SMITH INTERNATIONAL INC, 10-K405, 1995-03-14

SMITH INTERNATIONAL INC
10-K405, 1995-03-14
OIL & GAS FIELD MACHINERY & EQUIPMENT

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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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, 1994 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:

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<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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<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 3,
1995: $527,271,068 (38,698,794 shares at closing price on New York Stock
Exchange of $13.625). 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 3, 1995 39,558,993

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

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the Proxy Statement related to the Registrant's 1995 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 worldwide
supplier of products and services used in the drilling of oil and gas wells.
Smith produces and markets drilling fluids and systems through its M-I Drilling
Fluids Unit. Smith also manufactures and markets technologically advanced drill
bits through its Smith Drill Bits Unit, and manufactures and markets drilling
and completion products and services through its Smith Drilling and Completion
Services Unit. Approximately 97% of services to the Company's revenues are
derived from the oil and gas drilling industry with the remainder related to the
mining and industrial markets.

The Company began providing drilling fluids and systems to the oil and gas
drilling industry in March 1994 upon acquiring a 64% interest in M-I Drilling
Fluids L.L.C. The following table sets forth the revenues attributable to
continuing operations of the Company for its three business units:

RECENT ACQUISITIONS AND DIVESTITURES

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 in 1993 from discontinued operations of
$73.6 million including the gain from the sale of the DDS business of $80.1
million. The gain included 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 and $158.7 million in 1992. The
DDS business reported operating losses of $6.5 million in the first three months
of 1993 and $3.0 million in 1992.

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."

Acquisitions of A-Z/Grant and Lindsey

On December 22, 1993, the Company acquired the product line assets of
A-Z/Grant and Lindsey Completion Systems (A-Z/Grant and Lindsey) from MASX
Energy Services Group, Inc. for $19.0 million in cash. The acquired A-Z/Grant
and Lindsey operations are leading providers of downhole tools, remedial
services and liner hangers to the oil and gas drilling industry. A-Z/Grant and
Lindsey reported unaudited revenues of $31.6 million in 1993 and $29.0 million
in 1992. 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 L.L.C.

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systems to the oil and gas drilling industry. The Company purchased the 64%
interest in M-I using $80.0 million of its cash and issuing a note payable to
Dresser for $80.0 million. For further discussion, refer to Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of Operations." This
acquisition was accounted for as a purchase. M-I reported unaudited revenues of
$458.0 million in 1994, $405.8 million in 1993 and $382.6 million in 1992.

Acquisition of Supradiamant

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 $733.1 million in 1994
and $664.1 million in 1993.

Acquisition of Baker Hughes Treatment Services in 1995

Effective January 1, 1995, M-I (through its Swaco Geolograph division)
acquired Baker Hughes Treatment Services (BHTS) from Baker Hughes, Inc. for
approximately $5.1 million in cash. BHTS is a leading supplier of waste
minimization, product recovery services, water treatment, downhole injection and
reserve pit remediation services to the oilfield industry. This acquisition was
accounted for as a purchase. BHTS reported unaudited revenues of approximately
$10.7 million in 1994, $9.8 million in 1993 and $4.1 million in 1992.

INDUSTRY OVERVIEW

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 3.3% from 1,713 in 1993 to 1,769 in 1994, primarily due to
the 10.1% increase in the average North American rig count between 1993 and
1994.

Management anticipates that total drilling activity in 1995 will
approximate 1994 activity levels. North American drilling activity is expected
to decline due to the continued weakness in natural gas prices. A good portion
of this decline is expected to be offset by higher drilling activity outside
North America, principally in West Africa, the Far East and the North Sea.
Management believes that the Company is well positioned to benefit from the
increase in oil and gas drilling activity outside North America.

BUSINESS OPERATIONS

Drilling Fluids

Products and Services. Through the acquisition of M-I in March 1994, the
Company provides drilling fluids systems, products, and technical services to
end users engaged in drilling oil, natural gas, and geothermal wells worldwide.
Drilling fluid 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 to ensure that the products and
systems are applied effectively to optimize drilling operations. These services
include recommending products and

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systems during the well planning phase, testing drilling fluid properties and
recommending adjustments during the drilling phase, and analyzing well results
after the well is completed to improve the performance of wells to be drilled in
the future.

M-I offers water-based, oil-based, and synthetic-based drilling fluid
systems. These are chemically complex systems, comprised of a number of products
designed to ensure that the diverse functions of the fluid are met. Weighting
agents, composed of high specific gravity materials such as barite and hematite
are added to drilling fluid systems to increase their density. When drilling
through pressurized zones, the added weight creates hydrostatic pressures that
hold back formation pressures and prevent an influx of fluids from the formation
into the hole. Thickening agents, or viscosifiers, produce the viscosity needed
to remove the cuttings from the bit and provide adequate gel strength to suspend
the cuttings when circulation is interrupted. Bentonite, a naturally occurring
clay, is the most widely used viscosifier. Polymers are used to control
viscosity and gel strengths and for thinning a fluid that has become too thick
from formation cuttings. Loss circulation materials, such as fibers, flakes, and
shells, plug pores in the formation to prevent the loss of mud. Finally,
specialty products are used in certain circumstances to complement the base
products, acting to reduce torque and drag, free stuck pipe, or enhance
temperature stability.

Oil-based drilling fluids are used to drill water-sensitive shales, to
reduce torque and drag, and to drill in areas where stuck pipe is likely to
occur. These systems are low viscosity systems that sharply increase rates of
penetration in certain drilling areas of the world. Synthetic-based drilling
fluids are used in similar drilling environments and often exceed the superior
performance characteristics of oil-based drilling fluids.

M-I's geothermal/air drilling operations provides air drilling services to
the geothermal, oil and gas drilling markets. These services include the rental
of high-volume, high-pressure compressors and related equipment, along with
expert technical support and fluid products associated with air drilling.

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 solids 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.

With the acquisition of Baker Hughes Treatment Services (BHTS) in January
1995, Swaco Geolograph will become the world's largest supplier of waste
minimization and product recovery services to the oilfield industry. BHTS also
expands Swaco Geolograph's product line to include water treatment, downhole
injection, and reserve pit remediation services.

Competition. The major competitors in the worldwide drilling fluids
industry are Baroid Drilling Fluids (a division of Dresser), Inteq (a division
of Baker-Hughes, Inc.) and Dowell Drilling Fluids (a division of Schlumberger,
Inc.). 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 as
well as limited product producers that market their products without technical
services.

Competition within the drilling fluids industry is primarily based on the
performance of the system in meeting customers' drilling objectives, the quality
and experience of the field engineers, pricing, locational or other operational
advantages, well planning capabilities in the design of a drilling fluids
program, and the technical support of field engineers.

Drill Bits

Products. The Company's Drill Bits unit 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 Tooltm, Smith Diamondtm and
Smith Miningtm product lines. Drill bit sizes range from 3 1/2 to 28 inches in
diameter for the

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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 and cubic boron nitride at its SII Megadiamond, Inc. (Megadiamond) and
Supradiamant subsidiaries. These ultrahard materials are used in the Company's
diamond drill bits and in other specialized cutting tools. Megadiamond developed
and uses patented processes for applying diamonds to a curved surface with
multiple transition layers. The Company believes that the transition layer
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, across
other Smith product lines and into several non-energy cutting tool markets.
Diamond enhanced products last longer, 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 such as Diamond Enhanced
Insert roller cone bits and Impaxtm hammer bits as well as non-energy cutting
tool markets.

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/DBS (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 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.

Drilling and Completion Services

Products and Services. The Smith Drilling and Completion Services Unit
manufactures and markets downhole drilling tools and tubular drill string
components and provides related drilling and completion services for drilling
oil and gas wells. These tubular products, which are manufactured with the
Drilco product line, include drill collars to provide drilling weight to the
bit, Hevi-Watetm 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's downhole tools are sold or rented to the end users,
and include stabilizers to centralize the drill string and reamers to maintain a
uniform hole diameter.

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

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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/Grant products and
services provide a further strengthening to the Servco and Drilco product lines.
A-Z/Grant adds whipstock technology to Servco through its patented Packstocktm
and Anchorstocktm sidetrack systems. Well abandonment services are also enhanced
by the addition of the Dynacuttm Wellhead Severance system.

Grant tools adds further strengthening to Drilco through the addition of a
full line of rotating drilling heads and a computerized connection torque
monitoring system. The combinations of A-Z/Servco and Drilco/Grant strengthen,
enhance and position both product lines as market leaders in technology and
geographic presence.

Lindsey Completion Systems, a part of the A-Z/Grant acquisition offers a
product line expansion for the Company. The Lindsey product line provides hanger
systems and cementing equipment which are prevalent in deep wells and critical
completion systems.

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.

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,
57% of the Company's total revenues from continuing operations in 1994 were
generated from sales in the international markets, compared to 53% in 1993.
Approximately 52% of the Company's revenues in 1994 are denominated in U.S.
dollars as compared to 61% in 1993.

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. In addition, independent
distributors and unconsolidated joint ventures market drilling fluid products in
many locations. Sales efforts are also directed to end users in the drilling
industry including independent drilling contractors, major and independent oil
companies and national oil companies.

The Company's sales force is supported by field service centers worldwide.
The Company considers that its worldwide sales position has been significantly
enhanced by its field service centers presently maintained in every major oil
and gas producing area. 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.

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 approximately 1,700 average
active drilling rigs estimated for 1995. 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

Through its company-owned mines located in the U.S. and abroad, M-I has the
capability to produce a large portion of its requirements for barite and
bentonite. Significant barite reserves are located in Nevada and the United
Kingdom. Bentonite is produced from ore deposits in Wyoming and Greece. Mining
exploration activities continue worldwide to locate and evaluate ore bodies to
ensure deposits are ready for production when market conditions dictate their
entry. In addition to its own production, M-I purchases a majority of its
worldwide barite requirements from international suppliers, mainly located in
the People's Republic of China, India and Morocco.

The Company purchases a variety of raw materials for its Smith Drill Bits
Unit and Smith Drilling and Completion Services Unit, 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 and Grenoble, France 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 M-I Drilling Fluids Unit maintains an aggressive research and
development effort, reflecting the market's demands for better performance in
the more hostile drilling environments and heightened concern over protecting
the environment where drilling occurs. Through its research facilities in
Houston, Texas, Stravanger, Norway and Aberdeen, Scotland, M-I provides basic
research, testing, and technical support for its field engineers. Its
environmental services group evaluates and monitors toxicity data and safe
material handling procedures on all of M-I's products, enabling the customer to
design a drilling program that is environmentally responsible and safe.

The M-I Drilling Fluids Unit's focus on research and development has led to
the development and introduction of several new drilling fluid products and
systems, most notably, FLO-PROtm, NOVADRILtm, KLA-CUREtm, and PIPE-LAX ENVtm.
The FLO-PROtm system, a rheologically-engineered water-based system designed to
drill the productive interval of horizontal and highly deviated wells, was
introduced to the worldwide drilling and production market in 1994. NOVADRILtm
is a non-toxic, synthetic-based invert emulsion drilling fluid system that
offers many of the properties of conventional oil mud systems while avoiding the
environmental problems associated with using diesel oil. NOVADRILtm was
introduced to the U.S. Gulf of Mexico and North Sea markets in 1992 and to the
Far East market in 1994. In May and June of 1994, the system set industry
records for drilling performance, drilling over 7,400 feet and 8,400 feet,
respectively, in a 24-hour interval.

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KLA-CUREtm is a water-soluble, environmentally-acceptable hydration
suppressant, and is used to inhibit the dispersion and swelling of
highly-reactive clays. PIPE-LAX ENVtm is a low-toxic, water dispersible spotting
fluid designed to free differentially stuck drillstrings. Unlike other spotting
fluids, PIPE-LAX ENVtm contains no hydrocarbons and can be incorporated into
most normal drilling fluid systems to comply with most toxicity regulations.

The Smith Drill Bits and Smith Drilling and Completion Services Units
maintain product development and engineering departments in rock bit, diamond
bit, downhole tool and liner hanger 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 Spinodaltm bearing roller cone bits, Diamond
Enhanced Insert roller cone bits, steerable motor PDC and roller cone bits;
Diamond Enhanced Stabilizers; the Smith Diamond Maxidrilltm products and Diamond
Enhanced Impaxtm hammer bits; the Servco Millmastertm carbide cutting structure;
and the Servco Superdometm PDC underreamers and hole openers. 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 structures,
underreamers and hole openers 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. The Company's expenditures
for research and engineering activities amounted to $14.6 million in 1994, $6.6
million in 1993 and $6.2 million in 1992. In 1994, research and engineering
expenditures approximated 2% of revenues.

In February 1995, the Company and its wholly owned subsidiary, SII
Megadiamond, Inc., entered into a research and technology development agreement
with Sandvik AB, a Swedish company, which includes joint ownership of technology
and may lead to the sale of products. Should this cooperation agreement prove to
be successful and should revenues reach certain hurdle rates, Sandvik has the
option to purchase a minority interest in Megadiamond. In no instance does the
exercise of this option include the transfer of control of Megadiamond.

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, 1994, the Company had approximately 4,100 full time
employees throughout the world. Most of the Company's employees in the United
States are not covered by collective bargaining agreements except certain
domestic mining operations of M-I. The Company considers its labor relations to
be satisfactory.

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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."

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.

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ITEM 2. PROPERTIES

The principal facilities and properties of the Company at December 31, 1994
are shown in the table below.

<TABLE>
<CAPTION>
APPROX.
BLDG.
SPACE
PRINCIPAL PRODUCTS PROCESSED LAND (SQ.
LOCATION OR MANUFACTURED (ACRES) FT.)
-------- ---------------------------- ------- -------
<S> <C> <C> <C>
M-I Drilling Fluids Unit:

Greybull, Wyoming........ Bentonite mine and processing 8,393.7 110,000
Appleton, Wisconsin...... Drilling fluid chemical products 10.0 92,600
Wharton County, Texas.... Drilling fluid chemical products 100.0 60,502
Milos, Greece............ Bentonite mine and processing 123.9 54,553
Greystone, Nevada........ Barite mine and processing 268.2 49,800
Zavalla, Texas........... Drilling fluid chemical products 32.8 35,800
Foss/Aberfeldy,
Scotland............... Barite mine and processing and bentonite 102.0 10,405
processing

Smith Drill Bits and Smith Drilling and Completion Services Units:

Houston, Texas........... Tubulars, surface and downhole tools, remedial 106.4 720,199
products, liner hangers, diamond bits
Ponca City, Oklahoma..... Drill bits 15.2 206,800
Grenoble, France......... Synthetic diamond materials, and cubic boron 16.9 160,000
nitride
Saline de Volterra,
Italy.................. Drill bits 12.2 125,648
Provo, Utah.............. Synthetic diamond materials 4.0 32,000
</TABLE>

The Company considers its mines and manufacturing and processing 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 1994 and are continuing to operate below capacity levels. A
portion of the Houston, Texas facility is currently being held for sale by the
Company.

9
<PAGE> 11

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. On July 12, 1994, without
admitting any liability, the Company and Camco International, Inc. entered into
an agreement with the plaintiffs to pay $0.5 million. The Company's portion of
the agreed payment was $0.3 million. On July 25, 1994, the U.S. District Judge
signed and entered an Agreed Order of Dismissal giving final approval to the
settlement.

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. CV92-1196. In addition, seven of its employees or former employees (the
"Individual Defendants") were also served. 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. On
April 11, 1991, Executive Life was placed in conservatorship in California state
court by the California Insurance Commissioner. As a result of the
conservatorship and reorganization, Executive Life emerged in 1993 as Aurora
National Life Assurance Company, Inc. ("Aurora") from the conservatorship
proceeding. Under the rehabilitation plan as ordered by the Los Angeles Superior
Court judge, Aurora will honor in part Executive Life's past and continuing
commitments under the annuities outstanding; however, a portion of these
obligations will not be paid by Aurora (the "Shortfall").

In November 1994, the Company was dismissed from the lawsuit after
obtaining summary judgment in its favor on the grounds that the Company's 1986
bankruptcy barred the Department of Labor's claim. The Individual Defendants
remained in the lawsuit.

10
<PAGE> 12

Trial of the Department of Labor's claims against the Individual Defendants
and the Company's and the Individual Defendants' crossclaims was scheduled to
begin on December 6, 1994. Prior to the trial, the parties agreed in principle
to a settlement whereby: (i) the Department of Labor will be paid the sum of
$4.07 million (which represents an actuarial estimate of the Shortfall); (ii)
the Department of Labor will distribute the $4.07 million to the participants
and beneficiaries of the Company's Pension Plan consistent with the goal of
making the participants and beneficiaries whole to the extent possible from the
$4.07 million payment only; (iii) the Company and the Department of Labor will
sign a consent order which, among other things, provides that the Company
neither admits nor denies the allegations of the Department of Labor's
complaint; (iv) the Company will reasonably cooperate with the Department of
Labor in their efforts to equitably distribute the $4.07 million; and (v) the
Individual Defendants will not be required to sign the consent order and they
will be dismissed with prejudice upon the payment of the $4.07 million to the
Department of Labor. A substantial portion of the $4.07 million settlement will
be paid by the Company's insurance carrier. The Company accrued its portion of
the settlement of approximately $1.0 million in 1994.

The parties are in the process of preparing settlement documents. The
Company anticipates that the settlement will be fully documented and all
payments made to the Department of Labor by April 1995.

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 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 $3.0 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 $28.0 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 activities at
the Sheridan Site have been suspended until the consent decree has been entered
by the Federal District Court for the Southern District of Texas. The consent
decree provisions for installation of a spur jetty system and the performance of
an onsite Biotreatment Pilot Study have already been completed. The spur jetty
system was installed before the consent decrees were lodged and the Biotreatment
Pilot Study was performed under the Administrative Order. Once the consent
decree is entered, remediation efforts and expenditures at the Site will likely
extend over several years.

11
<PAGE> 13

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 $8.0 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 $10.0 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 $5.0 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 RODs 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
$300.0 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. The Company may be requested to pay its allocable
share of costs incurred to stabilize and remediate the OII Site.

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 has released a draft
Remedial Investigation, but is still preparing its final Remedial Investigation
and Feasibility Study ("RI/FS") which will examine the various alternatives for
a final remedy of the site. It is not known at this time when the EPA will
complete the final RI/FS. 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.

12
<PAGE> 14

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 EPA, executed an
Administrative Order on Consent ("AOC") and Scope of Work ("SOW") to 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, agreed to
undertake the groundwater monitoring work specified in the AOC and SOW. Four
quarters of groundwater monitoring have now been completed in accordance with
the terms of the AOC and SOW. The State of Florida, as represented by the
Florida Department of Environmental Protection ("Florida DEP"), has requested
that additional monitoring work be performed. The Company and two other PRPs are
presently conducting discussions with the EPA and the Florida DEP regarding
whether additional monitoring work will be required and, if so, what the scope
of such work will be. The final scale of the monitoring work is not yet known.
It is also not yet known whether any groundwater remediation work will
thereafter be required.

On September 16, 1993, the 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 was necessary to address Operable
Unit Two at the site; however, the Florida DEP requested that additional soil be
removed at the Chemform Site. The Company and the two other PRPs have performed
the soil removal requested, but it is unknown whether the Florida DEP will
require any additional soil removal work. As the EPA still retains jurisdiction
over the Chemform Site, it is possible that additional issues may arise which
would require further resolution. 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.

In 1994, 1993 and 1992, the Company paid for various clean-up activities
and recorded additional provisions charged to continuing operations of $0.3
million, $0.5 million and $0.4 million, respectively, and also charged a
provision of $1.5 million to the gain on sale of DDS operations based on
annually revised estimates of required future clean-up costs. In addition,
estimated liabilities of approximately $2.5 million were recorded in the 1994
consolidated balance sheet in connection with the Company's 1994 business
acquisitions.

At December 31, 1994, 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 $6.1 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.

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

Not applicable.

13
<PAGE> 15

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 POSITIONS PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
---------------------------------------- ---------------------------------------------------
<S> <C>
Douglas L. Rock (48).................... Chairman of the Board since February 1991; Chief
Chairman of the Board, Chief Executive Executive Officer, President and Chief Operating
Officer, President and Chief Operating Officer since March 1989.
Officer

Loren K. Carroll (51)................... President and Chief Executive Officer of M-I
Executive Vice President and Drilling Fluids L.L.C. since May 1994; Executive
Chief Financial Officer of the Vice President and Chief Financial Officer since
Company; President and Chief Executive October 1992; member of the Board of Directors
Officer of M-I Drilling Fluids L.L.C. since November 1987; President of The Geneva
Business Services and a Director of Geneva
Companies from March 1989 to October 1992.

Neal S. Sutton (49)..................... Senior Vice President -- Administration since
Senior Vice President -- December 1994; Vice President -- Administration
Administration, General Counsel from March 1992 to December 1994; Vice President,
and Secretary Secretary and General Counsel of the Company
since January 1991; Associate General Counsel of
Cooper Industries, Inc. from November 1989 to
December 1990.

John J. Kennedy (42).................... Vice President, Chief Accounting Officer and
Vice President, Chief Accounting Treasurer since March 1994; Treasurer from May 1991
Officer and Treasurer to March 1994; Treasury Director responsible for
International Operations from November 1987 to
May 1991.

D. Barry Heppenstall(48)................ President, Smith Drill Bits since May 1994; Vice
President, Smith Drill Bits President and General Manager -- Drill Bits from
March 1992 to May 1994; Vice President -- Smith
Tool Manufacturing from September 1990 to March
1992; Vice President -- Sii Manufacturing from
April 1987 to September 1990.

Richard A. Werner (53).................. President, Smith Drilling and Completion Services
President, Smith Drilling and since May 1994; Vice President and General
Completion Services Manager -- Smith Drilling and Completion Services
from December 1993 to May 1994; 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.

14
<PAGE> 16

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>
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
1994
First Quarter............................................ 11 1/8 8 3/8
Second Quarter........................................... 16 1/8 10 3/8
Third Quarter............................................ 17 5/8 13 3/4
Fourth Quarter........................................... 17 3/8 11 5/8
</TABLE>

On March 3, 1995, the Company had approximately 5,040 Common Stock holders
of record and the last reported closing price on the New York Stock Exchange
Composite Tape was $13.625.

The Company has not paid dividends on its Common Stock since the first
quarter of 1986. 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. In addition, the Company's debt agreements
contain covenants restricting the payment of cash dividends to the Company's
common stockholders based on net earnings and operating cash flow formulas as
defined.

15
<PAGE> 17

ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
----------------------------------------------------------------
1994(A) 1993 1992 1991 1990
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(B):
Revenues........................... $653,901 $220,712 $210,669 $251,967 $255,383
Gross profit....................... 221,274 79,963 71,535 97,387 93,741
Income from continuing operations
before litigation settlement,
interest and taxes............... 60,104 18,575 10,260 10,673 (e) 28,485
Income (loss) from continuing
operations before extraordinary
tax credit and change in
accounting principle............. 35,879 (3,995)(c) 1,164 (5,013) 5,574
Income (loss) from discontinued
operations(b).................... -- 73,623(b) (2,975) (4,623)(e) 5,006
Income (loss) before
extraordinary tax credit and
change in accounting
principle........................ 35,879 69,628 (1,811) (9,636) 10,580
Net income (loss).................. 35,879 68,328(d) (1,811) (9,636)(e) 15,801(g)

PER SHARE DATA:
Income (loss) applicable to
common stock --
From continuing operations
before extraordinary tax
credit and change in
accounting principle.......... $ .92 $ (.13) $ (.02) $ (.22) $ .13
From discontinued operations..... -- 1.95 (.08) (.16) .16
From extraordinary tax
credit........................ -- -- -- -- .17
From the change in accounting
principle..................... -- (.03)(d) -- -- --
Net income (loss)................ $ .92 $ 1.79 $ (.10) $ (.38) $ .46

BALANCE SHEET DATA (AT DECEMBER 31):
Total assets....................... $619,780 $348,486 $370,482 $397,335 $395,628
Long-term debt..................... $115,000 $ 46,000(b) $ 46,000(b) $100,020(f) $145,520
Total shareholders' equity......... $253,121 $214,466 $149,785 $157,006(f) $118,356
</TABLE>

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

(a) Effective February 28, 1994, the Company acquired a 64% interest in M-I
Drilling Fluids L.L.C. (M-I) from Dresser Industries, Inc. (Dresser) for
$160.0 million. M-I is a leading provider of drilling fluids and systems to
the oil and gas drilling industry. M-I was owned 64% by Dresser and 36% by
Halliburton prior to the acquisition. As a result, the financial data for
1994 includes the results of M-I for the period subsequent to the
acquisition date. The Company purchased the 64% interest in M-I using $80.0
million of its cash and issuing a note payable to Dresser for $80.0 million.
See Notes 2 and 4 of Notes to Consolidated Financial Statements.

(b) 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 1990 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, was presented as long-term
debt at December 31, 1993 and 1992. See Notes 2 and 4 of Notes to
Consolidated Financial Statements.
(Notes continued on following page)

16
<PAGE> 18

(c) 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 14
of Notes to Consolidated Financial Statements.

(d) 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 9 of Notes to Consolidated
Financial Statements.

(e) 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.

(f) 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.

(g) 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.

17
<PAGE> 19

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

GENERAL

Smith International, Inc. manufactures and markets a wide range of products
and services used in the drilling of oil and gas wells. The Company historically
has provided technologically advanced drill bits and drilling and completion
products and services to the oil and gas industry. The Company began providing
drilling fluids and systems to the oil and gas drilling industry in March 1994
upon acquiring a 64% interest in M-I Drilling Fluids L.L.C. (M-I).

The decline in worldwide oil and gas drilling activity which occurred in
1992 caused the Company to reassess its future strategy from both a business
portfolio and financial flexibility standpoint. Management concluded that the
sale of the Company's directional drilling systems and services (DDS) business
was in the best long-term interest of the Company's shareholders. This
conclusion resulted in the sale of the DDS business to Halliburton Company in
March 1993 for $247.7 million in cash.

The proceeds of the DDS sale have enabled the Company to pursue its
strategic growth objective and reduce its debt burden. The Company used $102.6
million of the cash proceeds to repay debt of the Company. In addition several
key acquisitions have been accomplished as part of the Company's strategic
program. On December 22, 1993, the Company purchased the product line assets of
A-Z/Grant and Lindsey Completion Systems (A-Z/Grant and Lindsey). On February
28, 1994, the Company acquired a 64% majority interest in M-I an acknowledged
world leader in drilling fluid systems, from Dresser Industries, Inc. On July 1,
1994, the Company acquired Supradiamant, S.A. (Supradiamant), a leading
manufacturer of ultrahard materials, polycrystalline diamonds and cubic boron
nitride, to strengthen the Company's Megadiamond product line. Effective January
1, 1995, M-I (through its Swaco Geolograph division) acquired Baker Hughes
Treatment Services (BHTS), a leading supplier of waste minimization, product
recovery services, water treatment, downhole injection and reserve pit
remediation services to the oilfield industry from Baker-Hughes, Inc. These
acquisitions were all accounted for as purchase transactions and the acquired
operations are included in the Company's Consolidated Statements of Operations
from the dates of each acquisition. The Company believes that these acquisitions
complement the Company's existing core products in forming one of the more
complete packages of expendable products to the oil and gas drilling and
production industry.

Management anticipates that total drilling activity in 1995 will
approximate 1994 activity levels. North American drilling activity is expected
to decline due to the continued weakness in natural gas prices. A good portion
of this decline is expected to be offset by higher drilling activity
internationally outside North America, principally in West Africa, the Far East
and the North Sea. Management believes that the Company is well positioned to
benefit from the increase in international oil and gas drilling activity outside
North America.

18
<PAGE> 20

RESULTS OF OPERATIONS

Revenues

The products manufactured and the services provided by the Company fall
into three product and service business units that are marketed throughout the
world. The following table sets forth the amounts and percentages of revenues by
business units and by area, as well as average rig count data:

<TABLE>
<CAPTION>
1994 1993 1992
------------- ------------- -------------
AMOUNT % AMOUNT % AMOUNT %
------ --- ------ --- ------ ---
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Breakdown by Business Unit:
Drilling fluids................................ $382.6 59 $ -- -- $ -- --
Drill bits..................................... 179.2 27 162.3 73 145.5 69
Drilling and completion services............... 92.1 14 58.4 27 65.2 31
------ --- ------ --- ------ ---
Total................................ $653.9 100 $220.7 100 $210.7 100
====== === ====== === ====== ===
Breakdown by Area:
Domestic....................................... $280.4 43 $104.4 47 $ 88.2 42
Export......................................... 56.4 9 29.9 14 27.9 13
International.................................. 317.1 48 86.4 39 94.6 45
------ --- ------ --- ------ ---
Total................................ $653.9 100 $220.7 100 $210.7 100
====== === ====== === ====== ===
Average Annual Active Rig Count:
Domestic....................................... 775 757 721
Canada......................................... 260 183 96
International (excluding Canada)............... 734 773 856
------ ------ ------
Total................................ 1,769 1,713 1,673
====== ====== ======
</TABLE>

Drilling Fluids

Drilling Fluids revenues represents ten months operations related to the
M-I Drilling Fluids Unit acquired on February 28, 1994. Drilling Fluids revenues
increased approximately $40.1 million or 11.7% over the same period in 1993
(prior to the Company's acquisition of M-I Drilling Fluids) due primarily to
increased revenues in North America due to increased drilling activity, and
increased volumes in Norway, Latin America and Germany.

Drill Bits

Drill Bits revenues are generated from the sale of petroleum drill bits and
mining bits. Petroleum drill bit revenues increased $16.3 million or 11.2% from
$145.8 million in 1993 to $162.1 million in 1994 due primarily to increased
sales in Canada resulting from the increase in drilling activity, the
acquisition of Supradiamant and increased sales in Latin America and the U.S.
These increases were partially offset by reduced sales in Europe due to lower
drilling activity. 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.

Mining drill bit sales increased $0.6 million or 3.6% from $16.5 million in
1993 to $17.1 million in 1994 due to higher sales in Australia and increased
sales to Canadian iron ore producers. Mining drill bit sales 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.

19
<PAGE> 21

Drilling and Completion Services

Drilling and Completion Services revenues increased $33.7 million or 57.7%
from $58.4 million in 1993 to $92.1 million in 1994. The increase in revenues
was primarily due to the acquisition of the A-Z/Grant and Lindsey product lines
and higher sales volume in North America and Colombia. 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.

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,
-----------------------------------------------
1994 1993 1992
------------- ------------- -------------
AMOUNT % AMOUNT % AMOUNT %
------ --- ------ --- ------ ---
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Revenues......................................... $653.9 100 $220.7 100 $210.7 100
------ --- ------ --- ------ ---
Costs and Expenses:
Cost of revenues............................... 432.6 66 140.7 64 139.1 66
Selling expenses............................... 116.2 18 40.5 18 40.1 19
General and administrative expenses............ 45.0 7 20.9 10 21.2 10
------ --- ------ --- ------ ---
Total costs and expenses............. 593.8 91 202.1 92 200.4 95
------ --- ------ --- ------ ---
Income from continuing operations before
litigation settlement, interest and taxes...... 60.1 9 18.6 8 10.3 5
Litigation settlement............................ -- -- 19.9 9 -- --
Interest expense, net............................ 8.6 1 2.2 1 10.1 5
------ --- ------ --- ------ ---
Income (loss) from continuing operations before
income taxes and minority interests............ 51.5 8 (3.5) (2) 0.2 --
Income tax provision (benefit)................... 6.8 1 0.5 -- (1.0) (1)
------ --- ------ --- ------ ---
Income (loss) from continuing operations before
minority interests............................. 44.7 7 (4.0) (2) 1.2 1
Minority interests............................... 8.8 1 -- -- -- --
------ --- ------ --- ------ ---
Income (loss) from continuing operations before
cumulative effect of change in accounting
principle...................................... $ 35.9 6 $ (4.0) (2) $ 1.2 1
====== === ====== === ====== ===
</TABLE>

1994 Versus 1993

Total revenues for 1994 increased by $433.2 million from $220.7 million in
1993 to $653.9 million in 1994. The increase was primarily due to the
acquisitions of M-I, A-Z/Grant and Lindsey and Supradiamant. In addition, the
revenue increase reflected the higher North American drilling activity,
increased drill bit sales in Latin America and increased drilling and completion
services volume in the United States and Colombia.

Gross profit, computed as revenues less cost of revenues, increased by
$141.3 million from $80.0 million in 1993 to $221.3 million in 1994. The
increase was due to the acquisitions of M-I, A-Z/Grant and Lindsey and
Supradiamant and higher volumes in Canada and the United States. In addition,
the increase in gross profit reflected increased drill bit volumes in Latin
America and lower drilling and completion services operating costs in
Europe/Africa.

Operating expenses, comprised of selling expenses and general and
administrative expenses, increased by $99.8 million from $61.4 in 1993 to $161.2
in 1994. The increase was due primarily to the additional expenses associated
with the newly acquired companies and increased variable costs related to the
higher level of revenues partially offset by lower legal expenses as a result of
the settlement of the drill bit litigation suit in 1993. Operating expenses as a
percentage of revenues decreased from 27.8% in 1993 to 24.7% in 1994.

20
<PAGE> 22

Interest expense increased by $4.0 million from $6.0 million in 1993 to
$10.0 million in 1994 due primarily to the additional $80.0 million of debt
incurred to acquire M-I and higher variable interest rates. Interest income
decreased by $2.4 million from $3.8 million in 1993 to $1.4 million in 1994 as a
result of reduced short-term investments as these funds were used in the
acquisition of A-Z/Grant and Lindsey in December 1993, and M-I and Supradiamant
in 1994.

The Company provides for U.S. taxes at the statutory rate offset by tax
benefits related to the net operating loss carryforwards, available to the
Company as well as foreign taxes. The tax provision increased $6.3 million from
$0.5 million in 1993 to $6.8 million in 1994. The tax provision primarily
reflects foreign taxes on income principally related to the additional earnings
of M-I.

Minority interests represents the share of M-I profits associated with the
36% minority interest in the earnings of M-I partially offset by credits
associated with other minority interests from investments in other joint
ventures held by M-I.

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.

Gross profit, computed as revenues less cost of revenues, increased $8.4
million or 11.7% from $71.6 million in 1992 to $80.0 million in 1993. Gross
profit increased due to higher sales and improved pricing 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 $61.3 million in
1992 to $61.4 million in 1993. The increase was due primarily to higher variable
selling expenses relating to the higher North American revenues and increased
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 29.1% in 1992 to 27.8% 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 by $3.3 million from $0.5 million in 1992 to $3.8
million in 1993 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.

21
<PAGE> 23

LIQUIDITY AND CAPITAL RESOURCES

General

The Company's cash position at December 31, 1994 totaled $8.1 million or a
decrease of $93.4 million from the Company's cash position at December 31, 1993.
The Company's current ratio decreased to 2.57 to 1 at December 31, 1994 from
3.28 to 1 at December 31, 1993. The decrease in cash and the current ratio was
due primarily to the acquisition of the 64% interest in M-I for $160.0 million
using $80.0 million of cash and the issuance of a note payable to Dresser for
$80.0 million and the acquisition of Supradiamant for approximately $6.3 million
in cash.

The Company refinanced the Dresser note payable in March 1994 with a $40.0
million term loan from two of its insurance company lenders, and a $65.0 million
revolving line of credit from a bank group. The term loan bears interest at a
rate of 6.02 percent and is payable over a four year period ending in January
1998. The revolving line of credit expires in March 1997 and bears interest at a
rate ranging from LIBOR + 3/4 percent to LIBOR + 1 1/2 percent based upon
debt-to-total capitalization ratios. The Company had borrowing capacity under
its domestic line of credit at December 31, 1994 of approximately $26.0 million.

In June 1994, the Company established a $20.0 million revolving line of
credit for M-I with its existing bank lenders. This revolving line of credit
expires in February 1996 and bears interest at the rate of LIBOR + 3/4 percent.
M-I had borrowing capacity under this revolving line of credit at December 31,
1994 of $20.0 million. The Company has guaranteed its proportional 64% interest
of the revolving line of credit or approximately $12.8 million.

The Company also had various international borrowing facilities with
various foreign banks totaling approximately $15.7 million. At December 31,
1994, the Company had borrowing capacity under its' international credit
facilities of approximately $10.1 million.

The Company has annual interest requirements of approximately $6.3 million
under its existing long-term fixed rate debt agreements. In addition, the
Company will incur interest expense under the $65.0 million and $20.0 million
revolving lines of credit referred to above. The amount of such interest expense
will be determined by the amounts of the lines which are utilized and the
variable interest rates in effect. The Company's debt agreements contain
covenants restricting the payment of cash dividends to the Company's common
stockholders based on net earnings and operating cash flow formulas as defined.
The Company has not paid dividends on its Common Stock since the first quarter
of 1986. In addition to complying with the covenants of the indentures, 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.

The Company believes that it has sufficient existing manufacturing capacity
to meet current demand for its products and services. Projected capital
expenditures in 1995 will approximate $28.0 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.

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, 1994, 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 $6.1 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" for discussion of Superfund matters
and other significant litigation.

22
<PAGE> 24

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.

Net Operating Loss Carryforwards

As of December 31, 1994, for U.S. tax reporting purposes, the Company had
net operating loss ("NOL") carryforwards of approximately $84.4 million,
expiring between 2002 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.

23
<PAGE> 25

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,
1994 and 1993, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1994. These consolidated financial statements and schedule
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and schedule 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, 1994 and 1993, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1994, 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 schedule listed in the accompanying
index of financial statements is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states 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, effective January 1, 1993, Statement of Financial
Accounting Standards (SFAS) No. 109 "Accounting for Income Taxes" and SFAS No.
106 "Employers Accounting for Postretirement Benefits other than Pensions".

ARTHUR ANDERSEN LLP

Houston, Texas
February 8, 1995

24
<PAGE> 26

SMITH INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
1994 1993 1992
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Revenues................................................. $653,901 $220,712 $210,669
-------- -------- --------
Costs and expenses:
Cost of revenues....................................... 432,627 140,749 139,134
Selling expenses....................................... 116,151 40,480 40,065
General and administrative expenses.................... 45,019 20,908 21,210
-------- -------- --------
Total costs and expenses....................... 593,797 202,137 200,409
-------- -------- --------
Income from continuing operations before litigation
settlement, interest and taxes......................... 60,104 18,575 10,260
Litigation settlement (Note 14).......................... -- 19,900 --
Interest expense......................................... 10,014 6,023 10,600
Interest income.......................................... (1,442) (3,821) (497)
-------- -------- --------
Income (loss) from continuing operations before income
taxes and minority interests........................... 51,532 (3,527) 157
Income tax provision (benefit) (Note 6).................. 6,815 468 (1,007)
-------- -------- --------
Income (loss) from continuing operations before minority
interests and cumulative effect of change in accounting
principle.............................................. 44,717 (3,995) 1,164
Minority interests....................................... 8,838 -- --
-------- -------- --------
Income (loss) from continuing operations................. 35,879 (3,995) 1,164
Income (loss) from discontinued operations (Note 2)...... -- 73,623 (2,975)
-------- -------- --------
Income (loss) before cumulative effect of change in
accounting principle................................... 35,879 69,628 (1,811)
Cumulative effect of change in accounting for
postretirement benefits (Note 1)....................... -- (1,300) --
-------- -------- --------
Net income (loss)........................................ 35,879 68,328 (1,811)
Preferred stock dividends (Note 7)....................... -- (868) (1,740)
-------- -------- --------
Net income (loss) applicable to common stock............. $ 35,879 $ 67,460 $ (3,551)
======== ======== ========
Income (loss) per common share from continuing
operations............................................. $ .92 $ (.13) $ (.02)
======== ======== ========
Net income (loss) per common share....................... $ .92 $ 1.79 $ (.10)
======== ======== ========
Average common shares and equivalent shares
outstanding............................................ 39,065 37,775 36,295
======== ======== ========
</TABLE>

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

25
<PAGE> 27

SMITH INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

ASSETS

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1994 1993
-------- --------
(IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.......................................... $ 8,145 $101,561
Receivables, less allowance of $8,679 in 1994 and $4,995 in 1993
for doubtful accounts........................................... 201,053 67,830
Inventories (Note 3)............................................... 201,104 88,369
Deferred tax assets, net (Note 6).................................. 2,161 --
Prepaid expenses and other......................................... 9,133 4,802
-------- --------
Total current assets....................................... 421,596 262,562
-------- --------

PROPERTY, PLANT AND EQUIPMENT:
Land............................................................... 17,079 888
Buildings.......................................................... 29,065 16,284
Machinery and equipment............................................ 220,953 176,940
-------- --------
267,097 194,112
Less -- accumulated depreciation................................... 149,388 139,395
-------- --------
Net property, plant and equipment.......................... 117,709 54,717
-------- --------

OTHER ASSETS, including assets held for sale of $8,726 in 1994 and
$11,866 in 1993.................................................... 41,446 28,253

GOODWILL............................................................. 39,029 2,954
-------- --------
TOTAL ASSETS......................................................... $619,780 $348,486
======== ========
</TABLE>

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

26
<PAGE> 28

SMITH INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

LIABILITIES AND SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1993
-------- --------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
CURRENT LIABILITIES:
Short-term borrowings and current portion of long-term debt (Note
4)................................................................ $ 15,852 $ 702
Accounts payable..................................................... 67,873 24,763
Accrued payroll and severance related costs.......................... 28,232 10,923
Income taxes payable (Note 6)........................................ 6,579 9,484
Other................................................................ 45,711 34,198
-------- --------
Total current liabilities.................................... 164,247 80,070
-------- --------
LONG-TERM DEBT (Note 4)................................................ 115,000 46,000
-------- --------
DEFERRED TAX LIABILITIES (Note 6)...................................... -- 4,563
-------- --------
OTHER LONG-TERM LIABILITIES............................................ 17,097 3,387
-------- --------
MINORITY INTERESTS (Notes 1 and 2)..................................... 70,315 --
-------- --------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 14)

SHAREHOLDERS' EQUITY:
Common stock:
Authorized -- 60,000,000 shares, $1 par value; issued and
outstanding -- 39,432,833 shares in 1994 and 39,311,447 shares in
1993............................................................. 39,433 39,311
Common stock warrants (Note 7):
Class A warrants -- outstanding -- 202,434 in 1994 and 225,520 in
1993............................................................. -- --
Class B warrants -- outstanding -- 1,871,400 in 1994 and 1,872,205
in 1993.......................................................... -- --
Class C warrants -- outstanding -- 451,357 in 1994 and 1993....... 7,278 7,278
Additional paid-in capital............................................. 272,483 271,582
Accumulated deficit.................................................... (47,554) (83,433)
Cumulative translation adjustments..................................... (4,605) (6,358)
Less-treasury securities, at cost (628,583 common shares
and 451,357 Class C warrants in 1994 and 1993) (Note 7).............. (13,914) (13,914)
-------- --------
Total shareholders' equity................................... 253,121 214,466
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................. $619,780 $348,486
======== ========
</TABLE>

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

27
<PAGE> 29

SMITH INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
1994 1993 1992
--------- --------- --------
<S> <C> <C> <C>
(IN THOUSANDS)
Cash flows from operating activities:
Income (loss) from continuing operations (after
litigation settlement of $19,900 in 1993)........... $ 35,879 $ (3,995) $ 1,164
Adjustments to reconcile net income (loss) to net cash
provided by operating activities excluding the net
effects from the Company's 1993 and 1994
acquisitions:
Depreciation and amortization..................... 21,802 11,600 22,737
Provision for losses on receivables............... 1,642 974 1,860
Gain on disposal of fixed assets.................. (5,675) (1,623) (7,164)
Foreign currency translation losses............... 1,986 621 2,902
Change in receivables............................. (18,457) 19,424 (7,139)
Change in inventories............................. (20,180) 2,011 15,045
Change in accounts payable........................ 6,396 (5,960) 564
Changes in other current assets and liabilities... (21,074) 763 (14,875)
Changes in other non-current assets and
liabilities.................................. 14,282 (631) 2,257
--------- --------- --------
Subtotal....................................... 16,601 23,184 17,351
Net results of discontinued operations......... -- (6,483) (2,975)
Cumulative effect of change in accounting for
postretirement benefits (Note 1)............. -- (1,300) --
--------- --------- --------
Net cash provided by operating
activities.............................. 16,601 15,401 14,376
--------- --------- --------
Cash flows from investing activities (Note 2):
Acquisition of M-I Drilling Fluids Company............. (162,000) -- --
Acquisition of Supradiamant............................ (6,363) -- --
Proceeds from the sale of the DDS operations........... -- 247,709 --
Costs and expenses related to the sale of the DDS
operations.......................................... -- (47,377) --
Acquisition of A-Z/Grant and Lindsey................... -- (19,000) --
Fixed asset additions.................................. (24,140) (15,191) (26,668)
Proceeds from disposal of fixed assets................. 10,435 7,091 11,756
--------- --------- --------
Net cash provided by (used in) investing
activities.............................. (182,068) 173,232 (14,912)
--------- --------- --------
Cash flows from financing activities (Notes 4 and 7):
Increase (decrease) in short-term borrowings, net...... 3,507 (33,360) (15,970)
Proceeds from issuance of long-term debt............... 84,000 -- 115,000
Repayment of long-term debt, net....................... (5,000) (67,683) (98,348)
Proceeds from issuance of common stock and exercise of
stock options and warrants.......................... 1,023 240 39
Purchase of treasury stock............................. -- (1,329) --
Distributions to minority interests, net............... (11,394) -- --
Dividends paid on preferred stock...................... -- (868) (1,740)
--------- --------- --------
Net cash provided by (used in) financing
activities.............................. 72,136 (103,000) (1,019)
--------- --------- --------
Effect of exchange rate changes on cash.................. (85) (321) (388)
--------- --------- --------
Increase (decrease) in cash and cash equivalents......... (93,416) 85,312 (1,943)
Cash and cash equivalents at beginning of year........... 101,561 16,249 18,192
--------- --------- --------
Cash and cash equivalents at end of year................. $ 8,145 $ 101,561 $ 16,249
========= ========= ========
</TABLE>

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

28
<PAGE> 30

SMITH INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<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, 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
Exercise of employee stock options....... -- -- 97,495 98 -- -- 722
Exercise of common stock warrants........ -- -- 23,891 24 (23,891) -- 179
Net income............................... -- -- -- -- -- -- --
Translation adjustment for the period.... -- -- -- -- -- -- --
--------- ------- ---------- ------- ---------- ------ ----------
Balance, December 31, 1994............... -- $ -- 39,432,833 $39,433 2,525,191 $7,278 $272,483
======== ======= ========= ======= ========= ======= =========

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

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

<S> <C> <C> <C> <C> <C> <C>
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)
Exercise of employee stock options....... -- -- -- -- -- --
Exercise of common stock warrants........ -- -- -- -- -- --
Net income............................... 35,879 -- -- -- -- --
Translation adjustment for the period.... -- 1,753 -- -- -- --
----------- ----------- -------- ------- -------- -------
Balance, December 31, 1994............... $ (47,554) $(4,605) (628,583) $(6,636) (451,357) $(7,278)
=========== =========== ======== ======= ======== =======
</TABLE>

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

29
<PAGE> 31

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLAR AMOUNTS IN THE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARE EXPRESSED IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND 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 and majority-owned 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 financial instruments purchased with an original
maturity of three months or less to be cash equivalents.

Property, Plant and Equipment

Property, plant and equipment, which includes rental equipment, are stated
at cost. The Company computes depreciation on plant and equipment 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. Expenditures for
maintenance, repairs and minor improvements are charged to expense when
incurred. When property, plant and equipment 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 of the domestic inventories
of the Smith Drill Bit Division and the Smith Drilling and Completion Services
Division and by the first-in, first-out ("FIFO") method for all other
inventories. Inventory costs consist of materials, labor and factory overhead.

Amortization

Goodwill is being amortized over 40 years using the straight-line method.
The Company continually evaluates whether subsequent events or circumstances
have occurred that indicate the remaining useful life of goodwill may warrant
revision or that the remaining balance of goodwill may not be recoverable.
Management believes that there have been no events or circumstances which
warrant revision to the remaining useful life or which affect the recoverability
of goodwill.

Translation of Foreign Currencies

For the majority of the Company's international operations, the functional
currency is the United States dollar. As a result, the accounts of these
international operations 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

30
<PAGE> 32

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

historical rates. All translation adjustments resulting from the translation of
these financial statements to United States dollars are charged or credited to
income currently.

For the remaining international operations of the Company, the functional
currency is the applicable local currencies. The accounts of the these
operations 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.

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 option contract. Gains arising on these options are
recognized at the time the options are exercised.

Environmental Obligations

Expenditures for environmental obligations that relate to current
operations are expensed or capitalized, as appropriate. Expenditures that relate
to an existing condition caused by past operations and which do not contribute
to current or future revenue generation are expensed. Liabilities are recorded
when remedial efforts are probable and the costs can be reasonably estimated.

Income Taxes

The Company accounts for income taxes in accordance Statement of Financial
Accounting Standards with ("SFAS") No. 109 "Accounting for Income Taxes" which
was adopted in the first quarter of 1993. This standard superseded SFAS No. 96,
"Accounting for Income Taxes" and requires an asset and liability approach for
financial accounting and income tax reporting based on enacted tax rates. 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.

Revenue Recognition

The Company's revenues are composed of product sales and rental, service
and other revenues. The Company records product sales when the goods are sold to
a customer. Rental, service and other revenues are recorded as the rentals and
services are performed.

Minority Interests

The Company records minority interests expense which primarily represents
the portion of the earnings of M-I applicable to the 36% minority interest in
M-I.

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 in 1993 and

31
<PAGE> 33

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1992. 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, 1994. As the Company incurred a net loss for the year
ended December 31, 1992, the equivalent shares were antidilutive; therefore, the
equivalent shares were not included in the average number of common shares
outstanding when calculating the loss per common share in 1992.

Income (loss) per common share from discontinued operations was $1.95 and
$(.08), respectively, for the years ended December 31, 1993 and 1992. 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 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
1993 consolidated statement of operations.

Reclassifications

Certain reclassifications have been made to the 1993 and 1992 consolidated
financial statements and notes in order to conform with the current year
presentation.

