DRIL-QUIP INC, 424B1, 1997-10-23

DRIL-QUIP INC
424B1, 1997-10-23
OIL & GAS FIELD MACHINERY & EQUIPMENT

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<PAGE>
FILED PURSUANT TO RULE 424(b)(1)

REGISTRATION NO. 333-33447

PROSPECTUS

5,000,000 Shares

[LOGO OF DRIL-QUIP APPEARS HERE]

COMMON STOCK

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OF THE 5,000,000 SHARES OF COMMON STOCK BEING OFFERED HEREBY, 2,500,000
SHARES ARE BEING SOLD BY THE COMPANY AND 2,500,000 SHARES ARE BEING
SOLD BY THE SELLING STOCKHOLDERS. SEE "PRINCIPAL AND SELLING
STOCKHOLDERS." THE COMPANY WILL NOT RECEIVE ANY OF THE PROCEEDS
FROM THE SALE OF SHARES BY THE SELLING STOCKHOLDERS. PRIOR
TO THIS OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR
THE COMMON STOCK OF THE COMPANY. SEE "UNDERWRITERS"
FOR A DISCUSSION OF THE FACTORS CONSIDERED IN
DETERMINING THE INITIAL PUBLIC OFFERING
PRICE.

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THE COMMON STOCK HAS BEEN APPROVED FOR LISTING ON THE NEW YORK STOCK EXCHANGE
UNDER THE SYMBOL "DRQ."

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

SEE "RISK FACTORS" COMMENCING ON PAGE 7 HEREOF FOR INFORMATION THAT
SHOULD BE CONSIDERED BY PROSPECTIVE 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.

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PRICE $24 A SHARE

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<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
------------ -------------- ----------- ------------
<S> <C> <C> <C> <C>
Per Share.................. $24.00 $1.68 $22.32 $22.32
Total(3)................... $120,000,000 $8,400,000 $55,800,000 $55,800,000
</TABLE>
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(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including under the
Securities Act of 1933, as amended. See "Underwriters."
(2) Before deducting expenses payable by the Company estimated at $800,000.
(3) The Company and the Selling Stockholders have granted to the
Underwriters an option, exercisable within 30 days of the date hereof,
to purchase up to an aggregate of 750,000 additional Shares at the
price to public less underwriting discounts and commissions for the
purpose of covering over-allotments, if any. If the Underwriters
exercise such option in full, the total price to public, underwriting
discounts and commissions, proceeds to Company and proceeds to Selling
Stockholders will be $138,000,000, $9,660,000, $64,170,000 and
$64,170,000, respectively. See "Underwriters."

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

The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal matters
by Andrews & Kurth L.L.P., counsel for the Underwriters. It is expected that
delivery of the Shares will be made on or about October 28, 1997 at the office
of Morgan Stanley & Co. Incorporated, New York, N.Y., against payment therefor
in immediately available funds.

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

MORGAN STANLEY DEAN WITTER
DONALDSON, LUFKIN & JENRETTE
Securities Corporation

October 22, 1997
<PAGE>

NO PERSON IS AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN AS CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, BY ANY SELLING
STOCKHOLDER OR BY ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE
COMMON STOCK OFFERED HEREBY NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OFFERED HEREBY TO ANY PERSON IN
ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION
TO SUCH PERSONS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE
MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES IMPLY THAT THE INFORMATION HEREIN
IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.

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UNTIL NOVEMBER 16, 1997 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING),
ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, 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.

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TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
Use of Proceeds........................................................... 12
Dividend Policy........................................................... 12
Dilution.................................................................. 13
Capitalization............................................................ 14
Selected Financial Data................................................... 15
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 16
Business.................................................................. 23
Management................................................................ 39
Certain Transactions...................................................... 44
Principal and Selling Stockholders........................................ 45
Shares Eligible for Future Sale........................................... 46
Description of Capital Stock.............................................. 47
Underwriters.............................................................. 54
Legal Matters............................................................. 56
Experts................................................................... 56
Additional Information.................................................... 56
Index to Consolidated Financial Statements................................ F-1
</TABLE>

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The Company intends to furnish to its stockholders annual reports containing
audited consolidated financial statements examined by an independent
accounting firm and quarterly reports for the first three quarters of each
fiscal year containing interim unaudited consolidated financial information.

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CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING,
AND MAY BID FOR, AND PURCHASE, SHARES OF THE COMMON STOCK IN THE OPEN MARKET.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITERS."

2
<PAGE>

[Map showing the locations of Dril-Quip's (i) manufacturing, engineering,
sales and service operations, (ii) sales and service operations and (iii)
sales representatives. Photographs of Dril-Quip's World Headquarters, Europe
Headquarters, Asia-Pacific Headquarters and Eldridge Road Facility.]

i
<PAGE>

[Illustrations of jack-up, platform, floating rig, tension leg platform and
spar installations, accompanied by a list of Dril-Quip products used in each
installation appear on pages ii-iv. The illustrations show where each product
is utilized. Illustrations of platform wellheads, mudline hanger systems,
platform production trees, diverters, specialty connectors, subsea wellheads,
wellhead connectors, subsea production trees and drilling and production riser
systems are also included.]
<PAGE>

PROSPECTUS SUMMARY

The following summary should be read in conjunction with, and is qualified in
its entirety by, the more detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus. Unless
otherwise indicated, the information in this Prospectus (i) gives effect to the
Company's 14.3686 for one stock split and its expected reorganization as a
Delaware corporation prior to the consummation of the Offering, and (ii)
assumes that the Underwriters' over-allotment option will not be exercised.
Unless otherwise indicated by the context, references herein to the "Company"
or "Dril-Quip" mean Dril-Quip, Inc., a Delaware corporation that is the issuer
of the Common Stock offered hereby, its predecessor and its subsidiaries.

THE COMPANY

Dril-Quip is one of the world's leading manufacturers of highly engineered
offshore drilling and production equipment which is well suited for use in
deepwater, harsh environment and severe service applications. The Company
designs and manufactures subsea equipment, surface equipment and offshore rig
equipment for use by major integrated, large independent and foreign national
oil and gas companies in offshore areas throughout the world. The Company's
principal products consist of subsea and surface wellheads, subsea and surface
production trees, mudline hanger systems, specialty connectors and associated
pipe, drilling and production riser systems, wellhead connectors and diverters.
The Company also provides installation and reconditioning services and rents
running tools for use in connection with the installation and retrieval of its
products. In 1996, the Company derived 82.1% of its revenues from the sale of
its products and 17.9% of its revenues from services.

Dril-Quip has developed its broad line of subsea equipment, surface equipment
and offshore rig equipment exclusively through its internal product development
efforts. The Company believes that it has achieved significant market share and
brand name recognition with respect to its established products due to the
technological capabilities, reliability, cost effectiveness and operational
timesaving features of these products. In particular, the Company's Quik-
Thread(R) and Quik-Stab(R) specialty connectors, MS-15(R) mudline hanger
systems and SS-10(R) and SS-15(R) subsea wellheads are among the most widely
used in the industry. The Company believes that, as of June 1, 1997, its subsea
wellhead equipment was being used on approximately 70% of the wells being
drilled in waters deeper than 3,000 feet worldwide. Since 1991, the Company has
introduced a number of new products, including diverters, wellhead connectors,
dual-bore and single-bore subsea production trees, subsea and platform valves,
platform wellheads, platform trees, drilling risers and Spar and tension leg
platform ("TLP") production risers.

The Company has grown consistently since its inception in 1981 and has been
profitable in every year since 1983. As a result of new product introductions,
increased market share in established product lines and increased offshore
drilling and production activity, the Company's revenues have increased from
$65.2 million in 1992 to $115.9 million in 1996 (an annual growth rate of
15.4%), and its net income has increased from $1.7 million in 1992 to $9.1
million in 1996 (an annual growth rate of 52.1%). From 1995 to 1996, the
Company's revenues and net income grew by 7% and 38%, respectively. For the six
months ended June 30, 1997, the Company's revenues were $68.7 million and its
net income was $5.1 million, representing a 24% increase in revenues and a 26%
increase in net income from the comparable period in 1996.

3
<PAGE>

independent oil and gas companies. These factors have contributed to the
increase in the Company's backlog from approximately $56 million at December
31, 1996 to approximately $101 million at June 30, 1997, an 80% increase. The
Company intends to use the proceeds from the Offering to expand its
manufacturing capacity in order to satisfy the increased demand for its
products.

Dril-Quip markets its products through its offices and sales representatives
located in all of the major international energy markets throughout the world.
In 1996, the Company generated approximately 68% of its revenues from foreign
sales. The Company manufactures its products at its facilities located in
Houston, Texas; Aberdeen, Scotland; and Singapore, and maintains additional
facilities for fabrication and/or reconditioning in Norway, Denmark and
Australia. Dril-Quip's manufacturing operations are vertically integrated, with
the Company performing substantially all of its forging, heat treating,
machining, fabrication, inspection, assembly and testing at its own facilities.
Unlike essentially all of the Company's competitors, which depend on outside
sources for forging and heat treatment services, Dril-Quip owns a forge and
heat treatment facility that handles virtually all of the Company's
requirements. This vertically integrated manufacturing capability provides
Dril-Quip with competitive advantages because the Company is able to (i)
control the quality of its products from initial stages, (ii) control the costs
of its production and (iii) assure timely delivery of high-volume and
customized orders.

The Company was co-founded in 1981 by the current Board of Directors, Larry
E. Reimert, Gary D. Smith, J. Mike Walker and Gary W. Loveless (the
"Founders"). Together, Messrs. Reimert, Smith and Walker have over 75 years of
combined experience in the oilfield equipment industry, essentially all of
which has been with the Company and its major competitors. In addition, key
department managers have been with the Company over 10 years, on average. See
"Management." After the Offering, the Founders will collectively beneficially
own approximately 70% of the outstanding Common Stock (approximately 67% if the
over-allotment option is exercised in full).

STRATEGY

The Company's goal is to expand its existing market position in the offshore
oil and gas equipment and services sector while at the same time increasing its
earnings and cash flow per share to enhance overall stockholder value. Key
elements of the Company's strategy for achieving this goal are to:

. INCREASE MANUFACTURING CAPACITY. To maintain and improve market share in
its major product lines, the Company plans to expand its manufacturing
capacity by approximately 90% during the three year period 1997 through
1999, approximately two-thirds of which is expected to be completed by
the end of 1998. The Company has been operating at close to full capacity
in recent years, and believes that this expansion is essential in order
to meet customer demand for its existing products and to continue its
strategy of developing new products.

. CONTINUE TO REDUCE COSTS AND INCREASE OPERATIONAL EFFICIENCIES. The
Company controls its costs through such activities as performing its own
forging and heat treatment, rebuilding quality used machine tools (rather
than purchasing new machine tools) and optimizing manufacturing
operations to increase the rate of production. Dril-Quip also plans to
expand its forging capacity to begin marketing forgings to third parties
in addition to supplying its own forging requirements. The Company
expects that this will provide additional cost efficiencies as well as
additional revenues, thereby contributing to profits.

4
<PAGE>

. CONTINUE EXPANSION INTO SELECTED INTERNATIONAL MARKETS. The Company's
products are currently utilized primarily in the Gulf of Mexico, the
North Sea and in selected markets in Southeast Asia, Australia and South
America. The Company has recently engaged international sales
representatives in several additional markets, including Mexico, West
Africa and the Middle East. The Company believes that there is
significant potential for increased sales through focused marketing
efforts in other active offshore areas in the world, such as China,
Argentina and the Caspian Sea.

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by:
The Company...................... 2,500,000 shares
The Selling Stockholders......... 2,500,000 shares
Total.......................... 5,000,000 shares
Common Stock to be outstanding
after the Offering................ 16,870,000 shares (1)
Use of Proceeds.................... To increase manufacturing capacity, improve
and expand facilities, and manufacture
additional running tools for rental. See
"Use of Proceeds."
New York Stock Exchange Symbol..... DRQ
</TABLE>
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(1) Excludes an aggregate of 419,250 shares of Common Stock reserved for
issuance upon exercise of stock options to be granted at the closing of the
Offering under the Company's 1997 Incentive Plan (the "Incentive Plan").
See "Management--Incentive Plan," "Shares Eligible for Future Sale" and
Notes to the Company's Consolidated Financial Statements.

RISK FACTORS

Prospective purchasers should consider all of the information contained in
this Prospectus before making an investment in shares of Common Stock. In
particular, prospective purchasers should consider the factors set forth herein
under "Risk Factors."

5
<PAGE>

SUMMARY FINANCIAL DATA

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
--------------------------- ----------------
1994 1995 1996 1996 1997
------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AND
INDUSTRY DATA)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................ $80,548 $108,390 $115,864 $55,346 $68,669
Cost of sales................... 58,604 76,471 77,863 37,602 47,725
Selling, general and
administrative expenses........ 11,673 13,597 15,031 7,253 7,839
Engineering and product
development expenses........... 6,069 5,769 6,971 3,245 4,109
------- -------- -------- ------- -------
76,346 95,837 99,865 48,100 59,673
Operating income................ 4,202 12,553 15,999 7,246 8,996
Interest expense................ 2,273 2,944 2,647 1,301 1,400
------- -------- -------- ------- -------
Income before income taxes...... 1,929 9,609 13,352 5,945 7,596
Income tax provision............ 635 3,023 4,234 1,885 2,483
------- -------- -------- ------- -------
Net income...................... $ 1,294 $ 6,586 $ 9,118 $ 4,060 $ 5,113
======= ======== ======== ======= =======
Earnings per share.............. $ .09 $ .46 $ .63 $ .28 $ .36
Weighted average shares
outstanding.................... 14,370 14,370 14,370 14,370 14,370
STATEMENT OF CASH FLOWS DATA:
Net cash provided by operating
activities..................... $ 2,422 $ 6,466 $ 5,185 $ 1,374 $ 2,437
Net cash used in investing ac-
tivities....................... (4,524) (5,659) (7,006) (2,756) (3,379)
Net cash provided by (used in)
financing activities........... 2,668 560 1,261 (351) 4
OTHER DATA:
EBITDA (1)...................... $ 8,069 $ 17,201 $ 20,387 $ 9,646 $11,604
Depreciation and amortization... 3,867 4,648 4,388 2,400 2,608
Capital expenditures............ 4,614 6,184 7,228 2,832 3,603
OFFSHORE INDUSTRY DATA (2):
Worldwide average contracted
offshore rig count............. 535.8 540.5 572.0 561.5 592.3
Worldwide average contracted
floating rig count (3)......... 143.0 139.4 152.8 150.7 159.0
</TABLE>

<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
-----------------------
ACTUAL AS ADJUSTED(4)
-------- --------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital......................................... $ 52,877 $ 78,910
Total assets............................................ 113,823 136,334
Total debt.............................................. 32,489 --
Total stockholders' equity.............................. 54,911 109,911
</TABLE>
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(1) EBITDA, or "earnings from continuing operations before interest expense,
interest income, income taxes, depreciation and amortization," is not a
generally accepted accounting principle measure, but is a supplemental
financial measurement used by the Company in the evaluation of its
business. EBITDA should not be construed as an alternative to net income or
to cash flow from operations or any other measure of performance in
accordance with generally accepted accounting principles, and is presented
solely as supplemental disclosure. EBITDA is a supplemental financial
measure commonly used by investors in the oil services industry and is
being presented because management believes that EBITDA provides
supplemental information about the Company's ability to meet its future
requirements for debt service, capital expenditures and working capital.
Management monitors the trends in EBITDA closely, as well as the trends in
revenues and net income, to aid it in managing the business, controlling
costs and increasing revenues. Management believes that the recent
increases in EBITDA are indicative of the increased level of profitable
business activity experienced by the Company. Because EBITDA excludes some,
but not all, items that affect net income and this measure may vary among
companies, the EBITDA data presented above may not be comparable to
similarly titled measures of other companies.
(2) Data obtained from Offshore Data Services.
(3) Includes semisubmersible and drillship-type rigs.
(4) Adjusted to give effect to the Offering and the application of the net
proceeds to the Company therefrom of approximately $55 million. See "Use of
Proceeds" and "Capitalization."

6
<PAGE>

RISK FACTORS

In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business before purchasing the Common Stock offered hereby. All statements
other than statements of historical facts included in this Prospectus,
including, without limitation, statements regarding the Company's business
strategy, plans and objectives of management of the Company for future
operations and future industry conditions are forward-looking statements.
Although the Company believes that the expectations reflected in such forward-
looking statements are reasonable, it can give no assurance that such
expectations will be met. Important factors that could cause actual results to
differ materially from the Company's expectations are disclosed below and
elsewhere in this Prospectus.

VOLATILITY OF OIL AND NATURAL GAS PRICES AND CYCLICALITY OF THE OIL AND GAS
INDUSTRY

The Company's business is substantially dependent upon the condition of the
oil and gas industry and, in particular, the willingness of oil and gas
companies to make capital expenditures on exploration, drilling and production
operations offshore. The level of capital expenditures is generally dependent
on the prevailing view of future oil and gas prices, which are influenced by
numerous factors affecting the supply and demand for oil and gas, including
worldwide economic activity, interest rates and the cost of capital,
environmental regulation, tax policies, coordination by the Organization of
Petroleum Exporting Countries ("OPEC"), the cost of exploring for and
producing oil and gas, the sale and expiration dates of offshore leases in the
United States and overseas, the discovery rate of new oil and gas reserves in
offshore areas and technological advances. Oil and gas prices and the level of
offshore drilling and production activity have been characterized by
significant volatility in recent years. Although hydrocarbon prices have
improved in recent years and the level of offshore exploration, drilling and
production activity has increased, there can be no assurance that such price
and activity levels will be sustained and that there will not be continued
volatility in the level of drilling and production related activities. A
significant and prolonged decline in hydrocarbon prices would likely have a
material adverse effect on the Company's results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview."

INTERNATIONAL OPERATIONS

The Company has substantial international operations, with approximately
two-thirds of its revenues derived from foreign sales in each of 1994, 1995
and 1996. The Company operates its business and markets its products and
services in all of the significant oil and gas producing areas in the world
and is, therefore, subject to the risks customarily attendant to international
operations and investments in foreign countries. These risks include
nationalization, expropriation, war and civil disturbance, restrictive action
by local governments, limitation on repatriation of earnings, change in
foreign tax laws and change in currency exchange rates, any of which could
have an adverse effect on either the Company's ability to manufacture its
products in its facilities abroad or the demand in certain regions for the
Company's products or both. To date, the Company has not experienced any
significant problems in foreign countries arising from local government
actions or political instability, but there is no assurance that such problems
will not arise in the future. Interruption of the Company's international
operations could have a material adverse effect on its overall operations.

The Company conducts a portion of its business in currencies other than the
United States dollar, and the Company's operations are subject to fluctuations
in foreign currency exchange rates. The Company has generally endeavored to
protect itself against substantial foreign currency fluctuations by limiting
the amount of sales denominated in currencies other than United States dollars
and by contractual purchase price adjustments based on an exchange rate
formula related to U.S. dollars. There is no assurance that the Company will
be able to protect itself against such fluctuations in the future.
Historically, the Company has not conducted business in countries that limit
repatriation of earnings. However, as the Company expands its international
operations, it may begin operating in countries that have such limitations.
Further, there can be no assurance that the countries in which the Company
currently operates will not adopt policies limiting repatriation of earnings
in the future. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Currency Risk."

7
<PAGE>

OPERATING RISKS

Potential Liabilities. Certain products of the Company are used in
potentially hazardous drilling, completion and production applications that
can cause personal injury, product liability and environmental claims.
Litigation arising from a catastrophic occurrence at a location where the
Company's equipment and/or services are used may in the future result in the
Company being named as a defendant in lawsuits asserting potentially large
claims. To the extent available, the Company maintains insurance coverage that
it believes is customary in the industry. Such insurance does not, however,
provide coverage for all liabilities (including liability for certain events
involving pollution), and there is no assurance that its insurance coverage
will be adequate to cover claims that may arise or that the Company will be
able to maintain adequate insurance at rates it considers reasonable. The
occurrence of an event not fully covered by insurance could have a material
adverse effect on the financial condition and results of operations of the
Company.

Competitive Project Bids. A portion of the Company's business consists of
designing, manufacturing, selling and installing equipment for major projects
pursuant to competitive bids, and the number of such projects in any year
fluctuates. The Company's profitability on such projects is critically
dependent on making accurate and cost effective bids and performing
efficiently in accordance with bid specifications. Various factors can
adversely affect the Company's performance on individual projects, with
potential adverse effects on project profitability.

Percentage-of-Completion Accounting. Some of the Company's revenues are
earned on a percentage-of-completion basis generally based on the ratio of
costs incurred to the total estimated costs. Accordingly, purchase order price
and cost estimates are reviewed periodically as the work progresses, and
adjustments proportionate to the percentage of completion are reflected in the
period when such estimates are revised. To the extent that these adjustments
result in a reduction or elimination of previously reported profits, the
Company would have to recognize a charge against current earnings, which could
be significant depending on the size of the project or the adjustment. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview."

DEPENDENCE ON KEY EMPLOYEES

The Company depends to a large extent on the services of the Company's
executive management team, Mr. Larry E. Reimert, Mr. Gary D. Smith and Mr. J.
Mike Walker, the loss of any of whom could have a material adverse effect on
the Company's operations. Prior to the completion of the Offering, the Company
will enter into employment agreements with each of Messrs. Reimert, Smith and
Walker. See "Management--Employment Agreements."

DEPENDENCE ON SKILLED MACHINISTS AND TECHNICAL PERSONNEL

The Company believes that its success is dependent upon its ability to
continue to employ and retain skilled machinists and technical personnel. The
Company's ability to expand its operations depends in part on its ability to
increase its skilled labor force. The demand for such workers is high and the
supply is limited. While the Company believes that its wage rates are
competitive and that its relationship with its skilled labor force is good, a
significant increase in the wages paid by competing employers could result in
a reduction of the Company's skilled labor force, increases in the wage rates
paid by the Company or both. If either of these events were to occur, in the
near-term, the profits realized by the Company from work in progress would be
reduced and, in the long-term, the production capacity and profitability of
the Company could be diminished and the growth potential of the Company could
be impaired.

RELIANCE ON PRODUCT DEVELOPMENT AND POSSIBLE TECHNOLOGICAL OBSOLESCENCE

The Company's ability to develop new products and maintain technological
advantages is important to its future success. There can be no assurance that
the Company will be able to develop new products, successfully differentiate
itself from its competitors or adapt to evolving markets and technologies.

8
<PAGE>

The Company's ability to compete effectively will also depend on its ability
to continue to obtain patents on its proprietary technology and products. As
of June 30, 1997 the Company held 36 U.S. patents and 77 foreign patents.
Although the Company does not consider any single patent to be material to its
business as a whole, the inability to protect its future innovations through
patents could have a material adverse effect on the Company.

