PONDER INDUSTRIES INC, 10-K, 1998-11-30

PONDER INDUSTRIES INC
10-K, 1998-11-30
EQUIPMENT RENTAL & LEASING, NEC

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UNITED STATES 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

FOR THE FISCAL YEAR ENDED AUGUST 31, 1998

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 0-18656

PONDER INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C>
DELAWARE 75-2268672
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5005 RIVERWAY DRIVE, SUITE 550 77056
HOUSTON, TEXAS (Zip Code)
(Address of principal executive offices)
</TABLE>

Registrant's telephone number, including area code: (713) 965-0653
---------------------

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

<TABLE>
<CAPTION>
TITLE OF EACH CLASS: NAME OF EXCHANGE ON WHICH REGISTERED:
-------------------- -------------------------------------
<S> <C>
Common Stock, $.01 par value National Association of Securities Dealers
Automated Quotation System
</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 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 [ ] .
---------------------

The number of shares outstanding of the Registrant's common stock as of
November 16, 1998, is 9,297,899.

The aggregate market value of the stock held by non-affiliates of the
Registrant as of November 16, 1998, was approximately $7,639,103.

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<PAGE> 2

This Annual Report on Form 10-K contains certain "forward-looking"
statements as such term is defined in the Private Securities Litigation Reform
Act of 1995 and information relating to the Company and its subsidiaries that
are based on the beliefs of the Company's management as well as assumptions made
by and information currently available to the Company's management. When used in
this report, the words "anticipate," "believe," "estimate," "expect" and
"intend" and words or phrases of similar import, as they relate to the Company
or its subsidiaries or Company management, are intended to identify
forward-looking statements. Such statements reflect the current risks,
uncertainties and assumptions related to certain factors including, without
limitations, competitive factors, general economic conditions, customer
relations, relationships with vendors, the interest rate environment,
governmental regulation and supervision, seasonality, distribution networks,
product introductions and acceptance, technological change, changes in industry
practices, onetime events and other factors described herein and in the
Company's Registration Statement on Form S-3 (Commission File No. 333-41971).
Based upon changing conditions, should any one or more of these risks or
uncertainties materialize, or should any underlying assumptions prove incorrect,
actual results may vary materially from those described herein as anticipated,
believed, estimated, expected or intended. The Company does not intend to update
these forward-looking statements.

PART I.

ITEM 1. BUSINESS

GENERAL

Ponder Industries, Inc. (the "Company" or "Ponder") is engaged in the
business of providing specialized oilfield services and rental equipment to the
oil and gas industry. The Company's principal executive offices are located in
Houston, Texas, at 5005 Riverway Drive, Suite 550, Houston, Texas 77056 and its
telephone number at that address is (713) 965-0653. The Company currently has
operating facilities in Texas, Louisiana, Oklahoma, Arkansas, Illinois,
Mississippi and the United Kingdom.

Ponder was founded as a Texas corporation in 1981. In 1990, Ponder became a
Delaware corporation through the merger of Ponder Industries, Inc., a Texas
corporation, into Ponder Industries, Inc., a Delaware corporation. In April
1997, Eugene L. Butler became Chairman and Chief Executive Officer of the
Company. Under Mr. Butler's leadership, a business strategy was implemented in
1997 that focused on reducing the Company's expenses and improving Ponder's
domestic and international market position by pursuing opportunities in
strategic oil and gas markets and through internal growth.

Ponder rents a full line of specialized equipment and tools utilized in
fishing operations. Fishing services are required by the oil and gas industry
whenever there is an obstruction in the borehole of a well. At times during the
life of a well, cable, tubulars, casing, wellbore tools or other debris may
become detached and stuck in the borehole of the well. Likewise, equipment can
accidentally be dropped into a well. Events such as these can create major
obstructions that impede work and raise drilling and completion costs. Ponder
provides expert "fishing" and cutting services to remove such obstructions and
return the wellsite to normal operation.

Fishing services require a variety of equipment designed to catch or snag
"fish" or "junk" in a well or to grind, cut or otherwise eliminate the
obstruction. Such equipment is generally purchased by Ponder, but it may also be
designed and built by the Company. Specialized fishing tool equipment is often
not owned by drilling contractors and operators because of the high cost of
owning and maintaining the full range of equipment required for the various
types of situations encountered in the oil and gas industry throughout many
geographic areas. The items of equipment available for rental from the Company
include a full line of fishing tools, such as milling tools, casing cutters,
jars, spears, overshots and whipstocks. Ponder also provides supervisory
services relating to the operation of its fishing tool equipment and the proper
selection and assembly of the fishing string. The fishing string consists of
jars, subs, overshots (external), spears (internal) and other tools for removing
the item or the "fish" from the well.

The Company also rents specialized oilfield equipment such as pressure
control equipment, tools, pipe, tubing and whipstocks used in the drilling,
completion and workover of wells.

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The Company solicits orders for its services, products and incidental
equipment rentals primarily through its employee sales force. Traditionally,
most U.S. orders have been received on a well-by-well basis, while
internationally, the Company generally obtains business through contracts with
customers who commit to use the Company's services, products and equipment for a
specified period of time or for a certain number of wells in a certain
geographic area.

Upon the completion of operations by the customer, the tools are returned
to the Company, and the tools are inspected and repaired as needed. Repairs are
at the cost of the customer, and if the tools cannot be restored to first class
condition, the cost of the tool is charged to the customer.

SEASONALITY

Demand for the Company's services and products is tied closely to the
seasonality of drilling activity. Higher activity is generally experienced in
the spring, summer and fall. In the United States and Europe, the lowest
drilling and workover activity generally occurs during the early months of the
year due to inclement weather. Purchases of the Company's products and services
are also to a substantial extent deferrable in the event oil and gas companies
reduce capital expenditures as a result of conditions existing in the oil and
gas industry or general economic downturns. Fluctuations in the Company's
revenues and costs may have a material adverse effect on the Company's business
and operations. Accordingly, the Company's operating results may vary from
quarter to quarter, depending upon factors outside of its control.

PATENTS AND LICENSES

The Company has certain patents and licenses for products and equipment
that appear to have commercial applications. The Company believes its patents
and licenses to be adequate for the conduct of its products and services
business and, while it considers them to be valuable in the aggregate, the
Company does not believe that its business is materially dependent upon its
patents or licenses. None of the Company's patents or licenses expire in the
near future. In management's opinion, engineering, operation skills and
application experience are more responsible for the Company's market position
than are patents or licenses.

MARKETING

The Company obtains orders through its direct sales force, supervisors and
fishermen. Due to the short-term nature of the equipment rental and service
business, backlog is not meaningful. The Company's backlog for equipment rentals
is not a significant percentage of the Company's consolidated revenues.

The Company's principal customers are major and independent national and
international oil and gas companies.

REVERSE STOCK SPLIT

On November 11, 1998, the Company's stockholders approved a one-for-five
reverse common stock split. On November 13, 1998, the Company filed appropriate
documentation with the Delaware Secretary of State affecting such common stock
split. The purpose of the reverse split was to increase the bid price of the
Company's common stock above $1 per share in order to continue the listing of
the Company's common stock on NASDAQ's Automated Quotation System. Accordingly,
other than where indicated, all common stock and price per share information
contained herein has been adjusted to reflect the reverse stock split. The
authorized capital stock and par value of the Company (10,000,000 shares of
preferred stock, $.01 par value, and 150,000,000 shares of common stock, $.01
par value) was not reduced or otherwise affected by the reverse stock split.

ACQUISITIONS

The following describes acquisitions by the Company during the years ended
August 31, 1996 and 1998. The Company had no significant acquisitions during the
year ended August 31, 1997.

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Effective September 1995, the Company acquired certain assets and assumed
certain liabilities of Armstrong Tool, Inc. ("Armstrong"). Armstrong was wholly
owned by the Company's former president and his spouse. Consideration given for
Armstrong was the issuance of a $400,000 promissory note to the Company's former
president plus assumption of various notes payable of approximately $450,000.
The $450,000 in notes payable were paid during the year ended August 31, 1996.
Armstrong is located in Fort Smith, Arkansas.

Effective October 1995, the Company acquired certain real property,
vehicles and rental tools and equipment from Apex Tool ("Apex"), a sole
proprietorship. Apex is located in Healdton, Oklahoma, and provides fishing and
rental tool services in the South Central Oklahoma and North Texas region. The
assets of Apex were acquired for consideration of $600,000.

Effective April 1996, the Company completed the acquisition of Panther Oil
Tools, (UK) Ltd. ("Panther"), an English company, and substantially all of the
assets of Villain Ltd. ("Villain"), a Guernsey company, for $1,250,000 and
240,000 shares of the Company's common stock which were valued on the date of
issuance at $3,060,000.

Effective May 1996, the Company acquired Runyon Oil Tools, Inc. (Olney,
Illinois), and DiKor, Inc. (Carmi, Illinois), and effective March 1996, the
Company acquired C&F Fishing Tools, Inc. (Maysville, Oklahoma), in separate
transactions in consideration for an aggregate of $283,000 and 66,291 shares of
the Company's common stock which were valued on the date of issuance at
approximately $640,000.

Effective June 1996, the Company acquired substantially all of the assets
of Reeled Tubular Components, Inc., of Houston, Texas, including the
intellectual property rights to an obstruction removing device, for a cash
payment of $50,000 and 4,000 shares of the Company's common stock which were
valued at $60,000 on the date of issuance.

Effective July 1996, the Company acquired all of the fixed assets of Brooks
Oil Service Co., L.P., and Bosco Fishing and Rental Tools, of Laurel,
Mississippi, for an initial cash payment of $200,000, and the assumption of
$1,200,000 in liabilities.

In August 1996, the Company acquired all of the issued ordinary shares of
Prime Pipe Limited, a UK company, for approximately $105,000 and the issuance of
930 shares of the Company's common stock.

In January 1998, the Company acquired all the outstanding capital stock of
Fishing Tools, Inc. ("FTI"), for approximately $7,500,000 cash, including
payment of acquired indebtedness, and the issuance of 128,899 shares of the
Company's common stock valued at $1,000,000. FTI is a full service fishing and
rental tool company, which has been in business since 1954. FTI operates three
locations in Louisiana and one in Texas and has a significant offshore presence.
FTI has historically been a profitable company with positive cash flow. The
acquisition is anticipated to strengthen the Company's operations on the Gulf
Coast and marks the Company's entry into higher margin offshore markets.

In May 1996, the Company signed a letter of intent to acquire Abilene,
Texas, based G&L Fishing Tool Company ("G&L"). In July 1996, the Company entered
into an agreement with G&L which gave the Company a one-year option to acquire
G&L under the same terms as the letter of intent. In connection with this
agreement, the Company paid to G&L a $1,000,000 forfeitable deposit. At August
31, 1996, approximately $1,172,000 related to this pending acquisition,
including the forfeitable deposit, was included in other assets in the Company's
consolidated balance sheet. In July 1997, the Company had not acquired G&L and
the option expired, requiring the Company to write-off $1,172,000 as an expense.

INDUSTRY CONDITION

The oil and gas industry has historically experienced significant
volatility. Demand for Ponder's services and products depends primarily upon the
number of oil and gas wells being drilled, the depth and drilling conditions of
such wells, the volume of production, the number of well completions and the
level of workover activity. Drilling and workover activity can fluctuate
significantly in a short period of time, particularly in the United States.

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The willingness of oil and gas operators to make capital expenditures for
the exploration and production of oil and natural gas will continue to be
influenced by numerous factors over which Ponder has no control, including the
prevailing and expected market prices for oil and natural gas. Such prices are
impacted by, among other factors, the ability of the members of the Organization
of Petroleum Exporting Countries ("OPEC") to maintain price stability through
voluntary production limits, the level of production by non-OPEC countries,
worldwide demand for oil and gas, general economic and political conditions,
costs of exploration and production, availability of new leases and concessions,
and governmental regulations regarding, among other things, environmental
protection, taxation, price controls and product allocations. No assurance can
be given as to the level of future oil and gas industry activity or demand for
Ponder's services and products.

During 1996 and much of 1997, the oil field service industry experienced a
general improvement in product demand and pricing as relatively stable and
improved oil and natural gas prices combined with a strong world economy to
increase exploration and development activity worldwide. Beginning in late 1997,
worldwide oil prices began to decline significantly and natural gas prices
weakened slightly on a year to year basis. These declines have been attributed
to, among other things, an excess supply of oil in world markets, reduced
domestic demand associated with an unseasonably warm winter, high inventory
levels of oil and gas and the impact of the economic downturn in Southeast Asia
and other factors over which Ponder has no control. As prices for oil declined
and remained depressed, the Company and others in the oil field services
industry experienced a significant drop in demand for their products and
services, in particular products associated with exploration activity and oil
production, as evidenced by a falling rig count.

While the Company anticipates continued long-term growth in the worldwide
demand for hydrocarbons and a related return to higher activity levels for oil
and gas companies over the next twelve to eighteen months, the Company intends
to actively monitor current industry market conditions and to continue to react,
if necessary, through consolidation or elimination of operating locations,
further reduction in personnel and related costs and to continue to aggressively
market its products and services.

FOREIGN OPERATIONS

Information by geographic location for the fiscal years 1998 and 1997 is
shown below. As discussed in Note 3 of the Notes to Consolidated Financial
Statements, the Company's former operations in Azerbaijan are shown as
discontinued operations in the Consolidated Financial Statements (expressed in
thousands):

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
AUGUST 31, AUGUST 31,
1998 1997
---------- ----------
<S> <C> <C>
Net sales --
Domestic.................................................. $15,822 $16,598
Foreign................................................... 5,031 5,277
------- -------
Total............................................. $20,853 $21,875
======= =======
Income (loss) from continuing operations --
Domestic.................................................. $(4,729) $(9,584)
Foreign................................................... 197 (337)
------- -------
Total............................................. $(4,532) $(9,921)
======= =======
Identifiable assets --
Domestic.................................................. $26,027 $17,585
Foreign................................................... 10,005 9,032
------- -------
Total............................................. $36,032 $26,617
======= =======
</TABLE>

The Company's foreign operations relate to Panther and Villain as discussed
in Note 15 of the Notes to the Consolidated Financial Statements.

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COMPETITION

The Company competes with numerous companies offering rental tool services
to the oil and gas industry. The Company experiences competition from both small
and major companies in all of its areas of operations. Many of the Company's
competitors are small, single-location companies, which offer only specialized
types of tools and services. Ponder also competes with large, international
corporations such as Weatherford International, Inc. and Tri-State (a Baker
Hughes Incorporated company) in most of the markets in which it participates.
These competitors have multiple locations, larger inventories of rental tools
and access to financial resources greater than those available to the Company.
The principal methods of competition that apply to the Company's rental tools
and fishing tool services are price, quality, availability and reputation. While
price is a major consideration to its customers, the Company believes that its
competitive position is enhanced by its experience, size, large inventory of
equipment, numerous locations in close proximity to drilling and production
sites, commitment to high quality equipment maintenance, customer service and
experienced personnel.

GOVERNMENTAL REGULATIONS

The Company currently is not directly subject to any specific regulatory
body, either state or federal. The most significant regulations that the Company
must comply with are those imposed by the Occupational Safety and Health
Administration. The Company has not had any material fines or penalties levied
against it due to unsafe working conditions for its employees. The Company
conducts safety training programs on a regular basis. There can be no assurance
that the cost of compliance with current environmental and safety regulations or
future changes in such laws and regulations will not have a material adverse
effect on the Company's operations.

ENVIRONMENTAL MATTERS

The trend in environmental regulations is to place more restrictions on
activities that may affect the environment, such as emissions of air and water
pollutants, generation and disposal of wastes, and the use and handling of
chemical substances. While the Company believes the cost of compliance with
environmental laws and regulations are not currently material, such costs have
increased over the past few years and are expected to continue to increase in
the future. Furthermore, because environmental laws and regulations are
frequently changed, and because environmental expenditures are often related to
unforeseen conditions with respect to facilities leased or acquired by the
Company and pre-acquisition activities of businesses acquired by the Company,
Ponder is unable to predict the impact, if any, that such laws and regulations
may have on its business in the future.

EMPLOYEES

As of November 16, 1998, the Company had approximately 161 full-time
employees. The Company has no contracts or collective bargaining agreements with
labor unions and considers its relations with its employees to be satisfactory.

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EXECUTIVE OFFICERS OF THE REGISTRANT

The current executive officers of the Company, their names, ages, positions
and tenure with the Company as of November 16, 1998 are as follows:

<TABLE>
<CAPTION>
OFFICER
NAME AGE POSITION SINCE
- ---- --- -------- -------
<S> <C> <C> <C>
Eugene L. Butler................... 57 Chairman, President and Chief
Executive Officer 1996
Gerald A. Slaughter................ 55 Senior Vice President and Chief
Financial Officer 1996
Frank J. Wall...................... 43 Senior Vice President Operations
Administration 1990
W. Brooks Owens.................... 40 Vice President Marketing/Operations 1998
Barry L. Cromeans.................. 47 Vice President and Controller 1998
Shirley G. Meyer................... 58 Vice President Human Resources and
Investor Relations and Secretary 1997
</TABLE>

There are no family relationships among the officers listed, and there are
no arrangements or understandings pursuant to which any of them were elected as
officers. Officers are elected annually by the Board of Directors at its first
meeting following the annual meeting of stockholders, each to hold office until
the corresponding meeting of the Board in the next year or until his or her
successor shall have been elected or shall have been qualified.

