SMITH INTERNATIONAL INC, 10-K, 1994-03-22

SMITH INTERNATIONAL INC
10-K, 1994-03-22
OIL & GAS FIELD MACHINERY & EQUIPMENT

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993 COMMISSION FILE NUMBER 1-8514

SMITH INTERNATIONAL, INC.

<TABLE>
<S> <C>
DELAWARE 95-3822631
(State of Incorporation) (IRS Employer Identification No.)
</TABLE>

16740 HARDY STREET
HOUSTON, TEXAS 77032
(Present address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code -- 713-443-3370

Securities registered pursuant to Section 12(b) of the Act:

<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
<S> <C>
Common Stock New York Stock Exchange, Inc.
Pacific Stock Exchange, Inc.
</TABLE>

Securities registered pursuant to 12(g) of the Act:

TITLE OF EACH CLASS
-------------------
Class A Warrants
Class B Warrants

Indicate by check or mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /

Aggregate market value of voting stock held by non-affiliates on March 4,
1994: $404,597,613 (38,533,106 shares at closing price on New York Stock
Exchange of $10.50). For this purpose all shares held by officers and directors
and their respective affiliates are considered to be held by affiliates, but
neither the registrant nor such persons concede that they are affiliates of the
registrant.

COMMON SHARES OUTSTANDING ON MARCH 4, 1994 39,314,667
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DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the Proxy Statement related to the Registrant's 1994 Annual
Shareholders Meeting are incorporated by reference into Part III of this Form
10-K.

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [/X/]

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PART I

ITEM 1. BUSINESS

GENERAL

Smith International, Inc. ("Smith" or the "Company") is a leading downhole
drilling tool manufacturer and service company, which manufactures and markets a
wide range of products and services used in the drilling of oil and gas wells.
Smith provides technologically advanced drill bits, and drilling and completion
services to the oil and gas drilling industry. Supplying products and services
to the oil and gas drilling industry represents approximately 92% of the
Company's revenues, with the remainder to the mining and industrial markets. The
following table sets forth the revenues attributable to continuing operations of
the Company for its two major product and service groups:

<TABLE>
<CAPTION>
1993 1992 1991
------------- ------------- -------------
AMOUNT % AMOUNT % AMOUNT %
------ --- ------ --- ------ ---
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Drill bits............................... $162.3 73 $145.5 69 $166.1 66
Drilling and completion services......... 58.4 27 65.2 31 85.9 34
------ --- ------ --- ------ ---
Total.......................... $220.7 100 $210.7 100 $252.0 100
------ --- ------ --- ------ ---
------ --- ------ --- ------ ---
</TABLE>

Beginning in March 1994, the Company will also provide drilling fluids and
systems to the oil and gas drilling industry as a result of the Company's
February 28, 1994 acquisition of a 64% interest in M-I Drilling Fluids Company
(M-I). Information about M-I is also provided below.

SALE OF DIRECTIONAL DRILLING BUSINESS

On March 29, 1993, the Company sold its directional drilling systems and
services (DDS) business and certain of its subsidiaries and other affiliates to
Halliburton Company (Halliburton) for 6,857,000 shares of Halliburton common
stock. In April 1993, the Halliburton common stock was sold for $247.7 million.
As a result, the Company recorded income from discontinued operations of $73.6
million including the gain from the sale of the DDS business of $80.1 million.
The gain includes provisions for various fees, expenses and taxes related to the
DDS sale. The DDS business reported revenues of approximately $36.3 million in
the first three months of 1993, $158.7 million in 1992 and $151.1 million in
1991. The DDS business reported operating losses of $6.5 million in the first
three months of 1993, $3.0 million in 1992 and $4.6 million in 1991.

The Company used a portion of the proceeds of the DDS sale to repay certain
debt of the Company. For further discussion, refer to Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

ACQUISITIONS OF A-Z/GRANT AND LINDSEY

On December 22, 1993, the Company acquired the product line assets of A-Z
International, Grant Oilfield Tools and Lindsey Completion Systems (A-Z/Grant
and Lindsey) from Masex Energy Services Group, Inc. for $19.0 million in cash.
A-Z/Grant and Lindsey are leading providers of downhole tools, remedial services
and liner hangers to the oil and gas industry. A-Z/Grant and Lindsey reported
unaudited revenues of $31.6 million in 1993, $29.0 million in 1992, and $31.0
million in 1991. The acquisition was accounted for as a purchase effective
December 22, 1993. The unaudited results of A-Z/Grant and Lindsey from December
22, 1993 to December 31, 1993 were not significant to the operations of the
Company.

ACQUISITION OF M-I DRILLING FLUIDS COMPANY IN 1994

Effective February 28, 1994, the Company acquired a 64% interest in M-I
from Dresser Industries, Inc. (Dresser) for $160 million. M-I was owned 64% by
Dresser and 36% by Halliburton prior to the acquisition. M-I is a leading
provider of environmentally sensitive drilling fluids and systems to the oil and
gas drilling

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industry. The Company purchased the 64% interest in M-I using $80 million of its
cash and issuing a note payable to Dresser for $80 million due on August 28,
1994. M-I reported unaudited revenues of $405.8 million in 1993, $382.6 million
in 1992 and $435.5 million in 1991.

With the completion of the aforementioned acquisitions, the Company has
established itself as a leading supplier of expendable drilling products to the
oil and gas drilling industry. On an unaudited pro forma basis, the combined
total revenues of all of the Company's businesses totaled $658.1 million in
1993.

INDUSTRY OVERVIEW AND BUSINESS OPERATIONS

Substantially all of the Company's products and services are used in the
process of drilling oil and natural gas wells. Therefore, the level of drilling
activity is a useful general indicator of the demand for the products and
services of the Company at any given time. The level of drilling activity is
determined by a variety of factors over which the Company has no control,
including the current and anticipated market price of crude oil and natural gas,
the production levels of the Organization of Petroleum Exporting Countries
("OPEC") and other oil and gas producers, the regional supply and demand for oil
and natural gas, the level of worldwide economic activity and the long-term
effect of worldwide energy conservation measures. The worldwide average active
rig count increased 2.4% from 1,673 in 1992 to 1,713 in 1993, primarily due to
the 5.0% increase in the average U.S. rig count between 1992 and 1993. Overall
the international active rig count increased slightly as an increase in drilling
activity in Canada was partially offset by drilling declines in all major
international areas except the Middle East.

Management anticipates drilling activity in 1994 to approximate 1993
activity levels and intense competition to continue. Some additional drilling
for natural gas is expected to occur during 1994 in the Gulf of Mexico region of
the U.S. due to the increase in natural gas prices over the prior year, the
decline in natural gas reserves and the general emphasis of utilizing natural
gas as an environmentally preferred fuel. Management believes that the Company
is well positioned to benefit from increases in worldwide oil and gas
exploration drilling which may develop in 1994 and beyond and that increased
drilling activity will positively impact the Company's results in the future.

OTHER BACKGROUND INFORMATION

On March 7, 1986, the Company, exclusive of its subsidiaries, filed for
protection under Chapter 11 of the U.S. Bankruptcy Code as a result of a
judgment in the amount of $205.4 million in a patent infringement case relating
to a drill bit patent that has since expired. The Company initiated the
bankruptcy proceedings in order to protect its assets and operations from the
judgment. On December 31, 1987, the Company's plan of reorganization became
effective, and since that date it has conducted its business in the ordinary
course.

During the reorganization, the Company completed an extensive restructuring
of its internal operating divisions and sold certain of its operations in order
to focus on its core businesses. Because the Company sustained its historical
levels of research and engineering expenditures and maintained its share of
industry revenues during this period, management believes that the Company was
not adversely affected by the reorganization.

Industrial Equity (Pacific) Limited, a Hong Kong Corporation ("IEP")
acquired 8,754,892 shares of Common Stock, 933,468 Class A Warrants and 967,133
Class B Warrants in open market purchases beginning in October 1986 and pursuant
to the Company's plan of reorganization. Pursuant to a private placement in
February 1988, IEP acquired preferred stock that was subsequently converted into
the Company's 8.75% Convertible Preferred Stock.

In May 1989, the Board of Directors of the Company was notified by IEP that
IEP wished to explore the possibility of acquiring the remaining shares of the
Company that it did not own. In response to that announcement, a Special
Committee of the Company's Board of Directors was formed. In July 1989, the
Special Committee announced that it intended to solicit offers for the Company
from third parties and "explore alternatives designed to maximize shareholder
value."

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The Company agreed to be acquired by Dresser pursuant to an Agreement and
Plan of Merger, dated November 13, 1989. On December 28, 1989, Dresser exercised
its right to terminate the Merger Agreement based upon circumstances relating to
obtaining clearance under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended.

On March 19, 1990, the Company and IEP entered into an agreement pursuant
to which the Company and IEP agreed, among other things, that IEP would sell
certain of the Company's securities owned by it in a public offering. The
offering was successful and closed on May 30, 1990. IEP agreed that it would not
acquire any securities in excess of 5% of the Company's Common Stock on a fully
diluted basis for a five year period from the closing of the offering.

DRILL BITS

Products. The Company's drill bits group designs, manufactures and markets
drill bits used in drilling oil and gas wells and mining applications. The
Company offers over 900 drill bits under the Smith Tool(TM), Smith Diamond(TM)
and Smith Mining(TM) product lines. Drill bit sizes range from 5 7/8 to 28
inches in diameter for the petroleum industry and from 2 15/16 to 17 1/2 inches
in diameter for the mining industry. Most bits manufactured by the Company are
three-cone drill bits. The surfaces of the cones are comprised of different
types of pointed structures that are referred to as "cutting structures" or
"teeth." The cutting structures are either an integral part of the steel cone
with a hardmetal applied surface (referred to as "milled tooth") or made of an
inserted material (referred to as "insert") which is usually tungsten carbide.

The Company also manufactures and markets shear bits featuring cutters made
of polycrystalline diamond ("PDC") or natural diamonds. The Company manufactures
PDC's for use in the Company's diamond drill bits, and has patented processes
for applying diamonds to a curved surface with multiple transition layers. The
Company believes that the curved surface diamond insert significantly improves
the ability of diamond shear bits to drill in harder and more abrasive
formations. Smith is the only oilfield equipment manufacturer that develops,
manufactures and markets its own synthetic diamond materials, which provides the
Company a cost and technological advantage with respect to these products. In
addition, the Company's in-house diamond research, engineering and manufacturing
capabilities enhance the Company's ability to develop the application of diamond
technology into Smith drill bits and across other Smith product lines. These
diamond enhanced products last longer and increase penetration rates, which
decreases overall drilling costs in certain formations. The Company believes
that its ability to develop specialized diamond inserts for specific
applications will provide new business opportunities as with Diamond Enhanced
Insert roller cone bits and Impax(TM) hammer bits.

The cutting structures in mining bits are principally tungsten carbide
inserts ("TCI"). Mining bits are typically utilized for shallow drilling to
place explosives for blasting in open pit mining operations. Other mining bits
using both tungsten carbide and diamond enhanced inserts have been designed for
use with air driven percussion tools and are known as hammer bits.

Competition. Besides the Company, Hughes Christensen (a division of
Baker-Hughes, Inc.), Security (a division of Dresser), and Reed/Hycalog (a
division of Camco International, Inc.) are the three major competitors in the
petroleum drill bit business. While the Company and Hughes Christensen maintain
the leading shares of worldwide revenues of three-cone mining drill bits, they
compete with over 20 other competitors.

Competition for sales of petroleum drill bits is generally based on a
number of factors, including performance, quality, reliability, service, price,
technological advances and breadth of products. The Company believes its quality
and reliability as well as technological advances, such as the Diamond Enhanced
Inserts, specialized hardmetal applications and Spinodal bearing features in its
drill bits, further enhance the Company's reputation and competitive advantage.
Competition for sales of mining drill bits generally is based on a number of
factors, including price, performance and availability.

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DRILLING AND COMPLETION SERVICES

Products and Services. The Company manufactures tubular drill string
components within its Drilco product line. These tubular products include drill
collars to provide drilling weight to the bit, Hevi-Wate(TM) drill pipe to
provide stress transition between drill collars and conventional drill pipe or
to provide drilling weight to the bit in horizontal drilling, connecting subs to
attach drill string members of differing diameters and connections and kellys to
rotate the drill string on conventional drilling rigs.

The Company manufactures downhole tools which are also used in the drilling
process. These downhole tools are sold or rented to the end users, and include
stabilizers to centralize the drill string, reamers to maintain a uniform hole
diameter and shock subs to reduce the shock and vibration that occurs in the
drill string.

The Company also manufactures downhole remedial tools for use in connection
with the drill string for specialized drilling and workover operations within
its Servco product line. These remedial tools are sold or rented to the end
users, and typically include supervision services provided by the Company's
employees. These remedial operations include section milling to remove a section
of casing permitting the well to be re-drilled using the existing casing string,
hole opening and underreaming to enlarge the wellbore for proper cementing of
the casing or gravel packing, packer milling to remove production packers,
conventional milling to remove wellbore obstructions, pipe cutting to remove the
casing when a well is abandoned and fishing services to remove obstructions from
well bores primarily during workover operations.

The Company maintains field service centers which provide inspection and
repair services for the Company's drill string components, customer owned
tubular goods and for the Company's rental tools. These field service centers
serve as the distribution points for all the Company's products, and are an
important part of the Company's marketing efforts.

In addition to the above, the recently acquired A-Z International and Grant
Oilfield Tools provides rotating drilling heads, milling tools, Pack-Stock
combination packers and whipstocks for various drilling and remedial activities,
and Lindsey Completion Systems has been an industry innovator in the liner
hanger, completion and cementing equipment product lines.

Competition. Competition in the drilling and completion services market is
primarily based on response time, reliability and price. The Company attributes
its competitive position to its commitment to quality and service which is
evidenced by the Company maintaining quality equipment and trained personnel at
field service centers in almost every major drilling location in the world. The
markets for drilling and completion services are highly fragmented.

DRILLING FLUIDS OPERATIONS

Products and Services. Through the acquisition of M-I, the Company will
provide drilling fluids products, systems, and technical services to end users
engaged in drilling oil, natural gas, and geothermal wells worldwide. Drilling
fluids products and systems are used to cool and lubricate the bit during
drilling operations, contain formation pressures, keep rock cuttings in
suspension to remove them from the hole, and maintain the stability of the
wellbore. Technical services are provided at the wellsite to ensure that the
products and systems are applied effectively to optimize drilling operations.
These services include well-specific products and systems during the planning
phase, testing and recommending adjustments to the properties of the fluids
during the drilling phase, and analyzing well results to improve the drilling of
future wells.

M-I is a global leader in environmentally-sensitive drilling fluids
products and systems as well as equipment related to the control of fluids at
the wellsite. M-I manufactures and distributes more than 200 minerals products
and chemical additives at nearly 30 grinding and chemical plants strategically
located near most of the world's major drilling areas. M-I offers water-base,
oil-base, and synthetic-base drilling fluids systems, each comprised of a number
of individual products designed to ensure that the multiple functions of the
drilling fluid are met. These products include weighting agents such as barite
which control formation pressures; thickening agents or viscosifiers which
improve the carrying capacity of the fluid; thinners and

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dispersants, used to thin a drilling fluid which has become too thick from
formation cuttings; and fluid loss control agents, lost circulation materials,
and other products used to address formation-specific conditions. Major new
products and systems introduced in the last three years include NOVADRIL, a
synthetic-base drilling fluid system; MCAT(TM), a cationic water-base system;
ENVIROTHERM, a high-temperature drilling fluid additive; KLA-CURE(R), an
additive used in suppressing shales; and PIPE-LAX(TM) ENV, an
environmentally-sensitive spotting fluid.

Through its Swaco Geolograph operations, a complete line of solids control,
pressure control, and rig instrumentation products are offered to the worldwide
drilling market on both a sale and rental basis. Key products in the pressure
control line include the D-Gasser and Super Choke which hold dominant market
positions. The solid control product line of shakers, hydroclones, and
centrifuges have been designed to offer operators the option to drill "dry
locations", where drilling fluid waste is minimized and handled in an
environmentally-safe manner. Swaco Geolograph's rig instrumentation line
features the SMART Data Acquisition System, an advanced monitoring system that
measures, monitors, and displays the drilling status of a well with high speed
accuracy.

Competition. Besides M-I, the major competitors in the worldwide drilling
fluids industry are Baroid Drilling Fluids (a subsidiary of Baroid Corporation
which recently merged with Dresser) and Inteq (a division of Baker-Hughes,
Inc.). Together, these three companies supply products and systems to over
two-thirds of the worldwide drilling fluids market. While these companies supply
a majority of the market, the drilling fluids industry is highly competitive,
with a significant number of smaller, locally-based competitors and foreign
multinational drilling fluids suppliers. Competition within the industry is
based on a number of factors, including drilling performance, quality,
reliability, service, price, technological advantages, and breadth of the
product line.

INTERNATIONAL OPERATIONS

Sales to the international oil drilling markets are a key strategic focus
of Smith management, and the Company markets its products and services through
its subsidiaries, joint ventures and sales agents in virtually all petroleum
producing areas of the world, including Canada, the North Sea/Europe, the Middle
East, Mexico, Central and South America, Asia/Pacific and Africa. As a result,
53% of the Company's total revenues from continuing operations in 1993 were
generated from sales in the international markets, compared to 58% in 1992.
Approximately 61% of the Company's revenues are denominated in U.S. dollars.

Historically, international drilling activity has been less volatile than
in the U.S. due to the relatively high costs of exploration and development
programs which can only be undertaken by major oil companies, consortiums and
national oil companies. These entities operate under longer term strategic
priorities than do the independent drilling operators that are more common in
the U.S. market.

SALES AND DISTRIBUTION

The Company markets its products on a worldwide basis, employing Company
sales personnel and independent sales agents. Sales are directed to end users in
the drilling industry including independent drilling contractors, major and
independent oil companies and national oil companies. In the United States,
approximately 75% of all sales are made by Company sales personnel and the
remainder of which are made by independent sales agents.

The Company's sales force is supported by 15 field service centers in the
U.S. and Canada and 27 field service centers outside of North America. The
Company considers that its worldwide sales position has been significantly
enhanced by its field service centers presently maintained in Bolivia, Brazil,
Canada, Colombia, France, Germany, Italy, Mexico, Norway, Singapore, Tunisia,
United Kingdom, United States and Venezuela. These field service centers serve
as bases for the sales force and rental tool operations and also provide an
opportunity to market a wider range of the Company's products than could be
marketed by a sales office. The Company's field service centers are also
important factors in maintaining good customer relations since they are designed
primarily for repair and maintenance of drill string components and rental
tools.

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MANUFACTURING

The Company's manufacturing operations, along with quality control support,
are designed to ensure that all products and services marketed by the Company
will meet standards of performance and reliability consistent with the Company's
reputation in the industry.

The Company lowered its fixed costs and labor costs by closing its
California manufacturing facilities and relocating the manufacturing of the
drill bits to Ponca City, Oklahoma and other products to Houston, Texas in 1989.
This move has permitted the Company to realize significant annual savings since
that date.

Management estimates that the Company has available manufacturing
facilities to accommodate a worldwide demand level equivalent to approximately
3,000 average active drilling rigs which compares to 1,700 average active
drilling rigs estimated for 1994. In addition, the Company has entered into
license agreements and joint ventures with worldwide manufacturers in order to
increase its production capacity for drill bits.

RAW MATERIALS

The Company purchases a variety of raw materials, including alloy and
stainless steel bars, tungsten carbide inserts and forgings. Generally, the
Company is not dependent on any single source of supply for any of its raw
materials or purchased components. The Company currently purchases 80% of the
tungsten carbide inserts used as cutting structures on drill bit cones, wear
pads for stabilizers and hard surface materials for mills and reamers from one
supplier pursuant to a supply agreement entered into in connection with the sale
of a division by the Company to that supplier. In addition, the Company has also
entered into a supply agreement to purchase 80% of its U.S. forging requirements
from a single supplier. The Company believes that numerous alternative supply
sources are available for all of such materials. The Company also produces PDC
synthetic diamonds in Provo, Utah for utilization in various Company products as
well as direct customer sales. The Company believes that it enjoys a competitive
advantage in the manufacture of diamond drill bits because it is the only
diamond drill bit manufacturer producing its own PDC.

PRODUCT DEVELOPMENT, ENGINEERING AND PATENTS

The Company maintains product development and engineering departments in
bit technology and downhole tool technology whose activities are directed to
developing new products and processes, improving existing product lines and
designing specialized products to meet customer requirements. Experimental work
in metallurgy also comprises a significant portion of the work of these
departments. For example, recent new product developments include: tungsten
carbide insert and milled tooth Spinodal(TM) bearing roller cone bits, Diamond
Enhanced Insert roller cone bits, steerable motor PDC and roller cone bits; the
Smith Diamond Maxidrill(TM) products and Diamond Enhanced Impax(TM) hammer bits;
the Servco Millmaster(TM) carbide cutting structure; and the Servco Bearclaw(TM)
PDC underreamer. In recent years, the Company has received special meritorious
awards for engineering innovations sponsored by Petroleum Engineer International
magazine. One such award was for the placement of PDC on curved surfaces for
rock bit cutting structure while another was for the development of a new
hardfacing material for use on milled tooth drill bits.

During 1991, the Company developed FDS+ Milled Tooth Rock Bits for longer
life at higher rates of penetration. The Company continuously attempts to
improve the quality, performance and reliability of its products in order to
maintain its competitive position in the industries it serves and to develop new
tools and materials to meet the evolving market needs.

The Company also maintains a drill bit data base which records the
performance of substantially all drill bits used in the U.S. over the last 10
years, including those manufactured by competitors. This database gives the
Company the ability to monitor, among other things, drill bit failures and
performance improvements with product development. Management believes this
proprietary data base gives the Company a competitive advantage in the drill bit
business.

The Company has historically maintained its research and engineering
expenditures at a high level to enable it to maintain its technological and
performance leadership and broaden its product lines in the drilling

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tools and services industry. The Company's expenditures for research and
engineering activities amounted to $6.6 million in 1993, $6.2 million in 1992
and $8.9 million in 1991. In 1993, research and engineering expenditures
approximated 3.0% of revenues.

Although the Company has over 650 patents and regards its patents and
patent applications as important in the operation of its business, it does not
believe that any significant portion of its business is materially dependent
upon any single patent or group of patents or generally upon patent protection.

EMPLOYEES

At December 31, 1993, the Company had approximately 1,750 full time
employees throughout the world. None of the Company's employees in the United
States are covered by collective bargaining agreements. The Company considers
its labor relations to be satisfactory.

ITEM 2. PROPERTIES

The principal manufacturing facilities of the Company at December 31, 1993
are shown in the table below.

<TABLE>
<CAPTION>
APPROX.
LAND BLDG. SPACE
LOCATION PRINCIPAL PRODUCTS MANUFACTURED (ACRES) (SQ. FT.)
------- ------------------------------ ------- -----------
<S> <C> <C> <C>
Houston, Texas........... Tubulars, downhole tools, remedial products, 106.4 720,199
diamond bits
Ponca City, Oklahoma..... Drill bits 15.2 206,800
Saline de Volterra, Drill bits 12.3 129,953
Italy..................
Provo, Utah.............. Synthetic diamond materials 4.0 32,000
</TABLE>

The Company considers its manufacturing facilities to be in good condition
and adequately maintained. Due to the downturn in business in recent years, the
Company's manufacturing facilities operated below capacity throughout 1993 and
are continuing to operate below capacity levels. A portion of the Houston, Texas
facility is currently being held for sale by the Company.

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ITEM 3. LEGAL PROCEEDINGS

In January 1991, the Company and several of the Company's competitors were
served with a federal grand jury subpoena for documents, principally concerning
the Company's sales, marketing and pricing activities for tri-cone rock bits
produced and sold by the Company. In June 1992, Baker Hughes entered a plea of
guilty to an Information charging it with a single count of violating Section 1
of the Sherman Act for the period March through May 11, 1989 and agreed to pay a
$1.0 million fine to the U.S. government. On November 23, 1993, the Company
entered a plea of guilty to a violation of Section 1 of the Sherman Act for the
same period and paid a fine to the U.S. government of $0.7 million.

After it was served the subpoena by the grand jury, the Company was served
with complaints in three civil proceedings. Each action alleged violations of
Section 1 of the Sherman Act. The cases were consolidated for discovery purposes
with four other cases filed against other tri-cone rock bit manufacturers, but
not the Company, in the Southern District of Texas, which made allegations
similar to those made against the Company. The consolidated case was captioned
Red Eagle Resources Corporation, Inc., et al. v. Baker Hughes, Inc., Baker
Hughes Production, Inc., Hughes Tool Company, Reed Tool Company, a/k/a/ Baker
RTC, Inc., Camco International, Inc., Smith International, Inc., and Dresser
Industries, Inc., Civil Action No. 91-H-627. In September 1992, the district
court certified the case as a class action. The class consisted of direct
purchasers of rock bits from defendants in the period September 1, 1986, through
January 15, 1992.

On August 27, 1993, without admitting any form of liability, the Company
entered into an agreement with the plaintiffs to settle all claims against the
Company. The Company recorded a special charge of $19.9 million to cover the
cost of the settlement of $16.8 million and related estimated legal fees and
other costs and expenses. On October 28, 1993, an order was entered which gave
final approval to this settlement.

Chevron USA Inc., which opted not to be part of the above mentioned class
action, filed suit against the Company in the United States District Court for
the Southern District of Texas, Houston Division, entitled Chevron USA Inc.,
acting by and through its division Chevron USA Production Company v. Baker
Hughes, Inc., Reed Tool Company a/k/a Baker RTC, Inc., CAMCO International,
Inc., Smith International, Inc. and Dresser Industries, Inc. Cause No. H-93-949,
alleging violations of Section 1 of the Sherman Act. This case is in its early
phase; little formal discovery has occurred; and docket call for the trial of
this matter has been set for January 26, 1996. Management believes that the
resolution of this matter will not have a material adverse effect on the
Company's financial position or results of operations.

Executive Life

On March 4, 1992, the Company was served with a complaint in the U.S.
District Court in the Central District of California, entitled Lynn Martin,
Secretary of the U.S. Dept. of Labor v. Smith International, Inc., et al., Case
No. CV-92-1196. The complaint alleges violations of the Employee Retirement
Income Security Act of 1974 ("ERISA") arising out of the Company's purchase of
annuities from Executive Life Insurance Company("Executive Life"), upon the
termination of its Pension Plan in August 1985. The Department of Labor ("DOL")
filed the lawsuit in order to prevent the expiration of the statute of
limitations while it completed its investigation of the Company's purchase of
annuities from Executive Life. In 1993, Executive Life emerged from a
conservatorship proceeding in California state court. The Company believes that
it properly discharged its legal responsibilities with regard to the purchase of
annuities from Executive Life and, consequently, that uninsured losses of the
Company, if any, resulting from the DOL claims will not be material.

Superfund

The Comprehensive Environmental Response, Compensation and Liability Act of
1980 (the "Superfund Act") generally addresses remedial action at sites from
which there has been a "release" of "hazardous substances." Among other things,
the Superfund Act authorizes the U.S. Environmental Protection Agency (the
"EPA") to take any necessary response actions at these sites and, in certain
circumstances, to order those parties liable for the "release" to take response
actions. The EPA may seek reimbursement of expenditures of federal funds from
parties potentially liable under the Superfund Act. Relevant court decisions
have

8
<PAGE> 10

interpreted the Superfund Act to impose strict, joint and several liability upon
all persons liable for response costs under the statute with respect to a
particular site, if the harm at such site is indivisible. The Superfund Act
requires the EPA to develop a National Priorities List ("NPL") of sites which
are the most deserving of prompt investigation and remediation. At present,
there are approximately 1,000 sites nationwide on the NPL.

The Sheridan Site. On March 31, 1987, the Sheridan Site Committee (the
"Committee") filed a claim in the Company's Chapter 11 case on behalf of itself
and 59 potentially responsible parties ("PRPs") at the Sheridan Disposal
Services site in Hempstead, Texas, an NPL site. The claim was based on the
Company's alleged liability to the claimants for "contribution and potential
cost recovery for administrative and remedial work" expenses incurred and to be
incurred by them in connection with the Sheridan Disposal site.

On August 28, 1987, the Company reached a settlement with the Committee.
The Committee agreed to withdraw its proof of claim. In return, the Company
agreed to pay its allocable share of response costs incurred by the Committee,
such share to be limited to the lesser of $3 million or 2.93% of actual response
costs. The Company's obligations pursuant to the settlement agreement with the
Committee were not discharged or affected by confirmation of the Company's plan
of reorganization.

The settlement agreement with the Committee further provides that payments
by the Company will be made on the same basis and at the same time as they are
made by members of the Committee whose members have recently agreed to enter
into a judicial consent decree under which they will complete the remedies
selected by EPA under its Record of Decision (the "ROD"), issued in December
1988 and supplemented in September 1989. Based upon the ROD, total remediation
costs are estimated, on a preliminary basis, to be approximately $28 million. On
this basis, the Company's share would be $0.8 million. On October 4, 1989, the
Company entered into a Sheridan Site Trust Agreement together with 37 other
PRPs, providing a mechanism for the disbursement of funds in connection with
remedial action to be performed at the Sheridan Site. Remediation efforts and
expenditures at the Sheridan Site will likely extend over the next five years.

The OII Site. Under the Superfund Act, the EPA has been conducting various
activities at the Operating Industries, Inc. ("OII") site, a disposal site on
the NPL located in Monterey Park, California. The United States, on behalf of
the EPA, filed a proof of claim in the Company's Chapter 11 case alleging that
it had incurred approximately $8 million in response costs to date, and would
continue to incur response costs in the future. Subsequently, the United States
alleged that its costs had increased to over $10 million. In addition to the
United States, 21 other PRPs for cleanup of the OII site also filed proofs of
claim against the Company's estate for contribution or indemnity arising from
any claims asserted against them by the United States for response costs. The
Company objected to the claims of the United States and the PRPs.

On June 14, 1988, the United States District Court entered an order
approving a Stipulation and Agreement to Compromise and Settle EPA's claim
against the Company's estate (the "OII Settlement Agreement"). Under the OII
Settlement Agreement, the claim of the United States was allowed as an amount
(approximately $150,000) sufficient to entitle the EPA to a distribution
pursuant to the Company's plan of reorganization. The Company further agreed to
pay its allocable share of total future site response costs at the OII site,
such share, however, to be limited to the lesser of $5 million or 0.65% of
future site response costs.

On July 15, 1988, the District Court entered a further order withdrawing
and dismissing the general unsecured claims of the 21 potentially responsible
parties and their requests for payment of administrative expenses.

The EPA has issued three ROD's with respect to the OII Site and remediation
work under RODs I and II has commenced. The Company may be requested to make
interim contributions with respect to these RODs. The EPA issued ROD III with
respect to landfill gas control and landfill cover on September 30, 1990. This
ROD includes net present work cost estimates for the work covering 30, 45 and 60
years of project life. The EPA has estimated the cost of this work to exceed
$100 million. Because of the time span involved in the remedy, EPA is working
with certain parties on a South West Early Action Plan ("SWEAP") designed to
address landfill gas issues in the southwestern portion of the OII landfill,
which is near several homes.

9
<PAGE> 11

The cost of the final long-term remedy for the clean-up of the OII site is
presently unknown and depends on the nature and extent of contamination at the
site and the remedy which is ultimately selected. The EPA is still preparing its
Remedial Investigation and Feasibility Study ("RI/FS") which will examine the
various alternatives for a final remedy of the site;and anticipates that the
RI/FS may be completed by mid-1994. Actual remediation expenditures will likely
extend for a number of years after a final remedy is selected for the site,
subsequent to completion of the RI/FS.

At this time, the Company is unable to determine the amount it may
ultimately have to contribute to the OII site pursuant to the OII settlement
agreement. This amount will range from the approximately $150,000 that the
Company has already paid to the $5.0 million at which the Company's liability is
capped under the OII settlement agreement.

The Chemform Site. Chemform, Inc. ("Chemform"), a former wholly owned
subsidiary of the Company and, subsequently, the Company itself, operated a
business and held a leasehold interest in property located in Pompano Beach,
Florida (the "Chemform Site") between May 14, 1976 and March 16, 1979, at which
time the Company sold the Chemform business and assigned the lease.

The EPA has been conducting various activities at the Chemform Site under
the Superfund Act and placed the Chemform Site on the NPL on October 4, 1989. In
October 1989, the Company, along with three other PRPs at the Chemform Site,
entered into a consent agreement with the EPA for the preparation of an RI/FS.
An Amendment to that consent agreement, which became effective on April 7, 1992,
specified that the RI/FS for the Chemform Site would be addressed in two
operable units: Operable Unit One addresses Site-related groundwater
contamination, and Operable Unit Two addressed source and soil contamination.

On September 22, 1992, the EPA issued the ROD for Operable Unit One at the
Site. The ROD selected a "No Action with Monitoring" alternative, under which
groundwater would be monitored quarterly for at least one year. On July 13,
1993, the Company, along with two other PRPs and the EPS, executed an
Administrative Order on Consent ("AOC") and Scope of Work ("SOW") which will
govern the implementation of the ROD for Operable Unit One at the Chemform Site.
Under the terms of the AOC and SOW, the Company, along with two other PRPs,
agree to undertake the groundwater monitoring work specified in the AOC and SOW.
In the ROD, EPA estimated the costs of constructing the required groundwater
wells and the cost of one year of groundwater monitoring to be approximately
$0.1 million.

On September 16, 1993, EPA issued the ROD for Operable Unit Two at the
Chemform Site, which addresses site-related soil contamination. The ROD
determined that no further Superfund action is necessary to address Operable
Unit Two at the site; however, the State of Florida, as represented by the
Florida Department of Environmental Protection, has not yet concurred in the ROD
for Operable Unit Two. It is not known whether the State of Florida will do so,
or whether any further proceedings will be required due to the State's lack of
concurrence. The Company believes that the EPA will demand reimbursement of
certain oversight expenses that the EPA allegedly has incurred in administering
the Chemform site. The Company intends to scrutinize and, if necessary,
vigorously contest any such claims made by the EPA.

As of December 31, 1990, the Company recorded a $5.0 million provision for
its estimated liability for clean-up of all of the Company's environmental
matters that were known at that time including the estimated costs to be
incurred regarding the Superfund sites discussed above. In 1993, 1992 and 1991,
the Company paid for various clean-up activities and recorded additional
provisions charged to continuing operations of $0.5 million, $0.4 million and
$0.8 million, respectively, and a provision of $1.5 million charged to the gain
on sale of DDS operations based on revised estimates of required future clean-up
costs. At December 31, 1993, the remaining recorded liability for estimated
future clean-up costs for the sites discussed above as well as properties
currently or previously owned or leased by the Company was $3.6 million. As
additional information becomes available, the Company may be required to provide
for additional environmental clean-up costs for Superfund sites and for
properties currently or previously owned or leased by the Company. However, the
Company believes that none of its clean-up obligations will result in
liabilities having a material adverse effect on the Company's consolidated
financial position or results of operations.

10
<PAGE> 12

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT

(a) The names and ages of all executive officers of the Company, all
positions and offices with the Company presently held by each person named and
their business experience during the last five years are stated below.
Positions, unless otherwise specified, are with the Company.

<TABLE>
<CAPTION>
NAME, AGE AND POSITION PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- ---------------------------------------- ---------------------------------------------------
<S> <C>
Douglas L. Rock (47).................... Chairman of the Board since February 1991; Chief
Chairman of the Board, Chief Executive Executive Officer, President and Chief Operating
Officer Officer since March 1989; President and Chief
Operating Officer from December 1987 to March
1989.
Loren K. Carroll (50)................... Executive Vice President and Chief Financial
Executive Vice President and Chief Officer since October 1992; member of the Board of
Financial Officer Directors since November 1987; President of
Geneva Business Services and a Director of Geneva
Companies from March 1989 to October 1992;
Executive Vice President and Chief Financial
Officer of the Company from January 1988 to March
1989.
Neal S. Sutton (48)..................... Vice President -- Administration since March 1992;
Vice President -- Administration, Vice President, Secretary and General Counsel of
General Counsel and Secretary the Company since January 1991; Associate General
Counsel of Cooper Industries, Inc. from November
1989 to December 1990; General Counsel and
Secretary of Cameron Iron Works, Inc. from 1977
to November 1989.
Bryan L. Dudman (37).................... Vice President -- Worldwide Bit Operations since
Vice President -- Worldwide Bit December 1993; Vice President -- Worldwide
Operations Operations from March 1993 to December 1993; Vice
President -- Western Hemisphere from September
1990 to March 1993. Vice President
Operations -- United States/Canada from May 1987
to September 1990.
D. Barry Heppenstall (47)............... Vice President and General Manager -- Drill Bits
Vice President and General Manager -- since March 1992; Vice President -- Smith Tool
Drill Bits Manufacturing from September 1990 to March 1992;
Vice President -- SII Manufacturing from April
1987 to September 1990.
John J. Kennedy (41).................... Treasurer since May 1991; Treasury Director
Treasurer responsible for International Operations from
November 1987 to May 1991.
Richard A. Werner (52).................. Vice President and General Manager -- Smith
Vice President and General Manager -- Drilling and Completion Services since December
Smith Drilling and Completion Services 1993; Vice President and General
Manager -- Drilco/Servco from March 1993 to
December 1993; Vice President and General
Manager -- Downhole Tools and Services from May
1991 to March 1993; Vice President Operations of
Triumph-LOR, Inc. from April 1987 to May 1991.
</TABLE>

(b) All officers of the Company are elected annually by the Board of
Directors at the meeting of the Board of Directors regularly held immediately
following the annual meeting of shareholders. They hold office until their
successors are elected and qualified.

11
<PAGE> 13

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS.

The Common Stock of the Company is traded on the New York Stock Exchange
and the Pacific Stock Exchange. The following are the high and low sale prices
for the Company's Common Stock as reported on the New York Stock Exchange
Composite Tape for the periods indicated.

<TABLE>
<CAPTION>
COMMON STOCK
----------------
HIGH LOW
---- ---
<S> <C> <C>
1992
First Quarter..................................................... 8 7/8 6 1/8
Second Quarter.................................................... 10 5/8 7 3/8
Third Quarter..................................................... 9 1/2 8
Fourth Quarter.................................................... 10 1/8 7 3/8
1993
First Quarter..................................................... 10 3/8 8
Second Quarter.................................................... 10 7/8 9 1/8
Third Quarter..................................................... 10 7/8 8 1/2
Fourth Quarter.................................................... 11 1/2 7 3/4
</TABLE>

On March 4, 1994, the Company had approximately 5,380 Common Stock holders
of record and the last reported closing price on the New York Stock Exchange
Composite Tape was $10.50.

The Company has not paid dividends on its Common Stock since the first
quarter of 1986. The Company's indenture relating to its long-term debt contains
covenants restricting the payment of cash dividends to the Company's common
Stockholders based on net earnings and operating cash flow formulas as defined
in the indenture. In addition to compliance with the indenture, the
determination of the amount of future cash dividends to be declared and paid on
the Common Stock, if any, will depend upon the Company's financial condition,
earnings and cash flow from operations, the level of its capital expenditures,
its future business prospects and other factors that the Board of Directors deem
relevant.

12
<PAGE> 14

ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
1993 1992 1991 1990 1989
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(A):
Revenues........................ $220,712 $210,669 $251,967 $255,383 $214,544
Gross profit.................... 82,542 74,114 99,966 96,320 71,067
Income (loss) from continuing
operations before litigation
settlement, interest and
taxes......................... 18,575 10,260 10,673(d) 28,485 9,012
Income (loss) from continuing
operations before
extraordinary
tax credit and change in
accounting principle.......... (3,995)(b) 1,164 (5,013) 5,574 (6,671)
Income (loss) from discontinued
operations(a)................. 73,623(a) (2,975) (4,623)(d) 5,006 3,368
Income (loss) before
extraordinary tax credit and
change in accounting
principle..................... 69,628 (1,811) (9,636) 10,580 (3,303)
Net income (loss)............... 68,328(c) (1,811) (9,636)(d) 15,801(f) (3,303)
PER SHARE DATA:
Income (loss) applicable to
common stock --
From continuing operations
before extraordinary tax
credit
and change in accounting
principle.................. $ (.13) $ (.02) $ (.22) $ .13 $ (.29)
From discontinued
operations................. 1.95 (.08) (.16) .16 .11
From extraordinary tax
credit..................... -- -- -- .17 --
From the change in accounting
principle.................. (.03)(c) -- -- -- --
Net income (loss)............. $ 1.79 $ (.10) $ (.38) $ .46 $ (.18)
BALANCE SHEET DATA
(AT DECEMBER 31):
Total assets.................... $348,386 $370,482 $397,335 $395,628 $325,869
Long-term debt.................. $ 46,000(a) $ 46,000(a) $100,020(e) $145,520 $138,405
Total shareholders' equity...... $214,466 $149,785 $157,006(e) $118,356 $101,310
</TABLE>

- ---------------
(a) In March 1993, the Company sold its DDS business to Halliburton resulting in
income from discontinued operations of $73.6 million. This amount includes
the gain from the sale of the DDS business of $80.1 million. As a result,
the financial data for the periods 1989 through 1992 has been restated to
report the results of the DDS business as discontinued operations. The
Company used a portion of the proceeds from the DDS sale to repay its bank
debt and $49.0 million of notes payable to insurance companies. The
Company's remaining debt, totaling $46.0 million, is presented as long-term
debt at December 31, 1993 and 1992. See Notes 2 and 6 of Notes to
Consolidated Financial Statements.

(b) In September 1993, the Company agreed to settle a class action civil lawsuit
which alleged violations of Section 1 of the Sherman Act. As a result, the
Company recorded a special charge of $19.9 million to cover the cost of the
settlement and related legal fees and other costs and expenses. See Note 16
of Notes to Consolidated Financial Statements.
(Notes continued on following page)

13
<PAGE> 15

(c) During the first quarter of 1993, the Company adopted SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions." As
a result of adopting SFAS No. 106, the Company recorded the total
outstanding liability related to such retiree benefits of $1.3 million as
the cumulative effect of a change in accounting principle in the
Consolidated Statements of Operations. See Note 11 of Notes to Consolidated
Financial Statements.

(d) In 1991, the Company recorded $22.2 million of non-recurring charges related
primarily to the restructuring of its worldwide operations in response to a
decline in U.S. drilling activity. The non-recurring charges consisted of
$21.2 million of charges related to the restructuring and an additional
$1.0 million tax provision to reflect expected tax settlements of prior
year foreign tax liabilities of certain of the Company's subsidiaries. The
amount of restructuring charges related to the continuing operations of the
Company of $18.4 million in 1991 was charged to income (loss) from
continuing operations before interest and taxes. The amount of
restructuring charges related to the DDS business of $2.8 million is
recorded in the results of discontinued operations in 1991. See Notes 3 and
8 of Notes to the Consolidated Financial Statements.

(e) In 1991, the Company paid off its Series B Notes totaling $44.7 million from
the $50.0 million proceeds of its temporary warrant reduction offers and
its issuance of 992,000 shares of additional common stock. See Notes 6 and
9 of Notes to Consolidated Financial Statements.

(f) In accordance with APB No. 11, the Company recognized an extraordinary tax
credit of $7.5 million in 1990 resulting from utilization of operating loss
carryforwards of which approximately $5.2 million related to continuing
operations.

14
<PAGE> 16

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

GENERAL

Substantially all of the products and services of the Company are used in
the process of drilling an oil or natural gas well. Consequently, drilling
activity is closely followed by the oil service industry as it is an indicator
of the overall market demand for the Company's products and services. Although
the average active drilling rig count is one indicator of the Company's
potential market, another important factor is the mix of natural gas and oil
wells being drilled.

During 1993, the United States average rig count increased by 5.0% from
1992 activity levels while the 1993 international average rig count increased
slightly from 1992 levels. The United States drilling activity rebounded from
the record low activity levels experienced during 1992 as a result of the
improvement in natural gas prices experienced during 1993. Although the average
international rig count did not change substantially from 1992 levels, there
were significant activity changes between international drilling markets, as all
international areas experienced drilling activity declines except Canada and the
Middle East.

Management anticipates drilling activity in 1994 to approximate 1993
activity levels and intense competition to continue. Some additional drilling
for natural gas is expected to occur during 1994 in the Gulf of Mexico region of
the U.S. due to the increase in natural gas prices during the prior year, the
decline in natural gas reserves and the general emphasis utilizing natural gas
as an environmentally preferred fuel. Management believes that the Company is
well positioned to benefit from increases in worldwide oil and gas exploration
drilling which may develop in 1994 and beyond and that greater drilling activity
will positively impact the Company's results in the future.

SALE OF DIRECTIONAL DRILLING BUSINESS

The Company used a portion of the proceeds of the DDS sale to repay certain
debt of the Company. For further discussion, refer to "Liquidity and Capital
Resources" below.

ACQUISITIONS OF A-Z/GRANT AND LINDSEY

On December 22, 1993, the Company acquired the product line assets of A-Z
International, Grant Oilfield Tools and Lindsey Completion Systems (A-Z/Grant
and Lindsey) from Masex Energy Services Group, Inc. for $19.0 million in cash.
A-Z/Grant and Lindsey are leading providers of downhole tools, remedial services
and liner hangers to the oil and gas industry. A-Z/Grant and Lindsey reported
unaudited revenues of $31.6 million in 1993, $29.0 million in 1992, and $31.0
million in 1991. The acquisition was accounted for as a purchase effective
December 22, 1993. The results of A-Z/Grant and Lindsey from December 22, 1993
to December 31, 1993 were not significant to the operations of the Company.

ACQUISITION OF M-I DRILLING FLUIDS COMPANY IN 1994

Effective February 28, 1994, the Company acquired a 64% interest in M-I
Drilling Fluids Company (M-I) from Dresser Industries, Inc. (Dresser) for $160
million. M-I was owned 64% by Dresser and 36% by Halliburton prior to the
acquisition. M-I is a leading provider of environmentally sensitive drilling
fluids and systems to the oil and gas drilling industry. The Company purchased
the 64% interest in M-I using $80 million of its cash and issuing a note payable
to Dresser for $80 million due on August 28, 1994. The acquisition will

15
<PAGE> 17

be accounted for as a purchase. M-I reported unaudited revenues of $405.8
million in 1993, $382.6 million in 1992 and $435.5 million in 1991.

PRO FORMA DATA

The unaudited pro forma revenues and income from continuing operations for
the year ended December 31, 1993 assuming the acquisitions of A-Z/Grant and
Lindsey and M-I had been made on January 1, 1993 are as follows:

<TABLE>
<S> <C>
Unaudited Pro Forma Revenues.............................................. $658,124
Unaudited Pro Forma Income from Continuing Operations..................... $ 1,652
Unaudited Income from Continuing Operations per Common Share.............. $ 0.02
</TABLE>

Refer to page 22 for a more complete presentation of the unaudited pro
forma statement of income (loss) from continuing operations and unaudited pro
forma balance sheet.

RESULTS OF OPERATIONS

Revenues

The tools and equipment manufactured and the services provided by the
Company fall into two major product and service groups that are marketed
throughout the world. The following table sets forth the amounts and percentages
of revenues by major product group and by area:

<TABLE>
<CAPTION>
1993 1992 1991
--------------- --------------- ---------------
AMOUNT % AMOUNT % AMOUNT %
------ ----- ------ ----- ------ -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Breakdown by Product Group:
Drill bits................................. $162.3 73 $145.5 69 $166.1 66
Drilling and completion services........... 58.4 27 65.2 31 85.9 34
------ ----- ------ ----- ------ -----
Total.............................. $220.7 100 $210.7 100 $252.0 100
------ ----- ------ ----- ------ -----
------ ----- ------ ----- ------ -----
Breakdown by Area:
Domestic................................... $104.4 47 $ 88.2 42 $110.2 44
Export..................................... 29.9 14 27.9 13 33.4 13
International.............................. 86.4 39 94.6 45 108.4 43
------ ----- ------ ----- ------ -----
Total.............................. $220.7 100 $210.7 100 $252.0 100
------ ----- ------ ----- ------ -----
------ ----- ------ ----- ------ -----
Average Active Rig Count:
Domestic................................... 757 721 860
Canada..................................... 183 96 121
International (excluding Canada)........... 773 856 909
------ ------ ------
Total.............................. 1,713 1,673 1,890
------ ------ ------
------ ------ ------
</TABLE>

Drill Bits

Drill bit revenues are generated from the sale of petroleum drill bits and
mining bits. Petroleum drill bit revenues increased $18.3 million or 14.4% from
$127.5 million in 1992 to $145.8 million in 1993 due primarily to higher sales
and improved pricing in the United States and Canada resulting from the increase
in North American drilling activity and increased sales into the former Soviet
Union. These increases were partially offset by reduced sales in the North Sea
area due to lower drilling activity and reduced volume in Mexico and Italy.
Petroleum drill bit revenues declined $18.0 million or 12.4% from $145.5 million
in 1991 to $127.5 million in 1992 due primarily to the decline in worldwide
drilling activity, principally in the U.S. and Canada, and price reductions
resulting from competitive pressures. This decrease was partially offset by an
increase of 16.0% in diamond bit sales.

16
<PAGE> 18

Mining drill bit revenues decreased $1.5 million or 8.3% from $18.0 million
in 1992 to $16.5 million in 1993 due to reduced sales to Canadian iron ore
producers. Mining drill bit revenues decreased $2.6 million or 12.6% from $20.6
million in 1991 to $18.0 million in 1992 due to lower domestic and export
activity.

Drilling and Completion Services

Drilling and completion services revenues decreased $6.8 million or 10.4%
from $65.2 million in 1992 to $58.4 million in 1993 due to lower international
drilling activity primarily in the Europe/Africa region, the Middle East and
Mexico. These declines were partially offset by increased sales in Canada.
Drilling and completion services revenues decreased $20.7 million or 24.1% from
$85.9 million in 1991 to $65.2 million in 1992 due to reduced worldwide drilling
activity, primarily the U.S., and lower sales in Australia, the Middle East,
Africa and the United Kingdom. The Company also discontinued its inspection
business in the United Kingdom and closed certain service centers in the U.S. in
1992.

For the periods indicated, the following table summarizes the results of
continuing operations of the Company and presents results as a percentage of
total revenues of the continuing operations:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------------
1993 1992 1991
------------- ------------- -------------
AMOUNT % AMOUNT % AMOUNT %
------ --- ------ --- ------ ---
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Product sales................................ $177.0 80 $166.6 79 $195.1 77
Rentals, services and other revenues......... 43.7 20 44.1 21 56.9 23
------ --- ------ --- ------ ---
Total revenues..................... 220.7 100 210.7 100 252.0 100
------ --- ------ --- ------ ---
Cost of product sales........................ 104.4 47 99.7 47 104.4 41
Cost of rentals, services and other
revenues................................... 33.8 16 36.9 18 47.6 19
------ --- ------ --- ------ ---
Total cost of sales................ 138.2 63 136.6 65 152.0 60
------ --- ------ --- ------ ---
Gross profit....................... 82.5 37 74.1 35 100.0 40
------ --- ------ --- ------ ---
Selling expenses............................. 42.0 19 41.6 20 45.5 18
General and administrative expenses.......... 21.9 10 22.2 10 25.4 10
Restructuring charges........................ -- -- -- -- 18.4 8
------ --- ------ --- ------ ---
Income from continuing operations before
litigation settlement, interest and
taxes...................................... 18.6 8 10.3 5 10.7 4
Litigation settlement........................ 19.9 9 -- -- -- --
Interest expense, net........................ 2.2 1 10.1 5 12.8 5
------ --- ------ --- ------ ---
Income (loss) from continuing operations
before income taxes........................ (3.5 ) (2) 0.2 -- (2.1 ) (1)
Income tax provision (benefit)............... 0.5 -- (1.0 ) (1) 2.9 1
------ --- ------ --- ------ ---
Income (loss) from continuing operations
before
cumulative effect of change in accounting
principle.................................. $(4.0 ) (2) $ 1.2 1 $(5.0 ) (2)
------ --- ------ --- ------ ---
------ --- ------ --- ------ ---
</TABLE>

1993 Versus 1992

Revenues for 1993 increased $10.0 million or 4.7% from $210.7 in 1992 to
$220.7 in 1993. Revenues in the United States and Canada increased due primarily
to increased drilling activity. These increases were partially offset by lower
revenues outside of North America due to lower drilling activity. Domestic
revenues increased $16.2 million, or 18.4%, from $88.2 million in 1992 to $104.4
million in 1993 due to a 5.0% increase in the average U.S. rig count and
improved pricing. International revenues decreased by $6.2 million or 5.1% from
$122.5 million in 1992 to $116.3 million in 1993 due to the 9.7% decline in
international drilling activity which was partially offset by revenues in Canada
and the former Soviet Union.

17
<PAGE> 19

Product sales increased $10.4 million or 6.2% from $166.6 in 1992 to $177.0
million in 1993 due primarily to the increase in drilling activity in the United
States and Canada partially offset by lower sales in the North Sea, the Middle
East and Mexico. Rentals, services and other revenues decreased $0.4 million or
0.9% from $44.1 million in 1992 to $43.7 million in 1993 as a result of lower
drilling activity in the Europe/Africa region and the Middle East.

Gross profit increased $8.4 million or 11.3% from $74.1 million in 1992 to
$82.5 million in 1993. Gross profit on product sales increased $5.7 million or
8.5% from $66.9 million in 1992 to $72.6 million in 1993 due to higher sales and
improved pricing in the United States and Canada. Gross profit on rentals,
services and other revenues increased $2.7 million or 37.5% from $7.2 million in
1992 to $9.9 million in 1993 due to lower operating costs in the United States
and Canada.

Operating expenses, comprised of selling expenses and general and
administrative expenses, increased by $0.1 million or 0.2% from $63.8 million in
1992 to $63.9 million in 1993. The increase was due primarily to higher variable
selling expenses relating to the higher North American sales and higher legal
expenses associated with the drill bit litigation. These increases were reduced
by lower personnel levels due to cost reduction actions and lower foreign
currency translation losses. Operating expenses as a percentage of revenues
decreased from 30.3% in 1992 to 29.0% in 1993.

On August 27, 1993, without admitting any form of liability, the Company
entered into an agreement to settle a class action civil lawsuit pending in the
federal district court in Houston. The lawsuit alleged that the Company and
other defendants violated Section 1 of the Sherman Act. The Company recorded a
special charge of $19.9 million to cover the cost of the settlement and related
estimated legal fees and other costs and expenses. On October 28, 1993, an order
was entered which gave final approval to this settlement.

Interest expense decreased $4.6 million or 43.4% from $10.6 million in 1992
to $6.0 million in 1993 due to the refinancing of long-term debt in the fourth
quarter of 1992 and the repayment of debt from the proceeds of the DDS sale.
Interest income increased due to a higher level of short-term investments
resulting from the investment of the proceeds of the DDS sale.

The tax provision of $0.5 million for 1993 consists primarily of foreign
taxes on income. The tax benefit of $1.0 million in 1992 relates primarily to a
$2.5 million benefit related to the settlement of a U.S. tax claim with the IRS.
The Company provides for U.S. taxes at the statutory rate offset by tax benefits
related to the U.S. net operating loss (NOL) carryforwards, available to the
Company as well as foreign taxes. During 1993, the Company adopted Statement of
Financial Accounting Standard No. 109 for accounting for income taxes. The
adoption did not materially affect the 1993 results.

1992 Versus 1991

Revenues for 1992 decreased $41.3 million or 16.4% from $252.0 million in
1991 to $210.7 million in 1992 due primarily to an 11.5% decline in the average
worldwide rig count. International revenues decreased $19.3 million or 13.6%
from $141.8 million in 1991 to $122.5 million in 1992 due primarily to lower
Canadian drilling activity, lower volume in the Middle East, France, the U.K.
and Australia and reduced revenues in the Far East due to increased competition
and pricing pressure. Domestic revenues decreased $22.0 million, or 20.0%, from
$110.2 million in 1991 to $88.2 million in 1992 due to a 16.2% decline in the
average U.S. rig count and competitive pricing pressures.

Product sales decreased $28.5 million or 14.6% from $195.1 million in 1991
to $166.6 million in 1992 due primarily to the decline in U.S. and Canadian
drilling activity and competitive pricing pressures in the U.S. and Far East.
Rentals, services and other revenues decreased $12.8 million or 22.5% from $56.9
million in 1991 to $44.1 million in 1992 due to reduced U.S. drilling activity,
lower demand in Africa, Australia and the Middle East and the closing of certain
service centers in the United States and the discontinuance of the inspection
business in the United Kingdom.

Gross profit decreased $25.9 million or 25.9% from $100.0 million in 1991
to $74.1 million in 1992. Gross profit on product sales decreased by $23.8
million or 26.2% from $90.7 million in 1991 to $66.9 million in 1992 due to
lower volumes in aforementioned areas and competitive pricing pressures
principally in the U.S. and

18
<PAGE> 20

Far East. Gross profit on rentals, services and other revenues decreased by $2.1
million or 22.6% from $9.3 million in 1991 to $7.2 million in 1992 due primarily
to lower U.S., Australia and the United Kingdom revenue levels.

Operating expenses, comprised of selling expenses and general and
administrative expenses, decreased by $7.1 million or 10.0% from $70.9 million
in 1991 to $63.8 million in 1992. This decrease was due primarily to lower
variable selling expenses associated with reduced revenues offset by currency
translation losses in 1992 compared to currency translation gains in 1991.
Operating expenses as a percentage of revenues increased from 28.1% in 1991 to
30.3% in 1992.

In 1991, the Company recorded $22.2 million of non-recurring charges
related primarily to the restructuring of its worldwide operations in response
to the decline in U.S. drilling activity. The non-recurring charges consisted
primarily of $21.2 million of restructuring charges composed of $9.9 million for
estimated severance and relocation costs, a writedown of $5.7 million related to
fixed assets of closed and downsized locations, a provision of $3.7 million to
expense certain manufacturing inefficiencies and $1.9 million related to other
non-recurring restructuring charges. The Company also recorded an additional
$1.0 million tax provision to reflect expected tax settlements of prior year
foreign tax liabilities of certain of the Company's subsidiaries. The amount of
restructuring charges related to the continuing operations of the Company of
$18.4 million was charged to income from continuing operations before interest
and taxes. The amount of the restructuring charges related to the DDS business
in 1991 of $2.8 million was recorded in the results of discontinued operations.
The $1.0 million tax provision was charged against continuing operations.

Interest expense decreased $3.2 million or 23.2% from $13.8 million in 1991
to $10.6 million in 1992 due primarily to lower long-term debt resulting from
the repayment of the Series B Notes in December, 1991, the refinancing of
long-term debt in the fourth quarter of 1992 and lower short-term interest
rates. Interest income decreased $0.5 million or 50.0% from $1.0 million in 1991
to $0.5 million in 1992 due primarily to lower short-term interest rates.

The tax benefit of $1.0 million at December 31, 1992 relates primarily to a
$2.5 million benefit related to the settlement of a U.S. tax claim with the IRS.
See Note 8 to the Notes to Consolidated Financial Statements. The Company
provides for U.S. taxes at the statutory rate offset by tax benefits related to
the U.S. NOL carryforwards available to the Company as well as foreign taxes.

In addition to the $1.0 million foreign tax provision discussed above, the
tax provision of $2.9 million at December 31, 1991 provides for U.S. taxes at
the statutory rate offset by tax credits related to the U.S. NOL carryforwards
available to the Company as well as foreign taxes. During 1991, the Company
adopted Statement of Financial Accounting Standard No. 96 for accounting for
income taxes. The adoption did not materially affect the 1991 results.

LIQUIDITY AND CAPITAL RESOURCES

General

The Company's cash position at December 31, 1993 totaled $101.6 million or
an increase of $85.3 million from the Company's cash position at December 31,
1992. The Company's current ratio increased to 3.20 to 1 at December 31, 1993
from 1.77 to 1 at December 31, 1992. The improvement in cash and the current
ratio arises due to proceeds received from the sale in 1993 of the DDS business
to Halliburton offset by debt repayment of $102.6 million, payments of $19.9
million related to a litigation settlement and the payment of $19.0 million to
acquire A-Z/Grant and Lindsey.

The Company was required to repay its bank debt in connection with the DDS
sale. The Company also granted options which expired on July 23, 1993 to its
insurance company lenders for early repayment of their debt at a reduced make
whole premium. On April 12, 1993, the Company used a portion of the proceeds of
the DDS sale to retire its domestic credit facility totaling $37.2 million, its
domestic bank term loan totaling $16.4 million and $39.0 million of notes
payable with insurance companies. On July 23, 1993, the Company repaid an
additional $10.0 million of notes payable with insurance companies. The
Company's remaining debt totaling $46.0 million at December 31, 1993 is
classified as long-term. The accompanying December 31, 1992

19
<PAGE> 21

balance sheet has also been restated to classify the $46.0 million of debt as
long-term. The Company has renegotiated its loan agreements with the insurance
companies to amend certain financial covenants as well as to release the
collateral under the loan indenture. The Company was in compliance with its loan
covenants under the amended loan indenture at December 31, 1993. See Note 6 of
the Notes to Consolidated Financial Statements.

Certain of the Company's foreign subsidiaries have short-term lines of
credit with various foreign banks totaling approximately $1.7 million. At
December 31, 1993, the Company had borrowed $0.7 million under these lines. The
majority of these lines are unsecured.