CONTROL BY CERTAIN STOCKHOLDERS

Upon completion of the Offering, the Founders collectively will beneficially
own approximately 70% (67% if the Underwriters' over-allotment option is
exercised in full) of the outstanding shares of Common Stock. As a result,
they will be able to influence significantly and possibly control the outcome
of certain matters requiring a stockholder vote, including the election of
directors. Such ownership of Common Stock may have the effect of delaying or
preventing a change of control of the Company and may adversely affect the
voting and other rights of other stockholders. In addition, Messrs. Reimert,
Smith and Walker have entered into a Stockholders Agreement pursuant to which
each party has agreed to vote the shares of Common Stock held by such party to
elect to the Company's Board of Directors one designee of each of the other
parties. See "Principal and Selling Stockholders" and "Certain Transactions--
Stockholders Agreement."

GOVERNMENTAL REGULATION AND ENVIRONMENTAL MATTERS

Many aspects of the Company's operations are affected by political
developments and are subject to both domestic and foreign governmental
regulations, including those relating to oilfield operations, worker safety
and the protection of the environment. In addition, the Company depends on the
demand for its services from the oil and gas industry and, therefore, is
affected by changing taxes, price controls and other laws and regulations
relating to the oil and gas industry generally, including those specifically
directed to offshore operations. The adoption of laws and regulations
curtailing exploration and development drilling for oil and gas for economic
or other policy reasons could adversely affect the Company's operations by
limiting demand for the Company's products. The Company cannot determine the
extent to which its future operations and earnings may be affected by new
legislation, new regulations or changes in existing regulations.

The Company's operations are affected by numerous foreign, federal, state
and local environmental laws and regulations. The technical requirements of
these laws and regulations are becoming increasingly expensive, complex and
stringent. These laws may provide for "strict liability" for damages to
natural resources or threats to public health and safety, rendering a party
liable for environmental damage without regard to negligence or fault on the
part of such party. Sanctions for noncompliance may include revocation of
permits, corrective action orders, administrative or civil penalties, and
criminal prosecution. Certain environmental laws provide for joint and several
strict liability for remediation of spills and releases of hazardous
substances. In addition, companies may be subject to claims alleging personal
injury or property damage as a result of alleged exposure to hazardous
substances, as well as damage to natural resources. Such laws and regulations
may also expose the Company to liability for the conduct of or conditions
caused by others, or for acts of the Company that were in compliance with all
applicable laws at the time such acts were performed. See "Business--
Governmental Regulations."

COMPETITION

The Company faces significant competition from other manufacturers of
drilling and production equipment. Several of its primary competitors are
diversified multinational companies with substantially larger operating staffs
and greater capital resources than those of the Company and which, in some
instances, have been engaged in the manufacturing business for a much longer
time than the Company. See "Business--Competition."

RELIANCE ON SIGNIFICANT CUSTOMERS

The Company's business is dependent on securing and maintaining customers by
promptly delivering reliable, high-performance products. For the year ended
December 31, 1996, one of the Company's customers, the Royal Dutch Shell Group
of Companies (aggregating orders placed by all of its worldwide affiliates),

9
<PAGE>

accounted for approximately 19% of revenues. The products that the Company may
sell to any particular customer depend on the size of that customer's capital
expenditure budget devoted to offshore drilling plans in a particular year and
on the results of competitive bids for major projects. Consequently, a
customer that accounts for a significant portion of revenues in one fiscal
year may represent an immaterial portion of revenues in subsequent years. See
"--Operating Risks--Competitive Project Bids." While the Company is not
dependent on any one customer or group of customers, the loss of one or more
of its significant customers could, at least on a short-term basis, have an
adverse effect on the Company's results of operations. See "Business--
Customers."

SHARES ELIGIBLE FOR FUTURE SALE

Upon the completion of the Offering, the Company will have a total of
16,870,000 shares of Common Stock outstanding. Of these shares, the 5,000,000
shares of Common Stock offered hereby (5,750,000 shares if the Underwriters'
over-allotment option is exercised in full) will be freely tradeable without
restrictions or registration under the Securities Act of 1933, as amended (the
"Securities Act"), by persons other than "affiliates" of the Company, as
defined under the Securities Act. The remaining 11,870,000 shares of Common
Stock outstanding will be restricted securities as that term is defined by
Rule 144 as promulgated under the Securities Act. In addition, 419,250 shares
of Common Stock may be issued pursuant to options that will be issued under
the Company's incentive plan at an exercise price equal to the initial public
offering price in the Offering. See "Management--Executive Compensation."

Under Rule 144 (and subject to the conditions thereof, including volume
limitations), all of the 11,870,000 restricted shares will become eligible for
sale 90 days after the Offering. The directors and officers of the Company
have agreed that they will not, directly or indirectly, sell any shares of
Common Stock for a period of 180 days from the date of this Prospectus without
the prior written consent of Morgan Stanley & Co. Incorporated. The Company
will enter into a Registration Rights Agreement upon the consummation of the
Offering whereby it will agree to register under the Securities Act shares of
Common Stock held by Messrs. Reimert, Smith, Walker and Loveless and certain
of their related family limited partnerships to facilitate the sales thereof.
See "Certain Transactions--Registration Rights Agreement." Future sales of
substantial amounts of Common Stock in the public market following the
Offering could adversely affect the market price of the Common Stock. For
further information concerning Common Stock available for resale after the
Offering, see "Shares Eligible for Future Sale" and "Underwriters."

NO INTENTION TO PAY DIVIDENDS

The Company currently intends to retain any earnings for the future
operation and development of its business and does not currently anticipate
paying any dividends in the foreseeable future. The Company's existing credit
facilities restrict the payment of dividends. See "Dividend Policy,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and Notes to the Company's
Consolidated Financial Statements.

CERTAIN ANTI-TAKEOVER PROVISIONS

The Company's Certificate of Incorporation and Bylaws, among other things,
provide for a classified Board of Directors with staggered terms, restrict the
ability of stockholders to take action by written consent, impose certain
supermajority voting requirements and authorize the Board of Directors to set
the terms of Preferred Stock. In addition, the Company's Certificate of
Incorporation and the Delaware General Corporation Law contain provisions that
impose restrictions on business combinations with interested parties. The
Company has also adopted a stockholder rights plan. The stockholder rights
plan, the provisions of the Company's Certificate of Incorporation and Bylaws
and the Delaware General Corporation Law may have the effect of delaying or
preventing a change of control of the Company. See "Description of Capital
Stock."

10
<PAGE>

ABSENCE OF PRIOR PUBLIC MARKET

Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price will be determined by negotiation between
the Company and the Underwriters and may not be indicative of the price at
which the Common Stock will trade following the completion of the Offering.
See "Underwriters" for a discussion of the factors to be considered in
determining the initial public offering price. The completion of the Offering
provides no assurance that an active trading market for the Common Stock will
develop or, if developed, that it will be sustained. The market price of the
Common Stock could also be subject to significant fluctuation and may be
influenced by many factors, including variations in results of operations,
variations in natural gas and oil prices, investor perceptions of the Company
and the oil and natural gas industry, and general economic and other
conditions.

DILUTION

Purchasers of Common Stock in the Offering will experience immediate and
substantial dilution in the net tangible book value of their stock of $17.49
per share. See "Dilution."

11
<PAGE>

USE OF PROCEEDS

The net proceeds to the Company from the Offering, after deducting
underwriting discounts, commissions and estimated expenses, are approximately
$55 million ($63 million if the Underwriters' over-allotment option is
exercised in full). The Company intends to use the net proceeds for capital
expenditures to increase manufacturing capacity, improve and expand facilities
and manufacture additional running tools for rental. Dril-Quip expects that
these expenditures will be incurred over a three-year period and that total
capital expenditures for these purposes will be approximately $11 million in
1997 and approximately $23 million in 1998. In particular, the Company expects
to spend approximately $16 million to complete the planned expansion at its
Eldridge site in Houston, Texas, which is expected to be completed in 1999.
The Company plans to spend approximately $4.5 million in 1997 to add machine
tools at its existing facilities, most of which will be moved to the new
facilities upon their completion. Pending application of the proceeds for
these purposes, the Company intends to use approximately $32 million to repay
its bank indebtedness in full and the balance will be used for working
capital. Excess cash will be invested in short term investment grade
securities.

The Company's credit facilities with Bank One, Texas, National Association
("Bank One") are provided through a Credit Agreement dated March 30, 1994, as
amended (the "Bank One Credit Facilities"), and currently consist of (i) a $25
million revolving credit facility bearing interest at a rate of 1/4% over Bank
One's base rate from day to day (this facility terminates on June 1, 1999),
(ii) a $3 million advancing credit facility for the purchase of land and
equipment and improvements to facilities bearing interest at a rate of 1/2%
over Bank One's base rate from day to day (this facility terminates on October
1, 2001), and (iii) a $10.7 million term loan bearing interest at 1/2% over
Bank One's base rate from day to day that matures on July 1, 1999.
Indebtedness under the term loan was used for the purchase of land, buildings,
equipment and improvements to facilities, as well as other capital
expenditures. At June 30, 1997, $29.0 million was outstanding under the Bank
One Credit Facilities, bearing interest at an average rate of 8.85%, and
approximately $7.7 million was available for drawdown under the revolving
facility.

The Company has three term loans with the Bank of Scotland: a June 7, 1996
loan, a September 19, 1994 loan and a December 12, 1991 loan. Each loan has a
120-month maturity. The June 7, 1996 and September 19, 1994 loans each bear
interest at 1.75% over the Bank of Scotland's base rate, and the December 12,
1991 loan bears interest at 1.5% over the Bank of Scotland's base rate.
Indebtedness under the Bank of Scotland term loans was used for the purchase
of land and buildings and to improve the Company's Aberdeen manufacturing
facilities. At June 30, 1997, $700,000, $600,000 and $1.7 million were
outstanding under the Bank of Scotland term loans, respectively. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."

DIVIDEND POLICY

The Company paid dividends of $.004 and $.007 per share of Common Stock in
1995 and 1996, respectively. However, the Company does not intend to pay cash
dividends on its Common Stock in the foreseeable future. The Company currently
intends to retain any earnings for the future operation and development of its
business. The Board of Directors will review this policy on a regular basis in
light of the Company's earnings, financial condition and market opportunities.
The Company's existing credit facilities restrict the payment of dividends.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources."

12
<PAGE>

DILUTION

As of June 30, 1997, the net tangible book value of the Company was
approximately $54.8 million, or approximately $3.81 per share of Common Stock.
Net tangible book value per share represents the amount of the Company's
tangible book value (total book value of tangible assets less total
liabilities) divided by the total number of shares of Common Stock
outstanding. After giving effect to the receipt of the estimated net proceeds
from the Offering (net of underwriting discounts and commissions and Offering
expenses), the pro forma net tangible book value of the Common Stock
outstanding at June 30, 1997 would have been $6.51 per share, representing an
immediate increase in net tangible book value of $2.70 per share to current
stockholders and an immediate dilution of $17.49 per share (the difference
between the initial public offering price and the net tangible book value per
share after the Offering) to persons purchasing Common Stock at the initial
public offering price. The following table illustrates such per share
dilution:

<TABLE>
<S> <C> <C>
Initial public offering price per share........................... $24.00
Net tangible book value per share before the Offering........... $3.81
Increase in net tangible book value per share attributable to
new investors.................................................. 2.70
-----
Pro forma net tangible book value per share after giving effect to
the Offering..................................................... 6.51
------
Dilution in net tangible book value per share to new investors.... $17.49
======
</TABLE>

The following table sets forth, on a pro forma basis as of June 30, 1997,
differences between the number of shares of Common Stock acquired from the
Company, the total consideration price and the average price per share paid to
the Company by existing stockholders and investors purchasing shares in the
Offering.

<TABLE>
<CAPTION>
SHARES AVERAGE
PURCHASED(1) TOTAL CONSIDERATION PRICE
------------------ ------------------- PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ----------- ------- -------
<S> <C> <C> <C> <C> <C>
Current stockholders(2).......... 14,370,000 85.2% $ 144,000 .2% $ .01
New investors(2)................. 2,500,000 14.8 60,000,000 99.8 $24.00
---------- ----- ----------- -----
Total.......................... 16,870,000 100.0% $60,144,000 100.0%
========== ===== =========== =====
</TABLE>
- --------
(1) Does not include approximately 419,250 shares of Common Stock issuable
pursuant to options to be granted to officers and employees of the Company
at the closing of the Offering. The exercise of such stock options will be
dilutive to the interests of new investors. See "Management--Incentive
Plan."
(2) Sales by the Selling Stockholders in the Offering will reduce the number
of shares of Common Stock held by existing stockholders to 11,870,000, or
70.4% of the shares of Common Stock outstanding after the Offering. New
investors will hold 29.6% of the shares of Common Stock outstanding after
the Offering.

13
<PAGE>

CAPITALIZATION

The following table sets forth the consolidated short-term debt and total
capitalization of the Company (i) as of June 30, 1997 and (ii) as adjusted for
the sale of the 2,500,000 shares of Common Stock offered by the Company hereby
and the application of the net proceeds to the Company therefrom (after
deducting underwriting discounts and commissions and estimated Offering
expenses payable by the Company). See "Use of Proceeds." This table should be
read in conjunction with the Company's Consolidated Financial Statements and
the related Notes thereto included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
-------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt:
Current maturities of long-term debt:.................... $ 3,522 $ --
======= ========
Long-term debt, less current maturities:................... $28,967 $ --
Stockholders' equity(1):
Preferred stock, $0.01 par value, 10,000,000 shares
authorized, none issued and outstanding................. -- --
Common stock, $0.01 par value, 50,000,000 shares
authorized, 14,370,000 shares issued and outstanding
(actual), 16,870,000 shares outstanding (as adjusted)... 144 169
Additional paid-in capital............................... -- 54,975
Retained earnings........................................ 54,765 54,765
Foreign currency translation adjustment.................. 2 2
------- --------
Total stockholders' equity............................. 54,911 109,911
------- --------
Total capitalization................................. $83,878 $109,911
======= ========
</TABLE>
- --------
(1) Does not include approximately 419,250 shares of Common Stock issuable
pursuant to options to be granted to officers and employees of the Company
at the closing of the Offering. See "Management--Incentive Plan."

14
<PAGE>

SELECTED FINANCIAL DATA

The selected financial data as of and for each of the years ended December
31, 1994, 1995 and 1996 are derived from the audited consolidated financial
statements of the Company included elsewhere in this Prospectus. The selected
financial data presented below as of and for the years ended December 31, 1992
and 1993 are derived from audited consolidated financial statements of the
Company not included in this Prospectus. The selected consolidated financial
data as of and for the six-month periods ended June 30, 1996 and 1997 are
derived from the unaudited consolidated financial statements of the Company
that in the opinion of the Company's management reflect all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of its financial condition and results of operations as of such
dates and for such periods. The results for the six-month period ended June
30, 1997 are not necessarily indicative of the results that may be expected
for the entire year. The information set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and Notes
thereto included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------------- --------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- -------- -------- ------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................ $65,172 $82,553 $80,548 $108,390 $115,864 $55,346 $ 68,669
Cost of sales........... 48,120 61,704 58,604 76,471 77,863 37,602 47,725
Selling, general and
administrative
expenses............... 8,074 10,907 11,673 13,597 15,031 7,253 7,839
Engineering and product
development expenses... 4,494 5,152 6,069 5,769 6,971 3,245 4,109
------- ------- ------- -------- -------- ------- --------
60,688 77,763 76,346 95,837 99,865 48,100 59,673
Operating income........ 4,484 4,790 4,202 12,553 15,999 7,246 8,996
Interest expense........ 1,915 1,494 2,273 2,944 2,647 1,301 1,400
------- ------- ------- -------- -------- ------- --------
Income before income
taxes.................. 2,569 3,296 1,929 9,609 13,352 5,945 7,596
Income tax provision.... 916 886 635 3,023 4,234 1,885 2,483
------- ------- ------- -------- -------- ------- --------
Net income.............. $ 1,653 $ 2,410 $ 1,294 $ 6,586 $ 9,118 $ 4,060 $ 5,113
======= ======= ======= ======== ======== ======= ========
Earnings per share...... $ .12 $ .17 $ .09 $ .46 $ .63 $ .28 $ .36
Weighted average shares
outstanding............ 14,370 14,370 14,370 14,370 14,370 14,370 14,370
STATEMENT OF CASH FLOWS
DATA:
Net cash provided by
operating activities... $ 776 $ 3,182 $ 2,422 $ 6,466 $ 5,185 $ 1,374 $ 2,437
Net cash used in
investing activities... (3,487) (6,413) (4,524) (5,659) (7,006) (2,756) (3,379)
Net cash provided by
(used in) financing
activities............. 3,914 1,448 2,668 560 1,261 (351) 4
OTHER DATA:
EBITDA(1)............... $ 8,050 $ 8,549 $ 8,069 $ 17,201 $ 20,387 $ 9,646 $ 11,604
Depreciation and
amortization........... 3,566 3,759 3,867 4,648 4,388 2,400 2,608
Capital expenditures.... 4,283 6,592 4,614 6,184 7,228 2,832 3,603
<CAPTION>
AS OF DECEMBER 31, AS OF
--------------------------------------------- JUNE 30,
1992 1993 1994 1995 1996 1997
------- ------- ------- -------- -------- -----------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital......... $30,135 $30,913 $34,099 $ 40,682 $ 49,524 $ 52,877
Total assets............ 65,712 70,346 79,208 93,186 114,777 113,823
Total debt.............. 26,659 28,100 30,416 31,052 32,536 32,489
Total stockholders'
equity................. 28,048 30,267 32,903 39,501 50,882 54,911
</TABLE>
- -------
(1) EBITDA, or "earnings from continuing operations before interest expense,
interest income, income taxes, depreciation and amortization," is not a
generally accepted accounting principle measure, but is a supplemental
financial measurement used by the Company in the evaluation of its
business. EBITDA should not be construed as an alternative to net income
or to cash flow from operations or any other measure of performance in
accordance with generally accepted accounting principles, and is presented
solely as a supplemental disclosure. EBITDA is a supplemental financial
measure commonly used by investors in the oil services industry and is
being presented because management believes that EBITDA provides
supplemental information about the Company's ability to meet its future
requirements for debt service, capital expenditures and working capital.
Management monitors the trends in EBITDA closely, as well as the trends in
revenues and net income, to aid it in managing the business, controlling
costs and increasing revenues. Management believes that recent increases
in EBITDA are indicative of the increased level of profitable business
activity experienced by the Company. Because EBITDA excludes some, but not
all, items that affect net income and this measure may vary among
companies, the EBITDA data presented above may not be comparable to
similarly titled measures of other companies.

15
<PAGE>

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

The following information should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto presented elsewhere in
this Prospectus.

OVERVIEW

Dril-Quip manufactures highly engineered offshore drilling and production
equipment which is well suited for use in deepwater, harsh environment and
severe service applications. The Company designs and manufactures subsea
equipment, surface equipment and offshore rig equipment for use by major
integrated, large independent and foreign national oil and gas companies in
offshore areas throughout the world. The Company's principal products consist
of subsea and surface wellheads, subsea and surface production trees, mudline
hanger systems, specialty connectors and associated pipe, drilling and
production riser systems, wellhead connectors and diverters. Dril-Quip also
provides installation and reconditioning services and rents running tools for
use in connection with the installation and retrieval of its products.

The market for offshore drilling and production equipment and services is
fundamentally driven by the exploration, development and production spending
of oil and gas companies, particularly with respect to offshore activities
worldwide. The Company has experienced increased demand for its products due
to the increased drilling and production activity in offshore areas throughout
the world during the last several years, particularly in deeper waters. The
recent increase in offshore drilling and production activity has been driven
by a number of factors, including (i) the prospect for relatively larger
hydrocarbon discoveries in deepwater areas and (ii) recent technological
advances in offshore drilling and production equipment (including those
introduced by Dril-Quip), seismic data collection and interpretation
techniques, and drilling techniques, which have enhanced the economics of
offshore drilling and production. In addition, several foreign national oil
companies have recently opened offshore areas for exploration and development
by other parties, including major integrated and large independent oil and gas
companies. These factors have contributed to the increase in the Company's
backlog from approximately $56 million at December 31, 1996 to approximately
$101 million at June 30, 1997, an 80% increase. See "Business--Industry
Overview."

The Company intends to use the proceeds from the Offering for a three-year
capital expansion program to increase manufacturing capacity, improve and
expand facilities and manufacture additional running tools for rental. The
Company plans to expand its manufacturing capacity by approximately 90% during
the three year period 1997 through 1999, approximately two-thirds of which is
expected to be completed by the end of 1998. The Company believes that its
increased capacity and improved facilities will enable the Company to achieve
higher sales volumes. In connection with the capacity expansion, the Company
plans to hire additional workers. See "Use of Proceeds" and "Business--
Strategy."

Revenues. Dril-Quip's revenues are generated by its two operating groups:
the Product Group and the Service Group. The Product Group manufactures
offshore drilling and production equipment, and the Service Group provides
installation and reconditioning services as well as rental running tools for
installation and retrieval of its products. In 1996, the Company derived 82.1%
of its revenues from the sale of its products and 17.9% of its revenues from
services. Revenues from the Service Group generally correlate to revenues from
product sales, as increased product sales generate increased revenues from
installation services and rental running tools. Revenues have increased over
the last three years principally as a result of increased sales volumes of the
Company's established products and services, the introduction of new products
and product enhancements and price increases for the Company's products and
services. These price increases have occurred due to an increase in demand and
capacity constraints experienced by the Company and its competitors.
Substantially all of Dril-Quip's sales are made on a purchase order basis.
Purchase orders are subject to change and/or termination at the option of the
customer. In case of a change or termination, the customer is required to pay
the Company for work performed and other costs necessarily incurred as a
result of the change or termination.

16
<PAGE>

Historically, Dril-Quip recognized revenues upon the delivery of a completed
product. As the Company has begun manufacturing larger and more complex
projects that have longer manufacturing times, the Company has begun to
account for purchase orders covering such projects on a percentage of
completion basis. The Company expects that such larger and more complex
projects will increase the Company's sales and revenues and afford the Company
certain economies of scale because such projects generally utilize the
Company's products as component parts. The Company also expects that such
projects may have a stabilizing effect on the Company's operations, as the
Company will have a longer period of time over which to plan and to allocate
its resources. Finally, the Company expects to receive certain periodic
payments associated with such projects, rather than payment upon delivery.
Because the Company has only recently become involved in such manufacturing
projects, the use of percentage of completion accounting does not affect the
comparability of financial information to earlier periods. No purchase orders
would have been accounted for using the percentage of completion method prior
to 1997. For the first six months of 1997, one project representing 8.7% of
the Company's revenues was accounted for using percentage of completion
accounting. The Company expects that this percentage may increase in the
future. Revenues accounted for in this manner are generally recognized on the
ratio of costs incurred to the total estimated costs. Accordingly, price and
cost estimates are reviewed periodically as the work progresses, and
adjustments proportionate to the percentage of completion are reflected in the
period when such estimates are revised. Amounts received from customers in
excess of revenues recognized are classified as a current liability. The
Company historically has experienced some seasonality, with revenues and
operating income slightly lower during the first and third quarters compared
to the second and fourth quarters. The Company's revenues are affected by its
customers' capital expenditure budgeting process, which generally results in
lower revenues in the first quarter and higher revenues in the fourth quarter.
The increase in revenues recognized using percentage of completion accounting
may result in less fluctuation in revenues recognized from quarter to quarter.
See "Risk Factors--Operating Risks--Percentage of Completion Accounting."

