<PAGE>   1
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                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

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

                                  FORM 10-K/A
(MARK ONE)
      [X]        ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                   For the fiscal year ended August 31, 1997
                                       OR
      [ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                     For the transition period from      to

                         Commission file number 0-18656

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

<TABLE>
              <S>                                                  <C>
                              DELAWARE                                 75-2268672
                   (State or other jurisdiction of                  (I.R.S. Employer
                   incorporation or organization)                  Identification No.)
                   5005 RIVERWAY DRIVE, SUITE 550                         77056
                           HOUSTON, TEXAS                              (Zip Code)
              (Address of principal executive offices)
</TABLE>
       Registrant's telephone number, including area code: (713) 965-0653

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

<TABLE>
                        <S>                               <C>
                        TITLE OF EACH CLASS:              NAME OF EXCHANGE ON WHICH REGISTERED:
                        --------------------              -------------------------------------

                           Common Stock,                    National Association of Securities
                           $.01 par value                   Dealers Automated Quotation System
</TABLE>

       Securities registered pursuant to Section 12(g) of the Act:  None

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

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

         The number of shares outstanding of the Registrant's common stock as
of November 24, 1997, is 28,681,620.

         The aggregate market value of the stock held by non-affiliates of the
Registrant as of November 24, 1997, was approximately $37,110,587.

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

================================================================================
<PAGE>   2
         This Annual Report on Form 10-K contains certain "forward-looking"
statements as such term is defined in the Private Securities Litigation Reform
Act of 1995 and information relating to the Company and its subsidiaries that
are based on the beliefs of the Company's management as well as assumptions
made by and information currently available to the Company's management. When
used in this report, the words "anticipate," "believe," "estimate," "expect"
and "intend" and words or phrases of similar import, as they relate to the
Company or its subsidiaries or Company management, are intended to identify
forward-looking statements. Such statements reflect the current risks,
uncertainties and assumptions related to certain factors including, without
limitations, competitive factors, general economic conditions, customer
relations, relationships with vendors, the interest rate environment,
governmental regulation and supervision, seasonality, distribution networks,
product introductions and acceptance, technological change, changes in industry
practices, onetime events and other factors described herein. Based upon
changing conditions, should any one or more of these risks or uncertainties
materialize, or should any underlying assumptions prove incorrect, actual
results may vary materially from those described herein as anticipated,
believed, estimated, expected or intended. The Company does not intend to
update these forward-looking statements.

                                    PART I.

ITEM 1. BUSINESS

GENERAL

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

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

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

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





                                       2
<PAGE>   3
         The Company also rents specialized oilfield equipment such as pressure
control equipment, tools, pipe, tubing and whipstocks used in the drilling,
completion and workover of wells.

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

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

SEASONALITY

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

PATENTS AND LICENSES

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

MARKETING

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

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

RECENT ACQUISITIONS

         The following describes acquisitions by the Company during the year
ended August 31, 1996. The Company had no significant acquisitions during the
years ended August 31, 1997 and 1995.

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





                                       3
<PAGE>   4
         Effective October 1995, the Company acquired certain real property,
vehicles and rental tools and equipment from Apex Tool ("Apex"), a sole
proprietorship. Apex is located in Healdton, Oklahoma, and provides fishing and
rental tool services in the South Central Oklahoma and North Texas region. The
assets of Apex were acquired for $600,000 of which $200,000 was paid at
closing. The amount paid at closing was funded through borrowing from a
commercial bank as described in Note 6 of the Notes to Consolidated Financial
Statements. A $400,000 note payable, bearing interest at 9 percent per annum
was paid in two installments of $200,000 March 15, 1996 and 1997, to the owner
of Apex.

         Effective April 1996, the Company completed the acquisition of Panther
Oil Tools, (UK) Ltd. ("Panther"), an English company, and substantially all of
the assets of Villain Ltd. ("Villain"), a Guernsey company, for $1,250,000 and
1,200,000 shares of the Company's restricted common stock which were valued on
the date of issuance at $3,060,000.

         Effective May 1996, the Company acquired Runyon Oil Tools, Inc.
(Olney, Illinois), and DiKor, Inc. (Carmi, Illinois), and effective March 1996,
the Company acquired C&F Fishing Tools, Inc. (Maysville, Oklahoma), in separate
transactions in consideration for an aggregate of $283,000 and 331,455 shares
of the Company's restricted common stock which were valued on the date of
issuance at approximately $640,000.

