth of one percent (1/16%)) determined pursuant to the
following formula:

Eurodollar Rate = LIBOR
----------------------------------------------
1.00 - Eurodollar Reserve Percentage

Where,

Eurodollar Reserve Percentagemeans the maximum
reserve percentage in effect on the date LIBOR for such Interest
Period is determined under regulations issued from time to time by the
Federal Reserve Board for determining the maximum reserve requirement
(including any emergency, supplemental or other marginal reserve
requirement) with respect to liabilities or assets consisting of or
including Eurocurrency Liabilities having a term equal to such
Interest Period; and

LIBOR means the rate of interest per annum determined
by the Bank to be the arithmetic mean (rounded upward, if necessary,
to the nearest one-hundredth of one percent (1/100%)) of the rates of
interest per annum notified to the Bank as the rate of interest at
which dollar deposits in an amount approximately equal to the amount
of the Loan to be made or continued as, or converted into, a
Eurodollar Rate Loan by the Bank and having a maturity equal to such
Interest Period would be offered to major banks in the London
Interbank market at their request at or about 11:00 a.m. (London Time)
on the second Business Day before the commencement of such Interest
Period.

Eurodollar Rate Loan means a Revolving Credit Loan that bears
interest based on the Eurodollar Rate.

Event of Default means any event specified in Section 7.1 of
this Agreement, provided that any requirement in connection with such event for
the giving of notice or lapse of time has been satisfied.

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<PAGE> 12
Foreign Accounts means with respect to any Person all of such
Person's Accounts which are generated from the sale or lease of goods or the
provision of services from installations of such Person outside of the United
States unless the invoices with respect to such Accounts are payable by the
account debtor from a location within the United States.

Foreign Subsidiaries means the foreign Subsidiaries of the
Borrower listed on Schedule 2.13 hereto.

GAAP means generally accepted accounting principles set forth
in the Opinions of the Accounting Principles Board of the American Institute of
Certified Public Accountants and in statements by the Financial Accounting
Standards Board that are applicable to the circumstances as of the date of
determination; and the requisite that such principles be applied on a
consistent basis shall mean that the accounting principles observed in a
current period are comparable in all material respects to those applied in a
preceding period.

Governmental Authority means any nation or government, any
state, province, county, city or other political subdivision, agency or
instrumentality exercising executive, legislative, judicial, regulatory or
administrative functions of or pertaining to government.

Hazardous Materials means any substance or material which is
or becomes regulated by, or which may form the basis of liability under, any
Environmental Law.

Hazardous Materials Contamination means the contamination
(whether presently existing or hereafter occurring) of the buildings,
facilities or improvements, air, soil, groundwater or surface water of the
Property or other property as a result of the presence of Hazardous Materials
on the Property at any time.

Indebtedness means the total liabilities of a Person
calculated in accordance with GAAP consistently applied.

Insolvency or Insolvent means, with reference to a Person
other than a partnership, (i) the sum of its debts is greater than all of its
properties, at a fair valuation, exclusive of any properties transferred,
concealed, or removed with intent to hinder, delay, or defraud creditors, or
(ii) is generally not able to pay its debts as they become due; and with
reference to a partnership, a Person is insolvent hereunder if (a) its
financial condition is such that the sum of its debts is greater than the
aggregate of, at a fair valuation, (i) all of such partnership's properties
exclusive of properties transferred, concealed or removed with intent to
hinder, delay or defraud creditors of the partnership, and (ii) the sum of the
excess of the value of each general partner's non-partnership properties,
exclusive of properties transferred, concealed or removed with intent to
hinder, delay or defraud creditors, over such partner's non-partnership debts,
or (b) is generally not able to pay its debts as they become due.

Interest Payment Date means, with respect to each Eurodollar
Rate Loan, the last day of each Interest Period applicable to such Loan, and
with respect to Prime Rate Loans, the last day of each calendar month and on
each date a Prime Rate Loan is converted into a Eurodollar Rate Loan; provided,
however, that if any Interest Period for Eurodollar Rate Loan exceeds three (3)
months, interest shall also be paid on the date which falls three (3) months
after the beginning of such Interest Period.

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<PAGE> 13
Interest Period means, with respect to any Eurodollar Rate
Loan, the period commencing on the Business Day such Loan is disbursed or
continued or on the Conversion Date on which such Loan is converted to such
Eurodollar Rate Loan and ending on the numerically corresponding day (or, if
there is no numerically corresponding day, on the last day) in the calendar
month that is one, two, three or six months thereafter, as selected by the
Borrower in its Notice of Borrowing or Notice of Conversion/Continuation;
provided that:

(i) if any Interest Period pertaining to a
Eurodollar Rate Loan would otherwise end on a day which is not a
Business Day, that Interest Period shall be extended to the next
succeeding Business Day unless, in the case of a Eurodollar Rate Loan,
the result of such extension would be to carry such Interest Period
into another calendar month, in which event such Interest Period shall
end on the immediately preceding Business Day; and

(ii) no Interest Period for any Loans shall extend
beyond the Termination Date.

Interest Rate Contracts means interest rate swap agreements,
interest rate cap agreements, interest rate collar agreements, interest rate
insurance, and other agreements or arrangements designed to provide protection
against fluctuations in interest rates.

International means Lawrence International, Inc., a Delaware
corporation and Affiliate of the Borrower.

Junior Creditor means the Parent.

Lease Subordination Agreements means one or more lease
subordination agreements in form and substance acceptable to the Bank, to be
executed by each Person that leases or occupies all or any part of the Pledged
Real Property, as the same may be modified or amended, at any time or from time
to time.

Lending Office means the office of the Bank set forth in
Section 8.8 hereof or such other office or offices of the Bank as the Bank may
from time to time specify to the Borrower.

Letter of Credit Agreements means the application and letter
of credit agreements now or hereafter executed by the Borrower, such agreements
to be on the Bank's standard form (with such changes thereto as the Borrower
and the Bank may agree from time to time) and completed in form and substance
satisfactory to the Bank.

Letter of Credit means a letter of credit issued pursuant to
Section 3.2 hereof and Letters of Credit means the letters of credit so issued.

Lien shall mean any interest in property securing an
obligation owed to, or a claim by, a Person other than the owner of the
property, whether such interest is based on the common law, statute or
contract, and including but not limited to the security interest or lien
arising from a mortgage, encumbrance, pledge, conditional sale or trust receipt
or a lease, consignment or bailment for security purposes. The term "Lien"
shall include reservations, exceptions, encroachments, easements,
rights-of-way, covenants, conditions, restrictions, leases and other title

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<PAGE> 14
exceptions and encumbrances affecting the property. For the purposes of this
Agreement, a Person shall be deemed to be the owner of any property which it or
he has acquired or holds subject to a conditional sale agreement, financing
lease or other arrangement pursuant to which title to the property has been
retained by or vested in some other Person for security purposes.

Line of Credit means the line of credit provided for in
Section 3.2 hereof.

Line of Credit Commitment means the commitment of the Bank to
make loans pursuant to Section 3.2 in the maximum aggregate amount not to
exceed the sum of $3,000,000 at any time outstanding.

Loan means the Term Loan or a Revolving Credit Loan, and Loans
means the Term Loan and the Revolving Credit Loans.

Loan Documents means this Agreement, the Notes, the Letter of
Credit Agreements, the Security Instruments, the Affiliate Subordination
Agreement, the Interest Rate Contracts between the Borrower and the Bank, and
any and all other documents and instruments executed in connection therewith or
contemplated thereby.

Loan Formula means at any time the amount equal to the sum of
(without duplication) (i) an amount equal to 80% of the Eligible Accounts of
the Borrower, plus (ii) an amount equal to 80% of the Eligible Foreign Accounts
of the Borrower and the Foreign Subsidiaries, plus (iii) an amount equal to
100% of the Eligible L/C-Backed Accounts of the Borrower and the Foreign
Subsidiaries, in each case as of the last day of the preceding month.

Loan Formula Certificate means a loan formula certificate in
substantially the form attached hereto as Exhibit E, setting forth the
computation of the Loan Formula as of the close of business on the last day of
the month immediately preceding the day that such loan formula certificate is
delivered on behalf of the Borrower to the Bank pursuant to Section 5.1 hereof.

Mandatory Prepayments means such payments from the Borrower to
the Bank as may be necessary to reduce the aggregate principal amount of
indebtedness and liabilities of the Borrower under the Revolving Credit Note
(including total Credit Exposure) to an amount permitted by the Loan Formula
and this Agreement.

Material Adverse Effect means a material adverse effect on (a)
the business, assets, operations, or financial or other condition of the
Borrower and its Subsidiaries and International taken as a whole or (b) the
Borrower's or International's ability to perform under any Loan Document to
which it is a party or to pay the Obligations in accordance with the terms of
this Agreement and the other Loan Documents or the Bank's rights to enforce or
collect the Obligations.

Maturity Date means the earlier to occur of (a) December 1,
2000 or (b) the date on which the Term Note shall be accelerated in accordance
with the provisions of this Agreement.

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<PAGE> 15
Maximum Rate means the maximum lawful rate of interest
permitted by applicable usury laws, now or hereafter enacted, which interest
rate shall change when and as such laws change, to the extent permitted by such
laws, effective on the day such change in such laws becomes effective;
provided, however, that the term "Maximum Rate" shall mean a rate of interest
equal to five percentage points above the Prime Rate, as it varies, if there is
no Maximum Rate under applicable usury laws.

Net Income means, for any period, a Person's consolidated net
income (or loss) after income and franchise taxes determined in conformity with
GAAP, but excluding: (a) the income of any other Person (other than
Subsidiaries) in which such Person or any of its Subsidiaries has an ownership
interest, unless and only to the extent received by such Person or its
Subsidiary in a cash distribution; (b) any after-tax gains or losses
attributable to asset dispositions or adjustments to the carrying value of
non-current assets; and (c) to the extent not included in clauses (a) and (b)
above, any after-tax extraordinary non-cash gains or extraordinary non-cash
losses.

Note means the Term Note or the Revolving Credit Note, and
Notes means the Term Note and the Revolving Credit Note, as any or all of the
same may be renewed, rearranged, modified, increased or extended at any time or
from time to time.

Notice of Borrowing means a notice given by the Borrower to
the Bank pursuant to Section 3.3 of this Agreement, in substantially the form
of Exhibit F to this Agreement.

Notice of Conversion/Continuation means a notice given by the
Borrower to the Bank pursuant to Section 3.4 of this Agreement, in
substantially the form of Exhibit G to this Agreement.

Obligations means the obligations and liabilities of the
Borrower to the Bank evidenced by this Agreement, the Notes, the Letter of
Credit Agreements, the other Loan Documents, the obligations and liabilities of
International to the Bank evidenced by the Loan Documents to which
International is a party, and any and all other indebtedness, liabilities and
obligations whatsoever of the Borrower and, or International to the Bank,
whether direct or indirect, absolute or contingent, due or to become due, and
whether now existing or hereafter arising, and howsoever evidenced, whether
joint or several, and whether evidenced by note, draft, acceptance, guaranty,
open account, letter of credit, surety agreement or otherwise; its being
contemplated by the parties hereto that the Borrower may become indebted to the
Bank in further sum or sums.

Parent means Lawrence Industries, Inc., a Delaware corporation
and owner of 100% of the capital stock of the Borrower and International.

Permitted Liens means (i) liens created by the Security
Instruments or this Agreement, (ii) liens for taxes, assessments and other
governmental charges not yet payable, or the validity of which are being
contested in good faith by appropriate proceedings and as to which adequate
reserves have been set aside on the books of the Borrower, (iii) deposits or
pledges to secure the payment of workmen's compensation, unemployment insurance
or other social security benefits or obligations, public or statutory
obligations, surety or appeal bonds or other obligations of a like general
nature incurred in the ordinary course of business,

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<PAGE> 16
(iv) landlords', mechanics', materialmen's, warehousemen's, carriers', vendors'
or other like liens arising by operation of law in the ordinary course of
business securing obligations which are not overdue for a period longer than 90
days, or which are being contested in good faith by appropriate proceedings and
against which the Borrower has provided adequate reserves in accordance with
GAAP, (v) reservations, exceptions, encroachments, easements, rights-of-way,
covenants, conditions, restrictions, leases and other minor title exceptions
with respect to property which do not materially impair the use of such
property in the operation of the business of the Borrower or International, as
applicable, or the value of such property, (vi) inchoate statutory liens, liens
arising under ERISA to secure current service pension liabilities as they are
incurred under the provisions of Plans from time to time in effect, (vii)
purchase money Liens or purchase money security interests on any fixed asset
acquired or held by the Borrower in the ordinary course of business, securing
Indebtedness incurred or assumed for the purpose of financing all or any part
of the cost of acquiring such fixed asset; provided that any such Lien attaches
to such fixed asset concurrently with or within thirty (30) days after the
acquisition thereof and provided that at the time any such purchase money Lien
or purchase money security interest attaches, the aggregate principal amount of
all Indebtedness outstanding at any one time that is secured by such purchase
money Lien or purchase money security interest when aggregated with the
outstanding amount of all other Indebtedness permitted in clauses (ii) and
(iii) of Section 6.1 hereof shall not exceed $700,000, (viii) adverse claims
and disputes that (A) arise with respect to the Borrower's Accounts, (B) arise
in the ordinary course of the Borrower's business, (C) were not incurred in
connection with the borrowing of money or obtaining of advances or credit, (D)
do not in the aggregate (I) materially detract from the value of the Borrower's
Accounts or (II) materially impair, or interfere with, the operation of the
Borrower's business, and (E) would not otherwise cause or result in a Default
or Event of Default, and (ix) liens permitted in the Security Instruments or
otherwise by the Bank in writing.

Person means any corporation, partnership, trust, estate,
individual, unincorporated business entity or governmental department,
administrative agency or instrumentality.

Plan means any plan subject to Title IV of ERISA and
maintained by the Borrower or any Subsidiary or any such plan to which the
Borrower or any Subsidiary is required to contribute on behalf of its
employees.

Pledged Real Property means all that certain real property and
the improvements located thereon, and all rights and appurtenances thereunto
belonging, as described with particularity on Exhibit "B" attached hereto and
made a part hereof for all purposes.

Prime Rate means the variable per annum rate of interest most
recently announced by the Bank as its "prime rate," with the understanding that
the Bank's "prime rate" may be one of several base rates and serves as a basis
upon which effective rates of interest from time to time are calculated for
loans making reference thereto and may not be the lowest of the Bank's base
rates.

Prime Rate Loan means a Revolving Credit Loan that bears
interest based on the Prime Rate.

Prior Note means that certain promissory note dated January
15, 1993, executed by the Borrower and payable to the order of the Bank in the
original principal amount of

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<PAGE> 17
$4,875,370.04, which note was given in renewal, rearrangement, increase and
modification of, but not in novation or discharge of, that certain revolving
credit note dated November 8, 1991, executed by the Borrower and payable to the
order of the Bank in the original principal amount of $5,000,000.

Property means any right or interest of the Borrower, its
Subsidiaries and, or International in or to property of any kind whatsoever,
whether real, personal or mixed and whether tangible or intangible.

Regulation U means Regulation U of the Board of Governors of
the Federal Reserve System, 12 C.F.R., Part 221.

Regulation X means Regulation X of the Board of Governors of
the Federal Reserve System, 12 C.F.R., Part 224.

Revolving Credit Loan means an advance by the Bank to the
Borrower pursuant to Section 3.2(a) of this Agreement and may be a Prime Rate
Loan or a Eurodollar Rate Loan, and Revolving Credit Loans means all advances
by the Bank to the Borrower pursuant to Section 3.2(a) of this Agreement.

Revolving Credit Note means a promissory note of the Borrower
payable to the order of the Bank in substantially the form attached hereto as
Exhibit D evidencing the indebtedness of the Borrower to the Bank arising under
the Line of Credit, as such note may be replaced, renewed, extended, modified,
supplemented, or rearranged from time to time or at any time.

Revenue Producing Assets means, for any Person, such Person's
inventory of (i) revenue producing tools, (ii) components, subassemblies, and
expendable (replacement) parts of or for revenue producing tools, (iii) revenue
producing tools and expendable (replacement) parts therefor in production, and
(iv) raw materials used to build the assets described in the foregoing clauses
(i), (ii) and (iii).

Security Agreement means (i) that certain Amended and Restated
Security Agreement dated as of December 1, 1993, between the Borrower, as
debtor, and the Bank, as secured party, amending and restating that certain
Security Agreement dated as of February 10, 1992, between the Borrower, as
debtor, and the Bank, as secured party, and (ii) any one or more other security
agreements in form and substance acceptable to the Bank, to be executed on
behalf of the Borrower, in each instance, as the same may be renewed, modified,
extended, supplemented, rearranged, amended, or restated, at any time or from
time to time.

Security Instruments means the Assignment of Leases, the Deed
of Trust, the Environmental Indemnity, the Environmental Questionnaire, the
Lease Subordination Agreements, the Tenant Estoppel Letters and the Security
Agreement, together with all financing statements and other documents necessary
for recordation of the same or perfection of the liens, mortgages and security
interests granted thereby.

Subordinated Indebtedness means the Indebtedness of a Person,
calculated in accordance with GAAP consistently applied, heretofore or
hereafter incurred, that, by the express

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<PAGE> 18
terms of the instrument evidencing or creating such Indebtedness or by the
terms of a subordination agreement in form and substance satisfactory to the
Bank, is validly and effectively made subordinate and subject in right to
payment, to whatever extent the Bank may require, to the prior payment of the
Obligations to the Bank.

Subsidiary means, with respect to any Person, (a) any
corporation of which more than 50 percent of the issued and outstanding
securities having ordinary voting power for the election of directors is owned
or controlled, directly or indirectly, by such Person and, or, one or more of
its Subsidiaries and (b) any partnership, association, joint venture or other
entity in which such Person, directly or indirectly through Subsidiaries, has a
greater than 50% equity interest at the time.

Tangible Net Worth of a Person means, at any time, the total
assets of such Person less the total liabilities of such Person as set forth on
its balance sheet at such date, prepared in accordance with GAAP consistently
applied, plus Subordinated Indebtedness of such Person, except that the sum of
the following shall be excluded therefrom: (i) goodwill, including any amounts
(however designated on such balance sheet) representing the cost of acquisition
of Subsidiaries in excess of underlying tangible assets, unless an appraisal of
such assets made by a reputable firm of appraisers acceptable to the Bank at
the time of acquisition indicates sufficient value to cover such excess, (ii)
patents, trademarks, copyrights, intangibles and other similar assets, and
(iii) any treasury stock.

Tenant Estoppel Letters means one or more tenant estoppel
letters, in form and substance acceptable to the Bank, to be executed by each
Person that leases or occupies all or any part of the Pledged Real Property, as
the same may be modified or amended, at any time or from time to time.

Termination Date means the earlier to occur of (i) December
13, 1996, or (ii) the date on which the Line of Credit Commitment is terminated
pursuant to the terms hereof.

Term Loan means any extension of credit by the Bank to the
Borrower pursuant to Section 3.1 of this Agreement.

Term Note means the promissory note dated December 1, 1993,
executed by the Borrower and payable to the order of the Bank in the original
principal amount of $10,000,000 (a copy of which is attached hereto as Exhibit
A), as such note may be replaced, renewed, extended, modified, supplemented, or
rearranged from time to time or at any time.

UCC means the Texas Business and Commerce Code as presently
enacted or hereafter amended.

U.S. Subsidiaries means any Subsidiary incorporated under the
laws of the United States of America or any state thereof.

Working Capital means, at any time, the excess of the Current
Assets of a Person over the Current Liabilities of such Person.

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ARTICLE 2. REPRESENTATIONS AND WARRANTIES. The Borrower represents, warrants
and agrees as follows:

Section 2.1 Corporate Authority. Each of the Borrower, its
Subsidiaries and International is a corporation duly incorporated, validly
existing and in good standing under the laws of the state or jurisdiction, as
the case may be, of its incorporation and is duly licensed, qualified to do
business and in good standing in each jurisdiction in which the ownership of
its property or the conduct of its business requires such licensing and
qualification and in which failure to be so licensed or qualified would have a
Material Adverse Effect, and has all powers and all permits, consents and
authorizations necessary to own and operate its properties and to carry on its
business as presently conducted. The execution, delivery and performance of
this Agreement by the Borrower, the borrowings hereunder and the execution and
delivery of the Notes and the other Loan Documents by the Borrower and
International, as applicable, (i) have been duly authorized by proper corporate
proceedings, and (ii) will not contravene, or constitute a default under, any
provision of applicable law or regulation or of the Articles of Incorporation
or Bylaws of the Borrower, its Subsidiaries and International, or of any
mortgage, indenture, contract, agreement or other instrument, or any judgment,
order or decree, binding upon the Borrower, its Subsidiaries or International.
No consent of the Borrower's, or any of its Subsidiaries' or International's
shareholders or any holder of any Indebtedness of the Borrower, any of its
Subsidiaries, or International is required as a condition to the validity of
this Agreement or any other Loan Document. This Agreement, the Notes, and the
other Loan Documents, when duly executed and delivered in accordance with this
Agreement, will constitute legal, valid and binding obligations of the
Borrower, its Subsidiaries and International in accordance with their
respective terms.

Section 2.2 Financial Statements. The audited annual financial
statements of the Borrower at April 30, 1995 and the interim financial
statements of the Borrower for the five months ended September 30, 1995, and
the related statements of income and retained earnings and cash flow for the
periods then ended, copies of which have been delivered to the Bank, fairly
present the financial position of the Borrower and its Subsidiaries at April
30, 1995 and September 30, 1995, and the results of its operations and the
changes in its financial position for the periods then ended in conformity with
GAAP applied on a basis consistent with the preceding period; provided,
however, that the interim financial statements of the Borrower shall not be
required to include statements of retained earnings and cash flow, and shall
not be required to contain footnote disclosures in accordance with GAAP. Such
financial statements are true and correct in all material respects and have
been prepared in accordance with GAAP consistently followed throughout the
periods involved. No material adverse change has occurred since September 30,
1995, in the financial position or in the results of operations of the Borrower
and its Subsidiaries or in any of their businesses.

Section 2.3 Governmental Approvals. No approvals of any Governmental
Authority having jurisdiction over the Borrower, any of its Subsidiaries, or
International are necessary to permit the Borrower, any of its Subsidiaries or
International to enter into this Agreement, the Note and the other Loan
Documents, to borrow hereunder and to grant security as provided herein and
therein.

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<PAGE> 20
Section 2.4 Litigation.

(a) As of the date of execution of this Agreement, except
as set forth on Schedule 2.4 hereto, there is no action, suit or proceeding
pending or, to the knowledge of the Borrower, threatened against the Borrower,
any of its Subsidiaries or International before any court or Governmental
Authority which, if such action, suit or proceeding were adversely determined,
(i) would subject the Borrower, any of its Subsidiaries or International to any
liability not fully covered by insurance (subject to normal deductibles), and
(ii) would have a Material Adverse Effect.

(b) Except as set forth on Schedule 2.4 hereto, there is
no action, suit or proceeding pending or, to the knowledge of the Borrower,
threatened against the Borrower, any of its Subsidiaries or International
before any court or Governmental Authority which, if such action, suit or
proceeding were adversely determined, would have a Material Adverse Effect.

Section 2.5 No Event of Default. No Default or Event of Default has
occurred and is continuing.

Section 2.6 Use of Proceeds. The proceeds of the Term Loan have been
used by the Borrower (i) to refinance the outstanding principal balance of the
Prior Note on the Closing Date, (ii) for the expansion of the Borrower's
Revenue Producing Assets, and (iii) the remainder, for the general corporate
purposes of the Borrower. The proceeds of the Revolving Credit Loans will be
used by the Borrower for working capital purposes. All loans evidenced by the
Notes are and shall be "business loans," as such term is used in the Depository
Institutions Deregulation and Monetary Control Act of 1980, as amended, and
such loans are for business or commercial purposes and not primarily for
personal, family, household or agricultural use, as such terms are used or
defined in Texas Revised Civil Statutes, Article 5069-1.04, Texas Credit Code,
Regulation Z promulgated by the Board of Governors of the Federal Reserve
System, and Titles I and V of the Consumer Credit Protection Act.

Section 2.7 Properties. Each of the Borrower, its Subsidiaries and
International has and will continue to have in all material respects good and
indefeasible title to all of its assets and properties, free and clear of all
liens, mortgages, security interests and other encumbrances, except for
Permitted Liens.

Section 2.8 Status. Neither the Borrower, any of its Subsidiaries
nor International is (i) subject to regulation as a "public utility" or "public
service corporation" or the equivalent under any applicable federal or state
law, (ii) an "investment company" or a company "controlled" by an "investment
company" or an "investment advisor" within the meaning of the Investment
Company Act of 1940, as amended, or (iii) a "holding company" or a "subsidiary
company" of a "holding company" or an "affiliate" of a "holding company" or of
a "subsidiary company" of a "holding company" within the meaning of the Public
Utilities Holding Company Act of 1935, as amended.

Section 2.9 Tax Returns. Each of the Borrower, its Subsidiaries and
International has filed all United States tax returns and all city, state and
foreign tax returns required to be filed by it, or obtained extensions of time
for filing such returns (without penalty), and has paid, or made provisions for
the payment of, all taxes which have become due pursuant to any such return

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<PAGE> 21
or pursuant to any assessment received by the Borrower, any of its Subsidiaries
or International, as applicable, except such taxes and assessments, if any, as
are being contested in good faith and as to which adequate reserves have been
provided in accordance with GAAP, and to the best of the Borrower's knowledge,
such returns properly reflect in all material respects any United States income
tax, foreign tax, state tax and city tax of the Borrower, any of its
Subsidiaries or International, as applicable, for the periods covered thereby.

Section 2.10 Liens and Security Interests. The security interests,
mortgages and liens attaching to the Collateral will constitute at all times
valid, perfected and enforceable first priority security interests, mortgages
and liens in favor of the Bank, subject to no prior or superior lien, mortgage,
security interest or other encumbrance, except Permitted Liens. Before any
funding under the Notes, the Borrower has taken and has caused its Subsidiaries
and International to take, or will have participated with the Bank in taking,
all necessary action (including making all necessary filings) to provide the
Bank with first priority perfected security interests, mortgages and liens in
the Collateral under the laws of all applicable jurisdictions. Notwithstanding
anything contained herein (a) with respect to equipment in which a security
interest would be perfected by taking possession of, or noting a lien on, a
certificate of title or similar document, the Borrower shall not be required to
take action to perfect security interests in such equipment, (b) with respect
to equipment which is leased to lessees located in jurisdictions where no UCC-1
financing statement in favor of the Bank has been filed, the Borrower shall be
required to sign and file a UCC-1 financing statement only if requested to do
so by the Bank in writing, (c) to the extent equipment or inventory is located
outside the United States in the ordinary course of the Borrower's business,
the Borrower shall not be required to perfect the security interest of the Bank
in such Collateral, and (d) the Borrower shall not be required to perfect the
security interest of the Bank in Foreign Accounts except to the extent that
such security interest can be perfected by filing in the United States.

Section 2.11 Availability of Records. The Borrower will, and will
cause each of its Subsidiaries and International to, permit any representative,
accountant, officer, employee, or attorney of the Bank to (i) visit and inspect
any of their properties, (ii) examine their books and financial records, (iii)
verify the due investment and application of the proceeds of the Note in
accordance with Section 2.6 hereof, and (iv) discuss their affairs, finances
and accounts with their officers and independent certified public accountants,
all at such reasonable times and during reasonable business hours, and as often
as the Bank may deem necessary.

Section 2.12 Regulations U and X. No part of the proceeds received
by the Borrower hereunder will be used, directly or indirectly, for the purpose
of purchasing or carrying, or for payment in full or in part of Indebtedness
which was incurred for the purpose of purchasing or carrying, any "margin
stock," as such term is defined in Regulation U. No part of the proceeds
received by the Borrower from the loans made hereunder will be used for any
purpose which violates Regulation X.

Section 2.13 Subsidiaries. Except as set forth on Schedule 2.13
hereto, neither the Borrower nor any of its Subsidiaries has any Subsidiaries
or investments in any Person (other than Cash Equivalents).

Section 2.14 ERISA. Each of the Borrower, its Subsidiaries and
International is in compliance in all material respects with the applicable
provisions of ERISA and, to the best of

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<PAGE> 22
the Borrower's knowledge, no "reportable event," as such term is defined in
Section 4043 of ERISA, has occurred with respect to any Plan of the Borrower,
its Subsidiaries or International.

Section 2.15 Solvency. Neither (a) the Borrower, (b) the Borrower
and its Subsidiaries taken as a whole, or (c) International, is Insolvent and,
after giving effect to the transactions contemplated hereby and by the other
Loan Documents, neither (a) the Borrower, (b) the Borrower and its Subsidiaries
taken as a whole, or (c) International will become Insolvent as a result
thereof. Each of (a) the Borrower, (b) the Borrower and its Subsidiaries taken
as a whole, and (c) International is and will be able to pay its debts as they
become due, and has and will have capital sufficient to carry on its business
and all businesses in which it is about to engage; owns and will own property
having a value, both at fair valuation and at present fair salable value,
greater than the amount required to pay its debts and obligations; and, after
giving effect to the transactions contemplated hereby and by the other Loan
Documents, neither (a) the Borrower, (b) the Borrower and its Subsidiaries
taken as a whole, or (c) International will have incurred, intended to incur,
or believe that it has incurred, debts beyond its ability to pay as such debts
become due.

Section 2.16 Environmental Condition of the Property.

(a) The location, construction, occupancy, operation,
condition and use of the Property do not violate any applicable law, statute,
ordinance, rule, regulation, order or determination of any Governmental
Authority, or any restrictive covenant or deed restriction (recorded or
otherwise) affecting the Property, including without limitation all applicable
zoning ordinances and building codes, flood disaster, occupational health and
safety laws and Environmental Laws where such violation could reasonably be
expected to have a Material Adverse Effect.

(b) Without limitation of (a) above, neither the Property
nor the Borrower, any of its Subsidiaries or International is in violation of
or subject to any existing, pending or threatened administrative enforcement
proceeding, notice of violation, administrative or consent order or agreement,
litigation or settlement by any Governmental Authority or subject to any
investigatory or remedial obligations under any Environmental Laws with respect
to the presence or suspected presence of Hazardous Materials Contamination
where such violation, proceeding, notice, order, agreement, litigation,
settlement or obligation would have a Material Adverse Effect.

(c) Neither the Borrower, any of its Subsidiaries nor
International is subject to any liability or obligation, where such liability
or obligation could reasonable be expected to have Material Adverse Effect,
relating to (i) the environmental conditions on, under or about the Property
which violate Environmental Laws, including without limitation, the air, soil,
surface and ground water conditions at the Property; or (ii) the use,
management, handling, transport, treatment, generation, storage, disposal,
release or discharge of any Hazardous Materials which violate Environmental
Laws.

(d) The Borrower, its Subsidiaries and International have
obtained or are pursuing all permits, licenses or similar authorizations
required under any Environmental Law to

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<PAGE> 23
construct, occupy, operate or use, or relating to the existence of buildings,
improvements, facilities, fixtures and equipment forming a part of the
Property.

(e) The Borrower, each of its Subsidiaries and
International is not aware that any Hazardous Materials are now located on the
Property or have escaped or been released into the environment, or deposited,
spilled, leaked, discharged, or disposed of at, on, from, under or near the
Property or any portion thereof when the maintenance of such Hazardous
Materials on the Property or such escape, release, deposit, spill, leak,
discharge or disposal could reasonably be expected to have a Material Adverse
Effect. In addition, (a) no portion of the Property is being used nor, to the
knowledge of the Borrower, or its Subsidiaries, or International has been used
by any Person at any previous time for the generation, disposal, storage,
treatment, processing or other handling of Hazardous Materials in violation of
Environmental Laws, and (b) no part of the Property is affected by any
Hazardous Materials Contamination, in either case where such use or if such
effect could reasonably be expected to have a Material Adverse Effect.

(f) To the best of Borrower's, its Subsidiaries' and
International's knowledge, no property adjoining or within a one-half mile
radius of any Property is being used, or has been used at any previous time,
for the generation, treatment, storage, processing, disposal or other handling
of Hazardous Materials in violation of Environmental Laws, where such use could
reasonably be expected to have a Material Adverse Effect.

(g) The Property is not currently on, and to Borrower's
and the Subsidiaries' knowledge, has never been on, any federal or state
"superfund" or "superlien" list or registry.

Section 2.17 Compliance. Each of the Borrower, its Subsidiaries and
International is in compliance in all respects with all applicable governmental
approvals and laws, ordinances and regulations, including without limitation,
the Americans with Disabilities Act, Environmental Laws and zoning, land use,
and building laws, ordinances and regulations, except to the extent that such
non-compliance would not have a Material Adverse Effect.

Section 2.18 Disclosure. All factual information heretofore or
contemporaneously furnished by or on behalf of the Borrower, any of its
Subsidiaries or International to Bank for purposes of or in connection with
this Agreement, the Notes, and the other Loan Documents, or any transaction
contemplated therein is, and all other such information hereafter furnished by
or on behalf of the Borrower, any of its Subsidiaries or International to the
Bank will be, true and accurate on the date as of which such information is
dated or certified and not incomplete by omitting to state any material fact
necessary to make such information not misleading at such time.

ARTICLE 3. THE CREDIT FACILITY.

Section 3.1 Term Loan.

(a) Subject to and upon the terms, conditions, covenants
and agreements contained in the Prior Loan Agreement, the Bank advanced to the
Borrower the sum of $10,000,000 evidenced by the Term Note. The principal
amount from time to time outstanding

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<PAGE> 24
under the Term Note shall bear interest during each day the loan evidenced
thereby is outstanding at a variable per annum rate equal to the lesser of (i)
the Basic Rate, as it varies, or (ii) the Maximum Rate, as it varies.
Notwithstanding the foregoing, if at any time the Basic Rate shall exceed the
Maximum Rate and thereafter the Basic Rate shall become less than the Maximum
Rate, the rate of interest payable under the Term Note shall be the Maximum
Rate until the Bank shall have received the amount of interest the Bank
otherwise would have received if the interest payable thereunder had not been
limited by the Maximum Rate during the period of time the Basic Rate exceeded
the Maximum Rate. All past due principal and interest hereunder and under the
Term Note, whether due as the result of acceleration of maturity or otherwise,
shall bear interest at the Default Rate from the date payment thereof shall
have become due until same shall have been discharged fully by payment.

(b) The principal of and interest to accrue on the Term
Note shall be due and payable as set forth in the Term Note.

(c) All renewals, extensions, modifications, increases,
and rearrangements of the Term Note, if any, shall be deemed to be made
pursuant to this Agreement and, accordingly, shall be subject to the terms and
provisions hereof, and the Borrower shall be deemed to have ratified, as of
such renewal, extension, modification, increase, or arrangement date, all of
the representations, warranties, covenants and agreements set forth herein.

(d) The Term Note was given in renewal, rearrangement,
increase and extension of, but not in novation or discharge of, the principal
balance of the Prior Note outstanding on December 1, 1993.

Section 3.2 Revolving Line of Credit.

(a) Subject to, and upon the terms, conditions, covenants
and agreements contained herein, the Bank agrees to make advances to the
Borrower at any time, and from time to time, prior to the Termination Date, in
such amounts as the Borrower may request up to, but not exceeding, an aggregate
principal amount at any one time outstanding equal to the lesser of the Line of
Credit Commitment or the Loan Formula less, however, in each instance, (i) the
sum of the aggregate amount of the then existing Credit Exposure and (ii) the
principal amount outstanding under the Revolving Credit Note.

(b) Subject to, and upon the terms, conditions, covenants
and agreements contained herein and in the applicable Letter of Credit
Agreements delivered in accordance with Section 3.3 hereof, the Bank agrees to
issue Letters of Credit for the account of the Borrower at any time and from
time to time, prior to the Termination Date, in such amounts as the Borrower
may request up to, but not exceeding, an aggregate undrawn face amount at any
time outstanding equal to $500,000; provided, however, at no time shall the sum
of the then existing Credit Exposure and the principal amount outstanding under
the Revolving Credit Note exceed the lesser of the Line of Credit Commitment or
the Loan Formula.

(c) Prior to the Termination Date, the Borrower may
request issuance of Letters of Credit, borrow, repay, and reborrow hereunder as
long as the sum of the Credit Exposure and the outstanding principal amount
owing to the Bank at any one time does not exceed the lesser of (i) the Line of
Credit Commitment or (ii) the Loan Formula. All Revolving Credit Loans

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<PAGE> 25
under the Line of Credit shall be evidenced by the Borrower's Revolving Credit
Note payable to the order of the Bank.

(d) Subject to Section 3.2(f), each Revolving Credit Loan
shall bear interest on the outstanding principal amount thereof from the date
when made until it becomes due at a rate per annum equal to the lesser of (i)
the Maximum Rate, on the one hand, and (ii) the Eurodollar Rate or the Prime
Rate, as the case may be, plus the Applicable Margin, on the other hand (any
interest rate referred to in this Section 3.2(d)(ii), and together with the
Default Rate, is referred to in the next succeeding sentence as an "Accrual
Rate"). Notwithstanding the foregoing, if at any time the Accrual Rate shall
exceed the Maximum Rate and thereafter the Accrual Rate shall become less than
the Maximum Rate, the rate of interest payable hereunder and under the
Revolving Credit Note shall be the Maximum Rate until the Bank shall have
received the amount of interest which the Bank would have received if the
Accrual Rate had not been limited by the Maximum Rate during the period of time
the Accrual Rate exceeded the Maximum Rate.

(e) The aggregate principal amount of Revolving Credit
Loans then outstanding shall be due and payable in full on the Termination
Date.

(f) Interest on each Revolving Credit Loan shall be
payable in arrears on each Interest Payment Date, and for Prime Rate Loans, on
each Conversion Date in respect thereof; provided, however, that as to any
Revolving Credit Loan with respect to which the Borrower has requested an
Interest Period of six months the Borrower shall also pay interest at three
months. Interest shall also be payable on the date of any prepayment of
Revolving Credit Loans pursuant hereto for the portion of the Revolving Credit
Loans so prepaid and upon payment (including prepayment) in full thereof and,
after the occurrence and during the continuance of any Event of Default,
interest shall be payable on demand. All past due principal and interest
hereunder and under the Revolving Credit Note, whether due as the result of
acceleration of maturity or otherwise, shall bear interest at the Default Rate
from the date payment thereof shall have become due until same shall have been
discharged fully by payment.

(g) All renewals, extensions, modifications, increases,
and rearrangements of the Revolving Credit Note, if any, shall be deemed to be
made pursuant to this Agreement and, accordingly, shall be subject to the terms
and provisions hereof, and the Borrower shall be deemed to have ratified, as of
such renewal, extension, modification, increase, or rearrangement date, all of
the representations, warranties, covenants and agreements set forth herein.

Section 3.3 Advances and Letters of Credit.

(a) Each Borrowing of Revolving Credit Loans shall be
made upon the irrevocable written notice of the Borrower in the form of a
Notice of Borrowing (which notice must be received by the Bank prior to 11:00
a.m. (Houston, Texas time) (i) two (2) Business Days prior to the requested
borrowing date, in the case of Eurodollar Rate Loans, (ii) one (1) Business Day
prior to the requested borrowing date, in the case of Prime Rate Loans,
specifying:

(1) the total amount of the Borrowing;

(2) the requested borrowing date which shall be a
Business Day;

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<PAGE> 26
(3) whether the Borrowing is to be a Revolving Credit
Loan comprised of Eurodollar Rate Loans, or Prime Rate Loans or a
request for the issuance of a Letter of Credit by Bank, and the amount
of each in conformance with Section 3.2 above; and

(4) the duration of the Interest Period applicable to
such Loans included in such notice, subject to the definition of
Interest Period. If the Notice of Borrowing shall fail to specify the
duration of the Interest Period for any Borrowing comprised of
Eurodollar Rate Loans, such Interest Period shall be three months;

provided, however, that with respect to the Borrowing to be made on the Closing
Date, the Notice of Borrowing shall be delivered to the Bank as aforesaid not
later than 11:00 a.m. (Houston, Texas time) one (1) Business Day before the
Closing Date and such Borrowing will consist of Prime Rate Loans only.