As part of its capacity expansion, the Company plans to expand its capacity
for forging and heat treatment by adding additional facilities and machinery.
In the future, the Company plans to market forgings to third parties to the
extent its capacity allows, an activity which it expects will be an additional
source of revenues.

Foreign sales represent a significant portion of the Company's business. In
the six months ended June 30, 1997 and in each of fiscal 1996, 1995 and 1994,
the Company generated approximately two-thirds of its revenues from foreign
sales. In each period, approximately two-thirds of all products sold were
manufactured in the United States.

Cost of Sales. The principal elements of cost of sales are labor, raw
materials and manufacturing overhead. Variable costs, such as labor, raw
materials, supplies and energy, generally account for approximately two-thirds
of the Company's cost of sales. The Company has experienced increased labor
costs over the past few years due to the limited supply of skilled workers.
See "Risk Factors--Dependence on Skilled Machinists and Technical Personnel."
Fixed costs, such as the fixed portion of manufacturing overhead, constitute
the remainder of the Company's cost of sales. The Company continually seeks to
improve its efficiency and cost position. See "Business--Strategy." Cost of
sales as a percentage of revenues is also influenced by the product mix sold
in any particular quarter and market conditions. The Company's costs related
to its foreign operations do not significantly differ from its domestic costs.

Products and services are closely correlated. The Company's Service Group
generates revenue from the installation of Product Group items, rental of
running tools used to install the Company's Product Group items, and
reconditioning services of the Company's Product Group items. Although the
Company attempts to keep margins consistent between the components of an
order, products and services are generally marketed as a package, and customer
or market requirements can result in significant differences between margins
on products versus services. As a result, the Company only focuses and
evaluates performance based on the overall margin for the total order.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses include the costs associated with sales and marketing,
general corporate overhead, compensation expense, legal expenses and other
related administrative functions.

17
<PAGE>

Engineering and Product Development Expenses. Engineering and product
development expenses consist of new product development and testing, as well
as application engineering related to customized products.

Income Tax Provision. Dril-Quip's marginal tax rate has historically been
lower than the statutory rate due to benefits from its foreign sales
corporation. The Company expects that its marginal tax rate will rise slightly
as its income increases.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, certain statement
of operations data expressed as a percentage of net revenues:

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED JUNE
DECEMBER 31, 30,
------------------- ------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
% % % % %
<S> <C> <C> <C> <C> <C>
Revenues:
Product Group............................. 83.0% 83.7% 82.1% 81.1% 85.6%
Service Group............................. 17.0 16.3 17.9 18.9 14.4
----- ----- ----- ----- -----
Total................................... 100.0 100.0 100.0 100.0 100.0
Cost of sales............................... 72.8 70.6 67.2 67.9 69.5
Selling, general and administrative
expenses................................... 14.5 12.5 13.0 13.1 11.4
Engineering and product development
expenses................................... 7.5 5.3 6.0 5.9 6.0
----- ----- ----- ----- -----
Operating income............................ 5.2 11.6 13.8 13.1 13.1
Interest expense............................ 2.8 2.7 2.3 2.4 2.0
----- ----- ----- ----- -----
Income before income taxes.................. 2.4 8.9 11.5 10.7 11.1
Income tax provision........................ 0.8 2.8 3.6 3.4 3.6
----- ----- ----- ----- -----
Net income.................................. 1.6% 6.1% 7.9% 7.3% 7.4%
===== ===== ===== ===== =====
</TABLE>

SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996

Revenues. Revenues increased by $13.4 million, or 24%, to $68.7 million in
the six months ended June 30, 1997 from $55.3 million in the six months ended
June 30, 1996. This increase was primarily due to strong market demand, along
with increased manufacturing capacity, price increases and an increase in
project related sales of new products.

Cost of Sales. Cost of sales increased $10.1 million, or 27%, to $47.7
million for the six months ended June 30, 1997 from $37.6 million for the same
period in 1996. As a percentage of revenues, cost of sales increased from 68%
in 1996 to 69% in 1997. This increase in cost of sales as a percentage of
revenues was primarily due to sales of new products, which tend to initially
have lower margins, and higher labor costs, which was partially offset by
improved pricing.

Selling, General and Administrative Expenses. In the first six months of
1997, selling, general and administrative expenses increased by $586,000, or
8%, to $7.8 million from $7.3 million in the 1996 period. The increase was due
to an increased number of personnel to support higher sales volumes and
increased labor costs. Selling, general and administrative expenses decreased
as a percent of revenues from 13% to 11%.

Engineering and Product Development Expenses. In the first six months of
1997, engineering and product development expenses increased by $864,000, or
27%, to $4.1 million from $3.2 million in the same period in 1996. The
increase primarily reflects an increased number of personnel and, to a lesser
extent, increased development testing related to new products.

Interest Expense. Interest expense for the six months ended June 30, 1997
was approximately $1.4 million, an increase of $100,000 as compared to the
corresponding period in the prior year.

Net Income. Net income increased by approximately $1.0 million, or 24%, from
$4.1 million in the first six months in 1996 to $5.1 million in 1997 for the
reasons set forth above.

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<PAGE>

YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

Revenues. Revenues increased by $7.5 million, or approximately 7%, to $115.9
million in 1996 from $108.4 million in 1995. This increase was primarily due
to a small volume increase plus a slight increase in prices in the last half
of the year. There was continued strong market demand for the Company's
products and services, but revenues were limited by manufacturing capacity
constraints. Domestic sales accounted for $4.8 million, or 64% of the
increase.

Cost of Sales. Cost of sales increased $1.4 million, or 2%, to $77.9 million
for the year ended December 31, 1996 from $76.5 million for the year ended
December 31, 1995. Cost of sales increased due to higher sales volumes, offset
in part by decreases in costs. As a percentage of revenues, cost of sales
decreased from 71% in 1995 to 67% in 1996. This decrease was primarily due to
the effect of increased forging operations which resulted in lower per unit
costs than in the comparable prior period when more of the Company's forgings
were outsourced. In addition, price increases in the last half of the year
contributed to the decrease in cost of sales as a percentage of revenues.

Selling, General and Administrative Expenses. For the year ended December
31, 1996, selling, general and administrative expenses increased by $1.4
million, or 10%, to $15.0 million from $13.6 million in 1995, but remained at
approximately 13% of revenues in each year. This increase was primarily due to
the increased number of personnel on a worldwide basis required to meet sales
demand.

Engineering and Product Development Expenses. For the year ended December
31, 1996, engineering and product development expenses increased by $1.2
million, or 21%, to $7.0 million from $5.8 million in the same period in 1995.
The increase was due primarily to the addition of personnel needed to expand
new product development.

Interest Expense. Interest expense for the year ended December 31, 1996 was
$2.6 million, a decrease of $300,000, or 10%, from interest expense of $2.9
million for the prior year. The decrease was due to lower bank interest rates.

Net Income. Net income increased by $2.5 million, or 38%, from $6.6 million
for the year ended December 31, 1995 to $9.1 million in 1996 for the reasons
set forth above.

YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994

Revenues. Revenues increased by $27.9 million, or 35%, to $108.4 million in
1995 from $80.5 million in 1994. This increase was due to increased sales
volumes of the Company's products and services. Foreign sales accounted for
$23.6 million, or 85%, of this increase.

Cost of Sales. Cost of sales increased $17.9 million, or 31%, to $76.5
million for the year ended December 31, 1995 from $58.6 million for the year
ended December 31, 1994. Cost of sales increased due to higher sales volumes
offset in part by decreases in costs. As a percentage of revenues, cost of
sales decreased from 73% in 1994 to 71% in 1995. This decrease was primarily
due to efficiencies associated with increased manufacturing volume, which
allowed allocation of fixed cost over a larger sales base, and increased
utilization of the Company's forging and heat treatment facilities, which
supplied all of the Company's heat treating requirements and a portion of its
forgings in 1995.

Selling, General and Administrative Expenses. For the year ended December
31, 1995, selling, general and administrative expenses increased by $1.9
million, or 16%, to $13.6 million from $11.7 million in 1994. The increase was
due to the increased number of personnel on a worldwide basis required to meet
sales demand and, to a lesser extent, increases in wages paid to personnel.

Engineering and Product Development Expenses. For the year ended December
31, 1995, engineering and product development expenses decreased by $300,000,
or 5%, to $5.8 million from $6.1 million in the same period in 1994. The
decrease was attributable to the large increase in revenues in 1995, which
delayed a portion

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<PAGE>

of the Company's new product development and testing. However, the Company
continued its product development program with respect to SingleBore(TM) and
dual bore subsea trees, platform wellheads and TLP equipment.

Interest Expense. Interest expense for the year ended December 31, 1995 was
$2.9 million, an increase of $600,000, or 30%, from interest expense of $2.3
million for the prior year. The increase was due to increased bank debt and
higher interest rates.

Net Income. Net income increased by $5.3 million, or 408%, from $1.3 million
for the year ended December 31, 1994 to $6.6 million in 1995 for the reasons
set forth above.

LIQUIDITY AND CAPITAL RESOURCES

The primary liquidity needs of the Company are to fund capital expenditures,
such as increasing manufacturing capacity, improving and expanding facilities
and manufacturing additional rental running tools; to fund payments of
principal and interest on indebtedness; and to fund working capital. The
Company's principal sources of funds have been cash flow from operations and
bank indebtedness.

Net cash provided by operating activities was $2.4 million in 1994, $6.5
million in 1995 and $5.2 million in 1996. For the six months ended June 30,
1997, net cash provided by operating activities was $2.4 million. Improvements
in cash flow from operating activities are principally the result of improved
operating results, offset in 1995, 1996 and 1997 by increased working capital
requirements attributable to increases in accounts receivable and inventory
due to increased sales. Accounts receivable at December 31, 1996 increased 27%
over December 31, 1995 levels compared to a 7% increase in revenues for the
year. The disproportionate increase in accounts receivable was due to timing
of cash receipts. Subsequent to December 31, 1996, accounts receivables as a
percentage of sales returned to levels more consistent with past periods.

Capital expenditures by the Company were $4.6 million, $6.2 million, $7.2
million and $3.6 million in 1994, 1995, 1996 and the six months ended June 30,
1997, respectively. Principal payments on long-term debt were $2.7 million,
$2.8 million, $3.2 million and $1.8 million in 1994, 1995, 1996 and the six
months ended June 30, 1997, respectively.

The Company has planned to spend approximately $50 million over a three-year
period for a capital expenditure program to increase manufacturing capacity,
improve and expand facilities and manufacture additional rental running tools.
Dril-Quip expects that total capital expenditures for these purposes will be
approximately $11 million in 1997 and approximately $23 million in 1998. In
particular, the Company expects to spend approximately $16 million to complete
the planned expansion at its Eldridge site in Houston, Texas, which is
expected to be completed in 1999. The Company plans to spend approximately
$4.5 million in 1997 to add machine tools at its existing facilities, most of
which will be moved to the new facilities upon their completion. The Company
plans to use the net proceeds from the Offering to fund these capital
expenditures. Pending application of the proceeds for these purposes, the
Company intends to use approximately $32 million to repay its bank
indebtedness in full and the balance will be used for working capital. Excess
cash will be invested in short-term investment grade securities. See "Use of
Proceeds."

The Bank One Credit Facilities currently consist of (i) a $25 million
revolving credit facility bearing interest at a rate of 1/4% over Bank One's
base rate from day to day (this facility terminates on June 1, 1999), (ii) a
$3 million advancing credit facility for the purchase of land and equipment
and improvements to facilities bearing interest at a rate of 1/2% over Bank
One's base rate from day to day (this facility terminates on October 1, 2001),
and (iii) a $10.7 million term loan bearing interest at 1/2% over Bank One's
base rate from day to day that matures on July 1, 1999. Indebtedness under the
term loan was used for the purchase of land, buildings, equipment and
improvements to facilities, as well as other capital expenditures. At June 30,
1997, $29.0 million was outstanding under the Bank One Credit Facilities,
bearing interest at an average rate of 8.85%, and approximately $7.7 million
was available for drawdown under the revolving facility.

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<PAGE>

In addition, the Company has three term loans with the Bank of Scotland to
finance land, buildings and improvements for its Aberdeen manufacturing
facility: a June 7, 1996 loan, a September 19, 1994 loan and a December 12,
1991 loan. Each loan has a 120-month maturity. The June 7, 1996 and
September 19, 1994 loans each bear interest at 1.75% over the Bank of
Scotland's base rate, and the December 12, 1991 loan bears interest at 1.5%
over the Bank of Scotland's base rate. At June 30, 1997, $700,000, $600,000
and $1.7 million were outstanding under these term loans, respectively.

BACKLOG

Backlog consists of firm customer orders for which a purchase order has been
received, satisfactory credit or financing arrangements exist and delivery is
scheduled. The Company's backlog at December 31, 1996 and June 30, 1997 was
approximately $56 million and approximately $101 million, respectively. The
Company expects to fill approximately 50% of the June 30, 1997 backlog by
December 31, 1997. The remaining backlog at June 30, 1997 consists of longer-
term projects that will be designed and manufactured to customer
specifications rather than sold out of inventory. All of the Company's
projects currently included in backlog are subject to change and/or
termination at the option of the customer. In the case of a change or
termination, the customer is required to pay the Company for work performed
and other costs necessarily incurred as a result of the change or termination.

GEOGRAPHIC AREAS

The Company's operations are divided into three geographic areas based upon
the locations of its manufacturing facilities: the United States (Houston,
Texas); Europe, Middle East and Africa (Aberdeen, Scotland) and Asia-Pacific
(Singapore). The United States area includes sales to both North and South
America. The area of Europe, Middle East and Africa includes primarily sales
to the North Sea with lesser sales to the Middle East and Africa. The Asia-
Pacific area includes sales primarily to Australia, Thailand, Malaysia and
Indonesia.

Revenues for each of these areas are dependent upon the ultimate sale of
products and services to the Company's customers. Revenues of the United
States area are also influenced by its sale of products to the European and
Asia-Pacific subsidiaries. Accordingly, the operating incomes of each area are
closely tied to third-party sales, and the operating income of the United
States area is also dependent upon its level of intercompany sales.

Total revenues increased by $27.9 million, or approximately 35%, to $108.4
million in 1995 from $80.5 million in 1994. This increase was primarily due to
revenue increases of $18.3 million in the Europe, Middle East and Africa area
and $8.1 million in the Asia-Pacific area, partially offset by a decrease in
export sales by the United States area of $2.6 million. Total revenues
increased by $7.5 million, or approximately 7%, to $115.9 million in 1996 from
$108.4 million in 1995. Domestic sales increases in the United States area
accounted for $4.8 million, or approximately 64%, of the increase.

Total operating income increased by $8.4 million to $12.6 million in 1995
from $4.2 million in 1994. Of this increase, $7.3 million, or approximately
87%, was due to the United States area, which experienced a modest increase in
third party sales coupled with an increase of $17.8 million, or approximately
143%, in intercompany sales. Total operating income rose by $3.4 million, or
approximately 27%, to $16.0 million in 1996 from $12.6 million in 1995. This
increase was primarily due to the United States area which contributed $2.7
million, or approximately 79%, of the gain. Most of the increase resulted from
an increase of $4.8 million in the United States area's domestic sales.

CURRENCY RISK

Through its subsidiaries, the Company conducts a portion of business in
currencies other than the United States dollar, principally the British pound
sterling and the Norwegian kroner. The Company generally attempts to minimize
its currency exchange risk by seeking international contracts payable in local
currency in amounts

21
<PAGE>

equal to the Company's estimated operating costs payable in local currency and
in U.S. dollars for the balance of the contract and by contractual purchase
price adjustments based on an exchange rate formula related to U.S. dollars.
Because of this strategy, the Company has not experienced significant
transaction gains or losses associated with changes in currency exchange rates
and does not anticipate such exposure to be material in the future. Exchange
losses were approximately $167,000 in 1994 and $0 in 1995, net of income
taxes. In 1996, the Company had an exchange gain of $163,000. The Company also
has significant investments in countries other than the United States,
principally its manufacturing operations in Aberdeen, Scotland and, to a
lesser extent, Singapore. The functional currency of these foreign operations
is the local currency and, accordingly, financial statement assets and
liabilities are translated at current exchange rates. Resulting translation
adjustments are reflected as a separate component of stockholders' equity and
have no current effect on earnings or cash flow. See "Risk Factors--
International Operations."

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, which establishes alternative methods of accounting and disclosure for
employee stock-based compensation arrangements. The Company intends to account
for anticipated stock options using the intrinsic value method of accounting
which, based on the expected stock option plan design, will not result in the
recognition of compensation expense as the anticipated exercise price of the
options will equal or exceed the fair market value of the stock on the date of
grant. The Company will provide pro forma disclosure of net income and
earnings per share in the notes to the consolidated financial statements as if
the fair value based method of accounting had been applied.

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<PAGE>

BUSINESS

GENERAL

Dril-Quip is one of the world's leading manufacturers of highly engineered
offshore drilling and production equipment which is well suited for use in
deepwater, harsh environment and severe service applications. The Company
designs and manufactures subsea equipment, surface equipment and offshore rig
equipment for use by major integrated, large independent and foreign national
oil and gas companies in offshore areas throughout the world. The Company's
principal products consist of subsea and surface wellheads, subsea and surface
production trees, mudline hanger systems, specialty connectors and associated
pipe, drilling and production riser systems, wellhead connectors and
diverters. The Company also provides installation and reconditioning services
and rents running tools for use in connection with the installation and
retrieval of its products. In 1996, the Company derived 82.1% of its revenues
from the sale of its products and 17.9% of its revenues from services.

Dril-Quip has developed its broad line of subsea equipment, surface
equipment and offshore rig equipment exclusively through its internal product
development efforts. The Company believes that it has achieved significant
market share and brand name recognition with respect to its established
products due to the technological capabilities, reliability, cost
effectiveness and operational timesaving features of these products. In
particular, the Company's Quik-Thread(R) and Quik-Stab(R) specialty
connectors, MS-15(R) mudline hanger systems and SS-10(R) and SS-15(R) subsea
wellheads are among the most widely used in the industry. The Company believes
that, as of June 1, 1997, its subsea wellhead equipment was being used on
approximately 70% of the wells being drilled in waters deeper than 3,000 feet
worldwide. Since 1991, the Company has introduced a number of new products,
including diverters, wellhead connectors, dual-bore and single-bore subsea
production trees, subsea and platform valves, platform wellheads, platform
trees, drilling risers and Spar and TLP production risers.

The Company has grown consistently since its inception in 1981 and has been
profitable in every year since 1983. As a result of new product introductions,
increased market share in established product lines and increased offshore
drilling and production activity, the Company's revenues have increased from
$65.2 million in 1992 to $115.9 million in 1996 (an annual growth rate of
15.4%), and its net income has increased from $1.7 million in 1992 to $9.1
million in 1996 (an annual growth rate of 52.1%). From 1995 to 1996, the
Company's revenues and net income grew by 7% and 38%, respectively. For the
six months ended June 30, 1997, the Company's revenues were $68.7 million and
its net income was $5.1 million, representing a 24% increase in revenues and a
26% increase in net income from the comparable period in 1996.

The Company has experienced increased demand for its products due to the
increased drilling and production activity in offshore areas throughout the
world during the last several years, particularly in deeper waters. The
increase in offshore drilling and production activity has been driven by a
number of factors, including (i) the prospect for relatively larger
hydrocarbon discoveries in deepwater areas and (ii) recent technological
advances in offshore drilling and production equipment (including those
introduced by Dril-Quip), seismic data collection and interpretation
techniques, and drilling techniques, which have enhanced the economics of
offshore drilling and production. In addition, several foreign national oil
companies have recently opened offshore areas for exploration and development
by other parties, including major integrated and large independent oil and gas
companies. These factors have contributed to the increase in the Company's
backlog from approximately $56 million at December 31, 1996 to approximately
$101 million at June 30, 1997, an 80% increase. The Company intends to use the
proceeds from the Offering to expand its manufacturing capacity in order to
satisfy the increased demand for its products. See "Use of Proceeds."

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<PAGE>

Company performing substantially all of its forging, heat treating, machining,
fabrication, inspection, assembly and testing at its own facilities. Unlike
essentially all of the Company's competitors, which depend on outside sources
for forging and heat treatment services, Dril-Quip owns a forge and heat
treatment facility that handles virtually all of the Company's requirements.
This vertically integrated manufacturing capability provides Dril-Quip with
competitive advantages because the Company is able to (i) control the quality
of its products from initial stages, (ii) control the costs of its production
and (iii) assure timely delivery of high-volume and customized orders.

The Company was co-founded in 1981 by the current Board of Directors, Larry
E. Reimert, Gary D. Smith, J. Mike Walker and Gary W. Loveless. Together,
Messrs. Reimert, Smith and Walker have over 75 years of combined experience in
the oilfield equipment industry, essentially all of which has been with the
Company and its major competitors. In addition, key department managers have
been with the Company over 10 years, on average. See "Management." After the
Offering, the Founders will collectively beneficially own approximately 70% of
the outstanding Common Stock (approximately 67% if the over-allotment option
is exercised in full).

The Company was incorporated as a Delaware corporation on August 12, 1997.
The Company's operations represent the original business, which was
incorporated as a Texas corporation on March 12, 1981. The Company's principal
executive offices are located at 13550 Hempstead Highway, Houston, Texas 77040
and its telephone number is (713) 939-7711.

INDUSTRY OVERVIEW

The market for offshore drilling and production equipment and services is
fundamentally driven by the exploration, development and production spending
of oil and gas companies, particularly with respect to offshore activities
worldwide. Industry exploration, development and production spending primarily
depends on the cash flow of oil and gas producers, which is a function of
current and anticipated future oil and gas production volumes and prices and
operating costs of oil and gas producers. Oil and gas prices are influenced
significantly by a variety of factors beyond the control of oil and gas
companies, including worldwide demand for oil and gas, production levels,
governmental policies regarding exploration and development of reserves and
political factors in production countries. Fundamental economics in the oil
and gas sector have improved in recent years and supply and demand for crude
oil and natural gas is currently relatively balanced with demand rising and
inventories comparatively low. Much of the incremental supply in recent years
has come from areas outside OPEC, particularly in offshore regions such as the
North Sea, the Gulf of Mexico and offshore Southeast Asia. These factors have
contributed to generally higher, and relatively more stable, oil and gas
prices during the last several years.