         Effective June 1996, the Company acquired substantially all of the
assets of Reeled Tubular Components, Inc., of Houston, Texas, including the
intellectual property rights to an obstruction removing device, for a cash
payment of $50,000 and 20,000 shares of the company's restricted common stock
which were valued at $60,000 on the date of issuance.

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

         In August 1996, the Company acquired all of the issued ordinary shares
of Prime Pipe Limited, a UK company, for approximately $105,000 and the
issuance of 4,650 shares of the Company's common stock.

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

INDUSTRY CONDITION

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

         The willingness of oil and gas operators to make capital expenditures
for the exploration and production of oil and natural gas will continue to be
influenced by numerous factors over which Ponder has no control, including the
prevailing and expected market prices for oil and natural gas. Such prices are
impacted by, among other factors, the ability of the members of the
Organization of Petroleum Exporting Countries ("OPEC") to maintain price
stability through voluntary production limits, the level of production by
non-OPEC countries, worldwide demand for oil and gas, general economic and
political





                                       4
<PAGE>   5
conditions, costs of exploration and production, availability of new leases and
concessions, and governmental regulations regarding, among other things,
environmental protection, taxation, price controls and product allocations.  No
assurance can be given as to the level of future oil and gas industry activity
or demand for Ponder's services and products.

FOREIGN OPERATIONS

         Information by geographic location for the fiscal years 1997 and 1996
is shown below. As discussed in Note 3 of the Notes to Consolidated Financial
Statements, the Company's former operations in Azerbaijan are shown as
discontinued operations in the Consolidated Financial Statements (expressed in
thousands):

<TABLE>
<CAPTION>
                                                                                     YEAR ENDED     YEAR ENDED
                                                                                     AUGUST 31,     AUGUST 31,
                                                                                        1997           1996
                                                                                      --------       --------
           <S>                                                                         <C>            <C>
           Net Sales --
           Domestic  . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         $16,598        $10,857
           Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           5,277          1,104
                                                                                      --------       --------
                     Total . . . . . . . . . . . . . . . . . . . . . . . . . .         $21,875        $11,961
                                                                                       =======        =======
           Loss from continuing operations --
           Domestic  . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         $(9,584)       $(5,123)
           Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            (337)          (147)
                                                                                      --------       -------- 
                     Total . . . . . . . . . . . . . . . . . . . . . . . . . .         $(9,921)       $(5,270)
                                                                                       =======        ======= 
           Identifiable assets --
           Domestic  . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         $17,585        $21,552
           Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           9,032          6,350
                                                                                      --------       --------
                     Total . . . . . . . . . . . . . . . . . . . . . . . . . .         $26,617        $27,902
                                                                                       =======        =======
</TABLE>

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

COMPETITION

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

GOVERNMENTAL REGULATIONS

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





                                       5
<PAGE>   6
ENVIRONMENTAL MATTERS

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

EMPLOYEES

         As of November 24, 1997, the Company had approximately 153 full-time
employees. The Company has no contracts or collective bargaining agreements
with labor unions and considers its relations with its employees to be
satisfactory.

EXECUTIVE OFFICERS OF THE REGISTRANT

         The current executive officers of the Company, their names, ages,
positions and tenure with the Company as of November 24, 1997 are as follows:

<TABLE>
<CAPTION>
                                                                                                 OFFICER
                   NAME                              AGE               POSITION                   SINCE 
            -----------------                        ---       -------------------------          ------
            <S>                                       <C>      <C>                                 <C>
            Eugene L. Butler  . . . . . . . . . .     56       Chairman, President and Chief       1996
                                                               Executive Officer
            Gerald A. Slaughter . . . . . . . . .     54       Senior Vice President and           1996
                                                               Chief Financial Officer
            Frank J. Wall . . . . . . . . . . . .     42       Senior Vice President of            1990
                                                               Operations
            Shirley Meyer . . . . . . . . . . . .     57       Vice President Human                1997
                                                               Resources and Investor
                                                               Relations and Secretary
</TABLE>