ITEM 2. PROPERTIES

The Company's principal executive offices are located at 5005 Riverway
Drive, Suite 550, Houston, Texas 77056 and its telephone number at that address
is (713) 965-0653. The Company's administrative offices are located at 511
Commerce Drive, Alice, Texas 78333 and its telephone number at that address is
(512) 664-5831. The Company's other properties include 19 equipment rental and
sales facilities owned or leased in Texas, Louisiana, Mississippi, Oklahoma,
Arkansas, and Illinois. In addition, the Company has two facilities located in
the United Kingdom. Substantially all of the Company's fixed assets are pledged
as security to a financial institution as collateral for certain of the
Company's long-term debt. See Note 6 of Notes to Consolidated Financial
Statements. The Company believes that its facilities are generally adequate for
their respective operations, and that the facilities of the Company are
maintained in good repair. The Company is lessee under a number of cancelable
and noncancelable leases for certain real properties. See Note 11 of Notes to
Consolidated Financial Statements.

ITEM 3. LEGAL PROCEEDINGS

In 1996, the Company sued its placement agent and its principal and related
entities (the "placement agent") in the Company's 1996 convertible debenture
offering and the debenture holders in the United States District Court for the
Western District of New York. In mid-1997, the Company settled with all of the
debenture holders, and the judge ordered the case against the placement agent
transferred to the United States District Court for the Northern District of
Georgia. In response, in September 1997, a case was filed against the Company in
Georgia State Court, which the Company removed to the United States District
Court for the Northern District of Georgia, Atlanta Division, by the placement
agent alleging that, in connection with such offering, the Company tortiously
interfered with its business relationships, breached a Proprietary Information,
Non-Circumvention and Indemnification Agreement between the Company and the
placement agent, defamed the placement agent and engaged in conduct giving rise
to an indemnification in favor of the placement agent. The Federal court
consolidated the two lawsuits, and on May 8, 1998, pursuant to a mutual release
and settlement agreement between the Company and the placement agent, dismissed
with prejudice all of the claims and counterclaims in the two lawsuits. Under
the terms of the settlement agreement, the consideration given by each of the
Company and the placement agent was the release of its claims against the other,
and no cash or other consideration was paid by either party.

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<PAGE> 8

On July 17, 1998, Titan Resources, Inc., ("Titan") sued the Company in the
District Court of Harris County, Texas. The suit alleges that in 1996, the
Company made misrepresentations in connection with the sale of all of the
Company's outstanding shares in Ponder International Services, Inc., its former
Azerbaijan subsidiary, to Titan in return for 2,000,000 shares of Titan's common
stock. The suit alleges breach of contract, breach of warranty, negligent
misrepresentation and fraudulent misrepresentation. Titan seeks unspecified
damages. The Company is defending the case vigorously and has counterclaimed for
unspecified sums that Titan owes it pursuant to one of the contracts executed in
connection with this transaction.

The Company is also a party to additional claims and legal proceedings
arising in the ordinary course of business. The Company believes it is unlikely
that the final outcome of any of the claims or proceedings to which the Company
is a party, including those described above, would have a material adverse
effect on the Company's financial statements; however, due to the inherent
uncertainty of litigation, the range of possible loss, if any, cannot be
estimated with a reasonable degree of precision and there can be no assurance
that the resolution of any particular claim or proceeding would not have an
adverse effect on the Company's results of operations for the interim period in
which such resolution occurred.

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

Not applicable.

PART II.

ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

On November 11, 1998, the Company's stockholders approved a one-for-five
reverse common stock split. On November 13, 1998, the Company filed appropriate
documentation with the Delaware Secretary of State affecting such common stock
split. The purpose of the reverse split was to increase the bid price of the
Company's common stock above $1 per share in order to continue the listing of
the Company's common stock on NASDAQ's Automated Quotation System. Accordingly,
all common stock and price per share information in the following table has been
adjusted to reflect the reverse stock split. The authorized capital stock and
par value of the Company (10,000,000 shares of preferred stock, $.01 par value,
and 150,000,000 shares of common stock, $.01 par value) was not reduced or
otherwise affected by the reverse stock split.

As of November 16, 1998, there were approximately 4,922 beneficial owners
of the Company's common stock which is traded on the NASDAQ SmallCap System
under the symbol "PNDR". The following table sets forth, for the fiscal periods
indicated, the range of high and low bid prices for the Company's common stock,
as reported by the NASDAQ Small Cap System. The following over-the-counter
market quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commission and may not necessarily reflect actual transactions.

<TABLE>
<CAPTION>
1998 1997
-------------- --------------
HIGH LOW HIGH LOW
------ ----- ------ -----
<S> <C> <C> <C> <C>
First Quarter........................................ $14.38 $2.19 $10.31 $6.88
Second Quarter....................................... 10.00 4.38 10.00 6.25
Third Quarter........................................ 7.03 4.69 6.56 3.91
Fourth Quarter....................................... 5.00 1.41 5.47 2.19
</TABLE>

The closing bid price of the Company's common stock on November 16, 1998
was $1.25.

The Company has not paid dividends on its common stock the past three years
and anticipates that it will not pay dividends in the foreseeable future. The
terms of certain of the Company's loan agreements restrict the payment of
dividends. See Note 6 of the Notes to Consolidated Financial Statements.

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<PAGE> 9

ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with
the Company's financial statements and related notes and Management's Discussion
and Analysis of Financial Condition and Results of Operations appearing
elsewhere herein.

OPERATING STATEMENT DATA
(IN THOUSANDS, EXCEPT SHARE INFORMATION)

<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31
-----------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Tool rentals and sales.......................... $20,853 $21,875 $11,961 $ 6,757 $ 7,635
======= ======= ======= ======= =======
Loss from continuing operations................. $(4,532) $(9,921) $(5,270) $ (440) $(1,567)
Income (loss) from discontinued operations...... -- -- 1,378 (3,791) (1,532)
Cumulative effect of change in accounting
principle..................................... -- -- -- 1,139 --
------- ------- ------- ------- -------
Net loss.............................. $(4,532) $(9,921) $(3,892) $(3,092) $(3,099)
======= ======= ======= ======= =======
Income (loss) per share --
Continuing operations........................... $ (.60) $ (3.64) $ (3.02) $ (.35) $ (1.25)
Discontinued operations......................... -- -- .79 (2.95) (1.20)
Change in accounting principle.................. -- -- -- .90 --
------- ------- ------- ------- -------
Net loss.............................. $ (.60) $ (3.64) $ (2.23) $ (2.40) $ (2.45)
======= ======= ======= ======= =======
</TABLE>

BALANCE SHEET DATA
(IN THOUSANDS, EXCEPT SHARE INFORMATION)

<TABLE>
<CAPTION>
AUGUST 31
----------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------ -------
<S> <C> <C> <C> <C> <C>
Working capital (deficit)........................ $(5,164) $(2,058) $ (273) $1,210 $(3,389)
Total assets..................................... 36,032 26,617 27,902 6,815 10,829
Current maturities of long-term debt............. 8,355 1,899 1,393 357 2,933
Long-term debt................................... 456 7,458 4,148 2,343 --
Stockholders' equity............................. 19,504 1,469 7,013 2,312 5,407
Book value per common share...................... $ 2.11 $ .42 $ 2.96 $ 1.81 $ 4.24
</TABLE>

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

The following discussion is included to describe the Company's financial
position and results of operations for each of the three years in the period
ended August 31, 1998. The Consolidated Financial Statements and notes thereto
contain detailed information that should be referred to in conjunction with this
discussion.

BUSINESS REVIEW

Ponder is an international oilfield service and rental tool company that
specializes in the use of fishing tools for the recovery of unwanted
obstructions in the borehole of oil and gas wells. The Company also rents
specialized oilfield equipment such as pressure control equipment, tools, pipe,
tubing and whipstocks used in the drilling, completion and workover of wells.
Ponder currently has 19 locations domestically and two locations in the United
Kingdom serving the North Sea area.

Since 1981, when the Company was founded, Ponder has been engaged
principally in providing fishing tool services to its customers in the United
States. In 1992, however, the Company started a major project in Azerbaijan,
formerly a state in the Soviet Union, which appeared to Ponder's management to
have great potential. Such operations were started based on a purported
agreement between MegaOil USA/Vista Joint Venture and Azerbaijan Oil Company, an
arm of the Government of Azerbaijan. It was subsequently determined that such
agreement was invalid and the Company took actions to protect its assets in
Azerbaijan

9
<PAGE> 10

by forming a new joint venture "Baku-Ponder Services JV." Also, Ponder
International Services, Inc. ("PISI"), a wholly owned subsidiary, contracted
with the State Oil Company of Azerbaijan ("SOCAR") to perform services and rent
and sell equipment for the workover of onshore and offshore oil and gas wells.
PISI performed jobs for SOCAR during fiscal 1995 but was unsuccessful in
obtaining full payment for services. Consequently, the service work was
terminated and the ability to obtain future work under the SOCAR contract became
questionable. Work for other entities in the region was not sufficient to result
in profitable operations for this segment of the Company. In November 1995
management concluded that the Azerbaijan project was not viable, and the Company
discontinued the project and decided to seek a new direction with a new
strategy. In February of 1996, the Company sold its operations in Azerbaijan to
Titan for 2,000,000 shares of Titan's common stock.

Ponder's strengths are its history, reputation, quality of service and its
people. Despite these strengths, the strategy of aggressive expansion initiated
in fiscal 1996 proved to be difficult to implement because Ponder was
financially unstable and losing significant cash. The Company sold equity to
acquire assets and raise much needed cash to fund its operating losses, open new
locations, hire strong management and sales teams, and buy additional equipment.
In fiscal 1996 management raised over $12 million in cash from financing
activities including the sale of convertible debentures and common stock. In
fiscal 1997, Ponder completed a $10 million financing agreement to pay off
existing bank debt and provide additional working capital for continuing growth.
Ponder acquired 10 companies in fiscal 1996 and opened three new locations, two
in Louisiana and one in Texas. One of the companies acquired, Panther Oil Tools,
is located in the North Sea area. Revenues increased to $21,900,000 in 1997,
from $12,000,000 in 1996 and $6,800,000 in 1995, reflecting the Company's
expansion program; however, the Company continued to incur substantial losses
and cash flow deficiencies. Effective April 26, 1997, Eugene L. Butler was named
Chairman, President and Chief Executive Officer. Mr. Butler has approximately 29
years industry experience. From 1974 through 1991, he served in various
executive capacities for Weatherford/Enterra, Inc., a multinational energy
corporation, now known as Weatherford International, Inc., including director,
president, chief executive officer and chief operating officer.

The Company immediately began an evaluation of its operations resulting
from the expansion program and commenced actions to consolidate certain of the
Company's marginal operating locations and to reduce operating and
administrative personnel and other corporate expenses. During the first 1998
fiscal quarter and prior to the rapid decline in oil prices and industry
activity, the Company had significantly reduced its losses and had operating
income from current operations indicating a successful turnaround at the then
current level of industry activity.

The willingness of oil and gas operators to make capital expenditures for
the exploration and production of oil and natural gas will continue to be
influenced by numerous factors over which Ponder has no control, including the
prevailing and expected market prices for oil and natural gas. Such prices are
impacted by, among other factors, the ability of the members of OPEC to maintain
price stability through voluntary production limits, the level of production by
non-OPEC countries, worldwide demand for oil and gas, general economic and
political conditions, costs of exploration and production, availability of new
leases and concessions, and governmental regulations regarding, among other
things, environmental protection, taxation, price controls and product
allocations. No assurance can be given as to the level of future oil and gas
industry activity or demand for Ponder's services and products.

10
<PAGE> 11

basis. These declines have been attributed to, among other things, an excess
supply of oil in world markets, reduced domestic demand associated with an
unseasonably warm winter, high inventory levels of oil and gas and the impact of
the economic downturn in Southeast Asia and other factors over which Ponder has
no control.

During the Company's fiscal years ended August 31, 1996 and 1997 and until
December 1997, world oil prices ranged in the mid to near $20's per barrel while
natural gas prices ranged from approximately $2.00 to as high as $3.50 per
thousand cubic feet. At the beginning of the Company's current fiscal 1998 year,
approximately 1,030 drilling rigs and approximately 1,400 workover rigs were
operating domestically. During late 1997, oil prices began to decline
significantly; dropping from near $20 to below $10 per barrel for certain posted
prices. Natural gas prices maintained a range of $2.00 to $2.50. By August 31,
1998, the activity of domestic drilling and workover rig utilization had reduced
to approximately 770 and 1,000, respectively. As crude oil prices continued to
stay below the $13 per barrel range, industry activity continued to decline,
especially in the Company's onshore operations. In January 1998, the Company
acquired FTI. FTI has historically been a profitable company with significant
offshore operations, which are less impacted by oil price fluctuations. With the
Company's expansion into the offshore market, the Company has aggressively
marketed its operations to merge the customer base of the Company and FTI with a
focus on the major and large independents with onshore and offshore operations.

The Company has substantially reduced costs by a reduction in operating and
administrative personnel and related expenses, the sale of certain nonproductive
equipment to reduce debt, resolving the litigation involving its convertible
debenture holders and substantially reducing other general and administrative
expenses. The Company is continuing to review its operations for further cost
reductions.

Demand for the Company's services and rentals depends primarily on the
number of oil and gas wells being drilled, the depth and drilling conditions of
such wells, and the level of workover activity. Drilling and workover activity
is largely dependent on the prices for oil and natural gas. The Company is
unable to predict the duration of the crude oil price declines and to a lesser
extent, natural gas price declines or the extent of the impact that such
declines may have on the Company's future results of operations.

FINANCIAL CONDITION AND LIQUIDITY

In November 1996, the Company completed a $10 million financing agreement
with KBK Financial, Inc. ("KBK"). The agreement includes a $4 million Revolving
Receivable Facility, a $2.5 million Revolving Credit Note and a $3.5 million
Term Note (collectively, the "Notes"). The Receivable Facility is a two year
facility maturing in December 1998 that is based on accounts receivable and is
utilized for short-term liquidity needs. The $2.5 million Revolving Credit Note
is a five year facility, based on inventory and equipment, and these funds were
used to acquire capital assets to expand the Company's business. The $3.5
million Term Note is a five and one-half year note, interest only for the first
six months, and amortizes over the remaining five years, collateralized by
equipment. The funds were used to pay off existing bank debt of $3 million with
the balance being used to fund operations and acquire capital equipment. In June
1998, the Company increased the Term Note to $4.0 million. At August 31, 1998,
the Company had borrowed approximately $7.2 million under the Notes. The Notes
require compliance with various covenants, including the maintenance of a
defined debt service coverage ratio and a defined tangible net worth. As a
result of continued losses primarily relating to the Company's aggressive
expansion commenced in fiscal year 1996 and the rapid decline in industry
activity during the current fiscal year, the Company is in technical default of
the Notes and, accordingly, all amounts due this lender have been classified as
a current liability at August 31, 1998.

11
<PAGE> 12

In September 1998, the Company obtained $500,000 from KBK under a
short-term promissory note. The proceeds were used for working capital
requirements. The promissory note principal and accrued interest were originally
due November 9, 1998. The due date of the note was subsequently extended to
December 24, 1998. The promissory note has cross-default provisions with the
Notes.

In April 1996, the Company raised approximately $10 million, net of fees,
by issuing eight percent Convertible Debentures. As discussed in Note 13 to the
Financial Statements, claims and counterclaims were filed between certain
convertible debenture holders and the Company. During the period of litigation,
the Company incurred substantial legal expenses in defense of the litigation. In
September 1997, the Company reached a settlement whereby those convertible
debenture holders who had not previously converted their debentures with the
Company agreed to convert the then outstanding debenture debt, approximately
$7,060,000, including accrued interest, into 2,205,217 shares of the Company's
common stock. The conversion of the debentures increased the Company's equity by
approximately $6.7 million.

The Company acquired approximately $8 million of equipment during the 1998
fiscal year, including equipment in the FTI acquisition. The funds used to
purchase these assets were provided primarily from securities issued and
additional borrowing.

At August 31, 1998, the Company had a working capital deficit of
approximately $5.2 million, as compared to a working capital deficit of $2.1
million at August 31, 1997. The current ratio was approximately .66 to 1.0 at
August 31, 1998, compared to .79 to 1.0 for the previous year end. As previously
discussed, the Company is in technical default of the Notes and as a result all
the amounts due this lender, approximately $7.2 million, have been classified as
a current liability and are a component of the approximately $5.2 million
working capital deficit at August 31, 1998. The Company is currently discussing
potential debt refinancing with another lender to increase its available
facilities, decrease interest rates and establish debt covenants which more
appropriately reflect the Company's current financial and market conditions.
There are no assurances that the Company will be able to refinance its current
indebtedness nor that it will be able to obtain an increase in available
facilities, achieve a reduction in interest rates or improve its debt covenants.
Included as a component of the Company's working capital at August 31, 1998 and
1997 is $560,000 and $800,000, respectively, representing the Company's
investment in 2,000,000 shares of Titan's common stock. The Titan common stock
is a thinly traded and volatile security. See also Notes 1 and 3 of Notes to
Consolidated Financial Statements.