Since 1995, offshore exploration, development and production activity has
increased considerably due to, among other factors, (i) favorable oil and gas
prices, (ii) significant improvement in the financial condition of many oil
and gas companies in recent years, (iii) increasing worldwide demand for
hydrocarbons, (iv) the potential for relatively large oil and gas discoveries
in various offshore areas, particularly previously unexplored deepwater areas,
(v) the opening of new offshore areas for foreign investment, including areas
offshore of Brazil, China and West Africa, and (vi) royalty relief granted by
the U.S. government for oil and gas produced from wells drilled in newly
acquired deepwater blocks in the Gulf of Mexico. In addition, technological
advances in exploration, development and production techniques, including
seismic data collection and interpretation (particularly with respect to 3-D
seismic data), drilling techniques (such as the use of deviated, horizontal
and multilateral wells), subsea completion and production equipment, and
mobile production units have contributed to increased offshore activity by oil
and gas companies. These factors have facilitated exploration for and
development of new reserves in deepwater and harsh environment offshore areas,
allowed the development of oil and gas fields that were considered
commercially marginal and extended development and production of reserves from
existing fields.

The increased exploration, development and production activity in offshore
areas has resulted in significant increases in the amount of oil and gas
produced from offshore areas in recent years. According to the

24
<PAGE>

International Energy Agency, (i) worldwide non-OPEC offshore oil production
grew 41% from 10.9 million barrels of oil per day (mmbopd) in 1990 to 15.3
mmbopd in 1996, and (ii) worldwide non-OPEC offshore oil production is
anticipated to grow an additional 26% from 15.3 mmbopd in 1996 to 19.3 mmbopd
in 2000. This increased activity has resulted in increased demand for drilling
and production equipment and services, as evidenced by the increase in the
average worldwide contracted utilization rate for all marketed offshore
drilling rigs from 76% for the year ended December 31, 1992 to 93% for the
first six months of 1997. Increased interest in offshore exploration,
development and production is also evidenced by the significant rise in
activity in the Gulf of Mexico lease sales held by the Department of the
Interior's Mineral Management Service. In the most recent Central Gulf of
Mexico lease sale held in March 1997, there were a record 1,790 bids received
for 1,032 blocks (out of 5,059 blocks available) at an average price of
approximately $799,000 per block. This compares to the May 1995 Central Gulf
of Mexico lease sale when only 880 bids were received on 588 blocks (out of
5,810 blocks available) at an average of approximately $523,000 per block.

Recently, several offshore drilling contractors have announced plans to
upgrade existing rigs to equip them with the capability to drill in deeper
water and harsher environments or to build new deepwater capable rigs. At June
30, 1997, there were approximately 31 semisubmersible rigs and ten drillship-
type rigs worldwide capable of drilling in greater than 2,450 feet of water.
Based on reports from Offshore Data Services related to new drilling rig
construction, it is anticipated that by the year 2000 there will be 48
semisubmersible-rigs and 22 drillship-type rigs capable of this deepwater
drilling. In addition, there are four new TLPs and three new Spars planned or
under construction for utilization by the year 2000. At the end of 1996, there
were only six TLPs and one Spar in operation worldwide. In addition, based on
industry reports related to new floating production, storage and offloading
monohulled moored vessel ("FPSO") construction, the number of FPSO ships will
increase from 63 FPSOs in operation worldwide at the end of 1996 to 110 by the
year 2001 and the number of floating production semisubmersibles will increase
from 33 to 51 over the same period. An increase in the number of wells drilled
and produced in deepwater or harsh environments should likewise increase the
demand for deepwater offshore equipment and services. The foregoing statements
concerning future industry conditions are forward-looking statements, and,
although the Company believes that the expectations reflected in such forward-
looking statements are reasonable, it can give no assurance that such
expectations will be met. See "Risk Factors."

STRATEGY

The Company's goal is to expand its existing market position in the offshore
oil and gas equipment and services sector while at the same time increasing
its earnings and cash flow per share to enhance overall stockholder value. Key
elements of the Company's strategy for achieving this goal are to:

. CONTINUE TO DEVELOP NEW PRODUCTS. The Company plans to utilize its
technological expertise to continue to develop and introduce new products
and product enhancements in both its existing product lines and new product
lines. For example, the Company has recently received purchase orders for
drilling risers, production risers and deepwater subsea production trees.
In 1996, approximately 30% of the Company's revenues were derived from the
sale of products and product enhancements introduced since 1991. Of the
Company's approximately $101 million backlog at June 30, 1997, at least 45%
was attributable to orders for products and product enhancements developed
since 1991. The Company intends to focus its future new product
developments and product enhancements on areas where it believes it will be
able to achieve a significant market position. The Company believes that
the strong brand name recognition and reputation of its existing products
will assist it in successfully introducing new products to customers.

. INCREASE MANUFACTURING CAPACITY. To maintain and improve market share in
its major product lines, Dril-Quip plans to expand its manufacturing
capacity by approximately 90% during the three-year period 1997 through
1999, approximately two-thirds of which is expected to be completed by the
end of 1998. The Company has been operating at close to full capacity in
recent years, and believes that this expansion is essential in order to
meet customer demand for its existing products and to continue its strategy
of developing new products. The Company owns a 218-acre site in Houston,
Texas where it plans to build additional manufacturing facilities during
the three-year period 1997 through 1999. To increase

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<PAGE>

manufacturing capacity while the construction of the new facilities is in
progress, the Company is adding machine tools at its existing facilities,
most of which will be transported to and utilized at the new facilities when
they are completed.

. CONTINUE TO REDUCE COSTS AND INCREASE OPERATIONAL EFFICIENCIES. Dril-Quip
has historically controlled its costs through such activities as performing
its own forgings and heat treatment, rebuilding quality used machine tools
(rather than purchasing new machine tools) and optimizing manufacturing
operations to increase the rate of production. Although it will need to
purchase some new machine tools in order to expand its manufacturing
capacity as rapidly as planned, the Company has an inventory of used machine
tools that it will continue to rebuild and upgrade in order to control
overall costs. Dril-Quip also plans to expand its forging capacity and to
begin marketing forgings to third parties in addition to supplying its own
forging requirements. The Company expects that this will provide additional
cost efficiencies as well as additional revenues, thereby contributing to
profits.

. CONTINUE EXPANSION INTO SELECTED INTERNATIONAL MARKETS. The Company's
products are currently utilized primarily in the Gulf of Mexico, the North
Sea and in selected markets in Southeast Asia, Australia and South America.
The Company has recently engaged international sales representatives in
several additional markets, including Mexico, West Africa and the Middle
East. Dril-Quip believes that there is significant potential for increased
sales through focused marketing efforts in other active offshore areas in
the world, such as China, Argentina and the Caspian Sea.

. CAPITALIZE ON STRONG BALANCE SHEET. The Company plans to use a portion of
the net proceeds from the Offering initially to repay its existing
indebtedness. The Company believes that its strong balance sheet will
provide it with the financial flexibility to carry out its strategy to
design and develop new products, significantly increase manufacturing
capacity and expand its international presence. In addition, the Company may
investigate potential acquisition opportunities as they arise. However, the
Company currently has not identified any such acquisition opportunities, and
there can be no assurance that any will arise in the future.

PRODUCTS AND SERVICES

PRODUCT GROUP

Dril-Quip designs, manufactures, fabricates, inspects, assembles, tests and
markets subsea equipment, surface equipment and offshore rig equipment. The
Company's products are used to explore for oil and gas on offshore drilling
rigs, such as floating rigs and jack-ups, and for drilling and production of
oil and gas wells on offshore platforms, TLPs, Spars and moored vessels such as
FPSOs. TLPs are floating production platforms that are connected to the ocean
floor via vertical mooring tethers (called tension legs). A Spar is a floating
cylindrical structure approximately six or seven times longer than its diameter
that is anchored in place (like a Spar buoy). FPSOs are floating production,
storage and offloading monohull moored vessels. Major oil companies are
actively pursuing TLPs, Spars and FPSOs as cost-effective means of producing
oil and gas from water depths in excess of 1,000 feet. The Company believes
that sales of its equipment in connection with TLPs, Spars and FPSOs are
potentially important sources of future revenues. The following table
illustrates the Company's products and their uses in various methods of
exploration, development and production:

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SUBSEA EQUIPMENT

SUBSEA WELLHEADS

The subsea wellhead is installed at the ocean floor and is interconnected
during drilling to the structure/vessel through the drilling riser. The
wellhead system provides a means of supporting and sealing each of the
multiple casing strings for well control. Major components include a guide
structure, wellhead housing, casing hangers, and seal assemblies configured
to specific well requirements.

[DIAGRAM OF SUBSEA WELLHEAD APPEARS HERE]

Subsea Wellhead

MUDLINE HANGER SYSTEMS

The mudline hanger system supports the weight of multiple casing strings at
the ocean floor while drilling a well. The mudline hanger system
incorporates disconnect features for abandonment after the drilling phase
and reconnect features for tie-back to a platform or subsea tree for the
production phase.

[DIAGRAM OF MUDLINE HANGER SYSTEM APPEARS HERE]

Mudline Hanger System

EXPLORATION
OR PRODUCTION
STRUCTURE/
VESSEL

. Floating Rigs
. TLPs
. Spars

. Jack-up Rigs
. Platforms

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SUBSEA EQUIPMENT (CONTINUED)

SPECIALTY CONNECTORS

Specialty connectors are used to join lengths of large diameter conductor
or casing used in offshore drilling operations. The specialty connector is
welded to the pipe prior to shipment offshore and provides fast, easy make-
up.

[DIAGRAM APPEARS HERE]

Quik-Thread/Multi-Thread
Connectors

[DIAGRAM APPEARS HERE]

Quik-Stab Connector

SUBSEA PRODUCTION TREES

The subsea production tree is used to control the flow of oil and gas from
a production well. The main components are remotely controlled valves,
wellhead connector, flowline connector, control equipment and tree cap
specially designed and configured into an assembly which is installed onto
the subsea wellhead at the ocean floor. Subsea production trees
typically produce back via flowlines to a central control point located
on a production structure/vessel.

[DIAGRAM APPEARS HERE]

Single Bore Subsea Production Tree

[DIAGRAM APPEARS HERE]

Dual Bore Subsea Production Tree

EXPLORATION
OR PRODUCTION
STRUCTURE/
VESSEL

. Jack-up Rigs
. Platforms
. Floating Rigs
. TLPs
. Spars

. Platforms
. TLPs
. Spars
. FPSOs

28
<PAGE>

SURFACE EQUIPMENT

PLATFORM WELLHEADS

The platform wellhead is installed at the surface on a platform or
production structure/vessel during drilling and provides a means of
supporting and sealing each of the multiple casing strings for well
control. The system includes a wellhead housing, casing hangers, seal
assemblies, and valves which are configured to specific well requirements.

[DIAGRAM APPEARS HERE]

PLATFORM PRODUCTION TREES

The platform production tree is located on the production deck of the
platform or production structure/vessel and is used to control the flow of
oil and gas from a producing well. The main components are surface
controlled valves, manual wellhead connector, controls and tree cap, which
are designed and configured into an assembly specific to the well
requirements.

[DIAGRAM APPEARS HERE]

EXPLORATION
OR PRODUCTION
STRUCTURE/
VESSEL

Platform Wellhead

. Jack-up Rigs
. Platforms
. TLPs
. Spars

Platform Production Trees

. Platforms
. TLPs
. Spars

29
<PAGE>

OFFSHORE RIG EQUIPMENT

DRILLING AND PRODUCTION RISER SYSTEMS

Drilling riser systems provide the vertical conduit between the floating
drilling vessel and the subsea wellhead. Through the riser, equipment is
guided into the well and drilling fluids are returned to the surface. The
drilling riser also provides a means of well control through auxiliary integral
high pressure tubes attached to the main riser body.

Drilling Riser

[DIAGRAM APPEARS HERE]

Production riser systems provide the vertical conduit from the subsea wellhead
to the floating production platform. Oil and gas flows to the surface for
processing through the production riser.

[DIAGRAM APPEARS HERE]

Production Riser

WELLHEAD CONNECTOR

The wellhead connector provides remote connection of the drilling
riser to the blowout preventer stack (BOP), and the BOP to the wellhead.
The wellhead connector is also used to connect the subsea production tree
or production riser to the subsea wellhead.

[DIAGRAM APPEARS HERE]

Wellhead Connector

DIVERTERS

The diverter is located at the surface and diverts gases off the rig during
the drilling operation to provide protection from shallow gas blowouts.

[DIAGRAM APPEARS HERE]

Diverter

EXPLORATION
OR PRODUCTION
STRUCTURE/
VESSEL

. Floating Rigs
. TLPs
. Spars

. TLPs
. Spars

. Floating Rigs
. TLPs
. Spars

. Jack-up Rigs
. Floating Rigs
. Platforms
. TLPs
. Spars

30
<PAGE>

Subsea Equipment. Subsea equipment is used in the drilling and production of
offshore oil and gas wells around the world. Included in the subsea equipment
product line are subsea wellheads, mudline hanger systems, specialty
connectors and associated pipe, subsea production trees, valves and TLP and
Spar well systems. Management believes that, based solely upon its internal
analysis, the Company has achieved a current market share of approximately 30%
in its subsea wellhead, mudline hanger system and specialty connector markets.
Dril-Quip's subsea production tree sales have increased steadily since their
introduction in 1992.

Subsea wellheads are pressure-containing forged and machined metal housings
in which casing hangers are landed and sealed subsea to suspend casing
(downhole pipe). As drilling depth increases, successively smaller diameter
casing strings are installed, each suspended by an independent casing hanger.
Subsea wellheads are utilized when drilling from floating drilling rigs,
either semi-submersible or drillship types, and TLPs and Spars. Management
believes that Dril-Quip's SS-15(R) and SS-10(R) wellheads are two of the most
widely used subsea wellheads in the world. Competitive advantages of the
Company's subsea wellheads include proprietary metal-to-metal seal technology
and simple installation procedures. These features are ideally suited to
subsea applications when a combination of high pressures, elevated
temperatures and corrosive environments are present. The Company generally
supplies subsea wellheads to customers from inventory.

Mudline hanger systems are used in jack-up drilling operations to support
the weight of the various casing strings at the ocean floor while drilling a
well. They also provide a method to disconnect the casing strings in an
orderly manner at the ocean floor after the well has been drilled, and
subsequently reconnect to enable production of the well by either tying it
back vertically to a subsequently-installed platform or by installing a subsea
tree. Dril-Quip's MS-15(R) mudline hanger systems are technologically advanced
products designed for simple operation while providing high load and high
pressure capacity. The Company believes many customers prefer its mudline
hanger systems to those manufactured by its competitors because of their
higher pressure and load capacity and field-proven reliability. The Company
generally supplies mudline hanger systems to customers from inventory.

Large diameter weld-on specialty connectors (threaded or stab type) are used
in offshore wells drilled from floating drilling rigs, jack-ups, fixed
platforms, TLPs and Spars. Specialty connectors join lengths of conductor or
large diameter (16-inch or greater) casing. Specialty connectors provide a
more rapid connection than other methods of connecting lengths of pipe, and,
although more expensive, their use becomes economically attractive when time
savings are considered, particularly as the rig day rate charged by offshore
drilling contractors increases. Connectors may be sold individually or as an
assembly after being welded to sections of Company or customer supplied pipe.
Dril-Quip's weld-on specialty connectors are designed to prevent cross
threading and provide a quick, convenient method of joining casing joints with
structural integrity compatible with casing strength. The Company generally
supplies specialty connectors individually or specialty connectors welded to
pipe from inventory.

A subsea production tree is an assembly composed of valves, a wellhead
connector, control equipment and various other components installed on a
subsea wellhead or a mudline hanger system and used to control the flow of oil
and gas from a producing well. Subsea trees may be either stand alone
satellite type or template mounted cluster arrangements. Both types typically
produce via flowlines to a central control point located on a platform, TLP,
Spar or FPSO. The use of subsea production trees has become an increasingly
important method for producing wells located in hard-to-reach deepwater areas
or economically marginal fields located in shallower waters. The Company is an
established manufacturer of more complicated dual-bore production trees, which
are used in severe service applications. In addition, Dril-Quip manufactures a
patented single bore (SingleBore(TM)) subsea completion system which features
a hydraulic mechanism instead of a wireline-installed mechanism that allows
the operator to plug the tubing hanger annulus remotely from the surface via a
hydraulic control line and subsequently unplug it when the well is put on
production. This mechanism eliminates the need for an expensive multibore
installation and workover riser, thereby saving both cost and installation
time. The Company's subsea production trees are generally custom designed and
manufactured to customer specifications.

31
<PAGE>

Surface Equipment. Surface equipment is principally used for flow control on
offshore production platforms, TLPs and Spars. Included in the Company's
surface equipment product line are platform wellheads and platform production
trees. Dril-Quip's development of platform wellheads and platform production
trees was facilitated by adaptation of its existing subsea wellhead and tree
technology to surface wellheads and trees.

Platform wellheads are pressure-containing forged and machined metal
housings in which casing hangers are landed and sealed at the platform deck to
suspend casings. The Company emphasizes the use of metal-to-metal sealing
wellhead systems with operational time-saving features which can be used in
high pressure, high temperature and corrosive drilling and production
applications. Dril-Quip believes that its SU-90(R) unitized platform wellheads
are superior to typical industry wellheads because they offer time savings,
safety and technological benefits to its customers.

After installation of the wellhead, platform production trees, consisting of
gate valves, a wellhead connector, controls, tree cap and associated
equipment, are installed on the wellhead to control and regulate oil or gas
production. Platform production trees are similar to subsea production trees
but utilize less complex equipment and more manual, rather than hydraulically
activated, valves and connectors. Platform wellheads and platform production
trees and associated equipment are designed and manufactured in accordance
with customer specifications.

Offshore Rig Equipment. Offshore rig equipment includes drilling and
production riser systems, wellhead connectors and diverters. The drilling
riser system consists of (i) lengths of riser pipe and associated riser
connectors that secure one to another; (ii) the telescopic joint, which
connects the entire drilling riser system to the diverter at the rig and
provides a means to compensate for vertical motion of the rig relative to the
ocean floor; and (iii) the wellhead connector, which provides a means for
remote connection and disconnection of the drilling riser system to and from
the BOP stack. Production risers provide a vertical conduit from the subsea
wellhead to a TLP, Spar or FPSO. The wellhead connector also provides remote
connection/disconnection of the BOP stack, production tree or production riser
to/from the wellhead. Diverters are used to provide protection from shallow
gas blowouts and to divert gases off of the rig during the drilling operation.

Wellhead connectors and drilling and production riser systems are also used
on both TLPs and Spars, which are being installed more frequently in deepwater
applications. The Company believes that its diverter is the simplest and most
reliable currently on the market, and that its DX(R) wellhead connector offers
the best combination of structural integrity and operational features of any
connector currently on the market. The Company has recently introduced
drilling and production risers as new product lines. The principal market for
offshore rig equipment is new rigs, rig upgrades, TLPs and Spars. Diverters,
drilling and production risers and wellhead connectors are generally designed
and manufactured to customer specifications.

SERVICE GROUP

Dril-Quip's Service Group provides field installation services,
reconditioning of its products which are customer-owned, and rental running
tools for installation and retrieval of its products. These services are
provided from the Company's worldwide locations and represented approximately
18% of revenues in 1996.

Field Installation. Dril-Quip provides field installation services through
the use of its technicians. These technicians assist in the onsite
installation of Company products and are available on a 24-hour call out from
the Company's facilities located in Houston, Texas; Aberdeen, Scotland;
Stavanger, Norway; Esbjerg, Denmark; Singapore; and Perth, Australia.

Reconditioning. The Company provides reconditioning of its products at its
facilities in Houston, Texas; Aberdeen, Scotland; Stavanger, Norway; and
Singapore.

Rental. The Company rents running and installation tools for use in
installing its products. These tools are used to install and retrieve Company
products which are purchased by customers. Running tools are available from
Dril-Quip's locations in Houston, Texas; Aberdeen, Scotland; Stavanger,
Norway; Esbjerg, Denmark; Singapore; and Perth, Australia.

32
<PAGE>

MANUFACTURING

Dril-Quip has major manufacturing facilities in Houston, Texas; Aberdeen,
Scotland; and Singapore. Each location conducts a broad variety of processes,
including machining, fabrication, inspection, assembly and testing. The
Houston facility provides forged and heat treated products to all the major
manufacturing facilities. The manufacturing process is illustrated in the
following diagram.

[MANUFACTURING CHART APPEARS HERE]

The Company's Houston and Aberdeen manufacturing plants are ISO 9001 and
American Petroleum Institute certified. See "--Properties--Major Manufacturing
Facilities." Dril-Quip maintains its high standards of product quality through
the use of quality assurance specialists who work with product manufacturing
personnel throughout the manufacturing process by inspecting and documenting
equipment as it is processed through the Company's manufacturing facilities.
The Company has the capability to manufacture various products from each of
its product lines at its major manufacturing facilities and believes that this
localized manufacturing capability is essential in order to compete with the
Company's major competitors.

The Company's manufacturing process is vertically integrated, performing, in
house, essentially all of its forging, heat treatment, machining, fabrication,
inspection, assembly and testing. This vertically integrated manufacturing
capability provides competitive advantages because Dril-Quip is able to (i)
control the quality of its products from initial stages, (ii) control the cost
of its production and (iii) assure timely delivery of high-volume and
customized orders. The Company's primary raw material is cast steel ingots,
from which it produces steel shaped forgings at its forging and heat treatment
facility. The Company routinely purchases four different grades of steel
ingots from approximately four suppliers on a purchase order basis and does
not have any long-term supply contracts.

33
<PAGE>

The Company acquired land and used equipment, and all equipment was rebuilt
to essentially "like new" condition to provide the Company with a modern
forging and heat treatment facility in Houston. This was done to reduce costs
and in anticipation of forging capacity shortages which could result if the
demand for forgings increased significantly. Dril-Quip now performs
essentially all of its own heat treatment and produces most of its forging
requirements. The Company's Houston facility also provides forgings and heat
treatment for its Aberdeen and Singapore facilities. The Company's major
competitors depend on outside sources for all or a substantial portion of
their forging and heat treatment requirements. With the expansion of its
forging capacity, the Company plans to begin marketing its forgings to third
party customers.