(b) The Bank will make the amount of the Borrowing
available to the Borrower by 10:00 a.m. (Houston, Texas time) on the borrowing
date requested by the Borrower. Unless any applicable condition specified in
Article 4 has not been satisfied, the proceeds of all such Revolving Credit
Loans will then be made available to the Borrower by crediting the account of
the Borrower on the books of the Bank.

(c) The provisions of Section 3.3(a) notwithstanding, if
the Borrower shall not have given a timely notice of a Borrowing to be made on
the last day of any Interest Period for outstanding Eurodollar Rate Loans, then
unless the Bank shall have received notice that the Borrower elects not to make
a Borrowing on such day (such notice to have been received at least two
Business Days prior to such day) the Bank shall be deemed to have received a
Notice of Borrowing from the Borrower requesting Prime Rate Loans to be made on
such day in an amount equal to the amount of such outstanding Eurodollar Rate
Loans reduced to the extent necessary to reflect any reductions of the
Commitments on or prior to such day.

(d) Each Letter of Credit shall be issued upon receipt by
the Bank of a duly executed Letter of Credit Agreement not later than 11:00
a.m. (Houston, Texas time) three (3) Business Days prior to the date set for
the issuance of such Letter of Credit. Each request for a Letter of Credit
shall be irrevocable. Any request for amendment to or extension of the expiry
date of any previously issued Letter of Credit shall be submitted pursuant to a
written request by the Borrower to the Bank not later than two (2) Business
Days prior to the date of the proposed amendment or extension. The Bank shall
not amend or extend the expiry date of any Letter of Credit if the issuance of
a new Letter of Credit having the same terms and conditions as such Letter of
Credit as so amended or extended would be prohibited by any provision of
Section 3.2 or 3.3(d) of this Agreement.

Section 3.4 Conversions and Renewals.

(a) The Borrower may upon irrevocable written notice to
the Bank:

(i) elect to convert on any Business
Day, any Prime Rate Loans (or any part thereof) into Eurodollar Rate
Loans,

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<PAGE> 27
(ii) elect to convert on any Interest
Payment Date, any Eurodollar Rate Loans maturing on such Interest
Payment Date (or any part thereof) into Prime Rate Loans;

(iii) elect to renew, on any Interest
Payment Date therefor, any Eurodollar Rate Loans (or any part
thereof);

(b) The Borrower shall deliver by telex, cable or
facsimile, confirmed immediately in writing, a Notice of Conversion/
Continuation in substantially the form of Exhibit G not later than 11:00 a.m.
(Houston, Texas time) at least (i) two (2) Business Days in advance of the
Conversion Date or renewal date, if the Revolving Credit Loans are to be
converted into or continued as Eurodollar Rate Loans; and (ii) one (1) Business
Day in advance of the Conversion Date or renewal date, if the Revolving Credit
Loans are to be converted into or renewed as Prime Rate Loans, specifying

(1) the proposed Conversion Date or renewal date;

(2) the aggregate amount of Revolving Credit Loans to be
converted or renewed;

(3) the nature of the proposed conversion or
continuation; and

(4) the duration of the requested Interest Period,
subject to the definition of Interest Period.

(c) If upon the expiration of any Interest Period
applicable to Eurodollar Rate Loans, the Borrower has failed to select a new
Interest Period to be applicable to such Eurodollar Rate Loans, or if any Event
of Default shall then have occurred and be continuing, the Borrower shall be
deemed to have elected to convert such Eurodollar Rate Loans into Prime Rate
Loans effective as of the expiration date of such current Interest Period.

Section 3.5 Loan Formula. The aggregate principal amount at any time
remaining unpaid on Revolving Credit Loans plus the sum of the then existing
Credit Exposure will not be in excess of the lesser of (i) the Line of Credit
Commitment or (ii) amount arrived at by the computation provided for in the
Loan Formula.

Section 3.6 Prepayments.

(a) Subject to Section 3.16, the Borrower may, at any
time or from time to time, upon at least three (3) Business Days' notice to the
Bank, prepay the Loans, in whole or in part, in amounts of Ten Thousand Dollars
($10,000) or any integral multiple of One Thousand Dollars ($1,000) above such
amount; provided, however, that because the Revolving Credit Note is a master
revolving credit note, the Revolving Credit Note shall remain in full force and
effect until terminated as provided therein or until, at a time when no
amounts, principal, interest or otherwise, are then owing, the Borrower
releases the Bank from any obligation to make Loans and issue Letters of Credit
pursuant to the Line of Credit. Any such prepayment shall be applied first to
accrued interest under the Note or Notes being so prepaid, then to the
discharge of any expenses or damages for which the Bank may be entitled to
receive reimbursement under any

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agreement with the Borrower, and the balance remaining, if any, shall be
applied to the reduction of principal of the Note being so prepaid in the
inverse order of maturity. Such notice of prepayment shall specify the date
and amount of such prepayment and whether such prepayment is of the Term Loan,
Prime Rate Loans, or Eurodollar Rate Loans, or any combination thereof. Such
notice shall not thereafter be revocable by the Borrower. If such notice is
given, the Borrower shall make such prepayment and the payment amount specified
in such notice shall be due and payable on the date specified therein, together
with accrued interest to each such date on the amount prepaid and the amounts
required pursuant to Section 3.16.

(b) Subject to Section 3.16, the Borrower shall make all
Mandatory Prepayments, if any, as and when each Loan Formula Certificate is
delivered to the Bank pursuant to Section 5.1 of this Agreement.

(c) Any prepayments pursuant to Section 3.5(b) above made
on a day other than an Interest Payment Date for any Revolving Credit Loan
shall be applied first to Prime Rate Loans, if any, then outstanding and then
to and Eurodollar Rate Loans with the shortest Interest Periods remaining;
provided, however, that if the amount of Prime Rate Loans then outstanding is
not sufficient to satisfy the entire prepayment requirement, the Borrower may,
at its option, place any amounts which it would otherwise be required to use to
prepay Eurodollar Rate Loans on a day other than the last day of the Interest
Period therefor in an interest-bearing account pledged to the Bank until the
end of such Interest Period at which time such pledged amounts will be applied
to prepay such Eurodollar Rate Loans.

Section 3.7 Fees.

(a) Commitment Fee. The Borrower agrees to pay to the
Bank a commitment fee in an amount (the "Commitment Fee") equal to one-quarter
of one percent (1/4%) per annum, multiplied by the average daily unused portion
of the Line of Credit Commitment. The Commitment Fee shall accrue from the
date this Agreement is executed by all parties hereto to the Termination Date
and shall be payable quarterly in arrears, all such payments, except for the
last such payment, becoming due and payable on the last day of each calendar
quarter commencing with the calendar quarter ending March 31, 1996, 1996 and
the last and final installment becoming due and payable on the Termination
Date.

(b) Letter of Credit Fee. The Borrower agrees to pay to
the Bank a letter of credit fee for issuing the Letters of Credit under the
Line of Credit (calculated separately for each Letter of Credit) equal to one
percent (1%) per annum of the face amount of each Letter of Credit (with a $300
minimum letter of credit fee per Letter of Credit issued). Such commission
shall be due and payable upon issuance and be non-refundable. In addition, the
Borrower shall pay the Bank its standard charges for opening, amending,
negotiating and drawing Letters of Credit.

Section 3.8 Payments.

(a) All payments of principal of and interest on the
Notes shall be made to the Bank at its office set forth in Section 8.8.

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(b) Whenever any payment of principal of or interest on
the Notes shall be due on a day which is not a Business Day, the date for
payment thereof shall be extended to the next succeeding Business Day and
interest shall be payable for such extended time at the rate of interest with
respect thereto in effect at the due date; provided, however, that if such
extension would cause payment of interest on or principal of Eurodollar Rate
Loans to be made in the next following calendar month, such payment shall be
made on the next preceding Business Day.

Section 3.9 Computation of Fees and Interest.

(a) All computations of interest payable in respect of
the Term Loan and Prime Rate Loans shall be made on the basis of a year of
three hundred sixty-five (365) or three hundred sixty-six (366) days, as the
case may be, and actual days elapsed. All other computations of fees and
interest under this Agreement shall be made on the basis of a three hundred
sixty (360) day year and actual days elapsed. Interest and fees shall accrue
during each period during which interest or such fees are computed from and
including the first day thereof to but excluding the last day thereof.

(b) Any change in the interest rate on a Loan resulting
from a change in the Eurodollar Reserve Percentage, Eurocurrency Liabilities,
or the Prime Rate shall become effective as of the opening of business on the
day on which such change in the Eurodollar Reserve Percentage, Eurocurrency
Liabilities, or the Prime Rate shall become effective. Each determination of
an interest rate by the Bank pursuant to any provision of this Agreement shall
be conclusive and binding on the Borrower in the absence of manifest error.

Section 3.10 Security.

(a) Payment of the Notes and the Obligations and the
performance of the covenants set forth in this Agreement and the other Loan
Documents will be secured, directly or indirectly, by a first priority
perfected security interest, mortgage, assignment or lien, as the case may be,
in and upon the following described property and assets:

(i) All of the Borrower's present and future
accounts, inventory, equipment, fixtures, documents, instruments,
general intangibles, chattel paper (as such terms are defined in the
UCC), notes receivable, drafts, acceptances, patents, copyrights,
trademarks, trade secrets and other intellectual property, rental
agreements and lease agreements relating to any of the foregoing, and
contract rights now owned or existing and hereafter acquired or
arising, wherever located, and all the proceeds thereof, which
property and assets are more particularly described in, and which
security interests will be evidenced by, a Security Agreement; and

(ii) The Pledged Real Property and all leases of
the Pledged Real Property, and all proceeds thereof, subject only to
Permitted Liens, which Pledged Real Property is more particularly
described in, and which liens will be evidenced by, a Deed of Trust
and Assignment of Leases (provided, however, the Revolving Credit Note
shall not be secured by a lien on the Pledged Real Property described
in this clause (ii)).

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(b) The Borrower will, and will cause each of its
Subsidiaries and International to, execute, acknowledge and deliver to the Bank
such instruments, mortgages, chattel mortgages, deeds of trust, security
agreements, security agreement-pledges, statements, assignments and financing
statements, in form and substance acceptable to the Bank as in the good faith
and discretion of counsel for the Bank may be necessary to enforce, grant to
the Bank and perfect in the United States the security interests, liens,
assignments and mortgages on the Collateral. Each of the Borrower and the Bank
agrees that all Collateral now or hereafter securing any of the Obligations
hereunder also shall secure any and all other indebtedness and liabilities now
or hereafter owing by the Borrower to the Bank.

Section 3.11 No Default. The Bank may, but shall not be required to,
make or continue any advance or issue any Letter of Credit under the Line of
Credit or renew any Note if an event has occurred and is continuing which
constitutes an Event of Default.

Section 3.12 Certain Agreements Regarding Letters of Credit.

(a) The Bank shall not have any obligation to issue a
Letter of Credit unless the Borrower shall have complied with all the terms and
conditions of this Agreement. In the event the Bank has not been totally
reimbursed for its payment of a draft drawn under a Letter of Credit, the
unreimbursed amount shall bear interest from the date of such payment until
reimbursement in immediately available funds at the Default Rate; provided,
however, that the Borrower may satisfy its obligation to reimburse the Bank for
the payment of a draft drawn under a Letter of Credit by requesting that the
Bank make an advance under the Revolving Credit Note if there are sufficient
unadvanced monies available thereunder.

(b) Each Letter of Credit (i) will be for the account of
the Borrower; (ii) shall have an expiration date not exceeding one year after
the Termination Date, unless otherwise agreed in writing by the Bank in its
sole discretion; and (iii) shall contain such other reasonable terms and
provisions as may be required or desired by the Bank.

(c) The Borrower assumes all risks of the acts or
omissions of beneficiaries of any of the Letters of Credit with respect to
their use of the Letters of Credit. The Bank will not pay drafts drawn under
Letters of Credit unless such conform to the requirements of the applicable
Letter of Credit. Except in the case of gross negligence or willful misconduct
on the part of the Bank or any of its employees, neither the Bank nor its
correspondents shall be responsible for the validity or genuineness of
certificates or other documents, even if such certificates or other documents
should in fact prove to be invalid, fraudulent or forged; for errors,
omissions, interruptions or delay in the transmission or delivery of any
messages, by mail, telex or otherwise, whether or not they be in code; for
errors in the translation or for errors in interpretation of technical terms;
or for any consequences arising from causes beyond the Bank's control or the
control of their correspondents; nor shall the Bank be responsible for any
error, neglect or default of any of their correspondents; and none of the above
shall affect, impair or prevent the vesting of any of the Bank's rights or
powers hereunder or under any Letter of Credit, all of which rights shall be
cumulative. The Bank and its correspondents may accept certificates or other
documents that appear on their face to be in order, without responsibility for
further investigation. In furtherance but not in limitation of the foregoing
provisions, the Borrower agrees that any action taken by the Bank or any of its
correspondents in good faith in connection with any such Letter of Credit, or
any related drafts, certificates, documents or instruments, shall

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be binding on the Borrower and shall not put the Bank or its correspondents
under any resultant liability to the Borrower; and the Borrower makes a like
agreement as to any inaction or omission, unless in breach of good faith.

Section 3.13 Taxes.

(a) Any and all payments by the Borrower to the Bank
under this Agreement shall be made free and clear of, and without deduction or
withholding for, any and all present or future taxes, levies, imposts,
deductions, charges or withholdings, and all liabilities with respect thereto,
excluding, in the case of the Bank such taxes (including income taxes or
franchise taxes) as are imposed on or measured by the Bank's net income by the
jurisdiction under the laws of which the Bank is organized or maintains a
Lending Office or any political subdivision thereof (all such non-excluded
taxes, levies, imposts, deductions, charges, withholdings and liabilities being
hereinafter referred to as "Taxes").

(b) In addition, the Borrower agrees to pay any present
or future stamp or documentary taxes or any other excise or property taxes,
charges or similar levies which arise from any payment made hereunder or from
the execution, delivery or registration of, or otherwise with respect to, this
Agreement or any other Loan Documents (hereinafter referred to as "Other
Taxes"); provided, however, nothing in this Agreement shall be construed to
require the Borrower to pay any Other Taxes if the payment of such Other Taxes
by the Borrower is prohibited by applicable laws.

(c) The Borrower will indemnify and hold harmless the
Bank for the full amount of Taxes or Other Taxes (including without limitation,
any Taxes or Other Taxes imposed by any jurisdiction on amounts payable under
this Section 3.13) paid by the Bank and any liability (including penalties,
interest, additions to tax and expenses) arising therefrom or with respect
thereto, whether or not such Taxes or Other Taxes were correctly or legally
asserted. Payment under this indemnification shall be made within thirty (30)
days from the date the Bank makes written demand therefor.

(d) If the Borrower shall be required by law to deduct or
withhold any Taxes or Other Taxes from or in respect of any sum payable
hereunder to the Bank then, (i) the sum payable shall be increased as may be
necessary so that after making all required deductions (including deductions
applicable to additional sums payable under this Section 3.13) the Bank
receives an amount equal to the sum it would have received had no such
deductions been made, (ii) the Borrower shall make such deductions, and (iii)
the Borrower shall pay the full amount deducted to the relevant taxation
authority or other authority in accordance with applicable law.

(e) Within thirty (30) days after the date of any payment
by the Borrower of Taxes or Other Taxes, the Borrower will furnish to the Bank
the original or a certified copy of a receipt evidencing payment thereof, or
other evidence of payment satisfactory to the Bank.

(f) The agreements and obligations of the Borrower
contained in this Section 3.13 shall survive the payment in full of principal
and interest hereunder and under the Notes and are subject in their entirety to
the terms and provisions of Section 8.6 hereof.

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<PAGE> 32
Section 3.14 Illegality.

(a) If the introduction of any Requirement of Law or any
change in or in the interpretation or administration thereof shall make it
unlawful, or any central bank or other Governmental Authority shall assert that
it is unlawful, for the Bank to make Eurodollar Rate Loans, then, on notice
thereof by the Bank to the Borrower (i) the obligation of the Bank to make
Eurodollar Rate Loans shall be suspended until the Bank shall have notified the
Borrower that the circumstances giving rise to such determination no longer
exists;

(b) If it shall be unlawful to maintain any Eurodollar
Rate Loan, the Borrower shall prepay in full all Eurodollar Rate Loans of the
Bank then outstanding, together with interest accrued thereon, either on the
last day of the Interest Period thereof if the Bank may lawfully continue to
maintain such Eurodollar Rate Loans to such day, or immediately, if the Bank
may not lawfully continue to maintain such Eurodollar Rate Loans together with
any amounts required to be paid in connection therewith pursuant to Section
3.16.

(c) If the Borrower is required to prepay any Eurodollar
Rate Loan immediately as provided in Section 3.14(b), then concurrently with
such prepayment, the Borrower shall borrow from the Bank, in the amount of such
repayment, a Prime Rate Loan.

(d) If the obligation of the Bank to make or maintain
Eurodollar Rate Loans has been terminated, the Borrower may elect, by giving
notice to the Bank that all Revolving Credit Loans which would otherwise be
made by the Bank as Eurodollar Rate Loans shall be instead Prime Rate Loans.

Section 3.15 Increased Cost and Reduced Return.

(a) If, due to either (i) the introduction of or any
change (other than any change by way of imposition of or increase in reserve
requirements included in the Eurodollar Reserve Percentage) in or in the
interpretation of any law or regulation or (ii) the compliance with any
guideline or request from any central bank or other Governmental Authority
(whether or not having the force of law) after the date of this Agreement,
there shall be any increase in the cost to the Bank of agreeing to make or
making, funding or maintaining any Eurodollar Rate Loans, then the Borrower
shall be liable for, and shall from time to time, upon demand therefor by the
Bank pay to the Bank additional amounts as are sufficient to compensate the
Bank for such increased costs.

(b) The Borrower agrees that if, due to the introduction
of any law or regulation, or because of any change in any existing law or
regulation or in the interpretation thereof by any official authority, whether
or not having the force of law, which comes into effect after the date of this
Agreement, (i) the Bank, or the Borrower should with respect to any Letters of
Credit issued or to be issued pursuant to the terms hereof, be subject to any
tax, charge, fee, deduction or withholding of any kind whatsoever, or (ii)
reserve requirements, or changes in existing reserve requirements, should be
imposed on the Bank, with respect to any Letters of Credit issued or to be
issued pursuant to the terms hereof, and if any of the above-mentioned
measures, or any other similar measure, should result in (A) any increase in
the cost to the Bank of issuing, maintaining, confirming or participating any
Letter of Credit pursuant to this Agreement or of any transaction under or in
connection with any Letter of Credit or this

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<PAGE> 33
Agreement, or (B) any reduction in the payment or deposit of any amount
(principal, interest, fee or otherwise) receivable by the Bank in respect of
any Letter of Credit or of any transaction under any Letter of Credit, then the
Borrower shall pay to the Bank upon demand such increased cost or reduction,
including such additional amounts as may be necessary so that every net payment
or deposit, after deduction or withholding for or on account of such payment or
deposit (including any taxes levied on additional amounts paid pursuant to this
Section) will not be less than the corresponding amount provided for under
applicable Letters of Credit or Letter of Credit Agreements.

(c) If the Bank shall have determined that the
introduction of any applicable law, rule, regulation or guideline regarding
capital adequacy, or any change therein, any change in the interpretation or
administration thereof by any governmental authority, central bank or
comparable agency charged with the interpretation or administration thereof, or
compliance by the Bank or any corporation controlling the Bank with any
request, guideline or directive regarding capital adequacy (whether or not
having the force of law) of any such authority, central bank or comparable
agency, affects or would affect the amount of capital required or expected to
be maintained by the Bank or any corporation controlling the Bank, and the Bank
(taking into consideration the Bank's or such corporation's policies with
respect to capital adequacy and the Bank's desired return on capital)
determines that the amount of such capital is increased as a consequence of the
Bank's obligation under this Agreement, then, upon demand of the Bank, the
Borrower shall immediately pay to the Bank, from time to time as specified by
the Bank, additional amounts sufficient to compensate the Bank for such
increase.

(d) The provisions of this Section 3.15 are subject in
their entirety to the provisions of Section 8.6 of this Agreement.

Section 3.16 Funding Losses. Subject to the provisions of Section
8.6 of this Agreement, the Borrower agrees to reimburse the Bank and to hold
the Bank harmless from any loss or expense which the Bank may sustain or incur
as a consequence of:

(a) failure of the Borrower to make any payment or
prepayment of principal with respect to any Eurodollar Rate Loan (including
payments made after any acceleration thereof),

(b) failure of the Borrower to borrow, continue or
convert a Revolving Credit Loan after the Borrower has given (or is deemed to
have given) a Notice of Borrowing or a Notice of Conversion/Continuation,

(c) failure of the Borrower to make any prepayment after
the Borrower has given a notice in accordance with Section 3.6, and/or

(d) prepayment (whether optional or mandatory under the
terms of this Agreement) of a Eurodollar Rate Loan on a day which is not the
last day of the Interest Period with respect thereto,

including, without limitation, any such loss or expense arising from the
liquidation or reemployment of funds obtained by it to maintain its Eurodollar
Rate Loans hereunder or from fees payable to terminate the deposits from which
such funds were obtained. A certificate of the

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Bank with respect to amounts owing under this Section 3.16 shall be conclusive
absent manifest error.

This covenant shall survive termination of this Agreement and the Loan
Documents and repayment of the Revolving Credit Loans and the extinguishment of
all Credit Exposure.

Section 3.17 Eurodollar Rate Protection. In the event that (a) the
Bank shall have determined (which determination shall be conclusive and binding
upon the Borrower) that for any reason adequate and reasonable means do not
exist for ascertaining the Eurodollar Rate applicable for any requested
Interest Period with respect to a proposed Revolving Credit Loan that the
Borrower has requested be made as a Eurodollar Rate Loan or (b) the Bank shall
determine (which determination shall be conclusive and binding upon the
Borrower) that the Eurodollar Rate applicable for any requested Interest Period
with respect to a proposed Revolving Credit Loan that the Borrower has
requested be made as a Eurodollar Rate Loan do not adequately and fairly
reflect the cost to the Bank of funding such Revolving Credit Loan, the Bank
shall forthwith give telex or facsimile notice of such determination to the
Borrower at least one day prior to the proposed borrowing date for such
Eurodollar Rate Loan. If such notice is given, any requested Eurodollar Rate
Loan shall be made as a Prime Rate Loan. Until such notice has been withdrawn
by the Bank, no further Eurodollar Rate Loans may be requested by the Borrower
and on the Interest Payment Date of any Eurodollar Rate Loan then outstanding
and so affected, such outstanding Eurodollar Rate Loan shall be converted into
a Prime Rate Loan.

ARTICLE 4. CONDITIONS PRECEDENT.

Section 4.1 Conditions Precedent to the Initial Revolving Credit Loan
or Letter of Credit. The obligation of the Bank to make the initial Revolving
Credit Loan or issue the initial Letter of Credit provided herein is subject to
the condition precedent that on or before the Closing Date the following shall
have been delivered to the Bank in form and substance satisfactory to the Bank:

(a) This Agreement and the Revolving Credit Note dated
the Closing Date and duly executed and delivered by the Borrower.

(b) The other Loan Documents and such evidence of
filings, acknowledgments or acceptances of any such documents as the Bank may
reasonably request or require, all duly executed and delivered by all parties
thereto. The Security Instruments shall be effective to grant to the Bank
first priority perfected liens and security interests in the Collateral.

(c) Written opinion or opinions, dated the Closing Date,
of counsel for the Borrower, International, and the Junior Creditor (other than
the Borrower's Subsidiaries) in form and substance satisfactory to the Bank
covering all such matters as the Bank may require.

(d) A copy of the Borrower's and International's articles
or certificates of incorporation, as the case may be, and bylaws, including all
amendments thereto, all certified, in the case of certificates of
incorporation, by the Secretary of State of the State of Delaware, and, in the
case of, bylaws, by the Secretary or an Assistant Secretary of the Borrower and
International, as the case may be, as being in full force and effect on the
Closing Date, and all

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other documents the Bank may request relating to the existence, qualification
and good standing of the Borrower and International.

(e) A copy of a resolution or resolutions passed by the
Boards of Directors of the Borrower, International, and the Junior Creditor
certified by the Secretary or an Assistant Secretary of such company as being
in full force and effect on the Closing Date, each of which corporate
resolutions authorizing the borrowings provided for herein and/or the
execution, delivery and performance of this Agreement, and the other Loan
Documents, and any other instrument or agreement required hereunder from such
Person, as the case may be, and providing as to the incumbency, and containing
the specimen signature or signatures, of the person or persons authorized to
execute and deliver this Agreement, the Note, and the other Loan Documents and
any other instrument or agreement required hereunder.

(f) A summary of the insurance coverage of the Borrower,
its Subsidiaries and International, which shall be in form, scope and substance
reasonably satisfactory to the Bank, together with certificates from each
insurer required pursuant to Section 5.5 hereof.

(g) Evidence satisfactory to the Bank that as of the
Closing Date the Bank has a first priority perfected Lien on the Collateral and
that there exist no Liens (other than Permitted Liens) on any property (real or
personal) of the Borrower, any of its Subsidiaries or International, except as
specifically provided in Section 3.10 hereof.

(h) The fees then payable pursuant to Sections 3.5 and
8.7 of this Agreement (including the fees, expenses and disbursements of the
Bank's counsel), shall have been paid to the Bank (or such counsel, as
applicable).

(i) Such other evidence as the Bank may reasonably
request to establish the consummation of the transactions contemplated hereby,
the taking of all proceedings in connection herewith and compliance with the
conditions set forth in this Agreement.

Section 4.2 Additional Conditions Precedent to the Loan. The
obligation of the Bank to make any Loan or issue any Letter of Credit provided
herein is subject to the following further conditions precedent:

(a) The representations and warranties contained herein
and in the other Loan Documents shall be true and correct on the date of such
Loan or Letter of Credit (except such representations and warranties that
relate solely to an earlier date and that were true and correct on such earlier
date) and each of the Borrower and International shall be deemed to repeat such
representations and warranties made by it on such date.

(b) The Borrower, its Subsidiaries and International
shall have performed and complied with all agreements and conditions contained
in this Agreement and the other Loan Documents. No Event of Default or Default
shall have occurred and be continuing.

(c) The making of the Loans and the issuance of all
Letters of Credit shall not be prohibited by the laws and regulations of the
jurisdictions to which the Bank, the Borrower, its Subsidiaries or
International is subject (including, without limitation, Regulation G, T, U or
X of the Board of Governors of the Federal Reserve System), and shall not
subject the Bank to

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any penalty or, in the reasonable judgment of the Bank, other burdensome
condition under or pursuant to any applicable law or governmental regulation.

(d) There shall be no suit, action, investigation,
inquiry or other proceeding by any Governmental Authority or any other Person
or any other legal or administrative proceeding pending or, to the knowledge of
the Borrower, threatened, which (i) questions the validity or legality of this
Agreement, any of the other Loan Documents or any of the transactions
contemplated by this Agreement or the other Loan Documents or seeks damages in
connection with any of the foregoing or (ii) if adversely determined, could
reasonably be expected to have a Material Adverse Effect.

ARTICLE 5. AFFIRMATIVE COVENANTS. During the term of this Agreement, and for
so long as the Bank shall have any Line of Credit Commitment hereunder, and
until the Notes and all of the Obligations have been paid in full and there
shall exist no Credit Exposure, unless compliance with the provisions of the
following subsections shall have been waived in writing by the Bank, the
Borrower agrees as follows:

Section 5.1 Financial Statements. The Borrower will furnish the
following to the Bank:

(a) As soon as available, but in any event, within one
hundred twenty (120) days after the end of each fiscal year of the Borrower, a
copy of the Borrower's and its Subsidiaries' annual audited consolidated
financial statements (consisting of at least a balance sheet and related
statements of income, retained earnings and cash flow prepared in conformity
with GAAP applied on a basis consistent with that of the preceding fiscal
year), and accompanied by an unqualified opinion of an independent certified
public accountant selected by the Borrower and acceptable to the Bank;

(b) As soon as available, but in any event not later than
one hundred twenty (120) days after the end of each fiscal year of the
Borrower, an unaudited consolidating balance sheet of the Borrower and each of
its Subsidiaries as at the end of such fiscal year and the related
consolidating statement of income for such fiscal year, all in reasonable
detail certified by a proper accounting officer of the Borrower as having been
used in connection with the preparation of the financial statements referred to
in Section 5.1(a) hereof;

(c) As soon as available, but in any event, within one
hundred twenty (120) days after the end of each fiscal year of the Parent, a
copy of the Parent's and its Subsidiaries' annual unaudited consolidated
financial statements (consisting of at least a balance sheet and related
statements of income, retained earnings and cash flow prepared in conformity
with GAAP applied on a basis consistent with that of the preceding fiscal
year), prepared and certified by a proper accounting officer of the Parent;

(d) As soon as available, but in any event, within
forty-five (45) days of the end of each quarter of each fiscal year during the
term hereof, unaudited interim consolidating and consolidated financial
statements of the Borrower and each of its Subsidiaries prepared and certified
by a proper accounting officer of the Borrower and prepared similarly to the
audited statements referred to in clause (a) above (subject to normal year-end
audit adjustments) and

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consisting of at least balance sheets as of the close of such period and profit
and loss statements for the quarter then ended and for the period from the
beginning of the fiscal year to the close of such period;

(e) Upon request by the Bank, a copy of the federal
income tax return of the Parent, Borrower and its Subsidiaries, and
International, for the current fiscal year then ended, certified by a proper
financial officer of such Person;

(f) (i) Promptly after the filing thereof with the
United States Secretary of Labor or the Pension Benefit Guaranty Corporation,
copies of each annual and other report with respect to each Plan or any trust
created thereunder, and (ii) immediately upon becoming aware of the occurrence
of any "reportable event," as such term is defined in Section 4043 of ERISA, or
of any "prohibited transaction," as such term is defined in Section 4975 of the
Code in connection with any Plan or any trust created thereunder, a notice
signed by the President or a principal financial officer of the Borrower
specifying the nature thereof, what action the Borrower is taking or proposes
to take with respect thereto and, when known, any action taken by the Internal
Revenue Service with respect thereto;

(g) As soon as available, but in any event, within 45
days after the end of each month during the term hereof, a monthly listing and
aging of accounts receivable and payable of the Borrower, together with a Loan
Formula Certificate for the appropriate time period, certified by a proper
accounting officer of the Borrower containing a certificate of a proper
accounting officer of the Borrower stating that a review of the activities of
the Borrower and its Subsidiaries and International during the period covered
by such certificate has been made under his supervision with a view to
determining whether the Borrower and its Subsidiaries and International have
kept, observed, performed and fulfilled all of their obligations under this
Agreement, the Notes, the Security Instruments and the other Loan Documents,
and that, to the best of his knowledge, during such period, each has kept,
observed, performed and fulfilled each and every covenant in this Agreement,
the Notes, the Security Instruments and the other Loan Documents, and is not at
the time in default under any of the same, or if it shall have been or shall be
in default, specifying the same; and

(h) Such other financial and other information concerning
the Borrower, its Subsidiaries and International as the Bank shall request from
time to time.

Section 5.2 Payment of Obligations. The Borrower will, and will
cause each of its Subsidiaries and International to, pay all Indebtedness to
the Bank in accordance with its terms and will, and will cause each of
Subsidiaries and International to, pay and discharge all other Indebtedness in
the ordinary course of business where failure to pay and discharge such other
Indebtedness would have a Material Adverse Effect; provided, further, that
notwithstanding the foregoing, the Borrower, its Subsidiaries and International
may contest in good faith any such other Indebtedness by appropriate
proceedings so long as adequate reserves are established as required by GAAP.

Section 5.3 Notice; Litigation. The Borrower shall and shall cause
each of its Subsidiaries and International to, promptly give written notice to
the Bank of (i) the occurrence of any Default or Event of Default, (ii) any
legal, judicial or regulatory proceedings affecting the Borrower, any
Subsidiary or International or any of their properties or assets in which the
amount

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<PAGE> 38
involved is material, is not covered (subject to normal deductibles) by
insurance and is likely to have a Material Adverse Effect, (iii) any dispute
between the Borrower, any of its Subsidiaries or International and any
Governmental Authority or other Person that is likely materially to interfere
with the normal business operations of the Borrower, any of its Subsidiaries or
International, (iv) any substantial damage to any material part of the
Collateral, specifying the nature and extent of damage and whether such damage
is being repaired in due course, or total loss or destruction of any material
part of the Collateral, (v) any other action, event or condition of any nature
of which it has knowledge which, in the reasonable opinion of the Borrower is
likely to have, or lead to, or result in, any Material Adverse Effect, and (vi)
the voluntary or involuntary bankruptcy of, or any assignment for the benefit
of creditors or the seeking of any relief under any bankruptcy or other similar
laws by, the Borrower, any of its Subsidiaries or International.

Section 5.4 Maintenance of Corporate Existence and Properties. The
Borrower will, and will cause each of its Subsidiaries and International to,
(i) continue to engage in the businesses presently being operated, (ii)
maintain its corporate existence and good standing in each jurisdiction in
which it is required to be qualified, if its failure to be so qualified would
have a Material Adverse Effect, (iii) keep and maintain all franchises,
permits, licenses and properties useful and necessary in the conduct of its
business in good order and condition if failure to do so would have a Material
Adverse Effect, and (iv) duly observe and conform to all material requirements
of any Governmental Authorities relative to the conduct of its business or the
operation of its properties or assets, if such failure duly to observe and
conform to such requirements would have a Material Adverse Effect or could
result in criminal prosecution.

Section 5.5 Insurance. The Borrower will, and will cause each of its
Subsidiaries and International to, maintain insurance with financially sound
and responsible companies, in such form, in such amounts and against such risks
(including, without limitation, public liability and property damage insurance)
as is customarily carried by companies engaged in the same or similar
businesses, operating like properties and similarly situated, plus any
additional insurance, if any, required in the Security Instruments. The
Borrower, its Subsidiaries and International will have the right to place any
such insurance with any insurance carrier acceptable to the Bank. Upon
execution of this Agreement, the Borrower will furnish the Bank (i) a summary
of the insurance coverage of the Borrower, its Subsidiaries and International,
together with certificates showing the Bank as loss payee to the extent its
interests may appear, all such policies to be noncancellable without 15 days'
prior written notice to the Bank, and will supplement such summary from time to
time as the amounts or terms of such insurance coverage change, and (ii) copies
of the applicable policies and proof of payment of the premiums therefor.

Section 5.6 Payment of Taxes. The Borrower will, and will cause each
of its Subsidiaries and International to, pay and discharge when due all taxes,
assessments and other liabilities, except those being contested in good faith
by appropriate proceedings, and against which the Borrower or its applicable
Subsidiary has set up adequate reserves, in accordance with GAAP.

Section 5.7 Accounts Receivable. The Borrower will, and will cause
each of its Subsidiaries and International to, maintain its accounts receivable
in a manner consistent with normal business practices, including normal terms
and conditions for payment, for companies engaged in similar operations in
similar jurisdictions.

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<PAGE> 39
Section 5.8 Further Assurances. The Borrower will, and cause each of
its Subsidiaries and International to, at any time and from time to time,
execute and deliver such further instruments and take such further action as
may reasonably be requested by the Bank, in order to cure any defects in the
execution and delivery of, or to comply with or accomplish the covenants and
agreements contained in this Agreement, the Notes, the Security Instruments or
the other Loan Documents.

Section 5.9 Inspection. The Borrower will, and will cause each of
its Subsidiaries and International to, permit the Bank (and any Person
appointed by the Bank to act for it and on its behalf) to examine its corporate
and financial books and records and other records, books and properties and to
discuss its affairs, finances and accounts with the officers of the Borrower,
the Borrower's Subsidiaries, and International, and the Borrower's, the
Borrower's Subsidiaries', and International's independent certified public
accountants at all reasonable times and as often as may be reasonably requested
by the Bank.

Section 5.10 Solvency. The Borrower will not be, and will not permit
the Borrower and its Subsidiaries and International taken as a whole, to be,
Insolvent.

Section 5.11 Current Ratio. The Borrower and its Subsidiaries will
maintain a ratio of Current Assets to Current Liabilities of not less than 1.30
to 1.0, determined on a consolidated basis, at all times throughout the term
hereof.

Section 5.12 Indebtedness Ratio. The Borrower and its Subsidiaries
will maintain a ratio of (i) total Indebtedness less Subordinated Indebtedness
to (ii) total Tangible Net Worth of not greater than 0.75 to 1.0, determined on
a consolidated basis, at all times throughout the term hereof.

Section 5.13 Working Capital. The Borrower and its Subsidiaries will
maintain Working Capital of not less than $3,000,000, determined on a
consolidated basis, at all times throughout the term hereof.

Section 5.14 Tangible Net Worth. The Borrower and its Subsidiaries
will maintain a positive Tangible Net Worth, determined on a consolidated
basis, at all times during the term of this Agreement in an amount not less
than $34,000,000.

Section 5.15 Debt Service Coverage Ratio. The Borrower will maintain
a ratio of Cash Flow to Debt Service of not less than 1.50 to 1.0 for each
twelve (12) month period ending on the last day of each fiscal quarter of the
Borrower throughout the term hereof.

Section 5.16 Revenue Producing Assets. At all times during the
periods set forth below, the Borrower will maintain Revenue Producing Assets
(exclusive of Consignment Assets (as such term is defined in the Security
Agreement)) with an original cost basis of not less than the amount set forth
below opposite such period in Eligible Jurisdictions (as such term is defined
in the Security Agreement), all in accordance with the terms of the Security
Agreement:

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<PAGE> 40
<TABLE>
<CAPTION>
Period Amount
------------ ------
<S> <C>
Closing Date to
11/30/95 $16,000,000
12/1/95 to 11/30/96 $15,000,000
12/1/96 and thereafter $14,000,000
</TABLE>

Section 5.17 Environmental Compliance. The Borrower will, and will
cause each of its Subsidiaries and International, and their respective
contractors and invitees to, comply in all respects with the requirements of
all Governmental Authorities pursuant to Environmental Laws. Borrower shall
not, and shall not permit any of its Subsidiaries and International to, cause
or permit any Hazardous Materials to be brought upon or kept or used on or
about the Property in violation of any Environmental Law or which results in
any Hazardous Materials Contamination which could reasonably be expected to
have a Material Adverse Effect.

Section 5.18 Notification of Releases of Hazardous Materials. The
Borrower will, and will cause each of its Subsidiaries and International to,
immediately notify the Bank of, and provide the Bank with copies of any
notifications of, discharges or releases or threatened releases or discharges
of a Hazardous Material on, upon, into, or from the Property that could
reasonably be expected to have a Material Adverse Effect which are given or
required to be given by or on behalf of the Borrower, any of its Subsidiaries
or International to any Governmental Authorities. Such copies of notifications
shall be delivered to the Bank at the same time as they are delivered to the
Governmental Authorities. The Borrower will, and will cause each of its
Subsidiaries and International to, promptly undertake and diligently pursue to
completion any appropriate and legally required or authorized investigation,
abatement and remedial containment and cleanup action in the event of any
release or discharge, or threatened release or discharge, of a Hazardous
Material on, upon, into or from the Property.

Section 5.19 Environmental Indemnification. The Borrower hereby
indemnifies and agrees to hold harmless the Bank and all of its respective
directors, officers, employees, agents, successors, attorneys and assigns
(collectively, the "Indemnified Parties") from and against all liabilities,
claims, actions, consequential damages, costs and expenses or loss, regardless
of whether any of the foregoing are foreseeable or unforeseeable, whether by
Governmental Authorities or third parties, so long as any of the foregoing
occur directly or indirectly by virtue of (i) the breach of any representation
or warranty, or affirmative or negative covenant regarding any Environmental
Laws or Hazardous Materials; (ii) any Hazardous Material being present at any
time in, upon or around any part of any Property, or in the soil, air,
groundwater, or surface water on, above or under the Property; (iii) the use,
generation, manufacture, production, storage, release, threatened release,
discharge, disposal or presence of a Hazardous Material on, under or about the
Property; (iv) operations of Borrower, any of its Subsidiaries or
International; or (v) the imposition or recording of liens on the Property
pursuant to any Environmental Laws. The liabilities, claims, actions,
consequential damages, costs and expenses and losses included in the indemnity
in this Section shall include, without limitation, amounts paid in settlement
of claims, all consultant, expert and legal fees and expenses of any
Indemnified Party's legal counsel costs and expense incurred in connection with
any investigations of site conditions, or any abatement, cleanup, remediation,
removal, or restoration work, or any damages or injuries to the person or
property of any third parties or to land, air, water or other natural
resources. Upon demand by the Bank, the Borrower, its Subsidiaries and
International shall jointly and severally defend any

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<PAGE> 41
investigation, action, or proceeding alleging the presence of any Hazardous
Material which affects any Property or which is brought or commenced against
any Indemnified Party, whether alone or together with the Borrower, its
Subsidiaries or any other person, all at the Borrower's cost and expense but
with counsel to be approved by the Bank in the exercise of its reasonable
judgment.