2. ACQUISITIONS AND DIVESTITURES

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 consolidated statements of operations report 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 and $158.7
million in 1992. In determining the income (loss) from discontinued operations,
interest expense of $1.3 million in 1993 and $5.6 million in 1992 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/Grant and Lindsey Completion Systems (A-Z/Grant and Lindsey) from MASX
Energy Services Group, Inc. for $19.0 million in cash. A-Z/Grant and Lindsey are
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 and $29.0 million in 1992. 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.

32
<PAGE> 34

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The historical balance sheet of the Company at December 31, 1993 included
the historical accounts of A-Z/Grant and Lindsey on an estimated basis. During
the third quarter of 1994, the Company revised its valuation of the tangible
assets acquired and other costs related to the purchase of A-Z/Grant and
Lindsey. The Company has restated its December 31, 1993 balance sheet for such
revisions by increasing inventories by $6.7 million, other assets by $0.8
million and other liabilities by $0.1 million and decreasing property, plant and
equipment, net by $7.4 million.

Acquisition of M-I Drilling Fluids L.L.C.

Effective February 28, 1994, the Company acquired a 64% interest in M-I
Drilling Fluids L.L.C. (M-I) from Dresser Industries, Inc. (Dresser) for $160.0
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
$80.0 million of its cash and issuing a note payable to Dresser for $80.0
million due on August 28, 1994 (See Note 4 for discussion of the refinancing of
this note). This acquisition was accounted for as a purchase. The Company
recorded approximately $37.3 million of goodwill upon purchase of the 64%
interest in M-I. M-I reported unaudited revenues of $75.4 million for the two
months ended February 28, 1994, $405.8 million in 1993 and $382.6 million in
1992.

Acquisition of Supradiamant

On July 1, 1994, the Company acquired Supradiamant, S.A. (Supradiamant)
from Societe Industrielle de Combustible Nucleaire for approximately $6.3
million in cash. Supradiamant is a leading manufacturer of ultrahard materials,
polycrystalline diamonds and cubic boron nitride. This acquisition was accounted
for as a purchase. Supradiamant reported unaudited revenues of $3.9 million for
the first six months of 1994, $7.5 million in 1993 and $6.8 million in 1992.
Summarized unaudited pro forma results from continuing operations of
Supradiamant for the years ended December 31, 1994 and 1993 are not significant
to the Company.

The historical balance sheet of the Company at December 31, 1994 includes
the historical accounts of Supradiamant and certain purchase accounting
adjustments on an estimated basis. Management has not fully evaluated all of the
consequences of the acquisition of Supradiamant including assessing the fair
market value of the tangible assets acquired and the total amount of costs that
may be necessary to reorganize their operations. Upon completion of these
evaluations during 1995, any additional adjustments will be recorded and the
excess purchase price over net tangible assets acquired, if any, will be
recorded as goodwill in accordance with purchase accounting rules and
principles.

The unaudited pro forma revenues and income from continuing operations for
the years ended December 31, 1994 and 1993 assuming the acquisitions of
A-Z/Grant and Lindsey, M-I and Supradiamant had been made on January 1, 1993 are
as follows:

<TABLE>
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
Unaudited pro forma revenues.................................. $733,135 $664,138
Unaudited pro forma income from continuing operations (after a
1993 charge of $19.9 million to settle litigation).......... $ 34,495 $ 572
Unaudited pro forma income (loss) from continuing operations
per common share............................................ $ 0.88 $ (0.01)
</TABLE>

33
<PAGE> 35

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Unaudited Subsequent Event-Acquisition of Baker Hughes Treatment Services

Effective January 1, 1995, M-I (through its Swaco Geolograph division)
acquired Baker Hughes Treatment Services (BHTS) from Baker-Hughes, Inc. for
approximately $5.1 million in cash. BHTS is a leading supplier of waste
minimization, product recovery services, water treatment, downhole injection and
reserve pit remediation services to the oilfield industry. This acquisition will
be accounted for as a purchase. BHTS reported unaudited revenues of
approximately $10.7 million in 1994, $9.8 million in 1993 and $4.1 million in
1992.

3. INVENTORIES

Inventories consist of the following:

<TABLE>
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
Raw materials................................................. $ 24,338 $ 10,965
Work in process............................................... 31,805 13,551
Finished goods................................................ 155,420 75,001
-------- --------
211,563 99,517
Reserves to state certain domestic inventories ($94,339 in
1994 and $77,312 in 1993) on a LIFO basis................... (10,459) (11,148)
-------- --------
$201,104 $ 88,369
======== ========
</TABLE>

4. DEBT

The following summarizes the Company's outstanding debt:

<TABLE>
<CAPTION>
BALANCE AT DECEMBER
31,
----------------------
1994 1993
-------- -------
<S> <C> <C>
SHORT-TERM DEBT
Short-term bank borrowings with weighted average interest rates
of 14% in 1994 and 7% in 1993................................ $ 5,852 $ 702
Current portion of long-term debt.............................. 10,000 --
-------- -------
Total short-term debt and current portion of
long-term debt..................................... 15,852 702
-------- -------
LONG-TERM DEBT
Notes payable to insurance companies due on October 1, 2001 at
9.83%........................................................ 46,000 46,000
Term loan payable to insurance companies due on January 2, 1998
at 6.02%..................................................... 40,000 --
Bank revolver payable to banks with final payment due in March
1997......................................................... 39,000 --
-------- -------
125,000 46,000
Less: Amounts classified as current portion of long-term
debt................................................... 10,000 --
-------- -------
Total Long-Term Debt................................. 115,000 46,000
-------- -------
Total Debt........................................... $130,852 $46,702
======== =======
</TABLE>

In March 1994, the Company refinanced the $80.0 million note payable to
Dresser issued to purchase its investment in M-I with a $40.0 million term loan
from two of its insurance company lenders and a $65.0 million revolving line of
credit from a bank group. The term loan is payable over a period ending in
January 1998. The revolving line of credit expires in March 1997 and bears
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. The revolving line
of credit carries a commitment fee of 3/8 percent of the unutilized credit
facility.

34
<PAGE> 36

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In June 1994, the Company established a $20.0 million revolving line of
credit for M-I with its existing bank lenders. This revolving line of credit
expires in February 1996 and bears interest at the rate of LIBOR + 3/4 percent.
At December 31, 1994, M-I has borrowing capacity under this revolving line of
credit of $20.0 million. The Company has guaranteed its proportional 64%
interest of the revolving line of credit or approximately $12.8 million. This
revolving line of credit carries a commitment fee of 1/4 percent of the
unutilized credit facility.

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 was
classified as long-term. The Company 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, 1994 and 1993,
respectively.

Certain of the Company's foreign subsidiaries have short-term lines of
credit with various foreign banks totaling approximately $15.7 million. At
December 31, 1994, borrowings of $5.6 million were outstanding under these
lines. The majority of these lines are unsecured.

The Company's indentures relating to its long-term debt contain covenants
restricting the payment of cash dividends to the Company's common stockholders
based on net earnings and operating cash flow formulas as defined. The Company
has not paid dividends on its Common Stock since the first quarter of 1986. In
addition to complying with the covenants of the indentures, 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.

The Company had average short-term borrowings of $9.1 million in 1994 and
$13.9 million in 1993. The average interest rate related to these short-term
borrowings were 13% and 7%, respectively.

Payment requirements on long-term debt for the next five years are as
follows: $10.0 million in 1995; $10.0 million in 1996; $59.2 million in 1997;
$20.2 million in 1998; $10.2 million in 1999; and $15.4 million thereafter.

Interest paid during the years ended December 31, 1994, 1993, and 1992
amounted to $7.0 million, $9.2 million, and $15.7 million, respectively.

5. 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.

35
<PAGE> 37

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Foreign Currency Forward Contracts and Options

At December 31, 1994, the Company had outstanding foreign exchange
contracts as a hedge against foreign accounts totaling $17.5 million maturing at
various dates during 1995. There were no significant unrecorded gains or losses
on these contracts as of December 31, 1994. The Company had outstanding foreign
currency option contracts of $14.8 million at December 31, 1994 which expire at
various dates in 1995. The Company has no loss exposure under these contracts.

Interest Rate Contracts

In July 1993, the Company entered into an interest rate swap agreement
which expires on October 1, 1997 with a financial institution in order to
balance the portfolio of fixed rate and floating rate instruments of the
Company. Under this agreement, the Company receives a fixed rate of 4.86% and
pays a floating rate based on 6 month LIBOR on $46.0 million in borrowings.
Management estimates that the fair market value of the swap agreement at
December 31, 1994 was approximately ($1.7 million). The fair market value was
estimated by discounting the expected cash flows using current market rates over
the life of the swap agreement. The estimation determined above may not be
indicative of the amounts which the Company would pay in a current market
exchange or ultimately pay over the life of the swap agreement. Management
believes that the swap will not have a material effect on the consolidated
financial position or results of the Company over the remaining term of the swap
agreement.

6. INCOME TAXES

The consolidated income tax provision (benefit) relating to continuing
operations are summarized as follows:

<TABLE>
<CAPTION>
1994 1993 1992
------ ----- -------
<S> <C> <C> <C>
Current --
United States........................................... $ 413 $ -- $ 108
Foreign................................................. 5,532 662 1,613
State................................................... 793 13 (30)
------ ----- -------
6,738 675 1,691
------ ----- -------
Deferred --
United States (including, in 1992, the benefit of a
$2,500 tax settlement)............................... 64 (301) (2,462)
Foreign................................................. 13 94 (236)
------ ----- -------
77 (207) (2,698)
------ ----- -------
Income tax provision (benefit)............................ $6,815 $ 468 $(1,007)
====== ===== =======
</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. In 1994 and 1993, 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.

36
<PAGE> 38

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- -------
<S> <C> <C> <C>
Income (loss) from continuing operations before
income taxes and after minority interest:
United States...................................... $ 40,745 $ 21,020 $ 2,740
Foreign............................................ 1,949 (24,547) (2,583)
-------- -------- -------
Total...................................... $ 42,694 $ (3,527) $ 157
======== ======== =======
Computed U.S. Federal statutory tax expense
(benefit).......................................... $ 14,943 $ (1,199) $ 53
U.S. Alternative Minimum Tax......................... 630 -- 161
Utilization of U.S. net operating loss
carryforward....................................... (12,118) (7,283) --
Permanent differences................................ (1,720) (165) (1,089)
State taxes, net..................................... 818 13 (30)
Foreign tax provisions in excess of U.S. rate/foreign
losses with no tax benefit realized................ 4,078 8,929 2,255
U.S. benefit of tax settlement....................... -- -- (2,500)
Other items, net..................................... 184 173 143
-------- -------- -------
Income tax provision (benefit)............. $ 6,815 $ 468 $(1,007)
======== ======== =======
</TABLE>

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

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, NET
1994 1993 CHANGE
------------ ------------ --------
<S> <C> <C> <C>
Deferred tax liabilities attributed to the excess
of net book basis over remaining tax basis
(principally depreciation):
Domestic...................................... $(10,114) $ (8,286) $ (1,828)
Foreign....................................... (5,076) (4,015) (1,061)
-------- -------- --------
Total deferred tax liabilities........... (15,190) (12,301) (2,889)
-------- -------- --------
Deferred tax assets attributed to net operating
loss and tax credit carryforwards:
Domestic...................................... 40,652 62,091 (21,439)
Foreign....................................... 24,278 6,970 17,308
Other deferred tax assets:
Domestic...................................... 14,898 11,863 3,035
Foreign....................................... 6,861 -- 6,861
-------- -------- --------
Subtotal................................. 86,689 80,924 5,765
Valuation allowance................................ (64,993) (73,186) 8,193
-------- -------- --------
Net deferred tax assets.......................... 21,696 7,738 13,958
-------- -------- --------
Net deferred tax asset (liability)....... $ 6,506 $ (4,563) $ 11,069
======== ======== ========
Balance sheet presentation:
Current deferred tax asset, net.................. $ 2,161 $ -- $ 2,161
Other assets..................................... 4,345 -- 4,345
Deferred tax liabilities, net.................... -- (4,563) 4,563
-------- -------- --------
Net deferred tax asset (liability)............ $ 6,506 $ (4,563) $ 11,069
======== ======== ========
</TABLE>

37
<PAGE> 39

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The net change in deferred taxes of $11.1 million is primarily attributed
to the acquisition of M-I as discussed in Note 2.

For U.S. tax reporting purposes, the Company has cumulative NOL
carryforwards in the amount of approximately $84.4 million. These losses were
generated in 1987, 1988 and 1992 in the amounts of $39.9 million, $42.3 million
and $2.2 million, respectively. Losses in 1987, 1988 and 1992 are available to
reduce future U.S. taxable income that may be generated through the years 2002,
2003 and 2007, respectively. On 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 $3.8 million and investment tax credits of $7.3 million.
The investment tax credits 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, 1994, 1993 and 1992 amounted to $7.0 million, $0.9
million, and $4.4 million respectively.

The Company's foreign subsidiaries currently have undistributed earnings of
$18.0 million which if repatriated would be generally sheltered from U.S. tax by
NOL carryforwards and various foreign tax credits.

7. CAPITAL STOCK

Preferred Stock

In 1988, the Company authorized the issuance of 5,000,000 shares of 8.75%
convertible preferred stock. The convertible preferred stock carried a
cumulative annual dividend of 8.75% ($2.1875 per share based on a $25 value) was
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.
The Company issued 800,000 shares of the preferred stock for $20.0 million in
cash in a private placement of securities in 1988. These shares were issued to
the public in a secondary offering of the preferred stock in 1990. At December
31, 1992, 798,800 shares of preferred stock were outstanding.

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 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 for the
year ended December 31, 1993. As of December 31, 1994, there were no shares of
the preferred stock outstanding.

Class C Warrants and Treasury Securities

During 1990, the Company issued 300,000 shares of common stock and 451,357
Class C warrants to an international subsidiary of the Company. These Class C
Warrants were exercisable until February 28, 1995 at a price of $1.00 per share.
The Company 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 at December 31, 1993. In 1994, the international

38
<PAGE> 40

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

subsidiary exchanged the 451,357 Class C Warrants with the parent to acquire the
parent's 64% interest in the Canadian drilling fluids subsidiary.

In June 1993, the Board of Directors approved a stock repurchase program
whereby the Company was authorized to 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, 1994, 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.

Unaudited Subsequent Event-Class A and Class B Warrants

On February 28, 1995, the Company's Class A Warrants and the Company's
Class B Warrants expired in accordance with the terms of the warrant agreements.
During 1995, prior to expiration, 142,880 Class A Warrants and 123 Class B
Warrants were exercised and converted into 143,003 shares of the Company's
common stock. The Company received $1.2 million in connection with this exercise
and conversion of these warrants.

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

As of December 31, 1994, 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.

The options, exercisable at various dates through December 2003, are
conditioned upon continued employment. A summary of stock option transactions
for 1994, 1993 and 1992 are as follows:

<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- --------
<S> <C> <C> <C>
Outstanding at beginning of year................... 1,002,832 720,190 636,854
Options granted.................................... 513,300 439,500 277,487
Options forfeited.................................. (41,562) (116,015) (136,078)
Options exercised:
-- with a basis of $2.48......................... -- (200) --
-- with a basis of $2.50......................... -- -- (40,132)
-- with a basis of $2.53......................... (4,700) (17,008) (11,941)
-- with a basis of $5.50......................... (17,400) (15,750) (6,000)
-- with a basis of $8.38......................... (32,150) (7,885) --
-- with a basis of $10.21........................ (1,200) -- --
-- with a basis of $10.27........................ (29,910) -- --
-- with a basis of $10.31........................ (2,300) -- --
-- with a basis of $12.56........................ (8,585) -- --
-- with a basis of $14.73........................ (1,250) -- --
--------- --------- --------
Outstanding at end of year......................... 1,377,075 1,002,832 720,190
======== ======== ========
</TABLE>

39
<PAGE> 41

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- --------
<S> <C> <C> <C>
Options exercisable:
Granted in 1982-1984 with a basis of $10.21...... -- 1,925 1,825
Granted in 1982-1985 with a basis of $2.53....... 2,100 6,800 25,133
Granted in 1986 with a basis of $2.48............ 633 633 833
Granted in 1987 with a basis of $5.50............ 17,250 34,650 52,400
Granted in 1989 with a basis of $10.27........... 60,185 91,345 80,408
Granted in 1990 with a basis of $12.56........... 81,915 75,924 53,495
Granted in 1990 with a basis of $15.72........... -- 3,750 2,500
Granted in 1990 with a basis of $16.09........... -- 10,313 6,875
Granted in 1991 with a basis of $10.52........... 3,750 2,500 1,250
Granted in 1991 with a basis of $14.73........... 70,501 66,455 31,445
Granted in 1992 with a basis of $8.38............ 65,007 54,293 --
Granted in 1992 with a basis of $9.25............ 20,000 20,000 20,000
Granted in 1993 with a basis of $8.38............ 49,625 -- --
Granted in 1993 with a basis of $10.31........... 57,325 -- --

Options not exercisable:
Granted in 1989 with a basis of $10.27 -- -- 26,802
Granted in 1990 with a basis of $12.56........... -- 20,036 53,495
Granted in 1990 with a basis of $15.72........... -- -- 2,500
Granted in 1990 with a basis of $16.09........... -- -- 6,875
Granted in 1991 with a basis of $10.52........... 1,250 2,500 3,750
Granted in 1991 with a basis of $14.73........... 22,739 45,370 104,333
Granted in 1992 with a basis of $8.38............ 83,745 126,838 246,271
Granted in 1993 with a basis of $8.38............ 148,875 199,500 --
Granted in 1993 with a basis of $10.31........... 178,875 240,000 --
Granted in 1994 with a basis of $13.13........... 513,300 -- --
--------- --------- --------
1,377,075 1,002,832 720,190
======== ======== ========
</TABLE>

The 1994 grants include stock options of 513,300 shares at a $13.13
exercise price. The 1993 grants included stock options of 199,500 shares and
240,000 shares at exercise prices of $8.38 and $10.31, respectively. 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. All stock
options discussed above, with the exception of the stock options granted at
$9.25, 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.

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, 1994, there were 9,164 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, 1994, there were 911,933 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.

40
<PAGE> 42

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9. EMPLOYEE BENEFITS

The Company has non-contributory pension plans in the U.S and the United
Kingdom. 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 1994 and 1993. Most
of the employees of M-I are not covered by any pension plans.

The following tables detail the components of pension expense for the three
years ended December 31, 1994, the funded status of the plans and major
assumptions used to determine these amounts:

<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Service cost.......................................... $ 266 $ 276 $ 343
Interest cost......................................... 862 769 805
Actual return on plan assets.......................... (299) (1,308) (848)
Net amortization and deferral and other............... (645) 1,284 19
------- ------- -------
Net periodic pension cost............................. $ 184 $ 1,021 $ 319
======= ======= =======
</TABLE>

Reconciliation of Funded Status of the Plan

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation........................... $ 9,863 $10,276 $ 9,674
======= ======= =======
Accumulated benefit obligation...................... $ 9,993 $10,468 $ 9,842
======= ======= =======
Projected benefit obligation........................ $10,681 $11,540 $10,373
Plan assets at fair value........................... 11,166 10,259 11,250
------- ------- -------
Projected benefit obligation (in excess of) or less
than plan assets................................. $ 485 $(1,281) $ 877
Unrecognized prior service cost..................... 11 -- --
Unrecognized net (gain) loss........................ (133) 1,440 (825)
Additional minimum liability........................ (978) (2,491) --
------- ------- -------
Prepaid pension cost (pension liability) recognized
in the balance sheet............................. $ (615) $(2,332) $ 52
======= ======= =======
Weighted-average assumed discount rate.............. 8.5%-8.875% 7.0% 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......................................... 8.5%-9.0% 7.0% 8.5%
</TABLE>

In 1993 and 1994, the Company adjusted its discount rate related to the
domestic pension plan for current and former employees of the Smith Drill Bits
and the Smith Drilling and Completion Services Units to more accurately reflect
current market trends. For 1993, the Company reduced its discount rate from 8.5%
to 7.0%. As a result, the projected benefit obligation exceeded the fair value
of the plan's assets by $2.5 million. This amount was recorded as an additional
minimum liability in the Consolidated Balance Sheets at December 31, 1993. For
1994, the Company increased its discount rate from 7.0% to 8.875%. This resulted
in a reduction in the amount by which the projected benefit obligation exceeded
the fair value of the plan's assets from $2.5 million in 1993 to $1.0 million.
This amount was recorded as reduction to the additional minimum liability in the
Consolidated Balance Sheets at December 31, 1994.

41
<PAGE> 43

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company has several other pension plans covering certain international
employees. Pension expense for these plans totaled $0.4 million in 1994, $0.2
million in 1993 and $0.4 million in 1992. Based on the latest available
actuarial valuations, total accumulated plan benefits are $2.6 million and net
assets available for benefits are $3.4 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 managed by Vanguard Group of Investment Companies (Vanguard)
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 $1.5 million in 1994, $1.7 million in 1993 and $2.0
million in 1992. 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.
The Company recorded an expense of $2.9 million in 1994 and $1.2 million in 1993
for this provision of the plan. No expense was required or recorded for matching
contributions for 1992.

The M-I Drilling Fluids Unit 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 managed by Vanguard or a combination
thereof. M-I contributes for all eligible employees 3% of their qualified
compensation into the Plan. In addition, a 1 1/2% matching contribution of an
individual employee's 401(k) contributions can be made based upon the attainment
of a certain level of operating income as a percentage of total revenue for the
year. M-I recorded contributions to this plan of approximately $1.7 million in
1994.

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. These costs totaled
approximately $0.2 million in 1992.

During the first quarter of 1993, the Company adopted SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions" and
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 per retiree per year. The cap will be adjusted
annually for inflation, which is currently assumed to be 4 percent.

Prior to March 1, 1994, M-I had provided retiree medical coverage to its
employees under the M-I Drilling Fluids Retiree Medical Plan. As part of the
Company's acquisition of M-I, eligibility for inclusion in the plan was closed
as of March 1, 1994. Active M-I employees are not eligible for benefits under
the closed M-I plan; however, they will be eligible for postretirement medical
benefits under the Smith International, Inc. Retiree Medical Plan. The closed
M-I plan continues to provide postretirement medical benefits to the eligible
M-I retirees and their dependents. The dollar amount of M-I's portion of the
cost of benefits under this closed plan is capped at a lifetime maximum benefit
of $500,000 per retiree. Any costs in excess of the capped amount is the
responsibility of the retiree or their dependents.

42
<PAGE> 44

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1993
------------ ------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
-- Retirees............................................... $ (4,829) $ (1,140)
-- Actives................................................ (3,248) (93)
Plan assets at fair value................................... -- --
------------ ------------
Accumulated postretirement benefit obligation in excess of
plan assets............................................... (8,077) (1,233)
Unrecognized net gain....................................... (2,510) (57)
------------ ------------
Prepaid (Accrued) postretirement benefit cost............... $(10,587) $ (1,290)
========== ==========
</TABLE>

Postretirement benefit expense recognized in income from continuing
operations for the years ended December 31, 1994 and 1993 is summarized as
follows:

<TABLE>
<CAPTION>
1994 1993
----- ----
<S> <C> <C>
Service cost........................................................ $ 87 $ 9
Interest cost on accumulated postretirement benefit obligation and
other............................................................. 701 223
Net gain............................................................ (159) --
----- ----
Postretirement benefit expense...................................... $ 629 $232
===== ====
</TABLE>

The health care cost trend rate assumption can have a significant effect on
the amounts reported. For measurement purposes, an 11% and 12% annual rate of
increase in the per capita cost of covered health care benefits was assumed for
1994 and 1993, 1993 respectively. 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 1994 and 1993 were 8.5%-8.875% and 7.0%,
respectively.

10. 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

43
<PAGE> 45

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

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.

11. SUPPLEMENTARY INCOME STATEMENT INFORMATION

Amounts charged to expense for continuing operations is as follows:

<TABLE>
<CAPTION>
1994 1993 1992
------- ------ ------
<S> <C> <C> <C>
Maintenance and repairs.................................. $ 9,921 $5,689 $3,927
Depreciation of fixed assets............................. 19,696 7,348 9,088
Amortization of intangible assets........................ 2,106 934 618
Taxes, other than payroll and income taxes............... 5,134 1,901 2,280
Rents.................................................... 12,994 6,572 6,190
Research and engineering costs........................... 14,615 6,574 6,218
</TABLE>

12. QUARTERLY INFORMATION (UNAUDITED)

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH YEAR
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
1994
Revenues................................. $100,762 $173,410 $181,489 $198,240 $653,901
======== ======== ======== ======== ========
Gross profit............................. $ 35,581 $ 57,609 $ 60,276 $ 67,808 $221,274
======== ======== ======== ======== ========
Income from continuing operations...... 7,589 $ 8,465 $ 9,349 $ 10,476 $ 35,879
======== ======== ======== ======== ========
Net income............................... $ 7,589 $ 8,465 $ 9,349 $ 10,476 $ 35,879
======== ======== ======== ======== ========
Income per common share:
From continuing operations............. 0.20 $ 0.22 $ 0.24 $ 0.27 $ 0.92
======== ======== ======== ======== ========
Net income............................. $ 0.20 $ 0.22 $ 0.24 $ 0.27 $ 0.92
======== ======== ======== ======== ========
</TABLE>

44
<PAGE> 46

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Included in the results for 1994 are a full year of the operations of
A-Z/Grant and Lindsey, ten months of operations for M-I and six months of
operations of Supradiamant. For a further discussion of these acquisitions, see
Note 2.

<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............................. $ 17,174 $ 19,005 $ 21,627 $ 22,157 $ 79,963
======== ======== ======== ======== ========
Income (loss) from continuing
operations............................. $ 1,327 $ 2,651 $(14,158) $ 6,185 $ (3,995)
Income from discontinued operations...... 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
14). Due to the conversion of the preferred stock into common stock (See Note 7)
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.

13. 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, 1994:
Revenues from unaffiliated customers........... $336,856 $ 317,045 $ -- $653,901
Transfers between geographic areas............. 85,153 46,964 (132,117) --
-------- --------- ---------- --------
Total revenues................................. $422,009 $ 364,009 $ (132,117) $653,901
======== ========= ========== ========
Income from continuing operations before
interest and taxes.......................... $ 33,520 $ 35,988 $ 781 $ 70,289
======== ========= ========== ========
Identifiable assets............................ $372,410 $ 247,370 $ -- $619,780
======== ========= ========== ========
</TABLE>

45
<PAGE> 47

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
UNITED INTERNATIONAL
STATES OPERATIONS ELIMINATIONS TOTAL
-------- ------------- ------------ --------
<S> <C> <C> <C> <C>
Year ended December 31, 1993:
Revenues from 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
interest and taxes.......................... $ 26,532 $ (1,920) $ (96) $ 24,516
======== ========= ========= ========
Identifiable assets............................ $249,218 $ 99,268 $ -- $348,486
======== ========= ========= ========
Year ended December 31, 1992:
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
======== ========= ========= ========
</TABLE>

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 $10.2 million in
1994, $5.9 million in 1993 and $5.7 million in 1992.

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

United States revenues include $56.4 million in 1994, $29.9 million in 1993
and $27.9 million in 1992 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.

14. 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, 1994 and 1993, machinery and equipment included
$3.2 million and $3.0 million, respectively (before accumulated amortization of
$1.1 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.

46
<PAGE> 48

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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>
1995............................................................ $ 519 $11,631
1996............................................................ 344 8,434
1997............................................................ 269 5,318
1998............................................................ 3 2,816
1999............................................................ -- 2,357
Thereafter........................................................ -- 11,937
------ ---------
1,135 $42,493
=======
Less: amount representing interest on capital leases.............. 221
------
Present value of minimum lease payments under capital leases...... $ 914
======
</TABLE>

Litigation

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. On July 12, 1994, without
admitting any liability, the Company and Camco International, Inc. entered into
an agreement with the plaintiffs to pay $0.5 million. The Company's portion of
the agreed payment was $0.3 million. On July 25, 1994, the U.S. District Judge
signed and entered an Agreed Order of Dismissal giving final approval to this
settlement.

47
<PAGE> 49

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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. In addition, seven of its employees or former employees (the
"Individual Defendants") were also served. 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. On
April 11, 1991, Executive Life was placed in conservatorship in California state
court by the California Insurance Commissioner. As a result of the
conservatorship and reorganization, Executive Life emerged in 1993 as Aurora
National Life Assurance Company, Inc. ("Aurora") from the conservatorship
proceeding. Under the rehabilitation plan as ordered by the Los Angeles Superior
Court judge, Aurora will honor in part Executive Life's past and continuing
commitments under the outstanding annuities; however, a portion of these
obligations will not be paid by Aurora (the "Shortfall").

In November 1994, the Company was dismissed from the lawsuit after
obtaining summary judgment in its favor on the ground that the Company's 1986
bankruptcy barred the Department of Labor's claim. The Individual Defendants
remained in the lawsuit.

The parties are in the process of preparing settlement documents. The
Company anticipates that the settlement will be fully documented and all
payments made to the Department of Labor by April 1995.

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. The Company has
agreed to pay its allocable share 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, 1994, 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

48
<PAGE> 50

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 (PRP's) 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. Four quarters of groundwater monitoring have
now been completed. The State of Florida, as represented by the Florida
Department of Environmental Protection ("Florida DEP"), has requested that
additional monitoring work be performed. The final scale of the monitoring work
is not yet known. It is also not yet known whether any groundwater remediation
work will thereafter be required. On September 16, 1993, the 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 Florida DEP requested
that additional soil be removed. The Company and the two other PRPs have
performed the soil removal requested, but it is unknown whether the Florida DEP
will require any additional soil removal work. As the EPA still retains
jurisdiction over the Chemform Site, it is possible that additional issues may
arise which would require further resolution. 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.

In 1994, 1993 and 1992, the Company paid for various clean up activities
and recorded additional provisions, charged to continuing operations, of $0.3
million, $0.5 million and $0.4 million, respectively, and also charged a
provision of $1.5 million to the gain on sale of DDS operations in 1993 based on
annually revised estimates of required future clean-up costs. In addition,
estimated liabilities of approximately $2.5 million were recorded as part of the
purchase price allocation for the Company's 1994 business acquisitions.

At December 31, 1994, 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 $6.1 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.

49
<PAGE> 51

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.

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............................... 24
Consolidated Statements of Operations for the years ended December 31,
1994, 1993 and 1992................................................... 25
Consolidated Balance Sheets at December 31, 1994 and 1993.............. 26-27
Consolidated Statements of Cash Flows at December 31, 1994, 1993 and
1992.................................................................. 28
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1994, 1993 and 1992..................................... 29
Notes to Consolidated Financial Statements............................. 30-49
(2) Financial statement schedule for the years ended December 31, 1994, 1993
and 1992:
II Valuation and qualifying accounts and reserves.................... 54
</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.

50
<PAGE> 52

(3) EXHIBITS AND INDEX TO EXHIBITS

<TABLE>
<S> <C>
3.1 -- Restated Certificate of Incorporation of the Company as amended to date.
Filed as Exhibit 3.1 to the Company's report on Form 10-K for the year ended
December 31, 1993 and incorporated herein by reference.

3.2 -- Bylaws of the Company as amended to date. Filed as Exhibit 3.2 to the
Company's report on Form 10-K for the year ended December 31, 1993 and
incorporated herein by reference.

4.1 -- Warrant Agreement dated as of February 12, 1988 between the Company and
Morgan Shareholder Services Trust Company, as Warrant Agent. Filed as Exhibit
4.1 to the Company's report on Form 10-K for the year ended December 31, 1993
and incorporated herein by reference.

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 -- Loan Agreement dated as of March 17, 1994, by and among the Company and Texas
Commerce Bank National Association, a national banking association,
individually and as Agent, and the other financial institutions parties
thereto.

4.4 -- First Amendment to Loan Agreement dated as of June 30, 1994, by and among the
Company and Texas Commerce Bank National Association, a national banking
association, individually and as Agent, and the other financial institutions
parties thereto.

4.5 -- Second Amendment to Loan Agreement dated as of February 15, 1995, by and
among the Company and Texas Commerce Bank National Association, a national
Banking association, individually and as Agent, and the other financial
institutions parties thereto.

4.6 -- Loan Agreement dated as of June 30, 1994, by and among M-I Drilling Fluids
Company, L.L.C., Texas Commerce Bank National Association, individually and
as Agent, and the other financial institutions parties thereto.

4.7 -- First Amendment to Loan Agreement dated as of February 15, 1995, by and among
M-I Drilling Fluids Company, L.L.C., Texas Commerce Bank National
Association, individually and as Agent, and the other financial institutions
parties thereto.

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.

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, as
amended to date.

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.
Filed as Exhibit 10.5 to the Company's report on Form 10-K for the year ended
December 31, 1993 and incorporated herein by reference.

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.
</TABLE>

51
<PAGE> 53

<TABLE>
<S> <C>
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. Filed as Exhibit 10.11 to the Company's report on Form 10-K for the
year ended December 31, 1993 and incorporated herein by reference.

10.12 -- Employment Agreement dated December 10, 1987 between the Company and D. Barry
Heppenstall. Filed as Exhibit 10.12 to the Company's report on Form 10-K for
the year ended December 31, 1993 and incorporated herein by reference.

10.13 -- 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.

10.14 -- 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.

10.15 -- 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.

10.16 -- 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.

10.17 -- 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.

10.18 -- 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.

10.19 -- 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.
</TABLE>

52
<PAGE> 54

<TABLE>
<S> <C>
22. -- Subsidiaries of the Company.

23. -- Not applicable.

24.1 -- Consent of Arthur Andersen & Co. regarding Form S-8 Registration Statement
No. 33-31556

24.2 -- Consent of Arthur Andersen & Co. regarding Form S-8 Registration Statement
No. 33-69840

24.3 -- Consent of Arthur Andersen & Co. regarding Form S-8 Registration Statement
No. 33-56693
</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.

53
<PAGE> 55

SMITH INTERNATIONAL, INC.

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE
BEGINNING CHARGED TO AT END
OF YEAR EXPENSE WRITE-OFFS OTHER OF YEAR
---------- ---------- ---------- ------ -------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
Year Ended -- December 31, 1994............. $4,995 $1,642 $ (2,705) $4,747(a) $ 8,679
Year Ended -- December 31, 1993............. $4,254 $ 974 $ (1,285) $1,052(b) $ 4,995
Year Ended -- December 31, 1992............. $4,308 $1,860 $ (1,914) $ -- $ 4,254
</TABLE>

(a) Amount represents accounts receivable reserves related to M-I Drilling
Fluids L.L.C. and Supradiamant upon purchase by the Company during the year
ended December 31, 1994.

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

54
<PAGE> 56

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 10, 1995

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>
<C> <S> <C>
/s/ DOUGLAS L. ROCK Chairman of the Board, Chief March 10, 1995
------------------------------------------- Executive Officer,
(Douglas L. Rock) President and Chief
Operating Officer

/s/ LOREN K. CARROLL Executive Vice President and March 10, 1995
------------------------------------------- Chief Financial Officer
(Loren K. Carroll)

/s/ JOHN J. KENNEDY Vice President, Chief March 10, 1995
------------------------------------------- Accounting Officer and
(John J. Kennedy) Treasurer

/s/ BENJAMIN F. BAILAR Director March 10, 1995
-------------------------------------------
(Benjamin F. Bailar)

/s/ G. CLYDE BUCK Director March 10, 1995
-------------------------------------------
(G. Clyde Buck)

/s/ JAMES R. GIBBS Director March 10, 1995
-------------------------------------------
(James R. Gibbs)

/s/ JERRY W. NEELY Director March 10, 1995
-------------------------------------------
(Jerry W. Neely)

/s/ H. MOAK ROLLINS Director March 10, 1995
-------------------------------------------
(H. Moak Rollins)
</TABLE>
55
<PAGE> 57

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
Exhibit No.
<S> <C>
3.1 -- Restated Certificate of Incorporation of the Company as amended to date.
Filed as Exhibit 3.1 to the Company's report on Form 10-K for the year ended
December 31, 1993 and incorporated herein by reference.

3.2 -- Bylaws of the Company as amended to date. Filed as Exhibit 3.2 to the
Company's report on Form 10-K for the year ended December 31, 1993 and
incorporated herein by reference.

9. -- Not applicable.

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, as
amended to date.

<PAGE> 58

<TABLE>
Caption>
Exhibit No.
<S> <C>
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.

11. -- Not applicable.

12. -- Not applicable.

13. -- Not applicable.

18. -- Not applicable.

19. -- Not applicable.
</TABLE>

<PAGE> 59

<TABLE>
<CAPTION>
Exhibit No.
<S> <C>
22. -- Subsidiaries of the Company.

23. -- Not applicable.

24.1 -- Consent of Arthur Andersen & Co. regarding Form S-8 Registration Statement
No. 33-31556

24.2 -- Consent of Arthur Andersen & Co. regarding Form S-8 Registration Statement
No. 33-69840

24.3 -- Consent of Arthur Andersen & Co. regarding Form S-8 Registration Statement
No. 33-56693
</TABLE>

<PAGE> 1

EXHIBIT 4.3

LOAN AGREEMENT

$65,000,000 REVOLVING LOAN FACILITY

DATED AS OF MARCH 17, 1994

AMONG

SMITH INTERNATIONAL, INC.,
AS BORROWER;

TEXAS COMMERCE BANK NATIONAL ASSOCIATION,
AS AGENT AND AS A BANK,

AND

THE OTHER BANKS NOW OR HEREAFTER
PARTIES HERETO

<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
1. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Certain Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

2. Commitments and Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2.1 Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2.2 Letters of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2.3 Terminations or Reductions of Loan Commitments . . . . . . . . . . . . . 21
2.4 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
2.5 Several Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . 21
2.6 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
2.7 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

3. Borrowings, Payments and Prepayments . . . . . . . . . . . . . . . . . . . . . . . 22
3.1 Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
3.2 Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

4. Payments; Pro Rata Treatment; Computations, Etc. . . . . . . . . . . . . . . . . . 23
4.1 Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
4.2 Pro Rata Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
4.3 Certain Actions, Notices, Etc. . . . . . . . . . . . . . . . . . . . . . 24
4.4 Non-Receipt of Funds by the Agent . . . . . . . . . . . . . . . . . . . 25
4.5 Sharing of Payments, Etc. . . . . . . . . . . . . . . . . . . . . . . . 26
4.6 Replacement of Banks . . . . . . . . . . . . . . . . . . . . . . . . . . 26

5. Conditions Precedent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
5.1 Initial Loans and Letters of Credit . . . . . . . . . . . . . . . . . . 27
5.2 All Loans and Letters of Credit . . . . . . . . . . . . . . . . . . . . 28

6. Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . 29
6.1 Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
6.2 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . 29
6.3 Enforceable Obligations; Authorization . . . . . . . . . . . . . . . . . 30
6.4 Other Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
6.5 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
6.6 Title . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
6.7 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
6.8 Regulations U and X . . . . . . . . . . . . . . . . . . . . . . . . . . 31
6.9 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
6.10 No Untrue or Misleading Statements . . . . . . . . . . . . . . . . . . . 31
6.11 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
</TABLE>

i
<PAGE> 3
<TABLE>
<S> <C> <C>
6.12 Investment Company Act . . . . . . . . . . . . . . . . . . . . . . . . . 31
6.13 Public Utility Holding Company Act . . . . . . . . . . . . . . . . . . . 31
6.14 Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
6.15 Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
6.16 Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
6.17 Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . 32

7. Affirmative Covenants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
7.1 Taxes, Existence, Regulations, Property, Etc. . . . . . . . . . . . . . 33
7.2 Financial Statements and Information . . . . . . . . . . . . . . . . . . 33
7.3 Financial Tests . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
7.4 Inspection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
7.5 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
7.6 Books and Records . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
7.7 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
7.8 Notice of Certain Matters . . . . . . . . . . . . . . . . . . . . . . . 35
7.9 Capital Adequacy . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
7.10 ERISA Information and Compliance . . . . . . . . . . . . . . . . . . . . 36

8. Negative Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
8.1 Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
8.2 Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
8.3 Contingent Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 39
8.4 Mergers, Consolidations and Dispositions and Acquisitions of Assets . . 39
8.5 Nature of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
8.6 Transactions with Related Parties . . . . . . . . . . . . . . . . . . . 40
8.7 Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
8.8 Purchase Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
8.9 Organizational Documents . . . . . . . . . . . . . . . . . . . . . . . . 40
8.10 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
8.11 Notice of Asset Sales . . . . . . . . . . . . . . . . . . . . . . . . . 40
8.12 No Restriction on Payment of Dividends . . . . . . . . . . . . . . . . . 40
8.13 Operating Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

9. Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
9.1 Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
9.2 Right of Setoff . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
9.3 Collateral Account . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
9.4 Preservation of Security for Unmatured Reimbursement Obligations . . . . 44
9.5 Remedies Cumulative . . . . . . . . . . . . . . . . . . . . . . . . . . 45

10. The Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
10.1 Appointment, Powers and Immunities . . . . . . . . . . . . . . . . . . . 45
10.2 Reliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
10.3 Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
</TABLE>

ii
<PAGE> 4
<TABLE>
<S> <C>
10.4 Rights as a Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
10.5 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
10.6 Non-Reliance on Agent and Other Banks . . . . . . . . . . . . . . . . . 48
10.7 Failure to Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
10.8 Resignation or Removal of Agent . . . . . . . . . . . . . . . . . . . . 48
10.9 No Partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

11. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
11.1 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
11.2 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
11.3 Expenses, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
11.4 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
11.5 Amendments, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
11.6 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . 52
11.7 Limitation of Interest . . . . . . . . . . . . . . . . . . . . . . . . . 54
11.8 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
11.9 Captions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
11.10 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
11.11 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
11.12 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
11.13 Tax Forms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
11.14 Venue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
11.15 Confidential Information . . . . . . . . . . . . . . . . . . . . . . . . 56

SCHEDULES

1 -- Interest Rate Agreement

EXHIBITS

A -- Request for Extension of Credit
B -- Borrowing Base Certificate
C -- Note
D -- Assignment and Acceptance
E -- Compliance Certificate
F -- Subsidiaries
G -- Litigation
H -- Borrowed Money Indebtedness
I -- Liens
J -- Certain Long-Term Leases
K -- Certain M-I Consents
</TABLE>

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<PAGE> 5
LOAN AGREEMENT

THIS LOAN AGREEMENT is made and entered into as of March 17, 1994 (the
"Effective Date"), by and among SMITH INTERNATIONAL, INC., a Delaware
corporation (the "Borrower"); each of the banks which is or may from time to
time become a party hereto in accordance with Section 11.6 hereof
(individually, a "Bank" and, collectively, the "Banks"), and TEXAS COMMERCE
BANK NATIONAL ASSOCIATION ("TCB"), a national banking association, as agent for
the Banks (in such capacity, together with its successors in such capacity, the
"Agent").

The parties hereto agree as follows:

1. Definitions.

1.1 Certain Defined Terms.

Unless a particular term, word or phrase is otherwise defined or the
context otherwise requires, capitalized terms, words and phrases used herein or
in the Loan Documents (as hereinafter defined) have the following meanings (all
definitions that are defined in this Agreement in the singular to have the same
meanings when used in the plural and vice versa):

Accounts and Inventory shall have the respective meanings assigned to
them in the Texas Business and Commerce Code in force on the Effective Date.

Affiliate shall mean any Person controlling, controlled by or under
common control with any other Person. For purposes of this definition,
"control" (including "controlled by" and "under common control with") means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities or otherwise.

Agreement shall mean this Loan Agreement, as it may from time to time
be amended, modified, restated or supplemented.

Annual Financial Statements shall mean the annual financial statements
of a Person, including all notes thereto, which statements shall include a
balance sheet as of the end of such fiscal year and an income statement and,
except with respect to Annual Financial Statements of SII Megadiamond, Inc., a
statement of cash flows for such fiscal year, all setting forth in comparative
form the corresponding figures from the previous fiscal year, all prepared in
conformity with GAAP. Whenever the Annual Financial Statements are required to
be audited, they shall be accompanied by (i) a report and opinion of
independent certified public accountants of recognized national standing
satisfactory to the Agent, which shall state that such financial statements, in
the opinion of such accountants, present fairly the financial position of such

<PAGE> 6
Person as of the date thereof and the results of its operations for the period
covered thereby in conformity with GAAP, and without expressing any doubt as to
such Person's ability to continue as a going concern and (ii) a certificate of
such accountants that in making their audit, such accountants did not become
aware of any Default or, if in the opinion of such accountant any such Default
exists, a description of the nature and status thereof. Whenever the Annual
Financial Statements are to be unaudited, they shall be certified by the chief
financial officer, treasurer, or other authorized officer of the applicable
Person as complete and correct copies which present fairly the consolidated
financial condition of the applicable Person. Annual Financial Statements
shall be prepared on a consolidated basis.

Applications shall mean all applications and agreements for Letters of
Credit, or similar instruments or agreements, in Proper Form, now or hereafter
executed by any Person in connection with any Letter of Credit now or hereafter
issued or to be issued under the terms hereof at the request of any Person.

Assignment and Acceptance shall have the meaning ascribed to such term
inSection 11.6 hereof.

Bankruptcy Code shall mean the United States Bankruptcy Code, as
amended, and any successor statute.

Borrowed Money Indebtedness shall mean, with respect to any Person,
without duplication, (a) all Indebtedness of such Person for borrowed money, or
with respect to deposits or advances of any kind to such Person, (b) all
Indebtedness of such Person evidenced by bonds, debentures, notes or similar
instruments, (c) all Indebtedness of such Person upon which interest charges
are customarily paid, (d) all Indebtedness of such Person under conditional
sale or other title retention agreements relating to Property purchased by such
Person, (e) all Indebtedness of such Person issued or assumed as the deferred
purchase price of property or services (excluding Indebtedness of such Person
to creditors for raw materials, inventory, services and supplies incurred in
the ordinary course of such Person's business), (f) all Capital Lease
Obligations, (g) all Indebtedness of others secured by any lien on property or
assets owned or acquired by such Person, whether or not the Indebtedness
secured thereby have been assumed, (h) all outstanding letters of credit issued
for the account of such Person and (i) all guarantees of Borrowed Money
Indebtedness of other Persons.

Borrowing Base shall mean, as at any date, the amount of the Borrowing
Base shown on the Borrowing Base Certificate then most recently delivered
pursuant to Section 7.2 hereof, determined by calculating the amount equal to:

(i) 80% of the aggregate amount of the Eligible Accounts of the
Borrower at said date, plus

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<PAGE> 7
(ii) 40% of the aggregate amount of Eligible Inventory of the
Borrower at said date (determined at the lower of cost or
market on a consistent basis).

In the absence of a current Borrowing Base Certificate, the Agent shall
determine the Borrowing Base from time to time in its reasonable discretion,
taking into account all information reasonably available to it, and the
Borrowing Base from time to time so determined shall be the Borrowing Base for
all purposes of this Agreement until a current Borrowing Base Certificate, in
Proper Form, is furnished to and accepted by the Agent.

Borrowing Base Certificate shall mean a certificate, duly executed by
the chief executive officer, chief financial officer, treasurer or controller
of the Borrower, appropriately completed and in substantially the form of
Exhibit B hereto. Each Borrowing Base Certificate shall be effective only as
accepted by the Agent (and with such revisions based on the terms and
provisions of this Agreement, if any, as the Agent may reasonably require--to
the extent any such determination of the Borrowing Base is not in accordance
with the terms of this Agreement--as a condition to such acceptance).

Business Day shall mean any day other than a day on which commercial
banks are authorized or required to close in Houston, Texas, Los Angeles,
California or Pittsburgh, Pennsylvania.

Capital Expenditures shall mean expenditures in respect of fixed or
capital assets by a Person, including the capital portion of lease payments
made in respect of Capital Lease Obligations, but excluding expenditures for
the restoration, repair or replacement of any fixed or capital asset which was
destroyed or damaged, in whole or in part, to the extent financed by the
proceeds of an insurance policy maintained by such Person and less the amount
of disposals by the applicable Person of rental tool equipment in the ordinary
course of business. Expenditures in respect of replacements and maintenance
consistent with the business practices of such Person in respect of plant
facilities, machinery, fixtures and other like capital assets utilized in the
ordinary course of business are not Capital Expenditures to the extent such
expenditures are not capitalized in preparing a balance sheet of such Person in
accordance with GAAP.

Capital Lease Obligations shall mean, as to any Person, the
obligations of such Person to pay rent or other amounts under a lease of (or
other agreement conveying the right to use) real and/or personal property which
obligations are required to be classified and accounted for as a capital lease
on a balance sheet of such Person under GAAP (including Statement of Financial
Accounting Standards No. 13 of the Financial Accounting Standards Board, as
amended) and, for purposes of this Agreement, the amount of such obligations
shall be the capitalized amount thereof, determined in accordance with GAAP
(including such Statement No. 13). Capital Lease Obligations shall not include
the interest component of any applicable rental payment.

3
<PAGE> 8
Cash Taxes shall mean, with respect to any period, all cash payments
actually made during such period on account of income or franchise taxes.

Ceiling Rate shall have the meaning assigned to it in the Interest
Rate Agreement.

Change of Control shall mean a change resulting when any Unrelated
Person or any Unrelated Persons acting together which would constitute a Group
together with any Affiliates or Related Persons thereof (in each case also
constituting Unrelated Persons) shall at any time either (i) Beneficially Own
more than 50% of the aggregate voting power of all classes of Voting Stock of
the Borrower or (ii) succeed in having sufficient of its or their nominees
elected to the Board of Directors of the Borrower such that such nominees, when
added to any existing director remaining on the Board of Directors of the
Borrower after such election who is an Affiliate or Related Person of such
Person or Group, shall constitute a majority of the Board of Directors of the
Borrower. As used herein (a) "Beneficially Own" means "beneficially own" as
defined in Rule 13d-3 of the United States Securities Exchange Act of 1934, as
amended, or any successor provision thereto; provided, however, that, for
purposes of this definition, a Person shall not be deemed to Beneficially Own
securities tendered pursuant to a tender or exchange offer made by or on behalf
of such Person or any of such Person's Affiliates until such tendered
securities are accepted for purchase or exchange; (b) "Group" means a "group"
for purposes of Section 13(d) of the United States Securities Exchange Act of
1934, as amended; (c) "Unrelated Person" means at any time any Person other
than the Borrower or any of its Subsidiaries and other than any trust for any
employee benefit plan of the Borrower or any of its Subsidiaries; (d) "Related
Person" of any Person shall mean any other Person owning (1) 5% or more of the
outstanding common stock of such Person or (2) 5% or more of the Voting Stock
of such Person; and (e) "Voting Stock" of any Person shall mean capital stock
of such Person which ordinarily has voting power for the election of directors
(or persons performing similar functions) of such Person, whether at all times
or only so long as no senior class of securities has such voting power by
reason of any contingency.

