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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 December 31, 1996
 
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
   EXCHANGE ACT OF 1934
 
  For the transition period from                      to
 
Commission File No. 0-20689
 
                           DRILEX INTERNATIONAL INC.
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
              DELAWARE                                 76-0438889
   (STATE OR OTHER JURISDICTION OF        (I.R.S. EMPLOYER IDENTIFICATION NO.)
   INCORPORATION OR ORGANIZATION)
 
 
          15151 SOMMERMEYER
           HOUSTON, TEXAS                                 77041
   (ADDRESS OF PRINCIPAL EXECUTIVE                     (ZIP CODE)
              OFFICES)
 
                                (713) 937-8888
             (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
 
       SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
 
                              TITLE OF EACH CLASS
                    Common Stock, par value $.01 per share
 
  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 such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
 
  Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
 
  As of February 27, 1997, there were 6,663,356 shares of Drilex International
Inc. Common Stock, $.01 par value, issued and outstanding, 2,450,264 of which,
having an aggregate market value of $27,718,612, were held by non-affiliates
of the Registrant.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
  Portions of the Proxy Statement related to the Registrant's 1997 Annual
Stockholders Meeting are incorporated by reference in Items 10, 11, 12 and 13
of Part III of this report.
 
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<PAGE>
 
                               TABLE OF CONTENTS
 
<TABLE>
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                                                                            PAGE
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 <C>      <S>                                                               <C>
 PART I
 Item 1.  Business.......................................................     1
 Item 2.  Properties.....................................................     9
 Item 3.  Legal Proceedings..............................................     9
 Item 4.  Submission of Matters to a Vote of Security Holders............     9
          Executive Officers of the Registrant...........................    10
 PART II
 Item 5.  Market for Registrant's Common Equity and Related Stockholder
           Matters.......................................................    11
 Item 6.  Selected Financial Data........................................    12
 Item 7.  Management's Discussion and Analysis of Financial Condition and
           Results of Operations.........................................    13
 Item 8.  Financial Statements and Supplementary Data....................    19
 Item 9.  Changes in and Disagreements with Accountants on Accounting and
           Financial Disclosure..........................................    38
 PART III
 Item 10. Directors and Executive Officers of Registrant.................    38
 Item 11. Executive Compensation.........................................    38
 Item 12. Security Ownership of Certain Beneficial Owners and Management.    38
 Item 13. Certain Relationships and Related Transactions.................    38
 PART IV
 Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-
           K.............................................................    38
</TABLE>
 
                                    * * * *
 
  The statements regarding the industry outlook, the Company's expectations
regarding growth in the precision drilling segment, the Company's expectations
regarding the future performance of its businesses, and other statements which
are not historical facts contained in this report are forward-looking
statements. The words "expect," "project," "estimate," "predict" and similar
expressions are also intended to identify forward-looking statements. Such
statements are subject to numerous risks and uncertainties, including but not
limited to the uncertainties relating to the exploration and development
decisions to be made in the future by oil and gas exploration and development
companies, market factors, market prices of natural gas and oil, future
operations and costs, unanticipated technological changes and other factors
detailed herein and in the Company's other Securities and Exchange Commission
filings. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual outcomes may vary
materially from those indicated.
<PAGE>
 
                                    PART I
 
ITEM 1. BUSINESS.
 
GENERAL
 
  Drilex International Inc. ("Drilex" or the "Company") is a leading provider
of products and services used in directional, horizontal and other precision
drilling of oil and gas wells, oilfield workover operations, environmental
remediation applications, and trenchless pipeline and cable laying
applications. The Company's products and services include comprehensive
computerized well planning and engineering services, supervision of drilling
operations and project management, a full range of high performance downhole
positive displacement motor systems, guidance systems (such as measurement-
while-drilling (MWD) instrument systems and steering tools), and other related
downhole tools. Drilex was one of the pioneers in the development of downhole
drilling motors in the early 1980s and is now a leader in the design and
manufacture of high-performance, multi-lobed positive displacement drilling
motors. The Company employs its drilling motors in its own service operations
and also provides motors for sale or rent under the internationally recognized
"Drilex" brand name to oil and gas exploration and development companies and
oilfield service contractors. The Company currently operates from 19 locations
around the world and has approximately 380 employees. In addition, the Company
has a number of agencies around the world which are all authorized by the
Company for sales and service. Oilfield applications accounted for
approximately 84% of the Company's revenues in 1996.
 
  The Company's predecessor, Drilex Systems, Inc. ("DSI"), was formed in
Scotland in 1981 and was subsequently acquired by MascoTech, Inc.
("MascoTech") in 1984. In March 1994, DRLX Partners, L.P. and John Forrest (a
founder of DSI and the current President and Chief Executive Officer of the
Company) purchased DSI from MascoTech following MascoTech's decision to exit
the oilfield services business (the "DSI Acquisition"). On September 30, 1994,
the Company acquired substantially all of the fixed assets of Cobb Directional
Drilling Company, Inc. and its affiliate, Posi-Trak Mud Motors, Inc. (the
"Cobb Acquisition"), an independent directional drilling contractor and
provider of drilling motors for the U.S. Gulf of Mexico region. On May 5,
1995, the Company acquired the stock of Sharewell, Inc. (the "Sharewell
Acquisition"), a leading provider of guidance services and equipment to the
trenchless drilling market worldwide and a significant supplier of guidance
and survey instruments to the oilfield precision drilling industry. On
September 30, 1995, the Company acquired substantially all of the net assets
of ENSCO Technology Company (the "ENSCO Technology Acquisition"), a wholly
owned subsidiary of ENSCO International Incorporated. ENSCO Technology Company
was an independent provider of precision drilling services, with special
emphasis on horizontal drilling and was among the largest precision drilling
service companies in the Austin Chalk formation. The Company completed the
initial public offering (the "Offering") of its common stock, par value $.01
per share (the "Common Stock"), in July 1996. During the third and fourth
quarters of 1996, the Company substantially completed the consolidation of
facilities and operations in Texas, Louisiana and the United Kingdom. During
1996, the Company also substantially completed the combination of its guidance
instrumentation support services into a single Houston facility which is
expected to reduce costs, enhance guidance instrument performance and improve
service delivery.
 
  Unless the context otherwise requires, references herein to the "Company" or
"Drilex" refer to Drilex International Inc. and its consolidated subsidiaries
viewed as a single entity and include its predecessors. The Company's
principal executive offices are located at 15151 Sommermeyer, Houston, Texas
77041, and its telephone number at such address is (713) 937-8888.
 
BUSINESS STRATEGY
 
  The Company's business strategy is built upon Drilex's premier line of
downhole positive displacement drilling motors and emphasizes (i) providing
the highest quality oilfield precision drilling and related customer support
services in key geographic markets where demand for precision drilling
services is concentrated, (ii) maximizing delivery of its core products,
either through sales, rentals or alliance arrangements, into other geographic
markets where the Company does not focus its service efforts, and (iii)
capitalizing on its technical strengths by developing opportunities to deliver
its core products and services into emerging oilfield and
 
                                       1
<PAGE>
 
nonoilfield markets where the Company's technical expertise can provide
significant advantages. The Company also intends to explore additional
opportunities for external growth through acquisitions of businesses to
complement the Company's existing operations.
 
  Drilex intends to continue its emphasis on delivering responsive, reliable
and high quality oilfield precision drilling services in key geographic
markets. The Company currently operates both onshore and offshore and
concentrates its activities in the United States (Texas, Louisiana, Mid
Continent, Rocky Mountains, California and Alaska), Venezuela, the European
Continental Shelf, Canada and the Far East. Each of these markets is
characterized by substantial oilfield development activity (as opposed to new
exploration activity) and a relatively high number of technically challenging
situations that require high quality precision drilling operations. The
Company concentrates its service activities in its key geographic markets in
order to develop and capitalize on the Company's local knowledge and to take
advantage of the regional experience and expertise of its drilling supervisors
and other technical field personnel, as well as to achieve scale operating
efficiencies. Furthermore, the high level of activity conducted by the Company
in concentrated geographic areas permits a focused application engineering
effort, which allows the Company to refine its products and services to meet
the needs of its customers on a more effective basis.
 
  The Company also utilizes other distribution channels to maximize delivery
of its products to areas outside of its key geographic markets. Since its
inception, the Company has successfully marketed its drilling motors on a sale
and rental basis to oil and gas exploration and development companies and
other oilfield service contractors. The Company intends to continue
strengthening its existing distribution channels and to expand its product
distribution in those markets where the Company is not a significant service
competitor. In particular, the Company is seeking to establish alliance
arrangements with several large oilfield service companies, which would permit
these companies to include Drilex motors in their comprehensive offerings of
oilfield products and services in certain markets. These alliances do not, in
general, constitute long-term purchase commitments by the other party.
 
  The Company plans to continue to build upon its technical drilling
capabilities by further developing opportunities in emerging markets where the
Company's expertise can provide competitive advantages. In particular, the
Company believes that the development and rapid growth in the use of coiled
tubing for oilfield workover, redrilling and recompletion operations has
provided a significant opportunity for growth in the use of precision drilling
technology for slim-hole applications. The Company has become a leading
supplier of smaller diameter drilling motors and related equipment for coiled
tubing operations and intends to maintain this leadership position as coiled
tubing operations increasingly become a substitute for conventional drilling
operations. Drilex has also been successful in developing opportunities for
precision drilling in the environmental remediation and trenchless services
markets, which the Company believes offer significant opportunities for
growth.
 
  The Company continually reviews opportunities for growth through the
acquisition of other businesses to complement its existing operations. Since
the DSI Acquisition, the Company has expanded its presence in certain of its
key geographic markets for oilfield precision drilling services and obtained
additional opportunities to expand its distribution of Drilex-manufactured
motors to replace third-party motors. In addition, the Company's MWD/Guidance
equipment fleet has been substantially expanded. The Company will continue to
explore opportunities involving acquisitions of other businesses to expand
distribution of the Company's products and services, to add key technologies,
to gain access to attractive industry niches, and to otherwise enhance its
market presence.
 
                                       2
<PAGE>
 
PRODUCTS AND SERVICES
 
 OILFIELD PRECISION DRILLING APPLICATIONS
 
  Precision Drilling Services. The Company provides comprehensive precision
drilling services for oil and gas drilling and workover applications,
including computerized well planning, on-site drilling supervision,
maintenance and support, and post-well analysis. In many oilfield
applications, precision drilling techniques offer significant economic
advantages over conventional vertical drilling techniques, such as reduced
drilling time and expense, increased well production and enhanced reservoir
recovery. The high torque, speed and performance offered by current-generation
downhole drilling motors permit the use of precision drilling techniques as a
practical alternative to conventional drilling even for vertically drilled
wells. Customers for oilfield precision drilling services are concentrated
primarily among major and large independent oil and gas companies. Because of
the complexity involved in precision drilling, these customers typically rely
on specialized precision drilling service contractors to manage the entire
process of drilling the horizontal or directional portion of a well. Precision
drilling services require high performance drilling motors, sophisticated
guidance systems and analytical tools, and an experienced staff of wellsite
and technical support personnel. The Company's drilling motors operate in
conjunction with various guidance systems (including MWD instrument systems
and steering tools) provided by the Company or other oilfield service
companies. While the Company has its own line of steering instruments, which
it assembles from sub-assemblies obtained from various third parties, Drilex
currently obtains all its MWD instrument systems from two third-party
manufacturers. See "--Dependence on Certain Third-Party Suppliers."
 
  Drilex has applied its technical drilling expertise to the development of
services for slim-hole production service, workover applications, coiled
tubing systems and "extended-reach" drilling. Production services typically
involve running small-diameter (3 1/2 inches or less) drilling motors on
either coiled tubing or workover strings for remedial work in existing wells,
for cleaning, deepening and recompleting a well or drilling a sidetrack well.
Workover applications involving the Company's services frequently entail re-
entering a well and replacing its existing completion with horizontal drain
holes to increase the well's product performance and extend the life of the
well. Other workover services provided by the Company include drilling out
cement and removing fill, scale or heavy wax; cleaning production tubing and
casing; milling casings, packers, junk and plugs; fishing; and well deepening.
Coiled tubing systems require specialized services, which utilize small
diameter drilling motors to develop mechanical power downhole. With the power
generated by the downhole drilling motor, coiled tubing systems can be used
for a variety of drilling operations, including conventional open-hole
drilling, coring, under-reaming, well deepening, medium-radius drilling,
horizontal drilling, setting whipstocks and milling. Extended-reach
development projects typically involve the drilling of numerous wells from a
single, stationary drilling location. This technology can provide substantial
reductions in capital requirements for development drilling, particularly in
offshore locations.
 
  Precision Drilling Products. Drilex was one of the pioneers in the
development of downhole drilling motors in the early 1980s and is now a
worldwide leader in the design and manufacture of high-performance, multi-
lobed positive displacement drilling motors. Drilex was the first manufacturer
to produce a high-torque downhole motor designed to drive a rock bit at its
optimal (relatively low) speed, thereby increasing the life of the bit and
reducing the risk of the bit breaking apart in the wellbore. Through its
manufacturing operations, Drilex is able to maintain close control over the
performance and quality characteristics and pricing of the drilling motors
used in its service operations. The Company's drilling motors have the ability
to generate power from a wide range of drilling fluids (both oil-based and
water-based fluids and compressed air) and to operate at both high and low
speeds.
 
  Downhole positive displacement drilling motors consist of four basic
elements: the power section, the transmission section, the output shaft
assembly and the motor casing. The Company's positive displacement motors
utilize a multi-lobed power section consisting of a rotor/stator combination
that is attached directly to the drillstring and is driven by drilling fluid
pumped down the drillstring to turn the drill bit. The power section operates
without lubrication (other than from the drilling fluid itself) and is
designed to withstand the highly abrasive drilling fluids being passed through
it. The stator and rotor comprising the power section act together as
 
                                       3
<PAGE>
 
a system of gears--one inside the other. The outer gear (the stator) consists
of a molded elastomer with at least three gears (or lobes), and is enclosed by
a metal tube. Positioned inside the stator is an internal gear called the
rotor, which is made of steel and has one fewer lobe than the stator. The
difference between the rotor/stator lobe configuration creates a spiral series
of gaps, which, during drilling operations, are filled with drilling fluid.
Under pressure, the fluid within this spiral acts as a wedge. Hydraulic force
applied to the top of the wedge applies a force on the rotor. Due to the
helical shape of the rotor, this application of fluid force onto the rotor
causes rotation.
 
  The rotation from the power section is applied to the transmission section,
which is a drive shaft that converts the complex eccentric rotary motion from
inside the power section to transmit high downward thrusts and torque to the
output shaft assembly at varying rotational speeds. The transmission section
can be configured in a variety of forms to meet differing drilling objectives.
The output shaft assembly provides the drive to the drill bit. The complex,
multi-stack ball track bearing design mounted on this element must be able to
tolerate the maximum bit thrust as well as high levels of vibration and the
reactive force of the weight on the bit, which operates in an upward
direction. The motor casing is a precision-manufactured shell that encases the
other elements of the motor. While the motor casings are thin-walled, they are
designed to maximize the structural integrity of the motor.
 