Section 5.20 Chattel Paper. The Borrower will stamp or otherwise
imprint all Chattel Paper (other than Chattel Paper consisting of Foreign
Accounts) relating to any of its respective assets with a legend in the
following form:

"THIS CHATTEL PAPER IS SUBJECT TO A SECURITY INTEREST IN FAVOR OF
FIRST INTERSTATE BANK OF TEXAS, N.A."

Section 5.21 Lockbox; Cash Collateral Account. Notwithstanding any
provision herein or in the other Loan Documents to the contrary, after the
occurrence of an Event of Default, the Borrower agrees to direct all customers
and licensees to send all sales remittance checks, license and royalty payments
and proceeds to a post office box (the "Lockbox") designed by the Bank for
collection and deposit in, and to deposit all cash generated by cash sales and
cash prepayments at time of purchase by the Borrower's customers, and all
proceeds (collectively, the "Proceeds) of accounts, accounts receivable,
license agreements, royalty agreements, and credit card sales received by it
into a cash collateral account (the "Cash Collateral Account") designated by
the Bank and from which only officers of the Bank will be authorized to
withdraw funds. The Proceeds shall be deposited promptly in the Cash
Collateral Account upon receipt thereof by the Borrower in the form received
with any endorsements necessary for collection). After the occurrence of an
Event of Default, all Proceeds deposited in the Cash Collateral Account shall
be applied to the reduction of the Revolving Credit Note.

ARTICLE 6. NEGATIVE COVENANTS.

During the term of this Agreement, and for so long as the Bank shall
have any Line of Credit Commitment hereunder, and until the Notes and all of
the Obligations have been paid in full and there shall exist no Credit
Exposure, unless compliance with the following subsections shall have been
waived in writing by the Bank, the Borrower agrees as follows:

Section 6.1 Limitations on Indebtedness. The Borrower will not, and
will not permit any of its Subsidiaries to, create, incur, assume or suffer to
exist any Indebtedness for borrowed money except (i) the Indebtedness incurred
under this Agreement and other Indebtedness to the Bank, (ii) existing
Indebtedness described on Schedule 6.1 attached hereto, (iii) capital leases or
other Indebtedness incurred to finance the purchase of tangible, fixed or
capital assets in an aggregate amount, when aggregated with all outstanding
indebtedness permitted under clause (ii) of this Section 6.1, not to exceed
$700,000 at any one time outstanding, (iv) Indebtedness for borrowed money
incurred by the Borrower from its Subsidiaries, (v) Indebtedness of any
Subsidiary of the Borrower to the Borrower or any of the Borrower's other
Subsidiaries, and (vi) Affiliate Subordinated Indebtedness.

Section 6.2 Limitations on Liens. The Borrower will not, and will
not permit any of its Subsidiaries to, create, assume or suffer to exist any
mortgage, lien, pledge, charge, security

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<PAGE> 42
interest or other encumbrance of any kind upon any of its properties or assets,
whether now owned or hereafter acquired, except Permitted Liens.

Section 6.3 Limitations on Contingent Liabilities. The Borrower will
not, and will not permit any of its Subsidiaries to, create, assume or suffer
to exist any Contingent Liabilities, except (i) as permitted hereunder, (ii)
guaranties of Indebtedness of the Borrower or any Subsidiary permitted pursuant
to Section 6.1 hereof, (iii) for endorsements of instruments for collection in
the ordinary course of business, (iv) reimbursement obligations in connection
with letters of credit and performance bonds to secure the performance of bids
and trade contracts (other than for borrowed money) incurred in the ordinary
course of the Borrower's and its Subsidiaries' business and (v) any such
liability in favor of the Bank.

Section 6.4 Loans, Advances and Investments. The Borrower will not,
and will not permit any of its Subsidiaries to, make or permit to remain
outstanding any advances, loans or extensions of credit to, or purchase or own
any stock, bonds, notes, debentures, or other securities of, or make any
investments in, any Person (other than the Borrower or a Subsidiary) except (i)
accounts, instruments, chattel paper, and general intangibles (as defined in
the UCC) arising or acquired, and trade credit extended, in the ordinary course
of business as presently conducted, (ii) Cash Equivalents, (iii) expenses,
advances and loans made to employees of the Borrower in the ordinary course of
business and not exceeding an aggregate amount of $500,000 at any one time
outstanding, and (iv) extensions of credit to, or investments in, Borrower's
Affiliates (other than Borrower's Subsidiaries) that are outstanding on
November 30, 1993 provided that any such extensions of credit and investments
shall not remain outstanding for more than thirty (30) days after the Closing
Date.

Section 6.5 Limitations on Fundamental Changes; Disposition of
Assets. The Borrower will not, and will not permit any of its Subsidiaries to,
(a) enter into any merger or consolidation, except any Subsidiary of the
Borrower may merge, consolidate or combine with or into (i) the Borrower
(provided that the Borrower shall be the continuing or surviving corporation)
or (ii) any one or more Subsidiaries of the Borrower (provided that if any
transaction shall be between a Subsidiary and a wholly-owned Subsidiary, the
wholly-owned Subsidiary shall be the continuing or surviving corporation), (b)
liquidate or dissolve itself (or suffer any liquidation or dissolution);
provided, however, that this Subsection 6.5(b) shall not apply to any
Subsidiary (c) convey, sell, lease (other than leases of inventory entered into
in the ordinary course of business), charter or otherwise dispose of all or
substantially all of its property, assets or business; provided that the
Borrower may transfer all or substantially all of the assets of any of the
Borrower's divisions (including, without limitation, the Dailey Drilling
Systems Division) to an existing or hereafter acquired U.S. Subsidiary, so long
as (i) no Default or Event of Default has occurred and is continuing, (ii) no
Default or Event of Default would occur as a result thereof, (iii) any and all
such U.S. Subsidiaries shall, prior to any such transfers, enter into a valid,
binding and enforceable security agreement (granting the Bank a first priority
perfected security interest in such U.S. Subsidiaries of the types described in
the Security Agreement) and take all other action necessary to grant to the
Bank a first priority security interest in such assets, and (B) guaranty
agreement guarantying the payment and performance of the Obligations, in each
case in form and substance acceptable to the Bank, and (iv) in each instance
each such U.S. Subsidiary promptly delivers an opinion of counsel acceptable to
the Bank in form, scope and substance acceptable to the Bank with respect
thereto, or (d) except in the ordinary course of business, enter into any
arrangement, directly or indirectly, whereby the Borrower or its applicable
Subsidiary would sell

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<PAGE> 43
or transfer any properties (other than real property), either now owned or
thereafter acquired, and then or thereafter lease as lessee such properties or
any part thereof or any other property (other than real property) to be used
for substantially the same purpose.

Section 6.6 Dividends. The Borrower will not, and will not permit
any of its Subsidiaries (other than wholly-owned Subsidiaries) to, declare or
pay any dividend (other than dividends payable solely in stock) or make any
other distribution on account of, or purchase, acquire, retire, or redeem any
stock of the Borrower or any such Subsidiaries whether now owned or hereafter
outstanding.

Section 6.7 ERISA Compliance. The Borrower will not, and will not
permit any of its Subsidiaries to, permit at any time any Plan maintained by it
to

(a) Engage in any "prohibited transaction," as such term
is defined in Section 4975 of the Code, which could reasonably be expected to
have a Material Adverse Effect;

(b) Incur any "accumulated funding deficiency," as such
term is defined in Section 302 of ERISA, which could reasonably be expected to
have a Material Adverse Effect; or

(c) Terminate any such Plan in a manner which could
result in the imposition of a lien on the property of the Borrower pursuant to
Section 4068 of ERISA.

Section 6.8 Nature of Business. The Borrower will not, and will not
permit any of its Subsidiaries to, (i) engage in any lines of business or
business ventures other than those in which it is presently engaged or that are
directly related thereto, (ii) change in any material respect its methods of
operation or manner of doing business, (iii) without prior written notice to
the Bank, carry on its business at any location or locations other than those
presently in existence, or (iv) change its name, its identity as a corporation
or its corporate structure.

Section 6.9 Transactions with Affiliates and Other Persons. Except
as disclosed on Schedule 6.9, the Borrower will not, and will not permit any of
its Subsidiaries to, engage in any transaction with an Affiliate, which
individually or together with other transactions subject to this Section 6.9 is
material, on terms less favorable to it than would be obtainable at the time in
comparable transactions with Persons not affiliated with the Borrower or its
Subsidiaries, as the case may be. The Borrower will not, and will not permit
any of its Subsidiaries to, incur, create or assume any commitments to make
payments, whether as rental or otherwise, under any lease, rental or other
arrangement, written or oral, for the use of any other Person if, under the
terms of any such agreements, the amount of rentals payable thereunder is
greater than a fair market rental.

Section 6.10 Subordinated Indebtedness. No payments of Subordinated
Indebtedness will be made without the Bank's prior written consent; provided,
however, the Borrower may make payments of Affiliate Subordinated Indebtedness
in the amounts and in accordance with the terms and conditions of the Affiliate
Subordination Agreement.

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<PAGE> 44
ARTICLE 7. DEFAULT.

Section 7.1 Events of Default. The occurrence of any of the
following events or conditions shall constitute an "Event of Default":

(a) Failure of the Borrower to pay any principal of or
interest on any Note, or failure to make any mandatory prepayment hereunder
when due;

(b) Any representation or warranty made by the Borrower,
any of its Subsidiaries or International in this Agreement or in any of the
other Loan Documents or in any certificate, financial or other statement
furnished by the Borrower, any of its Subsidiaries or International pursuant
hereto or thereto or in connection herewith or therewith is false in any
material respect as of the date made or furnished;

(c) Failure to observe or perform any of the covenants,
terms or agreements contained in Sections 3.6, 5.2, 5.5, 5.8, 5.9, 5.10, 5.11,
5.12, 5.13, 5.14, 5.15, 5.16, 5.21 or Article 6 hereof;

(d) Failure to pay any amounts due hereunder or under any
other Loan Document (other than those described in Section 7.1(a) above) when
due or declared due, or failure to observe or perform any other covenants,
terms or agreements contained in this Agreement, any Loan Document or any other
agreements with the Bank, and such failure to pay or other default shall
continue unremedied for a period of fifteen (15) days after the earlier of (i)
the date upon which the Borrower, applicable Subsidiaries, or International, as
applicable, knew or should have known of such failure or (ii) the date upon
which written notice thereof has been given to the Borrower by the Bank;

(e) The Borrower, any of its Subsidiaries or
International (i) is generally not paying its Indebtedness as it becomes due,
(ii) fails to pay any principal of or interest on any obligation or obligations
for borrowed money under any agreement involving an amount or amounts greater
than $500,000 beyond the period of grace, if any, provided for in the
instrument or agreement under which the same was created, or (iii) fails to
observe or perform any other term, condition or agreement contained in any
obligation or obligations for borrowed money under any agreement involving an
amount or amounts greater than $500,000 or in any instrument or agreement
evidencing, securing or relating thereto if the effect thereof is to cause or
permit the holder or holders of such obligation (or a trustee or an agent on
behalf of such holder or holders) to cause any such obligation to become due
prior to its stated maturity;

(f) An event of default shall occur under any of the Loan
Documents;

(g) Any Loan Document ceases to be in full force and
effect and valid, binding, and enforceable in accordance with its terms, or any
of the Security Instruments ceases to create a valid and perfected first
priority Lien as required hereby and thereby, or the Borrower, any of its
Subsidiaries or International shall so state in writing;

(h) Filing by the Borrower, any of its Subsidiaries or
International of a voluntary petition or any answer seeking reorganization,
arrangement, readjustment of its or his debts or for any other relief under any
applicable bankruptcy act or law, or under any other

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<PAGE> 45
insolvency act or law, now or hereafter existing, or any action by the
Borrower, any of its Subsidiaries or International consenting to, approving of
or acquiescing in any such petition or proceeding; the application by the
Borrower, any of its Subsidiaries or International for, or the appointment by
consent or acquiescence of, a receiver or trustee for the Borrower, any of its
Subsidiaries or International or for all or a substantial part of its or his
property; the making by the Borrower, any of its Subsidiaries or International
of an assignment for the benefit of creditors, the inability of the Borrower,
any of its Subsidiaries or International, or the admission by the Borrower, any
of its Subsidiaries in writing of its or his inability, to pay its or his debts
as they mature (the term "acquiescence" means the failure to file a petition or
motion in opposition to such petition or proceeding or to vacate or discharge
any order, judgment or decree providing for such appointment within 30 days
after the appointment of a receiver or trustee);

(i) Filing of an involuntary petition against the
Borrower, any of its Subsidiaries or International in bankruptcy or seeking
reorganization, arrangement or readjustment of its or his debts or for any
other relief under any applicable bankruptcy act or law, or under any other
insolvency act or law, now or hereafter existing and such petition remains
undismissed or unanswered for a period of 30 days from such filing; or the
involuntary appointment of a receiver or trustee for the Borrower, any of its
Subsidiaries or International for all or a substantial part of its or his
property and such appointment remains unvacated or unopposed for a period of 10
days from such appointment; or the issuance of a writ of attachment, execution
or similar process against any substantial part of the property of the
Borrower, any of its Subsidiaries or International and such writ remains
unbonded or undismissed for a period of 10 days from notice to the Borrower,
any of its Subsidiaries or International of its issuance;

(j) Final judgment for the payment of money in excess of
$100,000 shall be rendered against the Borrower, any of its Subsidiaries or
International and the same shall remain undischarged for a period of 30 days,
during which execution shall not be effectively stayed; or

(k) A trustee shall be appointed by an appropriate United
States District Court to administer any Plan of the Borrower, any of its
Subsidiaries or International, or the Pension Benefit Guaranty Corporation
shall institute proceedings to terminate any Plan of the Borrower, any of its
Subsidiaries or International.

Section 7.2 Optional Acceleration. Upon the occurrence of any Event
of Default set forth in Subsection 7.1(a), (b), (c), (d), (e), (f), (g), (j) or
(k) hereof, any obligation of the Bank to extend credit to the Borrower
pursuant hereto shall immediately terminate and the holder of the Notes, at its
option, without notice to the Borrower, any of its Subsidiaries or
International, may declare the principal of and interest accrued on the Notes
to be forthwith due and payable, WHEREUPON THE SAME SHALL BECOME DUE AND
PAYABLE WITHOUT ANY PRESENTMENT, DEMAND, PROTEST, NOTICE OF PROTEST, NOTICE OF
INTENT TO ACCELERATE, NOTICE OF ACCELERATION, OR NOTICE OF ANY KIND (EXCEPT
NOTICE REQUIRED PURSUANT TO THIS AGREEMENT OR OTHERWISE BY LAW), ALL OF WHICH
ARE HEREBY WAIVED. With respect to all Letters of Credit that shall not have
matured or with respect to which presentment for honor shall not have occurred,
Borrower shall deposit in a cash collateral account at the Bank an amount equal
to the aggregate undrawn amount of Letters of Credit, and the unused portions
thereof, if any, shall be returned to Borrower after the respective expiration
dates of the Letters of Credit and after all Notes and

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<PAGE> 46
Obligations hereunder, under the Security Instruments and under the Letter of
Credit Agreements are paid in full.

Section 7.3 Automatic Acceleration. Upon the occurrence of any Event
of Default set forth in Subsection 7.1(h) or (i) hereof, any obligation of the
Bank to make advances under the Notes shall automatically terminate and the
principal of and interest accrued on the Notes shall be immediately and
automatically due and payable without notice or demand of any kind, and THE
SAME SHALL BE DUE AND PAYABLE IMMEDIATELY WITHOUT ANY PRESENTMENT,
ACCELERATION, DEMAND, PROTEST, NOTICE OF INTENT TO ACCELERATE, NOTICE OF
ACCELERATION, NOTICE OF PROTEST OR NOTICE OF ANY KIND (EXCEPT NOTICE REQUIRED
PURSUANT TO THIS AGREEMENT OR OTHERWISE BY LAW), ALL OF WHICH ARE HEREBY
WAIVED. With respect to all Letters of Credit that shall not have matured or
with respect to which presentment for honor shall not have occurred, Borrower
shall deposit in a cash collateral account at the Bank an amount equal to the
aggregate undrawn amount of Letters of Credit, and the unused portions thereof,
if any, shall be returned to Borrower after the respective expiration dates of
the Letters of Credit and after all Notes and Obligations hereunder, under the
Security Instruments and under the Letter of Credit Agreements are paid in
full.

Section 7.4 Additional Remedies. In case any one or more Events of
Default or Defaults shall occur the Bank may proceed to protect and enforce the
rights of the Bank by an action at law, suit in equity or other appropriate
proceeding, whether for the specific performance of any agreement contained
herein, in the Notes, or in the other Loan Documents, or for an injunction
against a violation of any of the terms hereof or thereof, or in aid of the
exercise of any power granted hereby or thereby or by law, or otherwise. In
addition, the Borrower will pay to the Bank such further amount as shall be
sufficient to cover the cost and expenses of collection, including, without
limitation, reasonable attorneys' fees, expenses and disbursements. No course
of dealing and no delay on the part of any holder of the Notes in exercising
any right, power or remedy shall operate as a waiver thereof or otherwise
prejudice such holder's rights, powers or remedies. No right, power or remedy
conferred by this Agreement, the Notes, or by the other Loan Documents upon any
holder thereof shall be exclusive of any other right, power or remedy referred
to herein or therein or now or hereafter available at law, in equity, by
statute or otherwise.

ARTICLE 8. MISCELLANEOUS.

Section 8.1 No Waiver; Cumulative Remedies. No failure to exercise
and no delay in exercising, on the part of the Bank, any right, power or
privilege hereunder shall operate as a waiver thereof; nor shall any single or
partial exercise of any right, power or privilege hereunder preclude any other
or further exercise thereof or the exercise of any other right, power or
privilege. The rights and remedies herein provided are cumulative and not
exclusive of any rights or remedies provided by law or in any other agreement.

Section 8.2 Survival of Agreements. All representations and
warranties, all covenants and all provisions for indemnification and for the
payment of expenses contained in this Agreement or made in writing by or on
behalf of the Borrower, any of its Subsidiaries, International or any other
Person in connection with the transactions contemplated by this

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<PAGE> 47
Agreement shall survive the execution and delivery of this Agreement and the
other Loan Documents, any investigation at any time made by the Bank or on its
behalf, the making of the loan by the Bank under this Agreement, any transfer
of title to the Property (whether by sale, foreclosure, deed in lieu of
foreclosure or otherwise) and any disposition or payment of the Notes. All
statements contained in any certificate or other instrument delivered by or on
behalf of the Borrower, any of its Subsidiaries, International or any other
Person pursuant to this Agreement and the other Loan Documents or in connection
with the transactions contemplated by this Agreement and the other Loan
Documents shall be deemed representations and warranties of the Borrower under
this Agreement.

Section 8.3 Successors. This Agreement shall be binding upon the
Borrower, and its respective successors, assigns, heirs and legal
representatives, and shall inure to the benefit of the Bank and its successors
and assigns.

Section 8.4 Counterparts. This Agreement may be executed in any
number of counterparts and all of such counterparts taken together shall be
deemed to constitute one and the same instrument.

Section 8.5 Severability. In case any one or more of the provisions
contained in this Agreement, the Notes, or any other Loan Document should be
invalid, illegal or unenforceable in any respect, the validity, legality and
enforceability of the remaining provisions contained herein and therein shall
not be affected in any way thereby.

Section 8.6 Interest. It is the intention of the parties hereto to
comply strictly with applicable usury laws; accordingly, it is agreed that
notwithstanding any provisions to the contrary in this Agreement, any Note, the
other Loan Documents or in any of the documents securing payment thereof or
otherwise relating thereto, in no event shall this Agreement or such
instruments or documents require or permit the payment, charging, taking,
reserving or receiving of any sums constituting interest, as defined under
applicable usury laws, in excess of the maximum amount permitted by such laws.
If any such excess interest is contracted for, charged, taken, reserved or
received under this Agreement, any Note, the other Loan Documents or under the
terms of any of the documents securing payment thereof or otherwise relating
thereto, or in any communication by the Bank or any other Person to Borrower or
any other Person, or in the event all or part of the principal or interest of
the Obligations is prepaid or accelerated, so that under any of such
circumstances or under any other circumstances whatsoever, the amount of
interest contracted for, charged, taken, reserved or received under this
Agreement, any Note, the other Loan Documents or under any of the documents
securing payment thereof or otherwise relating thereto, on the amount of
principal actually outstanding from time to time under any Note shall exceed
the maximum amount of interest permitted by applicable usury laws, then in any
such event it is agreed as follows: (i) the provisions of this Section shall
govern and control, (ii) any such excess shall be deemed an accidental and bona
fide error and canceled automatically to the extent of such excess, and shall
not be collected or collectible, (iii) any such excess which is or has been
paid or received notwithstanding this Section shall be applied as a credit
against the then unpaid principal amount on such Note or refunded to the Person
paying the same, at the holder's option, and (iv) the effective rate of
interest shall be automatically reduced to the maximum lawful rate of interest
permitted under applicable usury laws as construed by courts having
jurisdiction thereof. It is further agreed that, without limitation of the
foregoing, all calculations of the rate of interest contracted for, charged,
taken, reserved or received under this

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<PAGE> 48
Agreement, any Note, the other Loan Documents or under such other documents or
instruments which are made for the purpose of determining whether such rate
exceeds the maximum lawful rate of interest shall be made, to the extent
permitted by applicable usury laws, by amortizing, prorating, allocating and
spreading during the period of the full term of the loans evidenced hereby,
including all prior and subsequent renewals and extensions, all interest at any
time contracted for, charged, taken, reserved or received from the Borrower or
otherwise by the holder or holders thereof in connection with the Notes, the
other Loan Documents or this Agreement. The terms of this paragraph shall be
deemed to be incorporated in every Loan Document, Security Instrument, and
communication relating to the Notes and the loans evidenced hereby. The term
"applicable usury laws" shall mean such laws of the State of Texas or the laws
of the United States, whichever laws allow the higher rate of interest, as such
laws now exist; provided, however, that if such laws shall hereafter allow
higher rates of interest, then the applicable usury laws shall be the laws
allowing the higher rates, to be effective as of the effective date of such
laws.

Section 8.7 Expenses; Documentary Taxes.

(a) The Borrower will pay (i) all out-of-pocket expenses
of the Bank (including reasonable fees, expenses and disbursements of counsel
for the Bank) in connection with the preparation, negotiation, enforcement,
operation and administration of this Agreement, the Notes, the other Loan
Documents, or any documents executed in connection therewith, or any waiver,
modification or amendment of any provision hereof or thereof; and (ii) if an
Event of Default occurs, all court costs and costs of collection, including,
without limitation, reasonable fees, expenses and disbursements of counsel
employed in connection with any and all collection efforts; then, and in any
such event, the attorneys' fees arising from such services, including those of
any appellate proceedings, and all expenses, costs, charges and other fees
incurred by such counsel in any way or respect arising in connection with or
relating to any of the events or actions described in this Section together
with interest thereon from the date incurred until paid by the Borrower at the
maximum rate allowed by applicable laws, which Borrower agrees to pay on
demand, shall constitute Obligations and shall be secured by and entitled to
the benefits of the Loan Documents. The Borrower agrees to indemnify the Bank
from and hold it harmless against any documentary taxes, assessments or charges
made by any Governmental Authority by reason of the execution and delivery by
the Borrower or any other Person of this Agreement, the Notes, the other Loan
Documents, and any documents executed in connection therewith.

(b) The Borrower shall indemnify the Bank, its officers,
directors, employees, representatives, attorneys and agents (collectively the
"Indemnified Parties") from, and hold the Indemnified Parties harmless against,
any and all costs, losses, liabilities, claims, damages or expenses incurred by
them (whether or not any of the Indemnified Parties is designated a party
thereto), INCLUDING THOSE CAUSED BY THE INDEMNIFIED PARTIES' OWN NEGLIGENCE but
excluding those caused by the Indemnified Parties' gross negligence or willful
misconduct, arising out of or by reason of any litigation or other similar
proceeding (including preparation for such litigation or proceeding) related to
the execution, delivery, and performance of this Agreement, the Notes, or the
other Loan Documents, or any actual or proposed use by the Borrower of the
proceeds of the issuance of the Notes or the Borrower's entering into and
performing of any agreement or instrument referred to herein, including,
without limitation, the reasonable fees and disbursements of the Indemnified
Parties' counsel incurred in connection therewith.

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<PAGE> 49
(c) The Borrower also agrees to pay, and will save the
Bank and each holder of the Notes harmless from, all claims, demands and
liabilities in respect of the fees and commissions, if any, of brokers and
finders alleged to have been incurred in connection with any of the
transactions contemplated by this Agreement and the other Loan Documents and
any expenses, including reasonable legal fees arising in connection with such
claims, demands or liabilities.

Section 8.8 Notices. All notices, requests and demands shall be
given to or made upon the respective parties hereto as follows:

If to the Borrower, to Dailey Petroleum Services Corp.
2507 North Frazier
Conroe, Texas 77303
Attn: Mr. David T. Tighe
Vice President
Telephone: (409) 350-3399
Telecopier: (409) 760-3304

If to the Bank, to First Interstate Bank of Texas, N.A.
First Interstate Bank Plaza
1000 Louisiana
Houston, Texas 77002
Attn: Mr. Randall S. Wade
Banking Officer
Telephone: (713) 250-4833
Telecopier: (713) 250-1048

All notices and other communications given to any party hereto in
accordance with the provisions of this Agreement shall be deemed to have been
given to any party upon receipt or when delivery is refused when delivered by
telecopy or by hand, within three (3) days of being deposited in the U. S. mail
(registered or certified mail), if by mail, or when delivered to the telegraph
company, charges prepaid, if by telegram, in each case addressed to such party
as provided herein or in accordance with the latest unrevoked direction from
such party.

Section 8.9 Participations. The Borrower expressly recognizes and
agrees that the Bank may sell to other financial institutions participations in
the loans incurred by the Borrower pursuant hereto (the "Participants"), and,
therefore, as security for the due payment and performance of all indebtedness
and other liabilities and obligations of the Borrower to the Bank under this
Agreement, the Notes, the other Loan Documents and any other obligation of the
Borrower to the Bank, whether now existing or hereafter arising, and to the
Participants by reason of such participation, the Borrower hereby grants to the
Bank and to the Participants, a lien on and security interest in any and all
deposits or other sums at any time credited by or due from the Bank and the
Participants, or either or any of them, to the Borrower, whether in regular or
special depository accounts or otherwise, and any and all money, securities and
other property of the Borrower and the proceeds thereof now or hereafter held
or received by or in transit to the Bank and the Participants, or either or any
of them, from or for the Borrower, whether for safekeeping, custody, pledge,
transmission, collection or otherwise and any such deposits, sums,

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<PAGE> 50
money, securities and other property at any time may be set off, appropriated
and applied by the Bank and by the Participants, or either or any of them,
against any indebtedness, liabilities or other obligations, whether now
existing or hereafter arising of the Borrower to the Bank and to the
Participants, or either or any of them, against any indebtedness, liabilities
or other obligations whether now existing or hereafter arising of the Borrower
to the Bank and to the Participants, or either or any of them, under this
Agreement, the Notes, the other Loan Documents or otherwise, whether or not
such indebtedness, liabilities or other obligations are then due or secured by
any collateral or if such is so secured, whether or not such collateral held by
the Bank or the Participants is considered to be adequate.

Section 8.10 Controlling Document. In the event of actual conflict
in the terms and provisions of this Agreement, the Notes and the other Loan
Documents, the terms and provisions of this Agreement will control.

Section 8.11 Amendment. This Agreement may not be amended except in
writing signed by the Borrower and the Bank.

Section 8.12 Table of Contents; Descriptive Headings. The table of
contents and the descriptive headings of the several sections of this Agreement
are inserted for convenience only and do not constitute a part of this
Agreement.

Section 8.13 Waivers and Release of Claims. As additional
consideration to the execution, delivery, and performance of this Agreement by
the parties hereto and to induce the Bank to enter into this Agreement, the
Borrower represents and warrants that (a) the Borrower knows of no defenses,
counterclaims or rights of setoff to the payment of any indebtedness of the
Borrower to the Bank, and (b) the Borrower for itself, its Subsidiaries, their
respective representatives, agents, officers, directors, employees,
shareholders, and successors and assigns, hereby fully, finally, completely,
generally and forever releases, discharges, acquits, waives and relinquishes
the Bank and its respective representatives, agents, officers, directors,
employees, shareholders, and successors and assigns, from any and all claims,
actions, demands, and causes of action of whatever kind or character, whether
joint or several, whether known or unknown, for any and all injuries, harm,
damages, penalties, costs, losses, expenses, attorneys' fees, and/or liability
whatsoever and whenever incurred or suffered by any of them prior to the
execution of this Agreement. Notwithstanding any provision of this Agreement,
the Prior Loan Agreement or any other Loan Document, this Section 8.13 shall
remain in full force and effect and shall survive the delivery of the Notes,
this Agreement and the other Loan Documents and the making, extension, renewal,
modification, amendment or restatement of any thereof.

Section 8.14 Grant of Security Interest; Ratification of Documents.
The Borrower hereby grants to the Bank a security interest and lien in the
Collateral to secure payment and performance of the Obligations, including,
without limitation, the Revolving Credit Note and the Letter of Credit
Agreements. All Loan Documents executed in connection herewith and with the
Prior Loan Agreement are and remain in full force and effect in accordance with
their respective terms. Without in any way limiting the generality of the
foregoing, the Borrower hereby ratifies and confirms the Security Instruments,
and the liens, security interests and obligations created thereby, and the
Borrower hereby confirms and agrees that any and all liens, security interests
and obligations created by the Security Instruments and other security or
Collateral now or hereafter held by the Bank as security for payment and
performance of the Obligations under the

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<PAGE> 51
Prior Loan Agreement, are hereby renewed and carried forward to secure payment
and performance of all of the Obligations, including, without limitation, the
Revolving Credit Note and the Letter of Credit Agreements. The Security
Instruments are and remain legal, valid and binding obligations of the parties
thereto, enforceable in accordance with their respective terms. References in
the Loan Documents (other than this Agreement) to the Prior Loan Agreement, the
"Agreement," the "Loan Agreement" and words of similar import shall be deemed
to be references to the Prior Loan Agreement as amended and restated by this
Agreement.

Section 8.15 Restatement and Amendment. This Agreement restates,
amends and supersedes the Prior Loan Agreement in its entirety, but does not
novate or discharge the Prior Loan Agreement. The recitals at the beginning of
this Agreement are incorporated into this Agreement as agreements of the
parties hereto.

Section 8.16 No Waiver. The Borrower agrees that no Event of Default
and no Default has been waived or remedied by the execution of this Agreement
by the Bank, and any such Default or Event of Default heretofore arising and
currently continuing shall continue after the execution and delivery hereof.

Section 8.17 Acknowledgement. Each of the Borrower, its Subsidiaries
and International ratifies and confirms that the Security Instruments are and
remain in full force and effect in accordance with their respective terms and
that the Collateral is unimpaired. Each of the Borrower, its Subsidiaries and
International hereby acknowledges and agrees that (a) the liens created and
evidenced by the Loan Documents are valid and existing liens of the recited
dignity and priority, and (b) no other granting of a lien or security interest
or assignment has been or will be executed affecting the Collateral without the
Bank's prior written consent.

SECTION 8.18 GOVERNING LAW. THIS AGREEMENT, THE NOTES, THE SECURITY
INSTRUMENTS AND THE OTHER LOAN DOCUMENTS SHALL BE GOVERNED BY, CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, EXCEPT TO THE
EXTENT THAT THE FEDERAL LAWS OF THE UNITED STATES OF AMERICA MAY APPLY.

SECTION 8.19 SUBMISSION TO JURISDICTION. WITH RESPECT TO ANY AND ALL
DISPUTES ARISING HEREUNDER, UNDER THE NOTES, UNDER THE OTHER LOAN DOCUMENTS, OR
UNDER ANY OF THE OTHER INSTRUMENTS AND DOCUMENTS EXECUTED IN CONNECTION
HEREWITH OR THEREWITH NOT SETTLED, OR SUBJECT TO ARBITRATION, PURSUANT TO THE
ARBITRATION PROGRAM REFERENCED IN SECTION 8.20 HEREOF, THE BORROWER HEREBY
IRREVOCABLY AND UNCONDITIONALLY:

(A) SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION
OR PROCEEDING RELATING TO THIS AGREEMENT, ANY NOTES AND ANY DOCUMENT TO WHICH
IT IS A PARTY, OR FOR RECOGNITION AND ENFORCEMENT OF ANY JUDGMENT IN RESPECT OF
ANY THEREOF, TO THE NON-EXCLUSIVE GENERAL JURISDICTION OF THE COURTS OF THE
STATE OF TEXAS, THE COURTS OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN
DISTRICT OF TEXAS, AND APPELLATE COURTS FROM ANY THEREOF;

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<PAGE> 52
(B) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE
BROUGHT IN SUCH COURTS, AND WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREAFTER
HAVE TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT OR THAT
SUCH ACTION OR PROCEEDING WAS BROUGHT IN AN INCONVENIENT COURT AND AGREES NOT
TO PLEAD OR CLAIM THE SAME;

(C) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR
PROCEEDING MAY BE EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR CERTIFIED
MAIL (OR ANY SUBSTANTIALLY SIMILAR FORM AND MAIL), POSTAGE PREPAID, TO IT AT
ITS ADDRESS SPECIFIED ON THE SIGNATURE PAGE HEREOF; AND

(D) AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO
EFFECT SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT
THE RIGHT TO SUE IN ANY OTHER JURISDICTION.

Section 8.20 Arbitration Program. The parties agree to be bound by
the terms and provisions of the current Arbitration Program of the Bank, which
is incorporated by reference herein and is acknowledged as received by the
parties, pursuant to which any and all disputes arising hereunder, under the
Notes, under any of the other Loan Documents, or under any of the documents and
instruments contemplated thereby, or pertaining hereto or thereto, shall be
resolved by mandatory binding arbitration upon the request of any party. A
copy of the Arbitration Program of the Bank in effect on the date hereof is
attached hereto as Exhibit "C".

SECTION 8.21 NO ORAL AGREEMENTS. THIS WRITTEN AGREEMENT, THE NOTES,
THE OTHER LOAN DOCUMENTS, AND THE INSTRUMENTS AND DOCUMENTS EXECUTED IN
CONNECTION HEREWITH, REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY
NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES.

THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed in Houston, Texas, as of the date first above-mentioned.

THE BANK: THE BORROWER:

FIRST INTERSTATE BANK OF DAILEY PETROLEUM SERVICES
TEXAS, N.A. CORP.

By /s/ RANDALL S. WADE By /s/ DAVID T. TIGHE
----------------------------------- -----------------------------------
Randall S. Wade David T. Tighe
Banking Officer Vice President

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<PAGE> 53

FIRST AMENDMENT TO SECOND
AMENDED AND RESTATED LOAN AGREEMENT

THIS FIRST AMENDMENT TO SECOND AMENDED AND RESTATED LOAN AGREEMENT
(hereinafter called this "Amendment") is entered into on June 5, 1996, to be
effective as of June 5, 1996 (the "Effective Date"), between DAILEY PETROLEUM
SERVICES CORP., a Delaware corporation (the "Borrower"), and WELLS FARGO BANK
(TEXAS), NATIONAL ASSOCIATION, formerly known as First Interstate Bank of
Texas, N.A. (the "Bank").

W I T N E S S E T H:

WHEREAS, the Borrower and the Bank entered into a Second Amended and
Restated Loan Agreement dated as of December 13, 1995 (the "Agreement"),
whereby the Bank agreed to make available to the Borrower credit upon the terms
and conditions set forth therein; and

WHEREAS, the Borrower has advised the Bank that pursuant to a Plan and
Agreement of Merger, the Borrower will be merged with and into Dailey
Corporation, an existing Delaware corporation (the "Surviving Corporation")
which shall continue its corporate existence as a Delaware corporation and
amend its Certificate of Incorporation to change its name to "Dailey Petroleum
Services Corp." (the "Merger Transaction"); and

WHEREAS, immediately after the Merger Transaction, the Surviving
Corporation will declare a dividend to Dailey Holdings Inc. ("Holdings") in the
form and substance of a $10,000,000 note (the "Dividend Note"), which shall be
payable to Holdings on demand; and

WHEREAS, following the Merger Transaction and pursuant to a Form S-1
(Registration Statement), the Surviving Corporation proposes to sell all of the
shares of its Class A Common Stock pursuant to an initial public offering (the
"Initial Public Offering"); and

WHEREAS, the Surviving Corporation contemplates using net proceeds
from the Initial Public Offering for, among other purposes, the payment of the
Dividend Note and that certain promissory note dated December 1, 1993 (the
"Junior Creditor Note"), in the original stated principal amount of $3,000,000,
executed by the Borrower, payable to Lawrence Industries, Inc. and otherwise
described in the Affiliate Subordination Agreement; and

WHEREAS, the Borrower has requested that the Bank (i) amend Sections
6.1, 6.5, 6.6, 6.8, and 6.10 of the Agreement in order to permit the Merger
Transaction and the
<PAGE> 54
remainder of the Proposed Transaction and (ii) agree to release the Bank's
liens on the Pledged Real Property collateral described in Section 3.10(a)(ii)
of the Agreement; and

WHEREAS, subject to and upon the terms and conditions hereinafter
stated, the Bank is willing to do so;

NOW, THEREFORE, for and in consideration of the mutual covenants and
agreements herein contained, the parties to this Amendment hereby agree as
follows:

SECTION 1. Terms Defined in Agreement. As used in this
Amendment, except as may otherwise be provided herein, all capitalized terms
which are defined in the Agreement shall have the same meaning herein as
therein, all of such terms and their definitions being incorporated herein by
reference.

SECTION 2. Amendments to Agreement. Subject to the conditions
precedent set forth in Section 4 hereof, the Agreement is hereby amended as
follows:

(a) Section 1.2 of the Agreement is hereby amended by
adding the following definitions thereto in the correct alphabetical order:

"Dividend Note means that certain Promissory Note,
in form and substance acceptable to the Bank, to be executed by the
Surviving Corporation and payable to the order of Holdings in the
original principal amount of $10,000,000 and being payable to Holdings
on demand, which Dividend Note is subordinated in accordance with the
terms and conditions of the Holdings Subordination Agreement."

"Holdings means Dailey Holdings Inc., a Delaware
corporation and owner of 100% of the capital stock of the Surviving
Corporation."

"Holdings Subordination Agreement means that certain
Subordination Agreement, in substantially the form of Exhibit H
hereto, to be executed by the Bank, the Surviving Corporation, and
Holdings, as the same may be amended or modified at any time from time
to time.

"Initial Public Offering means the sale by the
Surviving Corporation of all of the shares of the Surviving
Corporation's Class A Common Stock in an initial public offering
pursuant to a Form S-1 (Registration Statement) as filed with the
Securities and Exchange Commission on May 24, 1996 (Registration
Number 333-04593), as may be amended pursuant to applicable securities
laws."

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<PAGE> 55
"Junior Creditor Note means that certain Promissory
Note dated December 1, 1993 executed by the Borrower and payable to
the Parent in the original principal amount of $3,000,000 and as
otherwise described in the Affiliate Subordination Agreement."