Code shall mean the Internal Revenue Code of 1986, as amended, as now
or hereafter in effect, together with all regulations, rulings and
interpretations thereof or thereunder by the Internal Revenue Service.

Collateral shall mean all Property, tangible or intangible, real,
personal or mixed, now or hereafter subject to a Lien in favor of the Agent or
any of the Banks securing the Obligations (or any part thereof).

Compliance Certificate shall have the meaning given to it in Section
7.2 hereof.

Controlled Group shall mean all members of a controlled group of
corporations and all trades or businesses (whether or not incorporated) under
common control which, together with the Borrower, are treated as a single
employer under Section 414 of the Code.

4
<PAGE> 9
Corporation shall mean corporations, partnerships, joint ventures,
joint stock associations, business trusts and other business entities.

Cover for Letter of Credit Liabilities shall be effected by paying to
the Agent immediately available funds, to be held by the Agent in a collateral
account maintained by the Agent at its Principal Office and collaterally
assigned as security by the Borrower for the financial accommodations extended
pursuant to this Agreement using documentation satisfactory to the Agent, in
the amount required by any applicable provision hereof. Such amount shall be
retained by the Agent in such collateral account until such time as in the case
of the Cover being provided pursuant to Sections 2.2(a) or 9.3 hereof, the
applicable Letter of Credit shall have expired and the Reimbursement
Obligations, if any, with respect thereto shall have been fully satisfied;
provided, however, that at such time if a Default or Event of Default has
occurred and is continuing, the Agent shall not be required to release such
amount in such collateral account.

Current Assets, to the extent permitted by and as determined in
accordance with GAAP, shall include all (1) cash on hand or in transit or on
deposit in any bank or trust company which has not suspended business; (2)
Permitted Investments (valued at not more than cost or current market value,
whichever is lower); (3) inventories of raw materials and supplies, or work or
materials in process and of finished products, all valued at not in excess of
cost or current market value, whichever is lower; and (4) such other assets as,
in accordance with GAAP, would be included in "current assets"; all after
deduction of adequate reserves in each case where a reserve is proper under
GAAP; provided, that, notwithstanding the foregoing, in computing Current
Assets there shall be excluded (a) all Investments other than those permitted
to be included in this definition by clause (2) hereof, (b) all franchises,
licenses, permits, patents, patent applications, copyrights, trademarks, trade
names, good will, experimental or organizational expense and other like
intangibles, (c) any assets which are pledged or encumbered as security for or
for the purpose of paying any obligation (other than the Loans or the other
obligations hereunder) which is not included in Current Liabilities, (d) all
loans, advances and other receivables from officers, stockholders, directors or
employees, and (e) all prepaid items and expenses.

Current Liabilities means, on any date, all Indebtedness other than
Funded Indebtedness and, without limitation, shall include all (1) Indebtedness
maturing on demand or within one year after the date as of which such
determination is made, (2) final maturities and prepayments of Indebtedness and
sinking fund payments required to be made in respect of any Indebtedness within
one year after said date, (3) taxes payable or accrued as estimated and
deferred income taxes due for the fiscal year in which such determination is
made arising from differences in reporting depreciation and other non-cash
charges for tax purposes and for corporate financial purposes, (4) Indebtedness
owing to any employee, officer, director or stockholder of the Person with
respect to whom the computation of Current Liabilities is being made or any
Affiliate of such Person, (5) accrued liabilities (including the interest
component of any rental payments to be made under capital leases within one
year of said date), (6) payments required to be made

5
<PAGE> 10
with respect to Capital Lease Obligations within one year of said date, and (7)
all other items which in accordance with GAAP would be included as current
liabilities.

Current Ratio means, as of any day, the ratio of Current Assets to
Current Liabilities.

Debt to Total Capitalization Ratio shall mean, as of any day, the
ratio of (a) interest bearing Indebtedness (including Indebtedness bearing
imputed interest as a result of having been issued at a discount and including
the principal component of Capital Lease Obligations) to (b) the sum of (i)
such interest bearing Indebtedness plus (ii) stockholders' equity. For
purposes of this definition, the term "Indebtedness" shall not include
intercompany debt which is held by the Borrower or a Subsidiary of Borrower.

Default shall mean an Event of Default or an event which with notice
or lapse of time or both would, unless cured or waived, become an Event of
Default.

Dollars and $ shall mean lawful money of the United States of America.

EBITDA shall mean, without duplication, for any period the sum of (a)
Net Income after taxes and (b) the sum of (i) Interest Expense for such period,
(ii) income taxes deducted in determining such Net Income, (iii) amortization
of goodwill and other non-cash expenses and intangibles (including, without
limitation, deferred financing costs and debt discount) deducted in determining
such Net Income and (iv) depreciation, depletion and obsolescence of Property,
in each case, determined in accordance with GAAP. For all periods through the
end of the third fiscal quarter of the Borrower's fiscal year 1994, in
calculating EBITDA of the Borrower there shall also be added the special charge
in the amount of $19,900,000 related to settlement of certain litigation
recorded by the Borrower for the third quarter of its fiscal year 1993.

Eligible Accounts shall mean, as at any date of determination thereof,
each Account of the Borrower or its Subsidiaries which is at said date payable
to the Borrower or its applicable Subsidiary and which complies with the
following requirements: (a) the subject goods have been sold to an account
debtor on an absolute sale basis on open account and not on consignment, on
approval or on a "sale or return" basis or subject to any other repurchase or
return agreement and no material part of the subject goods has been returned,
rejected, lost or damaged, the Account is not evidenced by chattel paper or an
instrument of any kind and said account debtor is not insolvent or the subject
of any bankruptcy or insolvency proceedings of any kind; (b) it is a valid
obligation of the account debtor thereunder and is not subject to any offset
(other than non-material offsets already deducted in calculating Eligible
Accounts) or other defense on the part of such account debtor or to any claim
on the part of such account debtor denying liability thereunder (other than
non-material claims already deducted in calculating Eligible Accounts); (c) it
is subject to no Lien whatsoever; (d) it is evidenced by an invoice submitted
to the account debtor in timely fashion and in the normal course of business;
(e) it has not remained unpaid beyond 90 days after the date of the invoice
with respect to Accounts of U.S. account debtors or 120 days after the date of
the invoice with respect to Accounts of non-U.S. account debtors;

6
<PAGE> 11
(f) it does not arise out of transactions with an employee, officer, agent,
director or stockholder of the Borrower or any Affiliate of the Borrower; (g)
not more than 20% of the Accounts of the applicable account debtor or any of
its Affiliates fail to satisfy all of the requirements of an "Eligible
Account", and (h) inclusion of the applicable Account does not cause the total
Eligible Accounts with respect to the applicable account debtor and its
Affiliates, in the aggregate, to exceed 10% of the total Eligible Accounts. In
the event of any dispute under the foregoing criteria, about whether an Account
is or has ceased to be an Eligible Account, the decision of the Agent, made in
good faith, shall be conclusive and binding, absent manifest error.

Eligible Inventory shall mean, as at any date of determination
thereof, Inventory of the Borrower or its Subsidiaries and which complies with
the following requirements: (a) such Inventory shall be valued in accordance
with GAAP and consist of eligible raw materials and finished goods; (b) it is
in good condition, meets all standards imposed by any Governmental Authority
having regulatory authority over it, its use and/or sale and is either
currently usable or currently salable in the normal course of business of the
Borrower or its applicable Subsidiary, and (c) it is not in the possession or
control of any warehouseman, bailee, or any agent or processor for or customer
of the Borrower or, if it is, such warehouseman, bailee, agent, processor or
customer has waived and released any Lien it may claim therein. In the event
of any dispute under the foregoing criteria, about whether a portion of
Inventory is or has ceased to be Eligible Inventory, the decision of the Agent,
made in good faith, shall be conclusive and binding, absent manifest error.

Environmental Claim means any third party (including Governmental
Authorities and employees) action, lawsuit, claim or proceeding (including
claims or proceedings at common law or under the Occupational Safety and Health
Act or similar laws relating to safety of employees) which seeks to impose
liability for (i) noise; (ii) pollution or contamination of the air, surface
water, ground water or land or the clean-up of such pollution or contamination;
(iii) solid, gaseous or liquid waste generation, handling, treatment, storage,
disposal or transportation; (iv) exposure to Hazardous Substances; (v) the
safety or health of employees or (vi) the manufacture, processing, distribution
in commerce or use of Hazardous Substances. An "Environmental Claim" includes,
but is not limited to, a common law action, as well as a proceeding to issue,
modify or terminate an Environmental Permit, or to adopt or amend a regulation
to the extent that such a proceeding attempts to redress violations of an
applicable permit, license, or regulation as alleged by any Governmental
Authority.

Environmental Liabilities includes all liabilities arising from any
Environmental Claim, Environmental Permit or Requirement of Environmental Law
under any theory of recovery, at law or in equity, and whether based on
negligence, strict liability or otherwise, including but not limited to:
remedial, removal, response, abatement, investigative, monitoring, personal
injury and damage to property or injuries to persons, and any other related
costs, expenses, losses, damages, penalties, fines, liabilities and
obligations, and all costs and expenses necessary to cause the issuance,
reissuance or renewal of any Environmental Permit including reasonable
attorneys' fees and court costs.

7
<PAGE> 12
Environmental Permit means any permit, license, approval or other
authorization under any applicable Legal Requirement relating to pollution or
protection of health or the environment, including laws, regulations or other
requirements relating to emissions, discharges, releases or threatened releases
of pollutants, contaminants or hazardous substances or toxic materials or
wastes into ambient air, surface water, ground water or land, or otherwise
relating to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport, or handling of pollutants, contaminants or Hazardous
Substances.

ERISA shall mean the Employee Retirement Income Security Act of 1974,
as amended from time to time, and all rules, regulations, rulings and
interpretations adopted by the Internal Revenue Service or the U.S. Department
of Labor thereunder.

Event of Default shall have the meaning assigned to it inSection 9
hereof.

Federal Funds Rate shall have the meaning assigned to it in the
Interest Rate Agreement.

Fixed Charge Coverage Ratio shall mean, as of any day, the ratio of
(a) EBITDA for the preceding four (4) fiscal quarter period less Cash Taxes for
such immediately preceding four (4) fiscal quarter period plus or minus, as the
case may be, net cash received from or paid to M-I during such period, to (b)
the Fixed Charges for the immediately preceding four (4) fiscal quarter period.

Fixed Charges shall mean (without duplication), for any period, (a)
scheduled principal payments during such period with respect to Borrowed Money
Indebtedness (excluding any principal payments made to reduce any of the
Obligations), plus (b) payments made or scheduled to be made during such period
with respect to Capital Lease Obligations, plus (c) Interest Expense paid or
scheduled to be paid during such period, plus (d) Capital Expenditures made
during such period.

Funded Indebtedness shall mean all Borrowed Money Indebtedness which
by its terms matures more than one year from the date as of which any
calculation of Funded Indebtedness is made, and any Borrowed Money Indebtedness
maturing within one year from such date which is renewable at the option of the
obligor to a date beyond one year from such date.

8
<PAGE> 13
and changes in financial position, of such Person. If any change in any
accounting principle or practice is required by the Financial Accounting
Standards Board in order for such principle or practice to continue as a GAAP
or practice, all reports and financial statements required hereunder may be
prepared in accordance with such change only after written notice of such
change is given to the Agent.

Governmental Authority shall mean any foreign governmental authority,
the United States of America, any State of the United States and any political
subdivision of any of the foregoing, and any central bank, agency, department,
commission, board, bureau, court or other tribunal having jurisdiction over the
Agent, any Bank, the Borrower, any of the Borrower's Subsidiaries, the
Guarantor or their respective Property.

Guaranties mean those two (2) certain guaranties dated concurrently
herewith executed by the respective Guarantors in favor of the Agent.

Guarantors means SII Megadiamond, Inc., a Delaware corporation and
Smith International Acquisition Corp., a Delaware corporation, each a wholly
owned Subsidiary of the Borrower.

Hazardous Substance shall mean petroleum products, and any hazardous
or toxic waste or substance defined or regulated as such from time to time by
any law, rule, regulation or order described in the definition of "Requirements
of Environmental Law".

Indebtedness shall mean and include with respect to any Person (a) all
items which in accordance with GAAP would be included on the liability side of
a balance sheet of such Person on the date as of which Indebtedness is to be
determined (excluding capital stock, surplus, surplus reserves and deferred
credits); (b) all guaranties, letter of credit contingent reimbursement
obligations, endorsements and other contingent obligations in respect of, or
any obligations to purchase or otherwise acquire, Indebtedness of others, and
(c) all Indebtedness secured by any Lien existing on any interest of such
Person in Property owned subject to such Lien whether or not the Indebtedness
secured thereby shall have been assumed; provided, that the term "Indebtedness"
shall not mean or include any Indebtedness in respect of which monies
sufficient to pay and discharge the same in full (either on the expressed date
of maturity thereof or on such earlier date as such Indebtedness may be duly
called for redemption and payment) shall be deposited, in a manner and with a
depository, agency or trustee reasonably acceptable to the Agent, in trust for
the payment thereof. "Indebtedness" shall not include trade payables and
expense accruals incurred in the ordinary course of the applicable Person's
business provided that such payables have not remained unpaid for a period of
ninety (90) days after the same became due.

Interest Expense shall mean, for any period, the sum of (a) the cash
interest payments by an obligor made or accrued in accordance with GAAP during
such period in connection with

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<PAGE> 14
all of its interest-bearing Indebtedness and (b) the interest component of any
Capital Lease Obligations.

Interest Payment Dates shall have the meaning assigned to it in the
Interest Rate Agreement.

Interest Rate Agreement shall mean the Interest Rate Agreement
attached hereto as Schedule 1, as it may from time to time be amended,
modified, restated or supplemented.

Investment shall mean the purchase or other acquisition of any
securities or Indebtedness of, or the making of any loan, advance, transfer of
Property or capital contribution to, or the incurring of any liability,
contingently or otherwise, in respect of the Indebtedness of, any Person.
"Investments" shall not include (i) deposits with financial institutions
available for withdrawal on demand or (ii) the creation of Accounts in the
ordinary course of business or (iii) investments in the capital stock of
Subsidiaries.

Issuer shall mean the issuer (or, where applicable, each issuer) of a
Letter of Credit under this Agreement.

Legal Requirement shall mean any applicable law, statute, ordinance,
decree, requirement, order, judgment, rule, or regulation (or interpretation of
any of the foregoing) of, and the terms of any license or permit issued by, any
Governmental Authority, whether presently existing or arising in the future
binding on the applicable Person.

Letter of Credit shall have the meaning assigned to such term in
Section 2.2 hereof.

Letter of Credit Liabilities shall mean, at any time and in respect of
any Letter of Credit, the sum of (i) the amount available for drawings under
such Letter of Credit plus (ii) the aggregate unpaid amount of all
Reimbursement Obligations at the time due and payable in respect of previous
drawings made under such Letter of Credit. For the purpose of determining at
any time the amount described in clause (i), in the case of any Letter of
Credit payable in a currency other than Dollars, such amount shall be converted
by the Agent to Dollars by any reasonable method, and such converted amount
shall be conclusive and binding, absent manifest error.

Lien shall mean, with respect to any Property, any mortgage, pledge,
charge, encumbrance, security interest, collateral assignment or other lien or
restriction of any kind, whether based on common law, constitutional provision,
statute or contract upon such Property, and shall include reservations,
exceptions, encroachments, easements, rights of way, covenants, conditions,
restrictions and other title exceptions.

Loan shall mean a loan made pursuant to Section 2.1 hereof.

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<PAGE> 15
Loan Availability Period shall mean the period from and including the
Effective Date to (but not including) the Termination Date.

Loan Commitment shall mean, as to any Bank, the obligation, if any, of
such Bank to make Loans and incur Letter of Credit Liabilities in an aggregate
principal amount at any one time outstanding up to (but not exceeding) the
amount, if any, set forth opposite such Bank's name on the signature pages
hereof under the caption "Loan Commitment", or otherwise provided for in an
Assignment and Acceptance Agreement (as the same may be reduced from time to
time pursuant to Section 2.3 hereof).

Loan Commitment Percentage shall mean, as to any Bank, the percentage
equivalent of a fraction the numerator of which is the amount of such Bank's
Loan Commitment and the denominator of which is the aggregate amount of the
Loan Commitments of all Banks.

Loan Documents shall mean, collectively, this Agreement, the Notes,
the Interest Rate Agreement, the Guaranties, all Applications, that certain
Letter Agreement dated February 15, 1994 executed by and between the Agent and
the Borrower, all instruments, certificates and agreements now or hereafter
executed or delivered to the Agent or any Bank pursuant to any of the foregoing
or in connection with the Obligations or any commitment regarding the
Obligations or securing or guaranteeing any part of the Obligations, and all
amendments, modifications, renewals, extensions, increases and rearrangements
of, and substitutions for, any of the foregoing.

Long-Term Lease shall mean any lease of real or personal property
(other than a capital lease) having an original term, including any period for
which the lease may be renewed or extended at the option of the lessor, of more
than three years; provided that for purposes of any computation pursuant to
Section 8.13, there shall be excluded any Long-Term Lease described on Exhibit
J hereto which has a term, including any period for which any such Long-Term
Lease may be renewed or extended at the option of the lessor or the lessee,
expiring on or prior to December 31, 1995.

Majority Banks shall mean Banks having greater than 66-2/3% of the
aggregate amount of Loan Commitments.

Material Subsidiary shall mean each of the Guarantors, M-I and each
other Subsidiary of the Borrower with assets comprising 5% or more of the
aggregate fair market value of all assets of Borrower and its Subsidiaries on a
consolidated basis or with a Tangible Net Worth comprising 5% or more of the
Tangible Net Worth of Borrower and its Subsidiaries on a consolidated basis.
The Material Subsidiaries as of the Effective Date are designated on Exhibit F
hereto.

Material Adverse Effect shall mean (a) materially adverse effect on
the business, assets, operations or condition (financial or otherwise) of
Borrower and its Subsidiaries taken as a

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<PAGE> 16
whole, (b) material impairment of the ability of Borrower or either of the
Guarantors to perform any of its respective obligations under any Loan Document
to which it is a party or (c) material impairment of the rights or benefits
available to the Agent or any of the Banks under any Loan Document.

Maturity Date shall mean the maturity of the Notes, March 31, 1997, as
the same may hereafter be accelerated pursuant to the provisions of any of the
Loan Documents.

Maximum Loan Available Amount shall mean, at any date, an amount equal
to the lesser of (i) the aggregate of the Loan Commitments or (ii) the
Borrowing Base.

M-I shall mean M-I Drilling Fluids Company, L.L.C., a Delaware limited
liability company, owned on the date hereof 64% by the Borrower and 36% by
Halliburton Company, a Delaware corporation.

M-I Drilling Facility shall mean the facility or facilities
contemplated by that certain Loan Agreement executed or to be executed by and
among TCB, as agent, the Banks and M-I.

Net Income shall mean gross revenues less all expenses and other
proper charges, all determined in accordance with GAAP; provided, that there
shall not be included in such revenues (a) any equity in the undistributed
earnings of any Person which is not a Subsidiary; (b) any gains resulting from
the write-up of assets; (c) any proceeds of any life insurance policy, or (d)
any gain or loss which is classified as "extraordinary" in accordance with
GAAP; and provided further, that capital gains may be included in revenues only
to the extent of capital losses.

1994 Note Agreements shall mean those certain Note Agreements dated
concurrently herewith executed by and between the Borrower and certain Persons
providing for the issuance of promissory notes of the Borrower in the aggregate
principal amount of $40,000,000.

Notes shall having the meaning assigned to such term in Section 2.6
hereof.

Obligations shall mean, as at any date of determination thereof, the
sum of the following: (i) the aggregate principal amount of Loans outstanding
hereunder, plus (ii) the aggregate amount of the Letter of Credit Liabilities
hereunder, plus (iii) all other liabilities, obligations and indebtedness of
any Party under any Loan Document.

Organizational Documents shall mean, with respect to a Corporation,
the certificate of incorporation, articles of incorporation and bylaws of such
Corporation; with respect to a partnership, the partnership agreement
establishing such partnership; with respect to a joint venture, the joint
venture agreement establishing such joint venture, and with respect to a trust,
the instrument establishing such trust; in each case including any and all
modifications thereof

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<PAGE> 17
as of the date of the Loan Document referring to such Organizational Document
and any and all future modifications thereof.

Parties shall mean all Persons other than the Agent or any Bank
executing any Loan Document.

Past Due Rate shall mean, on any day, a rate per annum equal to the
lesser of (i) the Ceiling Rate for that day or (ii) the Base Rate (as defined
in the Interest Rate Agreement) plus three percent (3%) per annum.

PBGC shall mean the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.

Permitted Investments shall mean:

(i) direct obligations of the United States of America or
any agency thereof, or obligations guaranteed by the United States of
America or any agency thereof, in each case maturing within one year
from the date of creation thereof;

(ii) commercial paper of a Bank or such Bank's holding
company or of any other bank or bank holding company which, on the
date of such Investment, is given a credit rating of at least A2 by
Moody's Investors Service, Inc. and A by Standard & Poor's
Corporation, or of corporations doing business in and incorporated
under the laws of the United States or any state thereof which, on the
date of such Investment, is given a credit rating of at least A2 by
Moody's Investors Service, Inc. and A by Standard & Poor's
Corporation, in each case maturing within 270 days from the date of
acquisition thereof;

(iii) certificates of deposit issued by, money market
deposit accounts with, eurodollar deposits through, bankers'
acceptances of and repurchase and reverse repurchase agreements
covering Investments described in subclause (i) above executed by a
Bank or any other bank doing business in and incorporated under the
laws of the United States of any state thereof whose deposits are
insured through the Federal Deposit Insurance Corporation or any
successor thereto and having (either itself or its holding company) on
the date of such Investment combined capital, surplus and undivided
profits of at least $500,000,000, or any offshore branch of such bank,
in each case maturing within one year from the date of acquisition
thereof;

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<PAGE> 18
by the Agent (such approval not to be unreasonably withheld) having
(either itself or its holding company) on the date of such Investment
combined capital, surplus and undivided profits of at least
$500,000,000 (or the foreign currency equivalent thereof) and (where
rated) whose long-term and short-term bank debt securities are rated
(on the date of such Investment therein) not less than A2 by Moody's
Investors Service, Inc. and A by Standard & Poor's Corporation, in
each case maturing within one (1) year from the date of acquisition
thereof;

(v) shares of any money market mutual fund rated at least
AAA or the equivalent thereof by Standard & Poor's Corporation or at
least Aaa or the equivalent thereof by Moody's Investors Service,
Inc., including but not limited to any fund managed or advised by any
Bank or the Agent;

(vi) investments or loans described in the financial
statements described in Section 6.2 hereof;

(vii) loans or advances in the usual and ordinary course of
business to officers, directors and employees for expenses incidental
to carrying on the business of the Borrower, any Subsidiary or any
applicable Guarantor; and

(viii) prepaid expenses of the Borrower, its Subsidiaries
and any applicable Guarantor paid in the usual and ordinary course of
business of the Borrower, its Subsidiaries and any applicable
Guarantor and accounted for in accordance with GAAP.

Person shall mean any individual, Corporation, trust, unincorporated
organization, Governmental Authority or any other form of entity.

Plan shall mean an employee pension benefit plan which is covered by
Title IV of ERISA or subject to the minimum funding standards under Section 412
of the Code and is either (a) maintained by the Borrower or any member of the
Controlled Group for employees of the Borrower or any member of the Controlled
Group or (b) maintained pursuant to a collective bargaining agreement or any
other arrangement under which more than one employer makes contributions and to
which the Borrower or any member of the Controlled Group is then making or
accruing an obligation to make contributions or has within the preceding five
plan years made contributions.

Principal Office shall mean the principal office of the Agent,
presently located at 712 Main Street, Houston, Harris County, Texas 77002.

Proper Form shall mean in form and substance reasonably satisfactory
to the Agent.

Property shall mean any interest in any kind of property or asset,
whether real, personal or mixed, tangible or intangible.

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<PAGE> 19
Purchase Agreement shall mean that certain Purchase and Sale Agreement
dated as of February 28, 1994 executed by and between Smith International
Acquisition Corp., a Delaware corporation, and Dresser Industries, Inc., a
Delaware corporation.

Quarterly Dates shall mean the last day of each March, June, September
and December, provided that if any such date is not a Business Day, then the
relevant Quarterly Date shall be the next succeeding Business Day.

Quarterly Financial Statements shall mean the quarterly financial
statements of a Person, including all notes thereto, which statements shall
include a balance sheet as of the end of such calendar quarter and an income
statement and, except with respect to Quarterly Financial Statements of SII
Megadiamond, Inc., a statement of cash flows for such calendar quarter and for
the fiscal year to date, subject to normal year-end adjustments, all setting
forth in comparative form the corresponding figures for the corresponding
calendar quarter of the preceding year, prepared in accordance with GAAP and
certified by the chief financial officer, treasurer or other authorized officer
of such Person as complete and correct copies which present fairly the
consolidated financial condition of the applicable Person. Quarterly Financial
Statements shall be prepared on a consolidated basis.

Regulatory Change shall mean with respect to any Bank, any change on
or after the date of this Agreement in any Legal Requirement (including,
without limitation, Regulation D) or the adoption or making on or after such
date of any interpretation, directive or request applying to a class of banks
including such Bank under any Legal Requirements (whether or not having the
force of law) by any Governmental Authority.

Reimbursement Obligations shall mean, as at any date, the obligations
of the Borrower then outstanding, or which may thereafter arise, in respect of
Letters of Credit under this Agreement, to reimburse the applicable Issuers for
the amount paid by such Issuers in respect of any drawing under such Letters of
Credit, which obligations shall at all times be payable in Dollars
notwithstanding any such Letter of Credit being payable in a currency other
than Dollars.

Rentals shall mean and include as of the date of any determination
thereof all fixed payments (including as such all payments which the lessee is
obligated to make to the lessor on termination of the lease or surrender of the
property) payable by the Borrower or a Subsidiary of the Borrower, as lessee or
sublessee under a lease of real or personal property, but shall be exclusive of
any amounts required to be paid by the Borrower or a Subsidiary of the Borrower
(whether or not designated as rents or additional rents) on account of
maintenance, repairs, insurance, taxes and similar charges. Fixed rents under
any so-called "percentage leases" shall be computed solely on the basis of the
minimum rents, if any, required to be paid by the lessee regardless of sales
volume or gross revenues.

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<PAGE> 20
Request for Extension of Credit shall mean a request for extension of
credit duly executed by the chief executive officer, chief financial officer or
treasurer of the Borrower, appropriately completed and substantially in the
form of Exhibit A attached hereto.

Requirements of Environmental Law means all requirements imposed by
any law (including for example and without limitation The Resource Conservation
and Recovery Act and The Comprehensive Environmental Response, Compensation,
and Liability Act), rule, regulation, or order of any federal, state or local
executive, legislative, judicial, regulatory or administrative agency, board or
authority in effect at the applicable time which relate to (i) noise; (ii)
pollution, protection or clean-up of the air, surface water, ground water or
land; (iii) solid, gaseous or liquid waste generation, treatment, storage,
disposal or transportation; (iv) exposure to Hazardous Substances; (v) the
safety or health of employees or (vi) regulation of the manufacture,
processing, distribution in commerce, use, discharge or storage of Hazardous
Substances.

Secretary's Certificate shall mean a certificate, in Proper Form, of
the Secretary or an Assistant Secretary of a Corporation as to (a) the
resolutions of the Board of Directors of such Corporation authorizing the
execution, delivery and performance of the documents to be executed by such
Corporation; (b) the incumbency and signature of the officer of such
Corporation executing such documents on behalf of such Corporation, and (c) the
Organizational Documents of such Corporation.

Subsidiary shall mean, as to a particular parent Corporation, any
Corporation of which more than 50% of the indicia of equity rights (whether
outstanding capital stock or otherwise) is at the time directly or indirectly
owned by, such parent Corporation.

Tangible Net Worth shall mean all items classified as assets (valued
at cost less normal depreciation) in the financial statements of the applicable
Person delivered in accordance with this Agreement, less (a) all intangibles
and (b) all items classified as liabilities in the financial statements of such
Person delivered in accordance with this Agreement (including contingent and
indirect liabilities to the extent included on the balance sheet of the
applicable Person), all determined in accordance with GAAP. The term
"intangibles" shall include, without limitation, (1) deferred charges; (2) the
amount of any write-up in the book value of any assets contained in any balance
sheet resulting from revaluation thereof or any write-up in excess of the cost
of such assets acquired (other than purchase price adjustments related to the
acquisition of M-I recorded by the Borrower for its fiscal year 1994 in
accordance with GAAP) and (3) the aggregate of all amounts appearing on the
assets side of any such balance sheet for franchises, licenses, permits,
patents, patent applications, copyrights, trademarks, trade names, goodwill,
treasury stock, experimental or organizational expenses and other like
intangibles. The term "liabilities" shall include, without limitation, (1)
Indebtedness secured by Liens on Property of the Person with respect to which
Tangible Net Worth is being computed, whether or not such Person is liable for
the payment thereof; (2) deferred liabilities, and (3) Capital Lease
Obligations.

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<PAGE> 21
Termination Date shall mean the earlier of (a) the Maturity Date or
(b) the date specified by the Agent in accordance with Section 9.1 hereof.

Texas Credit Code shall mean Title 79, Texas Revised Civil Statutes,
1925, as amended.

Unfunded Liabilities shall mean, with respect to any Plan, at any
time, the amount (if any) by which (a) the present value of all benefits under
such Plan exceeds (b) the fair market value of all Plan assets allocable to
such benefits, all determined as of the then most recent actuarial valuation
report for such Plan, but only to the extent that such excess represents a
potential liability of any member of the Controlled Group to the PBGC or a Plan
under Title IV of ERISA. With respect to multiemployer Plans, the term
"Unfunded Liabilities" shall also include contingent liability for withdrawal
liability under Section 4201 of ERISA to all multiemployer Plans to which
Borrower or any member of a Controlled Group for employees of Borrower
contribute in the event of complete withdrawal from such Plans.

1.2 Miscellaneous. The words "hereof," "herein," and "hereunder"
and words of similar import when used in this Agreement shall refer to this
Agreement as a whole and not any particular provision of this Agreement.

2. Commitments and Loans.

2.1 Loans. From time to time on or after the Effective Date and
during the Loan Availability Period, each Bank severally agrees, subject to all
of the terms and conditions of this Agreement (including, without limitation,
Sections 5.1 and 5.2 hereof), to make loans under this Section 2.1 to the
Borrower in an aggregate principal amount at any one time outstanding
(including its Loan Commitment Percentage of all Letter of Credit Liabilities
at such time) up to but not exceeding such Bank's Loan Commitment Percentage of
the Maximum Loan Available Amount. Subject to the conditions in this
Agreement, any such Loan repaid prior to the Termination Date may be reborrowed
pursuant to the terms of this Agreement; provided, that any and all such Loans
shall be due and payable in full at the end of the Loan Availability Period.
The Borrower, the Agent and the Banks agree that Chapter 15 of the Texas Credit
Code shall not apply to this Agreement, the Notes or any Obligation. The
aggregate of all Loans to be made by the Banks in connection with a particular
borrowing shall be equal to $1,000,000 or a multiple of $100,000 in excess of
$1,000,000.

2.2 Letters of Credit.

(a) Letters of Credit. Subject to the terms and conditions of
this Agreement, and on the condition that aggregate Letter of Credit
Liabilities shall never exceed $7,000,000, the Borrower shall have the right
to, in addition to Loans provided for in Section 2.1 hereof, utilize the Loan
Commitments from time to time during the Loan Availability Period by obtaining
the issuance of standby letters of credit for the account of the Borrower and
on behalf of the Borrower as herein provided if the Borrower shall so request
in the notice referred to in Section

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<PAGE> 22
2.2(b)(i) hereof (such standby letters of credit as any of them may be amended,
supplemented, extended or confirmed from time to time, being herein
collectively called the "Letters of Credit)." If TCB is the Issuer, upon the
date of the issuance of a Letter of Credit, TCB shall be deemed, without
further action by any party hereto, to have sold to each Bank, and each such
Bank shall be deemed, without further action by any party hereto, to have
purchased from TCB, a participation, to the extent of such Bank's Loan
Commitment Percentage, in such Letter of Credit and the related Letter of
Credit Liabilities. No Letter of Credit issued pursuant to this Agreement,
shall have an expiration date later than two years from date of issuance. Any
Letter of Credit that shall have an expiration date after the end of the Loan
Availability Period shall be fully Covered or backed by a standby letter of
credit in form and substance, and issued by a Person, acceptable to the Agent
in its sole discretion. TCB shall be the Issuer of each Letter of Credit;
provided that TCB may, at its option, require that any requested Letter of
Credit which exceeds $2,000,000 be issued severally, but not jointly, by all of
the Banks in accordance with each Bank's Loan Commitment Percentage (and any
Letter of Credit so co-issued shall be a "Letter of Credit" for all purposes
hereunder and under the Loan Documents).

(b) Additional Provisions. The following additional provisions
shall apply to each Letter of Credit:

(i) The Borrower shall give the Agent notice requesting each
issuance of a Letter of Credit hereunder as provided in Section 4.3
hereof and shall furnish such additional information regarding such
transaction as the Agent may reasonably request. Upon receipt of such
notice, the Agent shall promptly notify each Bank of the contents
thereof and of such Bank's Loan Commitment Percentage of the amount of
such proposed Letter of Credit and whether TCB will require that the
applicable Letter of Credit be issued severally by all of the Banks.

(ii) No Letter of Credit may be issued if after giving effect
thereto the sum of (A) the aggregate outstanding principal amount of
Loans plus (B) the aggregate Letter of Credit Liabilities would exceed
the Maximum Loan Available Amount. On each day during the period
commencing with the issuance of any Letter of Credit and until such
Letter of Credit shall have expired or been terminated, the Loan
Commitment of each Bank shall be deemed to be utilized for all
purposes hereof in an amount equal to such Bank's Loan Commitment
Percentage of the amount then available for drawings under such Letter
of Credit.

(iii) Upon receipt from the beneficiary of any Letter of
Credit of any demand for payment thereunder, Agent shall promptly
notify the Borrower and each Bank as to the amount to be paid as a
result of such demand and the payment date. If at any time any Issuer
shall have made a payment to a beneficiary of a Letter of Credit in
respect of a drawing or in respect of an acceptance created in
connection with a drawing under such Letter of Credit, each Bank will
pay to Agent immediately upon demand by such Issuer at any time during
the period commencing after such payment until reimbursement

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<PAGE> 23
thereof in full by the Borrower, an amount equal to such Bank's Loan
Commitment Percentage of such payment, together with interest on such
amount for each day from the date of demand for such payment (or, if
such demand is made after 11:00 a.m. Houston time on such date, from
the next succeeding Business Day) to the date of payment by such Bank
of such amount at a rate of interest per annum equal to the Federal
Funds Rate for such period.

(iv) The Borrower shall be irrevocably and unconditionally
obligated forthwith to reimburse the Agent for any amount paid by any
Issuer upon any drawing under any Letter of Credit, without
presentment, demand, protest or other formalities of any kind, all of
which are hereby waived. Such reimbursement may, subject to
satisfaction of the conditions in Sections 5.1 and 5.2 hereof and to
the Maximum Loan Available Amount (after adjustment in the same to
reflect the elimination of the corresponding Letter of Credit
Liability), be made by the borrowing of Loans. Agent will pay to each
Bank such Bank's Loan Commitment Percentage of all amounts received
from the Borrower for application in payment, in whole or in part, of
the Reimbursement Obligation in respect of any Letter of Credit, but
only to the extent such Bank has made payment to Agent in respect of
such Letter of Credit pursuant to clause (iii) above.

(v) The Borrower will pay to the Agent at the Principal Office
for the account of each Bank a letter of credit fee with respect to
each Letter of Credit equal to the greater of (i) $500 or (ii) one
percent (1%) per annum on the face amount of such Letter of Credit
(pro rated for Letters of Credit having terms of less than or, to the
extent permitted hereunder, longer than one (1) year), such fee to be
due and payable in advance on the date of the issuance thereof.
Promptly after receiving any payment in respect of letter of credit
fees referred to in this clause (v), the Agent will pay to Banks, pro
rata in accordance with their respective Loan Commitments, an amount
equal to seven-eights (7/8ths) of such fee (the remaining one-eighth
(1/8th) to be retained by the the issuer or co-issuers of the
applicable Letter of Credit, pro rata in accordance with their
respective shares thereof).

(vi) The issuance by the applicable Issuer of each Letter of
Credit shall, in addition to the conditions precedent set forth in
Section 5 hereof, be subject to the conditions precedent (A) that such
Letter of Credit shall be in such form and contain such terms as shall
be reasonably satisfactory to the Agent, and (B) that the Borrower
shall have executed and delivered such Applications and other
instruments and agreements relating to such Letter of Credit as the
Agent shall have reasonably requested and are not inconsistent with
the terms of this Agreement. In the event of a conflict between the
terms of this Agreement and the terms of any Application, the terms
hereof shall control.

(c) Indemnification; Release. The Borrower hereby indemnifies and
holds harmless the Agent, each Bank and each Issuer from and against any and
all claims and damages, losses, liabilities, costs or expenses which the Agent,
such Bank or such Issuer may incur (or which

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<PAGE> 24
may be claimed against the Agent, such Bank or such Issuer by any Person
whatsoever, other than the Borrower), by reason of its own negligence or
otherwise, in connection with the execution and delivery of any Letter of
Credit or transfer of or payment or failure to pay under any Letter of Credit;
provided that the Borrower shall not be required to indemnify any party seeking
indemnification for any claims, damages, losses, liabilities, costs or expenses
to the extent, but only to the extent, caused by (i) the willful misconduct or
gross negligence of the party seeking indemnification, or (ii) by the failure
by the party seeking indemnification to pay under any Letter of Credit after
the presentation to it of a request required to be paid under applicable law.
The Borrower hereby releases, waives and discharges the Agent, each Bank and
each Issuer from any claims, causes of action, damages, losses, liabilities,
costs or expenses which the Agent, such Bank or such Issuer, as the case may
be, may incur (whether incurred as a result of its own negligence or otherwise)
by reason of or in connection with the failure of any other Bank (whether
incurred as a result of its own negligence or otherwise) to fulfill or comply
with its obligations to the Agent, such Bank or such Issuer, as the case may
be, hereunder (but nothing herein contained shall affect any rights the
Borrower may have against such defaulting Bank). Nothing in this Section
2.2(c) is intended to limit the obligations of the Borrower under any other
provision of this Agreement.

(d) Additional Costs in Respect of Letters of Credit. If as a
result of any Regulatory Change there shall be imposed, modified or deemed
applicable any tax, reserve, special deposit or similar requirement against or
with respect to or measured by reference to Letters of Credit issued or to be
issued hereunder or participations in such Letters of Credit, and the result
shall be to increase the cost to any Bank of issuing or maintaining any Letter
of Credit or any participation therein, or reduce any amount receivable by any
Bank hereunder in respect of any Letter of Credit or any participation therein
(which increase in cost, or reduction in amount receivable, shall be the result
of such Bank's reasonable allocation of the aggregate of such increases or
reductions resulting from such event) by an amount deemed in good faith by such
Bank to be material, then such Bank shall notify the Borrower through the
Agent, and upon demand therefor by such Bank through the Agent, the Borrower
shall pay to such Bank, from time to time as specified by such Bank, such
additional amounts as shall be sufficient to compensate such Bank for such
increased costs or reductions in amount. A statement as to such increased
costs or reductions in amount incurred by such Bank, submitted by such Bank to
the Borrower, shall be conclusive as to the amount thereof, absent manifest
error, and may be computed using any reasonable averaging and attribution
method. Each Bank will notify the Borrower through the Agent of any event
occurring after the date of this Agreement which will entitle such Bank to
compensation pursuant to this Section as promptly as practicable after it
obtains knowledge thereof and determines to request such compensation, and (if
so requested by the Borrower through the Agent) will designate a different
lending office of such Bank for the issuance or maintenance of Letters of
Credit by such Bank or will take such other action as the Borrower may
reasonable request if such designation or action is consistent with the
internal policy of such Bank and legal and regulatory restrictions, can be
undertaken at no additional cost, will avoid the need for, or reduce the amount
of, such compensation and will not, in the sole opinion of such Bank, be
disadvantageous to such Bank (provided that such Bank shall have

20
<PAGE> 25
no obligation so to designate a different lending office which is located in
the United States of America).

2.3 Terminations or Reductions of Loan Commitments.

(a) Mandatory. On the Termination Date, all Loan Commitments
shall be terminated in their entirety.

(b) Optional. The Borrower shall have the right to terminate or
reduce the unused portion of the Loan Commitments at any time or from time to
time, provided that (i) the Borrower shall give notice of each such termination
or reduction to the Agent as provided in Section 4.3 hereof and (ii) each such
partial reduction shall be in an aggregate amount of at least $5,000,000 and
the aggregate of all the Loan Commitments may not be reduced below $20,000,000
unless terminated entirely.

(c) No Reinstatement. Any termination of the Loan Commitments may
not be reinstated without the written approval of the Agent and the Banks.

2.4 Fees.

(a) The Borrower shall pay to the Agent for the account
of each Bank commitment fees for the period from the Effective Date to
and including the Termination Date at a rate per annum equal to 3/8 of
1%. Such commitment fees shall be computed (on the basis of the
actual number of days elapsed in a year composed of 360 days) on each
day and shall be based on the excess of (x) the aggregate amount of
each Bank's Loan Commitment for such day over (y) the sum of (i) the
aggregate unpaid principal balance of such Bank's Note on such day
plus (ii) the aggregate Letter of Credit Liabilities as to such Bank
for such day. Accrued commitment fees shall be payable on the
Quarterly Dates prior to the Termination Date and on the Termination
Date.

(b) The Borrower shall pay to the Agent an administration
fee of as set forth in that certain Letter Agreement dated February
15, 1994 executed by and between the Agent and the Borrower,
commencing with the Effective Date and thereafter payable quarterly in
advance on the first day of each calendar quarter for so long as any
Loans or Loan Commitments remain outstanding.

2.5 Several Obligations. The failure of any Bank to make any Loan
to be made by it on the date specified therefor shall not relieve any other
Bank of its obligation to make its Loan on such date, but neither the Agent nor
any Bank shall be responsible or liable for the failure of any other Bank to
make a Loan to be made by such other Bank or to participate in,

21
<PAGE> 26
or co-issue, any Letter of Credit. Notwithstanding anything contained herein
to the contrary, (a) no Bank shall be required to make or maintain Loans at any
time outstanding (or to issue or participate in Letters of Credit) if as a
result the total Obligations to such Bank shall exceed the lesser of (1) such
Bank's Loan Commitment Percentage of all Obligations and (2) such Bank's Loan
Commitment Percentage of the Maximum Loan Available Amount and (b) if a Bank
fails to make a Loan as and when required hereunder, then upon each subsequent
event which would otherwise result in funds being paid to the defaulting Bank,
the amount which would have been paid to the defaulting Bank shall be divided
among the non-defaulting Banks ratably according to their respective Loan
Commitment Percentages until the Obligations of each Bank (including the
defaulting Bank) are equal to such Bank's Loan Commitment Percentage of the
total Obligations.

2.6 Notes. The Loans made by each Bank shall be evidenced by a
single note of the Borrower (each, together with all renewals, extensions,
modifications and replacements thereof and substitutions therefor, a "Note,"
collectively, the "Notes") in substantially the form of Exhibit C hereto
payable to the order of such Bank in a principal amount equal to the Loan
Commitment of such Bank and otherwise duly completed. Each Bank is hereby
authorized by the Borrower to endorse on the schedule (or a continuation
thereof) that may be attached to each Note of such Bank, to the extent
applicable, the date, amount, type of and the applicable period of interest for
each Loan made by such Bank to the Borrower hereunder, and the amount of each
payment or prepayment of principal of such Loan received by such Bank,
provided, that any failure by such Bank to make any such endorsement shall not
affect the obligations of the Borrower under such Note or hereunder in respect
of such Loan.

2.7 Use of Proceeds. The proceeds of the Loans shall be used by
the Borrower to refinance a portion of the costs paid by the Borrower in
connection with the closing of the transactions contemplated in the Purchase
Agreement and for general corporate purposes.

3. Borrowings, Payments and Prepayments.

3.1 Borrowings. The Borrower shall give the Agent notice of each
borrowing to be made hereunder as provided in Section 4.3 hereof. Not later
than noon Houston time on the date specified for each such borrowing hereunder,
each Bank shall make available the amount of the Loan, if any, to be made by it
on such date to the Agent, at its Principal Office, in immediately available
funds, for the account of the Borrower. Such amounts received by the Agent
will be held in an account maintained by the Borrower with the Agent. The
amounts so received by the Agent shall, subject to the terms and conditions of
this Agreement, be made available to the Borrower by depositing or otherwise
transferring, in immediately available funds, such amount to an account
designated by the Borrower and maintained with Agent in Houston, Texas or, if a
borrowing shall not occur on such date because any condition precedent herein
specified shall not have been met, the Agent shall return the amounts so
received to the respective Banks as soon as practicable; provided, however,
that if and to the extent the Agent fails to return any such amounts to a Bank
on the Business day following the date for any such

22
<PAGE> 27
borrowing, the Agent shall pay interest on such unreturned amounts, for each
day from such date to the date such amounts are returned to such Bank, at the
Federal Funds Rate.

3.2 Prepayments.

(a) Optional Prepayments. Except as provided in the Interest Rate
Agreement, the Borrower shall have the right to prepay, on any Business Day, in
whole or in part, without the payment of any penalty or fee, Loans at any time
or from time to time, provided that the Borrower shall give the Agent notice of
each such prepayment as provided in Section 4.3 hereof. Each optional
prepayment on a Loan shall be in an amount at least equal to $250,000.

(b) Borrowing Base. The Borrower shall from time to time on
demand by the Agent prepay the Loans (or provide Cover for Letter of Credit
Liabilities) in such amounts as shall be necessary so that at all times the
aggregate outstanding amount of all Obligations shall be less than or equal to
the Maximum Loan Available Amount.

(c) Interest Payments. Accrued and unpaid interest on the unpaid
principal balance of the Notes shall be due and payable on the Interest Payment
Dates.

(d) Payments; Interest Rate Agreement. The Borrower shall pay all
amounts required to be paid under the Interest Rate Agreement, the Notes and
the other Loan Documents as and when due.

(e) Payments and Interest on Reimbursement Obligations. The
Borrower will pay to the Agent for the account of each Bank the amount of each
Reimbursement Obligation promptly upon its incurrence. The amount of any
Reimbursement Obligation may, if the applicable conditions precedent specified
in Sections 5.1 and 5.2 hereof have been satisfied, be paid with the proceeds
of Loans. Subject to Section 11.7 hereof, the Borrower will pay to the Agent
for the account of each Bank interest at the applicable Past Due Rate on any
Reimbursement Obligation and on any other amount payable by the Borrower
hereunder to or for the account of such Bank (but, if such amount is interest,
only to the extent legally allowed), which shall not be paid in full when due
(whether at stated maturity, by acceleration or otherwise), for the period
commencing on the due date thereof until the same is paid in full.

4. Payments; Pro Rata Treatment; Computations, Etc.

4.1 Payments.

(a) Except to the extent otherwise provided herein, all payments of
principal, interest, Reimbursement Obligations and other amounts to be paid by
the Borrower hereunder, under the Notes and under the other Loan Documents
shall be made in Dollars, in immediately available funds, to the Agent at the
Principal Office (or in the case of a successor Agent, at the principal office
of such successor Agent in the United States), not later than noon Houston time
on the

23
<PAGE> 28
date on which such payment shall become due (each such payment made after such
time on such due date to be deemed to have been made on the next succeeding
Business Day). The Agent, or any Bank for whose account any such payment is
made, may (but shall not be obligated to) debit the amount of any such payment
which is not made by such time to any ordinary deposit account of the Borrower
with the Agent or such Bank, as the case may be.

(b) The Borrower shall, at the time of making each payment
hereunder, under any Note or under any other Loan Document, specify to the
Agent the Loans or other amounts payable by the Borrower hereunder or
thereunder to which such payment is to be applied. Each payment received by
the Agent hereunder, under any Note or under any other Loan Document for the
account of a Bank shall be paid promptly to such Bank, in immediately available
funds.

(c) If the due date of any payment hereunder or under any Note
falls on a day which is not a Business Day, the due date for such payments
(except as otherwise provided in the Interest Rate Agreement) shall be extended
to the next succeeding Business Day and interest shall be payable for any
principal so extended for the period of such extension.

(d) If the Agent fails to send to any Bank its portion of any
payment timely received by the Agent hereunder by the close of business on the
day such payment was received, the Agent shall pay to such Bank interest on its
portion of such payment, from the day such payment was timely received by the
Agent until the date such Bank's portion of such payment is sent to such Bank,
at the Federal Funds Rate.

4.2 Pro Rata Treatment. Except to the extent otherwise provided
herein: (a) each borrowing from the Banks under Section 2.1 hereof shall be
made ratably from the Banks on the basis of their respective Loan Commitments,
each payment of commitment fees shall be made ratably for the account of the
Banks on the basis of their respective Loan Commitments, and each termination
or reduction of the Loan Commitments under Section 2.3 hereof shall be applied,
pro rata, according to the Banks' respective Loan Commitments; (b) each payment
by the Borrower of principal of or interest on the Loans shall be made to the
Agent for the account of the Banks pro rata in accordance with the respective
unpaid principal amounts of such Loans held by the Banks, and (c) if TCB is the
sole Issuer of a Letter of Credit, the Banks (other than TCB) shall purchase
from TCB participations in such Letter of Credit to the extent of their
respective Loan Commitment Percentages.