A $2,500,000 bridge loan was obtained from White Owl Capital Partners
("White Owl") and certain others in October 1997 with the intention of providing
additional capital for acquisitions and expansion of the Company's business. In
January 1998, the Company purchased FTI for $6,500,000 in cash, the payment of
approximately $1,000,000 in acquired indebtedness and 128,899 shares of common
stock valued at $1,000,000. FTI is a full service fishing and rental tool
company, with three locations in Louisiana and one in Texas, and has a
significant offshore presence. Concurrent with the FTI acquisition, the Company
completed an $11,000,000 private placement of its common stock to White Owl and
certain of its affiliates. These transactions increased the Company's equity to
approximately $22,000,000 and provided stronger liquidity ratios. FTI has
historically been a profitable company with positive cash flow and is
anticipated to have a positive impact on the Company's future net income and
cash flow.

In May 1998, the Company's stockholders approved a proposal to amend the
Company's certificate of incorporation to authorize 150,000,000 shares of common
stock and 10,000,000 shares of preferred stock. Each series or class of
preferred stock could, as determined by the Company's Board of Directors at the
time of issuance, rank, with respect to dividends, sinking fund provisions and
conversion, voting, redemption and liquidation rights, senior to the Company's
common stock.

FISCAL YEAR ENDED AUGUST 31, 1998 AS COMPARED WITH FISCAL YEAR ENDED AUGUST 31,
1997

A net loss of $4,532,000, or $.60 per share, was recorded in fiscal 1998,
as compared to a net loss of $9,921,000, or $3.64 per share in fiscal 1997.

Revenues decreased $1,022,000, or 5%, to $20,853,000 in fiscal 1998 from
$21,875,000 in fiscal 1997. Revenues relating to the Company's acquisition of
FTI, effective January 12, 1998, reflected an increase of
12
<PAGE> 13

$3,065,000 while a reduction in crude oil prices and decreased drilling and
workover activity contributed to a $4,087,000 decrease in revenues from the
Company's existing operations.

Cost of service and sales decreased $1,367,000, or 14%, to $8,306,000 in
fiscal 1998 from $9,673,000 in fiscal 1997. The net decrease of $2,775,000 from
the Company's existing operations resulted from decreased revenues and a cost
reduction program, partially offset by cost of sales and service of $1,408,000
attributable to the FTI acquisition. The Company's gross profit margin was 60%
in fiscal 1998 and 56% in fiscal 1997.

Operating expenses increased $122,000, or 1%, to $11,440,000 in fiscal 1998
from $11,318,000 for the previous fiscal year. The operating expenses
attributable to FTI operations were $1,397,000 for fiscal 1998 while the
Company's cost reduction efforts resulted in a decrease of $1,275,000, or 11%,
for the Company's existing operations. Operating expenses, as a percentage of
sales remained relatively stable at 55% for fiscal 1998, as compared to 52% for
the previous fiscal year.

General and administrative expenses decreased $2,190,000, or 38%, to
$3,524,000 for fiscal 1998 from $5,714,000 in fiscal 1997. In the third quarter
of fiscal 1997, the Company commenced a major cost reduction program which
included a reduction in administrative personnel and related costs, the sale of
certain nonproductive equipment to reduce debt, resolving the litigation
involving its convertible debenture holders and substantially reducing other
general and administrative expenses. The Company generally maintained the cost
reductions during fiscal 1998. General and administrative expenses as a
percentage of revenues decreased to 17% in fiscal 1998 from 26% in fiscal 1997.

Interest expense, net, decreased $636,000, or 26%, to $1,766,000 in fiscal
1998 from $2,402,000 in fiscal 1997. The decrease is due primarily to a
reduction of noncash interest and debt issue cost amortization expense of
approximately $937,000 related to the Company's convertible debentures, which
were outstanding during all of fiscal 1997, and were converted into shares of
the Company's common stock in September 1997, as discussed in Note 7 of the
Notes to Consolidated Financial Statements.

In fiscal 1998 the Company recorded an approximate $293,000 write-down of
equipment, primarily the value of certain used equipment inventory. During
fiscal 1997 the Company recorded a loss on write-down of assets in the amount of
$2,178,000. During fiscal 1996, the Company signed a letter of intent to acquire
Abilene, Texas, based G&L Fishing Tool Company ("G&L") and subsequently paid a
$1,000,000 forfeitable deposit for a one-year option to acquire G&L under the
same terms as the letter of intent. During fiscal 1997 the option to acquire G&L
expired and the Company expensed the forfeitable deposit and related acquisition
expense in the amount of $1,172,000. Additionally, in fiscal 1997 the Company
wrote-off approximately $446,000 relating to a failed Dubai joint venture,
$300,000 relating to a write-down of a receivable secured by available for sale
securities and an approximate $260,000 write-down of the value of certain used
equipment inventory.

FISCAL YEAR ENDED AUGUST 31, 1997 AS COMPARED WITH FISCAL YEAR ENDED AUGUST 31,
1996

A net loss of $9,921,000, or $3.64 per share, was recorded in fiscal 1997
compared with a net loss of $3,892,000, or $2.23 per share, in fiscal 1996. The
Company's loss from continuing operations in fiscal 1997 was $9,921,000, or
$3.64 per share, as compared to a loss of $5,270,000, or $3.02 per share, in
fiscal 1996. In fiscal 1996 the Company sold its interests in Azerbaijan in
exchange for 2,000,000 shares of Titan's common stock as previously discussed.
The sale resulted in a gain of $1,400,000 and income from discontinued
operations of $1,378,000 for fiscal year 1996, or $.79 per share.

Revenues increased $9,914,000, or 83%, to $21,875,000 in fiscal 1997
compared to $11,961,000 in fiscal 1996. The increase is due primarily to the
Company's expansion program initiated during fiscal 1996. During fiscal 1996 the
Company added nine new store locations in Oklahoma, Arkansas, Louisiana,
Mississippi, Illinois and Texas. During fiscal 1997, a location was added in
Texas. Effective April 1, 1996, the Company acquired Panther Oil Tools, (UK)
Ltd., an English corporation, and substantially all of the assets of Villain
Ltd., a Guernsey corporation.

Cost of service and sales increased $4,276,000, or 79%, to $9,673,000 in
fiscal 1997 from $5,397,000 in fiscal 1996. Cost of sales increased relative to
the increase in revenues. The Company's gross profit margin was
13
<PAGE> 14

56% in fiscal 1997 and 55% in fiscal 1996. Operating expenses, as a percentage
of sales increased to 52% in fiscal 1997 from 44% in fiscal 1996. The increase
is due to the Company's increase in number of operating locations and personnel.
In the fourth quarter of fiscal 1997, the Company closed two of its unsuccessful
North Louisiana expansion locations and further reduced operating personnel and
related expenses.

General and administrative expenses decreased $413,000, or 7%, to
$5,714,000 in fiscal 1997 as compared to $6,127,000 in fiscal 1996. General and
administrative expenses as a percentage of revenues decreased to 26% in fiscal
1997 from 51% in fiscal 1996, as a result of reduced fees for professional
services and a reduction in corporate sales and administrative personnel and
related expenses.

Net interest expense increased $1,729,000 or 257%, to $2,402,000 in fiscal
1997 from $673,000 in fiscal 1996. The increase is due to an increase in
outstanding debt obligations and interest rates. Additionally, interest expense
increased approximately $652,000 due to non-cash interest expense on the 8%
Convertible Debentures issued effective April 26, 1996, as discussed in Note 7
of the Notes to Consolidated Financial Statements.

YEAR 2000 COMPLIANCE

The efficient operation of the Company's business is dependent on its
computer software programs and operating systems (collectively, "Programs and
Systems"). These Programs and Systems are used in several key areas of the
Company's business, including information management services and financial
reporting, as well as in various administrative functions. The Company has been
evaluating its Programs and Systems to identify potential year 2000 compliance
problems, as well as manual processes, external interfaces with customers, and
services supplied by vendors to coordinate year 2000 compliance and conversion.
The year 2000 problem refers to the limitations of the programming code in
certain existing software programs to recognize date sensitive information for
the year 2000 and beyond. Unless modified prior to the year 2000, such systems
may not properly recognize such information and could generate erroneous data or
cause a system to fail to operate properly. Based on current information, the
Company believes its Programs and Systems are year 2000 compliant.

The Company's integrated accounting software is upgraded on a regular
basis, including testing and modification for year 2000 compliance. During 1998,
the company purchased additional new hardware and software. The Company believes
that the year 2000 problem will not pose a significant operational problem.
However, because most computer systems are, by their very nature,
interdependent, it is possible that non-compliant third party computers may not
interface properly with the Company's computer systems. The Company could be
adversely affected by the year 2000 problem if it or unrelated parties fail to
successfully address this issue. Management of the Company currently anticipates
that the expenses and capital expenditures associated with its year 2000
compliance project, including any costs associated with modifying the Programs
and Systems as well as the cost of purchasing or leasing certain additional
hardware and software, will not have a material effect on its business,
financial condition or results of operations and are expenses and capital
expenditures the Company anticipated incurring in the ordinary course of
business regardless of the year 2000 problem. Purchased hardware and software
has been and will continue to be capitalized in accordance with normal policy.
Personnel and other costs related to this process are being expensed as
incurred.

The costs of year 2000 compliance and the expected completion dates are the
best estimates of Company management and are believed to be reasonably accurate.
In the event the Company's plan to address the year 2000 problem is not
successfully or timely implemented, the Company may need to devote more
resources to the process and additional costs may be incurred, which could have
a material adverse effect on the Company's financial condition and results of
operations. Problems encountered by the Company's vendors, customers and other
third parties also may have a material adverse effect on the Company's financial
condition and results of operations.

In the event the Company's determines following the year 2000 date change
that its Programs and Systems are not year 2000 compliant, the Company will
likely experience considerable delays in processing customer orders and
invoices, compiling information required for financial reporting and performing
various
14
<PAGE> 15

administrative functions. In the event of such occurrence, the Company's
contingency plans call for it to switch vendors to obtain hardware and/or
software that is 2000 compliant, and until such hardware and/or software can be
obtained, the Company will plan to use non-computer systems for its business,
including information management services and financial reporting, as well as
its various administrative functions.

The above year 2000 disclosure constitutes a "Year 2000 Readiness
Disclosure" as defined in The Year 2000 Information and Readiness Disclosure Act
(the "Act"), which was signed into law on October 19, 1998. The Act provides
added protection from liability for certain public and private statements
concerning a company's year 2000 readiness. The Act also potentially provides
added protection from liability for certain types of year 2000 disclosures made
after January 1, 1996 and before October 19, 1998. As such, to the extent
permitted by applicable law, previously disclosed statements of or by the
Company or its management concerning the Company's year 2000 readiness are
intended to constitute "Year 2000 Readiness Disclosures," as defined in the Act.

ITEM 8. FINANCIAL STATEMENTS AND SCHEDULES

The report of the Company's Independent Public Accountants, Financial
Statements and Notes to Financial Statements appear herein commencing on page
F-1.

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

Not applicable.

PART III.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information called for by item 10 of Form 10-K is incorporated herein
by reference to such information included in the Company's Proxy Statement for
the 1999 Annual Meeting of Stockholders.

ITEM 11. EXECUTIVE COMPENSATION

The information called for by item 11 of Form 10-K is incorporated herein
by reference to such information included in the Company's Proxy Statement for
the 1999 Annual Meeting of Stockholders.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information called for by item 12 of Form 10-K is incorporated herein
by reference to such information included in the Company's Proxy Statement for
the 1999 Annual Meeting of Stockholders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information called for by item 13 of Form 10-K is incorporated herein
by reference to such information included in the Company's Proxy Statement for
the 1999 Annual Meeting of Stockholders.

15
<PAGE> 16

PART IV.

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

(a) 1. FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-1
Consolidated Balance Sheets -- August 31, 1998 and 1997..... F-2
Consolidated Statements of Operations for the years ended
August 31, 1998, 1997 and 1996............................ F-3
Consolidated Statements of Stockholders' Equity for the
years ended August 31, 1998, 1997 and 1996................ F-4
Consolidated Statements of Cash Flows for the years ended
August 31, 1998, 1997 and 1996............................ F-5
Notes to Consolidated Financial Statements.................. F-7
</TABLE>

2. FINANCIAL STATEMENT SCHEDULES

None

Schedules of the Company are omitted because of the absence of the
conditions under which they are required or because the required information is
included in the consolidated financial statements or notes thereto.

3. EXHIBIT INDEX

16
<PAGE> 17

<TABLE>
<CAPTION>
EXHIBIT
NUMBER IDENTIFICATION OF EXHIBIT
------- -------------------------
<C> <S>
10.4 -- Revolving Account Transfer and Purchase Agreement with
KBK Financial, Inc. (Incorporated herein by reference to
Exhibit 10.4 to the Company's Form 10-Q for quarter
ending February 28, 1997.)
10.5 -- Settlement Agreement and Release among the Company,
Eugene L. Butler, Larry Armstrong and certain
Debentureholders dated September 26, 1997. (Incorporated
herein by reference to Exhibit 10.1 to the Company's Form
10-Q for quarter ending November 30, 1997.)
10.6 -- Securities Purchase Agreement among the Company, White
Owl Capital Partners, Arvind Sanger, Antony T. F. Lundy
and Karl Bandtel dated October 15, 1997. (Incorporated
herein by reference to Exhibit 10.2 to the Company's Form
10-Q for the quarter ended November 30, 1997.)
10.7 -- Securities Purchase and Exchange Agreement dated January
12, 1998, among Ponder Industries, Inc., White Owl
Investors L.L.C., Somerset Capital Partners, White Owl
Capital Partners, Arvind Sanger, Antony T. F. Lundy and
Karl Bandtel. (Incorporated herein by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K
dated January 27, 1998.)
*11 -- Computation of Earnings (Loss) Per Share
21 -- Subsidiaries
</TABLE>

<TABLE>
<CAPTION>
STATE OF NAME UNDER WHICH
NAME INCORPORATION DOING BUSINESS
---- ------------- -------------------
<S> <C> <C>
Ponder Energy Services, Inc.............. Delaware Ponder Energy
Services, Inc.
Fishing Tools, Inc....................... Louisiana Fishing Tools, Inc.
</TABLE>

<TABLE>
<C> <S>
*23.1 -- Consent of Arthur Andersen LLP
*27 -- Financial Data Schedule
</TABLE>

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

* Filed herewith

(b) REPORTS ON FORM 8-K.

Form 8-K filed January 27, 1998, reporting the acquisition of Fishing
Tools, Inc.

Form 8-K/A filed March 27, 1998, providing the financial statements and pro
forma financial information of Fishing Tools, Inc.

17
<PAGE> 18

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, in Houston, Texas, on
November 24, 1998.

PONDER INDUSTRIES, INC.

By: /s/ EUGENE L. BUTLER
----------------------------------
Eugene L. Butler,
President, Chief Executive Officer
and
Chairman of the Board of Directors
(Principal Executive Officer)

By: /s/ GERALD A. SLAUGHTER
----------------------------------
Gerald A. Slaughter,
Senior Vice President, Chief
Financial Officer
(Chief Financial and Accounting
Officer)

Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, this report has been signed below by the following persons in the
capacities indicated on November 24, 1998.

<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>

/s/ EUGENE L. BUTLER Director
- -----------------------------------------------------
Eugene L. Butler

/s/ FRANK J. WALL Director
- -----------------------------------------------------
Frank J. Wall

/s/ JOE R. NEMEC Director
- -----------------------------------------------------
Joe R. Nemec

/s/ JOHN ROANE Director
- -----------------------------------------------------
John Roane

/s/ RITTIE W. MILLIMAN, SR. Director
- -----------------------------------------------------
Rittie W. Milliman, Sr.