"Merger Transaction means the merger of the Borrower
with and into the Surviving Corporation pursuant to a Plan and
Agreement of Merger in substantially the form of Exhibit I attached
hereto, which Surviving Corporation will continue its corporate
existence as a Delaware corporation and amend its Certificate of
Incorporation to change its name to "Dailey Petroleum Services Corp."

"Proposed Transaction means (i) the Merger
Transaction, (ii) immediately after the Merger Transaction, the
declaration of a dividend by the Surviving Corporation to Holdings in
the form of the Dividend Note, (iii) following the Merger Transaction,
the Initial Public Offering, and (iv) the payment by the Surviving
Corporation, using the proceeds from a Successful Offering, of, among
other things, the Dividend Note and the Junior Creditor Note."

"Successful Offering means the receipt by the
Surviving Corporation of net proceeds from the Initial Public Offering
in an amount equal to at least $15,000,000."

"Surviving Corporation means Dailey Corporation, a
Delaware corporation."

(b) The definition of the term "Parent" in Section 1.2
of the Agreement is hereby deleted therefrom and the following definition of
the term "Parent" is substituted in lieu thereof:

"Parent means Lawrence Industries, Inc., a Delaware
corporation and owner of 100% of the capital stock of Dailey Petroleum
Services Corp., a Delaware corporation, Holdings and International."

(c) Section 3.10 of the Agreement is hereby amended by
(i) deleting the "; and " from the end of clause (i) and substituting a period
(".") in lieu thereof and (ii) deleting clause (ii) therefrom in its entirety.

(d) Until the earlier to occur of (i) the occurrence of
a Successful Offering, receipt by the Surviving Corporation of the proceeds of
such Successful Offering,

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<PAGE> 56
and the payment in full of the Dividend Note or (ii) that date which is ninety
(90) days after the date of the Dividend Note, compliance with the financial
covenants set forth in Sections 5.11 through and including 5.15 of the
Agreement and the Tangible Net Worth requirements of Section 6.5(a)(F) of the
Agreement will be determined without giving effect to the Dividend Note.

(e) Section 6.1 of the Agreement is hereby deleted
therefrom and the following Section 6.1 is substituted in lieu thereof:

"Section 6.1 Limitations on Indebtedness. The Borrower will
not, and will not permit any of its Subsidiaries to, create, incur,
assume or suffer to exist any Indebtedness for borrowed money except
(i) the Indebtedness incurred under this Agreement and other
Indebtedness to the Bank, (ii) existing Indebtedness described on
Schedule 6.1 attached hereto, (iii) capital leases or other
Indebtedness incurred to finance the purchase of tangible, fixed or
capital assets in an aggregate amount, when aggregated with all
outstanding indebtedness permitted under clause (ii) of this Section
6.1, not to exceed $700,000 at any one time outstanding, (iv)
Indebtedness for borrowed money incurred by the Borrower from its
Subsidiaries, (v) Indebtedness of any Subsidiary of the Borrower to
the Borrower or any of the Borrower's other Subsidiaries, (vi)
Affiliate Subordinated Indebtedness, and (vii) Subordinated
Indebtedness evidenced by the Dividend Note."

(f) Section 6.5 of the Agreement is hereby deleted
therefrom and the following Section 6.5 is substituted in lieu thereof:

"Section 6.5 Limitations on Fundamental Changes; Disposition
of Assets. The Borrower will not, and will not permit any of its
Subsidiaries to,

(a) enter into any merger or consolidation,
except any Subsidiary of the Borrower may merge, consolidate or
combine with or into (i) the Borrower (provided that the Borrower
shall be the continuing or surviving corporation) or (ii) any one or
more Subsidiaries of the Borrower (provided that if any transaction
shall be between a Subsidiary and a wholly-owned Subsidiary, the
wholly-owned Subsidiary shall be the continuing or surviving
corporation); provided, however, the Borrower may merge with and into
the Surviving Corporation in accordance with the Merger Transaction,
provided further that (A) the Surviving Corporation is a corporation
duly organized, validly existing and in good standing under the laws
of the State of Delaware and will be qualified to do business as a
foreign corporation in good standing in the State of Texas within 30
days of the consummation of the

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<PAGE> 57
Merger Transaction, (B) the Surviving Corporation will expressly
assume, by an Assumption agreement executed and delivered to the Bank
(within five Business Days after the consummation of the Merger
Transaction), in substantially the form of Exhibit J hereto, each and
all of the obligations of the Borrower under this Agreement and the
other Loan Documents, (C) the Surviving Corporation executes and
delivers to the Bank any and all financing statements and other
documents and instruments as the Bank deems necessary or desirable to
perfect or to continue the perfection of first priority perfected
security interests in favor of the Bank in the Collateral, (D) the
Agreement and the other Loan Documents shall remain in full force and
effect, (E) immediately before and immediately after giving effect to
the Merger Transaction and the remainder of the Proposed Transaction,
no Default or Event of Default exists or shall occur or be continuing,
(F) immediately after giving effect to the Merger Transaction and the
remainder of the Proposed Transaction, the Tangible Net Worth of the
Surviving Corporation and its Subsidiaries (determined on a
consolidated basis) will be at least equal to the Tangible Net Worth
of the Borrower and its Subsidiaries (determined on a consolidated
basis) immediately before such Merger Transaction and the consummation
of the remainder of the Proposed Transaction, and (G) within five
Business Days after the consummation of the Merger Transaction the
Borrower shall deliver to the Bank a certificate of the Chief
Financial Officer and an opinion of Fulbright & Jaworski L.L.P. to the
effect that the Merger Transaction and the remainder of the Proposed
Transaction complies with clauses (A), (B), (C), and (D) above and, in
the case of such certificate of the Chief Financial Officer, clauses
(E) and (F) above;

(b) liquidate or dissolve itself (or suffer any
liquidation or dissolution); provided, however, that this Subsection
6.5(b) shall not apply to any Subsidiary;

(c) convey, sell, lease (other than leases of
inventory entered into in the ordinary course of business), charter or
otherwise dispose of all or substantially all of its property, assets
or business; provided that the Borrower may transfer all or
substantially all of the assets of any of the Borrower's divisions
(including, without limitation, the Dailey Drilling Systems Division)
to an existing or hereafter acquired U.S. Subsidiary, so long as (i)
no Default or Event of Default has occurred and is continuing, (ii) no
Default or Event of Default would occur as a result thereof, (iii) any
and all such U.S. Subsidiaries shall, prior to any such transfers,
enter into a valid, binding and enforceable (A) security agreement
(granting the Bank a first priority perfected security interest in
such U.S. Subsidiaries of the types described in

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<PAGE> 58
the Security Agreement) and take all other action necessary to grant
to the Bank a first priority security interest in such assets, and (B)
guaranty agreement guarantying the payment and performance of the
Obligations, in each case in form and substance acceptable to the
Bank, and (iv) in each instance each such U.S. Subsidiary promptly
delivers an opinion of counsel acceptable to the Bank in form, scope
and substance acceptable to the Bank with respect thereof; or

(d) except in the ordinary course of business,
enter into any arrangement, directly or indirectly, whereby the
Borrower or its applicable Subsidiary would sell or transfer any
properties (other than real property), either now owned or thereafter
acquired, and then or thereafter lease as lessee such properties or
any part thereof or any property (other than real property) to be used
for substantially the same purpose."

(g) Section 6.6 of the Agreement is hereby deleted
therefrom and the following Section 6.6 is substituted in lieu thereof:

"Section 6.6 Dividends. The Borrower will not, and will not
permit any of its Subsidiaries (other than wholly-owned Subsidiaries)
to, declare or pay any dividend (other than dividends payable solely
in stock) or make any other distribution on account of, or purchase,
acquire, retire, or redeem any stock of the Borrower or any such
Subsidiaries whether now owned or hereafter outstanding; provided,
however, within thirty days after the Merger Transaction, the Borrower
may declare and pay a one time dividend to Holdings in the form of the
Dividend Note."

(h) Clause (iv) of Section 6.8 of the Agreement is
hereby deleted therefrom and the following clause (iv) is substituted in lieu
thereof:

"(iv) change its name, its identity as a corporation or its corporate
structure; provided, however, the Borrower may change its name to
Dailey Corporation and its corporate structure, in each instance as
contemplated by the Merger Transaction in accordance with the terms
and conditions set forth in Section 6.5(a) hereof."

(i) Section 6.10 of the Agreement is hereby deleted
therefrom and the following Section 6.10 is substituted in lieu thereof:

"Section 6.10 Subordinated Indebtedness. No payments of
Subordinated Indebtedness will be made without the Bank's prior
written

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<PAGE> 59
consent; provided, however, the Borrower may (i) make payments of
Affiliate Subordinated Indebtedness in the amounts and in accordance
with the terms and conditions of the Affiliate Subordination Agreement
and (ii) notwithstanding any provision in this Agreement or the
Affiliate Subordination Agreement to the contrary, upon the
occurrence of, and the receipt by the Borrower of the proceeds of, a
Successful Offering, the Borrower may pay all outstanding amounts
owing on the Junior Creditor Note and the Dividend Note, in each
instance with the net proceeds of the Successful Offering."

(j) Exhibits H, I and J hereto are hereby added to the
Agreement as Exhibits H, I and J thereto.

SECTION 3. Release of Certain Real Estate Collateral.
Notwithstanding any provision in any of the Loan Documents to the contrary,
provided no Default or Event of Default exists under the Agreement or any other
Loan Document, the Borrower shall be entitled to obtain from the Bank a release
of the Bank's liens on the Pledged Real Property on the following basis:

(a) The Borrower shall pay any and all fees and expenses
incurred by the Bank, including, without limitation, all attorneys' fees and
expenses, incurred in connection with such release;

(b) The releases shall be in form and substance
satisfactory to the Bank; and

(c) It being understood and agreed that the releases
will only relate to the Pledged Real Property and does not and will not affect
in any way the remainder of the Collateral or the obligations of the Borrower
under the Agreement and the other Loan Documents.

SECTION 4. Conditions of Effectiveness. As a condition
precedent to the effectiveness of the Bank's agreements and obligations
hereunder, the Borrower shall have taken the following actions and delivered to
the Bank the following documents and instruments, in form and substance
satisfactory to the Bank:

(a) The Borrower shall have duly executed and delivered
this Amendment.

(b) The Borrower shall have paid all accrued and unpaid
legal fees and expenses referred to in Section 8.7 of the Agreement and
Section 8 hereof to the extent invoices for such fees and expenses have been
delivered to the Borrower.

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<PAGE> 60
(c) The Borrower shall have provided such other evidence
as the Bank may reasonably request to establish the consummation of the
transactions contemplated hereby, the taking of all proceedings in connection
herewith and compliance with the conditions set forth in this Amendment.

SECTION 5. Representations and Warranties of the Borrower. The
Borrower represents and warrants to the Bank, with full knowledge that the Bank
is relying on the following representations and warranties in executing this
Amendment, as follows:

(a) The Borrower has corporate power and authority to
execute, deliver and perform this Amendment, and all corporate action on the
part of the Borrower requisite for the due execution, delivery and performance
of this Amendment has been duly and effectively taken.

(b) The Agreement as amended by this Amendment and the
Loan Documents and each and every other document executed and delivered in
connection with this Amendment to which the Borrower or any of its Subsidiaries
is a party constitute the legal, valid and binding obligations of the Borrower
and any of its Subsidiaries to the extent it is a party thereto, enforceable
against such Person in accordance with their respective terms.

(c) This Amendment does not and will not violate any
provisions of the articles or certificate of incorporation or bylaws of the
Borrower or any contract, agreement, instrument or requirement of any
Governmental Authority to which the Borrower is subject. The Borrower's
execution of this Amendment will not result in the creation or imposition of
any lien upon any properties of the Borrower, other than those permitted by the
Agreement and this Amendment.

(d) The Borrower's execution, delivery and performance
of this Amendment does not require the consent or approval of any other Person,
including, without limitation, any Governmental Authority.

(e) The unaudited consolidated balance sheet of the
Borrower and its Subsidiaries as of February 29, 1996, the related consolidated
statements of earnings, capital accounts, and cash flows of the Borrower for
the period then ended and the consolidated balance sheet and related
consolidated statements of earnings, capital accounts and cash flows for the
period commencing the first day of the fiscal year and ending on the last day
of such quarter which have been furnished to the Bank, fairly present the
financial condition of the Borrower and its Subsidiaries as at such date and
the results of the operations of the Borrower and its Subsidiaries for the
periods ended on such date, all in accordance with

- 8 -
<PAGE> 61
GAAP applied on a consistent basis, and since February 29, 1996 there has been
no material adverse change in such condition or operations.

(f) The Borrower has performed and complied with all
agreements and conditions contained in the Agreement required to be performed
or complied with by the Borrower prior to or at the time of delivery of this
Amendment, other than as expressly waived pursuant to Section 7(a) hereof. No
Default or Event of Default exists, other than as expressly waived pursuant to
Section 7(a) hereof.

(g) All of the issued and outstanding shares of capital
stock of the Surviving Corporation are owned and held of record by Holdings and
all of the issued and outstanding shares of capital stock of Holdings are owned
and held of record by the Parent.

(h) All of the representations and warranties made by or
on behalf of the Borrower, Holdings and the Surviving Corporation to the Bank
with respect to or in connection with the Merger Transaction and the remainder
of the Proposed Transaction in connection with the execution and delivery of
this Amendment are true and correct in all respects on the date this Amendment
is executed, except such representations that relate solely to an earlier date
and that were true and correct on such earlier date.

(i) Nothing in this Section 5 of this Amendment is
intended to amend any of the representations or warranties contained in the
Agreement or the Loan Documents to which the Borrower or any of its
Subsidiaries is a party. The Borrower represents and warrants that all of the
representations and warranties contained in the Agreement and in all
instruments and documents executed pursuant thereto or contemplated thereby are
true and correct in all material respects on and as of this date, except (i)
such representations that relate solely to an earlier date and that were true
and correct on such earlier date, and (ii) the breach or inaccuracy of
representations and warranties about which the Bank has been notified in
writing prior to the date of this Amendment.

SECTION 6. Reference to and Effect on the Agreement.

(a) Upon the effectiveness of Sections 2 hereof, on and
after the Effective Date, each reference in the Agreement to "this Agreement",
"hereunder", "hereof", "herein", or words of like import, shall mean and be a
reference to the Agreement as amended hereby.

(b) Except as expressly provided herein, the Agreement
and the other Loan Documents shall remain in full force and effect in
accordance with their respective terms, and this Amendment shall not be
construed to impair the validity, perfection or priority of any lien or
security interest securing the Obligations.

- 9 -
<PAGE> 62
SECTION 7. Limited Waiver and No Other Waiver.

(a) In reliance upon the representations and warranties
of the Borrower herein set forth, the Bank hereby waives any Default or Event
of Default caused by (i) the Borrower delivering the monthly listing and aging
of accounts receivable and payable of the Borrower and the Loan Formula
Certificate as at the end of February 1996 after the date required by Section
5.1(g) of the Agreement and (ii) the failure of the Borrower to deliver a
monthly listing and aging of accounts receivable and payable of the Borrower
and a Loan Formula Certificate as at the end of March 1996 (the "March
Information"), within 45 days after the end of March 1996 as required by
Section 5.1(g) of the Agreement; provided, however, the Borrower hereby agrees
to deliver the March Information to the Bank on or before June 30, 1996.

(b) The Borrower agrees that, except as expressly waived
pursuant to Section 7(a) hereof, no Event of Default and no Default has been
waived or remedied by the execution of this Amendment by the Bank, and any such
Default or Event or Default heretofore arising and currently continuing shall
continue after the execution and delivery hereof. Nothing contained in this
Amendment nor any past indulgence by the Bank nor any other action or inaction
on behalf of the Bank (i) shall constitute or be deemed to constitute a waiver
of any defaults or events of default which may exist under the Agreement or the
other Loan Documents (other than as expressly waived pursuant to Section 7(a)
hereof), or (ii) shall constitute or be deemed to constitute an election of
remedies by the Bank or a waiver of any of the rights or remedies of the Bank
provided in the Agreement or the other Loan Documents or otherwise afforded at
law or in equity.

SECTION 8. Cost, Expenses and Taxes. The Borrower agrees to
pay on demand all reasonable costs and expenses of the Bank in connection with
the preparation, reproduction, execution and delivery of this Amendment and the
other instruments and documents to be delivered hereunder, including reasonable
attorneys' fees and out-of-pocket expenses of the Bank. In addition, the
Borrower shall pay any and all stamp and other taxes and fees payable or
determined to be payable in connection with the execution and delivery, filing
or recording of this Amendment and the other instruments and documents to be
delivered hereunder, and agrees to save the Bank harmless from and against any
and all liabilities with respect to or resulting from any delay in paying or
omission to pay such taxes or fees.

SECTION 9. Extent of Amendments. Except as otherwise expressly
provided herein, the Agreement and the other Loan Documents are not amended,
modified or affected by this Amendment. The Borrower ratifies and confirms
that (i) except as expressly amended hereby, all of the terms, conditions,
covenants, representations, warranties and all other provisions of the
Agreement remain in full force and effect, (ii) each of the other

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<PAGE> 63
Loan Documents are and remain in full force and effect in accordance with their
respective terms, and (iii) the Collateral is unimpaired by this Amendment.

SECTION 10. Grant and Affirmation of Security Interest. The
Borrower hereby grants to the Bank a security interest in the Collateral to
secure payment and performance of the Notes and the obligations described in
the Agreement, the other Loan Documents, and all documents and instruments
executed in connection therewith, and the Borrower hereby confirms and agrees
that any and all liens, security interests and other security or Collateral now
or hereafter held by the Bank as security for payment and performance of the
Obligations hereby are renewed, extended and carried forth to secure payment
and performance of all of the Obligations, including, without limitation, the
Notes. The Security Instruments executed by the Borrower are and remain legal,
valid and binding obligations of the parties thereto, enforceable in accordance
with their respective terms.

SECTION 11. Execution and Counterparts. This Amendment may be
executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed and delivered shall be
deemed to be an original and all of which taken together shall constitute but
one and the same instrument. Delivery of an executed counterpart of the
signature page of this Amendment by facsimile shall be equally as effective as
delivery of a manually executed counterpart of this Amendment.

SECTION 12. Severability. In the event any one or more
provisions contained in the Agreement or this Amendment should be held to be
invalid, illegal or unenforceable in any respect, the validity, enforceability
and legality of the remaining provisions contained herein and therein shall not
be affected in any way or impaired thereby and shall be enforceable in
accordance with their respective terms.

SECTION 13. Governing Law. This Amendment shall be governed by
and construed in accordance with the laws of the State of Texas and, to the
extent applicable, the federal laws of the United States of America.

SECTION 14. Interpretation. In the event of any inconsistency
between the terms of this Amendment and the Agreement or any of the other Loan
Documents, this Amendment shall govern. The Borrower acknowledges that it has
consulted with counsel and with such other experts and advisors as it has
deemed necessary in connection with the negotiation, execution and delivery of
this Amendment. This Amendment shall be construed without regard to any
presumption or rule requiring that it be construed against the party causing
this Amendment or any part hereof to be drafted.

- 11 -
<PAGE> 64
SECTION 15. Headings. Section headings in this Amendment are
included herein for convenience and reference only and shall not constitute a
part of this Amendment for any other purpose.

SECTION 16. Benefit of Agreement. This Amendment shall be
binding upon and inure to the benefit of and be enforceable by the parties
hereto and their respective successors and assigns. No other Person shall be
entitled to claim any right or benefit hereunder, including, without
limitation, the status of a third-party beneficiary of this Amendment.

SECTION 17. Arbitration Program. The parties agree to be bound
by the terms and provisions of the current Arbitration Program of the Bank
which is incorporated by reference herein and is acknowledged as received by
the parties pursuant to which any and all disputes arising hereunder, under the
Agreement, under any of the other Loan Documents, or under any of the documents
and instruments contemplated thereby, or pertaining hereto or thereto, shall be
resolved by mandatory binding arbitration upon the request of any party.

SECTION 18. NO ORAL AGREEMENTS. THE AGREEMENT (AS AMENDED BY
THIS AMENDMENT) AND THE OTHER LOAN DOCUMENTS, REPRESENT THE FINAL AGREEMENT
BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.

THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

[THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK]

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<PAGE> 65
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed by their respective officers thereunto duly authorized.

THE BANK: THE BORROWER:

WELLS FARGO BANK (TEXAS), DAILEY PETROLEUM SERVICES
NATIONAL ASSOCIATION (formerly CORP.
known as First Interstate
Bank of Texas, N.A.)

By /s/ JOE ARGUE By /s/ DAVID T. TIGHE
------------------------------ -------------------------------
Name: Joe Argue Name: David T. Tighe
Title: Senior Vice President Title: V.P. -- Finance

- 13 -

<PAGE> 1

REVOLVING CREDIT NOTE

FIRST INTERSTATE BANK OF TEXAS, N.A.

NO.________ Houston, Texas December 13, 1995 $3,000,000

FOR VALUE RECEIVED, the undersigned, DAILEY PETROLEUM SERVICES
CORPORATION, a Delaware corporation (herein called "Maker"), promises to pay to
the order of FIRST INTERSTATE BANK OF TEXAS, N.A., a national banking
association (herein called "Payee," which term herein in every instance shall
refer to any owner or holder of this note) the sum of THREE MILLION AND NO/100
DOLLARS ($3,000,000), or so much thereof as may be advanced from time to time
hereunder by Payee, together with interest on the principal hereof from time to
time outstanding from the date of advancement until maturity, at the per annum
rate hereinafter stated, said principal and interest being payable in lawful
money of the United States of America at the banking quarters of FIRST
INTERSTATE BANK OF TEXAS, N.A., 1000 Louisiana, Houston, Harris County, Texas,
or at such other place as Payee may designate hereafter in writing.

This note is issued pursuant to a second amended and restated loan
agreement of even date herewith, by and between Maker and Payee (as the same
may be amended, modified or restated from time to time, the "Loan Agreement"),
and reference is made hereby to the Loan Agreement for provisions for the
prepayment and the acceleration of the maturity hereof. All capitalized terms
used herein but not defined herein shall have the meaning ascribed to them in
the Loan Agreement.

Maker promises to pay interest on the unpaid principal balance, from
time to time outstanding, of all advances hereunder, at the rates and on the
dates set forth in the Loan Agreement. The aggregate unpaid principal amount
of all advances hereunder shall be due and payable on December 13, 1996. Until
December 13, 1996, the undersigned may borrow, pay, prepay in whole or in part
and reborrow hereunder in accordance with the terms and provisions set forth in
the Loan Agreement, so long as the outstanding principal balance outstanding at
any one time is not more than the lesser of (i) an amount equal to the Loan
Formula or (ii) $3,000,000, in each case less the then existing Credit
Exposure, it being understood that this note is a master revolving credit note;
it being expressly contemplated that, by reason of prepayments hereon, there
may be times when no indebtedness is owing hereunder, but, notwithstanding such
occurrences, this note shall

Page 1 of 4 Pages
<PAGE> 2
remain valid and shall be in full force and effect as to loans or advances made
subsequent to such occurrences; and it being understood and agreed that
advances and repayments of principal under this note are not limited to the
face amount of principal, but to a maximum of the face amount of principal at
any one time outstanding. Payee may advance funds pursuant to this note from
time to time, and from time to time the undersigned will make repayments on the
principal of this note, so that no more than the face amount of principal shall
be outstanding at any one time in accordance with the Loan Agreement. Each
advance and each payment of principal hereunder shall be reflected by a
notation made by Payee in its business records. The aggregate unpaid principal
amount of advances reflected by the notations made in Payee's business records
shall be conclusive evidence of the principal amount owing under this note,
which amount the undersigned unconditionally promises to pay to the order of
Payee under the terms hereof.

Maker and any and all sureties, guarantors and endorsers of this note
and all other parties now or hereafter liable hereon, severally waive grace,
demand, presentment for payment, protest, notice of any kind (including, but
not limited to, notice of dishonor, notice of protest, notice of intention to
accelerate and notice of acceleration) and diligence in collecting and bringing
suit against any party hereto, and agree (i) to all extensions and partial
payments, with or without notice, before or after maturity, (ii) to any
substitution, exchange or release of any security now or hereafter given for
this note, (iii) to the release of any party primarily or secondarily liable
hereon, and (iv) that it will not be necessary for Payee, in order to enforce
payment of this note, to first institute or exhaust Payee's remedies against
Maker or any other party liable therefor or against any security for this note.

In the event of default hereunder or under any of the instruments
securing payment hereof and this note is placed in the hands of an attorney for
collection (whether or not suit is filed), or if this note is collected by suit
or legal proceedings or through the probate court or bankruptcy proceedings,
Maker agrees to pay all reasonable attorneys' fees and all expenses of
collection and costs of court.

Page 2 of 4 Pages
<PAGE> 3
or in any of the documents securing the payment hereof or otherwise relating
hereto, or in any communication by Payee or any other person to Maker or any
other person, or in the event all or part of the principal or interest hereof
shall be prepaid or accelerated, so that under any of such circumstances or
under any other circumstance whatsoever the amount of interest contracted for,
charged, taken, reserved, or received on the amount of principal actually
outstanding from time to time under this note shall exceed the maximum amount
of interest permitted by applicable usury laws, then in any such event it is
agreed as follows: (i) the provisions of this paragraph shall govern and
control, (ii) any such excess shall be deemed an accidental and bona fide error
and canceled automatically to the extent of such excess, and shall not be
collected or collectible, (iii) any such excess which is or has been paid or
received notwithstanding this paragraph shall be credited against the then
unpaid principal balance hereof or refunded to Maker, at Payee's option, and
(iv) the effective rate of interest shall be automatically reduced to the
maximum lawful rate allowed under applicable laws as construed by courts having
jurisdiction hereof or thereof. Without limiting the foregoing, all
calculations of the rate of interest contracted for, charged, taken, reserved,
or received in connection herewith which are made for the purpose of
determining whether such rate exceeds the maximum lawful rate shall be made to
the extent permitted by applicable laws by amortizing, prorating, allocating
and spreading during the period of the full term of the loan, including all
prior and subsequent renewals and extensions, all interest at any time
contracted for, charged, taken, reserved, or received. The terms of this
paragraph shall be deemed to be incorporated in every loan document, security
instrument, and communication relating to this note and loan. The term
"applicable usury laws" shall mean such laws of the State of Texas or the laws
of the United States, whichever laws allow the higher rate of interest, as such
laws now exist; provided, however, that if such laws shall hereafter allow
higher rates of interest, then the applicable usury laws shall be the laws
allowing the higher rates, to be effective as of the effective date of such
laws.

Except to the extent required by federal law, this note shall be
governed by and construed under the laws of the State of Texas.

Any check, draft, money order or other instrument given in payment of
all or any portion hereof may be accepted by Payee and handled in collection in
the customary manner, but the same shall not constitute payment hereunder or
diminish any rights of Payee except to the extent that actual cash proceeds of
such instrument are unconditionally received by Payee.

Maker and Payee agree that Tex. Rev. Civ. Stat. Ann art. 5069 Ch. 15
(which regulates certain revolving loan accounts and revolving tri-party
accounts) shall not apply

Page 3 of 4 Pages
<PAGE> 4
to any revolving loan accounts created under this note or maintained in
connection therewith.

To the extent that the interest rate laws of the State of Texas are
applicable to this note, the applicable interest rate ceiling is the indicated
(weekly) ceiling determined in accordance with Article 5069-1.04(a)(1) of the
Texas Revised Civil Statutes, as amended, and, to the extent that this note is
deemed an open end account as such term is defined in Article 5069-1.01(f) of
the Texas Revised Civil Statutes, as amended, the Payee retains the right to
modify the interest rate in accordance with applicable law.

Maker represents and warrants to Payee and to all other owners and
holders of any indebtedness evidenced hereby that all loans evidenced by this
note are for business, commercial, investment or other similar purpose and not
primarily for personal, family, household or agricultural use, as such terms
are used or defined in Texas Revised Civil Statutes, Article 5069-1.04, Texas
Credit Code and Regulation Z promulgated by the Board of Governors of the
Federal Reserve System and under Titles I and V of the Consumer Credit
Protection Act.

This note is secured as provided in the Loan Agreement and is entitled
to all of the benefits of the Loan Agreement.

DAILEY PETROLEUM SERVICES
CORPORATION

By: /s/ DAVID T. TIGHE
------------------------------------
David T. Tighe
Vice President

- MAKER -

Page 4 of 4 Pages

<PAGE> 1

SECOND AMENDED AND RESTATED SUBORDINATION AGREEMENT

This Second Amended and Restated Subordination Agreement (this
"Agreement") is entered into as of December 13, 1995, by and among LAWRENCE
INDUSTRIES, INC., a Delaware corporation (the "Junior Creditor"), FIRST
INTERSTATE BANK OF TEXAS, N.A., a national banking association ("FITX," which
term shall include successors and assigns), and DAILEY PETROLEUM SERVICES
CORP., a Delaware corporation (the "Borrower"). Capitalized terms used but not
defined herein have the meanings assigned to them in the Senior Loan Agreement
(as hereinafter defined).

WHEREAS, the Borrower, FITX and the corporations a party thereto
entered into a Subordination Agreement dated as of November 8, 1991, which
Subordination Agreement was amended and restated by that certain Amended and
Restated Subordination Agreement dated as of December 1, 1993, by and among
FITX, Borrower and Junior Creditor (the "Prior Subordination Agreement"); and

WHEREAS, the Borrower has requested that FITX extend further credit
and other financial accommodations to the Borrower; and

WHEREAS, the Prior Subordination Agreement is being amended and
restated in order to reflect agreements of the parties hereto;

NOW, THEREFORE, in order to induce FITX to extend credit and other
financial accommodations to the Borrower pursuant to the Senior Loan Agreement
and understanding that FITX is relying hereon in extending such credit and
financial accommodations to the Borrower, the Junior Creditor has agreed to
subordinate financing and other credit accommodations previously or hereafter
extended to the Borrower on the terms and conditions hereinafter set forth,
and, therefore, the parties hereto agree to amend and restate the Prior
Subordination Agreement as follows, intending to be bound legally, to-wit:

1. Certain Definitions. As used in this Agreement, the following
terms shall have the following meanings:

"Junior Claims" means all principal of and interest (including
interest accrued subsequent to the filing of any petition under any bankruptcy,
insolvency or similar law) on all present and future indebtedness of the
Borrower to the Junior Creditor evidenced by that certain promissory note,
dated December 1, 1993, executed by the Borrower and payable to the order of
the Junior Creditor in the original principal amount of $3,300,000, together
with any amendments, modifications, supplements, renewals, extensions,
increases, and rearrangements thereof.
<PAGE> 2
"Proceeding" means any (a) insolvency, bankruptcy,
receivership, custodianship, liquidation, reorganization, readjustment,
composition or other similar proceeding relating to the Borrower or its
property, whether under any bankruptcy, reorganization or insolvency law or
laws, federal or state, or any law, federal or state, relating to relief of
debtors, readjustment of indebtedness, reorganization, composition or
extension, (b) proceeding for any liquidation, liquidating distribution,
dissolution or other winding up of the Borrower, voluntary or involuntary,
whether or not involving insolvency or bankruptcy proceedings, (c) assignment
for the benefit of creditors of the Borrower or (d) other marshalling of the
assets of the Borrower.

"Senior Claims" means all present and future indebtedness of
the Borrower which may be from time to time directly or indirectly incurred by
the Borrower to FITX, including without limitation all present and future
indebtedness pursuant to the Senior Loan Agreement or any of the documents or
instruments executed pursuant thereto or in connection therewith, including,
but not limited to (i) the principal of and interest (including interest
accrued subsequent to the filing of any petition under any bankruptcy,
insolvency or similar law) on that certain Term Note, in the principal amount
of $10,000,000, executed and delivered pursuant to the Senior Loan Agreement,
and all amendments, modifications, supplements, renewals, refinancings,
extensions, increases, and rearrangements thereof, and (ii) the principal of
and interest (including interest accrued subsequent to the filing of any
petition under any bankruptcy, insolvency or similar law) on that certain
Revolving Credit Note, in the principal amount of $3,000,000, executed and
delivered pursuant to the Senior Loan Agreement, and all amendments,
modifications, supplements, renewals, refinancings, extensions, increases, and
rearrangements thereof.

"Senior Event of Default" means any Default or Event of
Default in respect of any of the Senior Claims as described in Section 7.1 of
the Senior Loan Agreement.

"Senior Loan Agreement" means that certain Second Amended and
Restated Loan Agreement, dated as of December 13, 1995, by and between FITX and
the Borrower, as the same may be amended, restated, modified, supplemented,
renewed, extended or rearranged from time to time.

2. Subordination Prior to Proceeding or Senior Event of Default.
Unless and until the Senior Claims shall have been fully paid in cash and the
holders of the Senior Claims have no further commitment to extend credit to the
Borrower, the Borrower will not, without the express prior written consent of
the holders of the Senior Claims, make, give or permit, directly or indirectly,
by set-off, redemption, purchase or in any other manner, nor will any holder or
holders of Junior Claims be entitled to receive, directly or indirectly, any

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<PAGE> 3
payment or security for the whole or any part of the Junior Claims and, without
the express prior written consent of the holders of the Senior Claims, the
holders of the Junior Claims will not accelerate or amend the scheduled
maturity to a date earlier than currently scheduled or amend the interest
payments thereof to increase the amount thereof or to cause the same to occur
more frequently; provided, however, that the Borrower may pay the principal of
the Junior Claims in an amount not to exceed $660,000 per fiscal year of the
Borrower and the Borrower may pay interest on the Junior Claims (excluding any
default interest in respect of any past due payments thereof) annually (at a
rate not to exceed 8.00% per annum), so long as none of the events described in
Section 3 or 4 below shall have occurred and then be continuing and so long as
none of the events described in Section 4 below would be occasioned thereby.

3. Subordination in the Event of Insolvency, etc. In the event
of any Proceeding:

(a) All Senior Claims shall first be paid in full in cash
before any payment or distribution, whether in cash, securities or other
property, shall be made to any holder of any Junior Claim on account of such
Junior Claim.

(b) Any payment or distribution of any kind or character,
whether in cash, securities or other property which would otherwise (but for
these subordination provisions) be payable or deliverable in respect of any
Junior Claim shall be paid or delivered by the person making such distribution
or payment, whether a trustee in bankruptcy, receiver, assignee for the benefit
of creditors, liquidating trustee or agent, or otherwise, directly to the
holders of the Senior Claims, for application in payment of the Senior Claims
in accordance with the priorities then existing among such holders, to the
extent necessary to pay in full in cash all Senior Claims then remaining
unpaid, after giving effect to any concurrent payment or distribution to the
holders of the Senior Claims.

4. Subordination in the Event of a Senior Event of Default. Upon
the occurrence of any Senior Event of Default, all Senior Claims shall first be
paid in full in cash before any payment or distribution, principal, interest,
or otherwise, whether in cash, securities or other property, shall be made to
any holder of any Junior Claim on account of such Junior Claim.

5. Turnover of Improper Payments. If any payment or distribution
of any character, whether in cash, property or securities shall be received by
any holder of any Junior Claim in contravention of any of the terms of this
Agreement and before all the Senior Claims shall have been paid in full in
cash, such payment or distribution or security

-3-
<PAGE> 4
shall be received in trust for the benefit of, and shall be promptly paid over
or delivered and transferred to the holders of the Senior Claims at the time
outstanding in accordance with the priorities then existing among such holders
for application to the payment of all Senior Claims remaining unpaid, to the
extent necessary to pay all such Senior Claims in full.

6. Borrower's Obligations Absolute. Nothing contained herein
shall impair, as between the Borrower and the holder of any Junior Claim, the
obligations of the Borrower, which are absolute and unconditional, to pay to
the holder thereof all amounts payable in respect of such Junior Claim as and
when the same shall become due and payable in accordance with the terms
thereof, or is intended to or shall affect the relative rights of the holders
of the Junior Claims and creditors of the Borrower other than the holders of
the Senior Claims.

7. Subrogation. The holders of the Junior Claims shall be
subrogated, to the extent of any amounts required to be paid over to the
holders of the Senior Claims pursuant hereto, to all rights of any holders of
Senior Claims to receive any payments or distributions applicable to the Senior
Claims; provided, however, that the holders of the Junior Claims shall not be
entitled to enforce such rights until such time as all Senior Claims have been
paid in full. For the purposes of the foregoing subrogation, no payment or
distribution received by the holders of Senior Claims of cash, property or
securities to which the holders of the Junior Claims would have been entitled
except for these subordination provisions shall, as between the Borrower and
its creditors other than the holders of Senior Claims, on the one hand, and the
holders of the Junior Claims, on the other hand, be deemed to be a payment or
distribution by the Borrower to or on account of the Senior Claims, it being
understood that the provisions of this Agreement are solely for the purpose of
defining the relative rights of the holders of the Senior Claims, on the one
hand, and the holders of the Junior Claims, on the other hand.

8. Legending. The Junior Claims shall be subject to a security
interest in favor of the holders of the Senior Claims to secure this Agreement
and the Senior Claims (the holders of the Senior Claims having the rights and
remedies of a secured creditor under the Uniform Commercial Code). In the
event any Junior Claims are evidenced by a promissory note or other instrument,
such instrument shall be in form satisfactory to the holders of the Senior
Claims. Any such instruments evidencing the Junior Claims shall, at the option
of the holders of the Senior Claims, be either delivered to the holders of the
Senior Claims or the face of the instruments evidencing the Junior Claims shall
be permanently marked with a legend indicating that the instrument is subject
to this Agreement.

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<PAGE> 5
9. No Prejudice or Impairment. The holders of the Junior Claims
agree that the holders of the Senior Claims shall have uncontrolled power and
discretion, without notice to the holders of the Junior Claims, to deal in any
manner with the Senior Claims owing to the holders of the Senior Claims,
including interest, costs and expenses payable by the Borrower to the holders
of the Senior Claims, and any security and guarantees therefor, including, but
not by way of limitation, release, surrender, extension, renewal, acceleration,
increase, compromise or substitution. The holders of the Senior Claims may at
any time and from time to time and in their absolute discretion, change the
manner, place or terms of payment, change or extend the time of payment of, or
renew, increase, or alter, any Senior Claim or security therefor, or release,
sell or exchange such security, or amend or supplement any instrument pursuant
to which any Senior Claim is issued or secured, or exercise or refrain from
exercising any of their rights in respect of the Senior Claims including,
without limitation, the waiver of default thereunder, all without notice to or
assent from the holders of the Junior Claims, and all without impairing,
abridging, releasing or affecting the subordination provisions hereof. The
holders of the Junior Claims hereby waive and agree not to assert against the
holders of the Senior Claims any rights which a guarantor or surety could
exercise, but nothing in this Agreement shall constitute the holders of the
Junior Claims a guarantor or surety. The holders of the Junior Claims hereby
waive the right, if any, to require that any holder or holders of the Senior
Claims marshal or otherwise require any holder or holders of the Senior Claims
to proceed to dispose of or foreclose upon collateral in any manner or order.

10. Enforcement of Junior Claims. Until such time as all of the
Senior Claims have been paid in full, the holders of the Junior Claims will
not, without the prior written consent of the holders of the Senior Claims,
transfer, assert, collect, enforce, or release all or any part of the Junior
Claims or take any action to dispose of, foreclose, realize upon or release any
collateral securing said Junior Claims or enforce any liens, security
interests, deeds of trust, mortgages, lien instruments or other encumbrances
securing the Junior Claims, or any other rights and remedies. If the holders
of the Senior Claims so request, the holders of the Junior Claims shall take
all steps necessary to collect and enforce the Junior Claims and shall assign,
deliver or cause to be delivered to the holders of the Senior Claims any
collateral securing the Junior Claims. The holders of the Junior Claims
further hereby irrevocably authorize the holders of the Senior Claims or any
person the holders of the Senior Claims may designate to collect and receive
the proceeds of the Junior Claims, to do any and all things with the same power
and authority that said holders of the Junior Claims might or could have done
if this Agreement had not been executed, including the filing and proving of
claims in the name of the holders of the Senior Claims or in the name of the
holders of the Junior Claims, in any Proceeding.

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<PAGE> 6
11. Binding Effect. This Agreement shall be binding upon the
heirs, administrators, personal representatives, successors and assigns of the
parties hereto, and shall inure to the benefit of said heirs, administrators,
personal representatives, successors and assigns.