  Drilex has designed its drilling motors to optimize flexibility, power and
reliability. Drilex motors have demonstrated high performance capabilities and
reliability even in arctic locations and in severe downhole environments, both
onshore and offshore, where the motors encounter extremely high temperatures,
hard rock, sour gas, high sand content formations, highly abrasive muds and
environmentally sensitive fluids. The Company's motors are used for a wide
variety of wellbore drilling applications, including initial spudding of
wells, vertical drilling, directional drilling, horizontal drilling, tangent
drilling, under-reaming, casing cutting, coring, conductor drill down and
fishing. In addition, the Company's motors are used in a variety of production
services, workover applications and coiled tubing operations.
 
  Drilex maintains an inventory of drilling motors in sizes ranging from 1
11/16 to 9 1/2 inches in outside diameter, which are capable of drilling holes
in sizes ranging from 6 inches to 36 inches in diameter, depending on the
application. Approximately 31% of the Company's drilling motor inventory is
designed for slim-hole applications, such as workover, redrilling and
recompletion tasks. The Company's slim-hole product line has increased
substantially over the past four years, primarily reflecting the Company's
product development efforts to meet the substantial growth in coiled tubing
operations since 1993. The Company's wide range of drilling motors permits the
selection of the precise combination of size, torque, speed and bearing
configuration to meet the anticipated drilling conditions for a specified
project.
 
  Drilex uses its motors as a service tool, a rental tool and a direct sale
product, although rentals and sales have become a less significant part of the
Company's business in recent years. Motor rental involves renting the
equipment directly to oil and gas companies or oilfield service contractors
for use in the drilling of vertical, horizontal and directional wells. The
Company believes that its wide range of motor types and reputation for high
reliability and service gives it a distinct competitive advantage in the
drilling motor rental market.
 
  The Company's drilling motors operate in conjunction with various guidance
systems (including MWD instrument systems and steering tool systems) provided
by the Company or other oilfield service companies. The Company's drilling
motors are also sometimes operated together with logging-while-drilling
equipment, which the Company does not provide. While the Company has its own
line of steering instruments, which it assembles from sub-assemblies obtained
from various third parties, it obtains its MWD instrument systems from third-
party manufacturers. The Company's MWD instrument systems and steering tools
are modular and readily transportable.
 
                                       4
<PAGE>
 
 ENVIRONMENTAL REMEDIATION AND TRENCHLESS APPLICATIONS
 
  The Company has applied its technical drilling capabilities for use in
shallow well horizontal drilling for environmental remediation applications and
trenchless pipeline and cable installations.
 
  In its environmental remediation operations, Drilex focuses on groundwater
remediation activities. The Company uses its drilling systems to drill
horizontal wellbores beneath contaminated sites, so that extraction and
remediation of the contamination can take place at a much improved rate.
Horizontal drilling provides total cost and performance advantages to
conventional vertical drilling of sampling and treatment wells, primarily
because horizontal drilling requires fewer wells and surface installation
facilities and allows contaminants beneath fixed structures to be reached.
 
  The Company attempts to provide its environmental remediation services in a
manner so as to minimize its handling of materials that may be classified as
hazardous substances or wastes. In addition, the Company generally obtains
indemnity agreements from its environmental remediation services customers
requiring such customers to indemnify the Company against any liability that
may arise from the Company's handling of such materials in the course of
performing a contract for these services. There is no assurance, however, that
such contractual indemnity will, in all instances, be effective or sufficient
to protect the Company from liability for claims arising from its handling of
hazardous materials in connection with its environmental services operations.
 
  Through its Sharewell subsidiary, the Company also provides precision
drilling services and equipment for trenchless pipeline and cable laying
applications, which primarily involve horizontal boring underneath city streets
and structures to enable the "trenchless" delivery of conduits in densely built
areas, as well as subsurface crossings of rivers, streams and other bodies of
water. Sharewell is a leading provider of guidance systems to the trenchless
drilling industry worldwide. Applications for trenchless services include
subsurface installations of fiber optics lines, cable systems and utility
pipelines and wiring.
 
  The Company provides complete horizontal drilling services for environmental
remediation and trenchless services using two specialized mobile slant drilling
rigs that it designed and built. The rigs utilize a closed-loop circulation
system that captures, cleans and recirculates the drilling fluid, eliminating
the need for earthen mud pits at the well site. The rigs are compact, requiring
an area as small as 50 feet x 100 feet for four trailer-mounted rig components.
Surface rotary power and downhole motors may be used to advance the
drillstring. This equipment provides the Company with the capability to drill a
six-inch diameter hole approximately 30 feet below surface and hit a two-feet
in diameter target point 1,500 feet away. During 1996, the Company completed
two significant environmental remediation projects. The Company's environmental
remediation and trenchless services operations accounted for approximately 16%
of the Company's revenues in 1996.
 
CUSTOMERS
 
  The Company's customers for oilfield precision drilling services and products
are concentrated primarily among major and large independent oil and gas
companies, conventional drilling contractors and certain other oilfield service
contractors. Customers for the Company's environmental remediation services
include environmental service contractors, engineering consulting firms,
petrochemical companies, hydrocarbon transportation companies and military and
other governmental organizations. Customers for trenchless services include
telephone and other utilities, as well as general contractors.
 
  For the year ended December 31, 1996, two customers each accounted for
approximately 10% of the Company's revenues. While the Company is not dependent
on any one customer, the loss of one of its significant customers could, at
least on a short-term basis, have an adverse effect on the Company's results of
operations.
 
MARKETING AND SALES
 
  The Company markets and sells its services and products directly through its
sales force and operating managers, utilizing the Company's 12 domestic and 7
international locations. In addition, in certain foreign markets where the
Company does not maintain offices, the Company utilizes sales representatives
and local agents to enhance its marketing and sales efforts. The Company also
places print advertising in trade and technical publications targeted to the
Company's customer base and publishes technical papers, which it presents
 
                                       5
<PAGE>
 
at technical conferences and seminars. The Company is a qualified supplier or
an approved vendor to many oil and gas production companies. The Company's
jobs are generally on a per-well basis, which the Company believes is
representative of current industry practices. The Company does not have a
significant number of long-term service contracts.
 
  The Company's marketing and sales resources are generally focused in the
United States (Texas, Louisiana, Mid Continent, Rocky Mountains, California
and Alaska), Venezuela, the European Continental Shelf, Canada and the Far
East, which comprise the largest segments of the worldwide market for
precision drilling services.
 
  Controlled purchasing from external manufacturing vendors, combined with the
focused scope of the Company's in-house manufacturing function results in a
relatively short manufacturing lead time for production of the Company's
drilling motors; therefore, backlog is generally not significant to the
Company.
 
RELIANCE ON THE OIL AND GAS INDUSTRY
 
  The Company's business is substantially dependent upon the condition of the
oil and gas industry and the industry's willingness to spend capital on
drilling operations. The level of expenditures on such activities is generally
dependent on the prevailing view of future hydrocarbon product prices, which
are affected by the numerous factors affecting the supply and demand for oil
and gas, including worldwide economic activity, interest rates and the cost of
capital, environmental regulation, tax policies, political requirements of
national governments, coordination by the Organization of Petroleum Exporting
Countries ("OPEC"), the cost of producing oil and gas and technological
advances. Oil and gas prices and drilling activity have been characterized by
significant volatility in recent years.
 
RELIANCE ON NEW PRODUCT DEVELOPMENT AND POSSIBLE TECHNOLOGICAL OBSOLESCENCE
 
  The market for the Company's products and services is characterized by
changing technology. As a result, the Company's success is dependent upon its
ability to develop new products and services on a cost-effective basis and to
introduce them into the marketplace in a timely manner. Drilex intends to
continue committing financial resources and effort to the development of new
products and services.
 
PATENTS AND OTHER INTELLECTUAL PROPERTY
 
  The Company currently holds 17 U.S. patents and has one U.S. patent
application pending (and 32 foreign patents covering many of the same
inventions), most of which relate to the Company's positive displacement
drilling motors. Although in the aggregate these patents are important to the
Company, the Company generally depends on technological capabilities,
manufacturing quality control and the application of know-how rather than
patents in the conduct of its business. The Company does benefit from service
and product name brand recognition, principally through its Drilex trademark,
and considers such trademark to be important. In general, the Company will
seek to protect its intellectual property rights in all jurisdictions where
the Company believes the cost of such protection is warranted. There can be no
assurance that the steps taken by the Company to protect its proprietary
rights will be adequate to prevent misappropriation of its intellectual
property rights or independent development by others of competitive products
or services. In addition, the laws of certain foreign countries may not
protect such rights to the same extent as to the laws of the United States.
 
DEPENDENCE ON CERTAIN THIRD-PARTY SUPPLIERS
 
  The Company's two independent suppliers for MWD instrument systems are
essentially the only sources for such equipment available to the Company. The
Company's reliance on these limited sources subjects it to the risks of, among
other things, delays in the receipt of desired quantities of MWD equipment (as
a result of manufacturing delays or other reasons) and increases in prices for
such equipment. The Company also relies on single suppliers for the stator
molding and the thrust bearings used in the manufacture of its downhole
positive displacement motors. While the Company does not anticipate any
difficulties in continuing to obtain product from these single suppliers, the
Company believes that adequate alternative sources are available should the
need arise. Such alternative sources may, however, involve increased costs to
the Company and shipment delays.
 
                                       6
<PAGE>
 
COMPETITION
 
  The industry in which the Company operates is highly competitive. The
Company's ability to compete successfully depends on elements both within and
outside of its control, including successful and timely development of new
products and services, performance and quality, customer service, pricing,
industry trends, and general economic trends. Several of the Company's
competitors are divisions or subsidiaries of companies that are substantially
larger and have greater financial and other resources than the Company.
 
  Competition in the oilfield services market is primarily on the basis of
service quality, experience of personnel and equipment reliability, although
price competition is also a significant factor. The Company believes that, in
selecting from among qualified contractors for a particular precision drilling
service contract, customers also consider, among other things, bidding
responsiveness, the availability and technical capabilities of equipment and
personnel, and the flexibility of equipment to work within the technical
constraints imposed by other aspects of the drilling project (such as drill
bit sizes and types, hydraulics limitations, and differing drilling fluids and
borehole sizes).
 
OPERATIONAL HAZARDS AND INSURANCE
 
  The Company's operations are subject to many hazards inherent in the
drilling and workover of oil and gas wells (including explosions, blow-outs,
reservoir damage, loss of well control, cratering and fires), the occurrence
of which could result in the suspension of drilling operations, damage to or
destruction of equipment and injury or death to field personnel. Damage to the
environment could also result from operations that may involve the Company or
its products. The Company maintains insurance coverage in such amounts and
against such risks as it believes to be in accordance with normal industry
practice, and there can be no assurance that such insurance will be adequate
to cover all losses or liabilities that may be incurred by the Company in its
operations.
 
INTERNATIONAL OPERATIONS
 
  Drilex maintains facilities in five countries and, from time to time,
conducts operations in numerous other countries. The Company's non-U.S.
operations accounted for approximately 28% of the Company's revenues during
the year ended December 31, 1996 (and the Company's operations in Venezuela
accounted for approximately 43% of these foreign-sourced revenues). Certain
information concerning the Company's operations by geographic areas is set
forth in Note 15 to the Consolidated Financial Statements of the Company
included elsewhere herein.
 
  The Company's business outside the United States is subject to various risks
of international operations that are beyond its control, such as instability
of foreign economies and governments, currency fluctuations, overlap of
different tax structures, risks of expropriation, and changes in laws and
policies affecting trade and investment. The Company attempts to limit its
exposure to foreign currency fluctuations by limiting the amount by which its
foreign contracts are denominated in a currency other than U.S. dollars to an
amount generally equal to expenses expected to be incurred in such foreign
currency. The Company has not historically engaged in and does not currently
intend to engage in any significant hedging or currency trading transactions
designed to compensate for adverse currency fluctuations.
 
SEASONALITY
 
  The Company's business is somewhat seasonal, since domestic oil and gas
drilling activities are generally lower in the first and second quarters. In
addition, adverse weather conditions can curtail operations in certain regions
during different parts of the year.
 
EMPLOYEES
 
  As of December 31, 1996, the Company had approximately 380 employees. The
Company's future success will depend, in part, on its ability to continue to
attract, retain and motivate highly qualified technical, marketing,
engineering and management personnel. The Company is not a party to any
collective bargaining agreements and has not experienced any strikes or work
stoppages, and management believes that the Company's employee relations are
good.
 
                                       7
<PAGE>
 
GOVERNMENTAL REGULATION AND ENVIRONMENTAL MATTERS
 
  Many aspects of the Company's operations are affected by political
developments and are subject to both domestic and foreign governmental
regulations, including those relating to oilfield operations, worker safety
and the protection of the environment. In addition, the Company depends on the
demand for its services from the oil and gas industry and, therefore, is
generally affected by changing taxes, price controls and other laws and
regulations relating to the oil and gas industry.
 
  The Company's operations are affected by numerous foreign, federal, state
and local environmental laws and regulations. The technical requirements of
these laws and regulations are becoming increasingly expensive, complex and
stringent. These laws may provide for "strict liability" for damages to
natural resources or threats to public health and safety, rendering a party
liable for the environmental damage without regard to negligence or fault on
the part of such party. Sanctions for noncompliance may include revocation of
permits, corrective action orders, administrative or civil penalties, and
criminal prosecution. Certain environmental laws provide for joint and several
strict liability for remediation of spills and releases of hazardous
substances. In addition, companies may be subject to claims alleging personal
injury or property damage as a result of alleged exposure to hazardous
substances, as well as damage to natural resources. Such laws and regulations
may also expose the Company to liability for the conduct of or conditions
caused by others, or for acts of the Company that were in compliance with all
applicable laws at the time such acts were performed. Compliance with
environmental laws and regulations may require the Company to obtain permits
or other authorizations for certain activities and to comply with various
standards or procedural requirements. The Company believes that its facilities
are in substantial compliance with current regulatory standards.
 
  Capital expenditures for property, plant and equipment for environmental
control facilities during 1996 were not material. Based on the Company's
experience to date, it does not currently anticipate any material adverse
effect on its business or consolidated financial position as a result of
future compliance with existing environmental laws and regulations controlling
the discharge of materials into the environment.
 
                                       8
<PAGE>
 
ITEM 2. PROPERTIES.
 
  The Company's manufacturing and principal sales and service operations are
conducted using the following facilities:
 
<TABLE>
<CAPTION>
                                       FLOOR SPACE
       LOCATION          OWNED/LEASED (SQUARE FEET)          DESCRIPTION
       --------          ------------ -------------          -----------
<S>                      <C>          <C>           <C>
UNITED STATES:
Anchorage, Alaska           Leased          685     Sales and Service
Bakersfield, California     Leased        7,500     Sales and Service
Casper, Wyoming             Leased        9,500     Sales and Service
Denver, Colorado            Leased          200     Sales
Fort Worth, Texas           Leased          200     Sales
Houston, Texas              Leased       53,750     Executive Offices,
                                                    Manufacturing, Engineering,
                                                    Sales and Service
Houston, Texas              Leased       41,366     Sales and Service
Lafayette, Louisiana        Owned        20,000     Sales and Service
New Orleans, Louisiana      Leased        1,055     Sales
Oklahoma City, Oklahoma     Leased       10,500     Sales and Service
Prudhoe Bay, Alaska         Leased          500     Repair and Maintenance
Youngsville, Louisiana      Owned        10,516     Sales and Service
INTERNATIONAL:
Aberdeen, Scotland          Leased       17,523     Sales and Service
Anaco, Venezuela            Leased       10,500     Sales and Service
Calgary, Alberta            Leased          100     Sales
Ciudad Ojeda, Venezuela     Leased       16,666     Sales and Service
Edmonton, Alberta           Leased        6,896     Sales and Service
Maturin, Venezuela          Leased        2,000     Sales
North Freemantle, West      Leased          500     Sales and Service
 Australia
</TABLE>
 
  The foregoing reflects the consolidation of certain facilities in Texas,
which was completed in January 1997.
 