4.3 Certain Actions, Notices, Etc. Notices to the Agent of any
termination or reduction of Loan Commitments and of borrowings and prepayments
of Loans and requests for issuances of Letters of Credit shall be irrevocable
and shall be effective only if received by the Agent not later than 11:00 a.m.
Houston time on the number of Business Days prior to the date of the relevant
termination, reduction, borrowing and/or prepayment specified below:

24
<PAGE> 29
<TABLE>
<CAPTION>
Number of
Notice Business Days Prior
------ -------------------
<S> <C>
Termination or
Reduction of Loan Commitments 2

Loan repayment 1

Borrowing at the Base Rate same day
(as defined in the Interest
Rate Agreement)

Letter of Credit issuance 3

Prepayments required
pursuant to
Section 3.2(b) same day
</TABLE>

Each such notice of termination or reduction shall specify the amount of the
applicable Loan Commitment to be terminated or reduced. Each such notice of
borrowing or prepayment shall specify the amount of the Loans to be borrowed or
prepaid and the date of borrowing or prepayment (which shall be a Business
Day). The Agent shall promptly notify the affected Banks of the contents of
each such notice. Any selection of a Eurodollar Rate (as defined in the
Interest Rate Agreement) with respect to a Loan shall be subject to the advance
notice requirements set forth in the Interest Rate Agreement.

4.4 Non-Receipt of Funds by the Agent. Unless the Agent shall
have been notified by a Bank or the Borrower (the "Payor") prior to the date on
which such Bank is to make payment to the Agent of the proceeds of a Loan (or
funding of a drawing under a Letter of Credit or reimbursement with respect to
any drawing under a Letter of Credit) to be made by it hereunder or the
Borrower is to make a payment to the Agent for the account of one or more of
the Banks, as the case may be (such payment being herein called the "Required
Payment"), which notice shall be effective upon receipt, that the Payor does
not intend to make the Required Payment to the Agent, the Agent may assume that
the Required Payment has been made and may, in reliance upon such assumption
(but shall not be required to), make the amount thereof available to the
intended recipient on such date and, if the Payor has not in fact made the
Required Payment to the Agent, the recipient of such payment (or, if such
recipient is the beneficiary of a Letter of Credit, the Borrower and, if the
Borrower fails to pay the amount thereof to the Agent forthwith upon demand,
the Banks ratably in proportion to their respective Loan Commitment
Percentages) shall, on demand, pay to the Agent the amount made available by
the Agent together with interest thereon in respect of the period commencing on
the date such

25
<PAGE> 30
amount was so made available by the Agent until the date the Agent recovers
such amount from the recipient at a rate per annum equal to the Federal Funds
Rate for such period (or, if the recipient is the Borrower, the Past Due Rate).

4.5 Sharing of Payments, Etc. If a Bank shall obtain payment of
any principal of or interest on any Loan made by it under this Agreement, on
any Reimbursement Obligation or on other Obligation then due to such Bank
hereunder through the exercise of any right of set-off (including, without
limitation, any right of setoff or lien granted under Section 9.2 hereof),
banker's lien, counterclaim or similar right, or otherwise, it shall promptly
purchase from the other Banks participations in the Loans made, Reimbursement
Obligations or other Obligations held by the other Banks in such amounts, and
make such other adjustments from time to time as shall be equitable to the end
that all the Banks shall share the benefit of such payment (net of any expenses
which may be incurred by such Bank in obtaining or preserving such benefit) pro
rata in accordance with the unpaid principal and interest on the Obligations
then due to each of them. To such end all the Banks shall make appropriate
adjustments among themselves (by the resale of participations sold or
otherwise) if such payment is rescinded or must otherwise be restored. The
Borrower agrees, to the fullest extent it may effectively do so under
applicable law, that any Bank so purchasing a participation in the Loans made,
Reimbursement Obligations or other Obligations held by other Banks may exercise
all rights of set-off, bankers' lien, counterclaim or similar rights with
respect to such participation as fully as if such Bank were a direct holder of
Loans, Reimbursement Obligations or other Obligations in the amount of such
participation. Nothing contained herein shall require any Bank to exercise any
such right or shall affect the right of any Bank to exercise, and retain the
benefits of exercising, any such right with respect to any other indebtedness
or obligation of the Borrower.

4.6 Replacement of Banks. In the event any Bank shall seek
compensation pursuant to Section 2.2(d) or Section 7.9 of this Agreement or
pursuant to Section 2.3 of the Interest Rate Agreement, the Borrower may within
sixty (60) days after such event and so long as no Default shall have occurred
and be continuing give notice to such Bank (with copies to the Agent) that it
wishes to seek one or more eligible assignees (which may be one or more of the
Banks) to assume the Loan Commitment of such Bank and to purchase its
outstanding Loans and Notes. Each Bank requesting compensation pursuant to
Section 2.2(d) or Section 7.9 of this Agreement or pursuant to Section 2.3 of
the Interest Rate Agreement agrees to sell its Loan Commitment, Loans, Notes,
and interest in this Agreement pursuant to Section 11.6 hereof and the Agent
agrees that it will not unreasonably withhold its consent to any such transfer;
provided, that, concurrent with such transfer, the Borrower will pay, to the
extent not paid by the assignee pursuant to Section 11.6, all fees and amounts
(including without limitation any compensation claimed by such Bank under
Section 2.2(d) or Section 7.9 of this Agreement or pursuant to Section 2.3 of
the Interest Rate Agreement) due such Bank hereunder; provided, further, that,
prior to any transfer pursuant to this Section, the Borrower shall have given
written notice to the Bank of such intention and (i) for a period of 10 days
after receipt of such notice, the Bank requesting such compensation may (but
shall not be obligated to) rescind such request (and refund any such
compensation already paid by the Borrower) by written notice to the Borrower

26
<PAGE> 31
(with a copy to the Agent), in which event the rights of the Borrower under
this Section arising out of such request shall terminate or (ii) for a period
of 30 days after receipt of such notice, the other Banks may (but shall not be
obligated to) increase their Loan Commitments in order to replace the affected
Bank in lieu of such substitution.

5. Conditions Precedent.

5.1 Initial Loans and Letters of Credit. The obligation of each
Bank or TCB to make its initial Loans or issue or participate in a Letter of
Credit (if such Letter of Credit is issued prior to the funding of the initial
Loans) hereunder is subject to the following conditions precedent, each of
which shall have been fulfilled or waived to the satisfaction of the Agent:

(1) Corporate Action and Status. The Agent shall have received
from the appropriate Governmental Authorities certified copies of the
Organizational Documents (other than bylaws) of the Borrower, M-I and the
Guarantors, and evidence satisfactory to the Agent of all action taken by the
Borrower and the Guarantors authorizing the execution, delivery and performance
of the Loan Documents and all other documents related to this Agreement to
which it is a party (including, without limitation, certificates of the
secretaries of Borrower and the Guarantors setting forth the resolutions of
their Boards of Directors authorizing the transactions contemplated thereby and
attaching a copy of their bylaws), together with such certificates as may be
appropriate to demonstrate the qualification and good standing of and payment
of taxes by the Borrower, M-I and the Guarantors in the jurisdiction of its
organization and in each other jurisdiction where the failure in which to
qualify could reasonably be expected to have a Material Adverse Effect.

(2) Incumbency. The Borrower and each other Party shall have
delivered to the Agent a certificate in respect of the name and signature of
each of the officers (i) who is authorized to sign on its behalf the applicable
Loan Documents related to any Loan or the issuance of any Letter of Credit and
(ii) who will, until replaced by another officer or officers duly authorized
for that purpose, act as its representative for the purposes of signing
documents and giving notices and other communications in connection with any
Loan or the issuance of any Letter of Credit. The Agent and each Bank may
conclusively rely on such certificates until they receive notice in writing
from the Borrower or the appropriate Party to the contrary.

(3) Notes. The Agent shall have received the appropriate Notes of
the Borrower for each Bank, duly completed and executed.

(4) Loan Documents. The Borrower and each other Party shall have
duly executed and delivered the Loan Documents to which it is a party (in such
number of copies as the Agent shall have requested) and each such Loan Document
shall be in form satisfactory to Agent. Each such Loan Document shall be in
substantially the form furnished to the Banks prior to their execution of this
Agreement, together with such changes therein as the Agent may approve.

27
<PAGE> 32
(5) UCC Searches. The Agent shall have received Uniform
Commercial Code search reports evidencing that there are no Liens covering any
of the Property of the Borrower other than as permitted under this Agreement.

(6) Fees and Expenses. The Borrower shall have paid to the Agent
and the Banks all unpaid fees in the amounts previously agreed upon in writing
among the Borrower and the Agent and the Banks; and shall have in addition paid
to the Agent all amounts payable under Section 11.3 hereof, on or before the
date of this Agreement, except for amounts which Agent, in its sole discretion,
agrees may be paid at a later date.

(7) Insurance. The Borrower shall have delivered to the Agent
certificates of insurance satisfactory to the Agent evidencing the existence of
all insurance required to be maintained by the Borrower by this Agreement and
the other Loan Documents.

(8) Opinions of Counsel. The Agent shall have received an opinion
of Gardere & Wynne, L.L.P., counsel to the Borrower and the Guarantors, in such
form as the Agent shall reasonably request.

(9) Consents. The Agent shall have received evidence satisfactory
to it that all material consents of each Governmental Authority and of each
other Person, if any, reasonably required in connection with (a) the Loans and
the Letters of Credit, (b) the execution, delivery and performance of this
Agreement and the other Loan Documents and (c) except as set forth on Exhibit K
hereto, the Purchase Agreement have been satisfactorily obtained.

(10) Purchase Agreement. The Agent shall have received a copy of
the Purchase Agreement, in Proper Form, and shall have received evidence
satisfactory to the Agent that the transactions contemplated therein have been
consummated.

(11) 1994 Note Purchase Agreements. The Agent shall have received
copies of the 1994 Note Purchase Agreements.

(12) Other Documents. The Agent shall have received such other
documents consistent with the terms of this Agreement and relating to the
transactions contemplated hereby as the Agent may reasonably request.

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<PAGE> 33
to the Loan or the Letter of Credit, as the case may be, no later than 11:00
a.m. Houston time on the Business Day on which such Request for Extension of
Credit must be given under Section 4.3 hereof, (2) in the case of a Letter of
Credit, an Application, and (3) such other documents as the Agent or any Bank
may reasonably require; (d) prior to the making of such Loan or the issuance of
such Letter of Credit, no fact or condition shall have arisen which has a
Material Adverse Effect; (e) no Default or Event of Default shall have occurred
and be continuing; (f) on or immediately prior to the date of such borrowing or
issuance the Borrower shall have delivered to the Agent a Borrowing Base
Certificate in accordance with Section 7.2 hereof; (g) the making of such Loan
or the issuance of such Letter of Credit shall not be illegal or prohibited by
any Legal Requirement, and (h) the Borrower shall have paid all fees and
expenses of the type described in Section 11.3 hereof and all other fees, which
are owed to the Agent or any other Bank under the Loan Documents and accrued
and unpaid through the date of such Loan or such issuance.

6. Representations and Warranties.

To induce the Banks to enter into this Agreement and to make the Loans
and issue or participate in the Letters of Credit, the Borrower represents and
warrants (such representations and warranties to survive any investigation and
the making of the Loans and the issuance of any Letters of Credit) to the Banks
and the Agent as follows:

6.1 Organization. The Borrower and each of its Material
Subsidiaries and each of the Guarantors (a) is duly organized, validly existing
and in good standing under the laws of the state of its organization; (b) has
all necessary power and authority to conduct its business as presently
conducted, and (c) is duly qualified to do business and in good standing in the
jurisdiction of its organization and in all other jurisdictions in which the
failure to so qualify could reasonably be expected to have a Material Adverse
Effect.

6.2 Financial Statements.

(a) The Borrower has furnished to the Agent financial
statements (including a balance sheet) as to the Borrower and its
Subsidiaries (other than Subsidiaries created or acquired after
December 31, 1993) which fairly present, in accordance with GAAP, the
financial condition and the results of operations of the Borrower and
such Subsidiaries as at December 31, 1993. No event, condition or
circumstance has occurred from the date that such financial statements
were delivered to the Agent through the date hereof which would cause
said financial statements to be misleading in any material respect.
There is no material instrument or liability which should in
accordance with GAAP be reflected in such financial statements
provided to the Agent which is not so reflected.

(b) The Borrower has furnished to the Agent financial
statements (including a balance sheet) as to M-I and its Subsidiaries
which to the best knowledge and belief of the Borrower (except as
disclosed in writing to the Agent on or prior to the Effective

29
<PAGE> 34
Date) fairly present, in accordance with GAAP, the financial condition
and the results of operations of M-I and its Subsidiaries as at
October 31, 1993. The Borrower is not aware of any event, condition
or circumstance which has occurred from the date that such financial
statements were delivered to Agent through the date hereof which would
cause said financial statements to be misleading in any material
respect. The Borrower is not aware of any material instrument or
liability which should in accordance with GAAP be reflected in such
financial statements provided to the Agent which is not so reflected
(except as disclosed in writing to the Agent on or prior to the
Effective Date).

6.3 Enforceable Obligations; Authorization. The Loan Documents
are legal, valid and binding obligations of the Parties, enforceable in
accordance with their respective terms, except as may be limited by bankruptcy,
insolvency, reorganization and other similar laws affecting creditors' rights
generally and by general equitable principles. The execution, delivery and
performance of the Loan Documents (a) have all been duly authorized by all
necessary action; (b) are within the power and authority of the Parties; (c) do
not and will not contravene or violate any Legal Requirement applicable to the
Parties or the Organizational Documents of the Parties, the contravention or
violation of which could reasonably be expected to have a Material Adverse
Effect; (d) do not and will not result in the breach of, or constitute a
default under, any material agreement or instrument by which the Parties or any
of their respective Property may be bound or affected, and (e) do not and will
not result in the creation of any Lien upon any Property of any of the Parties,
except in favor of the Agent or as expressly contemplated therein. All
necessary permits, registrations and consents for such making and performance
have been obtained.

6.4 Other Debt. Neither the Borrower nor any of its Subsidiaries
nor either of the Guarantors is in default in the payment of any other
Indebtedness or under any agreement, mortgage, deed of trust, security
agreement or lease to which it is a party and which default could reasonably be
expected to have a Material Adverse Effect.

6.5 Litigation. Except as described in Exhibit G hereto, there is
no litigation or administrative proceeding pending or, to the knowledge of the
Borrower, threatened against, nor any outstanding judgment, order or decree
affecting, the Borrower, any of its Subsidiaries or either of the Guarantors
before or by any Governmental Authority which does or could reasonably be
expected to have a Material Adverse Effect. Neither the Borrower nor any of
its Subsidiaries nor either of the Guarantors is in default with respect to any
judgment, order or decree of any Governmental Authority where such default
could reasonably be expected to have a Material Adverse Effect.

6.6 Title. The Borrower and each of its Material Subsidiaries and
each of the Guarantors has good and marketable title to its respective
Property, free and clear of all Liens other than those permitted under Section
8.2 hereof.

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<PAGE> 35
6.7 Taxes. The Borrower, its Material Subsidiaries and the
Guarantors each has filed all tax returns required to have been filed and paid
all taxes shown thereon to be due, except those for which extensions have been
obtained and those which are being contested in good faith.

6.8 Regulations U and X. None of the proceeds of any Obligation
will be used for the purpose of purchasing or carrying directly or indirectly
any margin stock or for any other purpose would constitute this transaction a
"purpose credit" within the meaning of Regulation U and X of the Board of
Governors of the Federal Reserve System, as either of them may be amended from
time to time.

6.9 Subsidiaries. The Borrower has no Subsidiaries except as
listed on Exhibit F attached hereto or as disclosed to the Agent in accordance
with Section 8.10 hereof.

6.10 No Untrue or Misleading Statements. No representation or
warranty as to any factual matter made by the Borrower in any Loan Document and
no factual matter contained in any document, instrument or other writing
furnished to the Banks by or on behalf of the Borrower or any other Party in
connection with the transactions contemplated in any Loan Document does or will
contain any material misstatement of fact or does or will omit to state any
material fact (of which the Borrower or any other Party has knowledge)
necessary in order to make the representations, warranties and other statements
contained herein or in such other document, instrument or writing, in light of
the circumstances under which they were made, not misleading except for
information which was superseded by subsequent written information.

6.11 ERISA. With respect to each Plan, the Borrower and each
member of the Controlled Group have fulfilled their obligations, including
obligations under the minimum funding standards of ERISA and the Code and are
in compliance in all material respects with the provisions of ERISA and the
Code. No event has occurred which could result in a liability of the Borrower
or any member of the Controlled Group to the PBGC or a Plan (other than to make
contributions in the ordinary course). Since the effective date of Title IV of
ERISA, there have not been any nor are there now existing any events or
conditions that would cause the Lien provided under Section 4068 of ERISA to
attach to any property of the Borrower or any member of the Controlled Group.
There are no Unfunded Liabilities with respect to any Plan. To Borrower's
knowledge, no "prohibited transaction" has occurred with respect to any Plan
which could reasonably be expected to have a Material Adverse Effect.

6.12 Investment Company Act. Neither the Borrower nor any of its
Subsidiaries nor either of the Guarantors is an investment company within the
meaning of the Investment Company Act of 1940, as amended, or, directly or
indirectly, controlled by or acting on behalf of any Person which is an
investment company, within the meaning of said Act.

6.13 Public Utility Holding Company Act. Neither the Borrower nor
any of its Subsidiaries nor either of the Guarantors is an "affiliate" or a
"subsidiary company" of a "public utility company," or a "holding company," or
an "affiliate" or a "subsidiary company" of a

31
<PAGE> 36
"holding company," as such terms are defined in the Public Utility Holding
Company Act of 1935, as amended.

6.14 Solvency. Neither the Borrower, nor the Borrower and its
Material Subsidiaries, on a consolidated basis, nor either of the Guarantors is
"insolvent," as such term is used and defined in (i) the Bankruptcy Code and
(ii) the Texas Uniform Fraudulent Transfer Act, Tex. Bus. & Com. Code Ann.
Section 24.001 et seq., as amended from time to time.

6.15 Fiscal Year. The fiscal year of the Borrower, its
Subsidiaries (other than M-I) and the Guarantors ends on December 31. The 1993
fiscal year of M-I will end on October 31, 1994 and each subsequent fiscal year
of M-I will end on December 31.

6.16 Compliance. The Borrower, its Subsidiaries and the Guarantors
are each in compliance with all Legal Requirements applicable to it, except to
the extent that the failure to comply therewith does or would not have a
Material Adverse Effect.

6.17 Environmental Matters. The Borrower, its Subsidiaries and the
Guarantors have obtained and maintained in effect all Environmental Permits (or
the applicable Person has initiated the necessary steps to transfer the
Environmental Permits into its name or obtain such permits), the failure to
obtain which could reasonably be expected to have a Material Adverse Effect.
The Borrower, its Subsidiaries and the Guarantor and their real Properties,
business and operations have been and are in compliance with all applicable
Requirements of Environmental Law and Environmental Permits failure to comply
with which could reasonably be expected to have a Material Adverse Effect. The
Borrower, its Subsidiaries and the Guarantors and their real Properties,
business and operations are not subject to any (A) Environmental Claims or (B),
to the best of their respective officers' knowledge (after making reasonable
inquiry of the personnel and records of their respective Corporations),
Environmental Liabilities, in either case direct or contingent, arising from or
based upon any act, omission, event, condition or circumstance occurring or
existing on or prior to the date hereof which could reasonably be expected to
have a Material Adverse Effect. None of the officers of any of the Borrower,
any of its Subsidiaries or either of the Guarantors has received any written
notice of any violation or alleged violation of any Requirements of
Environmental Law or Environmental Permit or any Environmental Claim which
could reasonably be expected to have a Material Adverse Effect. The Borrower
does not know of any event or condition with respect to currently enacted
Requirements of Environmental Laws presently scheduled to become effective in
the future which could reasonably be expected to have a Material Adverse Effect
and for which the Borrower has not made good faith provisions in its business
plan and projections of financial performance.

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7. Affirmative Covenants.

The Borrower covenants and agrees with the Agent and the Banks that
prior to the termination of this Agreement it will do, and cause each of its
Subsidiaries and each of the Guarantors to do, and if necessary cause to be
done, each and all of the following:

7.1 Taxes, Existence, Regulations, Property, Etc. At all times
(a) pay when due all taxes and governmental charges of every kind upon it or
against its income, profits or Property, unless and only to the extent that the
same shall be contested diligently in good faith and reserves deemed adequate
by the independent certified public accounting firm used by the Borrower to
prepare the Borrower's Annual Audited Financial Statements have been
established therefor; (b) do all things necessary to preserve its existence,
qualifications, rights and franchises in all jurisdictions where such failure
to qualify could reasonably be expected to have a Material Adverse Effect; (c)
comply with all applicable Legal Requirements (including without limitation
Requirements of Environmental Law) in respect of the conduct of its business
and the ownership of its Property, the noncompliance with which could
reasonably be expected to have a Material Adverse Effect; and (d) cause its
Property to be protected, maintained and kept in good repair and make all
replacements and additions to its Property as may be reasonably necessary to
conduct its business properly and efficiently.

7.2 Financial Statements and Information. Furnish to the Agent
three copies of each of the following: (a) as soon as available and in any
event within 90 days after the end of each fiscal year of the applicable
Person, beginning with the fiscal year 1993, audited Annual Financial
Statements of the Borrower and its Subsidiaries and unaudited Annual Financial
Statements of SII Megadiamond, Inc., a Delaware corporation, and as soon as
available and in any event within 90 days after the end of each fiscal year of
the Borrower, beginning with the fiscal year 1994, unaudited Annual Financial
Statements of the Borrower and its Subsidiaries other than M-I; (b) as soon as
available and in any event on or before August 31, 1994, audited Annual
Financial Statements of M-I for its fiscal year 1993; (c) as soon as available
and in any event within 90 days after the end of each fiscal year of M-I,
beginning with the fiscal year 1994, audited Annual Financial Statement of M-I;
(d) as soon as available and in any event within 60 days after the end of each
fiscal quarter of each fiscal year of the applicable Person, Quarterly
Financial Statements of (1) the Borrower and its Subsidiaries, (2) the Borrower
and its Subsidiaries other than M-I, (3) M-I and (4) SII Megadiamond, Inc., a
Delaware corporation; (e) concurrently with the financial statements provided
for in Subsections 7.2(a), (b), (c) and (d) hereof, such schedules,
computations and other information, in reasonable detail, as may be required by
the Agent to demonstrate compliance with the covenants set forth herein or
reflecting any non-compliance therewith as of the applicable date, all
certified and signed by the president, chief financial officer or treasurer of
the Borrower (or other authorized officer approved by the Agent) as correct and
complete and, commencing with the quarterly financial statement prepared as of
March 31, 1994, a compliance certificate ("Compliance Certificate") in the form
of Exhibit E hereto, duly executed by such authorized officer; (f) (1) as of
the Effective Date and (2) within 30 days after (i) the end of each fiscal
month or (ii) receipt of a request therefor

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<PAGE> 38
(which may be given from time to time) from the Agent, a Borrowing Base
Certificate as at the Effective Date or the last day of such fiscal month or
the date of such receipt, as the case may be, together with such supporting
information as the Agent may reasonably request; (g) within 45 days after (i)
the end of each fiscal quarter or (ii) receipt of a request therefor (which may
be given from time to time) from the Agent, (1) a listing and aging of the
Accounts of the Borrower as of the end of the most recently ended fiscal month,
prepared in reasonable detail and containing such other information as the
Agent may request and (2) a summary of the Inventory of the Borrower as of the
end of the most recently ended fiscal month, prepared in reasonable detail and
containing such other information as the Agent may request; (h) from time to
time while an Event of Default shall have occurred and be continuing, upon the
request of the Agent, but at the cost of the Borrower, a report of a collateral
field examiner approved by the Agent in writing and reasonably acceptable to
the Borrower (which may be, or be affiliated with, the Agent or one of the
Banks) with respect to the Accounts and Inventory components included in the
Borrowing Base; (i) by December 31 of each year, the financial projections of
income and cash flow of the Borrower for the next calendar year, and (j) such
other information relating to the condition (financial or otherwise),
operations, prospects or business of any of the Borrower, any of its
Subsidiaries or either of the Guarantors as from time to time may be reasonably
requested by the Agent. Each delivery of a financial statement pursuant to
this Section 7.2 shall constitute a republication of the representations
contained in Section 6.2.

7.3 Financial Tests. The Borrower (on a consolidated basis but
excluding M-I) will have and maintain:

(a) Current Ratio - a Current Ratio of not less than 1.50
to 1.00 at all times.

(b) Debt to Total Capitalization Ratio - a Debt to Total
Capitalization Ratio of not greater than (1) 40% for the period
commencing on the Effective Date through and including March 31, 1995
and (5) 35% at all times thereafter.

(d) Tangible Net Worth - Tangible Net Worth of not less
than (1) for the period commencing on the Effective Date through and
including March 31, 1994, $150,000,000 and (2) for each fiscal quarter
thereafter the minimum Tangible Net Worth required during the
immediately preceding fiscal quarter plus 50% of the Net Income (if
positive) of the Borrower for the immediately preceding fiscal quarter
plus 100% of any increase in Tangible Net Worth during such fiscal
quarter resulting from any merger, sale or issuance of common stock.

7.4 Inspection. Permit the Agent upon 3 days' prior notice
(unless a Default or an Event of Default has occurred which is continuing, in
which case no prior notice is required), subject to Section 11.15 hereof, to
inspect its Property, to examine its files, books and records,

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<PAGE> 39
and make and take away copies thereof, and to discuss its affairs with its
officers and accountants, all during normal business hours and at such
intervals and to such extent as the Agent may reasonably desire.

7.5 Further Assurances. Promptly execute and deliver, at the
Borrower's expense, any and all other and further instruments which may be
reasonably requested by the Agent to cure any defect in the execution and
delivery of any Loan Document in order to effectuate the transactions
contemplated by the Loan Documents.

7.6 Books and Records. Maintain books of record and account in
accordance with GAAP.

7.7 Insurance. Borrower will (and will cause each of its
Subsidiaries and each Guarantor to) maintain insurance with such insurers, on
such of its Property, with responsible companies in such amounts, with such
deductibles and against such risks as are usually carried by owners of similar
businesses and properties in the same general areas in which the Borrower, its
Subsidiaries and the Guarantors operate or as the Agent may otherwise
reasonably require (including without limitation business interruption
insurance), and furnish the Agent satisfactory evidence thereof promptly upon
request. In determining compliance with the provisions of this Section, due
consideration shall be given to levels of self-insurance usually carried by
owners of similar businesses and properties in the same general areas in which
the Borrower, its Subsidiaries and the Guarantors operate. The insurance
required by this Section may not be canceled, reduced or affected in any
material manner without thirty (30) days' prior written notice to the Agent
(and the certificates of insurance provided to the Agent shall so state).

7.8 Notice of Certain Matters. Give the Agent prompt written
notice of the following:

(a) the issuance by any court or governmental agency or authority
of any injunction, order or other restraint prohibiting, or having the effect
of prohibiting, the performance of this Agreement, any other Loan Document, or
the making of the Loans or the initiation of any litigation, or any claim or
controversy probable of assertion which might result in the initiation of any
litigation, seeking any such injunction, order or other restraint;

(b) the filing or commencement of any action, suit or proceeding,
whether at law or in equity or by or before any court or any Federal, state,
municipal or other governmental agency or authority which may reasonably be
expected to have a Material Adverse Effect;

(c) any Event of Default or Default, specifying the nature and
extent thereof and the action (if any) which is proposed to be taken with the
respect thereto; and

(d) any development in the business or affairs of the Borrower,
any of its Subsidiaries or either of the Guarantors which has resulted in or
which could reasonably be expected to have a Material Adverse Effect.

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<PAGE> 40
The Borrower will also notify the Agent in writing at least 30 days prior to
the date that any Party changes its name or the location of its chief executive
office or principal place of business or the place where it keeps its books and
records.

7.9 Capital Adequacy. Agrees that if any Bank shall have
determined that the adoption after the Effective Date of any applicable law,
rule, regulation or treaty regarding capital adequacy, or any change therein
after the Effective Date, or any change in the interpretation or administration
thereof after the Effective Date by any Governmental Authority, central bank or
comparable agency charged with the interpretation or administration thereof, or
compliance by any Bank with any request or directive after the Effective Date
regarding capital adequacy (whether or not having the force of law) of any such
Governmental Authority, central bank or comparable agency has or would have the
effect of reducing the rate of return on such Bank's capital as a consequence
of its obligations hereunder, under the Letters of Credit, under the Notes or
under other Obligations held by it to a level below that which such Bank could
have achieved but for such adoption, change or compliance (taking into
consideration such Bank's policies with respect to capital adequacy) by an
amount deemed by such Bank to be material, then from time to time, upon
satisfaction of the conditions precedent set forth in this Section 7.9, upon
demand by such Bank (with a copy to the Agent), the Borrower (subject to
Section 11.7 hereof) shall pay to such Bank such additional amount or amounts
as will compensate such Bank for such reduction. The certificate of any Bank
setting forth such amount or amounts as shall be necessary to compensate it and
the basis thereof shall be delivered as soon as practicable to the Borrower and
shall be conclusive and binding, absent manifest error. The Borrower shall pay
the amount shown as due on any such certificate within five (5) Business Days
after the delivery of such certificate. In preparing such certificate, a Bank
may employ such assumptions and allocations of costs and expenses as it shall
in good faith deem reasonable and may use any reasonable averaging and
attribution method. The Borrower shall not be obligated to compensate any Bank
pursuant to this Section for any amounts attributable to a period more than
ninety (90) days prior to the giving of notice by such Bank to the Borrower of
its intention to seek compensation under this Section.

7.10 ERISA Information and Compliance. Promptly furnish to the
Agent (i) immediately upon receipt, a copy of any notice of complete or partial
withdrawal liability under Title IV of ERISA and any notice from the PBGC under
Title IV of ERISA of an intent to terminate or appoint a trustee to administer
any Plan, (ii) if requested by the Agent, promptly after the filing thereof
with the United States Secretary of Labor or the PBGC or the Internal Revenue
Service, copies of each annual and other report with respect to each Plan or
any trust created thereunder, (iii) immediately upon becoming aware of the
occurrence of any "reportable event," as such term is defined in Section 4043
of ERISA, for which the disclosure requirements of Regulation Section 2615.3
promulgated by the PBGC have not been waived, or of any "prohibited
transaction," as such term is defined in Section 4975 of the Code (except for
"prohibited transactions" effected by a statutory or administrative exemption),
in connection with any Plan or any trust created thereunder, a written notice
signed by the President or the principal financial officer of the Borrower or
the applicable member of the Controlled Group specifying

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<PAGE> 41
the nature thereof, what action the Borrower or the applicable member of the
Controlled Group is taking or proposes to take with respect thereto, and, when
known, any action taken by the PBGC, the Internal Revenue Service or the
Department of Labor with respect thereto, (iv) promptly after the filing or
receiving thereof by the Borrower or any member of the Controlled Group of any
notice of the institution of any proceedings or other actions which may result
in the termination of any Plan, and (v) each request for waiver of the funding
standards or extension of the amortization periods required by Sections 303 and
304 of ERISA or Section 412 of the Code promptly after the request is submitted
by the Borrower or any member of the Controlled Group to the Secretary of the
Treasury, the Department of Labor or the Internal Revenue Service, as the case
may be. The Borrower covenants that it shall and shall cause each member of
the Controlled Group to (1) make contributions to each Plan in a timely manner
and in an amount sufficient to comply with its contribution obligations under
such Plan and the minimum funding standards requirements of ERISA; (2) prepare
and file in a timely manner all notices and reports required under the terms of
ERISA including but not limited to annual reports; and (3) pay in a timely
manner all required PBGC premiums.

8. Negative Covenants.

The Borrower covenants and agrees with the Agent and the Banks that
prior to the termination of this Agreement it will not, and will not suffer or
permit any of its Subsidiaries or either of the Guarantors to, do any of the
following:

8.1 Indebtedness. Create, incur, suffer or permit to exist, or
assume or guarantee, directly or indirectly, or become or remain liable with
respect to any Indebtedness which constitutes Borrowed Money Indebtedness,
whether direct, indirect, absolute, contingent or otherwise, except (subject to
Section 7.3 hereof) the following:

(a) Borrowed Money Indebtedness of the Borrower and its
Subsidiaries outstanding on the Effective Date and described on
Exhibit H hereto or disclosed to the Agent in the financial statements
delivered on or prior to the Effective Date pursuant to Section 7.2
hereof;

(b) Borrowed Money Indebtedness evidenced by the Notes
(including contingent liabilities under the Guaranties);

(c) Borrowed Money Indebtedness evidenced by the M-I
Drilling Facility (including contingent liabilities of the Borrower
with respect thereto);

(d) Borrowed Money Indebtedness evidenced by the 1994
Note Purchase Agreements in an aggregate principal amount not to
exceed $40,000,000 (including contingent liabilities of the Guarantors
with respect thereto);

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(e) Borrowed Money Indebtedness of any Subsidiary owing
to the Borrower or another wholly-owned Subsidiary and Borrowed Money
Indebtedness of Borrower owing to any Subsidiary,provided such
Borrowed Money Indebtedness is expressly subordinated, in a manner
reasonably acceptable to the Agent, to the payment in full of all
Obligations of Borrower under the Loan Documents;

(f) contingent liability, not to exceed $20,000,000 in
the aggregate, incurred by the Borrower with respect to performance
letters of credit and bid and performance bonds required by M-I in the
ordinary course of M-I's business, and

(g) other Borrowed Money Indebtedness of the Borrower or
any of its Subsidiaries in an aggregate principal amount at any one
time outstanding up to but not exceeding $10,000,000, provided that
the aggregate principal amount of Borrowed Money Indebtedness of the
Subsidiaries of the Borrower (exclusive of Borrowed Money Indebtedness
permitted under clauses (a) through (e) above) shall not exceed
$5,000,000 in the aggregate at any one time outstanding and provided
further that all Borrowed Money Indebtedness incurred by the Borrower
or by any U.S. Subsidiary of Borrower shall take the form of purchase
money indebtedness or Capital Lease Obligations.

8.2 Liens. Create or suffer to exist any Lien upon any of its
Property now owned or hereafter acquired, or acquire any Property upon any
conditional sale or other title retention device or arrangement or any purchase
money security agreement; or in any manner directly or indirectly sell, assign,
pledge or otherwise transfer any of its Accounts or General Intangibles;
provided, however, that the Borrower, any of its Subsidiaries or either of the
Guarantors may create or suffer to exist: (a) artisans' or mechanics' Liens
arising in the ordinary course of business, and Liens for taxes, but only to
the extent that payment thereof shall not at the time be due or if due, the
payment thereof is being diligently contested in good faith and adequate
reserves, if required by GAAP, have been set aside therefor; (b) Liens in
effect on the Effective Date and described on Exhibit I hereto or disclosed to
the Agent in the financial statements delivered on or prior to the Effective
Date pursuant to Section 7.2 hereof, provided that neither the Indebtedness
secured thereby nor the Property covered thereby shall increase after the
Effective Date without the prior written consent of the Majority Banks; (c)
normal encumbrances and restrictions on title which do not secure Borrowed
Money Indebtedness and which do not have a Material Adverse Effect; (d) Liens
in favor of the Agent or any Bank under the Loan Documents; (e) Liens incurred
or deposits made in the ordinary course of business (i) in connection with
workmen's compensation, unemployment insurance, social security and other like
laws, or (ii) to secure insurance in the ordinary course of business, the
performance of bids, tenders, contracts, leases, licenses, statutory
obligations, surety, appeal and performance bonds and other similar obligations
incurred in the ordinary course of business, not, in any of the cases specified
in this clause (ii), incurred in connection with the borrowing of money, the
obtaining of advances or the payment of the deferred purchase price of
Property; (f) attachments, judgments and other similar Liens arising in
connection with the court proceedings, provided that the execution and
enforcement of such Liens are effectively stayed and the claims secured

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<PAGE> 43
thereby are being actively contested in good faith with adequate reserves made
therefor in accordance with GAAP; (g) Liens imposed by law, such as carriers',
warehousemen's, mechanics', materialmen's and vendors' liens, incurred in good
faith in the ordinary course of business and securing obligations which are not
yet due or which are being contested in good faith by appropriate proceedings
if adequate reserves with respect thereto are maintained in accordance with
GAAP; (h) zoning restrictions, easements, licenses, reservations, provisions,
covenants, conditions, waivers, and restrictions on the use of Property, and
which do not in any case singly or in the aggregate materially impair the
present use or value of the Property subject to any such restriction or
materially interfere with the ordinary conduct of the business of the Borrower,
any of its Subsidiaries or the Guarantor; (i) Liens securing the Indebtedness
incurred by non-U.S. Subsidiaries of the Borrower permitted under Section
8.1(g) covering Property owned by the applicable non-U.S. Subsidiaries of the
Borrower, and (j) extensions, renewals and replacements of Liens referred to in
paragraphs (a) through (i) of this Section; provided that any such extension,
renewal or replacement Lien shall be limited to the Property or assets covered
by the Lien extended, renewed or replaced and that the Indebtedness secured by
any such extension, renewal or replacement Lien shall be in an amount not
greater than the amount of the Indebtedness secured by the Lien extended,
renewed or replaced.

8.3 Contingent Liabilities. Directly or indirectly guarantee the
performance or payment of, or purchase or agree to purchase, or assume or
contingently agree to become or be secondarily liable in respect of, any
obligation or liability of any other Person except for (a) the endorsement of
checks or other negotiable instruments in the ordinary course of business; (b)
obligations disclosed to the Agent in the financial statements delivered on or
prior to the Effective Date pursuant to Section 7.2 hereof (but not increases
of such obligations after the Effective Date), and (c) those liabilities
permitted under Section 8.1 hereof.

8.4 Mergers, Consolidations and Dispositions of Assets. In any
single transaction or series of transactions, directly or indirectly: (a)
liquidate or dissolve (provided that such restriction shall not apply to
Subsidiaries of the Borrower which are not Material Subsidiaries); (b) be a
party to any merger or consolidation unless and so long as (i) no Default or
Event of Default has occurred that is then continuing, (ii) immediately
thereafter and giving effect thereto, no event will occur and be continuing
which constitutes a Default, (iii) the Borrower or the applicable Subsidiary of
the Borrower is the surviving Person; (iv) the surviving Person ratifies and
assumes each Loan Document to which any party to such merger was a party, and
(v) the Agent is given at least 30 days' prior notice of such merger or
consolidation; (c) sell, convey or lease all or any substantial part of its
assets, except for sales in the ordinary course of business and except for
disposal of obsolete equipment in the ordinary course of business, or (d)
transfer or otherwise dispose of any shares of capital stock or other indicia
of equity interests of any Material Subsidiary of the Borrower (including
without limitation any of the capital stock of Smith International Acquisition
Corp., a Delaware corporation, and any partnership interest in M-I) or any
Indebtedness of a Material Subsidiary of the Borrower, or permit any such
Material Subsidiary to issue any additional shares of capital stock or other
indicia of equity interests other than to the Borrower.

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8.5 Nature of Business. Engage in any business if, as a result,
the general nature of the business, taken on a consolidated basis, which would
then be engaged in by the Borrower and its Subsidiaries would be substantially
changed from the general nature of the business engaged in by the Borrower and
its Subsidiaries (inclusive of M-I) on the Effective Date.

8.6 Transactions with Related Parties. Enter into any transaction
or agreement with any officer, director or holder of any outstanding capital
stock of the Borrower, any of its Subsidiaries or either of the Guarantors (or
any Affiliate of any such Person) unless the same is upon terms no less
favorable than those obtainable from wholly unrelated sources.

8.7 Investments. Make any Investment, or make any commitment to
make any such Investment, except Permitted Investments.

8.8 Purchase Agreement. Terminate or agree to the termination of
any material provision of the Purchase Agreement or amend, modify or obtain or
grant a waiver of any provision of the Purchase Agreement if such amendment,
modification or waiver could reasonably be expected to have a Material Adverse
Effect unless the same shall be consented to in writing by the Majority Banks
(the Borrower shall promptly, and in any event within 10 calendar days after
its effective date, provide to the Agent a copy of any such amendment or waiver
[or a written summary, if such amendment or waiver is not in written form],
whether or not the Majority Banks' prior written consent to such amendment or
waiver is required).

8.9 Organizational Documents. Amend, modify, restate or
supplement any of its Organizational Documents if such action could reasonably
be expected to have a Material Adverse Effect unless such action shall be
consented to in writing by the Agent.

8.10 Subsidiaries. Form, create or acquire a Subsidiary without
giving written notice to the Agent promptly thereafter.

8.11 Notice of Asset Sales. Give any notice regarding the proposed
sale of assets under any documents evidencing Borrowed Money Indebtedness if
the giving of such notice would permit the holders of any such Borrowed Money
Indebtedness to accelerate the maturity of such Borrowed Money Indebtedness or
require the Borrower to prepay such Borrowed Money Indebtedness in its
entirety.

8.12 No Restriction on Payment of Dividends. Permit any Subsidiary
of the Borrower to enter into any agreement which prohibits or restricts the
ability of such Subsidiary to distribute dividends to the Borrower.

8.13 Operating Leases. Become obligated, as lessee, under any
Long-Term Lease if, at the time of entering into such Long-Term Lease and after
giving effect thereto, the aggregate present value of all Rentals determined by
discounting all such Rentals on an annual basis at a rate equal to 8% per annum
payable by the Borrower and its Subsidiaries on a consolidated basis

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under all Long-Term Leases would exceed 6.25% of the Tangible Net Worth of the
Borrower and its Subsidiaries.

9. Defaults.

9.1 Events of Default. If any one or more of the following events
(herein called "Events of Default") shall occur, then the Agent may (and at the
direction of the Majority Banks, shall) do any or all of the following: (1)
without notice to the Borrower, declare the Loan Commitments terminated
(whereupon the Loan Commitments shall be terminated) and/or accelerate the
Termination Date to a date as early as the date of termination of the Loan
Commitments; (2) terminate any Letter of Credit allowing for such termination,
by sending a notice of termination as provided therein; (3) declare the
principal amount then outstanding of and the unpaid accrued interest on the
Loans and Reimbursement Obligations and all fees and all other amounts payable
hereunder, under the Notes and under the other Loan Documents to be forthwith
due and payable, whereupon such amounts shall be and become immediately due and
payable, without notice (including, without limitation, notice of acceleration
and notice of intent to accelerate), presentment, demand, protest or other
formalities of any kind, all of which are hereby expressly waived by the
Borrower; provided that in the case of the occurrence of an Event of Default
with respect to the Borrower, any of its Subsidiaries or either of the
Guarantors referred to in clause (f) or (g) of this Section 9.1, the Loan
Commitments shall be automatically terminated and the principal amount then
outstanding of and unpaid accrued interest on the Loans and the Reimbursement
Obligations and all fees and all other amounts payable hereunder, under the
Notes and under the other Loan Documents shall be and become automatically and
immediately due and payable, without notice (including, without limitation,
notice of acceleration and notice of intent to accelerate), presentment,
demand, protest or other formalities of any kind, all of which are hereby
expressly waived by the Borrower, and (4) exercise any or other rights and
remedies available to the Agent or any of the Banks under the Loan Documents,
at law or in equity:

(a) Payments - (i) the Borrower or any other Party shall
fail to make any payment or required prepayment of any installment of
principal on the Loans or any Reimbursement Obligation payable under
the Notes, this Agreement or the other Loan Documents when due and
(except in the case of acceleration of maturity) such failure to pay
continues unremedied for a period of three days or (ii) the Borrower
or any other Party fails to make any payment or required prepayment of
interest with respect to the Loans or any Reimbursement Obligation or
the payment of any other fee or amount under the Notes, this Agreement
or the other Loan Documents when due and (except in the case of
acceleration of maturity) such failure to pay continues unremedied for
a period of five days; or

(b) Other Obligations - the Borrower or any Material
Subsidiary or either of the Guarantors shall default in the payment
when due of any principal of or interest on any Borrowed Money
Indebtedness having an outstanding principal amount of at least

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$2,500,000 (other than the Loans and Reimbursement Obligations) and
such default shall continue beyond any applicable period of grace; or
any event or condition shall occur which results in the acceleration
of the maturity of any such Borrowed Money Indebtedness or enables
(or, with the giving of notice or lapse of time or both, would enable)
the holder of any such Borrowed Money Indebtedness or any Person
acting on such holder's behalf to accelerate the maturity thereof and
such event or condition shall not be cured within any applicable
period of grace; or

(c) Representations and Warranties - any representation
or warranty made or deemed made by or on behalf of the Borrower or any
other Party in this Agreement or any other Loan Document or in any
writing, statement, certificate or data furnished or made by the
Borrower or any other Party to the Agent or the Banks in connection
herewith or therewith shall prove to have been incorrect, false or
misleading in any material respect as of the date thereof or as of the
date as of which the facts therein set forth were stated or certified;
or

(d) Affirmative Covenants - (i) default shall be made in
the due observance or performance of any of the covenants or
agreements contained in Sections 7.2, 7.3, 7.4, 7.8 or 7.10 hereof,
(ii) the Borrower shall permit any of the insurance provided for in
Section 7.7 hereof to lapse or (iii) default is made in the due
observance or performance of any of the other covenants and agreements
contained in Section 7 hereof or any other affirmative covenant of the
Borrower or any other Party contained in this Agreement or any other
Loan Document and such default continues unremedied for a period of 30
days after (x) notice thereof is given by the Agent to the Borrower or
(y) such default otherwise becomes known to the Borrower, whichever is
earlier; or

(e) Negative Covenants - default is made in the due
observance or performance by the Borrower of any of the other
covenants or agreements contained in Section 8 of this Agreement or of
any other negative covenant of the Borrower or any other Party
contained in this Agreement or any other Loan Document; or

(f) Involuntary Bankruptcy or Receivership Proceedings -
a receiver, conservator, liquidator or trustee of the Borrower or any
Material Subsidiary or either of the Guarantors or of any of its
Property is appointed by the order or decree of any court or agency or
supervisory authority having jurisdiction, and such decree or order
remains in effect for more than 60 days; or the Borrower or any
Material Subsidiary or either of the Guarantors is adjudicated
bankrupt or insolvent; or any of such Person's property is sequestered
by court order and such order remains in effect for more than 60 days;
or a petition is filed against the Borrower or any Material Subsidiary
or either of the Guarantors under any state or federal bankruptcy,
reorganization, arrangement, insolvency, readjustment or debt,
dissolution, liquidation or receivership law or any jurisdiction,
whether now or hereafter in effect, and is not dismissed within 60
days after such filing; or

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(g) Voluntary Petitions or Consents - the Borrower or any
Material Subsidiary or either of the Guarantors commences a voluntary
case or other proceeding or order seeking liquidation, reorganization,
arrangement, insolvency, readjustment of debt, dissolution,
liquidation or other relief with respect to itself or its debt or
other liabilities under any bankruptcy, insolvency or other similar
law now or hereafter in effect or seeking the appointment of a
trustee, receiver, liquidator, custodian or other similar official of
it or any substantial part of its property, or consents to any such
relief or to the appointment of or taking possession by any such
official in an involuntary case or other proceeding commenced against
it, or fails generally to, or cannot, pay its debts generally as they
become due or takes any corporate action to authorize or effect any of
the foregoing; or

(h) Assignments for Benefit of Creditors or Admissions of
Insolvency - the Borrower or any Material Subsidiary or either of the
Guarantors makes an assignment for the benefit of its creditors, or
admits in writing its inability to pay its debts generally as they
become due, or consents to the appointment of a receiver, trustee, or
liquidator of the Borrower or such Material Subsidiary or such
Guarantor or of all or any substantial part of its Property; or

(i) Undischarged Judgments - a final judgment or
judgments for the payment of money exceeding, in the aggregate,
$2,500,000 is rendered by any court or other governmental body against
the Borrower or any Material Subsidiary or either of the Guarantors
and the Borrower or such Material Subsidiary or such Guarantor does
not discharge the same or provide for its discharge in accordance with
its terms, or procure a stay of execution thereof within 45 days from
the date of entry thereof; or

(j) Attachment - the Borrower or any Material Subsidiary
or either of the Guarantors shall suffer any writ of attachment or
execution or any similar process to be issued or levied against it or
any substantial part of its Property which is not released, stayed,
bonded or vacated within 30 days after its issue or levy; or

(k) Material Adverse Change - any fact or condition
should arise which has a Material Adverse Effect; or

(l) Concealment - the Borrower or any Material Subsidiary
or either of the Guarantors, individually or on a consolidated basis,
shall have concealed, removed, or permitted to be concealed or
removed, any part of its Property, with intent to hinder, delay or
defraud its creditors or any of them, or made or suffered a transfer
of any of its Property which may be fraudulent under any bankruptcy,
fraudulent conveyance, insolvency or similar law; or shall have made
any transfer of its Property to or for the benefit of a creditor at a
time when other creditors similarly situated have not been paid; or

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<PAGE> 48
(m) Change of Control - any Change of Control shall occur
with respect to the Borrower; or

(n) Default under M-I Drilling Facility - a default or an
event of default shall occur under the M-I Drilling Facility which is
not fully cured or waived within any applicable cure period provided
for therein.

9.2 Right of Setoff. Upon the occurrence and during the
continuance of any Event of Default, the Banks each are hereby authorized at
any time and from time to time, to the extent permitted by applicable law,
without notice to the Borrower or either of the Guarantors (any such notice
being expressly waived by the Borrower and each of the Guarantors), to setoff
and apply any and all deposits (general or special, time or demand, provisional
or final (but excluding the funds held in accounts clearly designated as escrow
or trust accounts held by the Borrower or either of the Guarantors for the
benefit of Persons which are not wholly-owned Subsidiaries of the Borrower or
either of the Guarantors, whether or not such setoff results in any loss of
interest or other penalty, and including without limitation all certificates of
deposit) at any time held, and any other funds or property at any time held,
and other Indebtedness at any time owing by such Bank to or for the credit or
the account of the Borrower or either of the Guarantors against any and all of
the Obligations irrespective of whether or not such Bank or the Agent will have
made any demand under this Agreement, the Notes or any other Loan Document.
The Borrower also hereby grants to each of the Banks a security interest in and
hereby transfers, assigns, sets over, and conveys to each of the Banks, as
security for payment of all Loans and Reimbursement Obligations, all such
deposits, funds or property of the Borrower or either of the Guarantors, or
Indebtedness of any Bank to the Borrower or either of the Guarantors. Should
the right of any Bank to realize funds in any manner set forth hereinabove be
challenged and any application of such funds be reversed, whether by court
order or otherwise, the Banks shall make restitution or refund to the Borrower
pro rata in accordance with their Loan Commitments. Each Bank agrees to
promptly notify the Borrower and the Agent after any such setoff and
application, provided that the failure to give such notice will not affect the
validity of such setoff and application. The rights of the Agent and the Banks
under this Section are in addition to other rights and remedies (including
without limitation other rights of setoff) which the Agent or the Banks may
have. This Section is subject to the terms and provisions of Sections 4.5 and
11.7 hereof.