12. Counterparts. This Agreement may be executed in any number of
counterparts and all of such counterparts taken together shall be deemed to
constitute one and the same instrument.

13. Severability. In case any one or more of the provisions
contained in this Agreement or any other documents executed in connection
herewith should be invalid, illegal or unenforceable in any respect, the
validity, legality and enforceability of the remaining provisions contained
herein and therein shall not be affected in any way thereby.

14. Amendment. This Agreement may not be amended except in
writing signed by the parties hereto.

15. Descriptive Headings. Descriptive headings of the several
sections of this Agreement are inserted for convenience only and do not
constitute a part of this Agreement.

16. Amendment and Restatement. This Agreement amends, restates
and supersedes the Prior Subordination Agreement in its entirety. The recitals
at the beginning of this Agreement are incorporated into this Agreement as
agreements of the parties hereto.

17. GOVERNING LAW. THIS AGREEMENT AND THE OBLIGATIONS WHICH IT
SECURES AND ALL RIGHTS AND LIABILITIES OF THE PARTIES SHALL BE GOVERNED AS TO
VALIDITY, INTERPRETATIONS, ENFORCEMENT AND EFFECT BY THE LAWS OF THE STATE OF
TEXAS.

18. SUBMISSION TO JURISDICTION. WITH RESPECT TO ANY AND ALL
DISPUTES ARISING HEREUNDER OR UNDER ANY OF THE OTHER INSTRUMENTS AND DOCUMENTS
EXECUTED IN CONNECTION HEREWITH OR THEREWITH NOT SETTLED OR SUBJECT TO
ARBITRATION, PURSUANT TO THE ARBITRATION PROGRAM REFERENCED IN SECTION 19
HEREOF, EACH OF FITX, THE BORROWER AND THE HOLDERS OF THE JUNIOR CLAIMS HEREBY
IRREVOCABLY AND UNCONDITIONALLY:

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<PAGE> 7
(a) SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL
ACTION OR PROCEEDING RELATING TO THIS AGREEMENT, ANY NOTE AND ANY DOCUMENT TO
WHICH IT IS A PARTY, OR FOR RECOGNITION AND ENFORCEMENT OF ANY JUDGMENT IN
RESPECT OF ANY THEREOF, TO THE NON-EXCLUSIVE GENERAL JURISDICTION OF THE COURTS
OF THE STATE OF TEXAS, THE COURTS OF THE UNITED STATES OF AMERICA FOR THE
SOUTHERN DISTRICT OF TEXAS, AND APPELLATE COURTS FROM ANY THEREOF;

(b) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE
BROUGHT IN SUCH COURTS, AND WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREAFTER
HAVE TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT OR THAT
SUCH ACTION OR PROCEEDING WAS BROUGHT IN AN INCONVENIENT COURT AND AGREES NOT
TO PLEAD OR CLAIM THE SAME;

(c) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR
PROCEEDING MAY BE EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR CERTIFIED
MAIL (OR ANY SUBSTANTIALLY SIMILAR FORM AND MAIL), POSTAGE PREPAID, TO IT AT
ITS ADDRESS SPECIFIED ON THE SIGNATURE PAGE HEREOF; AND

(d) AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO
EFFECT SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT
THE RIGHT TO SUE IN ANY OTHER JURISDICTION.

19. Arbitration Program. The parties agree to be bound by the
terms and provisions of the current Arbitration Program which is incorporated
by reference herein and is acknowledged as received by the parties pursuant to
which any and all disputes arising hereunder or under any of the documents and
instruments contemplated hereby, or pertaining hereto or thereto, shall be
resolved by mandatory binding arbitration upon the request of any party.

20. NO ORAL AGREEMENTS. THIS WRITTEN AGREEMENT AND THE
INSTRUMENTS AND DOCUMENTS EXECUTED IN CONNECTION HEREWITH, REPRESENT THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.

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<PAGE> 8
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

IN WITNESS WHEREOF, the parties hereto have executed and delivered
this agreement effective as of the date first above-written.

FITX: Address for Notices:

FIRST INTERSTATE BANK 1000 Louisiana
OF TEXAS, N.A. Houston, Texas 77002
Attn: Mr. Randall S. Wade
Banking Officer

By /s/ RANDALL S. WADE
------------------------------
Randall S. Wade
Banking Officer

BORROWER:

DAILEY PETROLEUM SERVICES Address for Notices:
CORP.
2507 North Frazier
Conroe, Texas 77303
By /s/ DAVID T. TIGHE Attn: Mr. David T. Tighe
------------------------------ Vice President
David T. Tighe
Vice President

JUNIOR CREDITOR:

LAWRENCE INDUSTRIES, INC., Address for Notices for Junior Creditor:
a Delaware corporation
2507 North Frazier
Conroe, Texas 77303
By /s/ DAVID T. TIGHE Attn: David T. Tighe
------------------------------ Vice President
David T. Tighe
Vice President

-8-

<PAGE> 1

SECOND AMENDED AND RESTATED
COMMERCIAL SECURITY AGREEMENT

This Second Amended and Restated Commercial Security Agreement
("Agreement") is entered into effective as of the 13th day of December, 1995,
by and between FIRST INTERSTATE BANK OF TEXAS, N.A. ("Secured Party") and
DAILEY PETROLEUM SERVICES CORP. ("Debtor"). All capitalized terms not
otherwise defined herein shall have the meanings ascribed to them in the Second
Amended and Restated Loan Agreement dated as of December 13, 1995 between
Debtor and Secured Party (the Second Amended and Restated Loan Agreement as it
may be amended, modified or restated from time to time is hereinafter called
the "Loan Agreement").

FOR VALUE RECEIVED, the receipt and sufficiency of which is hereby
acknowledged, Debtor grants to Secured Party the security interest (and the
pledges and assignments as applicable) hereinafter set forth and agrees with
Secured Party as follows:

A. OBLIGATIONS SECURED. The security interest and pledges and
assignments as applicable granted hereby are to secure punctual payment and
performance of the following: (i) the Revolving Credit Note, and any and all
extensions, renewals, modifications, increases and rearrangements thereof, (ii)
all reimbursement obligations now existing or hereafter arising with respect to
Letters of Credit issued by Secured Party for the account of Debtor in
accordance with the Loan Agreement, (iii) the Term Note, and any and all
extensions, renewals, modifications, increases and rearrangements thereof, (iv)
the obligations of Debtor to Secured Party under this Agreement, the Loan
Agreement and the other Loan Documents and any and all amendments, supplements,
modifications and restatements thereof and thereto, and (v) any and all other
indebtedness, liabilities and obligations whatsoever of Debtor to Secured Party
whether direct or indirect, absolute or contingent, primary or secondary, due
or to become due and whether now existing or hereafter arising, whether joint
or several, or joint and several (all of which are herein separately and
collectively referred to as the "Obligations"). Debtor acknowledges that the
security interest hereby granted shall secure all future advances as well as
any and all other indebtedness, liabilities, and obligations of Debtor to
Secured Party whether now in existence or hereafter arising.

B. USE OF COLLATERAL. Debtor represents, warrants and covenants
to Secured Party that the Collateral will be used by the Debtor primarily for
business purpose.

C. DESCRIPTION OF COLLATERAL. Debtor hereby grants to Secured
Party a security interest in (and hereby pledges and assigns as applicable) and
agrees that Secured Party shall continue to have a security interest in (and a
pledge and assignment as applicable), the following property, to wit:

All Accounts. All accounts, contract rights, rights to the
payment of money including, but not limited to, tax refund claims,
insurance proceeds,
<PAGE> 2
proceeds from tort claims and any rent payable due or to become due
under any rent or lease contracts, now owned or existing as well as
any and all that may hereafter arise or be acquired by Debtor, and all
the proceeds and products thereof, including without limitation, all
notes, drafts, acceptances, instruments and chattel paper arising
therefrom, and all returned or repossessed goods arising from or
relating to any such accounts, or other proceeds or products of any
sale, lease, rental or other disposition of Debtor's inventory.

All Inventory. All of Debtor's inventory, including all
goods, merchandise, raw materials, goods or work in process, finished
goods and other tangible personal property, wheresoever located, now
owned or hereafter acquired and held for sale, rent or lease or
furnished or to be furnished under contracts for service or used or
consumed in Debtor's business and all additions and accessions thereto
and contracts with respect thereto and all documents of title
evidencing or representing any part thereof, and all products and
proceeds thereof.

All Equipment. All equipment of every nature and description
whatsoever now owned or hereafter acquired by Debtor including all
appurtenances and additions thereto and substitutions therefor,
wheresoever located, including all tools, parts and accessories used
in connection therewith. As used herein, the term "equipment" shall
not include inventory as herein defined.

All Fixtures. All of Debtor's fixtures and appurtenances
thereto, and such other goods, chattels, fixtures, equipment and
personal property affixed or in any manner attached to the real estate
and/or building(s) or structure(s), including all additions and
accessions thereto and replacements thereof and articles in
substitution therefor, howsoever attached or affixed, wherever
located, including without limitation the locations described on
Exhibit D.

General Intangibles. All general intangibles including, but
not limited to, goodwill, engineering drawings and customer lists, and
other personal property now owned or hereafter acquired by Debtor
other than goods, accounts, chattel paper, documents and instruments.

Chattel Paper. All of Debtor's interest under chattel paper,
lease agreements and other instruments or documents, whether now
existing or owned by Debtor or hereafter arising or acquired by
Debtor, evidencing both a debt and security interest in or lease of
specific goods.

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<PAGE> 3
Instruments. All of Debtor's now owned or existing as well as
hereafter acquired or arising instruments (other than stock of the
Subsidiaries) and documents.

Rental Agreements. Without limiting the foregoing, all of the
Debtor's right, title and interest in and to the following whether now
existing or hereafter arising or entered into: all agreements (the
"Rental Agreements") entered into by Debtor, as lessor, for the lease,
rental or conditional sale of inventory or equipment, or both,
(together with all monies and claims for monies which may arise out of
the Rental Agreements, all claims, rights, powers, privileges and
remedies of Debtor thereunder and, to the extent not included in the
foregoing, any and all proceeds of any and all of the foregoing).

Intellectual Property. Without limiting the foregoing, all of
Debtor's now or hereafter acquired: (i) Copyrights, including, without
limitation, those listed on Schedule I hereto, as it may be amended
from time to time, (ii) Licenses, including, without limitation, those
listed on Schedule II hereto, as it may be amended from time to time,
(iii) Intellectual Property General Intangibles, (iv) Patents,
including, without limitation, those listed on Schedule III hereto, as
it may be amended from time to time, (v) Trademarks, including,
without limitation, those listed on Schedule IV hereto, as it may be
amended from time to time, (vi) Trade Secrets, including, without
limitation, those related to the Products listed on Schedule V hereto,
as it may be amended from time to time, and (vii) all products and
Intellectual Property Proceeds (including, without limitation,
insurance proceeds) of, and additions, improvements and accessions to,
and books and records describing or used in connection with, any and
all of the foregoing property.

The term "Collateral" as used in this Agreement shall mean and
include, and the security interest (and pledge and assignment as applicable)
shall cover, all of the property described in this paragraph C, as well as any
accessions, additions and attachments thereto and the proceeds and products
thereof, including without limitation, all cash, general intangibles, accounts,
inventory, equipment, fixtures, notes, drafts, acceptances, securities,
instruments, chattel paper, insurance proceeds payable because of loss or
damage, or other property, benefits or rights arising therefrom, and in and to
all returned or repossessed goods arising from or relating to any of the
property described herein or other proceeds of any sale, rental, lease or other
disposition of such property.

As additional security for the punctual payment and performance of the
Obligations, and as part of the Collateral, Debtor hereby grants to Secured
Party a security interest in, and a pledge and assignment of, all of Debtor's
right, title and interest in and to any and all money, property, deposit
accounts, accounts, securities, documents, chattel paper, claims,

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<PAGE> 4
demands, instruments, items or deposits now held or hereafter coming within
Secured Party's custody or control, including without limitation, all
certificates of deposit and other depository accounts, whether such have
matured or the exercise of Secured Party's rights results in loss of interest
or principal or other penalty on such deposits, but excluding deposits subject
to tax penalties if assigned and excluding deposits of F.I.C.A. and federal
withholding taxes. Without prior notice to or demand upon the Debtor (except
as otherwise provided in the Loan Agreement), Secured Party may exercise its
rights granted above at any time when an event of default has occurred and is
continuing. Secured Party's rights and remedies under this paragraph shall be
in addition to and cumulative of any other rights or remedies of Secured Party
provided in the Loan Agreement or any of the other Loan Documents or otherwise
afforded at law and equity including, without limitation, any rights of setoff
to which Secured Party may be entitled.

All terms not otherwise defined herein or defined in the Loan
Agreement and which are defined in the Uniform Commercial Code adopted in the
State of Texas in effect on the date of execution hereof, shall have the
meaning ascribed to them in the Uniform Commercial Code adopted in the State of
Texas in effect as of the date of execution hereof and set forth in any
amendment to the Uniform Commercial Code adopted in the State of Texas to
become effective after the date of execution hereof.

D. REPRESENTATIONS, WARRANTIES AND COVENANTS OF DEBTOR. Debtor
represents and warrants as follows:

1. Ownership; No Encumbrances. The Debtor is, and as to any
property acquired after the date hereof which is included within the
Collateral, Debtor will be, the owner of such Collateral free and clear of all
security interests, charges, adverse claims, encumbrances, liens and rights of
any and every nature whatsoever except for (a) the security interests (and
pledges and assignments, as applicable) granted hereby, and (b) the Permitted
Liens. Schedules I through V attached hereto accurately describe all material
Copyright registrations, applications for Copyright registrations, Licenses,
Patents, and applications for Patents and Trademarks owned by Debtor, except
those filed in foreign jurisdictions which are not yet recorded in Debtor's
central records.

2. No Financing Statements. There is no financing statement or
similar filing now on file in any public office covering all or any part of the
Collateral, and Debtor will not execute and there will not be on file in any
public office any such financing statement or similar filing except the
financing statements filed or to be filed in favor of Secured Party or
financing statements that evidence Permitted Liens, and the filing of this
Agreement or a representation hereof with the United States Patent and
Trademark Office, the United States Copyright Office, and any similar office or
agency.

3. Accuracy of Information. All information furnished by Debtor
to Secured Party concerning Debtor, the Collateral and the Obligations, or
otherwise for the purpose

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<PAGE> 5
of obtaining or maintaining credit, is or will be at the time the same is
furnished, accurate and complete in all material respects.

4. Authority. Debtor has full right and authority to execute and
perform its obligations under this Agreement and to create the security
interest (and pledges and assignment as applicable) created by this Agreement.
The making and performance by Debtor of this Agreement will not violate any
articles or certificates of incorporation, bylaws or similar document
respecting Debtor, any provision of law, any order of court or governmental
agency, or any indenture or other agreement to which Debtor is a party, or by
which Debtor or any of the Collateral is bound, or be in conflict with, result
in a breach of or constitute (with due notice and/or lapse of time) a default
under any such indenture or other agreement, or result in the creation or
imposition of any charge, lien, security interest, claim or encumbrance of any
and every nature whatsoever upon the Collateral, except as contemplated by this
Agreement.

5. Addresses. The address of Debtor designated on the signature
page of the Loan Agreement is Debtor's place of business, if Debtor has only
one place of business; Debtor's chief executive office, if Debtor has more than
one place of business and the location where Debtor keeps all of its books and
records with respect to any accounts. Debtor agrees not to change such address
without advance written notice to Secured Party.

6. Possession of Collateral; Locations.

(a) To the best of Debtor's knowledge, the Debtor has
possession and control of its inventory, fixtures and equipment, except for (i)
inventory rented, leased, subleased, consigned for sale or rental, sold by
conditional sale or on demonstration to any customer or sales agent in the
ordinary course of the Debtor's business, (ii) inventory or equipment in
transit in the ordinary course of the Debtor's business, (iii) inventory,
equipment or fixtures under repair or maintenance by parties other than the
Debtor, (iv) inventory and equipment in the possession of persons who are
providing specialized fabrication of component parts in the ordinary course of
the Debtor's business and (v) equipment and fixtures at store points and sales
locations owned or leased by Debtor and leased or subleased to third parties or
otherwise not occupied by the Debtor.

(b) To the best of Debtor's knowledge, the list attached
hereto as Exhibit "A" accurately and completely describes all current locations
of any and all inventory and equipment owned by Debtor except for the inventory
and equipment described in the foregoing subclauses 6(a)(i) through (v).

(c) Commencing on the date hereof and continuing through
November 30, 1996, Revenue Producing Assets with an original cost basis of not
less than $15,000,000 will be located at all times in Eligible Jurisdictions
(as hereinafter defined). Commencing on December 1, 1996 and continuing
through the term of this Agreement, Revenue Producing

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<PAGE> 6
Assets with an original cost basis of not less than $14,000,000 will be located
at all times in Eligible Jurisdictions. For purposes of this clause 6(c), the
term "Revenue Producing Assets" shall not include any assets (other than those
assets for which the Debtor has properly complied with the filing and notice
requirements of Section 9.114 of the UCC) sold or delivered on a "sale on
approval" or a "sale or return" (as each of those terms are defined in Section
2.326 of the UCC), or on consignment, on memorandum, or on a guaranteed sale
basis (collectively, the "Consignment Assets"), and the original cost basis of
any of such Consignment Assets shall not be included in the calculation of the
original cost basis of the Revenue Producing Assets pursuant to this clause
6(c). All of Debtor's equipment and fixtures that are based in the United
States of America will be located at all times in Eligible Jurisdictions
(except for equipment and fixtures described in subclauses 6(a)(ii), 6(a)(iii),
and 6(a)(iv) above which, to the extent they are not located in Eligible
Jurisdictions, shall at no time constitute a material portion of the Debtor's
equipment and fixtures based in the United States). The term "Eligible
Jurisdictions" means at any time with respect to any Collateral (i) the states
listed on Exhibit B attached hereto or, if any such state is designated on
Exhibit B as a "Non-Central Filing State", the counties or parishes listed on
Exhibit B and (ii) any other jurisdiction in the United States in which
Collateral is located so long as Debtor delivers to Secured Party written
notice that Collateral is, or is to be, located in that jurisdiction within
sufficient time to permit Secured Party to continue its security interest in
such Collateral on a continuous basis and Debtor provides to Secured Party
financing statements or other documents reasonably required by Secured Party to
perfect a first priority security interest (subject only to Permitted Liens) in
such Collateral.

7. Labor Standards Compliance. Debtor and each of its
Subsidiaries has produced all goods in compliance in all material respects with
the terms and requirements of the Fair Labor Standards Act of 1938 (29 U.S.C.
Section 201 et seq.), as amended.

E. GENERAL COVENANTS. Debtor covenants and agrees as follows:

1. Operation of the Collateral. Debtor agrees to maintain and
use the Collateral solely in the conduct of its own business. All Collateral
will be maintained in a careful and proper manner, and in conformity in all
material respects with all applicable material permits or licenses. Debtor
shall comply in all respects with all applicable statutes, laws, ordinances and
regulations, if failure to so comply could reasonably be expected to have a
Material Adverse Effect. Debtor shall not use the Collateral in any unlawful
manner or for any unlawful purposes (if use in an unlawful manner or for an
unlawful purpose could reasonably be expected to have a Material Adverse
Effect), or in any manner or for any purpose that would expose the Collateral
to unusual risk (taking into account the nature of the oil and gas drilling
business), or to penalty, forfeiture or capture, or that would render void,
inoperative or unenforceable any insurance in connection with the Collateral.
Notwithstanding the foregoing, it is understood and agreed that (i) the
Collateral is used in the oil and gas drilling business, (ii) a portion of the
inventory is located in foreign countries which

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<PAGE> 7
present risk of political expropriation, civil unrest or other upheaval, (iii)
certain of Debtor's sales agents in foreign countries may be or could become
undercapitalized and involve inherent credit risk and (iv) Debtor's inventory
of rental tools is not covered by insurance.

2. Condition. Debtor shall maintain, service and repair the
Collateral so as to keep it in good working order and condition in all material
respects. Debtor shall replace within a reasonable time all parts that may be
worn out, lost, destroyed or otherwise rendered unfit for use, with appropriate
replacement parts except that tools which, in the ordinary course of its
business, Debtor determines to be worn out or obsolete may be sold as scrap.
Debtor shall obtain and maintain in good standing at all times all applicable
material permits, licenses, registrations and certificates relating to the
Collateral in all material respects.

3. Assessments. Debtor shall promptly pay when due all taxes,
assessments, license fees, registration fees, and governmental charges levied
or assessed against Debtor or with respect to the Collateral or any part
thereof except for those being contested in good faith by appropriate
proceedings and against which Debtor has set up adequate reserves in accordance
with GAAP.

4. No Encumbrances. Debtor agrees not to suffer or permit any
charge, lien, security interest, adverse claim or encumbrance of any and every
nature whatsoever against the Collateral or any part thereof except for (a) the
security interest in favor of Secured Party granted herein, and (b) Permitted
Liens.

5. No Transfer. Except as otherwise provided herein or in the
Loan Agreement with respect to inventory, Debtor shall not, without the prior
written consent of Secured Party, sell, assign, transfer, lease, charter,
encumber, pledge, mortgage, hypothecate or dispose of the Collateral, or any
part thereof, or interest therein, or offer or contract to do any of the
foregoing except for (i) sales and dispositions of Collateral which is worn
out, obsolete or not necessary to Debtor's operations and which occur in the
ordinary course of Debtor's business, (ii) Debtor may transfer inventory and
related support equipment to its Affiliates in the ordinary course of business
for use in foreign countries, as long as Debtor is in compliance with paragraph
D6(c) hereof, and (iii) Debtor may from time to time hereafter sell inventory
in the ordinary course of business on terms and may then sell any promissory
note or other instrument accepted in payment (and any letter of credit or other
collateral therefor) at such discount from face amount as Debtor may agree.
Debtor agrees to notify Secured Party promptly upon the sale of a store point
or sales location, such notice to include the aggregate sales price and a copy
of the applicable sales agreement(s) and related documents.

6. Notices and Reports. In addition to those notices required by
Debtor to Secured Party under the terms of the Loan Agreement, Debtor shall
promptly notify Secured Party in writing of any change in the name, identity or
structure of Debtor, any

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<PAGE> 8
charge, lien, security interest, claim or encumbrance asserted against the
Collateral (other than Permitted Liens). Debtor shall promptly notify Secured
Party of any additions or changes to Schedules I through V hereto. Debtor
shall furnish such other reports, information and data regarding the Collateral
and such other matters as Secured Party may reasonably request from time to
time. Secured Party is authorized to file at any time and from time to time
one or more financing statements, continuation statements, filings with the
United States Patent and Trademark Office, United States Copyright Office, and
other similar office or agency, or other documents for the purpose of
perfecting, confirming, continuing, enforcing or protecting the security
interests, pledges, assignments and other rights granted to Secured Party
hereunder.

7. Landlord's Waivers. Debtor shall furnish, at Debtor's sole
cost and expense, to Secured Party, if requested, landlord's waivers of all
liens with respect to any Collateral covered by this Agreement that is or may
be located upon leased premises, such landlord's waivers to be in such form and
upon such terms as are reasonably acceptable to Secured Party.

8. Additional Filings. Debtor agrees to execute and deliver such
financing statement or statements, or amendments thereof or supplements
thereto, or other documents as Secured Party may from time to time reasonably
require in order to comply with the Texas Uniform Commercial Code (or other
applicable state law of the jurisdiction where any of the Collateral is
located) and the laws of the United States of America and to preserve, protect
and, if necessary, perfect the Secured Party's rights to the Collateral.

9. Protection of Collateral. Secured Party, at its option, at
anytime after the occurrence and during the continuance of an event of default,
but without any obligation whatsoever to do so, may (a) discharge taxes,
claims, charges, liens, security interests, assessments or other encumbrances
of any and every nature whatsoever (other than Permitted Liens) at any time
levied, placed upon or asserted against the Collateral, or any portion thereof,
(b) place and pay for insurance on the Collateral, or any portion thereof, to
the extent such insurance is required by the Loan Agreement, including
insurance that only protects Secured Party's interest, (c) pay for the repair,
improvement, testing, maintenance and preservation of the Collateral, or any
portion thereof, (d) pay any filing, recording, registration, licensing or
certification fees or other fees and charges related to the Collateral, or any
portion thereof, or (e) take any other action to preserve and protect the
Collateral, or any portion thereof, and Secured Party's rights and remedies
under this Agreement as Secured Party may deem necessary or appropriate.
Debtor agrees that Secured Party shall have no duty or obligation whatsoever to
take any of the foregoing actions. Debtor agrees to promptly reimburse Secured
Party upon demand for any payment made or any expense incurred by the Secured
Party pursuant to this authorization. These payments and expenditures, together
with interest thereon from date incurred until paid by Debtor accruing at a
rate equal to the rate then being paid by the Debtor with respect to loans

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<PAGE> 9
made pursuant to the Loan Agreement, which Debtor agrees to pay, shall
constitute additional Obligations and shall be secured by and entitled to the
benefits of this Agreement.

10. Inspection. Debtor shall permit Secured Party by or through
any of its officers, agents, attorneys or accountants, to inspect and examine
the Collateral, or any portion thereof, wherever located, and to examine and
make copies and abstracts from Debtor's books and records.

11. Insurance. Debtor shall have and maintain insurance in
accordance with the terms of the Loan Agreement. For so long as no event of
default has occurred and is continuing, any proceeds of insurance with respect
to Collateral may be paid to Debtor, provided that if any such payment exceeds
$200,000, Debtor covenants to use such proceeds to repair or replace the
Collateral, or to pay the same to Secured Party to be applied to payment of the
Obligations, and Debtor shall provide to Secured Party such evidence and
assurance of such use as Secured Party may require; provided, however, that if
an event of default has occurred and is continuing, all proceeds of insurance
with respect to Collateral shall be paid to Secured Party. Upon the occurrence
and during the continuance of an event of default (i) Secured Party is hereby
authorized to act as attorney for Debtor in obtaining, adjusting, settling and
canceling such insurance and endorsing any drafts or instruments, (ii) Secured
Party shall be authorized to apply the proceeds from any insurance to the
Obligations secured hereby, and (iii) Debtor specifically authorizes Secured
Party to disclose information from the policies of insurance to prospective
insurers regarding the Collateral.

12. Further Assurances. Debtor shall do, make, procure, execute
and deliver all such additional and further acts, things, deeds, interests and
assurances as Secured Party may reasonably require from time to time to
protect, assure and enforce Secured Party's rights and remedies granted under
this Agreement.

F. ADDITIONAL PROVISIONS REGARDING ACCOUNTS. The following
provisions shall apply to all accounts included within the Collateral:

1. Definitions. The term "account," as used in this Agreement,
shall have the same meaning as set forth in the Uniform Commercial Code of
Texas in effect as of the date of execution hereof, and as set forth in any
amendment to the Uniform Commercial Code of Texas to become effective after the
date of execution hereof, and also shall include, but shall not be limited to,
all present and future notes, instruments, documents, general intangibles,
drafts, acceptances and chattel paper of Debtor, and the proceeds thereof.

2. Additional Warranties. The Debtor will maintain its accounts
receivable in a manner consistent with normal business practices, including
normal terms and conditions for payment, for companies engaged in similar
operations in similar jurisdictions. Debtor represents and warrants as to each
and all of its accounts as follows: (a) substantially all

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<PAGE> 10
of Debtor's accounts arise out of a bona fide sale or lease of goods delivered
to, or out of and for services actually rendered by Debtor to, the account
debtor named in the account; and (b) Debtor is the owner thereof free and clear
of any charges, liens, security interests, adverse claims and encumbrances of
any and every nature whatsoever except Permitted Liens.

3. Collection of Accounts. Secured Party shall have the right at
any time after the occurrence and during the continuance of an event of
default, in its own name or in the name of the Debtor to require Debtor
forthwith to transmit all proceeds of collection of accounts to Secured Party,
to notify any and all account debtors to make payments of the accounts directly
to Secured Party, to demand, collect, receive, receipt for, sue for, compound
and give acquittal for, any and all amounts due or to become due on the
accounts and to endorse the name of the Debtor on all commercial paper given in
payment or part payment hereof, and in Secured Party's discretion to file any
claim or take any other action or proceeding that Secured Party may deem
necessary or appropriate to protect and preserve and realize upon the accounts
and related Collateral. Unless and until Secured Party elects to collect
accounts, and the privilege of Debtor to collect accounts is revoked by Secured
Party in writing, Debtor shall continue to collect accounts. In order to
assure collection of accounts in which Secured Party has a security interest
(or pledge or assignment as applicable) hereunder, Secured Party may at any
time after the occurrence and during the continuance of an event of default
notify the post office authorities to change the address for delivery of mail
addressed to Debtor to such address as Secured Party may designate, and to open
and dispose of such mail and receive the collections of accounts included
herewith. Secured Party shall have no duty or obligation whatsoever to collect
any account, or to take any other action to preserve or protect the Collateral;
however, should Secured Party elect to collect any account or take possession
of any Collateral, Debtor releases Secured Party from any claim or claims for
loss or damage arising from any act or omission in connection therewith,
including, without limitation, any claim or claims for loss or damage arising,
in whole or in part, from any negligent act or omission of Secured Party, its
officers, directors, employees, agents, successors or assigns, except for the
Secured Party's gross negligence or willful misconduct.

4. Identification and Assignment of Accounts. At any time after
the occurrence and during the continuation of an event of default and upon the
written request of Secured Party, Debtor shall take such action and execute and
deliver such documents as Secured Party may reasonably request in order to
identify, confirm, mark, segregate and assign accounts and to evidence Secured
Party's interest in same. Without limitation of the foregoing, upon the
written request of Secured Party, Debtor agrees to assign accounts to Secured
Party, identify and mark accounts as being subject to the security interest (or
pledge or assignment as applicable) granted hereby, mark Debtor's books and
records to reflect such assignments, and forthwith to transmit to Secured Party
in the form as received by Debtor any and all proceeds of collection of such
accounts. The provisions of this paragraph

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<PAGE> 11

F.4 are in addition to, and do not limit, the provisions of paragraph H.2
of this Security Agreement.

5. Account Reports. Debtor will deliver to Secured Party written
reports in form and content satisfactory to Secured Party, with respect to
accounts and such other information as set forth in the Loan Agreement or as
Secured Party may request from time to time.

G. ADDITIONAL PROVISIONS REGARDING INVENTORY. The following
provisions shall apply to all inventory included within the Collateral:

1. Revenue Producing Assets Reports. Upon Secured Party's
request, Debtor will deliver to Secured Party the written report setting forth
a description of the Revenue Producing Assets of the Borrower and their
respective values (on an original cost basis) and their respective locations.
Debtor shall immediately notify Secured Party of any matter affecting the
Revenue Producing Assets which creates a Material Adverse Effect.

2. Use of Inventory. Unless and until the privilege of Debtor to
use inventory in the ordinary course of Debtor's business is revoked by Secured
Party upon the occurrence and during the continuance of an event of default,
Debtor may use the inventory in any manner not inconsistent with this
Agreement, may sell or lease that part of the Collateral consisting of
inventory provided that all such sales and leases are in the ordinary course of
business, and may use and consume any raw materials or supplies that are
necessary in order to carry on Debtor's business. A sale in the ordinary
course of business does not include a transfer in partial or total satisfaction
of a debt.

3. Accounts as Proceeds. All accounts that are proceeds of the
inventory included within the Collateral shall be subject to all of the terms
and provisions hereof pertaining to accounts.

4. Protection of Inventory. Debtor shall take all action
necessary to protect and preserve the inventory in all material respects.

H. ADDITIONAL PROVISIONS REGARDING CHATTEL PAPER. The following
provisions shall apply to chattel paper and similar property included within
the Collateral:

1. Representations and Warranties. Debtor represents and
warrants to Secured Party that: (a) Debtor is the owner of all inventory or
has a perfected first and prior security interest or lien on any such
inventory, except for the rights of any party to whom the inventory was sold,
rented or leased ("Customer"), any security interests or liens thereon in favor
of Secured Party and Permitted Liens; and (b) all chattel paper and any and all
documents related thereto are genuine and in all respects what they purport to
be and arise out of bona fide sales, rentals or leases of goods sold, rented or
leased; and (c) the Debtor

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<PAGE> 12
will maintain its chattel paper in a manner consistent with normal business
practices, including normal terms and conditions for payment, for companies
engaged in similar operations in similar jurisdictions.

2. Legend. Within five (5) days from the date of execution
hereof, Debtor (a) shall cancel and strike through any and all legends placed
on the chattel paper and any documents relating thereto declaring a security
interest in favor of any creditor (other than Secured Party), and (b) shall
stamp, imprint or type in bold print and in a conspicuous place on all chattel
paper with Debtor as the lessor and each document relating thereto the
following legend:

"THIS CHATTEL PAPER IS SUBJECT TO A SECURITY INTEREST IN FAVOR
OF FIRST INTERSTATE BANK OF TEXAS, N.A."

Debtor shall immediately stamp, print or type such legend in bold and in a
conspicuous place on all chattel paper hereafter made with Debtor as lessor.
Without limiting the right of inspection granted to Secured Party elsewhere in
this Agreement, Debtor shall permit Secured Party by or through any of its
officers, agents, attorneys or accountants, to visit the offices of Debtor and
inspect and examine the chattel paper, or any portion thereof, all at
reasonable times during normal business hours upon reasonable advance notice,
or at the option of Secured Party, to require Debtor to deliver to Secured
Party copies of any or all such chattel paper, all in order to assure
compliance with the covenants in this subparagraph 2.

3. Assignment of Perfected Interests. In the event Debtor files
or causes to be filed or recorded any financing statement or similar filing to
perfect its security interest or lien in any of the inventory, Debtor shall
reflect on such filing the assignment of such security interest to Secured
Party or at the election of Secured Party, Debtor shall execute and deliver to
Secured Party assignments of any such financing statements which Secured Party
may record, at the expense of Debtor.

4. Location of Chattel Paper. Debtor shall keep all chattel
paper and related records at its executive office located at the address of
Debtor set forth on the signature page of the Loan Agreement and shall not
relocate any of such chattel paper or related records without the prior written
consent of Secured Party.

I. ADDITIONAL PROVISIONS REGARDING RENTAL AGREEMENTS AND SIMILAR
COLLATERAL. The following provisions shall apply to all Rental Agreements
included within the Collateral:

1. General Representations and Warranties. Debtor represents and
warrants to Secured Party that Debtor has full right, power and authority to
assign its interest in the

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<PAGE> 13
Rental Agreements and Debtor has not assigned or granted a security interest in
any of the Rental Agreements to anyone other than Secured Party, and (b)
Debtor's interest in the Rental Agreements is not subject to any claim, setoff,
lien, deduction or encumbrance of any nature, except Permitted Liens.

2. Retention of Obligations. Neither this assignment nor any
action or actions on the part of Secured Party shall constitute an assumption
of any obligation on the part of Secured Party under the Rental Agreements and
Debtor shall continue to be liable for all obligations thereunder, Debtor
hereby agreeing to perform each and all of its obligations under the Rental
Agreements and to indemnify and hold Secured Party free and harmless from and
against any loss, costs, liability or expense (including but not limited to
reasonable attorneys' fees, the allocated costs of staff counsel and
accountants' fees) resulting from any failure of Debtor to so perform.

3. Rights to Assume Upon Event of Default. On or after the
occurrence and during the continuance of an event of default, Secured Party
may, but shall not be obligated to, assume all of the rights and obligations of
Debtor under any or all of the Rental Agreements. Debtor agrees that it will,
upon the request of Secured Party from time to time and at any time after an
event of default has occurred and is continuing, execute and deliver such
documents and instruments as Secured Party or its counsel may deem necessary or
desirable to effect the assignment of said Rental Agreements to Secured Party
or its nominee. Such assumption, however, shall not relieve Debtor of its
obligations under the Rental Agreements, and Debtor shall remain liable for all
costs and expenses incurred in connection with the performance of its
obligations under the Rental Agreements. If Secured Party shall pay the unpaid
amounts due under any Rental Agreement, Secured Party shall thereupon be
subrogated to all the Debtor's rights against the contracting party with
respect to such payment. Under no circumstances shall Secured Party be deemed
by any party to have assumed Debtor's rights and obligations under a Rental
Agreement unless and until such written notice is delivered to the lessee
thereunder in accordance with the foregoing.

4. Protection of Rights. Secured Party shall have the right at
any time after the occurrence and during the continuance of an event of default
(but shall have no obligation) to take in its name or in the name of Debtor or
otherwise such action as Secured Party may at any time or from time to time
determine to be necessary to cure any default under the Rental Agreements or to
protect the rights of Debtor or Secured Party thereunder. Secured Party shall
incur no liability to Debtor if any action taken by Secured Party or on its
behalf in good faith pursuant to this Agreement shall prove to be in whole or
in part inadequate or invalid. Debtor agrees to hold Secured Party free and
harmless from and against any loss, cost, liability or expense (including but
not limited to reasonable attorney's fees and expenses) to which Secured Party
may be exposed, or that Secured Party may incur, in exercising any of its
rights under this Agreement except for any such losses, costs, liabilities or
expenses incurred as a result of the Secured Party's gross negligence or
willful misconduct.

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<PAGE> 14
5. Power of Attorney. Debtor hereby irrevocably constitutes and
appoints Secured Party its true and lawful attorney-in-fact in Debtor's name or
in Secured Party's name or otherwise, upon the occurrence and during the
continuation of an event of default, to enforce, all rights of Debtor under the
Rental Agreements, and, or, to transfer the Rental Agreements to Secured Party
pursuant to paragraph 3 of this Section I. It is hereby recognized that the
power of attorney herein granted is coupled with an interest and shall not be
revocable.

6. Disposition. Debtor will not enter into any other security
agreement covering the Collateral and will not permit any other financing
statement covering the same to be on file so long as any of the Obligations
remain unpaid, except any such security agreement or financing statement in
favor of Secured Party. Except as provided in clause (iii) of paragraph E.5 of
this Agreement, Debtor will not sell or offer to sell or transfer any Rental
Agreements or rights under Rental Agreements as long as the Obligations remain
unpaid.

7. Maintenance of Rental Agreements. Debtor, at its expense,
shall perform and observe all terms and provisions of the Rental Agreements to
be performed and observed by it, maintain the Rental Agreements in full force
and effect and enforce the Rental Agreements in accordance with their terms
where Debtor's failure to do any such item would have a Material Adverse
Effect. Debtor will give Secured Party access to copies of all notices,
requests and other documents received by Debtor under or pursuant to the Rental
Agreements. Debtor shall not, without the prior written consent of Secured
Party, cancel or terminate the Rental Agreements, or consent to or accept any
cancellation or termination thereof, amend or otherwise modify the Rental
Agreements in any manner, give any consent, waiver or approval thereunder or
waive any default under or breach of any Rental Agreements except (in any such
event) in the ordinary course of Debtor's business.

8. Receipt of Proceeds in Trust by Debtor. In the event Debtor
shall receive any moneys, income, payments or benefits attributable or accruing
to the Rental Agreements, Debtor will hold the same in trust for Secured Party
and will not commingle the same with any other property or moneys of Debtor and
will promptly deliver the same to Secured Party in the form received, such sums
to be applied toward the payment of the principal balance of the Obligations,
or, in Secured Party's sole discretion, released to Debtor; provided, however,
that Debtor may retain, use, commingle, and dispose of any moneys received
before the occurrence and during the continuance of an event of default from
payment of any moneys, income, payments or benefits attributable to the Rental
Agreements for any lawful corporate purpose and such moneys shall not
constitute part of the moneys held in trust.

9. Form of Rental Agreements. All Rental Agreements will be in
substantially the form previously delivered to Secured Party or in such other
form or forms reasonably acceptable to the Secured Party. Debtor shall not
enter into any Rental Agreements prohibiting their assignability.