The Company has annual interest requirements of approximately $4.5 million
under its existing long-term debt. The Company's indenture relating to its
long-term debt contains covenants restricting the payment of cash dividends to
the Company's common stockholders based on net earnings and operating cash flow
formulas as defined in the indenture. The Company has not paid dividends on its
Common Stock since the first quarter of 1986. In addition to compliance with the
covenants of the indenture, the determination of the amount of future cash
dividends to be declared and paid on the Common Stock, if any, will depend upon
the Company's financial condition, earnings and cash flow from operations, the
level of its capital expenditures, its future business prospects and other
factors that the Board of Directors deem relevant.

On March 2, 1994, the Company used $80.0 million of its cash and issued a
note payable totaling $80.0 million to Dresser to acquire its 64% interest in
M-I. The note payable to Dresser bears interest at LIBOR +2% and is due on
August 28, 1994. The Company has commitments to refinance the Dresser note
payable with a $40 million term loan from its insurance company lenders and a
$65 million revolving line of credit from a bank group. The term loan will bear
interest at 6.02 percent and be payable over a period ending in January 1998.
The revolving line of credit will be due in March 1997 and bear interest at a
rate ranging from LIBOR + 3/4 percent to LIBOR +1 1/2 percent based upon the
debt-to-total capitalization of the Company. Management believes that such
financing will be completed by the end of March 1994.

The Company believes that it has sufficient existing manufacturing capacity
to meet current demand for its products and services. Projected capital
expenditures in 1994, excluding M-I capital expenditures, will approximate $14
million.

The Company currently expects to be able to meet its ongoing working
capital and capital expenditure requirements from existing cash on hand,
operating cash flow and existing credit facilities or credit facilities to
be arranged as discussed above.

The Company has been named as a potentially responsible party in connection
with three sites on the U.S. Environmental Protection Agency's National
Priorities List. At December 31, 1993, the remaining recorded liability for
estimated future clean-up costs for Superfund sites as well as properties
currently or previously owned or leased by the Company was $3.6 million. As
additional information becomes available, the Company may be required to provide
for additional environmental clean-up costs. However, the Company believes that
none of its clean-up obligations will result in liabilities having a material
adverse effect on the Company's consolidated financial position or results of
operations. See Item 3. "Legal Proceedings -- Superfund" for further discussion.

Because of its substantial foreign operations, the Company is exposed to
currency fluctuations and exchange risks. The Company tries to limit these risks
by matching, to the extent possible, assets and liabilities denominated in
foreign currencies and using hedging instruments to cover certain unmatched
positions.

Inflation has not had a material effect on the Company in the last few
years, and the effect is expected to be minor in the near future. In general,
the Company has been able to offset most of the effects of inflation through
productivity gains, cost reductions, and price increases.

20
<PAGE> 22

Net Operating Loss Carryforwards

As of December 31, 1993, for U.S. tax reporting purposes, the Company had
NOL carryforwards of approximately $148.5 million, expiring between 2001 and
2007, which should be available to offset future U.S. taxable income. Upon
certain changes in equity ownership of the Company, however, the Company's
ability to utilize its NOL carryforwards may become subject to limitation under
Section 382 of the Internal Revenue Code of 1986, as amended (the "Code").
Management believes that the application of Section 382 will not materially
limit the availability of the NOL carryforwards.

21
<PAGE> 23

UNAUDITED PRO FORMA FINANCIAL STATEMENTS

The following unaudited pro forma statement of income (loss) from
continuing operations for the year ended December 31, 1993 presents the
acquisitions of M-I and A-Z/Grant and Lindsey as though the acquisitions were
effective January 1, 1993. The unaudited pro forma statement of income (loss)
from continuing operations gives effect to the acquisitions under the purchase
method of accounting and the assumptions included in the accompanying unaudited
notes to pro forma financial statements. The unaudited pro forma statement of
income (loss) from continuing operations reflect the amortization of estimated
goodwill, additional depreciation expense related to the estimated write-up of
fixed assets and rental tools of A-Z/Grant and Lindsey and estimated adjustments
to interest, taxes and minority interest.

The following unaudited pro forma balance sheet as of December 31, 1993
presents the acquisition of M-I as if the acquisition had occurred at December
31, 1993. The unaudited pro forma balance sheet reflects the acquisition under
the purchase method of accounting and the assumptions included in the
accompanying unaudited notes to pro forma financial statements. The unaudited
pro forma balance sheet reflects only those adjustments relating to the
acquisition of M-I, the consolidation of the Company's 64% interest in M-I and
certain estimated asset and liability valuation adjustments anticipated to
result from the Company's allocation of the purchase price to the accounts of
M-I at February 28, 1994.

Management has not fully evaluated all of the consequences of the
acquisition of M-I including assessing the fair market value of the assets
acquired and the total amount of costs that may be necessary to consolidate the
operations of M-I with the Company. As a result, the current estimate of the
excess of the purchase price over net assets acquired in the acquisition of M-I
totaling $51.2 million has been reflected as goodwill in the unaudited pro forma
balance sheet. Upon completion of these evaluations during 1994, any additional
asset and liability adjustments and the adjusted excess purchase price over net
assets acquired will be recorded in accordance with purchase accounting rules
and principles.

The unaudited pro forma financial statements are not intended to be
indicative of the results that would have occurred if the acquisitions had been
effective as of the dates indicated or that may be obtained in the future. The
unaudited pro forma financial statements should be read in conjunction with the
Consolidated Financial Statements and notes thereto of the Company included
elsewhere in this Form 10-K.

22
<PAGE> 24

SMITH INTERNATIONAL, INC.

UNAUDITED PRO FORMA STATEMENT OF
INCOME (LOSS) FROM CONTINUING OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1993
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
UNAUDITED
----------------------------------------------------
HISTORICAL PRO FORMA
----------------------------------- -------------------------
A-Z/GRANT
SMITH & LINDSEY M-I ADJUSTMENTS COMBINED
-------- --------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
Revenues...................... $220,712 $31,600 $405,812 $658,124
Cost of Revenues.............. 138,170 23,200 247,045 27,122(a) 436,134
597(b)
-------- --------- -------- ----------- --------
Gross Margin.................. 82,542 8,400 158,767 (27,719) 221,990
Operating Expenses:
Selling Expenses............ 41,997 4,600 119,249 (27,122)(a) 138,724
General and Administrative
Expenses................. 21,970 1,000 18,231 41,201
Equity in Joint Ventures and
Other Income, net........ -- -- (6,051) 1,279(c) (4,597)
175(d)
-------- --------- -------- ----------- --------
Total Operating
Expenses............ 63,967 5,600 131,429 (25,668) 175,328
-------- --------- -------- ----------- --------
Income from Continuing
Operations Before Litigation
Settlement, Interest and
Taxes....................... 18,575 2,800 27,338 (2,051) 46,662
Litigation Settlement......... 19,900 -- -- 19,900
Interest Expense (Income),
net......................... 2,202 -- (628) 4,800(e) 10,434
4,060(f)
-------- --------- -------- ----------- --------
Income (Loss) From Continuing
Operations Before Income
Taxes....................... (3,527) 2,800 27,966 (10,911) 16,328
Income Tax Provision.......... 468 -- 6,289 115(g) 6,872
-------- --------- -------- ----------- --------
Income (Loss) From Continuing
Operations Before Minority
Interest.................... (3,995) 2,800 21,677 (11,026) 9,456
Minority Interest............. -- -- 7,804 7,804
-------- --------- -------- ----------- --------
Income (Loss) From Continuing
Operations.................. ($ 3,995)(h) $ 2,800 $ 13,873 $ (11,026) $ 1,652(h)
-------- --------- -------- ----------- --------
-------- --------- -------- ----------- --------
Average Common and Equivalent
Shares Outstanding.......... 37,775 37,775
-------- --------
-------- --------
Income (Loss) from Continuing
Operations Per Common
Share....................... ($ 0.13)(h) $ 0.02(h)
-------- --------
-------- --------
</TABLE>

See accompanying unaudited notes to pro forma financial statements.

23
<PAGE> 25

SMITH INTERNATIONAL, INC.

UNAUDITED PRO FORMA BALANCE SHEET
AS OF DECEMBER 31, 1993
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
UNAUDITED
--------------------------------------
HISTORICAL PRO FORMA
--------------------- -------------------------
SMITH M-I ADJUSTMENTS COMBINED
-------- -------- ----------- --------
<S> <C> <C> <C> <C>
(i)
ASSETS
Current Assets:
Cash and Cash Equivalents.................... $101,561 $ (2,203) $ (80,000)(j) $ 16,858
(2,500)(k)
Receivables.................................. 67,830 112,132 (1,280)(n) 178,682
Inventory.................................... 81,654 85,432 (7,040)(n) 160,046
Prepaid Expense and Other.................... 4,802 3,832 8,634
-------- -------- ----------- --------
Total Current Assets................. 255,847 199,193 (90,820) 364,220
-------- -------- ----------- --------
Rental Tools, net.............................. 20,510 -- 20,510
Property, Plant and Equipment, net............. 41,652 52,634 94,286
Investments in Joint Ventures and
Unconsolidated Subsidiaries.................. 6,283 9,518 15,801
Investment in M-I Drilling Fluids Co........... -- -- 160,000(j) --
(160,000)(l)
Goodwill....................................... 2,954 -- 37,254(l) 54,108
12,100(n)
1,800(k)
Other Assets................................... 21,140 5,427 700(k) 27,267
-------- -------- ----------- --------
Total Assets......................... $348,386 $266,772 $ (38,966) $576,192
-------- -------- ----------- --------
-------- -------- ----------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term Borrowings and Current Portion of
Long-term Debt............................ $ 702 $ 1,091 $ 10,000(j) $ 11,793
Accounts Payable............................. 24,763 30,467 55,230
Accrued Payroll Costs........................ 10,923 7,082 18,005
Income Taxes Payable......................... 9,484 807 10,291
Other........................................ 34,098 14,838 3,780(n) 52,716
-------- -------- ----------- --------
Total Current Liabilities............ 79,970 54,285 13,780 148,035
-------- -------- ----------- --------
Long-Term Debt................................. 46,000 -- 70,000(j) 116,000
Minority Interest.............................. -- -- 69,044(m) 69,044
Other Long-term Liabilities.................... 7,950 20,697 28,647
Shareholders' Equity........................... 214,466 191,790 (122,746)(l) 214,466
(69,044)(m)
-------- -------- ----------- --------
Total Liabilities and Shareholders'
Equity............................. $348,386 $266,772 $ (38,966) $576,192
-------- -------- ----------- --------
-------- -------- ----------- --------
</TABLE>

See accompanying unaudited notes to pro forma financial statements.

24
<PAGE> 26

SMITH INTERNATIONAL, INC.

UNAUDITED NOTES TO PRO FORMA FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF INCOME (LOSS) FROM CONTINUING OPERATIONS --

(a) To reclassify M-I freight expenses from selling expense to cost of sales to
be consistent with the policies of the Company.

(b) To record annual amortization of goodwill which will be amortized over 40
years

(c) To record additional depreciation expense as a result of adjustments to
increase the book value of the A-Z/Grant and Lindsey rental tools and
property and equipment to estimated fair value and depreciate the assets
over the estimated remaining lives of the respective assets.

(d) To record annual amortization of debt issuance costs which will be amortized
over the 4 year life of the debt.

(e) To record interest expense at an interest rate of 6.0 percent on the
acquisition-related debt, as refinanced (see Note j below), assuming no
principal reduction.

(f) To reduce interest income at an interest rate of 4.0 percent as
approximately $101.5 million of the Company's cash was used to fund the
acquisitions and, therefore, would not have been available to earn interest
income.

(g) To record additional income tax expense related to the earnings of A-Z/Grant
and Lindsey, the Company's portion of M-I earnings and the effects of the
aforementioned adjustments at the U.S. Alternative Minimum Tax Rate of 2.0
percent. Additional taxes would not be required because of the Company's
net operating loss carryforward position.

(h) Income (loss) from continuing operations is presented excluding the
cumulative effect of change in accounting principle. The Smith and
unaudited pro forma income (loss) from continuing operations of ($3,995)
and $1,652, respectively, include the special charge for a litigation
settlement of $19,900 ($0.53 per common share). The Smith and unaudited pro
forma income from continuing operations excluding the litigation settlement
would increase to $15,905 and $21,552, respectively, or $0.40 and $0.55 per
common share, respectively. The preferred stock dividends of $868 must be
deducted from the applicable income (loss) from continuing operations
amounts in order to compute these amounts per common share.

BALANCE SHEET --

(i) The historical balance sheet of the Company includes the accounts of
A-Z/Grant and Lindsey on an estimated basis acquired by the Company on
December 22, 1993 for $19.0 million. Management has not fully evaluated all
of the consequences of the acquisition of A-Z/Grant and Lindsey including
completing the appraisals of the assets acquired and assessing the total
amount of costs that may be necessary to consolidate the operations of
A-Z/Grant and Lindsey with the Company. Upon completion of these
evaluations, any additional asset and liability adjustments will be
recorded and the excess purchase price over net assets acquired, if any,
will be recorded in accordance with purchase accounting rules and
principles.

(j) To record the purchase of the 64% interest in M-I using $80.0 million in
cash and $80.0 million in debt. The Company has reflected $10.0 million of
debt as current portion of long-term debt and $70.0 million of debt as
long-term because the Company has commitments to refinance the Dresser note
payable with a $40 million term loan from its insurance company lenders and
a $65 million revolving line of credit from a bank group. The term loan
will bear interest at a rate of 6.02 percent and be payable over a period
ending in January 1998. The revolving line of credit will be due in March
1997 and bear interest at a rate ranging

25
<PAGE> 27

SMITH INTERNATIONAL, INC.

UNAUDITED NOTES TO PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)

from LIBOR + 3/4 percent to LIBOR +1 1/2 percent based upon the
debt-to-total capitalization of the Company. Management believes that such
financing will be completed by the end of March 1994.

(k) To record $1.8 million of estimated acquisition costs in connection with the
M-I acquisition and $0.7 million of debt issuance costs in connection with
the refinanced acquisition debt.

(l) To eliminate the investment in M-I of $160.0 million against the Company's
estimated portion of its equity in M-I of $122.7 million with the remaining
balance of $37.3 million reported tentatively as goodwill.

(m) To reclassify the minority interest ownership in M-I by Halliburton of $69.0
million from shareholders' equity to minority interest.

(n) To record the Company's portion of the current estimate of adjustments to
asset reserves and liabilities required at the acquisition date in
connection with the purchase of M-I with the corresponding adjustment
recorded as goodwill. Management has not fully evaluated all of the
consequences of the acquisition of M-I including assessing the fair market
value of the assets acquired and the total amount of costs that may be
necessary to consolidate the operations of M-I with the Company. Upon
completion of a full evaluation of the Company's purchase price allocation
of M-I accounts, additional adjustments may become necessary to the
preliminary allocation of the purchase price. The Company expects this
evaluation process will be completed in 1994.

26
<PAGE> 28

[THIS PAGE INTENTIONALLY LEFT BLANK]

27
<PAGE> 29

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Smith International, Inc.:

We have audited the accompanying consolidated balance sheets of Smith
International, Inc. (a Delaware corporation) and subsidiaries as of December 31,
1993 and 1992, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1993. These consolidated financial statements and schedules
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and schedules 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 financial position of Smith International, Inc.
and subsidiaries as of December 31, 1993 and 1992 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1993, in conformity with generally accepted accounting principles.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules listed in the accompanying
index of financial statements are presented for purposes of complying with the
Securities and Exchange Commission's rules and are not part of the basic
financial statements. These schedules have been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly state in all material respects the financial data required to be
set forth therein in relation to the basic financial statements taken as a
whole.

As discussed in Note 1 to the Notes to Consolidated Financial Statements,
the Company adopted Statement of Financial Accounting Standards (SFAS) No. 96
and SFAS No. 109 "Accounting for Income Taxes" in 1991 and 1993, respectively.
In 1993, the Company also adopted SFAS No. 106 "Employers Accounting for
Postretirement Benefits other than Pensions".

ARTHUR ANDERSEN & CO.

Houston, Texas
February 9, 1994,
except for the subsequent event
discussed in Note 2, as to which
the date is March 21, 1994

28
<PAGE> 30

SMITH INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1993 1992 1991
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Product sales.............................................. $177,021 $166,630 $195,047
Rentals, services and other revenues....................... 43,691 44,039 56,920
-------- -------- --------
Total revenues................................... 220,712 210,669 251,967
-------- -------- --------
Cost of product sales...................................... 104,406 99,656 104,368
Cost of rentals, services and other revenues............... 33,764 36,899 47,633
-------- -------- --------
Total cost of sales.............................. 138,170 136,555 152,001
-------- -------- --------
Gross profit............................................... 82,542 74,114 99,966
-------- -------- --------
Selling expenses........................................... 41,997 41,582 45,503
General and administrative expenses........................ 21,970 22,272 25,371
Restructuring charges (Note 3)............................. -- -- 18,419
-------- -------- --------
Total operating expenses......................... 63,967 63,854 89,293
-------- -------- --------
Income from continuing operations before litigation
settlement, interest and taxes........................... 18,575 10,260 10,673
Litigation settlement (Note 16)............................ 19,900 -- --
Interest expense........................................... 6,023 10,600 13,827
Interest income............................................ (3,821) (497) (999)
-------- -------- --------
Income (loss) from continuing operations before income
taxes.................................................... (3,527) 157 (2,155)
Income tax provision (benefit) (Note 8).................... 468 (1,007) 2,858
-------- -------- --------
Income (loss) from continuing operations before cumulative
effect of change in accounting principle................. (3,995) 1,164 (5,013)
-------- -------- --------
Discontinued operations (Note 2):
Net losses of discontinued DDS operations after income
tax provisions of $236 in 1993, $2,734 in 1992 and
$2,356 in 1991........................................ (6,483) (2,975) (4,623)
Gain from sale of DDS operations net of taxes of
$8,144................................................ 80,106 -- --
-------- -------- --------
Income (loss) from discontinued operations................. 73,623 (2,975) (4,623)
-------- -------- --------
Income (loss) before cumulative effect of change in
accounting principle..................................... 69,628 (1,811) (9,636)
Cumulative effect of change in accounting for certain post
retirement benefits (Note 1)............................. (1,300) -- --
-------- -------- --------
Net income (loss).......................................... 68,328 (1,811) (9,636)
Preferred stock dividends.................................. (868) (1,740) (1,747)
-------- -------- --------
Net income (loss) applicable to common stock............... $ 67,460 $ (3,551) $(11,383)
-------- -------- --------
-------- -------- --------
Income (loss) per common share from continuing
operations............................................... $ (.13) $ (.02) $ (.22)
-------- -------- --------
-------- -------- --------
Net income (loss) per common share......................... $ 1.79 $ (.10) $ (.38)
-------- -------- --------
-------- -------- --------
Average common shares and equivalent shares outstanding.... 37,775 36,295 30,095
-------- -------- --------
-------- -------- --------
</TABLE>

The accompanying notes are an integral part of these financial statements.

29
<PAGE> 31

SMITH INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

ASSETS

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1993 1992
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........................................... $101,561 $ 16,249
Receivables, less allowance of $4,995 in 1993 and $4,254 in 1992 for
doubtful accounts................................................ 67,830 89,264
Inventories (Note 4)................................................ 81,654 77,315
Prepaid expenses and other.......................................... 4,802 7,163
Net assets of DDS business sold in March 1993 (Note 2).............. -- 106,233
-------- ---------
Total current assets........................................ 255,847 296,224
-------- ---------
RENTAL EQUIPMENT, less accumulated depreciation of $23,457 in 1993 and
$24,140 in 1992..................................................... 20,510 10,551
-------- ---------
PROPERTY, PLANT AND EQUIPMENT:
Land................................................................ 1,348 743
Buildings........................................................... 18,007 15,044
Machinery and equipment............................................. 138,235 142,785
-------- ---------
157,590 158,572
Less -- accumulated depreciation.................................... 115,938 124,600
-------- ---------
Net property, plant and equipment.............................. 41,652 33,972
-------- ---------
OTHER ASSETS, including assets held for sale of $11,866 in 1993 and
$13,817 in 1992 (Note 5)............................................ 30,377 29,735
-------- ---------
TOTAL ASSETS.......................................................... $348,386 $ 370,482
-------- ---------
-------- ---------
</TABLE>

The accompanying notes are an integral part of these financial statements.

30
<PAGE> 32

SMITH INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

LIABILITIES AND SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1993 1992
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
CURRENT LIABILITIES:
Short-term borrowings and current portion of long-term debt (Note
6)............................................................... $ 702 $ 103,343
Accounts payable.................................................... 24,763 30,463
Accrued payroll costs............................................... 10,923 11,569
Income taxes payable (Note 8)....................................... 9,484 3,592
Other............................................................... 34,098 18,785
-------- ---------
Total current liabilities................................... 79,970 167,752
-------- ---------
LONG-TERM DEBT (Note 6)............................................... 46,000 46,000
-------- ---------
DEFERRED INCOME TAXES (Note 8)........................................ 4,563 4,666
-------- ---------
OTHER LONG-TERM LIABILITIES........................................... 3,387 2,279
-------- ---------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 16)
SHAREHOLDERS' EQUITY:
Preferred stock:
Authorized -- 5,000,000 shares, 8.75% convertible preferred
stock; issued and outstanding 798,800 shares in 1992 (Note 9)... -- 19,970
Common stock:
Authorized -- 60,000,000 shares, $1 par value; issued and
outstanding -- 39,311,447 shares in 1993 and 36,773,437 shares
in 1992 (Note 9)................................................ 39,311 36,773
Common stock warrants (Note 9):
Class A warrants -- outstanding -- 225,520 in 1993 and 1992...... -- --
Class B warrants -- outstanding -- 1,872,205 in 1993 and
1,872,324 in 1992............................................... -- --
Class C warrants -- outstanding -- 451,357 in 1993 and 1992...... 7,278 7,278
Additional paid-in capital............................................ 271,582 253,910
Accumulated deficit................................................... (83,433) (150,893)
Cumulative translation adjustments.................................... (6,358) (4,668)
Less-treasury securities, at cost (628,583 common shares and 451,357
Class C warrants in 1993; and 470,183 common shares and 451,357
Class C warrants in 1992) (Note 9).................................. (13,914) (12,585)
-------- ---------
Total shareholders' equity.................................. 214,466 149,785
-------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................ $348,386 $ 370,482
-------- ---------
-------- ---------
</TABLE>

The accompanying notes are an integral part of these financial statements.

31
<PAGE> 33

SMITH INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1993 1992 1991
--------- -------- --------
<S> <C> <C> <C>
(IN THOUSANDS)
Cash flows from operating activities:
Net income (loss) from continuing operations (after litigation
settlement of $19,900 in 1993 and restructuring charges of
$18,419 in 1991)................................................. $ (5,295) $ 1,164 $ (5,013)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities excluding the net effects from the
acquisition of
A-Z/Grant and Lindsey:
Depreciation and amortization.................................. 11,600 22,737 25,182
Provision for losses on receivables............................ 974 1,860 1,861
Provision for write-down of fixed assets and assets held for
sale (Notes 3 and 5).......................................... -- -- 5,746
Gain on disposal of fixed assets............................... (1,623) (7,164) (5,570)
Foreign currency translation losses............................ 621 2,902 1,058
Change in receivables.......................................... 19,424 (7,139) 10,034
Change in inventories.......................................... 2,011 15,045 (14,364)
Change in accounts payable..................................... (5,960) 564 3,844
Changes in other current assets and liabilities................ 763 (14,875) (3,567)
Changes in other non-current assets and liabilities............ (631) 2,257 (2,859)
--------- -------- --------
Subtotal.................................................... 21,884 17,351 16,352
Net results of discontinued operations...................... (6,483) (2,975) (4,623)
--------- -------- --------
Net cash provided by operating activities.............. 15,401 14,376 11,729
--------- -------- --------
Cash flows from investing activities:
Proceeds from the sale of the DDS operations (Note 2)............... 247,709 -- --
Costs and expenses paid related to the sale of the DDS operations
(Note 2)......................................................... (47,377) -- --
Acquisition of A-Z/Grant and Lindsey (Note 2)....................... (19,000) -- --
Fixed asset additions............................................... (15,191) (26,668) (43,429)
Proceeds from disposal of fixed assets.............................. 7,091 11,756 9,270
--------- -------- --------
Net cash provided by (used in) investing activities.... 173,232 (14,912) (34,159)
--------- -------- --------
Cash flows from financing activities:
Increase (decrease) in short-term borrowings, net (Note 6).......... (33,360) (15,970) 7,777
Proceeds from issuance of long-term debt (Note 6)................... -- 115,000 --
Repayment of long-term debt (Note 6)................................ (67,683) (98,348) (45,500)
Proceeds from issuance of common stock and exercise of stock options
and warrants (Note 9)............................................ 240 39 50,595
Purchase of treasury stock (Note 9)................................. (1,329) -- --
Dividends paid on preferred stock................................... (868) (1,740) (1,747)
--------- -------- --------
Net cash provided by (used in) financing activities.... (103,000) (1,019) 11,125
--------- -------- --------
Effect of exchange rate changes on cash............................... (321) (388) (208)
--------- -------- --------
Increase (decrease) in cash and cash equivalents...................... 85,312 (1,943) (11,513)
Cash and cash equivalents at beginning of year........................ 16,249 18,192 29,705
--------- -------- --------
Cash and cash equivalents at end of year.............................. $ 101,561 $ 16,249 $ 18,192
--------- -------- --------
--------- -------- --------
</TABLE>

The accompanying notes are an integral part of these financial statements.

32
<PAGE> 34

SMITH INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
<TABLE>
<CAPTION>
COMMON STOCK
WARRANTS
PREFERRED STOCK COMMON STOCK ------------------
------------------- ------------------- NUMBER ADDITIONAL
NUMBER NUMBER OF PAID-IN
OF SHARES AMOUNT OF SHARES AMOUNT WARRANTS AMOUNT CAPITAL
--------- ------- ---------- ------- ---------- ------ ----------
(IN THOUSANDS, EXCEPT SHARE AND WARRANT DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1990................. 799,300 $19,983 29,162,576 $29,162 8,867,103 $7,278 $210,760
Issuance of Class B Warrants to
management............................... -- -- -- -- 60,000 -- --
Exercise of employee stock options......... -- -- 105,516 105 -- -- 953
Exercise of common stock warrants.......... -- -- 6,377,864 6,378 (6,377,864) -- 32,594
Issuance of common stock................... -- -- 992,000 992 -- -- 9,573
Conversion of preferred stock
into common stock........................ (500) (13) 1,562 2 -- -- 11
Net loss................................... -- -- -- -- -- -- --
Preferred dividends........................ -- -- -- -- -- -- --
Translation adjustment for the year........ -- -- -- -- -- -- --
Other...................................... -- -- 113,690 114 -- -- --
------- ------- ---------- ------- ---------- ----- --------
Balance, December 31, 1991................. 798,800 19,970 36,753,208 36,753 2,549,239 7,278 253,891
Exercise of employee stock options......... -- -- 20,191 20 -- -- 19
Exercise of common stock warrants.......... -- -- 38 -- (38) -- --
Net loss................................... -- -- -- -- -- -- --
Preferred dividends........................ -- -- -- -- -- -- --
Translation adjustment for the year........ -- -- -- -- -- -- --
-------- ------- ---------- ------- ---------- ----- --------
Balance, December 31, 1992................. 798,800 19,970 36,773,437 36,773 2,549,201 7,278 253,910
Exercise of employee stock options......... -- -- 41,641 42 -- -- 197
Exercise of common stock warrants.......... -- -- 119 -- (119) -- 1
Purchase of treasury stock................. -- -- -- -- -- -- --
Conversion of preferred stock into
common stock............................. (798,800) (19,970) 2,496,250 2,496 -- -- 17,474
Net income................................. -- -- -- -- -- -- --
Preferred dividends........................ -- -- -- -- -- -- --
Translation adjustment for the year........ -- -- -- -- -- -- --
-------- ------- ---------- ------- --------- ------ ---------
Balance, December 31, 1993................. -- $ -- 39,311,447 $39,311 2,549,082 $7,278 $271,582
-------- ------- ---------- ------- ---------- ------ ---------
-------- ------- ---------- ------- ---------- ------ ---------

<CAPTION>
TREASURY SECURITIES
---------------------------------------

COMMON STOCK WARRANTS
------------------ ------------------
CUMULATIVE NUMBER NUMBER
ACCUMULATED TRANSLATION OF OF
DEFICITS ADJUSTMENTS SHARES AMOUNT WARRANTS AMOUNT
----------- ----------- -------- ------- -------- -------

<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1990................. $(135,959) $ (397) (356,493) $(5,193) (451,357) $(7,278)
Issuance of Class B Warrants to
management............................... -- -- -- -- -- --
Exercise of employee stock options......... -- -- -- -- -- --
Exercise of common stock warrants.......... -- -- -- -- -- --
Issuance of common stock................... -- -- -- -- -- --
Conversion of preferred stock
into common stock........................ -- -- -- -- -- --
Net loss................................... (9,636) -- -- -- -- --
Preferred dividends........................ (1,747) -- -- -- -- --
Translation adjustment for the year........ -- (562) -- -- -- --
Other...................................... -- -- (113,690) (114) -- --
--------- ------- -------- ------- -------- -------
Balance, December 31, 1991................. (147,342) (959) (470,183) (5,307) (451,357) (7,278)
Exercise of employee stock options......... -- -- -- -- -- --
Exercise of common stock warrants.......... -- -- -- -- -- --
Net loss................................... (1,811) -- -- -- -- --
Preferred dividends........................ (1,740) -- -- -- -- --
Translation adjustment for the year........ -- (3,709) -- -- -- --
--------- ------- -------- ------- -------- -------
Balance, December 31, 1992................. (150,893) (4,668) (470,183) (5,307) (451,357) (7,278)
Exercise of employee stock options......... -- -- -- -- -- --
Exercise of common stock warrants.......... -- -- -- -- -- --
Purchase of treasury stock................. -- -- (158,400) (1,329) -- --
Conversion of preferred stock into
common stock............................. -- -- -- -- -- --
Net income................................. 68,328 -- -- -- -- --
Preferred dividends........................ (868) -- -- -- -- --
Translation adjustment for the year........ -- (1,690) -- -- -- --
--------- ------- -------- ------- -------- -------
Balance, December 31, 1993................. $ (83,433) $(6,358) (628,583) $(6,636) (451,357) $(7,278)
--------- ------- -------- ------- -------- -------
--------- ------- -------- ------- -------- -------
</TABLE>

The accompanying notes are an integral part of these financial statements.

33
<PAGE> 35

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLAR AMOUNTS IN THE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARE EXPRESSED IN THOUSANDS, EXCEPT WHERE STATED IN MILLIONS)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of the Company
and all of its wholly-owned domestic and international subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
Investments in affiliates of at least a 20% interest but not more than a 50%
interest are accounted for using the equity method; all other investments are
carried at cost, which does not exceed the estimated net realizable value of
such investments.

Cash and Cash Equivalents

For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid debt instruments purchased with an original maturity
of three months or less to be cash equivalents.

The Company's cash balance at December 31, 1993 includes $8.8 million held
in escrow or otherwise restricted.

Fixed Assets

Fixed assets, consisting of rental equipment and property, plant and
equipment, are stated at cost. The Company computes depreciation on fixed assets
using principally the straight-line method. The estimated useful lives used in
computing depreciation range from 3 to 40 years for buildings, 3 to 20 years for
machinery and equipment, and 3 to 7 years for rental equipment. Leasehold
improvements are amortized over the lives of the leases or the estimated useful
lives of the improvements, whichever is shorter. For income tax purposes,
accelerated methods of depreciation are used.

Cost of major renewals and betterments are capitalized as fixed assets.
Expenditures for maintenance, repairs and minor improvements are charged to
expense when incurred. When fixed assets are sold or retired, the remaining cost
and related reserves are removed from the accounts and the resulting gain or
loss is included in the results of operations.

Valuation of Inventories

Inventories are stated at the lower of cost or market. Cost is determined
by the last-in, first-out ("LIFO") method for most domestic inventories and by
the first-in, first-out ("FIFO") method for all other inventories. Inventory
costs consist of materials, labor and factory overhead.

Translation of Foreign Currencies

The accounts of all international operations, except those described in the
following paragraph, are translated to United States dollars as follows: cash,
receivables and related allowances, current liabilities and long-term debt are
translated at year-end exchange rates; income and expense accounts, except for
cost of inventory sold and depreciation and amortization are translated at
average exchange rates during the year and all other accounts are translated at
historical rates. All translation adjustments resulting from the translation of
these financial statements to United States dollars are charged or credited to
income currently.

The accounts of the Company's operations in Italy are translated to United
States dollars as follows: all asset and liability accounts are translated at
year-end exchange rates, and income and expense items are translated at the
average exchange rates during the year. Cumulative translation adjustments
resulting from the translation of the financial statements of these operations
to United States dollars are recorded as a separate component of shareholders'
equity.

34
<PAGE> 36

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

All foreign currency transaction gains and losses are credited or charged
to income currently.

Foreign Exchange Contracts

From time to time, the Company enters into spot and forward contracts under
foreign exchange lines as a hedge against accounts payable in foreign
currencies. Market value gains and losses on such forward contracts are
recognized on a monthly basis, and the resulting amounts offset foreign exchange
gains or losses on the related accounts payable as payments are made.

The Company also purchases foreign exchange option contracts to hedge
certain operating exposures. Premiums paid under these contracts are expensed
over the life of the contract. Gains arising on these options are recognized at
the time the options are exercised.

Income Taxes

In the fourth quarter of 1991, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 96, "Accounting for Income Taxes" effective
January 1, 1991. This standard changed the criteria for measuring the provision
for income taxes and required that a liability approach be used to report the
deferred tax liability in the consolidated balance sheet. Deferred income tax
assets and liabilities arise from differences between the tax basis of an asset
or liability and its reported amount in the consolidated financial statements.
Deferred tax balances under this standard are determined by using the tax rate
expected to be in effect when the taxes will actually be paid. Under the
provisions of SFAS No. 96, the Company elected not to restate prior years'
consolidated financial statements and has determined that the cumulative effect
of the change in accounting for income taxes was insignificant.

In the first quarter of 1993, the Company adopted SFAS No. 109 "Accounting
for Income Taxes". This standard superseded SFAS No. 96, "Accounting for Income
Taxes" and required an asset and liability approach for financial accounting and
income tax reporting. In connection with the adoption of SFAS No. 109, the
Company elected not to restate prior years' consolidated financial statements
and has determined that the cumulative effect of the change in accounting for
income taxes was insignificant.

Earnings Per Common Share

Earnings per common share are computed on the basis of the weighted average
number of common shares and equivalent shares outstanding during each year after
deducting preferred dividends. Earnings per common share assuming full dilution,
is substantially the same as primary earnings per common share as presented for
each of the three years ended December 31, 1993. As the Company incurred a net
loss for the years 1992 and 1991, the equivalent shares were antidilutive for
those years; therefore, the equivalent shares are not included in the average
number of common shares outstanding when calculating the loss per common share
in 1992 and 1991.

Income (loss) per common share from discontinued operations was $1.95,
$(.08) and $(.16), respectively, for the years ended December 31, 1993, 1992 and
1991. The loss per common share attributable to the change in accounting
principle was $(.03) for the year ended December 31, 1993.

Employee Benefits

During the first quarter of 1993, the Company adopted SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions". This
standard changed the criteria for recognizing the cost of postretirement
benefits from the pay-as-you-go (cash) basis to the recognition of such benefits
over the employee service periods. As a result of adopting this standard, the
Company recorded the total outstanding liability related to such retiree
benefits of $1.3 million as the cumulative effect of a change in accounting
principle in the consolidated statements of operations.

35
<PAGE> 37

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2. ACQUISITIONS AND DISPOSITIONS

Sale of Directional Drilling Business

On March 29, 1993, the Company sold its Directional Drilling systems and
services (DDS) business and certain of its subsidiaries and other affiliates to
Halliburton Company (Halliburton) for 6,857,000 shares of Halliburton common
stock. In April 1993, the Halliburton common stock was sold for $247.7 million.
As a result, the Company recorded income from discontinued operations of $73.6
million including the gain from the sale of the DDS business of $80.1 million.
The gain includes provisions for various fees, expenses and taxes related to the
DDS sale.

The DDS sale consisted primarily of the inventory, rental equipment and
plant and equipment of the Dyna-Drill and Datadril product lines as well as
certain downhole tools used in the DDS business. In addition, the Company
retained approximately $23.0 million of receivables, net of payables related to
the DDS business as of the date of sale. The following table summarizes the net
assets as of December 31, 1992 of the DDS business sold to Halliburton in March
1993.

<TABLE>
<S> <C>
Inventories................................................................ $ 26,871
Rental equipment, net...................................................... 61,787
Plant and equipment, net................................................... 12,696
Other current assets....................................................... 4,350
Other long-term assets..................................................... 1,141
Liabilities assumed........................................................ (612)
--------
Net assets of the DDS business................................... $106,233
--------
--------
</TABLE>

The consolidated statements of operations reported the net results of the
DDS operations as income (loss) from discontinued operations. The DDS business
reported revenues of $36.3 million in the first three months of 1993, $158.7
million in 1992 and $151.1 million in 1991. In 1991, restructuring charges
relating to the DDS business totalled approximately $2.8 million (See Note 3).
In determining the income (loss) from discontinued operations, interest expense
of $1.3 million in 1993, $5.6 million in 1992 and $7.6 million in 1991 has been
allocated to the discontinued DDS operations based on the ratio of the estimated
net assets sold in relation to the sum of the Company's shareholders' equity and
the aggregate of outstanding debt at the end of each period.

Acquisitions of A-Z/Grant and Lindsey

On December 22, 1993, the Company acquired the product line assets of A-Z
International, Grant Oilfield Tools and Lindsey Completion Systems (A-Z/Grant
and Lindsey) from Masex Energy Services Group, Inc. for $19.0 million in cash.
A-Z/Grant and Lindsey is a leading provider of downhole tools, remedial services
and liner hangers to the oil and gas industry. A-Z/Grant and Lindsey reported
unaudited revenues of $31.6 million in 1993, $29.0 million in 1992, and $31.0
million in 1991. This acquisition was accounted for as a purchase effective
December 22, 1993. The unaudited results of A-Z/Grant and Lindsey from December
22, 1993 to December 31, 1993, were not significant to the operations of the
Company.

The historical balance sheet of the Company at December 31, 1993 includes
the accounts of A-Z/Grant and Lindsey on an estimated basis. Management has not
fully evaluated all of the consequences of the acquisition of A-Z/Grant and
Lindsey including assessing the fair market value of the assets acquired and the
total amount of costs that may be necessary to consolidate the operations of
A-Z/Grant and Lindsey with the Company. Upon completion of these evaluations
during 1994, any additional adjustments will be recorded and the excess purchase
price over net assets acquired, if any, will be recorded in accordance with
purchase accounting rules and principles.

36
<PAGE> 38

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Subsequent Event -- Acquisition of M-I Drilling Fluids Company

Effective February 28, 1994, the Company acquired a 64% interest in M-I
Drilling Fluids Company (M-I) from Dresser Industries, Inc. (Dresser) for $160
million. M-I was owned 64% by Dresser and 36% by Halliburton prior to the
acquisition. M-I is a leading provider of drilling fluids and systems to the oil
and gas drilling industry. The Company purchased the 64% interest in M-I using
$80 million of its cash and issuing a note payable to Dresser for $80 million
due on August 28, 1994. This acquisition will be accounted for as a purchase.
M-I reported unaudited revenues of $405.8 million in 1993, $382.6 million in
1992 and $435.5 million in 1991.

The Company has commitments to refinance the Dresser note payable with a
$40 million term loan from its insurance company lenders and a $65 million
revolving line of credit from the bank group. The term loan will bear interest
at a rate of 6.02 percent and be payable over a period ending in January 1998.
The revolving line of credit will be due in March 1997 and bear interest at a
rate ranging from LIBOR + 3/4 percent to LIBOR +1 1/2 percent based upon the
debt-to-total capitalization of the Company. Management believes such financing
will be completed by the end of March 1994.

<TABLE>
<S> <C>
Unaudited pro forma revenues............................................... $658,124
Unaudited pro forma income from continuing operations...................... $ 1,652
Unaudited income from continuing operations per common share............... $ 0.02
</TABLE>

3. RESTRUCTURING CHARGES

During the fourth quarter of 1991, the Company decided to restructure
certain of its worldwide operations in response to the continuing decline of
U.S. oil and gas drilling activity. The restructuring consisted of closing
manufacturing facilities in Mexico City and Veracruz, Mexico, closing various
service locations in the U.S. as well as downsizing other worldwide operations
and reducing the worldwide workforce by approximately 27%. As a result of the
restructuring, the Company recorded a $21.2 million unusual charge to income
from continuing operations before interest and taxes in 1991 consisting of $9.9
million for estimated severance and relocation costs, a writedown of $5.7
million related to fixed assets of closed and downsized locations, a provision
of $3.7 million to expense certain manufacturing inefficiencies and $1.9 million
related to other non-recurring items.

4. INVENTORIES

Inventories consist of the following:

<TABLE>
<CAPTION>
1993 1992
-------- --------
<S> <C> <C>
Raw materials................................................... $ 10,965 $ 13,084
Work in process................................................. 13,105 12,220
Finished goods.................................................. 68,732 64,359
-------- --------
92,802 89,663
Reserves to state domestic inventories ($70,597 in 1993 and
$69,011 in 1992) on a LIFO basis.............................. (11,148) (12,348)
-------- --------
$ 81,654 $ 77,315
-------- --------
-------- --------
</TABLE>

37
<PAGE> 39

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. ASSETS HELD FOR SALE

The Company's efforts to combine manufacturing facilities and reduce
operating capacity have resulted in certain excess and/or idle assets which are
classified as assets held for sale. Assets held for sale are stated at the lower
of cost or estimated net realizable value as of December 31, 1993 and 1992 as
follows:

<TABLE>
<CAPTION>
1993 1992
------- -------
<S> <C> <C>
Land.............................................................. $ 4,194 $ 4,840
Buildings......................................................... 5,865 8,593
Machinery and equipment........................................... 1,807 384
------- -------
$11,866 $13,817
------- -------
------- -------
</TABLE>

6. DEBT

The following summarizes the Company's short-term debt and long-term debt:

<TABLE>
<CAPTION>
BALANCE AT DECEMBER
31,
----------------------
1993 1992
------- --------
<S> <C> <C>
SHORT-TERM DEBT
Short-term bank borrowings with weighted average interest rates of 7%
in 1993 and 9% in 1992.............................................. $ 702 $ 34,361
Current portion of long-term debt..................................... -- 68,982
------- --------
Total short-term debt and current portion of long-term
debt...................................................... 702 103,343
------- --------
LONG-TERM DEBT
Notes payable to insurance companies due on October 1, 2001 at
9.83%............................................................... 46,000 95,000
Secured Term loan payable to banks at LIBOR +1 1/4%................... -- 18,182
Other................................................................. -- 1,800
------- --------
46,000 114,982
Less: Amounts classified as current portion of long-term debt....... -- 68,982
------- --------
Total Long-Term Debt........................................ 46,000 46,000
------- --------
Total Debt................................................ $46,702 $149,343
------- --------
------- --------
</TABLE>

On October 2, 1992, the Company refinanced substantially all of its
short-term and long-term debt through a private placement of debt and a new
syndicated bank credit facility. The private debt offering consisted of $95.0
million of secured long-term debt repayable over a nine year period with
interest at 9.83%. The secured domestic bank facility consisted of a $20.0
million three year term loan repayable in quarterly installments and a $40.0
million revolving credit facility expiring on June 30, 1995. The Company used
the proceeds of the secured long-term debt, the term loan and $19.6 million of
the revolving credit facility to retire the Company's $89.4 million Series A
notes due December 31, 1994 with interest at 13%, a term loan of $6.5 million
with interest at prime +1 3/4%, an outstanding balance of the Company's domestic
credit facility of $30.5 million and $8.2 million of international lines of
credit.

In connection with the DDS sale, the Company was required to repay its bank
debt. The Company also granted options which expired on July 23, 1993 to its
insurance company lenders for early repayment of their debt at a reduced make
whole premium. On April 12, 1993, the Company used a portion of the proceeds of
the DDS sale to retire its domestic credit facility totaling $37.2 million, its
domestic bank term loan totaling $16.4 million and $39.0 million of notes
payable with insurance companies. On July 23, 1993, the Company repaid an
additional $10.0 million of notes payable with insurance companies. The
Company's remaining debt totaling $46.0 million at December 31, 1993 is
classified as long-term. The accompanying December 31, 1992

38
<PAGE> 40

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company's indenture relating to its long-term debt contains covenants
restricting the payment of cash dividends to the Company's common stockholders
based on net earnings and operating cash flow formulas as defined in the
indenture. The Company has not paid dividends on its Common Stock since the
first quarter of 1986. In addition to compliance with the covenants of the
indenture, the determination of the amount of future cash dividends to be
declared and paid on the Common Stock, if any, will depend upon the Company's
financial condition, earnings and cash flow from operations, the level of its
capital expenditures, its future business prospects and other factors that the
Board of Directors deem relevant.

See Note 2 for a discussion of the financing of the M-I acquisition.

In July 1993, the Company entered into a swap agreement with a financial
institution. Under this agreement, the Company receives a fixed rate of 4.86% on
$46.0 million of borrowings and pays a floating rate based on 6 month LIBOR.
Management believes that the fair market value of the swap agreement at December
31, 1993 was insignificant.

Interest paid during the years ended December 31, 1993, 1992, and 1991
amounted to $9.2 million, $15.7 million, and $21.3 million, respectively.

7. FINANCIAL INSTRUMENTS

The carrying values of cash and cash equivalents, receivables, accounts
payable and short-term debt approximate the fair market values due to the
short-term maturities of these instruments. Management believes that the
carrying amount of long-term debt is not materially different from the fair
value using rates currently available for debt of similar terms and maturity.

The Company is a party to financial instruments described below with off
balance sheet risks which it utilizes in the normal course of business to manage
its exposure to fluctuations in interest rates and foreign currency exchange
rates.

Foreign Currency Forward Contracts and Options

At December 31, 1993, the Company had outstanding foreign exchange
contracts as a hedge against foreign accounts totaling $11.0 million maturing at
various dates during 1994. There were no significant unrecorded gains or losses
on these contracts at December 31, 1993. The Company has outstanding option
contracts of $5.9 million at December 31, 1993 which expire at various dates in
1994. The Company has no loss exposure under these contracts.

Interest Rate Contracts

The Company utilizes an interest rate swap agreement to manage its interest
rate exposure. At December 31, 1993 the fair value of the agreement was
insignificant. At December 31, 1993, the Company reported as part of cash and
cash equivalents $16.9 million as the carrying cost of an investment fund which
utilizes financial instruments to manage its interest rate exposure. During the
year ended December 31, 1993, the fund's hedge account incurred a net loss of
$0.3 million reducing the fair value of the fund to $16.6 million.

39
<PAGE> 41

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8. INCOME TAXES

See Note 1 regarding changes in the method in recording income taxes during
1991 and 1993. The consolidated income tax provision (benefit) relating to
continuing operations are summarized as follows:

<TABLE>
<CAPTION>
1993 1992 1991
----- ------- ------
<S> <C> <C> <C>
Current --
United States.......................................... $ -- $ 108 $ 257
Foreign................................................ 662 1,613 904
State.................................................. 13 (30) 181
----- ------- ------
675 1,691 1,342
----- ------- ------
Deferred --
United States (including, in 1992, the benefit of a
$2,500 tax settlement).............................. (301) (2,462) 627
Foreign................................................ 94 (236) 889
----- ------- ------
(207) (2,698) 1,516
----- ------- ------
Income tax provision (benefit)........................... $ 468 $(1,007) $2,858
----- ------- ------
----- ------- ------
</TABLE>

Deferred taxes are principally attributable to timing differences related
to depreciation expense and net operating loss (NOL) and tax credit
carryforwards. Deferred taxes also include, in 1992, the net benefit resulting
from a settlement of various outstanding issues with the Internal Revenue
Service related to prior year audits and offsetting claims for refunds of prior
year taxes and, in 1991, the recording of a $1.0 million tax provision to
reflect expected settlements of prior year foreign tax liabilities of certain of
the Company's subsidiaries. In 1993 and 1991, the Company reported the tax
benefit of operating loss carryforwards as a reduction in the provision for
income taxes in accordance with SFAS No. 109 and SFAS No. 96, respectively.

The income tax provision (benefit) computed by applying the U.S. Federal
statutory rate to income (loss) from continuing operations before income taxes
are reconciled to the actual tax provision (benefit) as follows:

<TABLE>
<CAPTION>
1993 1992 1991
------- ------- -------
<S> <C> <C> <C>
Income (loss) from continuing operations before income
taxes:
United States....................................... $21,020 $ 2,740 $ 7,002
Foreign............................................. (24,547) (2,583) (9,157)
------- ------- -------
Total....................................... $(3,527) $ 157 $(2,155)
------- ------- -------
------- ------- -------
Computed U.S. Federal statutory tax expense
(benefit)........................................... $(1,199) $ 53 $ (733)
U.S. Alternative Minimum Tax.......................... -- 161 548
Utilization of U.S. net operating loss carryforward... (7,283) -- (2,478)
U.S. branch income/foreign dividends.................. (165) (1,089) 98
State taxes, net...................................... 13 (30) 181
Expected settlement of foreign tax liabilities
(related to prior years)............................ -- -- 1,000
Foreign tax provisions in excess of U.S. rate/foreign
losses
with no tax benefit realized........................ 8,929 2,255 3,907
U.S. benefit of tax settlement........................ -- (2,500) --
Other items, net...................................... 173 143 335
------- ------- -------
Income tax provision (benefit).............. $ 468 $(1,007) $ 2,858
------- ------- -------
------- ------- -------
</TABLE>

40
<PAGE> 42

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The components of the net deferred tax liability are as follows:

<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 1,
1993 1993
------------ -----------
<S> <C> <C>
Deferred tax liabilities attributed to the excess of net
book basis over remaining tax basis (principally
depreciation):
Domestic.................................................. $ 8,286 $ 12,451
Foreign................................................... 4,015 3,990
-------- ---------
Total deferred tax liabilities....................... 12,301 16,441
-------- ---------
Deferred tax assets attributed to domestic net operating
loss and tax credit carryforwards......................... 62,091 71,168
Other deferred tax assets:
Domestic.................................................. 11,863 6,267
Foreign................................................... -- 173
-------- ---------
Subtotal............................................. 73,954 77,608
Valuation allowance......................................... (66,216) (65,833)
-------- ---------
Net deferred tax assets.............................. 7,738 11,775
-------- ---------
Net deferred tax liability...................... $ 4,563 $ 4,666
-------- ---------
-------- ---------
</TABLE>

For U.S. tax reporting purposes, the Company has cumulative NOL
carryforwards in the amount of approximately $148.5 million. These losses were
generated in 1986, 1987, 1988 and 1992 in the amounts of $12.7 million, $91.3
million, $42.3 million and $2.2 million, respectively. Losses in 1986, 1987,
1988 and 1992 are available to reduce future U.S. taxable income that may be
generated through the years 2001, 2002, 2003 and 2007, respectively. Upon
certain changes in equity ownership of the Company, the ability to utilize NOL
carryforwards becomes subject to limitation under Section 382 of the Internal
Revenue Code of 1986, as amended. In the opinion of management, the application
of Section 382 will not materially limit the availability of net tax loss
carryforwards.

Also available to reduce future U.S. income taxes are unused alternative
minimum tax credits of $2.8 million and investment tax credits of $7.3 million.
The investment tax credits which expire as follows: $2.8 million in 1997, $1.8
million in 1998, $1.6 million in 1999 and $1.1 million in 2000. Income taxes
paid during the years ended December 31, 1993, 1992 and 1991 amounted to $0.9
million, $4.4 million, and $7.4 million respectively.

The Company's foreign subsidiaries currently have undistributed earnings of
$17.8 million which if repatriated would be generally sheltered from U.S. tax by
NOL carryforwards and various foreign tax credits.

9. CAPITAL STOCK

Preferred Stock

The Company's preferred stock carried a cumulative annual dividend of 8.75%
($2.1875 per share based on a $25 value) payable quarterly and was convertible
into common stock at $8 per share, subject to certain antidilution adjustments.
The Preferred Stock had a liquidation preference of $25 per share plus cash
equal to any accumulated and unpaid dividends, and was redeemable at the
Company's option at any time at a redemption price of $25 per share plus cash
equal to any accumulated and unpaid dividends, provided that the average closing
price of the common stock for the 20 trading days ending on the fifth day before
mailing the notice of redemption was at least 125% of the conversion price if
mailed before February 10, 1994.

In June 1993, the Company called the remaining shares of preferred stock
for redemption in accordance with the terms of the Certificate of Designation
with regard to the preferred stock. All holders of the preferred stock
surrendered their shares for conversion into 2,496,250 shares of common stock of
the Company. For

41
<PAGE> 43

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

purposes of the Consolidated Statements of Cash Flows, this conversion of
preferred stock to common stock is a non-cash transaction, and, therefore, is
not reflected in the Consolidated Statements of Cash Flows. As of December 31,
1993, there were no shares of the preferred stock outstanding.

Common Stock Warrants and Treasury Securities

In November 1991, the Company raised approximately $50.0 million in equity
through its temporary warrant reduction offers and the issuance of 992,000
shares of additional common stock. In connection with the temporary warrant
reduction offers, 2,758,268 Class A Warrants and 3,619,596 Class B Warrants were
exercised to purchase the Company's common stock at a temporarily reduced
exercise price of $5.10 per Class A Warrant and $7.35 per Class B Warrant. The
proceeds were used to retire the Company's then outstanding Series B Notes and
accrued interest thereon totalling $46.8 million in December, 1991.

At December 31, 1993, the Company has outstanding 225,520 Class A Warrants
and 1,872,205 Class B Warrants to purchase common stock exercisable until
February 28, 1995 at a price of $8.28 per share and $15.00 per share,
respectively.

During 1990, the Company issued 300,000 shares of common stock and 451,357
Class C warrants to an international subsidiary. These Class C Warrants are
exercisable until February 28, 1995 at a price of $1.00 per share. The Company
has recorded these warrants at their estimated value at the date of issue of
$16.125 per warrant. This transaction is reflected as treasury securities in the
consolidated balance sheets and consolidated statements of shareholders' equity.

In June 1993, the Board of Directors approved a stock repurchase program
whereby the Company may buy up to 3 million shares of its outstanding common
stock. The program contemplates that the Company may, from time to time,
purchase shares in the open market. This program is funded by the Company's cash
balances. As of December 31, 1993, the Company had purchased 158,400 shares of
common stock under the stock repurchase program at a cost of $1.3 million. These
shares are reflected as treasury securities in the Consolidated Balance Sheets
and Consolidated Statements of Shareholders' Equity.

The Company did not make dividend payments to common stockholders during
1993, 1992 and 1991. See Note 6.

10. EMPLOYEE STOCK OPTIONS, RESTRICTED STOCK AWARDS AND STOCK APPRECIATION
RIGHTS

As of December 31, 1993, the Company has outstanding stock options granted
under two plans: the 1989 Long-Term Incentive Compensation Plan ("1989 Plan")
and the 1982 Stock Option Plan ("1982 Plan"). No further options may be granted
under the 1982 Plan. Options issued in 1982, 1983, 1984 and 1985 under the 1982
Plan were cancelled and reissued effective June of 1986 at an option price which
represented the fair market value on the date of reissuance. During 1991,
options under the Company's 1971 Stock Option Plan lapsed.

42
<PAGE> 44

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The options, exercisable at various dates through December 2003, are
conditioned upon continued employment. A summary of stock option transactions
for 1993, 1992 and 1991 are as follows:

<TABLE>
<CAPTION>
1993 1992 1991
--------- -------- -------
<S> <C> <C> <C>
Outstanding at beginning of year............................ 720,190 636,854 524,000
Options granted............................................. 439,500 277,487 247,620
Options forfeited........................................... (116,015) (136,078) (30,250)
Options exercised:
-- with a basis of $0.00.................................. -- -- (31,122)
-- with a basis of $2.48.................................. (200) -- --
-- with a basis of $2.50.................................. -- (40,132) (35,753)
-- with a basis of $2.53.................................. (17,008) (11,941) (4,758)
-- with a basis of $5.50.................................. (15,750) (6,000) (28,250)
-- with a basis of $8.38.................................. (7,885) -- --
-- with a basis of $10.27................................. -- -- (3,438)
-- with a basis of $12.56................................. -- -- (1,195)
--------- -------- -------
Outstanding at end of year.................................. 1,002,832 720,190 636,854
--------- -------- -------
--------- -------- -------
Options exercisable:
Granted in 1982-1984 with a basis of $10.21............... 1,925 1,825 2,450
Granted in 1982-1985 with a basis of $2.53................ 6,800 25,133 37,649
Granted in 1986 with a basis of $2.48..................... 633 833 833
Granted in 1987 with a basis of $5.50..................... 34,650 52,400 58,400
Granted in 1989 with a basis of $10.27.................... 91,345 80,408 59,460
Granted in 1990 with a basis of $2.50..................... -- -- 1,250
Granted in 1990 with a basis of $12.56.................... 75,924 53,495 31,068
Granted in 1990 with a basis of $15.72.................... 3,750 2,500 1,250
Granted in 1990 with a basis of $16.09.................... 10,313 6,875 3,438
Granted in 1991 with a basis of $10.52.................... 2,500 1,250 --
Granted in 1991 with a basis of $14.73.................... 66,455 31,445 --
Granted in 1992 with a basis of $8.38..................... 54,293 -- --
Granted in 1992 with a basis of $9.25..................... 20,000 20,000 --
Options not exercisable:
Granted in 1989 with a basis of $10.27.................... -- 26,802 59,460
Granted in 1990 with a basis of $2.50..................... -- -- 36,382
Granted in 1990 with a basis of $12.56.................... 20,036 53,495 93,202
Granted in 1990 with a basis of $15.72.................... -- 2,500 3,750
Granted in 1990 with a basis of $16.09.................... -- 6,875 10,312
Granted in 1991 with a basis of $2.52..................... -- -- 2,500
Granted in 1991 with a basis of $2.90..................... -- -- 75,150
Granted in 1991 with a basis of $10.52.................... 2,500 3,750 5,000
Granted in 1991 with a basis of $14.73.................... 45,370 104,333 155,300
Granted in 1992 with a basis of $8.38..................... 126,838 246,271 --
Granted in 1993 with a basis of $8.38..................... 199,500 -- --
Granted in 1993 with a basis of $10.31.................... 240,000 -- --
--------- -------- -------
1,002,832 720,190 636,854
--------- -------- -------
--------- -------- -------
</TABLE>

Included in the 1993 grants were stock options of 199,500 shares and
240,000 shares at exercise prices of $8.38 and $10.31, respectively. These stock
options vest over a four year period from the date of grant.

43
<PAGE> 45

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Included in the 1992 grants were stock options of 257,487 shares and 20,000
shares at exercise prices of $8.38 and $9.25, respectively. Of the total $8.38
stock options, the Company granted 167,497 shares in exchange for certain Stock
Appreciation Rights valued at an exercise price of $10.53 - $16.09. The stock
options granted at $8.38 vest over a four year period from the date of grant.
The stock options granted at $9.25 were fully vested at the date of grant.
Included in the 1991 grants were restricted stock options of 80,040 shares at
$2.90. These options vested over a two year period from the date of grant but
lapsed during 1992.

In addition, as part of the 1989 Plan, the Company granted 82,540 Stock
Appreciation Rights in 1991 at an exercise price range of $10.52 - $14.73 and
80,775 Stock Appreciation Rights in 1990 at an exercise price range of
$12.56 - $16.09. At December 31, 1993, there were 16,508 of these rights
outstanding. These rights vest over a four year period from date of grant, and
are exercisable until February 2001. Upon exercise of the rights, appreciation
is paid by distributing cash or shares at the option of the Company.

At December 31, 1993, there were no shares of common stock reserved under
the 1989 Plan for the future granting of stock options, awarding of additional
restricted stock options and/or awarding of additional Stock Appreciation
Rights.

11. EMPLOYEE BENEFITS

The Company has non-contributory pension plans in the U.S. and U.K. Benefit
accruals under the Company's U.S. pension plan, which have been frozen since
1987, covered substantially all the U.S. employees of the Company at that date.
Due to the freezing of domestic pension benefits and fully funding those
benefits in 1987, a contribution was not necessary for 1992 or 1991.

The following tables detail the components of pension expense for the three
years ended December 31, 1993, the funded status of the plans and major
assumptions used to determine these amounts:

<TABLE>
<CAPTION>
1993 1992 1991
------- ------- -------
<S> <C> <C> <C>
Service cost.................................................. $ 276 $ 343 $ 363
Interest cost................................................. 769 805 791
Actual return on plan assets.................................. (1,308) (848) (988)
Net amortization and deferral and other....................... 1,284 19 263
------- ------- -------
Net periodic pension cost..................................... $ 1,021 $ 319 $ 429
------- ------- -------
------- ------- -------
Reconciliation of Funded Status of the Plan
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1993 1992 1991
------- ------- -------
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation................................ $10,276 $ 9,674 $ 9,426
------- ------- -------
------- ------- -------
Accumulated benefit obligation........................... $10,468 $ 9,842 $ 9,626
------- ------- -------
------- ------- -------
Projected benefit obligation............................. $11,540 $10,373 $10,159
Plan assets at fair value................................ 10,259 11,250 10,248
------- ------- -------
Projected benefit obligation (in excess of) or less than
plan assets............................................ $(1,281) $ 877 $ 89
Unrecognized net (gain) loss............................. 1,440 (825) 351
Additional minimum liability............................. (2,491) -- --
------- ------- -------
Prepaid pension cost (pension liability) recognized in
the balance sheet...................................... $(2,332) $ 52 $ 440
------- ------- -------
------- ------- -------
Weighted-average assumed discount rate................... 7.0% 8.5% 8.5%
Rate of compensation increases........................... None in U.S. due to freezing
of benefits, 7.5% in U.K.
Weighted-average expected long-term rate of return on
plan assets............................................ 7.0% 8.5% 8.5%
</TABLE>

44
<PAGE> 46

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

For 1993, the Company reduced its discount rate related to the domestic
pension plan from 8.5% to 7.0% to more accurately reflect current market trends.
As a result, the projected benefit obligation exceeded the fair value of the
plan's assets by $2.5 million. This amount is recorded as an additional minimum
liability in the Consolidated Balance Sheets at December 31, 1993.

