SMITH INTERNATIONAL INC, 10-K405, 1996-03-21

SMITH INTERNATIONAL INC
10-K405, 1996-03-21
OIL & GAS FIELD MACHINERY & EQUIPMENT

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

COMMISSION FILE NUMBER 1-8514

SMITH INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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<S> <C>
DELAWARE 95-3822631
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

16740 HARDY STREET
HOUSTON, TEXAS 77032
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 443-3370

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

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<S> <C>
NEW YORK STOCK EXCHANGE, INC.
COMMON STOCK PACIFIC STOCK EXCHANGE, INC.
(TITLE OF CLASS) (NAME OF EACH EXCHANGE ON WHICH REGISTERED)
</TABLE>

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE

Indicate by check 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

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 the 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/

The aggregate market value of the voting stock held by non-affiliates on
March 11, 1996 was $850,948,240 (39,124,057 shares at closing price on New York
Stock Exchange of $21.75). 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.

There were 39,930,839 shares of common stock outstanding at March 11, 1996.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement related to the Registrant's 1996 Annual
Meeting of Shareholders are incorporated by reference into Part III of this Form
10-K.
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PART I

ITEM 1. BUSINESS

GENERAL

Smith International, Inc. ("Smith" or the "Company") was incorporated in
the State of California in January 1937 and reincorporated under Delaware law in
May 1983. The Company is a leading worldwide supplier of products and services
to the oil and gas drilling and production industry. Smith produces and markets
drilling fluids and systems through its majority owned subsidiary, M-I Drilling
Fluids L.L.C. ("M-I Drilling Fluids"). Smith also manufactures and markets
technologically advanced drill bits through its Smith Tool and Smith Diamond
Technology units, and manufactures and markets drilling and completion products
and services through its Smith Drilling & Completions Unit. Approximately 97% of
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's business units supply products and provide services to one
industry segment, the petroleum services segment. The information regarding
business segments and domestic and international operations appears in Note 12
of the Notes to Consolidated Financial Statements included elsewhere in this
Form 10-K.

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 obtained in the
transaction was sold for $247.7 million. The Company used a portion of these
proceeds to repay certain debt of the Company. As a result of the DDS sale, 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
transaction. The DDS operations had revenues of approximately $36.3 million and
operating losses of $6.5 million for the first three months of 1993.

Acquisitions of A-Z/Grant and Lindsey Completion Systems

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 industry. A-Z/Grant and Lindsey
reported unaudited revenues of $31.6 million in 1993. 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

Effective February 28, 1994, the Company acquired a 64% interest in M-I
Drilling Fluids from Dresser Industries, Inc. ("Dresser") for $160.0 million.
M-I Drilling Fluids was owned 64% by Dresser and 36% by Halliburton prior to the
acquisition. M-I Drilling Fluids is a leading provider of environmentally
sensitive drilling fluids and systems to the oil and gas drilling industry. The
Company purchased the 64% interest using $80.0 million of its cash and financed
the remaining portion of the purchase price with debt. M-I Drilling Fluids
reported unaudited revenues of $458.0 million in 1994, and $405.8 million in
1993.

Acquisition of Supradiamant, S.A.

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

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manufacturer of ultrahard materials, polycrystalline diamonds and cubic boron
nitride. This acquisition was accounted for as a purchase. Supradiamant reported
unaudited revenues of $7.1 million in 1994 and $7.5 million in 1993.

Acquisition of Baker Hughes Treatment Services

Effective January 1, 1995, the Company's M-I Drilling Fluids Unit 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 and $9.8 million in 1994 and 1993, respectively.

Acquisition of Fremont Chemical Company

Effective June 23, 1995, M-I Drilling Fluids acquired Fremont Chemical
Company ("Fremont") for approximately $2.7 million, of which $1.0 million was
funded by borrowings under its revolving line of credit and $1.7 million was
funded by the issuance of a 3-year note payable to the former owners of Fremont.
Fremont is the largest supplier of completion fluids in the Rocky Mountain
region of the United States. Fremont reported unaudited revenues of
approximately $7.2 million in both 1994 and 1993.

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 decreased 3% from 1,769 in 1994 to 1,713 in 1995.

Management anticipates that total worldwide drilling activity in 1996 will
increase slightly from 1995 activity levels. North American drilling activity is
expected to increase approximately 2.0% primarily due to higher forecasted
activity in the United States. Non-North American drilling activity is expected
to increase approximately 4.0% primarily as a result of higher forecasted
drilling activity in Latin America. Management believes that the Company is well
positioned to benefit from the expected increase in oil and gas drilling
activity.

BUSINESS OPERATIONS

M-I Drilling Fluids

Products and Services. Through the acquisition of M-I Drilling Fluids in
February 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 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 Drilling Fluids 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

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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, and add 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 Drilling Fluids' 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 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'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 BHTS in January 1995, Swaco is the world's largest
supplier of waste minimization and product recovery services to the oilfield
industry. BHTS also expands Swaco'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.

Smith Tool

Products. The Company offers drill bits under the Smith Tool(TM) and Smith
Mining(TM) product lines. This unit designs, manufactures and markets drill bits
used in drilling oil and gas wells and mining applications. The Company offers
drill bits under the Smith Tool(TM) and Smith Mining(TM) product lines. Drill
bit sizes range from 3 1/2 to 28 inches in diameter for the petroleum industry
and from 2 15/16 to 16 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. In the last few years, there has been a significant
increase in demand for drill bits in which the tungsten carbide insert is coated
with polycrystalline diamond. The Company is the only manufacturer offering this
product on a commercial basis.

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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. Competition for sales of mining
drill bits generally is based on a number of factors, including price,
performance and availability.

Smith Drilling & Completions

Products and Services. The Smith Drilling & Completions business unit
manufactures and markets product lines under the following names: Drilco/Grant,
A-Z/Servco and Lindsey Completion Systems. In general, all product lines are
manufactured, marketed, sold and maintained by the same management, operations
and sales personnel operating out of 22 international locations and 19 U.S.
locations. Houston, Texas is the sales, management, engineering, and
manufacturing headquarters for this business unit.

The Drilco/Grant product line includes rotating drilling heads, automatic
connection torque monitoring and control systems, downhole drilling tools,
tubular drill string components, drilling tool inspection products and services,
and machine shop services. The rotating drilling heads are rented and sold to
the end users primarily in air drilling areas and in underbalanced drilling
areas. The 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 tubular products, manufactured under the Drilco/Grant product line,
include drill collars to provide drilling weight to the bit, Hevi-Wate(TM) drill
pipe to provide stress transition between drill collars and conventional drill
pipe or to provide drilling weight to the bit in horizontal drilling, connecting
subs to attach drill string members of differing diameters and connections and
kellys to rotate the drill string on conventional drilling rigs.

The A-Z/Servco product line includes downhole remedial, re-entry and
fishing tools for use in connection with the drill string for specialized
drilling and workover operations. This includes the patented Reamaster(TM) and
Underream-While-Drilling System(TM) which allows two operations to be performed
simultaneously. The product line also includes remedial, re-entry and fishing
operations, including the patented Millmaster(TM) Performance Milling System and
the patented Packstock(TM) and Anchorstock(TM) Performance Window Cutting
System. These products provide a sidetrack or section milling operation to
remove a section of casing permitting the well to be re-drilled using the
existing casing slot. In addition, hole opening and underreaming services
enlarge the wellbore to allow for annular area for proper cementing of the
casing or for gravel pack displacement; packer milling to remove production
packers; conventional milling to remove wellbore obstructions; mechanical,
hydraulic, and explosive pipe cutting to remove casing during a well
abandonment; and fishing services to remove wellbore obstructions during
workover operations.

The Lindsey Completion Systems product line includes liner hangers,
cementing products and tools, liner top packers and tie-back equipment, setting
tools, plus the service personnel to supervise the running and setting of the
necessary liner and completion products. These products are used prevalently in
deep wells and in critical well completions because of the technological
advantage.

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

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Competition. Competition in the drilling and completions sales, rentals,
and services market is primarily based on performance, quality, reliability,
service, price, response time, and, in some cases, breadth of products. Smith
Drilling & Completions attributes its competitive position to its commitment to
technological advancements that add value to the customer's programs plus the
quality, performance, and service of its products and employees. The Company's
major competitors in the drilling, remedial, re-entry and fishing services
market are Weatherford Enterra, Inc., Baker Oil Tools (a division of
Baker-Hughes, Inc.), and fragmented local companies. The main competitors in the
completion markets are Baker Oil Tools and TIW.

Smith Diamond Technology

Products. 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 Megadiamond and Supradiamant
subsidiary. 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. 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 and increase penetration rates, which decreases overall
drilling costs in certain formations. The Company believes that its ability to
develop specialized diamond inserts for specific applications will provide new
business opportunities such as Diamond Enhanced Insert roller cone bits and
Impax(TM) hammer bits as well as non-energy cutting tool markets.

Competition. The Company's major competitors in the petroleum shear bit
business are Reed/Hycalog (a division of Camco International, Inc.), Hughes
Christensen (a division of Baker-Hughes, Inc.) and Security/DBS (a division of
Dresser).

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, provide its products with a competitive advantage.

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,
59% of the Company's total revenues in 1995 were generated from sales in the
international markets, compared to 57% in 1994. In 1995, approximately 74% of
the Company's revenues were denominated in U.S. dollars.

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

SALES AND DISTRIBUTION

The Company markets its products on a worldwide basis, employing Company
sales personnel and independent sales agents. 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.

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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.

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 1,760 average
active drilling rigs estimated for 1996. 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
Drilling Fluids 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 Drilling
Fluids 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 Tool, Smith
Diamond Technology and Smith Drilling & Completions Units, 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; Stavanger, Norway; Aberdeen, Scotland; and Bogota, Colombia; it
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 its 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 fluids products and
systems, most notably, FLO-PRO(TM), the family of NOVA(TM) systems,
KLA-GARD(TM), and DRIL-KLEEN(TM). The FLO-PRO(TM) system, a
rheologically-engineered

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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. The non-damaging character of a FLO-PRO(TM) system, coupled with
its cuttings suspension and transport performance, results in reduced drilling
and completion costs as well as maximum reservoir productivity. In 1995, the
system found new markets in the U.S. Gulf Coast, Latin America, West Africa, and
Europe, applications which extended the range and future potential of the fluid.
In the summer of 1995, FLO-PRO(TM)'s contribution was formally recognized by the
drilling industry when it was awarded Petroleum Engineer International's Special
Meritorious Award for Engineering Innovation.

The NOVA(TM) family includes NOVADRIL(TM), NOVAPLUS(TM), and NOVALITE(TM),
which together comprise M-I Drilling Fluids' olefin-based non-toxic invert
emulsion drilling fluids systems. These systems offer many of the performance
advantages of conventional oil mud systems but, because they are manmade olefins
and contain no aromatics or other Clean Water Act priority pollutants, they
avoid the environmental problems associated with using diesel oil. In May and
June 1994, the NOVADRIL(TM) system set successive industry records for drilling
performance, drilling over 7,400 and 8,400 feet, respectively, in a 24-hour
interval. In 1995, NOVA(TM) systems have been successfully used in all sectors
of the North Sea, Australasia, and the U.S. Gulf of Mexico, especially in the
Gulf's emerging deepwater frontiers where drilling performance and environmental
quality are paramount.

KLA-GARD(TM) is a shale stabilizer that reduces the swelling of sensitive
shales and drill cuttings exposed to water-based drilling fluids. By effectively
controlling the thick gumbo shales present in many drilling locations, operators
have been able to significantly reduce drilling time and reduce overall costs.
The DRIL-KLEEN(TM) detergent is a concentrated, low-toxicity additive designed
to prevent bit-and bottom-hole assembly ("BHA") balling in all water-based
drilling fluids. Applied directly to the bit or BHA, the product forms a
lubricating film which resists gumbo-balling and promotes higher rates of
penetration in drilling operations.

The Smith Tool, Smith Drilling & Completions, and Smith Diamond Technology
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 Spinodal(TM) bearing roller cone bits,
Diamond Enhanced Insert roller cone bits, steerable motor PDC and roller cone
bits; Diamond Enhanced Stabilizers; the Smith Diamond Maxidrill(TM) products and
Diamond Enhanced Impax(TM) hammer bits; the Servco Millmaster(TM) carbide
cutting structure; and the Servco Superdome(TM) 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 $21.4 million in 1995, $14.6
million in 1994 and $6.6 million in 1993. In 1995, research and engineering
expenditures approximated 2.5% of revenues.

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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, 1995, the Company had approximately 4,700 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 Drilling Fluids. The Company considers its
labor relations to be satisfactory.

ITEM 2. PROPERTIES

The principal facilities and properties utilized by the Company at December
31, 1995 are shown in the table below. All facilities and properties are owned
by the Company with the exception of the Grenoble, France location.

<TABLE>
<CAPTION>
APPROXIMATE
BUILDING
PRINCIPAL PRODUCTS PROCESSED LAND SPACE
LOCATION OR MANUFACTURED (ACRES) (SQ. 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 Tool, Smith Drilling & Completions and Smith Diamond Technology Units:
Houston, Texas.............. Tubulars, surface and downhole tools, 106.4 720,199
remedial products, liner hangers, diamond
bits
Ponca City, Oklahoma........ Drill bits 15.2 206,800
Grenoble, France............ Synthetic diamond materials, and cubic 16.9 160,000
boron 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 1995 and are continuing to operate below capacity levels. A
portion of the Houston, Texas facility is currently being held for sale by the
Company.

ITEM 3. LEGAL PROCEEDINGS

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. Executive Life emerged from the
conservatorship in 1993 as Aurora National Life Assurance Company, Inc.
("Aurora"). Under the rehabilitation plan as ordered by the Los Angeles Superior

8
<PAGE> 10

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 December 1994, the parties agreed in principle to a settlement. On April
12, 1995, the United States District Court for the Central District of
California entered a Consent Order ("Consent Order"), which documented the
principal settlement terms. The Individual Defendants were dismissed with
prejudice. Pursuant to the Consent Order, the Company paid $4.07 million into an
escrow account. A substantial portion of the $4.07 million settlement was paid
by the Company's insurance carrier. The Company accrued its portion of the
settlement of approximately $1.0 million in 1994.

The $4.07 million payment is still on deposit in the escrow account as the
Department of Labor has not yet finalized the timing, amount or manner of the
distributions from the escrow account to the Plan participants.

Superfund

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, a National Priorities List ("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. Based upon an U.S. Environmental Protection
Agency ("EPA") Record of Decision ("ROD"), total remediation costs are
estimated, on a preliminary basis, to be approximately $28 million. On this
basis, the Company's share would be $0.8 million. Remediation activities at the
Sheridan Site have been suspended pending receipt of a consent decree relating
to the settlement of this case. After it is resumed, the remediation, together
with the related expenditures, will likely extend over several years.

The OII Site. Under the Comprehensive Environmental Response, Compensation
and Liability Act of 1980 (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 million. 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.

Actual remediation of the OII Site is likely to extend for a number of
years after a final remedy is selected for the site. The EPA issued an ROD with
respect to the OII Site that estimates remediation costs of $300 million. 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

9
<PAGE> 11

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 placed the Chemform Site on the NPL on October 4, 1989. On
September 22, 1992, the EPA issued the ROD for a portion of the Chemform Site.
The ROD selected a "No Action with Monitoring" alternative, under which
groundwater would be monitored quarterly for at least one year. Although the
Company and two other PRPs have completed four quarters of groundwater
monitoring, the Florida Department of Environmental Protection ("Florida DEP")
has requested that additional monitoring 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 the remainder of the
Chemform Site, which addressed 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 performed the
soil removal requested under the oversight of the Florida DEP and has provided a
Technical Memorandum summarizing this action to the EPA and the Florida DEP. The
Company has not received any written response from either the EPA or the Florida
DEP. 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.

General Environmental. At December 31, 1995, the 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 $6.0
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.

10
<PAGE> 12

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(49)........... Chairman of the Board since February 1991; Chief Executive
Chairman of the Board, Officer, President and Chief Operating Officer since March
Chief Executive Officer, 1989.
President and Chief
Operating Officer

Loren K. Carroll(52).......... President and Chief Executive Officer of M-I Drilling Fluids,
Executive Vice President and L.L.C. since March 1994; Executive Vice President and Chief
Chief Financial Officer of Financial Officer since October 1992; member of the Board
the of Directors since November 1987; President of the Geneva
Company; President and Chief Business Services and a Director of Geneva Companies from
Executive Officer of M-I March 1989 to October 1992.
Drilling Fluids L.L.C.

Neal S. Sutton(50)............ Senior Vice President -- Administration since December 1994;
Senior Vice President -- Vice President -- Administration from March 1992 to December
Administration General 1994; Vice President, Secretary and General Counsel of the
Counsel and Secretary Company since January 1991; Associate General Counsel of
Cooper Industries, Inc. from November 1989 to December
1990.

John J. Kennedy(43)........... Vice President, Chief Accounting Officer and Treasurer since
Vice President, Chief March 1994; Treasurer from May 1991 to March 1994; Treasury
Accounting Officer and Director responsible for International Operations from
Treasurer November 1987 to May 1991.

D. Barry Heppenstall(49)...... President, Smith Tool since May 1994; Vice President and
President, Smith Tool 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(54)......... President, Smith Drilling & Completions since May 1994; Vice
President, Smith Drilling & President and General Manager -- Smith Drilling and
Completions 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.

Roger A. Brown(50)............ President, Smith Diamond Technology since April 1995; Vice
President, Smith Diamond President and General Manager, Eastern Hemisphere Operations,
Technology Reda Pump Company, Division of Camco International, Inc.
from November 1993 to March 1995; President, Hycalog,
Division of Camco International, Inc. from November 1990 to
October 1993.
</TABLE>

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

11
<PAGE> 13

PART II

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

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

<TABLE>
<CAPTION>
COMMON STOCK
---------------
HIGH LOW
----- -----
<S> <C> <C>
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
1995
First Quarter............................................ 14 1/2 11
Second Quarter........................................... 19 3/8 14
Third Quarter............................................ 19 15 1/8
Fourth Quarter........................................... 23 7/8 15
</TABLE>

On March 11, 1996, the Company had approximately 4,688 Common Stock holders
of record and the last reported closing price on the New York Stock Exchange
Composite Tape was $21.75.

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.

12
<PAGE> 14

ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1995 1994 1993 1992 1991(A)
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.......................... $874,544 $653,901 $220,712 $210,669 $251,967
Gross profit...................... 292,540 221,274 79,963 71,535 97,387
Income from continuing operations
before litigation settlement,
interest and taxes............. 86,248 60,104 18,575 10,260 10,673
Income (loss) from continuing
operations before discontinued
operations and change in
accounting principle........... 45,592 35,879 (3,995) 1,164 (5,013)
Income (loss) from discontinued
operations..................... -- -- 73,623 (2,975) (4,623)
Income (loss) before change in
accounting principle........... 45,592 35,879 69,628 (1,811) (9,636)
Net income (loss)................. $ 45,592 $ 35,879 $ 68,328 $ (1,811) $ (9,636)
PER SHARE DATA:
Net income (loss) applicable to
common stock -- From continuing
operations before discontinued
operations and change in
accounting principle........... $ 1.16 $ .92 $ (.13) $ (.02) $ (.22)
From discontinued operations... -- -- 1.95 (.08) (.16)
From the change in accounting
principle.................... -- -- (.03) -- --
Net income (loss).............. $ 1.16 $ .92 $ 1.79 $ (.10) $ (.38)
BALANCE SHEET DATA (AT DECEMBER 31):
Total assets...................... $702,844 $619,780 $348,486 $370,482 $397,335
Long-term debt.................... $117,238 $115,000 $ 46,000 $ 46,000 $100,020
Total shareholders' equity........ $300,886 $253,121 $214,466 $149,785 $157,006
</TABLE>

The Notes to Consolidated Financial Statements and Management's Discussion
and Analysis of Financial Condition and Results of Operations included elsewhere
in this Form 10-K should be read in order to understand factors such as
accounting changes, business combinations, dispositions of business operations
or other unusual items which may affect the comparability of the information
shown above.

(a) The 1991 results include $22.2 million of non-recurring charges related
to the restructuring of the Company's worldwide operations in response to a
decline in the U.S. drilling activity.

13
<PAGE> 15

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

GENERAL

Management's Discussion and Analysis of Financial Condition and Results of
Operations is the Company's discussion of its financial performance and of
significant trends which may impact the future performance of the Company. It
should be read in conjunction with the Consolidated Financial Statements of the
Company and the related notes thereto included elsewhere in this Form 10-K.

The Company manufactures and supplies a wide range of products and services
to the worldwide oil and gas drilling and production and mining industries. The
Company's revenues are derived from sales of drilling and completion fluid
systems, solids control equipment, drill bits, downhole drilling tools and
tubular drill string components and from providing drilling and completion
services to the oil and gas industry.

The Company operates in the global oil and gas services market and is
significantly impacted by changes in exploration and drilling activity in the
major energy producing areas. Exploration and drilling activity is primarily
influenced by the prices of oil and natural gas. In addition, exploration and
drilling activity may be affected by political actions and uncertainties,
environmental concerns, capital expenditure plans of customers and the overall
level of global economic growth and activity.

After 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, the DDS business was sold to Halliburton
Company in March 1993. The proceeds of this sale have enabled the Company to
strengthen its financial condition and pursue strategic growth objectives. The
following operations have been acquired as part of the Company's strategic
program which have strengthened the Company's product and service offerings and
global presence: a 64% interest in M-I Drilling Fluids, a leading supplier of
drilling fluid systems; Supradiamant, S.A., a leading manufacturer of diamond
products; Baker Hughes Treatment Services ("BHTS"), a major supplier of waste
minimization and product recovery services; and, Fremont Chemical Company, the
largest supplier of completion fluids in the Rocky Mountain region of the United
States. These acquisitions have been accounted for as purchase transactions and
the results of the acquired operations have been included in the Consolidated
Statements of Operations from the date of acquisition. These acquisitions
complement the Company's existing core products forming a more complete package
of expendable products to the oil and gas drilling and production industry.

14
<PAGE> 16

RESULTS OF OPERATIONS

Revenues

The Company operates through four business units which market the products
manufactured and provide services throughout the world. The following table sets
forth the amounts and percentages of revenues by business unit and by area, as
well as average rig count data (in thousands, except rig count information):

<TABLE>
<CAPTION>
1995 1994 1993
------------------- ------------------- -------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Breakdown by Business Unit:
M-I Drilling Fluids................ $556,394 64 $382,597 59 -- --
Smith Tool......................... 167,116 19 154,912 23 $142,402 64
Smith Drilling & Completions....... 115,245 13 92,095 14 58,500 27
Smith Diamond Technology........... 35,789 4 24,297 4 19,810 9
-------- --- -------- --- -------- ---
Total...................... $874,544 100 $653,901 100 $220,712 100
======== === ======== === ======== ===
Breakdown by Area:
Domestic........................... $358,392 41 $280,435 43 $104,415 47
Export............................. 50,454 6 56,421 9 29,926 14
International...................... 465,698 53 317,045 48 86,371 39
-------- --- -------- --- -------- ---
Total...................... $874,544 100 $653,901 100 $220,712 100
======== === ======== === ======== ===
Average Annual Active Rig Count:
Domestic........................... 724 775 757
Canada............................. 231 260 183
International (excluding Canada)... 758 734 773
-------- -------- --------
Total...................... 1,713 1,769 1,713
======== ======== ========
</TABLE>

M-I Drilling Fluids

The M-I Drilling Fluids operation, which was acquired in February, 1994,
provides drilling fluids systems, solids control equipment, products and
technical services to end users engaged in drilling oil, natural gas and
geothermal wells worldwide. The consolidated revenues attributable to M-I
Drilling Fluids increased $173.8 million or 45.4% from the prior year due
primarily to the higher sales volume and the product mix of sales in Latin
America, the United States and Germany. The remainder of the increase is related
to the inclusion of a full year of revenues for M-I Drilling Fluids and the
acquisitions of the BHTS and Fremont operations.

Smith Tool

The Smith Tool business unit manufactures and sells three-cone drill bits
used in the oil and gas drilling industry and in mining applications. Smith Tool
revenues increased $12.2 million or 7.9% from $154.9 million in 1994 to $167.1
million in 1995 due primarily to higher sales volume and improved pricing in the
United States and higher drilling activity in Latin America, Italy, and Germany.
These increases were partially offset by reduced sales in Canada due to lower
drilling activity. Smith Tool revenues increased $12.5 million or 8.8% from
$142.4 million in 1993 to $154.9 million in 1994 due primarily to increased
sales in Canada resulting from the increase in drilling activity and increased
sales in Latin America and the United States.