ITEM 3. LEGAL PROCEEDINGS.
 
  The Company is involved from time to time in routine litigation incidental
to its business. Drilex is not currently involved in any legal proceedings
that the Company believes will have a material adverse effect on its financial
condition or results of operations.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
 
  None.
 
                                       9
<PAGE>
 
EXECUTIVE OFFICERS OF THE REGISTRANT
 
  Set forth below is certain information regarding the executive officers of
the Company as of March 31, 1997.
 
<TABLE>
<CAPTION>
            NAME              AGE                     POSITION
            ----              ---                     --------
<S>                           <C> <C>
John Forrest.................  58 President and Chief Executive Officer
G. Bruce Broussard...........  53 Vice President--Finance and Administration and
                                   Secretary
Lee F. Hardin................  49 Vice President--Engineering and Manufacturing
David M. Henry...............  45 Vice President--Business Development
Charles Denton Kerr II.......  41 President--Drilex Energy Services Division of
                                   Drilex Systems, Inc.
</TABLE>
 
  John Forrest has served as President, Chief Executive Officer and a director
of Drilex International Inc. since its acquisition of DSI in March 1994. Mr.
Forrest was a founder of the Company and served as its chief executive officer
from 1981 to March 1994.
 
  G. Bruce Broussard was appointed to his current position in connection with
the DSI Acquisition. Prior thereto, Mr. Broussard served as Controller of DSI
for more than ten years.
 
  Lee F. Hardin was appointed to his current position in October 1995, after
serving as the Company's Director of Engineering and Manufacturing since he
joined the Company in August 1995. Mr. Hardin was a focus factory manager for
the Drilling Systems Business Unit of Halliburton Company from April 1993 to
August 1995. Prior thereto, he served as a manufacturing manager for the
Directional Drilling Business Unit of Smith International, Inc. where he
oversaw the production of MWD equipment and positive displacement motors.
 
  David M. Henry was appointed to his current position in May 1996. Prior to
joining the Company, he served as Global Operations Manager of the Drilling
Systems Business Unit of Halliburton Energy Services from March 1995 to May
1996. Prior thereto, he served in various positions, including Director of
Engineering and Marketing, and Vice President of Operations, for the Drilling
Division of Baker Hughes Incorporated from December 1980 to March 1995.
 
  Charles Denton Kerr II was appointed to his current position in December
1995. Prior thereto, he served as DSI's Vice President--Sales and Operations
from July 1994 to December 1995, Manager, Worldwide Sales and Operations from
August 1991 to July 1994, and Western Hemisphere Manager from August 1989 to
August 1991.
 
                                      10
<PAGE>
 
                                    PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
 
  Since July 3, 1996, the Company's common stock, $.01 par value (the "Common
Stock"), has been traded on the Nasdaq Stock Market under the symbol "DRLX."
As of February 27, 1997, there were 6,663,356 shares of Common Stock
outstanding, held by approximately 22 stockholders of record. The number of
record holders does not bear any relationship to the number of beneficial
owners of the Common Stock.
 
  The following table sets forth the range of high and low sale prices for the
Common Stock on the Nasdaq Stock Market for the periods indicated:
 
<TABLE>
<CAPTION>
                                                                   HIGH   LOW
                                                                  ------ ------
      <S>                                                         <C>    <C>
      Year ending December 31, 1996:
        3rd quarter (July 3 to September 30)..................... $17.00 $12.50
        4th quarter..............................................  18.00 $10.75
</TABLE>
 
  Drilex has not paid dividends on its Common Stock since its inception and
does not anticipate paying dividends on the Common Stock in the foreseeable
future. The Company expects that it will retain funds generated by the
Company's operations for the development and growth of its business. The
Company's future dividend policy will be determined by its Board of Directors
on the basis of various factors, including, among other things, the Company's
financial condition, cash flows from operations, the level of its capital
expenditures, its future business prospects, the requirements of Delaware law,
and any restrictions imposed by the Company's current or future credit
facilities and promissory notes. Provisions contained in the Company's bank
credit facility (the "Credit Facility") currently prohibit the payment of
dividends on the Common Stock. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
 
                                      11
<PAGE>
 
ITEM 6. SELECTED FINANCIAL DATA.
 
  The following table sets forth selected historical financial and other data
for the Company. The information presented as of and for the periods ended
December 31, 1996, 1995 and 1994, March 30, 1994 and December 31, 1993 is
derived from the audited consolidated financial statements of the Company and
its predecessor company, DSI. The information presented as of and for the year
ended December 31, 1992 is derived from the unaudited consolidated financial
statements of DSI. The following information should be read in conjunction
with "Management's Discussion and Analysis of Financial Conditions and Results
of Operation" and the Consolidated Financial Statements of the Company,
including the Notes thereto, included elsewhere herein.
<TABLE>
<CAPTION>
                                  THE COMPANY                  PREDECESSOR COMPANY(C)
                          ---------------------------------- ---------------------------
                                                 MARCH 30,
                                                    1994
                            YEARS ENDED         (INCEPTION)  JANUARY 1,   YEARS ENDED
                           DECEMBER 31,              TO       1994 TO    DECEMBER 31,
                          ------------------    DECEMBER 31, MARCH 30,  ----------------
                           1996      1995(A)      1994(B)       1994     1993     1992
                          -------    -------    ------------ ---------- -------  -------
                                 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                       <C>        <C>        <C>          <C>        <C>      <C>
STATEMENT OF INCOME DATA:
Net revenues............  $76,147    $57,526      $25,209     $ 6,357   $25,871  $24,349
Costs of sales and
 operations.............   45,696     34,606       12,924       3,364    14,093   14,326
Selling, general and
 administrative
 expenses...............   16,945     13,448        6,711       2,029     8,286   10,573
Depreciation and
 amortization...........    6,575(d)   4,492(d)     1,855         775     3,107    2,942
                          -------    -------      -------     -------   -------  -------
Operating income (loss).    6,931      4,980        3,719         189       385   (3,492)
Interest expense........   (2,079)    (1,935)        (478)       (481)   (1,893)  (1,667)
                          -------    -------      -------     -------   -------  -------
Income (loss) before
 income taxes and
 minority interests.....    4,852      3,045        3,241        (292)   (1,508)  (5,159)
Provision for income
 taxes..................   (1,727)    (1,097)      (1,166)         (3)     (152)     (84)
Minority interests......      (83)      (164)         (66)         --        --       --
                          -------    -------      -------     -------   -------  -------
Net income (loss).......  $ 3,042    $ 1,784      $ 2,009     $  (295)  $(1,660) $(5,243)
                          =======    =======      =======     =======   =======  =======
Net income per common
 and common equivalent
 share..................  $   .53    $   .40      $   .57
                          =======    =======      =======
Weighted average common
 and equivalent shares
 outstanding............    5,712      4,411        3,507
                          =======    =======      =======
OTHER DATA:
Capital expenditures....  $ 9,876    $ 5,408      $   707     $   195   $   252  $ 1,364
EBITDA (e)..............   13,506      9,472        5,574         964     3,492     (550)
Summary cash flow
 information:
  Net cash provided by
   (used for) operating
   activities...........      812       (185)         877         663       277   (3,752)
  Net cash used for
   investing activities.   (6,036)   (19,360)     (22,893)       (195)     (252)  (1,364)
  Net cash provided by
   financing activities
   (c)..................    6,957     19,415       22,965          28       503    5,379
BALANCE SHEET DATA:
Working capital.........  $22,164    $13,365      $ 9,511     $10,533   $10,717  $10,581
Total assets............   86,770     77,754       36,292      24,965    26,196   26,793
Long-term debt, less
 current maturities.....   11,883     32,467        7,633          --        --       --
Total stockholders'
 equity (c)(f)..........   57,680     23,682       19,557      22,794    22,990   24,459
</TABLE>
--------
(a) Results for the year are not comparable to prior periods due to the ENSCO
    Technology and Sharewell Acquisitions.
(b) Results for the period are not comparable to prior years due to the Cobb
    Acquisition.
(c) The predecessor company, DSI, was a wholly owned subsidiary of MascoTech
    prior to its acquisition by the Company on March 30, 1994. As a wholly
    owned subsidiary of MascoTech, DSI was allocated interest and other
    expenses by its parent, and had no long-term indebtedness since its
    financing requirements were met through advances from MascoTech. For
    purposes of this presentation, such advances from MascoTech are reflected
    in stockholders' equity. Earnings per share are not presented for periods
    during which DSI was wholly owned by MascoTech.
(d) Effective April 1, 1995, the Company changed its estimated useful life for
    certain drilling motor components from five to seven years. This change
    was made to better reflect the estimated period during which these assets
    will remain in
                                      12
<PAGE>
 
   service. The effect of this change was an increase in net income of
   $248,000, or $.06 per share, for the year ended December 31, 1995, and
   $378,000, or $.07 per share, for the year ended December 31, 1996.
(e) EBITDA means operating income (loss) plus depreciation and amortization
    and is a supplemental financial measurement used by the Company in the
    evaluation of its business. EBITDA is not intended to represent cash flow,
    an alternative to net income or any other measure of performance in
    accordance with generally accepted accounting principles. Reference is
    made to the Consolidated Statement of Cash Flows contained in the
    Consolidated Financial Statements of the Company included elsewhere herein
    for a complete presentation of cash flows from operating, investing and
    financing activities prepared in accordance with generally accepted
    accounting principles.
(f) No cash dividends were declared or paid on Common Stock during any of the
    periods presented.
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
 
  The following discussion should be read in conjunction with the Consolidated
Financial Statements of the Company and related notes thereto and "Selected
Financial Data" appearing elsewhere herein.
 
  The following discussion is intended to assist in understanding the
Company's financial condition and results of operations as of and for each
year in the three-year period ended December 31, 1996. The statements in this
discussion regarding the industry outlook, the Company's expectations
regarding growth in the precision drilling segment, the Company's expectations
regarding the future performance of its businesses, and other statements which
are not historical facts in this discussion are forward-looking statements.
The words "expect," "project," "estimate," "predict" and similar expressions
are also intended to identify forward-looking statements. Such statements are
subject to numerous risks and uncertainties, including but not limited to the
uncertainties relating to the exploration and development decisions to be made
in the future by oil and gas exploration and development companies, market
factors, market prices of natural gas and oil, future operations and costs,
unanticipated technological changes and other factors detailed herein and in
the Company's other Securities and Exchange Commission filings. Should one or
more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual outcomes may vary materially from those
indicated.
 
OVERVIEW
 
  The Company's business is substantially dependent upon the condition of the
oil and gas industry and the willingness of oil and gas companies to spend
capital on drilling and workover operations, which is generally dependent on
the prevailing view of future hydrocarbon product prices. This is particularly
the case in the United States, where the Company generates approximately 72%
of its revenues. Expectations relative to such future prices are affected by
numerous factors affecting the supply and demand for oil and natural gas,
including worldwide economic activity, interest rates and the cost of capital,
environmental regulation, tax policies, political requirements of national
governments, coordination by OPEC, the cost of producing oil and gas, and
technological advances. Oil and gas prices and exploration and development
activity have been characterized by significant volatility in recent years.
 
  Although overall oil and gas drilling activity as measured by the rotary rig
count has declined significantly over the past 15 years, rapid increases in
precision drilling technology, enhanced geological prospecting technologies
(such as 3-D seismic technologies and CAEX techniques), and the demands of
exploration and development companies for more precise and less costly
drilling systems have driven growth in the precision drilling segment of the
oilfield drilling market. Based on industry sources, the number of oil and gas
wells drilled in the United States using precision drilling technology and the
proportion of oil and gas wells drilled in the United States employing
precision drilling technology have each increased significantly over the past
five years.
 
  Drilex anticipates continued growth in the market for precision drilling
services and expects the number of oilfield jobs employing precision drilling
techniques to grow at a higher rate than the number of jobs in the overall
drilling market. Moreover, with respect to jobs employing precision drilling
techniques, the Company expects continued increases in the average number of
feet per well drilled using a downhole drilling motor,
 
                                      13
<PAGE>
 
particularly in slim-hole applications. The Company believes the growth in the
number of precision drilling jobs and the increase in the utilization of
precision drilling technology per job will be driven by the requirements of
exploration and production companies for more precision and cost efficiency in
their drilling operations, as well as the greater acceptance of precision
drilling technology in the drilling industry, which has resulted from
technological advancements, product improvements (which have extended
equipment lives and increased penetration rates), and the expansion of
downhole drilling motor technology to a wide variety of slim-hole
applications. The Company also believes that, over time, the demand for
hydrocarbon products will grow and that exploration and development activity
will increase. The Company expects this increase in activity to be primarily
driven by lower oil and gas company cost structures, technological advances
and the interest of foreign countries in maintaining or expanding their
production.
 
  Drilex International Inc. was organized by DRLX Partners L.P. and John
Forrest (a founder of DSI and the current President and Chief Executive
Officer of the Company) to acquire DSI (also referred to herein as the
"Predecessor") from MascoTech on March 30, 1994. The Company's predecessor was
originally formed in 1981.
 
  Since the DSI Acquisition, the Company has grown substantially through the
expansion of its product and service offerings and acquisitions of
complementary businesses. The Cobb and ENSCO Technology Acquisitions
(completed on September 30, 1994 and 1995, respectively) expanded the
Company's presence in certain of its key geographic markets for oilfield
precision drilling services and provided the Company with significant
opportunities to expand its distribution of Drilex-manufactured motors by
employing them in the newly acquired operations. In addition, the ENSCO
Technology Acquisition significantly expanded the Company's MWD capabilities,
providing the Company additional opportunities to deploy its products and
services. The Sharewell Acquisition (completed on May 5, 1995) also provided
the opportunity to expand the Company's product distribution and significantly
increased the Company's service capabilities in the emerging environmental
remediation and trenchless services markets. During the third and fourth
quarters of 1996, the Company substantially completed the consolidation of
facilities and operations in Texas, Louisiana and the United Kingdom. During
1996, the Company also combined its guidance instrumentation support services
into a single Houston facility which is expected to reduce costs, enhance
guidance instrument performance and improve service delivery.
 
  In July 1996, the Company completed the Offering. The net proceeds to the
Company of $28.3 million were used to repay debt incurred primarily in
connection with the Cobb, Sharewell and ENSCO Technology Acquisitions.
 