Dril-Quip's manufacturing facilities utilize state-of-the-art computer
numerically controlled ("CNC") machine tools and equipment, which contribute
to the Company's product quality and timely delivery. The Company has also
developed a cost effective, in-house machine tool rebuild capability, which
produces "like new" machine upgrades with customized features to enhance the
economic manufacture of its specialized products. The Company purchases
quality used machine tools as they become available and stores them at its
facilities to be rebuilt and upgraded as the need arises. Purchasing and
rebuilding used machine tools is a competitive advantage, allowing Dril-Quip
to add machine tools at lower overall costs than its competitors. Rebuilding
used machine tools also allows for greater customization suitable for
manufacturing Dril-Quip proprietary product lines. This provides the added
advantage of requiring only in-house expertise for repairs and maintenance of
these machines. A significant portion of the Company's manufacturing capacity
growth has been through the rebuild/upgrade of quality used machine tools,
including the replacement of outdated control systems with state-of-the-art
CNC controls.

In the last two years, as demand for offshore exploration and production
equipment has increased significantly, the Company has been operating at close
to full capacity. The Company plans to expand its manufacturing capacity by
approximately 90% during the three-year period 1997 through 1999,
approximately two-thirds of which is expected to be completed by the end of
1998. The first of the additional manufacturing facilities is currently under
construction and is expected to be completed by the end of 1998. The Company
believes that this capital expansion program will allow it to prudently manage
its growth in response to customer demand for its products. The Company has
already begun adding machine tools at its existing facilities that it will
move to the new facilities when they are completed. In order to expand its
capacity as rapidly as planned, the Company expects that it will supplement
its inventory of used machine tools, which it plans to rebuild and upgrade,
with purchases of new and additional used machine tools.

PERCENTAGE OF COMPLETION ACCOUNTING

Historically, Drip-Quip recognized revenues upon the delivery of a completed
product. As the Company has begun manufacturing larger and more complex
projects that have longer manufacturing times, the Company has begun to
account for purchase orders covering such projects on a percentage of
completion basis. The Company expects that such larger and more complex
projects will increase the Company's sales and revenues and afford the Company
certain economies of scale because such projects generally utilize the
Company's products as component parts. The Company also expects that such
projects may have a stabilizing effect on the Company's operations, as the
Company will have a longer period of time over which to plan and to allocate
its resources. Finally, the Company expects to receive certain periodic
payments associated with such projects, rather than payment upon delivery.
Because the Company has only recently become involved in such manufacturing
projects, the use of percentage of completion accounting does not affect the
comparability of financial information to earlier periods. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Overview."

CUSTOMERS

The Company's principal customers are major integrated oil and gas
companies, large independent oil and gas companies and foreign national oil
and gas companies. Offshore drilling contractors and engineering and
construction companies also represent a minor, but steadily increasing,
customer base. The Company's customers are generally oil and gas companies
that are well-known participants in offshore exploration and production, who

34
<PAGE>

depend on high quality, efficient, reliable products, such as those produced
by Dril-Quip, for their offshore activities, particularly in deepwater areas.

The Company is not dependent on any one customer or group of customers. In
1996, the Company's top 15 customers represented approximately 50% of total
revenues, with the Royal Dutch Shell Group of Companies (aggregating orders
placed by all of its worldwide affiliates), accounting for approximately 19%
of revenues. The number and variety of the Company's products required in a
given year by any one customer depends upon the amount of that customer's
capital expenditure budget devoted to offshore exploration and production in
any single year and on the results of competitive bids for major projects.
Consequently, a customer that accounts for a significant portion of revenues
in one fiscal year may represent an immaterial portion of revenues in
subsequent years.

Due to the demanding operating conditions in the offshore drilling and
production sector and high costs associated with equipment failure, customers
prefer manufacturers of highly reliable products, with established
qualifications and experience, such as Dril-Quip. The Company strives to build
strong long-term relationships with its customers by maintaining its
reputation as a manufacturer of high-quality, efficient and reliable products,
by developing new products to meet its customer's needs and by responding
promptly to customer orders. See "Risk Factors--Reliance on Significant
Customers" and "--Competition."

MARKETING AND SALES

Dril-Quip markets its products and services throughout the world directly
through its sales personnel in two domestic and six international locations.
In addition, in certain foreign markets where the Company does not maintain
offices, it utilizes independent sales representatives to enhance its
marketing and sales efforts. Locations in which Dril-Quip has sales
representatives include the United Arab Emirates, Saudi Arabia, China, Canada,
the Philippines, Brazil, Indonesia, Malaysia, Kuwait, Brunei, Oman, Qatar and
West Africa. Although they do not have authority to contractually bind the
Company, these representatives market the Company's products in their
respective territories in return for sales commissions. The Company also
places print advertising from time to time in trade and technical publications
targeted to its customer base. It also participates in industry conferences
and trade shows to enhance industry awareness of its products.

The Company's customers generally order products on a purchase order basis.
Orders are typically filled within two weeks to three months after receipt of
a purchase order, depending on the type of product and whether it is sold out
of inventory or requires some customization. Contracts for certain of the
Company's larger, more complex products, such as subsea production trees,
drilling risers and equipment for TLPs and Spars can take a year or more to
complete.

The primary factors influencing a customer's decision to purchase the
Company's products are the quality, reliability and reputation of the product,
price and technologically superior features. Timely delivery of equipment is
also very important to customer operations and the Company maintains an
experienced sales coordination staff to help assure such delivery. For large
drilling and production system orders, project management teams coordinate
customer needs with engineering, manufacturing and service organizations, as
well as with subcontractors and vendors.

The Company historically has experienced some seasonality, with revenues and
operating income slightly lower during the first and third quarters compared
to the second and fourth quarters. The Company's revenues are affected by its
customers' capital expenditure budgeting process, which generally results in
lower revenues in the first quarter and higher revenues in the fourth quarter.

PRODUCT DEVELOPMENT AND ENGINEERING

The technological demands of the oil and gas industry continue to increase
as offshore exploration and drilling expand into more hostile environments.
Conditions encountered in these environments include well

35
<PAGE>

pressures of up to 15,000 psi (pounds per square inch), mixed flows of oil and
gas under high pressure that may also be highly corrosive and water depths in
excess of 5,000 feet. Since its founding, Dril-Quip has actively engaged in
continuing product development to generate new products and improve existing
products. When developing new products, the Company typically seeks to design
the most technologically advanced version for a particular application to
establish its reputation and qualification in that product. Thereafter, the
Company leverages its expertise in the more technologically advanced product
to produce less costly and complex versions of the product for less demanding
applications. The Company also focuses its activities on reducing the overall
cost to the customer, which includes not only the initial capital cost but
also operating costs associated with its products. The reliable performance of
Dril-Quip's products during installation and during the life of the field is
one of the most important factors to the customer.

All of the Company's products have been developed from internally generated
designs, and the Company has continually introduced new products and product
enhancements since its founding in 1981. Product developments that began in
1991 have led to a series of new products, including diverters, wellhead
connectors, SingleBore(TM) subsea trees, improved severe service dual bore
subsea trees, subsea and platform valves, platform wellheads, platform trees,
subsea tree workover riser systems, drilling risers and TLP and Spar
production riser systems. For the year ended December 31, 1996, more than 30%
of the Company's total revenues were from the sales of products and product
enhancements developed since 1991. In addition, of the Company's approximately
$101 million backlog at June 30, 1997, at least 45% was attributable to orders
for products and product enhancements developed since 1991.

Dril-Quip's product development work is conducted at its facilities in
Houston, Texas and Aberdeen, Scotland. In addition to the work of its product
development staff, the Company's application engineering staff provides
engineering services to customers in connection with the design and sales of
its products.

The Company believes that the success of its business depends more on the
technical competence, creativity and marketing abilities of its employees than
on any individual patent, trademark or copyright. Nevertheless, as part of its
ongoing product development and manufacturing activities, Dril-Quip's policy
has been to seek patents when appropriate on inventions concerning new
products and product improvements. As of June 30, 1997, the Company held 36
United States patents and 77 foreign patents and had applications pending for
four United States patents and 17 foreign patents. All patent rights for
products developed by employees are assigned to the Company. Virtually all of
the Company's products have components that are covered by patents. The
Company's existing patents expire at various times beginning in 2001.

Dril-Quip has 12 U.S. registered trademarks, including Dril-Quip(R), Quik-
Thread(R), Quick-Stab(R), Multi-Thread(R), MS-15(R), SS-15(R), SS-10(R), SU-
90(R) and DX(R). The Company has registered its trademarks in the countries
where such registration is deemed material.

Although in the aggregate the Company's patents and trademarks are of
considerable importance to the manufacturing and marketing of many of its
products, the Company does not consider any single patent or trademark or
group of patents or trademarks to be material to its business as a whole,
except the Dril-Quip(R) trademark. The Company also relies on trade secret
protection for its confidential and proprietary information. The Company
routinely enters into confidentiality agreements with its employees and
suppliers. There can be no assurance, however, that others will not
independently obtain similar information or otherwise gain access to the
Company's trade secrets.

COMPETITION

Dril-Quip faces significant competition from other manufacturers of
exploration and production equipment. Several of its primary competitors are
diversified multinational companies with substantially larger operating staffs
and greater capital resources than those of the Company and which, in many
instances, have been engaged in the manufacturing business for a much longer
time than the Company. However, Dril-Quip believes it has a significant
position in its oil and gas drilling and production equipment markets,
particularly with respect to its high performance and time-saving products. In
these markets, the Company competes principally with ABB

36
<PAGE>

Vetco Gray Inc. (a subsidiary of Asea Brown Boveri, more commonly referred to
as ABB), the petroleum production equipment segment of Cooper Cameron
Corporation, the Petroleum Equipment Group of FMC Corporation and Kvaerner
National Ltd. (a division of Kvaerner A.S.).

Because of their relative size and diversity of products, several of these
companies have the ability to provide "turnkey" services for offshore drilling
and production applications, which enables them to use their own products to
the exclusion of Dril-Quip's products. The Company also competes to a lesser
extent with a number of other companies in various products. The principal
competitive factors in the petroleum drilling and production equipment markets
are quality, reliability and reputation of the product, price, technology,
service and timely delivery. See "Risk Factors--Competition."

PROPERTIES

MAJOR MANUFACTURING FACILITIES

<TABLE>
<CAPTION>
BUILDING
SIZE LAND
(APPROXIMATE (APPROXIMATE
LOCATION SQUARE FEET) ACREAGE) OWNED OR LEASED
-------- ------------ ------------ ----------------
<S> <C> <C> <C>
Houston, Texas
--13550 Hempstead Highway.......... 175,000 15 Owned
12,000 -- Leased (offices)
--6401 N. Eldridge Parkway......... 280,000 218 Owned
Aberdeen, Scotland................... 110,000 10 Owned
9,400 -- Leased (offices)
Singapore............................ 13,000 1.8 Leased
</TABLE>

Dril-Quip's manufacturing facilities in Houston and Aberdeen are capable of
manufacturing each of its products, and the facility in Singapore is capable
of manufacturing most of the Company's established products. The Company's
Eldridge site in Houston, Texas consists of 218 acres, of which approximately
70% is available for additional buildings and machine tools. The Company plans
to focus its domestic capacity expansion at the Eldridge site.

SALES, SERVICE AND RECONDITIONING FACILITIES

<TABLE>
<CAPTION>
BUILDING
SIZE LAND
(APPROXIMATE (APPROXIMATE
LEASED LOCATION SQUARE FEET) ACREAGE) ACTIVITY
--------------- ------------ ------------ -----------------------------
<S> <C> <C> <C>
New Orleans, Louisiana.. 2,300 -- Sales/Service
Beverwijk, Holland...... 5,200 0.2 Sales/Warehouse
Perth, Australia........ 13,300 1.4 Sales/Service/
Reconditioning/Warehouse
Stavanger, Norway....... 15,700 2.4 Sales/Service/Reconditioning/
Warehouse/Fabrication
Esbjerg, Denmark........ 7,800 0.5 Sales/Service/Reconditioning/
Warehouse
</TABLE>

The Company also performs sales, service and reconditioning activities at
its facilities in Houston, Aberdeen and Singapore. As part of its capital
expansion, the Company plans to expand its facilities in Stavanger to meet
growing demands for its products and services. Under the Company's existing
credit facilities, substantially all of the properties and assets of the
Company are subject to mortgages and security interests in favor of the
Company's lenders.

37
<PAGE>

EMPLOYEES

The total number of the Company's employees as of June 30, 1997 was 926. Of
these, 580 were located in the United States. The Company's employees are not
covered by collective bargaining agreements, and the Company considers its
employee relations to be good.

GOVERNMENTAL REGULATIONS

Many aspects of the Company's operations are affected by political
developments and are subject to both domestic and foreign governmental
regulations, including those relating to oilfield operations, worker safety
and the protection of the environment. In addition, the Company depends on the
demand for its services from the oil
and gas industry and, therefore, is affected by changing taxes, price controls
and other laws and regulations relating to the oil and gas industry generally,
including those specifically directed to offshore operations. The adoption of
laws and regulations curtailing exploration and development drilling for oil
and gas for economic or other policy reasons could adversely affect the
Company's operations by limiting demand for the Company's products.

Recently, increased concern has been raised over the protection of the
environment. Offshore drilling in certain areas has been opposed by
environmental groups and, in certain areas, has been restricted. To the extent
that new laws or other governmental actions prohibit or restrict offshore
drilling or impose additional environmental protection requirements that
result in increased costs to the oil and gas industry in general and the
offshore drilling industry in particular, the business of the Company could be
adversely affected. The Company cannot determine to what extent its future
operations and earnings may be affected by new legislation, new regulations or
changes in existing regulations.

The Company's operations are affected by numerous foreign, federal, state
and local environmental laws and regulations. The technical requirements of
these laws and regulations are becoming increasingly expensive, complex and
stringent. These laws may provide for "strict liability" for damages to
natural resources or threats to public health and safety, rendering a party
liable for the environmental damage without regard to negligence or fault on
the part of such party. Sanctions for noncompliance may include revocation of
permits, corrective action orders, administrative or civil penalties and
criminal prosecution. Certain environmental laws provide for joint and several
strict liability for remediation of spills and releases of hazardous
substances. In addition, companies may be subject to claims alleging personal
injury or property damage as a result of alleged exposure to hazardous
substances, as well as damage to natural resources. Such laws and regulations
may also expose the Company to liability for the conduct of or conditions
caused by others, or for acts of the Company that were in compliance with all
applicable laws at the time such acts were performed. Compliance with
environmental laws and regulations may require the Company to obtain permits
or other authorizations for certain activities and to comply with various
standards or procedural requirements. The Company believes that its facilities
are in substantial compliance with current regulatory standards.

Based on the Company's experience to date, the Company does not currently
anticipate any material adverse effect on its business or consolidated
financial position 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.

LEGAL PROCEEDINGS

The Company is not a party to, nor is any of its property the subject of,
any pending legal proceedings, which, in the opinion of management, are
expected to have a material adverse effect on the Company's consolidated
results of operations or financial position.

38
<PAGE>

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth the names, ages (as of August 31, 1997) and
positions of the Company's directors, the person nominated to become a
director of the Company upon completion of the Offering and the Company's
executive officers:

<TABLE>
<CAPTION>
DIRECTOR'S
TERM
NAME AGE POSITION ENDING
---- --- -------- ----------
<S> <C> <C> <C>
Larry E. Reimert........... 50 Co-Chairman of the Board and Director 2000
Gary D. Smith.............. 55 Co-Chairman of the Board and Director 2000
J. Mike Walker............. 54 Co-Chairman of the Board and Director 1999
Gary W. Loveless........... 54 Director 1999
James M. Alexander......... 45 Director(1) 1998
Jerry M. Brooks............ 45 Chief Accounting Officer
</TABLE>
- --------
(1) Appointment will become effective upon completion of the Offering.

The Company's Board of Directors is divided into three classes with
staggered terms of office, initially ending as set forth above. Thereafter,
the term for each class will expire on the date of the third annual
stockholders' meeting for the election of directors following the most recent
election of directors for such class. Each director holds office until the
next annual meeting of stockholders for the election of directors of his class
and until his successor has been duly elected and qualified. Officers serve at
the discretion of the Board of Directors.

Larry E. Reimert is Co-Chairman of the Board with principal responsibility
for engineering, product development and finance. He has been the Director--
Engineering, Product Development and Finance, as well as a member of the Board
of Directors, since the Company's inception in 1981. Prior to that, he worked
for Vetco Offshore, Inc. in various capacities, including as Vice President of
Technical Operations, Vice President of Engineering and Manager of
Engineering. Mr. Reimert holds a BSME degree from the University of Houston
and a MBA degree from Pepperdine University.

Gary D. Smith is Co-Chairman of the Board with principal responsibility for
sales, service, training and administration. He has been the Director--Sales,
Service, Training and Administration, as well as a member of the Board of
Directors, since the Company's inception in 1981. Prior to that, he worked for
Vetco Offshore, Inc. in various capacities, including as General Manager and
Vice President of Sales and Service.

J. Mike Walker is Co-Chairman of the Board with principal responsibility for
manufacturing, purchasing and facilities. He has been the Director--
Manufacturing, Purchasing and Facilities, as well as a member of the Board of
Directors, since the Company's inception in 1981. Prior to that, he served as
the Director of Engineering, Manager of Engineering and Manager of Research
and Development with Vetco Offshore, Inc. Mr. Walker holds a BSME degree from
Texas A&M University, a MSME degree from the University of Texas at Austin and
a Ph.D. in mechanical engineering from Texas A&M University.

Gary W. Loveless has been an outside director since the Company's inception
in 1981. From 1986 to 1997, he held various positions with Great Western
Resources Corporation, most recently as Chief Executive Officer and Director.
In 1997, Great Western Resources Corporation was purchased by Forcenegy Inc.,
and Mr. Loveless currently serves as Vice President/Onshore Exploration and
Production of Forcenegy Inc. He holds a BSME from Texas A&M University and a
MSME from the University of Texas at Austin.

James M. Alexander will become an outside director of the Company upon
completion of the Offering. Since December 1996, he has served as the Vice
President, Chief Financial Officer and Secretary of Spinnaker Exploration
Company, L.L.C. From November 1995 to December 1996, Mr. Alexander was
President of

39
<PAGE>

Alexander Consulting, Inc. He was the Senior Vice President and Chief
Financial Officer of Enron Global Power & Pipelines L.L.C. from November 1994
to June 1995, and served as its President from June until November 1995. Prior
to that time, Mr. Alexander was President of Alexander Corporate Financial
Consulting, Inc. from June 1992 to November 1994. Mr. Alexander holds a BA
from Yale College and an MBA from Harvard University.

Jerry M. Brooks has been Chief Accounting Officer since he joined the
Company in 1992. From 1980 to 1991, he held various positions with Chiles
Offshore Corporation, most recently as Chief Financial Officer, Secretary and
Treasurer. Mr. Brooks holds a BBA in Accounting and an MBA from the University
of Texas at Austin. He is a certified public accountant.

Upon completion of the Offering, there will be two committees of the Board
of Directors: an Audit Committee and a Compensation Committee. The initial
members of the Audit Committee will be Mr. Loveless and Mr. Alexander. The
Audit Committee will recommend the appointment of independent public
accountants to conduct audits of the Company's financial statements and review
with the independent accountants the plan and results of the auditing
engagement. The Audit Committee will also review the scope and results of
procedures for internal auditing of the Company and the adequacy of the
Company's system of internal accounting controls. The initial members of the
Compensation Committee will be Mr. Loveless and Mr. Alexander. The
Compensation Committee will approve, or in some cases, recommend to the Board,
remuneration arrangements and other compensation plans involving the Company's
directors, executive officers and certain other employees whose compensation
exceeds specified levels. The Compensation Committee will also act on the
granting of stock options, including grants made under the Incentive Plan to
the Company's directors and executive officers.

DIRECTOR COMPENSATION

Gary W. Loveless, one of the Company's directors, was paid fees totaling
$25,000 for his services as a director of the Company for the year ended
December 31, 1996. Commencing with the consummation of the Offering, each
director who is not an employee of the Company (a "Nonemployee Director") and
who is elected or appointed on or after completion of the Offering will
receive an annual fee of $35,000, plus a fee of $1,000 for attendance at each
Board of Directors meeting and $1,000 for each committee meeting (unless held
on the same day as a Board of Directors meeting). All directors will be
reimbursed for out-of-pocket expenses incurred in attending meetings of the
Board of Directors or committees thereof and for other expenses incurred in
their capacity as directors. Directors who are employees of the Company will
not receive additional compensation for serving as directors.

OFFICER AND DIRECTOR INDEMNIFICATION

The Company's 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 by the Delaware
General Corporation Law. The Bylaws include related provisions meant to
facilitate the indemnitee's receipt of such benefits. These provisions cover,
among other things: (i) specification of the method of determining entitlement
to indemnification and the selection of independent counsel that will in some
cases make such determination; (ii) specification of certain time periods by
which certain payments or determinations must be made and actions must be
taken; and (iii) the establishment of certain presumptions in favor of an
indemnitee. The benefits of certain of these provisions are available to an
indemnitee only if there has been a change in control (as defined therein).
The Company has entered into indemnification agreements with its directors and
officers that provide for similar protections.

EXECUTIVE COMPENSATION

Summary Compensation Table. The following table sets forth certain summary
information concerning the compensation paid or accrued by the Company during
the year ended December 31, 1996 to the Company's

40
<PAGE>

executive officers whose combined salary and bonus from the Company during
such period exceeded $100,000 (collectively, the "named executive officers").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL
COMPENSATION(1)
----------------- ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION(2)
--------------------------- ------ -------- ---------------
<S> <C> <C> <C>
Larry E. Reimert............................. $413,462 $200,000 $3,000
Co-Chairman of the Board
Gary D. Smith................................ $413,462 $200,000 $3,000
Co-Chairman of the Board
J. Mike Walker............................... $413,462 $200,000 $3,000
Co-Chairman of the Board
Jerry M. Brooks.............................. $107,566 $ 15,000 $2,151
Chief Accounting Officer
</TABLE>
- --------
(1) Other annual compensation for each named executive officer during 1996 did
not exceed the lesser of $50,000 or 10% of the annual compensation earned
by such individual.
(2) The amounts shown represent contributions by the Company under its 401(k)
Profit Sharing Plan and Company payments of life insurance premiums.