Smith Drilling & Completions

The Smith Drilling & Completions product group manufactures and markets
downhole drilling tools and tubular drill string components and provides related
drilling and completion services for drilling oil and gas wells. Drilling &
Completions revenues increased $23.1 million or 25.1% from $92.1 million in 1994
to $115.2 million in 1995 due primarily to higher sales volumes resulting from
increased activity in Latin

15
<PAGE> 17

America and the North Sea. In addition, sales volumes increased in the United
States, the Middle East and Canada. Drilling & Completions revenues increased
$33.6 million or 57.4% from $58.5 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.

Smith Diamond Technology

In 1995, the Company formed a new business unit, Smith Diamond Technology,
which was previously a part of the Smith Tool operations. This business unit
manufactures and markets shear bits featuring cutters made of polycrystalline
diamond ("PDC") or natural diamonds at its Geodiamond division. Smith Diamond
Technology also manufactures PDC's and cubic boron nitride at its Megadiamond
and Supradiamant subsidiaries. These ultrahard materials are used in the
business unit's diamond drill bits and in other specialized cutting tools. Smith
Diamond Technology revenues increased $11.5 million or 47.3% from $24.3 million
in 1994 to $35.8 million in 1995. The increase was primarily due to higher sales
volumes in Latin America, the North Sea and the Middle East and the inclusion of
a full year of revenues related to Supradiamant, which was acquired in July
1994. Smith Diamond Technology revenues increased $4.5 million or 22.7% from
$19.8 million in 1993 to $24.3 million in 1994. The increase in revenues was
primarily due to the acquisition of Supradiamant and increased volumes in the
Far East and Brazil.

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,
-----------------------------------------------------------------
1995 1994 1993
------------------- ------------------- -------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues............................... $874,544 100 $653,901 100 $220,712 100
-------- ----- -------- ---- - -------- ---- -
Costs and expenses:
Costs of revenues.................... 582,004 67 432,627 66 140,749 64
Selling expenses..................... 158,300 18 116,151 18 40,480 18
General and administrative
expenses.......................... 47,992 5 45,019 7 20,908 10
-------- ----- -------- ---- - -------- ---- -
Total costs and expenses..... 788,296 90 593,797 91 202,137 92
-------- ----- -------- ---- - -------- ---- -
Income from continuing operations
before litigation settlement,
interest and taxes................... 86,248 10 60,104 9 18,575 8
Litigation settlement.................. -- -- -- -- 19,900 9
Interest expense, net.................. 12,238 1 8,572 1 2,202 1
-------- ----- -------- ---- - -------- ---- -
Income (loss) from continuing
operations before income taxes and
minority interests................... 74,010 9 51,532 8 (3,527) (2)
Income tax provision................... 12,609 2 6,815 1 468 --
-------- ----- -------- ---- - -------- ---- -
Income (loss) from continuing
operations before minority interests
and cumulative effect of change in
accounting principle................. 61,401 7 44,717 7 (3,995) (2)
Minority interests..................... 15,809 2 8,838 1 -- --
-------- ----- -------- ---- - -------- ---- -
Income (loss) from continuing
operations........................... $ 45,592 5 $ 35,879 6 $ (3,995) (2)
======== ===== ======== ===== ======== =====
</TABLE>

1995 Versus 1994

Total revenues for 1995 increased $220.6 million or 33.7% from $653.9
million in 1994 to $874.5 million in 1995. The increase was primarily related to
the additional revenues associated with the previously discussed business
acquisitions and increased drilling activity in Latin America. The increase also
reflected higher sales volume in the United States and Germany for M-I Drilling
Fluids and Smith Tool. In addition, Smith Tool revenues increased in Italy.
Smith Drilling & Completions revenues increased due primarily to higher volumes

16
<PAGE> 18

in the North Sea, the United States, the Middle East and Canada. The increase in
Smith Diamond Technology was due to increased drilling activity in the North Sea
and higher volumes in the Middle East.

Gross profit, computed as revenues less costs of revenues, increased $71.2
million or 32.2% from $221.3 million in 1994 to $292.5 million in 1995. The
increase was due primarily to the aforementioned acquisitions. In addition, the
increase in gross profit reflected higher international volumes due to the
higher level of drilling activity and higher domestic sales.

Operating expenses, consisting of selling expenses and general and
administrative expenses, increased $45.1 million or 28.0% from the prior year;
however, as a percentage of revenues, operating expenses decreased from 1994.
The increase in absolute expenses is due primarily to increased variable costs
related to the higher level of revenues and additional expenses associated with
the recently acquired companies previously discussed. In addition, the increase
in operating expenses reflects the establishment of the recently formed Smith
Diamond Technology business unit and the expansion of M-I Drilling Fluids
operations in Latin America.

Net interest expense, which represents interest expense less interest
income, increased $3.6 million from $8.6 million in 1994 to $12.2 million in
1995. The increase in net interest expense was due primarily to higher debt
levels to fund working capital requirements, the acquisitions of M-I Drilling
Fluids, BHTS and Fremont and to hedge certain foreign-denominated assets.

The effective tax rate for the year approximated 17.0% which is lower than
the statutory rate and higher than the prior years' effective rate of 13.2%. The
effective tax rate for the year was lower than the statutory rate due primarily
to the utilization of U.S. net operating loss carryforwards. The effective rate
was higher than the prior year's rate due primarily to the expiration of certain
U.S. Alternative Minimum Tax net operating loss carryforwards.

Minority interests represents the share of M-I Drilling Fluids' profits
associated with the 36% minority interest as well as minority interests in
investments in other joint ventures held by M-I Drilling Fluids. Minority
interests increased $7.0 million from $8.8 million in 1994 to $15.8 million in
1995. The increase in minority interests was primarily due to the higher level
of M-I Drilling Fluids' earnings.

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 Drilling Fluids, 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 Drilling Fluids, 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 million in 1993
to $161.2 million 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.

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 Drilling Fluids 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

17
<PAGE> 19

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 Drilling Fluids
and Supradiamant in 1994.

The effective tax rate for 1994 approximated 13.2% which was lower than the
statutory rate. The income tax provision increased approximately $6.3 million
from the prior year due to increased profitability of the Company's foreign
operations. The effective tax rate for the year was lower than the statutory
rate due to the utilization of U.S. net operating loss carryforwards which was
somewhat offset by foreign tax provisions in excess of the U.S. tax rate.

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

LIQUIDITY AND CAPITAL RESOURCES

General

The Company's financial condition remained strong at December 31, 1995.
Working capital at December 31, 1995 increased approximately $42.7 million, or
16.6%, from the comparative period in the prior year. In 1995, cash generated
internally exceeded cash required to support the Company's operations resulting
in a $6.7 million increase in cash from the prior year-end.

The Company invested approximately $25.1 million in net property, plant and
equipment additions during the year. Capital expenditures for 1996 are expected
to increase to approximately $34.4 million, which includes routine additions of
equipment used to support the Company's operations as well as expenditures to
increase the productivity and efficiency of certain operations. The Company
believes funds generated from operations and amounts available under existing
credit facilities will be sufficient to finance capital expenditures and other
working capital needs of the existing operations for the foreseeable future.

The Company's primary internal source of liquidity is cash flow generated
from operations. External sources of liquidity include debt and, if needed,
equity financing. At December 31, 1995, the Company had a $65.0 million
revolving line of credit with a bank group and approximately $22.0 million of
international borrowing facilities with various foreign banks. The Company had
approximately $32.2 million of funds available for borrowing under these
facilities at December 31, 1995. Additionally, a revolving line of credit
facility of $20.0 million, which was established for the use of the M-I Drilling
Fluids operating group, had available borrowing capacity of $10.0 million at
December 31, 1995.

The Company believes that it has sufficient existing manufacturing capacity
to meet current demand for its products and services.

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, 1995, the 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 $6.0 million. As additional
information becomes available, the Company may be required to provide for
additional environmental clean-up costs. However, the Company believes that none
of its clean-up obligations will result in liabilities having a material adverse
effect on the Company's consolidated financial position or results of
operations. See Item 3. "Legal Proceedings -- Superfund" for further discussion.

Because of its substantial foreign operations, the Company is exposed to
currency fluctuations and exchange risks. To mitigate the effect of fluctuations
in exchange rates on foreign denominated balances, the Company utilizes a
protective hedge program. The program is designed to hedge net balance sheet
positions which expose the Company to exchange rate risk. To the extent
possible, the Company matches assets and liabilities denominated in foreign
currencies and uses 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 foreseeable future. In
general, the Company has been able to offset most of the effects of inflation
through productivity gains, cost reductions and price increases.

18
<PAGE> 20

On December 11, 1995, M-I Drilling Fluids signed a letter of intent related
to the acquisition of Anchor Drilling Fluids A.S., a Norwegian company.
Management anticipates financing the Company's portion of the purchase price by
utilizing approximately $70.0 million of borrowings under a new credit
facilities agreement, which is currently being negotiated. Aside from the
planned acquisition, management continues to evaluate opportunities to acquire
products or businesses complimentary to the Company's operations. These
acquisitions may involve the use of cash or, depending upon the size and terms
of the acquisition, may require debt or equity financing.

NEW ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board (the "FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 121 "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". This
statement is effective for fiscal years beginning after December 15, 1995.
Management does not believe that adoption of this pronouncement in 1996 will
have a material impact on its financial statements.

The FASB also issued SFAS No. 123, "Accounting for Stock Based
Compensation", effective for fiscal years beginning after December 15, 1995.
This statement allows companies to choose to adopt the statement's new rules for
accounting for employee stock-based compensation plans. For those companies who
choose not to adopt the new rules, the statement requires disclosures as to what
earnings and earnings per share would have been if the new rules have been
adopted. Management intends to adopt the disclosure requirements of this
statement in 1996.

19
<PAGE> 21

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,
1995 and 1994, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1995. 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, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, 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 7, 1996

20
<PAGE> 22

SMITH INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Revenues..................................................... $874,544 $653,901 $220,712
-------- -------- --------
Costs and expenses:
Costs of revenues.......................................... 582,004 432,627 140,749
Selling expenses........................................... 158,300 116,151 40,480
General and administrative expenses........................ 47,992 45,019 20,908
-------- -------- --------
Total costs and expenses........................... 788,296 593,797 202,137
-------- -------- --------
Income from continuing operations before litigation
settlement, interest and taxes............................. 86,248 60,104 18,575
Litigation settlement (Note 13).............................. -- -- 19,900
Interest expense............................................. 14,101 10,014 6,023
Interest income.............................................. (1,863) (1,442) (3,821)
-------- -------- --------
Income (loss) from continuing operations before income taxes
and minority interests..................................... 74,010 51,532 (3,527)
Income tax provision (Note 6)................................ 12,609 6,815 468
-------- -------- --------
Income (loss) from continuing operations before minority
interests and cumulative effect of change in accounting
principle.................................................. 61,401 44,717 (3,995)
Minority interests........................................... 15,809 8,838 --
-------- -------- --------
Income (loss) from continuing operations..................... 45,592 35,879 (3,995)
Income from discontinued operations (Note 2)................. -- -- 73,623
-------- -------- --------
Income before cumulative effect of change in accounting
principle.................................................. 45,592 35,879 69,628
Cumulative effect of change in accounting principle (Note
1)......................................................... -- -- (1,300)
-------- -------- --------
Net income................................................... 45,592 35,879 68,328
-------- -------- --------
Preferred stock dividends (Note 7)........................... -- -- (868)
-------- -------- --------
Net income applicable to common stock........................ $ 45,592 $ 35,879 $ 67,460
======== ======== ========
Income (loss) per common share from continuing operations.... $ 1.16 $ 0.92 $ (0.13)
======== ======== ========
Net income per common share.................................. $ 1.16 $ 0.92 $ 1.79
======== ======== ========
Average common shares and equivalent shares outstanding...... 39,383 39,065 37,775
======== ======== ========
</TABLE>

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

21
<PAGE> 23

SMITH INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

ASSETS

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
-------- --------
(IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................................ $ 14,845 $ 8,145
Receivables, less allowance for doubtful accounts of $6,838 and
$8,679 in 1995 and 1994, respectively............................. 230,590 201,053
Inventories (Note 3)................................................. 221,952 201,104
Deferred tax assets, net (Note 6).................................... 3,925 2,161
Prepaid expenses and other........................................... 13,979 9,133
-------- --------
Total current assets......................................... 485,291 421,596
-------- --------
PROPERTY, PLANT AND EQUIPMENT:
Land................................................................. 16,997 17,079
Buildings............................................................ 31,199 29,065
Machinery and equipment.............................................. 250,221 220,953
-------- --------
298,417 267,097
Less -- accumulated depreciation.................................. 165,918 149,388
-------- --------
Net property, plant and equipment................................. 132,499 117,709
-------- --------
OTHER ASSETS, including assets held for sale of $6,175 and $8,726 in
1995 and 1994, respectively.......................................... 41,129 41,446
GOODWILL, net of accumulated amortization of $3,275 and $2,137 in 1995
and 1994, respectively............................................... 43,925 39,029
-------- --------
TOTAL ASSETS........................................................... $702,844 $619,780
======== ========
</TABLE>

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

22
<PAGE> 24

SMITH INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

LIABILITIES AND SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
-------- --------
(IN THOUSANDS, EXCEPT
PAR VALUE DATA)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable..................................................... $ 71,439 $ 67,873
Short-term borrowings and current portion of long-term debt (Note
4)................................................................ 25,147 15,852
Accrued payroll costs................................................ 30,922 28,232
Income taxes payable (Note 6)........................................ 11,977 6,579
Other................................................................ 45,804 45,711
-------- --------
Total current liabilities.................................... 185,289 164,247
-------- --------
LONG-TERM DEBT (Note 4)................................................ 117,238 115,000
OTHER LONG-TERM LIABILITIES............................................ 15,754 17,097
MINORITY INTERESTS (Note 1)............................................ 83,677 70,315
COMMITMENTS AND CONTINGENT LIABILITIES (Note 13)
SHAREHOLDERS' EQUITY:
Common stock:
Authorized -- 60,000 shares, $1 par value; issued and
outstanding -- 39,807 shares in 1995 and 39,433 shares in 1994... 39,807 39,433
Common stock warrants (Note 7):
Class A warrants -- outstanding -- None in 1995 and 203 in 1994... -- --
Class B warrants -- outstanding -- None in 1995 and 1,871 in
1994............................................................. -- --
Class C warrants -- outstanding -- 451 in 1995 and 1994........... 7,278 7,278
Additional paid-in capital............................................. 275,432 272,483
Accumulated deficit.................................................... (1,962) (47,554)
Cumulative translation adjustments..................................... (5,755) (4,605)
Less -- treasury securities, at cost (629 common shares and 451 Class C
warrants in 1995 and 1994) (Note 7).................................. (13,914) (13,914)
-------- --------
Total shareholders' equity................................... 300,886 253,121
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................. $702,844 $619,780
======== ========
</TABLE>

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

23
<PAGE> 25

SMITH INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
1995 1994 1993
-------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................. $ 45,592 $ 35,879 $ 68,328
Adjustments to reconcile net income to net cash
provided by operating activities excluding the net
effects from the Company's acquisitions:
Depreciation and amortization..................... 25,540 21,802 11,600
Minority interests in earnings of subsidiary...... 15,809 8,838 --
Provision for losses on receivables............... 1,024 1,642 974
Gain on disposal of fixed assets.................. (4,198) (5,675) (1,623)
Foreign currency translation losses............... 1,112 1,986 621
Gain from sale of the Directional Drilling ("DDS")
operations..................................... -- -- (80,106)
Cumulative effect of change in accounting
principle...................................... -- -- 1,300
Change in receivables............................. (29,847) (18,457) 19,424
Change in inventories............................. (19,961) (20,180) 2,011
Change in accounts payable........................ 3,448 6,396 (5,960)
Changes in other current assets and liabilities... (72) (21,074) 763
Changes in other non-current assets and
liabilities.................................... (11,259) 5,444 (1,931)
-------- --------- ---------
Net cash provided by operating activities...... 27,188 16,601 15,401
-------- --------- ---------
Cash flows from investing activities (Note 2):
Acquisition of Baker Hughes Treatment Services......... (5,131) -- --
Acquisition of Fremont Chemical Company, net of
purchase price financed with long-term debt......... (1,000) -- --
Acquisition of M-I Drilling Fluids L.L.C............... -- (162,000) --
Acquisition of Supradiamant, S.A....................... -- (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 Completion
Systems............................................. -- -- (19,000)
Fixed asset additions.................................. (35,126) (24,140) (15,191)
Proceeds from disposal of fixed assets................. 10,042 10,435 7,091
-------- --------- ---------
Net cash provided by (used in) investing
activities................................... (31,215) (182,068) 173,232
-------- --------- ---------
Cash flows from financing activities (Notes 4 and 7):
Increase (decrease) in short-term borrowings, net...... 8,038 3,295 (33,360)
Proceeds from issuance of long-term debt............... 12,238 92,000 --
Repayment of long-term debt............................ (10,401) (12,788) (67,683)
Proceeds from issuance of common stock and exercise of
stock options and warrants.......................... 3,323 1,023 240
Purchase of treasury stock............................. -- -- (1,329)
Distributions to minority interest..................... (2,520) (11,394) --
Dividends paid on preferred stock...................... -- -- (868)
-------- --------- ---------
Net cash provided by (used in) financing
activities................................... 10,678 72,136 (103,000)
Effect of exchange rate changes on cash.................. 49 (85) (321)
-------- --------- ---------
Increase (decrease) in cash and cash equivalents......... 6,700 (93,416) 85,312
Cash and cash equivalents at beginning of year........... 8,145 101,561 16,249
-------- --------- ---------
Cash and cash equivalents at end of year................. $ 14,845 $ 8,145 $ 101,561
======== ========= =========
</TABLE>

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

24
<PAGE> 26

SMITH INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS, EXCEPT SHARE AND WARRANT DATA)
<TABLE>
<CAPTION>
COMMON STOCK
PREFERRED STOCK COMMON STOCK WARRANTS
--------------------- --------------------- -------------------- ADDITIONAL
NUMBER NUMBER NUMBER PAID-IN
OF SHARES AMOUNT OF SHARES AMOUNT OF WARRANTS AMOUNT CAPITAL
--------- -------- ---------- ------- ----------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
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
period............................ -- -- -- -- -- -- --
-------- ------- ---------- ------- ---------- ------ --------
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
Exercise of employee stock
options........................... -- -- 230,940 230 -- -- 1,908
Exercise of common stock warrants... -- -- 143,572 144 (143,572 ) -- 1,041
Expiration of common stock
warrants.......................... -- -- -- -- (1,930,262 ) -- --
Net income.......................... -- -- -- -- -- -- --
Translation adjustment for the
period............................ -- -- -- -- -- -- --
-------- ------- ---------- ------- ---------- ------ --------
Balance, December 31, 1995.......... -- $ -- 39,807,345 $39,807 451,357 $7,278 $275,432
======== ======= ========== ======= ========== ====== ========

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

COMMON STOCK WARRANTS
CUMULATIVE -------------------- ---------------------
ACCUMULATED TRANSLATION NUMBER NUMBER
DEFICIT ADJUSTMENTS OF SHARES AMOUNT OF WARRANTS AMOUNT
----------- ----------- --------- ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
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
period............................ -- (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)
Exercise of employee stock
options........................... -- -- -- -- -- --
Exercise of common stock warrants... -- -- -- -- -- --
Expiration of common stock
warrants.......................... -- -- -- -- -- --
Net income.......................... 45,592 -- -- -- -- --
Translation adjustment for the
period............................ -- (1,150) -- -- -- --
--------- ------- -------- ------- -------- -------
Balance, December 31, 1995.......... $ (1,962) $(5,755) (628,583 ) $(6,636) (451,357) $(7,278)
========= ======= ======== ======= ======== =======
</TABLE>

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

25
<PAGE> 27

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLAR AMOUNTS ARE EXPRESSED IN THOUSANDS, UNLESS OTHERWISE NOTED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

Smith International, Inc. (the "Company") manufacturers a wide range of
products and provides services to customers in the oil and gas drilling and
production industry. 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 percent interest but not more than a
50 percent 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.

Significant Risks and Uncertainties

Preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosed amounts of
contingent assets and liabilities and the reported amounts of revenues and
expenses. Actual results could differ from those estimates.

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.

Fixed Assets

Fixed assets, consisting of rental equipment and property, plant and
equipment, are stated at cost. The Company computes depreciation on fixed assets
using principally the straight-line method. The estimated useful lives used in
computing depreciation range from 30 to 40 years for buildings, 3 to 20 years
for machinery and equipment, and 3 to 7 years for rental equipment. Leasehold
improvements are amortized over the lives of the leases or the estimated useful
lives of the improvements, whichever is shorter. For income tax purposes,
accelerated methods of depreciation are used.

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

Valuation of Inventories

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

Goodwill

Goodwill is 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.

26
<PAGE> 28

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

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 services are
performed.

27
<PAGE> 29

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Minority Interests

The Company records minority interests expense which primarily represents
the portion of the earnings of M-I Drilling Fluids L.L.C. ("M-I Drilling
Fluids") applicable to the 36 percent minority interest partner. In addition,
minority interests includes income and expense associated with M-I Drilling
Fluids' minority interest ownership position in other joint ventures.

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. Earnings per common share assuming full
dilution, is substantially the same as primary earnings per common share as
presented for each of the years in the period ended December 31, 1995.

Income per common share from discontinued operations was $1.95 and 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 Statements of Operations.

The provisions of SFAS No. 87, "Employers' Accounting for Pensions",
require an additional minimum liability to be recognized for a defined benefit
plan to the extent that the accumulated pension benefit obligation exceeds the
fair value of pension plan assets and any accrued pension liabilities. An
offsetting intangible asset is recorded in the amount of the additional minimum
liability, not to exceed the amount of any unrecognized prior service costs and
any unrecognized transition obligation. Amounts exceeding the unrecognized prior
service costs and unrecognized transition obligation are reflected in other
current liabilities in the Consolidated Balance Sheets.

Reclassifications

Certain prior year amounts have been reclassified to conform to current
year presentation.

2. ACQUISITIONS AND DIVESTITURES

Acquisition of M-I Drilling Fluids

On February 28, 1994, the Company acquired a 64 percent interest in M-I
Drilling Fluids from Dresser Industries, Inc. ("Dresser") for $160.0 million.
M-I Drilling Fluids, which was owned 64 percent by Dresser and 36 percent by
Halliburton prior to the acquisition, is a leading provider of drilling fluids
and systems to the oil and gas drilling industry. The Company purchased the 64
percent interest in the operations using $80.0 million of its cash and issuing a
note payable to Dresser for $80.0 million (See Note 4). The acquisition was
accounted for as a purchase and, accordingly, the purchase price has been
allocated to the assets acquired based on estimated fair values at the date of
acquisition. The purchase price allocation resulted in the Company recording
approximately $37.3 million of goodwill in connection with the transaction. The
acquired operations have been included in results of operations since the
acquisition date.

M-I Drilling Fluids reported unaudited revenues of $75.4 million for the
two months ended February 28, 1994 and $405.8 million for the year ended
December 31, 1993.

28
<PAGE> 30

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Other Acquisitions

The Company has acquired certain other operations during the period
presented. These acquisitions have generally been financed with cash. All of
these acquisitions have been accounted for as purchases and, accordingly, the
purchase price has been allocated to the assets acquired based on estimated fair
values at the date of acquisition. The acquired operations have been included in
results of operations since their respective acquisition dates.

In 1993 and 1994, the Company acquired the operations of A-Z/Grant and
Lindsey Completion Systems ("A-Z/Grant" and "Lindsey") and Supradiamant, S.A.
("Supradiamant"). On December 22, 1993, the Company acquired the product line
assets of A-Z/Grant and Lindsey Completion Systems from MASX Energy Services
Group, Inc. for $19.0 million. A-Z/Grant and Lindsey are leading providers of
downhole tools, remedial services and liner hangers to the oil and gas industry.
On July 1, 1994, the Company acquired Supradiamant from Societe Industrielle de
Combustible Nucleaire for approximately $6.3 million. Supradiamant is a leading
manufacturer of ultrahard materials, polycrystalline diamonds and cubic boron
nitride.

During 1995, M-I Drilling Fluids acquired the operations of Baker Hughes
Treatment Services ("BHTS") and Fremont Chemical Company ("Fremont"). The BHTS
operations were acquired from Baker-Hughes, Inc. on January 1, 1995 in exchange
for approximately $5.1 million. BHTS is a leading supplier of waste
minimization, product recovery services, water treatment, downhole injection and
reserve pit remediation services to the oilfield industry. The Fremont
operations were acquired on June 23, 1995 for approximately $2.7 million.
Fremont is a major supplier of completion fluids in the Rocky Mountain region of
the United States.