  As an important part of its business strategy, the Company will continue to
seek acquisitions of other businesses to expand distribution of the Company's
products and services, to add key technologies, to gain access to industry
niches, and to otherwise enhance its market presence.
 
                                      14
<PAGE>
 
RESULTS OF OPERATIONS
 
  Drilex International Inc. began operations on March 30, 1994, the effective
date of the DSI Acquisition. As a result, for purposes of the following
discussion, the amounts from the consolidated statement of income of Drilex
International Inc. from March 30, 1994 through December 31, 1994 have been
combined with the statement of income for the Predecessor for the three months
ended March 31, 1994 (adjusted to a pro forma basis as if the DSI Acquisition
had occurred as of January 1, 1994). The following discussion presents an
analysis of such combined results for 1994 compared to the results of
operations of Drilex International Inc. for each of 1995 and 1996.
 
<TABLE>
<CAPTION>
                                       YEAR ENDED DECEMBER 31,
                          -----------------------------------------------------
                                1996              1995              1994
                          ----------------- ----------------- -----------------
                                   PERCENT           PERCENT           PERCENT
                                    OF NET            OF NET            OF NET
                          AMOUNT   REVENUES AMOUNT   REVENUES AMOUNT   REVENUES
                          -------  -------- -------  -------- -------  --------
                                        (DOLLARS IN THOUSANDS)
<S>                       <C>      <C>      <C>      <C>      <C>      <C>
Net revenues............. $76,147   100.0%  $57,526   100.0%  $31,566   100.0%
Operating expenses:
  Costs of sales and
   operations............  45,696    60.0    34,606    60.1    16,288    51.6
  Selling, general and
   administrative
   expenses..............  16,945    22.3    13,448    23.4     8,605    27.2
  Depreciation and
   amortization..........   6,575     8.6     4,492     7.8     2,324     7.4
                          -------   -----   -------   -----   -------   -----
Operating income.........   6,931     9.1     4,980     8.7     4,349    13.8
Interest expense.........  (2,079)   (2.7)   (1,935)   (3.4)     (567)   (1.8)
                          -------   -----   -------   -----   -------   -----
Income before income
 taxes and minority
 interests...............   4,852     6.4     3,045     5.3     3,782    12.0
Provision for income
 taxes...................  (1,727)   (2.3)   (1,097)   (1.9)   (1,362)   (4.3)
Minority interests.......     (83)   (0.1)     (164)   (0.3)      (66)   (0.2)
                          -------   -----   -------   -----   -------   -----
Net income............... $ 3,042     4.0%  $ 1,784     3.1%  $ 2,354     7.5%
                          =======   =====   =======   =====   =======   =====
</TABLE>
 
 Comparison of 1996 and 1995
 
  Consolidated revenues for 1996 were $76.1 million, an increase of 32% from
revenues of $57.5 million for the prior year. Of the $18.6 million increase,
$11.8 million was attributable to a full year's activity for the operations
acquired in the ENSCO Technology Acquisition as compared to the inclusion of
only three months of such operations in 1995 (following the September 1995
effective date of the ENSCO Acquisition) and $2.4 million was attributable to
a full year's activity for the operations acquired in the Sharewell
Acquisition as compared to the inclusion of eight months of such operations in
1995 (following the May 1995 effective date of the Sharewell Acquisition). The
remaining increases in revenues resulted from higher drilling service revenues
due primarily to an increase in revenues from operations in Latin America, a
$2 million product sale and associated service work in the Far East in the
third quarter and increased revenues associated with the Company's United
States land operations. These increases in revenue were partially offset by
decreased revenues from the Company's European Continental Shelf and
environmental remediation operations. The 1996 revenues were less than
expected during the third and fourth quarters due to MWD equipment performance
failures in the Austin Chalk, MWD delivery delays in Venezuela, the
consolidation of operations in Louisiana and lower than anticipated equipment
sales in the Far East.
 
  Cost of sales and operations increased from $34.6 million in 1995 to $45.7
million in 1996. As a percent of revenues, cost of sales and operations
decreased slightly from 60.1% in 1995 to 60.0% in 1996. The margins for
operations acquired in the ENSCO Technology and Sharewell Acquisitions have
historically been less than the Company's pre-existing oilfield drilling
services (excluding such acquisitions) due to the sale and use of third-party
equipment by such acquired operations. Lower margins associated with such
operations in 1996 were partially offset by higher margins associated with Far
East sales in the third quarter of 1996. Of the
 
                                      15
<PAGE>
 
$11.1 million increase in cost of sales and operations, $9.2 million was due
to the full year effect of the ENSCO Technology and Sharewell Acquisitions.
The remaining increase of $1.9 million primarily reflects increased expenses
related to higher drilling services revenues and higher engineering expenses
relating to replacement of third-party drilling motors used by the operations
acquired in the ENSCO and Sharewell Acquisitions. In 1995 there was a
nonrecurring $0.6 million charge resulting from a trenchless business unit
operational dispute.
 
  Selling, general and administrative expenses increased from $13.4 million in
1995 to $16.9 million in 1996. As a percent of revenues, selling, general and
administrative expenses decreased from 23.4% in 1995 to 22.3% in 1996. Of the
$3.5 million increase, $3.2 million was due to the full year effect of the
ENSCO Technology and Sharewell Acquisitions. The remaining $0.3 million
increase is attributable to increased expenses associated with becoming a
publicly held company.
 
  Depreciation and amortization increased from $4.5 million in 1995 to $6.6
million in 1996. Of the $2.1 million increase, $1.3 million was due to the
full year effect of the Sharewell and ENSCO Technology Acquisitions. The
remainder of the increase is attributable to increased depreciation resulting
from the capital expenditures in 1996.
 
  Interest expense increased from $1.9 million in 1995 to $2.1 million in
1996, primarily due to the effect of notes issued in connection with the ENSCO
Technology Acquisition and the full year effect of notes issued in connection
with the Sharewell Acquisition. Increases in interest expense were partially
offset by the retirement of debt, including the notes issued in connection
with the ENSCO Technology Acquisition, in connection with the Offering in July
1996.
 
 Comparison of 1995 and 1994
 
  Consolidated revenues for 1995 were $57.5 million, an increase of 82% from
revenues of $31.6 million for the prior year. Of the $25.9 million increase,
$7.9 million was attributable to the Sharewell Acquisition, $5.3 million was
attributable to the ENSCO Technology Acquisition, and $5.2 million resulted
from the effect of a full year's activity for the operations acquired in the
Cobb Acquisition, as compared to the inclusion of only three months of such
operations in 1994 (following the September 1994 effective date of the Cobb
Acquisition). The remaining increase in revenues resulted from an increase in
the Company's drilling services revenues, due primarily to increased
operations in Texas, Europe (including the North Sea) and Eastern Venezuela.
The increase in activity in Texas was a result of increased drilling activity
by several major customers. Increased revenues attributable to the European
markets were due to greater small motor activity, including motor sales to the
Commonwealth of Independent States, and expanded market penetration. Revenues
in Eastern Venezuela more than doubled to $6.2 million from 1994 levels, as
drilling activity significantly expanded in this area.
 
  Costs of sales and operations increased from $16.3 million in 1994 to $34.6
million in 1995. As a percent of revenues, costs of sales and operations
increased from 51.6% in 1994 to 60.1% in 1995. Of the $18.3 million increase,
$12.0 million was due to the ENSCO Technology and Sharewell Acquisitions and
the effect of a full year's activity for the operations acquired in the Cobb
Acquisition. Margins for the operations acquired in the Cobb Acquisition
decreased in 1995 due to increased field expenses, a greater proportion of
lower-margin onshore activity than higher-margin offshore activity compared to
the prior year, and increased costs associated with third-party motor rentals.
Sharewell's margins were adversely affected in 1995 due to a greater
proportion of lower-margin sales of third-party equipment compared to higher-
margin service billings, as compared to the prior year. The margins for the
operations acquired in the ENSCO Technology Acquisition were lower than the
Company's other drilling operations due to low utilization of MWD equipment
and the expenses associated with rentals of third-party motors.
 
  Costs of sales and operations related to the Company's pre-existing oilfield
drilling services (excluding the Sharewell and ENSCO Technology Acquisitions)
were adversely impacted in 1995 by increased engineering and manufacturing
costs of approximately $0.6 million. These increases resulted from costs
incurred in 1995 for development of newly designed small-diameter motors, a
new concept power section for the Company's primary
 
                                      16
<PAGE>
 
line of drilling motors, and equipment for slim-hole reentry drilling and
workover applications. The Company began operations in Western Venezuela in
1995 and incurred $0.3 million in startup expenses for staffing personnel,
freight and duties on imported equipment and facilities. Operations in this
location generated only minimal revenues in 1995. In 1995, the Company's
trenchless business unit absorbed a $0.6 million charge related to an
operational dispute, which was settled in full in May 1996.
 
  Selling, general and administrative expenses increased from $8.6 million in
1994 to $13.4 million in 1995. As a percentage of revenues, selling, general
and administrative expenses decreased from 27.2% in 1994 to 23.4% in 1995. Of
the $4.8 million increase, $3.1 million was due to the ENSCO Technology,
Sharewell and Cobb Acquisitions. Corporate overhead increased $0.8 million due
to additional advertising, marketing and personnel costs associated with the
support of these three acquisitions, in particular the ENSCO Technology
Acquisition because of its size and complexity.
 
  Depreciation and amortization increased from $2.3 million in 1994 to $4.5
million in 1995. This increase was primarily due to the ENSCO Technology,
Sharewell and Cobb Acquisitions, partially offset by a $0.4 million decrease
resulting from an increase in the estimated useful lives for certain drilling
equipment effective April 1, 1995.
 
  Interest expense increased from $0.6 million in 1994 to $1.9 million in 1995
due to an increase in debt to $38.4 million at December 31, 1995.
Substantially all of this increase in debt was due to the ENSCO Technology,
Sharewell and Cobb Acquisitions.
 
LIQUIDITY AND CAPITAL RESOURCES
 
  Prior to the Offering, the Company generally funded its activities (other
than its acquisitions) through cash generated from operations and short-term
borrowings. The cash portion of the purchase price for each of the Cobb,
Sharewell and ENSCO Technology Acquisitions was funded through borrowings
under the Credit Agreement and, in the case of the Cobb and ENSCO Technology
Acquisitions, from the issuance of capital stock.
 
  In July 1996, the Company sold 2,000,000 shares of Common Stock in the
Offering and received net proceeds of $28.3 million. The Company used
approximately $24.7 million of the net proceeds of the Offering to repay all
of the $14.8 million in borrowings under the term loan portion and $9.9
million of the borrowings under the revolving loan portion of its then-current
bank credit facility. The Company used approximately $3.6 million of the
proceeds from the Offering to repay a promissory note issued to ENSCO
Technology in connection with the ENSCO Technology Acquisition.
 
  At December 31, 1996, the Company had working capital of $22.2 million,
compared to working capital of $13.4 million at December 31, 1995 and $9.5
million at December 31, 1994. The increase of $8.8 million from 1995 to 1996
primarily reflects increases in cash and inventory and decreases in current
maturities of long-term debt. Inventories increased due to higher production
in response to increased slim-hole opportunities and the replacement of third-
party motors with Drilex motors in the operations acquired in the ENSCO
Technology Acquisition. The Company's current maturities of debt were lower
due to the repayment of debt from the proceeds of the Offering.
 
  Capital expenditures for 1996 were $9.9 million, as compared to $5.4 million
for the prior year. The 1996 expenditures included $7.3 million for
MWD/guidance equipment (including $3.7 million to replace equipment lost-in-
hole, which amount was primarily paid by customers) and $1.0 million for
machinery and equipment. The Company has budgeted approximately $8.4 million
for capital expenditures (excluding acquisitions and equipment lost-in-hole)
in 1997. Such budgeted expenditures include $6.6 million for MWD/guidance
equipment.
 
  During 1997, the Company expects to fund its working capital, anticipated
capital expenditures and debt maturity requirements primarily through cash
provided by operating activities and borrowings under its Credit
 
                                      17
<PAGE>
 
Facility. The Company carries substantial inventory and accounts receivable,
and will require increased working capital as its revenues grow. The Company
believes that cash flow from operations and its Credit Facility will be
adequate to support its normal working capital and capital expenditures for at
least the next 12 months. However, if 1997 capital expenditures exceed expected
levels or if cash flow from operations for the year is less than anticipated,
the Company may need to seek an increase in its borrowing limit under the
Credit Facility.
 
  In September 1996 the Company entered into the Credit Facility by amending
and restating its prior credit facility. The Credit Facility consists of an
unsecured revolving line of credit which is scheduled to mature on September
30, 1999. The Credit Facility provides for borrowings of up to $15.0 million at
December 31, 1996 (which limit was increased to $20 million in February 1997),
of which up to $3.0 million may be used for letters of credit. As of February
28, 1997, borrowings under the Credit Facility were $16.1 million and $3.7
million was available for borrowings. As of December 31, 1996, $5.9 million was
available for borrowing under the Credit Facility, of which $2.9 million was
available for letters of credit. The Credit Facility bears interest at a rate
per annum, at the Company's election, equal to (i) a Eurodollar or Eurosterling
interbank offered rate plus 3/4% or (ii) the bank's prime rate. The Credit
Facility requires the Company to maintain certain financial covenants
(including a minimum tangible net worth, a minimum fixed charge coverage ratio
and maximum debt to capitalization ratios) and limits additional borrowings of
the Company (other than under the Credit Facility) to no more than $5.0
million. The Credit Facility also places restrictions on the Company's ability
to, among other things, pay dividends, enter into unrelated lines of business,
undertake transactions with affiliates and make investments. For an additional
description of the Credit Facility's terms, see Note 6 to the Consolidated
Financial Statements of the Company included elsewhere herein.
 
  In February 1997, the Company repaid certain notes issued in connection with
the Cobb Acquisition, repurchased the 96,523 shares of Common Stock held by Mr.
Cobb and entered into an amendment to the non-competition provisions of Mr.
Cobb's employment agreement in connection with Mr. Cobb's termination of
employment, resulting in a net payment by the Company of approximately $2.7
million.
 
  The Company intends to continue pursuing attractive acquisition
opportunities. The timing, size or success of any acquisition effort and the
associated potential capital commitments are unpredictable. The Company expects
to fund future acquisitions primarily through a combination of working capital,
cash flow from operations and bank borrowings, including the unborrowed portion
of the Credit Facility, as well as issuances of additional equity.
 
  Due to the relatively low levels of inflation experienced in 1994, 1995 and
1996, inflation did not have a significant effect on the Company's results in
such years.
 
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
 
  In March 1995, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("SFAS 121"). SFAS 121 requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. SFAS 121 is effective for fiscal years beginning after December
15, 1995. The adoption of SFAS 121 in 1996 did not result in a charge to
earnings.
 
  In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123
establishes alternative methods of accounting and disclosure for employee
stock-based compensation arrangements. In adopting SFAS 123 in 1996, the
Company has elected to continue the use of the "intrinsic value based method"
of accounting for its employee stock option plan. This method does not result
in the recognition of compensation expense when employee stock options are
granted if the exercise price of the options equals or exceeds the fair market
value of the stock at the date of grant. See Note 10 to the Consolidated
Financial Statements of the Company included elsewhere herein.
 