/s/ JOHN M. LE SEELLEUR Director
- -----------------------------------------------------
John M. Le Seelleur

/s/ WILLIAM R. ZIEGLER Director
- -----------------------------------------------------
William R. Ziegler

/s/ STEVEN A. WEBSTER Director
- -----------------------------------------------------
Steven A. Webster
</TABLE>

18
<PAGE> 19

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER IDENTIFICATION OF EXHIBIT
------- -------------------------
<C> <S>
2.1 -- Stock Purchase Agreement dated January 12, 1998, among
Ponder Industries, Inc., Robert W. Gerdes, Sr., Reggie W.
Hanberry and Brian J. Sokol. (Incorporated herein by
reference to Exhibit 2.1 to the Company's Current Report
on Form 8-K dated January 27, 1998.)
*3.1(i) -- Certificate of Incorporation, as amended, of Ponder
Industries, Inc.
3.1(ii) -- Bylaws of Ponder Industries, Inc. (Incorporated herein by
reference to Exhibit 3 filed to Registration Statement on
Form S-1 [Commission File No. 33-33190].)
4.1 -- Registration Rights Agreement among the Company, White
Owl Capital Partners, Arvind Sanger, Antony T. F. Lundy
and Karl Bandtel dated October 15, 1997. (Incorporated
herein by reference to Exhibit 4.1 to the Company's Form
10-Q for quarter ended November 30, 1997.)
4.2 -- Joinder Agreement dated January 12, 1998, among Ponder
Industries, Inc., White Owl Investors L.L.C., Somerset
Capital Partners, White Owl Capital Partners, Arvind
Sanger, Antony T. F. Lundy and Karl Bandtel.
(Incorporated herein by reference to Exhibit 4.1 to the
Company's Current Report on Form 8-K dated January 27,
1998.)
10.1 -- Loan Agreement with KBK Financial, Inc. (Incorporated
herein by reference to Exhibit 10.1 to the Company's Form
10-Q for quarter ending February 28, 1997.)
10.2 -- Collateral Security Agreement with KBK Financial, Inc.,
dated November 27, 1996 (Incorporated herein by reference
to Exhibit 10.2 to the Company's Form 10-Q for quarter
ending February 28, 1997.)
10.3 -- Security Agreement -- Pledge with KBK Financial, Inc.
(Incorporated herein by reference to Exhibit 10.3 to the
Company's Form 10-Q for quarter ending February 28,
1997.)
10.4 -- Revolving Account Transfer and Purchase Agreement with
KBK Financial, Inc. (Incorporated herein by reference to
Exhibit 10.4 to the Company's Form 10-Q for quarter
ending February 28, 1997.)
10.5 -- Settlement Agreement and Release among the Company,
Eugene L. Butler, Larry Armstrong and certain
Debentureholders dated September 26, 1997. (Incorporated
herein by reference to Exhibit 10.1 to the Company's Form
10-Q for quarter ending November 30, 1997.)
10.6 -- Securities Purchase Agreement among the Company, White
Owl Capital Partners, Arvind Sanger, Antony T. F. Lundy
and Karl Bandtel dated October 15, 1997. (Incorporated
herein by reference to Exhibit 10.2 to the Company's Form
10-Q for the quarter ended November 30, 1997.)
10.7 -- Securities Purchase and Exchange Agreement dated January
12, 1998, among Ponder Industries, Inc., White Owl
Investors L.L.C., Somerset Capital Partners, White Owl
Capital Partners, Arvind Sanger, Antony T. F. Lundy and
Karl Bandtel. (Incorporated herein by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K
dated January 27, 1998.)
*11 -- Computation of Earnings (Loss) Per Share
21 -- Subsidiaries
*23.1 -- Consent of Arthur Andersen LLP
*27 -- Financial Data Schedule
</TABLE>

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

* Filed herewith
<PAGE> 20

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Ponder Industries, Inc.:

We have audited the accompanying consolidated balance sheets of Ponder
Industries, Inc. (a Delaware corporation), and subsidiaries as of August 31,
1998 and 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended August 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Ponder Industries, Inc., and
subsidiaries as of August 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended August 31,
1998, in conformity with generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the consolidated financial statements, the Company has deficit working
capital, has suffered recurring losses from operations, has negative cash flows
from operations, has an accumulated deficit, is not in compliance with certain
of its debt covenants, is delinquent in the payment of payroll taxes and has
limited access to capital resources. These matters raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 1. The Company's management
believes that it is likely the Company's operating results for fiscal 1999 will
significantly improve over fiscal 1998. There are no assurances that the Company
can achieve such operating improvements or that the Company will be able to
achieve future cash flows or generate working capital sufficient to support
operations. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.

/S/ ARTHUR ANDERSEN LLP

San Antonio, Texas
October 15, 1998 (except with respect to the
matters discussed in Note 18, as to
which the date is November 17, 1998)

F-1
<PAGE> 21

PONDER INDUSTRIES, INC., AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
AUGUST 31, 1998 AND 1997
(IN THOUSANDS, EXCEPT SHARE INFORMATION)

ASSETS

<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 149 $ 4
Receivables, net of allowance for doubtful accounts of
$680 and $657 in 1998 and 1997, respectively........... 4,672 4,134
Parts and supplies........................................ 4,435 2,622
Available for sale securities............................. 560 800
Prepaid expenses and other................................ 175 46
-------- --------
Total current assets.............................. 9,991 7,606
-------- --------
PROPERTY AND EQUIPMENT...................................... 40,992 31,383
Less -- Accumulated depreciation and amortization......... (16,656) (14,278)
-------- --------
24,336 17,105
-------- --------
DEFERRED AND OTHER ASSETS, net.............................. 425 545
GOODWILL, net of accumulated amortization of $474 and $393
in 1998 and 1997, respectively............................ 1,280 1,361
-------- --------
1,705 1,906
-------- --------
TOTAL ASSETS...................................... $ 36,032 $ 26,617
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 8,355 $ 1,899
Accounts payable.......................................... 4,096 5,562
Accrued liabilities....................................... 2,704 2,203
-------- --------
Total current liabilities......................... 15,155 9,664
-------- --------
LONG-TERM DEBT, less current maturities..................... 456 7,458
-------- --------
OTHER LONG-TERM LIABILITIES................................. 31 765
-------- --------
DEFERRED TAXES PAYABLE...................................... 886 881
-------- --------
CONVERTIBLE DEBENTURES...................................... -- 6,380
-------- --------
COMMITMENTS AND CONTINGENCIES (Notes 11, 13 and 14)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; authorized 10,000,000
shares and no shares, no shares issued as of August 31,
1998 and 1997, respectively............................ -- --
Common stock, $.01 par value; authorized 150,000,000
shares and 50,000,000 shares, issued and outstanding
9,260,281 and 3,514,205 shares as of August 31, 1998
and 1997, respectively................................. 93 35
Additional paid-in capital................................ 48,179 25,448
Cumulative foreign currency translation adjustment........ 69 49
Accumulated deficit....................................... (28,228) (23,696)
Note receivable for common stock.......................... (69) (66)
Deferred compensation..................................... -- (1)
Unrealized loss on available for sale securities.......... (540) (300)
-------- --------
Total stockholders' equity........................ 19,504 1,469
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $ 36,032 $ 26,617
======== ========
</TABLE>

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

F-2
<PAGE> 22

PONDER INDUSTRIES, INC., AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996
(IN THOUSANDS, EXCEPT SHARE INFORMATION)

<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
TOOL RENTALS................................................ $ 17,880 $ 17,705 $ 10,356
SALES OF TOOLS AND PARTS.................................... 2,973 4,170 1,605
--------- --------- ---------
Tool rentals and sales............................ 20,853 21,875 11,961
--------- --------- ---------
COST OF TOOL RENTALS........................................ 7,175 7,258 4,804
COST OF TOOLS AND PARTS SOLD................................ 1,131 2,415 593
--------- --------- ---------
Costs of service and sales........................ 8,306 9,673 5,397
--------- --------- ---------
Gross profit...................................... 12,547 12,202 6,564
--------- --------- ---------
EXPENSES:
Operating................................................. 11,440 11,318 5,215
General and administrative................................ 3,524 5,714 6,127
--------- --------- ---------
14,964 17,032 11,342
--------- --------- ---------
Operating loss.................................... (2,417) (4,830) (4,778)
OTHER INCOME (EXPENSE):
Interest, net............................................. (1,766) (2,402) (673)
Loss on sale of assets.................................... (112) (534) (12)
Loss on write-down of assets.............................. (293) (2,178) --
Other..................................................... 56 23 260
--------- --------- ---------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES......... (4,532) (9,921) (5,203)
INCOME TAX EXPENSE.......................................... -- -- (67)
--------- --------- ---------
LOSS FROM CONTINUING OPERATIONS............................. (4,532) (9,921) (5,270)
--------- --------- ---------
INCOME (LOSS) FROM DISCONTINUED OPERATIONS:
Operations................................................ -- -- (22)
Gain on sale of discontinued operations................... -- -- 1,400
--------- --------- ---------
INCOME FROM DISCONTINUED OPERATIONS......................... -- -- 1,378
--------- --------- ---------
NET LOSS.................................................... $ (4,532) $ (9,921) $ (3,892)
========= ========= =========
EARNINGS (LOSS) PER SHARE:
Loss from continuing operations........................... $ (.60) $ (3.64) $ (3.02)
Income from discontinued operations....................... -- -- .79
--------- --------- ---------
BASIC AND DILUTED LOSS PER SHARE............................ $ (.60) $ (3.64) $ (2.23)
========= ========= =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING.................. 7,514,309 2,728,312 1,743,582
========= ========= =========
</TABLE>

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

F-3
<PAGE> 23

PONDER INDUSTRIES, INC., AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
CUMULATIVE
COMMON STOCK ADDITIONAL FOREIGN CURRENCY NOTE
--------------------- PAID-IN TRANSLATION ACCUMULATED RECEIVABLE FOR
SHARES PAR VALUE CAPITAL ADJUSTMENT DEFICIT COMMON STOCK
--------- --------- ---------- ---------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, August 31, 1995.............. 1,333,487 $ 13 $13,271 $ -- $ (9,883) $(60)
Shares issued under employment
agreement.......................... 91,867 1 185 -- -- --
Compensation expense................. -- -- -- -- -- --
Shares issued in connection with
business acquisitions.............. 310,291 3 3,756 -- -- --
Shares issued as employee bonus...... 5,000 -- 13 -- -- --
Shares sold with warrants attached... 300,000 3 909 -- -- --
Exercise of warrants................. 200,000 2 1,498 -- -- --
Shares sold.......................... 16,667 -- 250 -- -- --
Shares issued under option
exercise........................... 3,300 -- 37 -- -- --
Debentures converted into shares..... 165,658 2 1,658 -- -- --
Compensation accrual for stock
grant.............................. -- -- 400 -- -- --
Interest on note receivable for
common stock....................... -- -- -- -- -- (3)
Foreign currency translation
adjustment......................... -- -- -- 24 -- --
Net loss............................. -- -- -- -- (3,892) --
--------- ---- ------- ---- -------- ----
BALANCE, August 31, 1996.............. 2,426,270 24 21,977 24 (13,775) (63)
Compensation expense, net............ -- -- 47 -- -- --
Shares issued in connection with
business acquisitions.............. 930 -- 18 -- -- --
Shares issued in settlement of
lawsuit............................ 15,584 -- 42 -- -- --
Shares issued in settlement of
payables and indebtedness.......... 85,914 1 370 -- -- --
Shares sold, including 57,975
treasury shares.................... 308,646 3 164 -- -- --
Shares issued under stock grant...... 100,000 1 (1) -- -- --
Debentures converted into shares..... 568,355 6 2,792 -- -- --
Shares contributed to 401(k) plan.... 8,506 -- 39 -- -- --
Interest on note receivable for
common stock....................... -- -- -- -- -- (3)
Foreign currency translation
adjustment......................... -- -- -- 25 -- --
Unrealized loss on available for sale
securities......................... -- -- -- -- -- --
Net loss............................. -- -- -- -- (9,921) --
--------- ---- ------- ---- -------- ----
BALANCE, August 31, 1997.............. 3,514,205 35 25,448 49 (23,696) (66)
Compensation expense, net............ -- -- -- -- -- --
Shares issued in connection with
business acquisitions.............. 128,899 1 999 -- -- --
Shares sold.......................... 2,200,000 22 10,978 -- -- --
Shares issued for drill pipe......... 350,000 4 1,217 -- -- --
Debentures converted into shares..... 2,205,217 22 6,910 -- -- --
Senior Notes converted into shares... 800,000 8 2,319 -- -- --
Shares contributed to 401(k) plan.... 61,960 1 308 -- -- --
Interest on note receivable for
common stock....................... -- -- -- -- -- (3)
Foreign currency translation
adjustment......................... -- -- -- 20 -- --
Unrealized loss on available for sale
securities......................... -- -- -- -- -- --
Net loss............................. -- -- -- -- (4,532) --
--------- ---- ------- ---- -------- ----
BALANCE, August 31, 1998.............. 9,260,281 $ 93 $48,179 $ 69 $(28,228) $(69)
========= ==== ======= ==== ======== ====

<CAPTION>
UNREALIZED
LOSS ON
DEFERRED AVAILABLE FOR TREASURY
COMPENSATION SALE SECURITIES STOCK TOTAL
------------ --------------- -------- -------
<S> <C> <C> <C> <C>
BALANCE, August 31, 1995.............. $ -- $ -- $(1,028) $ 2,313
Shares issued under employment
agreement.......................... (186) -- -- --
Compensation expense................. 40 -- -- 40
Shares issued in connection with
business acquisitions.............. -- -- -- 3,759
Shares issued as employee bonus...... -- -- -- 13
Shares sold with warrants attached... -- -- -- 912
Exercise of warrants................. -- -- -- 1,500
Shares sold.......................... -- -- -- 250
Shares issued under option
exercise........................... -- -- -- 37
Debentures converted into shares..... -- -- -- 1,660
Compensation accrual for stock
grant.............................. -- -- -- 400
Interest on note receivable for
common stock....................... -- -- -- (3)
Foreign currency translation
adjustment......................... -- -- -- 24
Net loss............................. -- -- -- (3,892)
----- ----- ------- -------
BALANCE, August 31, 1996.............. (146) -- (1,028) 7,013
Compensation expense, net............ 145 -- -- 192
Shares issued in connection with
business acquisitions.............. -- -- -- 18
Shares issued in settlement of
lawsuit............................ -- -- -- 42
Shares issued in settlement of
payables and indebtedness.......... -- -- -- 371
Shares sold, including 57,975
treasury shares.................... -- -- 1,028 1,195
Shares issued under stock grant...... -- -- -- --
Debentures converted into shares..... -- -- -- 2,798
Shares contributed to 401(k) plan.... -- -- -- 39
Interest on note receivable for
common stock....................... -- -- -- (3)
Foreign currency translation
adjustment......................... -- -- -- 25
Unrealized loss on available for sale
securities......................... -- (300) -- (300)
Net loss............................. -- -- -- (9,921)
----- ----- ------- -------
BALANCE, August 31, 1997.............. (1) (300) -- 1,469
Compensation expense, net............ 1 -- -- 1
Shares issued in connection with
business acquisitions.............. -- -- -- 1,000
Shares sold.......................... -- -- -- 11,000
Shares issued for drill pipe......... -- -- -- 1,221
Debentures converted into shares..... -- -- -- 6,932
Senior Notes converted into shares... -- -- -- 2,327
Shares contributed to 401(k) plan.... -- -- -- 309
Interest on note receivable for
common stock....................... -- -- -- (3)
Foreign currency translation
adjustment......................... -- -- -- 20
Unrealized loss on available for sale
securities......................... -- (240) -- (240)
Net loss............................. -- -- -- (4,532)
----- ----- ------- -------
BALANCE, August 31, 1998.............. $ -- $(540) $ -- $19,504
===== ===== ======= =======
</TABLE>

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

F-4
<PAGE> 24

PONDER INDUSTRIES, INC., AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996
(IN THOUSANDS)

<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (4,532) $ (9,921) $ (3,892)
Income from discontinued operations....................... -- -- (1,378)
-------- -------- --------
Loss from continuing operations................... (4,532) (9,921) (5,270)
Adjustments to reconcile net loss to net cash used in
operating activities --
Depreciation and amortization.......................... 2,963 2,384 1,401
Loss on sale of assets................................. 112 534 12
Noncash compensation expense........................... 1 145 454
Loss on write-down of assets........................... 293 2,178 --
Other noncash expenses................................. 20 421 46
Net change in operating assets and liabilities --
Receivables, net....................................... (538) (487) (1,000)
Parts and supplies..................................... (667) (545) (985)
Prepaid expenses and other............................. (129) 468 (131)
Accounts payable....................................... (1,466) 2,699 2,191
Accrued liabilities.................................... 536 (612) 1,734
-------- -------- --------
Net cash used in continuing operating
activities...................................... (3,407) (2,736) (1,548)
-------- -------- --------
CASH FLOWS FROM DISCONTINUED OPERATIONS:
Income from discontinued operations....................... -- -- 1,378
Accrued liabilities, estimated operating cost for
disposal............................................... -- -- (510)
Gain on sale of discontinued operations................... -- -- (1,400)
-------- -------- --------
Net cash used in discontinued operations.......... -- -- (532)
-------- -------- --------
Net cash used in operating activities............. (3,407) (2,736) (2,080)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (2,055) (3,595) (6,430)
Acquisitions, net of cash acquired........................ (7,576) -- (2,471)
Other asset additions..................................... -- 10 (1,696)
Proceeds from asset sales and notes receivable............ 326 965 19
-------- -------- --------
Net cash used in investing activities............. (9,305) (2,620) (10,578)
-------- -------- --------
</TABLE>

F-5
<PAGE> 25
PONDER INDUSTRIES, INC., AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996
(IN THOUSANDS)

<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term debt...................... $(18,959) $(18,159) $ (4,977)
Proceeds from long-term debt borrowings................... 18,351 21,764 3,673
Proceeds from Senior Notes................................ 2,500 -- --
Proceeds from convertible debentures...................... -- -- 10,950
Bank overdraft............................................ (35) 162 530
Proceeds from issuance of common stock.................... 11,000 1,195 2,700
-------- -------- --------
Net cash provided by financing activities......... 12,857 4,962 12,876
-------- -------- --------
CASH AND CASH EQUIVALENTS:
Increase (decrease)....................................... 145 (394) 218
Beginning of year......................................... 4 398 180
-------- -------- --------
End of year............................................... $ 149 $ 4 $ 398
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for --
Interest............................................... $ 1,657 $ 1,762 $ 458
======== ======== ========
Income taxes........................................... $ -- $ -- $ --
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Assets acquired in connection with acquisitions........... $ 2,470 $ 845 $ 9,636
======== ======== ========
Liabilities assumed in connection with acquisitions....... $ 1,470 $ 845 $ 1,690
======== ======== ========
Common stock issued in connection with acquisitions....... $ 1,000 $ 18 $ 3,759
======== ======== ========
Debt and capital leases assumed in connection with
acquisitions........................................... $ 1,165 $ -- $ 2,177
======== ======== ========
Capital lease obligations incurred........................ $ 62 $ 36 $ 294
======== ======== ========
Common stock issued in connection with debenture
conversions............................................ $ 6,932 $ 2,798 $ 1,660
======== ======== ========
Common stock issued in connection with conversion of
Senior Notes........................................... $ 2,327 $ -- $ --
======== ======== ========
Common stock issued for drill pipe........................ $ 1,221 $ -- $ --
======== ======== ========
Common stock issued to officers, directors and
employees.............................................. $ -- $ 400 $ 346
======== ======== ========
Common stock issued in settlement of lawsuit.............. $ -- $ 42 $ --
======== ======== ========
Common stock issued in settlement of payables............. $ -- $ 371 $ --
======== ======== ========
Common stock contributed to 401(k) plan................... $ 309 $ 39 $ --
======== ======== ========
Sale of discontinued operations in exchange for shares of
Titan stock............................................ $ -- $ -- $ 1,400
======== ======== ========
Compensation accrual for stock grant...................... $ -- $ -- $ 400
======== ======== ========
Unrealized loss on available for sale securities.......... $ 240 $ 300 $ --
======== ======== ========
</TABLE>

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

F-6
<PAGE> 26

PONDER INDUSTRIES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE INFORMATION)

1. BASIS OF PRESENTATION, BUSINESS, FUTURE OPERATIONS, LIQUIDITY, CAPITAL
RESOURCES AND VULNERABILITY DUE TO CERTAIN CONCENTRATIONS:

Principles of Consolidation and Basis of Presentation

The accompanying consolidated financial statements include the accounts of
Ponder Industries, Inc., and subsidiaries (Ponder or the Company). All
significant intercompany transactions have been eliminated in consolidation.