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10. Collection of Accounts and General Intangibles. In addition
to the foregoing, without assuming any rights or obligations under any of the
Rental Agreements, Secured Party shall have the right in its own name or in the
name of the Debtor, after the occurrence and during the continuance of an event
of default, to require Debtor forthwith to transmit all proceeds of Rental
Agreements not otherwise received in trust hereunder to Secured Party, to
notify any and all parties to said Rental Agreements to make payments
thereunder directly to Secured Party, to demand, collect, receive, receipt for,
sue for, compound and give acquittal for, any and all amounts due or to become
due thereunder and to endorse the name of Debtor on all commercial paper given
in payment or part payment thereof, and in Secured Party's discretion to file
any claim or take any other action or proceeding that Secured Party may deem
necessary or appropriate to protect and preserve and realize upon the Rental
Agreements. Secured Party shall have no duty or obligation whatsoever to
collect any amounts under the Rental Agreements, or to take any other action to
preserve or protect the Rental Agreements; however, should Secured Party elect
to collect any amounts under the Rental Agreements or take any other action to
protect or preserve same, Debtor releases Secured Party from any claim or
claims for loss or damage arising from any act or omission in connection
therewith, except for Secured Party's gross negligence or willful misconduct
BUT INCLUDING, WITHOUT LIMITATION, ANY CLAIMS ARISING OUT OF OR RELATING TO, IN
WHOLE OR IN PART, THE NEGLIGENT ACTS OR OMISSION OF SECURED PARTY.

J. ADDITIONAL PROVISIONS REGARDING INTELLECTUAL PROPERTY.

1. Definitions. In addition to the terms defined elsewhere in
this Agreement, the following terms have the following meanings:

"Copyrights" means all of the following now or hereafter owned
by Debtor: (i) all copyright in any original work of authorship fixed in any
tangible medium of expression, now known or later developed, (ii) all
registrations and applications for registration of any such copyright in the
United States or any other country or political subdivision, including, without
limitation, registrations, recordings, supplemental registrations and
applications in the United States Copyright Office, and (iii) the right to sue
for past, present and future infringement of the foregoing.

"Copyright License" means any written agreement executed or to
be executed by Debtor granting any right to any third party under any Copyright
now or hereafter owned by Debtor, or granting any right to Debtor under any
Copyright now or hereafter owned by any third party.

"Intellectual Property General Intangibles" means all
intangible intellectual or other similar property of Debtor of any kind or
nature now owned or hereafter acquired by Debtor, including without limitation,
inventions, designs, Patents, Copyrights, Licenses,

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Trademarks and associated goodwill, Trade Secrets, confidential or proprietary
technical and business information, know-how, improvements, technical
developments, know-how or other data or information, software, databases and
related documentation, registrations, franchises, and all other intellectual or
other similar property rights not otherwise described above.

"License" means any Patent License, Trademark License,
Copyright License or other intellectual property license as to which Debtor is
a party.

"Patent License" means any written agreement executed or to be
executed by Debtor granting to any third party any right to practice any
invention disclosed and claimed in a Patent, now or hereafter owned by Debtor,
or granting to Debtor any right to practice any invention disclosed and claimed
in a Patent, now or hereafter owned by any third party.

"Patents" means all of the following now or hereafter owned by
Debtor: (i) all extant letters patent of the United States or any other country
or political subdivision, all registrations and recordings thereof, and all
applications for letters patent of the United States or any other country or
political subdivision, including, without limitation, registrations, recordings
and applications in the United States Patent and Trademark Office or any other
country or political subdivision, (ii) all reissues, continuations, divisions,
continuations-in-part or extensions thereof, (iii) all inventions disclosed and
claimed therein, including the right to make, use and or sell the inventions
disclosed and claimed therein, and (iv) the right to sue for past, present and
future infringement of the foregoing.

"Intellectual Property Proceeds" means any consideration
received by Debtor from the sale, exchange, lease or other disposition of any
asset or property which constitutes Collateral, any value received as a
consequence of the possession of any Collateral and any payment received from
any insurer or other person or entity as a result of the destruction, loss,
theft or other involuntary conversion of whatever nature of any asset or
property which constitutes Collateral, any claim of Debtor which constitutes
Collateral, any claim of Debtor against third parties (i) for past, present or
future infringement of any Patent or Patent License, or (ii) for past, present
or future infringement or dilution of any Trademark or Trademark License or for
injury to the goodwill associated with any Trademark or Trademark licensed
under any Trademark License, or (iii) for past, present or future infringement
of any Copyright or Copyright License, and any and all other amounts from time
to time to time paid or payable under or in connection with any of the
Collateral.

"Trademark License" means any written agreement executed or to
be executed by Debtor granting to any third party any right to use any
Trademark now or hereafter owned by Debtor, or granting to Debtor any right to
use any Trademark now or hereafter owned by any third party.

"Trademarks" means all of the following now or hereafter owned
by Debtor: (i) all trademarks, service marks, trade names, corporate names,
company names, indicia,

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business source identifiers, business names, fictitious business names, trade
styles, trade dress, logos, other source or business identifiers, designs and
general intangibles of like nature all of the type for which exclusive rights
may be provided under the laws of the applicable jurisdiction, now existing or
hereafter adopted or acquired, all registrations and recordings thereof, and
all applications in connection therewith, including, without limitation,
registrations, recordings and applications in the United States Patent and
Trademark Office, any State of the United States or any other country or any
political subdivision thereof, (ii) all goodwill associated therewith arising
in or relating to the ordinary course of business of Debtor, (iii) all
extensions or renewals thereof, and (iv) the right to sue for past, present and
future infringement of the foregoing.

"Trade Secrets" means all trade secrets and other confidential
or proprietary technical and business information, now or hereinafter owned by
Debtor, including, without limitation, manufacturing processes, formulas,
compositions, data and other technical information and know-how all of the type
for which exclusive rights may be provided under the laws of the applicable
jurisdiction, relating to the products listed on Schedule V hereto, as it may
be amended from time to time, and any improvements thereon or changes thereto.

2. Trademark. Debtor (either itself or through licensees) will,
for each Trademark material to the conduct of Debtor's business, (i) continue
to use such Trademark on each and every trademark class of goods applicable to
its current line of products and/or services as reflected in its current
catalogs, brochures and price lists in order to maintain such Trademark in full
force free from any claim of abandonment for nonuse, (ii) maintain the quality
of products and services offered under such Trademark, (iii) employ such
Trademark with the notice of application or Federal registration as the case
may be, (iv) not use such Trademark in violation of any third-party rights and
(v) not (and not permit any licensee or sublicensee thereof to) do any act or
knowingly omit to do any act whereby such Trademark may become abandoned or
invalidated.

3. Patent. Debtor (either itself or through licensees) will, for
each Patent, not do any act, or omit to do any act, whereby any Patent which is
material to the conduct of Debtor's business may become invalidated or
dedicated, and shall continue to mark any products covered by a Patent with the
relevant patent number as required by the patent laws.

4. Copyright. Debtor (either itself or through licensees) will,
for each work covered by a Copyright, continue to publish, reproduce, display,
adopt and distribute the work with appropriate copyright notice as required
under the copyright laws.

5. Notification. Debtor shall notify Secured Party immediately
if it knows or has reason to know that any Patent, Trademark or Copyright
material to the conduct of its business may become abandoned or dedicated, or
of any adverse determination or development (including, without limitation, the
institution of, or any such determination or

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development in, any Proceeding in the United States Patent and Trademark
office, United States Copyright Office or any court) regarding such ownership
of any such material Patent, Trademark or Copyright, its right to register the
same, or to keep and maintain the same.

6. Filings. In no event shall Debtor, either itself or through
any agent, employee, licensee or designee, file an application for any Patent,
Trademark or Copyright with the United States Patent and Trademark Office,
United States Copyright Office or any similar office or agency in the United
States of America or any state thereof or enter into a License, unless it
timely executes, delivers and files for record, at its expense, in the United
States Patent and Trademark Office, the United States Copyright Office, or
similar office or agency of the United States of America or any state thereof,
as applicable, notice of this security interest in the form attached hereto as
Exhibit "C" or an equivalent thereof ("Notice of Security Interest"). Debtor,
at Debtor's expense, shall execute, deliver and file for record from time to
time at Secured Party's request, but not more often than annually, (a) Notice
of Security Interest in the United States Patent and Trademark Office and the
Library of Congress, as appropriate, to evidence and perfect this security
interest in each Patent, application for Patent, Trademark, application or
registration of Trademark, Patent License and Trademark License, provided no
such Notice of Security Interest in favor of Secured Party is on file with such
Office or Library, and (b) Notice of Security Interest in the United States
Copyright Office to evidence and perfect this security interest in each
Copyright, Copyright License and application or registration of Copyright,
provided no such Notice of Security Interest in favor of Secured Party is on
file with such Office. Each Notice of Security Interest shall completely and
accurately describe such Collateral and shall otherwise fully comply with the
rules of the respective offices in which they are filed. Upon request of
Secured Party, Debtor shall execute and deliver any and all other agreements,
instruments, documents, financing statements or amendments or supplements
thereto, notices of security interest and papers as Secured Party may
reasonably request to evidence and perfect Secured Party's security interest in
any such Patent, Trademark, Copyright or License, and the goodwill and general
intangibles of Debtor relating thereto or represented thereby, and Debtor
hereby constitutes Secured Party its attorney-in-fact upon the occurrence and
during the continuance of an event of default to execute and file such writings
for the foregoing purposes, all acts of such attorney being hereby ratified and
confirmed; such power, being coupled with an interest, is irrevocable until the
Obligations are paid in full.

7. Maintenance. Debtor will take all necessary steps that are
consistent with the general practice of companies in the Debtor's industry in
any proceeding before the United States Patent and Trademark Office, United
States Copyright Office or any similar office or agency, to maintain and pursue
each application material to the conduct of Debtor's business relating to the
Patents, Trademarks and/or Copyrights (and to obtain the relevant grant or
registration) and to maintain each registration material to the conduct of
Debtor's business of the Patents, Trademarks and Copyrights including, without
limitation, filing of application for renewal, affidavits of use, affidavits of
incontestability and maintenance fees,

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and, where appropriate, to initiate opposition, interference and cancellation
proceedings against third parties.

8. Infringement, Misappropriation or Dilution. In the event that
any Collateral consisting of a Patent, Trademark or Copyright material to the
conduct of Debtor's business is believed infringed, misappropriated or diluted
by a third party, Debtor shall notify Secured Party within fifteen (15) days
after it learns thereof and shall, if consistent with good business practice,
promptly sue for infringement, misappropriation or dilution and to recover any
and all damages for such infringement, misappropriation or dilution, and take
such other actions as are appropriate under the circumstances to protect such
Collateral.

9. Validity. To the best of Debtor's knowledge, each of the
Patents, Trademarks, Copyrights and Licenses which are material to the Debtor's
business are valid and enforceable and the Debtor has notified the Secured
Party in writing of all prior licenses, conveyances and transfers thereof
(including public uses and sales within one year of the date hereof) of which
it is aware and which are in effect and of all suits pending, or litigation
threatened of which the Debtor has actual knowledge which relate in any way to
the Patents, Trademarks, Copyrights and Licenses that are material to the
Debtor's business.

K. EVENTS OF DEFAULT. For purposes of this Agreement, the terms
"default" and "event of default" shall mean a "Default" and "Event of Default,"
respectively, as each of those terms are defined in the Loan Agreement.

L. REMEDIES. Upon the occurrence of and during the continuance
of an event of default, Secured Party, at its option, shall be entitled to
exercise any one or more of the remedies set forth in the Loan Agreement, any
of the other Loan Documents, any afforded at law or in equity and any of the
following remedies (all of which are cumulative):

1. Remedies. Secured Party shall have all of the rights and
remedies provided for in this Agreement, in the Loan Agreement and in any of
the other Loan Documents, the rights and remedies in the Uniform Commercial
Code of Texas, or to the extent the laws of states other than Texas would
apply, then any rights and remedies provided by the laws of those
jurisdictions, and any and all of the rights and remedies at law and equity,
all of which shall be deemed cumulative. Without limiting the generality of
the foregoing, Debtor agrees that Secured Party shall have the right to (a)
require Debtor to assemble the Collateral, or any portion thereof, and make it
available to Secured Party at a place designated by Secured Party that is
reasonably convenient to both parties, which Debtor agrees to do; (b) take
possession of the Collateral, or any portion thereof, with or without process
of law, and, in this connection, enter any premises where the Collateral, or
any portion thereof, is located to remove same, to render it unusable, or to
dispose of same on such premises; (c) sell, lease or otherwise dispose of the
Collateral, or any portion thereof, by public or private proceedings, for cash
or credit, without assumption of credit risk and Secured Party may conduct one
or multiple sales of such Collateral, or any portion thereof,

-19-
<PAGE> 20
without limiting, releasing or affecting the right of Secured Party to conduct
other sales with respect to the remaining Collateral; and/or (d) whether before
of after default, collect and receipt for, compound, compromise, and settle,
and give releases, discharges and acquittances with respect to, any and all
amounts owned by any person or entity with respect to the Collateral, or any
portion thereof. Unless the Collateral is perishable or threatens to decline
speedily in value or is of a type customarily sold on a recognized market,
Secured Party will send Debtor reasonable notice of the time and place of any
public sale or of the time after which any private sale or other disposition
will be made. Any requirement of reasonable notice to Debtor shall be met if
such notice is mailed, first class mail, postage prepaid, to Debtor at the
address of Debtor designated at the beginning of this Agreement, at least ten
(10) days before the day of any public sale or at least ten (10) days before
the time after which any private sale or other disposition will be made.

2. Appointment of Secured Party as Attorney-in-Fact. Debtor
irrevocably appoints Secured Party and any officer or agent thereof, with a
full power of substitution, as its true and lawful attorney-in-fact to take any
and all appropriate action in Secured Party's discretion and to execute any and
all documents and instruments which Secured Party may deem necessary and
desirable to accomplish the purpose of this Agreement, including without
limitation, to bring suit to enforce or defend any of the Intellectual Property
General Intangibles; to demand, collect, recover and give receipts with respect
to any sums due under any of the Collateral and to receive, endorse and collect
any drafts, instruments or documents of title with respect to any Collateral,
to remove any Collateral from the property owner, encumbrancer or other person
having an interest in the property where any Collateral is located, and in
connection therewith, Secured Party is authorized to show a copy of this
Agreement to such person as evidence of Debtor's appointment of Secured Party
as Debtor's agent and lawful attorney-in-fact and of Debtor's authorization to
allow Secured Party to remove any collateral from said property. This power of
attorney is a power coupled with an interest and shall be irrevocable.

3. Expenses. Debtor shall be liable for and agrees to pay the
reasonable expenses incurred by Secured Party in enforcing its rights and
remedies, in retaking, holding, testing, repairing, improving, selling, leasing
or disposing of the Collateral, or any portion thereof, or like expenses,
including, without limitation, attorneys' fees and out-of-pocket legal expenses
incurred by Secured Party. These expenses, together with interest thereon from
the date incurred until paid by Debtor at the Default Rate, which Debtor agrees
to pay, shall constitute additional Obligations and shall be secured by and
entitled to the benefits of this Agreement.

4. Proceeds; Surplus; Deficiencies. Proceeds received by Secured
Party from disposition of the Collateral, or any portion thereof, shall be
applied toward Secured Party's expenses and other Obligations in such order or
manner as Secured Party may elect. Debtor shall be entitled to any surplus if
one results after lawful application of the proceeds.

-20-
<PAGE> 21
To the extent not prohibited by applicable laws, Debtor shall remain liable for
any deficiency.

5. Remedies Cumulative. The rights and remedies of Secured Party
are cumulative and the exercise of any one or more of the rights or remedies
shall not be deemed an election of rights or remedies or a waiver of any other
right or remedy. Secured Party may remedy any default and may waive any
default without waiving the default remedied or without waiving any other prior
or subsequent default.

M. OTHER AGREEMENTS.

1. Savings Clause. The usury savings clause provided in Section
8.6 of the Loan Agreement is incorporated by reference into this Agreement and
is made a part hereof for all purposes; it being agreed that all rights and
remedies of Secured Party hereunder are subject to and entitled to the benefit
of the terms of such usury savings clause.

2. WAIVERS. DEBTOR AND ANY MAKER, ENDORSER, GUARANTOR, SURETY OR
OTHER PARTY LIABLE IN ANY CAPACITY RESPECTING THE OBLIGATIONS HEREBY WAIVE
DEMAND, NOTICE OF INTENTION TO ACCELERATE, NOTICE OF ACCELERATION, NOTICE OF
NONPAYMENT, PRESENTMENT, PROTEST, NOTICE OF DISHONOR AND ANY OTHER SIMILAR
NOTICE WHATSOEVER.

3. Severability. Any provision hereof found to be invalid by
courts having jurisdiction shall be invalid only with respect to such provision
(and then only to the extent necessary to avoid such invalidity). The
offending provision shall be modified to the maximum extent possible to confer
upon Secured Party the benefits intended thereby. Such provision as modified
and the remaining provisions hereof shall be construed and enforced to the same
effect as if such offending provision (or portion thereof) had not been
contained herein, to the maximum extent possible.

4. Use of Copies. Any carbon, photographic or other reproduction
of this Agreement or any financing statement signed by Debtor is sufficient as
a financing statement for all purposes, including without limitation, filing in
any state as may be permitted by the provisions of the Uniform Commercial Code
of such state; provided, however, Secured Party agrees to omit from any copy or
reproduction of this Agreement to be filed for record in any public office the
portion of Schedule III which lists and describes pending applications for
letters patent, it being understood, however, that Secured Party may file, or
cause to be filed, notices of security interest with the United States Patent
and Trademark Office and attach thereto descriptions of any pending
applications for letters patent.

5. Relationship to Other Agreements. This Security Agreement and
the security interests (and pledges and assignments as applicable) herein
granted are in addition to (and

-21-
<PAGE> 22
not in substitution, novation or discharge of) any and all prior or
contemporaneous security agreements, security interests, pledges, assignments,
liens, rights, titles or other interests in favor of Secured Party or assigned
to Secured Party by others in connection with the Obligations. All rights and
remedies of Secured Party in all such agreements are cumulative, but in the
event of actual conflict in terms and conditions, the terms and conditions of
this Agreement shall govern and control; provided, however, in the event of any
conflict between the terms and conditions of this Agreement and the Loan
Agreement, the terms and conditions of the Loan Agreement shall govern and
control.

6. Notices. Any notice or demand given by Secured Party to
Debtor in connection with this Agreement, the Collateral or the Obligations
shall be given in accordance with Section 8.8 of the Loan Agreement.

7. Headings and Gender. Paragraph headings in this Agreement are
for convenience only and shall be given no meaning or significance in
interpreting this Agreement. All words used herein shall be construed to be of
such gender or number as the circumstances require.

8. Amendments. Neither this Agreement nor any of its provisions
may be changed, amended, modified, waived or discharged orally, but only by an
instrument in writing signed by the party against whom enforcement of the
change, amendment, modification, waiver or discharge is sought.

9. Renewal and Extension of Security Interests. This Agreement
and the security interests (and pledges and assignments, as applicable) herein
granted are in addition to (but not in substitution, novation, or discharge
of), and in renewal, extension, ratification, and confirmation of, any and all
prior or contemporaneous security agreements, security interests, pledges,
assignments, liens, rights, titles, or other interests in favor of the Secured
Party including, but not limited to, that certain Amended and Restated
Commercial Security Agreement dated as of December 1, 1993 from Debtor to
Secured Party (such Amended and Restated Commercial Security Agreement, as
amended from time to time, being collectively called the "Prior Agreement"),
all of which security interests (and pledges and assignments, as applicable)
are hereby renewed, extended, and carried forward in full force and effect to
secure the prompt payment and performance of the Obligations. This Agreement
restates and amends the Prior Agreement in its entirety.

10. Continuing Agreement. The security interest (and pledges and
assignments as applicable) hereby granted and all of the terms and provisions
in this Agreement shall be deemed a continuing agreement. They shall continue
in full force and effect and remain effective between the parties until the
earliest of (a) the expiration of four (4) years after repayment in full of all
Obligations, or (b) the repayment in full of all Obligations and the giving by
Debtor of ten (10) days' written notice of revocation of this Agreement.

-22-
<PAGE> 23
11. Binding Effect. The provisions of this Security Agreement
shall be binding upon the heirs, personal representatives, successors and
assigns of Debtor and the rights, powers and remedies of Secured Party
hereunder shall inure to the benefit of the successors and assigns of Secured
Party; provided, however, nothing herein contained shall permit Debtor to
assign, transfer or convey any or all of the Collateral in violation of the
terms of this Agreement or the Loan Agreement.

12. Release of Certain Collateral. Secured Party hereby agrees
that in the event Debtor hereafter acquires fixed assets subject to a purchase
money Lien or purchase money security interest which is a Permitted Lien to
secure indebtedness permitted by Section 6.1(iv) of the Loan Agreement and the
security agreement pursuant to which Debtor grants such Lien or security
interest prohibits the Secured Party's lien in such fixed assets, then the
security interest granted herein in such fixed assets and the proceeds thereof
shall terminate and be of no further force and effect; provided, however, that
at such time no default or event of default then exists and that upon payment
in full of the indebtedness secured by such purchase money Lien or such
purchase money security interest, the security interest created hereby in such
fixed assets shall automatically be reinstated with full force and effect.
Secured Party hereby agrees to execute such partial release forms as may be
reasonably required from time to time by the lender or lenders who are entitled
to such purchase money Lien or purchase money security interest in accordance
with this Section M.12.

13. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, EXCEPT TO THE
EXTENT (A) PROCEDURAL AND SUBSTANTIVE MATTERS RELATING ONLY TO THE PERFECTION
OR FORECLOSURE OF LIENS AND ENFORCEMENT OF RIGHTS AND REMEDIES AGAINST THE
COLLATERAL ARE GOVERNED BY THE LAWS OF ANY APPLICABLE JURISDICTION OTHER THAN
THE STATE OF TEXAS, AND (B) THAT THE LAWS OF THE UNITED STATES OF AMERICA
INCLUDING, WITHOUT LIMITATION, THE NATIONAL BANK ACT, AND ANY RULES,
REGULATIONS OR ORDERS ISSUED OR PROMULGATED UNDER SUCH LAWS APPLICABLE TO THE
AFFAIRS AND TRANSACTIONS ENTERED INTO BY SECURED PARTY AND THE BANKS, OTHERWISE
PREEMPT TEXAS, OR OTHER STATE LAW, IN WHICH EVENT SUCH FEDERAL LAW SHALL
CONTROL.

14. SUBMISSION TO JURISDICTION. WITH RESPECT TO ANY AND ALL
DISPUTES ARISING HEREUNDER, UNDER THE OTHER LOAN DOCUMENTS, OR UNDER ANY OF THE
OTHER INSTRUMENTS AND DOCUMENTS EXECUTED IN CONNECTION HEREWITH OR THEREWITH
NOT SETTLED, OR SUBJECT TO ARBITRATION, PURSUANT TO THE ARBITRATION PROGRAM
REFERENCED IN SECTION M.14 HEREOF, THE DEBTOR HEREBY IRREVOCABLY AND
UNCONDITIONALLY:

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<PAGE> 24
(A) SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL
ACTION OR PROCEEDING RELATING TO THIS AGREEMENT AND ANY DOCUMENT TO WHICH IT IS
A PARTY, OR FOR RECOGNITION AND ENFORCEMENT OF ANY JUDGMENT IN RESPECT OF ANY
THEREOF, TO THE NON-EXCLUSIVE GENERAL JURISDICTION OF THE COURTS OF THE STATE
OF TEXAS, THE COURTS OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT
OF TEXAS, AND APPELLATE COURTS FROM ANY THEREOF;

(B) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE
BROUGHT IN SUCH COURTS, AND WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREAFTER
HAVE TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT OR THAT
SUCH ACTION OR PROCEEDING WAS BROUGHT IN AN INCONVENIENT COURT AND AGREES NOT
TO PLEAD OR CLAIM THE SAME;

(D) AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO
EFFECT SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT
THE RIGHT TO SUE IN ANY OTHER JURISDICTION.

15. Arbitration Program. The parties agree to be bound by the
terms and provisions of the current Arbitration Program of the Secured Party
which is incorporated by reference herein and is acknowledged as received by
the parties pursuant to which any and all disputes arising hereunder, under any
of the other Loan Documents, or under any of the documents and instruments
contemplated thereby, or pertaining hereto or thereto, shall be resolved by
mandatory binding arbitration upon the request of any party.

16. NO ORAL AGREEMENTS. THIS WRITTEN AGREEMENT, THE NOTE, THE
OTHER LOAN DOCUMENTS, AND THE INSTRUMENTS AND DOCUMENTS EXECUTED IN CONNECTION
HEREWITH, REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES.

THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

-24-
<PAGE> 25
EXECUTED this 13th day of December, 1995, to be effective as of
December 13, 1995.

DEBTOR:

DAILEY PETROLEUM SERVICES CORP.

By /s/ DAVID T. TIGHE
-------------------------------
David T. Tighe
Vice President
Address: 2507 North Frazier
Conroe, Texas 77303

SECURED PARTY:

FIRST INTERSTATE BANK OF
TEXAS, N.A.

By /s/ RANDALL S. WADE
-------------------------------
Randall S. Wade,
Banking Officer
Address: First Interstate Bank Plaza
1000 Louisiana
Houston, Texas 77002

-25-

<PAGE> 1

SECOND AMENDED NOTICE OF SECURITY
INTEREST IN INTELLECTUAL PROPERTY

This Second Amended Notice of Security Interest in Intellectual
Property is made as of December 13, 1995, by DAILEY PETROLEUM SERVICES CORP.
(the "Debtor"), a Delaware corporation, with its principal place of business
located at 2507 North Frazier, Conroe, Texas 77303, with reference to the
following facts:

WHEREAS, the Debtor entered into a Second Amended and Restated Loan
Agreement between the Debtor and FIRST INTERSTATE BANK OF TEXAS, N.A. (the
"Secured Party") dated as of December 13, 1995 (as the same may have been, or
may be further, amended, modified, supplemented, restated and rearranged and in
effect from time to time, the "Loan Agreement");

WHEREAS, the Debtor has entered into a Second Amended and Restated
Commercial Security Agreement dated as of December 13, 1995 (as the same may
have been, or may be further, amended, modified, supplemented, restated, and
rearranged and in effect from time to time, the "Security Agreement");

WHEREAS, the Debtor is the owner of or has certain rights in patents,
patent applications, trademark applications and registrations, copyright
applications and registrations and such other intellectual property described
in the Security Agreement (the "Assets").

WHEREAS, the Debtor has granted the Secured Party a continuing
security interest in and lien on the Assets on the terms and conditions set
forth in the Security Agreement;

WHEREAS, Debtor has agreed to record, from time to time, evidence of
Secured Party's security interest in the Assets, or any portion thereof, in the
United States Patent and Trademark Office, the Library of Congress and the
United States Copyright Office, appropriately;

WHEREAS, in compliance with such agreement, Debtor desires to record
this Notice as evidence of Secured Party's security interest in the
intellectual property more particularly described on Exhibit "A" attached
hereto (collectively, the "Subject Property").

NOW, THEREFORE, for valuable consideration and pursuant to the terms
and conditions set forth in the Security Agreement, NOTICE IS HEREBY GIVEN
THAT:

Pursuant to the Security Agreement, the Debtor has granted to the
Secured Party a continuing security interest in and lien on the Subject
Property or on the rights in that Subject Property now owned and hereafter
acquired by the Debtor.
<PAGE> 2
IN WITNESS WHEREOF, the Debtor has caused this Notice of Security
Interest in Intellectual Property to be executed by the undersigned, duly
authorized representative as of the date noted below.

DAILEY PETROLEUM SERVICES CORP.

By /s/ DAVID T. TIGHE
-------------------------------------
David T. Tighe
Vice President
Date: December 13, 1995

<PAGE> 1

TERM NOTE

FIRST INTERSTATE BANK OF TEXAS, N.A.

NO.________ Houston, Texas December 1, 1993 $10,000,000

FOR VALUE RECEIVED, the undersigned, DAILEY PETROLEUM SERVICES CORP.
(herein called "Maker"), promises to pay to the order of FIRST INTERSTATE BANK
OF TEXAS, N.A. (herein called "Payee," which term herein in every instance
shall refer to any owner or holder of this note) the sum of TEN MILLION AND
NO/100 DOLLARS ($10,000,000), or so much thereof as may be advanced from time
to time hereunder by Payee, together with interest on the principal hereof from
time to time outstanding from the date of advancement until maturity, at the
per annum rate hereinafter stated (computed on the basis of a year of 360 days
and paid for the actual number of days elapsed), said principal and interest
being payable in lawful money of the United States of America at the banking
quarters of First Interstate Bank of Texas, N.A., First Interstate Bank Plaza,
1000 Louisiana, Houston, Harris County, Texas, or at such other place in Harris
County, Texas as Payee may designate hereafter in writing.

This note is issued pursuant to that certain Amended and Restated Loan
Agreement dated as of even date herewith, by and between Maker and Payee (the
"Loan Agreement"), and reference is made hereby to the Loan Agreement for
certain rights as to the prepayment and the acceleration of the maturity
hereof.

The principal balance hereof advanced and from time to time remaining
unpaid shall bear interest during each day of the term of the loan evidenced
hereby at a variable per annum rate equal to the lesser of (A) a per annum rate
which is equal to the sum (herein called the "Basic Rate") of (i) one-half of
one percent (1/2%) plus (ii) the prime rate of interest (herein called the
"Prime Rate"), being the variable per annum rate of interest most recently
announced by First Interstate Bank of Texas, N.A. (herein sometimes called the
"Bank") as its "prime rate", with the understanding that the Bank's "prime
rate" may be one of several base rates and serves as a basis upon which
effective rates of interest are from time to time calculated for loans making
reference thereto and may not be the lowest of the Bank's base rates, which
Basic Rate shall change when and as the Prime Rate shall change, effective on
the day of such change or (B) the Maximum Rate (hereinafter defined).
Notwithstanding the foregoing, if at any time the Basic Rate shall exceed the
Maximum Rate and thereafter the Basic Rate shall become less than the Maximum
Rate, the rate of interest payable hereunder shall be the Maximum Rate until
the Payee shall have received the amount of interest it would have received
otherwise if the interest payable hereunder had
<PAGE> 2
not been limited by the Maximum Rate during the period of time the Basic Rate
exceeded the Maximum Rate.

All past due principal and interest of this note, whether due as the
result of acceleration of maturity or otherwise, shall bear interest at the
lesser of (1) a rate that is five percentage points above the Prime Rate as it
varies or (2) the maximum lawful rate of interest permitted by the applicable
usury laws, now or hereafter enacted, which interest rate (herein called the
"Maximum Rate") shall change when and as said laws shall change to the extent
permitted by said laws, effective on the day such change in said laws becomes
effective, from the date the payment thereof shall have become due until the
same have been fully discharged by payment.

The principal and interest of this note are due and payable at the
offices of said Payee in Houston, Harris County, Texas, as follows:

(i) Interest on the principal of this note shall be due and
payable in monthly installments as it accrues, the first such
installment of interest to be due and payable on January 1, 1994, and
each subsequent installment of interest to be due and payable on the
first day of each succeeding calendar month thereafter until the
Maturity Date (hereinafter defined), on which date the principal of
this note and all accrued unpaid interest thereon shall be due and
payable in full;

(ii) Commencing on January 1, 1995, until and including
December 1, 1995, the principal of this note shall be due and payable
in monthly installments, each such installment being in the amount of
$83,334.00, the first such installment being due and payable on
January 1, 1995 and a like installment being due and payable on the
first day of each succeeding calendar month thereafter until and
including December 1, 1995;

(iii) After December 1, 1995 until and including December 1,
1999, the principal of this note shall be due and payable in monthly
installments, each such installment being in the amount equal to
$138,889.00, the first such installment being due and payable on
January 1, 1996 and a like installment being due and payable on the
first day of each succeeding calendar month thereafter until and
including December 1, 1999; and

(iv) After December 1, 1999 until and including the Maturity
Date, the principal of this note shall be due and payable in monthly
installments, each such installment except for the last, being in the
amount of $194,444.00, and the last and

Page 2 of 5 Pages

<PAGE> 3
final installment being in the amount of the then remaining unpaid
principal balance of this note, the first such installment of
principal being due and payable on January 1, 2000, and each
subsequent installment of principal being due and payable on the first
day of each succeeding calendar month thereafter, until the Maturity
Date, when the then remaining unpaid balance of principal of the Note
shall become due and payable in full.

As used herein, the term "Maturity Date" means the earlier to occur of
(a) December 1, 2000 or (b) the date on which this note shall be accelerated in
accordance with the provisions of the Loan Agreement.

It is the intention of the parties hereto to comply strictly with
applicable usury laws; accordingly, notwithstanding any provision to the
contrary in this note or in any of the documents securing the payment hereof or
otherwise relating hereto, in no event shall this note or such documents
require or permit the payment, charging, taking, reserving, or receiving of any
sums constituting interest under applicable laws which exceed the maximum
amount permitted by such laws. If any such excess interest is contracted for,
charged, taken, reserved, or received in connection with the loan evidenced by
this note or in any of the documents securing the payment hereof or otherwise
relating hereto, or in any communication by Payee or any other person to Maker
or any other person, or in the event all or part of the principal or interest
hereof shall be prepaid or accelerated, so that under any of such circumstances
or under any other circumstance whatsoever the amount of

Page 3 of 5 Pages
<PAGE> 4
interest contracted for, charged, taken, reserved, or received on the amount of
principal actually outstanding from time to time under this note shall exceed
the maximum amount of interest permitted by applicable usury laws, then in any
such event it is agreed as follows: (i) the provisions of this paragraph shall
govern and control, (ii) any such excess shall be deemed an accidental and bona
fide error and canceled automatically to the extent of such excess, and shall
not be collected or collectible, (iii) any such excess which is or has been
paid or received notwithstanding this paragraph shall be credited against the
then unpaid principal balance hereof or refunded to Maker, at Payee's option,
and (iv) the effective rate of interest shall be automatically reduced to the
maximum lawful rate allowed under applicable laws as construed by courts having
jurisdiction hereof or thereof. Without limiting the foregoing, all
calculations of the rate of interest contracted for, charged, taken, reserved,
or received in connection herewith which are made for the purpose of
determining whether such rate exceeds the maximum lawful rate shall be made to
the extent permitted by applicable laws by amortizing, prorating, allocating
and spreading during the period of the full term of the loan, including all
prior and subsequent renewals and extensions, all interest at any time
contracted for, charged, taken, reserved, or received. The terms of this
paragraph shall be deemed to be incorporated in every loan document, security
instrument, and communication relating to this note and loan. The term
"applicable usury laws" shall mean such laws of the State of Texas or the laws
of the United States, whichever laws allow the higher rate of interest, as such
laws now exist; provided, however, that if such laws shall hereafter allow
higher rates of interest, then the applicable usury laws shall be the laws
allowing the higher rates, to be effective as of the effective date of such
laws.

Except to the extent required by federal law, this note shall be
governed by and construed under the laws of the State of Texas.

Maker and Payee agree that Tex. Rev. Civ. Stat. Ann art. 5069 Ch. 15
(which regulates certain revolving loan accounts and revolving tri-party
accounts) shall not apply to any revolving loan accounts created under this
note or maintained in connection therewith.

To the extent that the interest rate laws of the State of Texas are
applicable to this note, the applicable interest rate ceiling is the indicated
(weekly) ceiling determined in

Page 4 of 5 Pages
<PAGE> 5
accordance with Article 5069-1.04(a)(1) of the Texas Revised Civil Statutes, as
amended, and, to the extent that this note is deemed an open end account as
such term is defined in Article 5069-1.01(f) of the Texas Revised Civil
Statutes, as amended, the Payee retains the right to modify the interest rate
in accordance with applicable law.

This note is given in renewal, rearrangement, increase, modification,
and extension of, but not in novation or discharge of, that certain promissory
note dated January 15, 1993, executed by Maker and made payable to the order of
Payee in the original principal amount of $4,875,370.04, which note was given
in renewal, rearrangement, increase and modification of, but not in novation or
discharge of, that certain promissory note dated November 8, 1991, executed by
Maker and made payable to the order of Payee in the original principal amount
of $5,000,000.00.

This note is secured as provided in the Loan Agreement and is entitled
to all of the benefits of the Loan Agreement.

DAILEY PETROLEUM SERVICES CORP.

By [SIGNATURE ON ORIGINAL]
---------------------------------
David T. Tighe
Vice President

Page 5 of 5 Pages

<PAGE> 1

OFFICE LEASE AGREEMENT

THE STATE OF TEXAS )
COUNTY OF MONTGOMERY )

This Lease, made and entered into on the _____ day of June, 1996, and
made effective on the 1st day of May, 1996, by and between LAWRENCE
INTERNATIONAL, INC., a Delaware corporation, (the "Landlord") and DAILEY
PETROLEUM SERVICES CORP., a Delaware corporation (the "Tenant");

WITNESSETH:

In consideration of the mutual covenants set forth herein, Landlord
and Tenant hereby agree as follows:

LEASED PREMISES

1. Landlord hereby leases to Tenant, and Tenant hereby leases from
Landlord, for the rental and on the terms and conditions hereinafter set forth,
64,368 square feet of Rentable Area, (as defined in Paragraph 8 and
hereinafter referred to as the "Premises") in One Lawrence Centre (the
"Building") situated on a portion of a tract of land located in Montgomery
County, Texas (the "Land"), which Land is more particularly described in
Exhibit A hereto. The Premises are designated by the area outlined on Exhibit B
hereto. The Premises include space between the top surface of the floor slab of
the area outlined and the finished surface of the ceiling immediately above and
all Tenant Improvements (defined in Paragraph 9) constructed within this
space. The portion of the Land identified on Exhibit A-1 hereto and the
Building are hereinafter sometimes referred to as the "Complex."

AUTHORIZED USE

2. Tenant shall have the right to occupy and use the Premises for
general business purposes and any other reasonably related use. In addition,
Tenant shall have an easement and the right to use, on a non-exclusive basis,
with the Landlord and any other tenants of the Building on the Land, the
driveways, roads, streets, and surface parking lot and the portion of the Land
depicted on Exhibit A-1 hereto, (the driveways, roads, streets, surface
parking lot, reception area and portion of the Land not occupied by the
Building being hereinafter referred to as the "Common Areas").

1
<PAGE> 2
TERM

3. Subject to and upon the terms and conditions set forth in this
Lease, this Lease shall be in force for a term (the "Term") of five (5) years
beginning on the 1st day of May, 1996 (the "Commencement Date") and ending at
midnight on the 30th day of April, 2001, subject to the renewal option as set
forth in Schedule I hereto.

RENTAL

4. Commencing on May 1, 1996 and continuing for the Term of the
Lease, Tenant shall pay Landlord monthly rental for the Premises, in accordance
with the terms of this Lease, in advance on the first (1st) day of each
successive month. Such monthly rental for the Premises shall be: (a)
Forty-eight Thousand Two Hundred Seventy-six and no/100 Dollars ($48,276.00)
from May 1, 1996 until April 30, 1998 (Year 1 and 2); (b) Fifty-one Thousand
Two Hundred Twenty-six and 00/100 Dollars ($51,226.00) from May 1, 1998 until
April 30, 1999 (Year 3); (c) Fifty-two Thousand Seven Hundred Eighty-one and
00/100 Dollars ($52,781.00) from May 1, 1999 until April 30, 2000 (Year 4);
(d) Fifty-four Thousand Three Hundred Ninety and 00/100 Dollars ($54,390.00)
from May 1, 2000 until April 30, 2001 (Year 5). All such payments shall be
paid to Landlord in lawful money of the United States of America at the address
of Landlord shown herein or to such other party or to such other place as
Landlord may designate from time to time in a written notice to Tenant. If
this Lease commences or terminates on any day other than the first or last day
of a calendar month, the Rent due hereunder shall be prorated except as
otherwise provided in this Lease.

ADDITIONAL RENTAL

5. As additional rental, hereunder, Tenant shall also pay timely and
directly for the cost of all (i) those services for the Premises, set forth in
Exhibit "C" attached hereto, (ii) cleaning and janitorial services (defined in
Exhibit C-2 attached hereto), (iii) elevator service, (iv) personal property
taxes (as further described in Paragraph 15 herein), (v) the insurance premium
coverage required of the Tenant hereunder, and (vi) all normal maintenance and
repairs to the Premises. All sums, liabilities, obligations and other amounts
which Tenant is required to pay, reimburse or discharge pursuant to this Lease
in addition to rental or as a result of Landlord's curing an event of Tenant's
default pursuant to this Lease, together with interest thereon, shall
constitute additional rental hereunder. In the event of any failure on part of
the Tenant to pay, reimburse or discharge any additional rental, after notice
and opportunity to cure as herein provided, Landlord shall have all rights,
powers, remedies provided for herein by law in equity or otherwise in case of
non-payment of rent.