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

ITEM 2. PROPERTIES

         The Company's principal executive offices are located at 5005 Riverway
Drive, Suite 550, Houston, Texas 77056 and its telephone number at that address
is (713) 965-0653. The Company's administrative offices are located at 511
Commerce Drive, Alice, Texas and its telephone number at that address is (512)
664-5831. The Company's other properties include 18 equipment rental and sales
facilities owned or leased in Texas, Louisiana, Mississippi, Oklahoma,
Arkansas, and Illinois. In addition, the Company has two facilities located in
the United Kingdom. Substantially all of the Company's fixed assets are pledged
as security to a financial institution as collateral for certain of the
Company's long term debt. See Note 6 of Notes to Consolidated Financial
Statements. The Company believes that its facilities are generally adequate for
their respective operations, and that the facilities of the





                                       6
<PAGE>   7
Company are maintained in good repair. The Company is lessee under a number of
cancelable and noncancelable leases for certain real properties. See Note 11 of
Notes to Consolidated Financial Statements.

ITEM 3. LEGAL PROCEEDINGS

         In October 1995, the Securities and Exchange Commission (the
"Commission") notified the Company that the staff of the Commission intended to
recommend that the Commission institute a cease and desist proceeding against
the Company and various former officers and directors of the Company on the
basis of alleged violations of the Securities Exchange Act of 1934 (the
"Exchange Act"), primarily related to the Company's accounting treatment with
respect to revenue recognition for the Company's former operations in
Azerbaijan in the Company's periodic reports filed with the Commission in late
fiscal 1992 and fiscal 1993 and the Company's press release in August 1992
concerning the results of the Azerbaijan operations. In July 1997, the
Commission accepted the Company's and the various former officers' and
directors' offer of a non-cash settlement whereby the Commission ordered that
the Company and the various former officers and directors cease and desist from
committing or causing any violations of the Exchange Act.

         The Company had been a defendant in a lawsuit filed by a former
employee in December 1993 seeking damages for wrongful termination. The suit
sought approximately $317,000 in unpaid wages and value of $143,000 for 38,052
shares of stock he would have earned during the remainder of his contract term.
In April 1997, a final judgment was issued whereby the former employee
recovered the sum of $200,000 and 77,922 shares of restricted common stock of
the Company was issued to the former employee. Included in general and
administrative expenses for the year ended August 31, 1997, is $265,000 of
settlement costs relating to disposition of this suit.

         In August 1996, a case was filed in the United States District Court
for the Western District of New York alleging that the Company breached an
obligation to convert certain debentures held by the plaintiff into the
Company's common stock. In September 1997, the Company reached a settlement
with those convertible debenture holders who had not previously converted their
debentures whereby the Company agreed to convert all of such debenture holders'
then outstanding debenture debt of approximately $7,060,000, including accrued
interest, into 10,633,333 shares of the Company's common stock. The Company
also agreed to issue to such debenture holders five-year warrants to purchase
an additional 957,000 shares of the Company's common stock at $1 per share. At
August 31, 1997, the Company had accrued approximately $100,000 as its estimate
of the fair value of the warrants issued in settlement of this matter.

         In 1996, the Company sued its placement agent and its principal and
related entities (the "placement agent") in the Company's 1996 convertible
debenture offering and the debenture holders in the United States District
Court for the Western District of New York.  In mid-1997, the Company settled
with all of the debenture holders, and the judge ordered the case against the
placement agent transferred to the United States District Court for the
Northern District of Georgia.  In response, in September 1997, a case was filed
against the Company in Georgia State Court, which the Company removed to the
United States District Court for the Northern District of Georgia, Atlanta
Division, by the placement agent alleging that, in connection with such
offering, the Company tortiously interfered with its business relationships,
breached a Proprietary Information, Non-Circumvention and Indemnification
Agreement between the Company and the placement agent, defamed the placement
agent and engaged in conduct giving rise to an indemnification in favor of the
placement agent.  The Federal court has now consolidated the two lawsuits.  The
Company is seeking unspecified millions of dollars in actual and punitive
damages from the placement agent and the placement agent seeks actual damages
in an amount not less than $1,000,000 per breach, exemplary damages in an
amount not less than $2,500,000, interest, costs and attorney's fees.  Although
no assurance can be given, the Company believes it has meritorious claims
against the transfer agent which it intends to prosecute vigorously and that it
has meritorious defenses to the above action and intends to defend itself
vigorously.