9.3 Collateral Account. The Borrower hereby agrees, in addition
to the provisions of Section 9.1 hereof, that upon the occurrence and during
the continuance of any Event of Default, it shall, if requested by the Agent or
the Majority Banks (through the Agent), pay to the Agent an amount in
immediately available funds equal to the then aggregate amount available for
drawings under all Letters of Credit issued for the account of the Borrower,
which funds shall be held by the Agent as Cover.

9.4 Preservation of Security for Unmatured Reimbursement
Obligations. In the event that, following (i) the occurrence of an Event of
Default and the exercise of any rights available

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<PAGE> 49
to the Agent or any Bank under the Loan Documents, and (ii) payment in full of
the principal amount then outstanding of and the accrued interest on the Loans
and Reimbursement Obligations and fees and all other amounts payable hereunder
and under the Notes and all other amounts secured by the Security Documents,
any Letters of Credit shall remain outstanding and undrawn upon, the Agent
shall be entitled to hold (and the Borrower hereby grants and conveys to the
Agent a security interest in and to) all cash or other property ("Proceeds of
Remedies") realized or arising out of the exercise by the Agent of any rights
available to it under the Loan Documents, at law or in equity, including,
without limitation, the proceeds of any foreclosure, as collateral for the
payment of any amounts due or to become due under or in respect of such Letters
of Credit. Such Proceeds of Remedies shall be held for the ratable benefit of
the Banks. Such Proceeds of Remedies shall constitute "Collateral" for all
purposes under the terms and provisions of the Loan Documents, and the rights,
titles, benefits, privileges, duties and obligations of Agent with respect
thereto shall be governed by the terms and provisions of this Agreement. The
Agent may, but shall have no obligation to, invest any such Proceeds of
Remedies in such manner as the Agent, in the exercise of its sole discretion,
deems appropriate. Such Proceeds of Remedies shall be applied to Reimbursement
Obligations arising in respect of any such Letters of Credit and/or the payment
of any Bank's obligations under any such Letter of Credit when such Letter of
Credit is drawn upon. The Borrower hereby agrees to execute and deliver to the
Agent and the Banks such security agreements, pledges or other documents as the
Agent or any of the Banks may, from time to time, require to perfect the
pledge, Lien and security interest in and to any such Proceeds of Remedies
provided for in this Section. Nothing in this Section shall cause or permit an
increase in the maximum amount of the Obligations permitted to be outstanding
from time to time under this Agreement.

9.5 Remedies Cumulative. No remedy, right or power conferred upon
the Agent or any Bank is intended to be exclusive of any other remedy, right or
power given hereunder or now or hereafter existing at law, in equity, or
otherwise, and all such remedies, rights and powers shall be cumulative.

10. The Agent.

10.1 Appointment, Powers and Immunities. Each Bank hereby
irrevocably appoints and authorizes the Agent to act as its agent hereunder,
under the Letters of Credit and under the other Loan Documents with such powers
as are specifically delegated to the Agent by the terms hereof and thereof,
together with such other powers as are reasonably incidental thereto. The
Agent (the "Agent" as used in this Section 10 shall include reference to its
Affiliates and its own and its Affiliates' respective officers, shareholders,
directors, employees and agents) (a) shall not have any duties or
responsibilities except those expressly set forth in this Agreement, the
Letters of Credit, and the other Loan Documents, and shall not by reason of
this Agreement or any other Loan Document be a trustee or fiduciary for any
Bank; (b) shall not be responsible to any Bank for any recitals, statements,
representations or warranties contained in this Agreement, the Letters of
Credit or any other Loan Document, or in any certificate or other document
referred to or provided for in, or received by any of them under, this
Agreement, the

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Letters of Credit or any other Loan Document, or for the value, validity,
effectiveness, genuineness, enforceability, execution, filing, registration,
collectibility, recording, perfection, existence or sufficiency of this
Agreement, the Letters of Credit, or any other Loan Document or any other
document referred to or provided for herein or therein or any property covered
thereby or for any failure by any Party or any other Person to perform any of
its obligations hereunder or thereunder, and shall not have any duty to inquire
into or pass upon any of the foregoing matters; (c) shall not be required to
initiate or conduct any litigation or collection proceedings hereunder or under
the Letters of Credit or any other Loan Document except to the extent requested
by the Majority Banks; (d) shall not be responsible for any mistake of law or
fact or any action taken or omitted to be taken by it hereunder or under the
Letters or Credit or any other Loan Document or any other document or
instrument referred to or provided for herein or therein or in connection
herewith or therewith, including, without limitation, pursuant to its own
negligence, except for its own gross negligence or willful misconduct; (e)
shall not be bound by or obliged to recognize any agreement among or between
the Borrower and any Bank (other than this Agreement and the other Loan
Documents), regardless of whether the Agent has knowledge of the existence of
any such agreement or the terms and provisions thereof; (f) shall not be
charged with notice or knowledge of any fact or information not herein set out
or provided to the Agent in accordance with the terms of this Agreement or any
other Loan Document; (g) shall not be responsible for any delay, error,
omission or default of any mail, telegraph, cable or wireless agency or
operator, and (h) shall not be responsible for the acts or edicts of any
Governmental Authority. The Agent may employ agents and attorneys-in-fact and
shall not be responsible for the negligence or misconduct of any such agents or
attorneys-in-fact selected by it with reasonable care. Without in any way
limiting any of the foregoing, each Bank acknowledges that the Agent shall have
no greater responsibility in the operation of the Letters of Credit than is
specified in the Uniform Customs and Practice for Documentary Credits (1993
Revision, International Chamber of Commerce Publication No. 500). In any
foreclosure proceeding concerning any Collateral, each holder of an Obligation
if bidding for its own account or for its own account and the accounts of other
Banks is prohibited from including in the amount of its bid an amount to be
applied as a credit against the Obligations held by it or the Obligations held
by the other Banks; instead, such holder must bid in cash only. However, in
any such foreclosure proceeding, the Agent may (but shall not be obligated to)
submit a bid for all Banks (including itself) in the form of a credit against
the Obligations, and the Agent or its designee may (but shall not be obligated
to) accept title to such collateral for and on behalf of all Banks.

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or in refraining from acting, hereunder and thereunder in accordance with
instructions of the Majority Banks, and any action taken or failure to act
pursuant thereto shall be binding on all of the Banks. Pursuant to
instructions of the Majority Banks, the Agent shall have the authority to
execute releases of the Liens covering any Collateral on behalf of the Banks
without the joinder of any Bank. If any order, writ, judgment or decree shall
be made or entered by any court affecting the rights, duties and obligations of
the Agent under this Agreement or any other Loan Document, then and in any of
such events the Agent is authorized, in its sole discretion, to rely upon and
comply with such order, writ, judgment or decree which it is advised by legal
counsel of its own choosing is binding upon it under the terms of this
Agreement, the relevant Loan Document or otherwise; and if the Agent complies
with any such order, writ, judgment or decree, then it shall not be liable to
any Bank or to any other Person by reason of such compliance even though such
order, writ, judgment or decree may be subsequently reversed, modified,
annulled, set aside or vacated.

10.3 Defaults. The Agent shall not be deemed to have knowledge of
the occurrence of a Default (other than the non-payment of principal of or
interest on Loans or Reimbursement Obligations) unless it has received notice
from a Bank or the Borrower specifying such Default and stating that such
notice is a "Notice of Default." In the event that the Agent receives such a
Notice of Default, the Agent shall give prompt notice thereof to the Banks (and
shall give each Bank prompt notice of each such non-payment). The Agent shall
(subject to Section 10.7 hereof) take such action with respect to such Notice
of Default as shall be directed by the Majority Banks and within its rights
under the Loan Documents and at law or in equity, provided that, unless and
until the Agent shall have received such directions, the Agent may (but shall
not be obligated to) take such action, or refrain from taking such action,
permitted hereby with respect to such Notice of Default as it shall deem
advisable in the best interests of the Banks and within its rights under the
Loan Documents, at law or in equity.

10.4 Rights as a Bank. With respect to its Loan Commitments and
the Loans made by it and Letter of Credit Liabilities incurred by it, TCB in
its capacity as a Bank hereunder shall have the same rights and powers
hereunder as any other Bank and may exercise the same as though it were not
acting in its agency capacity, and the term "Bank" or "Banks" shall, unless the
context otherwise indicates, include the Agent in its individual capacity. The
Agent may (without having to account therefor to any Bank) accept deposits
from, lend money to and generally engage in any kind of banking, trust, letter
of credit, agency or other business with the Borrower (and any of its
Affiliates) as if it were not acting as the Agent, and the Agent may accept
fees and other consideration from the Borrower (in addition to the fees
heretofore agreed to between the Borrower and the Agent) for services in
connection with this Agreement or otherwise without having to account for the
same to the Banks.

10.5 Indemnification. Each Bank agrees to indemnify the Agent and
its directors, officers, employees and agents (to the extent not reimbursed
under Section 2.2(c), Section 11.3 or Section 11.4 hereof, but without limiting
the obligations of the Borrower under said Sections 2.2(c), 11.3 and 11.4),
ratably in accordance with the Banks' respective Loan Commitments,

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for any and all liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses or disbursements of any kind and nature
whatsoever (INCLUDING BUT NOT LIMITED TO, THE CONSEQUENCES OF THE NEGLIGENCE
[BUT NOT THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT] OF THE AGENT) which may be
imposed on, incurred by or asserted against the Agent in any way relating to or
arising out of this Agreement, the Letters of Credit or any other Loan Document
or any other documents contemplated by or referred to herein or therein or the
transactions contemplated hereby or thereby (excluding, unless a Default has
occurred and is continuing, normal administrative costs and expenses incident
to the performance of its agency duties hereunder) or the enforcement of any of
the terms hereof or thereof or of any such other documents, provided that no
Bank shall be liable for any of the foregoing to the extent they arise from the
gross negligence or willful misconduct of the party to be indemnified. The
obligations of the Banks under this Section 10.5 shall survive the termination
of this Agreement and the repayment of the Obligations.

10.6 Non-Reliance on Agent and Other Banks. Each Bank agrees that
it has received current financial information with respect to the Borrower and
that it has, independently and without reliance on the Agent or any other Bank
and based on such documents and information as it has deemed appropriate, made
its own credit analysis of the Borrower and decision to enter into this
Agreement and that it will, independently and without reliance upon the Agent
or any other Bank, and based on such documents and information as it shall deem
appropriate at the time, continue to make its own analysis and decisions in
taking or not taking action under this Agreement or any of the other Loan
Documents. The Agent shall not be required to keep itself informed as to the
performance or observance by any Party of this Agreement, the Letters of Credit
or any of the other Loan Documents or any other document referred to or
provided for herein or therein or to inspect the properties or books of the
Borrower or any Party. Except for notices, reports and other documents and
information expressly required to be furnished to the Banks by the Agent
hereunder, under the Letters of Credit or the other Loan Documents, the Agent
shall not have any duty or responsibility to provide any Bank with any credit
or other information concerning the affairs, financial condition or business of
the Borrower or any other Party (or any of their affiliates) which may come
into the possession of the Agent.

10.7 Failure to Act. Except for action expressly required of the
Agent hereunder, under the Letters of Credit or under the other Loan Documents,
the Agent shall in all cases be fully justified in failing or refusing to act
hereunder and thereunder unless it shall receive further assurances to its
satisfaction by the Banks of their indemnification obligations under Section
10.5 hereof against any and all liability and expense which may be incurred by
it by reason of taking or continuing to take any such action.

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as such successor Agent is also a Bank at the time of such appointment and (ii)
the Majority Banks shall have the right to appoint a successor Agent that is
not a Bank at the time of such appointment so long as the Borrower consents to
such appointment (which consent shall not be unreasonably withheld). If no
successor Agent shall have been so appointed by the Majority Banks and accepted
such appointment within 30 days after the retiring Agent's giving of notice of
resignation or the Majority Banks' removal of the retiring Agent, then the
retiring Agent may, on behalf of the Banks, appoint a successor Agent, which
shall be a bank which has an office in the United States and a combined capital
and surplus of at least $50,000,000. Upon appointment of a successor Agent,
such successor Agent shall thereupon succeed to and become vested with all the
rights, powers, privileges and duties of the retiring Agent, and the retiring
Agent shall be discharged from its duties and obligations hereunder and under
any other Loan Documents. Such successor Agent shall promptly specify by
notice to the Borrower its Principal Office referred to in Section 3.1 and
Section 4 hereof. After any retiring Agent's resignation or removal hereunder
as Agent, the provisions of this Section 10 shall continue in effect for its
benefit in respect of any actions taken or omitted to be taken by it while it
was acting as the Agent.

10.9 No Partnership. Neither the execution and delivery of this
Agreement nor any of the other Loan Documents nor any interest the Banks, the
Agent or any of them may now or hereafter have in all or any part of the
Obligations shall create or be construed as creating a partnership, joint
venture or other joint enterprise between the Banks or among the Banks and the
Agent. The relationship between the Banks, on the one hand, and the Agent, on
the other, is and shall be that of principals and agent only, and nothing in
this Agreement or any of the other Loan Documents shall be construed to
constitute the Agent as trustee or other fiduciary for any Bank or to impose on
the Agent any duty, responsibility or obligation other than those expressly
provided for herein and therein.

11. Miscellaneous.

11.1 Waiver. No waiver of any Default or Event of Default shall be
a waiver of any other Default or Event of Default. No failure on the part of
the Agent or any Bank to exercise and no delay in exercising, and no course of
dealing with respect to, any right, power or privilege under any Loan Document
shall operate as a waiver thereof, nor shall any single or partial exercise of
any right, power or privilege thereunder preclude any other or further exercise
thereof or the exercise of any other right, power or privilege.

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otherwise provided in this Agreement, all such notices or communications shall
be deemed to have been duly given when (i) transmitted by telecopier, delivered
to the telegraph or cable office, (ii) personally delivered (iii) one Business
Day after deposit with an overnight mail or delivery service, postage prepaid
or (iv) three Business Days' after deposit in a receptacle maintained by the
United States Postal Service, postage prepaid, registered or certified mail,
return receipt requested, in each case given or addressed as aforesaid.

11.3 Expenses, Etc. Whether or not any Loan is ever made or any
Letter of Credit ever issued, the Borrower shall pay or reimburse on demand (a)
the Agent for paying the reasonable fees and reasonable out-of-pocket expenses
of legal counsel to the Agent in connection with the preparation, negotiation,
execution and delivery of this Agreement (including the exhibits and schedules
hereto) and the other Loan Documents and the making of the Loans and the
issuance of Letters of Credit hereunder, and any modification, supplement or
waiver of any of the terms of this Agreement, the Letters of Credit or any other
Loan Document; (b) the Agent for reasonable out-of-pocket expenses incurred in
connection with the preparation, documentation, administration and syndication
of the Loans or any of the Loan Documents (including, without limitation, the
advertising, marketing, printing, publicity, duplicating, mailing and similar
expenses) of the Loans and Letter of Credit Liabilities; (c) the Agent or any
Bank for paying all transfer, stamp, documentary or other similar taxes,
assessments or charges levied by any governmental or revenue authority in
respect of this Agreement, any Letter of Credit or any other Loan Document or
any other document referred to herein or therein; (d) the Agent or any Bank for
paying all costs, expenses, taxes, assessments and other charges incurred in
connection with any filing, registration, recording or perfection of any
security interest contemplated by this Agreement, any other Loan Document or any
document referred to herein or therein, and (e) any Bank or the Agent for paying
all amounts reasonably expended, advanced or incurred by such Bank or Agent upon
the occurrence and during the continuance of an Event of Default to satisfy any
obligation of the Borrower under this Agreement or any other Loan Document, to
protect the Collateral, to collect the Obligations or to enforce, protect,
preserve or defend the rights of such Bank or Agent under this Agreement or any
other Loan Document, including, without limitation, fees and expenses incurred
in connection with such Bank's or Agent's participation as a member of a
creditor's committee in a case commenced under the Bankruptcy Code or other
similar law, fees and expenses incurred in connection with lifting the automatic
stay prescribed in Section 362 of the Bankruptcy Code and fees and expenses
incurred in connection with any action pursuant to Section 1129 of the
Bankruptcy Code and all other reasonable and customary out-of-pocket expenses
incurred by such Bank or Agent in connection with such matters, together with
interest thereon at the Past Due Rate on each such amount until the date of
reimbursement to such Bank or Agent.

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liabilities, claims or damages arise out of or result from any (i) actual or
proposed use by the Borrower of the proceeds of any extension of credit
(whether a Loan or a Letter of Credit) by any Bank hereunder; (ii) breach by
the Borrower of this Agreement or any other Loan Document or the breach by any
Party of any Loan Document; (iii) violation by the Borrower or any other Party
of any Legal Requirement; (iv) investigation, litigation or other proceeding
relating to any of the foregoing, and the Borrower shall reimburse the Agent,
each Bank, and each Affiliate thereof and their respective directors, officers,
employees and agents, upon demand for any reasonable expenses (including
reasonable legal fees) incurred in connection with any such investigation or
proceeding, or (v) taxes (excluding income taxes and franchise taxes) payable
or ruled payable by any Governmental Authority in respect of the Obligations or
any Loan Document, together with interest and penalties, if any; provided,
however, that the Borrower shall not have any obligations pursuant to this
Section with respect to any losses, liabilities, claims, damages or expenses
incurred by the Person seeking indemnification by reason of the gross
negligence or willful misconduct of that Person. Nothing in this Section is
intended to limit the obligations of the Borrower under any other provision of
this Agreement.

11.5 Amendments, Etc. No amendment or modification of this
Agreement, the Notes or any other Loan Document shall in any event be effective
against the Borrower unless the same shall be agreed or consented to in writing
by the Borrower. No amendment, modification or waiver of any provision of this
Agreement, the Notes or any other Loan Document, nor any consent to any
departure by the Borrower therefrom, shall in any event be effective against
the Banks unless the same shall be agreed or consented to in writing by the
Majority Banks, and each such waiver or consent shall be effective only in the
specific instance and for the specific purpose for which given; provided, that
no amendment, modification, waiver or consent shall, unless in writing and
signed by each Bank affected thereby, do any of the following: (a) increase
any Loan Commitment of any of the Banks or subject the Banks to any additional
obligations; (b) reduce the principal of, or interest on, any Loan,
Reimbursement Obligation or fee hereunder; (c) postpone or extend the Maturity
Date, the Termination Date, the Loan Availability Period or any scheduled date
fixed for any payment of principal of, or interest on, any Loan, any
Reimbursement Obligation or any fee hereunder or waive any Event of Default
described in Section 9.1(a) hereof; (d) change the percentage of any of the
Loan Commitments or of the aggregate unpaid principal amount of any of the
Loans and Letter of Credit Liabilities, or the number of Banks, which shall be
required for the Banks or any of them to take any action under this Agreement;
(e) change any provision contained in Sections 2.2(c), 7.9, 11.3 or 11.4 hereof
or this Section 11.5; (f) increase any of the fixed percentages to be
multiplied by the aggregate amounts of the components comprising the Borrowing
Base that are described in (i) and (ii) of the definition of Borrowing Base
herein, or (g) release the liability of either Guarantor under either Guaranty.
Notwithstanding anything in this Section 11.5 to the contrary, no amendment,
modification, waiver or consent shall be made with respect to Section 10
without the consent of the Agent to the extent it affects the Agent.

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11.6 Successors and Assigns.

(a) This Agreement shall be binding upon and inure to the benefit
of the Borrower, the Agent and the Banks and their respective successors and
assigns; provided, however, that the Borrower may not assign or transfer any of
its rights or obligations hereunder without the prior written consent of all of
the Banks, and any such assignment or transfer without such consent shall be
null and void. Each Bank may sell participations to any Person in all or part
of any Loan, or all or part of its Notes or Loan Commitments, to another bank
or other entity, in which event, without limiting the foregoing, the provisions
of the Loan Documents (including, without limitation, the Interest Rate
Agreement) shall inure to the benefit of each purchaser of a participation;
provided, however, the pro rata treatment of payments, as described in Section
4.2 hereof, shall be determined as if such Bank had not sold such
participation. Any Bank that sells one or more participations to any Person
shall not be relieved by virtue of such participation from any of its
obligations to Borrower under this Agreement relating to the Loans. In the
event any Bank shall sell any participation, such Bank shall retain the sole
right and responsibility to enforce the obligations of the Borrower relating to
the Loans, including, without limitation, the right to approve any amendment,
modification or waiver of any provision of this Agreement other than
amendments, modifications or waivers with respect to (i) any fees payable
hereunder to the Banks, (ii) the amount of principal or the rate of interest
payable on, or the dates fixed for the scheduled repayment of principal of, the
Loans and (iii) the release of the Liens on all or substantially all of the
Collateral.

(b) Each Bank may assign to one or more Banks or any other Person
all or a portion of its interests, rights and obligations under this Agreement;
provided, however, that (i) the aggregate amount of the Loan Commitments of the
assigning Bank subject to each such assignment shall in no event be less than
$5,000,000; (ii) other than in the case of an assignment to another Bank (that
is, at the time of the assignment, a party hereto) or to an Affiliate of such
Bank or to a Federal Reserve Bank, the Agent and the Borrower must each give
its prior written consent, which consents shall not be unreasonably withheld;
(iii) each such assignment must be matched by a like assignment between the
same parties under the M-I Drilling Facility, and (iv) the parties to each such
assignment shall execute and deliver to the Agent, for its acceptance an
Assignment and Acceptance in the form of Exhibit D hereto (each an "Assignment
and Acceptance") with blanks appropriately completed, together with any Note or
Notes subject to such assignment. The parties to such assignment shall also
deliver to the Agent a non-refundable assignment fee of $1,000 with respect to
each such assignment. Upon such execution, delivery and acceptance, from and
after the effective date specified in each Assignment and Acceptance, (A) the
assignee thereunder shall be a party hereto and, to the extent provided in such
Assignment and Acceptance, have the rights and obligations of a Bank hereunder
and (B) the Bank thereunder shall, to the extent provided in such Assignment
and Acceptance, be released from its obligations under this Agreement (and, in
the case of an Assignment and Acceptance covering all or the remaining portion
of an assigning Bank's rights and obligations under this Agreement, such Bank
shall cease to be a party hereto).

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<PAGE> 57
(c) By executing and delivering an Assignment and Acceptance, the
Bank assignor thereunder and the assignee thereunder confirm to and agree with
each other and the other parties hereto as follows: (i) other than the
representation and warranty that it is the legal and beneficial owner of the
interest being assigned thereby free and clear of any adverse claim, such Bank
assignor makes no representation or warranty and assumes no responsibility with
respect to any statements, warranties or representations made in or in
connection with this Agreement or any of the other Loan Documents or the
execution, legality, validity, enforceability, genuineness, sufficiency or
value of this Agreement or any of the other Loan Documents or any other
instrument or document furnished pursuant thereto; (ii) such Bank assignor
makes no representation or warranty and assumes no responsibility with respect
to the financial condition of the Borrower or the performance or observance by
the Borrower of any of its obligations under this Agreement or any of the other
Loan Documents or any other instrument or document furnished pursuant hereto;
(iii) such assignee confirms that it has received a copy of this Agreement,
together with copies of the financial statements referred to in Section 6.2
hereof and such other documents and information as it has deemed appropriate to
make its own credit analysis and decision to enter into such Assignment and
Acceptance; (iv) such assignee will, independently and without reliance upon
the Agent, such Bank assignor or any other Bank and based on such documents and
information as it shall deem appropriate at the time, continue to make its own
credit decisions in taking or not taking action under this Agreement and the
other Loan Documents; (v) such assignee appoints and authorizes the Agent to
take such action as agent on its behalf and to exercise such powers under this
Agreement and the other Loan Documents as are delegated to the Agent by the
terms hereof, together with such powers as are reasonably incidental thereto;
and (vi) such assignee agrees that it will perform in accordance with their
terms all obligations that by the terms of this Agreement and the other Loan
Documents are required to be performed by it as a Bank.

(d) The entries in the records of the Agent as to each Assignment
and Acceptance delivered to it and the names and addresses of the Banks and the
Loan Commitments of, and principal amount of the Loans owing to, each Bank from
time to time shall be conclusive, in the absence of manifest error, and the
Borrower, the Agent and the Banks may treat each Person the name of which is
recorded in the books and records of the Agent as a Bank hereunder for all
purposes of this Agreement and the other Loan Documents.

(e) Upon the Agent's receipt of an Assignment and Acceptance
executed by an assigning Bank and the assignee thereunder, together with the
Note subject to such assignment and the written consent to such assignment, the
Agent shall, if such Assignment and Acceptance has been completed with blanks
appropriately filled, (i) accept such Assignment and Acceptance, (ii) record
the information contained therein in its records and (iii) give prompt notice
thereof to the Borrower. Within five Business Days after receipt of notice,
the Borrower, at its own expense, shall execute and deliver to the Agent in
exchange for the surrendered Note a new Note payable to the order of such
assignee in an amount equal to the Loan Commitment assumed by it pursuant to
such Assignment and Acceptance and, if the assigning Bank has retained a Loan
Commitment, a new Note payable to the order of the assigning Bank in an amount
equal to the

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<PAGE> 58
Loan Commitment retained by it. Such new Note(s) shall be in an aggregate
principal amount equal to the aggregate principal amount of the surrendered
Note, shall be dated the effective date of such Assignment and Acceptance and
shall otherwise be in substantially the form required under this Agreement.

(f) Subject to Section 11.15 hereof, any Bank may, in connection
with any assignment or participation or proposed assignment or participation
pursuant to this Section 11.6, disclose to the assignee or participant or
proposed assignee or participant, any information relating to the Borrower
furnished to such Bank by or on behalf of the Borrower.

11.7 Limitation of Interest. The Borrower and the Banks intend to
strictly comply with all applicable federal and Texas laws, including
applicable usury laws (or the usury laws of any jurisdiction whose usury laws
are deemed to apply to the Notes or any other Loan Documents despite the
intention and desire of the parties to apply the usury laws of the State of
Texas). Accordingly, the provisions of this Section 11.7 shall govern and
control over every other provision of this Agreement or any other Loan Document
which conflicts or is inconsistent with this Section, even if such provision
declares that it controls. As used in this Section, the term "interest"
includes the aggregate of all charges, fees, benefits or other compensation
which constitute interest under applicable law, provided that, to the maximum
extent permitted by applicable law, (a) any non-principal payment shall be
characterized as an expense or as compensation for something other than the
use, forbearance or detention of money and not as interest, and (b) all
interest at any time contracted for, reserved, charged or received shall be
amortized, prorated, allocated and spread, in equal parts during the full term
of the Obligations. In no event shall the Borrower or any other Person be
obligated to pay, or any Bank have any right or privilege to reserve, receive
or retain, (a) any interest in excess of the maximum amount of nonusurious
interest permitted under the laws of the State of Texas or the applicable laws
(if any) of the United States or of any other state, or (b) total interest in
excess of the amount which such Bank could lawfully have contracted for,
reserved, received, retained or charged had the interest been calculated for
the full term of the Obligations at the Ceiling Rate. On each day, if any,
that the interest rate (the "Stated Rate") called for under this Agreement or
any other Loan Document exceeds the Ceiling Rate, the rate at which interest
shall accrue shall automatically be fixed by operation of this sentence at the
Ceiling Rate for that day, and shall remain fixed at the Ceiling Rate for each
day thereafter until the total amount of interest accrued equals the total
amount of interest which would have accrued if there were no such ceiling rate
imposed by this sentence. Thereafter, interest shall accrue at the Stated Rate
unless and until the Stated Rate again exceeds the Ceiling Rate, in which case,
the provisions of the immediately preceding sentence shall again automatically
operate to limit the interest accrual rate to the Ceiling Rate. The daily
interest rates to be used in calculating interest at the Ceiling Rate shall be
determined by dividing the applicable Ceiling Rate per annum by the number of
days in the calendar year for which such calculation is being made. None of
the terms and provisions contained in this Agreement or in any other Loan
Document (including, without limitation, Section 9.1 hereof) which directly or
indirectly relate to interest shall ever be construed without reference to this
Section 11.7, or be construed to create a contract to pay for the use,

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<PAGE> 59
forbearance or detention of money at an interest rate in excess of the Ceiling
Rate. If the term of any Obligation is shortened by reason of acceleration of
maturity as a result of any Default or by any other cause, or by reason of any
required or permitted prepayment, and if for that (or any other) reason any
Bank at any time, including but not limited to, the stated maturity, is owed or
receives (and/or has received) interest in excess of interest calculated at the
Ceiling Rate, then and in any such event all of any such excess interest shall
be canceled automatically as of the date of such acceleration, prepayment or
other event which produces the excess, and, if such excess interest has been
paid to such Bank, it shall be credited pro tanto against the then-outstanding
principal balance of the Borrower's obligations to such Bank, effective as of
the date or dates when the event occurs which causes it to be excess interest,
until such excess is exhausted or all of such principal has been fully paid and
satisfied, whichever occurs first, and any remaining balance of such excess
shall be promptly refunded to its payor.

11.8 Survival. The obligations of the Borrower under Sections
2.2(c), 2.2(d), 7.9, 11.3 and 11.4 hereof and all other obligations of the
Borrower in any other Loan Document (to the extent stated therein), and the
obligations of the Banks under Section 10.5 and 11.7 hereof, shall survive (for
the period provided under any applicable statute of limitations) the repayment
of the Loans and Reimbursement Obligations and the termination of the Loan
Commitments and the Letters of Credit.

11.9 Captions. Captions and section headings appearing herein are
included solely for convenience of reference and are not intended to affect the
interpretation of any provision of this Agreement.

11.10 Counterparts. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
agreement and any of the parties hereto may execute this Agreement by signing
any such counterpart.

11.11 Governing Law. THIS AGREEMENT AND (EXCEPT AS THEREIN
PROVIDED) THE OTHER LOAN DOCUMENTS SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE APPLICABLE LAWS (OTHER THAN THE CONFLICT OF LAWS RULES) OF
THE STATE OF TEXAS AND THE UNITED STATES OF AMERICA FROM TIME TO TIME IN
EFFECT.

11.12 Severability. Whenever possible, each provision of the Loan
Documents shall be interpreted in such manner as to be effective and valid
under applicable law. If any provision of any Loan Document shall be invalid,
illegal or unenforceable in any respect under any applicable law, the validity,
legality and enforceability of the remaining provisions of such Loan Document
shall not be affected or impaired thereby.

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<PAGE> 60
Bank shall provide the Agent and the Borrower with the forms prescribed by the
Internal Revenue Service of the United States certifying as to such Bank's
status for purposes of determining exemption from United States withholding
taxes with respect to all payments to be made to such Bank hereunder or other
documents satisfactory to the Bank and the Agent indicating that all payments
to be made to such Bank hereunder are subject to such tax at a rate reduced by
an applicable tax treaty. Unless the Borrower and the Agent shall have
received such forms or such documents indicating that payments hereunder are
not subject to United States withholding tax or are subject to such tax at a
rate reduced by an applicable tax treaty, the Borrower or the Agent shall
withhold taxes from such payments at the applicable statutory rate in the case
of payments to or for any Bank organized under the laws of a jurisdiction
outside the United States.

11.14 Venue. The Borrower hereby irrevocably (a) agrees that any
legal proceeding against the Agent or any Bank arising out of or in connection
with the Loan Documents shall be brought in the district courts of Harris
County, Texas, or in the United States District Court for the Southern District
of Texas, Houston Division (collectively, the "Houston Courts"); (b) submits to
the non-exclusive jurisdiction of the Houston Courts; (c) agrees and consents
that service of process may be made upon it in any proceeding arising out of
the Loan Documents or any transaction contemplated thereby by service of
process as provided by Texas law; (d) WAIVES, to the fullest extent permitted
by law, any objection which it may now or hereafter have to the laying of venue
of any suit, action or proceeding arising out of any Loan Document or the
transactions contemplated thereby in the Houston Courts; and (e) WAIVES any
claim that any such suit, action or proceeding in any Houston Court has been
brought in an inconvenient forum. All of the obligations of the Borrower under
the Loan Documents are performable in Harris County, Texas. Nothing herein
shall affect the right of the Agent or any Bank to commence legal proceedings
or otherwise proceed against the Borrower in any jurisdiction or to serve
process in any manner permitted by applicable law.

11.15 Confidential Information. The Agent and each Bank separately
agrees that:

(a) As used herein, the term "Confidential Information" shall mean
written information about the Borrower or the transactions contemplated herein
furnished by the Borrower to the Agent and/or the Banks which is specifically
designated as confidential by the Borrower; Confidential Information, however,
shall not include information which (i) was publicly known or available, or
otherwise available on a non-confidential basis to any Bank at the time of
disclosure from a source other than the Borrower, (ii) subsequently becomes
publicly known through no act or omission by such Bank, (iii) otherwise become
available on a non-confidential basis to any Bank other than through disclosure
by the Borrower, or (iv) has been in the possession of any Bank for a period of
more than three (3) years from the date on which such information originally
was furnished to such Bank by the Borrower, unless the Borrower shall have
requested the Agent and the Banks in writing, at least 30 days prior to the end
of such three (3) year period, to maintain the confidentiality of such
information for an additional three (3) year period (or for successive three
(3) year periods thereafter); provided that the Borrower

56
<PAGE> 61
shall not unreasonably withhold its consent to a request made after the initial
three (3) year period to eliminate information from "Confidential Information."

(b) The Agent and each Bank agrees that it will take normal and
reasonable precautions to maintain the confidentiality of any Confidential
Information furnished to such Person; provided, however, that such Person may
disclose Confidential Information (i) upon the Borrower's consent; (ii) to its
auditors; (iii) when required by any Governmental Requirement; (iv) as may be
required or appropriate in any report, statement or testimony submitted to any
Governmental Authority having or claiming to have jurisdiction over it; (v) to
such Person's and its Subsidiaries' or Affiliates' officers, directors,
employees, agents, representatives and professional consultants in connection
with this Agreement or administration of the Loans and Letters of Credit; (vi)
as may be required or appropriate in connection with any potential transfer by
any Bank of any Obligation in accordance with the terms of this Agreement,
provided that such Person agrees in writing to be bound by the terms of the
confidentiality statement customarily employed by the Agent in connection with
such potential transfers; (vii) as may be required or appropriate in response
to any summons or subpoena or in connection with any litigation or
administrative proceeding; (viii) to any other Bank or any of its Affiliates;
(ix) to the extent reasonably required in connection with the exercise of any
remedy hereunder or under the Notes or the Loan Documents; or (x) to correct
any false or misleading information which may become public concerning such
Person's relationship to the Borrower.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the Effective Date.

SMITH INTERNATIONAL, INC.

By:__________________________
Name:________________________
Title:_______________________

Address for Notices:

16740 Hardy Street
Houston, Texas 77205-0068
Telecopy No.: (713) 233-5259

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<PAGE> 62
TEXAS COMMERCE BANK NATIONAL
ASSOCIATION, as Agent and
as a Bank

By:____________________________
Name:__________________________
Title:_________________________

Address for Notices:

Loan Commitment: 712 Main Street
Houston, Texas 77002
$15,294,120 Attention: Manager,
Manufacturing and
Oilfield Services
Group
Telecopy No.: (713) 216-4227

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<PAGE> 63
THE BANK OF CALIFORNIA, N.A.

By:__________________________
Lynn E. Vine,
Vice President

Address for Notices:

Loan Commitment: 550 S. Hope Street, 5th Floor
Los Angeles, California 90071
$9,941,176 Attention: Mr. Derek Watson
Telecopy No.: (213) 243-3552

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<PAGE> 64
DEN NORSKE BANK AS

By:___________________________
Name:_________________________
Title:________________________

Address for Notices:

Loan Commitment: 333 Clay, Suite 4890
Houston, Texas 77002
$9,941,176 Attention: Mr. Haakon Sandborg
Telecopy No.: (713) 757-1167

with a copy to:

Mr. Phil Kurpiewski
Den Norske Bank AS
600 5th Avenue, 16th Floor
New York, New York 10020
Telecopy No.: (212) 757-6846

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<PAGE> 65
FIRST INTERSTATE BANK OF TEXAS, N.A.

By:_________________________________
Name:_______________________________
Title: _____________________________

Address for Notices:

Loan Commitment: 1000 Louisiana Street
Houston, Texas 77002
$9,941,176 Attention: Mr. Frank Schageman
Telecopy No.: (713) 250-7029

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<PAGE> 66
CORESTATES BANK, N.A.

By:______________________________
Name:____________________________
Title:___________________________

Address for Notices:

Loan Commitment: 5847 San Felipe, Suite 1050
Houston, Texas 77057
$9,941,176 Attention: Mr. Bart Brown
Telecopy No.: (713) 954-0932

with a copy to:

CoreStates Bank, N.A.
P.O. Box 7618
Philadelphia, Pennsylvania 19101
Attention: Mr. Jim Jackson

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<PAGE> 67
ARAB BANKING CORPORATION (B.S.C.)

By:_____________________________
Name:___________________________
Title:__________________________

Address for Notices:

Loan Commitment: 245 Park Avenue
New York, New York 10167
$9,941,176 Telecopy No.: (212) 599-8385

with a copy to:

600 Travis Street, Suite 1900
Houston, Texas 77002
Attention: Mr. Steve Plauche
Telecopy No.: (713) 227-6507

<PAGE> 1
EXHIBIT 4.4

FIRST AMENDMENT TO LOAN AGREEMENT

THIS FIRST AMENDMENT TO LOAN AGREEMENT ("First Amendment") dated as of
June 30, 1994 (the "First Amendment Effective Date") is made and entered into
by and among SMITH INTERNATIONAL, INC. (the "Borrower"), a Delaware
corporation, the banking institutions (each, together with its successors and
assigns, a "Bank" and collectively, the "Banks") from time to time a party to
the Loan Agreement (as hereinafter defined), as amended by this First
Amendment, and TEXAS COMMERCE BANK NATIONAL ASSOCIATION ("TCB"), a national
banking association, as agent for the Banks (in such capacity, together with
its successors in such capacity, the "Agent").

RECITALS:

WHEREAS, the Borrower, the Banks, and the Agent are parties to a Loan
Agreement dated as of March 17, 1994 (the "Loan Agreement"); and

WHEREAS, the Borrower, the Banks, and the Agent have agreed, on the
terms and conditions herein set forth, that the Loan Agreement be amended in
certain respects;

NOW, THEREFORE, IT IS AGREED:

Section 1. Definitions. Terms used herein which are defined in
the Loan Agreement shall have the same meanings when used herein unless
otherwise provided herein.

Section 2. Amendments to the Loan Agreement. On and after the
First Amendment Effective Date, the Loan Agreement shall be amended as follows:

(a) The following definitions shall be and are hereby added to
Section 1.1 of the Loan Agreement in their alphabetical order:

1992 Note Agreements shall mean those certain Note Agreements
dated August 31, 1992, executed by and between the Borrower and
certain Persons for the issuance of promissory notes of the Borrower
in the aggregate principal amount of $95,000,000.

Note Agreements shall mean the 1992 Note Agreements and the
1994 Note Agreements.

(b) The references to "$1,000,000" in the last sentence of Section
2.1 of the Loan Agreement are hereby amended to read "$500,000."

<PAGE> 2
(c) The references to "90 days" in Section 7.2(a) and Section
7.2(c) are hereby amended to read "120 days".

(d) A new Section 7.11 is hereby added to the Loan Agreement to
read in its entirety as follows:

7.11 Additional Subsidiaries; Corporate Restructuring. If
the Borrower (a) incorporates or acquires any Person and thereby
creates a new Subsidiary, (b) such 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, and (c)
for any reason whatsoever causes such Subsidiary to enter into a
guaranty (other than a guaranty of performance), then and in such
event the Borrower will cause such Subsidiary to execute a guaranty in
form and substance substantially similar to the Guaranties; provided
that the foregoing requirements shall not apply to M-I.

(e) Clause (f) of Section 8.1 of the Loan Agreement is hereby
amended to read in its entirety as follows:

(f) contingent liabilities incurred by M-I by with
respect to performance letters of credit and bid and performance bonds
required by M-I in support of contracts entered into by M-I in the
ordinary course of its business (or guaranties of such contingent
liabilities by the Borrower), and

(f) A new Section 8.14 is hereby added to the Loan Agreement to
read in its entirety as follows:

8.14 Modifications to Note Agreements. The Borrower
will not amend, modify or waive, without the prior written consent of
the Majority Banks:

(a) any of the financial covenants contained in Section 5.6
through 5.16 of the 1992 Note Agreements or in Sections 5.5 through
5.16 of the 1994 Note Agreements if the effect of such amendment,
modification or waiver would be to make the respective terms of the
Note Agreements more onerous on the Borrower; and

(b) any provision of the Note Agreements which (1) subjects
the Borrower to any additional material obligation, (2) increases the
principal amount of or (except as expressly provided for in the Note
Agreements) rate of interest on any note issued pursuant to the Note
Agreements, (3) accelerates the date fixed for any payment of
principal or interest on any note issued pursuant to the Note
Agreements, or (4) would change the definition of Required Noteholders
(as such term is defined in the Note Agreements).

2
<PAGE> 3
(g) Exhibit F of the Loan Agreement is hereby replaced in its
entirety with Exhibit A hereto.

(h) Exhibit G of the Loan Agreement is hereby replaced in its
entirety with Exhibit B attached hereto.

(i) Exhibit H of the Loan Agreement is hereby replaced in its
entirety with Exhibit C attached hereto.

Section 3. Limitations. The amendments set forth herein are limited
precisely as written and shall not be deemed to (a) be a consent to, or waiver
or modification of, any other term or condition of the Loan Agreement or any of
the other Loan Documents, or (b) except as expressly set forth herein,
prejudice any right or rights which the Banks may now have or may have in the
future under or in connection with the Loan Agreement, the Loan Documents or
any of the other documents referred to therein. Except as expressly modified
hereby or by express written amendments thereof, the terms and provisions of
the Loan Agreement, the Notes, and any other Loan Documents or any other
documents or instruments executed in connection with any of the foregoing are
and shall remain in full force and effect. In the event of a conflict between
this First Amendment and any of the foregoing documents, the terms of this
First Amendment shall be controlling.

Section 4. Payment of Expenses. The Borrower agrees, whether or not
the transactions hereby contemplated shall be consummated, to reimburse and
save the Agent and the Bank(s) harmless from and against liability for the
payment of all reasonable substantiated out-of-pocket costs and expenses
arising in connection with the preparation, execution, delivery, amendment,
modification, waiver and enforcement of, or the preservation of any rights
under this First Amendment, including, without limitation, the reasonable fees
and expenses of any local or other counsel for the Banks, and all stamp taxes
(including interest and penalties, if any), recording taxes and fees, filing
taxes and fees, and other charges which may be payable in respect of, or in
respect of any modification of, the Loan Agreement and the other Loan
Documents. The provisions of this Section shall survive the termination of the
Loan Agreement and the repayment of the Loans.

Section 5. Governing Law. This First Amendment and the rights and
obligations of the parties hereunder and under the Loan Agreement shall be
construed in accordance with and be governed by the laws of the State of Texas
and the United States of America.

Section 6. Descriptive Headings, etc. The descriptive headings of
the several Sections of this First Amendment are inserted for convenience only
and shall not be deemed to affect the meaning or construction of any of the
provisions hereof.

Section 7. Entire Agreement. This First Amendment and the documents
referred to herein represent the entire understanding of the parties hereto
regarding the subject matter hereof

3
<PAGE> 4
and supersede all prior and contemporaneous oral and written agreements of the
parties hereto with respect to the subject matter hereof, including, without
limitation, any commitment letters regarding the transactions contemplated by
this First Amendment.

Section 8. Counterparts. This First Amendment may be executed in any
number of counterparts and by different parties on separate counterparts and
all of such counterparts shall together constitute one and the same instrument.
Complete sets of counterparts shall be lodged with the Borrower and the Agent.

Section 9. Amended Definitions. As used in the Loan Agreement
(including all Exhibits thereto) and all other instruments and documents
executed in connection therewith, on and subsequent to the First Amendment
Effective Date the term (i) "Agreement" shall mean the Loan Agreement as
amended by this First Amendment, and (ii) references to any and all other Loan
Documents shall mean such documents as amended as contemplated hereby.

IN WITNESS WHEREOF, the parties hereto have caused this First
Amendment to be duly executed and delivered by their respective duly authorized
offices as of the date first above written.

SMITH INTERNATIONAL, INC.

By:_____________________________________

Name:___________________________________

Title:__________________________________

TEXAS COMMERCE BANK NATIONAL
ASSOCIATION, as the Agent and as a Bank

By:_____________________________________

Name:___________________________________

Title:__________________________________

4
<PAGE> 5

THE BANK OF CALIFORNIA, N.A.

By:_____________________________________

Name:___________________________________

Title:__________________________________

DEN NORSKE BANK AS

By:_____________________________________

Name:___________________________________

Title:__________________________________

FIRST INTERSTATE BANK OF TEXAS, N.A.

By:_____________________________________

Name:___________________________________

Title:__________________________________

CORESTATES BANK, N.A.

By:_____________________________________

Name:___________________________________

Title:__________________________________

<PAGE> 6
ARAB BANKING CORPORATION (B.S.C.)

By:_____________________________________

Name:___________________________________

Title:__________________________________

<PAGE> 1
EXHIBIT 4.5

SECOND AMENDMENT TO LOAN AGREEMENT

THIS SECOND AMENDMENT TO LOAN AGREEMENT ("Second Amendment") dated as
of February 15, 1995 (the "Second Amendment Effective Date") is made and
entered into by and among SMITH INTERNATIONAL, INC. (the "Borrower"), a
Delaware corporation, the banking institutions (each, together with its
successors and assigns, a "Bank" and collectively, the "Banks") from time to
time a party to the Loan Agreement (as hereinafter defined), as amended by this
Second Amendment, and TEXAS COMMERCE BANK NATIONAL ASSOCIATION ("TCB"), a
national banking association, as agent for the Banks (in such capacity,
together with its successors in such capacity, the "Agent").

RECITALS:

WHEREAS, the Borrower, the Banks, and the Agent are parties to a Loan
Agreement dated as of March 17, 1994, as amended pursuant to that certain First
Amendment to Loan Agreement dated as of June 30, 1994 (the "Loan Agreement");
and

WHEREAS, the Borrower, the Banks, and the Agent have agreed, on the
terms and conditions herein set forth, that the Loan Agreement be amended in
certain respects;

NOW, THEREFORE, IT IS AGREED:

Section 1. Definitions. Terms used herein which are defined in
the Loan Agreement shall have the same meanings when used herein unless
otherwise provided herein.

Section 2. Amendments to the Loan Agreement. On and after the
Second Amendment Effective Date, the Loan Agreement shall be amended as
follows:

(a) The definitions of "Borrowing Base", "Borrowing Base
Certificate", "Eligible Accounts", "Eligible Inventory", "Fixed Charge Coverage
Ratio" and "Fixed Charges" set forth in Section 1.1 of the Loan Agreement are
hereby deleted in their entirety.

(b) The definition of "Maximum Loan Available Amount" set forth in
Section 1.1 of the Loan Agreement is hereby amended to read in its entirety as
follows:

Maximum Loan Available Amount shall mean, at any date, an
amount equal to the aggregate of the Loan Commitments.
<PAGE> 2
(c) A new definition of "Interest Coverage Ratio" is hereby added
to Section 1.1 of the Loan Agreement, reading in its entirety as follows:

Interest Coverage Ratio shall mean, as of any day, the ratio
of (a) EBITDA for the preceding four (4) fiscal quarter period less
Capital Expenditures made during such period and less Cash Taxes for
such period plus or minus, as the case may be, net cash received from
or paid to M-I during such period, to (b) the Interest Expense for
such period.

(d) Section 2.2(b)(v) of the Loan Agreement is hereby amended to
read in its entirety as follows:

(v) The Borrower will pay to the Agent at the
Principal Office for the account of each Bank a letter of
credit fee with respect to each Letter of Credit equal to the
greater of (i) $500 or (ii) three-fourths percent (3/4%) per
annum on the face amount of such Letter of Credit (pro rated
for Letters of Credit having terms of less than or, to the
extent permitted hereunder, longer than one (1) year), such
fee to be due and payable in advance on the date of the
issuance thereof. Promptly after receiving any payment in
respect of letter of credit fees referred to in this clause
(v), the Agent will pay to Banks, pro rata in accordance with
their respective Loan Commitments, a fee of five-eighths
percent (5/8%) percent per annum on the face amount of such
Letter of Credit (the remaining one-eighths percent (1/8%) per
annum on the face amount of such Letter of Credit to be
retained by the issuer or co-issuers of the applicable Letter
of Credit, pro rata in accordance with their respective shares
thereof).

(e) Section 2.4(a) of the Loan Agreement is hereby amended to read
in its entirety as follows:

(a) The Borrower shall pay to the Agent for the
account of each Bank commitment fees for the period from the
Effective Date to and including the Termination Date at a rate
per annum equal to 3/8 of 1%. Such commitment fees shall be
computed (on the basis of the actual number of days elapsed in
a year composed of 360 days) on each day and shall be based on
the excess of (x) the aggregate amount of each Bank's Loan
Commitment for such day over (y) the sum of (i) the aggregate
unpaid principal balance of such Bank's Note on such day plus
(ii) the aggregate Letter of Credit Liabilities as to such
Bank for such day. Accrued commitment fees through each
Quarterly Date prior to the Termination Date shall be payable
on the third (3rd) Business Day after such Quarterly Date.
Any accrued and unpaid commitment fees shall be due and
payable on the Termination Date.