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UTILITY SERVICES

6. Tenant shall promptly make application in its name for and pay for
all public utilities, including electricity, water, gas and telephone service,
rendered or furnished to the Premises leased hereunder during the Term of the
Lease.

OWNERSHIP TAXES

7. Landlord shall timely pay all Ownership Taxes on or prior to their
respective due dates. "Ownership Taxes" shall mean and include all taxes,
assessments, and other governmental charges, general and special, ordinary and
extraordinary, of any kind and nature whatsoever, applicable to the Complex
including but not limited to assessments for public improvements or benefits,
franchise, estate, inheritance, succession, capital levy, transfer, income or
excess profits tax imposed upon Landlord; provided, that if at any time during
the Term of the Lease, under the laws of Texas or any political subdivision
thereof in which the Complex is or may be situated, a tax or excise on gross
rents or other tax, however described, is levied or assessed on land or
buildings, such tax or excise shall be included as a component of Ownership
Taxes. Tenant shall have no liability for Ownership Taxes.

RENTABLE AREA

8. The Rentable Area for a full floor of the Building shall be the
area bounded by the exterior Building walls (measured to the interior surface
of the glass windows on such floors), including the area used for elevator
lobbies, corridors, special stairways, rest rooms, atriums, mechanical rooms,
telephone closets, and the structural columns of the Building and all vertical
penetrations for the special use of Tenant, but excluding the area used for
Building stairs, vertical ducts, elevator shafts, flues, vents, stacks, and
pipe shafts. The Rentable Area for the Premises shall be the total Rentable
Area calculated for the floor or floors to be occupied by Tenant or where only
a portion of a floor is to be occupied, the Rentable Area for the Premises
shall be the area calculated within the boundaries defined by any exterior
Building walls bounding the Premises (measured to the interior surface of the
glass windows), the center line of any common walls separating the Premises
from area leased or to be leased to other tenants and the exterior of any walls
separating the Premises from any public corridors or other public or common
areas on such floors plus a pro rata portion of (i) the area used for elevator
lobbies, corridors, rest rooms, atriums, mechanical rooms and telephone
closets.

TENANT IMPROVEMENTS

9. The Premises, including doors, floor coverings, ceilings, walls,
window coverings, lighting, heating, cooling, ventilating, water, electrical
and other interior treatments, fittings, furnishings and fixtures ("Tenant
Improvements") have been substantially completed in accordance with mutually
approved plans and specifications signed by Landlord and Tenant.

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PROHIBITED USE

10. Tenant shall not use or permit any other party to use all or any
part of the Premises for any purpose whatsoever not authorized in Paragraph 2
of this Lease. Tenant shall not do or permit anything to be done in or about
the Building nor bring or keep or permit anything to be brought to or kept
therein, which is prohibited by or which will in any way conflict with any law,
statute, ordinance or governmental rule or regulation now in force or hereafter
enacted or promulgated, or which is prohibited by any standard form of fire
insurance policy or which will in any way increase the existing rate of or
affect any fire or other insurance which Landlord carries upon the Building or
any of its contents, or cause a cancellation of any insurance policy covering
the Building or any part thereof or any of its contents. Tenant shall not do or
permit anything to be done in or about the Premises which will in any way
obstruct or interfere with the rights of other tenants of the Building, or
injure or annoy them or use or allow the Premises to be used for any unlawful
or objectionable purpose. Tenant shall not cause, maintain or permit any
nuisance in, on, or about the Premises or Building or commit or suffer to be
committed any waste to, in, on or about the Premises or Building.

RULES AND REGULATIONS

11. Tenant shall perform and comply with the Rules and Regulations of
the Building set out in Exhibit D and, upon written notice thereof, all other
rules and regulations with respect to safety, care, cleanliness and
preservation of good order in the Building that may be established from time to
time by Landlord for tenants of the Building. Landlord shall not have any
liability to Tenant for any failure of any other tenants of the Building to
comply with such Rules and Regulations but shall use reasonable efforts to
enforce the same.

COMPLIANCE WITH LAWS AND OTHER REGULATIONS

12. Tenant shall, at its sole cost and expense, promptly comply with
all laws, statutes, ordinances and governmental rules, regulations or
requirements now in force or which may hereafter be in force, with the
requirements of any board of fire underwriters or other similar body now or
hereafter constituted, and with any directive or occupancy certificate issued
pursuant to any law by any public officer or officers insofar as any thereof
relate to or affect the condition, use or occupancy of the Premises, excluding
requirements of structural changes not resulting from acts of Tenant.

ALTERATIONS AND ADDITIONS

13. Tenant shall not make any structural alternations or additions to
the Tenant Improvements, Premises or Building, except with the prior written
consent of the Landlord. All structural improvements, alterations and additions
to the Leased Premises shall be the property of the

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Landlord and shall not be removed by Tenant either during or after the end of
the Term without the express written approval of Landlord. Tenant shall not be
entitled to any reimbursement or compensation resulting from its payment of the
cost of constructing all or any portion of the structural improvements or any
alterations or additions thereto unless otherwise expressly agreed by Landlord
in writing. Tenant shall not permit any mechanics', materialmen's or other
liens to be fixed or placed against the Premises or the Building or the Land
and agrees immediately to discharge (either by payment or by filing of the
necessary bond, or otherwise) any mechanics', materialmen's or other lien which
is allegedly fixed or placed against any of the foregoing.

TENANT'S EQUIPMENT AND INSTALLATIONS

14. Except for desk or table mounted typewriters, adding machines,
computers and copies, office calculators, dictation equipment and other similar
office equipment, Tenant shall not install within the Premises any fixtures,
equipment, facilities, or other improvements until the plans therefore have
been approved by Landlord and shall not, without the specific written consent
of Landlord and Tenant's written agreement to pay additional costs, install or
maintain any apparatus or devices within the Premises which will increase the
usage of electrical power, water or gas for the Premises to an amount greater
than would be normally required for general office use.

TAXES ON PERSONALTY AND TENANT IMPROVEMENTS

15. Tenant shall pay all ad valorem and similar taxes or assessments
levied upon or applicable to all equipment, fixtures, furniture, and other
property placed by Tenant in the Premises and all license and other fees or
charges imposed on the business conducted by Tenant on the Premises.

LANDLORD'S ACCESS

16. Upon prior notice (except in the case of an emergency), Landlord
shall have the right, at all reasonable times during the Term, to enter the
Premises and to inspect the condition thereof, to determine if Tenant is
performing its obligations under this Lease, to perform the services or to make
the repairs and restoration that Landlord is obligated or elects to perform or
furnish under this Lease, to make repairs to adjoining space, to cure any
defaults of Tenant hereunder that Landlord elects to cure, to remove from the
Premises any improvements thereto or property placed herein in violation of
this Lease and, during the last six (6) months of the Term, to show the
Premises to prospective new tenants.

INSURANCE

17. Landlord shall maintain, during the Term of this Lease, fire and
extended coverage insurance ("Insurance") insuring the Building and Premises
for the full replacement value thereof, but excluding Tenant's equipment, goods
or furniture, against damage or loss from fire or other casualty normally
insured against under the terms of standard policies of fire and extended
coverage insurance. Tenant shall be responsible for providing, at Tenant's own
expense, all insurance coverage necessary for the protection against loss or
damage from fire or other casualty of Tenant's equipment, goods or furniture.

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FIRE OR OTHER CASUALTY

18. If the Premises or the Building is damaged or destroyed, in whole
or in part, by fire or other casualty at any time during the Term and if, after
such damage or destruction, Tenant is not able to use the portion of the
Premises not damaged or destroyed to substantially the same extent and for
substantially the same purposes as Tenant used the Premises prior thereto, then
unless such damage or destruction is the result of the negligence or willful
misconduct of Tenant, within thirty (30) days after delivery to Landlord by
Tenant of a written notice describing in reasonable detail such damage or
destruction, Landlord shall give Tenant a written notice setting forth
Landlord's election either to (i) terminate this Lease, or (ii) restore or
replace the damaged or destroyed portion to substantially the same condition
that existed immediately prior to such damage or destruction. If Landlord does
not timely elect to proceed under the foregoing subsection (ii), it shall be
deemed that is has elected to terminate this Lease pursuant to the foregoing
subsection (i). If such damage or destruction occurs, then, unless such damage
or destruction is the result of the negligence or willful misconduct of Tenant,
the Rent shall be abated for the period and proportionately to the extent that
after such damage or destruction Tenant is not able to use the portion of the
Premises damaged or destroyed to substantially the same extent and for
substantially the same purposes as Tenant used the Premises prior thereto. If
Landlord elects to restore or replace the damaged or destroyed portions of the
Premises or Building, this Lease shall continue in full force and effect in
accordance with the terms hereof except for the rent abatement referred to
above (if applicable) and except that the Term shall be extended by a length of
time equal to the period beginning on the date of such damage or destruction
and ending upon completion of such restoration or replacement. If Landlord
elects to restore or replace the damaged or destroyed portions of the Premises
or Building, such restoration or replacement shall be made within a reasonable
time, subject to delay arising from Acts of God, shortages of labor or
materials, war, or other similar or dissimilar conditions or events beyond the
reasonable control of Landlord. If Landlord elects to terminate this Lease,
this Lease shall terminate on the date the damage or destruction occurred, and
Landlord shall promptly refund to Tenant any unearned Rent unless the damage or
destruction was caused by Tenant's negligence or willful misconduct.

WAIVER OF CLAIMS

19. Anything in this Lease to the contrary notwithstanding, each
party hereto releases and waives all claims, rights of recovery, and causes of
action that either such party or any party claiming by, through, or under such
party by subrogation or otherwise may now or hereafter have against the other
party or any of the other party's directors, officers, partners, employees, or
agents for any loss or damage that may occur to the Building, Premises, Tenant
Improvements, or any of the contents of any of the foregoing by reason of fire,
Act of God, the elements, or any other cause, excluding gross negligence or
willful misconduct but including negligence of the parties hereto or their
directors, officers, partners, employees, or agents that could have been
insured against under the terms of standard fire and extended coverage
insurance policies. Landlord shall not be obligated to insure any of Tenant's
equipment, goods, furniture, or other property placed in or incorporated in the
Building and, except with respect to Tenant Improvements and repairs,
maintenance, restoration

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or replacement due to the negligence or willful misconduct of Landlord or its
agents, employees. contractors, invitees or licensees, Landlord shall not be
obligated to repair, maintain, restore, or replace or otherwise be liable for
any damage to or destruction of any of the foregoing.

INDEMNITY

20. Except for the claims, rights of recovery and causes of action
that each party has released and waived pursuant to Paragraph 20 hereof,
Landlord and Tenant shall each indemnify and hold harmless the other and the
other's agents, directors, officers, partners, employees, invitees, and
contractors. from all claims, losses, costs, damages, or expenses (including,
but not limited to, reasonable attorneys' fees) resulting or arising from any
and all injuries to, including death of, any person or damage to any property,
caused by any act, omission, or neglect of Landlord or Tenant, as the case may
be, or its respective directors, officers, employees, agents, invitees, or
guests, or any parties contracting with Landlord or Tenant, as the case may be,
relating to the Premises. Neither Tenant nor Landlord shall not be liable for
any damage of any kind or for any damage to property, death or injury to
persons from any cause whatsoever by reason of the use and occupancy of the
Building by the other. Landlord shall not be liable to Tenant and Tenant hereby
waives all claims against Landlord or Landlord's directors, officers, partners,
employees, or agents for any damage or loss of any kind, for direct damages,
consequential damages, loss of profits, business interruption, and for any
damage to property, death or injury to persons from any cause whatsoever,
including but not limited to, acts of other Tenants, vandalism, loss of trade
secrets or other confidential information, any damage, loss or injury caused by
a defect in the Premises or the Building, pipes, air conditioning, heating,
plumbing, or by water leakage of any kind from the roof, walls, windows, or
other portion of the Premises or the Building, or caused by electricity, gas,
oil, fire or any other cause in, on, or about the Premises, Building, or Land
or any part thereof, unless caused by the willful misconduct or negligence of
Landlord or its agents, employees, contractors, invitees or licensees. During
the term of this Lease, Tenant, at its sole cost, shall obtain and maintain
with insurance companies approved by Landlord, comprehensive public liability
insurance including property damage insuring Tenant, Landlord and Landlord's
designees, if any, against liability for injury to person or property occurring
in or about the Premises or arising out of the ownership, maintenance, use or
occupancy thereof. The liability under such insurance shall not be less than
$500,000.00 for any one person injured and/or killed and not less than
$1,000,000.00 for any one accident and not less than $100,000.00 for personal
property damage per accident. A certificate of such insurance shall be
furnished to Landlord, and such policy shall provide that it may not be altered
or canceled without ten (10) days' notice being first given to Landlord.

NON-WAIVER

21. No consent or waiver, express or implied, by either party to or
of any breach in the performance or observance by the other party of any of its
obligations under this Lease shall be construed as or constitute a consent or
waiver to or of any other breach in the performance or observance by such party
of such obligation or any other obligations of such party. Neither the
acceptance by Landlord of any Rent or other payment hereunder, whether or not
any default

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hereunder by Tenant is then known to Landlord, nor any custom or practice
followed in connection with this Lease shall constitute a waiver of any of
Tenant's obligations under this Lease. Failure by one party to complain of any
action or non-action on the part of the other party or to declare such party in
default irrespective of how long such failure may continue, shall not be deemed
to be a waiver by the non-defaulting party of any of its rights hereunder. Time
is of the essence with respect to the performance of every obligation of Tenant
and Landlord under this Lease in which time of performance is a factor. Except
where expressly provided herein to the contrary, all Rent and other amounts
payable by Tenant under this Lease shall be paid without abatement, offset,
counterclaim, or diminution to any extent whatsoever. Except for the execution
and delivery of a written agreement expressly accepting surrender of the
Premises, no act taken or failed to be taken by Landlord shall be deemed an
acceptance of surrender of the Premises.

QUIET POSSESSION

22. Provided Tenant has performed all its obligations under this
Lease, including, but not limited to, the payment of Rent and all other sums
due hereunder, Tenant shall peaceably and quietly hold and enjoy the Premises
for the Term, subject to the provisions and conditions set forth in this Lease.

NOTICES

23. Each Notice required or permitted to be given hereunder by one
party to the other shall be in writing, with a statement therein to the effect
that notice is given pursuant to this Lease, and the same shall be given and
shall be deemed to have been delivered, served and given if placed in the
United States mail, two (2) postal business days after being deposited in the
United States mail, postage prepaid, by registered or certified mail, return
receipt requested, addressed to such party at the address provided for such
party herein. Any notices to the Landlord or Tenant shall be addressed and
given to such party as follows:

Attention: J. D. Lawrence
Lawrence International, Inc.
One Lawrence Centre
2507 North Frazier
P.O. Box 2866
Conroe, Texas 77305

Attention: President
Dailey Petroleum Services Corp.
One Lawrence Centre
2507 North Frazier
P. O. Box 1863
Conroe, Texas 77305

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The addresses stated above shall be effective for all notices to the
respective parties until written notice of a change in address is given
pursuant to the provisions hereof.

LANDLORD'S FAILURE TO PERFORM

24. If Landlord fails to perform any of its obligations under this
Lease, Landlord shall not be in default hereunder and Tenant shall not have any
rights or remedies growing out of such failure, unless Tenant gives Landlord
written notice thereof setting for the in reasonable detail the nature and
extent of such failure and such failure by Landlord is not cured within the
thirty (30) day period following delivery of such notice or such longer period
therefor provided elsewhere in this Lease. If such failure cannot reasonably be
cured within such thirty (30) day period, the length of such period shall be
extended for the period reasonably required therefor if Landlord commences
curing such failure within such thirty (30) day period and continues the curing
thereof with reasonable diligence and continuity.

TENANT'S FAILURE TO PERFORM

25. If Tenant fails to perform any one or more of its obligations
hereunder after notice and opportunity to cure as herein provided, in addition
to the other rights of Landlord hereunder, Landlord shall have the right, but
not the obligation, to perform all or part of such obligations of Tenant.
Within fifteen (15) days after receipt of a reasonably detailed statement
thereof from Landlord, Tenant shall reimburse Landlord for (i) the cost to
Landlord of performing such obligations plus (ii) interest thereon at the prime
rate of Texas Commerce Bank, National Association (the "Default Rate") from the
date due until paid.

ACT OF DEFAULT

26. The term "Act of Default" refers to the occurrence of any one or
more of the following: (i) failure of Tenant to pay any Rent or other amount
required to be paid under this Lease within ten (10) days after receipt of
written notice thereof from Landlord, or (ii) failure of Tenant to do, observe,
keep and perform with diligence and continuity any obligations, covenants, or
agreements of Tenant under this Lease within thirty (30) days after receipt of
written notice thereof from Landlord, plus such longer period as may be
necessary if such cure cannot be effected within such thirty (30) day time
period so long as Tenant promptly commences and diligently pursues such cure;
or (iii) the adjudication of Tenant to be a bankrupt; or (iv) the filing by
Tenant of a voluntary petition in bankruptcy, receivership, or other related or
similar proceedings; or (v) the making by Tenant of a general assignment for
the benefit of its creditors; or (vi) the appointment of a receiver of Tenant's
interests in the Premises in any action, suit or proceeding by or against
Tenant's interest in the Premises or by or against Tenant; or (vii) any other
voluntary or involuntary proceedings instituted by or against Tenant under any
bankruptcy, or similar laws, unless the occurrence of any such involuntary
bankruptcy, receivership or other proceeding is cured by the same being
dismissed or stayed within sixty (60) days thereafter; or (viii) the failure of
Tenant to discharge any judgment against Tenant within sixty (60) days after
such judgment becomes final; or (ix) the sale or attempted

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sale under execution or other legal process of the interest of Tenant in the
Premises; or (x) abandonment of the Premises for any period of time consisting
of thirty (30) consecutive days.

RIGHTS UPON DEFAULT

27. If an Act of Default occurs, Landlord at any time thereafter
prior to the curing of such Act of Default and without waiving any other rights
herein available to Landlord at law or in equity, may either terminate this
Lease or terminate Tenant's right to possession without terminating the Lease,
whichever Landlord elects. In either event, Landlord may, without additional
notice and without court proceedings, reenter and repossess the Premises, and
remove all persons and property therefrom, and Tenant hereby waives any claim
arising by reason thereof or by reason of issuance of any distress warrant. If
Landlord elects to terminate this Lease, it may treat the Act of Default as an
entire breach of this Lease and Tenant immediately shall become liable to
Landlord for damages for the entire breach in an amount equal to the amount by
which (i) the total Rent (being the Rent set forth in Paragraph 4 hereof as
adjusted pursuant to Paragraph 5 hereof through the date of default) and all
other payments due for the balance of the Term is in excess of (ii) the fair
market rental value of the Premises for the balance of the Term as of the time
of default, both discounted at the rate of 10% per annum to the then present
value. If Landlord elects to terminate Tenant's right to possession of the
Premises without terminating the Lease, Landlord may rent the Premises or any
part thereof for the account of Tenant to any person or persons for such rent
and for such terms and other conditions as Landlord deems practical, and Tenant
shall be liable to Landlord for the amount, if any, by which the total Rent and
all other payments herein provided for the unexpired balance of the Term exceed
the net amount, if any, received by Landlord from such re-renting, being the
gross amount so received by Landlord less the reasonable cost of repossession,
re-renting, remodeling and other expenses. Such sum or sums shall be paid by
Tenant in monthly installments on the first day of each month of the Term. In
no case shall Landlord be liable for failure to re-rent the Premises or collect
the rental due under such re-renting; provided, however, Landlord shall use
reasonable efforts to relet the Premises. If Landlord elects to terminate
Tenant's right to possession without terminating the Lease, Landlord shall have
the right at any time thereafter to terminate this Lease, whereupon the
foregoing provisions with respect to termination will thereafter apply. If an
Act of Default occurs or in case of any holding over or possession by Tenant of
the Premises after the expiration or termination of this Lease. Tenant shall
reimburse Landlord on demand for all reasonable costs incurred by Landlord in
connection therewith including, but not limited to, reasonable attorney's fees,
court costs and related costs plus interest thereon at the Default Rate from
the date such costs are paid by Landlord. Actions by Landlord to collect
amounts due from Tenant as provided in this paragraph 31 may be brought at any
time, and from time to time, on one or more occasions, without the necessity of
Landlord's waiting until the termination of this Lease.

SURRENDER

28. On the last day of the Term, or upon the earlier termination of
this Lease, Tenant shall peaceably and quietly surrender the Premises to
Landlord, broom clean, in good order, repair and condition, excepting only
reasonable wear and tear and damage by fire or other casualty. Prior to the

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surrender of the Premises to Landlord, Tenant, at its sole cost and expense,
shall remove all liens and other encumbrances, which may have resulted from the
acts or omissions of Tenant. If Tenant fails to do any of the foregoing,
Landlord, in addition to other remedies available to it at law or in equity,
may, without notice, enter upon, reenter, possess and repossess itself thereof,
by summary proceedings, ejectment, or otherwise, and may dispossess and remove
Tenant and all persons and property from the Premises; and Tenant waives any
and all damages or claims for damages as a result thereof. Such dispossession
and removal of Tenant shall not constitute a waiver by Landlord of any claims
by Landlord against Tenant.

HOLDING OVER

29. If Tenant does not surrender possession of the Premises at the
end of the Term, or upon earlier termination of this Lease, at the election of
Landlord, Tenant shall be a tenant-at-sufferance of Landlord and the Rent and
other payments due during the period of such holdover shall be one and one-half
times the amount of the average monthly rent during the primary Lease term (or
during the renewal term if the holding over extends beyond the renewal term).

REMOVAL OF TENANT'S PROPERTY

30. Tenant shall retain the ownership of all movable equipment,
furniture, trade fixtures and supplies placed in or on the Premises by Tenant
and shall have the right to remove such movable equipment, furniture, trade
fixtures and supplies prior to termination of this Lease provided that Tenant
repairs any injury to the Premises or the Building resulting from such removal.
Unless Tenant has made prior arrangements with Landlord and Landlord has agreed
in writing to permit Tenant to leave such equipment, furniture or supplies on
the Premises for an agreed period, if Tenant does not remove such movable
equipment, furniture and supplies prior to such termination, then, Landlord
shall have the right to have such items removed and stored and all damage to
the Premises or Building resulting therefrom repaired at the cost of Tenant.

LIENS

31. Tenant shall not permit any mechanics', materialmen's or other
liens to be fixed or placed against the Premises or the Building or the Land,
and agrees immediately to discharge (either by payment or by filing of the
necessary bond, or otherwise) any mechanics', materialmen's or other lien which
is allegedly fixed or placed against any of the foregoing.

INTEREST

32. All amounts of money payable by Tenant to Landlord under this
Lease, if not paid when due, shall bear interest from the date due until paid
at the then Default Rate. The "due date" shall be the first business day of
each calendar month if a specific due date is not otherwise provided in
accordance with the terms of this Lease. Provided, however, that if the
applicable check is mailed to the proper address (of which Tenant shall have
previously notified) on or before the first business day

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of the applicable month, it shall be deemed to have been paid timely for the
purposes of this paragraph 32.

ASSIGNMENT AND SUBLETTING

33. Landlord shall have the right to transfer and assign in whole or
in part, by operation of law or otherwise, its rights and obligations hereunder
whenever Landlord, in its sole judgment, deems it appropriate without any
liability to Tenant and Tenant shall attorn to any party to which Landlord
transfers the Building all subject, however, to the terms of this Lease. Tenant
shall not assign or otherwise transfer, mortgage, pledge, hypothecate or
otherwise encumber this Lease, or any interest herein, and shall not sublet the
Premises or any part thereof, or any right or privilege appurtenant thereto,
or permit any other party to occupy or use the Premises, or any portion
thereof, without the express written consent of Landlord, which consent shall
not be unreasonably withheld or delayed. Notwithstanding the foregoing
provision, Tenant may assign or sublet, in whole or in part, without Landlord's
consent to any parent or subsidiary or affiliated company, but without
releasing Tenant. Any such consent by Landlord shall not release Tenant from
any of Tenant's obligations hereunder or be deemed to be a consent to any
subsequent assignment, subletting, occupation or use by another person. Subject
to the foregoing, the rights and obligations of the parties hereunder shall
inure to the benefit of and being binding on the parties hereto and their
respective successor, assigns, heirs, and legal representatives.

MERGER OF ESTATES

34. The voluntary or other surrender of this Lease by Tenant or a
mutual cancellation thereof, shall not work a merger and shall, at the option
of Landlord, terminate all or any existing subleases or subtenancies, or may,
at the option of Landlord, operate as an assignment to it of Tenant's interest
in any or all such subleases or subtenancies.

LANDLORD'S LIABILITY

35. Any provisions of this Lease to the contrary notwithstanding,
Tenant hereby agrees that no personal or corporate liability of any kind or
character whatsoever now attaches or any time hereafter under any condition
shall attach to Landlord for payment of any amounts payable under this Lease or
for the performance of any obligation under this Lease. The exclusive remedies
of Tenant for the failure of Landlord to perform any of its obligations under
this Lease shall be to proceed against the interest of Landlord in and to the
Building. Nothing herein, however, shall prevent Tenant from pursuing
appropriate injunctive or other equitable relief.

CONDEMNATION

36. If all or more than twenty-five percent (25%) of the interest in
the Premises shall be taken as a result of the exercise of the power of eminent
domain, this Lease shall terminate as to the part so taken as of the date of
taking. If more than 25% of the interest in the Premises or if a substantial

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portion of the Building is so taken, either Landlord or Tenant shall have the
right to terminate this Lease as to the balance of the Premises by written
notice to the other within thirty (30) days after the date of taking; provided,
however, that a condition to the exercise by Tenant of such right to terminate
shall be that the portion of the Premises or Building taken shall be of such
extent and nature as to substantially handicap, impede or impair Tenant's use
of the Premises or the balance of the Premises remaining. In the event of any
taking, Landlord shall be entitled to any and all compensation, damages,
income, rent and awards with respect thereto, except for an award, if any,
specified by the condemning authority for any property that Tenant has the
right to remove upon termination of this Lease and for any relocation expenses
or loss of business awarded to Tenant. Tenant shall have no claim against
Landlord for the value of any unexpired Term. In the event of a partial taking
of the Premises which does not result in a termination of this Lease, the Rent
thereafter to be paid shall be equitably reduced by being proportionately
reduced as to the square footage so taken, and Landlord shall restore the
Premises at its cost to an architectural whole using reasonable diligence.

SUBORDINATION

37. The rights and interests of Tenant under this Lease and in and to
the Premises shall be subject and subordinate to first deeds of trust,
mortgages, and other security instruments and to all renewals, modifications,
consolidations, replacements and extensions thereof (the "Security Documents")
heretofore or hereafter executed by Landlord covering the Premises, the
Building and the Land, or any parts thereof, to the same extent as if the
Security Documents had been executed, delivered and recorded prior to the
execution of this Lease so long as Tenant's possession of the Premises and its
rights under the Lease are not disturbed by the beneficiary of the Security
Documents in the event of a default thereunder by Landlord, its successors or
assigns. The beneficiary of any such Security Documents shall execute and
deliver to Tenant an appropriate non-disturbance agreement. After the delivery
to Tenant of a notice from Landlord that it has entered into one or more
Security Documents, together with notice of the address of the beneficiaries of
such Security Documents, then, during the term of such Security Documents,
Tenant shall deliver to the holder or holders of all Security Documents a copy
of all notices to Landlord and shall grant to such holder or holders the right
to cure all defaults, if any, of Landlord hereunder within the same time period
provided in this Lease for curing such defaults by Landlord and, except with
the prior written consent of the holder of the Security Documents, shall not
(i) amend this Lease, (ii) surrender or terminate this Lease, except pursuant
to right to terminate expressly set forth in this Lease, or (iii) pay any Rent
more than one month in advance or pay any Rent or other amounts payable
hereunder other than in strict accordance with the terms hereof. The provisions
of this subsection shall be self-operative and shall not require further
agreement by Tenant; however, at the request of Landlord, Tenant shall execute
such further documents as may be reasonably required to evidence and set forth
for the benefit of the holder of any Security Documents the obligations of
Tenant hereunder. At any time and from time to time upon not less than fifteen
(15) days' prior notice by Landlord, Tenant shall execute, acknowledge and
deliver to the Landlord a statement of the Tenant, in writing, certifying, if
true, that this Lease is unmodified and in full force and effect (or, if there
have been modifications, that the same is in full force and effect as modified
and stating the modifications, if any), and stating whether or not to the best
knowledge of Tenant the Landlord is in default in the keeping, observance or

13
<PAGE> 14
performance of any covenant, agreement, term, provision or condition contained
in this lease and, if so, specifying each such default of which Tenant may have
knowledge, it being intended that any such statement may be relied upon by any
prospective purchaser, tenant, mortgagee or assignee of any mortgage of the
Building or of the Landlord's interest therein.

LEGAL INTERPRETATION

38. This Lease and the rights and obligations of the parties hereto
shall be interpreted, construed, and enforced in accordance with the laws of
the State of Texas. The determination that one or more provisions of this Lease
is invalid, void, illegal or unenforceable shall not affect or invalidate the
remainder. All obligations of either party requiring any performance after the
expiration of the Term shall survive the expiration of the Term and shall be
fully enforceable in accordance with those provisions pertaining thereto. If
the rights of the Tenant hereunder are owed by two or more parties, or two or
more parties are designated herein as Tenant, then all such parties shall be
jointly and severally liable for the obligations of Tenant hereunder. Paragraph
titles appearing in the margins are for convenient reference only and shall not
be used to interpret or limit the meaning of any provision of this Lease.

USE OF NAMES

39. Tenant shall not have the right to use the name ONE LAWRENCE
CENTRE except in connection with giving the address of Tenant, and then such
terms cannot be emphasized or displayed with more prominence than the rest of
such address.

WHOLE AGREEMENT

40. No oral statements or prior written material not specifically
incorporated herein shall be of any force or effect. Tenant agrees that in
entering into and taking this Lease, it relies solely upon the representations
and agreements contained in this Lease and no others. This Lease, including the
Exhibits which are attached hereto and made a part hereof for all purposes,
constitutes the whole agreement of the parties and shall in no way be
conditioned, modified or supplemented, except by a written agreement executed
by and delivered to both parties.

CONSENTS

41. Any and all consents or approvals required or given under the
terms of this Lease or in connection therewith by either party shall not be
unreasonably withheld, delayed or conditioned.

LANDLORD LIEN NEGATION

42. Landlord hereby expressly negates any lien in its favor, whether
statutory, contractual or otherwise, with respect to this Lease and Tenant's
obligations hereunder.

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<PAGE> 15
LANDLORD'S NEGLIGENCE

43. Notwithstanding any provision hereof to the contrary, Landlord
shall be liable for its negligence and willful misconduct and that of its
agents, employees, contractors, invitees and licensees.

FORCE MAJEURE

44. This Lease and the obligations of the Tenant or Landlord
hereunder (except for the payment of money) shall not be affected or impaired
because the Landlord or Tenant, as the case may be, is unable to fulfill any of
its obligations hereunder or is delayed in doing so, if such inability or delay
is caused by reason or fire, earthquake, acts of civil court or military
authorities, labor disturbances, strikes, labor troubles, acts of God or any
other cause beyond the reasonable control of the Landlord or Tenant, as the
case may be.

SIGNAGE

45. Tenant shall be permitted to erect and maintain, and Tenant is
hereby granted an easement to erect and maintain, Tenant's exterior signage, at
its expense, at the locations designated on Exhibit E hereto. All such signage
is subject to applicable local sign codes, ordinances and regulations. In
addition, Tenant shall have the right to erect and maintain (i) a sign within
the reception area and (ii) a building directory, at Tenant's expense, subject
to Landlord's approval, which approval shall not be unreasonably withheld,
delayed or conditioned.

PARKING

46. Landlord hereby leases to Tenant and Tenant hereby leases from
Landlord, at no additional rent (i) the underground parking facilities located
within the Building and (ii) no less than ninety (90) unreserved parking spaces
in the surface parking lots located on the Land and designated on Exhibit A-1
hereto.

ESTOPPEL CERTIFICATE OR THREE-PARTY AGREEMENT

47. Tenant agrees that Tenant will, within ten (10) days following
request of Landlord, execute an estoppel certificate or a three-party agreement
among Landlord, Tenant and Landlord's mortgagee or ground lessor or purchaser
certifying to such facts (if true) and agreeing to such notice provisions and
other matters as such mortgagee, lessor or purchaser may reasonably require in
connection with Landlord's present or future financing, lease or sale. Failure
of Tenant to execute the certificate or agreement within ten (10) days after
written request shall conclusively constitute Tenant's verification that this
Lease is in full force and effect, that Landlord is not in default in any
respect, and that Tenant agrees to all requested notice provisions and other
requested provisions. Tenant shall thereafter be estopped from any defense to
the foregoing verifications and agreements.

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<PAGE> 16
IN WITNESS WHEREOF, this Lease is hereby executed as of the date first
above set forth.

LANDLORD:

LAWRENCE INTERNATIONAL, INC.
ATTEST:

By:
- ------------------------------ -----------------------------------
J. D. Lawrence, President

TENANT:

DAILEY PETROLEUM SERVICES CORP.
ATTEST:

By:
- ------------------------------ -----------------------------------
James F. Farr, President

STATE OF TEXAS )
)
COUNTY OF MONTGOMERY )

Before me, the undersigned authority, on this date personally appeared
J. D. Lawrence, President of Lawrence International, Inc., known to me to be
the person whose name is subscribed to the foregoing instrument, and
acknowledged to me that he executed the same for the purposes and consideration
therein expressed.

Given under my hand and seal this _________ day of
__________________________________, 1996.

-----------------------------------
Notary Public in and for the State
of Texas

16
<PAGE> 17
STATE OF TEXAS )
)
COUNTY OF MONTGOMERY )

Before me, the undersigned authority, on this date personally appeared
James F. Farr, President of Dailey Petroleum Services Corp., known to me to be
the person whose name is subscribed to the foregoing instrument, and
acknowledged to me that he executed the same for the purposes and consideration
therein expressed.

Given under my hand and seal this _________ day of
__________________________________, 1996.

-----------------------------------
Notary Public in and for the State
of Texas

17
<PAGE> 18
EXHIBIT "A"

PROPERTY DESCRIPTION

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<PAGE> 19

Being 206.7382 acres of land situated in Montgomery County, Texas, and being a
composite of three (3) tracts of land, the remainder of a called 4.4113 acre
tract of land conveyed by deed dated March 11, 1983 from Garden Park Cemetery
of Conroe Association to Dailey Oil Tools, Inc. recorded under Clerks File
number 8312707 of the real property records in the James Edwards Survey A-190,
the remainder of a called 174.900 acres conveyed by deed dated April 30, 1981
from Fairview Farms, LTD, to Dailey Oil Tools, Inc. recorded under Clerks File
number 8115778 of the real property records in the Peter J. Willis Survey
A-610, and a called 35.092 acre tract conveyed by deed dated October 7, 1983
from William L. Gilmore and wife, Mildred S. Gilmore to Dailey, Inc. recorded
under Clerks File number 8349612 of the real property records in the William S.
Allen Survey A-2, Montgomery County, Texas, said 206.7382 acres being more
particularly described as follows:

Beginning at a Texas Highway Department concrete survey marker with a brass
disc found at the intersection of the south right-of-way line of Teas Nursery
Road, F.M. Highway 3083 (160 foot R.O.W.) recorded under Clerks File number
8912295 of the real property records, and the west right-of-way line of U.S.
Highway 75.(130 foot R.O.W.) for the northeast corner of the herein described
tract;

THENCE South 16 degrees 14'40" East, along the west right-of-way line of U.S.
Highway 75, a distance of 1020.61 feet, to a 1 inch iron pipe found for corner;

THENCE South 72 degrees 35'32" West, leaving U.S. Highway 75, along the north
line of Conroe Telephone Company tract, a distance of 1340.58 feet, to a fence
corner post for corner;

THENCE South 16 degrees 14'40" East, along a fence, the west line of said
Conroe Telephone Company tract, and Skytop Rig Co. 40 acre tract recorded in
Volume 1014, Page 900 of the deed records, a distance of 1265.88 feet, to a
fence corner post for corner;

THENCE South 72 degrees 35'32" West, continuing along a chain link fence, along
the north line of the City of Conroe 3.00 acre tract recorded in Volume 1031,
Page 621 of the deed records, a distance of 572.78 feet, to a 1/2 inch iron rod
set for corner;

THENCE South 17 degrees 24'28" East, along the west line of said 3.00 acre
tract, crossing from the Peter J. Willis Survey A-610, to the William S. Allen
Survey A-2, a total distance of 229.07 feet, to a 1/2 inch iron rod set for
corner;

THENCE North 72 degrees 35'32" East, along the south line of said City of
Conroe 3.00 acre tract, a distance of 336.70 feet, to a 1/2 inch iron rod set
for corner;

THENCE South 17 degrees 01'49" East, along the west line of Lots 1, 2, and 3 of
Section "B", J.O.H. Bennette Subdivision as recorded in Volume 3, Page 5 of the
Map Records of Montgomery County, a distance of 833.64 feet, to a 1/2 inch iron
rod set for the southeast corner of Lot 13, the southeast corner of the herein
described tract;

THENCE South 72 degrees 58'11" West, along the south line of lots 13, 14, 15,
and 16, also being the north line of Drennan Road (40 foot R.O.W.), a distance
of 1789.92 feet, to a 1/2 inch iron rod set for the southwest corner of the
herein described tract;

Exhibit "A"
Page 1

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<PAGE> 20
THENCE North 17 degrees 21'48" West, along the east right-of-way line of
Interstate Highway 45, as recorded in Volume 486, Page 14 of the deed records,
a distance of 279.44 feet, to a Texas Highway Department concrete right-of-way
marker station 655+00 for an angle point;

THENCE North 20 degrees 47'49" West, continuing along the east right-of-way
line of Interstate Highway 45, a distance of 300.00 feet, to a concrete
right-of-way marker for angle point;

THENCE North 25 degrees 05'10" West, at 240.9 feet passing an old post on the
agreement line as recorded in Volume 649, Page 5 of the deed records, passing
the north line of Lot 16, J.O.H. Bennette Subdivision also being the north line
of the William S. Allen Survey A-2, at 268.06 feet, a total distance of 401.12
feet, to a 1/2 inch iron rod set for an angle point;

THENCE North 20 degrees 47'49" West, continuing along the east right-of-way
line of Interstate Highway 45, as recorded in Volume 499, Page 64 of the deed
records, a distance of 700.00 feet, to a 1/2 inch iron rod set for an angle
point;

THENCE North 16 degrees 30'28" West, a distance of 200.56 feet, to a concrete
right-of-way marker station 639+00 for an angle point;

THENCE North 20 degrees 47'49" West, a distance of 814.12 feet, to a concrete
right-of-way marker;

THENCE North 18 degrees 46'20" West, a distance of 279.71 feet, to a 1/2 inch
iron rod set for an angle point;

THENCE North 18 degrees 05'44" West, a distance of 195.56 feet, to a 1/2 inch
iron rod set for an angle point;

THENCE North 19 degrees 37'14" West, a distance of 195.98 feet, to a concrete
right-of-way marker found for an angle point;

THENCE North 14 degrees 52'12" West, a distance of 587.87 feet, to a 1/2 inch
iron rod set for an angle point;

THENCE North 10 degrees 34'59" East, a distance of 258.36 feet, to a 1/2 inch
iron rod set for the northwest corner of said called 174.900 acre tract;

THENCE South 78 degrees 36'23" East, along a fence, the south line of the S.A.
Crawford tract, recorded in Volume 213, Page 343 of the deed records, a
distance of 353.53 feet, to a 1/2 inch iron rod set for corner;

THENCE North 11 degrees 48'34" East, along a fence, the west line of said
called 4.4113 acre tract, a distance of 255.39 feet, to a 1/2 inch iron rod set
for corner;

THENCE South 59 degrees 45'41" East, along the south right-of-way line of F.M.
Highway 3083, (160 foot R.O.W.), a distance of 679.77 feet, to a concrete
right-of-way marker with a brass disc for the point of curvature;

THENCE in a southeasterly direction, along a curve to the left, having a radius
of 1250.00 feet, a central angle of 48 degrees 20'30", a chord bearing of South
83 degrees 55'56" East, a chord distance of 1023.65 feet, an arc distance of
1054.65 feet, to a concrete right-of-way marker with a brass disc for the point
of tengency;

THENCE North 71 degrees 53'49" East, continuing along the south right-of-way
line of F.M. Highway 3083, a distance of 1614.00 feet, to the Point of
Beginning containing within these metes and bounds 206.7382 acres of land.