The balances included in the 1995 Consolidated Balance Sheet related to the
Fremont acquisition are based upon preliminary information and are subject to
change when additional information concerning final asset and liability
valuations is obtained. Material changes in the preliminary allocation are not
anticipated by management.

The unaudited pro forma revenues and income from continuing operations for
the years ended December 31, 1995 and 1994 assuming the acquisitions of M-I
Drilling Fluids, Supradiamant, BHTS and Fremont had occurred on January 1, 1994
are as follows:

<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Unaudited pro forma revenues................................... $878,144 $751,035
Unaudited pro forma income from continuing operations.......... $ 45,592 $ 34,495
Unaudited pro forma income from continuing operations per
common share................................................. $ 1.16 $ 0.88
</TABLE>

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.

29
<PAGE> 31

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Consolidated Statements of Operations reported the net results of the
DDS operations as income from discontinued operations. The DDS business reported
revenues of $36.3 million in the first three months of 1993. In determining the
income from discontinued operations, interest expense of $1.3 million in 1993
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 the period.

3. INVENTORIES

Inventories consist of the following at December 31:

<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Raw materials.................................................. $ 31,052 $ 24,338
Work-in-process................................................ 40,718 31,805
Finished goods................................................. 163,597 155,420
-------- --------
235,367 211,563
Reserves to state certain domestic inventories ($99,113 in 1995
and $94,339 in 1994) on a LIFO basis......................... (13,415) (10,459)
-------- --------
$221,952 $201,104
======== ========
</TABLE>

4. DEBT

The following summarizes the Company's outstanding debt at December 31:

<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Current:
Short-term bank borrowings with a weighted average interest
rate of 18% in 1995 and 14% in 1994 (average borrowings of
$18.0 million and $9.1 million in 1995 and 1994,
respectively, and an average interest rate of 18% and 13%
in 1995 and 1994, respectively)........................... $ 14,438 $ 5,852
Current portion of long-term debt............................ 10,709 10,000
-------- --------
Total short-term debt and current portion of
long-term debt..................................... 25,147 15,852
-------- --------
Long-Term:
Notes payable to insurance companies due on April 1, 2001
at 9.83%.................................................. 46,000 46,000
Bank revolver payable to banks with final payment due in
March 1997................................................ 50,400 39,000
Term loan payable to insurance companies due on January 2,
1998 at 6.02%............................................. 30,000 40,000
Other........................................................ 1,547 --
-------- --------
127,947 125,000
Less current portion of long-term debt......................... (10,709) (10,000)
-------- --------
Long-Term Debt....................................... $117,238 $115,000
======== ========
</TABLE>

Principal payments of long-term debt are as follows:

<TABLE>
<S> <C>
1997........................................................... $ 71,457
1998........................................................... 20,222
1999........................................................... 10,222
2000........................................................... 10,222
Thereafter..................................................... 5,115
--------
$117,238
========
</TABLE>

30
<PAGE> 32

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company has a $46.0 million term loan maturing April 1, 2001. The term
loan bears interest at a rate of 9.83 percent. The Company was in compliance
with all of its loan covenants under the various loan indentures at December 31,
1995 and 1994.

In March 1994, the Company refinanced the $80.0 million note payable to
Dresser issued to purchase its investment in M-I Drilling Fluids 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 period ending in January 1998. The
revolving line of credit expires in March 1997 and bears interest at a rate
ranging from LIBOR + 5/8 percent to LIBOR +1 1/4 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.

In June 1994, the Company established a $20.0 million revolving line of
credit for M-I Drilling Fluids with its existing bank lenders. This revolving
line of credit expires in May 1996 and bears interest at the rate of LIBOR + 5/8
percent. At December 31, 1995, the borrowing capacity under this revolving line
of credit approximated $10.0 million. The Company has guaranteed its
proportional 64 percent 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.

Certain of the Company's foreign subsidiaries have short-term lines of
credit with various foreign banks totaling approximately $22.0 million. At
December 31, 1995, borrowings of $4.4 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.

Interest paid during the years ended December 31, 1995, 1994 and 1993
amounted to $14.3 million, $7.0 million and $9.2 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.

Foreign Currency Forward Contracts and Options

At December 31, 1995, the Company had outstanding foreign exchange
contracts as a hedge against foreign accounts totaling $22.8 million maturing at
various dates during 1996. There were no significant unrecorded gains or losses
on these contracts as of December 31, 1995. The Company has outstanding foreign
currency option contracts of $7.9 million at December 31, 1995 which expire at
various dates in 1996. The Company has no loss exposure under these contracts.

31
<PAGE> 33

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 percent
and pays a floating rate based on 6 month LIBOR on $46.0 million in borrowings.
During 1995, the Company entered into various interest rate swap agreements to
offset the original agreement, thereby limiting any exposure to future interest
rate fluctuations. The net effect of these swap agreements has resulted in a
minimal gain to date. At December 31, 1995, the estimated costs which will be
incurred over the remaining lives of the swap agreements approximated $1.0
million.

6. INCOME TAXES

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

<TABLE>
<CAPTION>
1995 1994 1993
------- ------ -----
<S> <C> <C> <C>
Current --
United States.......................................... $ 1,605 $ 413 $ --
Foreign................................................ 10,700 5,532 662
State.................................................. 1,245 793 13
------- ------ -----
13,550 6,738 675
------- ------ -----
Deferred --
United States.......................................... 7 64 (301)
Foreign................................................ (948) 13 94
------- ------ -----
(941) 77 (207)
------- ------ -----
Income tax provision..................................... $12,609 $6,815 $ 468
======= ====== =====
</TABLE>

Deferred taxes are principally attributable to timing differences related
to depreciation expense and net operating loss ("NOL") and tax credit
carryforwards. In 1995, 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.

32
<PAGE> 34

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ --------
<S> <C> <C> <C>
Income (loss) from continuing operations before
income taxes and minority interests:
United States................................. $ 54,896 $ 49,583 $ 21,020
Foreign....................................... 19,114 1,949 (24,547)
-------- -------- --------
Total................................. $ 74,010 $ 51,532 $ (3,527)
======== ======== ========
Computed U.S. Federal statutory tax expense
(benefit)..................................... $ 25,904 $ 18,036 $ (1,199)
U.S. Alternative Minimum Tax.................... 1,592 630 --
Utilization of U.S. net operating loss
carryforward.................................. (15,181) (12,118) (7,283)
Minority interests' share of domestic
partnership earnings.......................... (5,351) (3,455) --
Permanent differences........................... 1,753 (1,720) (165)
State taxes, net................................ 1,245 818 13
Foreign tax provisions which vary from the U.S.
rate/foreign losses with no tax benefit
realized...................................... 3,106 4,440 8,929
Other items, net................................ (459) 184 173
-------- -------- --------
Income tax provision.................. $ 12,609 $ 6,815 $ 468
======== ======== ========
</TABLE>

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

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, NET
1995 1994 CHANGE
------------ ------------ --------
<S> <C> <C> <C>
Deferred tax liabilities attributed to the
excess of net book basis over remaining tax
basis (principally depreciation):
Domestic...................................... $(10,278) $(10,114) $ (164)
Foreign....................................... (4,461) (5,076) 615
-------- -------- --------
Total deferred tax liabilities........ (14,739) (15,190) 451
-------- -------- --------
Deferred tax assets attributed to net operating
loss and tax credit carryforwards:
Domestic...................................... 29,903 39,652 (9,749)
Foreign....................................... 19,808 24,278 (4,470)
Other deferred tax assets:
Domestic...................................... 14,355 14,898 (543)
Foreign....................................... 4,722 6,861 (2,139)
-------- -------- --------
Subtotal.............................. 68,788 85,689 (16,901)
Valuation allowance............................. (48,381) (63,993) 15,612
-------- -------- --------
Net deferred tax assets....................... 20,407 21,696 (1,289)
-------- -------- --------
Net deferred tax asset................ $ 5,668 $ 6,506 $ (838)
======== ======== ========
Balance sheet presentation:
Current deferred tax asset, net............... $ 3,925 $ 2,161 $ 1,764
Other assets.................................. 1,743 4,345 (2,602)
-------- -------- --------
Net deferred tax asset................ $ 5,668 $ 6,506 $ (838)
======== ======== ========
</TABLE>

33
<PAGE> 35

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The net change in deferred taxes of $0.8 million is primarily attributed to
the acquisition of M-I Drilling Fluids as discussed in Note 2.

For U.S. tax reporting purposes, the Company has cumulative NOL
carryforwards in the amount of approximately $51.4 million. These losses were
generated in 1987, 1988 and 1992 in the amounts of $6.9 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 $5.0 million and investment and other business tax
credits of $6.9 million. The investment tax credits expire as follows: $2.5
million in 1997, $1.6 million in 1998, $1.5 million in 1999, $1.1 million in
2000 and $0.2 million in 2001 through 2004. Income taxes paid during the years
ended December 31, 1995, 1994 and 1993 amounted to $3.8 million, $7.0 million,
and $0.9 million, respectively.

The Company's foreign subsidiaries currently have undistributed earnings of
$16.2 million which if repatriated would be generally sheltered from U.S. tax by
NOL carryforwards and various foreign tax credits.

7. CAPITAL STOCK

Common stock 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 respective warrant
agreements. During 1995, prior to expiration, 143,449 Class A Warrants and 123
Class B Warrants were exercised and converted into 143,572 shares of the
Company's Common Stock. The Company received approximately $1.2 million in
connection with this exercise and conversion of these warrants. As of December
31, 1995, there were no Class A Warrants and Class B Warrants outstanding.

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, 1994. In 1994, the international subsidiary
exchanged the 451,357 Class C Warrants with the parent to acquire the parent's
64 percent interest in the Canadian drilling fluids subsidiary.

Treasury securities

In addition to the Class C warrants noted above, the Company held
approximately 158,400 shares of common stock obtained under a stock repurchase
program at the end of 1995, 1994 and 1993. These shares are reflected as
treasury securities in the Consolidated Balance Sheets and Consolidated
Statements of Shareholders' Equity. In June 1993, the Board of Directors
approved a stock repurchase program whereby the Company 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. The
program is funded by the Company's cash balances, of which approximately $1.3
million was utilized for the share repurchases.

34
<PAGE> 36

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Preferred Stock

In 1988, the Company authorized the issuance of 5,000,000 shares of 8.75
percent convertible preferred stock. The convertible preferred stock carried a
cumulative annual dividend of 8.75 percent ($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.

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, 1995 and 1994, there were no
shares of the preferred stock outstanding.

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

As of December 31, 1995, 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"). Matters such as vesting periods
and expiration of options are determined on a plan by plan or grant by grant,
basis. The options, exercisable at various dates through December 2003, are
conditioned upon continued employment.

The following is a summary of stock option activity for the years ended
December 31, 1995, 1994 and 1993:

<TABLE>
<CAPTION>
SHARES UNDER
OPTION PRICE RANGE
------------ ---------------
<S> <C> <C>
Outstanding at December 31, 1992....................... 720,190 $ 2.48 - $16.09
Options granted...................................... 439,500 $ 8.38 - $10.31
Options forfeited.................................... (116,015) $ 2.53 - $16.09
Options exercised.................................... (40,843) $ 2.48 - $ 8.38
---------
Outstanding at December 31, 1993....................... 1,002,832 $ 2.48 - $16.09
Options granted...................................... 513,300 $13.13
Options forfeited.................................... (41,562) $ 8.38 - $16.09
Options exercised.................................... (97,495) $ 2.53 - $14.73
---------
Outstanding at December 31, 1994....................... 1,377,075 $ 2.48 - $14.73
Options granted...................................... 225,485 $13.13 - $17.88
Options forfeited.................................... (13,574) $ 8.38 - $14.73
Options exercised.................................... (228,940) $ 2.53 - $14.73
---------
Outstanding at December 31, 1995....................... 1,360,046 $ 2.48 - $17.88
=========
</TABLE>

Of the options outstanding at December 31, 1995, 494,889 options with
exercise prices ranging from $2.48 to $14.73 were exercisable. At December 31,
1994, 428,291 options granted at prices ranging from $2.48 to $14.73 were
exercisable.

In addition, as part of the 1989 Plan, the Company granted 82,540 Stock
Appreciation Rights in 1991 at an exercisable price range of $10.52 - $14.73 and
80,775 Stock Appreciation Rights in 1990 at an exercisable price range of
$12.56 - $16.09. At December 31, 1995, there were 8,594 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.

35
<PAGE> 37

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

At December 31, 1995, there were 691,428 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. No further options may be granted under the 1982 Plan.

9. EMPLOYEE BENEFITS

Pension Plans

The Company has 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 1995, 1994 or 1993. Most
of the employees of M-I Drilling Fluids are not covered by any pension plans.

The following tables detail the components of pension expense for the three
years ended December 31, 1995, the funded status of the plans and major
assumptions used to determine these amounts:

<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Service cost.................................... $ 286 $ 266 $ 276
Interest cost................................... 942 862 769
Actual return on plan assets.................... (796) (299) (1,308)
Prior service cost.............................. 8 -- --
Net amortization and deferral and other......... (199) (645) 1,284
------- ------- -------
Net periodic pension cost....................... $ 241 $ 184 $ 1,021
======= ======= =======
</TABLE>

Reconciliation of Funded Status of the Plan:

<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation..................... $11,672 $ 9,863 $10,276
======= ======= =======
Accumulated benefit obligation................ $11,834 $ 9,993 $10,468
======= ======= =======
Projected benefit obligation.................. $12,700 $10,681 $11,540
Plan assets at fair value..................... 12,926 11,166 10,259
------- ------- -------
Projected benefit obligation (in excess of) or
less than Plan assets...................... $ 226 $ 485 $(1,281)
Unrecognized prior service cost............... 34 11 --
Unrecognized net (gain) loss.................. 211 (133) 1,440
Additional minimum liability.................. (880) (978) (2,491)
------- ------- -------
Pension liability recognized in the Balance
Sheet...................................... $ (409) $ (615) $(2,332)
======= ======= =======
Weighted-average assumed discount rate......... 7.0% - 9.0% 8.5% - 8.9% 7.0%

Rate of compensation increases................. None in the U.S. due to freezing of
benefits; 7.5% in the U.K.

Weighted-average expected long-term rate of
return on Plan assets........................ 8.5% - 9.0% 8.5% - 9.0% 7.0%
</TABLE>

The Company has several other pension plans covering certain international
employees as well as a pension plan covering directors. Pension expense, total
accumulated plan benefits and net assets available for benefits for these plans
were not material at December 31, 1995, 1994 or 1993.

36
<PAGE> 38

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Retirement Plans

The Company established the Smith International, Inc. 401(k) Retirement
Plan (the "Plan") for the benefit of all eligible employees. Employees may
voluntarily contribute up to 12 percent of compensation, as defined, to the
Plan. The Company makes retirement and, in certain cases, matching contributions
to each participant's account under the Plan. The Company's retirement
contributions range from 2 percent to 6 percent of each participant's qualified
compensation. In addition, the Company may provide discretionary matching
contributions to participants who are employed by the Company on December 31.
The Company's contributions to the Plan totaled approximately $3.9 million, $4.4
million and $2.9 million in 1995, 1994 and 1993, respectively.

M-I Drilling Fluids has an employee 401(k) savings plan (the "M-I Plan")
under which participating employees may defer up to 12 percent of their
compensation, as defined, to the M-I Plan. Under the M-I Plan, 100 percent of
the first 1 1/2 percent of participants' contributions are matched by M-I
Drilling Fluids. In addition, M-I Drilling Fluids provides a 3 percent basic
contribution to all eligible employees. M-I Drilling Fluids' contributions to
the M-I Plan approximated $2.2 million in 1995 and $1.7 million in 1994.

Postretirement Benefit Plans

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. 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. The cap
will be adjusted annually for inflation, which is currently assumed to be 4
percent.

Prior to January 1, 1994 M-I Drilling Fluids had provided retiree medical
coverage to its employees under the M-I Drilling Fluids Retiree Medical Plan.
Eligibility for inclusion in that plan was closed as of January 1, 1994, to the
majority of M-I Drilling Fluids' employees. The plan continues to provide post-
retirement medical coverage to the eligible retirees and their dependents. M-I
Drilling Fluids contributes to the cost of the benefits under this plan;
however, these costs are reviewed annually for inflation, and limited to a
maximum 5 percent increase in M-I Drilling Fluids' contribution per year. Any
costs in excess of M-I Drilling Fluids' maximum contribution is the
responsibility of the retiree or their dependents.

37
<PAGE> 39

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 at December 31:

<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- -------
<S> <C> <C> <C>
Accumulated postretirement benefit obligation:
-- Retirees....................................... $ (5,105) $ (4,829) $(1,140)
-- Actives........................................ (3,543) (3,248) (93)
Plan assets at fair value........................... -- -- --
-------- -------- -------
Accumulated postretirement benefit obligation in
excess of plan assets............................. (8,648) (8,077) (1,233)
Unrecognized net gain............................... (1,832) (2,510) (57)
-------- -------- -------
Accrued postretirement benefit cost................. $(10,480) $(10,587) $(1,290)
======== ======== =======
</TABLE>

Postretirement benefit expense recognized in income from continuing
operations for the three years ended December 31, 1995 is summarized as follows:

<TABLE>
<CAPTION>
1995 1994 1993
----- ----- ----
<S> <C> <C> <C>
Service cost........................................... $ 83 $ 87 $ 9
Interest cost on accumulated postretirement benefit
obligation and other................................. 686 701 223
Net gain............................................... (170) (159) --
----- ----- ----
Postretirement benefit expense......................... $ 599 $ 629 $232
===== ===== ====
</TABLE>

The health care cost trend rate assumption can have a significant effect on
the amounts reported. For measurement purposes, an 10 percent, 11 percent and 12
percent annual rate of increase in the per capita cost of covered health care
benefits was assumed for 1995, 1994 and 1993, respectively. The rate was assumed
to gradually decrease to 7 percent for 1998 and to remain at that level
thereafter. An increase of one percentage point in the health care cost trend
rate would increase the accumulated postretirement benefit obligation and the
aggregate of the service and interest cost components of the postretirement
benefits expense by $1.1 million and $0.1 million, respectively.

The weighted-average discount rates used in determining the accumulated
postretirement benefit obligation for 1995, 1994 and 1993 were 8.4 percent,
8.5-8.9 percent and 7.0 percent, 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 acquirer 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 percent or more of the Common Stock or (b)
acquires beneficial ownership of 1 percent or more of the Company's Common Stock
if such person or group is a 20 percent-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

38
<PAGE> 40

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

own 20 percent or more of the Common Stock of the Company. However, the Rights
will not become exercisable if Common Stock is acquired pursuant to an offer for
all shares which a majority of the independent directors, excluding all officers
of the Company, determine to be fair to and otherwise in the best interests of
the Company and its shareholders.

If any person or group becomes the beneficial owner of 20 percent or more
of the Company's Common Stock, or acquires 1 percent or more of the Common Stock
if such person or group is a 20 percent-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 percent or
more of the Company's Common Stock, or acquires 1 percent or more of the Common
Stock if such person is a 20 percent-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 percent 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 percent or more of the Company's Common Stock, or acquires 1 percent or more
of the Common Stock if a 20 percent-or-more shareholder on the date when the
Rights dividend distribution is declared.

11. QUARTERLY INFORMATION (UNAUDITED)

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH YEAR
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
1995
Revenues...................... $199,603 $205,976 $229,437 $239,528 $874,544
======== ======== ======== ======== ========
Gross profit.................. $ 65,536 $ 68,797 $ 76,643 $ 81,564 $292,540
======== ======== ======== ======== ========
Net income.................... $ 10,805 $ 10,124 $ 11,743 $ 12,920 $ 45,592
======== ======== ======== ======== ========
Net income per common share... $ 0.28 $ 0.26 $ 0.30 $ 0.33 $ 1.16
======== ======== ======== ======== ========
</TABLE>

Included in the results for 1995 are a full year of the operations of
A-Z/Grant and Lindsey, M-I Drilling Fluids, Supradiamant and BHTS, in addition
to six months of operations of Fremont. For a further discussion of these
acquisitions, see Note 2.

39
<PAGE> 41

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<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
======== ======== ======== ======== ========
Net income.................... $ 7,589 $ 8,465 $ 9,349 $ 10,476 $ 35,879
======== ======== ======== ======== ========
Net income per common share... $ 0.20 $ 0.22 $ 0.24 $ 0.27 $ 0.92
======== ======== ======== ======== ========
</TABLE>

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 Drilling Fluids and six
months of operations of Supradiamant. For a further discussion of these
acquisitions, see Note 2.

12. INDUSTRY SEGMENTS AND INTERNATIONAL OPERATIONS

The Company operates primarily in one industry segment, the petroleum
services segment. The products and services of the petroleum services segment
are primarily used in the drilling of oil and gas wells. No single customer
represented in excess of 10 percent of total revenues during any of the years
presented.

The following table presents financial information about foreign and
domestic operations and export sales:

<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Revenues:
United States:
Domestic...................................... $358,392 $280,435 $104,415
Export........................................ 50,454 56,421 29,926
North Sea/Europe................................. 168,135 122,971 36,329
Latin America.................................... 112,587 44,065 8,655
Other............................................ 184,976 150,009 41,387
-------- -------- --------
$874,544 $653,901 220,712
======== ======== ========
Income from continuing operations before interest
and taxes:
United States.................................... $ 37,115 $ 33,520 $ 26,532
North Sea/Europe................................. 15,129 10,993 1,805
Latin America.................................... 21,307 2,279 (1,274)
Other............................................ 23,083 23,497 (2,547)
-------- -------- --------
$ 96,634 $ 70,289 $ 24,516
======== ======== ========
Identifiable assets:
United States.................................... $418,588 $372,410 249,218
North Sea/Europe................................. 94,648 109,283 17,305
Latin America.................................... 87,322 52,202 16,061
Other............................................ 102,286 85,885 65,902
-------- -------- --------
$702,844 $619,780 348,486
======== ======== ========
</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 $10.4 million in
1995, $10.2 million in 1994 and $5.9 million in 1993.

40
<PAGE> 42

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Transfers between geographic areas, which are eliminated upon
consolidation, are excluded from the above presentation. These transfers are
recorded by the Company and its subsidiaries based on their various intercompany
pricing agreements. U.S. sales to affiliates amounted to $126.1 million, $85.2
million and $58.7 million in 1995, 1994 and 1993, respectively. International
sales to affiliates approximated $58.2 million, $47.0 million and $23.1 million
in 1995, 1994 and 1993, respectively.

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.

13. COMMITMENTS AND CONTINGENT LIABILITIES

Leases

The Company has entered into operating and capital leases for certain of
its facilities and equipment. At December 31, 1995 and 1994, machinery and
equipment included $3.0 million and $3.2 million, respectively, of assets under
capital lease for which accumulated amortization approximated $1.3 million and
$1.1 million in 1995 and 1994, respectively. These capital leases are recorded
in other current and other long-term liabilities in the accompanying
Consolidated Balance Sheets.

Future minimum payments under all non-cancelable 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>
1996........................................................... $ 939 $11,929
1997........................................................... 861 8,092
1998........................................................... 354 6,041
1999........................................................... 2 4,804
2000........................................................... -- 3,753
Thereafter....................................................... -- 24,641
------ -------
2,156 $59,260
=======
Less: amount representing interest on capital leases............. 420
-------
Present value of minimum lease payments under capital leases..... $ 1,736
======
</TABLE>

Litigation

The Company is a defendant in various legal proceedings arising in the
ordinary course of business. A description of certain of these proceedings
follows.

The Company was named a defendant in an action entitled Lynn Martin,
Secretary of the U.S. Dept. of Labor v. Smith International, Inc., et al., which
alleged violations of the Employee Retirement Income Security Act of 1974
("ERISA") arising out of the Company's purchase of Executive Life Insurance
Company ("Executive Life") annuities. Executive Life was placed in
conservatorship in 1991 by the California Insurance Commissioner and has since
emerged from conservatorship as Aurora National Life Assurance Company, Inc.
("Aurora"). 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. In December 1994, the parties agreed in principle
to a settlement. Pursuant to a consent order, the Company paid $4.07 million
into an escrow account, the majority of which was paid by the Company's
insurance carrier. The Company recognized its portion of the settlement of
approximately $1.0 million in 1994. The settlement is still on deposit in the
escrow account as the Department of Labor has not yet finalized the timing,
amount or

41
<PAGE> 43

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

manner of the distributions to the Plan participants. In the opinion of
management, this matter will not have a material adverse effect on the Company's
consolidated financial condition or results of operations.

The Company is involved in several actions relating to alleged liability in
connection with the U.S. Environmental Protection Agency's ("EPA") National
Priorities List ("NPL") sites:

Sheridan. On March 31, 1987, the Sheridan Site Committee (the "Committee")
filed a claim on behalf of itself and 59 potentially responsible parties
("PRPs") at the Sheridan Disposal Services site in Hempstead, Texas, a 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 and 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 percent of actual
response costs. Based upon an EPA Record of Decision ("ROD"), total remediation
costs are estimated, on a preliminary basis, to be approximately $28 million. On
this basis, the Company's share would be $0.8 million.