The Company has several other pension plans covering certain international
employees. Pension expense for these plans totaled $0.2 million in 1993, $0.4
million in 1992 and $0.2 million in 1991. Based on the latest available
actuarial valuations, total accumulated plan benefits are $2.0 million and net
assets available for benefits are $2.4 million.

The Company has an Employee 401(k) Plan which allows eligible participating
employees to make contributions in either a Company stock fund or any one of
seven mutual funds or a combination thereof. The Company contributes for all
eligible employees a percentage of their qualified compensation into the Plan.
Contribution percentages range from 2% for employees under the age of 40 to 6%
for employees who are 60 years of age or older. Contributions to this plan by
the Company totaled approximately $1.7 million in 1993 and $2.0 million for the
years ended December 31, 1992 and 1991. Effective January 1, 1990, the Company
also initiated an additional plan to fund a matching contribution ranging from
0% to 100% of an individual employee's 401(k) contributions based on the Company
achieving a certain level of operating income as a percentage of total revenue
for the year. In 1993, the Company recorded an expense of $1.2 million for this
plan. No expense was required or recorded for matching contributions for 1992 or
1991 related to this plan.

The Company and its subsidiaries provide certain health care benefits for
retired employees. Most of the employees who retire from the Company are
eligible for these benefits. The cost of postretirement health care benefits
were recognized as an expense as claims were paid in 1992 and 1991. These costs
totaled approximately $0.2 million in 1992 and $0.3 million in 1991.

In 1990, the Financial Accounting Standards Board ("FASB") issued SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions."
During the first quarter of 1993, the Company adopted this new standard. As a
result of adopting SFAS No. 106, the Company recorded the total outstanding
liability related to such retiree benefits of $1.3 million as the cumulative
effect of a change in accounting principle in the consolidated statements of
operations.

Prior to May 1, 1993, the Company had two retiree medical coverage plans.
Effective May 1, 1993 the two plans were combined into one plan, the Smith
International, Inc. Retiree Medical Plan. The plan provides postretirement
medical benefits to retirees and their spouses. The retiree medical plan has an
annual limitation (a "cap") on the dollar amount of the Company's portion of the
cost of benefits incurred by retirees under the plan. The remaining cost of
benefits in excess of the cap is the responsibility of the participants. For
1993, the cap was $25,000. The cap is adjusted annually for inflation, which is
currently assumed to be 4 percent.

The following table sets forth the plan's funded status reconciled with the
amount shown in the Company's consolidated balance sheets:

<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 1,
1993 1993
------------ ----------
<S> <C> <C>
Accumulated postretirement benefit obligation:
-- Retirees................................................ $ (1,140) $ (1,236)
-- Actives................................................. (93) (64)
Plan assets at fair value.................................... -- --
-------- --------
Accumulated postretirement benefit obligation in excess of
plan assets................................................ (1,233) (1,300)
Unrecognized net gain........................................ (57) --
-------- --------
Prepaid (Accrued) postretirement benefit cost................ $ (1,290) $ (1,300)
-------- --------
-------- --------
</TABLE>

45
<PAGE> 47

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Postretirement benefit expense recognized in income from continuing
operations for the year ended December 31, 1993 is summarized as follows:

<TABLE>
<S> <C>
Service cost.................................................................. $ 9
Interest cost on accumulated postretirement benefit obligation and other...... 223
-----
Postretirement benefit expense................................................ $ 232
-----
-----
</TABLE>

The health care cost trend rate assumption can have a significant effect on
the amounts reported. For measurement purposes, a 12% annual rate of increase in
the per capita cost of covered health care benefits was assumed for 1993. The
rate was assumed to gradually decrease to 7% for 1998 and to remain at that
level thereafter. An increase of one percentage point in the health care cost
trend rate would not have a material effect on either the accumulated
postretirement benefit obligation or the aggregate of the service and interest
cost components of the postretirement benefits expense.

The weighted-average discount rates used in determining the accumulated
postretirement benefit obligation for 1993 and 1992 were 7.0% and 8.0%,
respectively.

12. STOCKHOLDERS' RIGHTS PLAN

On June 19, 1990, the Company adopted a Stockholder Rights Plan ("the
Rights Plan"). The Rights Plan provides for a dividend distribution of one
preferred stock purchase right ("Right") for each outstanding share of the
Company's Common Stock, to shareholders of record at the close of business on
June 29, 1990. The Rights Plan is designed to deter coercive takeover tactics
and to prevent an acquiror from gaining control of the Company without offering
a fair price to all of the Company's shareholders. The Rights will expire on
June 19, 2000.

Each Right entitles shareholders to buy one-hundredth of a newly issued
share of Series A Junior Participating Preferred Stock of the Company at an
exercise price of $50. The Rights are exercisable only if a person or group (a)
acquires beneficial ownership of 20% or more of the Common Stock or (b) acquires
beneficial ownership of 1% or more of the Company's Common Stock if such person
or group is a 20%-or-more shareholder on the date when the Rights dividend
distribution is declared or (c) commences a tender or exchange offer which upon
consummation such person or group would beneficially own 20% or more of the
Common Stock of the Company. However, the Rights will not become exercisable if
Common Stock is acquired pursuant to an offer for all shares which a majority of
the independent directors, excluding all officers of the Company, determine to
be fair to and otherwise in the best interests of the Company and its
shareholders.

If any person or group becomes the beneficial owner of 20% or more of the
Company's Common Stock, or acquires 1% or more of the Common Stock if such
person or group is a 20%-or-more shareholder on the date when the Rights
dividend distribution is declared, other than (in either case) pursuant to an
offer for all shares as described above, then each Right not owned by such
person or group or certain related parties will entitle its holder to purchase,
at the Right's then current exercise price, shares of the Company's Common Stock
(or, in certain circumstances as determined by the Board, cash, other property,
or other securities) having a value of twice the Right's exercise price. In
addition, if, after any person becomes the beneficial owner of 20% or more of
the Company's Common Stock, or acquires 1% or more of the Common Stock if such
person is a 20%-or-more shareholder on the date when the Rights dividend
distribution is declared, the Company is involved in the merger or other
business combination transaction with another person in which its Common Stock
is changed or converted, or sells 50% or more of its assets or earning power to
another person, each Right will entitle its holder to purchase, at the Right's
then current exercise price, shares of common stock of such other person having
a value of twice the Right's exercise price.

46
<PAGE> 48

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company will generally be entitled to redeem the Rights at $.01 cents
per Right at any time until the tenth business day (subject to extension)
following public announcement that a person has become the beneficial owner of
20% or more of the Company's Common Stock, or acquires 1% or more of the Common
Stock if a 20%-or-more shareholder on the date when the Rights dividend
distribution is declared.

13. SUPPLEMENTARY INCOME STATEMENT INFORMATION

Amounts charged to expense for continuing operations is as follows:

<TABLE>
<CAPTION>
1993 1992 1991
------- ------- -------
<S> <C> <C> <C>
Maintenance and repairs.................................. $5,689 $3,927 $9,748
Depreciation of fixed assets............................. 7,348 9,088 9,473
Amortization of intangible assets........................ 934 618 619
Taxes, other than payroll and income taxes............... 1,901 2,280 2,061
Rents.................................................... 6,572 6,190 4,663
Research and engineering costs........................... 6,574 6,218 8,943
</TABLE>

14. QUARTERLY INFORMATION (UNAUDITED)

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH YEAR
------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
1993
Revenues....................................... $49,954 $52,741 $ 59,039 $58,978 $220,712
------- ------- -------- ------- --------
------- ------- -------- ------- --------
Gross profit................................... $17,821 $19,619 $ 22,239 $22,863 $ 82,542
------- ------- -------- ------- --------
------- ------- -------- ------- --------
Income (loss) from continuing operations....... $ 1,327 $ 2,651 $(14,158) $ 6,185 $ (3,995)
Income from discontinued operations (Note 2)... 73,623 -- -- -- 73,623
Cumulative effect of change in accounting
principle.................................... (1,300) -- -- -- (1,300)
------- ------- -------- ------- --------
Net income (loss).............................. $73,650 $ 2,651 $(14,158) $ 6,185 $ 68,328
------- ------- -------- ------- --------
------- ------- -------- ------- --------
Income (loss) per common share:
From continuing operations................... $ 0.03 $ 0.06 $ (0.36) $ 0.16 $ (0.13)
From discontinued operations................. 2.02 -- -- -- 1.95
From the change in accounting principle...... (0.04) -- -- -- (0.03)
------- ------- -------- ------- --------
Net income (loss)............................ $ 2.01 $ 0.06 $ (0.36) $ 0.16 $ 1.79
------- ------- -------- ------- --------
------- ------- -------- ------- --------
</TABLE>

Included in third quarter of 1993 results is a special charge of $19.9
million ($0.51 per common share in the third quarter and $0.53 per common share
for the full year) relating to the settlement of drill bit litigation (See Note
16). Due to the conversion of the preferred stock into common stock (See Note 9)
in the second quarter of 1993, the total year income (loss) per common share
amounts do not equal the sum of the quarterly income (loss) per common share
amounts.

47
<PAGE> 49

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH YEAR
------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
1992
Revenues....................................... $53,895 $49,916 $ 53,386 $53,472 $210,669
------- ------- -------- ------- --------
------- ------- -------- ------- --------
Gross profit................................... $19,387 $18,255 $ 18,506 $17,966 $ 74,114
------- ------- -------- ------- --------
------- ------- -------- ------- --------
Income (loss) from continuing operations....... $ 2,039 $ (145) $ (280) $ (450) $ 1,164
Income (loss) from discontinued operations
(Note 2)..................................... 488 (1,371) (727) (1,365) (2,975)
------- ------- -------- ------- --------
Net income (loss).............................. $ 2,527 $(1,516) $ (1,007) $(1,815) $ (1,811)
------- ------- -------- ------- --------
------- ------- -------- ------- --------
Income (loss) per common share:
From continuing operations................... $ 0.05 $ (0.01) $ (0.02) $ (0.02) $ (0.02)
Income (loss) from discontinued operations..... 0.01 (0.04) (0.02) (0.04) (0.08)
------- ------- -------- ------- --------
Net income (loss)............................ $ 0.06 $ (0.05) $ (0.04) $ (0.06) $ (0.10)
------- ------- -------- ------- --------
------- ------- -------- ------- --------
</TABLE>

Included in the income (loss) from continuing operations and net income
(loss) for the fourth quarter of 1992 is a benefit of $2.5 million to reflect
the settlement of U.S. tax issues and approval of U.S. tax refund claim for
prior years. For each of the quarters in 1993 and 1992, fully diluted net income
(loss) per common share was the same as the respective primary net income (loss)
per common share amount.

15. INDUSTRY SEGMENTS AND INTERNATIONAL OPERATIONS

The Company operates primarily in one industry segment: petroleum services.
The products and services of the petroleum services segment are primarily used
in the drilling of oil and gas wells. The following chart sets forth information
concerning the Company's continuing domestic and international operations:

<TABLE>
<CAPTION>
UNITED INTERNATIONAL
STATES OPERATIONS ELIMINATIONS TOTAL
-------- ------------- ------------ -----------
<S> <C> <C> <C> <C>
Year ended December 31, 1993:
Sales and other revenues to unaffiliated
customers................................... $134,341 $ 86,371 $ -- $ 220,712
Transfers between geographic areas............. 58,693 23,061 (81,754) --
-------- --------- -------- ----------
Total revenues................................. $193,034 $ 109,432 $(81,754) $ 220,712
-------- --------- -------- ----------
-------- --------- -------- ----------
Income from continuing operations before
interes and taxes........................... $ 26,532 $ (1,920) $ (96) $ 24,516
-------- --------- -------- ----------
-------- --------- -------- ----------
Identifiable assets............................ $249,118 $ 99,268 $ -- $ 348,386
-------- --------- -------- ----------
-------- --------- -------- ----------
Year ended December 31, 1992:
Sales and other revenues to unaffiliated
customers................................... $116,129 $ 94,540 $ -- $ 210,669
Transfers between geographic areas............. 54,334 26,738 (81,072) --
-------- --------- -------- ----------
Total revenues................................. $170,463 $ 121,278 $(81,072) $ 210,669
-------- --------- -------- ----------
-------- --------- -------- ----------
Income from continuing operations before
interest and taxes.......................... $ 17,391 $ (1,556) $ 176 $ 16,011
-------- --------- -------- ----------
-------- --------- -------- ----------
Identifiable assets............................ $147,535 $ 116,102 $ -- $ 263,637
-------- --------- -------- ----------
-------- --------- -------- ----------
Year ended December 31, 1991:
Sales and other revenues to unaffiliated
customers................................... $143,592 $ 108,375 $ -- $ 251,967
Transfers between geographic areas............. 63,856 34,285 (98,141) --
-------- --------- -------- ----------
Total revenues................................. $207,448 $ 142,660 $(98,141) $ 251,967
-------- --------- -------- ----------
-------- --------- -------- ----------
Income from continuing operations before
interest and taxes.......................... $ 16,397 $ (856) $ (176) $ 15,365
-------- --------- -------- ----------
-------- --------- -------- ----------
Identifiable assets............................ $141,838 $ 146,724 $ -- $ 288,562
-------- --------- -------- ----------
-------- --------- -------- ----------
</TABLE>

48
<PAGE> 50

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

General corporate expenses and interest income and expense have been
excluded from income from continuing operations before interest and taxes in the
table above. Results of operations as reported in the accompanying consolidated
financial statements include general corporate expenses of $5.9 million in 1993,
$5.7 million in 1992 and $4.7 million in 1991.

Transfers between geographic areas are recorded by the Company and its
subsidiaries based on their various intercompany pricing agreements.

United States sales include $29.9 million in 1993, $27.9 million in 1992
and $33.4 million in 1991 exported to various international markets. These
markets include North Sea/Europe, Africa, Middle East, Latin America, Far
East/Asia, and Canada. With the exception of North Sea/Europe, neither export
nor international sales to any one of these individual markets exceeded 10% of
consolidated revenues.

No single customer accounts for 10% or more of consolidated revenues for
the periods presented.

The Company's revenues are derived principally from uncollateralized sales
to customers in the oil and gas industry. This industry concentration has the
potential to impact the Company's exposure to credit risk, either positively or
negatively, because customers may be similarly affected by changes in economic
or other conditions. The creditworthiness of this customer base is strong, and
the Company has not experienced significant credit losses on such receivables.

16. COMMITMENTS AND CONTINGENT LIABILITIES

Leases

The Company leases certain facilities and machinery and equipment under
operating leases. The Company also leases certain machinery and equipment under
capital leases. At December 31, 1993 and 1992, machinery and equipment included
$3.0 million and $2.5 million, respectively (before accumulated amortization of
$0.7 million and $0.7 million, respectively) related to capital leases. These
capital leases are recorded in other current and other long-term liabilities in
the accompanying consolidated balance sheets.

Future minimum payments under all non-cancellable leases having initial
terms of one year or more are as follows:

<TABLE>
<CAPTION>
YEAR ENDING CAPITAL OPERATING
DECEMBER 31, LEASES LEASES
- ------------ ------- ---------
<S> <C> <C> <C>
1994............................................................ $ 660 $ 3,316
1995............................................................ 520 2,149
1996............................................................ 435 1,437
1997............................................................ 345 1,072
1998............................................................ 11 872
Thereafter..................................................... -- 9,454
------- ---------
1,971 $18,300
---------
---------
Less: amount representing interest on capital leases........... 384
-------
Present value of minimum lease payments under capital leases... $ 1,587
-------
-------
</TABLE>

49
<PAGE> 51

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Litigation

On March 4, 1992, the Company was served with a complaint in the U.S.
District Court in the Central District of California by the U.S. Department of
Labor ("DOL"). The complaint alleges violations of the Employee Retirement
Income Security Act of 1974 ("ERISA") arising out of the Company's purchase of
annuities from Executive Life Insurance Company("Executive Life"), upon the
termination of its Pension Plan in August 1985. The DOL filed the lawsuit in
order to prevent the expiration of the statute of limitations while it completed
its investigation of the Company's purchase of annuities from Executive Life. In
1993, Executive Life emerged from a conservatorship proceeding in California
state court. The Company believes that it properly discharged its legal
responsibilities with regard to the purchase of annuities from Executive Life
and, consequently, that uninsured losses of the Company, if any, resulting from
the DOL claims will not be material.

The Company also is named in a number of environmental legal actions
related to the conduct of its business. The major actions relate to several
Superfund sites including the Sheridan Disposal Services site in Hempstead,
Texas, the Operating Industries, Inc. site in Monterey Park, California and the
Chemform site in Pompano Beach, Florida. The Company has notified its insurance
companies of potential claims for each of the above sites and coverage has been
denied.

The Company reached a settlement with the Sheridan Site Committee (the
Committee) with respect to the Sheridan Disposal Services site in Hempstead,
Texas. The Company has agreed to pay its allocable share

50
<PAGE> 52

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

of response costs incurred by the Committee, such share to be limited to the
lesser of $3.0 million or 2.93% of actual response costs. The Company has also
reached a settlement with the United States Environmental Protection Agency
Region IX ("EPA") with respect to the Operating Industries, Inc. ("OII") site.
The Company has agreed to pay its allocable share of total future site response
costs incurred, such share to be limited to the lesser of $5.0 million or 0.65%
of the future site response costs incurred. As of December 31, 1993, the Company
anticipates that its ultimate liability for the Sheridan and OII sites will be
substantially less than these maximum amounts.

Certain environmental problems may exist at the Chemform site in Pompano
Beach, Florida, which is located in a highly industrialized area. The Company
held a leasehold interest in this property between May 14, 1976 and March 16,
1979. On October 4, 1989, the EPA listed the Chemform site on the National
Priorities List. In October 1989, the Company and three other potential
responsible parties entered into an administrative consent decree order with the
EPA for the preparation of the Remedial Investigation and Feasibility Study
("RI/FS"). An amendment to the consent decree specified that the RI/FS would be
addressed in two operable units: Operable Unit One addresses Site-related
groundwater contamination, and Operable Unit Two addressed source and soil
contamination. On September 22, 1992, EPA issued the Record of Decision ("ROD")
for Operable Unit One, which selected a "No Action with Monitoring" alternative,
under which groundwater will be monitored for at least one year. In the ROD, the
EPA estimated the costs of constructing the required groundwater wells and the
cost of one year of groundwater monitoring to be approximately $0.1 million. On
September 16, 1993, EPA issued the ROD for Operable Unit Two at the Chemform
Site, which addresses site-related soil contamination. The ROD determined that
no further Superfund action is necessary to address Operable Unit Two at the
Site; however, the State of Florida, as represented by the Florida Department of
Environmental Protection, has not yet concurred in the ROD for Operable Unit
Two. The Company believes that the EPA will demand reimbursement of certain
oversight expenses that the EPA allegedly has incurred in administering the
Chemform site. The Company intends to scrutinize and, if necessary, vigorously
contest any such claims made by the EPA.

As of December 31, 1990, the Company recorded a $5.0 million provision for
its estimated liability for the clean-up of all of the Company's environmental
matters that were known at that time including the estimated costs to be
incurred regarding the Superfund sites discussed above. In 1993, 1992 and 1991,
the Company paid for various clean up activities and made additional provisions,
charged to continuing operations, of $0.5 million, $0.4 million and $0.8
million, respectively, and a provision of $1.5 million charged to the gain on
sale of DDS operations in 1993 based on revised estimates of required future
clean-up costs. At December 31, 1993, the remaining recorded liability for
estimated future clean-up costs for the sites discussed above as well as for
properties currently or previously owned or leased by the Company totalled $3.6
million. As additional information becomes available, the Company may be
required to provide for additional environmental clean-up costs for the
Superfund sites and for properties currently or previously owned or leased by
the Company. The Company believes that any additional unrecorded clean-up
liabilities will not have a material adverse effect on the Company's
consolidated financial position or the results of its operations.

51
<PAGE> 53

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

For information concerning directors of the Registrant, see the information
set forth following the caption "ELECTION OF DIRECTORS" in the Company's
definitive proxy statement to be filed no later than 120 days after the end of
the fiscal year covered by this Form 10-K (the "Proxy Statement"), which
information is incorporated herein by reference. For information concerning
executive officers of the Registrant, see Item 4A appearing in Part I of this
Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION

The information set forth following the caption "EXECUTIVE COMPENSATION AND
OTHER INFORMATION CONCERNING EXECUTIVE OFFICERS" in the Company's Proxy
Statement is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information set forth following the captions "ELECTION OF DIRECTORS"
and "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS" in the Company's Proxy
Statement is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information set forth following the captions "ELECTION OF DIRECTORS"
and "EXECUTIVE COMPENSATION AND OTHER INFORMATION CONCERNING EXECUTIVE OFFICERS"
in the Company's Proxy Statement is incorporated herein by reference.

52
<PAGE> 54

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(A) FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
REFERENCE
---------
<S> <C>
(1) Financial statements included in this report:
Report of Independent Public Accountants.............................. 28
Consolidated Statements of Operations for the years ended December 31,
1993, 1992 and 1991.................................................. 29
Consolidated Balance Sheets at December 31, 1993 and 1992............. 30-31
Consolidated Statements of Cash Flows at December 31, 1993, 1992 and
1991................................................................. 32
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1993, 1992 and 1991..................................... 33
Notes to Consolidated Financial Statements............................ 34-51
(2) Financial statement schedules for the years ended December 31, 1993,
1992 and 1991:
V -- Property, plant and equipment............................... 56-58
VI -- Accumulated depreciation of property, plant and equipment... 56-58
VIII -- Valuation and qualifying accounts and reserves.............. 59
IX -- Short-term borrowings....................................... 59
</TABLE>

All other schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the consolidated
financial statements or notes thereto.

(3) EXHIBITS AND INDEX TO EXHIBITS

<TABLE>
<S> <C>
3.1 -- Restated Certificate of Incorporation of the Company as amended to date.
3.2 -- Bylaws of the Company as amended to date.
4.1 -- Warrant Agreement dated as of February 12, 1988 between the Company and
Morgan Shareholder Services Trust Company, as Warrant Agent.
4.2 -- Rights Agreement, dated as of June 19, 1990, between the Company and First
Chicago Trust Company of New York. Filed as Exhibit 4.13 to the Company's
report on Form 10-K for the year ended December 31, 1991 and incorporated
herein by reference.
4.3 -- Note Agreement, dated as of August 31, 1992, between the Company and
Principal Mutual Life Insurance Company, John Hancock Mutual Life Insurance
Company, John Hancock Variable Life Insurance Company, IDS Life Insurance
Company, IDS Life Insurance Company of New York and American Enterprise Life
Insurance Company.
4.4 -- First Amendment and Waiver, dated as of March 24, 1993, between the Company
and Principal Mutual Life Insurance Company, John Hancock Mutual Life
Insurance Company, John Hancock Variable Life Insurance Company, IDS Life
Insurance Company, IDS Life Insurance Company of New York and American
Enterprise Life Insurance Company.
4.5 -- Second Amendment and Waiver, dated as of September 1, 1993, between the
Company and Principal Mutual Life Insurance Company, John Hancock Mutual Life
Insurance Company, John Hancock Variable Life Insurance Company, IDS Life
Insurance Company, IDS Life Insurance Company of New York and American
Enterprise Life Insurance Company.
9. -- Not applicable.
10.1 -- Smith International, Inc. Supplemental Pension Plan as amended to date. Filed
as Exhibit 10.1 to the Company's report on Form 10-K for the year ended
December 31, 1989 and incorporated herein by reference.
</TABLE>

53
<PAGE> 55

<TABLE>
<S> <C>
10.2 -- Smith International, Inc. 1982 Stock Option Plan. Filed as Exhibit 10.3 to
the Company's report on Form 10-K for the year ended December 31, 1989 and
incorporated herein by reference.
10.3 -- Smith International, Inc. 1989 Long-Term Incentive Compensation Plan. Filed
as Exhibit 10.4 to the Company's report on Form 10-K for the year ended
December 31, 1989 and incorporated herein by reference.
10.4 -- Smith International, Inc. Directors' Retirement Plan as amended to date.
Filed as Exhibit 10.5 to the Company's report on Form 10-K for the year ended
December 31, 1989 and incorporated herein by reference.
10.5 -- Smith International, Inc. Supplemental Executive Retirement Plan, as amended.
10.6 -- Agreement dated March 19, 1990 between the Company and Industrial Equity
(Pacific) Limited and Brierley Investments Limited. Filed as Exhibit 10.12 to
the Company's report on Form 10-K for the year ended December 31, 1989 and
incorporated herein by reference.
10.7 -- Supply Agreement dated April 2, 1987 between the Company and TCM Holding
Corporation and Rogers Tool Works, Inc. for the supply of tungsten carbide
products. Filed as Exhibit 10.13 to the Company's report on Form 10-K for the
year ended December 31, 1989 and incorporated herein by reference.
10.8 -- Supply Agreement dated October 1, 1989 between the Company and Amforge-Smith
Forge Company for the supply of forgings. Filed as Exhibit 10.14 to the
Company's report on Form 10-K for the year ended December 31, 1989 and
incorporated herein by reference.
10.9 -- Sale and Purchase and Business Agreement dated December 28, 1989 between the
Company and Gammaloy, Ltd. relating to the Company's sale of its domestic
fleet of non-magnetic drill collars. Filed as Exhibit 10.15 to the Company's
report on Form 10-K for the year ended December 31, 1989 and incorporated
herein by reference.
10.10 -- Consulting Agreement dated December 31, 1990 between the Company and Kenneth
R. Grumbles. Filed as Exhibit 10.11 to the Company's report on Form 10-K for
the year ended December 31, 1991 and incorporated herein by reference.
10.11 -- Employment Agreement dated December 10, 1987 between the Company and Douglas
L. Rock.
10.12 -- Employment Agreement dated December 10, 1987 between the Company and D. Barry
Heppenstall.
10.13 -- Employment Agreement dated December 10, 1987 between the Company and Bryan
Dudman.
10.14 -- Employment Agreement dated January 2, 1991 between the Company and Neal S.
Sutton. Filed as Exhibit 10.21 to the Company's report on Form 10-K for the
year ended December 31, 1990 and incorporated herein by reference.
10.15 -- Employment Agreement dated May 1, 1991 between the Company and Richard A.
Werner. Filed as Exhibit 10.20 to the Company's report on Form 10-K for the
year ended December 31, 1991 and incorporated herein by reference.
10.16 -- Amendment to Employment Agreement dated October 16, 1989 between the Company
and Douglas L. Rock. Filed as Exhibit 10.29 to the Company's report on Form
10-K for the year ended December 31, 1989 and incorporated herein by
reference.
10.17 -- Amendment to Employment Agreement dated October 16, 1989 between the Company
and D. Barry Heppenstall. Filed as Exhibit 10.31 to the Company's report on
Form 10-K for the year ended December 31, 1989 and incorporated herein by
reference.
10.18 -- Amendment to Employment Agreement dated October 16, 1989 between the Company
and Bryan Dudman. Filed as Exhibit 10.33 to the Company's report on Form 10-K
for the year ended December 31, 1989 and incorporated herein by reference.
</TABLE>

54
<PAGE> 56

<TABLE>
<S> <C>
10.19 -- Amendment to Employment Agreement dated January 2, 1991 between the Company
and Neal S. Sutton. Filed as Exhibit 10.32 to the Company's report on Form
10-K for the year ended December 31, 1990 and incorporated herein by
reference.
10.20 -- Amendment to Employment Agreement dated May 1, 1991 between the Company and
Richard A. Werner. Filed as Exhibit 10.30 to the Company's report on Form
10-K for the year ended December 31, 1991 and incorporated herein by
reference.
10.21 -- Asset Acquisition Agreement dated January 14, 1993 by and between the Company
and Halliburton Company with respect to the sale of the Company's directional
drilling business. Filed as Exhibit 10.21 to the Company's report on Form
10-K for the year ended December 31, 1992 and incorporated herein by
reference.
11. -- Not applicable.
12. -- Not applicable.
13. -- Not applicable.
18. -- Not applicable.
19. -- Not applicable.
21. -- Subsidiaries of the Company.
23.1 -- Consent of Arthur Andersen & Co. regarding Form S-8 Registration Statement
No. 33-31556.
23.2 -- Consent of Arthur Andersen & Co. regarding Form S-8 Registration Statement
No. 33-69840.
</TABLE>

(B) REPORTS ON FORM 8-K.

No reports on Form 8-K were filed during the last quarter of the period
covered by this report.

55
<PAGE> 57

SMITH INTERNATIONAL, INC.

SCHEDULE V -- PROPERTY, PLANT AND EQUIPMENT
FOR THE YEAR ENDED DECEMBER 31, 1993
(AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
BALANCE AT ADDITIONS TRANSFERS, BALANCE
BEGINNING --------------------- RETIREMENTS AT END
OF YEAR AT COST(A) OTHER(B) OR SALES OTHER(C) OF YEAR
---------- ---------- -------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Land............................... $ 743 $ 611 $ (12) $ -- $ 6 $ 1,348
Buildings.......................... 15,044 2,926 (230) (48) 315 18,007
Machinery and equipment............ 142,785 13,040 (1,744) (7,363) (8,483) 138,235
--------- --------- -------- ---------- -------- --------
158,572 16,577 (1,986) (7,411) (8,162) 157,590
Rental equipment................... 34,691 14,418 (417) (4,725) -- 43,967
--------- --------- -------- ---------- -------- --------
$ 193,263 $ 30,995 $(2,403) $ (12,136) $(8,162) $201,557
--------- --------- -------- ---------- -------- --------
--------- --------- -------- ---------- -------- --------
</TABLE>

SCHEDULE VI -- ACCUMULATED DEPRECIATION OF PROPERTY,
PLANT AND EQUIPMENT
FOR THE YEAR ENDED DECEMBER 31, 1993
(AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT -------------------- TRANSFERS, BALANCE
BEGINNING CHARGED RETIREMENTS AT END
OF YEAR TO INCOME OTHER(B) OR SALES OTHER(C) OF YEAR
---------- --------- -------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Buildings........................... $ 7,603 $ 543 $ (148) $ (769) $ -- $ 7,229
Machinery and equipment............. 116,997 4,060 (1,481) (3,178) (7,689) 108,709
--------- -------- -------- --------- -------- --------
124,600 4,603 (1,629) (3,947) (7,689) 115,938
Rental equipment.................... 24,140 2,347 (309) (2,721) -- 23,457
--------- -------- -------- --------- -------- --------
$ 148,740 $ 6,950 $(1,938) $(6,668) $(7,689) $139,395
--------- -------- -------- --------- -------- --------
--------- -------- -------- --------- -------- --------
</TABLE>

See Note 1 of Notes to Consolidated Financial Statements for discussion of
depreciation methods and rates.

(A) Includes $10,299 and $5,505 of rental equipment and plant and equipment,
respectively, related to the acquisition of A-Z/Grant and Lindsey.

(B) Foreign currency translation adjustment arising from the provisions of
Statement of Financial Accounting Standards Board No. 52; see Note 1 of
Notes to Consolidated Financial Statements.

56
<PAGE> 58

SMITH INTERNATIONAL, INC.

SCHEDULE V -- PROPERTY, PLANT AND EQUIPMENT
FOR THE YEAR ENDED DECEMBER 31, 1992
(AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
BALANCE AT ADDITIONS TRANSFER, BALANCE
BEGINNING ------------------ RETIREMENTS AT END
OF YEAR AT COST OTHER(A) OR SALES(B) OTHER(C) OF YEAR
---------- ------- -------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Land................................ $ 4,256 $ 20 $ (33) $ (240) $(3,260) $ 743
Buildings........................... 28,700 711 (544) (7,841) (5,982) 15,044
Machinery and equipment............. 167,395 8,399 (3,709) (29,300) -- 142,785
--------- ------- -------- ---------- -------- --------
200,351 9,130 (4,286) (37,381) (9,242) 158,572
Rental equipment.................... 134,731 17,538 (2,399) (115,179) -- 34,691
--------- ------- -------- ---------- -------- --------
$ 335,082 $26,668 $(6,685) $ (152,560) $(9,242) $193,263
--------- ------- -------- ---------- -------- --------
--------- ------- -------- ---------- -------- --------
</TABLE>

SCHEDULE VI -- ACCUMULATED DEPRECIATION OF PROPERTY,
PLANT AND EQUIPMENT
FOR THE YEAR ENDED DECEMBER 31, 1992
(AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT -------------------- TRANSFER, BALANCE
BEGINNING CHARGED RETIREMENTS AT END
OF YEAR TO INCOME OTHER(A) OR SALES(B) OTHER(C) OF YEAR
---------- --------- -------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Buildings........................... $ 11,022 $ 1,521 $ (352) $ (3,724) $ (864) $ 7,603
Machinery and equipment............. 133,013 7,016 (2,998) (20,034) -- 116,997
--------- --------- -------- ---------- -------- --------
144,035 8,537 (3,350) (23,758) (864) 124,600
Rental equipment.................... 61,617 13,582 (1,332) (49,727) -- 24,140
--------- --------- -------- ---------- -------- --------
$ 205,652 $22,119 $(4,682) $ (73,485) $ (864) $148,740
--------- --------- -------- ---------- -------- --------
--------- --------- -------- ---------- -------- --------
</TABLE>

See Note 1 of Notes to Consolidated Financial Statements for discussion of
depreciation methods and rates.

(A) Foreign currency translation adjustment arising from the provisions of
Statement of Financial Accounting Standards Board No. 52; see Note 1 of
Notes to Consolidated Financial Statements.

(B) Includes transfer of $61,787 and $12,696 of net book value of rental
equipment and plant and equipment, respectively, to net assets of DDS
business sold in 1993; see Note 2 of Notes to Consolidated Financial
Statements.

57
<PAGE> 59

SMITH INTERNATIONAL, INC.

SCHEDULE V -- PROPERTY, PLANT AND EQUIPMENT
FOR THE YEAR ENDED DECEMBER 31, 1991
(AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE
BEGINNING ------------------ RETIREMENTS AT END
OF YEAR AT COST OTHER(A) OR SALES OTHER(B) OF YEAR
---------- ------- -------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Land................................ $ 4,587 $ -- $ (2) $ (87) $ (242) $ 4,256
Buildings........................... 30,029 739 (26) (355) (1,687) 28,700
Machinery and equipment............. 192,126 8,653 (334) (20,893) (12,157) 167,395
---------- ------- -------- ----------- -------- --------
226,742 9,392 (362) (21,335) (14,086) 200,351
Rental equipment.................... 110,226 34,037 (150) (9,382) -- 134,731
---------- ------- -------- ----------- -------- --------
$ 336,968 $43,429 $ (512) $ (30,717) $(14,086) $335,082
---------- ------- -------- ----------- -------- --------
---------- ------- -------- ----------- -------- --------
</TABLE>

SCHEDULE VI -- ACCUMULATED DEPRECIATION OF PROPERTY,
PLANT AND EQUIPMENT
FOR THE YEAR ENDED DECEMBER 31, 1991
(AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT -------------------- BALANCE
BEGINNING CHARGED RETIREMENTS AT END
OF YEAR TO INCOME OTHER(A) OR SALES OTHER(B) OF YEAR
---------- --------- -------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Buildings........................... $ 10,598 $ 1,589 $ (26) $ (221) $ (918) $ 11,022
Machinery and equipment............. 149,645 8,797 (259) (18,286) (6,884) 133,013
---------- --------- -------- ----------- -------- --------
160,243 10,386 (285) (18,507) (7,802) 144,035
Rental equipment.................... 58,848 11,402 (123) (8,510) -- 61,617
---------- --------- -------- ----------- -------- --------
$ 219,091 $21,788 $ (408) $ (27,017) $(7,802) $205,652
---------- --------- -------- ----------- -------- --------
---------- --------- -------- ----------- -------- --------
</TABLE>

See Note 1 of Notes to Consolidated Financial Statements for discussion of
depreciation methods and rates.

(A) Foreign currency translation adjustment arising from the provisions of
Statement of Financial Accounting Standards Board No. 52; see Note 1 of
Notes to Consolidated Financial Statements.

(B) Amount represents a provision to writedown certain fixed assets to their
estimated net realizable value and the reclassification of such items to
assets held for sale.

58
<PAGE> 60

SMITH INTERNATIONAL, INC.

SCHEDULE VIII
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE
BEGINNING CHARGED AT END
OF YEAR TO EXPENSE WRITE-OFFS OTHER(1) OF YEAR
---------- ---------- ---------- -------- -------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
Year Ended -- December 31, 1993............... $4,254 $ 974 $ (1,285) $1,052 $ 4,995
Year Ended -- December 31, 1992............... $4,308 $1,860 $ (1,914) -- $ 4,254
Year Ended -- December 31, 1991............... $6,159 $1,861 $ (3,712) -- $ 4,308
</TABLE>

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

(1) Amount represents the reclassification of certain reserves relating to
long-term receivables to trade accounts receivable.

SMITH INTERNATIONAL, INC.

SCHEDULE IX -- SHORT-TERM BORROWINGS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
CATEGORY MAXIMUM AVERAGE
OF AMOUNT AMOUNT
AGGREGATE WEIGHTED OUT- OUT-
SHORT- BALANCE AVERAGE STANDING STANDING
TERM AT END INTEREST DURING DURING
BORROWINGS OF YEAR RATE THE YEAR THE YEAR
---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Year Ended:
December 31, 1993...... Notes payable to Banks $ 702 7% $ 39,702 $ 13,859 7%
December 31, 1992...... Notes payable to Banks $34,361 9% $ 52,208 $ 45,484 10%
December 31, 1991...... Notes payable to Banks $50,533 11% $ 50,533 $ 39,094 11%
</TABLE>

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

(2) Computed by dividing short-term interest expense by average short-term
borrowings.

59
<PAGE> 61

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

SMITH INTERNATIONAL, INC.

By: /s/ DOUGLAS L. ROCK
--------------------------------
Douglas L. Rock
Chief Executive Officer, President,
and Chief Operating Officer

March 21, 1994

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities on the date indicated:

<TABLE>
<S> <C> <C>
/s/ DOUGLAS L. ROCK Chairman of the Board, Chief March 21, 1994
- --------------------------------------------- Executive Officer,
(Douglas L. Rock) President and Chief
Operating Officer

/s/ LOREN K. CARROLL Executive Vice President and March 21, 1994
- --------------------------------------------- Chief Financial Officer
(Loren K. Carroll)

/s/ BENJAMIN F. BAILAR Director March 21, 1994
- ---------------------------------------------
(Benjamin F. Bailar)

/s/ G. CLYDE BUCK Director March 21, 1994
- ---------------------------------------------
(G. Clyde Buck)

/s/ JAMES R. GIBBS Director March 21, 1994
- ---------------------------------------------
(James R. Gibbs)

/s/ JERRY W. NEELY Director March 21, 1994
- ---------------------------------------------
(Jerry W. Neely)

/s/ H. MOAK ROLLINS Director March 21, 1994
- ---------------------------------------------
(H. Moak Rollins)
</TABLE>

<PAGE> 1

Exhibit 3.1
PAGE 1

State of Delaware

Office of the Secretary of State

I, WILLIAM T. QUILLEN, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
RESTATED CERTIFICATE OF INCORPORATION OF "SMITH INTERNATIONAL, INC." FILED IN
THIS OFFICE ON THE NINETEENTH DAY OF MAY, A.D. 1983, AT 10:15 O'CLOCK A.M.

[SEAL] /s/ William T. Quillen
----------------------
William T. Quillen
Secretary of State

Authentication: 3967432
931895078 Date: 07/08/1993
<PAGE> 2
RESTATED CERTIFICATE OF INCORPORATION

SMITH INTERNATIONAL, INC.

The undersigned, Jerry W. Neely and Raymond F. Schuler, certify that they
are the Chairman of the Board and the Secretary, respectively, of SMITH
INTERNATIONAL, INC., a corporation organized and existing under the laws of the
State of Delaware (the "Corporation"), and do hereby further certify as follows.

1. The name of the Corporation is Smith International, Inc., the
name under which it was originally incorporated.

2. The original Certificate of Incorporation of the Corporation was
filed in the Office of the Secretary of State of the State of Delaware on
March 25, 1983.

3. This Restated Certificate of Incorporation was duly adopted by
the written consent of the stockholders of the Corporation in accordance
with Sections 228, 242 and 243 of the General Corporation Law of the State
of Delaware.

4. The text of the Certificate of Incorporation of the Corporation
as amended hereby is restated to read in its entirety, as follows:

FIRST: The name of the Corporation is SMITH INTERNATIONAL, INC.

SECOND: The address of the registered office of the Corporation in the
State of Delaware is 100 West Tenth Street in the City of Wilmington, County of
New Castle. The name and address of its registered agent is the Corporation
Trust Company, 100 West Tenth Street in the City of Wilmington, County of New
Castle, State of Delaware.

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

FOURTH: The total number of shares of stock which the Corporation shall
have authority to issue is 65,000,000, consisting of 60,000,000 shares of
Common Stock, par value $1 per share (the "Common Stock"), and 5,000,000 shares
of Preferred Stock, par value $1 per share (the "Preferred Stock").

Shares of the Preferred Stock of the Corporation may be issued from time
to time in one or more classes or series, each of which class or series shall
have such distinctive designation or title as shall be fixed by the Board of
Directors of the Corporation (the "Board of Directors") prior to the issuance
of any shares thereof. Each such class or series of Preferred Stock shall have
such voting powers, full or limited, or no voting powers, and such preferences
and relative, participating, optional or other special rights and such
qualifications, limitations or restrictions thereof, as shall be stated in such
resolution or resolutions providing for the issue of such class or series of
Preferred Stock as may be adopted from time to time by the Board of Directors
prior to the issuance of any shares thereof pursuant to the authority hereby
expressly vested in it, all in accordance with the laws of the State of
Delaware.

FIFTH: In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make, repeal, alter,
amend and rescind the Bylaws of the Corporation.

SIXTH: Bylaws shall not be made, repealed, altered, amended or rescinded
by the stockholders of the Corporation except by the affirmative vote of the
holders of not less than 75% of the total voting power of all outstanding
securities of the Corporation then entitled to vote generally in the election
of directors, considered for purposes of this Article SIXTH as one class.

SEVENTH: The business and affairs of the Corporation shall be managed by
or under the direction of the Board of Directors consisting of not less than
six nor more than fifteen directors, the exact number of

1
<PAGE> 3
directors to be determined from time to time by resolution adopted by the
affirmative vote of a majority of the entire Board of Directors.

EIGHTH: The Board of Directors shall be and is divided into three
classes, designated Class I, Class II and Class III. Each class shall consist,
as nearly as may be possible, of one-third of the total number of directors
constituting the entire Board of Directors, with the term of office of the
directors of one class expiring each year. Each director shall serve for a
term ending on the date of the third annual meeting following the annual
meeting at which such director was elected, provided, however, that the
directors elected to Class I at the 1983 annual meeting of stockholders, shall
serve for a term ending on the date of the annual meeting, following the end of
the calendar year 1983, the directors elected to Class II at the 1983 annual
meeting of stockholders shall serve for a term ending on the date of the annual
meeting next following the end of the calendar year 1984, and the directors
elected to Class III at the 1983 annual meeting of stockholders shall serve for
a term ending on the date of the annual meeting next following the end of the
calendar year 1985. Each director shall hold office until the annual meeting
for the year in which his term expires and until such director's successor
shall be elected and qualified, subject, however, to such director's earlier
death, resignation, disqualification or removal from office. In the event of
any change in the authorized number of directors, the Board of Directors shall
apportion any newly created directorships among, or reduce the number of
directorships in, such class or classes, as shall, so far as possible, equalize
the number of directors in each class. Any vacancy in the Board of Directors
resulting from any increase in the number of directors and any other vacancy
occurring in the Board of Directors may be filled by the Board of Directors
acting by a majority of the directors then in office, although less than a
quorum, or by the sole remaining director, and any director so elected shall
hold office for a term that shall coincide with the term of the class to which
such director shall have been elected. In no event will a decrease in the
number of directors shorten the term of any incumbent director.

Notwithstanding the foregoing, whenever the holders of any one or more
classes or series of Preferred Stock issued by the Corporation shall have the
right, voting separately by class or series, to elect directors at an annual or
special meeting of stockholders, the election, term of office, filling of
vacancies and other features of such directorships shall be governed by the
terms of this Restated Certificate of Incorporation or the resolution or
resolutions adopted by the Board of Directors pursuant to Article FOURTH
applicable thereto, and such directors so elected shall not be divided into
classes pursuant to this Article EIGHTH unless expressly provided by such
terms.

NINTH: Subject to the rights, if any, of the holders of shares of
Preferred Stock then outstanding, any or all of the directors of the
Corporation, may be removed from office at any time, but only for cause and only
by the affirmative vote of the holders of a majority of the outstanding
securities of the Corporation then entitled to vote generally in the election
of directors, considered for purposes of this Article NINTH as one class.

TENTH: Elections of directors at an annual or special meeting of
stockholders shall by written ballot unless the Bylaws of the Corporation shall
otherwise provide.

ELEVENTH: Any action required or permitted to be taken at any annual or
special meeting of stockholders may be taken only upon the vote of the
stockholders at an annual or special meeting duly ___________? and called, as
provided in the Bylaws of the Corporation, and may not be taken by a written
consent of the stockholders pursuant to the General Corporation Law of the
State of Delaware.

TWELFTH: Special meetings of the stockholders of the Corporation for any
purpose or purposes may be called at any time by the Board of Directors, the
Chairman of the Board of Directors, the Chief Executive Officer, the President,
the Secretary or by any two of the other officers of the Corporation. Special
meetings of stockholders of the Corporation may not be called by any other
person or persons.

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

2
<PAGE> 4
FOURTEENTH: Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation or of any creditor or stockholder hereof or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of Section 291 of the General Corporation Law of the State of
Delaware or on the application of trustees in dissolution or of any receiver or
receivers appointed for this Corporation under the provisions of Section 279 of
the General Corporation Law of the State of Delaware, order a meeting of the
creditors or class of creditors, and/or of the stockholders or class of
stockholders of this Corporation, as the case may be, to be summoned in such
manner as the said court directs. If a majority in number representing
three-fourths in value of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of this Corporation, as the case may be,
agree to any compromise or arrangement and to any reorganization of this
Corporation as a consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on the stockholders or class of
stockholders of this Corporation, as the case may be, and also on this
Corporation.

IN WITNESS WHEREOF, SMITH INTERNATIONAL, INC. has caused its corporate
seal to be hereunto affixed and this certificate to be signed by Jerry W.
Neely, its Chairman of the Board, and attested by Raymond F. Schuler, its
Secretary, this 19th day of May, 1983.

SMITH INTERNATIONAL, INC.

/s/ Jerry W. Neely
---------------------
Jerry W. Neely
Chairman of the Board

ATTEST:

/s/ Raymond F. Schuler
----------------------
Raymond F. Schuler
Secretary

3
<PAGE> 5
PAGE 1

State of Delaware

Office of the Secretary of State

I, WILLIAM T. QUILLEN, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF CERTIFICATE OF CHANGE
OF ADDRESS OF REGISTERED AGENT AS IT APPLIES TO "SMITH INTERNATIONAL, INC." AS
RECEIVED AND FILED IN THIS OFFICE ON THE TWENTY-SEVENTH DAY OF JULY, A.D. 1984,
AT 4:30 O'CLOCK P.M.

[SEAL] /s/ William T. Quillen
----------------------
William T. Quillen
Secretary of State

Authentication: 3967435
931895078 Date: 07/08/1993
<PAGE> 6
CERTIFICATE OF CHANGE OF ADDRESS OF
REGISTERED OFFICE AND OF REGISTERED AGENT
PURSUANT TO SECTION 134 OF TITLE 8 OF THE DELAWARE CODE

To: DEPARTMENT OF STATE
Division of Corporations
Townsend Building
Federal Street
Dover, Delaware 19903

Pursuant to the provisions of Section 134 of Title 8 of the Delaware Code,
the undersigned Agent for service of process, in order to change the address of
the registered office of the corporations for which it is registered agent,
hereby certifies that:

1. The name of the agent is: The Corporation Trust Company

2. The address of the old registered office was:

100 West Tenth Street
Wilmington, Delaware 19801

3. The address to which the registered office is to be changed is:

Corporation Trust Center
1209 Orange Street
Wilmington, Delaware 19801

The new address will be effective on July 30, 1984.

4. The names of the corporations represented by said agent are set forth
on the list annexed to this certificate and made a part hereof by
reference.

IN WITNESS WHEREOF, said agent has caused this certificate to
be signed on its behalf by its Vice-President and Assistant Secretary
this 25th day of July, 1984.

THE CORPORATION TRUST COMPANY
----------------------------------------
(Name of Registered Agent)

By /s/ Virginia Coluill
-----------------------
Virginia Coluill
(Vice-President)

ATTEST:

/s/
---------------------
(Assistant Secretary)

5
<PAGE> 7
Page 1043
04-06-13 23146159

<TABLE>
<CAPTION>
STATE OF DELAWARE - DIVISION OF CORPORATIONS
CHANGE OF ADDRESS FILING FOR
CORPORATION TRUST AS OF JULY 27, 1984
DOMESTIC
<S> <C>
2005333 ASSOCIATED TRADING GROUP, INC. 03/23/1983 D DE
2005334 ZEECON ADMIXTURES CORPORATION 03/23/1983 D DE
2005336 SNA-COM ASSOCIATES INC. 03/23/1983 D DE
2005338 MHGGAA CORPORATION 03/23/1983 D DE
2005340 READING LIGNITE, INC. 03/23/1983 D DE
2005342 KUBAHI INVESTMENT COMPANY, INC. 03/23/1983 D DE
2005343 SEA BORNE YACHT CHARTERS, LTD. 03/23/1983 D DE
2005345 SME BESSEMER CEMENT, INC. 03/23/1983 D DE
2005346 PHOENIX YACHT CHARTERS, INC. 03/23/1983 D DE
2005347 CORRECTIONAL SYSTEMS, INC. 03/23/1983 D DE
2005348 AMERICAN ROOFING PROPERTIES, INC. 03/23/1983 D DE
2005350 GILG CORP. 03/23/1983 D DE
2005352 APOLLO HOLDINGS CORP. 03/23/1983 D DE
2005354 FRADCO, INC. 03/23/1983 D DE
2005360 SOGETAL CORPORATION 03/23/1983 D DE
2005366 KURTH MAILING CORPORATION 03/23/1983 D DE
2005385 OXOCO INC. 03/23/1983 D DE
2005422 1301 NORTH STATE CORPORATION 03/24/1983 D DE
2005424 MONSOON LIMITED 03/24/1983 D DE
2005426 HOSPITAL GROUP OF AMERICA, INC. 03/24/1983 D DE
2005427 GULF STATES TOWING CO. 03/24/1983 D DE
2005428 TURNER INTERNATIONAL (MICRONESIA) INC. 03/24/1983 D DE
2005429 PENNINGTON PROPERTIES CORP. 03/24/1983 D DE
2005430 WASTE MANAGEMENT PARTNERS, INC. 03/24/1983 D DE
2005431 GALE AND PINCUS 03/24/1983 D DE
2005432 INCON PACKAGING INC. 03/24/1983 D DE
2005433 IMPERIAL FREEHOLDS CORPORATION, INC. 03/24/1983 D DE
2005492 MUNICIPAL SERVICES CORPORATION 03/24/1983 D DE
2005496 MATHESON GAS PRODUCTS, INC. 03/24/1983 D DE
2005502 SMITH INTERNATIONAL, INC. 03/25/1983 D DE
2005503 KTK SKI CORPORATION 03/25/1983 D DE
2005504 FACET AEROSPACE PRODUCTS COMPANY 03/25/1983 D DE
2005505 ITT INDUSTRIAL TECHNOLOGY CORPORATION 03/25/1983 D DE
2005506 ITT DIVERSIFIED SERVICES CORPORATION 03/25/1983 D DE
2005507 CATHETER CORPORATION OF AMERICA 03/25/1983 D DE
2005508 CLIFF INDUSTRIES TEXAS, INC. 03/25/1983 D DE
2005509 ALL AMERICAN BURGER, INC. 03/25/1983 D DE
2005510 ISLE ASSOCIATES, INC. 03/25/1983 D DE
2005511 LASALLE BANKCORP, INC. 03/25/1983 D DE
2005512 ITT NATURAL RESOURCES AND FOOD PRODUCTS CORPORATION 03/25/1983 D DE
2005513 KIRK/ACORN INC. 03/25/1983 D DE
2005514 J.W. O'CONNOR AND CO. INCORPORATED 03/25/1983 D DE
2005515 COMMUNICATION SERVICES GROUP, INC. 03/25/1983 D DE
2005516 SEBAGO GROUP, INC. 03/25/1983 D DE
2005527 DYNERGY SYSTEMS CORPORATION 03/25/1983 D DE
2005556 WARNER SCIENTIFIC, INC. 03/25/1983 D DE
2005558 DEXTER FIBERS, INC. 03/25/1983 D DE
</TABLE>
<PAGE> 8
State of Delaware PAGE 1

Office of the Secretary of State

I, WILLIAM T. QUILLEN, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
AMENDMENT OF "SMITH INTERNATIONAL, INC." FILED IN THIS OFFICE ON THE SIXTH DAY
OF AUGUST, A.D. 1987, AT 9 O'CLOCK A.M.

/s/ William T. Quillen
[seal] ----------------------
William T. Quillen
Secretary of State

Authentication: 3967438
931895078 Date: 07/08/1993
<PAGE> 9
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
SMITH INTERNATIONAL, INC.
(Pursuant to Section 242)

Jerry W. Nealy and Ronald R. Randall certify that:

1. They are the Chief Executive Officer/Chairman and Secretary,
respectively, of SMITH INTERNATIONAL, INC., a Delaware corporation.

2. Present Article Thirteenth and Article Fourteenth of the Restated
Certificate of Incorporation shall be renumbered as Article Fourteenth and
Article Fifteenth, respectively and the following Article shall be added as new
Article Thirteenth and shall read as follows:

THIRTEENTH: A. A director of this Corporation shall not be
personally liable to the Corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability
(i) for any breach of the director's duty of loyalty to the Corporation or
its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of the law, (iii)
under Section 174 of the General Corporation Law of the State of Delaware,
or (iv) for any transaction from which the director derived an improper
personal benefit. If the General Corporation Law of the State of Delaware
is hereafter amended to authorize corporate action further eliminating or
limiting the personal liability of directors, then the liability of the
directors of the Corporation shall be eliminated or limited to the fullest
extent permitted by the General Corporation Law of the State of Delaware,
as so amended. Any repeal or modification of this Article shall be
prospective only, and shall not adversely affect any limitation on the
personal liability of a director of the Corporation existing at the time
of such repeal or modification.

B.(1) Each person who was or is made a party or is threatened to
be made a party to or is involved in any action, suit or proceeding,
whether civil, criminal, administrative or investigative (hereinafter a
"proceeding"), by reason of the fact that he or she or a person of whom he
or she is the legal representative is or was a director, officer or
employee of the Corporation or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another
corporation or of a partnership, joint venture, trust or other enterprise,
including service with respect to employee benefit plans,

1
<PAGE> 10
whether the basis of such proceeding is alleged action in an official
capacity as a director, officer, employee or agent or in any other
capacity while serving as a director, officer, employee or agent, shall be
indemnified and held harmless by the Corporation to the fullest extent
authorized by the General Corporation Law of the State of Delaware as the
same exists or may hereafter be amended (but, in the case of any such
amendment, only to the extent that such amendment permits the Corporation
to provide broader indemnification rights than said law permitted the
Corporation to provide prior to such amendment), against all expense,
liability and loss (including attorneys' fees, judgments, fines, ERISA
excise taxes or penalties and amounts paid or to be paid in settlement)
reasonably incurred or suffered by such person in connection therewith and
such indemnification shall continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of his
or her heirs, executors and administrators; provided, however, that except
as provided in paragraph (2) of this Section B with respect to proceedings
seeking to enforce rights to indemnification, the Corporation shall
indemnify any such person seeking indemnification in connection with a
proceeding (or part thereof) initiated by such person only if such
proceeding (or part thereof) was authorized by the Board of Directors of
the Corporation. The right to indemnification conferred in this Section B
shall be a contract right and shall include the right to be paid by the
Corporation the expenses incurred in defending any such proceeding in
advance of its final disposition; provided, however, that if the General
Corporation Law of the State of Delaware requires, the payment of such
expenses incurred by a director or officer in his or her capacity as a
director or officer (and not in any other capacity in which service was or
is rendered by such person while a director or officer, including without
limitation, service to an employee benefit plan) in advance of the final
disposition of a proceeding, shall be made only upon delivery to the
Corporation of an undertaking by or on behalf of such director or officer,
to repay all amounts so advanced if it shall ultimately be determined that
such director or officer is not entitled to be indemnified under this
Section B or otherwise.

(2) If a claim under paragraph (1) of this Section B is not paid in
full by the Corporation within thirty days after a written claim has been
received by the Corporation, the claimant may at any time thereafter bring
suit against the Corporation to recover the unpaid amount of the claim
and, if successful in whole or in part, the claimant shall be entitled to
be paid also the expense of prosecuting such claim. It shall be a defense
to any such action (other than an action brought to enforce a claim for
expenses incurred in defending any proceeding in advance of its final
disposition where the required undertaking, if any is required, has

2
<PAGE> 11
been tendered to the Corporation) that the claimant has not met the
standard of conduct which make it permissible under the General
Corporation Law of the State of Delaware for the Corporation to indemnify
the claimant for the amount claimed, but the burden of proving such
defense shall be on the Corporation. Neither the failure of the
Corporation (including its Board of Directors, independent legal counsel
or stockholders) to have made a determination prior to the commencement of
such action that indemnification of the claimant is proper in the
circumstances because he or she had met the applicable standard of conduct
set forth in the General Corporation Law of the State of Delaware, nor an
actual determination by the Corporation (including its Board of Directors,
independent legal counsel or stockholders) that the claimant has not met
such applicable standard of conduct, shall be a defense to the action or
create a presumption that the claimant has not met the applicable standard
of conduct.

(3) The right to indemnification and the payment of expenses
incurred in defending a proceeding in advance of its final disposition
conferred in this Section B shall not be exclusive of any other right
which any person may have or hereafter acquire under any statute,
provision of the Restate Certificate of Incorporation, By-Laws, agreement,
vote of stockholders or disinterested directors or otherwise.

(4) The Corporation may maintain insurance, at its expense, to
protect itself, any director, officer, employee or agent of the
Corporation or another corporation, partnership, joint venture, trust or
other enterprise against any expense, liability or loss, whether or not
the Corporation would have the power to indemnify such person against such
expense, liability or loss under the General Corporation Law of the State
of Delaware.

(5) The Corporation may, to the extent authorized from time to time
by the Board of Directors, grant rights to indemnification, and rights to
be paid by the corporation the expenses incurred in defending any
proceeding in advance of its final disposition, to any agent of the
Corporation to the fullest extent of the provisions of this Section B with
respect to the indemnification and advancement of expenses of directors,
officers and employees of the Corporation.

3. The foregoing amendment of the Articles of Incorporation has been
duly approved by the Board of Directors on July 8, 1987.

3
<PAGE> 12
4. The effective date of this amendment shall be July 8, 1987.

/s/ Jerry W. Neely
--------------------------------
Jerry W. Neely
Chief Executive Officer Chairman

/s/ Ronald R. Randall
--------------------------------
Ronald R. Randall
Secretary

The undersigned declare under penalty of perjury that the matters set
forth in the foregoing certificate are true of their own knowledge. Executed
at Newport Beach, California on July 30th, 1987.

/s/ Jerry W. Neely
--------------------------------
Jerry W. Neely

/s/ Ronald R. Randall
--------------------------------
Ronald R. Randall

4
<PAGE> 13
PAGE 1

State of Delaware

Office of the Secretary of State

I, WILLIAM T. QUILLEN, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
COURT ORDERED AMENDMENT OF "SMITH INTERNATIONAL, INC." FILED IN THIS OFFICE ON
THE NINETEENTH DAY OF NOVEMBER, A.D. 1987, AT 1 O'CLOCK A.M.

[SEAL] /s/ William T. Quillen
----------------------------
William T. Quillen,
Secretary of State

Authentication: 3967440
931895078 Date: 07/08/1993
<PAGE> 14
CERTIFICATE OF AMENDMENT
TO
RESTATED CERTIFICATE OF INCORPORATION
OF
SMITH INTERNATIONAL, INC.

The undersigned, Jerry W. Neely and Ronald R. Randall, certify that
they are the Chairman of the Board and the Secretary, respectively, of Smith
International, Inc., a Delaware corporation (the "Corporation") and further
certify, pursuant to Section 303 of the Delaware General Corporation Law, as
follows:

1. The Corporation is a Debtor and Debtor-in-Possession in a
reorganization proceeding (the "Reorganization Proceeding") under Chapter 11 of
the Bankruptcy Code, 11 U.S.C. ## 101 et seq., in the United States Bankruptcy
Court for the Central District of California, the ("Bankruptcy Court"),
Case No. LA 86-03947-JD. The Bankruptcy Court has jurisdiction of the
Reorganization Proceeding under the Bankruptcy Code for the reorganization of
the Corporation. A final decree in the Reorganization Proceeding closing the
case has not yet been entered.