                                       7
<PAGE>   8
         The Company is also a party to additional claims and legal proceedings
arising in the ordinary course of business. The Company believes it is unlikely
that the final outcome of any of the claims or proceedings to which the Company
is a party, including those described above, would have a material adverse
effect on the Company's financial statements; however, due to the inherent
uncertainty of litigation, the range of possible loss, if any, cannot be
estimated with a reasonable degree of precision and there can be no assurance
that the resolution of any particular claim or proceeding would not have an
adverse effect on the Company's results of operations for the interim period in
which such resolution occurred. The Company had accrued $500,000 at August 31,
1996 as its estimate of costs it expected to incur in defense of the above
actions. At August 31, 1997, approximately $170,000 of the accrued amount was
remaining.

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

         Not applicable.

                                    PART II.

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

         As of November 24, 1997, there were approximately 1,900 beneficial
owners of the Company's common stock which is traded on the NASDAQ SmallCap
System under the symbol "PNDR". The following table sets forth, for the
calendar periods indicated, the range of high and low bid closing prices for
the Company's common stock, as reported by the NASDAQ Small Cap System:

<TABLE>
<CAPTION>
                                                         1997                                1996
                                                         ----                                ----
                                                HIGH              LOW              HIGH               LOW  
                                              --------          -------          --------           -------
         <S>                                  <C>                <C>              <C>               <C>
         First Quarter . . . . . . . .        $2-1/16            $1-3/8           $1-5/8           $  3/4
         Second Quarter  . . . . . . .         2                  1-1/4            4-1/16           1
         Third Quarter . . . . . . . .         1-5/16             2-5/32           6-1/4            3-13/16
         Fourth Quarter  . . . . . . .         1-3/32               7/16           4-7/8            1-5/16
</TABLE>

         The closing price of the Company's common stock on November 24, 1997
was $1 29/32.

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

ITEM 6. SELECTED FINANCIAL DATA

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





                                       8
<PAGE>   9

                            OPERATING STATEMENT DATA
                    (IN THOUSANDS, EXCEPT SHARE INFORMATION)


<TABLE>
<CAPTION>
                                                                  YEARS ENDED AUGUST 31                           
                                                  -------------------------------------------------------------
                                                    1997         1996         1995         1994          1993     
                                                  --------    ---------     --------     ---------    ---------   
           <S>                                    <C>           <C>          <C>          <C>           <C>       
           Tool rentals and sales  . . . . . .    $21,875       $11,961       $ 6,757      $ 7,635       $8,719   
                                                  =======       =======       =======      =======       ======   
           Loss from continuing operations . .    $(9,921)      (5,270)      $  (440)     $(1,567)      (1,280)   
                                                                                                                  
           Income (loss) from discontinued                                                                        
             operations  . . . . . . . . . . .         --        1,378        (3,791)      (1,532)          --    
           Cumulative effect of change in                                                                         
             accounting principle  . . . . . .         --           --         1,139           --           --    
                                                  -------       ------       -------      -------       ------    
           Net loss  . . . . . . . . . . . . .    $(9,921)      $(3,892)      $(3,092)     $(3,099)      $(1,280) 
                                                  =======       =======       =======      =======       =======  
           Income (loss) per share --                                                                             
           Continuing operations . . . . . . .    $   (.73)     $  (.61)     $  (.07)     $  (.25)      $  (.20)  
           Discontinued operations . . . . . .         --           .16         (.59)        (.24)          --    
           Change in accounting principle  . .         --           --           .18           --           --    
                                                  -------       ------       -------      -------       ------    
           Net loss  . . . . . . . . . . . . .    $   (.73)     $  (.45)     $  (.48)     $  (.49)      $  (.20)  
                                                  ========      =======      =======      =======       =======   
</TABLE>


                               BALANCE SHEET DATA
                    (IN THOUSANDS, EXCEPT SHARE INFORMATION)

<TABLE>
<CAPTION>
                                                                              AUGUST 31                         
                                                           ------------------------------------------------
                                                           1997       1996       1995       1994       1993
                                                           ----       ----       ----       -----      ----
             <S>                                        <C>        <C>         <C>        <C>        <C>
             Working capital (deficit) . . . . . .      $(2,058)   $  (273)     $1,210    $(3,389)   $   425
             Total assets  . . . . . . . . . . . .        26,617     27,902      6,815     10,829     13,555
             Long-term debt  . . . . . . . . . . .         7,458      4,148      2,343         --      2,450
             Stockholders' equity  . . . . . . . .         1,469      7,013      2,312      5,407      8,508
             Book value per common share . . . . .          $.08       $.59       $.36       $.85      $1.33
</TABLE>

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

         The following discussion is included to describe the Company's
financial position and results of operations for each of the three years in the
period ended August 31, 1997. The Consolidated Financial Statements and notes
thereto contain detailed information that should be referred to in conjunction
with this discussion.