                                       18
<PAGE>
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 
                           DRILEX INTERNATIONAL INC.
 
                         INDEX TO FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                                           PAGE
                                                                           ----
<S>                                                                        <C>
DRILEX INTERNATIONAL INC. AND SUBSIDIARIES
  Independent Auditors' Report............................................  20
  Consolidated Balance Sheet as of December 31, 1996 and 1995.............  21
  Consolidated Statement of Income for the Years Ended December 31, 1996
   and 1995 and for the Period from March 30, 1994 (inception) to December
   31, 1994...............................................................  22
  Consolidated Statement of Cash Flows for the Years Ended December 31,
   1996 and 1995 and for the Period from March 30, 1994 (inception) to
   December 31, 1994......................................................  23
  Consolidated Statement of Stockholders' Equity for the Years Ended
   December 31, 1996 and 1995 and for the Period from March 30, 1994
   (inception) to December 31, 1994.......................................  24
  Notes to Consolidated Financial Statements..............................  25
</TABLE>
 
                                       19
<PAGE>
 
                         INDEPENDENT AUDITORS' REPORT
 
To the Board of Directors and Stockholders of
Drilex International Inc.:
 
  We have audited the accompanying consolidated balance sheets of Drilex
International Inc. and subsidiaries (the "Company") as of December 31, 1996
and 1995, and the related consolidated statements of income, cash flows, and
stockholders' equity for the years ended December 31, 1996 and 1995 and the
period from March 30, 1994 (inception) to December 31, 1994. Our audits also
included the financial statement schedule listed in the Table of Contents at
Item 14. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and financial statement schedule
based on our audits.
 
  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
  In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Drilex International Inc. and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for the years then ended and for the period
from March 30, 1994 (inception) to December 31, 1994 in conformity with
generally accepted accounting principles. Also, in our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
 
DELOITTE & TOUCHE llp
 
Houston, Texas
February 11, 1997
 
                                      20
<PAGE>
 
                   DRILEX INTERNATIONAL INC. AND SUBSIDIARIES
 
                           CONSOLIDATED BALANCE SHEET
 
                (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                                      DECEMBER 31,
                                                                     ---------------
                                                                      1996    1995
                                                                     ------- -------
<S>                                                                  <C>     <C>
                               ASSETS
Current assets:
  Cash and cash equivalents......................................... $ 2,552 $   819
  Receivables:
    Trade, net of allowance for doubtful accounts of $814 and $933
     at
     December 31, 1996 and 1995, respectively.......................  20,015  20,994
    Other...........................................................   1,031     694
  Inventories.......................................................  10,733   8,259
  Prepaid expenses and other current assets.........................   1,208   1,217
                                                                     ------- -------
      Total current assets..........................................  35,539  31,983
Property and equipment, net.........................................  33,909  27,557
Goodwill, net of accumulated amortization of $519 and $170 at
 December 31, 1996 and 1995, respectively...........................  13,801  14,151
Other assets, net of accumulated amortization of $1,397 and $686 at
 December 31, 1996 and 1995, respectively...........................   3,521   4,063
                                                                     ------- -------
                                                                     $86,770 $77,754
                                                                     ======= =======
<CAPTION>
                LIABILITIES AND STOCKHOLDERS' EQUITY
<S>                                                                  <C>     <C>
Current liabilities:
  Accounts payable.................................................. $ 8,614 $ 8,706
  Accrued compensation and related benefits.........................   1,112   1,550
  Accrued taxes, other than on income...............................     475   1,064
  Accrued income taxes..............................................     356     476
  Other accrued liabilities.........................................     347     936
  Long-term debt, current maturities................................   2,471   5,886
                                                                     ------- -------
      Total current liabilities.....................................  13,375  18,618
Long-term debt, less current maturities.............................  11,883  32,467
Other noncurrent liabilities........................................   2,944   2,182
                                                                     ------- -------
      Total liabilities.............................................  28,202  53,267
                                                                     ------- -------
Commitments and contingencies (Note 13)
Minority interests..................................................     888     805
Stockholders' equity:
  Preferred stock, $.01 par value; 10,000,000 shares authorized;
   none issued                                                            --      --
  Common stock, $.01 par value; 25,000,000 shares authorized;
   shares issued: 1996--6,759,879 and 1995--4,381,205...............      68      44
  Additional paid-in capital........................................  50,777  19,845
  Retained earnings.................................................   6,835   3,793
                                                                     ------- -------
      Total stockholders' equity....................................  57,680  23,682
                                                                     ------- -------
                                                                     $86,770 $77,754
                                                                     ======= =======
</TABLE>
 
                See notes to consolidated financial statements.
 
                                       21
<PAGE>
 
                   DRILEX INTERNATIONAL INC. AND SUBSIDIARIES
 
                        CONSOLIDATED STATEMENT OF INCOME
 
              (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                                  PERIOD FROM
                                                                 MARCH 30, 1994
                                        YEAR ENDED   YEAR ENDED  (INCEPTION) TO
                                       DECEMBER 31, DECEMBER 31,  DECEMBER 31,
                                           1996         1995          1994
                                       ------------ ------------ --------------
<S>                                    <C>          <C>          <C>
Net revenues:
  Rental and service..................   $63,601      $43,766       $21,850
  Equipment sales.....................    12,546       13,760         3,359
                                         -------      -------       -------
                                          76,147       57,526        25,209
                                         -------      -------       -------
Operating expenses:
  Costs of sales and operations
   (exclusive of depreciation and
   amortization):
    Rental and service................    40,087       27,956        11,714
    Equipment sales...................     5,609        6,650         1,210
  Selling, general and administrative
   expenses...........................    16,945       13,448         6,711
  Depreciation and amortization.......     6,575        4,492         1,855
                                         -------      -------       -------
                                          69,216       52,546        21,490
                                         -------      -------       -------
Operating income......................     6,931        4,980         3,719
Interest expense......................    (2,079)      (1,935)         (478)
                                         -------      -------       -------
Income before income taxes and
 minority interests...................     4,852        3,045         3,241
Provision for income taxes ...........    (1,727)      (1,097)       (1,166)
Minority interests....................       (83)        (164)          (66)
                                         -------      -------       -------
Net income............................   $ 3,042      $ 1,784       $ 2,009
                                         =======      =======       =======
Net income per common and common
 equivalent share.....................   $   .53      $   .40       $   .57
                                         =======      =======       =======
Weighted average common and common
 equivalent shares outstanding........     5,712        4,411         3,507
                                         =======      =======       =======
</TABLE>
 
 
                See notes to consolidated financial statements.
 
                                       22
<PAGE>
 
                   DRILEX INTERNATIONAL INC. AND SUBSIDIARIES
 
                      CONSOLIDATED STATEMENT OF CASH FLOWS
 
                           (IN THOUSANDS OF DOLLARS)
 
<TABLE>
<CAPTION>
                                                                   PERIOD FROM
                                                                  MARCH 30, 1994
                                         YEAR ENDED   YEAR ENDED  (INCEPTION) TO
                                        DECEMBER 31, DECEMBER 31,  DECEMBER 31,
                                            1996         1995          1994
                                        ------------ ------------ --------------
<S>                                     <C>          <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net income...........................    $  3,042     $  1,784      $  2,009
 Adjustments to reconcile net income
  to net cash provided by (used for)
  operating activities:
  Depreciation and amortization.......       6,575        4,492         1,855
  Net (gains) losses on disposition of
   property and equipment.............      (1,002)       1,033           883
  Minority interests..................          83          164            66
  Changes in assets and liabilities,
   excluding the effects of
   acquisitions:
   Increase in inventories............      (7,584)      (5,918)       (2,393)
   Decrease (increase) in receivables.         554       (5,209)       (3,667)
   Decrease (increase) in prepaid
    expenses and other assets.........         210         (560)         (576)
   (Decrease) increase in accounts
    payable...........................         (92)       4,568         1,628
   (Decrease) increase in accrued and
    other liabilities.................        (974)        (539)        1,072
                                          --------     --------      --------
   Net cash provided by (used for)
    operating activities..............         812         (185)          877
                                          --------     --------      --------
CASH FLOWS FROM INVESTING ACTIVITIES:
 Proceeds from disposition of property
  and equipment.......................       3,840        1,263            29
 Capital expenditures.................      (9,876)      (5,408)         (707)
 Acquisition of ENSCO Technology
  Company net assets, net of cash
  acquired............................          --      (11,488)           --
 Acquisition of Sharewell, Inc., net
  of cash acquired....................          --       (3,727)           --
 Acquisition of Drilex Systems, Inc.,
  net of cash acquired................          --           --       (18,625)
 Acquisition of Cobb net assets.......          --           --        (3,590)
                                          --------     --------      --------
    Net cash used for investing
     activities.......................      (6,036)     (19,360)      (22,893)
                                          --------     --------      --------
CASH FLOWS FROM FINANCING ACTIVITIES:
 Proceeds from issuance of long-term
  debt................................          --       17,450         2,250
 Net (payments) borrowings under
  revolving credit agreements.........        (200)       4,700         4,500
 Proceeds from issuance of common
  stock...............................      28,456        3,117        16,215
 Principal payments on long-term debt.     (21,299)      (4,826)           --
 Purchases of common stock............          --       (1,026)           --
                                          --------     --------      --------
    Net cash provided by financing
     activities.......................       6,957       19,415        22,965
                                          --------     --------      --------
NET INCREASE (DECREASE) IN CASH AND
 CASH EQUIVALENTS.....................       1,733         (130)          949
CASH AND CASH EQUIVALENTS AT BEGINNING
 OF PERIOD............................         819          949            --
                                          --------     --------      --------
CASH AND CASH EQUIVALENTS AT END OF
 PERIOD...............................    $  2,552     $    819      $    949
                                          ========     ========      ========
SUPPLEMENTARY SCHEDULE OF NON-CASH
 INVESTING AND FINANCING ACTIVITIES:
 Transfers of drilling equipment parts
  from inventories to property and
  equipment...........................    $  5,110     $  2,926      $  1,965
 Conversion of ENSCO Promissory Note..       2,500           --            --
 Amounts recorded in connection with
  acquisitions:
  Fair value of net assets acquired,
   including goodwill.................          --       26,257        26,881
  Issuances of long-term debt.........          --       10,792         1,333
  Issuance of long-term debt to
   reacquire equity interest in
   subsidiary.........................          --        2,154            --
  Issuances of common stock and
   warrants...........................          --          250         1,333
  Issuance of equity interest in
   subsidiary.........................          --           --         2,000
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
 INFORMATION:
 Interest paid........................    $  2,146     $  1,689      $    274
 Income taxes paid....................       1,097          842           613
</TABLE>
 
                See notes to consolidated financial statements.
 
                                       23
<PAGE>
 
                   DRILEX INTERNATIONAL INC. AND SUBSIDIARIES
 
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
 
                (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                 COMMON STOCK      ADDITIONAL
                             ---------------------  PAID-IN   RETAINED
                              SHARES    ($.01 PAR)  CAPITAL   EARNINGS  TOTAL
                             ---------  ---------- ---------- -------- -------
<S>                          <C>        <C>        <C>        <C>      <C>
Balance, March 30, 1994
 (inception)................        --     $ --     $    --    $   --  $    --
  Issuances of common stock. 4,080,818       41      17,507        --   17,548
  Net income................        --       --          --     2,009    2,009
                             ---------     ----     -------    ------  -------
Balance, December 31, 1994.. 4,080,818       41      17,507     2,009   19,557
  Issuances of common stock
   and warrants.............   451,220        5       3,362        --    3,367
  Purchases of common stock.  (150,833)      (2)     (1,024)       --   (1,026)
  Net income................        --       --          --     1,784    1,784
                             ---------     ----     -------    ------  -------
Balance, December 31, 1995.. 4,381,205       44      19,845     3,793   23,682
  Common stock issued in
   initial public offering.. 2,361,962       24      30,816        --   30,840
  Exercised stock options,
   net of tax benefit.......    16,712       --         116        --      116
  Net income................        --       --          --     3,042    3,042
                             ---------     ----     -------    ------  -------
Balance, December 31, 1996.. 6,759,879     $ 68     $50,777    $6,835  $57,680
                             =========     ====     =======    ======  =======
</TABLE>
 
 
 
                See notes to consolidated financial statements.
 
                                       24
<PAGE>
 
                  DRILEX INTERNATIONAL INC. AND SUBSIDIARIES
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 BASIS OF PRESENTATION
 
  Drilex International Inc. was organized on March 10, 1994 by DRLX Partners,
L.P. ("DRLX Partners") and Mr. John Forrest to acquire the common stock of
Drilex Systems, Inc. ("DSI") from MascoTech, Inc. See Note 2. Mr. Forrest is a
founder of DSI and the President and Chief Executive Officer of Drilex
International Inc. The initial capital contributions of $11,200,000 were made
on March 30, 1994.
 
  The consolidated financial statements include the accounts of Drilex
International Inc. and its majority and wholly owned subsidiaries,
collectively referred to herein as the "Company". All significant intercompany
balances and transactions have been eliminated in consolidation.
 
  The Company provides directional, horizontal and other precision drilling
services and products. Such services and products are used primarily for oil
and gas drilling, environmental remediation and trenchless service
applications.
 
  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, the
disclosure of contingent assets and liabilities as of 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.
 
 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Cash Equivalents
 
  Cash equivalents consist of highly liquid investments with original
maturities of three months or less.
 
 Inventories
 
  Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method. Inventory costs represent invoice
or production cost. Production costs include materials, labor and
manufacturing overhead. The largest portion of the Company's inventories is
consumed in connection with rental and service activities, and the remainder
is utilized for equipment sales. Certain drilling equipment parts are
transferred from inventories to property and equipment when placed in service.
 
 Property and Equipment
 
  Property and equipment is stated at cost, net of accumulated depreciation.
Depreciation is computed utilizing the straight-line method at rates based
upon the estimated useful lives of the various classes of assets. Additions
and improvements are capitalized, while maintenance and repairs are expensed.
Upon the sale or retirement of an asset, the related cost and accumulated
depreciation are removed from the accounts and any gain or loss is recognized.
 
  Effective January 1, 1996, the Company implemented Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of ("SFAS 121"). SFAS 121
requires that long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The Company's
adoption of SFAS 121 did not result in a charge to earnings.
 
                                      25
<PAGE>
 
                  DRILEX INTERNATIONAL INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 Goodwill and Other Intangible Assets
 
  Goodwill represents the excess of the purchase price for acquired businesses
over the allocated value of the related net assets (see Note 2). Goodwill is
amortized on a straight-line basis over a forty year life. The carrying value
of goodwill and other intangible assets is reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of the
acquired assets may not be recoverable. If the sum of the estimated future
cash flows (undiscounted) expected to result from the use and eventual
disposition of an asset is less than the carrying amount of the asset, an
impairment loss is recognized. Measurement of an impairment loss is based on
the fair value of the asset.
 
  Included in other assets are noncompete agreements, a technology licensing
agreement, organization costs and patents. These intangible assets are
amortized on a straight-line basis over their estimated useful lives.
 
 Revenue Recognition
 
  Rental and service revenues are recognized as the services are performed,
generally on an hourly or daily rate basis, under short-term contracts.
Revenues from equipment sales are recognized when products are shipped to
customers.
 