Operating Industries. Under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 (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 million. 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 percent
of future site response costs.

Chemform. The Company 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 business and
assigned the lease. The EPA placed the Chemform Site on the NPL on October 4,
1989. On September 22, 1992, the EPA issued the ROD for a portion of the
Chemform Site. The ROD selected a "No Action with Monitoring" alternative, under
which groundwater would be monitored quarterly for at least one year. Although
the Company and two other PRPs have completed four quarters of groundwater
monitoring, the Florida Department of Environmental Protection ("Florida DEP")
has requested that additional monitoring 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.

42
<PAGE> 44

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

removed at the Chemform Site. The Company and the two other PRPs performed the
soil removal requested under the oversight of the Florida DEP and has provided a
Technical Memorandum summarizing this action to the EPA and the Florida DEP. The
Company has not received any written response from either the EPA or the Florida
DEP. 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.

At December 31, 1995, 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 $6.0 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.

Litigation Settlement. In 1993, the Company recorded a special charge of
$19.9 million relating to the settlement of three civil actions which alleged
violations of Section 1 of the Sherman Act. 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 litigation settlement
appearing in the 1993 Consolidated Statements of Operations consists of the
settlement cost of $16.8 million and estimated legal fees and other expenses.

14. POTENTIAL ACQUISITION (UNAUDITED)

On December 11, 1995, M-I Drilling Fluids signed a letter of intent to
acquire Anchor Drilling Fluids A.S., a Norwegian company, in a transaction which
is expected to be accounted for as a purchase. Management anticipates financing
the Company's portion of the purchase price by utilizing approximately $70.0 of
borrowings under a new credit facilities agreement, which is currently being
negotiated.

The transaction is subject to, among other conditions, execution of a
Definitive Agreement and approval by various governmental entities in the United
States and Norway. There are no assurances as to whether this transaction will
be ultimately consummated.

43
<PAGE> 45

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

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> <C>
(1) Financial statements included in this report:
Report of Independent Public Accountants.............................. 20
Consolidated Statements of Operations for the years ended December 31,
1995, 1994 and 1993................................................. 21
Consolidated Balance Sheets at December 31, 1995 and 1994............. 22-23
Consolidated Statements of Cash Flows for the years ended December 31,
1995, 1994 and 1993................................................. 24
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1995, 1994 and 1993.................................... 25
Notes to Consolidated Financial Statements............................ 26-43
</TABLE>

44
<PAGE> 46

<TABLE>
<CAPTION>
PAGE
REFERENCE
----------
<S> <C> <C>
Financial statement schedule for the years ended December 31, 1995,
(2) 1994 and 1993:
II Valuation and qualifying accounts and reserves..................... 48
</TABLE>

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

(3) Exhibits and Index to Exhibits

<TABLE>
<S> <C>
3.1 -- Restated Certificate of Incorporation of the Company as amended to
date. 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. Filed as Exhibit 4.3 to the Company's
Form 10-K for the year ended December 31, 1994 and incorporated
herein by reference.
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. Filed as Exhibit 4.4 to
the Company's Form 10-K for the year ended December 31, 1994 and
incorporated herein by reference.
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. Filed as Exhibit 4.5 to
the Company's Form 10-K for the year ended December 31, 1994 and
incorporated herein by reference.
4.6 -- Loan Agreement dated as of July 1, 1995, by and among the Company and
Texas Commerce Bank National Association, individually and as Agent,
and the other financial institutions parties thereto.
4.7 -- 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. Filed as Exhibit 4.6 to the Company's Form 10-K for
the year ended December 31, 1994 and incorporated herein by
reference.
</TABLE>

45
<PAGE> 47

<TABLE>
<S> <C>
4.8 -- 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. Filed as Exhibit 4.7 to the
Company's Form 10-K for the year ended December 31, 1994 and
incorporated herein by reference.
4.9 -- Second Amendment to Loan Agreement dated as of January 31, 1996, 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.
10.2 -- Smith International, Inc. 1982 Stock Option Plan.
10.3 -- Smith International, Inc. 1989 Long-Term Incentive Compensation Plan,
as amended to date. Filed as Exhibit 10.3 to the Company's report on
Form 10-K for the year ended December 31, 1994 and incorporated by
reference.
10.4 -- Smith International, Inc. Directors' Retirement Plan as amended to
date.
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 -- 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.
10.7 -- Amendment to Supply Agreement dated October 1, 1989 between the
Company and Amforge-Smith Forge Company for the supply of forgings.
10.8 -- Supply Agreement dated October 1, 1989 between the Company and
Amforge-Smith Forge Company for the supply of forgings.
10.9 -- 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.
10.10 -- 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.
10.11 -- 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.
10.12 -- 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.
10.13 -- Employment Agreement dated April 3, 1995 between the Company and
Roger A. Brown.
10.14 -- Amendment to Employment Agreement dated October 16, 1989 between the
Company and Douglas L. Rock.
10.15 -- Amendment to Employment Agreement dated October 16, 1989 between the
Company and D. Barry Heppenstall.
10.16 -- 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.
</TABLE>

46
<PAGE> 48

<TABLE>
<S> <C>
10.17 -- 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.
10.18 -- First Amendment to Amendment to Employment Agreement dated November
12, 1992 between the Company and Doug Rock.
10.19 -- First Amendment to Amendment to Employment Agreement dated November
12, 1992 between the Company and Barry Heppenstall.
10.20 -- First Amendment to Amendment to Employment Agreement dated November
12, 1992 between the Company and Neal S. Sutton.
10.21 -- First Amendment to Amendment to Employment Agreement dated November
12, 1992 between the Company and Richard A. Werner.
10.22 -- Asset Acquisition Agreement dated January 14, 1993 by and between the
Company and Halliburton Company with respect to the sale of the
Company's directional drilling business. Filed as Exhibit 10.21 to
the Company's report on Form 10-K for the year ended December 31,
1992 and incorporated herein by reference.
11. -- Not applicable.
12. -- Not applicable.
13. -- Not applicable.
18. -- Not applicable.
19. -- Not applicable.
21. -- Subsidiaries of the Company.
23.1 -- Consent of Arthur Andersen LLP regarding Form S-8 Registration
Statement No. 33-31556
23.2 -- Consent of Arthur Andersen LLP regarding Form S-8 Registration
Statement No. 33-69840
23.3 -- Consent of Arthur Andersen LLP 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.

47
<PAGE> 49

SCHEDULE II

SMITH INTERNATIONAL, INC.

VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
BALANCE ADDITIONS BALANCE
AT BEGINNING CHARGED AT END
OF YEAR TO EXPENSE WRITE-OFFS OTHER OF YEAR
------------ ---------- ---------- ------ -------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
Year Ended -- December 31, 1995....... $8,679 $1,024 $ (2,865) $ -- $ 6,838
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
</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.

48
<PAGE> 50
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 20, 1996

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

<TABLE>
<S> <C> <C>
/s/ DOUGLAS L. ROCK Chairman of the Board, Chief March 20, 1996
_________________________________________ Executive Officer, President
(Douglas L. Rock) and Chief Operating Officer

/s/ LOREN K. CARROLL Executive Vice President and March 20, 1996
_________________________________________ Chief Financial Officer
(Loren K. Carroll)

/s/ JOHN J. KENNEDY Vice President, Chief Accounting March 20, 1996
_________________________________________ Officer and Treasurer
(John J. Kennedy)

/s/ BENJAMIN F. BAILAR Director March 20, 1996
_________________________________________
(Benjamin F. Bailar)

/s/ G. CLYDE BUCK Director March 20, 1996
_________________________________________
(G. Clyde Buck)

/s/ JAMES R. GIBBS Director March 20, 1996
_________________________________________
(James R. Gibbs)

/s/ JERRY W. NEELY Director March 20, 1996
_________________________________________
(Jerry W. Neely

/s/ H. MOAK ROLLINS Director March 20, 1996
_________________________________________
(H. Moak Rollins)

</TABLE>

49
<PAGE> 51

INDEX TO EXHIBIT

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER PAGE
- ----------- -----------
<C> <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. Filed as Exhibit 4.3 to the Company's
Form 10-K for the year ended December 31, 1994 and incorporated herein
by reference.
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. Filed as Exhibit 4.4 to the
Company's Form 10-K for the year ended December 31, 1994 and
incorporated herein by reference.
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. Filed as Exhibit 4.5 to the
Company's Form 10-K for the year ended December 31, 1994 and
incorporated herein by reference.
4.6 -- Loan Agreement dated as of July 1, 1995, by and among the Company and
Texas Commerce Bank National Association, individually and as Agent,
and the other financial institutions parties thereto.
4.7 -- 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. Filed as Exhibit 4.6 to the Company's Form 10-K for
the year ended December 31, 1994 and incorporated herein by reference.
4.8 -- 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. Filed as Exhibit 4.7 to the
Company's Form 10-K for the year ended December 31, 1994 and
incorporated herein by reference.
</TABLE>
<PAGE> 52

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER PAGE
- ----------- -----------
<C> <S> <C>
4.9 -- Second Amendment to Loan Agreement dated as of January 31, 1996, 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.
10.2 -- Smith International, Inc. 1982 Stock Option Plan.
10.3 -- Smith International, Inc. 1989 Long-Term Incentive Compensation Plan,
as amended to date. Filed as Exhibit 10.3 to the Company's report on
Form 10-K for the year ended December 31, 1994 and incorporated by
reference.
10.4 -- Smith International, Inc. Directors' Retirement Plan as amended to
date.
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 -- 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.
10.7 -- Amendment to Supply Agreement dated October 1, 1989 between the
Company and Amforge-Smith Forge Company for the supply of forgings.
10.8 -- Supply Agreement dated October 1, 1989 between the Company and
Amforge-Smith Forge Company for the supply of forgings.
10.9 -- 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.
10.10 -- 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.
10.11 -- 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.
10.12 -- 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.
10.13 -- Employment Agreement dated April 3, 1995 between the Company and Roger
A. Brown.
10.14 -- Amendment to Employment Agreement dated October 16, 1989 between the
Company and Douglas L. Rock.
10.15 -- Amendment to Employment Agreement dated October 16, 1989 between the
Company and D. Barry Heppenstall.
10.16 -- 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.
</TABLE>
<PAGE> 53

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER PAGE
- ----------- -----------
<S> <C> <C>
10.17 -- 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.
10.18 -- First Amendment to Amendment to Employment Agreement dated November
12, 1992 between the Company and Doug Rock.
10.19 -- First Amendment to Amendment to Employment Agreement dated November
12, 1992 between the Company and Barry Heppenstall.
10.20 -- First Amendment to Amendment to Employment Agreement dated November
12, 1992 between the Company and Neal S. Sutton.
10.21 -- First Amendment to Amendment to Employment Agreement dated November
12, 1992 between the Company and Richard A. Werner.
10.22 -- Asset Acquisition Agreement dated January 14, 1993 by and between the
Company and Halliburton Company with respect to the sale of the
Company's directional drilling business. Filed as Exhibit 10.21 to the
Company's report on Form 10-K for the year ended December 31, 1992 and
incorporated herein by reference.
11. -- Not applicable.
12. -- Not applicable.
13. -- Not applicable.
18. -- Not applicable.
19. -- Not applicable.
21. -- Subsidiaries of the Company.
23.1 -- Consent of Arthur Andersen LLP regarding Form S-8 Registration
Statement No. 33-31556
23.2 -- Consent of Arthur Andersen LLP regarding Form S-8 Registration
Statement No. 33-69840
23.3 -- Consent of Arthur Andersen LLP regarding Form S-8 Registration
Statement No. 33-56693
27 -- Financial Data Schedule
</TABLE>

<PAGE> 1
EXHIBIT 4.6

THIRD AMENDMENT TO LOAN AGREEMENT

THIS THIRD AMENDMENT TO LOAN AGREEMENT ("Third Amendment") dated as of
July 1, 1995 but effective as of February 28, 1994 (the "Third 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 Third 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, and as further amended
pursuant to that certain Second Amendment dated as of February 15, 1995 (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. Amendment to the Loan Agreement. On and after the
Third Amendment Effective Date, the Loan Agreement shall be amended as follows:

(a) Section 8.13 of the Loan Agreement shall be amended to read in
its entirety as follows:

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 under all Long-Term Learn would
exceed 6.25% of the Tangible Net Worth of the Borrower and its
Subsidiaries; provided, however, that beginning February 28, 1994,
with respect to each Long-Term Lease, (i) the Rentals due during each
of the three years immediately following the date of determination
shall be deemed to be equal to the Rentals due during the fourth such
following year, and (ii) for purposes of this Section only,
calculation of Tangible Net Worth shall include any direct or indirect
minority interest in M-I.
<PAGE> 2
(b) Section 2.2 of Schedule l the Loan Agreement shall be amended
to read in its entirety as follows:

(b) No more than seven (7) Eurodollar Rate Borrowings
shall be in effect at any time.

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 Third Amendment and any of the foregoing documents, the terms of this
Third 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 Third 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 Third 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 Third 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 Third 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 Third Amendment.

Section 8. Counterparts. This Third 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.

2
<PAGE> 3
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 Third Amendment
Effective Date the term (i) "Agreement" shall mean the Loan Agreement as
amended by this Third 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 Third
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 THIRD 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.

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

<PAGE> 1
EXHIBIT 4.9

SECOND AMENDMENT TO LOAN AGREEMENT

THIS SECOND AMENDMENT TO LOAN AGREEMENT ("Second Amendment") dated as
of January 31, 1996 (the "Second 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 a First Amendment to
Loan Agreement dated as of February 15, 1995 and 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 June 30, 1994, as amended by First Amendment to Loan
Agreement dated as of February 15, 1995 (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. Amendment to the Loan Agreement. On and after the
Second Amendment Effective Date, the definition 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,
May 14, 1996, as the same may hereafter be accelerated
pursuant to the provisions of any of the Loan Documents.

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 herein. 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
<PAGE> 2
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.

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.

2
<PAGE> 3
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.

M-I DRILLING FLUIDS, L.L.C.

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

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

By: /s/ MICHAEL V. ADDY
----------------------------------------------
Name: Michael V. Addy
----------------------------------------------
Title: Vice President
----------------------------------------------

3
<PAGE> 4
THE BANK OF CALIFORNIA, N.A.

By: /s/ LYNN E. VINE
----------------------------------------------
Name: Lynn E. Vine
----------------------------------------------
Title: Vice President
----------------------------------------------

4
<PAGE> 5
DEN NORSKE BANK AS

By: /s/ CHARLES E. HALL
----------------------------------------------
Name: Charles E. Hall
----------------------------------------------
Title: First Vice President
----------------------------------------------

By: /s/ BYRON L. COOLEY
----------------------------------------------
Name: Byron L. Cooley
----------------------------------------------
Title: First Vice President
----------------------------------------------

5
<PAGE> 6
FIRST INTERSTATE BANK OF TEXAS, N.A.

By: /s/ FRANK W. SCHAGEMAN
----------------------------------------------
Name: Frank W. Schageman
----------------------------------------------
Title: Vice President, First Interstate Bank-Texas
----------------------------------------------

6
<PAGE> 7
CORESTATES BANK, N.A.

By: /s/ KRISTEN V. METZGER
----------------------------------------------
Name: Kristen V. Metzger
----------------------------------------------
Title: Commercial Officer
----------------------------------------------

7
<PAGE> 8
ARAB BANKING CORPORATION (B.S.C.)

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

8
<PAGE> 9
The undersigned acknowledge and consent to the execution of the foregoing
Second Amendment.

SMITH INTERNATIONAL, INC.

HALLIBURTON COMPANY

By: /s/ C. ROBERT FIELDER
----------------------------------------------
Name: C. Robert Fielder
----------------------------------------------
Title: Vice President and Treasurer
----------------------------------------------

<PAGE> 1
EXHIBIT 10.1

AMENDMENT NO.2 OF THE SMITH INTERNATIONAL. INC.
SUPPLEMENTAL PENSION PLAN

The SMITH INTERNATIONAL, INC. SUPPLEMENTAL PENSION PLAN (the "Plan")
is hereby amended as follows:

With respect to Section 1.1, Mr. Jerry W. Neely shall be deemed to have met the
eligibility requirements for participation in the Plan. Payments shall
commence as provided in Section 2.5 of the Plan.

EXECUTED at Houston, Texas, this 27th day of April, 1994.

SMITH INTERNATIONAL, INC.

By: /s/ NEAL S. SUTTON
------------------------------------
Neal S. Sutton
Vice President,
Administration, General
Counsel and Secretary
<PAGE> 2
AMENDMENT NO. 1 TO THE SMITH INTERNATIONAL, INC.
SUPPLEMENTAL PENSION PLAN

The SMITH INTERNATIONAL, INC. SUPPLEMENTAL PENSION PLAN is hereby
amended as follows:

Effective from and after July 1, 1981 that portion of Section 1.1,
"Requirements for Participation," which reads "except Drilco, Drilco
Industrial, Mobile-Lab and Emco (which persons participate in a
Company-sponsored Profit Sharing Plan)," is deleted. Any person who
has served as President of the Drilco or Drilco Industrial divisions
of the Company on or after July 1, 1981 and meets the age, service,
and other requirements specified in Section 1.1 shall be eligible to
participate in this Plan.

EXECUTED at Newport Beach, California, this 17th day of June, 1981.

SMITH INTERNATIONAL, INC.

By: /s/ BRUCE D. WALLACE
------------------------------------
Bruce D. Wallace

APPROVED AS TO FORM:

VOEGELIN & BARTON
Attorneys for the Company

By: /s/ CRAIG C. ALEXANDER
-------------------------------------
Craig C. Alexander
<PAGE> 3

THE SMITH INTERNATIONAL. INC.

SUPPLEMENTAL PENSION PLAN

WHEREAS, SMITH INTERNATIONAL, INC. (the "Company") desires to
encourage the Voluntary early retirement of certain executive employees whose
normal retirement benefits accrue at age 65; and

WHEREAS, the terms of the Company's qualified Pension Plan require an
actuarial reduction in pension benefits for all Participants who retire prior
to age 65; and

WHEREAS, the Company desires to provide supplemental retirement
benefits for certain executive employees who are encouraged to retire at age
60, thus insuring such employees of a pension benefit equivalent to that which
they would have received had they remained in the Company's employ until age
65; and

WHEREAS, the Company desires to allow such certain executive employees
to elect voluntary retirement at age 55 or later with a reduced retirement
benefit;

NOW, THEREFORE. SMITH INTERNATIONAL. INC. hereby adopts this, the
SMITH INTERNATIONAL, INC. SUPPLEMENTAL PENSION PLAN to provide as follows:

ARTICLE I

ELIGIBILITY

Section 1.1 - Requirements for Participation

Any employee who, after the effective date of this Plan, has served
the Company as Chief Executive Officer, President, Vice President, Treasurer,
Secretary, Controller or as the President of any Division of the Company except
Drilco, Drilco Industrial, Mobile-Lab and Emco (which persons participate in a
Company sponsored Profit Sharing Plan), has attained age 55, and has
accumulated five (5) years of service with the Company, shall be eligible to
participate in this Plan; provided that such person has occupied such position
and has accumulated such five (5) years of service while a Participant in the
SMITH INTERNATIONAL, INC. PENSION PLAN (hereinafter referred to as "the
Qualified Plan").

1
<PAGE> 4

Section 1.2 - Date of Participation

An employee who meets the requirements of Section 1.1 above shall, as
of such date, have a fully vested, nonforfeitable, enforceable contract right
in supplement pension benefits computed as provided in Article II. Payments
shall commence as provided in Section 2.5 below.

ARTICLE II

SUPPLEMENTAL PENSION BENEFITS

Section 2.1 - Relation to Qualified Plan

Under the provision of Section 3.5 of the Qualified Plan, a
Participant in the Qualified Plan who retires prior to his normal retirement
date as defined therein suffers an actuarial reduction of his retirement
benefit. It is the intention of this Plan to supplement the provision of the
Qualified Plan so that a Participant herein shall suffer no loss of retirement
benefits by virtue of his voluntary early retirement at age 60. It is the
further intention of this Plan to supplement the provisions of the Qualified
Plan so that a Participant herein shall suffer an actuarial reduction in
benefits in the event he elects voluntary early retirement between ages 55 and
60. Such actuarial reduction is to be applied on a basis similar to that which
would have been applied had he elected voluntary early retirement between ages
60 and 65 under the Qualified Plan.

Section 2.2 - Early Retirement Benefit

A Participant in this Plan who retires at age 60 shall be entitled to
a supplementary benefit which, in combination with the early retirement benefit
such Participant receives from the Qualified Plan, is equivalent to the normal
retirement benefit such employee would have received at his normal retirement
date under the Qualified Plan.

In the event any Participant in this Plan remains in the employ of the
Company after age 60, the supplementary pension benefit provided by this Plan
shall be the amount required to provide the benefit such employee would have
received had he retired at age 60 under the provisions of both the Qualified
Plan and this Plan, provided that there shall be no supplementary benefit
payable if the benefit earned by such employee under the Qualified Plan as of
his actual date of retirement is as great or greater than the benefit such
employee would have received had he retired at age 60 under the provisions of
both the Qualified Plan and this Plan.

In the event any Participant in this Plan retires between the ages of
55 and 60, he shall be entitled to a supplementary benefit which, in
combination with the early retirement benefit such Participant receives from
the Qualified Plan, is equivalent to the normal retirement benefit such
employee would have received at his normal retirement date under

2
<PAGE> 5
the Qualified Plan, provided that the computation of such retirement benefit
shall be based upon actual years of service accrued by such Participant as of
his retirement date plus five years, and provided that the retirement benefit
thus computed shall be reduced by two-thirds of one percent (.006666) for each
of the first thirty-six months and one percent (1%) for each of the last
twenty-four months by which the Participant's Early Retirement Date preceded
his sixtieth birthday. Thus, a Participant who retired on his fifty-sixth
birthday would suffer an early retirement reduction of 36%.

If a Participant retires between the ages of fifty-five and sixty,
then the supplementary benefit to which he is entitled, calculated in the
amount hereinabove provided, shall be payable commencing immediately if such
retirement is approved by the Board of Directors of the Company, otherwise
payment of such supplementary benefit shall not commence until such retired
Participant has attained the age of sixty.

Section 2.3 - Death or Retirement Prior to Age Fifty-Five

In the event an employee terminates service with the Company, dies,
becomes disabled or retires prior to age 55, he shall be eligible for no
benefits under this Plan.

Section 2.4 - Death of a Participant After Age Fifty-Five

In the event an employee dies after attaining age 55, but prior to
separation from service with the Company, his Eligible Spouse (as that term is
defined by the Qualified Plan) shall be entitled to a survivor's annuity under
this Plan which is actuarially equivalent to fifty percent (50%) of the benefit
such deceased employee would have been entitled to under this Plan had he
retired as of the date of his death.

If a Participant dies after attaining age 55, and after separating
from the service of the Company, and has made an election under the Qualified
Plan which qualifies his Eligible Spouse for payment of benefits thereunder,
such Eligible Spouse shall be entitled to a survivor's annuity under this Plan
which is actuarially equivalent to either fifty percent (50%), seventy-five
percent (75%), or one hundred percent (100%) of his supplementary benefit
hereunder as determined by reference to his election under the Qualified Plan.
Such benefit shall commence as of the Participant's date of death, even though
he may not have been entitled to receive such benefit until attaining age
sixty, and shall continue during the lifetime of such Eligible Spouse.

Section 2.5 - Payment of Retirement Benefit

After retirement by a Participant, payments will be made to a
Participant (and in proper cases his Eligible Spouse) beginning on his
retirement date, subject to the requirement in Section 2.2 that Early
Retirement Benefits shall commence earlier than age sixty only if such
retirement is approved by the Board of Directors. The amount of each payment
will be the amount of the retirement benefit determined under this Article II.

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Section 2.6 - Form of Retirement Benefit

The form of retirement benefit payable to a Participant pursuant to
this Plan shall be the same as that payable to such Participant under the terms
of the Company's Qualified Plan.

Section 2.7 - Limitations on Methods of Distribution

Notwithstanding the provisions of this Article, if the monthly benefit
payable is less than Ten Dollars ($10.00), or if the value at retirement of the
benefit is less than One Thousand Seven Hundred Fifty Dollars ($1,750.00), the
sole method of distribution shall be in cash and a lump sum.

ARTICLE III

MISCELLANEOUS

Section 3.1 - Funding

This Plan shall not be funded by the creation of a separate trust fund
or by the establishment of any alternative funding program. Benefits shall be
paid from the general assets of the Company. Participation in the Plan will not
give any employee any right of claim to a retirement income or any other benefit
hereunder except to the extent that there are funds therefor as part of the
general assets of the Company.