2
<PAGE> 3
(f) Section 3.2(b) of the Loan Agreement is hereby amended to read
in its entirety as follows:

(b) INTENTIONALLY LEFT BLANK

(g) Section 5.2 of the Loan Agreement is hereby amended to read in
its entirety as follows:

5.2 All Loans and Letters of Credit. The obligation of
each Bank to make any Loan to be made by it hereunder or to issue or
participate in any Letter of Credit is subject to (a) the accuracy, in
all material respects, on the date of such Loan or such issuance
(except to the extent such representation or warranty expressly
relates to an earlier date) of all representations and warranties of
the Borrower and any other Party contained in this Agreement and the
other Loan Documents; (b) to the performance by the Borrower and each
other Party of its respective obligations under the Loan Documents,
and (c) the Agent shall have received the following, all of which
shall be duly executed and in Proper Form: (1) a Request for Extension
of Credit as to the Loan or the Letter of Credit, as the case may be,
no later than 11:00 a.m. Houston time on the Business Day on which
such Request for Extension of Credit must be given under Section 4.3
hereof, (2) in the case of a Letter of Credit, an Application, and (3)
such other documents as the Agent or any Bank may reasonably require;
(d) prior to the making of such Loan or the issuance of such Letter of
Credit, no fact or condition shall have arisen which has a Material
Adverse Effect; (e) no Default or Event of Default shall have occurred
and be continuing; (f) the making of such Loan or the issuance of such
Letter of Credit shall not be illegal or prohibited by any Legal
Requirement, and (g) the Borrower shall have paid all fees and
expenses of the type described in Section 11.3 hereof and all other
fees, which are owed to the Agent or any other Bank under the Loan
Documents and accrued and unpaid through the date of such Loan or such
issuance.

(h) Section 7.2 of the Loan Agreement is hereby amended to read in
its entirety as follows:

7.2 Financial Statements and Information. Furnish to the
Agent three copies of each of the following: (a) as soon as available
and in any event within 120 days after the end of each fiscal year of
the applicable Person, beginning with the fiscal year 1993, audited
Annual Financial Statements of the Borrower and its Subsidiaries; (b)
as soon as available and in any event within 120 days after the end of
each fiscal year of the applicable Person, beginning with the fiscal
year 1994, an unaudited consolidating Annual Financial Statement of
the Borrower and its Subsidiaries (including M-I Drilling Fluids,
L.L.C.) and the related statements of income and retained earnings and
cash flow for the period then ended, prepared in conformity with GAAP
consistently applied; (c) as soon as available and in any event within
60 days after the end of each fiscal quarter of each fiscal year of
the applicable Person, Quarterly Financial Statements of the

3
<PAGE> 4
Borrower and its Subsidiaries; (d) concurrently with the financial
statements provided for in Subsections 7.2(a), (b) and (c) hereof,
such schedules, computations and other information, in reasonable
detail, as may be required by the Agent to demonstrate compliance with
the covenants set forth herein or reflecting any non-compliance
therewith as of the applicable date, all certified and signed by the
president, chief financial officer, treasurer or assistant treasurer
of the Borrower (or other authorized officer approved by the Agent) as
correct and complete and, commencing with the quarterly financial
statement prepared as of March 31, 1994, a compliance certificate
("Compliance Certificate") in the form of Exhibit E hereto, duly
executed by such authorized officer; (e) by December 31 of each year,
the financial projections of income and cash flow of the Borrower for
the next calendar year, and (f) such other information relating to the
condition (financial or otherwise), operations, prospects or business
of any of the Borrower, any of its Subsidiaries or either of the
Guarantors as from time to time may be reasonably requested by the
Agent. Each delivery of a financial statement pursuant to this
Section 7.2 shall constitute a republication of the representations
contained in Section 6.2.

(i) Section 7.3 of the Loan Agreement is hereby amended to read in
its entirety as follows:

7.3 Financial Tests. The Borrower (on a consolidated
basis but excluding M-I) will have and maintain:

(a) Current Ratio - a Current Ratio of not less
than 1.50 to 1.00 at all times.

(b) Debt to Total Capitalization Ratio - a Debt
to Total Capitalization Ratio of not greater than (1) 40% for
the period commencing on the Effective Date through and
including March 31, 1995 and (2) 35% at all times thereafter.

(d) Tangible Net Worth - Tangible Net Worth of
not less than (1) for the period commencing on the Effective
Date through and including March 31, 1994, $150,000,000 and
(2) for each fiscal quarter thereafter the minimum Tangible
Net Worth required during the immediately preceding fiscal
quarter plus 50% of the Net Income (if positive) of the
Borrower for the immediately preceding fiscal quarter plus
100% of any increase in Tangible Net Worth during such fiscal
quarter resulting from any merger, sale or issuance of common
stock.

(j) Section 11.5 of the Loan Agreement is hereby amended to read
in its entirety as follows:

4
<PAGE> 5
11.5 Amendments, Etc. No amendment or modification of
this Agreement, the Notes or any other Loan Document shall in any
event be effective against the Borrower unless the same shall be
agreed or consented to in writing by the Borrower. No amendment,
modification or waiver of any provision of this Agreement, the Notes
or any other Loan Document, nor any consent to any departure by the
Borrower therefrom, shall in any event be effective against the Banks
unless the same shall be agreed or consented to in writing by the
Majority Banks, and each such waiver or consent shall be effective
only in the specific instance and for the specific purpose for which
given; provided, that no amendment, modification, waiver or consent
shall, unless in writing and signed by each Bank affected thereby, do
any of the following: (a) increase any Loan Commitment of any of the
Banks or subject the Banks to any additional obligations; (b) reduce
the principal of, or interest on, any Loan, Reimbursement Obligation
or fee hereunder; (c) postpone or extend the Maturity Date, the
Termination Date, the Loan Availability Period or any scheduled date
fixed for any payment of principal of, or interest on, any Loan, any
Reimbursement Obligation or any fee hereunder or waive any Event of
Default described in Section 9.1(a) hereof; (d) change the percentage
of any of the Loan Commitments or of the aggregate unpaid principal
amount of any of the Loans and Letter of Credit Liabilities, or the
number of Banks, which shall be required for the Banks or any of them
to take any action under this Agreement; (e) change any provision
contained in Sections 2.2(c), 7.9, 11.3 or 11.4 hereof or this Section
11.5, or (f) release the liability of either Guarantor under either
Guaranty. Notwithstanding anything in this Section 11.5 to the
contrary, no amendment, modification, waiver or consent shall be made
with respect to Section 10 without the consent of the Agent to the
extent it affects the Agent.

(k) The definition of "Eurodollar Margin Percentage" set forth in
Schedule 1 to the Loan Agreement is hereby amended to read in its entirety as
follows:

Eurodollar Margin Percentage means, with respect to any Loan:

(a) on any day prior to the first adjustment after
February 15, 1995 pursuant to clause (b) of this definition, the
Eurodollar Margin Percentage for any day shall be 1.25% per annum.

(b) the Eurodollar Margin Percentage for any day shall be
the applicable per annum percentage set forth at the appropriate
intersection in the table shown below, based on the Debt to Total
Capitalization Ratio as of the last day of each March, June, September
and December (beginning with the fiscal quarter ending on December 31,
1994) calculated by the Agent as soon as practicable after receipt by
the Agent of all required Current Information (provided, however, that
if the Eurodollar Margin Percentage is increased as a result of the
reported Debt to Total Capitalization Ratio, such increase shall be
retroactive to the date that Borrower was obligated to deliver the
Current Information to the Agent pursuant to the terms of the Loan
Agreement and

5
<PAGE> 6
provided further, however, that if the Eurodollar Margin Percentage is
decreased as a result of the reported Debt to Total Capitalization
Ratio, and the Current Information is delivered to the Agent not more
than ten (10) calendar days after the date required to be delivered
pursuant to the terms of the Loan Agreement, such decrease shall be
retroactive to the date that Borrower was obligated to deliver the
Current Information to the Agent pursuant to the terms of the Loan
Agreement):

<TABLE>
<CAPTION>
Eurodollar
Debt to Total Capitalization Ratio Margin Percentage
---------------------------------- -----------------
<S> <C>

Greater than 35% 1.25%

Greater than 30% but less
than or equal to 35% 1.00%

Greater than 25% but less
than or equal to 30% 0.875%

Greater than 20% but less
than or equal to 25% 0.75%

Less than or equal to 20% 0.625%
</TABLE>

(l) The definition of "Interest Period" set forth in Schedule 1 to
the Loan Agreement is hereby amended to read in its entirety as follows:

Interest Period means, for each Eurodollar Rate Borrowing, a
period commencing on the date such Eurodollar Rate Borrowing began and
ending on the numerically corresponding day which is, subject to
availability, 1, 2, 3 or 6 months (or any other designated period up
to a maximum of 6 months) thereafter, as Borrower shall elect in
accordance herewith; provided, (v) any Interest Period with respect to
a Eurodollar Rate Borrowing which would otherwise end on a day which
is not a Eurodollar Business Day shall be extended to the next
succeeding Eurodollar Business Day, unless such Eurodollar Business
Day falls in another calendar month, in which case such Interest
Period shall end on the next preceding Eurodollar Business Day; (w)
any Interest Period with respect to a Eurodollar Rate Borrowing which
begins on the last Eurodollar Business Day of a calendar month (or on
a day for which there is no numerically corresponding day in the
calendar month at the end of such Interest Period) and which is
designated to end 1, 2, 3, 4, 5 or 6 months after the beginning date
shall end on the last Eurodollar Business Day of the appropriate
calendar month; (x) no Interest Period shall ever extend beyond the
Maturity Date; and (y) Interest Periods shall be selected by Borrower
in such a

6
<PAGE> 7
manner that the Interest Period with respect to any portion of the
Loans which shall become due shall not extend beyond such Maturity
Date.

(m) Exhibit A to the Loan Agreement is hereby amended to be
identical to Exhibit A attached hereto.

(n) Exhibit B to the Loan Agreement is hereby amended to be
identical to Exhibit B attached hereto.

(o) Exhibit E to the Loan Agreement is hereby amended to be
identical to Exhibit C attached hereto.

Section 3. Limitations. The amendments set forth herein are limited
precisely as written and shall not be deemed to (a) be a consent to, or waiver
or modification of, any other term or condition of the Loan Agreement or any of
the other Loan Documents, or (b) except as expressly set forth herein,
prejudice any right or rights which the Banks may now have or may have in the
future under or in connection with the Loan Agreement, the Loan Documents or
any of the other documents referred to therein. Except as expressly modified
hereby or by express written amendments thereof, the terms and provisions of
the Loan Agreement, the Notes, and any other Loan Documents or any other
documents or instruments executed in connection with any of the foregoing are
and shall remain in full force and effect. In the event of a conflict between
this Second Amendment and any of the foregoing documents, the terms of this
Second Amendment shall be controlling.

Section 4. Payment of Expenses. The Borrower agrees, whether or not
the transactions hereby contemplated shall be consummated, to reimburse and
save the Agent and the Bank(s) harmless from and against liability for the
payment of all reasonable substantiated out-of-pocket costs and expenses
arising in connection with the preparation, execution, delivery and enforcement
of, or the preservation of any rights under this Second Amendment, including,
without limitation, the reasonable fees and expenses of any local or other
counsel for the Agent, and all stamp taxes (including interest and penalties,
if any), recording taxes and fees, filing taxes and fees, and other similar
charges which may be payable in respect of, or in respect of any modification
of, the Loan Agreement and the other Loan Documents. The provisions of this
Section shall survive the termination of the Loan Agreement and the repayment
of the Loans.

Section 5. Governing Law. This Second Amendment and the rights and
obligations of the parties hereunder and under the Loan Agreement shall be
construed in accordance with and be governed by the laws of the State of Texas
and the United States of America.

Section 6. Descriptive Headings, etc. The descriptive headings of
the several Sections of this Second Amendment are inserted for convenience only
and shall not be deemed to affect the meaning or construction of any of the
provisions hereof.

7
<PAGE> 8
Section 7. Entire Agreement. This Second Amendment and the documents
referred to herein represent the entire understanding of the parties hereto
regarding the subject matter hereof and supersede all prior and contemporaneous
oral and written agreements of the parties hereto with respect to the subject
matter hereof, including, without limitation, any commitment letters regarding
the transactions contemplated by this Second Amendment.

Section 8. Counterparts. This Second Amendment may be executed in
any number of counterparts and by different parties on separate counterparts
and all of such counterparts shall together constitute one and the same
instrument. Complete sets of counterparts shall be lodged with the Borrower
and the Agent.

Section 9. Amended Definitions. As used in the Loan Agreement
(including all Exhibits thereto) and all other instruments and documents
executed in connection therewith, on and subsequent to the Second Amendment
Effective Date the term (i) "Agreement" shall mean the Loan Agreement as
amended by this Second Amendment, and (ii) references to any and all other Loan
Documents shall mean such documents as amended as contemplated hereby.

IN WITNESS WHEREOF, the parties hereto have caused this Second
Amendment to be duly executed and delivered by their respective duly authorized
offices as of the date first above written.

NOTICE PURSUANT TO TEX. BUS. & COMM. CODE Section 26.02

THIS SECOND AMENDMENT AND ALL OTHER LOAN DOCUMENTS EXECUTED BY ANY OF
THE PARTIES BEFORE OR SUBSTANTIALLY CONTEMPORANEOUSLY WITH THE EXECUTION HEREOF
TOGETHER CONSTITUTE A WRITTEN LOAN AGREEMENT AND REPRESENT THE FINAL AGREEMENT
BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

SMITH INTERNATIONAL, INC.

By: /s/ JOHN KORNANY TRACY M. WELCH
------------------------------------
Name: John Kornany Tracy M. Welch
Title: Vice President Assistant Treasurer

8
<PAGE> 9
TEXAS COMMERCE BANK NATIONAL
ASSOCIATION, as the Agent and as a Bank

By: /s/ LEONARD H. PATON
-----------------------------------
Name: Leonard H. Paton
Title: Senior Vice President

9
<PAGE> 10
THE BANK OF CALIFORNIA, N.A.

By: /s/ THOMAS H. TEGART
--------------------------------
Name: Thomas H. Tegart
Title: Vice President

10
<PAGE> 11
DEN NORSKE BANK AS

By: /s/ NELVIN FARSTAD
-----------------------------------
Name: Nelvin Farstad
Title: Vice President

By: /s/ FRAN MEYERS
-----------------------------------
Name: Fran Meyers
Title: Vice President

11
<PAGE> 12
FIRST INTERSTATE BANK OF TEXAS, N.A.

By: /s/ FRANK W. SCHAGEMAN
-----------------------------------
Name: Frank W. Schageman
Title: Assistant Vice President

12
<PAGE> 13
CORESTATES BANK, N.A.

By: /s/
-----------------------------------
Name:__________________________________
Title:_________________________________

13
<PAGE> 14
ARAB BANKING CORPORATION (B.S.C.)

By: /s/ STEPHEN A. PLAUCHE
-----------------------------------
Name: Stephen A. Plauche
Title: Vice President

14
<PAGE> 15
The undersigned acknowledge and consent to the execution of the
foregoing Second Amendment.

SMITH INTERNATIONAL ACQUISITION
CORP.

By: /s/ TRACY M. WELCH
---------------------------------
Name: Tracy M. Welch
Title: Assistant Treasurer

SII MEGADIAMOND, INC.

By: /s/ TRACY M. WELCH
---------------------------------
Name: Tracy M. Welch
Title: Vice President

<PAGE> 1
EXHIBIT 4.6

LOAN AGREEMENT

($20,000,000 REVOLVING LOAN FACILITY)

DATED AS OF JUNE 30, 1994

AMONG

M-I DRILLING FLUIDS COMPANY, L.L.C.,
AS BORROWER;

TEXAS COMMERCE BANK NATIONAL ASSOCIATION,
AS AGENT AND AS A BANK,

AND

THE OTHER BANKS NOW OR HEREAFTER
PARTIES HERETO

<PAGE> 2
TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C> <C> <C>
1. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Certain Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

2. Commitments and Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.1 Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.2 Terminations or Reductions of Loan Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.3 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.4 Several Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.5 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2.6 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

3. Borrowings, Payments and Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
3.1 Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
3.2 Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

4. Payments; Pro Rata Treatment; Computations, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
4.1 Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
4.2 Pro Rata Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
4.3 Certain Actions, Notices, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
4.4 Non-Receipt of Funds by the Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
4.5 Sharing of Payments, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
4.6 Replacement of Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

5. Conditions Precedent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
5.1 Initial Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
5.2 All Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

6. Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
6.1 Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
6.2 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
6.3 Enforceable Obligations; Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
6.4 Other Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
6.5 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
6.6 Title . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
6.7 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
6.8 Regulations U and X . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
6.9 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
6.10 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

</TABLE>
i
<PAGE> 3

<TABLE>
Page
----
<S> <C> <C> <C>
6.11 Investment Company Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
6.12 Public Utility Holding Company Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
6.13 Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
6.14 Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
6.15 Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
6.16 Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

7. Affirmative Covenants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
7.1 Taxes, Existence, Regulations, Property, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . 22
7.2 Financial Statements and Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
7.3 Financial Tests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
7.4 Inspection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
7.5 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
7.6 Books and Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
7.7 Notice of Certain Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
7.8 Capital Adequacy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
7.9 ERISA Information and Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

8. Negative Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
8.1 Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
8.2 Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
8.3 Contingent Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
8.4 Mergers, Consolidations and Dispositions of Assets . . . . . . . . . . . . . . . . . . . . . . . . 27
8.5 Nature of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
8.6 Transactions with Related Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
8.7 Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
8.8 Organizational Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
8.9 No Restriction on Payment of Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

9. Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
9.1 Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
9.2 Right of Setoff . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
9.3 Remedies Cumulative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

10. The Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
10.1 Appointment, Powers and Immunities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
10.2 Reliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
10.3 Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
10.4 Rights as a Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
10.5 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
10.6 Non-Reliance on Agent and Other Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
10.7 Failure to Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
10.8 Resignation or Removal of Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

</TABLE>
ii

<PAGE> 4
<TABLE>
Page
----
<S> <C> <C> <C>
10.9 No Partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

11. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
11.1 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
11.2 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
11.3 Expenses, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
11.4 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
11.5 Amendments, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
11.6 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
11.7 Limitation of Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
11.8 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
11.9 Captions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
11.10 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
11.11 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
11.12 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
11.13 Tax Forms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
11.14 Venue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
11.15 Confidential Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
</TABLE>

SCHEDULES

1 -- Interest Rate Agreement

EXHIBITS

A -- Request for Extension of Credit
B -- Note
C -- Assignment and Acceptance
D -- Compliance Certificate
E -- Subsidiaries
F -- Litigation
G -- Borrowed Money Indebtedness
H -- Liens

iii
<PAGE> 5

LOAN AGREEMENT

THIS LOAN AGREEMENT is made and entered into as of June 30, 1994 (the
"Effective Date"), by and among M-I DRILLING FLUIDS COMPANY, L.L.C., a Delaware
limited liability company (the "Borrower"); each of the banks which is or may
from time to time become a party hereto in accordance with Section 11.6 hereof
(individually, a "Bank" and, collectively, the "Banks"), and TEXAS COMMERCE
BANK NATIONAL ASSOCIATION ("TCB"), a national banking association, as agent for
the Banks (in such capacity, together with its successors in such capacity, the
"Agent").

The parties hereto agree as follows:

1. Definitions.

1.1 Certain Defined Terms.

Accounts and General Intangibles shall have the respective meanings
assigned to them in the Texas Business and Commerce Code in force on the
Effective Date.

Agreement shall mean this Loan Agreement, as it may from time to time
be amended, modified, restated or supplemented.

Annual Audited Financial Statements shall mean the annual financial
statements of a Person, including all notes thereto, which statements shall
include a balance sheet as of the end of such fiscal year and an income
statement and a statement of cash flows for such fiscal year, all setting forth
in comparative form the corresponding figures from the previous fiscal year,
all prepared in conformity with GAAP. Whenever the Annual Financial Statements
are required to be audited, they shall be accompanied by (i) a report and
opinion of independent certified public accountants of recognized national
standing satisfactory to the Agent, which shall state that such financial
statements, in the opinion of such accountants, present fairly the financial
position of such Person as of the date thereof and the results of its
operations for the period

<PAGE> 6
covered thereby in conformity with GAAP, and without expressing any doubt as to
such Person's ability to continue as a going concern and (ii) a certificate of
such accountants that in making their audit, such accountants did not become
aware of any Default or, if in the opinion of such accountant any such Default
exists, a description of the nature and status thereof. Whenever the Annual
Financial Statements are to be unaudited, they shall be certified by the chief
financial officer, treasurer, or other authorized officer of the applicable
Person as complete and correct copies which present fairly the consolidated
financial condition of the applicable Person. Annual Financial Statements
shall be prepared on a consolidated basis.

Assignment and Acceptance shall have the meaning ascribed to such term
in Section 11.6 hereof.

Bankruptcy Code shall mean the United States Bankruptcy Code, as
amended, and any successor statute.

Borrowed Money Indebtedness shall mean, with respect to any Person,
without duplication, (a) all indebtedness of such Person for borrowed money, or
with respect to deposits or advances of any kind to such Person, (b) all
indebtedness of such Person evidenced by bonds, debentures, notes or similar
instruments, (c) all indebtedness of such Person upon which interest charges
are customarily paid, (d) all indebtedness of such Person under conditional
sale or other title retention agreements relating to Property purchased by such
Person, (e) all indebtedness of such Person issued or assumed as the deferred
purchase price of property or services (excluding indebtedness of such Person
to creditors for raw materials, inventory, services and supplies incurred in
the ordinary course of such Person's business), (f) all Capital Lease
Obligations, (g) all indebtedness of others secured by any lien on property or
assets owned or acquired by such Person, whether or not the indebtedness
secured thereby have been assumed, (h) all outstanding letters of credit issued
for the account of such Person and (i) all guarantees of Borrowed Money
Indebtedness of other Persons.

Business Day shall mean any day other than a day on which commercial
banks are authorized or required to close in Houston, Texas, Los Angeles,
California or Pittsburgh, Pennsylvania.

2
<PAGE> 7
Ceiling Rate shall have the meaning assigned to it in the Interest Rate
Agreement.

Compliance Certificate shall have the meaning given to it in Section
7.2 hereof.

Corporation shall mean corporations, partnerships, joint ventures,
joint stock associations, business trusts and other business entities.

Default shall mean an Event of Default or an event which with notice or
lapse of time or both would, unless cured or waived, become an Event of
Default.

Dollars and $ shall mean lawful money of the United States of America.

3
<PAGE> 8
Environmental Liabilities includes all liabilities arising from any
Environmental Claim, Environmental Permit or Requirement of Environmental Law
under any theory of recovery, at law or in equity, and whether based on
negligence, strict liability or otherwise, including but not limited to:
remedial, removal, response, abatement, investigative, monitoring, personal
injury and damage to property or injuries to persons, and any other related
costs, expenses, losses, damages, penalties, fines, liabilities and
obligations, and all costs and expenses necessary to cause the issuance,
reissuance or renewal of any Environmental Permit including reasonable
attorneys' fees and court costs.

Environmental Permit means any permit, license, approval or other
authorization under any applicable Legal Requirement relating to pollution or
protection of health or the environment, including laws, regulations or other
requirements relating to emissions, discharges, releases or threatened releases
of pollutants, contaminants or hazardous substances or toxic materials or
wastes into ambient air, surface water, ground water or land, or otherwise
relating to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport, or handling of pollutants, contaminants or Hazardous
Substances.

Event of Default shall have the meaning assigned to it in Section 9
hereof.

Federal Funds Rate shall have the meaning assigned to it in the
Interest Rate Agreement.

GAAP shall mean, as to a particular Person, such accounting practice
as, in the opinion of the independent certified public accountants of
recognized national standing regularly retained by such Person and acceptable
to the Agent, conforms at the time to generally accepted accounting principles,
consistently applied. GAAP means those principles and practices (a) which are
recognized as such by the Financial Accounting Standards Board; (b) which are
applied for all periods after the Effective Date in a manner consistent with
the manner in which such principles and practices were applied to the most
recent audited financial statements of the relevant Person furnished to the
Agent, and (c) which are consistently applied for all periods after the
Effective Date so as to present fairly the financial condition, and results of
operations and changes in financial position, of such Person. If any change in
any accounting principle or practice is required by the Financial Accounting
Standards Board in order for such principle or practice to continue as a GAAP
or practice, all reports and financial statements required hereunder may be
prepared in accordance with such change only after written notice of such
change is given to the Agent.

4
<PAGE> 9
having jurisdiction over the Agent, any Bank, the Borrower, any of the
Borrower's Subsidiaries, Smith or their respective Property.

Guaranties means those two (2) certain guaranties dated concurrently
herewith executed by the respective Guarantors in favor of the Agent.

Guarantors means Smith and Halliburton.

Halliburton shall mean Halliburton Company, a Delaware corporation.

Interest Payment Dates shall have the meaning assigned to it in the
Interest Rate Agreement.

Interest Rate Agreement shall mean the Interest Rate Agreement attached
hereto as Schedule 1, as it may from time to time be amended, modified,
restated or supplemented.

5
<PAGE> 10
Legal Requirement shall mean any applicable law, statute, ordinance,
decree, requirement, order, judgment, rule, or regulation (or interpretation of
any of the foregoing) of, and the terms of any license or permit issued by, any
Governmental Authority, whether presently existing or arising in the future
binding on the applicable Person.

Loan shall mean a loan made pursuant to Section 2.1 hereof.

Loan Availability Period shall mean the period from and including the
Effective Date to (but not including) the Termination Date.

Loan Commitment shall mean, as to any Bank, the obligation, if any, of
such Bank to make Loans in an aggregate principal amount at any one time
outstanding up to (but not exceeding) the amount, if any, set forth opposite
such Bank's name on the signature pages hereof under the caption "Loan
Commitment", or otherwise provided for in an Assignment and Acceptance
Agreement (as the same may be reduced from time to time pursuant to Section 2.2
hereof).

Loan Documents shall mean, collectively, this Agreement, the Notes,
the Interest Rate Agreement, the Guaranties, all instruments, certificates and
agreements now or hereafter executed or delivered to the Agent or any Bank
pursuant to any of the foregoing or in connection with the Obligations or any
commitment regarding the Obligations or securing or guaranteeing any part of
the Obligations, and all amendments, modifications, renewals, extensions,
increases and rearrangements of, and substitutions for, any of the foregoing.

Majority Banks shall mean Banks having greater than 66-2/3% of the
aggregate amount of Loan Commitments.

Material Subsidiary shall mean each Subsidiary of the Borrower with
assets comprising 5% or more of the aggregate fair market value of all assets
of Borrower and its Subsidiaries on a consolidated basis or with a Tangible Net
Worth comprising 5% or more of the Tangible Net Worth of Borrower and its
Subsidiaries on a consolidated basis.

6
<PAGE> 11
Material Adverse Effect shall mean (a) materially adverse effect on the
business, assets, operations or condition (financial or otherwise) of Borrower
and its Subsidiaries taken as a whole, (b) material impairment of the ability
of Borrower or either of the Guarantors to perform any of its respective
obligations under any Loan Document to which it is a party or (c) material
impairment of the rights or benefits available to the Agent or any of the Banks
under any Loan Document.

Maturity Date shall mean the maturity of the Notes, June 29, 1995, as
the same may hereafter be accelerated pursuant to the provisions of any of the
Loan Documents.

Notes shall having the meaning assigned to such term in Section 2.5
hereof.

Obligations shall mean, as at any date of determination thereof, the
sum of the following: (i) the aggregate principal amount of Loans outstanding
hereunder, plus (ii) all other liabilities and indebtedness of Borrower under
any Loan Document.

Parties shall mean all Persons other than the Agent or any Bank
executing any Loan Document.

PBGC shall mean the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.

Permitted Investments shall mean:

7
<PAGE> 12
Poor's Corporation, or of corporations doing business in and
incorporated under the laws of the United States or any state thereof
which, on the date of such Investment, is given a credit rating of at
least A2 by Moody's Investors Service, Inc. and A by Standard & Poor's
Corporation, in each case maturing within 270 days from the date of
acquisition thereof;

(iv) certificates of deposit issued by, money market
deposit accounts with, eurodollar deposits through, bankers'
acceptances of and repurchase and reverse repurchase agreements
covering Investments described in subclause (i) above executed by a
bank incorporated under the laws of Canada, Japan, Great Britain or
any other Western European country which is at the time a member of
the OECD and is approved by the Agent (such approval not to be
unreasonably withheld) having (either itself or its holding company)
on the date of such Investment combined capital, surplus and undivided
profits of at least $500,000,000 (or the foreign currency equivalent
thereof) and (where rated) whose long-term and short-term bank debt
securities are rated (on the date of such Investment therein) not less
than A2 by Moody's Investors Service, Inc. and A by Standard & Poor's
Corporation, in each case maturing within one (1) year from the date
of acquisition thereof;

(vi) investments or loans described in the financial
statements described in Section 6.2 hereof;

(vii) loans or advances to Smith or Halliburton, or
Affiliates of Smith or Halliburton, and other loans or advances in the
usual and ordinary course of business to officers, directors and
employees for expenses incidental to carrying on the business of the
Borrower, any Subsidiary;

8
<PAGE> 13
(viii) prepaid expenses of the Borrower and its Subsidiaries
paid in the usual and ordinary course of business of the Borrower and
its Subsidiaries and accounted for in accordance with GAAP; and

(ix) equity interests in any other Person engaged in a
business similar to the Borrower's principal business.

Person shall mean any individual, Corporation, trust, unincorporated
organization, Governmental Authority or any other form of entity.

Principal Office shall mean the principal office of the Agent,
presently located at 712 Main Street, Houston, Harris County, Texas 77002.

Proper Form shall mean in form and substance reasonably satisfactory to
the Agent.

Property shall mean any interest in any kind of property or asset,
whether real, personal or mixed, tangible or intangible.

Quarterly Financial Statements shall mean the quarterly financial
statements of a Person, including all notes thereto, which statements shall
include a balance sheet as of the end of such calendar quarter and an income
statement and a statement of cash flows for such calendar quarter and for the
fiscal year to date, subject to normal year-end adjustments, all setting forth
in comparative form the corresponding figures for the corresponding calendar
quarter of the preceding year, prepared in accordance with GAAP and certified
by the chief financial officer, treasurer or other authorized officer of such
Person as complete and correct copies which present fairly the consolidated
financial condition of the applicable Person. Quarterly Financial Statements
shall be prepared on a consolidated basis.

Regulatory Change shall mean with respect to any Bank, any change on
or after the date of this Agreement in any Legal Requirement (including,
without limitation, Regulation D) or the

9
<PAGE> 14
adoption or making on or after such date of any interpretation, directive or
request applying to a class of banks including such Bank under any Legal
Requirements (whether or not having the force of law) by any Governmental
Authority.

Request for Extension of Credit shall mean a request for extension of
credit duly executed by the chief executive officer, chief financial officer or
treasurer of the Borrower, appropriately completed and substantially in the
form of Exhibit A attached hereto.

Smith shall mean Smith International, Inc., a Delaware corporation.

Smith International Facility shall mean the facility or facilities
contemplated by that certain Loan Agreement dated as of March 17, 1994 executed
by and among TCB, as agent, the Banks and Smith.

10
<PAGE> 15
in any balance sheet resulting from revaluation thereof or any write-up in
excess of the cost of such assets acquired and (3) the aggregate of all amounts
appearing on the assets side of any such balance sheet for franchises,
licenses, permits, patents, patent applications, copyrights, trademarks, trade
names, goodwill, treasury stock, experimental or organizational expenses and
other like intangibles. The term "liabilities" shall include, without
limitation, (1) Indebtedness secured by Liens on Property of the Person with
respect to which Tangible Net Worth is being computed, whether or not such
Person is liable for the payment thereof; (2) deferred liabilities, and (3)
Capital Lease Obligations.

Termination Date shall mean the earlier of (a) the Maturity Date or
(b) the date specified by the Agent in accordance with Section 9.1 hereof.

Texas Credit Code shall mean Title 79, Texas Revised Civil Statutes,
1925, as amended.

2. Commitments and Loans.

2.1 Loans. From time to time on or after the Effective Date and
during the Loan Availability Period, each Bank severally agrees, subject to all
of the terms and conditions of this Agreement (including, without limitation,
Sections 5.1 and 5.2 hereof), to make loans under this Section 2.1 to the
Borrower in an aggregate principal amount at any one time outstanding up to but
not exceeding such Bank's Loan Commitment Percentage of $20,000,000. Subject
to the conditions in this Agreement, any such Loan repaid prior to the
Termination Date may be reborrowed pursuant to the terms of this Agreement;
provided, that any and all such Loans shall be due and payable in full at the
end of the Loan Availability Period. The Borrower, the Agent and the Banks
agree that Chapter 15 of the Texas Credit Code shall not apply to this
Agreement, the Notes or any Obligation. The aggregate of all Loans to be made
by the Banks in connection with a particular borrowing shall be equal to
$500,000 or a multiple of $100,000 in excess of $500,000.

11
<PAGE> 16
2.2 Terminations or Reductions of Loan Commitments.

(a) Mandatory. On the Termination Date, all Loan Commitments
shall be terminated in their entirety.

(c) No Reinstatement. Any termination of the Loan Commitments may
not be reinstated without the written approval of the Agent and the Banks.

2.3 Fees.

(a) The Borrower shall pay to the Agent for the account
of each Bank commitment fees for the period from the later of (i) the
Effective Date or (ii) July 21, 1994 to and including the Termination
Date at a rate per annum equal to 1/4 of 1%. Such commitment fees
shall be computed (on the basis of the actual number of days elapsed
in a year composed of 360 days) on each day and shall be based on the
excess of (x) the aggregate amount of each Bank's Loan Commitment for
such day over (y) the aggregate unpaid principal balance of such
Bank's Note on such day. Accrued commitment fees shall be payable on
the Quarterly Dates prior to the Termination Date and on the
Termination Date.

(b) All past due fees payable under this Section shall
bear interest at the Past Due Rate.

2.4 Several Obligations. The failure of any Bank to make any Loan
to be made by it on the date specified therefor shall not relieve any other
Bank of its obligation to make its Loan on such date, but neither the Agent nor
any Bank shall be responsible or liable for the failure of any other Bank to
make a Loan to be made by such other Bank. Notwithstanding anything contained
herein to the contrary, (a) no Bank shall be required to make or maintain Loans
at any time outstanding if as a result the total Obligations to such Bank shall
exceed the lesser of (1) such Bank's Loan Commitment Percentage of all
Obligations and (2) such Bank's Loan Commitment Percentage of $20,000,000 and
(b) if a Bank fails to make a Loan as and when required hereunder, then upon
each subsequent event which would otherwise result in funds being paid to the
defaulting Bank, the amount which would have been paid to the defaulting Bank
shall be divided among the non-defaulting Banks ratably according to their
respective Commitment Percentages until the Obligations of each Bank (including
the defaulting Bank) are equal to such Bank's Commitment Percentage of the
total Obligations.

12
<PAGE> 17
2.5 Notes. The Loans made by each Bank shall be evidenced by a
single note of the Borrower (each, together with all renewals, extensions,
modifications and replacements thereof and substitutions therefor, a "Note,"
collectively, the "Notes") in substantially the form of Exhibit B hereto
payable to the order of such Bank in a principal amount equal to the Loan
Commitment of such Bank and otherwise duly completed. Each Bank is hereby
authorized by the Borrower to endorse on the schedule (or a continuation
thereof) that may be attached to each Note of such Bank, to the extent
applicable, the date, amount, type of and the applicable period of interest for
each Loan made by such Bank to the Borrower hereunder, and the amount of each
payment or prepayment of principal of such Loan received by such Bank,
provided, that any failure by such Bank to make any such endorsement shall not
affect the obligations of the Borrower under such Note or hereunder in respect
of such Loan.

2.6 Use of Proceeds. The proceeds of the Loans shall be used by
the Borrower for general corporate purposes.

3. Borrowings, Payments and Prepayments.

3.1 Borrowings. The Borrower shall give the Agent notice of each
borrowing to be made hereunder as provided in Section 4.3 hereof. Not later
than 3:00 p.m. Houston time on the date specified for each such borrowing
hereunder, each Bank shall make available the amount of the Loan, if any, to be
made by it on such date to the Agent, at its Principal Office, in immediately
available funds, for the account of the Borrower. The amounts so received by
the Agent shall, subject to the terms and conditions of this Agreement, be made
available to the Borrower by depositing or otherwise transferring, in
immediately available funds, such amount to an account designated by the
Borrower or, if a borrowing shall not occur on such date because any condition
precedent herein specified shall not have been met, the Agent shall return the
amounts so received to the respective Banks as soon as practicable; provided,
however, that if and to the extent the Agent fails to return any such amounts
to a Bank on the Business Day following the date for any such borrowing, the
Agent shall pay interest on such unreturned amounts, for each day from such
date to the date such amounts are returned to such Bank, at the Federal Funds
Rate.

3.2 Prepayments.

(b) Interest Payments. Accrued and unpaid interest on the unpaid
principal balance of the Notes shall be due and payable on the Interest Payment
Dates.

13
<PAGE> 18
(c) Payments; Interest Rate Agreement. The Borrower shall pay all
amounts required to be paid under the Interest Rate Agreement, the Notes and
the other Loan Documents as and when due.

4. Payments; Pro Rata Treatment; Computations, Etc.

4.1 Payments.

(a) Except to the extent otherwise provided herein, all payments of
principal, interest and other amounts to be paid by the Borrower hereunder,
under the Notes and under the other Loan Documents shall be made in Dollars, in
immediately available funds, to the Agent at the Principal Office (or in the
case of a successor Agent, at the principal office of such successor Agent in
the United States), not later than noon Houston time on the date on which such
payment shall become due (each such payment made after such time on such due
date to be deemed to have been made on the next succeeding Business Day). The
Agent, or any Bank for whose account any such payment is made, may (but shall
not be obligated to) debit the amount of any such payment which is not made by
such time to any ordinary deposit account of the Borrower with the Agent or
such Bank, as the case may be.

14
<PAGE> 19
account of the Banks pro rata in accordance with the respective unpaid
principal amounts of the Loans held by the Banks.

4.3 Certain Actions, Notices, Etc. Notices to the Agent of any
termination or reduction of Loan Commitments and of borrowings and prepayments
of Loans shall be irrevocable and shall be effective only if received by the
Agent not later than 11:00 a.m. Houston time on the number of Business Days
prior to the date of the relevant termination, reduction, borrowing and/or
prepayment specified below:

Number of
Notice Business Days Prior
------ -------------------
Termination or
Reduction of
Loan Commitments 2

Loan repayment 1

Borrowing at the Base Rate same day
(as defined in the Interest
Rate Agreement)

4.4 Non-Receipt of Funds by the Agent. Unless the Agent shall
have been notified by a Bank or the Borrower (the "Payor") prior to the date on
which such Bank is to make payment to the Agent of the proceeds of a Loan to be
made by it hereunder or the Borrower is to make a payment to the Agent for the
account of one or more of the Banks, as the case may be (such payment being
herein called the "Required Payment"), which notice shall be effective upon
receipt, that the Payor does not intend to make the Required Payment to the
Agent, the Agent may assume that the Required Payment has been made and may, in
reliance upon such assumption (but shall not be required to), make the amount
thereof available to the intended recipient on such date and, if the Payor has
not in fact made the Required Payment to the Agent, the recipient of such
payment shall, on demand, pay to the Agent the amount made available by the
Agent together with interest thereon in respect of the period commencing on the
date such amount was so made available by the Agent until the date the Agent
recovers such amount from

15
<PAGE> 20
the recipient at a rate per annum equal to the Federal Funds Rate for such
period (or, if the recipient is the Borrower, the Stated Rate [as defined in
the Interest Rate Agreement] for a period of five (5) days and the Past Due
Rate thereafter).

4.5 Sharing of Payments, Etc. If a Bank shall obtain payment of
any principal of or interest on any Loan made by it under this Agreement or on
any other Obligation then due to such Bank hereunder through the exercise of
any right of set-off (including, without limitation, any right of setoff or
lien granted under Section 9.2 hereof), banker's lien, counterclaim or similar
right, or otherwise, it shall promptly purchase from the other Banks
participations in the Loans made or other Obligations held by the other Banks
in such amounts, and make such other adjustments from time to time as shall be
equitable to the end that all the Banks shall share the benefit of such payment
(net of any expenses which may be incurred by such Bank in obtaining or
preserving such benefit) pro rata in accordance with the unpaid principal and
interest on the Obligations then due to each of them. To such end all the
Banks shall make appropriate adjustments among themselves (by the resale of
participations sold or otherwise) if such payment is rescinded or must
otherwise be restored. The Borrower agrees, to the fullest extent it may
effectively do so under applicable law, that any Bank so purchasing a
participation in the Loans made or other Obligations held by other Banks may
exercise all rights of set-off, bankers' lien, counterclaim or similar rights
with respect to such participation as fully as if such Bank were a direct
holder of Loans or other Obligations in the amount of such participation.
Nothing contained herein shall require any Bank to exercise any such right or
shall affect the right of any Bank to exercise, and retain the benefits of
exercising, any such right with respect to any other indebtedness or obligation
of the Borrower.

4.6 Replacement of Banks. In the event any Bank shall seek
compensation pursuant to Section 7.9 of this Agreement or pursuant to Section
2.3 of the Interest Rate Agreement, the Borrower may within sixty (60) days
after such event and so long as no Default shall have occurred and be
continuing give notice to such Bank (with copies to the Agent) that it wishes
to seek one or more eligible assignees (which may be one or more of the Banks)
to assume the Loan Commitment of such Bank and to purchase its outstanding
Loans and Notes. Each Bank requesting compensation pursuant to Section 7.9 of
this Agreement or pursuant to Section 2.3 of the Interest Rate Agreement agrees
to sell its Loan Commitment, Loans, Notes, and interest in this Agreement
pursuant to Section 11.6 hereof and the Agent agrees that it will not
unreasonably withhold its consent to any such transfer; provided, that,
concurrent with such transfer, the Borrower will pay, to the extent not paid by
the assignee pursuant to Section 11.6, all fees and amounts (including without
limitation any compensation claimed by such Bank under Section 7.9 of this
Agreement or pursuant to Section 2.3 of the Interest Rate Agreement) due such
Bank hereunder; provided, further, that, prior to any transfer pursuant to this
Section, the Borrower shall have given written notice to the Bank of such
intention and (i) for a period of 10 days after receipt of such notice, the
Bank requesting such compensation may (but shall not be obligated to) rescind
such request (and refund any such compensation already paid by the Borrower) by
written notice to the Borrower (with a copy to the Agent), in which event the
rights of the Borrower under this Section arising out of such request shall
terminate or (ii) for

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<PAGE> 21
a period of 30 days after receipt of such notice, the other Banks may (but
shall not be obligated to) increase their Loan Commitments in order to replace
the affected Bank in lieu of such substitution.

5. Conditions Precedent.

5.1 Initial Loan. The obligation of each Bank to make its initial
Loan hereunder is subject to the following conditions precedent, each of which
shall have been fulfilled or waived to the satisfaction of the Agent:

(1) Corporate Action and Status. The Agent shall have received
from the appropriate Governmental Authorities certified copies of the
Organizational Documents (other than bylaws) of the Borrower and each of the
Guarantors, and evidence satisfactory to the Agent of all action taken by the
Borrower and each of the Guarantors authorizing the execution, delivery and
performance of the Loan Documents and all other documents related to this
Agreement to which it is a party (including, without limitation, certificates
of the secretaries of Borrower and each of the Guarantors setting forth the
resolutions of their respective Boards of Directors authorizing the
transactions contemplated thereby (either by specific description or by general
resolutions) and attaching a copy of their bylaws), together with such
certificates as may be appropriate to demonstrate the qualification and good
standing of and payment of taxes by the Borrower and Smith in the jurisdiction
of its organization and in each other jurisdiction where the failure in which
to qualify could reasonably be expected to have a Material Adverse Effect.

(2) Incumbency. The Borrower and each other Party shall have
delivered to the Agent a certificate in respect of the name and signature of
each of the officers (i) who is authorized to sign on its behalf the applicable
Loan Documents related to any Loan and (ii) who will, until replaced by another
officer or officers duly authorized for that purpose, act as its representative
for the purposes of signing documents and giving notices and other
communications in connection with any Loan. The Agent and each Bank may
conclusively rely on such certificates until they receive notice in writing
from the Borrower or the appropriate Party to the contrary.

(3) Notes. The Agent shall have received the appropriate Notes of
the Borrower for each Bank, duly completed and executed.

(4) Loan Documents. The Borrower and each other Party shall have
duly executed and delivered the Loan Documents to which it is a party (in such
number of copies as the Agent shall have requested). Each such Loan Document
shall be in substantially the form furnished to the Banks prior to their
execution of this Agreement, together with such changes therein as the Agent
may approve.

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<PAGE> 22
(5) UCC Searches. The Agent shall have received Uniform
Commercial Code search reports evidencing that there are no Liens covering any
of the Property of the Borrower other than as permitted under this Agreement.

(6) Fees and Expenses. The Borrower shall have (i) paid to the
Agent and the Banks all unpaid fees in the amounts previously agreed upon in
writing among the Borrower and the Agent and the Banks, (ii) caused Smith to
pay to the Agent and the Banks all unpaid fees relating to the facility
provided for herein in the amounts previously agreed upon in writing among
Smith and the Agent and the Banks and (iii) paid to the Agent all amounts
payable under Section 11.3 hereof, on or before the date of this Agreement,
except for amounts which Agent, in its sole discretion, agrees may be paid at a
later date.

(7) Opinions of Counsel. The Agent shall have received opinions
of (i) Gardere & Wynne, L.L.P., counsel to the Borrower and Smith, (ii) Rich
Chandler, in house counsel to the Borrower, and (iii) in house counsel for
Halliburton, in such forms as the Agent shall reasonably request.

(8) Consents. The Agent shall have received evidence satisfactory
to it that all material consents of each Governmental Authority and of each
other Person, if any, reasonably required in connection with (a) the Loans and
(b) the execution, delivery and performance of this Agreement and the other
Loan Documents have been satisfactorily obtained.

(9) Other Documents. The Agent shall have received such other
documents consistent with the terms of this Agreement and relating to the
transactions contemplated hereby as the Agent may reasonably request.

5.2 All Loans. The obligation of each Bank to make any Loan to be
made by it hereunder is subject to (a) the accuracy, in all material respects,
on the date of such Loan (except to the extent such representation or warranty
expressly relates to an earlier date) of all representations and warranties of
the Borrower and any other Party contained in this Agreement and the other Loan
Documents; (b) to the performance by the Borrower and each other Party of its
respective obligations under the Loan Documents, and (c) the Agent shall have
received the following, all of which shall be duly executed and in Proper Form:
(1) a Request for Extension of Credit as to the Loan no later than 11:00 a.m.
Houston time on the Business Day on which such Request for Extension of Credit
must be given under Section 4.3 hereof and (2) such other documents as the
Agent or any Bank may reasonably require; (d) prior to the making of such Loan,
no fact or condition shall have arisen which has a Material Adverse Effect; (e)
no Default or Event of Default shall have occurred and be continuing; (f) the
making of such Loan shall not be illegal or prohibited by any Legal
Requirement, and (g) the Borrower shall have paid all fees and expenses of the
type described in Section 11.3 hereof and all other fees, which are owed to the
Agent or any other Bank under the Loan Documents and accrued and unpaid through
the date of such Loan.

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<PAGE> 23
6. Representations and Warranties.

To induce the Banks to enter into this Agreement and to make the
Loans, the Borrower represents and warrants (such representations and
warranties to survive any investigation and the making of the Loans) to the
Banks and the Agent as follows:

6.1 Organization. The Borrower and each of its Material
Subsidiaries (a) is duly organized, validly existing and in good standing under
the laws of the state of its organization; (b) has all necessary power and
authority to conduct its business as presently conducted, and (c) is duly
qualified to do business and in good standing in the jurisdiction of its
organization and in all other jurisdictions in which the failure to so qualify
could reasonably be expected to have a Material Adverse Effect.

6.2 Financial Statements. The Borrower has furnished to the Agent
financial statements (including a balance sheet) as to MI Drilling Fluids
Company, a Texas general partnership and predecessor in interest to the
Borrower, and its Subsidiaries which (except as disclosed in writing to the
Agent on or prior to the Effective Date) fairly present, in accordance with
GAAP, the financial condition and the results of operations of the Borrower and
its Subsidiaries as at October 31, 1993. No event, condition or circumstance
has occurred from the date that such financial statements were delivered to
Agent through the date hereof which would cause said financial statements to be
misleading in any material respect. There is no material instrument or
liability which should in accordance with GAAP be reflected in such financial
statements provided to the Agent which is not so reflected (except as disclosed
in writing to the Agent on or prior to the Effective Date).

6.3 Enforceable Obligations; Authorization. The Loan Documents to
which the Borrower is a party are legal, valid and binding obligations of the
Borrower, enforceable in accordance with their respective terms, except as may
be limited by bankruptcy, insolvency, reorganization and other similar laws
affecting creditors' rights generally and by general equitable principles. The
execution, delivery and performance of the Loan Documents (a) have all been
duly authorized by all necessary action; (b) are within the power and authority
of the Borrower; (c) do not and will not contravene or violate any Legal
Requirement applicable to the Borrower or the Organizational Documents of the
Borrower, the contravention or violation of which could reasonably be expected
to have a Material Adverse Effect; (d) do not and will not result in the breach
of, or constitute a default under, any material agreement or instrument by
which the Borrower or any of its Property may be bound or affected, and (e) do
not and will not result in the creation of any Lien upon any Property of the
Borrower, except in favor of the Agent or as expressly contemplated therein.
All necessary permits, registrations and consents for such making and
performance have been obtained.

6.4 Other Debt. Neither the Borrower nor any of its Subsidiaries
is in default in the payment of any other Indebtedness or under any agreement,
mortgage, deed of trust, security

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<PAGE> 24
agreement or lease to which it is a party and which default could reasonably be
expected to have a Material Adverse Effect.

6.5 Litigation. Except as described in Exhibit F hereto, there is
no litigation or administrative proceeding pending or, to the knowledge of the
Borrower, threatened against, nor any outstanding judgment, order or decree
affecting, the Borrower, any of its Subsidiaries before or by any Governmental
Authority which does or could reasonably be expected to have a Material Adverse
Effect. Neither the Borrower nor any of its Subsidiaries is in default with
respect to any judgment, order or decree of any Governmental Authority where
such default could reasonably be expected to have a Material Adverse Effect.

6.6 Title. The Borrower and each of its Material Subsidiaries has
good title to all of its respective material items of Property, free and clear
of all Liens other than those permitted under Section 8.2 hereof.

6.7 Taxes. Each of the Borrower and its Material Subsidiaries has
filed all U.S. Federal income tax returns and all other material tax returns
required to have been filed and paid all taxes shown thereon to be due, except
those for which extensions have been obtained and those which are being
contested in good faith.

6.9 Subsidiaries. The Borrower has no Subsidiaries except as
listed on Exhibit F attached hereto or as disclosed to the Agent in accordance
with Section 8.10 hereof.