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

Certain reclassifications have been made to prior year balances to conform
to current year financial statement presentation.

Business

The Company specializes in the downhole recovery of unwanted obstructions
in the boreholes of oil and gas wells through the utilization of specifically
designed tools, known as "fishing tools." The Company is engaged in the business
of renting fishing tools as well as providing supervisory personnel for fishing
operations. The Company also rents specialized oilfield equipment such as
pressure control equipment, tools, pipe, tubing and whipstocks used in the
drilling, completion and workover of wells. As of August 31, 1998, the Company
operated out of its principal executive offices in Houston, Texas, its
administrative headquarters in Alice, Texas, and "stores" located in Texas,
Louisiana, Oklahoma, Arkansas, Illinois and Mississippi. The Company also
operates in the United Kingdom (UK) through certain acquisitions during fiscal
1996 as discussed in Note 15.

Future Operations, Liquidity, Capital Resources and Vulnerability Due to
Certain Concentrations

The accompanying consolidated financial statements of the Company have been
prepared on the basis of accounting principles applicable to a going concern. At
August 31, 1998 and 1997, the Company had deficit working capital of $5,164 and
$2,058, respectively. At August 31, 1998 and 1997, the Company had an
accumulated deficit of $28,228 and $23,696, respectively. During the years ended
August 31, 1998, 1997 and 1996, the Company incurred net losses from continuing
operations of $4,532, $9,921 and $5,270, respectively, and had negative cash
flows from continuing operating activities of $3,407, $2,736 and $1,548,
respectively. These losses have been funded primarily through issuances of
common stock and convertible debentures and debt financing. As discussed in Note
6, the Company was not in compliance with certain of its debt covenants and,
accordingly, all amounts due this lender have been classified as a current
liability at August 31, 1998. The Company is currently discussing potential debt
refinancings with another lender. As discussed in Note 13, the Company has
received notice of delinquency in the payment of payroll taxes. There is no
assurance the Company will be able to achieve future positive cash flows
sufficient to support operations. These matters raise substantial doubt about
the Company's ability to continue as a going concern. The ability of the Company
to continue as a going concern is dependent upon the ongoing support of its
customers, its ability to obtain capital resources to support operations and its
ability to successfully market its products and services. If the Company is
unable to obtain additional capital resources, or if the funds obtained in such
efforts are not adequate to support the Company until a successful level of
operations is attained, the Company would likely be unable to continue operating
as a going concern.

F-7
<PAGE> 27
PONDER INDUSTRIES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company has taken steps to improve its 1999 fiscal year operating
results. During the second half of both fiscal 1997 and fiscal 1998, the Company
made significant cost reductions, which included reductions in operating and
administrative personnel and related costs, consolidation or elimination of four
operating locations, the sale of certain nonproductive equipment to reduce debt
and the substantial reduction of general and administrative expenses. In
addition, the Company has resolved litigation involving its convertible
debenture holders (Note 13). The Company had attained positive cash flow from
operations for November and December of 1997 when the oil field service market
began to collapse in conjunction with the dramatic drop in oil prices. By the
end of fiscal 1998, management of the Company believes it has made major headway
on returning to positive cash flow from operations. In fiscal 1999, the Company
intends to actively monitor current industry conditions and to continue to
adjust its operations to further reduce personnel and related costs, if
required.

The Company has incurred substantial cash losses as a result of the prior
years' expansion efforts and the significant decline in industry activity during
the current year. The Company's current financing may not be sufficient to meet
the Company's cash requirements, if the depressed industry conditions continue
for an extended period. The Company is actively pursuing a new lender and
believes it will be able to refinance its debt to provide for its working
capital needs and to reduce interest rates.

The Company intends to aggressively market its products and services,
capitalizing on its entry into the higher margin offshore market through its
acquisition of Fishing Tools, Inc. (Note 15), and believes it has been gaining
market share in this market.

The Company's management believes that it is likely the Company's operating
results for fiscal 1999 will significantly improve over fiscal 1998. However,
there are no assurances that the Company can achieve such operating improvements
or that the Company will be able to achieve future cash flows or generate
working capital sufficient to support operations.

The Company's products and services are marketed under highly competitive
conditions. Products and services similar to those provided by the Company are
available from competitors in the U.S. and foreign markets, many with greater
financial resources than those of the Company. Approximately 24 percent, 24
percent and 9 percent of the Company's net sales for the years ended August 31,
1998, 1997 and 1996, respectively, and 28 percent, 34 percent and 23 percent of
its total assets at August 31, 1998, 1997 and 1996, respectively, are
attributable to foreign operations as described in Note 16.

Approximately 2 percent and 3 percent of the Company's total assets and 3
percent and 54 percent of its total stockholders' equity at August 31, 1998 and
1997, respectively, relate to the Company's available for sale securities
related to Titan Resources, Inc. (Titan), as described in Note 3. While
management of the Company believes such amounts are recorded at their fair
market values based upon quoted sales prices for Titan at August 31, 1998 and
1997, due to the thinly traded nature and volatility of this security, there can
be no assurance that the Company will realize the book value of its Titan
related investments. The inability of the Company to realize its Titan related
investments could have a material adverse effect on the Company's future results
of operations and its financial position. At October 15, 1998, the last quoted
sales price for Titan was $.20 per share. See Note 13 for a discussion of
litigation relating to the Titan securities.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents.

F-8
<PAGE> 28
PONDER INDUSTRIES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Parts and Supplies

Parts and supplies for the manufacturing and repair of rental tools and
parts used in conjunction with the rental of tools are stated at the lower of
average cost or market with cost determined by the first-in, first-out method.
These parts and supplies have been classified as a current asset on the
accompanying consolidated balance sheets consistent with industry practice.

Property and Equipment

Property and equipment are stated at cost. Depreciation is computed using
the straight-line method at rates based on estimated lives of the respective
assets. When assets are retired or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in income for the period. The cost of maintenance and repairs
is charged to income as incurred; significant renewals and betterments are
capitalized. (See Note 4.)

Goodwill

Goodwill consists of cost in excess of net assets acquired related to the
acquisition of businesses and assets. Goodwill is being amortized on a
straight-line basis over periods ranging from 15 to 40 years.

Long-Lived Assets

Property not in service (Note 4) is recorded at the lower of cost or
estimated market value. During the years ended August 31, 1998 and 1997, the
Company determined that its property not in service required an impairment loss
of approximately $200 and $260, respectively, to reflect its estimated market
value. Property not in service is comprised primarily of oilfield service
equipment.

During the year ended August 31, 1997, the Company contributed
approximately $446 in cash and equipment for the formation of a joint venture in
Dubai. During the fourth quarter of 1997, the Company concluded that the joint
venture would not be viable and recognized a loss of $446 related to its
investment in the joint venture. The Company recognized no revenue or expenses
from the joint venture with the exception of the amount written off.

Preferred Stock

In May 1998, the Company's stockholders approved a proposal to amend the
Company's certificate of incorporation to authorize 10,000,000 shares of
preferred stock. At August 31, 1998, no preferred stock had been issued. Each
series or class of preferred stock could, as determined by the Company's board
of directors at the time of issuance, rank, with respect to dividends, sinking
fund provisions and conversion, voting, redemption and liquidation rights,
senior to the Company's common stock.

Reverse Common Stock Split

See Note 18 for a discussion regarding a one-for-five reverse common stock
split in November 1998.

Foreign Currency Translation

Foreign subsidiaries translate monetary assets and liabilities at year-end
exchange rates and nonmonetary items are translated at historical rates. Income
and expense accounts are translated at the average rates in effect during the
year. Gains or losses from changes in exchange rates are recognized in income in
the year of occurrence. Adjustments resulting from these translations are
reflected in stockholders' equity as foreign currency translation adjustments.

F-9
<PAGE> 29
PONDER INDUSTRIES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Fair Value of Financial Instruments

The estimated fair values of the Company's financial instruments have been
determined by the Company using appropriate valuation methodologies and
approximate their recorded book values. The carrying values of the Company's
cash and cash equivalents, receivables, available for sale securities, accounts
payable, debt and other financial instruments approximate their fair values.

Revenue Recognition

Revenues are recorded when services have been provided or products have
been delivered.

Concentration of Credit Risk

The Company provides equipment and services to the oil and gas industries.
Concentration of credit risk with respect to trade receivables is limited due to
the large number of customers comprising the Company's customer base. Ongoing
credit evaluations of customers' financial condition are performed and,
generally, no collateral is required. The Company maintains reserves for
potential credit losses and such losses have not exceeded management's
expectations.

Income Taxes

The Company accounts for income taxes using Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," which
requires the establishment of a deferred tax asset or liability for the
recognition of future deductible or taxable amounts and operating loss and tax
credit carryforwards. Deferred tax expense or benefit is recognized as a result
of the changes in the assets and liabilities during the year. The Company has
established a valuation allowance equal to its net domestic deferred tax asset.

Earnings (Loss) Per Share

In February 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 128, "Earnings Per Share." SFAS No. 128 replaces the presentation of
Primary Earnings Per Share (EPS) with Basic EPS and requires dual presentation
of Basic and Diluted EPS on the face of the statements of operations. Basic EPS
excludes dilution and is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the Company. SFAS No. 128 is effective for financial
statements issued after December 15, 1997, and, accordingly, the accompanying
financial statements reflect the adoption of SFAS No. 128. As the Company had a
loss from continuing operations for the years ended August 31, 1998, 1997 and
1996, Diluted EPS equals Basic EPS as potentially dilutive common stock
equivalents, which consist of options and warrants, are antidilutive in loss
periods. Prior period EPS data has been restated as required by SFAS No. 128.
The average market price per share of the Company's common stock for the years
ended August 31, 1998, 1997 and 1996, was $5.65, $6.35 and $13.55, respectively.
Note 8 provides a detail of options and warrants outstanding and their
corresponding exercise prices. If the Company would have had income from
continuing operations for the years ended August 31, 1998, 1997 and 1996, the
denominator (weighted average common shares and common share equivalents
outstanding) in the Diluted EPS calculation would have been increased, through
application of the treasury stock method, for each class of option or warrant
for which the average market price per share of the Company's common stock
exceeded the common stock equivalent's exercise price.

F-10
<PAGE> 30
PONDER INDUSTRIES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

New Accounting Pronouncements

In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and displaying comprehensive
income and its components in a full set of financial statements. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997, and requires
reclassification of comparative financial statements for earlier periods.
Management of the Company believes that the adoption of SFAS No. 130 will result
in the presentation of comprehensive income (loss) that differs from net income
(loss) as presented in the accompanying financial statements to the extent of
foreign currency translation adjustments and unrealized gains (losses) on
available for sale securities as shown in the accompanying consolidated
statements of stockholders' equity.

In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information," which establishes standards for
reporting information about operating segments in annual and interim financial
statements. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. SFAS No. 131 supersedes SFAS
No. 14, "Financial Reporting for Segments of a Business Enterprise." Generally,
financial information is required to be reported on the basis that it is used
internally for evaluating segment performance and deciding how to allocate
resources to segments. SFAS No. 131 is effective for financial statements for
periods beginning after December 15, 1997. SFAS No. 131 need not be applied to
interim financial statements in the initial year of its application, but
comparative information for interim periods in the initial year of application
is to be reported in financial statements for interim periods in the second year
of application.

3. DISCONTINUED -- AZERBAIJAN OPERATIONS:

The Company commenced the establishment of operations in Azerbaijan and
other former republics of the Soviet Union in April of 1992. Such operations
were started based on a purported agreement between MegaOil USA/Vista Joint
Venture (Mega) and Azerbaijan Oil Company, an arm of the Government of
Azerbaijan. It was subsequently determined that such agreement was not valid and
management actions were taken to protect the Company's assets and costs incurred
in this area by forming a new joint venture "Baku-Ponder Services JV." This
entity was registered to do business in Azerbaijan. Also, Ponder International
Services, Inc. (PISI), a wholly owned subsidiary, was formed. PISI contracted
with the State Oil Company of Azerbaijan (SOCAR) to perform services and rent
and sell equipment for the workover of onshore and offshore oil and gas wells.
PISI performed jobs for SOCAR during fiscal 1995 but was unsuccessful in
obtaining full payment for services. Consequently, the service work was
terminated and future work was questionable under the contract. Work for other
entities in the region was not sufficient to result in profitable operations for
this segment of the Company.

A provision in one of the Company's loan agreements required management to
determine if its Azerbaijan operation would achieve financial stability by
December 31, 1995. Management's evaluation of the operation was that it was in
the Company's best interest to discontinue operations in this region. Attempts
were made to dispose of or enter into joint arrangements with third parties with
greater financial resources to obtain value for these operations. By November
1995, none of these attempts resulted in any reasonable expectation of being
able to complete a disposition or arrangement with a third party. Accordingly,
management concluded to write off all cost of assets in Azerbaijan as of August
31, 1995 ($3,002), and to provide an additional $510 to cover operations through
August 31, 1995, and during the estimated period to complete their
discontinuance.

In February of 1996, the Company sold its operations in Azerbaijan to Titan
for 2,000,000 shares of Titan stock and recognized a gain of $1,400. The Company
sold 500,000 shares of Titan stock to an investment company for a $500
receivable. The remaining 1,500,000 shares of Titan stock were valued at an
estimated fair market value of $900 ($.60 per share). During the year ended
August 31, 1997, the investment company returned the 500,000 shares of Titan
stock in settlement of its receivable. The Titan stock was estimated to
F-11
<PAGE> 31
PONDER INDUSTRIES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

have a fair market value of $200 when returned resulting in a loss of $300. The
Titan stock is shown as available for sale securities on the accompanying
consolidated balance sheets at August 31, 1998 and 1997, in accordance with the
guidelines of SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." At August 31, 1996, the estimated fair market value of Titan
was $.60 per share and, thus, no unrealized holding gain or loss was reported as
a separate component of stockholders' equity. At August 31, 1997, the estimated
fair market value of Titan was $.40 per share and an unrealized holding loss of
$300 is reported as a separate component of stockholders' equity. At August 31,
1998, the estimated fair market value of Titan was $.28 per share and an
unrealized holding loss of $240 is reported as a separate component of
stockholders' equity.

4. PROPERTY AND EQUIPMENT:

Property and equipment consists of the following:

<TABLE>
<CAPTION>
AUGUST 31
-----------------
1998 1997 ASSET LIFE
------- ------- -------------
<S> <C> <C> <C>
Property not in service............................. $ 441 $ 641
Land................................................ 292 188
Buildings and improvements.......................... 2,073 1,645 20 years
Rental tools and equipment.......................... 32,828 24,468 5 to 20 years
Shop equipment and tools............................ 2,338 1,954 5 years
Vehicles and transportation equipment............... 2,090 1,866 3-5 years
Furniture and fixtures.............................. 930 621 5 years
------- -------
$40,992 $31,383
======= =======
</TABLE>

Effective June 1, 1998, the Company extended the estimated useful life of
certain of its rental tools and equipment from approximately 7.5 years to 20
years. The Company believes the revised estimate more appropriately reflects the
actual useful life of such tools and equipment. This change in estimate
decreased the net loss by $158, or $.02 per basic and diluted share, for the
three months and year ended August 31, 1998.

During the fourth quarter of 1998, the Company purchased drill pipe through
the issuance of 350,000 shares of the Company's common stock. The drill pipe was
valued at the invoiced amount from the drill pipe vendor, approximately $1,221,
which approximated the fair market value of the common stock.

During the fourth quarter of 1997, the Company conducted an auction of
certain rental tools and equipment. Such sale resulted in proceeds of
approximately $750 and a loss on disposition of assets of approximately $274,
including $150 resulting from the issuance of approximately 30,000 shares of the
Company's common stock in settlement of a payable owed to the auction company.
The common stock was valued at the carrying value of the payable which
approximated the fair market value of the common stock.