 Income Taxes
 
  The Company accounts for income taxes using an asset and liability approach,
which requires the recognition of deferred income tax assets and liabilities
for the expected future tax consequences of events that have been recognized
in the Company's financial statements or tax returns. Deferred income tax
assets and liabilities are determined based on the temporary differences
between the financial statement and tax bases of assets and liabilities using
enacted tax rates.
 
 Foreign Currency Translation
 
  The Company uses the United States dollar as the functional currency for its
foreign operations. Foreign currency transaction gains and losses are
recognized in consolidated income as incurred. Gains or losses resulting from
balance sheet translation of foreign operations are included in consolidated
income.
 
 Per Share Information
 
  Per share information is based on the weighted average number of common
shares outstanding during each period and, if dilutive, the weighted average
number of common equivalent shares resulting from the assumed conversion of
outstanding stock options and warrants. Shares issued by the Company during
the one-year period prior to the filing of its Registration Statement have
been included in the computation of weighted average shares from the Company's
date of inception (using the treasury stock method and the initial public
offering price). The fully diluted computation assumes the conversion of the
Convertible Promissory Note as of the date of its issuance (see Note 6) and
the resulting decrease in interest expense for the applicable period. On July
9, 1996, the Convertible Promissory Note was converted in connection with the
Company's initial public offering (the "IPO") and the resulting shares were
included in the primary per share computation for the remainder of the year.
The difference between earnings per common share on a primary and fully
diluted basis is not significant.
 
 Stock Based Compensation
 
  In October 1995, Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation ("SFAS 123") was issued. SFAS 123
establishes alternative methods of accounting and
 
                                      26
<PAGE>
 
                  DRILEX INTERNATIONAL INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

disclosure for employee stock-based compensation arrangements. In adopting
SFAS 123 in 1996, the Company has elected to continue the use of the
"intrinsic value based method" of accounting for its employee stock option
plan (see Note 10). This method does not result in the recognition of
compensation expense when employee stock options are granted if the exercise
price of the options equals or exceeds the fair market value of the stock at
the date of grant. The Company has disclosed the proforma income and earnings
per share amounts that would have been reported under the "fair value" based
recognition provisions of SFAS 123 in Note 10.
 
2. ACQUISITIONS
 
  On March 31, 1994, the Company acquired all of the common stock of DSI for
cash of $20,000,000 in a transaction accounted for as a purchase. During the
remainder of 1994 and during 1995, the Company consummated three additional
business acquisitions which were also accounted for using the purchase method.
Results of operations and cash flows of the acquired businesses are included
in the consolidated financial statements for the periods subsequent to the
respective dates of acquisition.
 
 ENSCO Technology Company and subsidiary ("ENSCO Technology")
 
  On September 30, 1995, the Company acquired substantially all of the assets,
net of outstanding liabilities and minority interests, of ENSCO Technology.
ENSCO Technology provides precision drilling and measurement-while-drilling
services to customers primarily in Texas and Canada. The total purchase price
of $17,851,000 consisted of $11,790,000 in cash and notes payable to ENSCO
Technology totaling $6,061,000. The Company recognized goodwill of $8,586,000
in connection with this acquisition.
 
 Sharewell, Inc. and subsidiaries ("Sharewell")
 
  On May 5, 1995, the Company acquired all of the common stock of Sharewell
(formerly Shareco, Inc.), which provides directional drilling guidance systems
and services in both domestic and international locations. The total purchase
price of $9,167,000 consisted of $4,186,000 in cash, notes payable to
Sharewell's former stockholders totaling $4,731,000 and warrants to purchase
180,981 shares of the Company's common stock valued at $250,000. The Company
recognized goodwill of $4,332,000 in connection with this acquisition.
 
 Cobb Directional Drilling Company, Inc. and Posi-Trak Mud Motors, Inc.
(collectively, "Cobb")
 
  On September 30, 1994, the Company acquired substantially all of the fixed
assets of Cobb (the "Cobb acquisition"), which provides precision drilling
services to customers primarily in Louisiana and the Gulf of Mexico. The
Company used a newly-formed subsidiary, Cobb Directional Drilling Company LLC
("Cobb LLC"), to acquire the Cobb assets. The total purchase price of
$8,256,000 consisted of $3,590,000 in cash, a note payable to Posi-Trak Mud
Motors, Inc. for $1,333,000, a one-third equity interest in Cobb LLC valued at
$2,000,000 and 241,307 shares of the Company's common stock valued at
$1,333,000. The Company recognized goodwill of $1,403,000 in connection with
this acquisition.
 
  On March 23, 1995, the Company repurchased 144,784 of the shares of its
common stock for $1,000,000 in cash (the estimated fair value of such common
stock on that date). This repurchase, after retirement of the resulting
treasury shares, was recorded as a reduction of common stock and additional
paid-in capital on the Company's consolidated balance sheet. On the same date,
the Company reacquired the one-third equity interest in Cobb LLC in exchange
for two notes payable to Cobb Directional Drilling Company, Inc. totaling
$2,154,000 (the estimated fair value of such equity interest on that date).
This reacquisition was recorded as a reduction of minority interests on the
Company's consolidated balance sheet. The minority stockholder's share of Cobb
LLC's earnings for the period from October 1, 1994 through March 23, 1995 is
presented as minority interests in the Company's consolidated income
statement.
 
                                      27
<PAGE>
 
                  DRILEX INTERNATIONAL INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 Pro forma results of operations (unaudited)
 
  The following unaudited pro forma summary presents consolidated results of
operations for the Company as if (a) the Cobb acquisition had been consummated
on March 30, 1994 and (b) the Sharewell and ENSCO Technology acquisitions had
been consummated as of the beginning of the respective periods. Appropriate
adjustments have been reflected for depreciation and amortization, interest
expense, income taxes and minority interests. Net income for the period ended
December 31, 1994 includes an after-tax gain of $429,000, or $.10 per share,
resulting from ENSCO Technology's sale of stock of a foreign subsidiary. The
pro forma information does not necessarily reflect the actual results that
would have been achieved, nor is it necessarily indicative of future
consolidated results for the Company.
 
<TABLE>
<CAPTION>
                                                                  PERIOD FROM
                                                                 MARCH 30, 1994
                                                     YEAR ENDED  (INCEPTION) TO
                                                    DECEMBER 31,  DECEMBER 31,
                                                        1995          1994
                                                    ------------ --------------
                                                     (IN THOUSANDS OF DOLLARS,
                                                     EXCEPT PER SHARE AMOUNTS)
     <S>                                            <C>          <C>
     Net revenues..................................   $73,557       $48,719
       Net income..................................     1,929         2,905
       Net income per common and common equivalent
        share......................................       .42           .67
</TABLE>
 
3. INVENTORIES
 
  Inventories consist of the following:
 
<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                                 --------------
                                                                  1996    1995
                                                                 ------- ------
                                                                 (IN THOUSANDS
                                                                  OF DOLLARS)
      <S>                                                        <C>     <C>
      Drilling equipment parts.................................. $ 9,879 $7,573
      Work in process...........................................     854    686
                                                                 ------- ------
                                                                 $10,733 $8,259
                                                                 ======= ======
</TABLE>
 
4. PROPERTY AND EQUIPMENT
 
  The major classes of property and equipment are as follows:
 
<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                   ESTIMATED   ----------------
                                                  USEFUL LIVES  1996     1995
                                                  ------------ -------  -------
                                                                (IN THOUSANDS
                                                                 OF DOLLARS)
      <S>                                         <C>          <C>      <C>
      Land.......................................              $    52  $    52
      Buildings and improvements.................  5-40 years    1,382      985
      Machinery and equipment....................  3-15 years    8,110    7,122
      Rental tools...............................   3-7 years   29,927   19,901
      Furniture and fixtures.....................  3-10 years    3,244    2,385
      Construction in progress...................                   33    1,844
                                                               -------  -------
                                                                42,748   32,289
      Less: accumulated depreciation.............               (8,839)  (4,732)
                                                               -------  -------
                                                               $33,909  $27,557
                                                               =======  =======
</TABLE>
 
                                      28
<PAGE>
 
                  DRILEX INTERNATIONAL INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  Depreciation expense for the years ended December 31, 1996 and 1995 and for
the period ended December 31, 1994 was $5,467,000, $3,668,000 and $1,703,000,
respectively. Effective April 1, 1995, the Company changed its estimated
useful life for certain drilling motor components from five to seven years.
This change was made to better reflect the estimated period during which these
assets will remain in service. The effect of this change was an increase in
net income of $378,000, or $.07 per share, for the year ended December 31,
1996 and $248,000, or $.06 per share, for the year ended December 31, 1995.
 
5. OTHER ASSETS
 
  Other assets consist of the following:
 
<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                    ESTIMATED   ---------------
                                                   USEFUL LIVES  1996     1995
                                                   ------------ -------  ------
                                                                (IN THOUSANDS
                                                                 OF DOLLARS)
      <S>                                          <C>          <C>      <C>
      Noncompete agreements.......................   5-10 years $ 2,100  $2,100
      Technology licensing agreement.............. 13 1/3 years   1,465   1,465
      Organization costs..........................      5 years   1,058   1,052
      Patents.....................................     17 years     142     122
      Other.......................................                  153      10
                                                                -------  ------
                                                                  4,918   4,749
      Less: accumulated amortization..............               (1,397)   (686)
                                                                -------  ------
                                                                $ 3,521  $4,063
                                                                =======  ======
</TABLE>
 
  In conjunction with the acquisition of DSI, the Company obtained a licensing
agreement that provides it with a non-exclusive right to use a patented
technology for the remaining life of the patent. As consideration for the
license, the Company is obligated to sell or lease certain drilling systems
equipment to the licensor at a discount. The period of this obligation extends
through December 31, 1997. A liability for this obligation is included on the
Company's consolidated balance sheet in the amount of $1,138,000 and
$1,238,000 at December 31, 1996 and 1995, respectively.
 
6. LONG-TERM DEBT
 
  Long-term debt consists of the following:
 
<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                               ----------------
                                                                1996     1995
                                                               -------  -------
                                                                (IN THOUSANDS
                                                                 OF DOLLARS)
<S>                                                            <C>      <C>
Bank Credit Agreement:
  Revolving Credit Facility..................................  $ 9,000  $ 9,200
  Term Note..................................................       --   16,578
Promissory Note payable to Posi-Trak Mud Motors, Inc.........    1,333    1,333
Promissory Note payable to Cobb Directional Drilling Company,
 Inc.........................................................      417      750
Promissory Notes payable to former stockholders of Sharewell.    3,604    4,431
Promissory Note payable to ENSCO Technology..................       --    3,561
Convertible Promissory Note payable to ENSCO Technology......       --    2,500
                                                               -------  -------
                                                                14,354   38,353
Less: current maturities.....................................   (2,471)  (5,886)
                                                               -------  -------
                                                               $11,883  $32,467
                                                               =======  =======
</TABLE>
 
                                      29
<PAGE>
 
                  DRILEX INTERNATIONAL INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 Bank Credit Agreement
 
  On September 16, 1996, the Company entered into an unsecured credit
agreement with a bank (the "Bank Credit Agreement") which replaced previous
credit agreements entered into by the Company and its subsidiaries. The Bank
Credit Agreement, as amended on February 10, 1997, consists of a revolving
line of credit (the "Revolving Credit Facility") which matures on September
30, 1999 and provides for borrowings of up to $20,000,000 of which up to
$3,000,000 may be used for letters of credit. As of December 31, 1996,
$5,900,000 was available for borrowings, of which $2,865,000 was available for
letters of credit. Letters of credit outstanding amounted to $135,000 at
December 31, 1996.
 
  Borrowings under the Bank Credit Agreement bear interest at a rate per
annum, at the Company's election, equal to the bank's prime rate or a
Eurodollar and Eurosterling interbank offered rate plus 3/4% (8.3% and 6.4%,
respectively, at December 31, 1996). The interest rate margins may be
increased by 3/8% (non-cumulatively) based on a financial test, determined
quarterly. The Bank Credit Agreement requires the Company to maintain certain
financial covenants and places restrictions on the Company's ability to, among
other things, incur debt and liens, pay dividends, enter into unrelated lines
of business and make investments.
 
 Promissory Note payable to Posi-Trak Mud Motors, Inc.
 
  This note matures on September 30, 1997, bears interest at a rate of 7% per
annum and is secured by a pledge of the Company's equity interest in Cobb LLC.
(See Note 16.)
 
 Promissory Note payable to Cobb Directional Drilling Company, Inc.
 
  This note matures on March 23, 1998, bears interest at a rate of 7 1/2% per
annum, calls for quarterly principal payments of $83,000 and is secured by a
pledge of a one-third equity interest in Cobb LLC. A related promissory note
for $1,154,000 was repaid on July 1, 1995. (See Note 16.)
 
 Promissory Notes payable to former stockholders of Sharewell
 
  These unsecured notes mature on April 30, 2000 and bear interest at a rate
of 8% per annum. Six of the notes call for quarterly principal payments
aggregating $139,000. The remaining note calls for annual principal payments
of $250,000 and a final payment of $913,000 at maturity, and requires that the
Company maintain a minimum consolidated net worth.
 
 Maturities
 
  Scheduled maturities of long-term debt outstanding at December 31, 1996 are
as follows: years ending December 31, 1997--$2,471,000; 1998--$887,000; 1999--
$9,804,000; 2000--$1,192,000.
 
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
 
  The carrying amount of cash and cash equivalents approximates fair value for
these instruments. The estimated fair value of long-term debt is determined
based on the current rates offered for similar borrowings. The estimated fair
values of the Company's financial instruments, along with the carrying amounts
of the related assets (liabilities), are as follows:
 
<TABLE>
<CAPTION>
                                         DECEMBER 31, 1996   DECEMBER 31, 1995
                                         ------------------  ------------------
                                         CARRYING    FAIR    CARRYING    FAIR
                                          AMOUNT    VALUE     AMOUNT    VALUE
                                         --------  --------  --------  --------
                                              (IN THOUSANDS OF DOLLARS)
      <S>                                <C>       <C>       <C>       <C>
      Cash and cash equivalents......... $  2,552  $  2,552  $    819  $    819
      Long-term debt....................  (14,354)  (14,251)  (38,353)  (38,594)
      Interest rate swap agreement......       --        --        --      (332)
</TABLE>
 
                                      30
<PAGE>
 
                  DRILEX INTERNATIONAL INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  The Company's interest rate swap agreement was terminated on July 9, 1996 in
conjunction with the IPO and subsequent prepayment of the Term Note (see Note
10). The net settlement amount (a $57,000 credit) resulting from this
agreement was recognized as an adjustment to interest expense. The Company
does not hold or issue derivative financial instruments for trading purposes.
 