EMPLOYMENT AGREEMENTS

Prior to the completion of the Offering, the Company expects to enter into
employment agreements with each of Messrs. Reimert, Smith and Walker. The
following summary of these agreements, which will be effective on the closing
of the Offering, does not purport to be complete and is qualified by reference
to them, copies of which have been filed as exhibits to the Registration
Statement of which this Prospectus is a part. Each of these agreements
provides for an annual base salary in an amount not less than $350,000, and
will entitle the employee to participate in all of the Company's incentive,
savings, retirement and welfare benefit plans in which other executive
officers of the Company participate. Each agreement also provides for a bonus
of $250,000 payable on or before December 31, 1997, and thereafter an annual
performance bonus equal to up to 120% of the executive's annual base salary,
with the precise amount of the bonus determined based on specific Company
performance goals. The performance goals, which are equally weighted, are
based on (i) the Company's annual earnings before interest and taxes ("EBIT")
measured against the Company's annual budget or plan, and (ii) the Company's
annual return on capital (defined as EBIT divided by total assets less current
liabilities) compared to a peer group of companies. In addition, each
agreement provides that the employee will receive an annual grant of a number
of Options (as defined below) under the Incentive Plan equal to the employee's
base salary multiplied by three and divided by the market price of the Common
Stock on the grant date. Each agreement provides that the employee's
compensation, including his annual base salary, annual performance bonus and
annual grant of Options, shall be reviewed at least annually by the
Compensation Committee and shall be subject to increase at any time and from
time to time on a basis determined by the Compensation Committee, in the
exercise of its sole discretion.

Each of the employment agreements has an initial five-year term, provided
that at the end of the second year of such initial term and on every
anniversary thereafter, the term will be automatically extended for one year,
such that the remaining term of the agreement shall never be less than three
years. Each agreement will be subject to the right of the Company and the
employee to terminate the employee's employment at any time. Each agreement
provides that, upon termination of employment because of death or disability,
or if employment is terminated by the Company for any reason (except under
certain limited circumstances defined as "for cause" in the agreement), or if
employment is terminated by the employee subsequent to a change of control (as
defined) or with good reason (as defined), the employee will generally be
entitled to (i) a lump sum cash payment equal to the employee's base salary
through the date of termination, together with any deferred compensation
previously awarded and any accrued vacation time, (ii) a lump sum cash payment
equal to the

41
<PAGE>

annual base salary that would have been paid to the employee beginning on the
date of termination and ending on the latest possible date of termination of
the employment in accordance with the agreement, (iii) a lump sum cash payment
equal to the annual bonus calculated in accordance with the agreement for the
remaining employment period (assuming for such purpose that the annual bonus
payable for each applicable period during the remaining employment period
would equal the highest annual bonus paid during the last three years prior to
the date of termination), (iv) immediate vesting of any stock options or
restricted stock previously granted to such employee and outstanding as of the
time immediately prior to the date of his termination, or a cash payment in
lieu thereof, and (v) continued participation in medical, dental and life
insurance coverage until the employee receives equivalent coverage and
benefits under other plans of a subsequent employer or the later of the death
of the employee, the death of the employee's spouse and the youngest child of
the employee reaching age 21. The Company will also pay the employee any such
amount as may be necessary to hold the employee harmless from the consequences
of any resulting excise or other similar purpose tax relating to "parachute
payments" under the Internal Revenue Code of 1986, as amended.

Each agreement also provides that, during the term of the agreement and
after termination thereof, the employee shall not divulge any of the Company's
confidential information, knowledge or data. In addition, each agreement
requires the employee to disclose and assign to the Company any and all
conceptions and ideas for inventions, improvements and valuable discoveries
made by the employee which pertain primarily to the material business
activities of the Company. Each agreement also provides that, in the event
that the agreement is terminated for cause or the employee voluntarily resigns
(other than following a change of control or for good reason), for one year
thereafter the employee will not within any country with respect to which he
has devoted substantial attention to the material business interests of the
Company, (i) accept employment or render services to a competitor of the
Company or (ii) enter into or take part in business that would be competitive
with the Company.

INCENTIVE PLAN

Prior to the completion of the Offering, the Company expects to adopt the
Incentive Plan. The objectives of the Incentive Plan are (i) to attract and
retain key employees, (ii) to encourage the sense of proprietorship of these
persons in the Company and (iii) to stimulate the active interest of these
persons in the development and financial success of, the Company by making
awards ("Awards") under the Incentive Plan.

The Company plans to reserve 1,700,000 shares of Common Stock to use in
connection with the Incentive Plan. Persons eligible for Awards are employees
holding positions of responsibility with the Company or any of its
subsidiaries and whose performance can have a significant effect on the
success of the Company.

The Board of Directors will administer the Incentive Plan with respect to
all employees other than executive officers. The Compensation Committee will
administer the Incentive Plan with respect to executive officers. The Board
has the exclusive power to administer the Incentive Plan, to take all actions
specifically contemplated thereby or necessary or appropriate in connection
with the administration thereof, to interpret the Incentive Plan and to adopt
such rules, regulations and guidelines for carrying out its purposes as the
Board may deem necessary or proper, all of which powers will be exercised in
the best interests of the Company and in keeping with the objectives of such
plan. The Board may, in its discretion, among other things, (i) extend or
accelerate the exercisability of, accelerate the vesting of, or eliminate or
make less restrictive any restrictions contained in, any Award, (ii) waive any
restriction or other provision of the Incentive Plan or in any Award or (iii)
otherwise amend or modify any Award in any manner that is either not adverse
to that participant holding the Award or consented to by that participant. The
Board also may delegate to certain senior officers of the Company its duties
under the Incentive Plan.

The Board of Directors may amend, modify, suspend or terminate the Incentive
Plan for the purpose of addressing any changes in legal requirements or for
any other lawful purpose, except that no amendment or alteration that would
adversely affect the rights of any participant under any Award previously
granted to such participant shall be made without the consent of such
participant. The Board of Directors may make certain

42
<PAGE>

adjustments in the event of any subdivision, split or combination of
outstanding shares of Common Stock, any declaration of a stock dividend
payable in shares of Common Stock, any recapitalization or capital
reorganization of the Company, any consolidation or merger of the Company with
another corporation or entity, any adoption by the Company of any plan of
exchange affecting the Common Stock or any distribution to holders of Common
Stock of securities or property (other than normal cash dividends).

Awards to employees may be in the form of (i) rights to purchase a specified
number of shares of Common Stock at a specified price ("Options"), (ii) rights
to receive a payment, in cash or Common Stock, equal to the excess of the fair
market value or other specified value of a number of shares of Common Stock on
the date the right is exercised over a specified strike price, (iii) grants of
restricted or unrestricted Common Stock or units denominated in Common Stock,
(iv) grants denominated in cash and (v) grants denominated in cash, Common
Stock, units denominated in Common Stock or any other property which are made
subject to the attainment of one or more performance goals ("Performance
Awards"). An Option may be either an incentive stock option ("ISO") that
qualifies, or a nonqualified stock option ("NSO") that does not qualify, with
the requirements of Section 422 of the Internal Revenue Code. The Committee
will determine the employees to receive Awards and the terms, conditions and
limitations applicable to each such Award, which conditions may, but need not,
include continuous service with the Company, achievement of specific business
objectives, attainment of specified growth rates, increases in specified
indices or other comparable measures of performance. Performance Awards may
include more than one performance goal, and a performance goal may be based on
one or more business criteria applicable to the grantee, the Company as a
whole or one or more of the Company's business units and may include one or
more of the following: increased revenues, net income, stock price, market
share, earnings per share, return on equity or assets or decrease in costs.

On the date the Offering closes, Options under the Incentive Plan will be
granted to certain employees of the Company to purchase a total of
approximately 419,250 shares of Common Stock at an exercise price per share
equal to the initial public offering price per share set forth on the cover
page of this Prospectus. These awards include Options to be granted to each of
Messrs. Reimert, Smith and Walker to purchase 43,750 shares of Common Stock.
All such Options will have a term of ten years and become exercisable in
cumulative annual increments of one-fourth of the total number of shares of
Common Stock subject thereto, beginning on the first anniversary of the date
of the grant.

The foregoing description summarizes the principal terms and conditions of
the Incentive Plan, does not purport to be complete and is qualified in its
entirety by reference to the Incentive Plan, a copy of which has been filed as
an exhibit to the Registration Statement of which this Prospectus is a part.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Upon completion of the Offering, the Company will establish a Compensation
Committee. In the past, matters with respect to the compensation of executive
officers of the Company were determined by the members of the Board of
Directors as a whole. Messrs. Reimert, Smith and Walker, who were members of
the Board of Directors, participated in deliberations concerning compensation.

43
<PAGE>

CERTAIN TRANSACTIONS

REGISTRATION RIGHTS AGREEMENT

In connection with the Offering, the Company will enter into a registration
rights agreement among the Company and Messrs. Reimert, Smith, Walker,
Loveless, Reimert Family Partners, Ltd., Four Smith's Company, Ltd. and
Loveless Enterprises, Ltd. (the "Registration Rights Agreement"). The
Registration Rights Agreement will provide for registration rights pursuant to
which, upon the request of any of Messrs. Reimert, Smith and Walker (the
"Requesting Holders"), the Company will file a registration statement under
the Securities Act to register the Common Stock subject to the agreement
("Registrable Securities") held by such Requesting Holders and any other
stockholders who are parties to the Registration Rights Agreement and who
desire to sell Registrable Securities pursuant to such registration statement,
subject to a maximum of two requests by each of Messrs. Reimert, Smith and
Walker or their successors and assigns. The first such request may not be made
until after 180 days following the closing of the Offering. In addition,
subject to certain conditions and limitations, the Registration Rights
Agreement will provide that Messrs. Reimert, Smith, Walker and Loveless may
participate in any registration by the Company (including any registration
resulting from any exercise of a demand right under the Registration Rights
Agreement) of any of its equity securities in an underwritten offering. The
registration rights covered by the Registration Rights Agreement will
generally be transferable to transferees (whether by assignment or by death of
the holder) of the Registrable Securities covered thereby. The Registration
Rights Agreement will terminate when all Registrable Securities have been (i)
distributed to the public pursuant to a registration statement covering such
securities that has been declared effective under the Securities Act, or (ii)
distributed to the public in accordance with the provisions of Rule 144 (or
any similar provision then in force) under the Securities Act. An aggregate of
11,870,000 outstanding shares of Common Stock and 131,250 shares of Common
Stock issuable upon exercise of outstanding options will be subject to the
Registration Rights Agreement.

STOCKHOLDERS AGREEMENT

Messrs. Reimert, Smith, Walker, Reimert Family Partners, Ltd. and Four
Smith's Company, Ltd. are parties to a stockholders agreement (the
"Stockholders Agreement") pursuant to which each party has agreed to vote the
shares of Common Stock held by such party to elect to the Company's Board of
Directors one designee of Mr. Reimert and Reimert Family Partners, Ltd. (the
"Reimert Stockholders"), one designee of Mr. Smith and Four Smith's Company,
Ltd. (the "Smith Stockholders") and one designee of Mr. Walker. The rights
under the Stockholders Agreement are transferable to any heir or legal
representative of Messrs. Reimert, Smith or Walker who acquires Common Stock
upon the death of such stockholder and who agrees to be bound by the
provisions of such Agreement. In the event the Reimert Stockholders,
collectively, the Smith Stockholders, collectively, or Mr. Walker (or their
permitted transferees as described in the preceding sentence), own less than
10% of the total number of issued and outstanding shares of Common Stock of
the Company, the rights and obligations of such person under the Stockholders
Agreement are terminated.

CONSULTING SERVICES

In 1996, the Company paid Alexander Consulting, Inc., of which Mr. James M.
Alexander is the sole shareholder, fees totalling $50,000 for consulting
services. In 1997, the Company has paid Mr. Alexander fees totalling $85,000
for certain consulting services rendered to the Company. Mr. Alexander will be
appointed to the Board of Directors of the Company upon completion of the
Offering.

44
<PAGE>

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information with respect to the
current beneficial ownership of shares of Common Stock, and as adjusted to
reflect the sale of shares offered hereby, by (i) each person who is known by
the Company to own beneficially more than 5% of the Common Stock, (ii) each of
the Company's directors and named executive officers, (iii) all current
executive officers and directors as a group and (iv) each of the Selling
Stockholders. See "Risk Factors--Control by Certain Stockholders."

<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED BEFORE OWNED AFTER
OFFERING(1) NUMBER OF OFFERING(1) (2)
NAME OF BENEFICIAL --------------------- SHARES ---------------------
OWNER(3)(4) NUMBER PERCENTAGE OFFERED NUMBER PERCENTAGE
------------------ ---------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Larry E. Reimert(5)...... 4,311,000 30% 750,000 3,561,000 21.11%
Gary D. Smith(6)......... 4,311,000 30 750,000 3,561,000 21.11
J. Mike Walker........... 4,311,000 30 750,000 3,561,000 21.11
Gary W. Loveless(7)...... 1,437,000 10 250,000 1,187,000 7.04
James M. Alexander....... -- -- -- -- --
Jerry M. Brooks.......... -- -- -- -- --
All directors and execu-
tive officers as a group
(6 persons)............. 14,370,000 100% 2,500,000 11,870,000 70.37%
</TABLE>
- --------
(1) Shares of Common Stock subject to options that are expected to become
exercisable upon the consummation of the Offering are deemed outstanding
for computing the percentage ownership of the person holding such options,
but are not deemed outstanding for computing the percentage ownership of
any other person.
(2) Assumes no exercise of the Underwriters' over-allotment option.
(3) Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in the table have
sole voting and investment power with respect to all shares of Common
Stock.
(4) The address of each such person is 13550 Hempstead Highway, Houston, Texas
77040.
(5) Includes 4,310,545 shares of Common Stock held by Reimert Family Partners,
Ltd., a limited partnership of which Mr. Reimert is the Managing General
Partner, and with respect to which he exercises voting and investment
power.
(6) Includes 4,310,545 shares of Common Stock held by Four Smith's Company,
Ltd., a limited partnership of which Mr. Smith and his wife, Gloria Jean
Smith, are the Managing General Partners, and with respect to which they
exercise voting and investment power. Mrs. Smith may also be deemed to be
the beneficial owner of such shares.
(7) Includes 1,436,848 shares of Common Stock held by Loveless Enterprises,
Ltd., a limited partnership of which Loveless Enterprises, L.L.C. is the
Managing General Partner. Mr. Loveless is the sole manager of Loveless
Enterprises, L.L.C., and exercises voting and investment power with
respect to such shares.

45
<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

Upon consummation of the Offering, approximately 16,870,000 shares of Common
Stock will be outstanding. The shares of Common Stock sold in the Offering
will be freely tradeable without restriction or further registration under the
Securities Act, except for certain manner of sale, volume limitations and
other restrictions with respect to any shares purchased in the Offering by an
affiliate of the Company (a "Company Affiliate"), which will be subject to the
resale limitations of Rule 144 under the Securities Act. Under Rule 144 under
the Securities Act, a person is an affiliate of an entity if such person
directly or indirectly controls or is controlled by or is under common control
with such entity and may include certain officers and directors, principal
stockholders and certain other stockholders with special relationships. This
Prospectus may not be used by Company Affiliates in connection with any resale
of shares of Common Stock acquired in the manner described above.

In general, under Rule 144 as currently in effect, if a minimum of one year
has elapsed since the later of the date of acquisition of the restricted
securities from the issuer or from an affiliate of the issuer, a person (or
persons whose shares of Common Stock are aggregated), including persons who
may be deemed "affiliates" of the Company, would be entitled to sell within
any three-month period a number of shares of Common Stock that does not exceed
the greater of (i) 1% of the then-outstanding shares of Common Stock (i.e.,
168,700 shares immediately after consummation of the Offering) and (ii) the
average weekly trading volume during the four calendar weeks preceding the
date on which notice of the sale is filed with the Commission. Sales under
Rule 144 are also subject to certain provisions as to the manner of sale,
notice requirements and the availability of current public information about
the Company. In addition, under Rule 144(k), if a period of at least two years
has elapsed since the later of the date restricted securities were acquired
from the Company or the date they were acquired from an affiliate of the
Company, a stockholder who is not an affiliate of the Company at the time of
sale and who has not been an affiliate for at least three months prior to the
sale would be entitled to sell shares of Common Stock in the public market
immediately without compliance with the foregoing requirements under Rule 144.
Rule 144 does not require the same person to have held the securities for the
applicable periods. The foregoing summary of Rule 144 is not intended to be a
complete description thereof.

Upon the consummation of the Offering, 11,870,000 shares of Common Stock
outstanding will be restricted securities as that term is defined by Rule 144,
and, subject to the conditions thereof, including volume limitations, will
become eligible for sale 90 days after the Offering. The Company will enter
into a Registration Rights Agreement upon the consummation of the Offering
whereby it will agree to register under the Securities Act shares of Common
Stock held by Messrs. Reimert, Smith, Walker and Loveless and certain of their
related family limited partnerships. See "Certain Transactions."

The Company intends to file a registration statement on Form S-8 under the
Securities Act to register the shares of Common Stock reserved or to be
available for issuance pursuant to the Incentive Plan. Shares of Common Stock
issued pursuant to such plan generally will be available for sale in the open
market by holders who are not Company Affiliates and, subject to the volume
and other limitations of Rule 144, by holders who are Company Affiliates.

Subject to certain exceptions, each of the Company and the directors,
executive officers and certain other stockholders of the Company has agreed
that, without the prior written consent of Morgan Stanley & Co. Incorporated
on behalf of the Underwriters, it will not, during the period ending 180 days
after the date of this Prospectus, (i) offer, pledge, sell, contract to sell,
sell any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase or otherwise transfer,
lend or dispose of, directly or indirectly, any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock or
(ii) enter into any swap or other arrangements that transfers to another, in
whole or in part, any of the economic consequences of ownership of the Common
Stock, whether any such transaction described in clause (i) or (ii) above is
to be settled by delivery of Common Stock or other securities, in cash or
otherwise. See "Underwriters."

46
<PAGE>

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

DESCRIPTION OF CAPITAL STOCK

The Company's authorized capital stock consists of 50,000,000 shares of
Common Stock, par value $0.01 per share, and 10,000,000 shares of Preferred
Stock, par value $0.01 per share. Following consummation of the Offering there
will be approximately 16,870,000 shares of Common Stock outstanding (assuming
the over-allotment option is not exercised), and no shares of Preferred Stock
will be outstanding. The following summary does not purport to be complete,
and reference is made to the more detailed provisions of the Company's
Certificate of Incorporation (the "Certificate of Incorporation") and Bylaws,
which are filed as exhibits to the registration statement of which this
Prospectus is a part.

COMMON STOCK

The Common Stock possesses ordinary voting rights for the election of
directors and in respect of other corporate matters, each share being entitled
to one vote. There are no cumulative voting rights, meaning that the holders
of a majority of the shares voting for the election of directors can elect all
the directors if they choose to do so. The Common Stock carries no preemptive
rights and is not convertible, redeemable or assessable, or entitled to the
benefits of any sinking fund. The holders of Common Stock are entitled to
dividends in such amounts and at such times as may be declared by the Board of
Directors out of funds legally available therefor. See "Dividend Policy" for
information regarding dividend policy.

PREFERRED STOCK

The Board of Directors of the Company is empowered, without approval of the
stockholders, to cause shares of Preferred Stock to be issued in one or more
series, with the numbers of shares of each series to be determined by it. The
Board of Directors is authorized to fix and determine the powers,
designations, preferences and relative, participating, optional or other
rights (including, without limitation, voting powers, full or limited,
preferential rights to receive dividends or assets upon liquidation, rights of
conversion or exchange into Common Stock, Preferred Stock of any Series or
other securities, redemption provisions and sinking fund provisions) between
series and between the Preferred Stock or any series thereof and the Common
Stock, and the qualifications, limitations or restrictions of such rights.

Although the Company has no present intention to issue shares of Preferred
Stock, the issuance of shares of Preferred Stock, or the issuance of rights to
purchase such shares, could be used to discourage an unsolicited acquisition
proposal. For instance, the issuance of a series of Preferred Stock might
impede a business combination by including class voting rights that would
enable the holders to block such a transaction; or such issuance might
facilitate a business combination by including voting rights that would
provide a required percentage vote of the stockholders. In addition, under
certain circumstances, the issuance of Preferred Stock could adversely affect
the voting power of the holders of the Common Stock. Although the Board of
Directors is required to make any determination to issue such stock based on
its judgment as to the best interests of the stockholders of the Company, the
Board of Directors could act in a manner that would discourage an acquisition
attempt or other transaction that some or even a majority of the stockholders
might believe to be in their best interests or in which stockholders might
receive a premium for their stock over the then market price of such stock.
The Board of Directors does not at present intend to seek stockholder approval
prior to any issuance of currently authorized stock, unless otherwise required
by law or the rules of any market on which the Company's securities are
traded.

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<PAGE>

For purposes of the Rights Agreement described below, the Company Board has
authorized the creation of a series of Preferred Stock designated as "Series A
Junior Participating Preferred Stock" (the "Series A Preferred Stock"). An
aggregate of 500,000 shares of Preferred Stock have been reserved for issuance
as Series A Preferred Stock. Series A Preferred Stock will rank junior to all
other series of Preferred Stock that have been or may be established by the
Company Board with respect to the payment of dividends and the distribution of
assets upon liquidation. In general, the voting, dividend and liquidation
rights of Series A Preferred Stock are designed in such a way that one one-
hundredth of a share of Series A Preferred Stock will be substantially
equivalent from an economic point of view to one share of Common Stock. For a
statement of the rights and privileges of Series A Preferred Stock, reference
is made to the form of Certificate of Designations which is included as an
exhibit to this Registration Statement.

STOCKHOLDER RIGHTS PLAN

Each share of Common Stock offered hereby includes one right ("Right") to
purchase from the Company a unit consisting of one one-hundredth of a share (a
"Fractional Share") of Series A Preferred Stock at a specified purchase price
per Fractional Share, subject to adjustment in certain events (the "Purchase
Price"). The following summary description of the Rights does not purport to
be complete and is qualified in its entirety by reference to the Rights
Agreement between the Company and a Rights Agent (the "Rights Agreement"), the
form of which is filed as an exhibit to the Registration Statement of which
this Prospectus is a part and is incorporated herein by reference.