F-12
<PAGE> 32
PONDER INDUSTRIES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. ACCRUED LIABILITIES AND OTHER LONG-TERM LIABILITIES:

Accrued liabilities consist of the following:

<TABLE>
<CAPTION>
AUGUST 31
---------------
1998 1997
------ ------
<S> <C> <C>
Accrued legal and professional fees......................... $ 239 $ 476
Accrued interest expense.................................... 149 31
Accrued taxes............................................... 817 355
Accrued insurance expense................................... 182 201
Accrued consulting fees..................................... 79 107
Bank overdraft.............................................. 657 692
Other....................................................... 581 341
------ ------
$2,704 $2,203
====== ======
</TABLE>

Included in other long-term liabilities at August 31, 1997, is $676 of
accrued interest expense related to the convertible debentures described in Note
7 which were converted into shares of the Company's common stock in September
1997.

6. LONG-TERM DEBT, INCLUDING CAPITAL LEASE OBLIGATIONS:

Long-term debt consists of the following:

<TABLE>
<CAPTION>
AUGUST 31
-----------------
1998 1997
------- -------
<S> <C> <C>
Notes payable --
Term loan with financial institution...................... $ 3,383 $ 3,384
Inventory revolver with financial institution............. 2,500 2,500
Receivable revolver with financial institution............ 1,301 1,425
Mortgage note............................................. 76 107
Real estate............................................... 64 68
Bosco note................................................ 152 330
Capital lease obligations................................. 1,232 1,371
Former officer............................................ 103 172
------- -------
8,811 9,357
Less -- Current maturities................................ (8,355) (1,899)
------- -------
Long-term debt, excluding current maturities................ $ 456 $ 7,458
======= =======
</TABLE>

Maturities of long-term debt as of August 31, 1998, were as follows:

<TABLE>
<S> <C>
1999....................................................... $8,355
2000....................................................... 301
2001....................................................... 36
2002....................................................... 20
2003....................................................... 56
Thereafter................................................. 43
------
$8,811
======
</TABLE>

F-13
<PAGE> 33
PONDER INDUSTRIES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In 1995, the Company signed a revolving loan agreement with a bank that
provided a maximum borrowing limit of $500. The revolving line of credit bore
interest at 2.5 percent above a defined reference lending rate. The weighted
average interest rate on this short-term borrowing was 9.3 percent for the year
ended August 31, 1996. This loan agreement was replaced with the financing
discussed below.

During the year ended August 31, 1997, the Company obtained financing from
KBK Financial, Inc. (KBK). The financing provides for a $2,500 inventory based
line of credit (Inventory Revolver), a $4,000 receivable based revolver
(Receivable Revolver) and a $3,500 term loan (Term Loan) (collectively "Notes").
The Inventory Revolver allows for periodic borrowings, repayments and
reborrowings up to the lesser of $2,500 or an inventory and rental tools
supported Borrowing Base, as defined, provides for monthly interest payments at
a variable rate (15 percent at August 31, 1998) and matures in full in November
2001. The Receivable Revolver allows the Company to borrow up to $4,000 of its
eligible accounts receivable at a discount rate equal to the higher of 7 percent
or the Base Rate, as defined, plus 5.5 percent (14 percent at August 31, 1998)
and matures in full in December 1998. The Term Loan allows for borrowings up to
the lesser of $3,500 or the Borrowing Base less the outstanding principal
balance of the Inventory Revolver. The Term Loan bears interest at a variable
rate (15 percent at August 31, 1998) and required monthly payments of interest
only through May 1997. Beginning in June 1997, the Term Loan required monthly
principal and interest payments of $83 through May 2002 with a final payment of
all unpaid principal and interest due in June 2002. In June 1998, the Company
increased the Term Loan from $3,500 to $4,000. The amended Term Loan now
requires monthly principal and interest payments of $98 commencing July 1998
through May 2002 with a final payment of all principal and interest due in June
2002. The Notes are secured by substantially all of the assets of the Company
and prohibit the payment of dividends on the Company's common stock. The loan
agreement under the Notes requires compliance with various covenants, which were
amended in January 1998, including maintenance of a debt service coverage ratio,
as defined and amended, of not less than 1.0 to 1.0 as of the fiscal quarter
ended February 1998 and 1.25 to 1.0 as of the end of each fiscal quarter
thereafter. The Company received a waiver of the debt service coverage ratio for
the quarters ended February and May 1998. Additionally, the Company must
maintain a tangible net worth, as defined and amended, of not less than $18,000
at all times. As a result of continuing operating losses during the year ended
August 31, 1998, certain of the Company's covenants were not met at August 31,
1998, and, accordingly, all amounts due this financial institution have been
classified as current on the accompanying balance sheet at August 31, 1998. The
lender has the right to demand immediate repayment of the entire amounts
outstanding under the Notes. The Company is currently discussing potential debt
refinancings with another lender to increase its available facilities and
decrease interest rates. If the Company were to refinance its current debt with
another lender, it is anticipated that an extraordinary loss of approximately
$260 would be recognized associated with a prepayment penalty. While management
believes that it will be able to increase the Company's debt facilities and
reduce its interest rates, there are no assurances that the Company will be able
to refinance its current indebtedness nor that it will be able to obtain an
increase in available facilities or achieve a reduction in interest rates.

In September 1998, the Company obtained $500 from KBK under a short-term
promissory note. The proceeds were used for working capital requirements. The
promissory note bears interest at 15 percent with the principal and accrued
interest due November 9, 1998. In November 1998, the due date of this note was
extended (Note 18). The promissory note has cross-default provisions with the
Notes.

The mortgage note is to a financial institution, bears interest at 9.25
percent and is payable in monthly installments of $1, including interest,
through November 2002. The note is secured by real estate.

The real estate note is to an individual, bears interest at 6.5 percent and
is payable in monthly installments of $1, including interest, through October
2009. The note is secured by land and a building.

The Bosco note represents amounts, assumed in the Bosco acquisition (see
Note 15), due certain creditors of Bosco.
F-14
<PAGE> 34
PONDER INDUSTRIES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company leases vehicles and equipment under capital lease obligations
that have varying terms from 36 to 59 months. Minimum lease payments are
capitalized at interest rates ranging from 9.6 percent to 11.5 percent. The
following is a schedule by years of the future minimum lease payments under
capital leases and the present value of the minimum lease payments as of August
31, 1998:

<TABLE>
<S> <C>
Year ending August 31 --
1999..................................................... $ 969
2000..................................................... 311
2001..................................................... 27
2002..................................................... 9
2003..................................................... --
Thereafter............................................... --
------
Total minimum lease payments............................... 1,316
Less -- Amounts representing interest...................... 84
------
Present value of minimum lease payments.................... $1,232
======
</TABLE>

During the year ended August 31, 1997, the Company's former president and
chief executive officer resigned. The Company and the former officer entered
into an agreement in May 1997 whereby the Company agreed to a final payment
schedule for its September 1995 purchase of Armstrong Tool, Inc. (see Note 15),
which was previously wholly owned by the former officer and his spouse.
Additionally, the agreement stipulated the payout provisions under the former
officer's employment agreement entered into in September of 1995 and the
cancellation of an option held by the former officer to purchase 29,091 shares
of the Company's common stock. The final payment schedule for the purchase of
Armstrong Tool, Inc., requiring monthly payments of approximately $12 through
August 1998 (subsequently settled through the issuance of common stock as
described below), and the severance agreement payments of approximately $8 per
month through August 1999, are both noninterest bearing. The Company has imputed
interest on the severance agreement payments at 15 percent per annum, its
estimated incremental borrowing rate. As a result of the agreement entered into
with the former officer, as well as the acceleration of deferred compensation
associated with an award of 91,867 shares of the Company's common stock to the
former officer in fiscal 1996, the Company was required to accrue for and
recognize approximately $450 in compensation expense during the year ended
August 31, 1997. In August 1997, indebtedness to the former officer of $219,
including interest, related to the purchase of Armstrong Tool, Inc., was settled
through the issuance of approximately 56,000 shares of the Company's common
stock. The common stock was valued at the carrying value of the indebtedness
which approximated the fair market value of the common stock.

In October 1997, a $2,500 bridge loan was obtained from White Owl Capital
Partners (White Owl) and certain others with the intention of providing
additional capital for acquisitions and expansion of the Company's business. The
Company, in January 1998, purchased Fishing Tools, Inc. (FTI), for approximately
$7,500 cash, including payment of acquired indebtedness, and $1,000 in stock
(Note 15). This acquisition was funded with the proceeds from the sale of 2.2
million shares of common stock at $5 per share to White Owl and certain of its
affiliates.

7. CONVERTIBLE DEBENTURES AND SENIOR CONVERTIBLE NOTES:

Effective April 26, 1996, the Company completed a $10,950 placement of
eight percent convertible debentures. The debenture issue resulted in proceeds
of $9,855, net of issuance costs. Issuance costs were a component of deferred
assets on the consolidated balance sheets and were being amortized over a
three-year period. As of August 31, 1997 and 1996, debentures in the aggregate
principal amount of $4,570 and $1,800, respectively, had been converted into
734,012 and 165,658 shares of common stock, respectively. As discussed in Note
13, claims and counterclaims were filed between certain convertible debenture
holders and the

F-15
<PAGE> 35
PONDER INDUSTRIES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Company. In September 1997, the Company and the holders of the then outstanding
convertible debentures entered into a settlement agreement whereby all of the
then outstanding convertible debentures were converted into shares of the
Company's common stock as further described in Note 13. The Company also agreed
to issue to such debenture holders five-year warrants to purchase an additional
191,400 shares of the Company's common stock at $5 per share. At August 31,
1997, the Company had accrued approximately $100 as its estimate of the fair
value of the warrants issued in settlement of this matter.

In October 1997, the Company completed a private placement with White Owl
of $2,500 Senior Convertible Notes (Senior Notes) and warrants to purchase
800,000 shares of the Company's common stock at a purchase price of $3.125 per
share. The warrants expire on January 1, 2001. In January 1998, the Senior Notes
were converted into 800,000 shares of the Company's common stock concurrent with
the January 1998 equity placement described in Note 2.

8. EMPLOYEE STOCK PLANS, OPTIONS AND WARRANTS:

In June 1992, the Company filed with the Securities and Exchange Commission
a Registration Statement on Form S-8 registering 171,948 shares of common stock
for various stock option plans. The shares have been registered as follows:
40,000 shares to Incentive Stock Option Plan; 40,000 shares to Non-Qualified
Stock Option Plan; 40,000 shares to Stock Bonus Plan; and 51,948 shares to the
1989 Keyman Stock Option Plan.

In March 1994, shareholders approved the 1994 Incentive Stock Option Plan
(Incentive Plan) and 1994 Directors' Stock Option Plan (1994 Directors' Plan).
In August 1995, the Company filed with the Securities and Exchange Commission a
Registration Statement on Form S-8 registering 100,000 shares of common stock as
follows: 50,000 shares to the Incentive Plan and 50,000 shares to the 1994
Directors' Plan. The Incentive Plan provides that options may be granted to
employees for up to 50,000 shares. Any one employee is limited to $100 of fair
market value of stock at the time the option is granted. The purchase price of
each option shall not be less than 100 percent of the fair market value of the
Company's stock at the time the option is granted. The 1994 Directors' Plan
provides that an option to acquire 1,100 shares be granted to each director of
the Company as of the annual stockholders' meeting date in the years 1994
through 1998. The option price is the fair market value of the Company's stock
at the time of the grant, and the options are fully exercisable when granted.
The aggregate number of shares that may be granted under this plan is limited to
50,000 shares.

During the year ended August 31, 1997, stockholders of the Company approved
the adoption of the 1997 Long-Term Incentive Plan (1997 Incentive Plan). The
1997 Incentive Plan is intended to advance the best interests of the Company,
its subsidiaries and its stockholders by attracting, retaining and motivating
key employees. The 1997 Incentive Plan provides for the grant of stock options
(which may be nonqualified stock options or incentive stock options for tax
purposes), stock appreciation rights issued independent of or in tandem with
such options, restricted stock awards and performance awards to certain key
employees of the Company and its subsidiaries.

In May 1998, the Company's board of directors adopted the 1998 Director
Stock Option Plan (1998 Directors' Plan). The 1998 Directors' Plan provides that
an option to acquire 2,000 shares be granted to each director as of the date of
election or reelection as a director of the Company. The 1998 Directors' Plan
provides for the aggregate grant of options to acquire common stock not to
exceed 80,000 shares. The option price is the fair market value of the Company's
common stock at the time of the grant, and the options are fully exercisable
when granted. The options expire 10 years from date of grant.

F-16
<PAGE> 36
PONDER INDUSTRIES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A summary of activity in the 1994 Directors' Plan is set forth below:

<TABLE>
<CAPTION>
TOTAL EXERCISE
SHARES PRICE
RESERVED ACTIVITY PER SHARE
-------- -------- ---------
<S> <C> <C> <C>
Balances, August 31, 1995................................ 34,600 15,400
Granted................................................ (9,900) 9,900 $18.4375
Exercised.............................................. -- (1,100) $10.9375
Exercised.............................................. -- (1,100) $ 5.078
Exercised.............................................. -- (1,100) $18.4375
------ ------
Balances, August 31, 1996................................ 24,700 22,000
Granted................................................ (8,800) 8,800 $ 5.469
------ ------
Balances, August 31, 1997................................ 15,900 30,800
Granted................................................ -- --
------ ------
Balances, August 31, 1998................................ 15,900 30,800
====== ======
</TABLE>

A summary of activity in the 1998 Directors' Plan is set forth below:

<TABLE>
<CAPTION>
TOTAL EXERCISE
SHARES PRICE
RESERVED ACTIVITY PER SHARE
-------- -------- ---------
<S> <C> <C> <C>
Balances, August 31, 1997................................ -- -- $ --
Plan adoption.......................................... 80,000 -- $ --
Granted................................................ (16,000) 16,000 $6.095
------- ------
Balances, August 31, 1998................................ 64,000 16,000
======= ======
</TABLE>

In October 1996, options to acquire 91,000 shares of the Company's common
stock at an exercise price of $8.75 per share were granted to certain key
employees of the Company. The options vest at the rate of 20 percent per year
and expire 10 years from date of grant. During the years ended August 31, 1998
and 1997, 2,000 and 32,000, respectively, of these options were forfeited.

In September 1997, options to acquire 410,000 shares of the Company's
common stock at an exercise price of $2.50 per share were granted to certain key
employees of the Company. Options on 162,000 of these shares were immediately
vested while the remainder vest at the rate of 20 percent per year. The options
expire 10 years from date of grant.

In February 1998, options to acquire 95,000 shares of the Company's common
stock at an exercise price of $5.78 per share were granted to certain key
employees of the Company's FTI subsidiary. Options on 19,000 of these shares
were immediately vested while the remainder vest at a rate of 20 percent per
year. The options expire 10 years from date of grant.

In July 1998, options to acquire 10,000 shares of the Company's common
stock at an exercise price of $3.125 per share were granted to a key employee of
the Company pursuant to the 1997 Incentive Plan. Options on 2,000 of these
shares were immediately vested while the remainder vest at the rate of 20
percent per year and expire 10 years from date of grant.

F-17
<PAGE> 37
PONDER INDUSTRIES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table recaps options outstanding at August 31, 1998:

<TABLE>
<CAPTION>
WEIGHTED AVERAGE
EXERCISE PRICE REMAINING
TYPE OF GRANT OUTSTANDING VESTED PER SHARE CONTRACTUAL LIFE
- ------------- ----------- ------- -------------- ----------------
<S> <C> <C> <C> <C>
March 1994-1994 Directors' Plan..... 5,500 5,500 $10.9375 5.5 years
February 1995-1994 Directors'
Plan.............................. 7,700 7,700 $ 5.078 6.5 years
February 1996-1994 Directors'
Plan.............................. 8,800 8,800 $18.4375 7.5 years
March 1997-1994 Directors' Plan..... 8,800 8,800 $ 5.469 8.5 years
May 1998-1998 Directors' Plan....... 16,000 16,000 $ 6.095 9.7 years
October 1996 key employee options... 57,000 11,400 $ 8.75 8.1 years
September 1997 key employee
options........................... 410,000 162,000 $ 2.50 9.1 years
February 1998 key employee
options........................... 95,000 19,000 $ 5.78 9.5 years
July 1998 key employee options...... 10,000 2,000 $ 3.125 9.9 years
</TABLE>

The weighted average exercise price per share of options outstanding was
$4.26, $9.20 and $11.90 at August 31, 1998, 1997 and 1996, respectively.