BUSINESS REVIEW

         Ponder is an international oilfield service and rental tool company
that specializes in the use of fishing tools for the recovery of unwanted
obstructions in oil and gas wells. The Company also rents specialized oilfield
equipment such as pressure control equipment, tools, pipe, tubing and
whipstocks used in the drilling, completion and workover of wells. Ponder
currently has 18 locations domestically and two international locations serving
the North Sea area.

         Since 1981, when the Company was founded, Ponder has been engaged
principally in providing fishing tool services to its customers in the United
States. In 1992, however, the Company started a major project in Azerbaijan,
formerly a state in the Soviet Union, which appeared to Ponder's management to
have great potential.  Such operations were started based on a purported
agreement between MegaOil USA/Vista Joint Venture and Azerbaijan Oil Company,
an arm of the Government of Azerbaijan. It was subsequently determined that
such agreement was invalid and the Company took actions to protect its assets
in Azerbaijan by forming a new joint venture "Baku-Ponder Services JV."  Also,
Ponder International Services, Inc. ("PISI"), a wholly owned subsidiary,





                                       9
<PAGE>   10
contracted with the State Oil Company of Azerbaijan ("SOCAR") to perform
services and rent and sell equipment for the workover of onshore and offshore
oil and gas wells. PISI performed jobs for SOCAR during fiscal 1995 but was
unsuccessful in obtaining full payment for services.  Consequently, the service
work was terminated and the ability to obtain future work under the SOCAR
contract became questionable. Work for other entities in the region was not
sufficient to result in profitable operations for this segment of the Company.
In November 1995 management concluded that the Azerbaijan project was a
failure, and the Company discontinued the project and decided to seek a new
direction with a new strategy.  In February of 1996, the Company sold its
operations in Azerbaijan to Titan Resources, Inc.  ("Titan") for 2,000,000
shares of Titan stock.

         Ponder's strengths are its history, reputation, quality of service and
its people. Despite these strengths, the new strategy would prove difficult to
implement because Ponder was financially unstable and losing significant cash.
Growing the Company would require the use of equity to acquire assets and raise
much needed cash to fund its operating losses, open new locations, hire strong
management and sales teams, and buy additional equipment.

         In fiscal 1996 management raised over $12 million in cash from
financing activities including the sale of convertible debentures and common
stock.  In fiscal 1997, Ponder completed a $10 million financing agreement to
pay off existing bank debt and provide additional working capital for
continuing growth. Ponder acquired 10 companies in fiscal 1996 and opened three
new locations, two in Louisiana and one in Texas. One of the companies
acquired, Panther Oil Tools, is located in the North Sea area. Revenues
increased to $21,900,000 in 1997, from $12,000,000 in 1996 and $6,800,000 in
1995, reflecting the Company's expansion program; however, the Company
continued to incur substantial losses and cash flow deficiencies. Effective
April 26, 1997, Mr. Larry D. Armstrong resigned as Chairman, President and
Chief Executive Officer. Eugene L. Butler was named as his successor. Mr.
Butler has approximately 28 years industry experience. From 1974 through 1991,
he served in various executive capacities for Weatherford/Enterra, Inc., a
multinational energy corporation, including director, president, chief
executive officer and chief operating officer.

         With the exception of the acquisition of Fishing Tools, Inc. in
January of 1998, all of the Company's recent acquisitions were made during
fiscal 1996.  Accordingly, all costs, including administrative and general
expenses, associated with integrating the acquired companies into the Company
are reflected in the financial statements for the fiscal year ended 1997.
General and administrative expenses for fiscal 1997 decreased by 4% to
$6,250,000 from $6,478,000 in 1996.  As a percentage of revenues, general and
administrative expenses decreased to 29% in 1997 from 54% in 1996.  The
reduction in general and administrative expense was due to the major cost
reduction program the Company commenced in April 1997, which included a 10%
reduction in personnel, closing two of its unsuccessful operating locations in
North Louisiana, the sale of certain non-productive equipment to reduce debt,
resolving the litigation involving its convertible debenture holders and
substantially reducing general and administrative expenses. This cost reduction
program had a positive impact on the quarter ended August 31, 1997.  For fiscal
1998, the Company anticipates that general and administrative expenses will
further decrease, both in real dollar terms and as a percentage of revenues.