2. On November 12, 1987, the Bankruptcy Court entered an order in the
Reorganization Proceeding (the "Confirmation Order") confirming the
Corporation's Second Amended Plan of Reorganization (the "Plan"). The Plan and
the Confirmation Order provide in part that the Restated Certificate of
Incorporation of the Corporation, as heretofore amended, shall be further
amended as set forth in Exhibit A attached hereto.

3. No trustee, master or other representative has been appointed by the
Bankruptcy Court in the Reorganization Proceeding. Provision for making this
Certificate of Amendment by the undersigned officers is contained in the
Confirmation Order. The Plan and the Confirmation Order are on file with the
Clerk of the Bankruptcy Court.

IN WITNESS WHEREOF, Smith International, Inc. has caused its corporate
seal to be hereunto affixed and this

<PAGE> 15
Certificate to be signed by Jerry W. Neely, its Chairman of the Board, and
attested by Ronald R. Randall, its Secretary, this 17th day of November, 1987.

SMITH INTERNATIONAL, INC.
(Corporate Seal)

By: /s/ Jerry W. Neely
------------------------------
Jerry W. Neely
Chairman of the Board

Attest:

By: /s/ Ronald R. Randall
---------------------------
Ronald R. Randall
Secretary

2
<PAGE> 16

EXHIBIT A
TO
CERTIFICATE OF AMENDMENT
TO
RESTATED CERTIFICATE OF INCORPORATION
OF
SMITH INTERNATIONAL,INC.

The Corporation's Restated Certificate of Incorporation, as heretofore
amended, is hereby further amended as follows:

(a) to add the following paragraph to the end of Article FOURTH:

"The Corporation shall not issue any non-voting equity securities
within the meaning of Section 1123(a)(6) of the Bankruptcy Code, 11 U.S.C.
## 101 et seq."

(b) to renumber the present Articles THIRTEENTH, FOURTEENTH and FIFTEENTH
as Articles FOURTEENTH, FIFTEENTH AND SIXTEENTH, respectively; and

"THIRTEENTH. A. In addition to any affirmative vote required by law or
this Restated Certificate of Incorporation or the Bylaws of the Corporation,
and except as otherwise expressly provided in Section B of this Article
THIRTEENTH, a Business Combination (as hereinafter defined) with, or proposed
by or on behalf of, any Interested Stockholder (as hereinafter defined) or any
Affiliate or Associate (as hereinafter defined) of any Interested Stockholder
or any person who thereafter would be an Affiliate or Associate of such
Interested Stockholder shall require the affirmative vote of not less than
seventy-five percent (75%) of the votes entitled to be cast by the holders of
all the then outstanding shares of Voting Stock (as hereinafter defined),
voting together as a single class, excluding Voting Stock beneficially owned by
such Interested Stockholder and its Affiliates and Associates. Such
affirmative vote shall be required notwithstanding the fact that no vote may be
required, or that a lesser percentage or separate class vote may be specified,
by law or in any agreement with any national securities exchange or otherwise.

B. The provisions of Section A of this Article THIRTEENTH shall not be
applicable to any particular Business Combination, and such Business
Combination shall require only

<PAGE> 17
such affirmative vote, if any, as is required by law or by any other
provision of this Restated Certificate of Incorporation or the Bylaws of the
Corporation, or any agreement with any national securities exchange, if all of
the conditions specified in either of the following Paragraphs 1 or 2 are met
or, in the case of a Business Combination not involving the payment of
consideration to the holders of the Corporation's outstanding Capital Stock (as
hereinafter defined), if the condition specified in the following Paragraph 1
is met:

1. The Business Combination shall have been approved, either
specifically or as a transaction which is within an approved category of
transactions, by a majority (whether such approval is made prior to or
subsequent to the acquisition of, or announcement or public disclosure of
the intention to acquire, beneficial ownership of the Voting Stock that
caused the Interested Stockholder to become an Interested Stockholder) of
the Continuing Directors (as hereinafter defined).

2. All of the following conditions shall have been met:

a. The aggregate amount of cash and the Fair Market Value (as
hereinafter defined), as of the date of the consummation of the Business
Combination, of consideration other than cash to be received per share by
holders of Common Stock in such Business Combination shall be at least
equal to the highest amount determined under clauses (i), (ii), (iii) and
(iv) below:

(i) (if applicable) the highest per share price (including
any brokerage commissions, transfer taxes and soliciting dealers' fees)
paid by or on behalf of the Interested Stockholder for any share of Common
Stock in connection with the acquisition by the Interested Stockholder of
beneficial ownership of shares of Common Stock (x) within the two-year
period immediately prior to the first public announcement of the proposed
Business Combination (the "Announcement Date"), or (y) in the transaction
in which it became an Interested Stockholder, whichever is higher, in
either case as adjusted for any subsequent stock split, stock dividend,
subdivision or reclassification with respect to Common Stock;

(ii) the Fair Market Value per share of Common Stock on
the Announcement Date or on the date on which the Interested Stockholder
became an Interested

2
<PAGE> 18
Stockholder (the "Determination Date"), whichever is higher, as adjusted
for any subsequent stock split, stock dividend, subdivision or
reclassification with respect to Common Stock.

(iii) (if applicable) the price per share equal to the
Fair Market Value per share of Common Stock determined pursuant to the
immediately preceding clause (ii), multiplied by the ratio of (x) the
highest per share price (including any brokerage commissions, transfer
taxes and soliciting dealers' fee) paid by or on behalf of the Interested
Stockholder for any share of Common Stock in connection with the
acquisition by the Interested Stockholder of the beneficial ownership of
shares of Common Stock within the two-year period immediately prior to the
Announcement Date, as adjusted for any subsequent stock split, stock
dividend, subdivision or reclassification with respect to Common Stock, to
(y) the Fair Market Value per share of Common Stock on the first day in
such two-year period on which the Interested Stockholder acquired
beneficial ownership of any share of Common Stock, as adjusted for any
subsequent stock split, stock dividend, subdivision or reclassification
with respect to Common Stock;

(iv) The Corporation's net income per share of Common
Stock for the four full consecutive fiscal quarters immediately preceding
the Announcement Date, multiplied by the higher of the then price-earnings
multiple (if any) of such Interested Stockholder or the highest
price/earnings multiple of the Corporation within the two-year period
immediately preceding the Announcement Date (such price/earnings multiples
being determined as customarily computed and reported in the financial
community).

(b) The aggregate amount of cash and the Fair Market Value, as
of the date of the consummation of the Business Combination, of
consideration other than cash to be received per share by holders of
shares of any class or series of outstanding Capital Stock, other than
Common Stock, shall be at least equal to the highest amount determined
under clauses (i), (ii), (iii) and (iv) below;

3
<PAGE> 19
beneficial ownership of shares of such class or series of Capital Stock
(x) within the two-year period immediately prior to the Announcement Date
or (y) in the transaction in which it became an Interested Stockholder,
whichever is higher, in either case as adjusted for any subsequent stock
split, stock dividend, subdivision or reclassification with respect to
such class or series of Capital Stock;

(ii) the Fair Market Value per share of such class or
series of Capital Stock on the Announcement Date or on the Determination
Date, whichever is higher, as adjusted for any subsequent stock split,
stock dividend, subdivision or reclassification with respect to such class
or series of Capital Stock;

(iii) (if applicable) the price per share equal to the
Fair Market Value per share of such class or series of Capital Stock
determined pursuant to the immediately preceding clause (ii), multiplied
by the ratio of (x) the highest per share price (including any brokerage
commissions, transfer taxes and soliciting dealers' fees) paid by or on
behalf of the Interested Stockholder for any share of such class or series
of Capital Stock in connection with the acquisition by the Interested
Stockholder of beneficial ownership of shares of such class or series of
Capital Stock within the two-year period immediately prior to the
Announcement Date, as adjusted for any subsequent stock split, stock
dividend, subdivision or reclassification with respect to such class or
series of Capital Stock, to (y) the Fair Market Value per share of such
class or series of Capital Stock on the first day in which such two-year
period on which the Interested Stockholder acquired beneficial ownership
of any share of such class or series of Capital Stock, as adjusted for any
subsequent stock split, stock dividend, subdivision or reclassification
with respect to such class or series of Capital Stock; and

(iv) (if applicable) the highest preferential amount per
share to which the holders of shares of such class or series of Capital
Stock would be entitled in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Corporation
regardless of whether the Business Combination to be consummated
constitutes such an event.

The provisions of this Paragraph 2 shall be required to be met with respect to
every class or series of outstanding Capital Stock, whether or not the
Interested Stockholder has

4
<PAGE> 20
previously acquired beneficial ownership of any shares of a particular class or
series of Capital Stock.

c. The consideration to be received by holders of a particular
class or series of outstanding Capital Stock shall be in cash or in the
same form as previously has been paid by or on behalf of the Interested
Stockholder in connection with its direct or indirect acquisition of
beneficial ownership of shares of such class or series of Capital Stock.
If the consideration so paid for shares of any class or series of
Capital Stock varied as to form, the form of consideration for such class
or series of Capital Stock shall be either cash or the form used to
acquire beneficial ownership of the largest number of shares of such class
or series of Capital Stock previously acquired by the Interested
Stockholder.

d. After the Determination Date and prior to the consummation
of such Business Combination: (i) except as approved by a majority of the
Continuing Directors, there shall have been no failure to declare and pay
at the regular date therefor any full periodic dividends (whether or not
cumulative) payable in accordance with the terms of any outstanding
Capital Stock; (ii) there shall have been no reduction in the annual rate
of dividends paid on the Common Stock (except as necessary to reflect any
stock split, stock dividend or subdivision of the Common Stock), except as
approved by a majority of the Continuing Directors; (iii) there shall have
been an increase in the annual rate of dividends paid on the Common Stock
as necessary to reflect any reclassification (including any reverse stock
split), recapitalization, reorganization or any similar transaction that
has the effect of reducing the number of outstanding shares of Common
Stock, unless the failure so to increase such annual rate is approved by a
majority of the Continuing Directors; and (iv) such Interested Stockholder
shall not have become the beneficial owner of any additional shares of
Capital Stock except as part of the transaction that results in such
Interested Stockholder becoming an Interested Stockholder and except in a
transaction that, after giving effect thereto, would not result in any
increase in the Interested Stockholder's percentage beneficial ownership
of any class or series of Capital Stock.

e. A proxy or information statement describing the proposed
Business Combination and complying with the requirements of the Securities
Exchange Act of 1934 and the rules and regulations thereunder (the

5
<PAGE> 21
"Act") (or any subsequent provisions replacing such Act, rules or
regulations) shall be mailed to all stockholders of the Corporation at
least 30 days prior to the consummation of such Business Combination
(whether or not such proxy or information statement is required to be
mailed pursuant to such Act or subsequent provisions). The proxy or
information statement shall contain on the first page thereof, in a
prominent place, any statement as to the advisability (or inadvisability)
of the Business Combination that the Continuing Directors, or any of them,
may choose to make and, if deemed advisable by a majority of the
Continuing Directors, the opinion of an investment banking firm selected
by a majority of the Continuing Directors as to the fairness (or not) of
the terms of the Business Combination from a financial point of view to
the holders of the outstanding shares of Capital Stock other than the
Interested Stockholder and its Affiliates or Associates, such investment
banking firm to be paid a reasonable fee for its services by the
Corporation.

f. Such Interested Stockholder shall not have made any
major change in the Corporation's business or equity capital structure
without the approval of a majority of the Continuing Directors.

C. The following definitions shall apply with respect to this Article
THIRTEENTH:

1. The term "Business Combination" shall mean:

a. any merger or consolidation of the Corporation or any
Subsidiary (as hereinafter defined) with (i) any Interested Stockholder or
(ii) any other company (whether or not itself an Interested Stockholder)
which is or after such merger or consolidation would be an Affiliate or
Associate of an Interested Stockholder; or

b. any sale, lease, exchange, mortgage, pledge, transfer
or other disposition or security arrangement, investment, loan, advance,
guarantee, agreement to purchase, agreement to pay, extension of credit,
joint venture participation or other arrangement (in one transaction or a
series of transactions) with or for the benefit of any Interested
Stockholder or any Affiliate or Associate of any Interested Stockholder
involving any assets, securities or commitments of the Corporation, any
Subsidiary or any Interested Stockholder which (except for any
arrangement, whether as employee,

-6-
<PAGE> 22
consultant or otherwise, other than as a director, pursuant to which any
Interested Stockholder or any Affiliate or Associate thereof shall,
directly or indirectly, have any control over or responsibility for the
management of any aspect of the business or affairs of the Corporation,
with respect to which arrangements the value tests set forth below shall
not apply), together with all other such arrangements (including all
contemplated future events), has an aggregate Fair Market value and/or
involves aggregate commitments of $2,500,000 or more or constitutes more
than 5 percent of the book value of the total assets (in the case of
transactions involving assets or commitments other than capital stock) or
5 percent of the stockholders' equity (in the case of transactions in
capital stock) of the entity in question (the "Substantial Part"), as
reflected in the most recent fiscal year-end consolidated balance sheet of
such entity existing at the time the stockholders of the Corporation would
be required to approve or authorize the Business Combination involving the
assets, securities and/or commitments constituting any Substantial Part;
or

c. the adoption of any plan or proposal for the
liquidation or dissolution of the Corporation or for any amendment to the
Corporation's Bylaws; or

d. any reclassification of securities (including any
reverse stock split), or recapitalization of the Corporation, or any
merger or consolidation of the Corporation with any of its Subsidiaries or
any other transaction (whether or not with or otherwise involving an
Interested Stockholder) that has the effect, directly or indirectly, of
increasing the proportionate share of any class or series of Capital
Stock, or any securities convertible into Capital Stock or into equity
securities of any Subsidiary, that is beneficially owned by any Interested
Stockholder or any Affiliate or Associate of any Interested Stockholder;
or
e. any agreement, contract or other arrangement
providing for any one or more of the actions specified in the foregoing
clauses (a) to (d).

2. The term "Capital Stock" shall mean all capital stock of
the Corporation authorized to be issued from time to time under Article
FOURTH of this Restated Certificate of Incorporation, and the term "Voting
Stock" shall mean all Capital Stock with by its terms may be voted on all
matters submitted to stockholders of the Corporation generally.

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<PAGE> 23
3. The term "person" shall mean any individual, firm, company
or other entity and shall include any group comprised of any person and
any other person with whom such person or any Affiliate or Associate of
such person has any agreement, arrangement or understanding, directly or
indirectly, for the purpose of acquiring, holding, voting or disposing of
Capital Stock.

4. The term "Interested Stockholder" shall mean any person
(other than the Corporation or any Subsidiary and other than any
profit-sharing, employee stock ownership or other employee benefit plan of
the Corporation or any Subsidiary or any trustee of or fiduciary with
respect to any such plan when acting in such capacity) who (a) is or has
announced or publicly disclosed a plan or intention to become the
beneficial owner of Voting Stock representing twenty percent (20%) or more
of the votes entitled to be cast by the holders of all then outstanding
shares of Voting Stock; or (b) is an Affiliate or Associate of the
Corporation and at any time within the two-year period immediately prior
to the date in question was the beneficial owner of Voting Stock
representing twenty percent (20%) or more of the votes entitled to be cast
by the holders of all then outstanding shares of Voting Stock.

5. A person shall be a "beneficial owner" of any Capital Stock
(a) which such person or any of its Affiliates or Associates beneficially
owns, directly or indirectly; (b) which such person or any of its
Affiliates or Associates has, directly or indirectly, (i) the right to
acquire (whether such right is exercisable immediately or subject only to
the passage of time), pursuant to any agreement, arrangement or
understanding or upon the exercise of conversion rights, exchange rights,
warrants or options, or otherwise, or (ii) the right to vote pursuant to
any agreement, arrangement or understanding; or (c) which is beneficially
owned, directly or indirectly, by any other person with which such person
or any of its Affiliates or Associates has any agreement, arrangement or
understanding for the purpose of acquiring, holding, voting or disposing
of any shares of Capital Stock. For the purposes of determining whether a
person is an Interested Stockholder pursuant to Paragraph 4 of this
Section C, the number of shares of Capital Stock deemed to be outstanding
shall include shares deemed beneficially owned by such person through
application of this Paragraph 5 of Section C, but shall not include any
other shares of Capital Stock that may be issuable pursuant to any

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<PAGE> 24
agreement, arrangement or understanding, or upon exercise of conversion
rights, warrants or options, or otherwise.

6. The terms "Affiliate" and "Associate" shall have the
respective meanings ascribed to such terms in Rule 12b-2 under the Act as
in effect on November 1, 1987 (the term "registrant" in said Rule 12b-2
meaning in this case the Corporation).

7. The term "Subsidiary" means any company of which a majority
of any class of equity security is beneficially owned by the Corporation;
provided, however, that for the purposes of the definition of Interested
Stockholder set forth in Paragraph 4 of this Section C, the term
"Subsidiary" shall mean only a company of which a majority of each class
of equity security is beneficially owned by the Corporation.

8. The term "Continuing Directory" means any member of the
Board of Directors of the Corporation (the "Board of Directors"), which
such person is a member of the Board of Directors, who is not an
Affiliate or Associate or representative of the Interested Stockholder and
was a member of the Board of Directors prior to the time that the
Interested Stockholder became an Interested Stockholder, and any successor
of a Continuing Director while such successor is a member of the Board of
Directors, who is not an Affiliate or Associate or representative of the
Interested Stockholder and is recommended or elected to succeed the
Continuing Director by a majority of Continuing Directors.

9. "Fair Market Value" means (a) in the case of cash, the
amount of such cash: (b) in the case of stock, the highest closing sale
price during the 30-day period immediately preceding the date in question
of a share of such stock on the Composite Tape for New York Stock
Exchange-Listed Stocks, or, if such stock is not quoted on the Composite
Tape, on the New York Stock Exchange, or, if such stock is not listed on
such Exchange, on the principal United States securities exchange
registered under the Act on which such stock is listed, or, if such stock
is not listed on any such exchange, the highest closing bid quotation with
respect to a share of such stock during the 30-day period preceding the
date in question on the National Association of Securities Dealers, Inc.
Automated Quotations System or any similar system then in use, or, if no
such quotations are available, the fair market value on the date in
question of a share of such stock as determined

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<PAGE> 25
by a majority of the Continuing Directors in good faith; and (c) in the
case of property other than cash or stock, the fair market value of
such property on the date in question as determined in good faith by
a majority of the Continuing Directors.

10. In the event of any Business Combination in which the
Corporation survives, the phrase "consideration other than cash to be
received" as used in Paragraph 2.a and 2.b of Section B of this Article
THIRTEENTH shall include the shares of Common Stock and/or the shares
of any other class or series of Capital Stock retained by the holders
of such shares.

D. A majority of the Continuing Directors shall have the power and
duty to determine for the purposes of this Article THIRTEENTH, on the basis of
information known to them after reasonable inquiry, all questions arising under
this Article THIRTEENTH, including, without limitation, (a) whether a person is
an Interested Stockholder, (b) the number of shares of Capital Stock or other
securities beneficially owned by any person, (c) whether a person is an
Affiliate or Associate of another, (d) whether a Proposed Action (as
hereinafter defined) is with, or proposed by, or on behalf of an Interested
Stockholder or an Affiliate or Associate of an Interested Stockholder, (e)
whether the assets that are the subject of any Business Combination have, or
the consideration to be received for the issuance or transfer of securities by
the Corporation has, an aggregate Fair Market Value of $2,500,000 or more, and
(f) whether the assets or securities that are the subject of any Business
Combination constitute a Substantial Part. Any such determination made in good
faith shall be binding and conclusive on all parties.

E. Nothing contained in this Article THIRTEENTH shall be construed to
relieve any Interested Stockholder from any fiduciary obligation imposed by
law.

F. The fact that any Business Combination complies with the
provisions of Section B of this Article THIRTEENTH shall not be construed to
impose any fiduciary duty, obligation or responsibility on the Board of
Directors, or any member thereof, to approve such Business Combination or
recommend its adoption or approval to the stockholders of the Corporation, nor
shall such compliance limit, prohibit or otherwise restrict in any manner the
Board of Directors, or any member thereof, with respect to evaluations of or
actions and responses taken with respect to such Business Combination.

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<PAGE> 26
G. For the purposes of this Article THIRTEENTH, a Business Combination
or any proposal to amend, repeal, or adopt any provision of this Restated
Certificate of Incorporation inconsistent with this Article THIRTEENTH
(collectively, "Proposed Action") is presumed to have been proposed by, or on
behalf of, an Interested Stockholder or an Affiliate or Associate of an
Interested Stockholder or a person who thereafter would become such if (1)
after the Interested Stockholder became such, the Proposed Action is proposed
following the election of any director of the Corporation who, with respect to
such Interested Stockholder, would not qualify to serve as a Continuing
Director or (2) such Interested Stockholder, Affiliate, Associate or person
votes for or consents to the adoption of any such Proposed Action, unless as to
such Interested Stockholder, Affiliate, Associate or person a majority of the
Continuing Directors makes a good faith determination that such Proposed Action
is not proposed by or on behalf of such Interested Stockholder, Affiliate,
Associate or person, based on information known to them after reasonable
inquiry.

H. Notwithstanding any other provision of this Restated Certificate of
Incorporation or the Bylaws of the Corporation (and notwithstanding the fact
that a lesser percentage or separate class vote may be specified by law, this
Restated Certificate of Incorporation or the Bylaws of the Corporation), any
proposal to amend, repeal or adopt any provision of this Restated Certificate
of Incorporation inconsistent with this Article THIRTEENTH which is proposed by
or on behalf of an Interested Stockholder or an Affiliate or Associate of an
Interested Stockholder shall require the affirmative vote of the holders of not
less than seventy-five percent (75%) of the votes entitled to be cast by the
holders of all the then outstanding shares of Voting Stock, voting together as
a single class, excluding Voting Stock beneficially owned by such Interested
Stockholder and its Affiliates and Associates; provided however, that this
Section H shall not apply to, or such seventy-five percent (75%) vote shall not
be required for, any amendment, repeal or adoption unanimously recommended by
the Board of Directors if all of such directors are persons who would be
eligible to serve as Continuing Directors within the meaning of Section C,
Paragraph 8 of this Article THIRTEENTH.

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<PAGE> 27
STATE OF DELAWARE

OFFICE OF SECRETARY OF STATE

I, MICHAEL HARKINS, SECRETARY OF STATE OF THE STATE OF DELAWARE DO HEREBY
CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF STOCK
DESIGNATION OF SMITH INTERNATIONAL, INC. FILED IN THIS OFFICE ON THE TWENTIETH
DAY OF JUNE, A.D. 1990, AT 10:45 O'CLOCK A.M.

[SEAL]

/s/ Michael Harkins
Michael Harkins, Secretary of State

AUTHENTICATION: 12697725
DATE: 06/20/1990
<PAGE> 28
CERTIFICATE OF DESIGNATION, PREFERENCES AND
RIGHTS OF SERIES A JUNIOR PARTICIPATING PREFERRED STOCK

SMITH INTERNATIONAL, INC.

Pursuant to Section 151 of the General Corporation Law
of the State of Delaware

We, Douglas L. Rock, President and Chief Executive Officer, and
Vivian M. Cline, Acting Secretary, of Smith International, Inc., a corporation
organized and existing under the General Corporation Law of the State of
Delaware, in accordance with the provisions of Section 103 thereof, DO HEREBY
CERTIFY:

That pursuant to the authority conferred upon the Board of Directors
by the Restated Certificate of Incorporation of the said Corporation, the said
Board of Directors on June 19, 1990, adopted the following resolution creating
a series of 420,000 shares of Preferred Stock designated as Series A Junior
Participating Preferred Stock:

RESOLVED, that pursuant to the authority vested in the Board of
Directors of this Corporation in accordance with the provisions of its Restated
Certificate of Incorporation, a series of Preferred Stock of the Corporation be
and it hereby is created, and that the designation and amount thereof and the
voting powers, preferences and relative, participating, optional and other
special rights of the shares of such series, and the qualifications,
limitations or restrictions thereof are as follows:

1. Designation and Amount. The shares of such series shall be designated as
"Series A Junior Participating Preferred Stock" and the number of shares
constituting such series shall be 420,000.
<PAGE> 29
2. Dividends and Distributions.

(A) Subject to the prior and superior rights of the holders of any
shares of any series of Preferred Stock ranking prior and superior to the
shares of Series A Junior Participating Preferred Stock with respect to
dividends, the holders of shares of Series A Junior Participating Preferred
Stock shall be entitled to receive, when, as and if declared by the Board of
Directors out of funds legally available for the purpose, quarterly dividends
payable in cash on the last day of March, June, September and December in each
year (each such date being referred to herein as a "Quarterly Dividend Payment
Date"), commencing on the first Quarterly Dividend Payment Date after the first
issuance of a share or fraction of a share of Series A Junior Participating
Preferred Stock, in an amount per share (rounded to the nearest cent) equal to
the greater of (a) $1.00 or (b) subject to the provision for adjustment
hereinafter set forth, 100 times the aggregate per share amount of all cash
dividends, and 100 times the aggregate per share amount (payable in kind) of
all non-cash dividends or other distributions other than a dividend payable in
shares of Common stock or a subdivision of the outstanding shares of Common
Stock (by reclassification or otherwise), to be declared on the Common Stock,
par value $1.00 per share, of the Corporation (the "Common Stock") with respect
to the immediately preceding Quarterly Dividend Payment Date, or, in the case
of the first Quarterly Dividend Payment Date, since the first issuance of any
share or fraction of a share of Series A Junior Participating Preferred Stock.
In the event the Corporation shall at any time after June 19, 1990 (the "Rights
Declaration Date") (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the
outstanding Common Stock into a smaller number of shares, then in each such
case the amount to which holders of shares of Series A Junior Participating
Preferred Stock were entitled immediately prior to such event under clause (b)
of the preceding sentence shall be adjusted by multiplying such amount by a
fraction the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to
such event.

2
<PAGE> 30
(B) The Corporation shall declare a dividend or distribution on the
Series A Junior Participating Preferred Stock as provided in paragraph (A)
above immediately prior to the time when it declares a dividend or distribution
on the Common Stock (other than a dividend payable in shares of Common Stock);
provided that, in the event no dividend or distribution shall have been
declared on the Common Stock during the period between any Quarterly Dividend
Payment Date and the next subsequent Quarterly Dividend Payment Date, a
dividend of $1.00 per share on the Series A Junior Participating Preferred
Stock shall nevertheless be payable on such subsequent Quarterly Dividend
Payment Date.

(C) Dividends shall begin to accrue and be cumulative on outstanding
shares of Series A Junior Participating Preferred Stock from the Quarterly
Dividend Payment Date next preceding the date of issue of such shares of Series
A Junior Participating Preferred Stock, unless the date of issue of such shares
is prior to the record date for the first Quarterly Dividend Payment Date, in
which case dividends on such shares shall begin to accrue from the date of
issue of such shares, or unless the date of issue is a Quarterly Dividend
Payment Date or is a date after the record date for the determination of
holders of shares of Series A Junior Participating Preferred Stock entitled to
receive a quarterly dividend and before such Quarterly Dividend Payment Date,
in either of which events such dividends shall begin to accrue and be
cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid
dividends shall not bear interest. Dividends paid on the shares of Series A
Junior Participating Preferred Stock in an amount less than the total amount of
such dividends at the time accrued and payable on such shares shall be
allocated pro rata on a share-by-share basis among all such shares at the time
outstanding. The Board of Directors may fix a record date for the
determination of holders of shares of Series A Junior Participating Preferred
Stock entitled to receive payment of a dividend or distribution declared
thereon, which record date shall be no more than 30 days prior to the date
fixed for the payment thereof.

3. Voting Rights. The holders of shares of Series A Junior Participating
Preferred Stock shall have the following voting rights:

3
<PAGE> 31
(A) Subject to the provision for adjustment hereinafter set forth,
each share of Series A Junior Participating Preferred Stock shall entitle the
holder thereof to 100 votes on all matters submitted to a vote of the
stockholders of the Corporation. In the event the Corporation shall at any
time after the Rights Declaration Date (i) declare any dividend on Common Stock
payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock,
or (iii) combine the outstanding Common Stock into a smaller number of shares,
then in each such case the number of votes per share to which holders of shares
of Series A Junior Participating Preferred Stock were entitled immediately
prior to such event shall be adjusted by multiplying such number by a fraction
the numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.

(B) Except as otherwise provided herein or by law, the holders of
shares of Series A Junior Participating Preferred Stock and the holders of
shares of Common Stock shall vote together as one class on all matters
submitted to a vote of stockholders of the Corporation.

(C) If and whenever dividends on Series A Junior Participating
Preferred Stock shall be in arrears and such arrears shall aggregate an amount
at least equal to six quarterly dividends upon such stock, then and in such
event, the holders of Series A Junior Participating Preferred Stock, voting
separately as a class with the holders of shares of any one or more other
series of preferred stock upon which like voting rights have been conferred,
shall be entitled, at any annual meeting of the stockholders or special meeting
held in place thereof, or at a special meeting called as hereinafter provided,
to elect two directors. Whenever all arrears in dividends on the Series A
Junior Participating Preferred Stock then outstanding shall have been paid and
dividends thereon for the current quarterly period shall also have been paid or
declared and a sum sufficient for the payment thereof set aside, then the right
of the holders of Series A Junior Participating Preferred Stock to elect such
number of directors shall cease, but subject always to the same provisions for
vesting of such voting rights in the case of any similar future arrearages in
dividends. At any time after such voting power shall have so

4
<PAGE> 32
vested in the Series A Junior Participating Preferred Stock, the Secretary of
the Corporation may, and upon the written request of the holders of record of
10% or more in amount of the Series A Junior Participating Preferred Stock then
outstanding, addressed to him at the principal office of this corporation,
shall call a special meeting of the holders of Series A Junior Participating
Preferred Stock and the holders of any other stock entitled to vote with the
Series A Junior Participating Preferred Stock at such meeting for the election
of the directors to be elected by them as hereinafter provided, to be held
within 30 days after such call and at the place and upon the notice provided by
law and in the by-laws of the Corporation for the holding of meetings of
stockholders; provided, however, that the Secretary shall not be required to
call such special meeting in the case of any such request received less than 90
days before the date fixed for any annual meeting of stockholders. If any such
special meeting required to be called as above provided shall not be called by
the Secretary within 30 days after receipt of any such request, then the
holders of record of 10% or more in amount of the series A Junior Participating
Preferred Stock then outstanding may designate in writing one of their number
to call such meeting, and the person so designated may call such meeting to be
held at the place and upon the notice above provided, and for that purpose
shall have access to the stock ledger of the Corporation. No such special
meeting and no adjournment thereof shall be held on a date later than 30 days
before the annual meeting of the stockholders or special meeting held in place
thereof next succeeding the time when the holders of Series A Junior
Participating Preferred Stock become entitled to elect directors as above
provided. If any such special meeting shall be called as above provided and if
the holders of at least a majority of the stock then outstanding and entitled
to vote at such meeting shall be present or represented by proxy at such
meeting or any adjournment thereof, then, by vote of the holders of at least a
majority of such stock present or so represented at such meeting, the then
authorized number of directors of the Corporation shall be increased by two,
and at such meeting, the holders of such stock shall be entitled to elect the
additional directors so provided for but any director so elected shall not be
classified and shall not hold office beyond the annual meeting of the
stockholders or special meeting held in place thereof next succeeding the time
when the holder of such stock become entitled to elect directors as above
provided.

5
<PAGE> 33
Directors elected pursuant to this Section 3(C) shall hold office until the
annual meeting of stockholders next succeeding their election and until their
respective successors are duly elected and qualified. Notwithstanding the
foregoing sentence, whenever the holders of Series A Junior Participating
Preferred Stock (and the holders of any other stock entitled to vote with such
stock) shall be divested of voting power as above provided, the terms of office
of all persons elected as directors by such holders, voting separately, shall
forthwith terminate, and the number of directors shall be reduced accordingly.

(D) Except as set forth herein, holders of Series A Junior
Participating Preferred Stock shall have no special voting rights and their
consent shall not be required (except to the extent they are entitled to vote
with holders of Common Stock as set forth herein) for taking any corporate
action.

4. Certain Restrictions.

(A) Whenever quarterly dividends or other dividends or distributions
payable on the Series A Junior Participating Preferred Stock as provided in
Section 2 are in arrears, thereafter and until all accrued and unpaid dividends
and distributions, whether or not declared, on shares of Series A Junior
Participating Preferred Stock outstanding shall have been paid in full, the
Corporation shall not

(i) declare or pay dividends on, make any other
distributions on, or redeem or purchase or otherwise acquire for
consideration any shares of stock ranking junior (either as to dividends
or upon liquidation, dissolution or winding up) to the Series A Junior
Participating Preferred Stock;

(ii) declare or pay dividends on or make any other
distributions on any shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the Series
A Junior Participating Preferred Stock, except dividends paid ratably on
the Series A Junior Participating Preferred Stock and all such parity
stock on

6
<PAGE> 34
which dividends are payable or in arrears in proportion to the total
amounts to which the holders of all such shares are then entitled;

(iii) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the Series
A Junior Participating Preferred Stock, provided that the Corporation may
at any time redeem, purchase or otherwise acquire shares of any such
parity stock in exchange for shares of any stock of the Corporation
ranking junior (either as to dividends or upon dissolution, liquidation or
winding up) to the Series A Junior Participating Preferred Stock;

(iv) purchase or otherwise acquire for consideration
any shares of Series A Junior Participating Preferred Stock, or any shares
of stock ranking on a parity with the Series A Junior Participating
Preferred Stock, except in accordance with a purchase offer made in
writing or by publication (as determined by the Board of Directors) to all
holders of such shares upon such terms as the Board of Directors, after
consideration of the respective annual dividend rates and other relative
rights and preferences of the respective series and classes, shall
determine in good faith will result in fair and equitable treatment among
the respective series or classes.

(B) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares of
stock of the Corporation unless the Corporation could, under paragraph (A) of
this Section 4, purchase or otherwise acquire such shares at such time and in
such manner.

5. Reacquired Shares. Any shares of Series A Junior Participating Preferred
Stock purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and cancelled promptly after the acquisition
thereof. All such shares shall upon their cancellation become authorized but
unissued shares of Preferred Stock and may be reissued as part of a new series
of

7
<PAGE> 35
Preferred Stock to be created by resolution or resolutions of the Board of
Directors, subject to the conditions and restrictions on issuance set forth
herein.

6. Liquidation, Dissolution or Winding Up. (A) Upon any liquidation
(voluntary or otherwise), dissolution or winding up of the Corporation, no
distribution shall be made to the holders of shares of stock ranking junior
(either as to dividends or upon liquidation, dissolution or winding up) to the
Series A Junior Participating Preferred Stock unless, prior thereto, the
holders of shares of Series A Junior Participating Preferred Stock shall have
received $100 per share, plus an amount equal to accrued and unpaid dividends
and distributions thereon, whether or not declared, to the date of such payment
(the "Series A Liquidation Preference"). Following the payment of the full
amount of the Series A Liquidation Preference, no additional distributions
shall be made to the holders of shares of Series A Junior Participating
Preferred Stock unless, prior thereto, the holders of shares of Common Stock
shall have received an amount per share (the "Common Adjustment") equal to the
quotient obtained by dividing (i) the Series A Liquidation Preference by (ii)
100 (as appropriately adjusted as set forth in subparagraph C below to reflect
such events as stock splits, stock dividends and recapitalization with respect
to the Common Stock) (such number in clause (ii) immediately above being
referred to as the "Adjustment Number"). Following the payment of the full
amount of the Series A Liquidation Preference and the Common Adjustment in
respect of all outstanding shares of Series A Junior Participating Preferred
Stock and Common Stock, respectively, holders of Series A Junior Participating
Preferred Stock and holders of shares of Common Stock shall receive their
ratable and proportionate share of the remaining assets to be distributed in
the ratio of the Adjustment Number to one (1) with respect to such Preferred
Stock and Common Stock, on a per share basis, respectively.

(B) In the event, however, that there are not sufficient assets
available to permit payment in full of the Series A Liquidation Preference and
the liquidation preferences of all other series of preferred stock, if any,
which rank on a parity with the Series A Junior Participating Preferred Stock,
then such remaining assets shall be distributed ratably to the holders of such
parity shares in proportion to their respective liquidation preferences. In
the event, however, that there are not

8
<PAGE> 36
sufficient assets available to permit payment in full of the Common Adjustment,
then such remaining assets shall be distributed ratably to the holders of
Common Stock.

(C) In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the
outstanding Common Stock into a smaller number of shares, then in each such
case the Adjustment Number in effect immediately prior to such event shall be
adjusted by multiplying such Adjustment Number by a fraction the numerator of
which is the number of shares of Common Stock outstanding immediately after
such event and the denominator of which is the number of shares of Common Stock
that were outstanding immediately prior to such event.

7. Consolidation, Merger, etc. In case the Corporation shall enter into any
consolidation, merger, combination or other transaction in which the shares of
Common Stock are exchanged for or changed into other stock or securities, cash
and/or any other property, then in any such case the shares of Series A Junior
Participating Preferred Stock shall at the same time be similarly exchanged or
changed in an amount per share (subject to the provision for adjustment
hereinafter set forth) equal to 100 times the aggregate amount of stock,
securities, cash and/or any other property (payable in kind), as the case may
be, into which or for which each share of Common Stock is changed or exchanged.
In the event the Corporation shall at any time after the Rights Declaration
Date (i) declare any dividend on Common Stock payable in shares of Common
Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the
outstanding Common Stock into a smaller number of shares, then in each such
case the amount set forth in the preceding sentence with respect to the
exchange or change of shares of Series A Junior Participating Preferred Stock
shall be adjusted by multiplying such amount by a fraction the numerator of
which is the number of shares of Common Stock outstanding immediately after
such event and the denominator of which is the number of shares of Common Stock
that were outstanding immediately prior to such event.

9
<PAGE> 37
8. Redemption.

(A) The outstanding shares of Series A Junior Participating
Preferred Stock may be redeemed at the option of the Board of Directors as a
whole, or in part, at any time, or from time to time, at a cash price per share
equal to the product of the Adjustment Number times the Average Market Value
(as such term is hereinafter defined) of the Common Stock on the date of
mailing of the notice of redemption, plus all dividends which on the redemption
date have accrued on the shares to be redeemed and have not been paid, or
declared and a sum sufficient for the payment thereof set apart, without
interest. The "Average Market Value" as of a particular date is the average of
the closing sale prices of the Common Stock during the 10 consecutive Trading
Day period immediately preceding such date on the Composite Tape for New York
Stock Exchange Listed Stocks, or, if such stock is not quoted on the Composite
Tape, on The New York Stock Exchange, or, if such stock is not listed on such
Exchange, on the principal United States securities exchange registered under
the Securities Exchange Act of 1934, as amended, on which such stock is listed,
or, if such stock is not listed on any such exchange, the average of the
closing sale prices with respect to a share of Common Stock during such 10-day
period, as quoted on the National Association of Securities Dealers, Inc.
Automated Quotations System or any system then in use, or if no such quotations
are available, the fair market value of the Common Stock as determined by the
Board of Directors in good faith. The term "Trading Day" shall mean a day on
which the principal national securities exchange on which the Common Stock is
listed or admitted to trading is open for the transaction of business or, if
the Common Stock is not listed or admitted to trading on any national
securities exchange, a Monday, Tuesday, Wednesday, Thursday or Friday on which
banking institutions in the State of New York are not authorized or obligated
by law or executive order to close.

(B) Notice of any such redemption shall be given by mailing to the
holders of the Series A Junior Participating Preferred Stock a notice of such
redemption, first class postage prepaid, not later than the thirtieth day and
not earlier than the sixtieth day before the date fixed for redemption, at
their last address as the same shall appear upon the books of the Company. Any
notice which is mailed in the manner herein provided

10
<PAGE> 38
shall be conclusively presumed to have been duly given, whether or not the
shareholder received such notice, and failure duly to give such notice by mail,
or any defect in such notice, to any holder of Series A Junior Participating
Preferred Stock shall not affect the validity of the proceedings for the
redemption of such Series A Junior Participating Preferred Stock as are to be
redeemed, and the redemption shall be made by lot as determined by the Board of
Directors.

(C) The notice of redemption to each holder of Series A Junior
Participating Preferred Stock shall specify (a) the number of shares of Series
A Junior Participating Preferred Stock of such holder to be redeemed, (b) the
date fixed for redemption, (c) the redemption price and (d) the place of
payment of the redemption price.

(D) If any such notice of redemption shall have been duly given or if
the Company shall have given to the bank or trust company hereinafter referred
to irrevocable written authorization promptly to give or complete such notice,
and if on or before the redemption date specified therein the funds necessary
for such redemption shall have been deposited by the Company with the bank or
trust company designated in such notice, doing business in the Borough of
Manhattan, the City of New York, State of New York, and having a capital,
surplus and undivided profits aggregating at least $25,000,000 according to its
last published statement of condition, in trust for the benefit of the holders
of Series A Junior Participating Preferred Stock called for redemption, then,
notwithstanding that any certificate for such shares so called for redemption
shall not have been surrendered for cancellation, from and after the time of
such deposit all such shares called for redemption shall no longer be deemed
outstanding and all rights with respect to such shares shall no longer be
deemed outstanding and all rights with respect to such shares shall forthwith
cease and terminate, except the right of the holders thereof to receive from
such bank or trust company at any time after the time of such deposit the funds
so deposited, without interest, and the right to exercise, up to the close of
business on the fifth day before the date fixed for redemption, all privileges
of conversion or exchange if any. In case less than all the shares represented
by any surrendered certificate are redeemed, a new certificate shall be issued
representing the unredeemed shares. Any interest accrued on such

11
<PAGE> 39
funds shall be paid to the Company from time to time. Any funds so deposited
and unclaimed at the end of six years from such redemption date shall be repaid
to the Company, after which the holders of shares of Series A Junior
Participating Preferred Stock called for redemption shall look only to the
Company for payment thereof; provided that any funds so deposited which shall
not be required for redemption because of the exercise of any privilege of
conversion or exchange subsequent to the date of deposit shall be repaid to the
Company forthwith.

9. Ranking. The Series A Junior Participating Preferred Stock shall rank (i)
junior to all other series of the Corporation's Preferred Stock and (ii) senior
to the Corporation's Common Stock, as to the payment of dividends and the
distribution of assets, unless the terms of any such other stock shall provide
otherwise.

10. Amendment. The Restated Certificate of Incorporation of the Corporation
shall not be further amended in any manner which would materially alter or
change the powers, preferences or special rights of the Series A Junior
Participating Preferred Stock so as to affect them adversely without the
affirmative vote of the holders of a majority or more of the outstanding shares
of Series A Junior Participating Preferred Stock, voting separately as a class.

11. Fractional Shares. Series A Junior Participating Preferred Stock may be
issued in fractions of a share which shall entitle the holder, in proportion to
such holders fractional shares, to exercise voting rights, receive dividends,
participate in distributions and to have the benefit of all other rights of
holders of Series A Junior Participating Preferred Stock.

12
<PAGE> 40
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be executed
in its name this 19th day of June, 1990.

SMITH INTERNATIONAL, INC.

/s/ Douglas L. Rock
--------------------------
Douglas L. Rock
President and Chief Execu-
tive Officer

(Corporate Seal)

Attest:

/s/ Vivian M. Cline
- ----------------------
Vivian M. Cline
Acting Secretary
<PAGE> 41
State of Delaware

Office of the Secretary of State

PAGE 1

I, WILLIAM T. QUILLEN, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
CHANGE OF REGISTERED AGENT/OFFICE OF "SMITH INTERNATIONAL, INC." FILED IN THIS
OFFICE ON THE THIRTY-FIRST DAY OF AUGUST, A.D. 1992, AT 9 O'CLOCK A.M.
A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE APPROPRIATE
COUNTY RECORDER OF DEEDS FOR RECORDING.

* * * * * * * * * * * * * * *

[SEAL] /s/ William T. Quillen
---------------------------------
William T. Quillen, Secretary of State

AUTHENTICATION: #3967443

DATE: 07/08/1993
<PAGE> 42
CERTIFICATE OF CHANGE OF LOCATION OF REGISTERED OFFICE

AND OF REGISTERED AGENT

It is hereby certified that:

1. The name of the corporation (hereinafter called the "corporation") is:
SMITH INTERNATIONAL, INC.

2. The registered office of the corporation within the State of Delaware is
hereby changed to 32 Loockerman Square, Suite L-100, Dover, Delaware
19901, County of Kent.

3. The registered agent of the corporation within the State of Delaware is
hereby changed to The Prentice-Hall Corporation System, Inc., the business
office of which is identical with the registered office of the corporation
as hereby changed.

4. The corporation has authorized the changes hereinbefore set forth by
resolution of its Board of Directors.

Signed on August 25 , 1992.

/s/ Neal S. Sutton
------------------------------------------
Neal S. Sutton (Vice)President

Attest:

/s/ Vivian M. Cline
- -----------------------------------------------
Vivian M. Cline (Assistant)Secretary

<PAGE> 1
EXHIBIT 3.2

RESTATED

BYLAWS

SMITH INTERNATIONAL, INC.
(a Delaware Corporation)

<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>

ARTICLE I OFFICES .................................... 1

Section 1. Registered Office .......................... 1
Section 2. Other Offices .............................. 1

ARTICLE II MEETING OF STOCKHOLDERS .................... 1

Section 1. Place of Meetings .......................... 1
Section 2. Annual Meetings ............................ 2
Section 3. Special Meetings ........................... 3
Section 4. Notice of Meetings ......................... 3
Section 5. Quorum ..................................... 3
Section 6. Voting ..................................... 4
Section 7. Action Without Meeting ..................... 4
Section 8. List of Stockholders Entitled to Vote....... 5
Section 9. Stock Ledger ............................... 5

ARTICLE III DIRECTORS .................................. 5

Section 1. General Powers ............................. 5
Section 2. Number and Election of Directors ........... 5
Section 3. Vacancies and Newly Created Directorships .. 6
Section 4. Place of Meetings .......................... 6
Section 5. Regular Meetings ........................... 7
Section 6. Special Meetings ........................... 7
Section 7. Quorum ..................................... 8
Section 8. Participation in Meetings by Conference
Telephone .......................... 9
Section 9. Fees and Compensation ...................... 9
Section 10. Action Without Meeting ..................... 9
Section 11. Rights of Inspection ....................... 9
Section 12. Committees ................................. 9
Section 13. Interested Directors ....................... 10
Section 14. Entire Board of Directors .................. 11
Section 15. Nomination of Directors .................... 11

ARTICLE IV OFFICERS ................................... 12

Section 1. General .................................... 12
Section 2. Election ................................... 12
Section 3. Removal and Resignation .................... 13
</TABLE>
(i)

<PAGE> 3

<TABLE>
<S> <C> <C>
Section 4. Vacancies .................................. 13
Section 5. Chairman of the Board of Directors ......... 13
Section 6. Chief Executive Officer .................... 14
Section 7. President .................................. 14
Section 8. Vice Presidents ............................ 15
Section 9. Secretary .................................. 15
Section 10. Treasurer .................................. 16
Section 11. Assistant Secretaries ...................... 17
Section 12. Assistant Treasurers ....................... 17
Section 13. Other Officers ............................. 18
Section 14. Voting Securities Owned by the Corporation . 18

ARTICLE V STOCK...................................... 18

Section 1. Form of Certificates ....................... 18
Section 2. Signatures ................................. 19
Section 3. Lost Certificates .......................... 19
Section 4. Transfers .................................. 19
Section 5. Record Date ................................ 20
Section 6. Beneficial Owners .......................... 20

ARTICLE VI NOTICES .................................... 20

Section 1. Notices .................................... 20
Section 2. Waivers of Notice .......................... 21

ARTICLE VII GENERAL PROVISIONS ......................... 21

Section 1. Dividends .................................. 21
Section 2. Disbursements .............................. 21
Section 3. Fiscal Year ................................ 22
Section 4. Corporate Seal ............................. 22

ARTICLE VIII INDEMNIFICATION............................. 22

Section 1. Power to Indemnify in Actions Suits or
Proceedings Other than those by or in
the Right of the Corporation ............ 22
Section 2. Power to Indemnify in Actions, Suits or
Proceedings by or in the Right of the
Corporation ............................. 23
Section 3. Authorization of Indemnification ........... 23
Section 4. Good Faith Defined ......................... 24
Section 5. Indemnification by a Court ................. 25
Section 6. Expenses Payable in Advance ................ 25
</TABLE>

(ii)

<PAGE> 4
<TABLE>
<S> <C> <C>
Section 7. Non-exclusivity and Survival of
Indemnification .......................... 25
Section 8. Insurance .................................. 26
Section 9. Meaning of "Corporation" for Purposes of
Article VIII ............................ 26

ARTICLE IX AMENDMENT OF BYLAWS ........................ 27

Section 1. Amendments ................................. 27
</TABLE>

(iii)

<PAGE> 5
BYLAWS

SMITH INTERNATIONAL, INC.

a Delaware corporation

(hereinafter called the "Corporation")

ARTICLE I

OFFICES

Section 1. Registered Office. The registered office of the
Corporation shall be 100 West Tenth Street, in the city of Wilmington, County
of New Castle, State of Delaware, and the name of the Corporation's registered
agent at that address is the Corporation Trust Company.

Section 2. Other Offices. The Corporation may also have offices at
such other places both within and without the State of Delaware as the Board
of Directors may from time to time determine.

ARTICLE II

MEETINGS OF STOCKHOLDERS

Section 1. Place of Meetings. Meetings of the stockholders for the
election of directors or for any other purpose shall be held at such time and
place, either within or without the State of Delaware, as shall be designated
from time to time by the Board of Directors, the Chairman of the Board, the
Chief

- 1 -

<PAGE> 6
Executive Officer, the President or the Secretary in the order of precedence
listed and stated in the notice of the meeting or in a duly executed waiver of
notice thereof.

*Section 2. Annual Meetings. The annual meetings of stockholders for
the election of directors and such other business as may properly be brought
before the meeting shall be held on such date and at such time and place or
places, within or without the State of Delaware, as shall be designated from
time to time by the Board of Directors and stated in the notice of the meeting.
Except as provided in Section 15 of Article III hereof, to be properly brought
before an annual meeting, business must be (i) specified in the notice of the
meeting (or any supplement thereto) given by or at the direction of the Board of
Directors, (ii) brought before the meeting by or at the direction of the Board
of Directors pursuant to a vote of not less than a majority of the entire Board
of Directors or (iii) otherwise properly brought before an annual meeting by a
stockholder. For business to be properly brought before the meeting by a
stockholder, the stockholder must have given written notice of the proposed
business, either by personal delivery or by United States mail, postage
pre-paid, to the Secretary of the Corporation, such that the Secretary receives
such notice at least sixty (60) days prior to the anniversary date of the
immediate preceding annual meeting or not later than ten (10) days after notice
of public disclosure of the date of the annual meeting was given or made to
stockholders, whichever date is earlier. Any such notice shall set forth as to
each matter the stockholder proposes to bring before the annual meeting (i)
brief description of the business desired to be brought before the meeting and
the reasons for conducting such business at the meeting and, in the event that
such business includes a proposal to amend either the Certificate of
Incorporation or Bylaws of the Corporation, the language of the proposed

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

*Section 2, ARTICLE II, amended 4-13-87

- 2 -

<PAGE> 7
amendment, (ii) the name and address of the stockholder proposing such
business, (iii) a representation that the stockholder is a holder of record
of stock of the Corporation entitled to vote at such meeting and intends to
appear in person or by proxy at the meeting to propose such business, and
(iv) any material interest of the stockholder in such business. No
business shall be conducted at any annual meeting of stockholders except in
accordance with this Section 2 of Article II and the chairman of any annual
meeting of stockholders may refuse to permit any business to be brought
before such annual meeting without compliance with the foregoing procedures.

Section 3. Special Meetings. Special meetings of the stockholders
of the Corporation for any purpose or purposes may be called at any time by
the Board of Directors, the Chairman of the Board, the Chief Executive
Officer, the President or the Secretary or by any two other officers of the
Corporation. Special meetings of stockholders of the Corporation may not be
called by any other person or persons.

Section 4. Notice of Meetings. Except as otherwise required by
law, notice of each meeting of stockholders, whether annual or special,
shall be given not less than ten days nor more than sixty days before the date
on which the meeting is to be held to each stockholder of record entitled to
vote thereat. Such notice shall state the place, date and hour of the
meeting, and in the case of special meeting, the purpose or purposes for
which the meeting is called. Notice of any meeting of stockholders shall not
be required to be given to any stockholder who shall attend such meeting in
person or by proxy, except a stockholder who shall attend such meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened, and if any stockholder shall in writing waive notice of

- 3 -

<PAGE> 8

any meeting of the stockholders, whether prior to or after such meeting, notice
thereof need not be given to him. Notice of any adjourned meeting of the
stockholders shall not be required to be given except where expressly required
by law.

Section 5. Quorum. Except as otherwise required by law or by the
Certificate of Incorporation, the holders of a majority of the capital stock
issued and outstanding and entitled to vote thereat, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business. If however, such quorum shall
not be present or represented at any meeting of the stockholders, the
stockholders entitled to vote thereat, present in person or represented by
proxy, shall have the power to adjourn the meeting from time to time until a
quorum shall be present or represented. At such adjourned meeting at which a
quorum shall be present or represented, any business may be transacted which
might have been transacted at the meeting as originally noticed.

Section 6. Voting. Except as otherwise required by law or the
Certificate of Incorporation, any question brought before any meeting of
stockholders at which a quorum is present shall be decided by the vote of the
holders of a majority of the stock represented and entitled to vote thereat.
Except as otherwise provided by the Certificate of Incorporation, each
stockholder represented at a meeting of stockholders shall be entitled to cast
one vote for each share of the capital stock of the Corporation entitled to
vote thereat held by such stockholder. Such votes may be cast in person or by
proxy, but no proxy shall be voted on or after three years from its date,
unless such proxy provides for a longer period. The vote for the election of
directors, and upon the direction of the presiding officer of the meeting, the
vote on any other question before the meeting, shall be by written ballot.

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Section 7. Action Without Meeting. Except as otherwise required by
the Certificate of Incorporation, any action required or permitted to be taken
at any annual or special meeting of stockholders may be taken only upon the
vote of the stockholders at an annual or special meeting duly noticed and
called as provided in these Bylaws, and may not be taken by a written consent
of the stockholders pursuant to the General Corporation Law of the State of
Delaware.

Section 8. List of Stockholders Entitled to Vote. The officer of the
Corporation who has charge of the stock ledger of the Corporation shall prepare
and make, at least ten days before every meeting of stockholders, a complete
list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also
be produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder of the Corporation who is
present.

Section 9. Stock Ledger. The stock ledger of the Corporation shall be
the only evidence as to who are the stockholders entitled to examine the stock
ledger, the list required by Section 8 of this Article II or the books of the
Corporation, or to vote in person or by proxy at any meeting of stockholders.

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ARTICLE III

DIRECTORS

Section 1. General Powers. Except as otherwise required by law or the
Certificate of Incorporation, the business and affairs of the Corporation shall
be managed by or under the direction of the Board of Directors of the
Corporation.

Section 2. Number and Election of Directors. The number of directors
of the corporation shall be fixed in the manner provided in the Certificate of
Incorporation. Except as otherwise provided in Section 3 of this Article III,
the directors of the Corporation shall be elected by the stockholders of the
corporation, and at each such election the nominees receiving the greatest
number of votes, up to the number of directors then to be elected, shall be
the persons then elected. The election of directors is subject to any
provisions contained in the Certificate of Incorporation relating thereto
including any provisions for a classified Board of Directors. Any director may
resign at any time effective upon giving written notice to the Chairman of the
Board, the Chief Executive Officer, the President, the Secretary or the Board
of Directors, unless the notice specifies a later time for the effectiveness of
such resignation.

Section 3. Vacancies and Newly Created Directorships. Except as
otherwise required by the Certificate of Incorporation, any vacancy in the
Board of Directors of the Corporation resulting from any increase in the number
of directors and any other vacancy occurring in the Board of Directors may be
filled by the Board of Directors acting by a majority of the directors then in
office, although less than a quorum, or by the sole remaining director, and any
director so elected to fill a vacancy shall hold office until such director's
successor is duly elected and

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<PAGE> 11
qualified, or until such director resigns or is removed, for a term that shall
coincide with the term of the class to which such director shall have been
elected. In no event will a decrease in the number of directors shorten the
term of any incumbent director.

Section 4. Place of Meetings. The Board of Directors may hold its
meetings, both regular and special, at such place or places, within or without
the State of Delaware, as the Board of Directors, the Chairman of the Board or
the Secretary may from time to time determine.

Section 5. Regular Meetings.

(a) Immediately following each annual meeting of stockholders the
Board of Directors shall hold a regular meeting for the purpose of
organization, election of officers and the transaction of other business.

(b)(i) Other regular meetings of the Board of Directors shall be
held on such dates, at such places, and at such times as shall be determined by
the Board of Directors, by the Chief Executive Officer or by the Secretary, and
notice thereof may be given to each director prior to each regular meeting. In
the absence of any notice, regular meetings shall be held at the principal
executive offices of the Corporation at 9:00 a.m., California time, on the last
business day of each of said months.

(ii) Notice given by the Chief Executive Officer or the Secretary
of regular meetings shall be given in the manner provided in subsections (b)
and (c) of Section 6 of this Article III of these Bylaws, provided, that such
notice shall be given at least four (4) days prior to the time of the meeting.
If no notice is given, the regular meetings shall be held as provided in
paragraph (i) of this subsection (b), and notice thereof shall be deemed
dispensed with.

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Section 6. Special Meetings.

(a) Special meetings of the Board of Directors for any purpose or
purposes may be called at any time by the Chairman of the Board, the Chief
Executive Officer, the President, any Vice President or the Secretary or by a
majority of the directors then in office.

(b) Notice of special meetings shall be given to each director by a
written notice mailed, postage prepaid, at least two days prior to the special
meeting, or by any electronic means producing a written record of the notice
transmitted at least one day prior to the meeting, or by such shorter telephone
or other notice as the person calling the meeting may deem appropriate in the
circumstances. Any such notice shall be addressed or delivered to each
director at such director's address as it is shown upon the records of the
Corporation or as may have been given to the Corporation by the director for
purposes of notice, or if such address is not shown on such records or is not
readily ascertainable, at the place in which the meetings of the directors are
regularly held.

(c) Notice by mail shall be deemed to have been given at the time a
written notice is deposited in the United States mails, postage prepaid. Any
other written notice shall be deemed to have been given at the time it is
personally delivered to the director or is delivered to a common carrier for
transmission, or actually transmitted by the person giving the notice by
electronic means, to the director. Oral notice shall be deemed to have been
given at the time it is communicated, in person or by telephone or wireless, to
the director or to a person at the address of the director as shown on the
records of the Corporation or at his office who the person giving the notice
has reason to believe will promptly communicate it to the director.

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Section 7. Quorum. Except as otherwise required by law, the
Certificate of Incorporation of these Bylaws, at all meetings of the Board of
Directors, a majority of the entire Board of Directors shall constitute a
quorum for the transaction of business (except as otherwise provided in this
Section 7) and the act of a majority of the directors present at any meeting at
which there is a quorum shall be the act of the Board of Directors. If a
quorum shall not be present at any meeting of the Board of Directors, the
directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be present.
If the meeting is adjourned for more than 24 hours, notice of any adjournment
to another time or place, or both, shall be given prior to the time of the
adjourned meeting to the directors who were not present at the time of the
adjournment. A meeting at which a quorum is initially present may continue to
transact business notwithstanding the withdrawal of directors, if any action
taken is approved by the required vote of the required quorum for such meeting.

Section 8. Participation in Meetings by Conference Telephone. Members
of the Board of Directors of the Corporation, or any committee designated by
the Board of Directors, may participate in a meeting of the Board of Directors
or such committee by means of a conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and participation in a meeting pursuant to this Section 8 shall
constitute presence in person at such meeting.

Section 9. Fees and Compensation. Directors and members of committees
may receive such compensation, if any, for their services, and such
reimbursement for expenses, as may be fixed or determined by the Board of
Directors. Nothing herein contained

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shall be construed to preclude any director from serving the Corporation in any
other capacity as an officer, agent, employee, or otherwise, and receiving
compensation therefore.

Section 10. Action Without Meeting. Except as otherwise required by
the Certificate of Incorporation or these Bylaws, any action required or
permitted to be taken by the Board of Directors at any meeting of the Board of
Directors or of any committee thereof may be taken without a meeting if all
members of the Board of Directors or committee, as the case may be, consent
thereto in writing and the writing or writings are filed with the minutes of
the proceedings of the Board of Directors or committee.

Section 11. Rights of Inspection. Every director shall have the right
to examine the corporation's stock ledger, a list of its stockholders and its
other books and records for a purpose reasonably related to such directors's
position as a director.

Section 12. Committees. The Board of Directors may, by resolution
passed by a majority of the entire Board of Directors, designate one or more
committees, each committee to consist of one or more of the directors of the
Corporation. The Board of Directors may designate one or more directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of any such committee. In the absence or
disqualification of a member of a committee, and in the absence of a
designation by the Board of Directors of an alternate member to replace the
absent or disqualified member, the member or members thereof present at any
meeting and not disqualified from voting, whether or not such member or members
constitute a quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in the place of any absent or disqualified
member. Any committee, to the extent allowed by law

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<PAGE> 15
and provided in the resolution establishing such committee, shall have and may
exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of the corporation. Each committee
shall keep regular minutes and report to the Board of Directors when required.
The Board of Directors shall have the power to prescribe the manner in which
proceedings of any such committee shall be conducted. In the absence of any
such prescription, such committee shall have the power to prescribe the manner
in which its proceedings shall be conducted. Unless the Board of Directors or
such committee shall otherwise provide, the regular and special meetings and
other actions of any such committee shall be governed by the provisions of this
Article III applicable to meetings and actions of the Board of Directors.