6.10 ERISA. With respect to each Plan, the Borrower and each
member of the Controlled Group have fulfilled their obligations, including
obligations under the minimum funding standards of ERISA and the Code and are
in compliance in all material respects with the provisions of ERISA and the
Code. No event has occurred which could result in a liability of the Borrower
or any member of the Controlled Group to the PBGC or a Plan (other than to make
contributions in the ordinary course). Since the effective date of Title IV of
ERISA, there have not been any nor are there now existing any events or
conditions that would cause the Lien provided under Section 4068 of ERISA to
attach to any property of the Borrower or any member of the Controlled Group.
There are no Unfunded Liabilities with respect to any Plan. To Borrower's
knowledge, no "prohibited transaction" has occurred with respect to any Plan
which could reasonably be expected to have a Material Adverse Effect.

6.11 Investment Company Act. Neither the Borrower nor any of its
Subsidiaries is an investment company within the meaning of the Investment
Company Act of 1940, as amended,

20
<PAGE> 25
or, directly or indirectly, controlled by or acting on behalf of any Person
which is an investment company, within the meaning of said Act.

6.12 Public Utility Holding Company Act. Neither the Borrower nor
any of its Subsidiaries is an "affiliate" or a "subsidiary company" of a
"public utility company," or a "holding company," or an "affiliate" or a
"subsidiary company" of a "holding company," as such terms are defined in the
Public Utility Holding Company Act of 1935, as amended.

6.13 Solvency. Neither the Borrower, nor the Borrower and its
Material Subsidiaries, on a consolidated basis, is "insolvent," as such term is
used and defined in (i) the Bankruptcy Code and (ii) the Texas Uniform
Fraudulent Transfer Act, Tex. Bus. & Com. Code Ann. Section 24.001 et seq., as
amended from time to time.

6.14 Fiscal Year. The 1994 fiscal year of the Borrower and its
Subsidiaries will end on December 31, 1994 and each subsequent fiscal year of
the Borrower and its Subsidiaries will end on December 31.

6.15 Compliance. The Borrower and its Subsidiaries are each in
compliance with all Legal Requirements applicable to it, except to the extent
that the failure to comply therewith does or would not, have a Material Adverse
Effect.

6.16 Environmental Matters. The Borrower and its Subsidiaries have
obtained and maintained in effect all Environmental Permits (or the applicable
Person has initiated the necessary steps to transfer the Environmental Permits
into its name or obtain such permits), the failure to obtain which could
reasonably be expected to have a Material Adverse Effect. The Borrower and its
Subsidiaries and their real Properties, business and operations have been and
are in compliance with all applicable Requirements of Environmental Law and
Environmental Permits failure to comply with which could reasonably be expected
to have a Material Adverse Effect. The Borrower and its Subsidiaries and their
real Properties, business and operations are not subject to any (A)
Environmental Claims or (B), to the best of their respective officers'
knowledge (after making reasonable inquiry of the personnel and records of
their respective Corporations), Environmental Liabilities, in either case
direct or contingent, arising from or based upon any act, omission, event,
condition or circumstance occurring or existing on or prior to the date hereof
which could reasonably be expected to have a Material Adverse Effect. None of
the officers of any of the Borrower or any of its Subsidiaries has received any
written notice of any violation or alleged violation of any Requirements of
Environmental Law or Environmental Permit or any Environmental Claim which
could reasonably be expected to have a Material Adverse Effect. The Borrower
does not know of any event or condition with respect to currently enacted
Requirements of Environmental Laws presently scheduled to become effective in
the future which could reasonably be expected to have a Material Adverse Effect
and for which the Borrower has not made good faith provisions in its business
plan and projections of financial performance.

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<PAGE> 26
7. Affirmative Covenants.

The Borrower covenants and agrees with the Agent and the Banks that
prior to the termination of this Agreement it will do, and cause each of its
Subsidiaries to do, and if necessary cause to be done, each and all of the
following:

7.1 Taxes, Existence, Regulations, Property, Etc. At all times
(a) pay when due all taxes and governmental charges of every kind upon it or
against its income, profits or material Property, unless and only to the extent
that the same shall be contested diligently in good faith and reserves deemed
adequate by the independent certified public accounting firm used by the
Borrower to prepare the Borrower's Annual Audited Financial Statements have
been established therefor; (b) do all things necessary to preserve its
existence, qualifications, rights and franchises in all jurisdictions where
such failure to qualify could reasonably be expected to have a Material Adverse
Effect; (c) comply with all applicable Legal Requirements (including without
limitation Requirements of Environmental Law) in respect of the conduct of its
business and the ownership of its Property, the noncompliance with which could
reasonably be expected to have a Material Adverse Effect; and (d) cause its
material Property necessary for its business operations to be protected,
maintained and kept in good repair and make all replacements and additions to
such Property as may be reasonably necessary to conduct its business properly
and efficiently.

7.2 Financial Statements and Information. Furnish to the Agent
three copies of each of the following: (a) as soon as available and in any
event on or before August 31, 1994, audited Annual Financial Statements of the
Borrower for its fiscal year 1993; (b) as soon as available and in any event
within 120 days after the end of each fiscal year of the Borrower, beginning
with the fiscal year 1994, audited Annual Financial Statements of the Borrower;
(c) as soon as available and in any event within 60 days after the end of each
fiscal quarter of each fiscal year of the applicable Person, Quarterly
Financial Statements of the Borrower and its Subsidiaries; (d) concurrently
with the financial statements provided for in Subsections 7.2(a), (b) and (c)
hereof, such schedules, computations and other information, in reasonable
detail, as may be required by the Agent to demonstrate compliance with the
covenants set forth herein or reflecting any non-compliance therewith as of the
applicable date, all certified and signed by the president, chief financial
officer or treasurer of the Borrower (or other authorized officer approved by
the Agent) as correct and complete and, commencing with the quarterly financial
statement prepared as of March 31, 1994, a compliance certificate ("Compliance
Certificate") in the form of Exhibit D hereto, duly executed by such authorized
officer, and (e) such other information relating to the condition (financial or
otherwise), operations, prospects or business of any of the Borrower or any of
its Subsidiaries as from time to time may be reasonably requested by the Agent.

7.3 Financial Tests. The Borrower will have and maintain (on a
consolidated basis):

(b) Debt to Total Capitalization Ratio - a Debt to Total
Capitalization Ratio of not greater than 20%.

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<PAGE> 27
(d) Tangible Net Worth - Tangible Net Worth of not less
than $140,000,000.

7.4 Inspection. At any time following the occurrence and during
the continuance of a Default, permit the Agent upon 3 days' prior notice
(unless a Default or an Event of Default has occurred which is continuing, in
which case no prior notice is required), subject to Section 11.15 hereof, to
inspect its Property, to examine its files, books and records, and make and
take away copies thereof, and to discuss its affairs with its officers and
accountants, all during normal business hours and at such intervals and to such
extent as the Agent may reasonably desire.

7.5 Further Assurances. Promptly execute and deliver, at the
Borrower's expense, any and all other and further instruments which may be
reasonably requested by the Agent to cure any defect in the execution and
delivery of any Loan Document executed by the Borrower in order to effectuate
the transactions contemplated by the Loan Documents.

7.6 Books and Records. Maintain books of record and account in
accordance with GAAP.

7.7 Notice of Certain Matters. Give the Agent prompt written
notice of the following:

(c) any Event of Default or Default, specifying the nature and
extent thereof and the action (if any) which is proposed to be taken with the
respect thereto; and

(d) any development in the business or affairs of the Borrower or
any of its Subsidiaries which has resulted in or which could reasonably be
expected to have a Material Adverse Effect.

The Borrower will also notify the Agent in writing at least 30 days prior to
the date that any Party changes its name or the location of its chief executive
office or principal place of business or the place where it keeps its books and
records.

7.8 Capital Adequacy. Agrees that if any Bank shall have
determined that the adoption after the Effective Date of any applicable law,
rule, regulation or treaty regarding capital adequacy, or any change therein
after the Effective Date, or any change in the

23
<PAGE> 28
interpretation or administration thereof after the Effective Date by any
Governmental Authority, central bank or comparable agency charged with the
interpretation or administration thereof, or compliance by any Bank with any
request or directive after the Effective Date regarding capital adequacy
(whether or not having the force of law) of any such Governmental Authority,
central bank or comparable agency has or would have the effect of reducing the
rate of return on such Bank's capital as a consequence of its obligations
hereunder, under the Notes or under other Obligations held by it to a level
below that which such Bank could have achieved but for such adoption, change or
compliance (taking into consideration such Bank's policies with respect to
capital adequacy) by an amount deemed by such Bank to be material, then from
time to time, upon satisfaction of the conditions precedent set forth in this
Section 7.8, upon demand by such Bank (with a copy to the Agent), the Borrower
(subject to Section 11.7 hereof) shall pay to such Bank such additional amount
or amounts as will compensate such Bank for such reduction. The certificate of
any Bank setting forth such amount or amounts as shall be necessary to
compensate it and the basis thereof (with reasonable supporting data and
calculations) shall be delivered as soon as practicable to the Borrower and
shall be conclusive and binding, absent manifest error. The Borrower shall pay
the amount shown as due on any such certificate within five (5) Business Days
after the delivery of such certificate. In preparing such certificate, a Bank
may employ such assumptions and allocations of costs and expenses as it shall
in good faith deem reasonable and may use any reasonable averaging and
attribution method. The Borrower shall not be obligated to compensate any Bank
pursuant to this Section for any amounts attributable to a period more than
ninety (90) days prior to the giving of notice by such Bank to the Borrower of
its intention to seek compensation under this Section.

7.9 ERISA Information and Compliance. Promptly furnish to the
Agent (i) immediately upon receipt, a copy of any notice of complete or partial
withdrawal liability under Title IV of ERISA and any notice from the PBGC under
Title IV of ERISA of an intent to terminate or appoint a trustee to administer
any Plan, (ii) if requested by the Agent, promptly after the filing thereof
with the United States Secretary of Labor or the PBGC or the Internal Revenue
Service, copies of each annual and other report with respect to each Plan or
any trust created thereunder, (iii) immediately upon becoming aware of the
occurrence of any "reportable event," as such term is defined in Section 4043
of ERISA, for which the disclosure requirements of Regulation Section 2615.3
promulgated by the PBGC have not been waived, or of any "prohibited
transaction," as such term is defined in Section 4975 of the Code (except for
"prohibited transactions" effected by a statutory or administrative exemption),
in connection with any Plan or any trust created thereunder, a written notice
signed by the President or the principal financial officer of the Borrower or
the applicable member of the Controlled Group specifying the nature thereof,
what action the Borrower or the applicable member of the Controlled Group is
taking or proposes to take with respect thereto, and, when known, any action
taken by the PBGC, the Internal Revenue Service or the Department of Labor with
respect thereto, (iv) promptly after the filing or receiving thereof by the
Borrower or any member of the Controlled Group of any notice of the institution
of any proceedings or other actions which may result in the termination of any
Plan, and (v) each request for waiver of the funding standards or extension of
the amortization periods required by Sections 303 and 304 of ERISA or Section
412

24
<PAGE> 29
of the Code promptly after the request is submitted by the Borrower or any
member of the Controlled Group to the Secretary of the Treasury, the Department
of Labor or the Internal Revenue Service, as the case may be. The Borrower
covenants that it shall (1) make contributions to each Plan in a timely manner
and in an amount sufficient to comply with its contribution obligations under
such Plan and the minimum funding standards requirements of ERISA; (2) prepare
and file in a timely manner all notices and reports required under the terms of
ERISA including but not limited to annual reports; and (3) pay in a timely
manner all required PBGC premiums.

8. Negative Covenants.

The Borrower covenants and agrees with the Agent and the Banks that
prior to the termination of this Agreement it will not, and will not suffer or
permit any of its Subsidiaries to, do any of the following:

(a) Borrowed Money Indebtedness of the Borrower and its
Subsidiaries outstanding on the Effective Date and described on
Exhibit G hereto or disclosed to the Agent in the financial statements
delivered on or prior to the Effective Date pursuant to Section 7.2
hereof;

(b) Borrowed Money Indebtedness evidenced by the Notes;

(d) Borrowed Money Indebtedness of Borrower owing to any
Subsidiary, provided such Borrowed Money Indebtedness is expressly
subordinated, in a manner reasonably acceptable to the Agent, to the
payment in full of all Obligations of Borrower under the Loan
Documents;

(e) contingent liabilities incurred by the Borrower with
respect to performance letters of credit and bid and performance bonds
required by the Borrower in support of contracts entered into by
Borrower in the ordinary course of its business; and

(f) other Borrowed Money Indebtedness of the Borrower or
any of its Subsidiaries that does not cause the Borrower to be in
default under the provisions of Section 7.3 hereof.

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<PAGE> 30
8.2 Liens. Create or suffer to exist any Lien upon any of its
Property now owned or hereafter acquired, or acquire any Property upon any
conditional sale or other title retention device or arrangement or any purchase
money security agreement; or in any manner directly or indirectly sell, assign,
pledge or otherwise transfer any of its Accounts or General Intangibles;
provided, however, that the Borrower or any of its Subsidiaries may create or
suffer to exist: (a) artisans' or mechanics' Liens arising in the ordinary
course of business, and Liens for taxes, but only to the extent that payment
thereof shall not at the time be due or if due, the payment thereof is being
diligently contested in good faith and adequate reserves, if required by GAAP,
have been set aside therefor; (b) Liens in effect on the Effective Date and
described on Exhibit H hereto or disclosed to the Agent in the financial
statements delivered on or prior to the Effective Date pursuant to Section 7.2
hereof, provided that neither the Indebtedness secured thereby nor the Property
covered thereby shall increase after the Effective Date without the prior
written consent of the Majority Banks; (c) normal encumbrances and restrictions
on title which do not secure Borrowed Money Indebtedness and which do not have
a Material Adverse Effect; (d) Liens in favor of the Agent or any Bank under
the Loan Documents; (e) Liens incurred or deposits made in the ordinary course
of business (i) in connection with workmen's compensation, unemployment
insurance, social security and other like laws, or (ii) to secure insurance in
the ordinary course of business, the performance of bids, tenders, contracts,
leases, licenses, statutory obligations, surety, appeal and performance bonds
and other similar obligations incurred in the ordinary course of business, not,
in any of the cases specified in this clause (ii), incurred in connection with
the borrowing of money, the obtaining of advances or the payment of the
deferred purchase price of Property; (f) attachments, judgments and other
similar Liens arising in connection with the court proceedings, provided that
the execution and enforcement of such Liens are effectively stayed and the
claims secured thereby are being actively contested in good faith with adequate
reserves made therefor in accordance with GAAP; (g) Liens imposed by law, such
as carriers', warehousemen's, mechanics', materialmen's and vendors' liens,
incurred in good faith in the ordinary course of business and securing
obligations which are not yet due or which are being contested in good faith by
appropriate proceedings if adequate reserves with respect thereto are
maintained in accordance with GAAP; (h) zoning restrictions, easements,
licenses, reservations, provisions, covenants, conditions, waivers, and
restrictions on the use of Property, and which do not in any case singly or in
the aggregate materially impair the present use or value of the Property
subject to any such restriction or materially interfere with the ordinary
conduct of the business of the Borrower or any of its Subsidiaries; (i) Liens
securing the Indebtedness permitted under Section 8.1(f) covering Property
owned by non-U.S. Subsidiaries of the Borrower obligated with respect to such
Indebtedness, and (j) extensions, renewals and replacements of Liens referred
to in paragraphs (a) through (i) of this Section; provided that any such
extension, renewal or replacement Lien shall be limited to the Property or
assets covered by the Lien extended, renewed or replaced and that the
Indebtedness secured by any such extension, renewal or replacement Lien shall
be in an amount not greater than the amount of the Indebtedness secured by the
Lien extended, renewed or replaced.

8.3 Contingent Liabilities. Directly or indirectly guarantee the
performance or payment of, or purchase or agree to purchase, or assume or
contingently agree to become or be

26
<PAGE> 31
secondarily liable in respect of, any obligation or liability of any other
Person except for (a) the endorsement of checks or other negotiable instruments
in the ordinary course of business; (b) obligations disclosed to the Agent in
the financial statements delivered on or prior to the Effective Date pursuant
to Section 7.2 hereof (but not increases of such obligations after the
Effective Date), and (c) those liabilities permitted under Section 8.1 hereof.

8.4 Mergers, Consolidations and Dispositions of Assets. In any
single transaction or series of transactions, directly or indirectly: (a)
liquidate or dissolve (provided that such restriction shall not apply to
Subsidiaries of the Borrower which are not Material Subsidiaries); (b) be a
party to any merger or consolidation unless and so long as (i) no Default or
Event of Default has occurred that is then continuing, (ii) immediately
thereafter and giving effect thereto, no event will occur and be continuing
which constitutes a Default, (iii) the Borrower or the applicable Subsidiary of
the Borrower is the surviving Person; (iv) the surviving Person ratifies and
assumes each Loan Document to which any party to such merger was a party, and
(v) the Agent is given at least 30 days' prior notice of such merger or
consolidation; (c) sell, convey or lease all or any substantial part of its
assets, except for sales in the ordinary course of business and except for
disposal of obsolete equipment in the ordinary course of business, or (d)
transfer or otherwise dispose of any shares of capital stock or other indicia
of equity interests of any Material Subsidiary of the Borrower or any
Indebtedness of a Material Subsidiary of the Borrower, or permit any such
Material Subsidiary to issue any additional shares of capital stock or other
indicia of equity interests other than to the Borrower.

8.5 Nature of Business. Engage in any business if, as a result,
the general nature of the business, taken on a consolidated basis, which would
then be engaged in by the Borrower and its Subsidiaries would be substantially
changed from the general nature of the business engaged in by the Borrower and
its Subsidiaries on the Effective Date.

8.6 Transactions with Related Parties. Enter into any material
transaction or agreement with any officer, director or holder of any
outstanding capital stock of the Borrower or any of its Subsidiaries (or any
Affiliate of any such Person) unless the same is upon terms no less favorable
than those obtainable from wholly unrelated sources.

8.7 Investments. Make any Investment, or make any commitment to
make any such Investment, except Permitted Investments.

8.8 Organizational Documents. Amend, modify, restate or
supplement any of its Organizational Documents if such action could reasonably
be expected to have a Material Adverse Effect unless such action shall be
consented to in writing by the Agent.

8.9 No Restriction on Payment of Dividends. Permit any Subsidiary
of the Borrower to enter into any agreement which prohibits or restricts the
ability of such Subsidiary to distribute dividends to the Borrower.

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9. Defaults.

9.1 Events of Default. If any one or more of the following events
(herein called "Events of Default") shall occur, then the Agent may (and at the
direction of the Majority Banks, shall) do any or all of the following: (1)
without notice to the Borrower, declare the Loan Commitments terminated
(whereupon the Loan Commitments shall be terminated) and/or accelerate the
Termination Date to a date as early as the date of termination of the Loan
Commitments; (2) declare the principal amount then outstanding of and the
unpaid accrued interest on the Loans and all fees and all other amounts payable
hereunder, under the Notes and under the other Loan Documents to be forthwith
due and payable, whereupon such amounts shall be and become immediately due and
payable, without notice (including, without limitation, notice of acceleration
and notice of intent to accelerate), presentment, demand, protest or other
formalities of any kind, all of which are hereby expressly waived by the
Borrower; provided that in the case of the occurrence of an Event of Default
with respect to the Borrower, any of its Subsidiaries or either the Guarantors
referred to in clause (f) or (g) of this Section 9.1, the Loan Commitments
shall be automatically terminated and the principal amount then outstanding of
and unpaid accrued interest on the Loans and all fees and all other amounts
payable hereunder, under the Notes and under the other Loan Documents shall be
and become automatically and immediately due and payable, without notice
(including, without limitation, notice of acceleration and notice of intent to
accelerate), presentment, demand, protest or other formalities of any kind, all
of which are hereby expressly waived by the Borrower, and (3) exercise any or
other rights and remedies available to the Agent or any of the Banks under the
Loan Documents, at law or in equity:

(a) Payments - (i) the Borrower or any other Party shall
fail to make any payment or required prepayment of any installment of
principal on the Loans payable under the Notes, this Agreement or the
other Loan Documents when due and (except in the case of acceleration
of maturity) such failure to pay continues unremedied for a period of
five days or (ii) the Borrower or any other Party fails to make any
payment or required prepayment of interest with respect to the Loans
or the payment of any other fee or amount under the Notes, this
Agreement or the other Loan Documents when due and (except in the case
of acceleration of maturity) such failure to pay continues unremedied
for a period of five days; or

(b) Other Obligations - the Borrower or any Material
Subsidiary or the Guarantors shall default in the payment when due of
any principal of or interest on any Borrowed Money Indebtedness having
an outstanding principal amount of at least (i) $2,500,000 (other than
the Loans) as to the Borrower or Smith and (ii) $5,000,000 as to
Halliburton, and such default shall continue beyond any applicable
period of grace; or any event or condition shall occur which results
in the acceleration of the maturity of any such Borrowed Money
Indebtedness or enables (or, with the giving of notice or lapse of
time or both, would enable) the holder of any such Borrowed Money
Indebtedness or

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any Person acting on such holder's behalf to accelerate the maturity
thereof and such event or condition shall not be cured within any
applicable period of grace; or

(d) Affirmative Covenants - (i) default shall be made in
the due observance or performance of any of the covenants or
agreements contained in Sections 7.2, 7.3, 7.4, 7.7 or 7.9 hereof or
(ii) default is made in the due observance or performance of any of
the other covenants and agreements contained in Section 7 hereof or any
other affirmative covenant of the Borrower or any other Party
contained in this Agreement or any other Loan Document and such
default continues unremedied for a period of 30 days after (x) notice
thereof is given by the Agent to the Borrower or (y) such default
otherwise becomes known to the Borrower, whichever is earlier; or

(g) Voluntary Petitions or Consents - the Borrower or any
Material Subsidiary or either of the Guarantors commences a voluntary
case or other proceeding or order seeking liquidation, reorganization,
arrangement, insolvency, readjustment of debt, dissolution,
liquidation or other relief with respect to itself or its debt or
other liabilities under any bankruptcy, insolvency or other similar
law now or hereafter in effect or

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seeking the appointment of a trustee, receiver, liquidator, custodian
or other similar official of it or any substantial part of its
property, or consents to any such relief or to the appointment of or
taking possession by any such official in an involuntary case or other
proceeding commenced against it, or fails generally to, or cannot, pay
its debts generally as they become due or takes any corporate action
to authorize or effect any of the foregoing; or

(i) Undischarged Judgments - a final judgment or
judgments for the payment of money exceeding, in the aggregate, (i)
$2,500,000 as to the Borrower or Smith and (ii) $5,000,000 as to
Halliburton, is rendered by any court or other governmental body
against the Borrower or any Material Subsidiary or either of the
Guarantors and the Borrower or such Material Subsidiary or such
Guarantors does not discharge the same or provide for its discharge in
accordance with its terms, or procure a stay of execution thereof
within 45 days from the date of entry thereof; or

(k) Concealment - the Borrower or any Material Subsidiary
or either of the Guarantors, individually or on a consolidated basis,
shall have concealed, removed, or permitted to be concealed or
removed, any part of its Property, with intent to hinder, delay or
defraud its creditors or any of them, or made or suffered a transfer
of any of its Property which may be fraudulent under any bankruptcy,
fraudulent conveyance, insolvency or similar law; or shall have made
any transfer of its Property to or for the benefit of a creditor at a
time when other creditors similarly situated have not been paid; or

(l) Ownership Change or Encumbrance (Borrower) - any
Person other than the Guarantors (or a wholly owned Subsidiary of
either of the Guarantors) shall own any capital stock of or other
equity interest in the Borrower or acquire any Lien on any of the
capital stock or other equity interest in the Borrower.

9.2 Right of Setoff. Upon the occurrence and during the
continuance of any Event of Default, the Banks each are hereby authorized at
any time and from time to time, to the

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extent permitted by applicable law, without notice to the Borrower (any such
notice being expressly waived by the Borrower), to setoff and apply any and all
deposits (general or special, time or demand, provisional or final (but
excluding the funds held in accounts clearly designated as escrow or trust
accounts held by the Borrower for the benefit of Persons which are not
wholly-owned Subsidiaries of the Borrower), whether or not such setoff results
in any loss of interest or other penalty, and including without limitation all
certificates of deposit) at any time held, and any other funds or property at
any time held, and other Indebtedness at any time owing by such Bank to or for
the credit or the account of the Borrower against any and all of the
Obligations irrespective of whether or not such Bank or the Agent will have
made any demand under this Agreement, the Notes or any other Loan Document.
The Borrower also hereby grants to each of the Banks a security interest in and
hereby transfers, assigns, sets over, and conveys to each of the Banks, as
security for payment of all Loans, all such deposits, funds or property of the
Borrower, or Indebtedness of any Bank to the Borrower. Should the right of any
Bank to realize funds in any manner set forth hereinabove be challenged and any
application of such funds be reversed, whether by court order or otherwise, the
Banks shall make restitution or refund to the Borrower pro rata in accordance
with their Loan Commitments. Each Bank agrees to promptly notify the Borrower
and the Agent after any such setoff and application, provided that the failure
to give such notice will not affect the validity of such setoff and
application. The rights of the Agent and the Banks under this Section are in
addition to other rights and remedies (including without limitation other
rights of setoff) which the Agent or the Banks may have. This Section is
subject to the terms and provisions of Sections 4.5 and 11.7 hereof.

9.3 Remedies Cumulative. No remedy, right or power conferred upon
the Agent or any Bank is intended to be exclusive of any other remedy, right or
power given hereunder or now or hereafter existing at law, in equity, or
otherwise, and all such remedies, rights and powers shall be cumulative.

10. The Agent.

10.1 Appointment, Powers and Immunities. Each Bank hereby
irrevocably appoints and authorizes the Agent to act as its agent hereunder and
under the other Loan Documents with such powers as are specifically delegated
to the Agent by the terms hereof and thereof, together with such other powers
as are reasonably incidental thereto. The Agent (the "Agent" as used in this
Section 10 shall include reference to its Affiliates and its own and its
Affiliates' respective officers, shareholders, directors, employees and agents)
(a) shall not have any duties or responsibilities except those expressly set
forth in this Agreement and the other Loan Documents, and shall not by reason
of this Agreement or any other Loan Document be a trustee or fiduciary for any
Bank; (b) shall not be responsible to any Bank for any recitals, statements,
representations or warranties contained in this Agreement or any other Loan
Document, or in any certificate or other document referred to or provided for
in, or received by any of them under, this Agreement or any other Loan
Document, or for the value, validity, effectiveness, genuineness,
enforceability, execution, filing, registration, collectibility, recording,
perfection,

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<PAGE> 36
existence or sufficiency of this Agreement or any other Loan Document or any
other document referred to or provided for herein or therein or any property
covered thereby or for any failure by any Party or any other Person to perform
any of its obligations hereunder or thereunder, and shall not have any duty to
inquire into or pass upon any of the foregoing matters; (c) shall not be
required to initiate or conduct any litigation or collection proceedings
hereunder or under any other Loan Document except to the extent requested by
the Majority Banks; (d) shall not be responsible for any mistake of law or fact
or any action taken or omitted to be taken by it hereunder or under any other
Loan Document or any other document or instrument referred to or provided for
herein or therein or in connection herewith or therewith, including, without
limitation, pursuant to its own negligence, except for its own gross negligence
or willful misconduct; (e) shall not be bound by or obliged to recognize any
agreement among or between the Borrower and any Bank (other than this Agreement
and the other Loan Documents), regardless of whether the Agent has knowledge of
the existence of any such agreement or the terms and provisions thereof; (f)
shall not be charged with notice or knowledge of any fact or information not
herein set out or provided to the Agent in accordance with the terms of this
Agreement or any other Loan Document; (g) shall not be responsible for any
delay, error, omission or default of any mail, telegraph, cable or wireless
agency or operator, and (h) shall not be responsible for the acts or edicts of
any Governmental Authority. The Agent may employ agents and attorneys-in-fact
and shall not be responsible for the negligence or misconduct of any such
agents or attorneys-in-fact selected by it with reasonable care. In any
foreclosure proceeding concerning any Collateral, each holder of an Obligation
if bidding for its own account or for its own account and the accounts of other
Banks is prohibited from including in the amount of its bid an amount to be
applied as a credit against the Obligations held by it or the Obligations held
by the other Banks; instead, such holder must bid in cash only. However, in
any such foreclosure proceeding, the Agent may (but shall not be obligated to)
submit a bid for all Banks (including itself) in the form of a credit against
the Obligations, and the Agent or its designee may (but shall not be obligated
to) accept title to such collateral for and on behalf of all Banks.

10.2 Reliance. The Agent shall be entitled to rely upon any
certification, notice or other communication (including any thereof by
telephone, telex, telegram or cable) believed by it to be genuine and correct
and to have been signed or sent by or on behalf of the proper Person or
Persons, and upon advice and statements of legal counsel (which may be counsel
for the Borrower), independent accountants and other experts selected by the
Agent. The Agent shall not be required in any way to determine the identity or
authority of any Person delivering or executing the same. As to any matters
not expressly provided for by this Agreement or any other Loan Document, the
Agent shall in all cases be fully protected in acting, or in refraining from
acting, hereunder and thereunder in accordance with instructions of the
Majority Banks, and any action taken or failure to act pursuant thereto shall
be binding on all of the Banks. Pursuant to instructions of the Majority
Banks, the Agent shall have the authority to execute releases of the Liens
covering any Collateral on behalf of the Banks without the joinder of any Bank.
If any order, writ, judgment or decree shall be made or entered by any court
affecting the rights, duties and obligations of the Agent under this Agreement
or any other Loan

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<PAGE> 37
Document, then and in any of such events the Agent is authorized, in its sole
discretion, to rely upon and comply with such order, writ, judgment or decree
which it is advised by legal counsel of its own choosing is binding upon it
under the terms of this Agreement, the relevant Loan Document or otherwise; and
if the Agent complies with any such order, writ, judgment or decree, then it
shall not be liable to any Bank or to any other Person by reason of such
compliance even though such order, writ, judgment or decree may be subsequently
reversed, modified, annulled, set aside or vacated.

10.3 Defaults. The Agent shall not be deemed to have knowledge of
the occurrence of a Default (other than the non-payment of principal of or
interest on Loans) unless it has received notice from a Bank or the Borrower
specifying such Default and stating that such notice is a "Notice of Default."
In the event that the Agent receives such a Notice of Default, the Agent shall
give prompt notice thereof to the Banks (and shall give each Bank prompt notice
of each such non-payment). The Agent shall (subject to Section 10.7 hereof)
take such action with respect to such Notice of Default as shall be directed by
the Majority Banks and within its rights under the Loan Documents and at law or
in equity, provided that, unless and until the Agent shall have received such
directions, the Agent may (but shall not be obligated to) take such action, or
refrain from taking such action, permitted hereby with respect to such Notice
of Default as it shall deem advisable in the best interests of the Banks and
within its rights under the Loan Documents, at law or in equity.

10.4 Rights as a Bank. With respect to its Loan Commitments and
the Loans made by it, TCB in its capacity as a Bank hereunder shall have the
same rights and powers hereunder as any other Bank and may exercise the same as
though it were not acting in its agency capacity, and the term "Bank" or
"Banks" shall, unless the context otherwise indicates, include the Agent in its
individual capacity. The Agent may (without having to account therefor to any
Bank) accept deposits from, lend money to and generally engage in any kind of
banking, trust, letter of credit, agency or other business with the Borrower
(and any of its Affiliates) as if it were not acting as the Agent, and the
Agent may accept fees and other consideration from the Borrower (in addition to
the fees heretofore agreed to between the Borrower and the Agent) for services
in connection with this Agreement or otherwise without having to account for
the same to the Banks.

10.5 Indemnification. Each Bank agrees to indemnify the Agent and
its directors, officers, employees and agents (to the extent not reimbursed
under Section 11.3 or Section 11.4 hereof, but without limiting the obligations
of the Borrower under said Sections 11.3 and 11.4), ratably in accordance with
the Banks' respective Loan Commitments, for any and all liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements of any kind and nature whatsoever (INCLUDING BUT NOT
LIMITED TO, THE CONSEQUENCES OF THE NEGLIGENCE [BUT NOT THE GROSS NEGLIGENCE OR
WILLFUL MISCONDUCT] OF THE AGENT) which may be imposed on, incurred by or
asserted against the Agent in any way relating to or arising out of this
Agreement or any other Loan Document or any other documents contemplated by or
referred to herein or therein or the transactions contemplated hereby or

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thereby (excluding, unless a Default has occurred and is continuing, normal
administrative costs and expenses incident to the performance of its agency
duties hereunder) or the enforcement of any of the terms hereof or thereof or
of any such other documents, provided that no Bank shall be liable for any of
the foregoing to the extent they arise from the gross negligence or willful
misconduct of the party to be indemnified. The obligations of the Banks under
this Section 10.5 shall survive the termination of this Agreement and the
repayment of the Obligations.

10.6 Non-Reliance on Agent and Other Banks. Each Bank agrees that
it has received current financial information with respect to the Borrower and
that it has, independently and without reliance on the Agent or any other Bank
and based on such documents and information as it has deemed appropriate, made
its own credit analysis of the Borrower and decision to enter into this
Agreement and that it will, independently and without reliance upon the Agent
or any other Bank, and based on such documents and information as it shall deem
appropriate at the time, continue to make its own analysis and decisions in
taking or not taking action under this Agreement or any of the other Loan
Documents. The Agent shall not be required to keep itself informed as to the
performance or observance by any Party of this Agreement or any of the other
Loan Documents or any other document referred to or provided for herein or
therein or to inspect the properties or books of the Borrower or any Party.
Except for notices, reports and other documents and information expressly
required to be furnished to the Banks by the Agent hereunder or under the other
Loan Documents, the Agent shall not have any duty or responsibility to provide
any Bank with any credit or other information concerning the affairs, financial
condition or business of the Borrower or any other Party (or any of their
affiliates) which may come into the possession of the Agent.

10.7 Failure to Act. Except for action expressly required of the
Agent hereunder or under the other Loan Documents, the Agent shall in all cases
be fully justified in failing or refusing to act hereunder and thereunder
unless it shall receive further assurances to its satisfaction by the Banks of
their indemnification obligations under Section 10.5 hereof against any and all
liability and expense which may be incurred by it by reason of taking or
continuing to take any such action.

10.8 Resignation or Removal of Agent. Subject to the appointment
and acceptance of a successor Agent as provided below, the Agent may resign at
any time by giving notice thereof to the Banks and the Borrower, and the Agent
may be removed at any time with or without cause by the Majority Banks. Upon
any such resignation or removal, (i) the Majority Banks without the consent of
the Borrower shall have the right to appoint a successor Agent so long as such
successor Agent is also a Bank at the time of such appointment and (ii) the
Majority Banks shall have the right to appoint a successor Agent that is not a
Bank at the time of such appointment so long as the Borrower consents to such
appointment (which consent shall not be unreasonably withheld). If no
successor Agent shall have been so appointed by the Majority Banks and accepted
such appointment within 30 days after the retiring Agent's giving of notice of
resignation or the Majority Banks' removal of the retiring Agent, then the
retiring Agent may, on behalf of the Banks, appoint a successor Agent, which
shall be a bank which has an office

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in the United States and a combined capital and surplus of at least
$50,000,000. Upon appointment of a successor Agent, such successor Agent shall
thereupon succeed to and become vested with all the rights, powers, privileges
and duties of the retiring Agent, and the retiring Agent shall be discharged
from its duties and obligations hereunder and under any other Loan Documents.
Such successor Agent shall promptly specify by notice to the Borrower its
Principal Office referred to in Section 3.1 and Section 4 hereof. After any
retiring Agent's resignation or removal hereunder as Agent, the provisions of
this Section 10 shall continue in effect for its benefit in respect of any
actions taken or omitted to be taken by it while it was acting as the Agent.

11. Miscellaneous.

11.2 Notices. All notices and other communications provided for
herein (including, without limitation, any modifications of, or waivers or
consents under, this Agreement) shall be given or made by telegraph, telecopy
(confirmed by mail), cable or other writing and telecopied, telegraphed,
cabled, mailed or delivered to the intended recipient at the "Address for
Notices" specified below its name on the signature pages hereof (or provided
for in an Assignment and Acceptance); or, as to any party, at such other
address as shall be designated by such party in a notice to the Borrower and
the Agent given in accordance with this Section 11.2. Except as otherwise
provided in this Agreement, all such notices or communications shall be deemed
to have been duly given when (i) transmitted by telecopier, delivered to the
telegraph or cable office, (ii) personally delivered (iii) one Business Day
after deposit with an overnight mail or delivery service, postage prepaid or
(iv) three Business Days' after deposit in a receptacle maintained by the
United States Postal Service, postage prepaid, registered or certified mail,
return receipt requested, in each case given or addressed as aforesaid.

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11.3 Expenses, Etc. Whether or not any Loan is ever made, the
Borrower shall pay or reimburse on demand (a) the Agent for paying the
reasonable fees and reasonable out-of-pocket expenses of legal counsel to the
Agent in connection with the preparation, negotiation, execution and delivery
of this Agreement (including the exhibits and schedules hereto) and the other
Loan Documents and the making of the Loans hereunder, and any modification,
supplement or waiver of any of the terms of this Agreement or any other Loan
Document; (b) the Agent for reasonable out-of-pocket expenses incurred in
connection with the preparation, documentation, administration and syndication
of the Loans or any of the Loan Documents (including, without limitation, the
advertising, marketing, printing, publicity, duplicating, mailing and similar
expenses) of the Loans; (c) the Agent or any Bank for paying all transfer,
stamp, documentary or other similar taxes, assessments or charges levied by any
governmental or revenue authority in respect of this Agreement or any other
Loan Document or any other document referred to herein or therein; (d) the
Agent or any Bank for paying all costs, expenses, taxes, assessments and other
charges incurred in connection with any filing, registration, recording or
perfection of any security interest contemplated by this Agreement, any other
Loan Document or any document referred to herein or therein, and (e) any Bank
or the Agent for paying all amounts reasonably expended, advanced or incurred
by such Bank or Agent upon the occurrence and during the continuance of an
Event of Default to satisfy any obligation of the Borrower under this Agreement
or any other Loan Document, to protect the Collateral, to collect the
Obligations or to enforce, protect, preserve or defend the rights of such Bank
or Agent under this Agreement or any other Loan Document, including, without
limitation, fees and expenses incurred in connection with such Bank's or
Agent's participation as a member of a creditor's committee in a case commenced
under the Bankruptcy Code or other similar law, fees and expenses incurred in
connection with lifting the automatic stay prescribed in Section 362 of the
Bankruptcy Code and fees and expenses incurred in connection with any action
pursuant to Section 1129 of the Bankruptcy Code and all other reasonable and
customary out-of-pocket expenses incurred by such Bank or Agent in connection
with such matters, together with interest thereon at the Past Due Rate on each
such amount until the date of reimbursement to such Bank or Agent.

11.4 Indemnification. The Borrower shall indemnify each of the
Agent, the Banks, and each affiliate thereof and their respective directors,
officers, employees and agents from, and hold each of them harmless against,
any and all losses, liabilities, claims or damages to which any of them may
become subject (REGARDLESS OF WHETHER CAUSED IN WHOLE OR IN PART BY THE SIMPLE
[BUT NOT GROSS] NEGLIGENCE OF THE PERSON INDEMNIFIED), insofar as such losses,
liabilities, claims or damages arise out of or result from any (i) actual or
proposed use by the Borrower of the proceeds of any extension of credit by any
Bank hereunder; (ii) breach by the Borrower of this Agreement or any other Loan
Document or the breach by any Party of any Loan Document to which it is a
party; (iii) violation by the Borrower or any other Party of any Legal
Requirement; (iv) investigation, litigation or other proceeding relating to any
of the foregoing, and the Borrower shall reimburse the Agent, each Bank, and
each Affiliate thereof and their respective directors, officers, employees and
agents, upon demand for any reasonable expenses (including reasonable legal
fees) incurred in connection with any such investigation or

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proceeding, or (v) taxes (excluding income taxes and franchise taxes) payable
or ruled payable by any Governmental Authority in respect of the Obligations or
any Loan Document, together with interest and penalties, if any; provided,
however, that the Borrower shall not have any obligations pursuant to this
Section with respect to any losses, liabilities, claims, damages or expenses
incurred by the Person seeking indemnification by reason of the gross
negligence or willful misconduct of that Person. Nothing in this Section is
intended to limit the obligations of the Borrower under any other provision of
this Agreement.

11.5 Amendments, Etc. No amendment or modification of this
Agreement, the Notes or any other Loan Document to which it is a party shall in
any event be effective against the Borrower unless the same shall be agreed or
consented to in writing by the Borrower. No amendment, modification or waiver
of any provision of this Agreement, the Notes or any other Loan Document to
which it is a party, nor any consent to any departure by the Borrower
therefrom, shall in any event be effective against the Banks unless the same
shall be agreed or consented to in writing by the Majority Banks, and each such
waiver or consent shall be effective only in the specific instance and for the
specific purpose for which given; provided, that no amendment, modification,
waiver or consent shall, unless in writing and signed by each Bank affected
thereby, do any of the following: (a) increase any Loan Commitment of any of
the Banks or subject the Banks to any additional obligations; (b) reduce the
principal of, or interest on, any Loan or any fee hereunder; (c) postpone or
extend the Maturity Date, the Termination Date, the Loan Availability Period or
any scheduled date fixed for any payment of principal of, or interest on, any
Loan or any fee hereunder or waive any Event of Default described in Section
9.1(a) hereof; (d) change the percentage of any of the Loan Commitments or of
the aggregate unpaid principal amount of any of the Loans, or the number of
Banks, which shall be required for the Banks or any of them to take any action
under this Agreement; (e) change any provision contained in Sections 7.9, 11.3
or 11.4 hereof or this Section 11.5, or (f) release the liability of either
Guarantor under either Guaranty. Notwithstanding anything in this Section 11.5
to the contrary, no amendment, modification, waiver or consent shall be made
with respect to Section 10 without the consent of the Agent to the extent it
affects the Agent.

11.6 Successors and Assigns.

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<PAGE> 42
one or more participations to any Person shall not be relieved by virtue of
such participation from any of its obligations to Borrower under this Agreement
relating to the Loans. In the event any Bank shall sell any participation,
such Bank shall retain the sole right and responsibility to enforce the
obligations of the Borrower relating to the Loans, including, without
limitation, the right to approve any amendment, modification or waiver of any
provision of this Agreement other than amendments, modifications or waivers
with respect to (i) any fees payable hereunder to the Banks, (ii) the amount of
principal or the rate of interest payable on, or the dates fixed for the
scheduled repayment of principal of, the Loans and (iii) the release of the
Liens on all or substantially all of the Collateral.

(b) Each Bank may assign to one or more Banks or any other Person
all or a portion of its interests, rights and obligations under this Agreement;
provided, however, that (i) the aggregate amount of the Loan Commitments of the
assigning Bank subject to each such assignment shall in no event be less than
$2,000,000; (ii) other than in the case of an assignment to another Bank (that
is, at the time of the assignment, a party hereto) or to an Affiliate of such
Bank or to a Federal Reserve Bank, the Agent and the Borrower must each give
its prior written consent, which consents shall not be unreasonably withheld;
(iii) each such assignment must be matched by a like assignment between the
same parties under the Smith International Facility, and (iv) the parties to
each such assignment shall execute and deliver to the Agent, for its acceptance
an Assignment and Acceptance in the form of Exhibit C hereto (each an
"Assignment and Acceptance") with blanks appropriately completed, together with
any Note or Notes subject to such assignment. The parties to such assignment
shall also deliver to the Agent a non-refundable assignment fee of $1,000 with
respect to each such assignment. Upon such execution, delivery and acceptance,
from and after the effective date specified in each Assignment and Acceptance,
(A) the assignee thereunder shall be a party hereto and, to the extent provided
in such Assignment and Acceptance, have the rights and obligations of a Bank
hereunder and (B) the Bank thereunder shall, to the extent provided in such
Assignment and Acceptance, be released from its obligations under this
Agreement (and, in the case of an Assignment and Acceptance covering all or the
remaining portion of an assigning Bank's rights and obligations under this
Agreement, such Bank shall cease to be a party hereto).

(c) By executing and delivering an Assignment and Acceptance, the
Bank assignor thereunder and the assignee thereunder confirm to and agree with
each other and the other parties hereto as follows: (i) other than the
representation and warranty that it is the legal and beneficial owner of the
interest being assigned thereby free and clear of any adverse claim, such Bank
assignor makes no representation or warranty and assumes no responsibility with
respect to any statements, warranties or representations made in or in
connection with this Agreement or any of the other Loan Documents or the
execution, legality, validity, enforceability, genuineness, sufficiency or
value of this Agreement or any of the other Loan Documents or any other
instrument or document furnished pursuant thereto; (ii) such Bank assignor
makes no representation or warranty and assumes no responsibility with respect
to the financial condition of the Borrower or the performance or observance by
the Borrower of any of its obligations under this Agreement or any of the other
Loan Documents or any other instrument or document

38
<PAGE> 43
furnished pursuant hereto; (iii) such assignee confirms that it has received a
copy of this Agreement, together with copies of the financial statements
referred to in Section 6.2 hereof and such other documents and information as
it has deemed appropriate to make its own credit analysis and decision to enter
into such Assignment and Acceptance; (iv) such assignee will, independently and
without reliance upon the Agent, such Bank assignor or any other Bank and based
on such documents and information as it shall deem appropriate at the time,
continue to make its own credit decisions in taking or not taking action under
this Agreement and the other Loan Documents; (v) such assignee appoints and
authorizes the Agent to take such action as agent on its behalf and to exercise
such powers under this Agreement and the other Loan Documents as are delegated
to the Agent by the terms hereof, together with such powers as are reasonably
incidental thereto; and (vi) such assignee agrees that it will perform in
accordance with their terms all obligations that by the terms of this Agreement
and the other Loan Documents are required to be performed by it as a Bank.

(d) The entries in the records of the Agent as to each Assignment
and Acceptance delivered to it and the names and addresses of the Banks and the
Loan Commitments of, and principal amount of the Loans owing to, each Bank from
time to time shall be conclusive as between the Banks, in the absence of
manifest error, and the Borrower, the Agent and the Banks may treat each Person
the name of which is recorded in the books and records of the Agent as a Bank
hereunder for all purposes of this Agreement and the other Loan Documents.

11.7 Limitation of Interest. The Borrower and the Banks intend to
strictly comply with all applicable federal and Texas laws, including
applicable usury laws (or the usury laws of any

39
<PAGE> 44
jurisdiction whose usury laws are deemed to apply to the Notes or any other
Loan Documents despite the intention and desire of the parties to apply the
usury laws of the State of Texas). Accordingly, the provisions of this Section
11.7 shall govern and control over every other provision of this Agreement or
any other Loan Document which conflicts or is inconsistent with this Section,
even if such provision declares that it controls. As used in this Section, the
term "interest" includes the aggregate of all charges, fees, benefits or other
compensation which constitute interest under applicable law, provided that, to
the maximum extent permitted by applicable law, (a) any non-principal payment
shall be characterized as an expense or as compensation for something other
than the use, forbearance or detention of money and not as interest, and (b)
all interest at any time contracted for, reserved, charged or received shall be
amortized, prorated, allocated and spread, in equal parts during the full term
of the Obligations. In no event shall the Borrower or any other Person be
obligated to pay, or any Bank have any right or privilege to reserve, receive
or retain, (a) any interest in excess of the maximum amount of nonusurious
interest permitted under the laws of the State of Texas or the applicable laws
(if any) of the United States or of any other state, or (b) total interest in
excess of the amount which such Bank could lawfully have contracted for,
reserved, received, retained or charged had the interest been calculated for
the full term of the Obligations at the Ceiling Rate. On each day, if any,
that the interest rate (the "Stated Rate") called for under this Agreement or
any other Loan Document exceeds the Ceiling Rate, the rate at which interest
shall accrue shall automatically be fixed by operation of this sentence at the
Ceiling Rate for that day, and shall remain fixed at the Ceiling Rate for each
day thereafter until the total amount of interest accrued equals the total
amount of interest which would have accrued if there were no such ceiling rate
imposed by this sentence. Thereafter, interest shall accrue at the Stated Rate
unless and until the Stated Rate again exceeds the Ceiling Rate, in which case,
the provisions of the immediately preceding sentence shall again automatically
operate to limit the interest accrual rate to the Ceiling Rate. The daily
interest rates to be used in calculating interest at the Ceiling Rate shall be
determined by dividing the applicable Ceiling Rate per annum by the number of
days in the calendar year for which such calculation is being made. None of
the terms and provisions contained in this Agreement or in any other Loan
Document (including, without limitation, Section 9.1 hereof) which directly or
indirectly relate to interest shall ever be construed without reference to this
Section 11.7, or be construed to create a contract to pay for the use,
forbearance or detention of money at an interest rate in excess of the Ceiling
Rate. If the term of any Obligation is shortened by reason of acceleration of
maturity as a result of any Default or by any other cause, or by reason of any
required or permitted prepayment, and if for that (or any other) reason any
Bank at any time, including but not limited to, the stated maturity, is owed or
receives (and/or has received) interest in excess of interest calculated at the
Ceiling Rate, then and in any such event all of any such excess interest shall
be canceled automatically as of the date of such acceleration, prepayment or
other event which produces the excess, and, if such excess interest has been
paid to such Bank, it shall be credited pro tanto against the then-outstanding
principal balance of the Borrower's obligations to such Bank, effective as of
the date or dates when the event occurs which causes it to be excess interest,
until such excess is exhausted or all of such principal has been fully paid and
satisfied, whichever occurs first, and any remaining balance of such excess
shall be promptly refunded to its payor.

40
<PAGE> 45
11.8 Survival. The obligations of the Borrower under Sections 7.9,
11.3 and 11.4 hereof and all other obligations of the Borrower in any other
Loan Document (to the extent stated therein), and the obligations of the Banks
under Section 10.5 and 11.7 hereof, shall survive (for the period provided
under any applicable statute of limitations) the repayment of the Loans and the
termination of the Loan Commitments.

11.9 Captions. Captions and section headings appearing herein are
included solely for convenience of reference and are not intended to affect the
interpretation of any provision of this Agreement.