Section 3.2 - Administration and Interpretation

The Administrative Committee appointed in accordance with Section 6.1
of the Qualified Plan shall serve as the Administrative Committee hereunder and
shall exercise all rule-making powers and shall have the power to interpret the
Plan and any rules adopted. The Company shall indemnify the Administrative
Committee against any and all claims, loss, damage, expense and liability
arising from any act or failure to act unless the same is judicially determined
to be the result of gross negligence or willful misconduct.

Section 3.3 - Relation to Employee Retirement Income Security Act of 1974

This Plan is to be unfunded and is established for the purpose of
providing supplementary retirement benefits for a select group of highly
compensated management employees. It is the intent of the Company that this
Plan qualify as an "Excess Benefit Plan" as that term is defined by Section
3(36) of the Employee Retirement Income Security Act of 1974 and, as such,
shall be exempt from certain requirements of that law.

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<PAGE> 7
Section 3.4 - Termination of the Plan

Subject to the rights vested in accordance with Section 1.2 and other
provisions herein, this Plan is entirely a voluntary undertaking of the Company
and may be terminated by the Company at any time.

Section 3.5 - Effective Date

The effective date of this Plan shall be January 1, 1979. This Plan
shall operate prospectively only and is not intended to confer any rights or
benefits on employees who are not accruing years of service as of the effective
date.

EXECUTED at Newport Beach, California, this 28th day of December ,
1978.

SMITH INTERNATIONAL, INC.

By: /s/ BRUCE D. WALLACE
------------------------------------
Bruce D. Wallace

By: /s/ JOHN C. PETRY
------------------------------------
John C. Petry

APPROVED AS TO FORM:

VOEGELIN & BARTON

By: /s/ ROBERT M. DAHLBO
----------------------------------
Robert M. Dahlbo
Attorneys for the Company

<PAGE> 1
EXHIBIT 10.2

SMITH INTERNATIONAL, INC.

1982 STOCK OPTION PLAN

1. Purpose of the Plan.

The purpose of this Plan is to advance the interests of the Company
and its shareholders by strengthening the ability of the Company to attract and
maintain in its employ persons of training, experience and ability, and to
furnish additional incentives to officers, directors 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 grated pursuant to Section 7 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 Pan.

"Common Stock" shall mean the common shares, without 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 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.

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"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 a Incentive Award.

"Incentive Award" shall mean an Option, Stock Appreciation Right or
Cash Award granted under the plan.

"Incentive Stock Option" shall mean an option as defined under Section
422A of the Internal Revenue Code and regulations thereunder,
including an Incentive Stock Option granted pursuant to Section 9 of
the Plan.

"Nonstatutory Stock Option" shall mean all Options other then
Incentive Stock Options granted pursuant to Section 8 of the Plan.

"Option" shall mean either an Incentive Stock Option or 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. 1982 Stock Option 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 10 or Section 11 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.

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 1,000,000.

(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 Company, including shares purchased on
the open market.

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<PAGE> 3
(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.

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.

(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 my be granted and the number of shares subject to
each Incentive 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 who are engaged in performing
management, supervisory, sales, scientific or engineering services or who have
been determined

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<PAGE> 4
by the Committee to be key Employees and persons who are Directors who have
been determined by the Committee to be Eligible Persons are eligible to receive
Incentive Awards under the Plan. The Committee may at any time determine that
a Director is no longer eligible to receive future Incentive Awards under the
Plan. Directors of the Company who are not Employees may receive only
Incentive Awards other than Incentive Stock Options. 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.

(c) Notwithstanding the foregoing, no person shall be eligible for
the grant of an Incentive Stock Option who owns or would own immediately before
the grant of such Option, directly or indirectly, stock possessing more than
ten percent of the total combined voting power of all classes of stock of the
Company or of any parent or subsidiary corporation unless at the time such
Option is granted the Option price is at least 110% of the Fair Market Value of
the Common Stock subject to the Option and such Option by its terms is not
exercisable after the expiration of five years from the date such Option is
granted. For purposes of this subparagraph (c), a person shall be considered
as owning the stock owned, directly or indirectly, by or for his brothers and
sisters (whether by the whole or half blood), spouse, ancestors and lineal
descendants; and stock owned, directly or indirectly, by or for a corporation,
partnership, estate or trust, shall be considered as being owned
proportionately by or for its shareholders, partners or beneficiaries.

6. Forms of Incentive Awards.

Incentive Awards may be granted in the following forms:

(a) Cash Award in accordance with Section 7 of the Plan;

(b) Nonstatutory Stock Option in accordance with Section 8 of the
Plan;

(d) Stock Appreciation Right related to an Option in accordance
with Section 10 of the Plan;

(e) Stock Appreciation Right not related to an Option in
accordance with Section 11 of the Plan, or

(f) Any combination of the foregoing.

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<PAGE> 5

7. Cash Award.

At the time an Optionee exercises an Option or sells shares of Common
Stock received upon the exercise of an Option or any other option granted by
the Company prior to the effective date of this Plan the Committee may grant a
Cash Award to the Optionee in such amount as the Committee may determine. In no
event may a Cash Award exceed the difference between the option price and the
fair market value of the shares on the date of exercise. The Committee may make
such a determination at the time such option is granted or is exercised or at
the time such shares are sold.. The Cash Award may be subject to any condition
imposed by the Committee, including a reservation of the right to revoke a Cash
Award at any time before it is paid.

8. 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.

(d) 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 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.

(e) 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.

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<PAGE> 6

(f) 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.

(g) 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.

(h) 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
Optionee exercised.

(i) 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.

9. Incentive Stock Option.

The Committee may at any time and from time to time approve the grant
by the Company of Incentive Stock Options to Eligible Persons other than
Directors who are not Employees 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 agreements, 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 on which 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 an Incentive Stock
Option shall be at least equal to the Fair Market Value of the Common Stock on
the date the Option is granted.

(d) Upon the exercise of an Incentive Stock Option, the purchase
price shall be payable in full in cash or in 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.

(e) The Fair Market Value (determined at the time the Incentive
Stock Option is

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<PAGE> 7
granted) of the shares of Common Stock for which any Employee may be granted
options in any calendar year (including options under all plans of the Company
and its parent and subsidiary corporations) shall not exceed $100,000 plus any
unused limit carryover to such year as determined under Section 422A(c)(7) of
the Internal Revenue Code.

(f) An Incentive Stock Option may not be exercised while there is
"outstanding" within the "meaning" of Section 422A(c)(7) of the Internal
Revenue Code any Incentive Stock Option that was granted before the granting of
such Option to such Optionee to purchase stock in the Company or in a
corporation that is a parent or subsidiary corporation, or in a predecessor
corporation of any such corporation.

(g) No fractional shares shall be issued pursuant to the exercise
of an Incentive Stock Option nor shall any cash payment be made in lieu
thereof.

(h) An Incentive 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.

(i) No person shall have the rights and privileges of a
shareholder with respect to shares subject to or purchased under an Incentive
Stock Option until the date appearing on the stock certificate issued upon the
exercise of the Option.

(j) To the extent an Incentive Stock Option is exercised, any
related Stock Appreciation Right shall be proportionately redeemed by a number
of shares equal to the shares with respect to which the Option is exercised.

(k) Each Incentive Stock Option shall be evidenced by a written
instrument and may, but need not, include such other terms and conditions not
inconsistent with the Plan as the Committee may approve.

(l) The Board of Directors or the Committee may make any
amendments to the Smith International, Inc. 1971 Stock Option Plan and
outstanding options thereunder in order to qualify said plan and any or all
options granted under said plan under Section 422A of the Internal Revenue Code
and other applicable provisions of the Code and regulations thereunder relating
to Incentive Stock Options.

10. 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 or Incentive 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
or appropriate resolutions of the

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<PAGE> 8
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
an Incentive Stock Option or 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.

(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, with respect to the
number of shares as to which such Stock Appreciation Right is exercised, and to
receive payment of an amount computed pursuant to Section 10(e). Such Option
shall, to the extent so surrendered, thereupon cease to be exercisable.

(d) Subject to Section 10(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) Upon the exercise of a Stock Appreciation Right, the Holder
thereof shall be entitled to receive payment of an amount determined by
multiplying:

(i) The difference obtained by subtracting the purchase price of
a share of Common Stock specified in the related Option from the Fair Market
Value of a share of Common Stock on the date of exercise of such Stock
Appreciation Right, by

(ii) The number of shares with respect to which such Stock
Appreciation Right shall have been exercised.

In no event shall the Holder receive with respect to a Stock Appreciation Right
an amount greater than 200% of the Fair Market Value (or such lesser percentage
as the Committee may determine at the time of grant) of a share of Common Stock
on the date the Stock Appreciation Right is granted times the number of shares
with respect to which such Stock Appreciation Right is exercised. The
Committee may (but need not) limit the percentage of Fair Market Value of a
share of Common Stock by which a Stock Appreciation Right may increase in any
year.

(f) Payment of the amount determined under Section 10(e) may be
made solely in whole shares of Common Stock valued at their Fair Market Value
on the date of exercise of the Stock Appreciation Right or alternatively, in
the sole discretion of the Committee, solely in cash or a combination of cash
and shares as the Committee deems advisable. In the event that the Committee
decides to make full payment in shares of Common Stock, and the amount payable
results in a fractional share, then payment for the fractional share shall be
made in cash.

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<PAGE> 9

(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
l6b-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 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 or Director 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 or
Director 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.

11. 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 multiplying:

(i) The difference obtained by subtracting the Fair
Market Value of a share of Common Stock on the date the Stock
Appreciation Right is granted from the Fair Market Value of a share of
Common Stock on the date of exercise of such Stock Appreciation Right,
by

(ii) The number of shares with respect to which such Stock
Appreciation Right shall have been exercised.

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<PAGE> 10

In no event shall the Holder receive with respect to a Stock
Appreciation Right an amount greater than 200% of the Fair Market Value (or
such lesser percentage as the Committee may determine at the time of grant) of
a share of Common Stock on the date the Stock Appreciation Right is granted
times the number of shares with respect to which such Stock Appreciation Right
is exercised. The Committee may (but need not) limit the percentage of Fair
Market Value of a share of Common Stock by which a Stock Appreciation Right may
increase in any year.

(c) Payment of the amount determined under Section 11(b) above may
be made solely in whole shares of Common Stock valued at their Fair Market
Value on the date of exercise of the Stock Appreciation Right or alternatively,
in the sole discretion of the Committee, solely in cash or in such combination
of cash and such whole shares as the Committee deems advisable. In the event
that the Committee decides to make full payment in shares of Common Stock, and
the amount payable results in a fractional share, then payment for the
fractional share shall be made in cash.

(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 or Director
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 or Director 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.

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,

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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 the provisions of section 12(a) to the
contrary, upon the dissolution or liquidation of the Company or upon a
reorganization, merger or consolidation of the Company with one or more
corporations as a result of which the Company is not the surviving corporation,
or upon the sale of all or substantially all of the property of the Company,
all Options and Stock Appreciation Rights then outstanding under the Plan shall
be fully vested and exercisable unless provisions are made in connection with
such transaction for the continuance of the Plan and the assumption or the
substitution for such Incentive Awards of new options or stock appreciation
rights covering the stock of a successor employer corporation, or a parent or
subsidiary thereof; with appropriate adjustments as to the number and kind of
shares and prices.

(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.

(d) 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 Sections 13(d) or 14(d) of the
Securities Exchange Act of 1934 with respect to the Company, the Committee may
in its sole discretion, without obtaining shareholder approval, at the time of
any one of the foregoing events or at any time thereafter, take one or more of
the following actions to the extent permitted by Section 14 of this Plan with
respect to all Eligible Persons and Holders:

(i) Accelerate the exercise dates of any outstanding
Stock Appreciation Right or Option, or make all such Stock
Appreciation Rights or Options fully vested and exercisable;

(ii) Grant a Cash Award to any of the Holders of
outstanding Stock Appreciation Rights or Options;

(iii) Grant Stock Appreciation Rights to Holders of
outstanding Options;

(iv) Pay cash to any or all Holders in exchange for the
cancellation of their outstanding Stock Appreciation Rights and
Options;

11
<PAGE> 12

(v) Grant new Incentive Awards to any Eligible Person;

(vi) Make any other adjustments or amendments to the Plan
and outstanding Stock Appreciation Rights and Options and substitute
new Incentive Awards for outstanding Stock Appreciation Rights and
Options;

(vii) Take any of the foregoing actions with respect to
options outstanding under the Smith International, Inc 1971 Stock
Option Plan.

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 full
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.

(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 elector
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.

12
<PAGE> 13

(g) Nothing in the Plan is intended to be a substitute for, or to
preclude or limit any other plan, practice or arrangement for the payment of
compensation or benefits to employees generally, or to any class or group of
employees, or to the Directors 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 or Director of the Company or any
subsidiary corporation of the Company) in connection with the exercise of a
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 or Director 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 Stock Option Plan 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.

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 a Option or a Stock Appreciation
Right as it deems advisable.

13
<PAGE> 14

(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 a 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 a Employee is terminated by the
Company other then for cause, for which the Company shall be the sole
judge, then the Stock Appreciation Rights and Options shall 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 expire sooner. During said
period, the Stock Appreciation Rights and Options my 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 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
representative or the persons to whom his rights under the Stock
Appreciation Rights

14
<PAGE> 15
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) A Stock Appreciation Right or an Option held by a Director who
was a Director but not an Employee on the date the Stock Appreciation Right or
Option was granted shall terminate three years after such Director ceases for
any reason whatever to be a Director, unless by its terms it expires sooner.
If the former Director dies or becomes permanently and totally disabled within
the three year period referred to in the prior sentence, then the Stock
Appreciation Right or Option shall expire on the later of three years after the
former Director ceased to be a Director or one year after the date of death or
permanent and total disability, unless by its terms it expires sooner. During
said three year and one year periods such Stock Appreciation Rights and Options
may be exercised by the former Director, or in the event of the death of the
former Director, the Stock Appreciation Rights and Options may be exercised by
the former Director'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 they were exercisable on the date the
former Director ceased to be a Director.

(g) 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.

(h) 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 or 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 19,1982) 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 Directors and 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.

15
<PAGE> 16
and the Pacific Stock Exchange, Inc. Unless previously terminated by the Board
of Directors, the Plan shall terminate at the close of business on June 30,
1987, 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.

<PAGE> 1
EXHIBIT 10.4

AMENDMENT NO. 1

TO THE SMITH INTERNATIONAL, INC.
DIRECTORS' RETIREMENT PLAN

The SMITH INTERNATIONAL, INC. DIRECTORS' RETIREMENT PLAN (the "Plan") is
hereby amended effective September 30, 1987 in the following particular only:

1. Section 3.3 of the Plan is hereby amended to read as follows:

Section 3.3 - Commencement of Benefits. Benefits payable to a
Participant shall commence on the first day of the month following the later of
(a) his seventieth (70th) birthday and (b) if the Board of Directors has
consented to his service as a Director after the age seventy (70), the date he
ceases to serve as a Director. Notwithstanding the foregoing, however, the
Board of Directors may specify an earlier commencement date for payment of a
benefit hereunder to a Participant whose service as a Director has ceased prior
to age seventy (70) but after age fifty-five (55); no reduction shall occur in
the amount specified in Section 3.1 above due to such earlier commencement
date. Benefits payable to a surviving Spouse of a Participant shall commence
on the first day of the month following the date of death of the Participant.

Executed at Newport Beach, California, this 4th day of December, 1987.

SMITH INTERNATIONAL, INC.

By: /s/ R.M. GUBRUD
-----------------------------------
R.M. Gubrud

By: /s/ VIVIAN M. CLINE
-----------------------------------
Vivian M. Cline
<PAGE> 2

SMITH INTERNATIONAL, INC.

DIRECTORS' RETIREMENT PLAN

WHEREAS, SMITH INTERNATIONAL, INC. desires to provide retirement
income to certain of its outside directors through the maintenance of an
unfunded, nonqualified retirement plan;

NOW, THEREFORE, effective January 1, 1984, SMITH INTERNATIONAL, INC.
does hereby adopt this, the SMITH INTERNATIONAL, INC. DIRECTORS' RETIREMENT
PLAN to provide as follows:

ARTICLE I

DEFINITIONS

Section 1.1 - General

Whenever the following terms are used in this Plan, they shall have
the meaning specified below unless the context clearly indicates to the
contrary.

Section 1.2 - Board of Directors

"Board of Directors" shall mean the Board of Directors of the Company.

Section 1.3 - Company

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

Section 1.4 - Director

"Director" shall mean a member of the Board of Directors.

Section 1.5 - Outside Director

"Outside Director" shall mean each Director who is not an employee of
the Company on January 1, 1984, and each person thereafter elected a Director
who has never been an employee of the Company.

Section 1.6 - Participant

"Participant" shall mean any Outside Director included in the Plan as
provided in Article II.

1
<PAGE> 3
Section 1.7 - Plan

"Plan" shall mean the Smith International, Inc. Directors' Retirement
Plan.

Section 1.8 - Surviving Spouse

"Surviving Spouse" shall mean the person to whom a Participant is
married as of the date of the Participant's death.

ARTICLE II

ELIGIBILITY AND PARTICIPATION

Section 2.1 - Service Requirement

Each Outside Director who has served as an Outside Director for an
aggregate total of ten (10) or more years shall become a Participant in the
Plan.

Section 2.2 - Designation

Each other Outside Director who is designated by the Board of
Directors as eligible for the Plan shall participate in the Plan.

ARTICLE III

RETIREMENT BENEFITS

Section 3.1 - Retirement Benefits

The amount of the retirement benefit payable to a Participant under
the Plan shall be Twenty Thousand Dollars ($20,000.00) per calendar year,
prorated for portions thereof, payable monthly for the life of the Participant.

Section 3.2 - Benefits to Surviving Spouse

After the death of a Participant who has attained age seventy (70) and
who is survived by a Surviving Spouse, a benefit equal to Ten Thousand Dollars
($10,000.00) per calendar year, prorated for portions thereof, shall be payable
monthly for the following periods: (a) in the case of a Surviving Spouse who is
ten (10) or fewer years younger than the deceased Participant, for the life of
the Surviving Spouse; or (b) in the case of a Surviving Spouse who is more than
ten (10) years younger than the deceased Participant, for a period of the life
of the Surviving Spouse or ten (10) years, whichever is less. Notwithstanding
the foregoing, however, the Board of Directors may determine that such a
benefit shall be payable to the Surviving Spouse of a Participant whose death
occurs prior to age seventy (70) but after age sixty-five (65); no reduction
shall occur in the amount specified herein due to such earlier commencement
date.

2
<PAGE> 4

Section 3.3 Commencement of Benefits

Benefits payable to a Participant shall commence on the first day of
the month following the later of (a) his seventieth (70th) birthday and (b) if
the Board of Directors has consented to his service as a Director after the age
seventy (70), the date he ceases to serve as a Director. Notwithstanding the
foregoing, however, the Board of Directors may specify an earlier commencement
date for payment of a benefit hereunder to a Participant whose service as a
Director has ceased prior- to age seventy (70) but after age sixty-five (65);
no reduction shall occur in the amount specified in Section 3.1 above due to
such earlier commencement date. Benefits payable to a Surviving Spouse of a
Participant shall commence on the first day of the month following the date of
death of the Participant.

ARTICLE V

ADMINISTRATION OF PLAN

Section 4.1 - Funding

This Plan shall not be funded by the creation of a separate trust fund
or by the establishment of any alternative funding program. Benefits shall be
paid from the general assets of the Company. The Company shall be under no
obligation to segregate or earmark any cash or other property for the payment
of any benefits under this Plan, or to purchase insurance to provide any
benefits, and if any cash or other property is segregated or earmarked by the
Company or insurance purchased for such purpose: no Participant shall have any
right whatsoever in any such cash or other property but the same shall remain
free for disposition for any purpose by the Company. Participation in the Plan
will not give any person any right of claim to a retirement income or any other
benefit hereunder except to the extent that there are funds therefor as part of
the general assets of the Company.

Section 4.2 - Administration and Interpretation

The Board of Directors shall have the sole authority to construe and
interpret this Plan in accordance with its terms and provisions and to make
rules relating to the administration thereof. Tho decision of the Board of
Directors with respect to any issues relating to the interpretation of this
Plan shall be final, conclusive and binding on all parties. The Board of
Directors may delegate any part of its duties hereunder to the Company's Vice
President Human Resources, subject to the final authority of the Board of
Directors.

Section 4.3 - Termination and Amendment

The Board of Directors may terminate, suspend or amend this Plan in
whole or in part, at any time, as it may deem advisable, provided that no such
termination, suspension or amendment shall impair any rights which have already
accrued to a Participant under this Plan; provided, however, that to - the
extent that the Board of Directors approves any new benefit plan or improvement
to any existing benefit plan applicable to Directors it may terminate rights
which have already accrued to a Participant under this Plan if, in its sole

3
<PAGE> 5
discretion, it determines that the benefits payable to a Participant under such
new or improved plan adequately replace the benefits provided hereunder.

Section 4.4 - Assignment

No Participant or Surviving Spouse, nor any other person shall have
any right or interest in this Plan or its continuance, or in the payment of any
benefit hereunder, unless and until all the provisions of this Plan, the rules
adopted hereunder, and restrictions and limitations on any benefit provided
herein have been fully satisfied. No rights under this Plan, contingent or
otherwise, shall be assignable or subject to any pledge or encumbrance of any
nature.

Section 4.5 - Required Withholdings

There shall be deducted from all payments of benefits under the Plan
any taxes or other amounts which may be required to be withheld by the Company
in respect of such payments.

Section 4.6 - Effective Date

The effective date of the Plan shall be January 1, 1984. Service prior
to that date as an Outside Director of the Company or of its predecessor
California corporation, however, shall be taken into account for purposes of
Section 2.1.

Executed at Newport Beach, California, this 14th day of December, 1983.

SMITH INTERNATIONAL, INC.

By /s/ JAMES R. HAUKE
------------------------------
James R. Hauke

By /s/ JOHN L. PRICE
------------------------------
John L. Price

<PAGE> 1
EXHIBIT 10.6
SUPPLY AGREEMENT

AGREEMENT made as of this 2nd day of April, 1987, between TCM Holding
Corporation, a Delaware corporation and Rogers Tool Works, Inc., a Delaware
corporation (the "Seller") and Smith International, Inc., a Delaware
corporation, (the "Buyer" or "Smith").

WITNESSETH THAT

WHEREAS, simultaneously herewith, TCM Holding Corporation is acquiring
certain assets of the Tungsten Carbide Manufacturing Division of Buyer (the
"TCM Division"); and

WHEREAS, the TCM Division has had considerable experience in the
business of manufacturing products which perform the functions set forth on
Annex A hereto (each product which performs one of such functions, a "Product";
collectively, the "Products") and has been manufacturing such Products for
several years; and

WHEREAS, the TCM Division has been supplying Buyer with Products for
several years: and

WHEREAS, it is anticipated that upon such acquisition by TCM Holding
Corporation of the TCM Division, Seller, which has had considerable experience
in the business of manufacturing items similar to the Products, will combine
the TCM Division's Products business with Seller's own related business; and

WHEREAS, TCM Holding Corporation, in acquiring certain assets of the
TOM Division, anticipates that a significant proportion of its production of
Products shall be sold to Buyer; and

WHEREAS, Buyer, subsequent to its sale of certain assets of the TCM
Division, desires to continue to obtain Products.

NOW, THEREFORE, Buyer and Seller, for and in consideration of the
covenants contained herein and other good and valuable consideration, hereby
agree as follows:

(I) Term. This agreement shall commence on the Closing Date, as
defined in Section 4.1 of that certain Purchase Agreement between TCM Holding
Corporation and Smith dated as of April 2, 1987 (the "Purchase Agreement") ,
and shall continue in effect for a period of seven and one-half years
thereafter.

(2) Quantity. (a) Except as otherwise provided in Paragraph
2(b), the Buyer agrees to buy from Seller and Seller agrees to sell to Buyer,
the percentages of Buyer's total Net Purchases, as defined in this Paragraph
2(a), from all sources of the Products during each calendar year of the periods
specified below:

1
<PAGE> 2
<TABLE>
<CAPTION>
Percentage of the Buyer's
total Net Purchases Period
------------------- ------
<S> <C>
75 The Closing Date, as defined in Section 4.1 of the Purchase
Agreement, through December 31, 1988

80 January 1, 1989 through the last day of the term of this agreement
</TABLE>

Subject to the obligation of Seller specified in the preceding sentence, all
orders are subject to acceptance by Seller. The term "Net Purchase" means,
with respect to each purchase of the Products by Buyer, the dollar amount which
is determined by subtracting the cash discount and freight charges, if any,
from the total invoice price of the Products set forth in the related invoice.
Notwithstanding the foregoing, in the event that Buyer acquires a company or
entity from a party which is not affiliated with Buyer and which company or
entity is not engaged in rockbit production, there shall be excluded from the
percentage of Buyer's total Net Purchases of the Products requirements of this
Paragraph 2(a) all purchases of the Products by such newly acquired company or
entity.