Section 13. Interested Directors. No contract or transaction between
the Corporation and one or more of its directors or officers, or between the
Corporation and any other corporation, partnership, association or other
organization in which one or more of its directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the Board of Directors or committee thereof
which authorizes the contract or transaction, or solely because his or their
votes are counted for such purpose if (i) the material facts as to his or their
relationship or interest and as to the contract or transaction are disclosed or
are known to the Board of Directors or the committee, and the Board of
Directors or committee in good faith authorizes the contract or transaction by
the affirmative votes of a majority of the disinterested directors, even though
the disinterested directors be less than a quorum; or (ii) the material facts
as to his or their relationship or interest and as to the contract or

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<PAGE> 16
transaction are disclosed or are known to the stockholders entitled to vote
thereon, and the contract or transaction is specifically approved in good faith
by vote of the stockholders; or (iii) the contract or transaction is fair as to
the Corporation as of the time it is authorized, approved or ratified, by the
Board of Directors, a committee thereof or the stockholders. Common or
interested directors may be counted in determining the presence of a quorum at
a meeting of the Board of Directors or of a committee which authorizes the
contract or transaction.

Section 14. Entire Board of Directors. As used in these Bylaws
generally, the term "entire Board of Directors" means the total number of
directors which the Corporation would have if there were no vacancies.

*Section 15. Nomination of Directors. Nominations for the election of
directors may be made by the Board of Directors or by any stockholder entitled
to vote for the election of directors. Any stockholder entitled to vote for
the election of directors at a meeting of stockholders may nominate a person or
persons for election as directors only if written notice of such stockholder's
intention to make such nomination or nominations is given in accordance with
the procedures set forth in Section 2 of Article II hereof. Each such notice
shall set forth (i) the name and address of the stockholder who intends to make
the nomination and of the person or persons to be nominated; (ii) a
representation that the stockholder is a holder of record of stock of the
Corporation entitled to vote at such meeting and intends to appear in person or
by proxy at the meeting to nominate the person or persons specified in the
notice; (iii) a description of all arrangements or understandings between the
stockholder and each nominee and any other person or persons (naming such
person or persons) pursuant to which the nomination or nominations are to be
made by the stockholder; (iv) such other information regarding

__________________________________

*Section 15, ARTICLE III, amended 4-13-87

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<PAGE> 17
each nominee proposed by such stockholder as would have been required to be
included in a proxy statement filed pursuant to the proxy rules of the
Securities and Exchange Commission had such nominee been nominated, or intended
to be nominated, by the Board of Directors, and (v) the consent of each nominee
to serve as a director of the Corporation if so elected. The chairman of any
meeting of stockholders, and the Board of Directors, may refuse to recognize
the nomination of any person not made in compliance with the foregoing
procedures.

ARTICLE IV

OFFICERS

Section 1. General. The officers of the Corporation shall be chosen
by the Board of Directors and shall be a Chairman of the Board, a Chief
Executive Officer, a President, a Secretary and a Treasurer. The Corporation
may also have at the discretion of the Board of Directors, one or more Vice
Presidents, one or more Assistant Secretaries, one or more Assistant
Treasurers, a Controller, one or more Assistant Controllers and such officers
as may be elected or appointed in accordance with Section 2 of this Article IV.
Any number of offices may be held by the same person, unless otherwise
prohibited by law, the Certificate of Incorporation or these Bylaws. The
officers of the Corporation need not be stockholders of the Corporation, nor,
except in the case of the Chairman of the Board of Directors, need such
officers be directors of the Corporation.

Section 2. Election. The officers of the Corporation, except such
officers as may be elected or appointed in accordance with the provisions of
Section 4 or Section 11 of this Article IV, shall be chosen annually by, and
shall serve at the pleasure of, the Board of Directors, and shall hold their
respective

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offices until their resignation, removal or other disqualification from
service, or until their respective successors shall be elected and qualified.

Section 3. Removal and Resignation.

(a) Any officer may be removed, either with or without cause, by the
Board of Directors at any time, or, except in the case of an officer chosen by
the Board of Directors, by any officer upon whom such power of removal may be
conferred by the Board of Directors. Any such removal shall be without
prejudice to the rights, if any, of the officer under any contract of
employment of the officer.

(b) Any officer may resign at any time by giving written notice to
the Corporation, but without prejudice to the rights, if any, of the
Corporation under any contract to which the officer is a party. Any such
resignation shall take effect at the date of the receipt of such notice or at
any later time specified therein; and, unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective.

Section 4. Vacancies. A vacancy in any office because of death,
resignation, removal, disqualification or any other reason shall be filled in
the manner prescribed in these Bylaws for regular election or appointment to
such office at any regular or special meeting of the Board of Directors or by
its unanimous written consent.

Section 5. Chairman of the Board of Directors. The Chairman of the
Board shall, if present, preside at all meeting of the Board of Directors. The
Chairman of the Board shall, in the absence or disability of the Chief
Executive Officer of the Corporation, perform all of the duties of the Chief
Executive Officer, and when so acting shall have all the powers of, and be

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<PAGE> 19
subject to all the restrictions upon, the Chief Executive officer. The
Chairman of the Board shall also exercise and perform such other powers and
duties as may be from time to time assigned by these Bylaws or the Board of
Directors. Except where by law the signature of the Chief Executive officer or
the President is required, the Chairman of the Board shall possess the same
power as the Chief Executive Officer or the President to sign all contracts,
certificates and other instruments of the Corporation which may be authorized
by the Board of Directors.

Section 6. Chief Executive Officer. Subject to such powers, if any,
as may be given by the Board of Directors, to the Chairman of the Board, the
Chief Executive Officer shall be the general manager and chief executive
officer of the Corporation and shall have, subject to the control of the Board
of Directors, general supervision, direction and control of the business and
officers of the Corporation. The Chief Executive Officer shall preside at all
meetings of the stockholders, and in the absence of the Chairman of the Board,
at all meetings of the Board of Directors. The Chief Executive Officer has the
general powers and duties of management usually vested in the office of chief
executive officer and general manager of a corporation and such other powers
and duties as may be prescribed by these Bylaws or the Board of Directors. The
Chief Executive Officer shall execute all bonds, mortgages, contracts and other
instruments of the Corporation requiring a seal, under the seal of the
Corporation, except where required or permitted by law to be otherwise signed
and executed and except that the other officers of the Corporation may sign and
execute documents when so authorized by these Bylaws, the Board of Directors or
the Chief Executive Officer.

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<PAGE> 20
Section 7. President. Subject to such powers as may be given by the
Board of Directors to the Chairman of the Board and the Chief Executive
Officer, the President shall, in the absence of the Chairman of the Board of
Directors and the Chief Executive Officer, perform all of the duties of the
Chief Executive Officer, and when so acting shall have all the powers of, and
be subject to all the restrictions upon, the Chief Executive Officer. The
President shall also have such other powers and perform such other duties as
may be prescribed from time to time by law, these Bylaws or the Board of
Directors.

Section 8. Vice Presidents. In the absence of the Chairman of the
Board, the Chief Executive Officer and the President, the Vice Presidents in
order of their rank as fixed by the Board of Directors, or if not ranked, the
Vice President designated by the Board of Directors, shall perform all the
duties of the Chief Executive Officer, and when so acting shall have all the
powers of, and be subject to all the restrictions upon, the Chief Executive
Officer. The Vice Presidents shall have such other powers and perform such
other duties as from time to time may be prescribed for them respectively by
these Bylaws or the Board of Directors.

Section 9. Secretary.

(a) The Secretary shall keep or cause to be kept, at the principal
executive office and such other place as the Board of Directors may order, a
book of minutes of all meetings of stockholders, the Board of Directors and its
committees, with the time and place of holding, whether regular or special,
and, if special, how authorized, the notice thereof given, the names of those
present at Board of Directors and committee meetings, the number of shares
present or represented at stockholders' meetings and the proceedings thereof.

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<PAGE> 21
(b) The Secretary shall keep, or cause to be kept, at the principal
executive officer or at the officer of the Corporation's transfer agent or
registrar, if one be appointed, a stock ledger or a duplicate stock ledger,
showing the names of the stockholders and their addresses, the number and
classes of shares held by each, the number and date of certificates issued for
the same, and the number and date of cancellation of every certificate
surrendered for cancellation.

(c) The Secretary shall give, or cause to be given, notice of all
the meetings of the stockholders and of the Board of Directors, and if
requested by the chairman thereof, of any committees thereof required by these
Bylaws or by law to be given.

(d) The Secretary shall have custody of the seal of the Corporation
and the Secretary or any Assistant Secretary, if there be one, shall have
authority to affix the same to any instrument requiring it and when so affixed,
it may be attested by the signature of the Secretary or by the signature of any
such Assistant Secretary. The Board of Directors may give general authority to
any other officer to affix the seal of the Corporation and to attest the
affixing by his signature.

(e) The Secretary shall see that all books, reports, statements,
certificates and other documents and records required by law to be kept or
filed are properly kept or filed, as the case may be.

Section 10. Treasurer. The Treasurer shall have the custody of the
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and shall
deposit all moneys and other valuable effects in the name and to the credit of
the Corporation in such depositories as may be designated by the Board

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of Directors. The Treasurer shall disburse the funds of the Corporation as may
be ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the Chief Executive Officer and the Board of
Directors, at its regular meetings, or when the Board of Directors so requires,
an account of all his transactions as Treasurer and of the financial condition
of the Corporation. If required by the Board of Directors, the Treasurer shall
give the Corporation a bond in such sum and with such surety or sureties as
shall be satisfactory to the Board of Directors for the faithful performance of
the duties of his office and for the restoration to the Corporation, in case of
his death, resignation, retirement or removal from office, of all books,
papers, vouchers, money and other property of whatever kind in his possession
or under his control belonging to the Corporation.

Section 11. Assistant Secretaries. Except as may be otherwise provide
in these Bylaws, Assistant Secretaries, if there be any, shall perform such
duties and have such powers as from time to time may be assigned to them by the
Board of Directors, the Chairman of the Board, the Chief Executive Officer, the
President, and Vice President, if there be one or the Secretary, and in the
absence of the Secretary or in the event of his disability or refusal to act,
shall perform the duties of the Secretary, and when so acting, shall have all
the powers of and be subject to all the restrictions upon the Secretary.

Section 12. Assistant Treasurers. Assistant Treasurers, if there be
any, shall perform such duties and have such powers as from time to time may be
assigned to them by the Board of Directors, the Chairman of the Board, the
Chief Executive Officer, the President, any Vice President, if there be one, or
the Treasurer, and in the absence of the Treasurer or in the event of his
disability or refusal to act, shall perform the duties of the

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<PAGE> 23
Treasurer, and when so acting, shall have all the powers of and be subject to
all the restrictions upon the Treasurer. If required by the Board of
Directors, an Assistant Treasurer shall give the Corporation a bond in such sum
and with such surety or sureties as shall be satisfactory to the Board of
Directors for the faithful performance of the duties of his office and for the
restoration to the Corporation, in case of his death, resignation, retirement
or removal from office, of all books, papers, vouchers, money and other
property of whatever kind in his possession or under his control belonging to
the Corporation.

Section 13. Other Officers. Such other officers as the Board of
Directors may choose shall perform such duties and have such powers as from
time to time may be assigned to them by the Board of Directors. The Board of
Directors may delegate to any other officer of the Corporation the power to
choose such other officers and to prescribe their respective duties and powers.

Section 14. Voting Securities Owned by the Corporation. Powers of
attorney, proxies, waivers of notice of meeting, consents and other instruments
relating to securities owned by the Corporation may be executed in the name of
and on behalf of the Corporation by the Chairman of the Board, the Chief
Executive Officer or the President and any such officer may, in the name of and
on behalf of the Corporation, take all such action as such officer may deem
advisable to vote in person or by proxy at any meeting of security holders of
any corporation in which the Corporation may own securities and at any such
meeting shall possess and may exercise any and all rights and power incident to
the ownership of such securities and which, as the owner thereof, the
Corporation might have exercised and possessed if present. The Board of
Directors may, be resolution, from time to time confer like powers upon any
other person or persons.

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<PAGE> 24
ARTICLE V

STOCK

Section 1. Form of Certificates. Every holder of stock in the
Corporation shall be entitled to have a certificate signed, in the name of the
Corporation (i) by the Chairman of the Board, the President or a Vice President
and (ii) by the Treasurer or an Assistant Treasurer, or the Secretary or an
Assistant Secretary of the Corporation, certifying the number of shares owned
by him in the corporation.

Section 2. Signatures. Where a certificate is countersigned by (i) a
transfer agent other than the Corporation or its employee, or (ii) a registrar
other than the Corporation or its employee, any other signature on the
certificate may be a facsimile. In case any officer transfer agent or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent or registrar
before such certificate is issued, it may be issued by the Corporation with the
same effect as if he were such officer, transfer agent or registrar at the date
of issue.

Section 3. Lost Certificates. The Board of Directors may direct a new
certificate to be issued in place of any certificate theretofore issued by the
Corporation alleged to have been lost, stolen or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen or destroyed. When authorizing such issue of a new certificate,
the Board of Directors may, in its discretion and as a condition precedent to
the issuance thereof, require the owner of such lost, stolen or destroyed
certificate, or his legal representative, to advertise the same in such manner
as the Board of Directors shall require and/or to give the Corporation a bond
in

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such sum as it may direct as indemnity against any claim that may be made
against the Corporation with respect to the certificate alleged to have been
lost, stolen or destroyed.

Section 4. Transfers. Stock of the Corporation shall be transferable
in the manner prescribed by law and in these Bylaws. Transfer of stock shall
be made on the books of the Corporation only by the person named in the
certificate or by his attorney lawfully constituted in writing and upon the
surrender of the certificate therefor, which shall be canceled before a new
certificate shall be issued.

Section 5. Record Date. In order that the Corporation may determine
the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or entitled to receive payment of
any dividend or other distribution or allotment of any rights, or entitled
to exercise any rights in respect of any change, conversion or exchange of
stock, or for the purpose of any other lawful action, the Board of Directors
may fix, in advance a record date, which shall not be more than sixty days
nor less than ten days before the date of such meeting, nor more than sixty
days prior to any other action. A determination of stockholders of record
entitled to notice of or to vote at a meeting of stockholders shall apply
to any adjournment of the meeting; provided, however, that the Board of
Directors may fix a new record date for the adjourned meeting.

Section 6. Beneficial Owners. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the
owner of shares to receive dividends, and to vote as such owner, and to hold
liable for calls and assessments a person registered on its books as the
owner of shares, and shall not be bound to recognize any equitable or other
claim to

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or interest in such share or shares on the part of any other person, whether
or not it shall have express or other notice thereof, except as otherwise
provided by law.

ARTICLE VI

NOTICES

Section 1. Notices. Unless otherwise provided by these Bylaws,
whenever written notice is required by law, the Certificate of Incorporation or
these Bylaws to be given to any director, member of a committee or stockholder,
such notice may be given by mail, addressed to such director, member of a
committee or stockholder, at his address as it appears on the records of the
Corporation (unless such person shall have filed with the Secretary of the
Corporation a written request that notices intended for such person be directed
to another address, in which case such notice shall be directed to such person
at the address designated in such request), with postage thereon prepaid, and
such notice shall be deemed to be given at the time when the same shall be
deposited in the United States mails. Written notice may also be given
personally or by telegram, telex or cable.

Section 2. Waivers of Notice. Whenever any notice is required by
law, the Certificate of Incorporation or these Bylaws to be given to any
director, member of a committee or stockholder, a waiver thereof in
writing, signed by the person or persons entitled to said notice, whether
before or after the time stated therein, shall be deemed equivalent thereto.

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<PAGE> 27
ARTICLE VII

GENERAL PROVISIONS

Section 1. Dividends. Dividends upon the capital stock of the
Corporation, subject to the provisions of the Certificate of Incorporation,
if any, may be declared by the Board of Directors at any regular or special
meeting, and may be paid in cash, in property, or in shares of the capital
stock. Before payment of any dividend, there maybe set aside out of any
funds of the Corporation available for dividends such sum or sums as the
Board of Directors from time to time, in its absolute discretion, deems proper
as a reserve or reserves to meet contingencies, or for equalizing dividends,
of for repairing or maintaining any property of the Corporation, or for any
proper purpose, and the Board of Directors may modify or abolish any such
reserve.

Section 2. Disbursements. All checks or demands for money and notes
of the Corporation shall be signed by such officer or officers or such other
person or persons as the Board of Directors may from time to time designate.

Section 3. Fiscal Year. The fiscal year of the Corporation shall
end at the close of business on December 31 of each such year.

Section 4. Corporate Seal. The corporate seal shall have inscribed
thereon the name of the Corporation, the year of its organization and the
words "Corporate Seal, Delaware". The seal may be used by causing it or a
facsimile thereof to be impressed or affixed or reproduced or otherwise.

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<PAGE> 28
ARTICLE VIII

INDEMNIFICATION

Section 1. Power to Indemnify in Actions, Suits or Proceedings Other
Than Those by or in the Right of the Corporation. Subject to Section 3 of this
Article VIII, the Corporation shall indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceedings, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in
a manner which he reasonably believed to be in or not opposed to the best
interests of the Corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.

- 24 -

<PAGE> 29
*Section 2. Power to Indemnify In Actions, Suits or Proceedings by or
in the Right of the Corporation. Subject to Section 3 of this Article VIII, the
Corporation shall indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action or suit by or in
the right of the Corporation to procure a judgment in its favor by reason of the
fact that he is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Corporation; except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled
to indemnity for such expenses which the court of Chancery or such other courts
shall deem proper.

Section 3. Authorization of Indemnification. Any indemnification
under this Article VIII (unless ordered by a court) shall be made by the
Corporation only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances because he has met the applicable standard of conduct set forth in
Section 1 or Section 2 of this Article VIII, as the case may be. Such
determination shall be made (i) by the Board of

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

*Section 2, ARTICLE VIII, amended 9-30-87

- 25 -

<PAGE> 30
Directors by a majority vote of a quorum consisting of directors who were not
parties to such action, suit or proceeding, or (ii) if such a quorum is not
obtainable, or, even if obtainable a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, or (iii) by the
stockholders. To the extent, however, that a director, officer, employee or
agent of the Corporation has been successful on the merits or otherwise in
defense of any action, suit or proceeding described above, or in defense of
any claim, issue or matter therein, he shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection therewith, without the necessity of authorization in the specific
case.

Section 4. Good Faith Defined. For purposes of any determination
under Section 3 of this Article VIII, a person shall be deemed to have acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the Corporation, or, with respect to any criminal action or
proceeding, to have had no reasonable cause to believe his conduct was unlawful,
if his action is based on the records or books of account of the Corporation or
another enterprise, or on information supplied to him by the officers of the
Corporation or another enterprise in the course of their duties, or on the
advice of legal counsel for the Corporation or another enterprise or on
information or records given or reports made to the Corporation or another
enterprise by an independent certified public accountant or by an appraiser or
other expert selected with reasonable care by the Corporation or another
enterprise. The term "another enterprise" as used in this Section 4 shall mean
any other corporation or any partnership, joint venture, trust or other
enterprise of which such person is or was serving at the request of the
Corporation as a director, officer, employee or agent. The provisions of this
Section 4 shall not be deemed to be exclusive

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<PAGE> 31
or to limit in any way the circumstances in which a person may be deemed to
have met the applicable standard of conduct set forth in Sections 1 or 2 of
this Article VIII, as the case may be.

Section 5. Indemnification by a Court. Notwithstanding any contrary
determination in the specific case under Section 3 of this Article VII, and
notwithstanding the absence of any determination thereunder, any director,
officer, employee or agent may apply to any court of competent jurisdiction
in the State of Delaware for indemnification to the extent otherwise
permissible under Sections 1 and 2 of this Article VIII. The basis of such
indemnification by a court shall be a determination by such court that
indemnification of the director, officer, employee or agent is proper in
the circumstances because he has met the applicable standards of conduct
set forth in Sections 1 or 2 of this Article VIII, as the case may be.
Notice of any application for indemnification pursuant to this Section 5
shall be given to the Corporation promptly upon the filing of such application.

*Section 6. Expenses Payable in Advance. Expenses incurred in
defendant or investigating a threatened or pending action, suit or proceeding
may be paid by the Corporation in advance of the final disposition of such
action, suit or proceeding upon receipt of an undertaking by or on behalf of the
director, officer, employee or agent to repay such amount unless it shall
ultimately be determined that he is entitled to be indemnified by the
Corporation as authorized in this Article VIII.

*Section 7. Non-exclusivity and Survival of Indemnification. The
indemnification and advancement of expenses provided by, or granted pursuant to,
this Article VIII shall not be deemed exclusive of any other rights to which
those seeking indemnification may be entitled under any Bylaw, agreement,
contract, vote

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

*Section 6, ARTICLE VIII, amended 9-30-87

- 27 -

<PAGE> 32
of stockholders or disinterested directors of pursuant to the direction
(howsoever embodied) of any court of competent jurisdiction or otherwise, both
as to action in his official capacity and as to action in another capacity while
holding such office, it being the policy of the corporation that indemnification
of the person specified in Section 1 and 2 of this Article VIII shall be made to
the fullest extent permitted by law. The provisions of this Article VIII shall
not be deemed to preclude the indemnification of any person who is not specified
in Section 1 or 2 of this Article VIII but whom the Corporation has the power or
obligation to indemnify under the provisions of the General Corporation Law of
the State of Delaware, or otherwise. The indemnification provided by this
Article VIII shall continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such person.

Section 8. Insurance. The Corporation may purchase and maintain
insurance on behalf of any person who is or was a director, officer,
employee or agent of the Corporation, or is or was serving at the request
of the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
any liability asserted against him and incurred by him in any such capacity,
or arising out of his status as such, whether or not the Corporation would
have the power or the obligation to indemnify him against such liability under
the provisions of this Article VIII.

Section 9. Meaning of "Corporation" for Purposes of Article VIII.
For purposes of this Article VIII, references to "the Corporation" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its

- ------------------------
*Section 7, ARTICLE VIII, AMENDED 9-30-87

- 28 -

<PAGE> 33
separate existence had continued, would have had power and authority to
indemnify its directors, officers, employees and agents, so that any person who
is or was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, shall stand in the same position under
the provisions of this Article VIII with respect to the resulting or surviving
corporation as he would have with respect to such constituent corporation if
its separate existence had continued.

*Section 10. Meaning of "Other Enterprises" for Purposes of Article
VIII. For purposes of this Article VIII, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on a person with respect to any employee benefit plan; and
references to "serving at the request of the Corporation" shall include any
service as a director, officer, employee or agent of the Corporation which
imposes duties on, or involves services by, such director, officer, employee or
agent with respect to an employee benefit plan, its participants or
beneficiaries; and a person who acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the Corporation" as referred to in this
Article VIII.

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

*Section 10, ARTICLE VIII, added 9-30-87

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<PAGE> 34
ARTICLE IX

AMENDMENT OF BYLAWS

Section 1. Amendments. Unless otherwise provided by law or the
Certificate of Incorporation, the Bylaws of the Corporation shall not be made,
repealed, altered, amended or rescinded except as provided in the Certificate
of Incorporation.

BYLAWS

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<PAGE> 1

Exhibit 4.1

WARRANT AGREEMENT

THIS WARRANT AGREEMENT is made as of this 12th day of February, 1988 by
and between SMITH INTERNATIONAL, INC., a Delaware corporation, and MORGAN
SHAREHOLDER SERVICES TRUST COMPANY, a New York corporation, in its capacity as
Warrant Agent hereunder.

Each party hereto agrees as follows for the benefit of the other party and
for the benefit of the holders of the Warrants.

1. CERTAIN DEFINITIONS. As used herein the following terms have the
respective meanings set forth below:

(a) "Class A Warrants" (or individually, "Class A Warrant") means
the warrants to purchase Common Stock, in the form of Exhibit A
to this Warrant Agreement (subject to Section 2 hereof), which
are at any time outstanding and which were originally issued by
the Company to holders of Allowed Claims in Class 8 as Creditor
Warrants pursuant to the Plan.

(b) "Class B Warrants" (or individually, "Class B Warrant") means
the warrants to purchase Common Stock, in the form of Exhibit B
to this Warrant Agreement (subject to Section 2 hereof), which
are at any time outstanding and which were originally issued by
the Company to holders of Allowed Interests and to certain
members of management of the Company as Shareholder Warrants and
Management Warrants, respectively, pursuant to the Plan.

(c) "Common Stock" means the Company's common stock, par value
$1.00 per share (as such common stock may be subdivided or
combined), or any other class of stock resulting from successive
changes or reclassifications of such common stock consisting
solely of changes in par value, or from par value to no par
value, or from no par value to par value, into which such common
stock may be exchanged or reclassified.

(d) "Company" means Smith International, Inc., a Delaware
corporation.

- 1 -
<PAGE> 2
(e) "Expiration Date" means, with respect to a Class of Warrants,
the seventh anniversary of the date of the initial issuance of
any Warrants of such class.

(f) "Holder" means a holder of a Warrant, as registered on the books
of the Warrant Agent kept for such purpose.

(g) "Initial Exercise Price" means (i) as to the Class A Warrants,
125% of the Index Price per share of Common Stock and (ii) as to
the Class B Warrants, $15.00 per share of Common Stock.

(h) "Index Price" means the simple average computed by using the
closing price of the Common Stock on the New York Exchange
Composite Tape for each of the first 30 Trading Days following
the Effective Date.

(i) "Market Price" as of any Trading Day means the last sale price,
regular way, of the Common Stock, or, in case no such sale takes
place on such day, the average of the closing bid and asked
prices, regular way, of the Common Stock, in either case as
reported in the principal consolidated transaction reporting
system with respect to securities listed or admitted to trading
on the New York Stock Exchange or, if the Common Stock is not
listed or admitted to trading on the New York Stock Exchange, as
reported in the principal consolidated transaction reporting
system with respect to securities listed on the principal
national securities exchange on which the Common Stock is listed
or admitted to trading or, if the Common Stock is not listed or
admitted to trading on any national securities exchange, the
last quoted price or, if not so quoted, the average of the high
bid and low asked prices of the Common Stock in the
over-the-counter market, as reported by the National Association
of Securities Dealers, Inc. Automated Quotation System or such
other system then in use, or, if on any such date the Common
Stock is not quoted by any such organization, the average of the
closing bid and asked prices of the Common Stock as furnished by
a professional market maker making a market in the Common Stock
selected by the Board of Directors of the Company, or if on any
such date no market maker is making a market in the Common
Stock, the fair value of the Common Stock, on such date as
determined reasonably and

- 2 -
<PAGE> 3
with utmost good faith to the Holders by the Board of Directors
of the Company.

(j) "Plan" means the Plan of Reorganization, as confirmed by the
bankruptcy court, in In re Smith International, Inc., Case No LA
86-03947-JD in the United States Bankruptcy Court for the
Central District of California.

(k) "Subsidiary Securities" and "Subsidiary Warrants" are defined in
Subsection 5(c).

(l) "Trading Day" means a day on which the principal national
securities exchange on which the Common Stock is listed or
admitted to trading is open for the transaction of business or,
if the Common Stock is not listed or admitted to trading on any
national securities exchange, a day on which banking
institutions in New York City generally are open.

(m) "Warrant Agent" means Morgan Shareholder Services Trust Company,
a New York corporation, in its capacity as warrant agent
hereunder.

(n) "Warrant Agreement" means this agreement, as the same may be
amended from time to time.

(o) "Warrant Price" means, as to each Class A Warrant and each Class
B Warrant, respectively, the price per share payable for each of
the shares of Common Stock deliverable upon the exercise of such
Warrant, as such relative prices may from time to time be
adjusted as provided herein.

(p) "Warrants" means, collectively, all Class A Warrants and Class B
Warrants.

Capitalized terms not otherwise defined herein shall have the
meanings ascribed to them in the Plan.

2. AUTHORIZATION AND ISSUANCE OF WARRANTS. The Company hereby
authorizes the issuance and delivery by the Warrant Agent, in accordance with
the Plan, of the Class A Warrants and Class B Warrants, which shall be in the
forms of Exhibits A and B attached hereto, respectively, with no such changes
as may be required to conform to the requirements of any securities exchange,
shall expire on their respective Expiration Dates, and shall be issued subject
to the terms and provisions of this Warrant Agreement. Exhibits C and D
attached hereto will appear on

- 3 -
<PAGE> 4
the reverse side of each Warrant. The Warrants may have notations, legends or
endorsements required by law or usage. Each Warrant shall be dated the date of
its issue. Two officers of the Company shall sign each Warrant for the Company
by manual or facsimile signature. If an officer whose signature appears on a
Warrant no longer holds that office, the Warrant shall nevertheless be valid.
Subject to Sections 5 and 6 hereof, each Warrant will evidence the right to
purchase the number of shares of Common Stock indicated on its face.

The Warrants shall be issued in accordance with the Plan. Prior to the
issuance of any Warrants, the Company shall have (i) fixed a record date for
determining the holders of Allowed Claims in Class 8 entitled to receive Class
A Warrants, (ii) fixed a record date for determining the holders of Allowed
Interests in Class 9 entitled to receive Class B Warrants constituting
Shareholder Warrants, (iii) calculated the Index Price and the total number of
shares of Common Stock purchasable upon the exercise of the Class A Warrants,
and (iv) delivered to the Warrant Agent:

(a) certifications of (A) the Index Price and the total number of
shares of Common Stock purchasable upon the exercise of the Class A
Warrants, (B) the holders of Allowed Claims in Class 8 entitled to receive
Class A Warrants and the holders of Allowed Interests in Class 9 entitled
to receive Class B Warrants constituting Shareholder Warrants (each such
certification to show the amount of Warrants of each class to be
distributed to each person and to be deposited in the Disputed Claims
Reserve, the Unclaimed Property Reserve and the Fractional Shares Pool)
and (C) the persons entitled to receive Class B Warrants constituting
Management Warrants and the amount of such Warrants to be distributed to
each; and

(b) Class A Warrants and Class B Warrants with instructions to issue
the same in accordance with the Plan and the foregoing certifications.

The date of issuance and the Expiration Date shall be inserted in each Warrant
and the Index Price and total number of shares of Common Stock purchasable upon
exercise of the Class A Warrants, as certified by the Company, shall be
inserted in each Class A Warrant.

The Warrant Agent shall authenticate by its manual signature each Warrant
prior to issuance. A Warrant shall not be valid until so authenticated, but
the manual signature

- 4 -
<PAGE> 5
of the Warrant Agent shall be conclusive evidence of such authentication.

3. RESERVATION AND LISTING OF SHARES OF COMMON STOCK. During the period
within which the Warrants may be exercised, the Company shall at all times have
authorized and reserved for the purpose of issue upon exercise of the Warrants
the full number of shares of Common Stock deliverable upon such exercise. If
at any time the number of authorized and unissued shares of Common Stock shall
not be sufficient to effect the issuance of all such shares of Common Stock,
the Company shall take such corporate action as may be necessary to increase
the number of its authorized and unissued shares of Common Stock to such number
as shall be sufficient for such purpose. The Company will take all requisite
action to assure that the par value per share of the Common Stock is at all
times equal to or less than the Warrant Price then in effect. If the Common
Stock is listed on any securities exchange, the Company will, at its expense
and on a continual basis, use its best efforts to cause the Common Stock
deliverable upon exercise of the Warrants to be listed on such exchange.

All shares of Common Stock which may be issued upon the exercise of the
Warrants shall, upon issuance, be fully paid and nonassessable. The issuance
of certificates for shares of Common Stock upon the exercise of the Warrants
shall be made without charge for any issuance tax in respect thereof, provided
that (i) the Company and the Warrant Agent shall not be required to bear any
tax which may be payable in respect of any transfer involved in the issuance
and delivery of any certificate in a name other than that of the Holder of the
Warrant being exercised, and (ii) the Company and the Warrant Agent shall not
be required to issue or deliver any such certificate unless or until the Holder
requesting such issuance shall have paid to the Company or the Warrant Agent
the amount of such tax or shall have established to the satisfaction of the
Company or the Warrant Agent that such tax has been paid or is not applicable.

4. EXERCISE; DELIVERY OF CERTIFICATES; PAYMENT.
(a) The Warrants may be exercised by the Holders thereof at any time or
from time to time prior to 5:00 p.m., New York time, on the Expiration Date, in
whole or in part, except that no fractional shares of Common Stock shall be
issued upon the exercise of any Warrant. The Company shall pay a cash
adjustment in respect of any remaining fraction of a share due to the Holder of
any Warrant which has been otherwise fully exercised (or as to any such
fraction remaining after cumulating all remaining fractions due to the Holder
of a number of Warrants which are fully exercised in

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<PAGE> 6
the same transaction), in an amount equal to the same fraction of the Market
Price on the Trading Day which next precedes the date of exercise.

(b) Any such exercise shall be accomplished by the surrender to the
Warrant Agent of the Warrant accompanied by a duly executed Purchase Form (in
the form of Exhibit C attached hereto) with signature(s) guaranteed and payment
to the Warrant Agent on behalf of the Company and for the Company's account by
certified or official bank check, of the applicable Warrant Price for each of
the shares of Common Stock to be purchased (the "Purchase Price").

(c) Shares of Common Stock purchased upon the exercise of a Warrant shall
be, and be deemed to be, issued, and the person entitled to receive the shares
of Common Stock issuable upon such exercise shall become the record owner of
such shares of Common Stock, as of the close of business on the date on which
such Warrant shall have been surrendered and payment made for such shares of
Common Stock as aforesaid. Certificates for the shares of Common Stock so
purchased shall be delivered to the person entitled thereto within a reasonable
time, not exceeding 10 days, after such Warrant shall have been so exercised,
and, unless the Warrant so delivered has expired or been exercised in full, a
new Warrant representing the number of shares of Common Stock with respect to
which such Warrant shall not then have been exercised shall also be delivered
to the Holder of the surrendered Warrant within such time.

5. ADJUSTMENT OF WARRANT PRICES AND NUMBER OF SHARES PURCHASABLE OR
NUMBER OF WARRANTS. The respective Warrant Prices, the number of shares or
other securities purchasable upon the exercise of each Warrant and the number
of Warrants outstanding are subject to adjustment from time to time upon the
occurrence of the events enumerated in this Section 5.

(a) In case the Company shall (i) pay a dividend in, or make a
distribution of, shares of Common Stock to holders of Common Stock, (ii)
subdivide its outstanding shares of Common Stock into a larger number of shares
of Common Stock, (iii) combine its outstanding shares of Common Stock into a
smaller number of shares of Common Stock, or (iv) issue any of its shares of
capital stock in a reclassification of the Common Stock (including any such
reclassification in connection with a consolidation or merger in which the
Company is the continuing corporation), the number of shares of Common Stock
purchasable upon exercise of each Warrant immediately prior thereto shall be
adjusted so that the holder of each Warrant shall be entitled to receive the
kind and number of shares of Common Stock or other securities of the Company

- 6 -
<PAGE> 7
which such holder would have owned or have been entitled to receive after the
happening of any of the events described above, had such Warrant been exercised
immediately prior to the happening of such event or any record date with
respect thereto. The requisite adjustment shall be made each time an event
described in this Subsection (a) occurs and shall become effective immediately
after the effective date of such event retroactive to immediately after the
record date, if any, for such event. Notwithstanding the foregoing provisions
of this Subsection (a), in the event that the Company shall (i) pay a dividend
in, or make a distribution of, shares of Common Stock to holders of Common
Stock, or (ii) subdivide its outstanding shares of Common Stock into a larger
number of shares of Common Stock, the Company may, at its option, in lieu of
making the adjustments to the Warrant Prices and the number of shares of Common
Stock or other securities purchasable upon the exercise of each Warrant in
accordance with the provisions of this Section 5, (x) adjust the Warrant Price,
but not the number of shares of Common Stock issuable upon exercise, of each
outstanding Warrant (as of the date referred to in the preceding sentence) by
multiplying such Warrant Price by a fraction the numerator of which is the
number of shares of Common Stock outstanding immediately before such dividend,
distribution or subdivision and the denominator of which is such number of
shares of Common Stock plus the number of shares of Common Stock issued
pursuant to such dividend, distribution or subdivision; and (y) issue to each
Holder a number of additional Warrants of the same class as the Warrants held
by such Holder, having the same terms and conditions as the outstanding
Warrants of such class (after the adjustment to the Warrant Price required by
clause (x)), determined by multiplying the number of Warrants of such class
then held by such Holder by a fraction the numerator of which is the number of
shares of Common Stock issued pursuant to such dividend, distribution or
subdivision and the denominator of which is the number of shares of Common
Stock outstanding immediately before such dividend, distribution or
subdivision. Such additional Warrants shall be issued to the persons who are
Holders on the same record date as that fixed for determining the holders of
Common Stock entitled to receive such dividend, distribution or subdivision, or
if no such record date is fixed, on the effective date thereof. No fractional
Warrants shall be issued, but the Company shall pay a cash adjustment in
respect of any fraction of a Warrant which would otherwise be due a Holder
(after cumulating all such fractions based on all Warrants held by such Holder)
in an amount equal to the same fraction of the market price of the same class
of Warrants (calculated as if such class of Warrants were substituted for the
Common Stock in the definition of "Market

- 7 -
<PAGE> 8
Price") on the Trading Day which next precedes such record date, or if none,
such effective date.

(b) In case the Company shall fix a record date for the issuance of
rights or warrants (other than Class B Warrants) to all holders of Common Stock
entitling them to subscribe for or purchase additional shares of Common Stock
at a price per share less than the then Current Market Price (as defined in
Subsection 5(e)) on such record date, the number of shares of Common Stock
purchasable upon the exercise of each Warrant after such record date shall be
determined by multiplying the number of shares of Common Stock purchasable upon
the exercise of such Warrant immediately prior to such record date by a
fraction (i) the numerator of which shall be the number of shares of Common
Stock outstanding on such record date plus the total number of additional
shares of Common Stock offered for subscription or purchase in connection with
such rights or warrants, and (ii) the denominator of which shall be the number
of shares of Common Stock outstanding on such record date plus the number of
shares of Common Stock which the aggregate offering price of the total number
of shares so offered would purchase at such Current Market Price. Such
adjustment shall be made successively whenever such a record date is fixed;
and, in the event that such rights or warrants are not so issued, the number of
shares of Common Stock purchasable upon exercise of the Warrants shall again be
adjusted to be the number of shares of Common Stock purchasable upon exercise
of the Warrants which would then be in effect if such record date had not been
fixed. If any such rights or warrants shall expire without having been
exercised, the number of shares of Common Stock purchasable upon the exercise
of each Warrant shall be readjusted, as of the expiration date of such rights
or warrants, to the number of shares which would have been so purchasable had
the calculation required by the first sentence of this Subsection 5(b) been
made on the basis of the actual number of shares of Common Stock issued upon
the exercise of such rights or warrants and the aggregate offering price for
such number of shares.

(c) In case the Company shall distribute, to all holders of its Common
Stock, stock of a subsidiary or securities convertible into or exercisable for
such stock ("Subsidiary Securities"), then, in lieu of any other adjustment
provided in this Section 5, the Company shall, at its option: (i) make
provision that the holder of each Warrant, upon the exercise thereof at any
time after such distribution, shall be entitled to receive from the Company,
such subsidiary or both, as the Company shall determine, the Subsidiary
Securities to which such holder would have been entitled if such holder had
exercised such Warrant

- 8 -
<PAGE> 9
immediately prior thereto, all subject to further adjustment as provided in
this Section 5, provided that no adjustment in respect of dividends or interest
on such Subsidiary Securities shall be made during the term of a Warrant or
upon the exercise of a Warrant; or (ii) issue or cause such subsidiary to issue
and deliver to the Holders of Warrants, on the same record date fixed for
determining the holders of Common Stock entitled to receive such distribution
of Subsidiary Securities, one warrant ("Subsidiary Warrant") to purchase the
amount of Subsidiary Securities distributed in respect of one share of Common
Stock for each Warrant held. If Subsidiary Warrants are issued (x) the
exercise price thereof shall be the fair value (as determined in good faith by
the Board of Directors of the Company, whose determination shall be conclusive)
of the Subsidiary Securities distributed in respect of one share of Common
Stock, subject to adjustment under provisions comparable to those contained in
this Section 5 and Section 6, (y) the Subsidiary Warrants will expire on the
same Expiration Date as the Warrants in respect of which they are issued, and
(z) the Warrant Price will be reduced by an amount equal to the exercise price
of one Subsidiary Warrant, effective on the date of distribution of the
Subsidiary Securities retroactive to immediately after the record date for such
distribution.

(d) In case the Company shall distribute to all holders of its Common
Stock evidences of its indebtedness or assets (excluding cash dividends or
distributions payable out of consolidated earnings or earned surplus and
dividends or distributions referred to in Subsections 5(a), 5(b) or 5(c)), then
in each case the number of shares of Common Stock thereafter purchasable upon
the exercise of each Warrant shall be determined by multiplying the number of
shares of Common Stock theretofore purchasable upon the exercise of each
Warrant, by a fraction (i) the numerator of which shall be the then Current
Market Price (as defined in Subsection 5(e)) per share of Common Stock as of
the date of such distribution and (ii) the denominator of which shall be the
then Current Market Price per share of Common Stock less the then fair value
(as determined in good faith by the Board of Directors of the Company, whose
determination shall be conclusive) of the portion of the assets or evidences of
indebtedness so distributed applicable to one share of Common Stock. Such
adjustment shall be made whenever any such distribution is made, and shall
become effective on the date of distribution retroactive to immediately after
the record date for the determination of shareholders entitled to receive such
distribution.

(e) For the purpose of any computation under Subsections 5(b), 5(c) or
5(d), the Current Market Price per

- 9 -
<PAGE> 10
share of Common Stock at any date shall be deemed to be the average of the
daily Market Prices for ten consecutive Trading Days ending with the fifth
Trading Day before such date.

(f) No adjustment in the number of shares of Common Stock purchasable
upon exercise of the Warrants shall be required unless such adjustment would
require an increase or decrease of at least 1% in the number of shares
purchasable upon the exercise of all Warrants; provided, however, that any
adjustments which by reason of this Subsection 5(f) are not required to be made
shall be carried forward and taken into account in any subsequent adjustment.
All calculations shall be made to the nearest one-hundredth of a share.

(g) Whenever the number of shares of Common Stock purchasable upon the
exercise of each Warrant shall be adjusted as herein provided, the respective
Warrant Prices payable upon exercise of each of the respective classes of
Warrants shall be adjusted by multiplying each such Warrant Price immediately
prior to such adjustment by a fraction, the numerator of which shall be the
aggregate number of shares of Common Stock purchasable upon the exercise of all
Warrants in such class immediately prior to such adjustment and the denominator
of which shall be the aggregate number of shares of Common Stock so purchasable
immediately thereafter.

(h) In the event that at any time, as a result of an adjustment made
pursuant to Subsection 5(a), the holders of Warrants shall become entitled to
purchase any shares of the Company other than Common Stock, thereafter the
number of such other shares so purchasable upon exercise of each Warrant and
the respective Warrant Prices in respect of such shares shall be subject to
adjustment from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the shares purchasable upon
exercise of the Warrants contained in Subsections 5(a) through 5(g) inclusive,
and the provisions of this Warrant Agreement with respect to the shares of
Common Stock shall apply on like terms to any such other shares.

(i) Except as provided in Subsections 5(a), 5(b), 5(c)(ii), 5(d) and
5(g), no adjustment in respect of any dividends or distributions shall be made
during the term of a Warrant or upon the exercise of a Warrant.

(j) Irrespective of any adjustments in the respective Warrant Prices or
the number or kind of shares purchasable upon the exercise of the Warrants,
Warrants theretofore or thereafter issued may continue to express the same
price and

- 10 -
<PAGE> 11
number and kind of shares as are stated in the Warrants initially issuable
pursuant to this Warrant Agreement.

(k) Whenever there is an adjustment as herein provided in the respective
Warrant Prices and the number of shares of Common Stock purchasable upon the
exercise of the Warrants, or in the securities to be delivered upon the
exercise of a Warrant as provided in Subsection 5(c)(i), the Company shall
compute the adjusted Warrant Prices and number of shares of Common Stock
purchasable upon the exercise of the respective classes of Warrants in
accordance with Section 5, shall prepare a certificate signed by the Chief
Financial Officer of the Company setting forth the adjusted Warrant Price for
the respective classes of Warrants and adjusted number of shares of Common
Stock purchasable upon the exercise of the respective classes of Warrants, or
the securities deliverable upon the exercise of a Warrant, showing in
reasonable detail the facts and computations upon which such adjustments are
based, and such certificates shall forthwith be delivered by the Company to the
Warrant Agent. The Warrant Agent shall cause to be mailed to each registered
holder of Warrants of a class a copy of the certificate pertaining to such
class, as promptly as possible but in any event within 15 days after its
receipt by the Warrant Agent.

6. MERGER, CONSOLIDATION OR DISPOSITION OF ASSETS.
(a) In case the Company shall merge or consolidate into another
corporation, or shall sell, transfer or otherwise dispose of all or
substantially all of its property, assets or business to another corporation
and pursuant to the terms of such merger, consolidation or disposition of
assets, shares of common stock of the successor or acquiring corporation or an
affiliate thereof are to be received by or distributed to the holders of Common
Stock of the Company, then the holders of the Warrants shall have the right
thereafter to receive, upon exercise of the Warrants, the number of shares of
common stock of the successor or acquiring corporation or affiliate receivable
upon or as a result of such merger, consolidation or disposition of assets by a
holder of the number of shares of Common Stock purchasable upon the exercise
thereof immediately prior to such event.

(b) If pursuant to the terms of such merger, consolidation or disposition
of assets, any cash, shares of stock or other securities or property of any
nature whatsoever (including warrants or other subscription or purchase rights)
are to be received by or distributed to the holders of Common Stock of the
Company in addition to common stock of the successor or acquiring corporation
or affiliate, there shall be a reduction of the respective Warrant Prices equal
to the

- 11 -
<PAGE> 12
amount applicable to each share of Common Stock of any such cash and of the
fair value (as determined in good faith by the Board of Directors of the
Company whose determination shall be conclusive) of any and all such shares of
stock or other securities or property to be received by or distributed to the
holders of Common Stock of the Company.

(c) In case of any such merger, consolidation or disposition of assets,
the successor or acquiring corporation of affiliate shall expressly assume the
due and punctual observance and performance of each and every covenant and
condition of this Warrant Agreement and the Warrants to be performed and
observed by the Company and all of the obligations and liabilities hereunder
and thereunder, subject to such modifications as may be deemed appropriate (as
determined in good faith by the Board of Directors of the Company whose
determination shall be conclusive) in order to provide for adjustments of the
respective Warrant Prices and the number of shares purchasable upon the
exercise of the Warrants which shall be as nearly equivalent as practicable to
the adjustments provided for in Section 5 and this Section 6.

(d) For the purposes of this Section 6 "common stock of the successor or
acquiring corporation or an affiliate thereof" shall include stock of such
corporation of any class which is not preferred over any other class of stock
of such corporation and which is not subject to redemption, and shall also
include any evidence of indebtedness, shares of common stock or other
securities which are convertible into or exchangeable for any such stock,
either immediately or upon the occurrence of a specified date or the happening
of a specified event, and any warrants or other rights to subscribe for or
purchase any such stock. The foregoing provisions of this Section 6 shall
similarly apply to successive mergers, consolidations or dispositions of
assets.

7. NOTIFICATION OF CERTAIN EVENTS. In the event that the Company shall:

(a) take a record of the holders of its Common Stock for the purpose of
entitling them to receive any dividend or other distribution (other than a cash
dividend payable out of consolidated earnings or earned surplus); or

(b) authorize the granting to the holders of its Common Stock generally
of rights (other than Class B Warrants) to subscribe for or purchase any shares
of stock of any class or of any other rights; or

- 12 -
<PAGE> 13
(c) authorize any reclassification of the Common Stock (other than a
subdivision or combination of its outstanding Common Stock), or any
consolidation or merger to which the Company is a party and for which approval
of any shareholders of the Company is required, or of the sale or transfer of
all or substantially all of the assets of the Company; or

(d) become subject to voluntary or involuntary dissolution, liquidation,
or winding up;

then the Company shall deliver to the Warrant Agent, and the Warrant Agent
shall cause to be mailed to each registered holder of the Warrants, as promptly
as possible but in any event at least 10 days prior to the applicable record or
other date hereinafter specified, a notice stating (x) the date on which a
record is to be taken for the purpose of such dividend, distribution or rights,
or, if a record is not to be taken, the date as of which the holders of Common
Stock of record entitled to such dividend, distribution or rights are to be
determined, or (y) the date on which such reclassification, consolidation,
merger, sale, transfer, dissolution, liquidation or winding up is expected to
become effective, and the date as of which it is expected that holders of
Common Stock of record shall be entitled to exchange their shares of Common
Stock for securities or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer, dissolution, liquidation, or winding up.

8. AGENCY FOR WARRANT EXERCISE, REGISTRATION, TRANSFER OR EXCHANGE;
WARRANTS ENDORSED IN BLANK MAY BE DEEMED NEGOTIABLE.

(a) The Company will maintain at all times in the Borough of Manhattan,
the City and State of New York, at either an office of the Company in such
location or through the agency of the Warrant Agent (or any successor to the
Warrant Agent), an office or agency where the Warrants may be surrendered for
exercise or for registration of transfer or exchange. Warrants shall be issued
in registered form only. The Warrant Agent shall cause to be kept a register
in which, subject to such reasonable regulations as the Company may prescribe,
the Warrant Agent shall provide for the registration of Warrants and of
transfers or exchanges of Warrants. At the option of the holders of the
Warrants, Warrants may be exchanged for one or more other Warrants of the same
class representing in the aggregate the right to purchase the number of shares
of Common Stock which may be purchased under the Warrant(s) surrendered for
exchange. All Warrants issued upon any registration of transfer or exchange
shall be valid obligations of the Company, evidencing the same obligations,

- 13 -
<PAGE> 14
and entitled to the same benefits as the Warrant(s) surrendered for such
registration of transfer or exchange. Every Warrant surrendered for
registration of transfer or exchange shall be accompanied by a written
instrument of transfer in the form of Exhibit D annexed hereto, duly executed
by the registered holder thereof or his attorney duly authorized in writing
with signature(s) guaranteed. No service charge shall be made for any
registration of transfer or exchange of Warrants. The Company or the Warrant
Agent may require payment of a sum sufficient for payment of any tax or other
governmental charge that may be imposed in connection with any transfer,
registration of transfer or exchange of any Warrant in a name other than that
of the holder of such Warrant.

(b) Any Warrant when endorsed in blank shall be deemed negotiable and
when a Warrant shall have been so endorsed, the holder thereof may be treated
by the Company, the Warrant Agent and all other persons dealing with said
holder as the absolute owner thereof for any purpose and as the person entitled
to exercise the right represented thereby, or to the registration of transfer
thereof on the register of the Company, any notice to the contrary
notwithstanding, but until due presentment for such registration of transfer on
such register, the Company and the Warrant Agent may treat the registered
holder thereof as the owner for all purposes.

9. LOSS OR MUTILATION. Upon receipt by the Company (or the Warrant
Agent on behalf of the Company) of evidence satisfactory to it (in the exercise
of reasonable discretion) of the ownership of and the loss, theft, destruction
or mutilation of any Warrant and of indemnity satisfactory to it, and (in the
case of mutilation) upon surrender and cancellation thereof, then, in the
absence of notice to the Company (or the Warrant Agent on behalf of the
Company) that the Warrants represented thereby have been acquired by a bona
fide purchaser, the Company (or the Warrant Agent on behalf of the Company)
shall execute and deliver to the holder of the lost, stolen, destroyed or
mutilated Warrant, in exchange for or in lieu thereof, a new Warrant of the
same class and tenor representing the right to purchase a like number of shares
of Common Stock. Upon the issuance of any new Warrant under this Section 9,
the Company may require the payment of a sum sufficient to cover any tax or
other governmental charge that may be imposed in relation thereto and any other
expenses in connection therewith. Every new Warrant executed and delivered in
lieu of any lost, stolen or destroyed Warrant shall constitute an additional
contractual obligation of the Company, whether or not the allegedly lost,
stolen or destroyed Warrant shall be at any time enforceable by anyone. The
provisions of this Section 9 are exclusive and shall

- 14 -
<PAGE> 15
preclude (to the extent lawful) all other rights or remedies with respect to
the replacement of mutilated, lost, stolen or destroyed Warrants.

10. THE WARRANT AGENT.

10.01. Appointment of Warrant Agent. The Company hereby appoints
the Warrant Agent as Warrant Agent, and the Warrant Agent hereby accepts such
appointment and agrees to perform its duties hereunder in accordance with the
terms and provisions of this Warrant Agreement.

10.02. Duties of Warrant Agent. The Warrant Agent need perform
only those duties that are specifically set forth in this Warrant Agreement or
in any written notice or direction from the Company to the Warrant Agent and no
others; and in the absence of bad faith on its part, the Warrant Agent may
conclusively rely, as to the truth of the statements and the correctness of the
opinions expressed therein, upon directions, certificates or opinions furnished
to the Warrant Agent and conforming to the requirements of this Warrant
Agreement.

10.03. Warrant Agent's Disclaimer. The Warrant Agent makes no
representation as to the validity or adequacy of this Warrant Agreement or the
Warrants, it shall not be accountable for the Company's use of the proceeds
from the Warrants, and it shall not be responsible for any statement in the
Warrants other than their authentication.

10.04. Compensation and Indemnity. The Company shall pay to the
Warrant Agent from time to time, upon receipt of invoices therefor, reasonable
compensation for its services. The Company shall reimburse the Warrant Agent
upon request for all reasonable out-of-pocket expenses incurred by it. Such
expenses shall include the reasonable compensation and out-of-pocket expenses
of the Warrant Agent's agents and counsel.

The Company shall indemnify the Warrant Agent against any loss or
liability incurred by it in its capacity as Warrant Agent hereunder. The
Warrant Agent shall notify the Company promptly of any claim for which it may
seek indemnity. The Company shall defend the claim and the Warrant Agent shall
cooperate in the defense. The Warrant Agent may have separate counsel and the
Company shall pay the reasonable fees and expenses of such counsel. The
Company need not pay for any settlement made without its consent. The Company
need not reimburse any expense or indemnify against any loss or liability
incurred by the Warrant Agent through gross negligence or bad faith.

- 15 -
<PAGE> 16
10.05. Successor Warrant Agent by Merger, etc. If the Warrant
Agent consolidates, merges or converts into, or transfers all or substantially
all of its corporate trust or stock transfer business to, another corporation,
the successor corporation without any further act shall be the successor
Warrant Agent.

10.06. Replacement of Warrant Agent. The Warrant Agent may resign
by so notifying the Company in writing at least 60 days prior to the effective
date of such resignation. The Company may remove the Warrant Agent in the
Company's discretion, upon written notice to the Warrant Agent given no less
than 60 days prior to the effective date of such removal.

If the Warrant Agent resigns or is removed or if a vacancy exists in
the office of Warrant Agent for any reason, the Company shall use its best
efforts promptly to appoint a successor Warrant Agent, which shall be a bank
with corporate trust powers with an office in the Borough of Manhattan, the
City and State of New York. If a successor Warrant Agent is not so appointed
by the effective date of such resignation or removal, the Company shall act as
successor Warrant Agent.

Upon the effective date of such resignation or removal of the
retiring Warrant Agent, or the succession of a new Warrant Agent pursuant to
Section 10.05, the successor Warrant Agent shall have all the rights, powers
and duties of the Warrant Agent under this Warrant Agreement. The successor
Warrant Agent shall mail a notice of its succession to holders of the Warrants.

11. NOTICES. Any notice or other communication by the Company or the
Warrant Agent to the holder of a Warrant shall be sufficiently given or made if
sent by first class mail, postage prepaid, addressed to the registered holder
of such Warrant at such holder's last known address appearing on the register
maintained by the Warrant Agent. Any notice or other communication by the
Warrant Agent to the Company shall be sufficiently given or made if sent by
first class mail, postage prepaid, as follows:

Smith International, Inc.
4490 Van Karman Avenue
Newport Beach, California 92660

Attention: General Counsel

or other such address as shall have been furnished by the Company to the
Warrant Agent.

- 16 -
<PAGE> 17
Any notice or other communication by any holder of a Warrant or the
Company to the Warrant Agent shall be sufficiently given or made if sent by
first class mail, postage prepaid as follows:

Morgan Shareholder Service Trust Company
30 West Broadway
New York, New York 10007-2192
Attention: R. Frank Rabolt

or other such address as shall have been furnished by the Warrant Agent to the
registered holders of the Warrants and to the Company.

12. APPLICABLE LAW. This Warrant Agreement, the Warrants, and the rights
and obligations of the parties hereunder and thereunder shall be governed by,
and construed and interpreted in accordance with, the internal laws of the
State of New York without reference to principles of conflicts of laws, except
as the Delaware General Corporation Law may be otherwise applicable.

13. DESCRIPTIVE HEADINGS. The descriptive headings of the several
paragraphs of this Warrant Agreement are inserted for convenience only and do
not constitute a part of this Warrant Agreement.

IN WITNESS WHEREOF, the parties hereto have caused this Warrant
Agreement to be signed by their respective duly authorized officers.

SMITH INTERNATIONAL, INC.

By: /s/
----------------------------
V.P. & Treasurer

Its:
--------------------------------

MORGAN SHAREHOLDER SERVICES
TRUST COMPANY

By: /s/
----------------------------
Assistant Vice Pres.
Its:
--------------------------------

A3R687C

- 17 -
<PAGE> 18
EXHIBIT A
FORM OF CLASS A WARRANT
(facing page)

No. A- Warrant to Purchase
--------- --------------------
Shares of Common Stock

Exercisable on and after the date hereof until 5:00 p.m., New York time,
on February 28, 1995 (the "Expiration Date").

WARRANT

To Purchase Common Stock of

SMITH INTERNATIONAL, INC.

THIS CERTIFIES that, for value received, _____________________________ or
registered assigns is entitled to purchase from Smith International, Inc. (the
"Company"), a $___________, subject to adjustment as provided in the Warrant
Agreement referred to below, at any time on or after the date hereof until 5:00
p.m. (New York time) on the Expiration Date, the number of fully paid and
nonassessable shares of Common Stock indicated above, subject to adjustment as
provided in the Warrant Agreement. This Warrant is one of the Company's Class A
Warrants, which are identical in all respects except as to the names of the
holders and the numbers of shares of Common Stock purchasable thereunder,
representing upon the original issue thereof rights to purchase an aggregate of
____ shares of Common Stock, subject to adjustment as provided in the Warrant
Agreement.

This Warrant is subject to the provisions, terms and conditions contained
in that certain Warrant Agreement, dated February __, 1988 (the "Warrant
Agreement") by and between the Company and Morgan Shareholder Services Trust
Company, as Warrant Agent, and the holder of this Warrant, by its acceptance
hereof, agrees to all of such provisions, terms and conditions. Capitalized
terms used herein have the meaning ascribed to them in the Warrant Agreement.
The Warrant Agreement is on file at the corporate trust offices
<PAGE> 19
of the Warrant Agent, at 30 West Broadway, New York, New York 10007-2192 and at
the principal offices of the Company, located at 17832 Gillette Avenue, Irvine,
California 92713, and may be inspected by any registered holder hereof at such
locations.

IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officers under its corporate seal, and this Warrant to be
dated as of the Issue Date.

SMITH INTERNATIONAL, INC.

By:
----------------------
Its:
---------------------

[SEAL]

Attest:

- -------------------------
Secretary

Issued as of February 29, 1988

(the "Issue Date")

This is one of the Class A Warrants referred to in the within-mentioned
Warrant Agreement.

MORGAN SHAREHOLDER SERVICES
TRUST COMPANY as Warrant Agent

By
----------------------------

-2-
<PAGE> 20
EXHIBIT B TO WARRANT AGREEMENT
FORM OF CLASS B WARRANT
(facing page)

No. B- Warrant to Purchase
------------- ------------------
Shares of Common Stock

Exercisable on and after the date hereof until 5:00 p.m., New York time,
on February 28, 1995 (the "Expiration Date").

WARRANT

To Purchase Common Stock of

SMITH INTERNATIONAL, INC.

THIS CERTIFIES that, for value received, _________________________ or
registered assigns is entitled to purchase from Smith International, Inc. (the
"Company"), a Delaware corporation, at the price of $15.00 per share, subject
to adjustment as provided in the Warrant Agreement referred to below, at any
time on or after the date hereof until 5:00 p.m. (New York time) on the
Expiration Date, the number of fully paid and nonassessable shares of Common
Stock indicated above, subject to adjustment as provided in the Warrant
Agreement. This Warrant is one of the Company's Class B Warrants, which are
identical in all respects except as to the names of the holders and the numbers
of shares of Common Stock purchasable thereunder, representing upon the
original issued thereof rights to purchase an aggregate of 5,500,000 of shares
of Common Stock, subject to adjustment as provided in the Warrant Agreement.