8. INCOME TAXES
 
  The domestic and foreign components of income before income taxes and
minority interests are as follows:
 
<TABLE>
<CAPTION>
                                                                   PERIOD FROM
                                                                  MARCH 30, 1994
                                         YEAR ENDED   YEAR ENDED  (INCEPTION) TO
                                        DECEMBER 31, DECEMBER 31,  DECEMBER 31,
                                            1996         1995          1994
                                        ------------ ------------ --------------
                                               (IN THOUSANDS OF DOLLARS)
      <S>                               <C>          <C>          <C>
      Domestic.........................    $  563       $  951        $2,217
      Foreign..........................     4,289        2,094         1,024
                                           ------       ------        ------
                                           $4,852       $3,045        $3,241
                                           ======       ======        ======
</TABLE>
 
  The provision for income taxes consists of the following:
 
<TABLE>
<CAPTION>
                                                                   PERIOD FROM
                                                                  MARCH 30, 1994
                                         YEAR ENDED   YEAR ENDED  (INCEPTION) TO
                                        DECEMBER 31, DECEMBER 31,  DECEMBER 31,
                                            1996         1995          1994
                                        ------------ ------------ --------------
                                                (IN THOUSANDS OF DOLLARS)
      <S>                               <C>          <C>          <C>
      Current:
        Federal........................    $  110       $  301        $  682
        State..........................       162           41            23
        Foreign........................       744          670           170
                                           ------       ------        ------
                                            1,016        1,012           875
                                           ------       ------        ------
      Deferred:
        Federal........................       711           85           291
                                           ------       ------        ------
                                           $1,727       $1,097        $1,166
                                           ======       ======        ======
</TABLE>
 
  A reconciliation between the provision for income taxes and the amount
computed by applying the federal statutory income tax rate to income before
income taxes and minority interests is as follows:
 
<TABLE>
<CAPTION>
                                                                 PERIOD FROM
                                                                MARCH 30, 1994
                                       YEAR ENDED   YEAR ENDED  (INCEPTION) TO
                                      DECEMBER 31, DECEMBER 31,  DECEMBER 31,
                                          1996         1995          1994
                                      ------------ ------------ --------------
                                             (IN THOUSANDS OF DOLLARS)
      <S>                             <C>          <C>          <C>
      Provision for income taxes at
       statutory rate................    $1,650       $1,035        $1,102
      Nondeductible goodwill
       amortization..................        36           24            --
      Other..........................        41           38            64
                                         ------       ------        ------
                                         $1,727       $1,097        $1,166
                                         ======       ======        ======
</TABLE>
 
                                      31
<PAGE>
 
                  DRILEX INTERNATIONAL INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  The components of the net deferred income tax assets and liabilities are as
follows:
 
<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                               ----------------
                                                                1996  1995 1994
                                                               ------ ---- ----
                                                               (IN THOUSANDS OF
                                                                   DOLLARS)
<S>                                                            <C>    <C>  <C>
Deferred income tax liabilities:
  Property and equipment...................................... $  916 $626 $194
  Basis difference in foreign subsidiaries, net of foreign tax
   credits....................................................    598   72  151
  Other.......................................................    291  236    3
                                                               ------ ---- ----
    Total deferred income tax liabilities.....................  1,805  934  348
                                                               ------ ---- ----
Deferred income tax assets:
  Receivables allowance.......................................    277   65   52
  Other.......................................................     --   52    5
                                                               ------ ---- ----
    Total deferred income tax assets..........................    277  117   57
                                                               ------ ---- ----
Net deferred income tax liabilities........................... $1,528 $817 $291
                                                               ====== ==== ====
</TABLE>
 
  Provision has been made for the U.S. income tax effect of the anticipated
repatriation of earnings of foreign subsidiaries.
 
  No valuation allowances are required for the deferred income tax assets. The
net current deferred income tax assets are included in prepaid expenses and
other current assets, and the net non-current deferred income tax liabilities
are included in other noncurrent liabilities, on the consolidated balance
sheet.
 
9. MINORITY INTERESTS
 
  Minority interests at December 31, 1996 and 1995 represent minority
stockholders' interests in certain foreign subsidiaries of acquired companies.
 
10. STOCKHOLDERS' EQUITY
 
 Authorized Shares
 
  On May 16, 1996, the Company filed an amendment to its certificate of
incorporation to, among other things, (i) increase the number of authorized
common shares to 25,000,000 and to effect a stock split involving the issuance
of approximately 1.81 shares of common stock in exchange for each share of
common stock then outstanding; (ii) retire all treasury shares of common stock
purchased since the Company's inception; and (iii) authorize 10,000,000 shares
of $.01 par value preferred stock. The effect of the stock split and the
retirement of treasury shares has been presented retroactively to the date of
inception in the Company's consolidated financial statements.
 
 Initial Public Offering
 
  On July 2, 1996, the Company entered into an underwriting agreement
providing for the issuance of 2,361,962 shares of common stock in the IPO. Of
the total number of shares issued, 2,000,000 were sold by the Company, and
361,962 were sold by ENSCO Technology, which had converted its Convertible
Promissory Note. Net proceeds to the Company from the IPO, after issuance
costs, were $28,340,000 and were used to (i) retire the $3,561,000 of
outstanding principal and $12,000 accrued interest under the Promissory Note
payable to ENSCO Technology; and (ii) make principal repayments of $14,833,000
for all term loan borrowings and $9,934,000 for a portion of the revolving
line of credit borrowings outstanding under its Bank Credit Agreement (see
Note 6).
 
                                      32
<PAGE>
 
                  DRILEX INTERNATIONAL INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 Stock options
 
  In 1996, the Company amended and restated the Drilex Holdings Corp. 1994
Stock Option Plan (the "1994 Stock Option Plan"). Up to 440,000 shares of the
Company's common stock are reserved for awards or for payment of rights
granted to certain employees and to non-employee directors of the Company and
its subsidiaries. These options are exercisable ratably over periods of three
to four years beginning one year from the date of grant. All stock options are
granted at the fair market value of the Common Stock at the date of grant.
Stock options granted to non-employee directors generally expire ten years
after the date of grant or three months after the date of retirement from the
Board of Directors, if earlier. Stock options granted to employees prior to
the IPO generally expire seven years after the date of grant. Stock options
granted to employees after the IPO generally expire five years after the date
of grant. All stock options granted to employees may expire earlier, at the
discretion of the Compensation Committee, if employment is terminated.
 
  The following table summarizes the stock option activity related to the
Company's plan:
 
<TABLE>
<CAPTION>
                                                       WEIGHTED AVERAGE
                                            EXERCISE    EXERCISE PRICE  WEIGHTED AVERAGE
                                 SHARES      PRICE        PER SHARE     CONTRACTUAL LIFE
                                 -------  ------------ ---------------- ----------------
 <C>   <S>                       <C>      <C>          <C>              <C>
 1994: Granted.................   62,911  $       5.53      $ 5.53
                                 -------                    ------
       Outstanding at December
       31......................   62,911          5.53        5.53         7.12 years
 1995: Granted.................   25,044  $ 5.53-11.05      $10.52
       Forfeited/Cancelled.....  (12,099)         5.53        5.53
                                 -------                    ------
       Outstanding at December
        31.....................   75,856    5.53-11.05        7.18         7.19 years
 1996: Granted.................  161,850  $11.94-16.00      $15.88
       Exercised...............  (16,712)         5.53        5.53
       Forfeited/Cancelled.....  (24,806)   5.53-16.00       15.66
                                 -------                    ------
       Outstanding at December
        31.....................  196,188    5.53-16.00       13.43         6.34 years
</TABLE>
 
  The following table provides information for the exercisable stock options:
 
<TABLE>
<CAPTION>
                                                                WEIGHTED AVERAGE
                                                     EXERCISE    EXERCISE PRICE
                                             SHARES    PRICE       PER SHARE
                                             ------ ----------- ----------------
      <S>                                    <C>    <C>         <C>
      December 31, 1995..................... 12,905 $      5.53      $5.53
      December 31, 1996..................... 15,561 $5.53-11.05      $7.54
</TABLE>
 
  In adopting SFAS 123 in 1996, the Company has elected to continue the use of
the "intrinsic value based method" of accounting for its employee stock option
plan. This method does not result in the recognition of compensation expense
when employee stock options are granted if the exercise price of the options
equals or exceeds the fair market value of the stock at the date of grant. The
following table discloses the proforma income and earnings per share amounts
that would have been reported as prescribed by SFAS 123:
 
<TABLE>
<CAPTION>
                                                                    1996   1995
                                                                   ------ ------
                                                                   (IN THOUSANDS
                                                                    EXCEPT PER
                                                                       SHARE
                                                                     AMOUNTS)
      <S>                                                          <C>    <C>
      Net income:
        As reported............................................... $3,042 $1,784
        Proforma.................................................. $2,963 $1,770
      Earnings per share:
        As reported............................................... $ 0.53 $ 0.40
        Proforma.................................................. $ 0.52 $ 0.40
</TABLE>
 
                                      33
<PAGE>
 
                   DRILEX INTERNATIONAL INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  The weighted average fair values of options granted during 1996 and 1995 were
$5.17 and $4.56 per share, respectively. The fair value of each stock option
granted during 1996 and 1995 was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions:
 
<TABLE>
<CAPTION>
                                                                YEAR OF GRANT
                                                             -------------------
                                                               1996      1995
                                                             --------- ---------
      <S>                                                    <C>       <C>
      Risk free interest rate...............................     6.29%     6.47%
      Expected life of options.............................. 3.5 years 2.5 years
      Expected volatility of the Company's stock price......       64%        0%
      Expected dividend yield of the Company's stock........        0%        0%
</TABLE>
 
 Warrants
 
  On May 5, 1995, in connection with the Sharewell acquisition (see Note 2),
the Company issued warrants to purchase an aggregate of 180,981 shares of its
common stock at an exercise price of $5.53 per share. The warrants are
exercisable, in whole or in part, at any time until May 5, 2000. None of the
warrants had been exercised as of December 31, 1996.
 
 Shares reserved for issuance
 
  At December 31, 1996, the Company had the following shares of common stock
reserved for future issuance:
 
<TABLE>
      <S>                                                               <C>
      1994 Stock Option Plan........................................... 423,288
      Warrants......................................................... 180,981
                                                                        -------
                                                                        604,269
                                                                        =======
</TABLE>
 
 Restrictions on payment of dividends
 
  As of December 31, 1996, the Company is precluded from paying dividends on
its common stock by the provisions of various debt agreements (see Note 6).
 
11. RELATED PARTY TRANSACTIONS
 
  The Company purchases equipment and services from parties related to Cobb's
former stockholder. Charges for such purchases amounted to $767,000, $629,000
and $178,000 for the periods ended December 31, 1996, 1995 and 1994,
respectively.
 
  In connection with the ENSCO Technology acquisition (see Note 2), the Company
was charged a $150,000 fee for investment banking and consulting services by an
affiliate of DRLX Partners. This fee, included in other accrued liabilities on
the Company's consolidated balance sheet as of December 31, 1995, was paid in
1996.
 
  Included in other receivables at December 31, 1996 and 1995 are advances to
employees of the Company amounting to $395,000 and $334,000, respectively.
 
                                       34
<PAGE>
 
                  DRILEX INTERNATIONAL INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
12. EMPLOYEE BENEFIT PLAN
 
  On April 1, 1994, the Company adopted a defined contribution savings plan
covering substantially all of its employees. Employees may elect to contribute
up to 15% of their eligible compensation to the plan. For those participants
who have elected to make voluntary contributions to the plan, the Company's
contributions consist of a 50% matching amount for participant contributions,
not to exceed 4% of the eligible compensation of participants. The cost to the
Company of this plan was $273,000, $207,000 and $87,000 for the periods ended
December 31, 1996, 1995 and 1994, respectively.
 
13. COMMITMENTS AND CONTINGENCIES
 
 Commitments
 
  Minimum rental commitments under operating leases at December 31, 1996 are
as follows: years ending December 31, 1997--$1,202,000; 1998--$691,000; 1999--
$602,000; 2000--$370,000; 2001--$165,000; thereafter--$1,146,000. Rental
expense for operating leases was $1,287,000, $993,000 and $565,000 for the
periods ended December 31, 1996, 1995 and 1994, respectively.
 
  The Company has a licensing agreement that provides it with a non-exclusive
right to purchase and use certain measurement-while-drilling systems
equipment. Most of this equipment was obtained in connection with the ENSCO
Technology acquisition (see Note 2). As consideration for this license, the
Company is obligated to make annual royalty payments of $360,000 to the
supplier of the equipment. The Company is entitled to receive discounts on the
royalty payments for the ENSCO Technology equipment amounting to $46,000 per
year for the first three years of the agreement and $260,000 per year for the
fourth and fifth years of the agreement. The terms of this licensing agreement
are to be reviewed and renegotiated in September 2000.
 
  In November 1996, the Company committed to be a participating lender for an
unaffiliated entity's senior secured oil and gas exploration and development
loan facility ("Facility"). The Company's maximum commitment of $500,000 is
secured by certain domestic oil and gas properties of the borrower and it will
receive an overriding royalty interest in each property for which funding
under the Facility is provided. Interest is earned on advances made under this
Facility at an annual rate of 12% and is receivable quarterly. Principal
payments are to be received quarterly beginning in 1999 based on a stated
percentage of net production revenues of properties covered under the
Facility. At December 31, 1996, the Company had a receivable of $150,000 with
respect to the Facility included in Other Assets.
 
 Contingencies
 
  The Company is involved in various claims, lawsuits and proceedings arising
in the ordinary course of business. While there are uncertainties inherent in
the ultimate outcome of such matters and it is impossible to presently
determine the ultimate costs that may be incurred, management believes the
resolution of such uncertainties and the incurrence of such costs should not
have a material adverse effect on the Company's consolidated financial
position or results of operations.
 
14. CONCENTRATIONS OF CREDIT RISK
 
  Financial instruments that potentially subject the Company to concentrations
of credit risk are primarily cash and cash equivalents and trade receivables.
The Company mitigates its risk with respect to cash and cash equivalents by
maintaining such deposits at high credit quality financial institutions and
monitoring the credit ratings of those institutions.
 
                                      35
<PAGE>
 
                  DRILEX INTERNATIONAL INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  The Company derives a significant portion of its revenues from sales and
services to customers in the energy industry. In addition, the Company has
concentrations of operations in certain geographic areas (primarily Texas, the
Louisiana Gulf Coast, Venezuela and the North Sea). At December 31, 1996, two
customers each accounted for approximately 10% of the Company's revenues. At
December 31, 1995, one customer accounted for approximately 11% of the
Company's revenues. At December 31, 1996, there were no individual customers
which had accounts receivable balances greater than 10% of total trade
receivables. At December 31, 1995, outstanding receivables from two
significant customers accounted for approximately 13% and 11% of total trade
receivables, respectively. The Company mitigates its concentrations of credit
risk with respect to trade receivables by actively monitoring the
creditworthiness of its customers.
 