(b) In the event that any shipment of Products by Seller to Buyer
does not conform to the specifications for such Products described in Paragraph
9, Buyer may provide a written notice to Seller which specifies the details of
such nonconformance and requests Seller to remedy such nonconformance. In the
event that Seller fails to remedy such nonconformance specified in the written
notice described in the preceding sentence within 60 days of receipt by Seller
of the aforesaid notice, the purchase price of such nonconforming Products
shall be applied towards the total Net Purchases of the Products specified in
Paragraph 2(a) for the calendar year during which the nonconforming Products
were shipped to Buyer.

(c) Upon reasonable notice to Buyer, Seller shall have the right
to examine the books and records of Buyer and its divisions, subsidiaries and
affiliates necessary to verify Buyer's compliance with the purchase obligations
set forth in Paragraph 2(a).

(3) Certain Adjustments. (a) In the event that Buyer shall have
made aggregate Net Purchases of the Products and any other items ("Other
Products") sold by Seller to Buyer of not less than the dollar amount set forth
in the column of Table 3 below headed "Minimum Purchase Quantity" during the
twelve month period specified for such dollar amount, Seller shall pay Buyer an
amount which is equal to 5% of such aggregate Net Purchases in any such twelve
month period, provided, however, that aggregate Net Purchases for purposes only
of the preceding clause shall not include purchases of Other Products unless
the aggregate purchase price of Other Products exceeds $500,000 during the
pertinent twelve month period. If the requirement of the first sentence of
this Paragraph 3 has been met in any twelve month period specified therein,
Seller shall pay Buyer such 5% of aggregate Net Purchases within 30 days after
the last day for such twelve month period. At the option of Seller, such
payment may be made by credit to Buyer's open account with Seller to the extent
that a balance exists on the date of the adjustment.

2
<PAGE> 3
Table 3

<TABLE>
<CAPTION>
Twelve month period Minimum Purchase Quantity (000)
- ------------------- -------------------------------
<S> <C>

January 1, 1989 through
December 31, 1989 $9,200

January 1, 1990 through
December 31, 1990 11,400

January 1, 1991 through
December 31, 1991 14,200

January 1, 1992 through
December 31, 1992 16,300

January 1, 1993 through
December 31, 1993 18,800

January 1, 1994 through
December 31, 1994 21,700

January 1, 1995 through
December 31, 1995 25,000

January 1, 1996 through
December 31, 1996 26,800
</TABLE>

(b) In the event that the Buyer sells its McEvoy-Willis division, the annual
Minimum Purchase Quantity numbers specified in Table 3 shall be reduced and
adjusted as set forth in Table 3.1 below, effective on the January 1st
immediately following such sale. Any such reduction and adjustment shall be
prorated for the year of the sale as of the first day of the month succeeding
such sale.

Table 3.1

<TABLE>
<CAPTION>
Adjusted Minimum
Twelve month period Reduction Purchase Quantity (000)
- ------------------- --------- -----------------------
<S> <C> <C>

January 1, 1989 through
December 31, 1989 $ 700 $ 8,500

January 1, 1990 through
December 31, 1990 700 10,700

January 1, 1991 through
December 31, 1991 800 13,400

</TABLE>

3
<PAGE> 4
<TABLE>
<S> <C> <C>
January 1, 1992 through
December 31, 1992 800 15,500

January 1, 1993 through
December 31, 1993 1,000 17,800

January 1, 1994 through
December 31, 1994 1,100 20,600

January 1, 1995 through
December 31, 1995 1,300 23,700

January 1, 1996 through
December 31, 1996 1,400 27,400
</TABLE>

(4) Shipments. Seller shall, to the extent practicable, make shipments of
the products at such times and, subject to paragraph 2 above, in such
quantities, as shall be required and ordered by Buyer. Buyer shall place
orders as far in advance as practicable and shall place orders in a manner
which aids Seller in maintaining level production volumes to the extent
practicable. Seller shall use its best efforts to keep confidential all
forecasts of the amount of the products to be purchased furnished to it by
Buyer. A Net Purchase of the Products shall be deemed to have been made
pursuant to paragraphs 2 and 3 on the date which Seller promised delivery of
such order to Buyer notwithstanding any failure of Seller to ship such Products
to Buyer on such promised delivery date. Each promised delivery date shall be
reasonable and made in the ordinary course of business under the circumstances
of the particular order.

(5) Price. (a) Except as otherwise provided in Paragraphs 10 and 11
hereof, the initial price to be paid by Buyer for each unit of a Product shall
be the price per unit of such Product on the effective date of this agreement
as set forth on Annex B hereto. The price applicable to each fiscal quarter
commencing on (the first day of the second fiscal quarter commencing after the
Closing Date, as defined in the Purchase Agreement) shall be adjusted to
reflect (i) changes in the American Metal Market prices for tungsten carbide
and extra fine cobalt powders, as published in American Metal Market, or if not
available, from such other source as may be agreed to by the parties, for that
portion of the cost of materials of each Product as set forth in Annex B
hereto, and (ii) the amount of the change in the Producer Price Index for
Machinery Except Electric (Industry Code 35) (P.P.I.), for that portion of the
cost of each Product as set forth in Annex B hereto.

(b) In addition to the adjustments provided for in subparagraph
(a) above, upon the written request of either Buyer or Seller, which request
may be given one time after each of the second, fourth and sixth anniversaries
of the date of this agreement, Buyer and Seller shall negotiate further
adjustments in the prices to be paid by Buyer for Products. Such further
adjustments shall become effective for orders given subsequent to the date of
agreement. If Buyer and Seller do not reach agreement as to adjusted prices
within 90 days of receipt of the request to adjust prices, the matter shall be
submitted to the Dallas, Texas office of the American Arbitration Association
for arbitration by one arbitrator pursuant to

4
<PAGE> 5
the rules of such association. The arbitrator shall determine adjustments to
prices which shall reflect a fair and reasonable market price for such items,
taking into account market prices of items of comparable quality, quantity,
availability, composition and style. The decision by the arbitrator shall be
final, non-appealable and binding upon Buyer and Seller and shall be effective
for orders given subsequent to the date of such decision.

(c) Open orders from Smith to the TCM Division for products, which
orders are assumed by TCM Holding Corporation pursuant to the purchase
Agreement shall be governed as to price and other terms and conditions by this
agreement, notwithstanding any variance herein from the prices, terms and
conditions of such assumed open orders.

(6) Deliveries; Risk of Loss. All deliveries shall be FOB
Seller's plant. The freight charges on all deliveries shall not exceed the
charges which would have been applicable if the items delivered had been
shipped from Rogers, Arkansas. Risk of loss shall pass to Buyer FOB Seller's
plant. Seller shall arrange transportation of Buyer's choice at Buyer 's
expense.

(7) Terms of Payment. Net Cash thirty (30) days.

(8) Inspection. Seller shall, throughout the term of this
agreement, provide a representative of Buyer access at reasonable times and
upon reasonable advance notice to its manufacturing facilities for the purpose
of allowing Buyer to inspect and ascertain the manner in which Seller is then
manufacturing the products.

(9) Exclusion of Warranties. SELLER WARRANTS THAT ALL PRODUCTS
FURNISHED HEREUNDER WILL CONFORM TO THE SPECIFICATIONS TO BE PROVIDED AT THE
TIME OF THE ORDER FOP SUCH PRODUCTS. ALL OTHER WARRANTIES, EXPRESS OR IMPLIED,
INCLUDING, WITHOUT LIMITATION, ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR
A PARTICULAR PURPOSE, WHETHER ARISING BY LAW, CUSTOM, CONDUCT, OR USAGE OF
TRADE ARE HEREBY EXCLUDED AND THE RIGHTS AND REMEDIES OF THE BUYER PROVIDED
HEREIN ARE EXCLUSIVE OF ANY OTHER RIGHTS OR REMEDIES OF BUYER. BUYER'S
EXCLUSIVE REMEDY FOR THE BREACH OF THE WARRANTY OF THIS PARAGRAPH WITH RESPECT
TO ANY PRODUCT IS TO RECEIVE A TIMELY REPLACEMENT OF, OR., IF NOT TIMELY
REPLACED, A CREDIT FOR SUCH PRODUCT AND IN NO EVENT SHALL SELLER BE LIABLE FOR
SPECIAL, INDIRECT, CONSEQUENTIAL OR CONTINGENT DAMAGES ARISING FROM OR IN
CONNECTION WITH ITS PERFORMANCE UNDER THIS AGREEMENT OR THE SALE OR USE OF ANY
PRODUCT.

(10) Custom Orders. Buyer may request custom orders of special or
experimental products from Seller. Such requests are subject to acceptance by
Seller. Such Custom Orders shall be made at prices and upon terms negotiated
to reflect any special tooling or other costs incurred by Seller. Custom
Orders shall be counted toward satisfaction of Buyer's obligations under
paragraph 2 of this agreement. All tooling developed in connection with Custom
Orders shall be owned by Seller.

5
<PAGE> 6
(11) Product Improvements, Process Improvements and New Products.
Buyer and Seller shall upon such terms and conditions as they may agree from
time to time cooperate in the development and testing of Product improvements,
process improvements in the manufacture of, or which result in the enhancement
of, Products and new products. Any improved product or new product which
performs any of the functions set forth in Annex A shall be deemed to be a
Product and shall be subject to this agreement. The prices of any such
improved product or new product shall be agreed to by Buyer and Seller. Unless
otherwise required by law, each party shall use its best efforts to hold in
confidence and not disclose to any third party any information not otherwise
available concerning know-how, processes or technology obtained from the other,
including know-how, processes or technology obtained in connection with the
cooperation described in this paragraph 11 or the inspection described in
paragraph 8. Seller shall not divulge to its customers any specifications for
the Products or initiate any offer to sell a Product manufactured in accordance
with Buyer's specifications, provided that the restriction set forth in the
preceding clause shall not apply if such specifications are independently
developed by Seller or are known by third parties who acquired such knowledge
independent of seller.

(12) Claims. Except for the Warranty contained in paragraph 9,
Seller shall not be liable for any loss, cost, damage or expense whatsoever
resulting from the use of any product. Claims on account of quality, loss of
or damage to or by any Product shall be made in writing as promptly as possible
but in no event later than one year after the delivery of such product.
Failure to give notice of such claims within such one year period shall be
deemed an admission by Buyer that the Product is as represented and warranted
by Seller and free from all defects and Seller shall be released from any and
all claims, including claims for contribution or indemnity, arising out of or
in connection with the Product. Seller's liability for damages in respect of
such claims shall in no event exceed the purchase price of the unit of Product
as to which such damages are claimed. The applicable specifications referred
to in Paragraph 9 hereof shall govern.

(13) Patent Infringement. Seller shall not be responsible in any
manner whatsoever for any infringement or alleged infringement of any patent or
patents covering any existing products made pursuant to this agreement or any
product embodying any such Products; and Buyer, at its own expense, shall
defend any claim brought against Seller, or Seller's agents or representatives,
on account of such infringement or alleged infringement involving any existing
Product and save and hold harmless each of them from and against any and all
loss, cost, damage or expense resulting from, arising out of, or in connection
with any such infringement or alleged infringement.

(14) Force Majeure. The failure or omission by either of the
parties hereto to perform any obligation contained in this agreement other than
the obligations contained in paragraph 7 of this agreement shall not be deemed
a breach of this agreement if the same shall arise from any causes beyond the
control and without the fault or negligence of such party, including, but not
restricted to, acts of God, acts of federal, state, or local governments or any
agency thereof, requests of any governmental authority or any officer,
department, agency or instrumentality thereof other than those described in the
final sentence of this Paragraph 14, fire, storm, flood, earthquake, explosion,
accident, acts of the public enemy, war, rebellion, insurrection, riot,
sabotage, epidemic, quarantine, restrictions,

6
<PAGE> 7
transportation embargoes or failures or delays in transportation, or
unavailability or delays in the delivery of any transportation facility,
product or material necessary to the performance hereof. Notwithstanding the
foregoing sentence, the failure or omission by either of the parties hereto to
perform any obligation contained in this Agreement as a consequence of such
party becoming subject to any act of any federal, state or local governments or
any agency thereof or any request of any governmental authority or any officer,
department, agency or instrumentality thereof by virtue of an affirmative act
of such party, such as relocation of manufacturing operations, shall be a
breach of this agreement and not excused under this Paragraph 14.

(15) Modification and Termination. This agreement may not be
modified or terminated orally. No claimed modification, termination or waiver
of any of its provisions shall be valid unless in writing and signed by the
duly authorized representative of each of Buyer and Seller.

(16) Applicable Law. This agreement shall be governed by and
construed according to the laws of the State of Arkansas.

(17) Successors and Assigns. This agreement shall inure to the
benefit of and be binding upon the successors and assigns of the parties
hereto, including purchasers or transferees of any significant portion of the
assets of any affiliate or division of Buyer which would result in a material
reduction of Buyer's requirements for the Products other than any purchaser of
the McEvoy-Willis division of the Buyer, and including any affiliate of either
Buyer or any successor of Buyer, whether or not such affiliate exists on the
effective date of this agreement. Buyer shall not sell all or a significant
portion of its Smith International division or any other division or subsidiary
of Buyer then engaged in the business of manufacturing rockbits unless the
purchaser(s) of such division(s) or subsidiary(ies) expressly assumes the
obligations and liabilities of Buyer hereunder.

(18) Notices. All notices provided for by this agreement shall be
considered to have been received if sent by courier or by certified mail,
return receipt requested, addressed as provided herein:

If to the Buyer: Smith International Division
Smith International, Inc.
4490 Von Karman Avenue
Newport Beach, CA 92660
Attention: President

With copies to: Ronald R. Randall, Esq.
Smith International, Inc.
4490 Von Karman Avenue
Newport Beach, CA 92660

7
<PAGE> 8
If to the Seller: TCM Holding Corporation
c/o Harbour Group Investments, Inc.
7701 Forsyth Boulevard
Suite 550
Clayton, MO 63105
Attention: Ralph S. Lobdell
President

Rogers Tool Works, Inc.
205 North 13th Street
Rogers, AR 72756
Attention: Robert W. Britzke
President

With copies to: Dickstein, Shapiro & Morin
2101 L Street, N.W.
Washington, D.C. 20037
Attention: Ira H. Polon, Esq.

IN WITNESS WHEREOF, the parties hereto have caused this agreement to be
executed by their respective officers duly authorized thereto, all as of the
day and year first above written.

SMITH INTERNATIONAL, INC.

By: /s/ LOREN K. CARROLL
-----------------------------------------
Loren K. Carroll, Vice President

TCM HOLDING CORPORATION

By: /s/ ROBERT W. BRITZKE
-----------------------------------------
Robert W. Britzke, President,
ROGERS TOOL WORKS, INC.

By: /s/ ROBERT W. BRITZKE
-----------------------------------------
Robert W. Britzke, President

8
<PAGE> 9
Annex A

ITEMS TO BE INCLUDED IN SUPPLY CONTRACT

1. ITEMS OF CEMENTED CARBIDE WHICH ARE USED AS THE CUTTING OF GAGE TEETH
IN ROCK BITS, GENERALLY KNOWN AS COMPACTS OR INSERTS OR OTHER ITEMS
PERFORMING LIKE FUNCTIONS.

2. ITEMS OF CEMENTED CARBIDE WHICH ARE USED TO CONTROL OR DIRECT THE FLOW
OF DRILLING MUD OR OTHER DRILLING FLUIDS OR GASES, GENERALLY KNOWN AS
NOZZLES, OR OTHER ITEMS PERFORMING LIKE FUNCTIONS.

3. ITEMS OF SOLID CEMENTED CARBIDE OR ITEMS WHICH HAVE A BODY OF STEEL OR
OTHER MATERIAL, WHICH HAVE CEMENTED CARBIDE ELEMENTS INSERTED IN OR
AFFIXED TO, WHICH ARE DESIGNED TO WITHSTAND WEAR, ABRASION, CORROSION,
IMPACT OR OTHER DEGRADING CONDITIONS. GENERALLY KNOWN AS WEAR PARTS OR
OTHER ITEMS PERFORMING LIKE FUNCTIONS.

NOT TO BE INCLUDED IN THIS CATEGORY ARE PRODUCTS WHICH CONSIST MAINLY
OF METALS SUCH AS STEEL, AND TO WHICH CEMENTED CARBIDE IS AFFIXED BY
GAS OR ELECTRIC WELDING PROCESSES KNOWN AS HARDFACING.

4. VARIOUS ALLOYS OF TUNGSTEN CARBIDE. COBALT, IRON AND OTHER MATERIALS.
WHICH ARE TO BE USED, EITHER IN POWDER FORM, OR ENCASED IN TUBE. AS A
HARDFACING COMPOUND IN GAS OR ELECTRIC WELDING OR OTHER PROCESSES.

9
<PAGE> 10
ANNEX B

THIS IS SUBJECT TO FINAL REVISION AS OF CLOSING TO REFLECT CURRENT MATERIAL
PRICES.

Sii SMITH INTERNATIONAL DIV.

PRICING FOR HARDFACING ROD

MACROCRYSTALLINE TUNGSTEN CARBIDE 50% - 80% BY WEIGHT

PRICE PER POUND = $18.25 X (WC CONTENT %) X RAW MATERIALS MULTIPLIER;

ADD $100 PER LINE FOR ORDER QUANTITIES LESS THAN 1000 POUNDS PER ITEM

QUARTERLY RAW MATERIALS ADJUSTMENT MULTIPLIER

TUNGSTEN CARBIDE (BASE PRICE. . .) $9.35 PER POUND)

AVERAGE OF 4 WEEKS END OF PREVIOUS QUARTER (OR LATEST 4 PERIOD
PRICE) TUNGSTEN CARBIDE PRICE QUOTATION FROM AMERICAN METALS
MARKET DIVIDED BY TUNGSTEN CARBIDE BASE PRICE

HYPOTHETICAL QUARTER 7 MULTIPLIER

END OF QUARTER 6 PRICES

<TABLE>
<S> <C>
$9.00 WEEK 1
$9.00 WEEK 2
$8.95 WEEK 3
$8.95 WEEK 4
$8.95 AVERAGE
</TABLE>

MULTIPLIER = $8.95/$9.35 = 8.957

QUARTER 7
PRICE PER POUND = $18.25 X (WC CONTENT %) X .957 = $17.47 X (WC CONTENT %)

It is understood that Smith Tool is currently evaluating other hardfacing
products. At the request of Smith Tool, RTW agrees to review pricing when this
evaluation is completed.

10
<PAGE> 11
ANNEX B - PAGE 2

WEAR PARTS AND CERTAIN OTHER SPECIALTY ITEMS - PRICING

SII - VARIOUS DIVISIONS

Prices for this category of parts are subject to quotation.

11
<PAGE> 12
ANNEX B - PAGE 3

NOZZLE PRICING
Sii SMITH INTERNATIONAL DIV

NOZZLE PRICING FORMULA (BEGINNING AT TCM SALE CLOSING DATE)

PRICE PER NOZZLE = $0.75 + $0.052 PER GRAM + ($175.00 DIVIDED BY THE QUANTITY
ON THE ORDER

$0.052 = $0.003 (COBALT) + $0.019 (WC) + 0.03 (L,OH&MU) PER GRAM

QUARTERLY MATERIALS ADJUSTMENT MULTIPLIERS

COBALT (BASE PRICE. . .) $15.30 PER POUND)

AVERAGE OF 4 WEEKS END OF PREVIOUS QUARTER OR LATEST 4 PERIOD
PRICE) COBALT PRICE QUOTATION FROM AMERICAN METALS MARKET
DIVIDED BY COBALT BASE PRICE

HYPOTEHTICAL QUARTER 7 MULTIPLIER

END OF QUARTER 6 PRICES
<TABLE>
<S> <C>

$15.00 WEEK 1
$15.00 WEEK 2
$14.90 WEEK 3
$14.95 AVERAGE
</TABLE>

MULTIPLIER = $14.95/15.30 = $0.977

TUNGSTEN CARBIDE (BASE PRICE. . .> $9.35 PER POUND)

AVERAGE OF 4 WEEKS END OF PREVIOUS QUARTER (OR LATEST 4 PERIOD
PRICE) TUNGSTEN CARBIDE PRICE QUOTATION FROM AMERICAN METALS
MARKET DIVIDED BY TUNGSTEN CARBIDE BASE PRICE

HYPOTEHTICAL QUARTER 7 MULTIPLIER

END OF QUARTER 6 PRICES

<TABLE>
<S> <C>
$9.00 WEEK 1
$9.00 WEEK 2
$8.90 WEEK 3
$8.90 WEEK 4
$8.95 AVERAGE
</TABLE>

MULTIPLIER = $8.95/$9.35 = $0.957

12
<PAGE> 13
ANNEX B - PAGE 4

QUARTERLY LABOR AND OVERHEAD ADJUSTMENT MULTIPLIER

PRODUCER PRICE INDEX BASE IS 101.1

END OF PREVIOUS QUARTER PRODUCER PRICE INDEX DIVIDED BY BASE PRODUCER
PRICE INDEX

HYPOTHETICAL QUARTER 7 MULTIPLIER

PPI AT END OF QUARTER 6
102.1

MULTIPLIER = 102.1/101.1 = 1.010

HYPOTEHTICAL QUARTER 7 PRICING FORMULA

<TABLE>
<S> <C> <C>
L, OH&MU $0.75 X 1.010 = $0.76
$0.530 X 1.010 = $0.5353 >
COBALT $0.0030 X 0.977 = $0.0029 > $0.0513 CENTS PER GRAM
WC $0.019 X 0.957 = $0.0181 >
SET UP $175.00 X 1.010 = $176.75

</TABLE>

QUARTER 7 PRICING FORMULA =
$0.76 + $0.0513 PER GRAM + ($176.75 DIVIDED BY THE QUANTITY ON THE ORDER)

13
<PAGE> 14
ANNEX B - PAGE 5

<TABLE>
<CAPTION>
NOZZLES > COBALT . . . > $15.30 PER POUND
Press, Sinter, Centerless Grind BASE PRICES. . .>
> WC . . . . . > $9.35 PER POUND

LABOR, OH
EXAMPLE 8% avg. 92% avg. SET UP & MARK UP
PRICE COBALT WC $225 $1.00 $0.047
CALCULATIONS cents/gm cents/gm per run per pc per gm

WT/PC QTY COBALT WC SETUP/PC L,OH+MU PRICE price/gm
<S> <C> <C> <C> <C> <C> <C> <C> <C>
26 50 $0.078 $0.494 $3.500 $0.750 $0.780 $5.60 21
100 $0.078 $0.494 $1.750 $0.750 $0.780 $3.85 16
250 $0.078 $0.494 $0.700 $0.750 $0.780 $2.80 12
500 $0.078 $0.494 $0.350 $0.750 $0.780 $2.80 9

37 50 $0.111 $0.703 $3.500 $0.750 $1.110 $6.17 16
334.2 100 $0.111 $0.703 $1.750 $0.750 $1.110 $4.42 12
250 $0.111 $0.703 $0.700 $0.750 $1.110 $3.37 9
500 $0.111 $0.703 $0.350 $0.750 $1.110 $3.02 8

100 50 $0.300 $1.900 $3.500 $0.750 $3.000 $9.45 9
100 $0.300 $1.900 $1.750 $0.750 $3.000 $7.70 7
250 $0.300 $1.900 $0.700 $0.750 $3.000 $6.65 6
500 $0.300 $1.900 $0.350 $0.750 $3.000 $6.30 6

151 50 $0.453 $2.869 $3.500 $0.750 $4.530 $12.10 8
6055.1 100 $0.453 $2.869 $1.750 $0.750 $4.530 $10.35 6
250 $0.453 $2.869 $0.700 $0.750 $4.530 $ 9.30 6
500 $0.453 $2.869 $0.350 $0.750 $4.530 $ 8.95 5

180 50 $0.540 $3.420 $3.500 $0.750 $5.400 $13.61 7
100 $0.540 $3.420 $1.750 $0.750 $5.400 $11.86 6
250 $0.540 $3.420 $0.700 $0.750 $5.400 $10.81 6
500 $0.540 $3.420 $0.350 $0.750 $5.400 $10.46 5

250 50 $0.750 $4.750 $3.500 $0.750 $7.500 $17.25 6
100 $0.750 $4.750 $1.750 $0.750 $7.500 $15.53 6
250 $0.750 $4.750 $0.700 $0.750 $7.500 $14.45 5
500 $0.750 $4.750 $0.350 $0.750 $7.500 $14.18 5