This Warrant is subject to the provisions, terms and conditions contained
in that certain Warrant Agreement, dated February ____, 1988 (the "Warrant
Agreement") by and between the Company and Morgan Shareholder Services Trust
Company, as Warrant Agent, and the holder of this Warrant, by its acceptance
hereof, agrees to all of such provisions, terms and conditions. Capitalized
terms used herein have the meaning ascribed to them in the Warrant Agreement.
The Warrant Agreement is on file at the corporate trust offices of the Warrant
Agent at 30 West Broadway, New York, New York 10007-2192 and at the principal
offices of the Company, at
<PAGE> 21
17832 Gillette Avenue, Irvine, California 92713, and may be inspected by any
registered holder hereof at such locations.

IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officers under its corporate seal, and this Warrant to be
dated as of the Issued Date.

SMITH INTERNATIONAL, INC.

By:
-----------------------
Its:
----------------------

[SEAL]

Attest:

- ------------------------
Secretary

Issue as of February 29, 1988

(the "Issue Date")

This is one of the Class B Warrants referred to in the within-mentioned
Warrant Agreement.

MORGAN SHAREHOLDER SERVICES
TRUST COMPANY as Warrant Agent

By
---------------------------

-2-
<PAGE> 22
EXHIBIT C
PURCHASE FORM

(To be executed only upon exercise of
the within Warrant)

TO: SMITH INTERNATIONAL, INC.
c/o Morgan Shareholder Services Trust Company,
as Warrant Agent
30 West Broadway
New York, New York 10007-2192

The undersigned registered Holder of the within Warrant irrevocably
exercises the within Warrant for and purchases ________________ shares of
Common Stock and herewith makes payment therefor in the amount of
$____________, all at the price and on the terms and conditions specified in
the within Warrant. Such payment is in cash or by certified or official bank
check payable to the order of Smith International, Inc. The undersigned hereby
requests that a certificate for the shares of Common Stock hereby purchased be
issued in the name of and delivered to (choose one) (a) the undersigned at its
address appearing in the records of the Company or (b) ______________, whose
address is ________________ , and, if such shares of Common Stock shall not
include all the shares of Common Stock issuable as provided in the within
Warrant, that a new Warrant of like tenor for the number of shares of Common
Stock not being purchased hereunder be issued in the name of and delivered to
(choose one) (a) the undersigned at its address appearing in the records of the
Company or (b) _________________, whose address is __________________________.

Dated: , 19
-------------------- ---
By
------------------------------------
(Signature of Registered Holder)

Signature Guaranteed:
-------------------------------

- ---------------------------------
By
-------------------------------
[Title: ]

NOTICE: The signature to this Purchase Form must correspond with the name as
written upon the face of the within
<PAGE> 23
Warrant in every particular, without alteration or enlargement or any
change whatever.

The signature to this Purchase Form must be guaranteed by a
commercial bank or trust company in the United States or a member
firm of the New York Stock Exchange.

-2-
<PAGE> 24
EXHIBIT D
FORM OF ASSIGNMENT

FOR VALUE RECEIVED the undersigned registered holder of the within Warrant
hereby sells, assigns and transfers unto the Assignee named below all of the
rights of the undersigned under the within Warrant, with respect to the number
of shares of Common Stock set forth below:

Name of No. of
Assignee Address Shares
-------- ------- ------

and does hereby irrevocably constitute and appoint the Warrant Agent as
his/her/its Attorney-in-Fact to make such transfer on the books of Smith
International, Inc. maintained by such Warrant Agent for that purpose, with
full power of substitution.

Dated: , 19
-------------

------------------------------
(Name of Holder)

By
----------------------------
(Title)

Signature Guaranteed ______________________________

NOTICE: The signature to this Form of Assignment must correspond with the
name as written upon the face of the within Warrant in every
particular, without alteration or enlargement or any change whatever.

The signature to this From of Assignment must be guaranteed by a
commercial bank or trust company in the United States or a member
firm of the New York Stock Exchange.

<PAGE> 1
EXHIBIT 4.3

SMITH INTERNATIONAL, INC.

NOTE AGREEMENT

Dated as of August 31, 1992

Re: $95,000,000 9.83% Senior Secured Notes
Due October 1, 2001
<PAGE> 2
TABLE OF CONTENTS

(NOT A PART OF THE AGREEMENT)

<TABLE>
<CAPTION>
SECTION HEADING Page
<S> <C>
SECTION 1. DESCRIPTION OF NOTES AND COMMITMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Section 1.1. Description of Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.2. Commitment, Closing Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.3. Other Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.4. Security for the Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

SECTION 2. PREPAYMENT OF NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Section 2.1. Required Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 2.2. Optional Prepayment with Premium . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 2.3. Prepayment on Change of Control . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 2.4. Notice of Optional Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 2.5. Application of Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 2.6. Direct Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

SECTION 3. REPRESENTATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Section 3.1. Representations of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 3.2. Representations of the Purchaser . . . . . . . . . . . . . . . . . . . . . . . . . 6

SECTION 4. CLOSING CONDITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Section 4.1. Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 4.2. Waiver of Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

SECTION 5. COMPANY COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Section 5.1. Corporate Existence, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 5.2. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 5.3. Taxes, Claims fopr Labor and Materials; Compliance with Laws;
Environment Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 5.4. Maintenance, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 5.5. Nature of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 5.6. Current Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 5.7. Certain Ratios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 5.8. Consolidated Tangible Net Worth . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 5.9. Limitations on Funded Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 5.10. Limitation on Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 5.11. Limitation on Long-Term Leases . . . . . . . . . . . . . . . . . . . . . . . . . 18
Section 5.12. Dividends, Stock Purchases, Restricted Investments . . . . . . . . . . . . . . . 18
Section 5.13. Mergers, Consolidations and Sales of Assets . . . . . . . . . . . . . . . . . . 19
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
Section 5.14. Guaranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Section 5.15. Repurchase of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Section 5.16. Transactions with Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . 23
Section 5.17. Termination of Pension Plans . . . . . . . . . . . . . . . . . . . . . . . . . 24
Section 5.18. Reports and Richts of Inspection . . . . . . . . . . . . . . . . . . . . . . . 24
Section 5.19. Performance of Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 5.20. Liens on Additional Real Estate . . . . . . . . . . . . . . . . . . . . . . . 29
Section 5.21. Paying Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Section 5.22. Modifications to Credit Agreement . . . . . . . . . . . . . . . . . . . . . . 29
Section 5.23. Additional Subsidiaries, Corporate Restructuring . . . . . . . . . . . . . . . 30

SECTION 6. EVENTS OF DEFAULT AND REMEDIES THEREFOR . . . . . . . . . . . . . . . . . . . . . . . . 30

Section 6.1. Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Section 6.2. Acceleration of Maturities . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Section 6.3. Rescission of Acceleration . . . . . . . . . . . . . . . . . . . . . . . . . . 33

SECTION 7. AMENDMENTS, WAIVERS AND CONSENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

Section 7.1. Consent Required . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Section 7.2. Solicitation of Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Section 7.3. Effect of Amendment or Waiver . . . . . . . . . . . . . . . . . . . . . . . . 34

SECTION 8. INTERPRETATION OF AGREEMENT, DEFITNTIONS . . . . . . . . . . . . . . . . . . . . . . . 34

Section 8.1. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Section 8.2. Accounting Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Section 8.3 Directly or Indirectly . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

SECTION 9. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

Section 9.1. Registered Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Section 9.2. Exchange of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Section 9.3. Loss, Theft, Etc. of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Section 9.4. Expenses, Stamp Tax Indemnity . . . . . . . . . . . . . . . . . . . . . . . . 51
Section 9.5. Powers and Rights Not Waived; Remedies Cumulative . . . . . . . . . . . . . . 51
Section 9.6. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Section 9.7. Environmental Indemnity and Covenant Not To Sue . . . . . . . . . . . . . . . 52
Section 9.8. Intercreditor Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Section 9.9. Submission to Jurisdiction . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Section 9.10. Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Section 9.11. Survival of Covenants and Representations . . . . . . . . . . . . . . . . . . 55
Section 9.12. Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Section 9.13. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Section 9.14. Maximum Interest Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Section 9.15. Release of Lien Security Documents . . . . . . . . . . . . . . . . . . . . . . 56
Section 9.16. Captions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
</TABLE>
<PAGE> 4

<TABLE>
<S> <C>
Signature. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
</TABLE>

ATTACHEMTS TO NOTE AGREEMENT:

Schedule I - Names and Addresses of Purchasers and Amounts of Commitments

Schedule II - Description of Funded Debt, Liens, Leases, Restricted
Investments, Idle Assets and Subsidiaries as of the
Execution Date

Exhibit A - Form of 9.83% Senior Secured Note due October 1, 2001

Exhibit B - Representations and Warranties of the Company

Exhibit C - Description of Special Counsel's Closing Opinion

Exhibit D-1 - Description of Closing Opinion of Counsel to the Company

Exhibit D-2 - Description of Closing Opinion of General Counsel to the
Company and its subsidiaries.

Exhibit E - Form of Guaranty of SII Megadiamond, Inc.
<PAGE> 5
SMITH INTERNATIONAL, INC.
16740 Hardy Street
Houston, Texas 77032

NOTE AGREEMENT

Re: $95,000,000 9.83% Senior Secured Notes
Due October 1, 2001

Dated as of
August 31, 1992

To the Purchaser named in Schedule I
hereto which is a signatory of this
Agreement

Ladies and Gentlemen:

The undersigned, Smith International, Inc., a Delaware corporation (the
"Company"), agrees with you as follows:

SECTION 1. DESCRIPTION OF NOTES AND COMMITMENT.

Section 1.1. DESCRIPTION of Notes. The Company will authorize the issue
and sale of $95,000,000 aggregate principal amount of its 9.83% Senior Secured
Notes (the "Notes") to be dated the date of issue, to bear interest from such
date at a rate of 9.83% per annum, payable semi-annually on the first day of
each April and October in each year (commencing April 1, 1993) and at maturity
and to bear interest on overdue principal (including any overdue required or
optional prepayment of principal) and premium, if any, and (to the extent
legally enforceable) on any overdue installment of interest at the Overdue Rate
after the date due, whether by acceleration or otherwise, until paid, to be
expressed to mature on October 1, 2001, and to be substantially in the form
attached hereto as Exhibit A. Interest on the Notes shall be computed on the
basis of a 360-day year of twelve 30-day months. The Notes are not subject to
prepayment or redemption at the option of the Company prior to their expressed
maturity dates except on the terms and conditions and in the amounts and with
the premium, if any, set forth in #2 of this Agreement. The term "Notes" as used
herein shall include each Note delivered pursuant to this Agreement and the
separate agreeements with the other purchasers named in Schedule I. You and the
other purchasers named in Schedule I are hereafter sometimes referred to as the
"Purchasers". The terms which are capialized herein shall have the meanings set
forth in #8.1 unless the context shall otherwise require.

Section 1.2. Commitment. Closing Date. 10/2/92. Subject to the terms and
conditions hereof and on the basis of the representations and warranties set
forth, the Company
<PAGE> 6
agrees to issue and sell to you, and you agree to purchase from the Company,
Notes in the principal amount set forth opposite your name on Schedule I hereto
at a price of 100% of the principal amount thereof on the Closing Date
hereafter mentioned.

Delivery of the Notes will be made at the offices of Andrews & Kurth,
L.L.P., New York City, New York, against payment therefor in Federal Reserve
or other funds current and immediately available at the principal office of
Bankers Trust Company, ABA #021001033, Loan Division Account #99-401-268,
Reference: Smith International, Inc., in the amount of the purchase price at
10:00 A.M., New York City time, on October 5, 1992 or such later date (not
later than October 30, 1992) as shall mutually be agreed upon by the Company
and the Purchasers (the "Closing Date"). The Notes delivered to you on the
Closing Date will be delivered to you in the form of a single registered Note
in the form attached hereto as Exhibit A for the full amount of your purchase
(unless different denominations are specified by you), registered in your name
or in the name of such nominee, as may be specified in Schedule I attached
hereto and in substantially the form attached hereto as Exhibit A.

Section 1.3. Other Agreements. Simultaneously with the execution and
delivery of this Agreement, the Company is entering into similar agreements
with the other Purchasers under which such other Purchasers agree to purchase
from the Company the principal amount of Notes set opposite such Purchasers'
names in Schedule I. This Agreement and said similar agreements with the other
Purchasers are herein collectively referred to as the "Agreements." The
obligations of each Purchaser shall be several and not joint and no Purchaser
shall be liable or responsible for the acts of any other Purchaser.

Section 1.4. Security for the Notes. The Notes will be entitled to the
benefit of following contracts and agreements, each of which will be in form
and substance satisfactory to you and your special counsel (together with any
amendments, replacements or restatements of the foregoing, the "Security
Documents"):

(a) the Security Agreement (the "Security Agreement") between the
Company and Bankers Trust Company, as Collateral Agent (Bankers Trust
Company and its successors being herein referred to as the "Collateral
Agent") dated as the Closing Date;

(b) the Security Agreement between Megadiamond and the Collateral
Agent to be dated as the CLosing Date;

(c) the Security Agreemtn (Pledge of Notes and Liens) between Dutch
Subsidiary and the Company to be dated as the Closing Date (the "Dutch
Subsidiary Security Agreement") as assigned by the Company to the
Collateral Agent pursuant to the Security Agreement to secure repayment
of the Dutch Subsidiary Note;

(d) the Guaranty of Megadiamond in favor of the holders of the Notes
to be dated as the Closing Date substantially in the form of Exhibit E
hereto (the "Megadiamond Guaranty");
<PAGE> 7

(e) the Deed of Trust and Security Agreement from the Company
to Kenneth M. Anderson, as trustee, dated as the Closing Date (the "Deed
of Trust"); and

(f) each of the Foreign Subsidiary Credit Documents now or
hereafter executed and delivered pursuant to the terms of the Security
Documents and #5.9(a)(5) hereof;

and enforcement of the rights and benefits in respect of such Security
Documents will be subject to an Intercreditor Agreement dated as of August 31,
1992 in form and substance satisfactory to you and your special counsel (the
"Intercreditor Agreement") to be entered into by the Collateral Agent, Bankers
Trust Company, The Bank of California, N.A., CoreStates Bank, N.A., Deutsche
Bank AG, Den Norske Bank AS and the Company with you and the other Purchasers.

SECTION 2. PREPAYMENT OF NOTES.

Section 2.1. Required Prepayments. In addition to paying the entire
outstanding principal amount and the interest due on the Notes on the maturity
date thereof, the Company agrees that on the first day of April and October in
each year, commencing October 1, 1997 and ending April 1, 2001, both inclusive,
it will prepay and apply and there shall become due and payable on the
principal indebtedness evidenced by the Notes an amount equal to the lesser of
(a) $10,555,556 or (b) the principal amount of the Notes then outstanding. The
entire remaining principal amount of the Notes shall become due and payable on
October 1, 2001. No premium shall be payable in connection with any required
prepayment made pursuant to this #2.1.

In the event that the Company shall prepay less than all of the Notes
pursuant to #2.2 or #2.3 hereof, the amounts of the prepayments required by
this #2.1 shall be reduced by an amount which is the same percentage of such
required prepayment as the percentage that the principal amount of Notes
prepaid pursuant to #2.2 or #2.3 hereof, as the case may be, is of the
aggregate principal amount of outstanding Notes immediately prior to such
prepayment.

Section 2.2. Optional Prepayment with Premium. In addition to the
payments required by #2.1, upon compliance with #2.4, the Company shall have
the privilege, at any time and from time to time of prepaying the outstanding
Notes, either in whole or in part (but if in part then in a minimum principal
amount of $10,000,000) by payment of the principal amount of the Notes, or
portion thereof to be prepaid, and accrued interest thereon to the date of such
prepayment, together, subject to #9.14, with a premium equal to the Make-Whole
Amount, determined as of one Business Day prior to the date of such prepayment
pursuant to this #2.2.

Section 2.3. Prepayment on Change of Control. (a) In the event that
the Company shall have knowledge of a proposed Change of Control or that a
Change of Control has occurred, the Company shall promptly provide written
notice (a "Company Notice") of such fact in the manner provided in #9.6 hereof
to all holders of the Notes. The Company

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<PAGE> 8
Notice shall be delivered promptly upon receipt of such knowledge by the
Company and in any event no later than two Business Days following the
occurrence of a Change of Control. The Company Notice shall be in writing and
shall set forth (1) a summary of the transaction or transactions constituting
the proposed Change of Control or the Change of Control, (2) refer to this #2.3
and the right of the holders of the Notes to require the Company to purchase
their Notes on the terms and conditions provided for herein, (3) offer to
prepay in full the outstanding Notes, together with accrued interest to the
date of prepayment and a premium equal to the then applicable Make-Whole
Amount, (4) specify the date set for prepayment of the Notes (the "Change of
Control Prepayment Date"), which Change of Control Prepayment Date shall not be
more than 60 nor less than 30 days following the date of such Company Notice,
(5) the date when such premium will be calculated and the estimated amount
thereof and (6) the accrued interest applicable to the prepayment. Each holder
of the then outstanding Notes shall have the right to accept such offer and
require prepayment of the Notes held by such holder by written notice to the
Company (a "Noteholder Notice") given not later than 20 days after receipt of
the Company Notice. No later than 15 days after the date of the Company
Notice, the Company shall provide each holder of the Notes with the name of
each holder of Notes, and the aggregate principal amount of such Notes held by
each such holder that has theretofore elected to be prepaid One Business Day
prior to the Change of Control Prepayment Date, the Company shall provide each
holder of Notes to be prepaid, written notice of the premium, if any, payable
in connection with such prepayment calculated on and as of the third Business
Day preceding such Change of Control Prepayment Date and, whether or not any
premium is payable, a reasonably detailed computation of the Make-Whole Amount.
The Company shall on the Change of Control Prepayment Date prepay all Notes
held by holders which have so accepted such offer of prepayment, together with
accrued interest thereon to the date of such prepayment and, subject to #9.14
and to the extent not prohibited by applicable law, a premium equal to the then
applicable Make Whole Amount.

(b) Without limiting the foregoing, notwithstanding any failure on the
part of the Company to give the Company Notice herein required as a result of
the occurrence of a Change of Control, each holder of the Notes that shall not
have received such Company Notice shall have the right to require the Company
to prepay, and the Company will prepay, such holder's Notes in full, together
with accrued interest thereon to the date of prepayment and, subject to #9.14
and to the extent not prohibited by applicable law, an amount equal to the then
applicable Make-Whole Amount at any time after such holder has actual knowledge
of any such Change of Control. Notice of any required prepayment pursuant to
this #2.3(b) shall be delivered by a holder of the Notes which was entitled
to, but did not receive, such Company Notice to the Company after such holder
has actual knowledge of such Change of Control. On the date (the "Delayed
Change of Control Prepayment Date") designated in such holder's notice (which
shall be not more than 45 nor less than 30 days following the date of such
holder's notice), the Company shall prepay in full all the Notes held by such
holder, together with accrued interest thereon to the date of prepayment and,
subject to #9.14 and to the extent not prohibited by applicable law, an amount
equal to the then applicable Make-Whole Amount, determined as of one Business
Day prior to the Delayed Change of Control Prepayment Date. If the holder of
any Note gives any notice pursuant to this #2.3(b), the Company shall give a
Company Notice within 5 days of

-4-
<PAGE> 9
receipt of such notice and identify the Delayed Change of Control
Prepayment Date to all other holders of the Notes and each of such holders
shall then and thereupon have the right to accept the Company's offer to prepay
the Notes held by such holder and require prepayment of such Notes by delivery
of a Noteholder Notice within 15 days following receipt of such Company Notice;
provided only that any date for prepayment of such Notes shall be the Delayed
Change of Control Prepayment Date. The Company agrees to make such prepayment
on the Change of Control Delayed Prepayment Date.

Section 2.4. Notice of Optional Prepayments. The Company will give
notice of any prepayment of the Notes pursuant to #2.2 to each holder thereof
not less than 30 days nor more than 60 days before the date fixed for such
optional prepayment specifying (a) such date, (b) the principal amount of the
holder's Notes to be prepaid on such date, (c) that a premium may be payable,
(d) the date when such premium will be calculated, (e) the estimated premium,
and (f) the accrued interest applicable to the prepayment. Such notice of
prepayment shall also certify all facts, if any, which are conditions precedent
to any such prepayment. Notice of prepayment having been so given, the
aggregate principal amount of the Notes specified in such notice, together with
accrued interest thereon and the premium, if any, payable with respect thereto
shall become due and payable on the prepayment date specified in said notice.
Not later than one Business Day prior to the prepayment date specified
in such notice, the Company shall provide each holder of a Note written notice
of the premium, if any, payable in connection with such prepayment and, whether
or not any premium is payable, a reasonably detailed computation of the
Make-Whole Amount. The computation with respect to the Make-Whole Amount shall
in any event be subject to review and approval by the holders of at least
66-2/3% in aggregate principal of outstanding Notes and in the event of any
disagreement by such holders with such computation or the method thereof, the
conclusion of such holders shall, in the absence of manifest error, be deemed
binding and conclusive.

Section 2.5. Application of Prepayments. All partial prepayments
pursuant to #2.1 or #2.2 shall be applied on all outstanding Notes ratably in
accordance with the unpaid principal amounts thereof. Partial prepayments made
pursuant to #2.2 shall be credited ratably against the required prepayments as
provided in #2.1.

Section 2.6. Direct Payment. Notwithstanding anything to the contrary
contained in this Agreement or the Notes, in the case of any Note registered in
accordance with #9.1 hereof and owned by you or your nominee or owned by any
subsequent Institutional Holder (or its nominee) which has given written notice
to the Company requesting that the provisions of this #2.6 shall apply, the
Company will punctually pay when due the principal thereof, interest thereon
and premium, if any, due with respect to said principal, without any
presentment thereof, directly to you, to your nominee or to such subsequent
Institutional Holder or its nominee at your address or your nominee's address
set forth in Schedule I hereto or such other address as you, your nominee or
such subsequent Institutional Holder may from time to time designate in writing
to the Company or, if a bank account with a United States bank is designated
for you or your nominee on Schedule I hereto or in any written notice to the
Company from you, from your nominee or from any such subsequent Institutional
Holder, the Company will make such payments in immediately available funds

-5-
<PAGE> 10
to such bank account, marked for attention as indicated, or to such other
account in any United States bank as you, your nominee or any such subsequent
Institutional Holder may from time to time direct in writing.

SECTION 3. REPRESENTATIONS.

Section 3.1. Representations of the Company. The Company represents and
warrants that all representations and warranties set forth in Exhibit B are
true and correct as of the date hereof (the "Execution Date") and are
incorporated herein by reference with the same force and effect as though
herein set forth in full.

Section 3.2. Representations of the Purchaser. (a) You represent, and
in entering into this Agreement the Company understands, that you are acquiring
the Notes for the purpose of investment and not with a view to the distribution
thereof, and that you have no present intention of selling, negotiating or
otherwise disposing of the Notes; it being understood, however, that the
disposition of your property shall at all times be and remain within your
control.

(b) You further represent that either: (1) no part of the funds to be
used by you to purchase the Notes constitutes assets allocated to any separate
account maintained by you; (2) no part of the funds to be used by you to
purchase the Notes constitutes assets allocated to any separate account
maintained by you such that the application of such funds constitutes a
prohibited transaction under Section 406 of ERISA; or (3) all or a part of such
funds constitute assets of one or more separate accounts, trusts or a
commingled pension trust maintained by you, and you have disclosed to the
Company the names of such employee benefit plans whose assets in such separate
account or accounts or pension trusts exceed 10% of the total assets or are
expected to exceed 10% of the total assets of such account or accounts or
trusts as of the date of such purchase and the Company has advised you in
writing (and in making the representations set forth in this clause (3) you are
relying on such advice) that the Company is not a party-in-interest nor are the
Notes employer securities with respect to the particular employee benefit plan
disclosed to the Company by you as aforesaid (for the purpose of this clause
(3), all employee benefit plans maintained by the same employer or employee
organization are deemed to be a single plan). As used in this Section 3.2(b),
the terms "separate account", "party-in-interest", "employer securities", and
"employee benefit plan" shall have the respective meanings assigned to them in
ERISA.

SECTION 4. CLOSING CONDITIONS.

Section 4.1. Conditions. Your obligation to purchase the Notes on the
Closing Date shall be subject to the truth and accuracy on the Execution Date
of the representations and warranties made in #3.1. the performance by the
Company of its agreements hereunder which by the terms hereof are to be
performed at or prior to the time of deliver of the Notes and to the following
further conditions precedent:

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<PAGE> 11
(a) Conditions Precedent to be Met on or Prior to the Execution Date. On
or prior to the Execution Date:

(1) Certain Agreements. The Agreements, the Intercreditor
Agreement and the Credit Agreement shall be in form and substance
satisfactory to you and your special counsel, shall have been duly
executed and delivered by the parties thereto and shall be in full force
and effect and you shall have received true, correct and complete copies
of each thereof.

(2) Environmental Matters. You shall have received from the
Company in form and substance reasonably satisfactory to you and your
special counsel (i) the ENSR Environmental Assessment and (ii) a summary
of conditions known or believed by the Company to exist at any site or
facility owned or operated, presently or at any previous time, by the
Company or any of its Subsidiaries, which constitute a (A) violations of
any Environmental Law or (B) a Release or Threatened Release of a
Hazardous Substance, which could reasonably be expected to result in
liability or remedial obligations in excess of $1,000,000, individually,
or $5,000,000 in the aggregate, assuming disclosure to relevant
Governmental Authorities of all relevant facts, conditions and
circumstances, if any, pertaining to the relevant conditions.

(3) Internal Revenue Service Proceedings. You shall have
received from the Company in form and substance reasonably satisfactory to
you and your special counsel a written summary of the status of the
Company's ongoing proceedings with the Internal Revenue Service.

(4) Evidence of Insurance Coverage. The Company will furnish
or cause to be furnished to you and your special counsel a summary of the
insurance coverages of the Company and its Subsidiaries in form and
substance satisfactory to you and your special counsel and copies of all
applicable insurance policies as you or your special counsel may request.

(5) Pending Litigation. You shall have received from the
Company in form and substance reasonably satisfactory to you and your
special counsel a summary of all proceedings pending or threatened against
or affecting the Company or any Subsidiary in any court or before any
Governmental Authority or arbitration board or tribunal which,
individually or in the aggregate, if adversely determined could have a
material, adverse effect on the properties, business, prospects, profits
or condition (financial and otherwise) of the Company and its Subsidiaries.

(6) Proposed Use of Proceeds. You shall have received from the
Company in form and substance reasonably satisfactory to you a schedule
setting forth and identifying all Indebtedness of the Company and its
Subsidiaries to be repaid from the net proceeds from the sale of the Notes
and borrowings made pursuant to the Credit Agreement.

-7-
<PAGE> 12
(7) ERISA. You shall have received from the Company in form
and substance reasonably satisfactory to you and your special counsel a
summary of all conditions or transactions existing in connection with any
Plan which could result in the incurrence by the Company or any ERISA
Affiliate of any material liability, fine or penalty.

(8) Rating of the Notes. You shall received written evidence
that the Notes have been accorded a rating of "2" or better by the
National Association of Insurance Commissioners.

(b) Conditions Precedent to be Met on or Prior to the Closing Date. On
or prior to the Closing Date:

(1) Security Documents. The Security Documents shall be in
form and substance satisfactory to you and your special counsel, shall
have been duly executed and delivered by the parties thereto and shall be
in full force and effect and you shall have received true, correct and
complete copies of each thereof.

(2) Filing and Recording. The Security Documents (and/or
financing statements or similar notices thereof if and to the extent
permitted by applicable law) shall have been recorded or filed for record
in such public offices as may be deemed necessary or appropriate by you or
your special counsel in order to perfect the Liens and security interests
granted or conveyed thereby.

(3) Closing Certificate. You shall have received a certificate
dated the Closing Date, signed by the President or a Vice President of the
Company, the truth and accuracy of which shall be a condition to your
obligation to purchase the Notes proposed to be sold to you, to the effect
that (i) the representations and warranties of the Company set forth in
Exhibit B hereto are true and correct on and with respect to the Closing
Date, (ii) since the Execution Date, there has not occurred any material
change, or any development involving a prospective change, with respect to
any of the matters disclosed to you in writing by the Company on the
Execution Date in compliance with the conditions set forth in ##4.1(a)(2),
(3), (4), (5), (6) or (7) or in any Schedule to this Agreement or the
Credit Agreement, (iii) each Security Document and/or financing statements
or similar notices thereof have been recorded or filed for record in all
public offices wherein such filing or recordation is necessary to perfect
the Lien thereof against creditors of and purchasers from the Company and
its Affiliates and each Security Document constitutes a valid first
priority Lien or first perfected security interest, as the case may be,
on the collateral described therein, subject only to Liens expressly
permitted by the terms of such Security Documents, (iv) the Company has
performed all of its obligations hereunder which are to be performed on
or prior to the Closing Date, and (v) no Default or Event of Default has
occurred and is then continuing.

-8-
<PAGE> 13
(4) Legal Opinions. You shall have received opinions
from:

(i) Chapman and Cutler, who are acting as your
special counsel in this transaction in the form of Exhibit
C hereto;

(ii) Andrews & Kurth, L.L.P., counsel for the
Company and Megadiamond in substantially the form of
Exhibit D-1 hereto with respect to the matters set forth
therein and such other opinions with respect to the
Security Documents (other than the Foreign Subsidiary
Credit Documents), the perfection of the Liens contemplated
thereby and the Dutch Subsidiary Note requested by you and
your special counsel;

(iii) Neal S. Sutton, Esq., General Counsel to the
Company and its Subsidiaries;

(iv) Bennett Jones Verchere, special Canadian
counsel for Smith International Canada, Ltd.;

(v) M. Bejot & E. Marchandise, special French
counsel for Smith International France, S.A.R.L.;

(vi) Dickson Minto, special Scottish counsel for
Smith International (North Sea) Limited;

(vii) DeBraun Blackstone & Westbock, special Dutch
counsel for the Dutch Subsidiary;

(viii) Androkatfirmaet Schjodt Ans, special
Norwegian counsel for Smith International Norway A/S; and

(ix) Mueller Weitzel Weisner, special German
counsel for Smith International Deutschland GmbH;

each dated the Closing Date and in form and substance reasonably
satisfactory to you and your special counsel.

(5) Company's and Megadiamond's Existence and Authority. You shall
have received, in form and substance reasonably satisfactory to you and
your special counsel, such documents and evidence with respect to the
Company and Megadiamond in order to establish (i) the existence and good
standing of the Company and Megadiamond, (ii) the authorization of the
transactions contemplated by this Agreement and the Megadiamond Guaranty
and (iii) the incumbency of each officer authorized to execute the
Agreements, the Notes or the Megadiamond Guaranty, as the case may be.

(6) Dutch Subsidiary's Existence and Authority. You shall have
received, in form and substance reasonably satisfactory to you and your
special counsel, such documents and evidence with respect to the Dutch
Subsidiary as you may reasonably

-9-
<PAGE> 14
request in order to establish (i) the existence and good standing of the
Dutch Subsidiary, (ii) the authorization of the transactions contemplated
by such Dutch Subsidiary Credit Documents and (iii) the incumbency of each
officer authorized to execute the Dutch Subsidiary Credit Documents.

(7) Foreign Subsidiaries' Existence and Authority. You shall have
received, in form and substance reasonably satisfactory to you and your
special counsel, such documents and evidence with respect to each of the
Foreign Subsidiaries executing and delivering any Foreign Subsidiary
Credit Document on the Closing Date as you may reasonably request in order
to establish (i) the existence and good standing of each such Foreign
Subsidiary, (ii) the authorization of the transactions contemplated by
each such Foreign Subsidiary Credit Document and (iii) the incumbency of
each officer authorized to execute such Foreign Subsidiary Credit
Documents.

(8) Title Insurance; Survey. You shall have received a true,
correct and complete copy of the mortgagee's policy of title insurance in
favor of the Collateral Agent in form and substance satisfactory to you
and your special counsel insuring the first priority Lien granted pursuant
to the Deed of Trust, together with a survey satisfactory to you and your
special counsel.

(9) Pledged Securities. The Company shall have delivered to the
Collateral Agent (i) certificates and corresponding stock powers with
respect to the stock of each of the Foreign Subsidiaries to be pledged by
the Company pursuant to the terms of the Security Agreement and (ii) the
Dutch Subsidiary Note and each of the Foreign Subsidiary Notes to be
executed and delivered on the Closing Date, in each case properly endorsed
to the order of the Collateral Agent in accordance with the terms of the
Security Agreement and the Dutch Subsidiary Security Agreement.

(10) Related Transactions. The Company shall have consummated (i)
the sale of the entire principal amount of the Notes scheduled to be sold
on the Closing Date pursuant to the Agreements, (ii) the execution and
delivery of the Credit Agreement and (iii) the issuance of the Tranche B
Notes.

(11) Private Placement Number. Special counsel to the Purchasers of
the Notes have duly made the appropriate filings with Standard & Poor's
CUSIP Service Bureau, as agent for the National Association of Insurance
Commissioners, in order to obtain a private placement number for the
Notes.

(12) Rating of the Notes. You shall have received confirmation that
the Notes continue to be accorded a rating of "2" or better by the
National Association of Insurance Commissioners Inc.

(13) Funding Instructions. At least 3 Business Days prior to the
Closing Date, you shall have received written instructions executed by a
Responsible Officer of the Company directing the manner of the payment of
funds and setting forth (i) the name of the transferee bank, (ii) such
transferee bank's ABA number, (iii) the account

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<PAGE> 15
name and number into which the purchase price for the Notes is to be
deposited, and (iv) the name and telephone number of the account
representative responsible for verifying receipt of such funds.

(14) Legality of Investment. The Notes to be purchased by you shall
be a legal investment for you under the laws of each jurisdiction to which
you may be subject (without resort to any so-called "basket provisions" to
such laws).

(15) Satisfactory Proceedings. All proceedings taken in connection
with the transactions contemplated by this Agreement, and all documents
necessary to the consummation thereof, shall be satisfactory in form and
substance to you and your special counsel, and you shall have received a
copy (executed or certified as may be appropriate) of all legal documents
or proceedings taken in connection with the consummation of said
transactions.

Section 4.2. Waiver of Conditions. If on the Closing Date the Company
fails to tender to you the Notes to be issued to you on such date or if the
conditions specified in #4.1 have not been fulfilled, you may thereupon
elect to be relieved of all further obligations under this Agreement. Without
limiting the foregoing, if the conditions specified in #4.1 have not been
fulfilled, you may waive compliance by the Company with any such condition to
such extent as you may in your sole discretion determine. Nothing in this #4.2
shall operate to relieve the Company of any of its obligations hereunder or to
waive any of your rights against the Company.

SECTION 5. COMPANY COVENANTS.

From and after the Closing Date and continuing so long as any amount
remains unpaid on any Note:

Section 5.1. Corporate Existence, Etc. The Company will preserve and
keep in full force and effect, and will cause each Subsidiary to preserve and
keep in full force and effect, its corporate existence and all licenses and
permits necessary to the proper conduct of its business, provided that the
foregoing shall not prevent the dissolution of any Subsidiary involved in any
transaction otherwise permitted by #5.13; and provided further that the
corporate existence of Smith International France S.A.R.L. need not be
preserved and maintained if and when all or substantially all of the property
and assets of Smith International France S.A.R.L. have been sold or transferred
pursuant to #5.13(b)(1).

Section 5.2. Insurance. The Company will maintain, and will cause each
Subsidiary to maintain, insurance coverage by financially sound and reputable
insurers rated "A, Class XII" or better by A.M. Best Company, Inc. ("A.M.
Best") (or accorded a similar rating by another nationally recognized insurance
rating agency of similar standing) and in such forms and amounts and against
such risks as are customary for corporations of established reputation engaged
in the same or a similar business and owning and operating similar properties;
provided, however, that if, during the term of any insurance policy, the rating
accorded the insurer by A.M. Best or such other recognized insurance rating

-11-

<PAGE> 1

EXHIBIT 4.4

THIS FIRST AMENDMENT AND WAIVER dated March 24, 1993 (the or this
"First Amendment") to the several Note Agreements each dated as of August 31,
1992 (the "Note Agreements") between SMITH INTERNATIONAL, INC., a Delaware
corporation (the "Company"), and each of the institutions identified in
Schedule I thereto (collectively, the "Purchasers"), is between the Company and
each of the institutions which is a signatory to this First Amendment (the
"Required Noteholders").

RECITALS:

A. The Company and each of the Purchasers have heretofore entered
into separate and several Note Agreements, each dated as of August 31, 1992
(the "Note Agreements"). The Required Noteholders are the holders of at least
66-2/3% of the outstanding $95,000,000 9.83% Senior Secured Notes, due October
1, 2001 (the "Notes") of the Company issued and sold under and pursuant to the
Note Agreements.

B. The Company and the Required Noteholders now desire to waive
certain Events of Default under the Note Agreements and to amend the Note
Agreements effective on March ____, 1993 (the "Effective Date") in the
respects, but only in the respects, hereinafter set forth. Pursuant to Section
7.1 of the Note Agreements, the consent of the holders of at least 66-2/3% of
the aggregate principal amount of the outstanding Notes is required to waive
non-compliance with a provision of the Note Agreements and amend the Note
Agreements as contemplated herein.

C. Capitalized term used herein but not otherwise defined shall
have the meanings assigned thereto in the Note Agreements.

NOW, THEREFORE, the acceptance hereof by the Required Noteholders and
the full and complete satisfaction of the conditions precedent to the
effectiveness of this First Amendment set forth in Section 3.1 hereof, will
confirm the understanding of the Company and the Required Noteholders that the
Note Agreements shall be and are hereby amended in the following respects:

SECTION 1. AMENDMENTS.

Section 1.1. The reference in the second line of Section 2.2 of
the Note Agreements to "Section 2.4" shall be amended to read "Section 2.5".

Section 1.2. Sections 2.4, 2.5 and 2.6 of the Note Agreements
shall be renumbered 2.5, 2.6 and 2.7, respectively, and a new Section 2.4 shall
be added to read as follows:

Section 2.4. Prepayment upon Specified Asset Sale. (a)(1)
The Company shall provide written notice (a "Company Asset Sale
Notice") not more than 60 nor less than 45 days prior to the date that
a Specified Asset Sale (as hereinafter defined) is reasonably likely
to occur in the manner provided in Section 9.6 hereof to all holders
of the
<PAGE> 2
Notes; provided, however, that, notwithstanding the foregoing, with
respect to the Halliburton Asset Sale, to the extent the same is
scheduled on the date hereof to be consummated on or prior to March
31, 1993, the Company shall provide the Company Asset Sale Notice to
all holders of the Notes simultaneously with the execution and
delivery of this First Amendment. The Company Asset Sale Notice shall
be in writing and shall (i) set forth a summary of the transaction or
transactions constituting such Specified Asset Sale; (ii) refer to
this Section 2.4 and the right of the holders of the Notes to require
the Company to purchase their Notes on the terms and conditions
provided for herein; (iii) offer to prepay in full the outstanding
Notes, together with accrued interest to the date of prepayment and a
premium equal to the then applicable Asset Sale Make-Whole Amount,
which offer to prepay may be made contingent upon the consummation of
the anticipated Specified Asset Sale; (iv) specify two dates for
prepayment of the Notes (the "First Prepayment Date" and "Second
Prepayment Date"); provided, that if such dates for prepayment can not
be specified with certainty, the Company may provide its best estimate
of such dates; and (v) provide a calculation of the estimated amount
of premium and accrued interest applicable to the First Prepayment
Date and the Second Prepayment Date.

(2) The First Prepayment Date shall be not more than
three Business Days following the date on which the Company shall have
received substantially all of the cash proceeds from such Specified
Asset Sale nor in any event more than 65 days after such Specified
Asset Sale; provided, however, that notwithstanding the foregoing,
with respect to the Halliburton Asset Sale, the First Prepayment Date
shall be the earlier of (i) the Business Day on which, under the terms
of the Bailee Agreement, the Bailee shall have received the proceeds
from the sale of the shares of the Common Stock of Halliburton
pursuant to the Underwriting Agreement and deposited the same in
Account No. 99401268, at Bankers Trust Company and (ii) a date not
more than 65 days after the consummation of the Halliburton Asset
Sale. The Second Prepayment Date shall be not more than 105 days nor
less than 100 days after the First Prepayment Date. In the event that
the First Prepayment Date or Second Prepayment Date identified in the
Company Asset Sale Notice are only estimates of such expected
prepayment dates, the Company shall confirm the actual prepayment date
or dates as soon as it has actual knowledge of the same by notice to
each holder of the Notes given no less than five Business Days prior
to such actual prepayment date, provided that the First Prepayment
Date and Second Prepayment Date shall in any event satisfy the time
requirements contained in the immediately two preceding sentences of
this Section 2.4(a)(2).

(3) Each holder of the then outstanding Notes shall have
the right to accept such offer of prepayment on either the First
Prepayment Date or the Second Prepayment Date and require prepayment
of the Notes held by such holder on either of such dates by written
notice to the Company (a "Noteholder Asset Sale Notice") delivered not
later than (i) three Business Days prior to the First Prepayment Date
if such holder elects to accept such offer of prepayment on the First
Prepayment Date or (ii) 90 days after the First Prepayment Date if
such holder elects to accept such offer of prepayment on the Second
Prepayment Date. No later than two Business Days

-2-
<PAGE> 3
prior to the First Prepayment Date and no later than 95 days after the
First Prepayment Date, the Company shall provide each holder of the
Notes with the name of each holder of Notes and the aggregate
principal amount of such Notes held by each such holder that has
theretofore elected to be prepaid on the First Prepayment Date and the
Second Prepayment Date, respectively. Two Business Days prior to each
of the First Prepayment Date and the Second Prepayment Date, the
Company shall provide each holder of Notes to be prepaid on each such
date, written notice of the premium, if any, payable in connection
with each such prepayment calculated on and as of such Business Day
and, whether or not any premium is payable, a reasonably detailed
computation of the Asset Sale Make-Whole Amount; provided, however,
that notwithstanding the foregoing, with respect to the Halliburton
Asset Sale, each holder of the Notes shall have received such written
notice of the computation of the Asset Sale Make-Whole Amount on a
date three Business Days after the Underwriters shall have executed the
Underwriting Agreement.

(4) The Company shall on each of the First Prepayment
Date and the Second Prepayment Date, respectively, prepay all Notes
held by holders which have so accepted such offer of prepayment for
each such date, together with accrued interest thereon to the date of
such prepayment and, subject to Section 9.14 and to the extent not
prohibited by applicable law, a premium equal to the then applicable
Asset Sale Make-Whole Amount.

(5) In the event that the net proceeds from any such
Specified Asset Sale (other than the net proceeds of the Halliburton
Asset Sale) shall be insufficient to prepay in full the principal
amount of the Notes held by each holder of the Notes which has
accepted such offer of prepayment on and as of the First Prepayment
Date or the Second Prepayment Date, as the case may be, the prepayment
called for hereby shall be made on a pro rata basis among the holders
which have so accepted such offer of prepayment on either such
Prepayment Date and no Event of Default shall be deemed to have
occurred as a result thereof solely by virtue of such partial
prepayment on such Prepayment Date; provided, however, that
notwithstanding the foregoing, the Company shall in any event be
required to prepay in full the principal amount of the Notes held by
each holder of the Notes which has accepted an offer of prepayment as
a result of the Halliburton Asset Sale, together with accrued interest
thereon to the date of such prepayment and, subject to Section 9.14
and to the extent not prohibited by applicable law, a premium equal to
the then applicable Asset Sale Make-Whole Amount.

(b) (1) Without limiting the foregoing and
notwithstanding the failure on the part of the Company to give the
Company Asset Sale Notice as and when herein required, each holder of
the Notes that shall not have received such Company Asset Sale Notice
shall have the right to require the Company to prepay, and the Company
will prepay, such holder's Notes in full, together with accrued
interest thereon to the date of prepayment and, subject to Section
9.14 and to the extent not prohibited by applicable law, an amount
equal to the then applicable Asset Sale Make-Whole Amount at any time
after such holder has actual knowledge of any such Specified Asset
Sale.

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<PAGE> 4
Notice of any required prepayment pursuant to this Section 2.4(b)
shall be delivered by a holder of the Notes which was entitled to, but
did not receive, such Company Asset Sale Notice to the Company after
such holder has actual knowledge of such Specified Asset Sale.

(2) On the date (the "Delayed Specified Asset Sale
Prepayment Date") designated in such holder's notice (which shall be
not more than 45 nor less than 30 days following the date of such
holder's notice), the Company shall prepay in full all the Notes held
by such holder, together with accrued interest thereon to the date of
prepayment and, subject to Section 9.14 and to the extent not
prohibited by applicable law, an amount equal to the then applicable
Asset Sale Make-Whole Amount, determined as of two Business Days prior
to the Delayed Specified Asset Sale Prepayment Date; provided,
however, that if such holder has failed to receive the required
Company Asset Sale Notice with respect to the Halliburton Asset Sale,
the Delayed Specified Asset Sale Prepayment Date designated in such
holder's notice shall be either the First Prepayment Date or the
Second Prepayment Date.

(3) If the holder of any Note gives any notice pursuant
to this Section 2.4(b), the Company shall, within five days of receipt
of such notice, give to all other holders of the Notes written notice
(i) setting forth a summary of the transaction or transactions
constituting such Specified Asset Sale(ii) referring to this Section
2.4(b) and the right of the holders of the Notes to require the
Company to purchase their Notes on the terms and conditions provided
for herein, (iii) offering to prepay in full the outstanding Notes,
together with accrued interest to the date of prepayment and a premium
equal to the then applicable Asset Sale Make-Whole Amount and (iv)
identifying the Delayed Specified Asset Sale Prepayment Date. Each of
such holders shall then and thereupon have the right to accept the
Company's offer to prepay the Notes held by such holder and require
prepayment of such Notes (together with accrued interest thereon to
the date of such prepayment and, subject to Section 9.14 and to the
extent not prohibited by applicable law, a premium equal to the then
applicable Asset Sale Make-Whole Amount) by delivery of a written
notice within ten days following receipt of such notice from the
Company; provided only that any date for prepayment of such Notes
shall be the Delayed Specified Asset Sale Prepayment Date. The
Company agrees to make such prepayment on the Delayed Specified
Asset Sale Prepayment Date.

(4) In the event that the Net Proceeds from any such
Specified Asset Sale shall be insufficient to prepay in full the
principal amount of the Notes on such Delayed Specified Asset Sale
Prepayment Date held by each holder of the Notes which has accepted
such offer of prepayment, the prepayment called for hereby shall be
made on a pro rata basis among the holders which have so accepted such
offer of prepayment and no Event of Default shall be deemed to have
occurred as a result thereof solely by virtue of such partial
prepayment on such Delayed Specified Asset Sale Prepayment Date;
provided, however, that notwithstanding the foregoing, the Company
shall in any event be required to prepay in full the principal amount
of the Notes held by each holder of the Notes which has notified the
Company that it wishes

-4-
<PAGE> 5
such Notes to be prepaid as a result of the Halliburton Asset Sale, together
with accrued interest thereon to the date of such prepayment and, subject to
Section 9.14 and to the extent not prohibited by applicable law, a premium
equal to the then applicable Asset Sale Make-Whole Amount.

(1) the Company or any Subsidiary shall sell,
lease, transfer, abandon or otherwise dispose of assets
(valued at net book value) which:

(i) together with all other assets of
the Company and its Subsidiaries previously disposed
of during the same fiscal year, exceed 10% of
Consolidated Net Tangible Assets, determined as of
the end of the lately preceding fiscal year, or

(ii) together with all other assets of
the Company and its Subsidiaries previously disposed
of during the same fiscal year contributed more than
10% of Consolidated EBIT for the immediately
preceding fiscal year of the Company; or (iii) and
(iv) (per second amendment)

provided, however, that the foregoing shall not include or
apply to (A) assets sold by the Company to customers or by the
Company to a Wholly-owned Subsidiary which then and thereupon
sells such assets to customers, in any such case in the
ordinary course of business, (B) assets of a Subsidiary sold,
leased, transferred or otherwise disposed of to the Company or
a Wholly-owned Subsidiary or (C) the disposal of Idle Assets,

(2) the Company or any Subsidiary shall sell,
pledge or otherwise dispose of its entire Investment in any
Subsidiary and the assets (valued at net book value) of the
Subsidiary sold, pledged or otherwise disposed of:

(i) together with all other assets of
the Company and its Subsidiaries previously disposed
of during the same fiscal year (other than to (A)
customers in the ordinary course of business or (B)
the Company or a Wholly-owned Subsidiary) exceed 10%
of Consolidated Net Tangible Assets, determined as of
the end of the immediately preceding fiscal year; or

(ii) together with all other assets of
the Company and its Subsidiaries previously disposed
of during the same fiscal year (other than to (A)
customers in the ordinary course of business or (B)
the Company or a Wholly-owned Subsidiary) contributed
more than 10% of

-5-
<PAGE> 6
Consolidated EBIT for the immediately preceding
fiscal year of the Company;

provided, however, that the foregoing shall not apply to the
sale or other disposition of Subsidiary Stock to the Company
or any Wholly-owned Subsidiary.

Computations pursuant to Section 2.4(c)(1) shall include dispositions
made pursuant to Section 2.4(c)(2) and computations pursuant to
Section 2.4(c)(2) shall include dispositions made pursuant to Section
2.4(c)(1).

(d) This Section 2.4 shall not in any manner be construed
to affect the right of any holder of the Notes to require prepayment
of its Notes pursuant to and in accordance with the provisions of
Section 2.3.

Section 1.3. The reference in the first sentence of Section 2.6 of
the Note Agreements to "Section 2.6" shall be amended to read "Section 2.7".

Section 1.4. The second proviso in Section 5.13(b) of the Note
Agreements shall be amended to read as follows:

provided, however, that for purposes of the foregoing calculation,
there shall not be included (A) any of the Idle Assets disposed of, or
(B) any assets the proceeds from the sale of which were or are used
first, to prepay the Notes pursuant to Section 2.4 and second, within
twelve months of the date of sale of such assets to (y) the
acquisition of property or assets useful and intended to be used and
actually used in the operations of the Company and its Subsidiaries
and having a fair market value (as determined in good faith by the
Board of Directors of the Company) at least equal to that of the
assets so disposed of, reduced by the principal amount of Notes
prepaid pursuant to Section 2.4 from any sale of assets described in
clause (B) above, or (z) the prepayment, at any applicable prepayment
premium, on a pro rata basis, of Funded Debt of the Company (other
than (i) Subordinated Indebtedness of the Company or any of its
Subsidiaries and (ii) Guarantees by the Company of Funded Debt of
others). It is understood and agreed by the Company that, after giving
effect to any prepayment of the Notes pursuant to Section 2.4, any
such proceeds paid and applied to the prepayment of the Notes as
provided in the foregoing clause (z) shall be prepaid as and to the
extent provided in Section 2.2 of this Agreement.

Section 1.5. The second proviso in Section 5.13(c) of the Note
Agreements shall be amended to read as follows:

provided, however, that for purposes of the foregoing calculation,
there shall not be included (A) any of the Idle Assets disposed of, or
(B) any of the proceeds from the sale of which were or are used first,
to prepay the Notes pursuant to Section 2.4 and second, within twelve
months of the date of sale of such assets to either (y) the
acquisition of property or assets useful and intended to be used and
actually used in the

-6-
<PAGE> 7
operations of the Company and its Subsidiaries and having a fair
market value (as determined in good faith by the Board of directors of
the Company) at least equal to that of the assets so disposed of,
reduced by the principal amount of Notes prepaid pursuant to Section
2.4 from any sale of assets described in clause (B) above, or (z) the
prepayment, at any applicable prepayment premium, on a pro rata basis,
of Funded Debt of the Company (other than (i) Subordinated
Indebtedness of the Company or any of its Subsidiaries and (ii)
Guaranties by the Company of Funded Debt of others. It is understood
and agreed by the Company that, after giving effect to any prepayment
of the Notes pursuant to Section 2.4, any such proceeds paid and
applied to the prepayment of the Notes as provided in the foregoing
clause (z) shall be prepaid as and to the extent provided in Section
2.2 of this Agreement.

Section 1.6. Section 8.1 of the Note Agreements shall be amended
by the addition of the following definitions in alphabetical order:

"Asset Sale Make-Whole Amount" shall mean in connection with
any prepayment pursuant to Section 2.4 the excess, if any, of (a) the
aggregate present value as of the date os such prepayment or payment
of each dollar of principal being prepaid (taking into account the
application of such prepayment required by Section 2.1) and the amount
of interest (exclusive of interest accrued to the date of prepayment)
that would have been payable in respect of such dollar if such
prepayment had not been made, determined by discounting such amounts
at the Reinvestment Rate from the respective dates on which they would
have been payable, over (b) 100% of the principal amount of the
outstanding Notes being prepaid or paid. If the Reinvestment Rate is
equal to or higher that 9.83%, the Asset Sale Make-Whole Amount shall
be zero. For purposes of any determination of the Asset Sale
Make-Whole Amount:

"Reinvestment Rate" shall mean (1) 1.50%, plus the
yield reported on the display designated as "Page 5" on the
Telerate Service (or, if not available, any other nationally
recognized trading screen reporting on-line intraday trading
in United States government Securities) at 11:00 A.M. (Chicago
time) for United States government Securities having a
maturity (rounded to the nearest month) corresponding tot he
remaining Weighted Average Life to Maturity of the principal
being prepaid or paid (taking into account the application of
any prepayment or payment required by Section 2.1) or (2) in
the event that no such nationally recognized trading screen
reporting on-line intraday trading in United States government
Securities in available, Reinvestment Rate shall mean 1.50%,
plus the arithmetic mean of the yields for the two columns
under the heading "Week Ending" published in the Statistical
Release under the caption "Treasury Constant Maturities" for
the maturity (rounded to the nearest month) corresponding to
the Weighted Average Life to Maturity of the principal being
prepaid or paid (taking into account the application of such
prepayment required by Section 2.1). If no maturity exactly
corresponds to such Weighted Average Life to Maturity, yields
for the two published maturities most closely corresponding to
such Weighted Average Life to Maturity shall be calculated
pursuant to the immediately preceding sentence and the
Reinvestment Rate shall

-7-
<PAGE> 8
be interpolated or extrapolated from such yields on a
straight-line basis, rounding in each of such relevant periods
to the nearest month. For the purposes of calculating the
Reinvestment Rate, the most recent Statistical Release
published prior to the date of determination of the Asset Sale
Make-Whole Amount shall be used.

"Remaining Dollar-Years" of such principal shall mean
the amount obtained by (1) multiplying (i) the remainder of
(A) the amount of principal that would have become due on each
scheduled payment date if such prepayment or payment had not
been made, less (B) the amount of principal on the Notes
schedules to become due on such date after giving effect to
such prepayment of payment and the application thereof in
accordance with the provisions of Section 2.1, by (ii) the
number of years (calculated to the nearest one-twelfth) which
will elapse between the date of determination and such
scheduled payment date, and (2) totaling the products obtained
in (1).

"Statistical Release" shall mean the then most
recently published statistical release designated "H.15(519)"
or any successor publication which is published weekly by the
Federal Reserve System and which established yields on
actively traded U.S. Government Securities adjusted to
constant maturities or, if such statistical release is not
published at the time of any determination hereunder, then
such other reasonably comparable index which shall be
designated by the holders of 66-2/3% in aggregate principal
amount of the outstanding Notes.

"Weighted Average Life to Maturity" of the principal
amount of the Notes being prepaid shall mean, as of the time
of any determination thereof, the number of years obtained by
dividing the then Remaining Dollar-Years of such principal by
the aggregate amount of such principal.

"Bailee" shall mean Simpson Thacher & Bartlett, the Bailee
under and pursuant to the terms of the Bailee Agreement.

"Bailee Agreement" shall mean that certain Bailee Agreement
dated March ____, 1993 by and among Texas Commerce Bank National Association,
the Company, Bankers Trust Company, as Collateral Agent, and The First Boston
Corporation and Shearson Lehman Brothers Inc., as representatives of the
Underwriters substantially in the form attached hereto as Exhibit F.

"Company Asset Sale Notice" shall have the meaning specified
in Section 2.4(a).

"Delayed Specified Asset Sale Prepayment Date" shall have the
meaning specified in Section 2.4(b).

"First Prepayment Date" shall have the meaning specified in
Section 2.4(a).

"Halliburton" shall mean Halliburton Company, a Delaware
corporation.

-8-
<PAGE> 9
"Halliburton Asset Sale" shall mean the sale of the
directional drilling business of the Company in exchange for shares of
Common Stock of Halliburton under and pursuant to the Asset
Acquisition Agreement dated as of January 14, 1993 between the Company
and Halliburton.

"Noteholder Asset Sale Notice" shall have the meaning
specified in Section 2.4(a).

"Second Prepayment Date" shall have the meaning specified in
Section 2.4(a).

"Specified Asset Sale" shall have the meaning specified in
Section 2.4(c).

"Subsidiary Stock" shall have the meaning specified in Section
5.13(c).

"Underwriters" shall mean the underwriters who are a party to
the Underwriting Agreement.

"Underwriting Agreement" shall mean the Underwriting Agreement
dated as of March ____, 1993 among the Company, certain Subsidiaries
of the Company who are a party thereto and the Underwriters providing
for the purchase by the Underwriters of Common Stock of Halliburton
and the sale of such Common Stock of Halliburton in a public offering
registered under the Securities Act of 1933, as amended.

Section 1.7. The definition of "Reinvestment Rate" contained
within the definition of "Make-Whole Amount" in Section 8.1 of the Note
Agreements shall be amended by replacing the phrase "under the respective
headings "This Week" and "Last Week"" with the phrase "for the two columns
under the heading "Week Ending"".

SECTION 2. WAIVER.

Upon and by virtue of this First Amendment becoming effective as
herein contemplated, the failure of the Company to meet:

(a) the required ratio of Consolidated EBIT to
Consolidated Interest Expense as set forth in Section 5.7(b) of the
Note Agreements as of the fiscal quarters ended September 30, 1992 and
December 31, 1992, based upon the financial statements of the Company
and its Subsidiaries for the fiscal quarters ended as of each such
date; and

(b) the required ratio Consolidated Current Assets to
Consolidated Current Liabilities as set forth in Section 5.6 of the
Note Agreements as of the fiscal quarter ended December 31, 1992,
based upon the financial statements of the Company and its
Subsidiaries for the fiscal quarter ended as of such date;

and which failures constitute Events of Default under the Note Agreements,
shall be and are hereby waived by the Purchasers, provided, however, that if
the sale of the Company's directional drilling assets to Halliburton does not
occur on or prior to March 31, 1993, such

-9-
<PAGE> 10
waiver shall then and thereupon cease to be effective. Upon and by virtue of
this First Amendment becoming effective as herein contemplated, the failure of
the Company to comply with Section 4.05 of the Security Agreement by reason of
the transfer by the Company to HCS Leasing Corp., a wholly-owned subsidiary of
the Company, of the patents and intellectual property rights that the Company
has agreed to sell to Halliburton Company, which failure constitutes an Event
of Default under the Security Agreement and the Note Agreements, shall be and
is hereby waived by the Purchasers, provided, however, that if the sale of the
Company's directional drilling assets to Halliburton does not occur on or prior
to March 31, 1993, such waiver shall then and thereupon cease to be effective.

The Company understands and agrees that the waivers contained in this
Section 2 pertain only to the matters and to the extent herein described and
not to any other actions of the Company under, or matters arising in connection
with, the Note Agreements or to any rights which the Purchasers have arising by
virtue of any such other actions or matters.

SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

The Company hereby represents and warrants to each of you that all of
the representations and warranties set forth in Exhibit A attached hereto are
true and correct as of the Effective Date and are incorporated herein by
reference with the same force and effect as though herein set forth in full.

SECTION 4. MISCELLANEOUS.

Section 4.1. This First Amendment shall become effective and
binding upon the Company and the Purchasers on the Effective Date upon the
acceptance hereof by the Required Noteholders in the space below and upon the
satisfaction in full of the following conditions:

(a) The Purchasers shall have received, in form and
substance reasonably satisfactory to the Purchasers and their special
counsel, such documents and evidence with respect to the Company as
the Purchasers may reasonably request in order to establish the
existence and good standing of the Company and the authorization of
the transactions contemplated by this First Amendment;

(b) The Purchasers shall have received an opinion of
counsel from counsel to the Company covering the matters set forth in
clause (a) above (other than the good standing of the Company) and
such other matters relating to this First Amendment as the Purchasers
may reasonably request;

(c) Any consents or approvals from any holder or holders
of any outstanding Security of the Company and any amendments of
agreements pursuant to which any Securities amy have been issued which
shall be necessary to permit the consummation of th transactions
contemplated hereby shall have been obtained and all such consents

-10-
<PAGE> 11
or amendments shall be reasonably satisfactory in form and substance
to the Purchasers and their special counsel; and

(d) Each of (1) the First Amendment to Security Agreement
between the Company and the Collateral Agent dated as of March ____,
1993 substantially in the form attached hereto as Exhibit B (the
"First Amendment to Security Agreement"), (2) the Registration Rights
Agreement effective as of March ____, 1993 between the Company and
Halliburton in the form attached hereto as Exhibit C and (3) the First
Amendment to Credit Agreement and Waiver effective on March ____, 1993
among the signatories thereto in the form attached hereto as Exhibit D
(the "First Amendment to Credit Agreement") shall have been duly
executed and delivered by the parties thereto and shall constitute the
legal, valid and binding obligation of each of the parties thereto and
shall be enforceable against each of the respective parties thereto in
accordance with its terms.