         Demand for the Company's services and rentals depends primarily on the
number of oil and gas wells being drilled, the depth and drilling conditions of
such wells, and the level of workover activity. Drilling and workover activity
is largely dependent on the prices for oil and natural gas. Demand for oil and
natural gas has allowed for higher prices in 1997 and 1996 than the average
prices for the past several years.  However, oil prices, and to a lesser
extent, natural gas prices, have recently declined.  The Company is unable to
predict the duration of such price declines or the impact that such declines
may have on the Company's future results of operations.

FINANCIAL CONDITION AND LIQUIDITY

         In November 1996, the Company completed a $10 million financing
agreement with KBK Financial, Inc. ("KBK").  The agreement includes a $4
million Revolving Receivable Facility, a $2.5 million Revolving Credit Note and
a $3.5 million Term Note (collectively, the "Notes"). The Receivable Facility
is a two year facility that is based





                                       10
<PAGE>   11
on accounts receivable and will be utilized for short-term liquidity needs. The
$2.5 million Revolving Credit Note is a five year facility, based on inventory
and equipment, and these funds were used to acquire capital assets to expand
the Company's business. The $3.5 million Term Note is a five and one-half year
note, interest only for the first six months, and amortizes over the remaining
five years, collateralized by equipment. The funds were used to pay off
existing bank debt of $3 million with the balance being used to fund operations
and acquire capital equipment. At August 31, 1997, the Company had borrowed
approximately $7.3 million under the Notes. The Notes require compliance with
various covenants, including the maintenance of a defined debt service coverage
ratio and a defined tangible net worth. As a result of continued losses
primarily relating to the Company's expansion program, the Company was in
technical default of the Notes.  The Company and KBK have amended the Notes and
the Company is no longer in technical default thereunder.

         In April 1996, the Company raised approximately $10 million, net of
fees, by issuing eight percent Convertible Debentures. As discussed in Note 13
to the Financial Statements, claims and counterclaims were filed between
certain convertible debenture holders and the Company. During the period of
litigation, the Company incurred substantial legal expenses in defense of the
litigation. In September 1997, the Company reached a settlement whereby those
convertible debenture holders who had not previously converted their debentures
with the Company agreed to convert the then outstanding debenture debt of
approximately $7,060,000, including accrued interest, into 10,633,333 shares of
the Company's common stock. The conversion of the debentures will increase the
Company's equity by approximately $6.7 million.

         The Company acquired approximately $3.6 million of property and
equipment during the 1997 fiscal year. The funds used to purchase these assets
were provided primarily from securities issued and additional borrowings.

         At August 31, 1997, the Company had a working capital deficit of
approximately $2.1 million, as compared to a working capital deficit of $.3
million at August 31, 1996. The current ratio was approximately .79 to 1.0 at
August 31, 1997, compared to .96 to 1.0 for the previous year end. Included as
a component of the Company's working capital at August 31, 1997 is $800,000
representing the Company's investment in 2 million shares of Titan Resources,
Inc. ("Titan") common stock.  The Titan common stock is a thinly traded and
volatile security. See also Notes 2 and 3 of Notes to Consolidated Financial
Statements.

         A $2,500,000 bridge loan was obtained from White Owl Capital Partners
("White Owl") and certain others in October 1997 with the intention of
providing additional capital for acquisitions and expansion of the Company's
business.  In January 1998, the Company purchased Fishing Tools, Inc. ("FTI")
for $6,500,000 in cash and approximately 645,000 shares of Common Stock valued
at $1,000,000.  FTI is a full service fishing and rental tool company, with
three locations in Louisiana and one in Texas, and has a significant offshore
presence.  Also in January 1998, the Company completed an $11,000,000 private
placement of its Common Stock to affiliates of White Owl.  These transactions
have increased the Company's equity to approximately $22,000,000 and provided
stronger liquidity ratios.  FTI's revenues were approximately $6,200,000 in
1996. FTI has historically been a profitable company with positive cash flow
and is anticipated to have a positive impact on the Company's future net income
and cash flow.

         The balance of the proceeds from the $11,000,000 private placement
will be used by the Company for working capital and debt reduction.  The
Company anticipates that the proceeds from the private placement and the cash
proceeds generated from operations will be sufficient to provide for the
Company's working capital needs for the next 12 months and beyond.