Initially, the Rights will attach to all certificates representing
outstanding shares of Common Stock, including the shares of Common Stock
offered hereby, and no separate certificates for the Rights ("Rights
Certificates") will be distributed. The Rights will separate from the Common
Stock and a "Distribution Date" will, with certain exceptions, occur upon the
earlier of (i) 10 days following a public announcement that a person or group
of affiliated or associated persons (an "Acquiring Person") has acquired, or
obtained the right to acquire, beneficial ownership of 15% or more of the
outstanding shares of Common Stock (the date of the announcement being the
"Stock Acquisition Date") or (ii) 10 business days following the commencement
of a tender offer or exchange offer that would result in a person's becoming
an Acquiring Person. Larry E. Reimert, Gary D. Smith, J. Mike Walker, Reimert
Family Partners, Ltd. and Four Smith's Company, Ltd. (the "Major
Stockholders"), each of whom will both prior to and, immediately after
consummation of the Offering be the beneficial owner of more than 15% of the
outstanding shares of Common Stock, will not be deemed to be an Acquiring
Person as a result of such ownership position or any subsequent increase in
ownership position. Additionally, a transferee of Common Stock (an "Individual
Major Stockholder Transferee") owned by Larry E. Reimert, Gary D. Smith, or J.
Mike Walker (the "Individual Major Stockholders") who as a result of such
transfer becomes the beneficial owner of 15% or more of the outstanding Common
Stock will not be deemed to be an Acquiring Person if (a) such transferee
receives such Common Stock directly from an Individual Major Stockholder by
will or intestate succession or (b) such transfer is made (i) directly from an
Individual Major Stockholder or an Individual Major Stockholder Transferee to
a spouse, sibling or lineal descendant of an Individual Major Stockholder or
lineal descendant of a spouse of an Individual Major Stockholder or (ii)
directly from an Individual Major Stockholder or an Individual Major
Stockholder Transferee to a trust, family partnership or similar family-
related or family-controlled entity for estate planning purposes, all of the
interests of which are owned by an Individual Major Stockholder, a spouse,
sibling or lineal descendant of an Individual Major Stockholder or lineal
descendant of a spouse of an Individual Major Stockholder or any distributees
under the will of any of the foregoing persons, successors of such persons by
intestate succession or trusts for the benefit of any of the foregoing persons
(an "Estate Planning Vehicle"), unless and until such Individual Major
Stockholder Transferee, together with his affiliates and associates, becomes
the beneficial owner of additional shares of Common Stock constituting 1% or
more of the then-outstanding shares of Common Stock or any other person who is
the beneficial owner of at least 1% of the then-outstanding shares of Common
Stock becomes an affiliate or associate of such Individual Major Stockholder
Transferee. Reimert Family Partners, Ltd. shall cease to be a Major
Stockholder at such time as all of the interests in such partnership are not
owned by Larry E. Reimert, his spouse, siblings, lineal descendants, lineal
descendants of his spouse, any distributees under the will of any of the
foregoing persons, successors of such persons by intestate succession, trusts
for the benefit of any

48
<PAGE>

of the foregoing persons and Wave Enterprises, Inc. Four Smith's Company, Ltd.
shall cease to be a Major Stockholder at such time as all of the interests in
such partnership are not owned by Gary D. Smith, his spouse, siblings, lineal
descendants, lineal descendants of his spouse, any distributees under the will
of any of the foregoing persons, successors of such persons by intestate
succession, and trusts for the benefit of any of the foregoing persons. An
Estate Planning Vehicle shall cease to be an Individual Major Stockholder
Transferee at such time as all of the interests therein cease to be owned by
an Individual Major Stockholder, a spouse, sibling or lineal descendant of an
Individual Major Stockholder or a lineal descendant of a spouse of an
Individual Major Stockholder or any distributees under the will of any of the
foregoing persons, successors of such persons by intestate succession or
trusts for the benefit of any of the foregoing persons. In certain
circumstances the Distribution Date may be deferred by the Board of Directors.
Certain inadvertent acquisitions will not result in a person's becoming an
Acquiring Person if the person promptly divests itself of sufficient Common
Stock. Until the Distribution Date, (a) the Rights will be evidenced by the
Common Stock certificates and will be transferred with and only with those
certificates, (b) Common Stock certificates will contain a notation
incorporating the Rights Agreement by reference and (c) the surrender for
transfer of any certificate for Common Stock also will constitute the transfer
of the Rights associated with the stock represented by such certificate.

The Rights are not exercisable until the Distribution Date and will expire
at the close of business on the date that is the tenth anniversary of the
adoption of the Rights Plan, unless earlier redeemed or exchanged by the
Company as described below.

As soon as practicable after the Distribution Date, Rights Certificates will
be mailed to holders of record of Common Stock as of the close of business on
the Distribution Date and, from and after the Distribution Date, the separate
Rights Certificates alone will represent the Rights. All shares of Common
Stock issued prior to the Distribution Date will be issued with Rights. Shares
of Common Stock issued after the Distribution Date in connection with certain
employee benefit plans or upon conversion of certain securities will be issued
with Rights. Except as otherwise determined by the Board of Directors, no
other shares of Common Stock issued after the Distribution Date will be issued
with Rights.

In the event (a "Flip-In Event") that a person becomes an Acquiring Person
(except pursuant to a tender or exchange offer for all outstanding shares of
Common Stock at a price and on terms that a majority of directors of the
Company who are unaffiliated with an Acquiring Person or offeror determines to
be fair to and otherwise in the best interests of the Company and its
stockholders (a "Permitted Offer")), each holder of a Right will thereafter
have the right to receive, upon exercise of such Right, a number of shares of
Common Stock (or, in certain circumstances, cash, property or other securities
of the Company) having a Current Market Price (as defined in the Rights
Agreement) equal to two times the exercise price of the Right. Notwithstanding
the foregoing, following the occurrence of any Triggering Event (as defined
below), all Rights that are, or (under certain circumstances specified in the
Rights Agreement) were, beneficially owned by or transferred to an Acquiring
Person (or by certain related parties) will be null and void in the
circumstances set forth in the Rights Agreement. Rights are not exercisable
following the occurrence of any Flip-In Event until such time as the Rights
are no longer redeemable by the Company as set forth below.

In the event (a "Flip-Over Event") that, at any time from and after the time
an Acquiring Person becomes such, (i) the Company is acquired in a merger or
other business combination transaction (other than certain mergers that follow
a Permitted Offer) or (ii) 50% or more of the Company's assets or earning
power is sold or transferred, each holder of a Right (except Rights that are
voided as set forth above) shall thereafter have the right to receive, upon
exercise, a number of shares of common stock of the acquiring company having a
Current Market Price equal to two times the exercise price of the Right. Flip-
In Events and Flip-Over Events are collectively referred to as "Triggering
Events."

The number of outstanding Rights associated with a share of Common Stock, or
the number of Fractional Shares of Preferred Stock issuable upon exercise of a
Right and the Purchase Price, are subject to adjustment in the event of a
stock dividend on, or a subdivision, combination or reclassification of, the
Common Stock occurring prior to the Distribution Date. The Purchase Price
payable, and the number of Fractional Shares of

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<PAGE>

Preferred Stock or other securities or property issuable, upon exercise of the
Rights are subject to adjustment from time to time to prevent dilution in the
event of certain transactions affecting the Preferred Stock.

With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments amount to at least 1% of the Purchase
Price. No fractional shares of Series A Preferred Stock that are not integral
multiples of a Fractional Share are required to be issued and, in lieu
thereof, an adjustment in cash may be made based on the market price of the
Series A Preferred Stock on the last trading date prior to the date of
exercise. Pursuant to the Rights Agreement, the Company reserves the right to
require prior to the occurrence of a Triggering Event that, upon any exercise
of Rights, a number of Rights be exercised so that only whole shares of Series
A Preferred Stock will be issued.

At any time until 10 days following the first date of public announcement of
the occurrence of a Flip-In Event, the Company may redeem the Rights in whole,
but not in part, at a price of $.01 per Right, payable, at the option of the
Company, in cash, shares of the Common Stock or such other consideration as
the Board of Directors of the Company may determine. Immediately upon the
effectiveness of the action of the Board of Directors ordering redemption of
the Rights, the Rights will terminate and the only right of the holders of
Rights will be to receive the $.01 redemption price.

At any time after the occurrence of a Flip-In Event and prior to a person's
becoming the beneficial owner of 50% or more of the shares of Common Stock
then outstanding or the occurrence of a Flip-Over Event, the Company may, at
its option, exchange the Rights (other than Rights owned by an Acquiring
Person or an affiliate or an associate of an Acquiring Person, which will have
become void), in whole or in part, at an exchange ratio of one share of Common
Stock, and/or other equity securities deemed to have the same value as one
share of Common Stock, per Right, subject to adjustment.

Other than the redemption price, any of the provisions of the Rights
Agreement may be amended by the Board of Directors as long as the Rights are
redeemable. Thereafter, the provisions of the Rights Agreement other than the
redemption price may be amended by the Board of Directors in order to cure any
ambiguity, defect or inconsistency, to make changes that do not materially
adversely affect the interests of holders of Rights (excluding the interests
of any Acquiring Person), or to shorten or lengthen any time period under the
Rights Agreement; provided, however, that no amendment to lengthen the time
period governing redemption shall be made at such time as the Rights are not
redeemable. Until a Right is exercised, the holder thereof, as such, will have
no rights to vote or to receive dividends or any other rights as a stockholder
of the Company.

The Rights will have certain antitakeover effects. They will cause
substantial dilution to any person or group that attempts to acquire the
Company without the approval of the Company's Board of Directors. As a result,
the overall effect of the Rights may be to render more difficult or discourage
any attempt to acquire the Company, even if such acquisition may be favorable
to the interests of the Company's stockholders. Because the Board of Directors
can redeem the Rights or approve a Permitted Offer, the Rights should not
interfere with a merger or other business combination approved by the Board.
The Rights are being issued to protect the Company's stockholders from
coercive or abusive takeover tactics and to afford the Company's Board of
Directors more negotiating leverage in dealing with prospective acquirors.

OTHER MATTERS

Delaware law 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. The duty of care
requires that, when acting on behalf of the corporation, directors must
exercise an informed business judgment based on all material information
reasonably available to them. Absent the limitations authorized by Delaware
law, directors are accountable to corporations and their stockholders for
monetary damages for conduct constituting gross negligence in the exercise of
their duty of care. Delaware law enables corporations to limit available
relief to equitable remedies such as injunction or rescission. The Certificate
of Incorporation limits the liability of directors of the Company 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

50
<PAGE>

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 as provided
in Section 174 of the Delaware General Corporation Law or (iv) for any
transaction from which the director derived an improper personal benefit.

The inclusion of this provision in the Certificate of Incorporation may have
the effect of reducing the likelihood of derivative litigation against
directors, and may discourage or deter stockholders or management from
bringing a lawsuit against directors for breach of their duty of care, even
though such an action, if successful, might otherwise have benefited the
Company and its stockholders. The Company's Bylaws provide indemnification to
the Company's officers and directors and certain other persons with respect to
certain matters, and the Company has entered into agreements with each of its
directors providing for indemnification with respect to certain matters.

The Certificate of Incorporation provides that stockholders may act only at
an annual or special meeting of stockholders and may not act by written
consent. The Bylaws provide that special meetings of the stockholders can be
called only by any Chairman of the Board, the President or a majority of the
Board of Directors of the Company.

Pursuant to the Certificate of Incorporation, certain transactions
involving, among other persons, any person who is a beneficial owner of 10% or
more of the aggregate voting power of all outstanding stock of the Company (a
"related person") require the affirmative vote of the holders of both (i) at
least 80% of the outstanding voting stock and (ii) at least 66 2/3% of the
outstanding voting stock not beneficially owned by the related person.
Transactions subject to such approval include certain mergers or
consolidations of the Company or sales or transfers of assets and properties
having an aggregate fair market value of $10 million or more. Notwithstanding
the foregoing, the Certificate of Incorporation provides that none of the
Major Stockholders shall be a related person. Additionally, an Individual
Major Stockholder Transferee who as a result of such transfer becomes the
beneficial owner of 10% or more of the outstanding Common Stock will not be
deemed to be a related person if (a) such transferee receives such Common
Stock directly from an Individual Major Stockholder by will or intestate
succession or (b) such transfer is made (i) directly from an Individual Major
Stockholder or from a person that is an Individual Major Stockholder
Transferee to a spouse, sibling or lineal descendant of an Individual Major
Stockholder or lineal descendant of a spouse of an Individual Major
Stockholder or (ii) directly from an Individual Major Stockholder or from a
person that is otherwise an Individual Major Stockholder Transferee to an
Estate Planning Vehicle for estate planning purposes, unless and until such
Individual Major Stockholder Transferee, together with his affiliates and
associates, becomes the beneficial owner of additional shares of Common Stock
constituting 1% or more of the then-outstanding shares of Common Stock or any
other person who is the beneficial owner of at least 1% of the then-
outstanding shares of Common Stock becomes an affiliate or associate of such
Individual Major Stockholder Transferee. Reimert Family Partners, Ltd. shall
cease to be a Major Stockholder at such time as all of the interests in such
partnership are not owned by Larry E. Reimert, his spouse, siblings, lineal
descendants, lineal descendants of his spouse, any distributees under the will
of any of the foregoing persons, successors of such persons by intestate
succession, trusts for the benefit of any of the foregoing persons and Wave
Enterprises, Inc. Four Smith's Company, Ltd. shall cease to be a Major
Stockholder at such time as all of the interests in such partnership are not
owned by Gary D. Smith, his spouse, siblings, lineal descendants, lineal
descendants of his spouse, any distributees under the will of any of the
foregoing persons, successors of such persons by intestate succession, and
trusts for the benefit of any of the foregoing persons. An Estate Planning
Vehicle shall cease to be an Individual Major Stockholder Transferee at such
time as all of the interests therein cease to be owned by an Individual Major
Stockholder, a spouse, sibling or lineal descendant of an Individual Major
Stockholder or a lineal descendant of a spouse of an Individual Major
Stockholder or any distributees under the will of any of the foregoing
persons, successors of such persons by intestate succession or trusts for the
benefit of any of the foregoing persons.

The Certificate of Incorporation provides that the Board of Directors shall
consist of three classes of directors serving for staggered three-year terms.
As a result, approximately one-third of the Company's Board of

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<PAGE>

Directors will be elected each year. The classified board provision could
prevent a party who acquires control of a majority of the outstanding voting
stock of the Company from obtaining control of the Board of Directors until
the second annual stockholders' meeting following the date the acquiror
obtains the controlling interest. See "Management."

The Certificate of Incorporation provides that the number of directors will
be no greater than 12 and no less than 3. The Certificate of Incorporation
further provides that directors may be removed only for cause (as defined in
the Certificate of Incorporation), and then only by the affirmative vote of
the holders of at least a majority of all outstanding voting stock entitled to
vote. This provision, in conjunction with the provisions of the Certificate of
Incorporation authorizing the Board of Directors to fill vacant directorships,
will prevent stockholders from removing incumbent directors without cause and
filling the resulting vacancies with their own nominees. In addition, the
Bylaws provide that the Compensation Committee will consist solely of members
who are not employees of the Company and the Audit Committee will include at
least a majority of members who are not employees of the Company.

The Company is a Delaware corporation and is subject to Section 203 of the
Delaware General Corporation Law. In general, Section 203 prevents an
"interested stockholder" (defined generally as a person owning 15% or more of
a corporation's outstanding voting stock) from engaging in a "business
combination" (as defined) with a Delaware corporation for three years
following the date 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 interested
stockholder becoming an interested stockholder, the interested stockholder
owned 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 right 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 was 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.

STOCKHOLDER PROPOSALS

The Company's Bylaws contain provisions requiring that advance notice be
delivered to the Company of any business to be brought by a stockholder before
an annual meeting of stockholders, and providing for certain procedures to be
followed by stockholders in nominating persons for election to the Board of
Directors of the Company. Generally, such advance notice provisions provide
that written notice must be given to the Secretary of the Company by a
stockholder (i) in the event of business to be brought by a stockholder before
an annual meeting, not less than 90 days prior to the anniversary date of the
immediately preceding annual meeting of stockholders of the Company (with
certain exceptions if the date of the annual meeting is different by more than
specified amounts from the anniversary date) and (ii) in the event of
nominations of persons for election to the Board of Directors by any
stockholder, (a) with respect to an election to be held at the annual meeting
of stockholders, not less than 90 days prior to the anniversary date of the
immediately preceding annual meeting of stockholders of the Company (with
certain exceptions if the date of the annual meeting is different by more than
specified amounts from the anniversary date) and (b) with respect to an
election to be held at a special meeting of stockholders for the election of
directors, not later than the close of business on the tenth day following the

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<PAGE>

day on which notice of the date of the special meeting was mailed to
stockholders or public disclosure of the date of the special meeting was made,
whichever first occurs. Such notice must set forth specific information
regarding such stockholder and such business or director nominee, as described
in the Company's Bylaws.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services, L.L.C.

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<PAGE>

UNDERWRITERS

Under the terms and subject to conditions contained in an Underwriting
Agreement dated the date hereof (the "Underwriting Agreement"), the
Underwriters named below, for whom Morgan Stanley & Co. Incorporated and
Donaldson, Lufkin & Jenrette Securities Corporation are acting as
Representatives, have severally agreed to purchase, and the Company and the
Selling Stockholders have agreed to sell to them, severally, the respective
number of shares of Common Stock set forth opposite the names of such
Underwriters below:

<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Morgan Stanley & Co. Incorporated..................................... 2,125,000
Donaldson, Lufkin & Jenrette Securities Corporation................... 2,125,000
Howard, Weil, Labouisse, Friedrichs Incorporated...................... 250,000
Morgan Keegan & Company, Inc.......................................... 250,000
Simmons & Company..................................................... 250,000
---------
Total............................................................... 5,000,000
=========
</TABLE>

The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by their
counsel and to certain other conditions. The Underwriters are obligated to
take and pay for all of the shares of Common Stock offered hereby (other than
those covered by the Underwriters' over-allotment option described below) if
any such shares are taken.

The Underwriters initially propose to offer part of the shares of Common
Stock directly to the public at the public offering price set forth on the
cover page hereof and part to certain dealers at a price that represents a
concession not in excess of $1.03 a share under the public offering price. Any
Underwriter may allow, and such dealers may reallow, a concession not in
excess of $.10 a share to other Underwriters or to certain other dealers.
After the initial offering of the shares of Common Stock, the offering price
and other selling terms may from time to time be varied by the
Representatives.

The Company and the Selling Stockholders have granted to the Underwriters an
option, exercisable for 30 days from the date of this Prospectus, to purchase
up to an aggregate of 750,000 additional shares of Common Stock at the public
offering price set forth on the cover page hereof, less underwriting discounts
and commissions. The Underwriters may exercise such option solely for the
purpose of covering over-allotments, if any, made in connection with the
offering of the shares of Common Stock offered hereby. To the extent such
option is exercised, each Underwriter will become obligated, subject to
certain conditions, to purchase approximately the same percentage of such
additional shares of Common Stock as the number set forth next to such
Underwriter's name in the preceding table bears to the total number of shares
of Common Stock set forth next to the names of all Underwriters in the
preceding table.

Morgan Stanley & Co. Incorporated and Donaldson, Lufkin & Jenrette
Securities Corporation have informed the Company that they do not intend sales
to discretionary accounts to exceed five percent of the total number of shares
of Common Stock offered by them.

The Common Stock has been approved for listing on The New York Stock
Exchange under the symbol "DRQ".

Each of the Company and the directors, executive officers and certain other
stockholders of the Company has agreed that, without the prior written consent
of Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it will
not, during the period ending 180 days after the date of this Prospectus, (i)
offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase or otherwise transfer, lend or dispose of, directly or
indirectly, any shares of

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<PAGE>

Common Stock or any securities convertible into or exercisable or exchangeable
for Common Stock or (ii) enter into any swap or other arrangement that
transfers to another, in whole or in part, any of the economic consequences of
ownership of the Common Stock, whether any such transaction described in
clause (i) or (ii) above is to be settled by delivery of Common Stock or such
other securities, in cash or otherwise. The restrictions in this paragraph do
not apply to (w) Common Stock issued or options granted pursuant to the
Company's Incentive Plan, (x) the sale of Shares to the Underwriters, (y) the
issuance by the Company of shares of Common Stock upon the exercise of an
option or warrant or the conversion of a security outstanding on the date of
this Prospectus of which the Underwriters have been advised in writing or (z)
transactions by any person other than the Company relating to shares of Common
Stock or other securities acquired in open market transactions after the
completion of the Offering of the Shares.

In order to facilitate the offering of the Common Stock, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Common Stock. Specifically, the Underwriters may over-allot in
connection with the offering, creating a short position in the Common Stock
for their own account. In addition, to cover over-allotments or to stabilize
the price of the Common Stock, the Underwriters may bid for, and purchase,
shares of Common Stock in the open market. Finally, the underwriting syndicate
may reclaim selling concessions allowed to an Underwriter or a dealer for
distributing the Common Stock in the Offering, if the syndicate repurchases
previously distributed Common Stock in transactions to cover syndicate short
positions, in stabilization transactions or otherwise. Any of these activities
may stabilize or maintain the market price of the Common Stock above
independent market levels. The Underwriters are not required to engage in
these activities, and may end any of these activities at any time.

The Company, the Selling Stockholders and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act.

PRICING OF THE OFFERING

Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price will be determined by negotiations between
the Company and the Representatives. Among the factors to be considered in
determining the initial public offering price will be the future prospects of
the Company and its industry in general, sales, earnings and certain other
financial operating information of the Company in recent periods, and the
price-earnings ratios, price-sales ratios, market prices of securities and
certain financial and operating information of companies engaged in activities
similar to those of the Company. The estimated initial public offering price
range set forth on the cover page of this Preliminary Prospectus is subject to
change as a result of market conditions and other factors.

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<PAGE>

LEGAL MATTERS

The validity of the shares of Common Stock offered by this Prospectus will
be passed upon for the Company by Baker & Botts, L.L.P., Houston, Texas.
Certain legal matters in connection with the sale of the Common Stock offered
hereby will be passed upon for the Underwriters by Andrews & Kurth L.L.P.,
Houston, Texas.

EXPERTS

The consolidated financial statements of the Company at December 31, 1996
and 1995, and for each of the three years in the period ended December 31,
1996, appearing in this Prospectus and Registration Statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
report given upon the authority of such firm as experts in accounting and
auditing.

ADDITIONAL INFORMATION

The Company has not previously been subject to the reporting requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Upon
completion of the Offering, the Company will be subject to the informational
requirements of the Exchange Act, and in accordance therewith, will be
required to file periodic reports and other information with the Commission.
Such information can be inspected without charge after the Offering at the
public reference facilities of the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of
the Commission located at Suite 1400, Northwest Atrium Center, 500 West
Madison Street, Chicago, Illinois 60661 and Seven World Trade Center, 13th
Floor, New York, New York 10048. Copies of such material may also be obtained
at prescribed rates from the Public Reference Section of the Commission, 450
Fifth Street, N.W., Washington, D.C. 20549. The Commission also maintains a
Web site (http://www.sec.gov) that will contain all information filed
electronically by the Company with the Commission.

The Company has filed the Registration Statement with the Commission under
the Securities Act with respect to the shares of Common Stock offered hereby.
This Prospectus, which constitutes a part of the Registration Statement, does
not contain all of the information set forth in the Registration Statement,
including the exhibits and schedules thereto. For further information with
respect to the Company and the Common Stock offered hereby, reference is made
to the Registration Statement, exhibits and schedules. Statements contained in
this Prospectus as to the contents of any contract or other document are not
necessarily complete, and, with respect to each such contract or document
filed as an exhibit to the Registration Statement, reference is made to the
copy of such contract or document filed as an exhibit to the Registration
Statement, and each such statement is qualified in all respects by such
reference. A copy of the Registration Statement, including the exhibits and
schedules thereto, may be inspected and copies thereof may be obtained as
described in the preceding paragraph with respect to periodic reports and
other information to be filed by the Company under the Exchange Act.