Section 4.2. The undersigned holders of the Notes hereby (A)
authorize the Collateral Agent to execute and deliver (1) that certain Partial
Release of Liens and Security Interests dated as of March ____, 1993, (2) the
First Amendment to Security Agreement, (3) the UCC-3 collateral release
statements for the collateral described in the Partial Release of Liens and
Security Interests (4) the Bailee Agreement and the Release of Liens and
Security Interests in Halliburton Stock attached as Exhibit A to the Bailee
Agreement; (5) the Full Release and Discharge dated as of March ____, 1993 and
the related PPSA filing relating to Canadian assets; (6) the Agreement on
Re-Transfer of Certain Securities dated as of March ____, 1993 related to
German assets; (7) the Release Document dated as of March ____, 1993 relating
to Norwegian assets; (8) the Instrument of Alteration to Effect Release of
Property from Bond and Floating Charge dated as of March ____, 1993 related to
United Kingdom assets; and (9) the Global Release of Liens and Security
Interests dated as of March ____, 1993 relating to the Canadian, German,
Norwegian and United Kingdom assets, (B) consent to the First Amendment to
Credit Agreement, and (C) consent to the lease by the Company of a portion of
the property covered by the Deed of Trust, which lease shall be pursuant to
Article II of the Transition Agreement between the Company and Halliburton
Company substantially in the form attached hereto as Exhibit E.

Section 4.3. Whenever in any certificate, letter, notice or other
instrument reference is made to the Note Agreements, such reference without
more shall include reference to this First Agreement.

Section 4.4. Except as modified and expressly amended by this
First Amendment, the Note Agreements are in all respects ratified, confirmed
and approved and all of the terms, provisions and conditions thereof shall be
and remain in full force and effect. Notwithstanding anything contained herein
to the contrary, this First Amendment shall not be construed to modify or
affect the rights and obligations of the signatories to the Intercreditor
Agreement as set forth therein.

-11-
<PAGE> 12
Section 4.5. The Company agrees to pay all reasonable fees and
expenses of the Purchasers and their special counsel in connection with the
preparation of this First Amendment.

Section 4.6. This First Amendment may be executed and delivered in
any number of counterparts, each of such counterparts constituting an original,
but all together only one First Amendment.

-12-
<PAGE> 13
SMITH INTERNATIONAL, INC.

By /s/ J. KENNEDY
Its Treasurer

By /s/ VINCENT XXXXX
Its Assistant Treasurer

-13-
<PAGE> 14
Agreed to and accepted:

THE NORTHWESTERN MUTUAL LIFE
INSURANCE COMPANY

By /s/ J. THOMAS CHRISTOFFERSON
J. Thomas Christofferson
Its Vice President
<PAGE> 15
PRINCIPAL MUTUAL LIFE INSURANCE
COMPANY

By /s/ GEORGE E. ALTON
George E. Alton
Its Second Vice President
Securities Trading

By /s/ JON C. HEINY
Jon C. Heiny
Its Counsel
<PAGE> 16
JOHN HANCOCK MUTUAL LIFE INSURANCE
COMPANY

By /s/ EUGENE R. HODGE, JR.
Its Investment Officer

JOHN HANCOCK VARIABLE LIFE INSURANCE
COMPANY

By /s/ STEPHEN A. MACLEAN
Its Investment Vice President
<PAGE> 17
AMERICAN INTERNATIONAL LIFE
ASSURANCE COMPANY OF NEW YORK

By /s/ J. PAUL GATLIN
Its AVP

AIG LIFE INSURANCE COMPANY

By /s/ J. PAUL GATLIN
Its AVP
<PAGE> 18
IDS LIFE INSURANCE COMPANY

By /s/ LORRAINE R. HART
Its Vice President, Investments

IDS LIFE INSURANCE COMPANY OF NEW YORK

By /s/ LORRAINE R. HART
Its Investment Officer
<PAGE> 19
AMERICAN ENTERPRISE LIFE INSURANCE
COMPANY

By /s/ LORRAINE R. HART
Its Vice President, Investments
<PAGE> 20
FARM BUREAU LIFE INSURANCE COMPANY

By /s/ RICHARD D. WARMING
Richard D. Warming
Its Vice President, Investments

FLB LIFE INSURANCE COMPANY

By /s/ RICHARD D. WARMING
Richard D. Warming
Its Vice President, Investments
<PAGE> 21
THE PENN MUTUAL LIFE INSURANCE
COMPANY

By /s/ BARBARA B. HENDERSON
Its Assistant Vice President

THE PENN INSURANCE & ANNUITY
COMPANY

By /s/ BARBARA B. HENDERSON
Its Investment Officer
<PAGE> 22
OHIO NATIONAL LIFE ASSURANCE
CORPORATION

By /s/ JOSEPH P. BROM
Joseph P. Brom
Its Senior Vice President and
Chief Investment Officer
<PAGE> 23
CONFIRMATION OF GUARANTY AGREEMENT

SII Megadiamond, Inc., (the "Guarantor") pursuant to that certain
Guaranty Agreement dated as of October 2, 1992 (the "Guaranty"), which has been
executed and delivered by the Guarantor to the Purchasers, hereby agrees that
its liabilities thereunder and the Security Documents to which such Guarantor
is a party are and shall remain enforceable against such Guarantor in
accordance with their terms, and are, and shall continue to be, in full force
and effect and shall not be reduced, altered, limited, lessened or in any way
affected by the execution and delivery of the First Amendment and Waiver dated
as of even date herewith and to which this Confirmation is attached, executed
by the Company and the Required Noteholders, and are hereby confirmed and
ratified in all respects.

WITNESS THE EXECUTION HEREOF, effective as of the ____ day of March,
1993.

SII MEGADIAMOND, INC.

By: /s/ NEAL SUTTON
Name: Neal Sutton
Title: Vice President
<PAGE> 24
REPRESENTATIONS AND WARRANTIES

The Company represents and warrants to you as follows:

1. Corporate Organization and Authority. The Company and each
Subsidiary

(a) is a corporation duly organized, validly existing and
in good standing under the laws of its jurisdiction of incorporation;

(b) has all requisite power and authority and all
necessary licenses and permits to own and operate its properties and
to carry on its business as now conducted and as presently proposed to
be conducted; and

(c) is duly licensed or qualified and is good standing as
a foreign corporation in each jurisdiction wherein the nature of the
business transacted by it or the nature of the property owned or
leased by it makes such licensing or qualification necessary, except
for such jurisdictions wherein the failure to be so licensed or
qualified would not have a Material Adverse Effect.

2. Full Disclosure. Neither the First Amendment and Waiver, the
First Amendment to the Security Agreement, the Bailee Agreement nor any other
written statement furnished by the Company to you in connection with the
negotiation of the First Amendment and Waiver, contain any untrue statement of
a material fact or omit a material fact necessary to make the statements
contained therein or herein not misleading. There is no fact peculiar to the
Company which the Company has not disclosed to you in writing which materially
affects adversely nor, so far as the Company can now foresee, will materially
affect adversely the Properties, business, prospects, profits or condition
(financial or otherwise) of the Company or the ability of the Company to enter
into and perform the First Amendment and Waiver, the First Amendment to the
Security Agreement and the Bailee Agreement.

3. Transactions Legal and Authorized. The execution and delivery
of the First Amendment and Waiver, the First Amendment to the Security
Agreement and the Bailee Agreement--

(a) are within the corporate powers of the Company;

(b) will not violate any material provisions of any law
or any order of any court or governmental authority or agency and will
not conflict with or result in any breach of any of the terms,
conditions or provisions of, or constitute a default under, the
Certificate of Incorporation or By-laws of the Company or any loan
agreement, indenture or other agreement or instrument to which the
Company will be a party or by which it may be bound on the Effective
Date or result in the imposition of any Lien on any property of the
Company; and

EXHIBIT A
(to First Amendment and Waiver)
<PAGE> 25
(c) have been duly authorized by proper corporate action
on the part of the Company )no action by the stockholders of the
Company being required by law, by the Certificate of Incorporation or
the By-laws of the Company or otherwise), executed and delivered by
the Company and each of the First Amendment and Waiver, the First
Amendment to the Security Agreement and the Bailee Agreement
constitutes the legal, valid and binding obligation, contract and
agreement of the Company enforceable in accordance with its respective
terms.

4. Pending Litigation. There are no proceedings pending or, to
the knowledge of the Company, threatened against or affecting the Company in
any court or before any governmental authority or arbitration board or tribunal
which, if adversely determined, could have a material, adverse effect on the
properties, business, prospects, profits or condition (financial or otherwise)
of the Company and its Subsidiaries. The Company is not in default with respect
to any order of any court or governmental authority or arbitration board or
tribunal.

5. No Defaults. The Company is not in default in the payment of
principal or interest on any Indebtedness for borrowed money and, other than
those Events of Default specified in Section 2 of the First Amendment and
Waiver, is not in default under any instrument or instruments or agreements
under and subject to which any Indebtedness for borrowed money has been issued
and no event has occurred and is continuing under the provisions of any such
instrument or agreement which with the lapse of time or the giving of notice,
or both, would constitute an event of default thereunder. The Company is not in
violation of any term of any agreement, charter instrument, regulation or other
instrument to which it is a party or by which it maybe bound which violation
would have a material adverse effect on the business or the financial condition
of the Company.

6. Consents. No approval, consent or withholding of objection on
the part of any regulatory body, state, Federal or local, is necessary in
connection with the execution and delivery by the Company of the First
Amendment and Waiver, the First Amendment to the Security Agreement and the
Bailee Agreement or Compliance by the Company with any of the provisions
thereof. All approvals and consents required from any other Person for the due
execution and delivery by the Company of the First Amendment and compliance by
the Company with any of the provisions thereof have been obtained and are in
full force and effect.

7. Release of Liens. The property and assets identified on Annex
A to that certain Partial Release of Security Interest dated March ____, 1993
and in the various UCC-3's which the Company has requested the Collateral Agent
to execute and deliver are the property and assets which are being sold to
Halliburton on or about the Effective Date. Upon the consummation of the
Halliburton Asset Sale, the Company shall have no right, title or interest in
any of the property or assets described in Annex A to the Partial Release of
Security Interests. The definition of "Excluded Assets" set forth in Annex A is
a complete and accurate description of the property and assets which will not
be conveyed to Halliburton under the terms of the Halliburton Asset Sale, and
the Partial Release of Security

A-2
<PAGE> 26
Interests will not affect in any manner the lien and security interest of the
Collateral Agent in such Excluded Assets.

A-3

<PAGE> 1
EXHIBIT 4.5

================================================================================

SMITH INTERNATIONAL, INC.

SECOND AMENDMENT AND WAIVER
DATED AS OF SEPTEMBER 1, 1993

NOTE AGREEMENT
DATED AS OF AUGUST 31, 1992

RE: $95,000,000 9.83% SENIOR SECURED NOTES
DUE OCTOBER 1, 2001

================================================================================
<PAGE> 2
THIS SECOND AMENDMENT AND WAIVER dated as of September 1, 1993 (the or
this "Second Amendment") to the several Note Agreements, each dated as of
August 31, 1992 between SMITH INTERNATIONAL, INC., a Delaware corporation (the
"Company"), and each of the institutions identified in Schedule I thereto
(collectively, the "Purchasers"), as amended by the First Amendment and Waiver
dated March 24, 1993 between the Company and the Purchasers, is between the
Company and each of the institutions which is a signatory to this Second
Amendment (the "Required Noteholders").

RECITALS:

A. The Company and each of the Purchasers have heretofore entered
into separate and several Note Agreements, each dated as of August 31, 1992
(the "Original Note Agreements"), as amended by the First Amendment and Waiver
dated March 24, 1993 between the Company and the Purchasers (the "First
Amendment"; the Original Note Agreements as amended by the First Amendment
being referred to herein as the "Existing Note Agreements"). The Required
Noteholders are the holders of at least 66-2/3% of the outstanding $95,000,000
9.83% Senior Secured Notes, due October 1, 2001 (the "Notes") of the Company
issued and sold under and pursuant to the Original Note Agreements.

B. The Company and the Required Noteholders now desire to waive
certain Events of Default under the Existing Note Agreements and to amend the
Existing Note Agreements effective on October 27, 1993 (the "Effective Date")
in the respects, but only in the respects, hereinafter set forth. Pursuant to
Section 7.1 of the Existing Note Agreements, the consent of the holders of at
least 66-2/3% of the aggregate principal amount of the outstanding Notes is
required to waive non-compliance with a provision of the Existing Note
Agreements and to amend the Existing Note Agreements as contemplated herein.
The Existing Note Agreements as hereinafter amended are referred to herein as
the "Note Agreements".

C. Capitalized terms used herein but not otherwise defined shall
have the meanings assigned thereto in the Existing Note Agreements.

NOW, THEREFORE, the acceptance hereof by the Required Noteholders and
the full and complete satisfaction of the conditions precedent to the
effectiveness of this Second Amendment set forth in Section 4.1 hereof, will
confirm the understanding of the Company and the Required Noteholders that the
Existing Note Agreements shall be and are hereby amended in the following
respects:

SECTION 1. AMENDMENTS.

Section 1.1. Amendment of Section 1.4. Section 1.4 of the Existing
Note Agreements shall be and is hereby amended in its entirety so that the same
shall henceforth read as follows:
<PAGE> 3

"Section 1.4. Security for the Notes. The Notes will be
entitled to the benefit of the following contract and agreement
(together with any amendments, replacements or restatements of the
foregoing, the "Security Document"): the Guaranty of Megadiamond in
favor of the holders of the Notes dated as the Closing Date
substantially in the form of Exhibit E hereto (the "Megadiamond
Guaranty")."

Section 1.2. Amendment of Section 2.1. The first paragraph of
Section 2.1 of the Existing Note Agreements shall be and is hereby amended in
its entirety so that the same shall henceforth read as follows:

"Section 2.1. Required Prepayments. In addition to paying
the entire outstanding principal amount and the interest due on the
Notes on the maturity date thereof, the Company agrees that on the
first day of April and October in each year, commencing October 1, 1997
and ending April 1, 2001, both inclusive, it will prepay and apply and
there shall become due and payable on the principal indebtedness
evidenced by the Notes an amount equal to the lesser of (a) $5,111,111
or (b) the principal amount of the Notes then outstanding. The entire
remaining principal amount of the Notes shall become due and payable on
October 1, 2001. No premium shall be payable in connection with any
required prepayment made pursuant to this Section 2.1."

Section 1.3. Amendment of Section 2.4. Paragraph (c)(1)(ii) of
Section 2.4 of the Existing Note Agreements shall be and is hereby amended by
(a) adding after the ";" at the end thereof "or" and (b) adding at the end
thereof the following clauses (iii) and (iv):

"(iii) together with all other assets of the Company
and its Subsidiaries previously disposed of during the period
from the Closing Date to and including the date of the sale of
such assets exceeds 25% of Consolidated Net Tangible Assets,
determined as of the immediately preceding fiscal year; or

(iv) together with all other assets of the Company and
its Subsidiaries previously disposed of during the period from
the Closing Date to and including the date of the sale of such
assets contributed more than 25% of Consolidated EBIT,
determined as of the immediately preceding fiscal year;"

Section 1.4. Amendment of Section 5.6. Section 5.6 of the Existing
Note Agreements shall be and is hereby amended in its entirety so that the same
shall henceforth read as follows:

"Section 5.6. Current Ratio. The Company will at all times
keep and maintain the ratio of Consolidated Current Assets to
Consolidated Current Liabilities at not less than 2.00 to 1.00."

-2-
<PAGE> 4
Section 1.5. Amendment of Section 5.7. Section 5.7 of the Existing
Note Agreements shall be and is hereby amended in its entirety so that the same
shall henceforth read as follows:

"Section 5.7. Certain Ratios. (a) The Company will at all
times during the period from and including the Closing Date to and
including December 31, 1992, maintain the ratio of Consolidated
Indebtedness to Consolidated Total Capitalization at not more than
0.55 to 1.00 and will at all times from and after January 1, 1993,
maintain the ratio of Consolidated Indebtedness to Consolidated Total
Capitalization at not more than 0.35 to 1.00.

(b) The Company will not at any time permit the ratio of Consolidated
EBIT for the immediately preceding four fiscal quarter period to Consolidated
Interest Expense for the immediately preceding four fiscal quarter period to be
less than:

DURING THE PERIOD: RATIO

Closing Date through
December 31, 1992 1.25 to 1.00

January 1, 1993 through
June 30, 1993 1.50 to 1.00

July 1, 1993 through
September 30, 1993 1.50 to 1.00

October 1, 1993 through
December 31, 1993 2.00 to 1.00

January 1, 1994 and
thereafter 2.50 to 1.00"

Section 1.6. Amendment of Section 5.8. Section 5.8 of the Existing
Note Agreements shall be and is hereby amended in its entirety so that the same
shall henceforth read as follows:

"Section 5.8. Consolidated Tangible Net Worth. The Company
will at all times keep and maintain Consolidated Tangible Net Worth at
an amount not less than the sum of (a) $165,000,000 plus (b) 50% of
Consolidated Net Earnings computed on a cumulative basis for each of
the elapsed fiscal years ending after January 1, 1992; provided that
notwithstanding that Consolidated Net Earnings for any of such elapsed
fiscal years may be a deficit figure, no reduction as a result thereof
shall be made in the sum to be maintained pursuant hereto."

-3-
<PAGE> 5
Section 1.7. Amendment of Section 5.9. The heading of Section 5.9 of
the Existing Note Agreements shall be and is hereby amended to read
"Limitations on Funded Debt and Secured Current Debt", and Section 5.9(a) of
the Existing Note Agreements shall be and is hereby amended in its entirety so
that the same shall henceforth read as follows:

"(a) The Company will not, and will not permit any Subsidiary to,
create, assume, guarantee or otherwise incur or in any manner be or
become liable in respect of any Funded Debt or secured Current Debt,
except:

(1) Funded Debt of the Company and its Subsidiaries
outstanding as of the Execution Date and described on
Schedule II hereto;

(2) Funded Debt evidenced by the Notes;

(3) Intentionally deleted;

(4) additional Funded Debt and secured Current Debt of the
Company and its Subsidiaries, provided that at the time of creation,
issuance, assumption, guarantee or incurrence thereof and after
giving effect thereto and to the application of the proceeds
thereof:

(i) in the case of Funded Debt, as at the end of the
immediately preceding fiscal quarter of the Company and its
Subsidiaries, the ratio of Consolidated EBIT for the
immediately preceding four fiscal quarter period to Pro Forma
Consolidated Interest Expense for the immediately succeeding
four fiscal quarter period would not be less than:

DURING THE PERIOD: RATIO

Closing Date through
December 31, 1992 1.25 to 1.00

January 1, 1993 through
June 30, 1993 1.50 to 1.00

July 1, 1993 through
September 30, 1993 1.50 to 1.00

October 1, 1993 through
December 31, 1993 2.00 to 1.00

January 1, 1994 and 2.50 to 1.00
thereafter

and

-4-
<PAGE> 6
(ii) in the case of the creation, issuance,
assumption, guarantee or incurrence of (A) any Funded Debt of
a Subsidiary and (B) any Funded Debt or Current Debt of the
Company secured by Liens permitted by Section 5.10(j), the sum
of (A) and (B) would not exceed 20% of Consolidated Tangible
Net Worth; and

(iii) no Default or Event of Default would exist; and

(5) Funded Debt of a Subsidiary to the Company or a
Wholly-owned Subsidiary (including, without limitation, Funded Debt
evidenced by the Dutch Subsidiary Note and the Foreign Subsidiary
Notes to be executed and delivered on the Closing Date), provided all
such Funded Debt of any Foreign Subsidiary shall be evidenced by (i) a
Foreign Subsidiary Note and (ii) if at any time such Funded Debt of
such Foreign Subsidiary exceeds $2,500,000 in aggregate principal
amount, then upon the request of the Required Noteholders, the Company
will cause such Foreign Subsidiary to execute, within 45 days of such
request, a security instrument in form and substance satisfactory to
the Collateral Agent granting to the Collateral Agent a Lien on
current assets of such Foreign Subsidiary, with regard to which
security instrument such Foreign Subsidiary shall have provided an
opinion of counsel in form, substance and scope satisfactory to the
Collateral Agent in its sole discretion."

Section 1.8. Amendment of Section 5.10(f). Section 5.10(f) of the
Existing Note Agreements shall be and is hereby amended in its entirety so that
the same shall henceforth read as follows:

"(f) Liens described on Schedule II hereto;"

Section 1.9. Deletion of Section 5.1O(g). Section 5.10(g) of the
Existing Note Agreements shall be and is hereby deleted in its entirety so that
the same shall henceforth read as follows:

"(g) Intentionally deleted;"

Section 1.10. Amendment of Section 5.10(j). Section 5.10(j) of the
Existing Note Agreements shall be and is hereby amended in its entirety so that
the same shall henceforth read as follows:

"(j) Liens incurred after the Execution Date given to secure
Funded Debt or Current Debt of the Company or any of its Subsidiaries
in addition to the Liens permitted by the preceding clauses (a)
through (i) hereof; provided that all Funded Debt and Current Debt of
the Company and its Subsidiaries secured by such Liens shall have been
incurred within the limitations provided in Section Section
5.9(a)(4)(i), (ii) and (iii) and provided further that in the event
that (x) any property or assets of the Company or any of its
Subsidiaries is subjected to a Lien pursuant to this Section 5.10(j)
and (y) the Funded Debt or Current Debt secured by such Liens exceeds
in the

-5-
<PAGE> 7
aggregate $15,000,000 within the United States or outside the United
States or in the aggregate $5,000,000 with respect to Liens on assets
located in the United States, the Company will make or cause to be
made provision whereby the Notes will be secured equally and ratably
with all other obligations secured by any such Liens, and the Notes
shall have the benefit, to the full extent of the law, of an equitable
Lien on such property or assets securing the Notes, under terms and
conditions satisfactory to the holders of the Notes and the Company
shall provide an opinion to the holders of the Notes to the effect
that the Liens and documentation related thereto granted to the
holders of the Notes are valid, binding and enforceable pursuant to
the terms of documents creating such Liens and properly perfected;
and"

Section 1.11. Amendment of Section 5.12(a). Section 5.12(a)
of the Existing Note Agreements shall be and is hereby amended in its
entirety so that the same shall henceforth read as follows:

"(a) The Company will not and the Company will not permit any
Subsidiary to, directly or indirectly, or through any
Affiliate, declare or make or incur any liability to declare
or make any Distribution and neither the Company nor any of
its Subsidiaries will make or authorize any Restricted
Investment, unless, immediately after giving effect to the
proposed Distribution or Restricted Investment, the aggregate
amount of Distributions declared in the case of dividends or
made in the case of other Distributions plus the aggregate
amount of Restricted Investments made by the Company and its
Subsidiaries (valued immediately after the making of such
Restricted Investment as provided in the definition thereof)
during the period from and after March 1, 1993 to and
including the date of declaration in the case of a dividend,
the date of payment in the case of any other Distribution and
the date such Investment is committed to in the case of a
Restricted Investment would not exceed the sum of:

(1) $5,000,000; plus

(2) 50% of Consolidated Net Earnings (or if such
Consolidated Net Earnings is a deficit figure, then minus 100%
of such deficit) for such period determined on a cumulative
basis commencing on March 1, 1993, to and including the date
of such declaration, payment or commitment; plus

(3) an amount equal to the aggregate net cash
proceeds received by the Company from the sale on or after
March 1, 1993, of shares of any class of the common stock of
the Company;

The foregoing notwithstanding, nothing herein shall be deemed
to limit, restrict or prohibit the Company's repurchase of not more than
3,000,000 shares of its Common Stock, at a price not to exceed $10 per share,
for payments in an aggregate amount not to exceed

-6-
<PAGE> 8
$25,000,000; provided, however, the Company shall not repurchase any Common
Stock if, after giving effect to any such repurchase, a Default or Event of
Default would exist or the Company would not be permitted to incur at least
$1.00 of additional Funded Debt under the provisions of Section 5.9(a)."

Section 1.12. Amendment of Section 5.13(b). Section 5.13(b) of the
Existing Note Agreements shall be and is hereby amended by (a) deleting the
period at the end of the first sentence of the second proviso and (b) adding at
the end of the first sentence of the second proviso the following:

"or (C) the proceeds from the Halliburton Asset Sale."

Section 1.13. Amendment of Section 5.13(c). Section 5.13(c) of the
Existing Note Agreements shall be and is hereby amended by (a) deleting the
period at the end of the first sentence of the second proviso and (b) adding at
the end of the first sentence of the second proviso the following:

"or (C) the proceeds from the Halliburton Asset Sale."

Section 1.14. Amendment of Section 5.23. Section 5.23 of the Existing
Note Agreements shall be and is hereby amended in its entirety so that the same
shall henceforth read as follows:

"Section 5.23. Additional Subsidiaries. Corporate
Restructuring. If the Company incorporates or acquires any Person and
thereby creates a new Subsidiary and the newly formed, acquired,
surviving or Transferee Subsidiary has material operations and is
organized under the laws of any state of the United States of America,
the Company will cause such Subsidiary to execute a guaranty agreement
in form and substance substantially similar to the Megadiamond
Guaranty guaranteeing the Notes."

Section 1.15. Amendment of Section 6.1(1). Section 6.1(1) of the
Existing Note Agreements shall be and is hereby amended in its entirety so that
the same shall henceforth read as follows:

"(1) The Megadiamond Guaranty shall cease to be in full force
and effect for any reason whatsoever, including, without limitation, a
determination by any governmental body or court that such agreement is
invalid, void or unenforceable or Megadiamond shall contest or deny in
writing the validity or enforceability of any of its obligations under
the Megadiamond Guaranty; or"

Section 1.16. Amendment of Definitions. The following definitions
shall be and are hereby added to Section 8.1 of the Existing Note Agreements in
their alphabetical order:

"'Cash Equivalents' shall mean the Investments described in
clauses (c), (d) and (e) of the definition of Restricted Investments.

-7-
<PAGE> 9
'Common Stock' shall mean the Common Stock of the Company, par
value $_____ per share.

'Current Debt' of any Person shall mean as of the date of any
determination thereof (i) all Indebtedness of such Person for borrowed
money other than Funded Debt of such Person and (ii) Guaranties by
such Person of Current Debt of others."

Section 1.17. Definition of Asset Sale Make-Whole Amount. The
definition of "Asset Sale Make-Whole Amount" contained in Section 8.1 of the
Existing Note Agreements shall be and is hereby amended by replacing the
reference to "1.50%" contained in the first line and the eleventh line of the
definition of "Reinvestment Rate" with ".50%".

Section 1.18. Definition of Idle Assets. The definition of "Idle
Assets" contained in Section 8.1 of the Existing Note Agreements shall be and
is hereby amended in its entirety and shall henceforth read as follows:

"'Idle Assets' shall mean (i) those properties and
assets described in Note 4 to the Company's audited
consolidated financial statements for the period ended
December 31, 1991 as more fully described in Schedule II
hereto and (ii) the real property and fixtures located at the
Company's Hardy Street facility at 16740 Hardy Street,
Houston, Texas 77032."

Section 1.19. Definition of "Restricted Investments." The definition
of "Restricted Investments" contained in Section 8.1 of the Existing Note
Agreements shall be and is hereby amended by: (a) deleting the word "and" at
the end of clause (1) of said definition, (b) deleting the period at the end of
clause (m) and substituting therefor"; and" and (c) adding at the end thereof
the following clause (n):

"(n) Investments in the diversified hedged portfolio
of preferred stocks, which are rated "Baa" or better by Moody's
Investor Service, Inc. or "BBB" or better by Standard & Poor's
Corporation, administered by Spectrum Asset Management, Inc., provided
that the aggregate amount of such Investments shall not at any time
exceed the lesser of $20,000,000 or 15% of the aggregate amount of
Cash and Cash Equivalents held by the Company; provided further, (A)
no more than 5% of the aggregate amount of the Investments described
in this clause (n) shall be invested in any single issuer of preferred
stock and (B) in the event (i) any issuer of preferred stock within
such portfolio defaults on its obligations under the terms of such
preferred stock or (ii) bankruptcy, reorganization, arrangement or
insolvency proceedings, or other proceedings for relief under
bankruptcy or similar laws for the relief of debtors, are instituted
by or against any issuer of preferred stock within such portfolio and,
if instituted against such issuer of preferred stock, are consented to
or are not dismissed within 60 days after such institution, the
Company shall sell its entire Investment described in this clause (n)
within 30 days of the event described in (i) or (ii) above."

-8-
<PAGE> 10
SECTION 2. WAIVER

Upon and by virtue of this Second Amendment becoming effective as
herein contemplated, the failure of the Company to comply with the requirements
of Section 5.12 of the Existing Note Agreements by virtue of the Company's
Restricted Investment in the amount of $20,000,000 in the diversified hedged
portfolio of preferred stocks administered by Spectrum Asset Management, Inc.
and which failure constitutes an Event of Default under the Existing Note
Agreements, shall be and is hereby waived by the Purchasers.

SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

The Company hereby represents and warrants to each of you that all of
the representations and warranties set forth in Exhibit A attached hereto
are true and correct as of the Effective Date and are incorporated herein by
reference with the same force and effect as though herein set forth in full.

SECTION 4. MISCELLANEOUS.

Section 4.1. This Second Amendment shall become effective and binding
upon the Company and the Purchasers on the Effective Date upon the acceptance
hereof by the Required Noteholders in the space below and upon the satisfaction
in full of the following conditions:

(a) The Purchasers shall have received, in form and substance
reasonably satisfactory to the Purchasers and their special counsel,
such documents and evidence with respect to the Company as the
Purchasers may reasonably request in order to establish the
existence and good standing of the Company and the authorization of
the transactions contemplated by this Second Amendment;

(b) The Purchasers shall have received an opinion of counsel
from counsel to the Company covering the matters set forth in clause
(a) above (other than the good standing of the Company) and such
other matters relating to this Second Amendment as the Purchasers
may reasonably request; and

(c) Any consents or approvals from any holder or holders of
any outstanding Security of the Company and any amendments of
agreements pursuant to which any Securities may have been issued
which shall be necessary to permit the consummation of the
transactions contemplated hereby shall have been obtained and all
such consents amendments shall be reasonably satisfactory in form
and substance to the Purchasers and their special counsel.

-9-
<PAGE> 11
Section 4.2. The undersigned holders of the Notes hereby (A)authorize
the Collateral Agent to execute and deliver (1) the Release of Liens and
Security Interests dated as of September __, 1993 substantially in the form
attached hereto as Exhibit __, (2) the UCC-3 collateral release statements for
the collateral described in the Release of Liens and Security Interests and (3)
the Release of the Deed of Trust substantially in the form attached hereto as
Exhibit__ and (B) consent to the termination of the Intercreditor Agreement.

Section 4.3. Whenever in any certificate, letter, notice or other
instrument reference is made to the Note Agreements, such reference without
more shall include reference to this Second Amendment.

Section 4.4. Except as modified and expressly amended by this Second
Amendment, the Note Agreements are in all respects ratified, confirmed and
approved and all of the terms, provisions and conditions thereof shall be and
remain in full force and effect.

Section 4.5. The Company agrees to pay all reasonable fees and
expenses of the Purchasers and their special counsel in connection with the
preparation of this Second Amendment.

Section 4.6. This Second Amendment may be executed and delivered in
any number of counterparts, each of such counterparts constituting an original,
but all together only one Second Amendment.

-10-
<PAGE> 12
REPRESENTATIONS AND WARRANTIES

The Company represents and warrants to you as follows:

1. Corporate Organization and Authority. The Company and each
Subsidiary

(a) is a corporation duly organized, validly existing and in good
standing under the laws of its jurisdiction of incorporation;

(b) has all requisite power and authority and all necessary
licenses and permits to own and operate its properties and to carry
on its business as now conducted and as presently proposed to be
conducted; and

(c) is duly licensed or qualified and is in good standing as a
foreign corporation in each jurisdiction wherein the nature of the
business transacted by it or the nature of the property owned or
leased by it makes such licensing or qualification necessary, except
for such jurisdictions wherein the failure to be so licensed or
qualified would not have a Material Adverse Effect.

2. Full Disclosure. Neither the Second Amendment and Waiver nor any
other written statement furnished by the Company to you in connection with the
negotiation of the Second Amendment and Waiver, contain any untrue statement of
a material fact or omit a material fact necessary to make the statements
contained therein or herein not misleading. There is no fact peculiar to the
Company which the Company has not disclosed to you in writing which materially
affects adversely nor, so far as the Company can now foresee, will materially
affect adversely the properties, business, prospects, profits or condition
(financial or otherwise) of the Company or the ability of the Company to enter
into and perform the Second Amendment and Waiver.

3. Transactions Legal and Authorized. The execution and delivery of
the Second Amendment and Waiver --

(a) are within the corporate powers of the Company;

(b) will not violate any material provisions of any law or any
order of any court or governmental authority or agency and will not
conflict with or result in any breach of any of the terms, conditions
or provisions of, or constitute a default under, the Certificate of
Incorporation or By-laws of the Company or any loan agreement,
indenture or other agreement or instrument to which the Company will
be a party or by which it may be bound on the Effective Date or
result in the imposition of any Lien on any property of the Company;
and

(c) have been duly authorized by proper corporate action on the
part of the Company (no action by the stockholders of the Company
being required by law, by the Certificate of Incorporation or the
By-laws of the Company or otherwise), executed and delivered by the
Company and the Second Amendment and Waiver

EXHIBIT A
(to First Amendment and Waiver)
<PAGE> 13
constitutes the legal, valid and binding obligation, contract and
agreement of the Company enforceable in accordance with its terms.

4. Pending Litigation. There are no proceedings pending or, to the
knowledge of the Company, threatened against or affecting the Company in any
court or before any governmental authority or arbitration board or tribunal
which, if adversely determined, could in the aggregate have a material,
adverse effect on the properties, business, prospects, profits or condition
(financial or otherwise) of the Company and its Subsidiaries. The Company is
not in default with respect to any order of any court or governmental authority
or arbitration board or tribunal.

5. No Defaults. The Company is not in default in the payment of
principal or interest on any Indebtedness for borrowed money and, other than
those Events of Default specified in Section 2 of the Second Amendment and
Waiver, is not in default under any instrument or instruments or agreements
under and subject to which any Indebtedness for borrowed money has been issued
and no event has occurred and is continuing under the provisions of any such
instrument or agreement which with the lapse of time or the giving of notice,
or both, would constitute an event of default thereunder. The Company is not
in violation of any term of any agreement, charter instrument, regulation or
other instrument to which it is a party or by which it maybe bound which
violation would in the aggregate have a material adverse effect on the business
or the financial condition of the Company.

6. Contents. No approval, consent or withholding of objection on the
part of any regulatory body, state, Federal or local, is necessary in
connection with the execution and delivery by the Company of the Second
Amendment and Waiver or compliance by the Company with any of the provisions
thereof. All approvals and consents required from any other Person for the due
execution and delivery by the Company of the Second Amendment and Waiver and
compliance by the Company with any of the provisions thereof have been obtained
and are in full force and effect.

7. Compliance with Law. Neither the Company nor any Subsidiary (a) is
in violation of any law, ordinance, franchise, governmental rule or regulation
to which it is subject; or (b) has failed to obtain any license, permit,
franchise or other governmental authorization necessary to the ownership of its
property or to the conduct of its business, which violation or failure to
obtain would, individually or in the aggregate, materially adversely affect
the business, prospects, profits, properties or condition (financial or
otherwise) of the Company and its Subsidiaries, taken as a whole, or impair
the ability of the Company to perform its obligations contained in the Second
Amendment and Waiver. Neither the Company nor any Subsidiary is in default
with respect to any order of any court or governmental authority or
arbitration board or tribunal.

A-2
<PAGE> 14
SMITH INTERNATIONAL, INC.

By /s/ J. KENNEDY
Its Treasurer

By /s/ VINCIENT E. SENTF
Its Assistant Treasurer
<PAGE> 15
Agreed to and accepted:

PRINCIPAL MUTUAL LIFE INSURANCE
COMPANY

By /s/ JAMES K. HOVEY
Its Director-Securities
Investment

By /s/ DAVID A. SEEVERS
Its Director-Securities
Research and Portfolio
Management
<PAGE> 16
JOHN HANCOCK MUTUAL LIFE INSURANCE
COMPANY

By /s/ EUGENE HODGES JR.
Its Investment Officer

JOHN HANCOCK VARIABLE LIFE INSURANCE
COMPANY

By /s/ STEPHEN S. MAC LEAN
Its Investment Vice President
<PAGE> 17
AMERICAN ENTERPRISE LIFE INSURANCE
COMPANY

By /s/ LAUAINE R. HART
Its Vice President, Investments

Smith International, Inc.
Second Amendment and Waiver
to Note Agreement
<PAGE> 18
IDS LIFE INSURANCE COMPANY

By /s/ LAUAINE R. HART
Its Vice President, Investments

IDS LIFE INSURANCE COMPANY OF NEW
YORK

By /s/ LAUAINE R. HART
Its Investment Officer

Smith International, Inc.
Second Amendment and Waiver
to Note Agreement

<PAGE> 1
EXHIBIT 10.5

SMITH INTERNATIONAL, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

(Effective October 1, 1993)
<PAGE> 2
TABLE OF CONTENTS

Section
ARTICLE ONE - PURPOSE OF PLAN

ARTICLE TWO - DEFINITIONS

Administrative Committee................................... 2.1
Beneficiary................................................ 2.2
Board...................................................... 2.3
Bonus...................................................... 2.4
Bonus Agreement............................................ 2.5
Code....................................................... 2.6
Company.................................................... 2.7
Compensation............................................... 2.8
Compensation Committee..................................... 2.9
Deferral Agreement......................................... 2.10
Deferred Compensation Ledger............................... 2.11
Determination Date......................................... 2.12
Employee................................................... 2.13
Employment................................................. 2.14
Financial Emergency........................................ 2.15
Interest Equivalents....................................... 2.16
Participant................................................ 2.17
Plan....................................................... 2.18
Plan Year.................................................. 2.19
Retirement Date............................................ 2.20
Subsidiary................................................. 2.21
Total and Permanent Disability............................. 2.22
Trust...................................................... 2.23
Trustee.................................................... 2.24

ARTICLE THREE - ADMINISTRATION

Composition of Administrative Committee.................... 3.1
Administration of Plan..................................... 3.2
Action by Committee........................................ 3.3
Delegation................................................. 3.4
Reliance Upon Information.................................. 3.5
Responsibility and Indemnity............................... 3.6

ARTICLE FOUR - PARTICIPATION

Eligibility of Employees................................... 4.1
Notification of Eligible Employees......................... 4.2
Compensation Deferral Agreement............................ 4.3
Bonus Deferral............................................. 4.4

i
<PAGE> 3
Suspension of Deferral for Financial Emergency ........... 4.5
Company Contributions..................................... 4.6
Vesting................................................... 4.7

ARTICLE FIVE - DEFERRAL OF COMPENSATION AND ALLOCATION OF
INTEREST EQUIVALENTS

Deferral of Compensation and/or Bonus..................... 5.1
Interest Equivalents...................................... 5.2
Determination of Account.................................. 5.3

ARTICLE SIX - DISTRIBUTIONS

Amount of Deferred Compensation Subject to Distribution... 6.1
Form of Distributions ................................... 6.2
Timing of Distributions................................... 6.3
Advance Distribution Election Required.................... 6.4
Distribution due to Financial Emergency................... 6.5
Payor of Deferred Compensation............................ 6.6
Claims Procedures......................................... 6.7
Reimbursement of Participant.............................. 6.8
Facility of Payments...................................... 6.9
Beneficiary Designations.................................. 6.10
Withholding of Taxes...................................... 6.11

ARTICLE SEVEN - RIGHTS OF PARTICIPANTS

Annual Statement to Participants.......................... 7.1
Limitation of Rights...................................... 7.2
Nonalienation of Benefits................................. 7.3

ARTICLE EIGHT - MISCELLANEOUS

Amendment or Termination of the Plan...................... 8.1
Powers of the Company..................................... 8.2
Waiver.................................................... 8.3
Separability.............................................. 8.4
Gender, Tense and Headings................................ 8.5
Governing Law............................................. 8.6
Notice.................................................... 8.7
Effective Date............................................ 8.8

ii
<PAGE> 4
SMITH INTERNATIONAL, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

ARTICLE ONE

PURPOSE OF PLAN

The purpose of this Supplemental Executive Retirement Plan is to
provide benefits in the form of unfunded deferred compensation to a select
group of management or highly compensated employees who contribute materially
to the continued growth, development and business success of the Company. It
is also intended that the Plan may be "informally funded" at some future date
by setting aside assets in a grantor trust of the type commonly referred to as
a "rabbi trust." The Plan shall be effective as of October 1, 1993.

ARTICLE TWO
DEFINITIONS

In addition to the terms defined in the text hereof, each term below
shall have the meaning assigned thereto for all purposes of the Plan unless the
context reasonably requires a broader, narrower or different meaning.

2.1 ADMINISTRATIVE COMMITTEE. "Administrative Committee" means
the committee described in Article Three of the Plan.

2.2 BENEFICIARY. "Beneficiary" means the beneficiary or
beneficiaries designated by the Participant to receive any amounts
distributable under the Plan upon the death of the Participant.

2.3 BOARD. "Board" means the Board of Directors of the Company.

2.4 BONUS. "Bonus" means any amount payable to the employee
during a Plan Year as an award granted under the Smith International, Inc.
Annual Incentive Plan or any successor thereto.

2.5 BONUS AGREEMENT. "Bonus Agreement" means a separate written
agreement entered into by and between the Company and a Participant during a
Plan Year, which agreement describes the terms and conditions of such
Participant's arrangement to defer all or any portion of his Bonus that may be
awarded with respect to such Plan Year. The Bonus Agreement shall be used only
to the extent that the Participant did not indicate a Bonus deferral election
on his Deferral Agreement for such Plan Year. The Bonus Agreement shall be
executed and dated by the Participant and shall specify (i) the amount of
Bonus, by percentage or dollar amount, to be deferred, (ii) the date or dates
for payment of deferred Bonuses with credited Interest Equivalents, and (iii)
the method that the deferred Bonuses are to be paid, such as lump sum or
installment payments. The date(s) and method of payment for deferred Bonuses
must be consistent with the Participant's similar elections for deferred
Compensation, i.e., all amounts deferred hereunder shall be paid at the same
time or times and by the same payment method. In the event of any discrepancy
between the date(s) and payment method indicated on the
<PAGE> 5
Participant's Deferral Agreement and on his Bonus Agreement, the Deferral
Agreement shall control.

2.6 CODE. "Code" means the Internal Revenue Code of 1986, as
amended, and the regulations and other authority issued thereunder by the
appropriate governmental authority. References herein to any section of the
Code shall include references to any successor section or provision of the
Code.

2.7 COMPANY. "Company" means Smith International, Inc. or any
successor thereto.

2.8 COMPENSATION. "Compensation" means the salary and other cash
remuneration that is payable by the Company to the Employee during a Plan Year
for compensatory services rendered, excluding any Bonuses and reimbursements of
business and other expenses.

2.9 COMPENSATION COMMITTEE. "Compensation Committee" means the
Compensation Committee of the Board.

2.10 DEFERRAL AGREEMENT. "Deferral Agreement" means a separate
written agreement entered into by and between the Company and a Participant
prior to the commencement of a Plan Year, which agreement describes the terms
and conditions of such Participant's deferred compensation arrangement
hereunder for the Plan Year. The Deferral Agreement shall be executed and
dated by the Participant and shall specify (i) the amount of Compensation
and/or Bonus, by percentage or dollar amount, to be deferred, (ii) the date or
dates for payment of deferred amounts with credited Interest Equivalents, and
(iii) the method that the deferred amount are to be paid, such as lump sum or
installment payments.

2.11 DEFERRED COMPENSATION LEDGER. "Deferred Compensation Ledger"
means the appropriate accounting records maintained by the Administrative
Committee for the Participants which set forth the name of each Participant and
separate accounts reflecting for each Participant (i) the amount of
Compensation and Bonus deferred pursuant to Article Four of the Plan, (ii) the
amount of Company contributions made pursuant to Article Four, and (iii) the
amount of Interest Equivalents credited to the Participant's accounts pursuant
to Article Five. The Deferred Compensation Ledger shall be utilized solely as
a device for the measurement and determination of the contingent amounts to be
paid to Participants under the Plan. The Deferred Compensation Ledger shall
not constitute or be treated as an escrow, trust fund, or any other type of
funded account of whatever kind for Code or ERISA purposes and, moreover,
contingent amounts credited thereto shall not be considered "plan assets" for
ERISA purposes. In addition, no economic benefit or constructive receipt of
income shall be provided to any Participant for purposes of the Code until cash
payments under the Plan are actually made to the Participant. The Deferred
Compensation Ledger shall record the bookkeeping entries relating to the
contingent benefits that the Company intends to provide to Participants and
shall thus reflect a mere promise to pay such amounts in the future.

2.12 DETERMINATION DATE. "Determination Date" means, with respect
to a Participant, the termination of his Employment due to his death, Total and
Permanent Disability, retirement or another reason.

2
<PAGE> 6
2.13 EMPLOYEE. "Employee" means a member of a select group of
management or highly compensated employees of the Company or a Subsidiary, as
determined by the Compensation Committee for each Plan Year.

2.14 EMPLOYMENT. "Employment" means employment as an Employee. In
this regard, neither the transfer of a Participant from employment by the
Company to employment by a Subsidiary nor the transfer of a Participant from
employment by a Subsidiary to employment by the Company shall be deemed to be a
termination of Employment by the Participant. Moreover, the Employment of a
Participant shall not be deemed to have been terminated because of his absence
from active employment on account of temporary illness or authorized vacation,
or during temporary leaves of absence from active employment granted by the
Company or a Subsidiary for reasons of professional advancement, education,
health, or government service, or during military leave for any period if the
Participant returns to active employment within 90 days after the termination
of his military leave, or during any period required to be treated as a leave
of absence by virtue of (i) any enforceable employment or other agreement or
(ii) any applicable law, such as the federal Family and Medical Leave Act of
1993.

2.15 FINANCIAL EMERGENCY. "Financial Emergency" means an
unforeseeable emergency and severe financial hardship to the Participant
resulting from a sudden and unexpected illness or accident of the Participant
or of a dependent (as defined in Section 152(a) of the Code) of the
Participant, loss of the Participant's property due to casualty, or other
similar extraordinary and unforeseeable circumstances arising as a result of
events beyond the control of the Participant. The circumstances that will
constitute an unforeseeable emergency will depend upon the facts of each case,
but a Financial Emergency shall not be deemed to exist to the extent that such
hardship is or may be relieved;

(i) Through reimbursement or compensation by insurance or
otherwise,

(ii) By liquidation of the Participant's assets, to the extent the
liquidation of such assets would not itself cause severe
financial hardship, or

(iii) By cessation of Compensation or Bonus deferrals under the Plan.

By way of example, the need to send a Participant's child to college
or the desire to purchase a home would not be considered a Financial Emergency.

Withdrawals of amounts because of a Financial Emergency shall only be
permitted to the extent reasonably needed to satisfy the emergency need. The
Administration Committee, in its discretion, shall determine whether a
Financial Emergency has occurred and the amount needed to satisfy the emergency
need. The Participant must provide the Administrative Committee with all
relevant information needed to make these determinations.

2.16 INTEREST EQUIVALENTS. "Interest Equivalents" means the
hypothetical amounts credited as interest to the balances in the Participant's
accounts under the Deferred Compensation Ledger pursuant to Article Five.

3
<PAGE> 7
2.17 PARTICIPANT. "Participant" means an Employee who has been
selected by the Compensation Committee to participate in the Plan.

2.18 PLAN. "Plan" means the Smith International, Inc.
Supplemental Executive Retirement Plan as set forth herein, and as the same may
hereafter be amended from time to time.

2.19 PLAN YEAR. "Plan Year" means the calendar year commencing on
January 1; provided, however, the first Plan Year shall be a short year that
commences on October 1, 1993 and ends on December 31, 1993.

2.20 RETIREMENT DATE. "Retirement Date" means the first day of the
month coincident with or next following the sixty-fifth birthday of a
Participant (or such other retirement age specified in his Deferral Agreement)
or the date of his actual termination of Employment, if later.

2.21 SUBSIDIARY. "Subsidiary" means any wholly-owned subsidiary of
the Company or any wholly-owned subsidiary thereof, or any other corporation or
business venture in which the Company owns, directly or indirectly, a
significant financial interest provided that (i) the Board designates such
corporation or business venture to be a Subsidiary for the purposes of this
Plan for any Plan Year and (ii) the Board of Directors (or equivalent governing
authority) of such corporation or business venture consents to being designated
as a Subsidiary.

2.22 TOTAL AND PERMANENT DISABILITY. "Total and Permanent
Disability" means a physical or mental impairment which (i) renders the
Participant incapable of performing the material duties of his occupation (ii)
lasts for at least six consecutive months, and (iii) is a permanent and
irrevocable condition or it will last for an indefinite duration as determined
by a Physician selected or pre-approved by the Administrative Committee. The
determination of whether a Total and Permanent Disability has occurred shall be
made by the Administrative Committee in its discretion based on the advice of a
Physician.

2.23 TRUST. "Trust" means a grantor trust of the type commonly
referred to as a "rabbi trust' if one is created to "informally fund"
contingent benefits payable under the Plan.

2.24 TRUSTEE. "Trustee" means the duly appointed and acting
trustee of the Trust, and any successor thereto.

ARTICLE THREE
ADMINISTRATION

3.1 COMPOSITION OF ADMINISTRATIVE COMMITTEE. The Administrative
Committee shall be comprised of such officers of the Company as chosen by the
Compensation Committee to constitute the Administrative Committee. Each member
of the Administrative Committee shall serve at the pleasure of the Compensation
Committee and the Compensation Committee may remove or replace a member of the
Administrative Committee pursuant to procedures established by the Compensation
Committee.

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<PAGE> 8
A member of the Administrative Committee may also be a Participant. A
member of the Administrative Committee who is also a Participant shall not vote
or otherwise act on any matter relating solely to himself.

The members of the Administrative Committee shall not receive any
special compensation for serving in their capacities as members of the
Administrative Committee but shall be reimbursed by the Company for any
reasonable expenses incurred in connection therewith. No bond or other
security need be required of the Administrative Committee or any member
thereof.

3.2 ADMINISTRATION OF PLAN. The Administrative Committee shall
operate, administer, interpret, construe and construct the Plan, including
correcting any defect, supplying any omission or reconciling any inconsistency.
The Administrative Committee shall have all powers necessary or appropriate to
implement and administer the terms and provisions of the Plan. The
determination of the Administrative Committee as to the proper interpretation,
construction, or application of any term or provision of the Plan shall be
final, binding, and conclusive with respect to all interested persons.

3.3 ACTION BY COMMITTEE. A majority of the members of the
Administrative Committee shall constitute a quorum for the transaction of
business, and the vote of a majority of those members present at any meeting at
which a quorum is present shall decide any question brought before the meeting
and shall be the act of the Administrative Committee. In addition, the
Administrative Committee may take any other action otherwise proper under the
Plan by an affirmative vote, taken without a meeting, of a majority of its
members.

3.4 DELEGATION. The Administrative Committee may, in its
discretion, delegate one or more of its duties to its designated agents or to
employees of the Company or a Subsidiary, but may not delegate its authority to
make the determinations specified in Section 3.2.

3.5 RELIANCE UPON INFORMATION. No member of the Administrative
Committee shall be liable for any decision, action, omission, or mistake in
judgment, provided that he acted in good faith in connection with the
administration of the Plan. Without limiting the generality of the foregoing,
any decision or action taken by the Administrative Committee in reasonable
reliance upon any information supplied to it by the Board, the Compensation
Committee, any employee of the Company or a Subsidiary, the Company's legal
counsel, or the Company's independent accountants shall be deemed to have been
taken in good faith.

The Administrative Committee may consult with legal counsel, who may
be counsel for the Company or other counsel, with respect to its obligations or
duties hereunder, or with respect to any action, proceeding or question at law,
and shall not be liable with respect to any action taken, or omitted, in good
faith pursuant to the advice of such counsel.

3.6 RESPONSIBILITY AND INDEMNITY. To the full extent permitted by
law, Smith International, Inc. and each Subsidiary (collectively, the
"Employer") jointly and severally shall indemnify and hold harmless each past,
present and future member of the Administrative Committee and each other
employee who acts in the capacity of an agent, delegate or representative of
the Administrative Committee or the Company under the Plan (hereafter, all

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such indemnified persons shall be jointly and severally referred to as "PLAN A
RATION EMPLOYEE") against, and each Plan Administration Employee shall be
entitled without further act on his part to indemnity from the Employer for,
any and all losses, claims, damages, judgments, settlements, liabilities,
expenses and costs (and all actions in respect thereof and any legal or other
costs and expenses in giving testimony or furnishing documents in response to a
subpoena or otherwise), including the cost of investigating, preparing or
defending any pending threatened or anticipated possible action, claim, suit or
other proceeding, whether or not in connection with litigation in which the
Plan Administration Employee is a party, (collectively, the "Losses"), as and
when incurred, directly or indirectly, relating to, based upon, arising out of,
or resulting from his being or having been a Plan Administration Employee;
provided, however, that such indemnity shall not include any Losses incurred by
such Plan Administration Employee (i) with respect to any matters as to which
he is finally adjudged in any such action, suit or proceeding to have been
guilty of gross negligence, bad faith or intentional misconduct in the
performance of his duties as a Plan Administration Employee, or (ii) with
respect to any matter to the extent that a settlement thereof is effected in an
amount in excess of the amount approved by the Company (which approval shall
not be unreasonably withheld), and, further, no right of indemnification
hereunder shall be available to, or enforceable by, any such Plan
Administration Employee unless, within thirty (30) days after his actual
receipt of service of process in any such action, suit or other proceeding (or
such longer period as may be approved by the Company), he shall have offered
the Company in writing, the opportunity to handle and defend same at its sole
expense, and the decision by the Company to handle such proceeding shall
conclusively determine that the Plan Administration Employee is entitled to the
indemnity provided herein. The foregoing right of indemnification shall be in
addition to any liability that the Employer may otherwise have to the Plan
Administration Employee.

THE EMPLOYER'S OBLIGATION HEREUNDER TO INDEMNIFY THE PLAN
ADMINISTRATION EMPLOYEE SHALL EXIST WITHOUT REGARD TO THE CAUSE OR CAUSES OF
THE MATTERS FOR WHICH INDEMNITY IS OWED AND EXPRESSLY INCLUDES (BUT IS NOT
LIMITED TO) THE lOSSES, DIRECTLY OR INDIRECTLY, RELATING TO, BASED UPON,
ARISING OUT OF, OR RESULTING FROM ANY ONE OR MORE OF THE FOLLOWING:

(i) THE SOLE NEGLIGENCE OR FAULT OF ANY PLAN
ADMINISTRATION EMPLOYEE OR COMBINATION OF PLAN ADMINISTRATION
EMPLOYEES;

(ii) THE SOLE NEGLIGENCE OR FAULT OF THE EMPLOYER;

(iii) THE SOLE NEGLIGENCE OR FAULT OF THIRD PARTIES;

(iv) THE CONCURRENT NEGLIGENCE OR FAULT OR ANY COMBINATION
OF THE PLAN ADMINISTRATION EMPLOYEE AND/OR THE EMPLOYER AND/OR ANY
THIRD PARTY; AND

(v) ANY OTHER CONCEIVABLE OR POSSIBLE COMBINATION OF
FAULT OR NEGLIGENCE, IT BEING THE SPECIFIC INTENT OF THE EMPLOYER TO
PROVIDE THE MAXIMUM POSSIBLE INDEMNIFICATION PROTECTION HEREUNDER, BUT
EXCLUDING ANY SUCH lOSSES THAT ARE FOUND BY A COURT OF COMPETENT
JURISDICTION TO HAVE RESULTED FROM THE GROSS NEGLIGENCE, BAD FAITH OR
INTENTIONAL MISCONDUCT OF THE PLAN ADMINISTRATION EMPLOYEE.

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The Plan Administration Employee shall have the right to retain
counsel of its own choice to represent it, however, such counsel shall be
acceptable to the Employer which acceptance shall not be unreasonably withheld.
The Employer shall pay the fees and expenses of such counsel and such counsel
shall to the full extent consistent with its professional responsibilities
cooperate with the Employer and any counsel designated by it. The Employer
shall be liable for any settlement of any claim against the Plan Administration
Employee made with the written consent of the Employer which consent shall not
be unreasonably withheld.

The foregoing right of indemnification shall inure to the benefit of
the successors and assigns, and the heirs, executors, administrators and
personal representatives of each Plan Administration Employee, and shall be in
addition to all other rights to which the Plan Administration Employee may be
entitled as a matter of law, contract, or otherwise.

ARTICLE FOUR
PARTICIPATION

4.1 ELIGIBILITY OF EMPLOYEES. The Compensation Committee shall
have the sole and exclusive authority and discretion to designate Employees who
are eligible to participate in the Plan. Only Employees who are members of a
select group of management or highly compensated Employees shall be eligible
for selection by the Compensation Committee.

4.2 NOTIFICATION OF ELIGIBLE EMPLOYEES. Within thirty (30) days
prior to the beginning of each Plan Year, the Administrative Committee, as
directed by the Compensation Committee, shall notify in writing each of the
Employees who are eligible to elect to defer Compensation under the Plan;
provided, however, with respect to the first Plan Year, eligible Employees
shall be notified at any time prior to October 1, 1993. The Compensation
Committee shall also have the right to designate Employees as Participants at
any time during a Plan Year. Each Employee who has been designated as a
Participant by the Compensation Committee in any Plan Year shall remain
eligible to defer Compensation and/or Bonuses hereunder unless and until the
Compensation Committee determines that he is no longer eligible to authorize
such deferrals and notifies Employee of same. An Employee (or in the event of
his death, his Beneficiary) shall be a Participant hereunder as long as he has
any balance credited to his accounts under the Deferred Compensation Ledger,
regardless of whether he is eligible to authorize Compensation and/or Bonus
deferrals hereunder for any Plan Year.

4.3 COMPENSATION DEFERRAL AGREEMENT. After an Employee has been
notified by the Administrative Committee that he is eligible to participate
in the Plan for the relevant Plan Year, he must, in order to defer Compensation
with respect to such Plan Year, notify the Administrative Committee of his
deferral election by completing and executing a Deferral Agreement. The
Employee cannot defer more than fifty percent (50%) of his Compensation for a
Plan Year or the portion thereof that he is a Participant. Any Deferral
Agreement that is not completed and signed by the Employee, and received and
accepted by the Administrative Committee, on or prior to the last day of the
Plan Year immediately preceding the Plan Year for which the Employee is
notified that he may make a deferral election, shall be treated as the
Employee's election not to defer Compensation for that Plan Year.
Notwithstanding any provision herein to the contrary, with respect to the first
Plan Year, an Employee may defer up to seventy-five (75%) of his Compensation
for services to be performed during the Plan Year

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<PAGE> 11

subsequent to receipt and approval of his Deferral Agreement by the
Administrative Committee. Deferral Agreements for the first Plan Year must be
received and accepted on or before September 30, 1993 subject to the 30-day
rule described in the next paragraph.

If an Employee is designated by the Compensation Committee as a
Participant for the first time, the newly eligible Participant, in order to
defer Compensation hereunder, must complete and execute a Deferral Agreement
and return it to the Administrative Committee within thirty (30) days of the
effective date on which the Employee first became a Participant. Such Deferral
Agreement shall only apply to defer Compensation for services to be performed
for the remainder of the Plan Year by the Participant provided that such
services are to be performed subsequent to receipt and approval of his Deferral
Agreement by the Administrative Committee.

The amount of Compensation elected to be deferred pursuant to a
Deferral Agreement shall be withheld on a pro rata basis from the Participant's
regular payments of Compensation for each pay period during the Plan Year
unless otherwise designated by the Participant in his Deferral Agreement.

4.4 BONUS DEFERRAL. Bonuses are payable under the Company's Annual
Incentive Plan in the discretion of the Compensation Committee. Regardless of
any services performed during a year on behalf of the Company, no Participant
will accrue any right to receive any Bonus until it is actually awarded to him
in the discretion of the Compensation Committee. A Participant's election to
defer all or any portion of his Bonus that may be awarded with respect to any
Plan Year must be made prior to the earliest of (i) the last day of the Plan
Year, (ii) the date on which the fact that a Bonus is to be awarded to the
Participant becomes fixed or determinable, or (iii) the date on which the
amount of Bonus to be awarded to the Participant is determined or determinable.
A Participant may make a deferral election with respect to the amount of any
Bonus that may be awarded with respect to the Plan Year when completing his
Deferral Agreement for that Plan Year. To the extent that a Participant does
not elect to defer any portion of his potential Bonus in his Deferral
Agreement, the Administrative Committee will provide such Participant with a
Bonus Agreement during the last quarter of the Plan Year. The Participant may
elect to defer all or any portion of his potential Bonus by completing and
executing a Bonus Agreement and returning it to the Administrative Committee at
any time prior to the last day of the Plan Year provided that the other timing
conditions for the deferral of Bonus awards, as set forth in the preceding
provisions of this paragraph, have been satisfied.

The dollar amount or percentage of a Bonus elected to be deferred
under this Section shall be deferred in one lump sum and shall be deemed to
have been deferred on the date the deferred portion of the Bonus would
otherwise have been paid to the Participant in the absence of his deferral
election. Any Bonus deferral election hereunder, whether made in the
Participant's Deferral Agreement or in his Bonus Agreement, shall be void and
ineffective to the extent that no Bonus is awarded to the Participant with
respect to the Plan Year.