The following table recaps warrants outstanding at August 31, 1998:

<TABLE>
<CAPTION>
WEIGHTED AVERAGE
EXERCISE PRICE REMAINING
TYPE OF GRANT OUTSTANDING VESTED PER SHARE CONTRACTUAL LIFE
- ------------- ----------- ------- -------------- ----------------
<S> <C> <C> <C> <C>
September 1997 convertible debenture
warrants (Note 7)................. 191,400 191,400 $ 5.00 4 years
October 1997 Senior Note warrants
(Note 7).......................... 800,000 800,000 $ 3.125 2.3 years
</TABLE>

In October 1995, SFAS No. 123, "Accounting for Stock-Based Compensation,"
was issued. SFAS No. 123 defines a fair value based method of accounting for
employee stock options or similar equity instruments and encourages all entities
to adopt that method of accounting for all of their employee stock compensation
plans. Under the fair value based method, compensation cost is measured at the
grant date based on the value of the award and is recognized over the service
period of the award, which is usually the vesting period. However, SFAS No. 123
also allows entities to continue to measure compensation costs for employee
stock compensation plans using the intrinsic value method of accounting
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB No. 25). Entities electing to remain with the
accounting prescribed by APB No. 25, as the Company has, must make pro forma
disclosures of net income (loss) and earnings (loss) per share as if the fair
value based method recommended by SFAS No. 123 had been applied. The impact of
SFAS No. 123 on the Company's pro forma disclosures of net loss and net loss per
share as if the fair value based method of accounting under SFAS No. 123 had
been applied to employee and director options are as follows:

<TABLE>
<CAPTION>
AUGUST 31
----------------------------
1998 1997 1996
------- -------- -------
<S> <C> <C> <C> <C>
Net loss.................................. As Reported $(4,532) $ (9,921) $(3,892)
Pro Forma (5,155) (10,054) (4,020)
Net loss per share........................ As Reported $ (.60) $ (3.64) $ (2.23)
Pro Forma (.69) (3.69) (2.31)
</TABLE>

The weighted average grant-date fair value of options granted during fiscal
1998 was $2.75 per option. This value was determined using an option pricing
model with an expected term of five years, expected

F-18
<PAGE> 38
PONDER INDUSTRIES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

volatility of 127 percent, expected annual rate of quarterly dividends of zero
and a risk-free discount rate of 5.1 percent.

The weighted average grant-date fair value of options granted during fiscal
1997 was $7.32 per option. This value was determined using an option pricing
model with an expected term of five years, expected volatility of 132 percent,
expected annual rate of quarterly dividends of zero and a risk-free discount
rate of 6.25 percent.

The weighted average grant-date fair value of options granted during fiscal
1996 was $14.60 per option. This value was determined using an option pricing
model with an expected term of five years, expected volatility of 104 percent,
expected annual rate of quarterly dividends of zero and a risk free discount
rate of 6.20 percent.

During the year ended August 31, 1995, the board of directors rescinded
warrants issued to the Company's former chairman of the board and chief
executive officer to purchase 400,000 shares at $26.25 per share. During the
year ended August 31, 1996, 100,000 shares of the Company's restricted common
stock was granted (Note 14) to the former chairman and officer in consideration
of his years of service to the Company, continued personal guarantees of Company
indebtedness and his return to the Company of the warrants referred to above as
well as his return of options to purchase up to 400,000 shares of the Company's
common stock at an exercise price of $26.25 per share. These options were
granted in December 1995.

9. INCOME TAXES:

The Company accounts for income taxes in accordance with the requirements
of SFAS No. 109. Under the provisions of SFAS No. 109, an entity recognizes
deferred tax assets and liabilities for future tax consequences of events that
have already been recognized in the Company's financial statements or tax
returns. The measurement of deferred tax assets and liabilities is based on
provisions of the enacted tax law; the effect of future changes in the tax laws
or rates are not anticipated.

The net deferred tax assets (liabilities) include the following components:

<TABLE>
<CAPTION>
1998 1997
------- ------
<S> <C> <C>
Deferred tax assets --
Net operating loss carryforwards.......................... $10,209 $8,126
Tax credit carryforwards.................................. 444 211
Allowance for receivables................................. 269 278
Liabilities............................................... 130 216
------- ------
Gross deferred tax assets......................... 11,052 8,831
Deferred tax liabilities --
Property and equipment (domestic)......................... (2,910) (114)
Property and equipment (foreign).......................... (886) (881)
------- ------
7,256 7,836
Total valuation allowance................................... (8,142) (8,717)
------- ------
Net deferred tax liabilities................................ $ (886) $ (881)
======= ======
</TABLE>

A valuation reserve of $8,142 and $8,717 as of August 31, 1998 and 1997,
respectively, representing the total of net deferred domestic tax assets has
been recognized by the Company as it cannot determine that it is more likely
than not that all of the deferred tax assets will be realized.

F-19
<PAGE> 39
PONDER INDUSTRIES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Income tax expense (all foreign) for the fiscal year ended August 31, 1996,
was $67 and relates to taxes on the Company's UK operations related to 1996
acquisitions as discussed in Note 15. The deferred taxes payable are the result
of book and tax basis differentials existing at the date of the UK acquisitions.

At August 31, 1998, the Company had net operating loss (NOL) carryforwards
of approximately $30,000 for income tax purposes. Such losses will expire in the
years ending August 31, 2007 ($2,404), 2008 ($1,796), 2009 ($3,668), 2010
($2,704), 2011 ($5,149), 2012 ($8,106) and 2018 ($6,200). The Company has
approximately $319 of unused foreign income tax credits and unused investment
tax credit carryforwards of approximately $125 to reduce future income taxes
payable. The Company must first use its available NOL carryforwards to offset
future taxable income before utilizing its available tax credits.

The Company's ability to use its NOL and tax credit carryforwards to offset
future taxable income is subject to the restrictions of Section 382 of the
Internal Revenue Code (Code). Section 382 of the Code provides for annual
limitations on the utilization of the NOL and tax credit carryforwards when the
beneficial stock ownership of a corporation changes by more than 50 percentage
points within a three-year period (an Ownership Change). In February 1997, the
Company incurred an Ownership Change. Additionally, because U.S. tax laws limit
the time during which NOL and tax credit carryforwards may be applied against
future taxable income and tax liabilities, the Company may not be able to take
full advantage of its NOL and tax credits for federal income tax purposes. The
Code has been revised to provide a 20-year carryforward period for net operating
losses generated in the Company's fiscal 1998 and subsequent years. Prior to
this revision, carryforwards were limited to 15 years.

10. RELATED-PARTY TRANSACTIONS:

Certain stockholders of the Company were also independent fishing tool
operators who provided past services to the Company on a commission basis. The
Company incurred $1,176 of commission expense in 1996 of which $38 was related
to these individuals. Management of the Company believes these services were
performed at rates consistent with those charged by independent third parties.
Subsequent to fiscal 1996, the Company conducted substantially all of its
fishing tool operations with noncommissioned operators.

The Company has debt with a former officer as discussed in Note 6.

The Company has a note receivable from an employee totaling $69 and $66 at
August 31, 1998 and 1997, respectively. The note relates to the purchase of
shares of the Company's stock, earns interest at a rate of 6 percent annually
and matures August 31, 1999. Interest earned on the note has been added to the
principal balance on an annual basis.

11. OPERATING LEASES:

The Company leases certain property and equipment under operating leases.
Minimum payments for operating leases having initial or remaining noncancelable
terms in excess of one year as of August 31, 1998, are as follows:

<TABLE>
<S> <C>
1999........................................................ $357
2000........................................................ 138
2001........................................................ 88
2002........................................................ 51
2003........................................................ 49
Thereafter.................................................. 49
----
Total minimum lease payments...................... $732
====
</TABLE>

F-20
<PAGE> 40
PONDER INDUSTRIES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Total rent expense for all operating leases amounted to $1,228, $329 and
$81 for the years ended August 31, 1998, 1997 and 1996, respectively. The 1998
operating lease rental expense includes approximately $946 relating to tool
rentals in the U.K.

12. 401(k) EMPLOYEE BENEFIT PLAN:

The Company has a 401(k) Employee Benefit Plan for employees that meet
certain criteria. Company contributions to the plan are at the discretion of the
board of directors. Employees may make voluntary contributions to the plan on
their own behalf and direct how their accounts are invested. While the Company
had accrued discretionary contributions in prior fiscal years, management of the
Company determined during fiscal 1996 that such amounts would not be contributed
to the 401(k) plan. Accordingly, approximately $105 relating to prior years'
accruals was reversed into income during 1996. During the year ended August 31,
1997, the Company began contributing common stock to the 401(k) plan as
discretionary contributions. For the years ended August 31, 1998 and 1997, the
Company recognized approximately $146 and $50, respectively, in expense
associated with the 401(k) plan.

13. CONTINGENCIES:

In 1996, the Company sued its placement agent and its principal and related
entities (the placement agent) in the Company's 1996 convertible debenture
offering (Note 7) and the debenture holders in the United States District Court
for the Western District of New York. In mid-1997, the Company settled with all
of the debenture holders, and the judge ordered the case against the placement
agent transferred to the United States District Court for the Northern District
of Georgia. In response, in September 1997, a case was filed against the Company
in Georgia State Court, which the Company removed to the United States District
Court for the Northern District of Georgia, Atlanta Division, by the placement
agent alleging that, in connection with such offering, the Company tortiously
interfered with its business relationships, breached a Proprietary Information,
Non-Circumvention and Indemnification Agreement between the Company and the
placement agent, defamed the placement agent and engaged in conduct giving rise
to an indemnification in favor of the placement agent. The federal court
consolidated the two lawsuits, and on May 8, 1998, pursuant to a mutual release
and settlement agreement between the Company and the placement agent, dismissed
with prejudice all of the claims and counterclaims in the two lawsuits. Under
the terms of the settlement agreement, the consideration given by each of the
Company and the placement agent was the release of its claims against the other,
and no cash or other consideration was paid by either party.

On July 17, 1998, Titan sued the Company in the District Court of Harris
County, Texas. The suit alleges that in 1996, the Company made
misrepresentations in connection with the sale of all of the Company's
outstanding shares in Ponder International Services, Inc. (its former Azerbaijan
subsidiary), to Titan in return for 2,000,000 shares of Titan's common stock.
The suit alleges breach of contract, breach of warranty, negligent
misrepresentation and fraudulent misrepresentation. Titan seeks unspecified
damages. The Company is defending the case vigorously and has counterclaimed for
unspecified sums that Titan owes it pursuant to one of the contracts executed in
connection with this transaction.

In September 1998, the Company received notice from the Internal Revenue
Service (IRS) that it was delinquent in the remittance of payroll taxes. At
August 31, 1998, the Company had accrued approximately
F-21
<PAGE> 41
PONDER INDUSTRIES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

$600 in payroll taxes and an additional $110 in penalties and interest relating
to these delinquent taxes. Until such amounts are paid, the IRS could file tax
liens or seize Company assets which would have a material adverse effect on the
Company's operations.

In July 1998, the Company received notification that it was subject to
delisting on the NASDAQ stock market as its minimum bid price for its common
stock had fallen below $1 per share. In October 1998, the Company gave notice of
a special stockholders' meeting to be held November 11, 1998, to effect a
one-for-five reverse common stock split in order to meet NASDAQ listing
requirements (Note 18). There can be no assurance that the Company will be able
to retain its current listing or meet future listing requirements which could
have an adverse effect on the Company's ability to access additional capital
resources.

14. EMPLOYMENT AGREEMENTS:

Effective September 1, 1995, the Company entered into an employment
agreement with the Company's former president and chief operating officer. Since
July 1995, he had served the Company in such capacity without a contractual
agreement. The agreement provided for an annual salary of $100 payable in
monthly increments for four years. In addition, he received 91,867 shares of the
Company's stock for services to be provided to the Company. This was recorded as
deferred compensation and is shown as a separate component of stockholders'
equity. Unearned compensation was being amortized to expense over a four-year
period. As discussed in Note 6, the former officer resigned during the year
ended August 31 1997, and the Company was required to accelerate the recognition
of the deferred compensation.

In April 1996, the Company's former chairman of the board and chief
executive officer was granted 100,000 shares of the Company's restricted common
stock. At August 31, 1996, the Company had recognized $400 in compensation
expense and additional paid-in capital associated with this stock grant.

At August 31, 1998, the Company had employment agreements with six
employees providing for combined future compensation of $478 and $173 during the
fiscal years ending August 31, 1999 and 2000, respectively. Two of the
agreements, representing combined annual compensation of $265, provide for a
two-year lump-sum payment in the event of termination by the Company without
cause.

15. ACQUISITIONS:

The following describes acquisitions by the Company during the years ended
August 31, 1996 and 1998. The Company had no significant acquisitions during the
year ended August 31, 1997.

Effective September 1995, the Company acquired certain assets and assumed
certain liabilities of Armstrong Tool, Inc. (Armstrong). Armstrong was wholly
owned by the Company's former president and his spouse. Consideration given for
Armstrong was the issuance of a $400 promissory note to the Company's former
president plus assumption of various notes payable of approximately $450. The
$450 in notes payable were paid during the year ended August 31, 1996. Armstrong
is located in Fort Smith, Arkansas.

Effective October 1995, the Company acquired certain real property,
vehicles and rental tools and equipment from Apex Tool (Apex), a sole
proprietorship. Apex is located in Healdton, Oklahoma, and provides fishing and
rental tool services in the South Central Oklahoma and North Texas region. The
assets were acquired for $600, of which $200 was paid at closing. The amount
paid at closing was funded through borrowings from a commercial bank. A $400
note payable, bearing interest at 9 percent per annum was paid in two
installments of $200, due March 15, 1996 and 1997, to the owner of Apex.

Effective April 1996, the Company completed the acquisition of Panther Oil
Tools, (UK) Ltd. (Panther) (an English company), and substantially all of the
assets of Villain Ltd. (Villain) (a Guernsey company) for $1,250 and 240,000
shares of the Company's restricted common stock which were valued on the date of
issuance at $3,060.

F-22
<PAGE> 42
PONDER INDUSTRIES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Effective May 1996, the Company acquired Runyon Oil Tools, Inc. (Olney,
Illinois), and DiKor, Inc. (Carmi, Illinois), and effective March 1996, the
Company acquired C&F Fishing Tools, Inc. (Maysville, Oklahoma), in separate
transactions in consideration for an aggregate of $283 and 66,291 shares of the
Company's restricted common stock which were valued on the date of issuance at
approximately $640.

Effective June 1996, the Company acquired substantially all of the assets
of Reeled Tubular Components, Inc. (Houston, Texas), including the intellectual
property rights to an obstruction removing device, for a cash payment of $50 and
4,000 shares of the Company's restricted common stock which were valued at $60
on the date of issuance.

Effective July 1996, the Company acquired all of the fixed assets of Brooks
Oil Service Co., L.P., and Bosco Fishing and Rental Tools (Bosco) (Laurel,
Mississippi) for an initial cash payment of $200 and the assumption of $1,200 in
liabilities.

In August 1996, the Company acquired all of the issued ordinary shares of
Prime Pipe Limited (a UK company) for approximately $105 and the issuance of 930
shares of the Company's common stock.

The results of operations of all acquisitions after the respective
acquisition dates are included in the consolidated statements of operations. All
acquisitions were recorded using the purchase method of accounting. The
following unaudited pro forma information has been prepared assuming that the
Panther, Villain, Bosco and Armstrong acquisitions had taken place at the
beginning of the period presented. The remaining acquisitions were not
considered to have a significant effect on the unaudited pro forma information.
The cash portion of the Panther and Villain purchase price and acquisition
related costs were funded by a portion of the net proceeds from the placement of
convertible debentures as discussed in Note 7. The unaudited pro forma
information includes adjustments to reflect the effect on depreciation expense
of recording the fair value of property and equipment acquired and the pro rata
portion of interest expense on the convertible debentures and debt assumed
related to the acquisitions.

<TABLE>
<CAPTION>
YEAR ENDED
AUGUST 31, 1996
---------------
(UNAUDITED)
<S> <C>
Sales....................................................... $14,710
Cost of sales............................................... (6,344)
-------
Gross profit................................................ $ 8,366
=======
Loss from continuing operations............................. $(5,018)
=======
Basic and diluted loss per share from continuing
operations................................................ $ (2.88)
=======
</TABLE>

The unaudited pro forma information is not necessarily indicative of the
results that would have occurred had such transactions actually taken place at
the beginning of the period specified nor does such information purport to
project the results of operations for any future date or period.

In January 1998, the Company acquired all of the outstanding stock of FTI
for approximately $7,500 cash, including payment of acquired indebtedness, and
the issuance of 128,899 shares of the Company's common stock valued at $1,000.
The cash consideration was provided through the equity placement described in
Note 2. The results of operations of FTI have been included in the consolidated
statements of operations since January 12, 1998. The FTI acquisition was
recorded using the purchase method of accounting. The following unaudited pro
forma information has been prepared assuming that the FTI acquisition had taken

F-23
<PAGE> 43
PONDER INDUSTRIES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

place on September 1, 1997. The unaudited pro forma information includes
adjustments to reflect the effect on depreciation expense of recording the fair
value of property and equipment acquired in the FTI acquisition:

<TABLE>
<CAPTION>
YEAR ENDED
AUGUST 31, 1998
---------------
(UNAUDITED)
<S> <C>
Sales................................................. $22,744
Cost of sales......................................... 9,835
-------
Gross profit.......................................... $12,909
=======
Loss from continuing operations....................... $(4,808)
=======
Basic and diluted loss per share from continuing
operations.......................................... $ (.64)
=======
</TABLE>

The unaudited pro forma information is based upon available information and
certain estimates and assumptions related to the accounting for the FTI
acquisition that is subject to final determination. The unaudited pro forma
information is not necessarily indicative of the results that would have
occurred had the FTI acquisition actually taken place on September 1, 1997, nor
does such information purport to project the results of operations for any
future date or period.