56
<PAGE>

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Report of Independent Auditors............................................. F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997, and as of
June 30, 1997 (unaudited)................................................. F-3
Consolidated Statements of Income for the Three Years in the Period Ended
December 31, 1996 and for the Six Months Ended June 30, 1996 and 1997
(unaudited)............................................................... F-4
Consolidated Statements of Cash Flows for the Three Years in the Period
Ended December 31, 1996 and for the Six Months Ended June 30, 1996 and
1997 (unaudited).......................................................... F-5
Consolidated Statements of Changes in Stockholders' Equity for the Three
Years in the Period Ended December 31, 1996 and for the Six Months Ended
June 30, 1997 (unaudited)................................................. F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT AUDITORS

Board of Directors
Dril-Quip, Inc.

We have audited the accompanying consolidated balance sheets of Dril-Quip,
Inc., as of December 31, 1996 and 1995, and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Dril-Quip,
Inc., at December 31, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting
principles.

Ernst & Young LLP

Houston, Texas
April 3, 1997, except Note
11 as to which the date is
October 16, 1997

F-2
<PAGE>

DRIL-QUIP, INC.

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31 (UNAUDITED)
----------------- JUNE 30,
ASSETS 1995 1996 1997
------ ------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Current assets:
Cash....................................... $ 2,579 $ 1,361 $ 766
Trade receivables.......................... 20,150 25,514 24,514
Inventories................................ 38,670 51,571 51,858
Deferred taxes............................. 3,088 3,739 3,741
Prepaids and other current assets.......... 619 789 816
------- -------- --------
Total current assets..................... 65,106 82,974 81,695
Property, plant, and equipment, net.......... 27,602 31,384 31,675
Other assets................................. 478 419 453
------- -------- --------
Total assets............................. $93,186 $114,777 $113,823
======= ======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C> <C>
Current liabilities:
Accounts payable........................... $11,807 $ 14,965 $ 11,021
Current maturities of long-term debt....... 3,090 3,537 3,522
Accrued income taxes....................... 1,753 2,712 2,027
Customer prepayments....................... 1,104 7,215 6,610
Accrued compensation....................... 2,830 1,887 2,260
Other accrued liabilities.................. 3,840 3,134 3,378
------- -------- --------
Total current liabilities................ 24,424 33,450 28,818
Long-term debt............................... 27,962 28,999 28,967
Deferred taxes............................... 1,299 1,446 1,127
------- -------- --------
Total liabilities........................ 53,685 63,895 58,912
Stockholders' equity:
Preferred stock, 10,000,000 shares
authorized at $0.01 par value (none
issued)................................... -- -- --
Common stock:
50,000,000 shares authorized at $0.01 par
value (14,370,000 shares issued)......... 144 144 144
Additional paid-in capital................. -- -- --
Retained earnings.......................... 40,634 49,652 54,765
Foreign currency translation adjustment.... (1,277) 1,086 2
------- -------- --------
Total stockholders' equity............... 39,501 50,882 54,911
------- -------- --------
Total liabilities and stockholders'
equity.................................. $93,186 $114,777 $113,823
======= ======== ========
</TABLE>

The accompanying notes are an integral part of these statements.

F-3
<PAGE>

DRIL-QUIP, INC.

CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
(UNAUDITED)
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31 JUNE 30
-------------------------------- ---------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues................ $ 80,548 $ 108,390 $ 115,864 $ 55,346 $ 68,669
Cost and expenses:
Cost of sales......... 58,604 76,471 77,863 37,602 47,725
Selling, general, and
administrative....... 11,673 13,597 15,031 7,253 7,839
Engineering and
product
development.......... 6,069 5,769 6,971 3,245 4,109
---------- ---------- ---------- ---------- ----------
76,346 95,837 99,865 48,100 59,673
---------- ---------- ---------- ---------- ----------
Operating income........ 4,202 12,553 15,999 7,246 8,996
Interest expense........ 2,273 2,944 2,647 1,301 1,400
---------- ---------- ---------- ---------- ----------
Income before income
taxes.................. 1,929 9,609 13,352 5,945 7,596
Income tax provision.... 635 3,023 4,234 1,885 2,483
---------- ---------- ---------- ---------- ----------
Net income.............. $ 1,294 $ 6,586 $ 9,118 $ 4,060 $ 5,113
========== ========== ========== ========== ==========
Earnings per share...... $ 0.09 $ 0.46 $ 0.63 $ 0.28 $ 0.36
========== ========== ========== ========== ==========
Weighted average shares. 14,370,000 14,370,000 14,370,000 14,370,000 14,370,000
========== ========== ========== ========== ==========
</TABLE>

The accompanying notes are an integral part of these statements.

F-4
<PAGE>

DRIL-QUIP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
(UNAUDITED)
SIX MONTHS
YEAR ENDED DECEMBER 31 ENDED JUNE 30
-------------------------- ----------------
1994 1995 1996 1996 1997
------- ------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income...................... $ 1,294 $ 6,586 $ 9,118 $ 4,060 $ 5,113
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization. 3,867 4,648 4,388 2,400 2,608
Loss (gain) on sale of
equipment.................... (31) (111) (82) 18 (126)
Deferred income taxes......... (118) (426) (505) (710) (336)
Changes in operating assets
and liabilities:
Trade receivables........... 8 (4,025) (4,553) (2,836) 502
Inventories................. (5,755) (6,663) (10,815) (2,826) (1,146)
Prepaids and other assets... (447) 556 (144) (464) (18)
Trade accounts payable and
accrued expenses........... 3,604 5,901 7,778 1,732 (4,160)
------- ------- -------- ------- -------
Net cash provided by operating
activities..................... 2,422 6,466 5,185 1,374 2,437
INVESTING ACTIVITIES
Purchase of property, plant, and
equipment...................... (4,614) (6,184) (7,228) (2,832) (3,603)
Proceeds from sale of equipment. 90 525 222 76 224
------- ------- -------- ------- -------
Net cash used in investing ac-
tivities....................... (4,524) (5,659) (7,006) (2,756) (3,379)
FINANCING ACTIVITIES
Proceeds from revolving line of
credit and long-term
borrowings..................... 5,400 3,436 4,564 1,156 1,773
Principal payments on long-term
debt........................... (2,679) (2,823) (3,203) (1,507) (1,769)
Dividends paid.................. (53) (53) (100) -- --
------- ------- -------- ------- -------
Net cash provided by (used in)
financing activities........... 2,668 560 1,261 (351) 4
Effect of exchange rate changes
on cash activities............. (971) (232) (658) (265) 343
------- ------- -------- ------- -------
Increase (decrease) in cash..... (405) 1,135 (1,218) (1,998) (595)
Cash at beginning of period..... 1,849 1,444 2,579 2,579 1,361
------- ------- -------- ------- -------
Cash at end of period........... $ 1,444 $ 2,579 $ 1,361 $ 581 $ 766
======= ======= ======== ======= =======
</TABLE>

The accompanying notes are an integral part of these statements.

F-5
<PAGE>

DRIL-QUIP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
UNREALIZED
COMMON PAID-IN RETAINED TRANSLATION
STOCK CAPITAL EARNINGS ADJUSTMENT TOTAL
------ ------- -------- ----------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993...... $144 $-- $32,860 $(2,737) $30,267
Net income...................... -- -- 1,294 -- 1,294
Translation adjustment.......... -- -- -- 1,395 1,395
Dividends ($.004 per share)..... -- -- (53) -- (53)
---- --- ------- ------- -------
Balance at December 31, 1994...... 144 -- 34,101 (1,342) 32,903
Net income...................... -- -- 6,586 -- 6,586
Translation adjustment.......... -- -- -- 65 65
Dividends ($.004 per share)..... -- -- (53) -- (53)
---- --- ------- ------- -------
Balance at December 31, 1995...... 144 -- 40,634 (1,277) 39,501
Net income...................... -- -- 9,118 -- 9,118
Translation adjustment.......... -- -- -- 2,363 2,363
Dividends ($.007 per share)..... -- -- (100) -- (100)
---- --- ------- ------- -------
Balance at December 31, 1996...... 144 -- 49,652 1,086 50,882
Net income (unaudited).......... -- -- 5,113 -- 5,113
Translation adjustment
(unaudited).................... -- -- -- (1,084) (1,084)
---- --- ------- ------- -------
Balance at June 30, 1997 (unau-
dited)........................... $144 $-- $54,765 $ 2 $54,911
==== === ======= ======= =======
</TABLE>

The accompanying notes are an integral part of these statements.

F-6
<PAGE>

DRIL-QUIP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1996

1. ORGANIZATION

Dril-Quip, Inc. (the "Company"), manufactures offshore drilling and
production equipment which is well suited for use in deepwater, harsh
environment and severe service applications. The Company's principal products
consist of subsea and surface wellheads, subsea and surface production trees,
mudline hanger systems, specialty connectors and associated pipe, drilling and
production riser systems, wellhead connectors and diverters for use by major
integrated, large independent and foreign national oil and gas companies in
offshore areas throughout the world. Dril-Quip also provides installation and
reconditioning services and rents running tools for use in connection with the
installation and retrieval of its products. The Company has three subsidiaries
that manufacture and market the Company's products abroad. Dril-Quip (Europe)
Limited is located in Aberdeen, Scotland, with branches in Norway, Holland,
and Denmark. Dril-Quip Asia Pacific PTE Ltd. is located in Singapore. DQ
Holdings PTY Ltd. is located in Perth, Australia.

2. SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of the Company
and its subsidiaries. All material intercompany accounts and transactions have
been eliminated.

Interim Information

In the opinion of management, the unaudited consolidated interim financial
statements include all adjustments, consisting solely of normal recurring
adjustments, necessary for a fair presentation of the financial position as of
June 30, 1997, and the results of operations and cash flows for each of the
six-month periods ended June 30, 1997 and 1996. Although management believes
the unaudited interim related disclosures in these financial statements are
adequate to make the information presented not misleading, certain information
and footnote disclosures normally included in annual audited financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. The results of
operations and the cash flows for the six-month period ended June 30, 1997 are
not necessarily indicative of the results to be expected for the full year.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the
financial statements and reported amounts of revenues and expenses during the
reporting period. Accounting measurements at interim dates inherently involve
greater reliance on estimates than at year-end. Actual results could differ
from those estimates.

Fair Value of Financial Instruments

The Company's financial instruments consist primarily of cash and cash
equivalents, receivables, payables, and debt instruments. Cash equivalents
include only those investments having a maturity of three months or less at
the time of purchase. The carrying values of these financial instruments
approximate their respective fair values.

Inventories

The Company's inventories are reported at the lower of cost (first-in,
first-out method) or market.

F-7
<PAGE>

DRIL-QUIP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Property, Plant, and Equipment

Property, plant, and equipment are carried at cost, with depreciation
provided on a straight-line basis over their estimated useful lives.

Income Taxes

The Company accounts for income taxes using the liability method. Deferred
income taxes are provided on income and expenses which are reported in
different periods for income tax and financial reporting purposes.

Revenue Recognition

The Company delivers most of its products on an as-needed basis by its
customers and records revenues as the products are shipped. Certain revenues
are derived from long-term contracts which generally require more than one
year to fulfill. Revenues and profits on long-term contracts are recognized
under the percentage-of-completion method based on a cost-incurred basis.
Losses, if any, on contracts are recognized when they become known. Contracts
for long-term projects contain provisions for customer progress payments.
Payments in excess of revenues recognized are included as a customer
prepayment liability.

Foreign Currency

The financial statements of foreign subsidiaries are translated into U.S.
dollars at current exchange rates except for revenues and expenses, which are
translated at average rates during each reporting period. Translation
adjustments are reflected as a separate component of shareholders' equity and
have no current effect on earnings or cash flows. These adjustments amounted
to a gain of $1,395,000 in 1994, a gain of $65,000 in 1995, and a gain of
$2,363,000 in 1996, net of allocated income taxes of $79,000, $37,000, and
$458,000, respectively.

Foreign currency exchange transactions are recorded using the exchange rate
at the date of the settlement. Exchange losses were approximately $167,000 in
1994 and $-0- in 1995, net of income taxes. In 1996, the Company had an
exchange gain of $163,000. These amounts are included in the consolidated
statements of income.

Earnings Per Share

Earnings per share amounts are based on weighted average number of shares
and common stock equivalents outstanding. Earnings per share on a fully
diluted basis are not presented since the effect is not material.

3. INVENTORIES

Inventories consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31 (UNAUDITED)
--------------- JUNE 30,
1995 1996 1997
------- ------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Raw materials and supplies.................... $10,028 $15,164 $16,851
Work in progress.............................. 7,208 13,356 17,769
Finished goods and purchased supplies......... 21,434 23,051 17,238
------- ------- -------
$38,670 $51,571 $51,858
======= ======= =======
</TABLE>

F-8
<PAGE>

DRIL-QUIP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

4. PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment consist of:

<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31
USEFUL ---------------
LIVES 1995 1996
----------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Land and improvements........................ 10-25 years $ 5,798 $ 6,910
Buildings.................................... 15-40 years 12,987 14,759
Machinery and equipment...................... 3-10 years 34,018 39,051
------- -------
52,803 60,720
Less accumulated depreciation................ 25,201 29,336
------- -------
$27,602 $31,384
======= =======
</TABLE>

5. LONG-TERM DEBT

Long-term debt consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31
---------------
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Revolving lines of credit................................ $14,900 $16,600
Notes payable to bank.................................... 15,872 15,502
Other.................................................... 280 434
------- -------
31,052 32,536
Less current portion..................................... 3,090 3,537
------- -------
$27,962 $28,999
======= =======
</TABLE>

Subsequent to December 31, 1996, the Company renewed the terms of its
revolving line of credit. Accordingly, the debt, as of December 31, 1996, is
classified in accordance with the terms of the new agreement. The Company's
revolving lines of credit provide for borrowings of up to $25,000,000, with a
maturity date of June 1, 1999. Additionally, the Company has an advancing
credit note providing borrowings of up to $3,000,000 at prime plus 1/2% which
matures on October 1, 2001. At December 31, 1996, there were no borrowings
under this note.

Notes payable to bank include a note with an interest rate of prime plus
1/2%, maturing in July 1999, and a note with an interest rate of the Bank's
base rate plus 1 1/2% to 1 3/4%, maturing from February 2002 through December
2006.

Substantially all of the Company's assets are pledged under various lending
agreements. Interest paid on long-term debt for the years ended December 31,
1994, 1995, and 1996 was $2,352,000, $2,883,000, and $2,695,000, respectively.

Scheduled maturities of long-term debt are as follows: 1997--$3,537,000;
1998--$3,486,000; 1999-- $23,592,000; 2000--$623,000; 2001--$528,000; and
thereafter--$770,000.

F-9
<PAGE>

DRIL-QUIP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

6. INCOME TAXES

Income before income taxes consisted of the following:
<TABLE>
<CAPTION>
1994 1995 1996
------ ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Domestic........................................... $2,130 $5,634 $ 9,068
Foreign............................................ (201) 3,975 4,284
------ ------ -------
Total............................................ $1,929 $9,609 $13,352
====== ====== =======
</TABLE>

The income tax provision consists of the following:

<TABLE>
<CAPTION>
1994 1995 1996
----- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal.......................................... $ 620 $2,671 $3,408
Foreign.......................................... 133 778 1,331
----- ------ ------
Total current.................................. 753 3,449 4,739
Deferred:
Federal.......................................... 110 (825) (505)
Foreign.......................................... (228) 399 --
----- ------ ------
Total deferred................................. (118) (426) (505)
----- ------ ------
$635 $3,023 $4,234
===== ====== ======
</TABLE>

The difference between the effective tax rate reflected in the provision for
income taxes and the U.S. federal statutory rate was as follows:

<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Federal income tax statutory rate....................... 34.0% 34.0% 34.0%
Benefit of foreign sales corporation.................... (2.6) (1.4) (1.8)
Other................................................... 1.5 (1.1) (.5)
---- ---- ----
Effective tax rate...................................... 32.9% 31.5% 31.7%
==== ==== ====
</TABLE>

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax liabilities and assets are as follows:

<TABLE>
<CAPTION>
DECEMBER 31
-------------
1995 1996
------ ------
(IN
THOUSANDS)
<S> <C> <C>
Deferred tax liability:
Fixed assets............................................. $1,299 $1,446
Deferred tax assets:
Deferred profit on intercompany sales.................... 1,913 2,499
Other--net............................................... 1,175 1,240
------ ------
Total deferred tax assets.................................. 3,088 3,739
------ ------
Net deferred tax asset..................................... $1,789 $2,293
====== ======
</TABLE>

F-10
<PAGE>

DRIL-QUIP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Undistributed earnings of the Company's foreign subsidiaries are considered
to be indefinitely reinvested and, accordingly, no provision for U.S. federal
income taxes has been provided thereon. Upon distribution of those earnings in
the form of dividends or otherwise, the Company would be subject to both U.S.
income taxes (subject to an adjustment for foreign tax credits) and
withholding taxes payable to the various foreign countries. Determination of
the amount of unrecognized deferred U.S. income tax liability is not
practicable.

The Company paid approximately $1,708,000, $1,909,000, and $4,314,000 in
income taxes in 1994, 1995, and 1996, respectively.

7. EMPLOYEE BENEFIT PLANS

The Company has a defined-contribution 401(k) plan covering domestic
employees and a defined-contribution pension plan covering certain foreign
employees. The Company generally makes contributions to the plans equal to
each participant's eligible contributions for the plan year up to a specified
percentage of the participant's annual compensation. The Company's
contribution expense was $440,000, $501,000, and $548,000 in 1994, 1995, and
1996, respectively.

8. COMMITMENTS AND CONTINGENCIES

The Company leases certain office, shop, and warehouse facilities;
automobiles; and equipment and expenses all lease payments when incurred.
Total lease expense incurred was $1,076,000, $923,000, and $853,000 in 1994,
1995, and 1996, respectively. Annual minimum lease commitments at December 31,
1996 are as follows: 1997--$546,000; 1998--$491,000; 1999--$267,000; and
2000--$35,000.

The Company operates its business and markets its products and services in
most of the significant oil and gas producing areas in the world and is,
therefore, subject to the risk customarily attendant to international
operations and dependency on the condition of the oil and gas industry.
Additionally, products of the Company are used in potentially hazardous
drilling, completion, and production applications that can cause personal
injury, product liability, and environmental claims. Although exposure to such
risk has not resulted in any significant problems in the past, there can be no
assurance that future developments will not adversely impact the Company.

9. STOCKHOLDERS' EQUITY

In August 1996, the Company revised its capital structure and retired all
outstanding common stock and issued new common stock. The new common stock
includes shares with voting and nonvoting rights. These changes in the capital
structure have been retroactively reflected in the financial statements.
Earnings per share and dividends per share in prior years have been restated
to reflect the change in the capital structure.

F-11
<PAGE>

DRIL-QUIP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

10. GEOGRAPHIC AREAS

<TABLE>
<CAPTION>
1994 1995 1996
------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues
United States:
Domestic......................................... $27,710 $ 31,945 $ 36,759
Export........................................... 8,520 5,938 7,561
Intercompany..................................... 12,464 30,243 28,188
------- -------- --------
Total United States............................ 48,694 68,126 72,508
Europe, Middle East, and Africa.................... 34,629 52,978 54,728
Asia-Pacific....................................... 10,005 18,150 16,944
Eliminations....................................... (12,780) (30,864) (28,316)
------- -------- --------
Total.......................................... $80,548 $108,390 $115,864
======= ======== ========
Operating Income
United States...................................... $ 3,670 $ 10,944 $ 13,693
Europe, Middle East, and Africa.................... 392 2,948 3,309
Asia-Pacific....................................... 86 2,113 1,825
Eliminations....................................... 54 (3,452) (2,828)
------- -------- --------
Total.......................................... $ 4,202 $ 12,553 $ 15,999
======= ======== ========
Identifiable Assets
United States...................................... $42,265 $ 44,627 $ 50,664
Europe, Middle East, and Africa.................... 30,405 39,823 59,564
Asia-Pacific....................................... 8,621 12,730 9,700
Eliminations....................................... (2,083) (3,994) (5,151)
------- -------- --------
Total.......................................... $79,208 $ 93,186 $114,777
======= ======== ========
</TABLE>

Export sales from the United States to unaffiliated customers consist of
sales to South America, Latin America, and Canada. Europe, Middle East and
Africa area consists of manufacturing operations located in Europe with sales
primarily to Europe's North Sea and limited export sales to Africa and the
Middle East. Asia-Pacific's sales are primarily to Australia, Thailand,
Malaysia, and Indonesia.

Eliminations of operating profits are related to intercompany inventory
transfers that are deferred until shipment is made to third-party customers.
General corporate expense is generally allocated to geographic areas based on
revenues.

One of the Company's customers, the Royal Dutch Shell Group of Companies
accounted for approximately 12%, 11% and 19% of consolidated sales in 1994,
1995, and 1996, respectively.

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<PAGE>

DRIL-QUIP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

11. INITIAL PUBLIC OFFERING

The Company filed a registration statement with the Securities and Exchange
Commission in August 1997 to register the sale of 5,000,000 shares of its
common stock (the "Offering"). Of the 5,000,000 shares, 2,500,000 shares are
being sold by the Company and 2,500,000 shares are being sold by Selling
Stockholders.

Before the consummation of the Offering, the Company effected a
recapitalization wherein each outstanding share of its non-voting common stock
was converted into 0.95 shares of its voting common stock. Thereafter, each
outstanding share of its voting common stock was converted into 15.12472
shares of voting common stock, resulting in 14,370,000 outstanding shares. The
existing corporation, Dril-Quip, Inc., a Texas corporation ("Dril-Quip--
Texas"), was merged (the "Merger") into Dril-Quip, Inc., a Delaware
corporation ("Dril-Quip--Delaware"). The Merger resulted in the Company's
reincorporation from Texas to Delaware. The Company anticipates authorized
common stock of 50 million shares, par value $0.01 per share, and 10 million
shares of preferred stock, par value $0.01 per share. The financial statements
have been retroactively restated to give effect to the recapitalization.

In addition, prior to the consummation of the Offering, the Company adopted
the Dril-Quip, Inc. 1997 Incentive Plan (the "Incentive Plan"). The Company
has reserved 1,700,000 shares of Common Stock for use in connection with the
Incentive Plan. Persons eligible for awards under the Incentive Plan are
employees holding positions of responsibility with the Company or any
subsidiaries and whose performance can have a significant effect on the
success of the Company. On the date the Offering closes, Options under the
Incentive Plan will be granted to certain employees of the Company to purchase
a total of 419,250 shares of Common Stock at an exercise price per share equal
to the initial public offering price per share.

F-13
<PAGE>

Illustrations of Dril-Quip's project capabilities appear here.

[Logo of Dril-Quip
appears here]