11.13 Tax Forms. With respect to each Bank which is organized under
the laws of a jurisdiction outside the United States, on the day of the initial
borrowing from each such Bank hereunder and from time to time thereafter if
requested by the Borrower or the Agent, such Bank shall provide the Agent and
the Borrower with the forms prescribed by the Internal Revenue Service of the
United States certifying as to such Bank's status for purposes of determining
exemption from United States withholding taxes with respect to all payments to
be made to such Bank hereunder or other documents satisfactory to the Bank and
the Agent indicating that all payments to be made to such Bank hereunder are
subject to such tax at a rate reduced by an applicable tax treaty. Unless the
Borrower and the Agent shall have received such forms or such documents
indicating that payments hereunder are not subject to United States withholding
tax or are subject to such tax at a rate reduced by an applicable tax treaty,
the Borrower or the Agent shall withhold taxes from such payments at the
applicable statutory rate in the case of payments to or for any Bank organized
under the laws of a jurisdiction outside the United States.

11.14 Venue. The Borrower hereby irrevocably (a) agrees that any
legal proceeding against the Agent or any Bank arising out of or in connection
with the Loan Documents shall

41
<PAGE> 46
be brought in the district courts of Harris County, Texas, or in the United
States District Court for the Southern District of Texas, Houston Division
(collectively, the "Houston Courts"); (b) submits to the non-exclusive
jurisdiction of the Houston Courts; (c) agrees and consents that service of
process may be made upon it in any proceeding arising out of the Loan Documents
or any transaction contemplated thereby by service of process as provided by
Texas law; (d) WAIVES, to the fullest extent permitted by law, any objection
which it may now or hereafter have to the laying of venue of any suit, action
or proceeding arising out of any Loan Document or the transactions contemplated
thereby in the Houston Courts; and (e) WAIVES any claim that any such suit,
action or proceeding in any Houston Court has been brought in an inconvenient
forum. All of the obligations of the Borrower under the Loan Documents are
performable in Harris County, Texas.

11.15 Confidential Information. The Agent and each Bank separately
agrees that:

(b) The Agent and each Bank agrees that it will take normal and
reasonable precautions to maintain the confidentiality of any Confidential
Information furnished to such Person; provided, however, that such Person may
disclose Confidential Information (i) upon the Borrower's consent; (ii) to its
auditors; (iii) when required by any Governmental Requirement; (iv) as may be
required, in the opinion of counsel, in any report, statement or testimony
submitted to any Governmental Authority having or claiming to have jurisdiction
over it; (v) to such Person's and its Subsidiaries' or Affiliates' officers,
directors, employees, agents, representatives and professional consultants in
connection with this Agreement or administration of the Loans; (vi) as may be
required or appropriate in connection with any potential transfer by any Bank
of any Obligation in accordance with the terms of this Agreement, provided that
such Person agrees in writing to be bound by the terms of the confidentiality
statement customarily employed by the Agent in connection with such potential
transfers; (vii) as may be required or appropriate in response to any summons
or subpoena or in connection with any litigation or administrative proceeding;
(viii) to any other Bank or any of its Affiliates; (ix) to the extent
reasonably required in connection with the exercise of any remedy hereunder or
under the Notes or the Loan Documents; or (x) to correct any false or
misleading information which may become public concerning such Person's
relationship to the Borrower.

42
<PAGE> 47
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the Effective Date.

M-I DRILLING FLUIDS COMPANY, L.L.C.

By: /s/ CHRISTOPHER I. S. RIVERS
-----------------------------------
Name: CHRISTOPHER I. S. RIVERS
---------------------------------
Title: Vice President and C.F.O.
---------------------------------

Address for Notices:

16740 Hardy Street
Houston, Texas 77205-0068
Telecopy No.: (713) 233-5259

with a copy to:

Halliburton Company
3600 Lincoln Plaza
500 North Akard Street
Dallas, Texas 75201

<PAGE> 48

TEXAS COMMERCE BANK NATIONAL
ASSOCIATION, as Agent and as a Bank

By: /s/ RICHARD A. POND
----------------------------------
Name: RICHARD A. POND
--------------------------------
Title: Vice President
-------------------------------

Address for Notices:

Loan Commitment: 712 Main Street
Houston, Texas 77002
$4,705,880 Attention: Manager, Manufacturing and
Oilfield Services Group
Telecopy No.: (713) 216-4227

44
<PAGE> 49
THE BANK OF CALIFORNIA, N.A.

By: /s/ THOMAS H. TEGART
----------------------------------
THOMAS H. TEGART,
Vice President

Address for Notices:

Loan Commitment: 550 S. Hope Street, 5th Floor
Los Angeles, California 90071
$3,058,824 Attention: Mr. Thomas H. Tegart
Telecopy No.: (213) 243-3552

45
<PAGE> 50
DEN NORSKE BANK AS

By: /s/ NELVIN FARSTAD
-----------------------------------
Name: NELVIN FARSTAD
---------------------------------
Title: Senior Vice President
--------------------------------

Address for Notices:

Loan Commitment: 333 Clay, Suite 4890
Houston, Texas 77002
$3,058,824 Attention: Mr. Haakon Sandborg
Telecopy No.: (713) 757-1167

By: /s/
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------

46
<PAGE> 51
FIRST INTERSTATE BANK OF TEXAS, N.A.

By: /s/ FRANK W. SCHAGEMAN
----------------------------------
Name: FRANK W. SCHAGEMAN
--------------------------------
Title: Assistant Vice President
-------------------------------

Address for Notices:

Loan Commitment: 1000 Louisiana Street, 3rd Floor
Houston, Texas 77002
$3,058,824 Attention: Mr. Frank Schageman
Telecopy No.: (713) 250-7029

47
<PAGE> 52
CORESTATES BANK, N.A.

By: /s/ R. BART BROWN
----------------------------------
Name: R. BART BROWN
--------------------------------
Title: Vice President
-------------------------------

Address for Notices:

Loan Commitment: 5847 San Felipe, Suite 1050
Houston, Texas 77057
$3,058,824 Attention: Mr. Bart Brown
Telecopy No.: (713) 954-0932

with a copy to:

CoreStates Bank, N.A.
P.O. Box 7618
Philadelphia, Pennsylvania 19101
Attention: Mr. Jim Jackson

48
<PAGE> 53
ARAB BANKING CORPORATION (B.S.C.)

By: /s/ STEPHEN A. PLAUCHE
----------------------------------
Name: STEPHEN A. PLAUCHE
--------------------------------
Title: Vice President
-------------------------------

Address for Notices:

Loan Commitment: 245 Park Avenue
New York, New York 10167
$3,058,824 Telecopy No: (212) 599-8385

with a copy to:

600 Travis Street, Suite 1900
Houston, Texas 77002
Attention: Mr. Stephen Plauche
Telecopy No.: (713) 227-6507

<PAGE> 1

EXHIBIT 4.7

FIRST AMENDMENT TO LOAN AGREEMENT

THIS FIRST AMENDMENT TO THE LOAN AGREEMENT ("First Amendment") dated as
of February 15, 1995 (the "First Amendment Effective Date") is made and entered
into by and among M-I DRILLING FLUIDS, L.L.C. (the "Borrower"), a Delaware
limited liability company (formerly known as M-I Drilling Fluids Company,
L.L.C.), the banking institutions (each, together with its successors and
assigns, a "Bank" and collectively, the "Banks") from time to time a party to
the Loan Agreement (as hereinafter defined), as amended by this First
Amendment, and TEXAS COMMERCE BANK NATIONAL ASSOCIATION ("TCB"), a national
banking association, as agent for the Banks (in such capacity, together with
its successors in such capacity, the "Agent").

RECITALS:

WHEREAS, the Borrower, the Banks, and the Agent are parties to a Loan
Agreement dated as of June 30, 1994 (the "Loan Agreement"); and

WHEREAS, the Borrower, the Banks, and the Agent have agreed, on the
terms and conditions herein set forth, that the Loan Agreement be amended in
certain respects;

NOW, THEREFORE, IT IS AGREED:

Section 1. Definitions. Terms used herein which are defined in
the Loan Agreement shall have the same meanings when used herein unless
otherwise provided herein.

Section 2. Amendments to the Loan Agreement. On and after the
First Amendment Effective Date, the Loan Agreement shall be amended as follows:

(a) The definition of "Maturity Date" set forth in Section 1.1 of
the Loan Agreement is hereby amended to read in its entirety as follows:

Maturity Date shall mean the maturity of the Notes,
February 14, 1996, as the same may hereafter be accelerated
pursuant to the provisions of any of the Loan Documents.

(b) Section 2.3(a) of the Loan Agreement is hereby amended to read
in its entirety as follows:

<PAGE> 2
(a) The Borrower shall pay to the Agent for the
account of each Bank commitment fees for the period from the
later of (i) the Effective Date or (ii) July 21, 1994 to and
including the Termination Date at a rate per annum equal to
1/4 of 1%. Such commitment fees shall be computed (on the
basis of the actual number of days elapsed in a year composed
of 360 days) on each day and shall be based on the excess of
(x) the aggregate amount of each Bank's Loan Commitment for
such day over (y) the aggregate unpaid principal balance of
such Bank's Note on such day. Accrued commitment fees through
each Quarterly Date prior to the Termination Date shall be
payable on the third (3rd) Business Day after such Quarterly
Date. Any accrued and unpaid commitment fees shall be due and
payable on the Termination Date.

7.2 Financial Statements and Information. Furnish to the
Agent three copies of each of the following: (a) as soon as available
and in any event within 60 days after the end of each fiscal quarter
of each fiscal year of the applicable Person, Quarterly Financial
Statements of the Borrower and its Subsidiaries; (b) as soon as
available and in any event within 120 days after the end of each
fiscal year of the applicable Person, beginning with the fiscal year
1994, an unaudited consolidating Annual Financial Statement of the
Smith International, Inc. and its Subsidiaries (including the
Borrower) and the related statements of income and retained earnings
and cash flow for the period then ended, prepared in conformity with
GAAP consistently applied; (c) concurrently with the financial
statements provided for in Subsections 7.2(a) and (b) hereof, such
schedules, computations and other information, in reasonable detail,
as may be required by the Agent to demonstrate compliance with the
covenants set forth herein or reflecting any non-compliance therewith
as of the applicable date, all certified and signed by the president,
chief financial officer, treasurer or assistant treasurer of the
Borrower (or other authorized officer approved by the Agent) as
correct and complete and, commencing with the quarterly financial
statement prepared as of March 31, 1994, a compliance certificate
("Compliance Certificate") in the form of Exhibit D hereto, duly
executed by such authorized officer, and (d) such other information
relating to the condition (financial or otherwise), operations,
prospects or business of any of the Borrower or any of its
Subsidiaries as from time to time may be reasonably requested by the
Agent.

(d) The definition of "Eurodollar Rate" set forth in Schedule 1 to
the Loan Agreement is hereby amended to read in its entirety as follows:

Eurodollar Rate means for any day a rate per annum equal to
the lesser of (a) the sum of (1) the Eurodollar Interbank Rate in
effect on the first day of the Interest Period for the applicable
Eurodollar Rate Borrowing plus (2) 0.625% and (b) the Ceiling Rate.

2
<PAGE> 3
Each Eurodollar Rate is subject to adjustments for reserves, insurance
assessments and other matters as provided for in Section 2.3 hereof.

(e) The definition of "Interest Period" set forth in Schedule 1 to
the Loan Agreement is hereby amended to read in its entirety as follows:

(f) Exhibit D to the Loan Agreement is hereby amended to be
identical to Exhibit A attached hereto.

3
<PAGE> 4
Section 4. Payment of Expenses. The Borrower agrees, whether or not
the transactions hereby contemplated shall be consummated, to reimburse and
save the Agent and the Bank(s) harmless from and against liability for the
payment of all reasonable substantiated out-of-pocket costs and expenses
arising in connection with the preparation, execution, delivery and enforcement
of, or the preservation of any rights under this First Amendment, including,
without limitation, the reasonable fees and expenses of any local or other
counsel for the Agent, and all stamp taxes (including interest and penalties,
if any), recording taxes and fees, filing taxes and fees, and other similar
charges which may be payable in respect of, or in respect of any modification
of, the Loan Agreement and the other Loan Documents. The provisions of this
Section shall survive the termination of the Loan Agreement and the repayment
of the Loans.

Section 7. Entire Agreement. This First Amendment and the documents
referred to herein represent the entire understanding of the parties hereto
regarding the subject matter hereof and supersede all prior and contemporaneous
oral and written agreements of the parties hereto with respect to the subject
matter hereof, including, without limitation, any commitment letters regarding
the transactions contemplated by this First Amendment.

4
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have caused this First
Amendment to be duly executed and delivered by their respective duly authorized
offices as of the date first above written.

NOTICE PURSUANT TO TEX. BUS. & COMM. CODE Section 26.02

THIS FIRST AMENDMENT AND ALL OTHER LOAN DOCUMENTS EXECUTED BY ANY OF
THE PARTIES BEFORE OR SUBSTANTIALLY CONTEMPORANEOUSLY WITH THE EXECUTION HEREOF
TOGETHER CONSTITUTE A WRITTEN LOAN AGREEMENT AND REPRESENT THE FINAL AGREEMENT
BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

M-I DRILLING FLUIDS, L.L.C.

By:______________________________________

Name:____________________________________

Title:___________________________________

TEXAS COMMERCE BANK NATIONAL
ASSOCIATION, as the Agent and as a Bank

By:______________________________________

Name:____________________________________

Title:___________________________________

5
<PAGE> 6
THE BANK OF CALIFORNIA, N.A.

By:_____________________________________

Name:___________________________________

Title:__________________________________

6
<PAGE> 7
DEN NORSKE BANK AS

By:_____________________________________

Name:___________________________________

Title:__________________________________

By:_____________________________________

Name:___________________________________

Title:__________________________________

7
<PAGE> 8
FIRST INTERSTATE BANK OF TEXAS, N.A.

By:____________________________________

Name:__________________________________

Title:_________________________________

8
<PAGE> 9
CORESTATES BANK, N.A.

By:____________________________________

Name:__________________________________

Title:_________________________________

9
<PAGE> 10
ARAB BANKING CORPORATION (B.S.C.)

By:____________________________________

Name:__________________________________

Title:_________________________________

10
<PAGE> 11
The undersigned acknowledge and consent to the execution of the
foregoing First Amendment.

SMITH INTERNATIONAL, INC.

By:____________________________________

Name:__________________________________

Title:_________________________________

HALLIBURTON COMPANY

By:____________________________________

Name:__________________________________

Title:_________________________________

<PAGE> 1
Exhibit 10.3

SMITH INTERNATIONAL, INC.

1989 LONG-TERM INCENTIVE COMPENSATION PLAN
(As Amended as of April 27, 1994)

1. PURPOSE OF THE PLAN

The purpose of the 1989 Long-Term Incentive Compensation Plan (the
"Plan") is to advance the interests of Smith International, Inc. (the
"Company") and its shareholders by strengthening the ability of the Company to
attract and retain in its employ persons of training, experience and ability,
and to furnish additional incentives to officers and valued employees of the
Company upon whose judgment, initiative and efforts the successful conduct and
development of the business of the Company largely depends.

2. DEFINITIONS

Whenever the following terms are used in this Plan, they shall have
the meaning specified below unless the context clearly indicates to the
contrary.

"Board of Directors" shall mean the Board of Directors of the Company.

"Cash Award" shall mean a cash award granted pursuant to Section 1 of
the Plan.

"Committee" shall mean the Compensation and Benefits Committee of the
Board of Directors, unless the Board of Directors appoints another committee to
administer the Plan.

"Common Stock" shall mean the common shares, $1.00 par value of the
Company and any class of common shares into which such common shares may
hereafter be converted.

"Company" shall mean Smith International, Inc.

"Director" shall mean a member of the Board of Directors.

"Disinterested Person" shall have the meaning assigned to that term
under the rules and regulations of the Securities and Exchange Commission under
the Securities Exchange Act of 1934.

"Eligible Person" shall mean a person eligible to receive an Incentive
Award.

"Employee" shall mean any employee of the Company, or of any of its
present or future parent or subsidiary corporations, or a corporation (or a
parent or subsidiary corporation of such corporation) issuing or assuming an
Option in a transaction to which Section 425(a) of

-1-
<PAGE> 2

the Internal Revenue Code applies, whether such Employee is so employed at the
time this Plan is adopted or becomes so employed subsequent to adoption of this
Plan.

"Fair Market Value" shall mean the average of the high and low prices
of a share of Common Stock on the New York Stock Exchange on the date as of
which fair market value is to be determined, or if no such sales were made on
such date, the closing price of such shares on the New York Stock Exchange on
the next preceding date on which there were such sales; provided, however, that
the Committee may utilize such other listing or reporting services that in its
judgment provide an accurate index of the fair market value of the Common
Stock.

"Holder" shall mean a person holding an Incentive Award.

"Incentive Award" shall mean an Option, Stock Appreciation Right,
Restricted Stock, Stock Award or Cash Award granted under the Plan.

"Nonstatutory Stock Option" shall mean an option granted pursuant to
Section 7 of the Plan.

"Option" shall mean a Nonstatutory Stock Option.

"Optionee" shall mean any person holding an Option granted under the
Plan.

"Parent corporation" and "subsidiary corporation" shall -have the
meanings assigned to them in Sections 425(e) and 425(f) of the Internal Revenue
Code.

"Plan" shall mean the Smith International, Inc. 1989 Long-Term
Incentive Compensation Plan as set forth herein, as the same may be amended
from time to time.

"Stock Appreciation Right" shall mean a right granted pursuant to
Section 8 or Section 9 of the Plan to receive a number of shares of Common
Stock or, in the discretion of the Committee, an amount of cash or a
combination of shares and cash, based on the increase in the Fair Market Value
of the shares subject to the right.

"Stock Award" shall mean a stock award granted pursuant to Section 10
of the Plan.

3. SHARES OF COMMON STOCK SUBJECT TO THE PLAN

(a) Subject to the provisions of Section 3(c) and Section 12 of
the Plan, the aggregate number of shares of Common Stock that may be issued or
transferred or as to which Stock Appreciation rights may be exercised pursuant
to Incentive Awards under the Plan shall not exceed 2,500,000.

(b) The shares to be delivered under the Plan shall be made
available, at the discretion of the Board of Directors or the Committee, either
from authorized but unissued shares of Common Stock or from previously issued
shares of Common Stock reacquired by the

-2-

<PAGE> 3
Company, including shares purchased on the open market. Common Stock issued
under the Plan in connection with restricted stock or stock awards shall be
issued shares held as treasury shares.

(c) If any shares of Common Stock subject to an Option are not
issued or transferred and cease to be issuable or transferable for any reason,
the shares not so issued or transferred shall no longer be charged against the
limitation provided for in Section 3(a) and may again be made subject to
Incentive Awards. However, shares as to which an Option has been surrendered
in connection with the exercise of a related Stock Appreciation Right shall not
again be available for the grant of any further Incentive Awards. If a Stock
Appreciation Right not related to an Option expires or terminates without
having been exercised, then the number of shares of Common Stock with respect
to which the unexercised portion of such Stock Appreciation Right was granted
shall no longer be charged against the limitation provided for in Section 3(a)
and may again be made subject to Incentive Awards.

(d) The Committee may, in its discretion, determine to cancel, and
agree to the cancellation of, Options in order to make a participant eligible
for the grant of an Option at a lower price than the option cancelled.

(e) In the event that shares of Common Stock are issued as
restricted stock or pursuant to a stock award and thereafter are forfeited or
reacquired by the Company pursuant to rights reserved upon issuance thereof,
such forfeited and reacquired shares may again be issued under the Plan, either
as restricted stock, pursuant to stock awards or otherwise.

4. ADMINISTRATION OF THE PLAN

(a) The Plan shall be administered by the Committee, which shall
consist of three or more persons (i) who are not eligible to receive Incentive
Awards under the Plan, (ii) who have not been eligible, at any time within one
year prior to appointment to the Committee, for selection as persons to whom
Incentive Awards may be granted pursuant to the Plan or to whom shares may be
allocated or stock options or stock appreciation rights may be granted pursuant
to any other plan of the Company or any of its affiliates entitling the
participants therein to acquire stock, stock appreciation rights or options of
the Company or any of its affiliates and (iii) who are Disinterested Persons.
All members of the Committee shall be Disinterested Persons. The Board of
Directors may from time to time remove members from, or add members to, the
Committee. Vacancies on the Committee, however caused, shall be filled only by
the Board of Directors. The Board of Directors may take any action permitted
to be taken by the Committee if a majority of the Directors are Disinterested
Persons.

(b) The Committee shall have and may exercise such powers and
authority of the Board of Directors as may be necessary or appropriate for the
Committee to carry out its functions as described in the Plan, and any
references in the Plan to any specific power or authority of the Committee
shall not derogate from the foregoing. The Committee shall have authority in
its discretion to determine the Eligible Persons to whom, and the time or times
at which, Incentive Awards may be granted and the number of shares subject to
each Incentive

-3-
<PAGE> 4

Award. Subject to the express provisions of the Plan, the Committee shall also
have authority to interpret the Plan, to prescribe, amend and rescind rules and
regulations relating to it, to determine the terms and provisions of the
respective Incentive Award agreements (which need not be identical) and to make
all other determinations necessary or advisable for the administration of the
Plan. All interpretations, determinations and actions by the Committee shall
be final, conclusive and binding upon all parties.

(c) No member of the Board of Directors or the Committee shall be
liable for any action or determination made in good faith by the Board of
Directors or the Committee with respect to the Plan or any Incentive Award
thereunder.

5. ELIGIBILITY

(a) All full-time salaried Employees (including officers and
directors, but excluding directors of the Company who are not also full-time
employees of the Company) who are engaged in performing management,
supervisory, sales, scientific or engineering services or who have been
determined bv the Committee to be key Employees are eligible to receive
Incentive Awards under the Plan. Eligible employees may be designated
individually or by groups or categories (for example, by pay grade) as the
Committee deems appropriate. Participation by officers of the Company and any
performance objectives relating to such officers must be approved by the
Committee. Participation by persons other than officers and any performance
objectives relating thereto may be approved by groups or categories (for
example, by pay grade) and authority to designate participants who are not
officers and to set or modify such targets may be delegated. The Committee
shall have authority, in its sole discretion, to determine and designate from
time to time those Eligible Persons who are to be granted Incentive Awards, the
type of Incentive Award to be granted, and the number of shares of Common Stock
or the amount of cash subject to each Incentive Award. In making such
determinations, the Committee may take into account the nature of the services
rendered by the respective Eligible Persons, their present and potential
contributions to the Company's success and such other factors as the Committee
in its sole discretion shall deem relevant.

(b) An Eligible Person who has been granted an Incentive Award
may, if he is otherwise eligible, be granted an additional Incentive Award.

6. FORMS OF INCENTIVE AWARDS

Incentive Awards may be granted in the following forms:

(a) Nonstatutory Stock Option in accordance with Section
7 of the Plan;

(b) Stock Appreciation Right, related to an Option in
accordance with Section 8 of the Plan;

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<PAGE> 5
(d) Stock Award in accordance with Section 10 of the Plan;

(e) Restricted Stock in accordance with Section 10 of the
Plan;

(f) Cash Award in accordance with Section 1 of the Plan;
or

(g) Any combination of the foregoing.

7. NONSTATUTORY STOCK OPTIONS

The Committee may at any time and from time to time approve the grant
by the Company of Nonstatutory Stock Options to Eligible Persons to purchase
shares of Common Stock of the Company, and determine the specific Eligible
Persons to whom such Options may be granted, the number of shares subject to
each Option, the terms and provisions of the Option agreement, and the time or
times at which such Options may be exercised, subject to the following terms
and conditions:

(a) The date of grant shall be the date the Committee takes the
necessary action to approve the grant; provided, however, that if the minutes
or appropriate resolutions of the Committee provide that an Option is to be
granted as of a date in the future, the date of grant shall be such future
date. In any event, the intended Optionee must be an Eligible Person on the
date of grant.

(b) The purchase price of Common Stock under each Nonstatutory
Stock Option shall be determined by the Committee, and may be more or less than
the Fair Market Value of the Common Stock on the date the Option is granted,
subject to adjustment as provided in section 12 below.

(c) Each Nonstatutory Stock Option shall become exercisable at
such time or times during its term as shall be determined by the Committee at
the time of grant. The Committee may accelerate the exercisability of any
stock option. Subject to the foregoing and with the approval of the Committee,
all or any part of the shares of Common Stock with respect to which the right
to purchase has accrued may be purchased by the Company at the time of such
accrual or at any time or times thereafter during the term of the Option.

(d) No Nonstatutory Stock Option may be exercised after ten years
from the date the Option is granted.

(e) Upon the exercise of a Nonstatutory Stock Option, the purchase
price shall be payable in full in cash or its equivalent acceptable to the
Company. In the discretion of the Committee, the purchase price may be paid by
the assignment and delivery to the Company of shares of Common Stock or a
combination of cash and such shares equal in value to the Option exercise
price. Any shares so assigned and delivered to the Company in payment or
partial payment of the purchase price shall be valued at their Fair Market
Value on the exercise date.

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<PAGE> 6
(f) No fractional shares shall be issued pursuant to the exercise
of a Nonstatutory Stock Option, nor shall any cash payment be made in lieu
thereof.

(g) A Nonstatutory Stock Option shall not be assignable or
transferable by the Optionee to whom granted otherwise than by will or the laws
of descent and distribution, and may be exercised during the lifetime of the
Optionee only by the Optionee.

(h) No person shall have the rights and privileges of a
shareholder with respect to shares subject to or purchased under a Nonstatutory
Stock Option until the date appearing on the stock certificate issued upon the
exercise of the Option.

(i) To the extent that a Nonstatutory Stock Option is exercised,
any related Stock Appreciation Right shall be proportionately reduced by a
number of shares equal to the number of shares with respect to which the Option
is exercised.

(j) Upon approval of the Committee, the Company may repurchase a
previously-granted stock option from an Optionee by mutual agreement before
such option has been exercised by payment to the Optionee of the amount per
share by which: (i) the Fair Market Value of the Common Stock subject to the
option on the date of purchase exceeds (ii) the option price.

(k) Each Nonstatutory Stock Option shall be evidenced by a written
agreement and may, but need not, include any other terms and conditions not
inconsistent with the Plan as the Committee may approve.

8. STOCK APPRECIATION RIGHTS RELATED TO OPTIONS

The Committee may at any time and from time to time approve the grant
by the Company of Stock Appreciation Rights to Eligible Persons that are
related to Nonstatutory Stock Options, and determine the specific Eligible
Persons to whom Stock Appreciation Rights may be granted, the terms and
provisions of the Stock Appreciation Rights agreements, and the time or times
at which such Stock Appreciation Rights may be exercised, subject to the
following terms and conditions:

(a) The date of grant shall be the date the Committee takes the
necessary action to approve the grant; provided, however, that, if the minutes
of appropriate resolutions of the Committee provide that a Stock Appreciation
Right is to be granted as of a date in the future, the date of grant shall be
such future date. In any event, the intended Optionee must be an Eligible
Person on the date of grant.

(b) A Stock Appreciation Right may be granted in connection with a
Nonstatutory Stock Option, either at the time of the grant of such Option or at
any time thereafter during the term of the Option.

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<PAGE> 7
(c) A Stock Appreciation Right shall entitle the Holder of the
related Option, upon exercise of the Stock Appreciation Right, to surrender
such Option, or any portion thereof to the extent unexercised (subject to a
limitation of 50% of the shares of Common Stock subject to the Option), with
respect to the number of shares as to which Stock Appreciation Right is
exercised, and to receive payment of an amount computed pursuant to Section
8(e). Such Option shall, to the extent so surrendered, thereupon cease to be
exercisable.

(d) Subject to Section 8(g), a Stock Appreciation Right granted
hereunder shall be exercisable at such time or times, and only to the extent,
that a related Option is exercisable and shall not be transferable except to
the extent that such related Option may be transferable. The Stock
Appreciation Right shall be exercisable only by the Holder thereof or by such
other person entitled to exercise the related Option in the event of the death
of the Holder.

(e) Subject to the right of the Committee to deliver cash in lieu
of shares of Common Stock, the number of shares of Common Stock which shall be
issuable upon the exercise of a Stock Appreciation Right shall be determined by
dividing:

(i) the number of shares of Common Stock as to which the
Stock Appreciation Right is exercised multiplied by
the amount of the appreciation in such shares (for
this purposes the "appreciation" shall be the amount
by which the Fair Market Value of the shares of
Common Stock subject to the Stock Appreciation Right
on the exercise date exceeds an amount which shall be
determined by the Committee at the time of grant; by

(ii) the Fair Market Value of a share of Common Stock on
the exercise date.

(f) In lieu of issuing shares of Common Stock upon the exercise of
a Stock Appreciation Right, the Committee may elect to pay the holder of the
Stock Appreciation Right cash equal to the Fair Market Value on the exercise
date of any or all of the shares which would otherwise be issuable. No
fractional shares of Common Stock shall be issued upon the exercise of a Stock
Appreciation Right; instead, the holder of the Stock Appreciation Right shall
be entitled to receive a cash adjustment equal to the same fraction of the Fair
Market Value of a share of Common Stock on the exercise date or to purchase the
portion necessary to make a whole share at its Fair Market Value on the date of
exercise.

(g) The Committee may impose such conditions on the exercise of a
Stock Appreciation Right as may be required to satisfy the requirements of Rule
16b-3 under the Securities Exchange Act of 1934 (or any other comparable
provisions in effect at the time or times in question). Without limiting the
generality of the foregoing, the Committee may determine that a Stock
Appreciation Right may be exercised only during the period beginning on the
third business day and ending on the twelfth business day following the
publication of the Company's quarterly and annual summarized financial data.
Such publication shall be deemed to occur when the data first appears on a wire
service, in a financial news service or in a newspaper of general circulation.
The Company may provide written notification to the

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<PAGE> 8

Holder of a Stock Appreciation Right specifying the date on which such
financial data was published.

(h) No Stock Appreciation Right or related Option granted to an
officer of the Company may be exercised prior to six months after the date of
grant except in the event death or disability of the officer occurs prior to
the expiration of the six-month period.

(i) Each Stock Appreciation Right shall be evidenced by a written
instrument and may, but need not, include any other terms and conditions not
inconsistent with the Plan as the Committee may approve.

9. STOCK APPRECIATION RIGHTS UNRELATED TO OPTIONS

The Committee may at any time and from time to time approve the grant
by the Company to Eligible Persons of Stock Appreciation Rights that are
unrelated to Options, and determine the specific Eligible Persons to whom such
Stock Appreciation Rights may be granted, the terms and provisions of the Stock
Appreciation Rights agreements, and the time or times at which such Stock
Appreciation Rights may be exercised, subject to the following terms and
conditions.

(a) The date of grant shall be the date the Committee takes the
necessary action to approve the grant; provided, however, that if the minutes
or appropriate resolutions of the Committee provide that a Stock Appreciation
Right is to be granted as of a date in the future, the date of grant shall be
such future date. In any event, the intended Eligible Person must be an
Eligible Person on the date of grant.

(b) A Stock Appreciation Right shall entitle the Holder, upon
exercise of the Stock Appreciation Right, to receive payment of an amount
determined by dividing:

(i) the number of shares of Common Stock as to which the
Stock Appreciation Right is exercised multiplied by
the amount of the appreciation in such shares (for
this purposes the "appreciation' shall be the amount
by which the Fair Market Value of the shares of
Common Stock subject to the Stock Appreciation Right
on the exercise date exceeds an amount which shall be
determined by the Committee at the time of grant; by

(ii) the Fair Market Value of a share of Common Stock on
the exercise date.

(c) In lieu of issuing shares of Common Stock upon the exercise of
a Stock Appreciation Right, the Committee may elect to pay the holder of the
Stock Appreciation Right cash equal to the Fair Market Value on the exercise
date of any or all of the shares which would otherwise be issuable. No
fractional shares of Common Stock shall be issued upon the exercise of a Stock
Appreciation Right; instead, the holder of the Stock Appreciation Right shall
be entitled to receive a cash adjustment equal to the same fraction of the Fair

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<PAGE> 9
Market Value of the share of Common Stock on the exercise date or to purchase
the portion necessary to make a whole share at its Fair Market Value on the
date of exercise.

(d) The Committee may impose such conditions on the exercise of a
Stock Appreciation Right granted hereunder as may be required to satisfy the
requirements of Rule 16b-3 under the Securities Exchange Act of 1934 (or any
other comparable provisions in effect at the time or times in question).
Without limiting the generality of the foregoing, the Committee may determine
that a Stock Appreciation Right may be exercised only during the period
beginning on the third business day and ending on the twelfth business day
following the date of publication of the Company's quarterly and annual
summarized financial data. Such publication shall be deemed to occur when the
data first appears on the wire service, in a financial news service or in a
newspaper of general circulation. The Company may provide written notification
to the Holder of a Stock Appreciation Right specifying the date on which such
financial data was published.

(e) No Stock Appreciation Right granted to an officer of the
Company may be exercised prior to six months after the date of grant except in
the event death or disability of the officer occurs prior to the expiration of
said six-month period.

(f) A Stock Appreciation Right shall not be assignable or
transferable by the Holder otherwise than by will or the laws of descent and
distribution, and may be exercised during the lifetime of the Holder only by
the Holder.

(g) Each Stock Appreciation Right hereunder shall be evidenced by
a written instrument and may, but need not, include any other terms and
condition not inconsistent with the Plan as the Committee may approve.

10. STOCK AWARD AND RESTRICTED STOCK

The Committee may at any time and from time to time approve the grant
by the Company of a Stock Award or Restricted Stock to Eligible Persons, and
determine the specific Eligible Persons to whom such Stock awards and
restricted stock may be granted, the number of shares to be granted and the
terms and provisions of such award of Common Stock. A stock award consists of
the transfer by the Company to a participant of shares of Common Stock, without
other payment therefor, as additional compensation for his/her services to the
Company. A share of restricted stock consists of shares of Common Stock which
are sold or transferred by the Company to a participant at a price which may be
below their Fair Market Value or for no payment, but subject to restrictions on
their sale or other transfer by the participant. The transfer of Common Stock
pursuant to stock awards and the transfer and sale of restricted stock shall be
subject to the following terms and conditions:

(a) The number of shares to be transferred or sold by the Company
to a participant pursuant to a stock award or as restricted stock shall be
determined by the Committee.

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<PAGE> 10
(b) The Committee shall determine the prices, if any, at which
shares of restricted stock shall be sold to a participant, which may vary from
time to time and among participants and which may be below the Fair Market
Value of such shares of Common Stock at the date of sale.

(c) All shares of restricted stock transferred or sold hereunder
shall be subject to such restrictions as the Committee may determine,
including, without limitation any or all of the following:

(i) A prohibition against the sale, transfer, pledge or
other encumbrance of the shares of restricted stock,
such prohibition to lapse at such time or times as
the Committee shall determine (whether in annual or
more frequent installments, at the time of the death,
disability or retirement of the holder of such
shares, or otherwise);

(ii) A requirement that the holder of shares of restricted
stock forfeit, or (in the case of shares sold to a
participant) resell back to the Company at his cost,
all or a part of such shares in the event of
termination of his employment during any period in
which such shares are subject to restrictions;

(iii) A prohibition against employment of the holder of
such restricted stock by any competitor of the
Company or a subsidiary of the Company, or against
such holder's dissemination of any secret or
confidential information belonging to the Company or
a subsidiary of the Company.

(d) In order to enforce the restrictions imposed by the Committee
pursuant to (c) above, the participant receiving restricted stock shall enter
into an agreement with the Company setting forth the conditions of the grant.
Shares of restricted stock shall be registered in the name of the participant
and deposited, together with a stock power endorsed in blank, with the Company.

(e) At the end of any time period during which the shares of
restricted stock are subject to forfeiture and restrictions on transfer, such
shares will be delivered free of all restrictions to the participant or to the
participant's legal representative, beneficiary or heir.

(f) Subject to the terms and conditions of the Plan, each
participant receiving restricted stock shall have all the rights of a
stockholder with respect to shares of stock during any period in which such
shares are subject to forfeiture and restrictions on transfer, including
without limitation, the right to vote such shares. Dividends paid in cash or
property other than Common Stock with respect to shares of restricted stock
shall be paid to the participant currently or, at the election of the
participant, be reinvested by the participant under the Company's Automatic
Dividend Reinvestment Service. Shares purchased with reinvested dividends
shall not be restricted.

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<PAGE> 11
11. CASH AWARDS

The Committee may at any time and from time to time approve the
payment by the Company of a cash award to Eligible Persons. A cash award
consists of a monetary payment made by the Company to a participant as
additional compensation for his/her services to the Company. Payment of a cash
award will normally depend on achievement of performance objectives by the
Company or by individuals. The amount of any monetary payment constituting a
cash award shall be determined by the Committee in its sole discretion. Cash
awards may be subject to other terms and conditions, which may vary from time
to time and among participants, as the Committee determines to be appropriate.

12. ADJUSTMENT PROVISIONS

(a) Subject to Section 12(b), if the outstanding shares of Common
Stock of the Company are increased, decreased or exchanged for a different
number or kind of shares or other securities, or if additional shares or new or
different shares or other securities are distributed with respect to such
shares of Common Stock or other securities, through merger, consolidation, sale
of all or substantially all of the property of the Company, reorganization,
recapitalization, reclassification, stock dividend, stock split, reverse stock
split or other distribution with respect to such shares of Common Stock or
other securities, an appropriate and proportionate adjustment may be made in
(i) the maximum number and kind of shares provided in Section 3 of the Plan,
(ii) the number and kind of shares or other securities subject to the then
outstanding Options and Stock Appreciation Rights, and (iii) the price for each
share or other unit of any other securities subject to then outstanding Options
and the value of any then outstanding Stock Appreciation Rights without change
in the aggregate purchase price or value as to which such Options or Stock
Appreciation Rights remain exercisable.

(b) Notwithstanding any provision in this Plan or in any Incentive
to the contrary, (i) the restrictions on all shares of restricted stock awarded
shall lapse immediately; (ii) all outstanding Options and Stock Appreciation
Rights will become exercisable immediately; and (iii) all performance
objectives shall be deemed to be met and payment made immediately if any of the
following events occur unless otherwise determined by the Board of Directors
and a majority of the Continuing Directors (as defined below):

(i) in the event of a pending or threatened takeover bid
or tender offer for 25% or more of the outstanding
securities of the Company, whether or not deemed a
tender offer under applicable state or federal laws,
or in the event that any person makes any filing
under Section 13(d) or 14(d) of the Securities
Exchange Act of 1934 with respect to the Company;

(ii) a majority of the members of the Board of Directors
of the Company is replaced within any period of less
than two years by directors not nominated and
approved by the Board of Directors; or

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<PAGE> 12

(iii) the stockholders of the Company approve an agreement
to merge or consolidate with or into another
corporation or an agreement to sell or otherwise
dispose of all or substantially all of the Company's
assets (including a plan of liquidation).

For purposes of this Section, "Continuing Directors" are directors (a)
who were in office prior to the time any of provisions (i), (ii) or (iii)
occurred or any person publicly announced an intention to acquire 25% or more
of any equity security of the Company, (b) directors in office for a period of
more than two years, and (c) directors nominated and approved by the Continuing
Directors.

(c) Adjustments under Sections 12(a) and 12(b) shall be made by
the Committee, whose determination as to what adjustments shall be made and the
extent thereof shall be final, binding and conclusive. No fractional interest
shall be issued under the Plan on account of any such adjustment.

13. GENERAL PROVISIONS

(a) With respect to any shares of Common Stock issued or
transferred under any provisions of the Plan, such shares may be issued or
transferred subject to such conditions, in addition to those specifically
provided in the Plan, as the Committee may direct.

(b) Nothing in the Plan or in any instrument executed pursuant
thereto shall confer upon any Holder any right to continue in the employ of the
Company or any of its subsidiaries or affect the right of the Company to
terminate the employment of any Holder at any time with or without cause.

(c) No shares of Common Stock shall be issued or transferred
pursuant to an Incentive Award unless and until all then applicable
requirements imposed by federal and state securities and other laws, rules and
regulations and by any regulatory agencies having jurisdiction, and by any
stock exchanges upon which the Common Stock may be listed, shall have been
fully met. As a condition precedent to the issuance of shares pursuant to the
grant or exercise of an Incentive Award, the Company may require the Holder to
take any reasonable action to meet such requirements.

(d) No Holder (individually or as a member of a group) and no
beneficiary or other person claiming under or through such Holder shall have
any right, title or interest in or to any shares of Common Stock allocated or
reserved under the Plan or subject to any Incentive Award except as to such
shares of Common Stock, if any, that have been issued or transferred to such
Holder.

(e) The Company may make such provisions as it deems appropriate
for the withholding of any taxes that the Company or any subsidiary corporation
determines it is required to withhold in connection with any Incentive Award.

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<PAGE> 13
(f) No Incentive Award and no right under the Plan, contingent or
otherwise, shall be assignable or subject to any encumbrance, pledge or charge
of any nature except that, under such rules and regulations as the Company may
establish pursuant to the terms of the Plan, a beneficiary may be designated
with respect to an Incentive Award in the event of the death of the Holder of
such Incentive Award and except also, that if such beneficiary is the executor
or administrator of the estate of the Holder of such Incentive Award, then any
rights with respect to such Incentive Award may be transferred to the person or
persons or entity (including a trust) entitled thereto under the will of the
holder of such Incentive Award, or in the case of intestacy, under the laws
relating to intestacy.

(g) Nothing in the Plan is intended to be a substitute for, or to
preclude or limit the establishment of, any other plan, practice or arrangement
for the payment of compensation or benefits to employees generally, or to any
class or group of employees that the Company now has or may hereafter lawfully
put into effect, including, without limitation, any retirement, pension,
insurance, stock purchase, incentive compensation or bonus plan.

(h) The Company may make a loan or guarantee a loan to an Optionee
(including an Optionee who is an officer of the Company or any subsidiary
corporation of the Company) in connection with the exercise of an Option in an
amount not to exceed the aggregate exercise price of the Option being exercised
and any federal and state taxes payable in connection with such exercise for
the purpose of assisting such Optionee to exercise such Option. The Company
may also make a loan or guarantee a loan to an optionee (including an optionee
who is an officer of the Company or any subsidiary corporation of the Company)
in connection with the exercise of an option granted under the Smith
International, Inc. 1971 and 1982 Stock Option Plans in an amount not to
exceed the aggregate exercise price of the option being exercised and any
federal and state taxes payable in connection with such exercise for the
purpose of assisting such optionee to exercise such option. Any such loan or
guarantee may be secured by shares of Common Stock or other collateral deemed
adequate by the Committee and shall comply in all respects with all applicable
laws and regulations. The Board of Directors and the Committee may adopt
policies regarding eligibility for such loans and guarantees, the maximum
amounts thereof and any terms and conditions not specified in the Plan upon
which such loans will be made and guarantees extended.

(i) The Company shall have the right to withhold from any payments
made under the Plan or to collect as a condition of payment, any taxes required
by law to be withheld. At any time when a participant is required to pay to
the Company an amount required to be withheld under applicable income tax laws
in connection with a distribution of Common Stock or upon exercise of an option
or Stock Appreciation Right, the participant may satisfy this obligation in
whole or in part by electing (the "Election") to have the Company withhold from
the distribution shares of Common Stock having a value equal to the amount
required to be withheld. The value of the shares to be withheld shall be based
on the Fair Market Value of the Common Stock on the date that the amount of tax
to be withheld shall be determined ("Tax Date"). Each Election must be made
prior to the Tax Date. The Committee may disapprove of any Election, may
suspend or terminate the right to make Elections, or may provide with

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<PAGE> 14

respect to any Incentive that the right to make Elections shall not apply to
such Incentive. An Election is irrevocable.

(j) If a participant is an officer of the Company within the
meaning of Section 16 of the 1934 Act, then an Election is subject to the
following additional restrictions:

(i) No Election shall be effective for a Tax Date which
occurs within six months of the grant of the award,
except that this limitation shall not apply in the
event death or disability of the participant occurs
prior to the expiration of the six-month period.

(ii) The Election must be made either six months prior to
the Tax Date or must be made during a period
beginning on the third business day following the
date of release for publication of the Company's
quarterly or annual summary statements of sales and
earnings and ending on the twelfth business day
following such date.

(k) Anything in this Plan to the contrary notwithstanding, the
Company, may if it shall determine it necessary or desirable for any reason, at
the time of award of any Incentive or the issuance of any shares of Common
Stock pursuant to any Incentive, require the recipient of the Incentive, as a
condition to the receipt thereof or to the receipt of shares of Common Stock
issued pursuant thereto, to deliver to the Company a written representation of
present intention to acquire the Incentive or the shares of Common Stock issued
pursuant thereto for his own account for investment and not for distribution.

14. AMENDMENT AND TERMINATION

(a) The Board of Directors shall have the power, in its
discretion, to amend, suspend or terminate the Plan at any time. No such
amendment shall, without approval of the shareholders of the Company, except as
provided in Section 12 of the Plan:

(i) Change the class of persons eligible to
receive Incentive Awards under the Plan;

(ii) Materially increase the benefits accruing to
Eligible Persons under the Plan;

(iii) Increase the number of shares of Common Stock
subject to the Plan; or

(iv) Transfer the administration of the Plan to
any person who is not a Disinterested Person.

(b) The Committee may, with the consent of a Holder, make such
modifications in the terms and conditions of an Option or a Stock Appreciation
Right as it deems advisable.

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<PAGE> 15
(c) No amendment, suspension or termination of the Plan shall,
without the consent of the Holder, alter, terminate, impair or adversely affect
any right or obligation under any Incentive Award previously granted under the
Plan.

(d) No amendment to the Plan shall be made that would permit the
granting of Incentive Awards to members of the Committee.

(e) A Stock Appreciation Right or an Option held by a person who
was an Employee at the time such Right or Option was granted shall terminate if
and when the Holder ceases to be an Employee, except as follows:

(i) If the employment of an Employee is terminated for
cause, for which the Company shall be the sole judge,
or if the Employee voluntarily resigns, all of the
Stock Appreciation Rights and Options of the Employee
shall expire immediately. Retirement with the
consent of the Company shall not be deemed a
voluntary resignation for purposes of this
subparagraph (i).

(ii) If the employment of an Employee is terminated by the
Company other than for cause, for which the Company
shall be the sole judge, then the Stock Appreciation
Rights and Options expire one year thereafter unless
by their terms they expire sooner. During said
period, the Stock Appreciation Rights and Options may
be exercised in accordance with their terms, but only
to the extent exercisable on the date of termination
of employment.

(iii) If the employee retires at normal retirement age or
retires with the consent of the Company at an earlier
date the Stock Appreciation Rights and Options of the
Employee shall expire three years thereafter unless
by their terms they expire sooner. During said
period, the Stock Appreciation Rights and Options may
be exercised in accordance with their terms, but only
to the extent exercisable on the date of retirement.

(iv) If an Employee dies or becomes permanently and
totally disabled while employed by the Company or a
parent or subsidiary corporation, the Stock
Appreciation Rights and Options of the Employee shall
expire three years after the date of death or
permanent and total disability unless by their terms
they expire sooner. If the Employee dies or becomes
permanently and totally disabled within the one-year
period referred to in subparagraph (ii) above, the
Stock Appreciation Rights and Options shall expire
one year after the date of death or permanent and
total disability, unless by their terms they expire
sooner. If the Employee dies or becomes permanently
and totally disabled within the three-year period
referred to in subparagraph (iii) above, the Stock
Appreciation

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<PAGE> 16

Rights and Options shall expire upon the later of
three years after retirement or one year after the
date of death or permanent and total disability,
unless by their terms they expire sooner. During said
periods the Stock Appreciation Rights and Options may
be exercised by the Employee, or in the event of the
death of the Employee, the Stock Appreciation Rights
and Options may be exercised by the Employee's
designated beneficiary, personal representatives or
the persons to whom his rights under the Stock
Appreciation Rights and Options have passed by will
or the laws of descent and distribution, in
accordance with their terms, but only to the extent
exercisable on the date of retirement or
termination of employment.

(v) Notwithstanding the above, a Stock Appreciation Right
or Option may not be exercised after the expiration
of ten years from the date the Stock Appreciation
Right or Option is granted.

(f) The Committee may in a particular case provide for earlier
termination or expiration periods for any Stock Appreciation Right or Option
but may not extend any of the periods provided for in this section.

(g) The Committee may in its sole discretion determine, with
respect to a Stock Appreciation Right or Option, that any Holder who is on
leave of absence for any reason will be considered as still in the employ of
the Company, provided that the Stock Appreciation Right or Option shall be
exercisable during a leave of absence only as to the amount of number of shares
with respect to which it was exercisable at the commencement of such leave of
absence.

15. EFFECTIVE DATE OF PLAN AND DURATION OF PLAN

This Plan shall become effective upon adoption by the Board of
Directors of the Company (February 6, 1989) and Incentive Awards may be made
under the Plan at any time thereafter, provided, however, that no shares of
Common Stock may be issued under the Plan, no Stock Appreciation Rights granted
under the Plan may be exercised and no Cash Award may be paid prior to
completion of the following: (a) the approval of the Plan by shareholders
owning a majority of the outstanding shares of Common Stock of the Company,
with the votes of any officers who are shareholders not being counted for the
purpose of determining a majority, (b) the registration of the Plan and
securities to be issued in connection therewith under the Securities Act of
1933, and (c) the listing of the shares of Common Stock reserved for issuance
under the Plan on the New York Stock Exchange, Inc. and the Pacific Stock
Exchange, Inc. Unless previously terminated by the Board of Directors, the
Plan shall terminate at the close of business on April 27, 2004, and no
Incentive Award may be granted under the Plan thereafter, but such termination
shall not affect any Incentive Award issued or granted on or prior to said
date.

-16-

<PAGE> 1
EXHIBIT 22

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>

Smith Internacional,
S.A. de C.V. Mexico 100%
Omega II 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 International
do Brasil Ltda. 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 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 24.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the
incorporation by reference of our report dated February 8, 1995 included in
this Form 10-K into the Company's previously filed Registration Statement File
No. 33-31556.

ARTHUR ANDERSEN & CO. L.L.P.

Houston, Texas
February 8, 1995

<PAGE> 1

EXHIBIT 24.2

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

ARTHUR ANDERSEN & CO. L.L.P.

Houston, Texas
February 8, 1995

<PAGE> 1

EXHIBIT 24.3

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

ARTHUR ANDERSEN & CO. L.L.P.

Houston, Texas
February 8, 1995