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

         A net loss of $9,921,000, or $.73 per share, was recorded in 1997
compared with a net loss of $3,892,000, or $.45 per share, in 1996. The
Company's loss from continuing operations in 1997 was $9,921,000, or $.73 per
share, as compared to a loss of $5,270,000, or $.61 per share, in 1996. In
1995, the Company recognized a





                                       11
<PAGE>   12
$3,791,000 loss, or $.59 per share, as a result of the write-off of its
operations in Azerbaijan. In 1996 the Company disposed of its operations in
Azerbaijan. The sale resulted in a gain of $1,400,000 and income from
discontinued operations of $1,378,000, or $.16 per share.

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

         Cost of service and sales increased $4,235,000, or 80%, to $9,555,000
in 1997 from $5,320,000 in 1996. Cost of sales increased relative to the
increase in revenues. The Company's gross profit margin was 56% in each of the
years 1997 and 1996. Operating expenses, as a percentage of sales increased to
50% in 1997 from 41% in 1996. The increase is due to the Company's increase in
operating locations and personnel. In the fourth quarter of 1997, the Company
closed two of its unsuccessful North Louisiana expansion locations and reduced
operating personnel and related expenses.

         General and administrative expenses decreased $228,000, or 4%, to
$6,250,000 in 1997 as compared to $6,478,000 in 1996. General and
administrative expenses as a percentage of revenues, decreased to 29% in 1997
from 54% in 1996, as a result of reduced fees for professional services and a
reduction in corporate sales and administrative personnel and related expenses.

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

         During 1997, the Company recorded a loss on write-down of assets in
the amount of $2,178,000. During 1996, the Company signed a letter of intent to
acquire Abilene, Texas, based G&L Fishing Tool Company and during fiscal 1997
recorded $1,172,000 as a forfeited deposit and related acquisition expense. The
option expired in July 1997, resulting in a write-off of the balance.
Additionally, the Company wrote-off approximately $446,000 relating to a Dubai
joint venture, $300,000 relating to a write-down of available for sale
securities and an approximate $260,000 write-down of the value of certain used
equipment inventory.

FISCAL YEAR ENDED AUGUST 31, 1996 AS COMPARED WITH FISCAL YEAR ENDED AUGUST 31,
1995

         A net loss of $3,892,000, or $.45 per share, was recorded in 1996
compared with a net loss of $3,092,000, or $.48 per share, in 1995. The
Company's loss from continuing operations in 1996 was $5,270,000, or $.61 per
share, as compared to a loss of $440,000, or $.07 per share, in 1995. In 1995,
the Company recognized a $3,791,000 loss, or $.59 per share, as a result of the
write-off of its operations in Azerbaijan and recognized income of $1,139,000,
or $.18 per share, due to a cumulative effect of a change in accounting
principle for its inventory of parts. In 1996 the Company disposed of its
operations in Azerbaijan. The sale resulted in a gain of $1,400,000 and income
from discontinued operations of $1,378,000, or $.16 per share.

         Revenues increased $5,204,000, or 77%, to $11,961,000 in 1996 compared
to $6,757,000 in 1995. The increase was due to a significant increase in the
domestic marketing effort and an increase in operating locations. Revenues
attributable to the four Texas stores and the machine shop operation in place
at the beginning of the year increased $1,248,000, or 18%, to $8,005,000 in
1996 as compared to $6,757,000 in 1995. During 1996 the Company added nine new
store locations in Oklahoma, Arkansas, Louisiana, Mississippi, Illinois and
Texas, and





                                       12
<PAGE>   13
these new locations contributed approximately $2,852,000 to the 1996 revenue.
The acquisition of Villain and Panther resulted in an additional $1,104,000 in
1996 revenues.

         Cost of service and sales increased $1,959,000, or 58%, to $5,320,000
in 1996 from $3,361,000 in 1995.  Operating expenses increased $2,711,000, or
122%, to $4,941,000 in 1996 as compared to $2,230,000 in 1995. Cost of sales
and operating expenses increased relative to the increase in revenues, while
operating expenses increased in a greater percentage, due to the start-up cost
incurred in establishing the new store locations and the addition of 62
operating personnel.