Exhibit "A"
Page 2

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<PAGE> 21
EXHIBIT "A" - 1

SITE PLAN

[MAP]

21
<PAGE> 22
EXHIBIT "A" - 1 CONTINUED

[MAP]

22
<PAGE> 23
EXHIBIT "B"

DESCRIPTION OF PREMISES

FIRST FLOOR PLAN

[MAP]

23
<PAGE> 24
EXHIBIT "B"

DESCRIPTION OF PREMISES

SECOND FLOOR PLAN

[MAP]

24
<PAGE> 25
EXHIBIT "B"

DESCRIPTION OF PREMISES

THIRD FLOOR PLAN

[MAP]

25
<PAGE> 26
EXHIBIT "B"

DESCRIPTION OF PREMISES

FOURTH FLOOR PLAN

[MAP]

26
<PAGE> 27
EXHIBIT "C"

SERVICES PROVIDED BY TENANT

Janitorial service five days per week, including vacuuming and spot cleaning of
floors, dusting, trash collecting and general cleaning to maintain a
first-class standard.

All utilities for the Premises

Light tube replacement and ballast replacement and fixture cleaning for
Building fixtures.

All Building air conditioning and heating equipment maintenance.

All Building electrical, mechanical or plumbing maintenance.

Restroom supplies including paper towels and soap.

Window cleaning.

Landscape and parking area cleaning and maintenance.

On-site maintenance man.

Pest Control (on a least a quarterly basis).

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<PAGE> 28
EXHIBIT "C-2"

CLEANING AND JANITORIAL SERVICES

NIGHTLY 1. Empty, clean and damp dust all waste receptacles,
wash as necessary.
CLEANING 2. Empty and clean all ash trays.
3. Vacuum all rugs and carpeted areas.
4. Dust furniture, files, fixtures, etc.
5. Damp wipe and polish all glass furniture tops.
6. Remove finger marks and smudges from vertical
surfaces.
7. Clean all water coolers.
8. Sweep all private stairways nightly, vacuum if
carpeted.
9. Damp mop spillage in office and public areas as
required.
10. Damp dust all telephones as necessary.

WASH ROOMS 1. Damp mop, rinse and dry floors nightly.
(NIGHTLY) 2. Scrub floors as necessary.
3. Clean all mirrors, bright work and enameled surfaces
nightly.
4. Wash and disinfect all fixtures.
5. Damp wipe and disinfect all partitions, tile walls,
etc.
6. Empty and sanitize all receptacles.
7. Fill toilet tissue, soap, towel, and sanitary napkin
dispensers.
8. Clean flushometers and other metal work.
9. Wash and polish all wall partitions, tile walls and
enamel surfaces from trim to floor monthly.
10. Vacuum all louvers, ventilating grilles and dust
light fixtures monthly.

FLOORS 1. Ceramic tile, marble and terrazzo floors to be swept
and buffed nightly and washed and scrubbed as
necessary.
2. Vinyl asbestos floors and bases to be swept nightly.
3. Tile floors to be waxed and buffed monthly.
4. All carpeted areas and rugs to be vacuum cleaned
nightly.
5. Carpet shampooing will be performed at Tenant's
request and billed to tenant.

GLASS 1. Clean all perimeter windows quarterly, inside and
outside.
2. Clean entrance doors and adjacent glass panels
nightly.
3. Clean partition glass and interior glass doors
quarterly.

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<PAGE> 29
HIGH DUSTING 1. Dust and wipe clean all closet shelving when empty.
(QUARTERLY) 2. Dust all picture frames, charts, graphs, etc.
3. Dust clean all vertical surfaces.
4. Damp dust all ceiling air conditioning diffusers.
5. Dust the exterior surfaces of lighting fixtures.

DAY SERVICE 1. Check mens' washrooms for toilet tissue replacement.
2. Check ladies' washrooms for toilet tissue and
sanitary napkin replacements.
3. Supply toilet tissue, soap and towels in men's and
ladies' washrooms.

Anything hereinabove to the contrary notwithstanding, it is
understood that no service of the character provided for in
this Exhibit shall be performed on Saturdays, Sundays or
Holidays defined in this Lease.

29
<PAGE> 30
EXHIBIT "D"
RULES AND REGULATIONS OF BUILDING

1. Landlord will provide and maintain a directory for all tenants of the
Building. No signs, advertisements or notices visible to the general
public shall be permitted within the Building unless first approved in
writing by Landlord.

2. Sidewalks, doorways, vestibules, halls, stairways and other similar
areas shall not be obstructed by tenants or used by any tenant for any
purpose other than ingress and egress to and from the Premises and for
going from one to another part of the Building.

3. Corridor doors on multi-tenant floors, when not in use, shall be kept
closed.

4. Plumbing fixtures and appliances shall be used only for the purposes
for which designed, and no sweepings, rubbish, rags or other
unsuitable material shall be thrown or placed therein. Damage
resulting to any such fixtures or appliances from misuse by a tenant
shall be paid by tenant.

5. Landlord shall provide all locks for doors into each tenant's leased
area, and no tenant shall place any additional lock or locks on any
door in its leased area without Landlord's prior written consent. Two
keys for each lock on the doors in each tenant's leased area shall be
furnished by Landlord. Additional keys shall be made available to
tenants at Landlord's cost. Tenants shall not have any duplicate keys
made except by Landlord.

6. Electric current shall not be used for cooking (except in designated
areas), or heating without Landlord's prior written permission.

7. All tenants will refer all contractors, contractors' representatives
and installation technicians who are to perform any work within the
Building to Landlord for Landlord's supervision, approval and control
before the performance of any such work. This provision shall apply
to all work performed in the Building including, but not limited to,
installation of telephones, telegraph equipment, electrical devices
and attachments, and any and all installations of every nature
affecting floors, walls, woodwork, trim, windows, ceilings, equipment
and any other physical portion of the Building.

8. Movement in or out of the Building of furniture or office equipment,
or dispatch or receipt by tenants of any heavy equipment, bulky
material or merchandise shall be performed only in such manner, during
such hours and using such elevators and passageways as the Landlord
may designate and approve in advance and, if reasonable, necessary or
appropriate in view of all the circumstances, then only upon having
been scheduled in advance with Landlord.

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<PAGE> 31
9. The location, weight and supporting devices for any safes and other
heavy equipment shall in all cases be approved by Landlord prior to
initial installation or relocation.

10. No portion of any tenant's leased area shall at any time be used for
cooking, sleeping or lodging quarters. No birds, animals or pets of
any type, with the exception of guide dogs accompanying visually
handicapped persons, shall be brought into or kept in, on or about
Tenant's leased area.

11. Tenants shall not make or permit any loud or improper noises in the
Building or otherwise interfere in any way with other tenants or
persons having business with them.

12. Each tenant shall endeavor to keep its leased area neat and clean.
Nothing shall be swept or thrown into the corridors, halls, elevator
shafts or stairways, nor shall tenants place any trash receptacles in
these areas.

13. Tenants shall not employ any person for the purpose of cleaning other
than the authorized cleaning and maintenance personnel for the
Building unless otherwise approved in writing by Landlord.

14. Landlord shall not be responsible for the tenants, their agents,
employees or invitees for any loss of money, jewelry or other personal
property from the leased premises or public areas or for any damages
to any property therein from any cause whatsoever whether such loss or
damage occurs when an area is locked against entry or not.

15. Tenants shall exercise reasonable precautions in protection of their
personal property from loss or damage by keeping doors to unattended
areas locked. Tenants shall also report any thefts or losses to
Landlord and security personnel as soon as reasonably possible after
discovery and shall also notify Landlord and security personnel of the
presence of any persons whose conduct is suspicious or causes a
disturbance.

16. Tenants, their employees, patients, guests and invitees may be called
upon to show suitable identification and sign a building register when
entering or leaving the Building at times other than normal Building
operating hours, and all tenants shall cooperate fully with Building
personnel in complying with such requirements.

17. Tenants shall not solicit from or circulate advertising material among
other tenants of the Building except through the regular use of the
U.S. Postal Service. Tenants shall notify Landlord or the building
personnel promptly if it comes to their attention that any
unauthorized persons are soliciting from or causing annoyance to
tenants, their employees, guests or invitees.

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<PAGE> 32
18. Landlord reserves the right to deny entrance to the building or remove
any person or persons from the Building in any case where the conduct
of such person or persons involves a hazard or nuisance to any tenant
of the Building or to the public or in the event or other emergency,
riot, civil commotion or similar disturbance involving risk to the
Building, tenants or the general public.

19. Tenant shall not tamper with or attempt to adjust temperature controls
in the Building. Landlord shall adjust thermostats as required to
maintain the Building at standard temperature.

20. All requests for overtime air conditioning or heating must be
submitted in writing to the Building management office by 2:00 p.m. on
the day desired for weekday requests, by 2:00 p.m. Friday for weekend
requests, and by 2:00 p.m. on the preceding business day for holiday
requests.

21. No flammable or explosive fluids or materials shall be kept or used
within the Building except in areas approved by Landlord, and Tenant
shall comply with all applicable building and fire codes relating
thereto.

22. Landlord reserves the right to rescind any of these rules and
regulations and to make such other and further rules and regulations
as in its judgment shall from time to time be needful for the safety,
protection, care and cleanliness of the Building, the operation
thereof, the preservation of good order therein and the protection and
comfort of the tenants and their agents, employees and invitees, which
rules and regulations, when made and written notice thereof is given
to a tenant, shall be binding upon it in like manner as if originally
herein prescribed.

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<PAGE> 33
EXHIBIT "E"

SIGNAGE

Tenant shall have the right to erect exterior signage, at its cost, at the
locations generally describe don Exhibit E-1 hereto. Landlord and Tenant
hereby agree that they will enter into an easement agreement more particularly
identifying the location of the easements for such exterior signage as soon as
reasonably practicable.

33
<PAGE> 34
E-1

SIGNAGE

SITE PLAN

[MAP]

34
<PAGE> 35
SCHEDULE 1

RENEWAL OPTION

Provided no uncured material default exists at the time of exercise of
the renewal option, Tenant shall have one (1) option to extend and renew the
Lease Term of this Lease (the "Extended Lease Term"), for a period of five (5)
years from and after the expiration under Paragraph 3 of the Leased Term of
this Lease at the Monthly Rent as hereinafter set forth.

The Monthly Rent for the option period during the Extended Term shall
be increased by the escalation factor (hereinafter defined), being payable in
monthly installments as provided in Paragraph 4 of the Lease. As used in this
Lease, the term "escalation factor" shall be a fraction, the numerator of which
shall be the "CPI" (as hereinafter defined) published next preceding the
applicable anniversary date of each year during the Extended Lease Term, and
the denominator of which shall be the CPI published next preceding the
Commencement Date of the Lease Term of this Lease. The term "CPI" shall mean
the United States Consumer Price Index for All Urban Consumers (also known as
the CPI-U), 1967 equals one hundred, for Houston, Texas, as published
bi-monthly (or, if same shall no longer be published bi-monthly, on the most
frequent basis available), by the Bureau of Labor Statistics, U. S. Department
of Labor. If such index shall be discontinued, the term "CPI" shall then refer
to such comparable statistics on changes in the cost of living for urban
consumers in Houston, Texas (or for all urban consumers if statistics for
Houston, Texas are not available) as the same may be computed and published (on
the most frequent basis available) by an agency of the United States or by a
responsible financial periodical of recognized authority, as selected by
Landlord and Tenant.

Except for an adjustment in the Monthly Installment for any year of
the Extended Lease Term, the terms and provisions of the Lease shall be
applicable to and continue for the Extended Lease Term.

To exercise the option to extend, Tenant must notify Landlord in
writing on or before sixty (60) days before the expiration of the Term of this
Lease, that it elects to exercise the option, in which event this Lease shall
be automatically extended for the additional option period. The option shall
be void, however, if Tenant is not in possession of the Leased Premises under
this Lease at the time of giving such notice, or if Tenant is in material
default under any of the terms of this Lease at that time, or if Tenant does
not in fact exercise the option in writing on or before sixty (60) days before
the expiration of the Term.

<PAGE> 1
SERVICE CENTER LEASE AGREEMENT

THIS SERVICE CENTER LEASE AGREEMENT [this "Lease"] is executed
effective as of May 1, 1996, between LAWRENCE INTERNATIONAL, INC., a Delaware
corporation ["Landlord"], and DAILEY PETROLEUM SERVICES CORP., a Delaware
corporation ["Tenant"].

W I T N E S S E T H:

I. Leased Premises

For and in consideration of the rentals to be paid and the
covenants and agreements set forth in the Lease and this Modification
Agreement, Landlord hereby leases to Tenant, and Tenant hereby leases from
Landlord, upon and subject to the terms and provisions of this Lease, office
and/or warehouse space containing in the aggregate approximately 81,219 square
feet as outlined and crosshatched on the diagram attached hereto as "Exhibit A"
and made a part hereof for all purposes, situated on a portion of a tract of
real property [the "Land"] more particularly described in Exhibit "B", attached
hereto and made a part hereof for all purposes [collectively, the "Leased
Premises"]. The Leased Premises are comprised of those four (4) buildings [the
"Buildings"] and associated real property commonly known as The Service Center
and The Distribution/R&D Center, Conroe, Texas, (the Land, the Building and
all other improvements thereon collectively referred to as the "Project").

II. Term

1. The term of this Lease [the "Lease Term"] shall
commence effective as of May 1, 1996 [the "Commencement Date"] and thereafter
continue for, and terminate at the end of, sixty (60) full calendar months,
subject to the renewal option as set forth in Exhibit C attached hereto and
made a part hereof for all purposes, unless sooner terminated pursuant to any
provision of this Lease. Upon the Commencement Date of the Lease Term
hereunder, Tenant and Landlord shall execute a written statement confirming the
commencement of the Lease Term.

2. If the Lease Term commences on a day other than the
first day of a calendar month, then Tenant shall pay upon the Commencement Date
one-thirtieth (1/30th) of the Monthly Installment of Term Rental for each day
of such fractional calendar month.

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<PAGE> 2
III. Rental

1. Commencing on May 1, 1996 and continuing for the
remainder of the Lease Term, Tenant agrees to pay to Landlord rental for the
Leased Premises for the Lease Term [the "Term Rental"] in accordance with the
terms of this Lease, monthly in advance on the first (1st) day of each such
month, the sum of Twenty-eight Thousand and 00/100 Dollars ($28,000.00) [the
"Monthly Installment"].

2. As "Additional Rent" hereunder, Tenant shall also pay
timely and directly for the cost of all utilities servicing the Leased
Premises, the premiums for all insurance coverage required of Tenant hereunder
and all maintenance and repairs to the Leased Premises. All sums, liabilities,
obligations and other amounts which Tenant is required to pay, reimburse or
discharge pursuant to this Lease in addition to term Rental or as a result of
Landlord's curing an event of Tenant's default pursuant to this Lease, together
with any interest thereon, shall constitute Additional Rent hereunder. In the
event of any failure on the part of Tenant to pay, reimburse or discharge any
Additional Rent, after notice and opportunity to cure as herein provided,
Landlord shall have all rights, powers and remedies provided for herein or by
law or equity or otherwise in the case of non-payment of Term Rental.

3. Tenant covenants and agrees to pay to Landlord, in
lawful money of the United States of America or by good check or draft (subject
to collection), at One Lawrence Centre, 2507 North Frazier, P. O. Box 1863,
Conroe, Texas 77305, or at such other place and to such other payee as Landlord
may from time to time designate in writing, the Term Rental in Monthly
Installments payable one each in advance on the first (1st) day of every
calendar month of the Lease Term commencing May 1, 1996. The first Monthly
Installment shall be paid by Tenant to Landlord upon the Commencement Date.
Additional Rent due and payable to Landlord shall be payable to Landlord at the
same place and in the same manner provided for Term Rental. Amounts due
hereunder from Tenant as Term Rental or Additional Rent shall be due and
payable at the dates and in the amounts specified and otherwise in accordance
with this Lease without demand, notice, set off or deduction whatsoever, except
as hereinafter provided.

4. Landlord shall timely pay all Ownership Taxes prior
to their respective due dates. "Ownership Taxes" shall mean and include all
taxes, assessments, and other governmental charges, general and special,
ordinary and extraordinary, of any kind and nature whatsoever, applicable to
the Leased Premises including but not limited to assessments for public
improvements or benefits, franchise, estate, inheritance, succession, capital
levy, transfer, income or excess profits tax imposed upon Landlord; provided,
that if at any time during the Lease Term, under the laws of Texas or any
political subdivision thereof in which the Leased Premises are or may be
situated, a tax or excise on gross rents or other tax, however described, is
levied or assessed on land or buildings, such tax or excise shall be included
as a component of Ownership Taxes. Tenant shall have no liability for
Ownership Taxes.

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<PAGE> 3
5. In the event that Tenant shall fail to pay any
Monthly Installment or any amount due as Additional Rent when due, then
interest, calculated at a per annum rate, shall accrue from and after the date
on which any such sum shall be due and payable at the prime rate of Texas
Commerce Bank, National Association [the "Delinquent Rental Rate"]. Such
interest shall be paid by Tenant to Landlord at the time of payment of the
delinquent sum and shall constitute Additional Rent.

IV. Utility Services

Tenant shall promptly make application in its name for and pay for
all public utilities, including electricity, water, gas and telephone service,
rendered or furnished to the Leased Premises during the Lease Term.
V. Use

1. The Leased Premises and all improvements, systems,
facilities and equipment thereon shall be used and occupied by Tenant during
the Lease Term only for general and lawful business purposes [the "Specified
Use"], and for no other use. Tenant may use the Leased Premises for the
Specified Use, but Tenant shall neither injure, overload, deface, waste or
otherwise harm the Leased Premises; nor make or permit any use of the Leased
Premises which is improper, offensive, or contrary to any law or ordinance.
Landlord represents and warrants to Tenant that there are no restrictions
affecting the Leased Premises which prohibit or adversely affect the Specified
Use.

2. In addition, Tenant shall have an easement and the
right to use, on a non-exclusive basis with Landlord, the driveways, roads,
streets and surface parking lot, including without limitation, Teas Nursery
Road, depicted on Exhibit A attached hereto.

VI. Condition and Maintenance

1. Tenant accepts the Leased Premises subject to all
applicable zoning, municipal, county, state and federal laws, ordinances, rules
and regulations applicable to the use and occupancy thereof. At the
termination of this Lease, Tenant shall return the Leased Premises to Landlord
in good order and condition except for reasonable wear and tear and damage by
fire or casualty.

2. Tenant agrees, at its cost and expense and at all
times during the Lease Term (i) to keep the Leased Premises, and all equipment
and systems facilities and non-structural elements [excluding the roof,
load-bearing walls and the foundation which shall be the responsibility of
Landlord], neat, clean, and in good order, repair and condition and (ii) to
keep all glass clean and in good condition and to replace immediately any glass
which may be damaged or broken. Tenant shall also maintain and repair all
parking lots, streets, driveways and roads on the Land, as well as maintain all
landscaping, grass and gardens on the Land and provide pest control on a
quarterly basis.

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3. Landlord shall, at its cost during the Lease Term,
maintain, repair and, if necessary, replace the structural elements (including
roof, foundation and load-bearing walls) at the Leased Premises.

4. Tenant shall have the right during the Lease Term, to
make, at its sole cost and expense, non-structural changes, additions and
alterations in or to the Leased Premises and the improvements, equipment,
facilities and systems thereon, and subject in all cases to the following as to
any work, change or alteration to be done:

a. Any work, change, addition or alteration shall be
done in a good and workmanlike manner and in compliance with
all other laws, ordinances, rules, regulations and
requirements of all governmental or quasi-governmental
authorities having jurisdiction thereof;

b. Tenant shall timely pay for all labor and services
performed for, materials used by or on behalf of or furnished
to Tenant, and hold Landlord and the Leased Premises harmless
and free from any liens, claims, encumbrances or judgments
created by, under or through Tenant; and

c. Public liability insurance and worker's compensation
insurance shall be maintained by Tenant, at Tenant's (or
Tenant's contractor's) sole cost and expense, at all times in
connection with any work, change or alteration.

5. During the Lease Term, Tenant may, upon prior written
approval of Landlord and at its sole cost and expense, make structural
improvements, changes, additions and alterations ("Structural Improvements") in
or to the Leased Premises. Any such structural improvements shall be subject
to the following:

a. any work, change, addition or alteration shall be
done in a good and workmanlike manner and in compliance with
all other laws, ordinances, rules, regulations and
requirements of all governmental or quasi-governmental
authorities having jurisdiction thereof;

b. Tenant shall timely pay for all labor and services
performed for, materials used by or on behalf of or furnished
to tenant, and hold Landlord and the Leased Premises harmless
and free from any liens, claims, encumbrances or judgments
created by, under or through Tenant; and

c. Public liability insurance and worker's compensation
insurance acceptable to Landlord shall be maintained by
Tenant, at Tenant's (or Tenant's contractor's) sole cost and
expense, at all times in connection with any work, change or
alteration.

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<PAGE> 5
d. All Structural Improvements, alterations and
additions to the Leased Premises made by Tenant on, after or
before the effective date of this Lease shall be the property
of the Landlord and shall not be removed by Tenant either
during or after the end of the Term without the express
written approval of Landlord. Tenant shall not be entitled to
any reimbursement or compensation resulting from its payment
of the cost of constructing all or any portion of the
Structural Improvements or any alterations or additions
thereto unless otherwise expressly agreed by Landlord in
writing.

6. Tenant may install trade fixtures and other
improvements in and to the Leased Premises and may remove therefrom any trade
fixtures and other improvements installed by Tenant provided Tenant repairs, at
its expenses, any damage to the Leased Premises resulting from the installation
or removal of the trade fixtures and other improvements installed by Tenant.

VII. Insurance

1. Tenant shall maintain in force, at its own expense,
during this Lease Term, an insurance policy or policies for comprehensive
liability, bodily injury and property damage insurance insuring against claims
of any and all personal injury, death or damage occurring in or about the
Leased Premises, with single limit combined coverage in an amount not less than
$1,000,000.00. Tenant may provide this insurance under a blanket policy. No
other insurance shall be required of Tenant hereunder. Nothing herein shall be
deemed to refer to insurance coverage for Tenant's personal property, which
shall be Tenant's sole responsibility. Landlord shall maintain, at its cost,
during the Lease Term, comprehensive liability, bodily injury and property
damage insurance in an amount not less than $1,000,000.00.

2. Landlord shall, at its own expense, during the Lease
Term, keep the Leased Premises insured by an extended coverage "all risk"
insurance policy insuring against loss or damage by fire, vandalism or
malicious mischief in an amount at least equal to the full replacement value of
the Buildings and all improvements on the Land.

3. All policies of insurance required hereunder from
Tenant shall be placed with companies authorized to do business in the State of
Texas and shall name Landlord as an additional insured with the provision that
the policy may not be canceled without the insurer giving at least twenty (20)
days prior written notice of cancellation to Landlord. Upon the Commencement
Date, Tenant shall present copies of each policy, or certificates of insurance.

4. Each of Landlord and Tenant hereby waives any and all
rights of recovery, claims, demands, and causes of action for damages to goods,
wares and merchandise in, upon or about the Leased Premises and for injury to
the other, its agents, employees, licensees, invitees, or third persons in or
about the Leased Premises from any cause coverable by insurance coverage and
arising at any time, including negligence of such other party; and each of
Landlord and Tenant, on

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<PAGE> 6
behalf of its respective insurance companies insuring it and its property and
employees against any such loss, waives and releases any rights by subrogation
that such companies may have against the other party.

VIII. Repair of Building in Event of Fire or Casualty

1. If all or any part of the Leased Premises shall be
damaged or destroyed by fire or other casualty, the Lease and rental
obligations hereunder shall continue in full force and effect, unless
terminated or abated as provided in this Article VIII, and Landlord shall with
reasonable diligence repair, restore or rebuild the Leased Premises. In the
event, Landlord elects to rebuild or repair the Leased Premises, however, all
rental under this Lease shall abate from the date of such fire or casualty
until repairs have been completed and accepted in writing by Tenant as to the
portion of the Leased Premises rendered untenantable by such fire or other
casualty unless such damage or destruction was caused by Tenant's negligence or
willful misconduct in which event rental shall not abate and Tenant shall
repair the damage.

2. Landlord or Tenant, at its option, may terminate this
Lease upon notice, given within thirty (30) days after the date of occurrence
of the damage or destruction, to the other if:

a. the Leased Premises shall be damaged or destroyed as
a result of an occurrence which is not covered by insurance
and has not been caused by Tenant's negligence or willful
misconduct; or

b. the Leased Premises shall be substantially damaged or
destroyed during the last six (6) months of the Lease Term.

If no such notice is given, Landlord shall immediately commence to repair or
rebuild the Leased Premises.

3. Tenant shall give to Landlord and to all mortgagees
(whose name and address has been furnished in writing to Tenant) prompt written
notice of any damage or destruction of any portion of the Leased Premises
resulting from fire or other casualty.

IX. Condemnation

1. If the whole of the Leased Premises shall be taken
for any public or quasi-public use under statue or by right of eminent domain
or by private purchase in lieu thereof, then this Lease shall automatically
terminate as of the date that title shall be taken.

2. If any part of the Leased Premises shall be so taken,
then this Lease shall automatically terminate as of the date that title shall
be taken as to the part so taken and the rent payable under this Lease shall be
equitably apportioned according to the space so taken, and Landlord shall, at
its own cost and expense, restore the remaining portion of Leased Premises to
the extent

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<PAGE> 7
necessary to render it reasonably suitable for the purposes for which it was
leased and shall make all repairs to the Leased Premises to the extent
necessary to constitute the Leased Premises a complete architectural unit;
provided, however, that the cost of such restoration, and Landlord's
obligations with respect thereto, shall be limited by and shall not exceed the
proceeds from Landlord's condemnation award therefor.

3. All compensation awarded or to be paid upon such a
total or partial taking of the Leased Premises shall belong to and be the
property of Landlord and Tenant in the amounts awarded by the condemning
authority.

X. Assignment and Subletting

1. Without Landlord's prior written consent (which
consent shall not be unreasonably withheld, delayed or conditioned), Tenant may
not assign or sublet this Lease except to a parent, subsidiary or affiliate of
Tenant. Tenant shall not be relieved of its primary liability hereunder by
virtue of any permitted assignment or subletting by Tenant.

XI. Landlord's Performance of Tenant's Covenants

Should Tenant at any time fail or omit to do any act or thing
provided under this Lease to be done by Tenant, after notice and opportunity to
cure such default as provided in this Lease, Landlord may, in its sole
discretion, itself do or cause to be done such act or thing. All monies paid
by Landlord pursuant to the provisions of this Article XII shall be and
constitute Additional Rent from Tenant to Landlord to be due and payable upon
demand by Landlord to Tenant with interest at the Delinquent Rental Rate from
the date of payment by Landlord until repayment by Tenant.

XII. Certain Rights Reserved to Landlord

Landlord reserves the right to enter the Leased Premises upon
prior arrangements (except in the case of emergency) with Tenant for the
purpose of taking, and to take, any and all measures, including inspections, to
the Leased Premises, as may be necessary or desirable for the operation,
safety, protection or preservation thereof. It is expressly agreed that in
addition to the other rights of Landlord with respect to this Lease, Landlord
shall have the right to inspect the Leased Premises for the purpose of
ascertaining its physical condition, and upon receipt by Tenant of written
notice from Landlord regarding any requested reasonable repairs resulting from
Tenant's use of the Leased Premises, Tenant shall commence and diligently
complete such reasonable repairs at its cost.

XIII. Subordination to Existing Mortgages

1. This Lease and all rights and privileges of Tenant
provided in this Lease shall be subject to and subordinate to the liens of any
mortgages (including consolidated mortgages) or deeds of trust now existing
(and any renewals, modifications or extensions thereof) against the Leased
Premises, and Tenant shall not be disturbed with respect to this Lease and
Tenant's rights thereunder

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so long as no uncured default has occurred with respect to Tenant's obligations
under this Lease. Landlord agrees that it will use its best efforts to cause
the holder of any such mortgage to execute and deliver to Tenant a
Subordination and Non-Disturbance Agreement.

2. Tenant's right of quiet possession of the Leased
Premises shall not be disturbed and Tenant shall have quiet possession of the
Leased Premises during the Lease Term hereof, subject to the terms, conditions
and provisions of this Lease so long as Tenant is not in default under this
Lease.

XIV. Remedies

If default shall be made in the timely payment of any sum to
be paid by Tenant under this Lease, and default shall continue for ten (10)
days after written notice thereof to Tenant, or if default shall be made in the
performance of any of the other covenants or conditions which Tenant is
required to observe and to perform under this Lease and such default shall
continue for thirty (30) days after written notice thereof to Tenant, provided,
however, that if such default is curable but requires work to be performed,
acts to be done or conditions to be remedied which, by their nature, cannot be
performed, done or remedied, as the case may be, within such thirty (30) day
period, no default shall be deemed to have occurred if Tenant commences the
same within such thirty (30) day period and thereafter diligently and
continuously prosecutes the same to completion, or if the interest of Tenant
under this Lease shall be levied on under execution or other legal process, or
if a case is commenced by Tenant under any title of the United States
Bankruptcy Code or a petition is filed or relief is sought by Tenant under any
bankruptcy or debtor's relief act, statute or law, or if an order for relief is
granted against Tenant under such title or any such act, law or statute, or if
any petition shall be filed by or against Tenant to declare Tenant a bankrupt
or a debtor under any such act, statute or law or to delay, reduce or modify
Tenant's debts or obligations, or if Tenant becomes insolvent according to law,
or if any assignment of Tenant's property shall be made for the benefit of
creditors, or if a receiver or trustee is appointed for Tenant or substantially
all its property or if Tenant shall abandon or vacate the Leased Premises
during the Lease Term or fail to operate its business from the Leased Premises,
and any of the foregoing matters is not released, vacated, stayed or cured
within ninety (90) days after written notice thereof to Tenant, then Landlord
may treat the occurrence of any one or more of the foregoing events as a breach
of this Lease and thereupon, at Landlord's option, may have any one or more of
the following remedies in addition to all other rights and remedies provided at
law or in equity:

a. Landlord may terminate this Lease and immediately
repossess the Leased Premises and be entitled to recover
immediately as damages a sum of money equal to the total of
(i) the reasonable cost of recovering the Leased Premises,
(ii) the unpaid Term Rental and Additional Rent due and earned
at the time of termination, and (iii) any other sum of money
owed by Tenant to Landlord hereunder or at law or in equity.

b. Landlord may immediately terminate Tenant's right of
possession (as opposed to the Lease) without terminating this
Lease and may immediately repossess the

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Leased Premises by forcible entry and detainer suit or
otherwise, without demand or further notice of any kind to
Tenant and without terminating this Lease, in which event
Landlord shall use reasonable diligence to relet the same for
the account of Tenant for such rent and upon such terms as
shall be satisfactory to Landlord. For the purposes of such
reletting Landlord is authorized to make any reasonable
repairs in or to the Leased Premises to restore the Leased
Premises to the condition which existed at the time of
Tenant's default under this Lease. If Landlord elects to
terminate tenant's right of possession pursuant to this
Section XIV.b., Landlord shall be entitled to the remedies set
forth above, including, but not limited to, the reasonable
cost of recovering the Leased Premises, the unpaid Term Rental
and Additional Rent due and earned at the time of the
termination, the reasonable cost and expenses incurred in
reletting the Leased Premises and the collection of rent
accruing therefrom, and the reasonable cost and expenses of
the repairs made necessary by the use of Leased Premises by
Tenant. Furthermore, to the extent the Leased Premises have
been relet, Tenant's liability for the unpaid Term Rental and
Additional Rent shall be limited to the deficiency which
arises as a result of such reletting.

XV. Surrender of Possession

Upon the termination of this Lease or upon the termination of
Tenant's right of possession, Tenant shall surrender possession of the Leased
Premises to Landlord and remove all Tenant's effects therefrom, and if such
possession is not immediately surrendered Landlord may, after notice to Tenant
as herein provided, re-enter the Leased Premises and repossess it and remove
all persons and effects therefrom. Without limiting the generality of the
foregoing, Tenant agrees to remove at the termination of the Lease Term,
Tenant's office furniture, trade fixtures and office equipment and such
alterations, improvements and additions as may be requested in writing by
Landlord. If Tenant shall fail or refuse to remove all such property from the
Leased Premises which Tenant is permitted to remove, Tenant shall be
conclusively presumed to have abandoned the same and title thereto shall
thereupon pass to Landlord. Landlord may, at its option, accept the title to
such property or remove the same or any part thereof in any manner that
Landlord shall choose without incurring liability to Tenant or any other
person.

XVI. Holding Over

If, without Landlord's prior written consent, Tenant shall
remain in possession of the Leased Premises after termination or expiration of
the Lease Term, then such holding over by Tenant shall be construed as a
tenancy from month-to-month, and Tenant shall pay monthly to Landlord a sum
equal to one and one-half (1-1/2) times the Monthly Installment as holdover
rental, plus Additional Rental and any other cost constituting rental under
this Lease for each month, or portion thereof, that Tenant shall retain
possession of the Leased Premises, or any part thereof, beyond the expiration
or termination of the Lease Term. The provisions of this Article XVI shall not
operate as a waiver by Landlord of any right of Landlord, including the right
of re-entry. Such holdover tenancy shall be subject to all conditions,
provisions, and obligations of this Lease insofar as the same are

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applicable to a month-to-month tenancy and not inconsistent with this Article
XVI.

XVII. Notices

After notice required or desired to be given under this Lease
shall be in writing with copies directed as indicated herein and shall be
personally served or given by certified mail, return receipt requested. Any
notice given by mail shall be deemed to have been given on the third (3rd)
postal business day after the date such notice was deposited in the United
States mail, certified and postage prepaid, addressed to the party to be served
with a copy as indicated herein at the last address given by that party to the
other party under the provisions of this Article XVII.

At the date of the execution of this Lease, the address of
Landlord is:

Lawrence International, Inc.
One Lawrence Centre
2507 North Frazier
P. O. Box 1863
Conroe, Texas 77305

and the address of Tenant is:

Dailey Petroleum Services Corp.
P. O. Box 1863
Conroe, Texas 77305

For purposes of notice, the addresses of the parties shall, until changed as
herein provided, be as given first above. However, the parties hereto and
their respective heirs, successors, legal representatives and permitted assigns
shall have the right from time to time and at any time to change their
respective addresses and designate additional addresses and each shall have the
right to specify as its address any other address within the continental United
Sates by at least ten (10) days' written notice to the other party.

XVIII. Miscellaneous

1. All rights and remedies of Landlord and Tenant under
this Lease shall be cumulative, and none shall exclude any other rights and
remedies allowed by law.

2. Each of the provisions of this Lease shall extend to
and shall, as the case may require, bind and inure to the benefit, not only of
Landlord and of Tenant, but also of their respective heirs, legal
representatives, successors and assigns.

3. This Lease (which includes the Exhibits attached
hereto for all purposes of this Lease) embodies the entire contract between the
two parties hereto relative to the Leased Premises

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and the subject matter hereof, constitutes the sole and only agreement of the
parties hereto at the date hereof and supersedes any prior understandings or
oral or written agreements between the parties hereto respecting the Leased
Premises and the subject matter hereof. All of the representations and
obligations of Landlord are contained herein, and no variations, modifications,
changes, waivers or amendments of this Lease or any of its conditions or its
provisions shall be binding upon Landlord unless executed by Landlord. Any
consent, approval or waiver of a party must be in writing signed by such party.

4. This Lease may be executed in any number of
counterparts. Each such executed counterpart shall be deemed an original
hereof, and all such executed counterparts shall together constitute but one
and the same instrument, which instrument shall for all purposes be
sufficiently evidenced by any such executed counterpart.

5. The Article headings used in this Lease are for the
purpose of convenience only. They shall not be construed to limit or to extend
the meaning of any part of this Lease.

6. In the event that either party hereto fails to comply
with any of the terms of this Lease to be complied with on its part and either
party commences legal proceedings to enforce any of the terms of this Lease or
to terminate the tenancy of the Leased Premises, the prevailing party in any
such suit shall receive from the other a reasonable sum as attorneys' fees and
costs as may be fixed by the court or jury.

7. The provisions of this Lease shall be only for the
benefit of the Landlord and Tenant and their respective successors and
permitted assigns, and provisions of this Lease shall not inure to the benefit
of any third party.

8. Upon request of either party hereto, the other party
shall furnish written evidence in form and substance reasonably satisfactory to
the requesting party confirming its authority and legal capacity to enter this
Lease and perform its obligations hereunder. Each of Landlord and Tenant
hereby covenants and represents to the other that it is duly authorized to
enter this Lease and to perform its obligations hereunder and its officers or
other representatives executing this Lease on its behalf are duly authorized
and empowered to do so.

9. Notwithstanding any provision hereof to the contrary,
Landlord shall be liable for its negligence and willful misconduct and that of
its agents, employees, contractors, invitees and licensees.

10. Tenant shall be permitted to erect and maintain, and
Tenant is hereby granted an easement to erect and maintain, Tenant's signage,
at its expense, at the locations designated on Exhibit D hereto. All such
signage is subject to applicable local sign codes, ordinates and regulations.

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11. Tenant agrees that Tenant will, within ten (10) days
following request of Landlord, execute an estoppel certificate or a three-party
agreement among Landlord, Tenant and Landlord's mortgagee or ground lessor or
purchaser certifying to such facts (if true) and agreeing to such notice
provisions and other matters as such mortgagee, lessor or purchaser may
reasonably require in connection with Landlord's present or future financing,
lease or sale. Failure of Tenant to execute the certificate or agreement
within ten (10) days after written request shall conclusively constitute
Tenant's verification that this lease is in full force and effect, that
Landlord is not in default in any respect, and that Tenant agrees to all
requested notice provisions and other requested provisions Tenant shall
thereafter be estopped from any defense to the foregoing verifications and
agreements.

IN WITNESS WHEREOF, the parties have executed this Lease
effective as of the day and year first above written.

LANDLORD:

ATTEST: LAWRENCE INTERNATIONAL, Inc.

By: By:
----------------------------------- -----------------------------------
Name: J. D. Lawrence
---------------------------------
Title: President
--------------------------------

TENANT:

ATTEST: DAILEY PETROLEUM SERVICES CORP.

By: By:
----------------------------------- -----------------------------------
Name: James F. Farr
---------------------------------
Title: President
--------------------------------

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EXHIBIT "A"

[MAP]

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EXHIBIT "B"

LEGAL DESCRIPTION

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<PAGE> 15

THENCE South 16 degrees 14'40" East, along the west right-of-way line of U.S.
Highway 75, a distance of 1020.61 feet, to a 1 inch iron pipe found for corner;

THENCE South 72 degrees 35'32" West, leaving U.S. Highway 75, along the north
line of Conroe Telephone Company tract, a distance of 1340.58 feet, to a fence
corner post for corner;

THENCE North 72 degrees 35'32" East, along the south line of said City of
Conroe 3.00 acre tract, a distance of 336.70 feet, to a 1/2 inch iron rod set
for corner;

Exhibit "B"
Page 1

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THENCE North 17 degrees 21'48" West, along the east right-of-way line of
Interstate Highway 45, as recorded in Volume 486, Page 14 of the deed records,
a distance of 279.44 feet, to a Texas Highway Department concrete right-of-way
marker station 655+00 for an angle point;