4.5 SUSPENSION OF DEFERRAL FOR FINANCIAL EMERGENCY. All
deferrals of Compensation and Bonuses hereunder for a Plan Year shall be
irrevocable, except that the Administrative Committee may, in its discretion,
grant a suspension of a Participant's deferral election for such time as the
Administrative Committee deems to be necessary upon a finding that the
Participant has suffered a Financial Emergency. A Participant who believes he
has

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suffered a Financial Emergency must petition the Administrative Committee in
writing to request a suspension of his deferrals hereunder.

4.6 COMPANY CONTRIBUTIONS.

(1) Age-Weighted Contributions. Effective as of the last day of
each 3-month quarter during a Plan Year, a hypothetical Age-Weighted
Contribution with respect to each Participant shall be allocated and credited
to affected Participants' accounts under the Deferred Compensation Ledger by
the Administrative Committee. The Age-Weighted Contribution shall be based on
the Participant's Age-Weighted Contribution Percentage ("AWCP") as determined
based on the schedule set forth below:

<TABLE>
<CAPTION>
Age as of First
Day of Plan Year AWCP
---------------- ----
<S> <C>
Under Age 40 2.00%
40-44 2.50%
45-49 3.00%
50-54 4.00%
55-59 5.00%
60 or older 6.00%

</TABLE>

To compute a Participant's Age-Weighted Contribution for a Plan Year,
his AWCP shall be multiplied by the difference between, for the Plan Year, the
Participant's (i) "Total 401(k) Compensation" (defined below) and his (ii) "Net
401(k) Compensation" (defined below).

"Total 401(k) Compensation" means the total of all cash amounts
payable by the Company to or for the benefit of a Participant for services
rendered or labor performed while a Participant during the Plan Year (including
overtime pay, Bonuses and incentive or other supplemental pay and amounts which
he could have received in cash (i) in lieu of a contribution to this Plan or a
401(k) Salary Deferral Contribution made under the Smith International, Inc.
401(k) Retirement Plan (the "401(k) Plan") and (ii) had he not entered into a
salary reduction agreement pursuant to a cafeteria plan under Section 125 of
the Code), excluding, however, severance pay. The Total 401(k) Compensation of
any Participant taken into account for purposes of the Plan shall be prorated
for (i) a Plan Year of less than twelve months (other than the first Plan Year)
or (ii) in the case of a Participant who is either a Participant for less than
the entire Plan Year or receives Compensation for less than the entire Plan
Year.

"Net 401(k) Compensation" means the total of all cash amounts payable
by the Company to or for the benefit of a Participant for services rendered or
labor performed while a Participant during a Plan Year (including overtime pay,
Bonuses and incentive or other supplemental pay and amounts which he could have
received in cash (i) in lieu of a 401(k) Salary Deferral Contribution made
under the 401(k) Plan and (ii) had he not entered into a salary reduction
agreement pursuant to a cafeteria plan under Section 125 of the Code),
excluding, however, severance pay and Employee contributions to this Plan or to
another deferred compensation program other than 401(k) Salary Deferral
Contributions made to the 401(k) Plan. The "Net 401(k) Compensation" of any
Participant taken into account for purposes of the Plan shall be

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limited to $150,000 for any Plan Year with such amount to be (i) adjusted
automatically to reflect any cost-of-living increases authorized by Section
401(a)(17) of the Code and (ii) prorated for (a) a Plan Year of less than
twelve months (other than the first Plan Year) or (b) in the case of a
Participant who is either a Participant for less than the entire Plan Year or
receives Compensation for less than the entire Plan Year.

Notwithstanding the preceding provisions of this Section, only with
respect to the first Plan Year (beginning on October 1 and ending on December
31, 1993), Age-Weighted Contributions shall be made only on behalf of those
Participants whose Total 401(k) Compensation is in excess of $235,840 for the
entire 1993 calendar year. With respect to each such Participant, a dollar
amount shall be computed which is equal to his Total 401(k) Compensation minus
$235,840. To calculate such Participant's Age-Weighted Contribution for the
1993 Plan Year, his AWCP shall be multiplied by the lesser of (i) the dollar
amount computed pursuant to the immediately preceding sentence or (ii) the
dollar amount of his Total 401(k) Compensation that was payable by the Company
to the Participant during the 3-month 1993 Plan Year.

(2) Make-Up Matching Contributions. The provisions of this
subsection (2) shall apply only to those Participants who are also Members in
the Smith International, Inc. 401(k) Retirement Plan (the "401(k) Plan") during
the Plan Year. To the extent that a Participant's account under the 401(k) Plan
is precluded during a Plan Year from receiving any allocation of Matching
Contributions under the 401(k) Plan, that it otherwise would have been eligible
to receive, as the result of non-discrimination limits imposed by the average
deferral percentage ("ADP") test or the actual contribution percentage ("ACP")
test under the Code, then such Participant shall be eligible to receive a
hypothetical Make-up Matching Contribution hereunder for that Plan Year. The
hypothetical Make-up Matching Contribution shall be equal to the difference
between (i) the total Matching Contributions that the Participant's account
under the 401(k) Plan would have been allocated for the Plan Year without
regard to the ADP and ACP tests and (ii) the amount of Matching Contributions
actually allocated to his account under the 401(k) Plan for the Plan Year. The
hypothetical Make-up Matching Contributions shall be allocated and credited to
affected Participants' accounts under the Deferred Compensation Ledger by the
Administrative Committee effective as of the last day of the Plan Year.
Notwithstanding the preceding provisions of this subsection, no such Make-up
Matching Contribution shall be credited by the Administrative Committee on
behalf of any Participant who is not in Employment on the last day of such Plan
Year for any reason.

(3) Discretionary Profit Sharing Contributions. The Compensation
Committee may, in its discretion, determine the amount, if any, of the
Company's hypothetical profit sharing contribution for a Plan Year and how such
amount is to be allocated and credited between and among the Participants'
accounts under the Deferred Compensation Ledger. A Participant shall not be
entitled to share in the allocation of any such Company profit sharing
contribution for a Plan Year if he is not in Employment on the last day of the
Plan Year for any reason. The Compensation Committee shall have no obligation
to authorize any such profit sharing contributions hereunder for any Plan Year.

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4.7 VESTING. All contributions made by Employees and the Company
hereunder shall be fully vested and nonforfeitable at all times. All Interest
Equivalents credited on all contributions shall also be fully vested and
nonforfeitable at all times.

ARTICLE FIVE
DEFERRAL OF COMPENSATION AND ALLOCATION
OF INTEREST EQUIVALENTS

5.1 DEFERRAL OF COMPENSATION AND/OR BONUS. If a Participant has
elected to defer Compensation and/or a Bonus hereunder for a Plan Year, the
deferred amounts shall not be paid when they otherwise would have been paid in
the absence of such election. A bookkeeping entry to reflect the deferred
amounts shall be credited by the Administrative Committee to the Participant's
accounts under the Deferred Compensation Ledger. With respect to Compensation
and Bonuses deferred hereunder for a Plan Year, each such deferred amount shall
be credited to the Participant's accounts under the Deferred Compensation
Ledger as of the date it otherwise would have been paid to the Participant and
shall reflect a mere promise by the Company to pay such amounts in the future.

5.2 INTEREST EQUIVALENTS. AR amounts credited and allocated to a
Participant's accounts under the Deferred Compensation Ledger shall be credited
quarterly with Interest Equivalents. The rate of Interest Equivalents shall be
equal to 120% of the long-term, applicable federal rate (AFR) for quarterly
compounding for the last month of the calendar quarter immediately preceding
the calendar quarter in which the Interest Equivalents are to be credited. For
example, for purposes of crediting Interest Equivalents for the 3-month quarter
ending December 31 of a given Plan Year, 120% of the AFR rate for September of
that Plan Year will be used.

Allocations of Interest Equivalents shall be computed and credited by
the Administrative Committee based on the balances credited to the
Participant's accounts under the Deferred Compensation Ledger as of the last
day of each calendar quarter during a Plan Year, i.e., March 31, June 30,
September 30 and December 31. Compensation and Bonuses being deferred during a
calendar quarter shall be considered to be invested on the mid-point day of the
calendar quarter during which such amounts would otherwise have been payable to
the Participant and shall be credited with Interest Equivalents accordingly for
that calendar quarter. In the event of a distribution following a Determination
Date, the Participant's account balances shall be credited with Interest
Equivalents based on such account balances as of the last day of the month
which includes the Determination Date.

Interest Equivalents credited to the Participant's accounts under the
Deferred Compensation Ledger shall be compounded quarterly and shall increase
the contingent benefits receivable by the Participant in the future.

5.3 DETERMINATION OF ACCOUNT. The aggregate amount credited to a
Participant's accounts under the Deferred Compensation Ledger shall consist of
(i) the amounts of Compensation and Bonuses that were deferred pursuant to
Article Four, plus (ii) the amounts of hypothetical Company contributions
credited to the Participant's accounts pursuant to Article Four, plus (iii) the
amounts of Interest Equivalents credited to such accounts pursuant to Article

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Five, minus (iv) the aggregate amount of any distributions made from his
accounts pursuant to Article Six.

ARTICLE SIX
DISTRIBUTIONS

6.1 AMOUNT OF DEFERRED COMPENSATION SUBJECT TO DISTRIBUTION. As of
the Participant's Determination Date, the aggregate amount credited to his
accounts maintained under the Deferred Compensation Ledger shall become
distributable in accordance with the provisions of Section 6.2. Any amount that
is to be distributed to a Participant or Beneficiary pursuant to this Article
Six shall be fixed and determined as of the last day of the month which
includes the Determination Date.

6.2 FORM OF DISTRIBUTIONS. Upon the occurrence of the Participant's
Determination Date, the amount in a Participant's accounts maintained under the
Deferred Compensation Ledger shall become distributable to such Participant (or
to his Beneficiary in the event of Participant's death) in one of the following
forms as elected in writing by such person:

(i) Lump-sum distribution of the entire balance
credited to the Participant's accounts as of the last day of the
month in which the Determination Date occurs; or

(ii) If the distributable amount is at least
$10,000, annual installments to be paid during a specified period
of not less two (2) nor more than ten (10) years. If the distributable
amount is less than $10,000, it shall automatically be paid in a
lump sum distribution.

6.3 TIMING OF DISTRIBUTIONS.

(1) Lump Sum Distribution. Lump sum distributions shall
be made by the last day of the month immediately
following the month in which the Determination Date
occurs.

(2) Installment Payments. Annual installment payments
shall commence as of the date selected by the
Participant which date must be (i) the first day of a
quarter and (ii) within one year of the Determination
Date. Thereafter, the remaining installment payments
shall be made as of the annual anniversary of the
first installment date.

(3) Deferral of Distribution.

(a) Determination Date Prior to Age 55. If the Participant
has not attained age 55 as of his Determination Date, subject to
Section 6.4, he may petition the Administrative Committee in writing
to request that (i) his distribution hereunder be deferred until
the date selected by the Participant which date must be the first day
of any quarter between the Participant's 55th birthday and the quarter
next following the quarter containing his 65th birthday, and (ii) the
form of the distribution be either in a lump sum or installment
payments pursuant to subsections (1) or (2) of this Section. If
the Participant's request is approved by the Administrative Committee
in its sole discretion, distribution shall be made in accordance with
the Participant's election.

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<PAGE> 16
(b) Determination Date on or After Age 55. If the
Participant has attained age 55 as of his Determination Date, subject
to Section 6.4, he may direct the Administrative Committee in writing
that (i) his distribution hereunder be deferred until the date
selected by the Participant, which date must be the first day of any
quarter between the Participant's 55th birthday and the quarter next
following the quarter containing his 65th birthday, and (ii) the form
of the distribution be either a lump sum or installment payments
pursuant to subsections (1) or (2) of this Section. A valid direction
from the Participant in accordance with the immediately preceding
sentence shall be followed by the Administrative Committee and does
not require the discretionary approval of the Administrative
Committee in order to be effective.

(c) Account Balance must be $10,000 or More. A
Participant shall not be permitted to defer receipt of his
distribution pursuant to this subsection (3) unless, as of the last
day of the month which contains his Determination Date, the aggregate
balance in his accounts maintained under the Deferred Compensation
Ledger is at least $10,000.

(4) Immediate Distribution Due to Competition with the Company. In
the event that (i) a Participant has (a) incurred a Determination Date and (b)
elected an installment payment form of distribution pursuant to subsection (2)
above or a deferral of his distribution to a later date pursuant to subsection
(3) above, and (ii) has "engaged in competition with the Company (as defined
below) at any time prior to the date that he receives a complete distribution
of his benefits, then, in the discretion of the Administrative Committee, the
remaining balance credited to his accounts maintained under the Deferred
Compensation Ledger shall be paid to such Participant in a lump sum
distribution as soon as administratively practicable without regard to any
Interest Equivalents for the quarter in which such lump sum distribution is
made.

For purposes of the preceding paragraph, a Participant shall be
considered to be "engaged in competition with the Company" to the extent that
the Administrative Committee in good faith determines that at any time while
the Participant has a balance credited to his accounts under the Deferred
Compensation Ledger he, directly or indirectly, alone or with others, (i)
engages in or has more than a 2% ownership interest in any person or entity,
whether as an employee, owner, partner, equity security holder, or otherwise,
that engages in, or participates as an employee, agent, partner, principal
shareholder or joint venturer in, any activity competitive with the business
carried on by the Company or any Subsidiary as determined by the Administrative
Committee or (ii) induces or attempts to induce any employee of the Company or
any Subsidiary to leave such employment or in any other manner to detrimentally
interfere with such employment, without first obtaining the written consent of
the President of the Company.

6.4 ADVANCE DISTRIBUTION ELECTION REQUIRED. The Participant's
election as to the form and timing of his distribution hereunder must be made
at least one year prior to the date that he is eligible to receive a
distribution hereunder for any reason other than Financial Emergency, and such
election shall be irrevocable during such one-year period. If the Participant
or Beneficiary, as the case may be, (i) validly elects annual installment
payments or (ii) validly defers making a distribution election until a later
date, then Interest Equivalents shall continue to be credited by the
Administrative Committee to undistributed amounts allocated to the
Participant's accounts under the Deferred Compensation Ledger. However, no
further

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<PAGE> 17
deferrals of Compensation or Bonuses shall be made by the Participant, and no
further Company contributions shall be made on his behalf, after his
Determination Date. Pending receipt of any distribution from the Plan, the
Participant or Beneficiary shall remain subject to Section 7.2 and other
applicable provisions of the Plan.

6.5 DISTRIBUTIONS DUE TO FINANCIAL EMERGENCY. A Participant who
believes he has suffered a Financial Emergency may in writing request a
distribution of the portion of his account balances needed to satisfy the
emergency need. The Administrative Committee will review the Participant's
request to determine whether, in its discretion, a Financial Emergency has
occurred and, if so, the amount reasonably needed to satisfy the emergency
need. All deferrals of Compensation and/or Bonuses authorized by the
Participant for the remainder of the Plan Year shall be suspended before any
distribution is made hereunder on account of the Financial Emergency.

In its discretion, the Administrative Committee shall authorize a
distribution to the Participant in the amount reasonably necessary to satisfy
the Financial Emergency. No Interest Equivalents shall be credited to the
Participant's accounts during a calendar quarter with respect to the amount
distributed to satisfy the Financial Emergency.

6.6 PAYOR OF DEFERRED COMPENSATION. Benefits payable under the
Plan with respect to a Participant's accounts maintained under the Deferred
Compensation Ledger shall be the obligation of, and payable by, the Company;
provided, however, the Company may seek reimbursement from any Subsidiary which
employed the Participant. Adoption and maintenance of the Plan by the Company
and any Subsidiary shall not, for that reason, create a joint venture or
partnership relationship between or among such entities for purposes of payment
of benefits under the Plan or for any other purpose.

In order to meet its contingent obligations under the Plan, the
Company shall not set aside any assets or otherwise create any type of fund in
which any Participant, or any person claiming under such Participant, has an
interest other than that of an unsecured general creditor of the Company or
which would provide any Participant, or any person claiming under such
Participant, with a legally enforceable right to priority over any general
creditor of the Company in the event of insolvency of the Company. For all
purposes of the Plan, the Company shall be considered insolvent if it is unable
to pay its debts as they mature or if it is subject to a pending proceeding as
a debtor under the U.S. Bankruptcy Code.

During any period in which a Trust is in existence, benefits payable
under the Plan shall be payable by the Trustee in accordance with the terms,
provisions, conditions and limitations of the Plan and Trust. To the extent
that any distribution described in the immediately preceding sentence does not
fully satisfy the obligation for any benefit due under the Plan, the Company
shall remain fully liable and obligated for full payment of any unpaid benefit
due and payable under the Plan.

6.7 CLAIMS PROCEDURES. When a benefit is due and payable under the
Plan, a claim should be submitted to the Administrative Committee or Trustee,
as applicable, by the Participant or by his Beneficiary in the event of
Participant's death ("Claimant" for purposes of this section). A decision on a
Claimant's claim for benefits shall be made within twenty (20)

14
<PAGE> 18
days after receipt of the claim. In the event there is a disagreement
concerning the amount payable to the Claimant, the Claimant shall receive
written notification of the amount in dispute and shall be entitled to a full
review of his claim. A Claimant desiring a review must submit a written request
to the Compensation Committee requesting such a review, which request should
include whatever comments or arguments that the Claimant wishes to make.
Incident to the review, the Claimant may represent himself or appoint a
representative to do so, and he shall have the right to inspect all documents
pertaining to the issue. The Compensation Committee, in its discretion, may
schedule any meeting with the Claimant and/or the Claimant's representative
that it deems to be necessary or appropriate to facilitate or expedite its
review of the amount in dispute.

A request for a review must be filed with the Compensation Committee
within sixty (60) days after notice of the disputed amount is received by the
Claimant. If no request is received within the 60-day time limit, the
determination of the amount due by the Administrative Committee or Trustee, as
applicable, will be final. However, if a request for review of a disputed
amount is timely filed, the Compensation Committee must render its decision
under normal circumstances within thirty (30) days of its receipt of the
request for review. In special circumstances the decision may be delayed if,
prior to expiration of the initial 30-day period, the Claimant is notified of
the extension, but must in any event be rendered no later than sixty (60) days
after receipt of the Claimant's request. All decisions of the Compensation
Committee shall be in writing and shall include specific reasons for whatever
action has been taken, as well as the Plan provisions on which the decision is
based.

6.8 REIMBURSEMENT OF PARTICIPANT. The Company agrees to pay as
incurred, to the full extent permitted by law, all legal fees and expenses
which the Participant may reasonably incur as a result of any contest
(regardless of the outcome thereof) by the Company, the Participant or others
concerning the validity or enforceability of, or liability under, any provision
of this Plan or any guarantee of performance thereof (including, without
limitation, as a result of any contest by the Participant about the amount of
any payment due pursuant to this Plan), plus in each case interest on any
delayed payment at the applicable interest rate specified in Section 5.2 hereof.
To the extent that the Company is found under a final decree of a court of
competent jurisdiction to have engaged in an intentional breach of contract
without good cause, bad faith or fraudulent conduct hereunder in delaying or
failing to make any payment due under this Plan, then the amount found due to
any Participant shall be doubled and paid to Participant within thirty (30)
days.

6.9 FACILITY OF PAYMENTS. If the Administrative Committee
determines that any person entitled to payments under the Plan is physically or
mentally incompetent to receive or properly receipt for such payments, the
Company shall make such payments or, if applicable, the Administrative
Committee shall direct the Trustee to make the payments, to the legal guardian
or other personal representative of such person for the use and benefit of such
person. If the Administrative Committee for any reason is unable to determine
with reasonable certainty the proper person to pay pursuant to the immediately
preceding sentence, the Company shall pay or, if applicable, the Administrative
Committee shall direct the Trustee to pay, any amounts due hereunder into a
court of competent jurisdiction in an interpleader proceeding for purposes of
being directed by such court as to the proper disposition of such amounts. Any
such payments so made by the Company or the Trustee, to the extent of the
amounts thereof, shall be a full and

15
<PAGE> 19

complete discharge of any liability or obligation of the Plan, Trust, Company,
Administrative Committee, Compensation Committee, Board and other interested
parties, therefor.

6.10 BENEFICIARY DESIGNATIONS. Each Employee upon becoming a
Participant shall file with the Administrative Committee a designation of one
or more Beneficiaries to whom benefits otherwise payable to the Participant
shall be made in the event of his death prior to the complete distribution of
the amount credited to his accounts under the Deferred Compensation Ledger.
Such designation shall be effective when received in writing by the
Administrative Committee. A Participant may, from time to time, revoke or
change his Beneficiary designation without the consent of any prior Beneficiary
by filing a new designation with the Administrative Committee. The last valid
designation received by the Administrative Committee shall be controlling;
provided, however, that no Beneficiary designation, or change or revocation
thereof, shall be effective unless received by the Administrative Committee
prior to the Participant's death and in no event shall it be effective as of a
date prior to its receipt.

If no valid Beneficiary designation is in effect at the time of a
Participant's death, or if no designated Beneficiary survives the Participant,
or if such designation conflicts with applicable law, the payment of the
Participant's death benefits under the Plan shall be made to the Participant's
estate. If the Administrative Committee is in doubt as to the right of any
person to receive such amount, the Administrative Committee may direct that the
amount be paid into any court of competent jurisdiction, and such payment shall
be a full and complete discharge of any liability or obligation of the Plan,
Trust, Company, Administrative Committee, Compensation Committee, Board and
other interested parties, therefor.

6.11 WITHHOLDING OF TAXES. The Administrative Committee shall
direct the Company or, if appropriate, the Trustee, to withhold from the amount
of benefits payable under the Plan all federal, state and local taxes required
to be held under any applicable law or governmental regulation or ruling.

ARTICLE SEVEN
RIGHTS OF PARTICIPANTS

7.1 ANNUAL STATEMENT TO PARTICIPANTS. As soon as practicable after
the end of each Plan Year, or at such other time as the Administrative
Committee determines to be appropriate, the Administrative Committee shall
cause to be prepared and delivered to each Participant a written statement
showing the following information and such other information that the
Administrative Committee decides is appropriate:

(i) The beginning balances in the Participant's accounts
under the Deferred Compensation Ledger as of the first day of the Plan
Year;

(ii) The amount of Compensation and Bonuses deferred for
the Plan Year and credited to the Participant's accounts under the
Deferred Compensation Ledger for the Plan Year;

(iii) The amount of Company contributions for the Plan Year
that were credited to the Participant's accounts under the Deferred
Compensation Ledger for the Plan Year;

16
<PAGE> 20
(iv) The adjustments to the Participant's accounts to
reflect the crediting of Interest Equivalents and any distributions
made during the Plan Year; and

(v) the ending balances in the Participant's accounts
under the Deferred Compensation Ledger as of the last day of the Plan
Year.

7.2 LIMITATION OF RIGHTS. Nothing in this Plan shall be construed
to:

(i) Give any individual who is employed by the Company or
any Subsidiary any right to be a Participant in the Plan unless and
until such person is selected by the Compensation Committee.

(ii) Give a Participant any rights, other than as an
unsecured general creditor of the Company or Subsidiary, with respect
to the Compensation, Bonuses, Company contributions and Interest
Equivalents credited to his accounts under the Deferred Compensation
Ledger until such amounts are actually distributed to him;

(iii) Limit in any way the right of the Company or any
Subsidiary to terminate a Participant's Employment with the Company or
any Subsidiary;

(iv) Give a Participant or any other person any interest
in any fund or in any specific asset of the Company or any Subsidiary;

(v) Give a Participant or any other person any interests
or rights other than those of an unsecured general creditor of the
Company or any Subsidiary;

(vi) Be evidence of any agreement or understanding,
express or implied, that the Company or any Subsidiary will employ a
Participant in any particular position, at any particular rate of
remuneration, or for any particular time period; or

(vii) Create a fiduciary relationship between the Participant
and the Company, Subsidiary, Compensation Committee, and/or
Administrative Committee.

7.3 NONALIENATION OF BENEFITS. No right or benefit under this Plan
shall be subject to anticipation, alienation, sale, assignment, pledge,
encumbrance, or charge, and any attempt to anticipate, alienate, sell, assign,
pledge, encumber, or charge the same will be void and without effect. No right
or benefit hereunder shall in any manner be liable for or subject to any debts,
contracts, liabilities or torts of the person entitled to such benefits. If any
Participant or Beneficiary hereunder shall become bankrupt or attempt to
anticipate, alienate, assign, sell, pledge, encumber, or charge any right or
benefit hereunder, or if any creditor shall attempt to subject the same to a
writ of garnishment, attachment, execution, sequestration, or any other form of
process or involuntary lien or seizure, then such right or benefit shall be
held by the Company for the sole benefit of the Participant or Beneficiary, his
spouse, children, or other dependents, or any of them, in such manner as the
Administrative Committee shall deem proper, free and clear of the claims of any
party.

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<PAGE> 21
The first paragraph of this section shall not preclude (i) the
Participant from designating a Beneficiary to receive any benefit payable
hereunder upon his death, or (ii) the executors, administrators, or other legal
representatives of the Participant or his estate from assigning any rights
hereunder to the person or persons entitled thereto.

ARTICLE EIGHT
MISCELLANEOUS

8.1 AMENDMENT OR TERMINATION OF THE PLAN. The Administrative
Committee may amend or terminate the Plan at any time effective as of the date
specified by the Administrative Committee, including amendments with a
retroactive effective date; provided, however, the provisions of 8.2 may not be
amended without the consent of at least two-thirds of all affected Participants
and no amendment may be made which affects the rights or duties of the
Compensation Committee hereunder without its consent. In addition, unless the
particular Participant (or his Beneficiary in the event of Participant's death)
consents in writing, no such amendment or termination shall adversely affect
any rights of such Participant or Beneficiary to any amounts which are required
to be allocated and credited hereunder to his accounts maintained under the
Deferred Compensation Ledger. However, in the event that incident to any such
amendment or termination, payment of any benefit accrued under the Plan is
accelerated, such benefit shall be paid by the Company if payment of such
benefit would otherwise be made by the Trustee from assets of the Trust under
circumstances which would at any time when the Company is insolvent (i) treat
the Participant, or any person claiming under the Participant, as other than a
general unsecured creditor of the Company or (ii) provide the Participant, or
any person claiming under the Participant, with a legally enforceable right to
priority over any general unsecured creditor of the Company. For purposes of
this paragraph, "insolvent" means the Company is unable to pay its debts as
they mature or the Company is subject to a pending proceeding as a debtor under
the U.S. Bankruptcy Code.

8.2 POWERS OF THE COMPANY. The existence of outstanding and unpaid
benefits under the Plan shall not affect in any way the right or power of the
Company or any Subsidiary to make or authorize any adjustments,
recapitalization, reorganization or other changes in the Company's or
Subsidiary's capital structure or in its business, or any merger or
consolidation of the Company or any Subsidiary, or any issue of bonds,
debentures, common or preferred stock, or the dissolution or liquidation of the
Company or any Subsidiary, or any sale or transfer of all or any part of their
assets or business, or any other act or corporate proceeding, whether of a
similar character or otherwise.

Should the Company or any Subsidiary (or any successor thereto) elect
to dissolve, enter into a sale of its assets, or enter into any reorganization
incident to which it is not the surviving entity, unless the surviving or
successor entity shall formally agree to assume and continue the Plan, and the
Trust if applicable, the Plan shall terminate with respect to the Company or
any Subsidiary (or any successor thereto) on the earlier of the date of closing
or the effective date of such transaction. In such event, the full amount of
any remaining unpaid benefits credited to the accounts maintained under the
Deferred Compensation Ledger for each Participant shall immediately be paid in
a single lump sum payment of cash as if each such Participant had retired under
applicable provisions of the Plan on the date immediately prior to the earlier
of the date

18
<PAGE> 22
of closing or the effective date, whichever is applicable, of such dissolution,
liquidation, sale or other reorganization.

Should any successor to the Company assume and continue the Plan and
Trust incident to a transaction described in the immediately preceding
paragraph, the full amount of any remaining unpaid benefits credited to
Participants' accounts under the Deferred Compensation Ledger shall become
informally funded in full. Such funding shall be paid to the trustee of the
Trust in a single lump sum in cash not later than the earlier of date of
closing or the effective date, whichever is applicable, of the transaction or
event that gave rise to such assumption and continuation of the Plan and Trust
by such successor.

8.3 WAIVER. No term or condition of this Plan shall be deemed to
have been waived, nor shall there be an estoppel against the enforcement of any
provision of this Plan, except by written instrument of the party charged with
such waiver or estoppel. No such written waiver shall be deemed a continuing
waiver unless specifically stated therein, and each such waiver shall operate
only as to the specific term or condition waived and shall not constitute a
waiver of such term or condition for the future or as to any act other than
that specifically waived.

Any waiver by either party hereto of a breach of any provision of
this Plan by the other party shall not operate or be construed as a waiver by
such party of any subsequent breach thereof

8.4 SEPARABILITY. In the event that any provision of this Plan is
declared invalid and not binding on the parties hereto in a final decree or
order issued by a court of competent jurisdiction, such declaration shall not
affect the validity of the other provisions of this Plan to which such
declaration of invalidity does not relate and such other provisions shall
remain in full force and effect.

8.5 GENDER, TENSE AND HEADINGS. Whenever the context requires,
words of the masculine gender used herein shall include the feminine and
neuter, and words used in the singular shall include the plural. The words
"hereof", "hereunder", "herein," and similar compounds of the word "here" shall
refer to the entire Plan and not to any particular term or provision of the
Plan. Headings of Articles and Sections, as used herein, are inserted solely
for convenience and reference and shall not affect the meaning, interpretation
or scope of the Plan.

8.6 GOVERNING LAW. The Plan shall be subject to and governed by
the laws of the State of Texas (other than such laws relating to choice of
laws), except to the extent preempted by ERISA.

8.7 NOTICE. Any notice required or permitted to be given under
this Plan shall be sufficient if in writing and hand-delivered with appropriate
proof of same, or sent by registered or certified mail, return receipt
requested, to the Company, Administrative Committee, Compensation Committee,
Participant, Beneficiary or other person or entity at the address last
furnished by such person or entity. Such notice shall be deemed given as of the
date of delivery or, if delivery is made by mail, as of the date shown on the
postmark on the receipt for registration or certification.

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<PAGE> 23

8.8 EFFECTIVE DATE. The effective date of the Plan shall be
October 1, 1993.

IN WITNESS WHEREOF, this Plan is executed this 30 day of September,
1993 by a duly authorized officer of the Company, to be effective as of October
1, 1993.

SMITH INTERNATIONAL, INC.

By: /s/ K.R VAN HAREN

Name: K.R. Van Haren
Title: Ass't. Treasurer

20
<PAGE> 24

FIRST AMENDMENT TO THE
SMITH INTERNATIONAL, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

WHEREAS, the Compensation Committee of the Board of Directors (the
"Compensation Committee") of Smith International, Inc. (the "Company") by
unanimous consent approved the adoption of the Smith International, Inc.
Supplemental Executive Retirement Plan (the "Plan") on September 27, 1993; and

WHEREAS, the Compensation Committee expressly authorized the proper
officers of the Company to effectuate and implement the Plan substantially in
the form approved by the Compensation Committee, together with any changes
which such officers deem to be necessary or appropriate; and

WHEREAS, the Compensation Committee and the proper officers of the
Company deem it to be necessary and appropriate to amend the Plan to add a new
matching contribution and to impose a limit on the amount of matching
contributions that can be credited by the Company on behalf of any individual
Participant in the Plan with respect to any single Plan Year;

NOW, THEREFORE, the Plan is hereby amended, effective as of the
initial effective date of the Plan, October 1, 1993, as follows:

The following new subsections are hereby added to the Plan
immediately following the existing subsection 4.6(2):

(2)(A) SERP Matching Contributions. The provisions of this
subsection (2)(A) shall apply only for a Plan Year for which a
matching contribution is made to eligible participants under
the 401(k) Plan. To the extent of elective deferrals of
Compensation and/or Bonus actually deferred and credited
hereunder during such Plan Year (i.e., current Plan Year
salary, and prior Plan Year Bonus (if any), deferred and
credited during such Plan Year), the Participant shall be
entitled to a SERP Matching Contribution thereon based upon
the matching percentage for such Plan Year under the 401(k)
Plan, subject to the limitation under subsection (2)(B)
hereof. The SERP Matching Contributions shall be allocated and
credited to affected Participants' accounts under the Deferred
Compensation Ledger by the Administrative Committee effective
as of the last day of the Plan Year. Notwithstanding the
preceding provisions of this subsection, no such SERP Matching
Contribution shall be credited by the Administrative Committee
on behalf of any Participant who is not in Employment on the
last day of such Plan Year for any reason.

(2)(B) Limitation on SERP Matching Contributions.
Notwithstanding any provision herein to the contrary, the
amount of a SERP Matching Contribution (as described in
subsection (2)(A) above) for any single Plan Year that can be
allocated and credited to any individual Participant's account
under the Deferred Compensation Ledger shall not exceed a
dollar amount computed as follows:
<PAGE> 25
(a) Six Percent (6%) of such Participant's total 401(k)
Compensation (as defined in Section 4.6(l) above) for
such Plan Year, excluding therefrom any Annual Incentive
Plan Bonus, less;

(b) The amount of any Make-up Matching Contribution for such
Plan Year computed and credited pursuant to
subsection (2) above, and the amount of matching
credited to the Participant in the 401(k) Plan for
the Plan Year.

The intent of this limitation is to cap total matching dollars in both
plans combined at an amount equal to 6% of base salary.

The remainder of the Plan shall remain unchanged.

IN WITNESS WHEREOF, this First Amendment has been approved and adopted
on this 30th day of November, 1993, to be effective as of October 1, 1993.

ATTEST: SMITH INTERNATIONAL, INC.

By: /s/ VIVIAN M. CLINE By: /s/ K.R. VAN HAREN

Name: Vivian M. Cline Name: K.R. Van Haren
Title: Asst. Secretary Title: Asst. Treasurer

<PAGE> 1
EXHIBIT 10.11

{LOGO} SMITH INTERNATIONAL, INC.

Post Office Box 1860
Newport Beach, California 92660
Phone (714) 752-9000 Telex: 4996871

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (the "Agreement"), made this 10th day of
December, 1987, is entered into by SMITH INTERNATIONAL, INC., a Delaware
corporation with its principal place of business at Newport Beach, California
(the "Company"), and DOUG ROCK, residing at Houston, Texas (the "Executive").

The Company desires to employ the Executive, and the Executive desires
to be employed by the Company. In consideration of the mutual covenants and
promises contained herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged by the parties hereto,
the parties hereto agree as follows:

1. TERM OF EMPLOYMENT.

1.1 The Company hereby agrees to employ the Executive
because of the extraordinary and unique services the Executive can render to
the Company, and the Executive accepts employment with the Company, upon the
terms set forth in this Agreement, for the period commencing on January 1, 1988
(the "Commencement Date") and ending on December 31, 1990, unless sooner
terminated in accordance with the provisions of Section 4.

1.2 At each anniversary ("Anniversary Date") of the
Commencement Date, the period of employment hereunder (the "Employment Period")
shall be extended for one additional year, but, provided the Executive is still
employed hereunder, the Employment Period shall end forthwith at the earlier of
the Executive attaining the age of 65 years or if the Executive begins to
receive benefits under any pension or retirement income plan provided by the
Company or any of its subsidiaries.

2. TITLE; CAPACITY; DUTIES. The Executive shall serve as
President and Chief Operating Officer or in such other position as the
Company's Board of Directors (the "Board") may determine from time to time. The
foregoing description of Executive position shall not limit the Company from
assigning to Executive other duties and functions in addition to or in
substitution for those described above. The Executive shall be subject to the
supervision of, and shall have such authority as is delegated to him by the
Board, the Company's Chief Executive Officer or such other senior executive(s)
as the Board or the Chief Executive Officer shall determine.
<PAGE> 2
3. COMPENSATION AND BENEFITS

3.1. SALARY. The Company shall pay the Executive, in
regular periodic installments, consistent with the Company's general pay
practices, an annual base salary of $225,000 for each one year period,
commencing on the Commencement Date, during the Employment Period. Such salary
shall be subject to adjustment as determined by the Board in its annual review
of Executive's performance hereunder. Executive specifically acknowledges that
Company has no obligation to increase said salary as a result of such review.

3.2. FRINGE BENEFITS AND BONUS. The Executive shall be
entitled to participate in all bonus, stock purchase, warrant, stock option and
any other form of benefit programs that the Company establishes and makes
available to its executive employees, if any, to the extent that Executive's
position, tenure, salary, age, health and other qualifications make him
eligible to participate.

3.3. REIMBURSEMENT OF EXPENSES. The Company shall
reimburse the Executive for all reasonable travel, entertainment and other
expenses incurred or paid by the Executive in connection with, or related to,
the performance of his duties, responsibilities or services under this
Agreement, upon presentation by the Executive of documentation, expense
statements, vouchers and/or such other supporting information as the Board of
Directors may request.

4. EMPLOYMENT TERMINATION. The employment of the Executive by the
Company pursuant to this Agreement shall terminate upon the occurrence of any
of the following:

4.1. At the election of the Company, for cause,
immediately upon written notice by the Company to the Executive. For the
purposes of this Section 4.1, cause for termination shall be deemed to exist
upon (a) the conviction of the Executive of, or the entry of a pleading of
guilty or nolo contendere by the Executive to, any crime involving moral
turpitude or any felony; or (b) any theft, embezzlement, fraud or other act of
dishonesty whether or not involving the Company, which, in the good faith
finding of the Board, will have a material adverse effect on the Company if
Executive's employment by the Company were to continue.

4.2. Upon the Executive's death or in accordance with the
Company's policies applicable to Executive in the event of the inability of the
Executive to provide services due to illness, disability, or physical or
emotional incapacity.

4.3. If for any reason the Executive's position is
eliminated or otherwise becomes redundant, or his responsibilities are
substantially decreased, whether because of merger, acquisition, sale of
business or assets, dissolution, tender offer, or any other reason.

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<PAGE> 3
4.4. The expiration of the Employment Period in accordance
with Section 1.2.

5. EFFECT OF TERMINATION.

5.1. TERMINATION PURSUANT TO SECTION 4.1 OR 4.4. In the
event the Executive's employment is terminated pursuant to Section 4.1 or 4.4,
the Company shall pay to the Executive the compensation and benefits otherwise
payable to him under Section 3 through the last day of his actual employment by
the Company. Any compensation previously earned by Executive hereunder but not
yet paid to him shall be accelerated and shall become payable in a lump sum
upon termination of employment.

5.2. TERMINATION PURSUANT TO SECTION 4.2 OR 4.4. If the
Executive's employment is terminated pursuant to Section 4.1 or 4.4, the
Company shall pay to the Executive or his personal representative, as the case
may be, the compensation which would otherwise be payable to the Executive
under Section 3 in a lump sum, equal to the amounts in effect under Section 3
through the end of the Employment Period. Any compensation previously earned by
Executive hereunder but not yet paid to him shall be accelerated and shall
become payable in a lump sum upon termination of employment.

5.3. NO DUTY TO MITIGATE. If the Executive's employment is
terminated pursuant to Section 4.3 or under circumstances constituting a breach
of this Agreement by the Company, the payments and benefits provided in Section
5.2 shall be payable without regard to Executive's other income or his ability
to obtain other employment, and Executive shall be under no duty to mitigate
the amount payable hereunder.

5.4. SURVIVAL. The provisions of Sections 6, 7 and 8 shall
survive the termination of this Agreement.

6. BREACH OF CONTRACT BY EXECUTIVE. Executive recognizes that the
Company is entering into this Agreement in order to obtain the exclusive use of
his personal services during the term hereof, that Executive's services are of
a special, unique, unusual, extraordinary, creative and intellectual character,
and that the commercial success of the enterprise for which Executive has been
hired depends primarily upon the unique character of his services. Executive
therefore agrees that the termination of employment by the Executive or the
diversion of a substantial portion of the Executive's services to unrelated
endeavors during the Employment Period, in violation of this Agreement and
without consent of the Company, shall be a material breach of this Agreement.
The Executive understands that such loss or diversion of his services could
neither be cured by the hiring of other executives nor could damages be
reasonably or adequately calculated and recovered in an action at law, and
therefore Executive further agrees that, to the extent permitted by law, any
material breach of this Agreement may, without limiting any other remedies, be
prevented or cured by an action

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<PAGE> 4
for specific performance or injunctive relief, without the need for the Company
to post bond or other security.

7. NON-COMPETITION.

(a) During the Employment Period, the Executive will not
directly or indirectly:

(i) As an individual proprietor, partner,
stockholder, officer, executive, director, joint venturer, investor, lender, or
in any other capacity whatsoever (other than as a holder of not more than one
percent (1%) of the total outstanding stock of a publicly held company), engage
in the business of developing, producing, marketing or selling, whether at
wholesale or at retail, or of performing, providing, or offering, products
and/or services of the kind or type developed or being developed, produced,
marketed, sold, offered, provided or performed by the Company while the
Executive was employed by the Company; or

(ii) recruit, solicit or induce, or attempt to
induce, any executive or executives of the Company or any other person or
entity having any continuing or periodic relationship with the Company to
terminate their employment with, or otherwise cease their relationship with,
the Company; or

(iii) solicit, divert or take away, or attempt to
divert or to take away, the business or patronage of any of the customers or
accounts, or prospective customers or accounts, of the Company which were
contacted, solicited or served by the Executive while employed by the Company.

(b) If any restriction set forth in this Section 7 is
found by a court of competent jurisdiction to be unenforceable because it
extends for too long a period of time or over too great a range of activities
or in too broad a geographic area, it shall be interpreted to extend only over
the maximum period of time, range of activities or geographic areas as to which
it may be enforceable.

(c) The restrictions contained in this Section 7 are
necessary for the protection of the business and goodwill of the Company and
are considered by the Executive to be reasonable for such purpose. The
Executive agrees that any breach of this Section 7 will cause the Company
substantial and irrevocable damage and therefore, the Company shall have the
right, in addition to any other remedies it may have, to seek specific
performance and injunctive relief, without the need to post a bond or other
security.

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<PAGE> 5
8. PROPRIETARY INFORMATION AND DEVELOPMENTS.

8.1. PROPRIETARY INFORMATION.

(a) Executive agrees that all information and
know-how, whether or not in writing, of a private, secret or confidential
nature concerning the Company's business or financial affairs, business
methods, suppliers or customers (collectively, "Proprietary Information") is
and shall be the exclusive property of the Company. Executive will not disclose
any Proprietary Information to others outside the Company or use the same for
any unauthorized purposes without written approval by the Board, either during
or after his employment, unless and until such Proprietary Information has
become public knowledge without fault of the Executive.

(b) Executive agrees that all files, letters,
memoranda, reports, records, data, sketches, drawings, flow charts, business
methods, promotional materials, video or sound recordings, program listings, or
other written, photographic, or other tangible material containing Proprietary
Information, whether created by the Executive or others, which shall come into
his custody or possession, shall be and are the exclusive property of the
Company to be used by the Executive only in the performance of his duties for
the Company.

(c) Executive agrees that his obligation not to
disclose or use information, know-how and records of the types set forth in
paragraphs (a) and (b) above, also extends to such types of information,
know-how, records and intangible property of customers of the Company or
suppliers to the Company or other third parties who may have disclosed or
entrusted the same to the Company or to the Executive in the course of the
Company's business.

8.2. DEVELOPMENTS.

(a) Executive. will make full and prompt disclosure
to the Company of all inventions, improvements, discoveries, methods,
developments, software and works of authorship, whether or not patentable or
copyrightable, which are created, made, conceived or reduced to practice by the
Executive or under his direction or jointly with others during his employment
by the Company, whether or not during normal working hours or on the premises
of the Company (all of which are collectively referred to in this Agreement as
"Developments").

(b) Executive agrees to assign and does hereby assign
to the Company (or any person or entity designated by the Company) all his
right, title and interest in and to all Developments and all related patents,
patent applications, copyrights and copyright applications. However, this
Section 8.2(b) shall not apply to Developments which do not relate to the
present or planned business or research and development of the Company and
which are made and conceived by the Executive not

- 5 -
<PAGE> 6
during normal working hours, not on the Company's premises and not using the
Company's tools, devices, equipment or Proprietary Information.

(c) Executive agrees to cooperate fully with the
Company, both during and after his employment with the Company, with respect to
the procurement, maintenance and enforcement of copyrights, patents and other
intellectual and intangible property rights (both in the United States and in
foreign countries) relating to Proprietary Information and Developments.
Executive shall sign all papers, including, without limitation, copyright
applications and/or assignments, patent applications and/or assignments,
declarations, oaths, formal assignments, assignments of proprietary rights, and
powers of attorney, which the Company may deem necessary or desirable in order
to protect its rights and interests in any Proprietary Information or
Development.

8.3. OTHER AGREEMENTS. Executive hereby represents that he
is not bound by the terms of any agreement with any previous employer or other
party to refrain from using or disclosing any trade secret or confidential or
proprietary information in the course of his employment with the Company or to
refrain from competing, directly or indirectly, with the business of such
previous employer or any other party. Executive further represents that his
performance of all the terms of this Agreement and as an Executive of the
Company does not and will not breach any agreement to keep in confidence
proprietary information, knowledge or data acquired by him in confidence or in
trust prior to his employment with the Company.

9. NOTICES. All notices required or permitted under this
Agreement shall be in writing and shall be deemed effective upon personal
delivery or upon deposit in the United States Post Office, by registered or
certified mail, postage prepaid, addressed to the other party at the address
shown above, or at such other address or addresses as either party shall
designate to the other in accordance with this Section 9. A copy of all notices
given by Executive to the.Company shall be sent to each member of the Board.

10. PRONOUNS. Whenever the context may require, any pronouns used
in this Agreement shall include the corresponding masculine, feminine or neuter
forms, and the singular forms of nouns and pronouns shall include the plural,
and vice versa.

11. ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement between the parties and supersedes all prior agreements and
understandings, whether written or oral, relating to the subject matter of this
Agreement.

12. AMENDMENT. This Agreement may be amended or modified only by a
written instrument executed by both the Company and Executive.

- 6 -
<PAGE> 7
13. GOVERNING LAW. This Agreement shall be construed, interpreted
and enforced in accordance with the law of the State of California.

14. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon
and inure to the benefit of both parties and their respective successors and
assigns, including any corporation with which or into which the Company may be
merged or which may succeed to its assets or business, provided, however, that
the obligations of Executive are personal and shall not be assigned by him.

15. MISCELLANEOUS.

15.1. No delay or omission by the Company in exercising any
right under this Agreement shall operate as a waiver of that or any other
right. A waiver of consent given by the Company on any one occasion shall be
effective only in that instance and shall not be construed as a bar or waiver
of any right on any other occasion.

15.2. The captions of the sections of this Agreement are
for convenience of reference only and in no way define, limit or affect the
scope or substance of any section of this Agreement.

15.3. In case any provision of this Agreement shall be
invalid, illegal or otherwise unenforceable, the validity, legality and
enforceability of the remaining provisions shall in no way be affected or
impaired thereby.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year set forth above.

SMITH INTERNATIONAL, INC.

By: /s/ H. NOAK ROLLINS
Its: Chairman and C.E.O

EXECUTIVE: /s/ DOYLE T. ROCK 2-1-88

- 7 -

<PAGE> 1

EXHIBIT 10.12

{SMITH INTERNATIONAL, INC. LOGO}

Post Office Box 1860
Newport Beach, California 92660
Phone (714) 752-9000 Telex: 4996871

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (the "Agreement"), made this 10th day of
December, 1987, is entered into by SMITH INTERNATIONAL. INC., a Delaware
corporation with its principal place of business at Newport Beach, California
(the "Company"), and BARRY HEPPENSTALL, residing at Irvine, California (the
"Executive").

1. TERM OF EMPLOYMENT.

2. TITLE; CAPACITY; DUTIES. The Executive shall serve as Vice
President of Manufacturing or in such other position as the Company's Board of
Directors (the "Board") may determine from time to time. The foregoing
description of Executive position shall not limit the Company from assigning to
Executive other duties and functions in addition to or in substitution for
those described above. The Executive shall be subject to the supervision of,
and shall have such authority as is delegated to him by the Board, the
Company's Chief Executive Officer or such other senior executive(s) as the
Board or the Chief Executive Officer shall determine.
<PAGE> 2
3. COMPENSATION AND BENEFITS

3.1. SALARY. The Company shall pay the Executive, in
regular periodic installments, consistent with the Company's general pay
practices, an annual base salary of $110,000 for each one year period,
commencing on the Commencement Date, during the Employment Period. Such salary
shall be subject to adjustment as determined by the Board in its annual review
of Executive's performance hereunder. Executive specifically acknowledges that
Company has no obligation to increase said salary as a result of such review.

4. EMPLOYMENT TERMINATION. The employment of the Executive by the
Company pursuant to this Agreement shall terminate upon the occurrence of any
of the following:

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<PAGE> 3
4.4. The expiration of the Employment Period in accordance
with Section 1.2.

5. EFFECT OF TERMINATION.

5.2. TERMINATION PURSUANT TO SECTION 4.2 OR 4.3. If the
Executive's employment is terminated pursuant to Section 4.2 or 4.3, the
Company shall pay to the Executive or his personal representative, as the case
may be, the compensation which would otherwise be payable to the Executive
under Section 3 in a lump sum, equal to the amounts in effect under Section 3
through the end of the Employment Period. Any compensation previously earned by
Executive hereunder but not yet paid to him shall be accelerated and shall
become payable in a lump sum upon termination of employment.

5.4. SURVIVAL. The provisions of Sections 6, 7 and 8 shall
survive the termination of this Agreement.

-3-
<PAGE> 4
for specific performance or injunctive relief, without the need for the Company
to post bond or other security.

7. NON-COMPETITION.

(a) During the Employment Period, the Executive will not
directly or indirectly:

-4-
<PAGE> 5
8. PROPRIETARY INFORMATION AND DEVELOPMENTS.

8.1. PROPRIETARY INFORMATION.

(a) Executive agrees that all information and know-how,
whether or not in writing, of a private, secret or confidential nature
concerning the Company's business or financial affairs, business methods,
suppliers or customers (collectively, "Proprietary Information") is and shall
be the exclusive property of the Company. Executive will not disclose any
Proprietary Information to others outside the Company or use the same for any
unauthorized purposes without written approval by the Board, either during or
after his employment, unless and until such Proprietary Information has become
public knowledge without fault of the Executive.

(b) Executive agrees that all files, letters, memoranda,
reports, records, data, sketches, drawings, flow charts, business methods,
promotional materials, video or sound recordings, program listings, or other
written, photographic, or other tangible material containing Proprietary
Information, whether created by the Executive or others, which shall come into
his custody or possession, shall be and are the exclusive property of the
Company to be used by the Executive only in the performance of his duties for
the Company.

(c) Executive agrees that his obligation not to disclose
or use information, know-how and records of the types set forth in paragraphs
(a) and (b) above, also extends to such types of information, know-how, records
and intangible property of customers of the Company or suppliers to the Company
or other third parties who may have disclosed or entrusted the same to the
Company or to the Executive in the course of the Company's business.

8.2. DEVELOPMENTS.

(a) Executive will make full and prompt disclosure to the
Company of all inventions, improvements, discoveries, methods, developments,
software and works of authorship, whether or not patentable or copyrightable,
which are created, made, conceived or reduced to practice by the Executive or
under his direction or jointly with others during his employment by the
Company, whether or not during normal working hours or on the premises of the
Company (all of which are collectively referred to in this Agreement as
"Developments").

(b) Executive agrees to assign and does hereby assign to
the Company (or any person or entity designated by the Company) all his right,
title and interest in and to all Developments and all related patents, patent
applications, copyrights and copyright applications. However, this Section
8.2(b) shall not apply to Developments which do not relate to the present or
planned business or research and development of the Company and which are made
and conceived by the Executive not

-5-
<PAGE> 6
during normal working hours, not on the Company's premises and not using the
Company's tools, devices, equipment or Proprietary Information.

(c) Executive agrees to cooperate fully with the Company,
both during and after his employment with the Company, with respect to the
procurement, maintenance and enforcement of copyrights, patents and other
intellectual and intangible property rights (both in the United States and in
foreign countries) relating to Proprietary Information and Developments.
Executive shall sign all papers, including, without limitation, copyright
applications and/or assignments, patent applications and/or assignments,
declarations, oaths, formal assignments, assignments of proprietary rights, and
powers of attorney, which the Company may deem necessary or desirable in order
to protect its rights and interests in any Proprietary Information or
Development.

8.3. OTHER AGREEMENTS. Executive hereby represents that he is not
bound by the terms of any agreement with any previous employer or other party
to refrain from using or disclosing any trade secret or confidential or
proprietary information in the course of his employment with the Company or to
refrain from competing, directly or indirectly, with the business of such
previous employer or any other party. Executive further represents that his
performance of all the terms of this Agreement and as an Executive of the
Company does not and will not breach any agreement to keep in confidence
proprietary information, knowledge or data acquired by him in confidence or in
trust prior to his employment with the Company.

9. NOTICES. All notices required or permitted under this
Agreement shall be in writing and shall be deemed effective upon personal
delivery or upon deposit in the United States Post Office, by registered or
certified mail, postage prepaid, addressed to the other party at the address
shown above, or at such other address or addresses as either party shall
designate to the other in accordance with this Section 9. A copy of all notices
given by Executive to the Company shall be sent to each member of the Board.

12. AMENDMENT. This Agreement may be amended or modified only by a
written instrument executed by both the Company and Executive.

-6-
<PAGE> 7
13. GOVERNING LAW. This Agreement shall be construed, interpreted
and enforced in accordance with the law of the State of California.

15. MISCELLANEOUS.

15.2. The captions of the sections of this Agreement are
for convenience of reference only and in no way define, limit or affect the
scope or substance of any section of this Agreement.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year set forth above.

SMITH INTERNATIONAL, INC.

By: /s/ H. MARK ROLLINS
Its: CHAIRMAN AND C.E.O.

EXECUTIVE:
/s/ D. BARRY HEPPENSTALL

-7-

<PAGE> 1

EXHIBIT 10.13

{SMITH INTERNATIONAL, INC. LOGO}

Post Office Box 1860
Newport Beach, California 92660
Phone (714) 752-9000 Telex: 4996871

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (the "Agreement"), made this 10th day of
December, 1987, is entered into by SMITH INTERNATIONAL, INC., a Delaware
corporation with its principal place of business at Newport Beach, California
(the "Company"), and BRYAN DUDMAN, residing at Spring, Texas (the "Executive").

The Company desires to employ the Executive, and the Executive
desires to be employed by the Company. In consideration of the mutual covenants
and promises contained herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged by the parties hereto,
the parties hereto agree as follows:

1. TERM OF EMPLOYMENT.

2. TITLE; CAPACITY; DUTIES. The Executive shall serve as Vice
President of U.S. Sales or in such other position as the Company's Board of
Directors (the "Board") may determine from time to time. The foregoing
description of Executive position shall not limit the Company from assigning to
Executive other duties and functions in addition to or in substitution for
those described above. The Executive shall be subject to the supervision of,
and shall have such authority as is delegated to him by the Board, the
Company's Chief Executive Officer or such other senior executive(s) as the
Board or the Chief Executive Officer shall determine.
<PAGE> 2
3. COMPENSATION AND BENEFITS

3.1. SALARY. The Company shall pay the Executive, in
regular periodic installments, consistent with the Company's general pay
practices, an annual base salary of $100,000 for each one year period,
commencing on the Commencement Date, during the Employment Period. Such salary
shall be subject to adjustment as determined by the Board in its annual review
of Executive's performance hereunder. Executive specifically acknowledges that
Company has no obligation to increase said salary as a result of such review.

4. EMPLOYMENT TERMINATION. The employment of the Executive by the
Company pursuant to this Agreement shall terminate upon the occurrence of any
of the following:

-2-
<PAGE> 3
4.4. The expiration of the Employment Period in accordance
with Section 1.2.

5. EFFECT OF TERMINATION.

5.3. NO DUTY TO MITIGATE. If the Executive's employment
is terminated pursuant to Section 4.3 or under circumstances constituting a
breach of this Agreement by the Company, the payments and benefits provided in
Section 5.2 shall be payable without regard to Executive's other income or his
ability to obtain other employment, and Executive shall be under no duty to
mitigate the amount payable hereunder.

5.4. SURVIVAL. The provisions of Sections 6, 7 and 8 shall
survive the termination of this Agreement.

6. BREACH OF CONTRACT BY EXECUTIVE. Executive recognizes that the
Company is entering into this Agreement in order to obtain the exclusive use of
his personal services during the term hereof, that Executive's services are of
a special unique, unusual, extraordinary, creative and intellectual character,
and that the commercial success of the enterprise for which Executive has been
hired depends primarily upon the unique character of his services. Executive
therefore agrees that the termination of employment by the Executive or the
diversion of a substantial portion of the Executive's services to unrelated
endeavors during the Employment Period, in violation of this Agreement and
without consent of the Company, shall be a material breach of this Agreement.
The Executive understands that such loss or diversion of his services could
neither be cured by the hiring of other executives nor could damages be
reasonably or adequately calculated and recovered in an action at law, and
therefore Executive further agrees that, to the extent permitted by law, any
material breach of this Agreement may, without limiting any other remedies, be
prevented or cured by an action

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<PAGE> 4
for specific performance or injunctive relief, without the need for the Company
to post bond or other security.

7. NON-COMPETITION.

(a) During the Employment Period, the Executive will not
directly or indirectly:

-4-
<PAGE> 5
8. PROPRIETARY INFORMATION AND DEVELOPMENTS.

8.1. PROPRIETARY INFORMATION.

8.2. DEVELOPMENTS.

(a) Executive will make full and prompt
disclosure to the Company of all inventions, improvements, discoveries,
methods, developments, software and works of authorship, whether or not
patentable or copyrightable, which are created, made, conceived or reduced to
practice by the Executive or under his direction or jointly with others during
his employment by the Company, whether or not during normal working hours or on
the premises of the Company (all of which are collectively referred to in this
Agreement as "Developments").

(b) Executive agrees to assign and does hereby
assign to the Company (or any person or entity designated by the Company) all
his right, title and interest in and to all Developments and all related
patents, patent applications, copyrights and copyright applications. However,
this Section 8.2(b) shall not apply to Developments which do not relate to the
present or planned business or research and development of the Company and
which are made and conceived by the Executive not

-5-
<PAGE> 6
during normal working hours, not on the Company's premises and not using the
Company's tools, devices, equipment or Proprietary Information.

8.3. OTHER AGREEMENTS. Executive hereby represents that he is not
bound by the terms of any agreement with any previous employer or other party
to refrain from using or disclosing any trade secret or confidential or
proprietary information in the course of his employment with the Company or to
refrain from competing, directly or indirectly, with the business of such
previous employer or any other party. Executive further represents that his
performance of all the terms of this Agreement and as an Executive of the
Company does not and will not breach any agreement to keep in confidence
proprietary information, knowledge or data acquired by him in confidence or in
trust prior to his employment with the Company.

9. NOTICES. All notices required or permitted under this
Agreement shall be in writing and shall be deemed effective upon personal
delivery or upon deposit in the United States Post Office, by registered or
certified mail, postage prepaid, addressed to the other party at the address
shown above, or at such other address or addresses as either party shall
designate to the other in accordance with this Section 9. A copy of all notices
given by Executive to the Company shall be sent to each member of the Board.

12. AMENDMENT. This Agreement may be amended or modified only by a
written instrument executed by both the Company and Executive.

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<PAGE> 7
13. GOVERNING LAW. This Agreement shall be construed, interpreted
and enforced in accordance with the law of the State of California.

15. MISCELLANEOUS.

15.2. The captions of the sections of this Agreement are
for convenience of reference only and in no way define, limit or affect the
scope or substance of any section of this Agreement.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year set forth above.

SMITH INTERNATIONAL, INC.
By: /s/ H. MARK ROLLINS
Its: CHAIRMAN AND C.E.O.

EXECUTIVE: /s/ BRYAN DUDMAN

-7-

<PAGE> 1

EXHIBIT 21

SUBSIDIARIES OF THE COMPANY

The following table sets forth all subsidiaries of Smith International,
Inc., other than inactive and insignificant subsidiaries that, considered in the
aggregate, would not constitute a significant subsidiary, indicating the
percentage of issued and outstanding voting securities beneficially owned by
it:

<TABLE>
<CAPTION>
% of Direct
Where and Indirect
Name of Subsidiary Incorporated Ownership
------------------ ------------ ------------
<S> <C> <C>
Industrias Smith
Internacional, Mexico 100%
S.A. de C.V.
Omega Insurance Ltd. Bermuda 100%
S.I. Nederland B.V. Netherlands 100%
Smith International
Acquisition Corp. Delaware 100%
Smith International
Australia (Pty) Ltd. Australia 100%
Smith International
Canada Ltd. Canada 100%
Smith Equipamentos
E Servicos S/A Brazil 100%
Smith International
Deutschland GmbH Germany 100%
Smith International
Gulf Services Ltd.* U.A.E. 49%
Smith International
France, S.A.R.L. France 100%
Smith International
Italia, S.p.A. Italy 100%
Smith International
(North Sea) Ltd. Scotland 100%
Smith International
Sales Corporation California 100%
Smith Internacional
de Venezuela, C.A. Venezuela 100%
</TABLE>

* Not consolidated; accounted for on the equity method of accounting.

Except as indicated, all of the above subsidiaries are included in the
Company's consolidated financial statements.

<PAGE> 1

EXHIBIT 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the
incorporation by reference of our report dated February 9, 1994 included in
this Form 10-K into the Company's previously filed Registration Statement
File No. 33-31556.

ARTHUR ANDERSEN & CO.

Houston, Texas
March , 1994

<PAGE> 1

EXHIBIT 23.2

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

ARTHUR ANDERSEN & CO.

Houston, Texas
March , 1994