15. GEOGRAPHIC INFORMATION
 
  Summarized information by geographic area is as follows:
 
<TABLE>
<CAPTION>
                                                                 PERIOD FROM
                                                                MARCH 30, 1994
                                       YEAR ENDED   YEAR ENDED  (INCEPTION) TO
                                      DECEMBER 31, DECEMBER 31,  DECEMBER 31,
                                          1996         1995          1994
                                      ------------ ------------ --------------
                                             (IN THOUSANDS OF DOLLARS)
<S>                                   <C>          <C>          <C>
Net revenues from unaffiliated
 customers:
  Domestic...........................   $54,732      $42,557       $18,460
  Latin America......................     9,237        6,635         2,544
  Europe.............................     4,848        5,378         2,023
  Other foreign......................     7,330        2,956         2,182
                                        -------      -------       -------
    Total............................   $76,147      $57,526       $25,209
                                        =======      =======       =======
Operating income (loss):
  Domestic...........................   $ 4,886      $ 3,180       $ 3,287
  Latin America......................       803          355           522
  Europe.............................       396        1,292            42
  Other foreign......................       846          153          (132)
                                        -------      -------       -------
    Total............................   $ 6,931      $ 4,980       $ 3,719
                                        =======      =======       =======
Identifiable assets:
  Domestic...........................   $64,747      $59,492       $28,836
  Latin America......................    10,680        7,170         2,560
  Europe.............................     4,657        4,633         2,518
  Other foreign......................     6,686        6,459         2,378
                                        -------      -------       -------
    Total............................   $86,770      $77,754       $36,292
                                        =======      =======       =======
</TABLE>
 
 
  Sales and transfers among geographic areas are not significant. Included in
results of operations are aggregate foreign currency transaction gains
(losses) of $(87,000), $(43,000) and $30,000 for the periods ended December
31, 1996, 1995 and 1994, respectively. Export sales were less than 10% of
total net revenues for the periods ended December 31, 1996, 1995 and 1994.
 
 
                                      36
<PAGE>
 
                  DRILEX INTERNATIONAL INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
16. SUBSEQUENT EVENT
 
  On January 31, 1997, the Company entered into a stock repurchase and
promissory note repayment agreement and general release with the previous
owner of Cobb ("the Cobb Buy-Out Agreement"), which was effected on February
10, 1997. The agreement provides for, among other things, the repurchase of
Company stock, early payment of outstanding notes payable, the termination of
Mr. Cobb's employment as of January 31, 1997, and the amendment of the non-
compete provision in the related employment agreement. Company stock
repurchased was 96,523 shares at the January 31, 1997 market closing price of
$13.50 per share. The notes payable repaid were to Posi-Trak Mud Motors, Inc.
and Cobb Directional Drilling Company, Inc. having principal balances
outstanding of $1,333,000 and $417,000, respectively. The employment agreement
was amended to provide for a reduction in the duration of the post-termination
non-compete from five years to two years. The total cash payment made by the
Company under the Cobb Buy-Out Agreement was $2,726,000 and was funded through
its Revolving Credit Facility.
 
17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
 
  Summary quarterly financial information for the years ended December 31,
1996 and 1995, and the period from March 30, 1994 (inception) to December 31,
1994 is as follows:
 
<TABLE>
<CAPTION>
                                                 THREE MONTHS ENDED
                                      -----------------------------------------
                                      MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
                                      -------- ------- ------------ -----------
                                        (IN THOUSANDS OF DOLLARS, EXCEPT PER
                                                   SHARE AMOUNTS)
<S>                                   <C>      <C>     <C>          <C>
1996:
  Net revenues....................... $19,457  $18,593   $20,075      $18,022
  Operating income...................   1,616      823     2,419        2,073
  Net income.........................     526       93     1,279        1,144
  Net income per common and common
   equivalent share..................     .12      .02       .19          .17
1995:
  Net revenues....................... $10,527  $12,343   $14,493      $20,163
  Operating income...................     660    1,023     1,411        1,886
  Net income.........................     205      361       574          644
  Net income per common and common
   equivalent share..................     .05      .08       .13          .14
1994:
  Net revenues.......................          $ 6,689   $ 7,770      $10,750
  Operating income...................              846     1,101        1,772
  Net income.........................              426       631          952
  Net income per common and common
   equivalent share..................              .18       .17          .22
</TABLE>
 
 
                                      37
<PAGE>
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
 
  None.
 
                                   PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
 
  The information to be set forth under the caption "Election of Directors" in
the Company's definitive proxy statement ("Proxy Statement") in connection
with the 1997 annual meeting of stockholders is incorporated herein by
reference. The Proxy Statement will be filed with the Securities and Exchange
Commission (the "Commission") not later than 120 days subsequent to December
31, 1996.
 
  Pursuant to Item 401(b) of Regulations S-K, the information required by this
item with respect to executive officers of the Company is set forth in Part I
of this report.
 
ITEM 11. EXECUTIVE COMPENSATION.
 
  The information to be set forth under the caption "Executive Compensation"
in the Proxy Statement is incorporated herein by reference.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
 
  The information to be set forth under the captions "Beneficial Ownership of
Stock" in the Proxy Statement is incorporated herein by reference.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
 
  The information to be set forth under the caption "Certain Transactions" in
the Proxy Statement is incorporated herein by reference.
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
 
  (A)(1) FINANCIAL STATEMENTS.
 
  See Index on page 19.
 
  (2) FINANCIAL STATEMENT SCHEDULES.
 
  Schedule II--Valuation and Qualifying Accounts and Reserves. See page 41.
 
  (3) EXHIBITS.
 
<TABLE>
<CAPTION>
 EXHIBIT
 NUMBER                                DESCRIPTION
 -------                               -----------
 <C>     <S>
  *3.1   Restated Certificate of Incorporation of the Company (Drilex
          International Inc. Registration Statement on Form S-1 (Reg. No. 333-
          03405), Exhibit 3.1).
  *3.2   Bylaws of the Company, as amended (Drilex International Inc.
          Registration Statement on Form S-1 (Reg. No. 333-03405), Exhibit
          3.2).
  *4.1   Form of certificate representing Common Stock (Drilex International
          Inc. Registration Statement on Form S-1 (Reg. No. 333-03405), Exhibit
          4.1).
</TABLE>
 
 
                                      38
<PAGE>
 
<TABLE>
<CAPTION>
 EXHIBIT
 NUMBER                                DESCRIPTION
 -------                               -----------
 <C>     <S>
  *4.2   Restated Registration Rights Agreement dated as of May 15, 1996, among
          the Company and the stockholders listed on the signature pages
          thereto (Drilex International Inc. Registration Statement on Form S-1
          (Reg. No. 333-03405), Exhibit 4.2).
  *4.3   Form of Employee Stockholders Agreement among the Company and certain
          stockholders of the Company (Drilex International Inc. Registration
          Statement on Form S-1 (Reg. No. 333-03405), Exhibit 4.4).
  *4.4   Stockholders' Agreement dated as of September 30, 1994 among the
          Company and Posi-Trak Mud Motors, Inc. (Drilex International Inc.
          Registration Statement on Form S-1 (Reg. No. 333-03405), Exhibit
          4.5).
  *4.5   Stockholders' Agreement dated as of May 5, 1995 among the Company and
          the stockholders and holders of warrants to purchase Common Stock
          listed on the signature pages thereto (Drilex International Inc.
          Registration Statement on Form S-1 (Reg. No. 333-03405), Exhibit
          4.6).
  *4.6   Stockholders Agreement dated as of October 4, 1995 among the Company,
          ENSCO Technology Company and certain permitted assigns (Drilex
          International Inc. Registration Statement on Form S-1 (Reg. No. 333-
          03405), Exhibit 4.7).
  *4.7   Amended and Restated Credit Agreement dated as of September 16, 1996,
          among the Company, Drilex Systems, Inc., Cobb Directional Drilling
          Company, L.L.C., Sharewell, Inc., Drilex Systems Limited and Texas
          Commerce Bank National Association, as lender, (Drilex International
          Inc. Quarterly Report on Form 10-Q (September 30, 1996), Exhibit
          4.1).
  *4.8   Dollar Note dated September 16, 1996 of the Company, Drilex Systems,
          Inc., Sharewell, Inc. and Cobb Directional Drilling Company, L.L.C.
          payable to the order of Texas Commerce Bank National Association
          (Drilex International Inc. Quarterly Report on Form 10-Q (September
          30, 1996), Exhibit 4.2).
  *4.9   Interest Rate Agreement dated as of September 16, 1996 among Texas
          Commerce Bank National Association, the Company, Drilex Systems,
          Inc., Cobb Directional Drilling Company, L.L.C., Sharewell, Inc. and
          Drilex Systems Limited (Drilex International Inc. Quarterly Report on
          Form 10-Q (September 30, 1996), Exhibit 4.3).
   4.10  Amendment to Credit Agreement dated as of February 10, 1997, among the
          Company, Drilex Systems, Inc., Drilex Systems Limited, Cobb
          Directional Drilling Company, L.L.C., Sharewell, Inc. and Texas
          Commerce Bank National Association.
         The Company is a party to several debt instruments under which the
         total amount of securities authorized does not exceed 10% of the total
         assets of the Company and its subsidiaries on a consolidated basis.
         Pursuant to paragraph 4(iii)(A) of Item 601(b) of Registration S-K,
         the Company agrees to furnish a copy of such instruments to the
         Commission upon request.
 *10.1   Stock Purchase Agreement dated March 31, 1994 between the Company and
          MascoTech, Inc. (Drilex International Inc. Registration Statement on
          Form S-1 (Reg. No. 333-03405), Exhibit 10.1).
 *10.2   Repurchase Agreement dated June 30, 1994 between Drilex Systems, Inc.
          and MascoTech, Inc. (Drilex International Inc. Registration Statement
          on Form S-1 (Reg. No. 333-03405), Exhibit 10.2).
 *10.3   Asset Purchase Agreement dated September 30, 1994 among the Company,
          Cobb Directional Drilling Company, L.L.C., Cobb Directional Drilling
          Company, Inc., Posi-Trak Mud Motors, Inc. and Archie A. Cobb, III
          (Drilex International Inc. Registration Statement on Form S-1 (Reg.
          No. 333-03405), Exhibit 10.3).
 *10.4   Stock Purchase Agreement dated as of March 23, 1995 among the Company,
          Drilex Systems, Inc., Cobb Directional Drilling, Inc. and Archie A.
          Cobb, III (Drilex International Inc. Registration Statement on Form
          S-1 (Reg. No. 333-03405), Exhibit 10.4).
</TABLE>
 
 
                                       39
<PAGE>
 
<TABLE>
<CAPTION>
 EXHIBIT
 NUMBER                                DESCRIPTION
 -------                               -----------
 <C>     <S>
  *10.5  Stock Repurchase Agreement dated as of March 23, 1995 among the
          Company, Posi-Trak Mud Motors, Inc. and Archie A. Cobb, III (Drilex
          International Inc. Registration Statement on Form S-1 (Reg. No. 333-
          03405), Exhibit 10.5).
  *10.6  Stock Purchase Agreement dated as of May 5, 1995 between the Company
          and the Sellers listed on the signature pages thereto (Drilex
          International Inc. Registration Statement on Form S-1 (Reg. No. 333-
          03405), Exhibit 10.6).
  *10.7  Asset Purchase Agreement dated September 29, 1995 among the Company,
          Drilex Systems, Inc., ENSCO Technology Company and ENSCO
          International Incorporated (Drilex International Inc. Registration
          Statement on Form S-1 (Reg. No. 333-03405), Exhibit 10.7).
 +*10.8  Form of Indemnification Agreement between the Company and each of its
          directors (Drilex International Inc. Registration Statement on Form
          S-1 (Reg. No. 333-03405), Exhibit 10.8).
  +10.9  Stock Option Plan of the Company, as amended.
 +*10.10 Employment Agreement dated September 30, 1994 between Cobb Directional
          Drilling Company, L.L.C. and Archie A. Cobb, III (Drilex
          International Inc. Registration Statement on Form S-1 (Reg. No. 333-
          03405), Exhibit 10.10).
  +10.11 Stock Repurchase and Promissory Note Repayment Agreement and General
          Release dated as of January 31, 1997, among the Company, Cobb
          Directional Drilling Company, L.L.C., Drilex Systems, Inc., Posi-Trak
          Mud Motors, Inc., Cobb Directional Drilling Company, Inc. and Archie
          A. Cobb, III.
   11.1  Computation of Net Income Per Common and Common Equivalent Share.
  *21.1  Subsidiaries of the Company (Drilex International Inc. Registration
          Statement on Form S-1 (Reg. No. 333-03405), Exhibit 21.1).
   23.1  Consent of Deloitte & Touche LLP.
   27.1  Financial Data Schedule.
</TABLE>
--------
* Incorporated herein by reference as indicated.
+ Management contract or compensatory plan or arrangement required to be filed
  as an exhibit pursuant to the requirements of Item 14(c) of Form 10-K.
 
  (B) REPORTS ON FORM 8-K.
 
  None.
 
                                       40
<PAGE>
 
                                                                     SCHEDULE II
 
                   DRILEX INTERNATIONAL INC. AND SUBSIDIARIES
 
                 VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
 
                                 (IN THOUSANDS)
 
  The following table summarizes the activity in the Allowance for Doubtful
Accounts for each of the years ended December 31, 1996 and 1995 and for the
period from March 30, 1994 (inception) to December 31, 1994:
 
<TABLE>
<CAPTION>
                                              ADDITIONS
                                           ----------------
 ALLOWANCE FOR DOUBTFUL     BALANCE AT     CHARGED TO                       BALANCE AT
       ACCOUNTS:         BEGINNING OF YEAR  EXPENSE   OTHER    DEDUCTIONS   END OF YEAR
------------------------ ----------------- ---------- -----    ----------   -----------
<S>                      <C>               <C>        <C>      <C>          <C>
1996....................       $933           $585    $ 10       $(714)(a)     $814
1995....................        308            224     559(b)     (158)         933
1994....................        157            182       6         (37)         308
</TABLE>
--------
(a) Includes a reduction of $606 of allowance related to accounts receivable
    written off of which $315 related to the ENSCO acquisition (See(b)).
(b) Includes the addition of $458 of allowance related to the ENSCO acquisition
    and $69 related to the Sharewell acquisition.
 
                                       41
<PAGE>
 
                                  SIGNATURES
 
  Pursuant to the requirements 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 the City of Houston, State of
Texas, on the 28th day of March, 1997.
 
                                          DRILEX INTERNATIONAL INC.
 
                                                    /s/ John Forrest
                                          By:__________________________________
                                                      John Forrest
                                               Chief Executive Officer and
                                                        President
 
  Pursuant to the requirements of the Securities Exchange Act 1934, this
report has been signed by the following persons in the capacities indicated on
March 28, 1997.
 
 /s/
<TABLE>
<S>                                  <C>
            John Forrest             Chief Executive Officer, President and a
____________________________________ Director (Principal Executive Officer)
            John Forrest
 /s/
        G. Bruce Broussard           Vice President--Finance and Administration and
____________________________________ Secretary (Principal Financial Officer and
         G. Bruce Broussard          Principal Accounting Officer)
 /s/
            L.E. Simmons             Chairman of the Board
____________________________________
            L.E. Simmons
 /s/
          A. Clark Johnson           Director
____________________________________
          A. Clark Johnson
 /s/
         David C. Baldwin            Director
____________________________________
          David C. Baldwin
 /s/
          Sam S. Sorrell             Director
____________________________________
           Sam S. Sorrell
 /s/
            R.T. Swinton             Director
____________________________________
            R.T. Swinton
 /s/
         Philip Burguieres           Director
____________________________________
         Philip Burguieres
</TABLE>
 
                                      42