347 50 $1.041 $6.593 $3.500 $0.750 $10.410 $22.29 6
100 $1.041 $6.593 $1.750 $0.750 $10.410 $20.54 5
250 $1.041 $6.593 $0.700 $0.750 $10.410 $19.49 5
500 $1.041 $6.593 $0.350 $0.750 $10.410 $19.14 5

</TABLE>

14
<PAGE> 15
ANNEX B - PAGE 6

EXTENDED AND CERTAIN OTHER NOZZLES - PRICING
Sii SMITH INTERNATIONAL DIV

EXTENDED NOZZLE PRICING FORMULA (BEGINNING AT TCM SALE CLOSING DATE)

PRICE PER NOZZLE = $1.00 + $0.052 PER GRAM + ($225.00 DIVIDED BY THE QUANTITY
ON THE ORDER)

$0.052 = $0.003 (COBALT) + $0.019 (WC) + 0.03 (L,OH&MU) PER GRAM

QUARTERLY MATERIALS ADJUSTMENT MULTIPLIERS

COBALT (BASE PRICE. . .> $15.30 PER POUND)

AVERAGE OF 4 WEEKS END OF PREVIOUS QUARTER OR LATEST 4 PERIOD PRICE)
COBALT PRICE QUOTATION FROM AMERICAN METALS MARKET DIVIDED BY COBALT
BASE PRICE

HYPOTEHTICAL QUARTER 7 MULTIPLIER

END OF QUARTER 6 PRICES

<TABLE>
<S> <C>
$15.00 WEEK 1
$15.00 WEEK 2
$14.90 WEEK 3
$14.95 AVERAGE
</TABLE>

MULTIPLIER = $14.95/15.30 = $0.977

TUNGSTEN CARBIDE (BASE PRICE. . .> $9.35 PER POUND)

AVERAGE OF 4 WEEKS END OF PREVIOUS QUARTER (OR LATEST 4 PERIOD PRICE)
TUNGSTEN CARBIDE PRICE QUOTATION FROM AMERICAN METALS MARKET DIVIDED
BY TUNGSTEN CARBIDE BASE PRICE

HYPOTEHTICAL QUARTER 7 MULTIPLIER

END OF QUARTER 6 PRICES

<TABLE>
<S> <C>
$9.00 WEEK 1
$9.00 WEEK 2
$8.90 WEEK 3
$8.90 WEEK 4
$8.95 AVERAGE
</TABLE>

MULTIPLIER = $8.95/$9.35 = $0.957

15
<PAGE> 16
ANNEX B - PAGE 7

QUARTERLY LABOR AND OVERHEAD ADJUSTMENT MULTIPLIER

PRODUCER PRICE INDEX BASE IS 101.1

END OF PREVIOUS QUARTER PRODUCER PRICE INDEX DIVIDED BY BASE PRODUCER PRICE
INDEX

HYPOTHETICAL QUARTER 7 MULTIPLIER

PPI AT END OF QUARTER 6
102.1

MULTIPLIER = 102.1/101.1 = 1.010

HYPOTEHTICAL QUARTER 7 PRICING FORMULA

<TABLE>
<S> <C> <C> <C>
L, OH&MU $1.00 X 1.010 = $1.01
$0.530 X 1.010 = $0.5353 >
COBALT $ X 0.977 = $ > $ CENTS PER GRAM
WC $ X 0.957 = $0.0181 >
SET UP $225.00 X 1.010 = $227.25
</TABLE>

QUARTER 7 PRICING FORMULA =
$1.01 + $0.0513 PER GRAM + ($227.25 DIVIDED BY THE QUANTITY ON THE ORDER)

16
<PAGE> 17
ANNEX B - PAGE 8

<TABLE>
<CAPTION>
EXTENDED & REGULAR NOZZLES > COBALT . . . > $15.30 PER POUND
W/1 SHAPE SET UP BASE PRICES. . .>
> WC . . . . . > $9.35 PER POUND

LABOR, OH
EXAMPLE 8% avg. 92% avg. SET UP & MARK UP
PRICE COBALT WC $225 $1.00 $0.047
CALCULATIONS cents/gm cents/gm per run per pc per gm

WT/PC QTY COBALT WC SETUP/PC L,OH+MU PRICE price/gm
<S> <C> <C> <C> <C> <C> <C> <C> <C>
100 50 $0.300 $1.900 $4.500 $1.000 $4.700 $ 12.40 12
100 $0.300 $1.900 $2.250 $1.000 $4.700 $ 10.15 10
250 $0.300 $1.900 $0.900 $1.000 $4.700 $ 8.80 8
500 $0.300 $1.900 $0.450 $1.000 $4.700 $ 8.35 8

150 50 $0.450 $2.850 $4.500 $1.000 $7.050 $15.85 10
100 $0.450 $2.850 $2.250 $1.000 $7.050 $13.60 9
250 $0.450 $2.850 $0.900 $1.000 $7.050 $12.25 8
500 $0.450 $2.850 $0.450 $1.000 $7.050 $11.80 7

180 50 $0.540 $3.420 $4.500 $1.000 $8.460 $17.92 10
100 $0.540 $3.420 $2.250 $1.000 $8.460 $15.67 8
250 $0.540 $3.420 $0.900 $1.000 $8.460 $14.32 8
500 $0.540 $3.420 $0.450 $1.000 $8.460 $13.87 8

250 50 $0.750 $4.750 $4.500 $1.000 $11.750 $22.75 9
100 $0.750 $4.750 $2.250 $1.000 $11.750 $20.50 8
250 $0.750 $4.750 $0.900 $1.000 $11.750 $19.15 7
500 $0.750 $4.750 $0.450 $1.000 $11.750 $18.75 7

300 50 $0.900 $5.700 $4.500 $1.000 $14.100 $26.20 8
100 $0.900 $5.700 $2.250 $1.000 $14.100 $23.95 8
250 $0.900 $5.700 $0.900 $1.000 $14.100 $22.60 7
500 $0.900 $5.700 $0.450 $1.000 $14.100 $22.15 7

350 50 $1.050 $6.650 $4.500 $1.000 $16.450 $29.65 8
100 $1.050 $6.650 $2.250 $1.000 $16.450 $27.40 7
250 $1.050 $6.650 $0.900 $1.000 $16.450 $26.85 7
500 $1.050 $6.650 $0.450 $1.000 $16.450 $25.60 7

400 50 $1.200 $7.600 $4.500 $1.000 $18.800 $33.10 8
100 $1.200 $7.600 $2.250 $1.000 $18.800 $30.85 7
250 $1.200 $7.600 $0.900 $1.000 $18.800 $29.50 7
500 $1.200 $7.600 $0.450 $1.00 $18.800 $29.05 7
</TABLE>

17
<PAGE> 18
ANNEX B - PAGE 9

COMPACTS PRICING
Sii SMITH INTERNATIONAL DIV

COMPACTS PRICING FORMULA (BEGINNING AT TCM SALE CLOSING DATE)

PRICE PER COMPACT= $0.35 + $0.052 PER GRAM + ($70.00 DIVIDED BY THE QUANTITY ON
THE ORDER)

$0.052 = $0.004 (COBALT) + $0.018 (WC) + 0.03 (L,OH&MU) PER GRAM

7% OF SELLING PRICE PER COMPACT ADDITIONAL CHARGE REQUIRED FOR HIP

QUARTERLY MATERIALS ADJUSTMENT MULTIPLIERS

COBALT (BASE PRICE. . .> $15.30 PER POUND)

AVERAGE OF 4 WEEKS END OF PREVIOUS QUARTER OR LATEST 4 PERIOD PRICE)
COBALT PRICE QUOTATION FROM AMERICAN METALS MARKET DIVIDED BY COBALT
BASE PRICE

HYPOTEHTICAL QUARTER 7 MULTIPLIER

END OF QUARTER 6 PRICES

<TABLE>
<S> <C>
$15.00 WEEK 1
$15.00 WEEK 2
$14.90 WEEK 3
$14.95 AVERAGE
</TABLE>

MULTIPLIER = $14.95/15.30 = $0.977

TUNGSTEN CARBIDE (BASE PRICE. . .> $9.35 PER POUND)

AVERAGE OF 4 WEEKS END OF PREVIOUS QUARTER (OR LATEST 4 PERIOD
PRICE) TUNGSTEN CARBIDE PRICE QUOTATION FROM AMERICAN METALS
MARKET DIVIDED BY TUNGSTEN CARBIDE BASE PRICE

HYPOTEHTICAL QUARTER 7 MULTIPLIER

END OF QUARTER 6 PRICES

<TABLE>
<S> <C>
$9.00 WEEK 1
$9.00 WEEK 2
$8.90 WEEK 3
$8.90 WEEK 4
$8.95 AVERAGE
</TABLE>

MULTIPLIER = $8.95/$9.35 = $0.957

18
<PAGE> 19
ANNEX B - PAGE 10

QUARTERLY LABOR AND OVERHEAD ADJUSTMENT MULTIPLIER

PRODUCER PRICE INDEX BASE IS 101.1

END OF PREVIOUS QUARTER PRODUCER PRICE INDEX DIVIDED BY BASE PRODUCER
PRICE INDEX

HYPOTHETICAL QUARTER 7 MULTIPLIER

PPI AT END OF QUARTER 6
102.1

MULTIPLIER = 102.1/101.1 = 1.010

HYPOTEHTICAL QUARTER 7 PRICING FORMULA

<TABLE>
<S> <C> <C> <C>
L,OH&MU $0.35 X 1.010 = $0.35
$0.030 X 1.010 = $0.0303 >
COBALT $ 0.0040 X 0.977 = $0.0039 > $0.0514 CENTS PER GRAM
WC $ 0.018 X 0.957 = $0.0172 >
SET UP $70.00 X 1.010 = $70.70
</TABLE>

QUARTER 7 PRICING FORMULA =
$0.35 + $0.0514 PER GRAM + ($70.70 DIVIDED BY THE QUANTITY ON THE ORDER)

19
<PAGE> 20
ANNEX B - PAGE 11

<TABLE>
<CAPTION>
COMPACTS PRICING > COBALT . . . > $15.30 PER POUND
SII SMITH INTERNATIONAL DIV BASE PRICES. . . >
> WC . . . . . > $9.35 PER POUND

LABOR, OH
EXAMPLE 8% avg. 92% avg. SET UP & MARK UP
PRICE COBALT WC $225 $1.00 $0.047
CALCULATIONS cents/gm cents/gm per run per pc per gm

WT/PC
SIZE
1986 KGS. QTY COBALT WC SETUP/PC L,OH+MU PRICE price/gm
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1.5 250 $0.0060 $0.0270 $0.280 $0.350 $0.045 $ 0.71 4
1000 $0.0060 $0.0270 $0.070 $0.350 $0.045 $ 0.50 3
3/16 5000 $0.0060 $0.0270 $0.014 $0.350 $0.045 $ 0.33 2
108 10000 $0.0060 $0.0270 $0.007 $0.350 $0.045 $ 0.44 2

3.5 250 $0.0140 $0.0630 $0.280 $0.350 $0.105 $ 0.81 2
1000 $0.0140 $0.0630 $0.070 $0.350 $0.105 $ 0.60 1
1/4 5000 $0.0140 $0.0630 $0.014 $0.350 $0.105 $ 0.55 1
880 10000 $0.0140 $0.0630 $0.007 $0.350 $0.105 $ 0.54 1

6.5 250 $0.0260 $0.1170 $0.280 $0.350 $0.195 $ 0.97 1
1000 $0.0260 $0.1170 $0.070 $0.350 $0.195 $ 0.76 1
5/16 5000 $0.0260 $0.1170 $0.014 $0.350 $0.195 $ 0.70 1
1382 10000 $0.0260 $0.1170 $0.007 $0.350 $0.195 $ 0.70 1

10 250 $0.0400 $0.1800 $0.280 $0.350 $0.3000 $1.15 1
1000 $0.0400 $0.1800 $0.070 $0.350 $0.3000 $0.94
3/8 5000 $0.0400 $0.1800 $0.014 $0.350 $0.3000 $0.88
4046 10000 $0.0400 $0.1800 $0.007 $0.350 $0.3000 $0.88

21 250 $0.0840 $0.3780 $0.280 $0.350 $0.6300 $1.72
1000 $0.0840 $0.3780 $0.070 $0.350 $0.6300 $1.51
7/16 5000 $0.0840 $0.3780 $0.014 $0.350 $0.6300 $1.46
13660 10000 $0.0840 $0.3780 $0.007 $0.350 $0.6300 $1.45

25 250 $0.1000 $0.4500 $0.280 $0.350 $0.7500 $1.93
1000 $0.1000 $0.4500 $0.070 $0.350 $0.7500 $1.72
1/2 5000 $0.1000 $0.4500 $0.014 $0.350 $0.7500 $1.66
8065 10000 $0.1000 $0.4500 $0.007 $0.350 $0.7500 $1.66

38 250 $0.1520 $0.6840 $0.280 $0.350 $1.1400 $2.61
1000 $0.1520 $0.6840 $0.070 $0.350 $1.1400 $2.40
9/16 5000 $0.1520 $0.6840 $0.014 $0.350 $1.1400 $2.34
22096 10000 $0.1520 $0.6840 $0.007 $0.350 $1.1400 $2.33

48 250 $0.1920 $0.8640 $0.280 $0.350 $1.4400 $3.13
1000 $0.1920 $0.8640 $0.070 $0.350 $1.4400 $2.92
5/8 5000 $0.1920 $0.8640 $0.014 $0.350 $1.4400 $2.34
13870 10000 $0.1920 $0.8640 $0.007 $0.350 $1.4400 $2.33

</TABLE>

20
<PAGE> 21
ANNEX B - PAGE 12 (CONTINUATION OF COMPACTS PRICING)

<TABLE>
<CAPTION>
COMPACTS PRICING > COBALT . . . > $15.30 PER POUND
SII SMITH INTERNATIONAL DIV BASE PRICES. . .>
> WC . . . . . > $9.35 PER POUND

LABOR, OH
EXAMPLE 8% avg. 92% avg. SET UP & MARK UP
PRICE COBALT WC $225 $1.00 $0.047
CALCULATIONS cents/gm cents/gm per run per pc per gm

WT/PC
SIZE
1986 KGS. QTY COBALT WC SETUP/PC L,OH+MU PRICE price/gm
<S> <C> <C> <C> <C> <C> <C> <C> <C>
80 250 $0.3200 $01.440 $0.280 $0.350 $2.400 $ 4.79
1000 $0.3200 $01.440 $0.070 $0.350 $2.400 $ 4.58
3/4 5000 $0.3200 $01.440 $0.014 $0.350 $2.400 $ 4.52
13677 10000 $0.3200 $01.440 $0.007 $0.350 $2.400 $ 4.52

90 250 $0.3600 $01.620 $0.280 $0.350 $2.700 $ 5.31
1000 $0.3600 $01.620 $0.070 $0.350 $2.700 $ 5.10
13/16 5000 $0.3600 $01.620 $0.014 $0.350 $2.700 $ 5.04
300 10000 $0.3600 $01.620 $0.007 $0.350 $2.700 $ 5.04

100 250 $0.4000 $01.800 $0.280 $0.350 $3.000 $ 5.83
1000 $0.4000 $01.800 $0.070 $0.350 $3.000 $ 5.62
7/8 5000 $0.4000 $01.800 $0.014 $0.350 $3.000 $ 5.56
3890 10000 $0.4000 $01.800 $0.007 $0.350 $3.000 $ 5.56

100 250 $0.5000 $02.250 $0.280 $0.350 $3.750 $ 7.13
1000 $0.5000 $02.250 $0.070 $0.350 $3.750 $ 6.92
1 5000 $0.5000 $02.250 $0.014 $0.350 $3.750 $ 6.86
930 10000 $0.5000 $02.250 $0.007 $0.350 $3.750 $ 6.86

</TABLE>

<PAGE> 1
Exhibit 10.7

AMENDMENT TO SUPPLY AGREEMENT

Amendment made as of the 22nd day of January, 1993, by and between
Rogers Tool Works, Inc., a Delaware corporation (the "Seller") and Smith
International, Inc., a Delaware corporation (the "Buyer").

WITNESSETH THAT

WHEREAS, TCM Holding Corporation, a Delaware corporation ("TCM"),
Rogers Tool Works, Inc., a Delaware corporation ("RTW") and the Buyer entered
into a Supply Agreement dated as of April 2, 1987 (the "Supply Agreement"); and

WHEREAS, TCM has merged into RTW which in turn has merged into Seller
(formerly known as Carbide International Corporation); and

WHEREAS, the Seller, as successor to TCM and RTW, and the Buyer desire
to amend the Supply Agreement as set forth herein:

NOW, THEREFORE, the Buyer and Seller, for and in consideration of the
covenants contained herein and other good and valuable consideration, hereby
agree as follows:

1. Paragraph (1) of the Supply Agreement is hereby amended to
read as follows:

"1. Term. This agreement shall commence on the Closing Date, as
defined in Section 4.1 of that certain Purchase Agreement
between TCM Holding Corporation and Smith Dated as of April 2,
1987 (the "Purchase Agreement"), and shall continue in effect
until December 31, 1997."

1
<PAGE> 2

2. Table 3.1 of Paragraph 3 of the Supply Agreement is hereby
amended to read as follows:

Table 3.1

<TABLE>
<CAPTION>
Twelve Month Period Reduction Adjusted Minimum
Purchase Quantity (000)
<S> <C> <C>
January 1, 1989 through $ 700 $ 8,500
December 31, 1989
January 1, l990 through $ 700 $ 10,700
December 31, 1990
January 1, 1991 through $ 800 $ 13,400
December 31, 1991
January 1, 1992 through $ 800 $ 8,000
December 31, 1992
January 1, 1993 through $1,000 $ 8,000
December 31, 1993
January 1, 1994 through $1,100 $ 8,000
December 31, 1994
January 1, 1995 through $1,300 $ 8,640
December 31, 1995
January 1, 1996 through $1,400 $ 9,331
December 31, 1996
January 1, 1997 through NIA $ 10,078
December 31, 1997
</TABLE>

3. Table 3 of Paragraph 3 of the Supply Agreement is and has not been
operational since the sale by the Buyer of its McEvoy-Willis Division.

4. The first sentence of Paragraph 5(b) of the Supply Agreement is hereby
amended to read as follows:

"(b)In addition to the adjustments provided for in subparagraph (a)
above, upon the written requet of either Buyer or Seller, which
request may be given one time after each of the second, fourth, sixth
and eighth anniversaries of the date of this agreement, Buyer and
Seller shall negotiate further adjustments in the prices to be paid by
Buyer for Products."

2
<PAGE> 3

5. Except as otherwise set forth herein, the Supply Agreement shall
remain in full force and effect.

6. This Amendment may be signed in any number of counterparts, each of
which shall be an original, with the same effect as if the signatures thereto
and hereto were upon the same instrument.

7. This Amendment shall be governed by and construed according to the
laws of the State of Arkansas.

IN WITNESS WHEREOF the parties hereto have caused this Amendment to be
executed by their respective officers duly authorized thereto, all as of the
day and year first above written.

SMITH INTERNATIONAL, INC.

By /s/ BARRY HEPPENSTALL
--------------------------------------
Barry Heppenstall

ROGERS TOOL WORKS

By /s/ ROBERT W. BRITZKE
--------------------------------------
Robert W. Britzke

<PAGE> 1
Exhibit 10.8

SUPPLY AGREEMENT

This Agreement, made this 1st day of October, 1989, between SMITH
INTERNATIONAL, INC., a Delaware corporation ("Buyer") and AMFORGE-SMITH FORGE
COMPANY, a Delaware corporation ("Seller").

Buyer is currently engaged in the manufacture and marketing of, among other
things, rock bits and down hole tools which are machined from forgings. Some
of these forgings are manufactured at Buyer's forge plant in Irvine,
California. Seller is engaged in the manufacture of, among other things,
forgings. Upon acquiring certain assets of Buyer's Irvine forge plant and in
return for establishing manufacturing capacity, commitment to quality, timely
deliveries and certain price arrangements, Seller wishes to become a major
supplier of forgings to Buyer.

Therefore, Buyer and Seller agree as follows:

(1) Term. The term of this Agreement shall commence on October 1, 1989, and,
except as otherwise provided by Paragraph 5 hereof, shall continue for a term
of seven and one half (7-1/2) years.

(2) Quantity. Buyer agrees to buy from Seller 80% of its future requirements
for rock bit forgings of the type currently supplied out of the Irvine forge
plant. Forgings not being manufactured in the Irvine forge plant at the date
hereof are excluded from this Agreement. This exclusion includes forgings
already being purchased from other outside vendors, Italian forgings and small
mining bits. Buyer may ask Seller to quote these excluded forgings at a later
date on an individual basis to determine competitiveness. Vendor selection
shall be determined by Buyer at that time.

(3) Prices. (a) The price to be paid by Buyer for forgings shall be
determined by adding the conversion costs (i.e., labor, burden, overhead,
material yield loss and mark up) to the net competitive market cost for raw
material.

(b) The conversion cost shall be fixed from the date hereof
until the date seller ceases production at the Irvine forge plant at $0.62 per
pound, and, thereafter, until the second anniversary of the date hereof at
$0.59 per lb. This cost shall be reviewed annually thereafter with any
subsequent adjustments negotiated between Buyer and Seller and must be mutually
acceptable and competitive.

(c) The net competitive market cost for raw material shall be
the actual cost by finish forging weight of the alloy required. The raw
material costs shall be determined by competitive actual market prices (based
upon normal purchase quantities and conditions) and subject to periodic review
by Buyer not more than once every six months.

(d) There shall be a minimum charge per order as follows:

1
<PAGE> 2
Legs and TCI Cones

<TABLE>
<CAPTION>
Minimum Charge Sizes
-------------- -----
<S> <C>
$1000 Less than or equal to 7-7/8" bit size
$2000 Greater than 7-7/8" and less than or equal to 9-7/8"bit size
$3000 Greater than 9-7/8" bit size
</TABLE>

Mill Tooth Cone Sets (i.e., #1, #2, #3 cones equal 1 set)

<TABLE>
<CAPTION>
Minimum Charge Sizes
-------------- -----
<S> <C>
$1000 Less than or equal to 7-7/8" bit size
$2000 Greater than 7-7/8" and less than or equal to 9-7/8" bit size
$3000 Greater than 9-7/8" bit size
</TABLE>

(e) The payment terms shall be net forty-five (45) days from
receipt by Buyer of Seller's invoice.

(f) Forgings shall be shipped FOB, Azusa, California or
Irvine, California.

(4) Forging Dies. All forging dies to produce rock bit and down hole tool
forgings shall become the property of Seller, except as stated in Paragraph 5.
Dies shall be stored and maintained in working order at Seller's facility at
Seller's expense. Buyer shall pay for resinking of dies due to Engineering
revision or new dies for new products. All charges are subject to negotiation.

(5) Quality, Cost, and Delivery Considerations. Seller agrees to provide
Buyer with a quality product, delivered on time, at a competitive price, within
reasonable and agreed to lead times. Buyer shall provide Seller with as much
forecasting information as possible to assist Seller in planning for raw
material purchases and shop scheduling.

- A quality product is defined as being manufactured to the Buyer's
requirement and determined by Buyer to require no "in-house"
inspection upon receipt at Buyer's facility.

- Seller shall initially commit to 90% minimum on time delivery of
forgings to Buyer during first year transition period. Seller commits
to 95% minimum on time delivery, thereafter.

- Seller shall provide lead times to Buyer consistent with current lead
times provided by Irvine forge plant.

The 80% purchase commitment as stated in Paragraph 2 may be waived if Seller's
performance falls below above stated levels for a period of time that is
reasonably determined unacceptable by Buyer or if future price negotiations
between Buyer and Seller are unsuccessful. In such event, Buyer may relocate
dies, at no cost except freight and

2
<PAGE> 3
without cost to Seller, to another supplier to ensure necessary production
levels are maintained.

(6) Benefit of Parties. All of the terms and provisions of this Supply
Agreement shall be binding upon and inure to the benefit of Buyer and Seller
and their respective successors and assigns. In the event Buyer sells all or
substantially all of its business for which the forgings covered by this
Agreement are supplied, Buyer will have its obligations under this Agreement
assumed by the Buyer of such business.

(7) Notice. All notices provided for by this Agreement shall be considered to
have been received if sent by courier or by certified mail, return receipt
requested, post prepaid, bearing the following addresses:

(i) Buyer:
SMITH INTERNATIONAL, INC.
16740 Hardy Street
P.O. Box 60068
Houston, TX 77205

(ii) Seller:
AMFORGE-SMITH FORGE COMPANY
1520 Kensington Road, Suite 112
Oak Brook, IL 60521

or such other addresses as Buyer or Seller may designate in writing as herein
provided.