In May 1996, the Company signed a letter of intent to acquire Abilene,
Texas, based G&L Fishing Tool Company (G&L). In July 1996, the Company entered
into an agreement with G&L which gave the Company a one-year option to acquire
G&L under the same terms as the letter of intent. In connection with this
agreement, the Company paid to G&L a $1,000 forfeitable deposit. At August 31,
1996, approximately $1,172 related to this pending acquisition, including the
forfeitable deposit, was included in deferred and other assets on the Company's
consolidated balance sheet. In July 1997, the Company had not acquired G&L and
the option expired, requiring the Company to write-off $1,172 as an expense.

F-24
<PAGE> 44
PONDER INDUSTRIES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

16. GEOGRAPHIC INFORMATION:

Information by geographic location for 1998, 1997 and 1996 is shown below.
As discussed in Note 3, the Company's former operations in Azerbaijan are shown
as discontinued operations in the consolidated financial statements:

<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
---------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Net sales --
Domestic.............................................. $15,822 $16,598 $10,857
Foreign............................................... 5,031 5,277 1,104
------- ------- -------
Total......................................... $20,853 $21,875 $11,961
======= ======= =======
Income (loss) from continuing operations --
Domestic.............................................. $(4,729) $(9,584) $(5,123)
Foreign............................................... 197 (337) (147)
------- ------- -------
Total......................................... $(4,532) $(9,921) $(5,270)
======= ======= =======
Identifiable assets --
Domestic.............................................. $26,027 $17,585 $21,552
Foreign............................................... 10,005 9,032 6,350
------- ------- -------
Total......................................... $36,032 $26,617 $27,902
======= ======= =======
</TABLE>

The Company's foreign operations relate to Panther and Villain as discussed
in Note 15.

17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):

The results of operations by quarter for the fiscal years ended August 31,
1998 and 1997, were as follows:

<TABLE>
<CAPTION>
NET GROSS NET BASIC AND DILUTED
SALES PROFIT LOSS LOSS PER SHARE
------- ------- ------- -----------------
<S> <C> <C> <C> <C>
1998 -- quarter ended --
November 30........................... $ 5,101 $ 3,260 $ (424) $ (.08)
February 28........................... 4,976 2,924 (961) (.14)
May 31................................ 5,572 3,086 (1,313) (.14)
August 31............................. 5,204 3,277 (1,834) (.24)
------- ------- -------
Total......................... $20,853 $12,547 $(4,532)
======= ======= =======
1997 -- quarter ended --
November 30........................... $ 5,141 $ 2,898 $ (882) $ (.36)
February 28........................... 5,248 2,930 (2,053) (.83)
May 31................................ 5,614 3,233 (2,111) (.79)
August 31............................. 5,872 3,141 (4,875) (1.46)
------- ------- -------
Total......................... $21,875 $12,202 $(9,921)
======= ======= =======
</TABLE>

During the fourth quarter of 1998, the Company recognized a loss of $93
related to the impairment of certain of its U.K. tangible fixed assets and an
additional $200 related to a write-down of property not in service. During the
second quarter of 1997, the Company recognized $265 in general and
administrative costs in connection with a court ordered judgment in a lawsuit
brought by a former employee as discussed in Note 13. During the third quarter
of 1997, an expense of $150 was recognized relating to an increase in the
allowance for doubtful accounts. The Company recognized $450 in compensation
expense in the third quarter

F-25
<PAGE> 45
PONDER INDUSTRIES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

of 1997 related to acceleration of deferred compensation and other matters with
a former office as described in Note 6. The Company realized a loss on
disposition of assets sold at auction of $274 in the fourth quarter of 1997 as
discussed in Note 4. During the fourth quarter of 1997, the Company recognized a
loss of $446 related to its investment in a joint venture and an additional $260
related to a write-down of property not in service. Additionally, the Company
recognized approximately $100 in general and administrative expense in the 1997
fourth quarter related to a settlement with the Company's convertible debenture
holders as discussed in Note 7 and a loss of $300 on the return of Titan stock
as discussed in Note 3. As discussed in Note 15, the Company recognized a loss
of $1,172 in the fourth quarter of 1997 as a result of the write-off of a
forfeitable deposit and other assets relating to a proposed acquisition. In the
fourth quarter of 1997, approximately $751 was recognized as an expense relating
to the write-off of receivables and an increase in the allowance for doubtful
accounts.

18. SUBSEQUENT EVENTS:

On November 11, 1998, the Company's stockholders approved a one-for-five
reverse common stock split. On November 13, 1998, the Company filed appropriate
documentation with the Delaware Secretary of State affecting such common stock
split. Accordingly, all common stock and share information has been adjusted to
reflect the reverse stock split. The authorized capital stock and par value of
the Company (10,000,000 shares of preferred stock, $.01 par value, and
150,000,000 shares of common stock, $.01 par value) was not reduced or otherwise
affected by the reverse stock split.

On November 17, 1998, the due date on the Company's $500 short-term
promissory note with KBK (Note 6) was extended to December 24, 1998.

F-26

<PAGE> 1

EXHIBIT 3.1(i)

CERTIFICATE OF INCORPORATION
OF
G.D.E. SEARCH CORPORATION

A STOCK CORPORATION

FIRST: The name of this Corporation is G.D.E. Search Corporation.

SECOND: Its Registered Office in the state of Delaware is to be
located at 3422 Old Capitol Trail, Suite 700, in the City of Wilmington,
County of New Castle, Zip Code 19808-6192. The Registered Agent in charge
thereof DELAWARE BUSINESS INCORPORATORS, INC., located at same address, as
above.

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

FOURTH: The amount of the total authorized capital stock of this
corporation is 50,000,000 shares of $.0001 par value.

FIFTH: The name and mailing address of the incorporator are as
follows:

NAME Lori M. Smith
MAILING ADDRESS 3422 Old Capitol Trail, Suite 700
Wilmington, Delaware ZIP CODE 19808-6192

SIXTH: The powers of the incorporator are to terminate upon the filing
of the certificate of incorporation. The name and mailing address of the
person who is to serve as director until the first annual meeting of the
shareholders or until their successors are duly elected and qualify is as
follows:

NAME Arthur A. Graves, III
MAILING ADDRESS 701 S. Parker Street, Suite 7300
Orange, California ZIP CODE 92668

THE UNDERSIGNED, for the purpose of forming a corporation under the laws of the
State of Delaware, make, file and record this Certificate, and do certify that
the facts herein stated are true, and have accordingly hereunto set my hand this
31st day of January, A.D. 1989.

/S/ LORI M. SMITH
<PAGE> 2

CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION

IT IS HEREBY CERTIFIED THAT:

The name of the corporation is G.D.E. SEARCH CORPORATION (the
"Corporation").

1. The applicable section amended by this Certificate of Amendment of
Certificate of Incorporation presently reads as follows:

"FOURTH: The amount of the total authorized capital stock of this
corporation is 50,000,000 shares of $.0001 par value."

The Company's Amended Certificate of Incorporation shall be amended to read
as follows:

"FOURTH: The amount of the total authorized capital stock of this
corporation is 50,000,000 shares of $.00001 par value."

2. The applicable section amended by this Certificate of Amendment of
Certificate of Incorporation presently reads as follows:

"SIXTH: The powers of the incorporator are to terminate upon the
filing of the Certificate of Incorporation. The name and mailing address of
the person who is to serve as director until the first annual meeting of
the shareholders or until their successors are duly elected and qualify is
as follows:

<TABLE>
<S> <C>
Name: Arthur A. Graves, III
Address: 701 S. Parker Street, Suite 7300
Orange, CA 92668"
</TABLE>

The Corporation's Amended Certificate of Incorporation shall be amended to
read as follows:

"SIXTH: The powers of the incorporator terminate upon the filing of
the Certificate of Incorporation. The name and mailing address of the
Chairman of the Board is as follows:

<TABLE>
<S> <C>
Name: Robert P. Jackson
Address: 4200 South Hulen Street
Suite 536
Fort Worth, Texas 76109"
</TABLE>

3. That pursuant to resolution of its Board of Directors, a special meeting
of the stockholders of said corporation was duly called and held, upon notice in
accordance with Section 222 of the General Corporation Law of the State of
Delaware at which meeting the necessary number of shares as required by statute
were voted in favor of the amendments.

4. That said amendments were duly adopted in accordance with the provisions
of Section 242 of the General Corporation Law of the State of Delaware.

IN WITNESS WHEREOF, said G.D.E. SEARCH CORPORATION has caused its corporate
seal to be hereunto affixed and this Certificate to be signed by Robert P.
Jackson, its President and G. Don Edwards, its Secretary, this 21st day of
March, 1989.

/S/ ROBERT P. JACKSON
------------------------------------
Robert P. Jackson

ATTEST:

/S/ G. DON EDWARDS
------------------------------------
G. Don Edwards
<PAGE> 3

CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF INCORPORATION
OF
G.D.E. SEARCH CORPORATION

Pursuant to the provisions of Section 242 of the Delaware General
Corporation Law, the undersigned corporation hereby certifies the adoption of
the following Certificate of Amendment to its Certificate of Incorporation.

FIRST: The name of the corporation is G.D.E. SEARCH CORPORATION.

SECOND: The following amendments of the Articles of Incorporation were duly
adopted in the manner prescribed by Section 242 of the Delaware General
Corporation Law with written consent of the stockholders given in accordance
with Section 228 of the Delaware General Corporation Law:

Article FIRST of the Certificate of Incorporation is hereby amended to
read as follows:

FIRST: The name of the Corporation is PONDER INDUSTRIES, INC.

Article FOURTH of the Certificate of Incorporation is hereby amended
to read as follows:

FOURTH: The total number of shares of stock which this Corporation
shall have the authority to issue shall be 50,000,000
shares of common stock of the par value of $.01 per share.

Each four shares of the Corporation's common stock, $.00001
par value per share, outstanding and to be outstanding
pursuant to this Corporation's Stock Bonus Plan, shall be
and they are hereby automatically changed (without any
further act) into one share of common stock, $.01 par value
per share, provided that no fractional shares shall be
issued. Fractional share interests of .5 or more shall be
rounded to the next full share and fractional share
interests of less than .5 shall be eliminated. Immediately
after the effective date of this amendment, the
stockholders of record as of the close of business on the
effective date shall be given notice to surrender their
certificates of shares of common stock, $.00001 par value,
to the Corporation for cancellation and reissue in
accordance with the terms of the foregoing.

G.D.E. SEARCH CORPORATION

By: /S/ ROBERT P. JACKSON
----------------------------------
Robert P. Jackson

ATTEST:

/S/ C. DIANE WELLS
------------------------------------
C. Diane Wells
Secretary

Dated: January 26, 1990
<PAGE> 4

CERTIFICATE OF MERGER
OF
PONDER INDUSTRIES, INC.
INTO PONDER INDUSTRIES, INC.

Under Section 252 of the General Corporation Law of the State of Delaware,
Ponder Industries, Inc. hereby certifies that:

1. The name and state of incorporation of each of the constituent
corporations are:

a. Ponder Industries, Inc., a Texas corporation.

b. Ponder Industries, Inc., a Delaware corporation.

2. An Agreement and Plan of Merger has been approved, adopted,
certified, executed and acknowledged by each of the constituent
corporations in accordance with the provisions of subsection (c) of Section
252 of the General Corporation Law of the State of Delaware.

3. The name of the surviving corporation is Ponder Industries, Inc., a
Delaware corporation.

4. The executed Agreement and Plan of Merger is on file at the
principal place of business of the surviving corporation at 5005 Riverway
Drive, Suite 550, Houston, Texas 77056.

5. A copy of the Agreement and Plan of Merger will be furnished by the
surviving corporation on request and without cost, to any stockholder of
Ponder Industries, Inc., a Texas corporation or Ponder Industries, Inc., a
Delaware corporation.

6. The authorized capital stock of the non-surviving corporation,
which is incorporated under the laws of the State of Texas, is 4,200,000
shares of common stock, no par value.

7. The Certificate of Incorporation of Ponder Industries, Inc. shall
be its Certificate of Incorporation.

IN WITNESS WHEREOF, Ponder Industries, Inc. has caused this certificate to
be signed by its President, and attested by its Secretary, on the 2nd day of
December, 1997, to be effective October 12, 1990.

PONDER INDUSTRIES, INC.

By: /S/ EUGENE L. BUTLER
----------------------------------
Eugene L. Butler
President, Chief Executive Officer
and Chairman of the Board

ATTEST:

By: /S/ DEBORAH S. HUDGEONS
----------------------------------
Name: Deborah S. Hudgeons
Title: Office Manager
<PAGE> 5

CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
PONDER INDUSTRIES, INC.

The undersigned, Ponder Industries, Inc., a Delaware corporation (the
"Corporation"), for the purpose of amending the Certificate of Incorporation of
the Corporation, in accordance with the General Corporation Law of the State of
Delaware, does hereby make and execute this Certificate of Amendment of
Certificate of Incorporation and does hereby certify that:

FIRST: The following resolutions proposed by the Board of Directors
and adopted by the stockholders of the Corporation set forth the amendments
adopted:

RESOLVED, that the Certificate of Incorporation of the Company be
amended by deleting all of the present Article Fourth and inserting in
lieu thereof the following Article Fourth:

FOURTH. The total number of shares of stock which the
Corporation shall have authority to issue is 160,000,000 shares, of
which 150,000,000 shares shall be common stock, $.01 par value per
share, and 10,000,000 shares shall be preferred stock, $.01 par value
per share. The designations, rights, preferences, privileges and
voting powers of the preferred stock, and any restrictions and
qualifications thereof, shall be determined by the Board of
Directors.

RESOLVED, that the Certificate of Incorporation of the Company be
amended by deleting all of the present Article Sixth and inserting in
lieu thereof the following Article Sixth:

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

SECOND: Such amendments were duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State
of Delaware, as amended.

IN WITNESS WHEREOF, this Certificate of Amendment has been executed on
behalf of the Corporation by its President on this 21st day of May 1998.

PONDER INDUSTRIES, INC.

By: /S/ EUGENE L. BUTLER
----------------------------------
Eugene L. Butler,
President

<PAGE> 1

EXHIBIT 11

PONDER INDUSTRIES, INC., AND SUBSIDIARIES

COMPUTATION OF EARNINGS (LOSS) PER SHARE

<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31
----------------------------------------
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<S> <C> <C> <C>
COMPUTATION OF BASIC LOSS PER SHARE:
Net loss........................................... $ (4,532) $ (9,921) $ (3,892)
========== ========== ==========
WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK
OUTSTANDING........................................ 7,514,309 2,728,312 1,743,582
========== ========== ==========
BASIC LOSS PER COMMON SHARE.......................... $ (.60) $ (3.64) $ (2.23)
========== ========== ==========
COMPUTATION OF DILUTED LOSS PER SHARE:
Net loss........................................... $ (4,532) $ (9,921) $ (3,892)
Interest not incurred upon assumed conversion of
Senior Notes.................................... 48 -- --
Interest not incurred upon assumed conversion of
convertible debentures.......................... -- 422 254
---------- ---------- ----------
Net loss available to common stockholders used for
computation..................................... $ (4,484) $ (9,499) $ (3,638)
========== ========== ==========
Weighted average number of shares of common stock
outstanding..................................... 7,514,309 2,728,312 1,743,582
Weighted average incremental shares outstanding
upon assumed conversion of options.............. 547,934 2,548 6,117
Weighted average incremental shares outstanding
upon assumed conversion of Senior Notes......... 232,500 -- --
Weighted average incremental shares outstanding
upon assumed conversion of convertible
debentures...................................... -- 1,921,832 558,101
---------- ---------- ----------
WEIGHTED AVERAGE COMMON SHARES AND COMMON SHARE
EQUIVALENTS USED FOR COMPUTATION................... 8,294,743 4,652,692 2,307,800
========== ========== ==========
DILUTED LOSS PER COMMON SHARE AND COMMON SHARE
EQUIVALENT......................................... $ (.54)(a) $ (2.04)(a) $ (1.58)(a)
========== ========== ==========
</TABLE>

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

(a) This calculation is submitted in accordance with Item 601(b)(11) of
Regulation S-K although it is not required by SFAS No. 128 because it is
antidilutive.

<PAGE> 1

EXHIBIT 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K into the Company's previously filed
Registration Statements on Form S-8 (SEC File No. 33-48270 and SEC File No.
33-33190) and Form S-3 (SEC File No. 333-41971).

/S/ ARTHUR ANDERSEN LLP

San Antonio, Texas
November 24, 1998

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PONDER
INDUSTRIES, INC.'S CONSOLIDATED BALANCE SHEET AS OF AUGUST 31, 1998, AND ITS
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR THEN ENDED AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-END> AUG-31-1998
<CASH> 149
<SECURITIES> 560
<RECEIVABLES> 5,352
<ALLOWANCES> 680
<INVENTORY> 4,435
<CURRENT-ASSETS> 9,991
<PP&E> 40,992
<DEPRECIATION> 16,656
<TOTAL-ASSETS> 36,032
<CURRENT-LIABILITIES> 15,155
<BONDS> 456
0
0
<COMMON> 93
<OTHER-SE> 19,411
<TOTAL-LIABILITY-AND-EQUITY> 36,032
<SALES> 20,853
<TOTAL-REVENUES> 20,853
<CGS> 8,306
<TOTAL-COSTS> 8,306
<OTHER-EXPENSES> 14,964
<LOSS-PROVISION> 293
<INTEREST-EXPENSE> 1,766
<INCOME-PRETAX> (4,532)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,532)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,532)
<EPS-PRIMARY> (.60)
<EPS-DILUTED> (.60)

</TABLE>