IN WITNESS WHEREOF, the parties have executed this Supply Agreement.

SMITH INTERNATIONAL, INC.

By /s/ R. N. GUBRUD
------------------------------------------------
R. M. Gubrud

Title Vice President & Chief Financial Officer
---------------------------------------------

AMFORGE-SMITH FORGE COMPANY

By /s/ ARTHUR G. TICHENOR
------------------------------------------------
Arthur G. Tichenor

Title Chairman
---------------------------------------------

<PAGE> 1
EXHIBIT 10.13

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (the "Agreement"), made this 3rd day of
April, 1995, is entered into by SMITH INTERNATIONAL, INC., a Delaware
corporation with its principal place of business at Houston, Texas (the
"Company"), and ROGER A. BROWN residing at Houston, Texas (the "Executive").

The Company desires to employ the Executive, and the Executive desires
to be employed by the Company. In consideration of the mutual covenants and
promises contained herein, and the good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged by the parties hereto, the
parties hereto agree as follows:

1. TERM OF EMPLOYMENT.

1.1 The Company hereby agrees to employ the Executive
because of the extraordinary and unique services the Executive can render to
the Company, and the Executive accepts employment with the Company, upon the
terms set forth in this Agreement, for the period commencing on the date hereof
(the "Commencement Date") and ending on April 2, 1998, unless sooner terminated
in accordance with the provisions of Section 4 (the "Employment Period").

1.2 Upon expiration of the term of this Agreement, if the
parties hereto mutually agree, the Employment Period may be extended
indefinitely, and the Executive shall continue thereafter as an "at will"
employee. Regardless of whether employment is continued, this Agreement shall
terminate and be of no further force and effect on April 2, 1998, except as
otherwise specifically provided herein.

2. TITLE; CAPACITY; DUTIES. The Executive shall serve as
President, Smith Diamond Products division or in such other position as the
Company's Board of Directors (the "Board") may determine from time to time.
The foregoing description of Executive position shall not limit the Company
from assigning to Executive other duties and functions in addition to or in
substitution for those described above. The Executive shall be subject to the
supervision of, and shall have such authority as is delegated to him by the
Board, the Company's Chief Executive Office or such other senior executive(s)
as the Board or the Chief Executive Officer shall determine.

3. COMPENSATION AND BENEFITS.

3.1 Salary. The Company shall pay the Executive, in
regular periodic installments, consistent with the Company's general pay
practices, an annual base salary of $180,000.00 for each one year period,
commencing on the Commencement Date, during the Employment Period. Such salary
shall be subject to adjustment as determined by the Board in its annual review
of Executive's performance hereunder. Executive specifically acknowledges that
Company has no obligation to increase said salary as a result of such review.

1
<PAGE> 2
3.2 Fringe Benefits and Bonus. The Executive shall
be entitled to participate in all bonus, stock purchase, warrant, stock option
and any other form of benefit programs that the Company establishes and makes
available to its executive employees, if any, to the extent that Executive's
position, tenure, salary, age, health and other qualifications make him
eligible to participate.

3.3 Reimbursement of Expenses. The Company shall
reimburse the Executive for all reasonable travel, entertainment and other
expenses incurred or paid by the Executive in connection with, or related to,
the performance of his duties, responsibilities or services under this
Agreement, upon presentation by the Executive of documentation, expense
statements, vouchers and/or such other supporting information as the Board of
Directors may request.

4. Employment Termination. The employment of the Executive by
the Company pursuant to the Agreement shall terminate upon the occurrence of
any of the following:

4.1 At the election of the Company for cause, immediately
upon written notice by the Company to the Executive. For the purposes of this
Section 4.1, cause for termination shall be deemed to exist upon (a) the
conviction of the Executive of, or the entry of a pleading of guilty or nolo
contendere by the Executive to, any crime involving moral turpitude or any
felony; or (b) any theft, embezzlement, fraud or other act of dishonesty
whether or not involving the Company, which, in the good faith finding of the
Board, will have a material adverse effect on the Company if Executive's
employment by the Company were to continue.

4.2 Upon the Executive's death or in accordance with the
Company's policies applicable to Executive in the event of the inability of the
Executive to provide services due to illness, disability, or physical or
emotional incapacity.

4.3 If for any reason the Executive's position is
eliminated or otherwise becomes redundant, or his responsibilities are
substantially decreased, whether because of merger, acquisition, sale of
business or assets, dissolution, tender offer, or any other reason.

4.4 The expiration of the Employment Period unless
extended in accordance with Section 1.2.

5. EFFECT OF TERMINATION

5.1 Termination Pursuant to Section 4.1 or 4.4.
During the term of this Agreement, in the event the Executive's employment is
terminated pursuant to Section 4.1 or pursuant to Section 4.4 unless extended
in accordance with Section 1.2, the Company shall pay to the Executive the
compensation and benefits otherwise payable to him under Section 3 through the
last day of his actual employment by the Company. Any compensation previously
earned by Executive hereunder but not yet paid to him shall be accelerated and
shall become payable in a lump sum upon termination of employment.

2
<PAGE> 3
5.2 Termination Pursuant to Section 4.2 or 4.3.
During the term of this Agreement, if the Executive's employment is terminated
pursuant to Section 4.2 or 4.3, the Company shall pay to the Executive or his
personal representative, as the case may be, the compensation which would
otherwise be payable to the Executive under Section 3 in a lump sum, equal to
the amounts in effect under Section 3 through the end of the Employment Period.
Any compensation previously earned by Executive hereunder but not yet paid to
him shall be accelerated and shall become payable in a lump sum upon
termination of employment.

5.3 No Duty to Mitigate. If the Executive's
employment is terminated pursuant to Section 4.3 or under circumstances
constituting a breach of this Agreement by the Company, the payments and
benefits provided in Section 5.2 shall be payable without regard to Executive's
other income or his ability to obtain other employment, and Executive shall be
under no duty to mitigate the amount payable hereunder.

5.4 Survival. The provisions of Sections 6, 7 and
8 shall survive the termination of this Agreement.

6. Breach of Contract by Executive. Executive recognizes that
the Company is entering into this Agreement in order to obtain the exclusive
use of his personal services during the term hereof, that Executive's services
are of a special, unique, unusual, extraordinary, creative and intellectual
character, and that the commercial success of the enterprise for which
Executive has been hired depends primarily upon the unique character of his
services. Executive therefore agrees that the substantial portion of the
Executive's services to unrelated endeavors during the Employment Period, in
violation of this Agreement and without consent of the Company, shall be a
material breach of this Agreement. The Executive understands that such loss or
diversion of his services could neither be cured by the hiring of other
executives nor could damages be reasonably or adequately calculated and
recovered in an action at law, and therefore Executive further agrees that, to
the extent permitted by law, any material breach of this Agreement may, without
limiting any other remedies, be prevented or cured by an action for specific
performance or injunctive relief, without the need of the Company to post bond
or other security.

7. NON-COMPETITION.

(a) During the Employment Period, the Executive will not
directly or indirectly:

(i) As an individual proprietor, partner,
stockholder, officer, executive, director, joint venture, investor, lender, or
in any other capacity whatsoever (other than as a holder of not more than one
percent (1%) of the total outstanding stock of a publicly held company, engage
in the business of developing, producing, marketing or selling, whether at
wholesale or at retail, or of performing, providing, or offering, products
and/or services of the kind or type developed or being developed, produced,
marketed, sold, offered, provided or performed by the Company while the
Executive was employed by the Company; or

3
<PAGE> 4
(ii) recruit, solicit or induce, or attempt to
induce, any executive or executives of the Company or any other person or
entity having any continuing or periodic relationship with the Company to
terminate their employment with, to otherwise cease their relationship with,
the Company, or

(iii) solicit, divert or take away, or attempt to
divert or to take away, the business or patronage of any of the customers or
accounts, or prospective customers or account, of the Company which were
contracted, solicited or serviced by the Executive while employed by the
Company.

(b) If any restriction set forth in this Section 7 is
found by a court of competent jurisdiction to be unenforceable because it
extends for too long period of time or over too great a range of activities or
in too broad a geographic area, it shall be interpreted to extend only over the
maximum period of time, range of activities or geographic areas as to which it
may be enforceable.

(c) The restrictions contained in this Section 7 are
necessary for the protection of the business and goodwill of the Company and
are considered by the Executive to be reasonable for such purpose. The
Executive agrees that any breach of this Section 7 will cause the Company
substantial and irrevocable damage and therefore, the Company shall have the
right, in addition to any other remedies it may have, to seek specific
performance and injunctive relief, without the need to post a bond or other
security.

8. PROPRIETARY INFORMATION AND DEVELOPMENTS.

8.1 Proprietary Information.

(a) Executive agrees that all information and know-how,
whether or not in writing, of a private, secret or confidential nature
concerning the Company's business or financial affairs, business methods,
suppliers or customers (collectively, "Proprietary Information") is and shall
be the exclusive property of the Company. Executive will not disclose any
Proprietary Information to others outside the Company or use the same for any
unauthorized purposes without written approval by the Board, either during or
after his employment, unless and until such Proprietary Information has become
public knowledge without fault of the Executive.

(b) Executive agrees that all files, letters, memoranda,
reports, records, data, sketches, drawings, flow charts, business methods,
promotional materials, video or sound recordings, program listings, or other
written, photographic, or other tangible material containing Proprietary
Information, whether created by the Executive or others, which shall come into
his custody or possession, shall be and are the exclusive property of the
Company to be used by the Executive only in the performance of his duties for
the Company.

(c) Executive agrees that his obligation not to disclose
or use information, know-how and records of the types set forth in paragraphs
(a) and (b) above, also extends to such types of information, know-how, records
and intangible property of customers of the Company or suppliers to the Company
or other third parties who may have disclosed or

4
<PAGE> 5
entrusted the same to the Company or to the Executive in the course of the
Company's business.

8.2 Developments.

(a) Executive will make full and prompt disclosure to the
Company of all inventions, improvements, discoveries, methods, developments,
software and works of authorship, whether or not patentable or copyrightable,
which are created, made, conceived or reduced to practice by the Executive or
under his direction jointly with others during his employment by the Company,
whether or not during normal working hours or on the premises of the Company
(all of which are collectively referred to in this Agreement as
"Developments").

(b) Executive agrees to assign and does hereby assign to
the Company (or any person or entity designated by the Company) all his right,
title and interest in and to all Developments and all related patents, patent
applications, copyrights and copyright applications. However, this Section
8.2(b) shall not apply to Developments which do not relate to the present or
planned business or research and development of the Company and which are made
and conceived by the Executive not during normal working hours, not on the
Company's premises and not using the Company's tools, devices, equipment or
Proprietary Information.

(c) Executive agrees to cooperate fully with the Company,
both during and after his employment with the Company, with respect to the
procurement, maintenance and enforcement of copyrights, patents and other
intellectual and intangible property rights (both in the United States and in
foreign countries) relating to Proprietary Information and Developments.
Executive shall sign all papers, including, without limitation, copyright
applications and/or assignments, patent applications and/or assignments,
declarations, oaths, formal assignments, assignments of proprietary rights, and
powers of attorney, which the Company may deem necessary or desirable in order
to protect its rights and interests in any Proprietary Information or
Development.

8.3 Other Agreements. Executive further represents
that his performance of all the terms of this Agreement and as an Executive of
the Company does not and will not breach any agreement to keep in confidence
proprietary information, knowledge or data acquired by him in confidence or in
trust prior to his employment with the Company.

9. Notices. All notices required or permitted under this
Agreement shall be in writing and shall be deemed effective upon personal
delivery or upon deposit in the United States Post Office, by registered or
certified mail, postage prepaid, addressed to the other party at the address
shown above, or at such other address or addresses as either party shall
designate to the other in accordance with this Section 9. A copy of all
notices given by Executive to the Company shall be sent to each member of the
Board.

10. Pronouns. Whenever the context may require, any
pronouns used in this Agreement shall include the corresponding masculine,
feminine or neuter forms, and the singular forms of nouns and pronouns shall
include the plural, and vice versa.

5
<PAGE> 6
11. Entire Agreement. This Agreement constitutes the
entire agreement between the parties and supersedes all prior agreements and
understandings, whether written or oral, relating to the subject matter of this
Agreement.

12. Amendment. This Agreement may be amended or modified
only by a written instrument executed by both the Company and Executive.

13. GOVERNING LAW. THE AGREEMENT SHALL BE CONSTRUED, INTERPRETED
AND ENFORCED IN ACCORDANCE WITH THE LAW OF THE STATE OF TEXAS.

14. Successors and Assigns. This Agreement shall be binding upon
and inure to the benefit of both parties and their respective successors and
assigns, including any corporation with which or into which the Company may be
merged or which may succeed to its assess or business, provided, however, that
the obligations of Executive are personal and shall not be assigned by him.

15. Miscellaneous.

15.1 No delay or omission by the Company in exercising any
right under this Agreement shall operate as a waiver of that or any other
right. A waiver of consent given by the Company on any one occasion shall be
effective only in that instance and shall not be construed as a bar or waiver
of any right on any other occasion.

15.2 The captions of the sections of this Agreement are
for convenience of reference only and in no way define, limit or affect the
scope or substance of any section of this Agreement.

15.3 In case any provision of this Agreement shall be
invalid, illegal or otherwise unenforceable, the validity, legality and
enforceability of the remaining provisions shall in no way be affected or
impaired thereby.

IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year set forth above.

SMITH INTERNATIONAL, INC. EXECUTIVE:

/s/ DOUGLAS L. ROCK /s/ ROGER A. BROWN
- ----------------------------- -------------------------------
Douglas L. Rock Roger A. Brown
President

<PAGE> 1
EXHIBIT 10.14

AMENDMENT TO EMPLOYMENT
AGREEMENT BETWEEN
EMPLOYEE
AND
SMITH INTERNATIONAL, INC.

This Amendment to Employment Agreement is entered into this 16th day
of October, 1989 and is by and between the employee executing this agreement on
the last page hereof ("EMPLOYEE") and Smith International, Inc. ("COMPANY").

WHEREAS, EMPLOYEE AND COMPANY entered into an Employment Agreement on
December 10, 1987 (the "Employment Agreement") which sets forth EMPLOYEE'S
term of employment with COMPANY; and

WHEREAS, the Employment Agreement did not address or provide any
protection for EMPLOYEE or COMPANY in the event of a Change in Control of
COMPANY; and

WHEREAS, should COMPANY receive any proposal from a third person
concerning a possible business combination with, or acquisition of equity
securities of, COMPANY, the Board of Directors of COMPANY believes it
imperative that COMPANY be able to rely upon EMPLOYEE's advice as to the best
interest of COMPANY and its shareholders without concern that EMPLOYEE might be
distracted by the personal uncertainties and risks created by such a proposal.

NOW, THEREFORE, EMPLOYEE and the COMPANY hereby agree as follows:

1. In the event a third person begins a tender or exchange offer,
circulates a proxy to shareholders, or takes other steps to
effect a Change of Control (as defined in Section 11 hereof)
of COMPANY, EMPLOYEE agrees that he will not voluntarily leave
the employ of COMPANY, and will render the services
contemplated in the Employment Agreement, until the third
person has abandoned or terminated his efforts to effect a
Change of Control or until a Change of Control has occurred.

2. In the event EMPLOYEE's employment with the COMPANY (including
its subsidiaries) is involuntarily terminated (as defined in
Section 8 hereof), other than as a consequence of his death or
disability, or of his retirement at or after his normal
retirement date under COMPANY's pension or other retirement
plans, within one and one-half (1 1/2) years after a Change of
Control of COMPANY (a "Covered Termination"), each of the
following payments shall be made by COMPANY to EMPLOYEE not
later than thirty (30) days after the date of such covered
Termination:

(a) Base Salary. An amount in cash equal to three (3)
times the amount of EMPLOYEE's base salary in effect
on his date of Covered

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Termination. Any payments made hereunder are in lieu
of any lump sum payment of base salary required under
the Employment Agreement as a result of the
termination of EMPLOYEE pursuant to Section 4.3 of
the Employment Agreement.

(b) Bonus. An amount in cash equal to the amount of
EMPLOYEE's Target Incentive Level for an Award under
COMPANY's Long Term Incentive Compensation Plan as
in effect on his date of Covered Termination.

(c) 401(k) Plan. An amount in cash equal to the amount
contributed by COMPANY under the Smith International,
Inc. 401(k) Retirement Plan (the "401(k) Plan") to
EMPLOYEES's "Company Contribution Account," as such
term is defined in the 401(k) Plan, for the year
ending immediately prior to the Change in Control.

(d) Perquisites. An amount in cash equal to the
perquisite amount provided in the Executive
Perquisite Program in effect on EMPLOYEE's date of
Covered Termination. Any payments made hereunder
are in lieu of any lump sum payment of perquisites
required under the Employment Agreement as a result
of the termination of EMPLOYEE pursuant to Section
4.3 of the Employment Agreement.

3. COMPANY agrees that for the period beginning on the date of EMPLOYEE's
Covered Termination and ending on the first to occur of (i) the date
of EMPLOYEE's reemployment or (ii) the last day of the twelfth (12th)
month following the date of EMPLOYEE's Covered Termination, COMPANY
shall provide medical and dental insurance, life insurance, accidental
death and dismemberment insurance and disability protection no less
favorable to EMPLOYEE (including with respect to any costs borne by
EMPLOYEE) than the better of (a) the coverage provided by COMPANY
immediately prior to the Change of Control or (b) the coverage
provided by COMPANY immediately prior to EMPLOYEE's date of Covered
Termination.

4. Without in any way limiting any pre-existing agreements between
COMPANY and EMPLOYEE, in the event of a Covered Termination, COMPANY
will assist EMPLOYEE with executive outplacement, will provide
office space from which EMPLOYEE may conduct employment efforts,
and secretarial assistance, for a period of up to one year at no cost
to EMPLOYEE and will reimburse EMPLOYEE for the out-of-pocket costs
and expenses (including, without limitation, the reasonable fees of
any placement agencies employed by EMPLOYEE and travel expenses, but
excluding all relocation expenses) incurred by EMPLOYEE in seeking
other employment following any involuntary termination up to a maximum
amount of $12,000.

5. Stock Options. Upon a Change in Control, all stock options become
fully vested and exercisable immediately. In the event of a Covered
Termination, COMPANY shall pay to EMPLOYEE, in respect of each option
to purchase common stock of the Company and any related stock
appreciation right ("SAR") granted to EMPLOYEE

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under COMPANY's 1989 Long-Term Incentive Compensation Plan, 1982
Stock Option Plan or 1971 Stock Option Plan (the "Stock Option Plans")
that is then outstanding (and that has not been exercised) an amount
in cash equal to the excess, if any, of the higher of (a) the Closing
Price per share of COMPANY's common stock on the EMPLOYEE's
termination date or (b) the highest per share price actually paid in
connection with any Change of Control (such higher amount being
hereinafter referred to as "Fair Market Value") over the exercise
price, multiplied by the total number of shares of COMPANY's common
stock subject to such option. Such payment shall be in consideration
of a cancellation of any rights which EMPLOYEE may have in said stock
options and SARs.

6. Unrelated Stock Appreciation Rights (SARs). In the event of a Covered
Termination, the COMPANY shall pay to EMPLOYEE, in respect of each
then outstanding unrelated SAR held by EMPLOYEE, an amount in cash
equal to the amount by which the Fair Market Value of each share of
COMPANY's common stock subject to the SAR exceeds the exercise price
thereof, multiplied by the number of shares of COMPANY's common stock
subject to such SAR. Such payment shall be in consideration of a
cancellation of any rights which EMPLOYEE may have in said SARs.

7. Stock Grants. Upon a Change in Control, all stock grants become fully
vested and exercisable immediately. In the event of a Covered
Termination, the COMPANY shall pay to EMPLOYEE, in respect of each
then outstanding stock grant granted to EMPLOYEE under the Stock
Option Plans, an amount in cash equal to the Fair Market Value of each
share of COMPANY's common stock subject to the stock grant, multiplied
by the number of shares of COMPANY's common stock subject to such
stock grant. Such payment shall be in consideration of a cancellation
of any rights which EMPLOYEE may have in said Stock Grants.

8. Involuntary Termination. For purpose of this agreement, EMPLOYEE's
employment with COMPANY (including its subsidiaries) shall be deemed
to have been involuntarily terminated by COMPANY if (a) EMPLOYEE's
employment is terminated by COMPANY for a reason other than for cause
(which for purposes of this Agreement shall mean EMPLOYEE's gross
negligence, habitual neglect or willful misconduct in performance of
the duties and services required of him pursuant to the Employment
Agreement or EMPLOYEE's final conviction of a felony or of a
misdemeanor involving moral turpitude) or (b) EMPLOYEE terminates his
employment with COMPANY within sixty (60) days of the occurrence of
one or more of the following events: (i) a substantial adverse
alteration in the nature or status of EMPLOYEE's responsibilities from
those in effect immediately prior to the Change in Control (other than
any such alteration primarily attributable to the fact that COMPANY
may no longer be a public company); (ii) the assignment to EMPLOYEE of
any duties inconsistent with his status as an executive officer of
COMPANY; (iii) a reduction by COMPANY in EMPLOYEE'S annual base salary
as in effect on the date hereof or as the same may be increased from
time to time except for across-the-board salary reductions similarly
affecting all executives of COMPANY and all executives of any person
in control of COMPANY; (iv) COMPANY 5 requiring

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EMPLOYEE to be permanently based anywhere other than the continental
United States except for required travel on COMPANY's business to an
extent substantially consistent with EMPLOYEE's present business
travel obligations; (v) the failure by COMPANY to continue in effect
compensation plans that, in the aggregate, provide EMPLOYEE with
benefits not materially less favorable than those provided to EMPLOYEE
immediately prior to the Change in Control under COMPANY's pension,
profit sharing, bonus, incentive, life insurance, health, accident,
disability and other employee benefit plans, programs or arrangements
(other than stock-based compensation plans, programs or arrangements);
or (vi) the taking of any action by COMPANY that would materially
adversely affect the physical conditions existing at the time of the
Change in Control in or under which EMPLOYEE performs his employment
duties; provided, however, that a termination of employment by
EMPLOYEE pursuant to clause (ii), (iii), (iv), (v) or (vi) of this
Section 8 shall not fail to constitute an involuntary termination
within the meaning of this Section 8 merely because the event set
forth in any such clause is primarily attributable to the fact that
COMPANY is no longer a public company.

9. Section 7 to the Employment Agreement is hereby revised to insert a
new subsection (d) as follows:

(d) Following the occurrence of a Covered Termination, the
Employment Period shall be defined as the period of time in
which EMPLOYEE is employed by the COMPANY.

10. Upon a Change in Control, the provisions of Section 7 relating to
Non-Competition shall not be construed to prohibit EMPLOYEE from
seeking or continuing employment with any third person who may
acquire 50% or more of the outstanding common shares of the COMPANY.

11. Definition of Change of Control. For the purpose of this Amendment, a
"Change of Control" shall be deemed to have taken place if: (i) a
third person, including a "group" as defined in Section 13(d)(3) of
the Securities Exchange Act of 1934, acquires shares of the COMPANY
having 50% or more of the total number of votes that may be cast for
the election of Directors of the Company; (ii) as the result of any
cash tender or exchange offer, merger or other business combination
(a "Transaction"), the persons who were Directors of the COMPANY
before the Transaction shall cease to constitute a majority of the
Board of Directors of the COMPANY or any successor to the COMPANY; or
(iii) the stockholders of the COMPANY approve an agreement to sell or
otherwise dispose of all or substantially all of the Company's assets
(including a plan of liquidation).

12. Relation to Other Benefit Plans. Except for the specific references
above to the Employment Agreement nothing in this Amendment shall be
deemed to alter or be in lieu of any entitlements due EMPLOYEE under
the benefit plans or policies of COMPANY in existence on the date
hereof. In the event any benefit plan or policy of COMPANY shall
provide for earlier vesting or payment to EMPLOYEE (e.g.,

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<PAGE> 5
stock options, stock appreciation rights or stock grants) than set
forth herein then the terms of the plan or policy shall govern.

13. Successors. This Amendment shall be binding upon and inure to the
benefit of the EMPLOYEE and his estate, and the COMPANY and its
successors or assigns, but neither this Amendment nor any rights
arising hereunder may be assigned or pledged by the EMPLOYEE.

IN WITNESS WHEREOF, the parties have executed this Amendment as of the day and
year first above written.

SMITH INTERNATIONAL, INC. EMPLOYEE:

By: /s/ ROBERT M. GUBRUD /s/ DOUGLAS L. ROCK
----------------------- -----------------------------
Robert M. Gubrud Douglas L. Rock

<PAGE> 1
EXHIBIT 10.15