         General and administrative expenses increased $3,875,000, or 149%, to
$6,478,000 in 1996 from $2,603,000 in 1995. During 1996, the Company
significantly increased its domestic marketing effort by adding 41 personnel in
the regional and corporate sales group and has established a marketing presence
in Oklahoma, Arkansas, Illinois and the Gulf Coast region. During the year, the
Company relocated its corporate offices to Houston, Texas with the Alice, Texas
facility remaining as the administrative office. The Company has added 15
personnel in the corporate and administrative functions as a result of the
expansion effort. The employee costs and other related expenses associated with
this expansion accounts for approximately $2,450,000, or 63% of the current
year increase. Fees for professional services increased $650,000, or 17% of the
current year increase, primarily due to the Company's accrual of legal fees of
$500,000 as the estimated cost it expected to incur in defense of certain
contingencies discussed in Notes 13 and 18.  Additionally, the Company incurred
increased accounting, legal and public corporation expenses associated with the
increase in business activity. Expenses of $700,000 were recognized during the
year, relating to a stock grant and consulting arrangement with the former
chairman of the Company, as discussed in Note 18.

         Net interest expense increased $202,000, or 43%, to $673,000 in 1996
from $471,000 in 1995. The increase is due primarily to $285,000 non-cash
interest expense on the 8% Convertible Debentures issued effective April 26,
1996, as discussed in Note 7, offset by a reduction in the average interest
rate of bank debt during the year and increased interest income.

         The gain (loss) on disposal of assets decreased from a gain of
$1,320,000 in 1995 to a loss of $12,000 in 1996.  In 1995, the Company
conducted an auction of its excess rental tools and certain equipment with a
resultant $1,358,000 gain from disposal of assets.

ITEM 8. FINANCIAL STATEMENTS AND SCHEDULES

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

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

         The firm of, Hairston, Kemp, Sanders & Stich, P.C., certified public
accountants ("Hairston") served as the independent auditors of the Company
until January 8, 1996 at which time the Company replaced the firm now known as
Kemp & Stich, P.C. with William B. Sanders, C.P.A. ("Sanders") as the principle
accountant of the Company (see Form 8-K dated January 8, 1996). On April 10,
1996, Sanders was replaced by Arthur Andersen LLP ("Andersen"). The decision to
change accountants was recommended by the Board of Directors of the Company.

         In connection with the audits of the two fiscal years ended August 31,
1995, and the subsequent interim period through April 10, 1996, there were no
disagreements with Hairston or Sanders on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedures,
which disagreements if not resolved to their satisfaction would have caused
them to make reference in connection with their opinion to the subject matter
of the disagreement.





                                       13
<PAGE>   14
         Other than a qualification of opinion as to the Company's ability to
continue operations as a going concern due to recurring losses from continuing
operations for the past three years contained in the independent auditor's
report filed by Hairston in connection with the Company's consolidated
financial statements for the fiscal years ended August 31, 1995 and August 31,
1994 and a qualification of opinion regarding the recovery of the Company's
cost of its Azerbaijan operations contained in the 1994 independent auditor's
report, the audit reports of Hairston on the consolidated financial statements
of the Company as of and for the years ended August 31, 1994 and 1995, did not
contain any adverse opinion or disclaimer of opinion nor were they qualified or
modified as to uncertainty, audit scope, or accounting principles.

         On April 10, 1996, Andersen was engaged to audit the financial
statements of the Company for its fiscal year ended August 31, 1996. The
Company has authorized Sanders to respond fully to inquiries of Andersen. The
Company did not contact Andersen during the Company's two most recent fiscal
years, or any subsequent interim period, regarding (1) any disagreement with
Sanders or Hairston or (2) the application of accounting principles to a
specified transaction or the type of audit opinion that might be rendered on
the Company's financial statements. Prior to its engagement, Andersen was
neither asked for, nor has it expressed any opinion on any accounting issues
concerning the Company.

                                   PART III.

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The information called for by item 10 of Form 10-K is incorporated
herein by reference to such information included in the Company's Proxy
Statement for the 1998 Annual Meeting of Stockholders.

ITEM 11.  EXECUTIVE COMPENSATION

         The information called for by item 11 of Form 10-K is incorporated
herein by reference to such information included in the Company's Proxy
Statement for the 1998 Annual Meeting of Stockholders.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The information called for by item 12 of Form 10-K is incorporated
herein by reference to such information included in the Company's Proxy
Statement for the 1998 Annual Meeting of Stockholders.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The information called for by item 13 of Form 10-K is incorporated
herein by reference to such information included in the Company's Proxy
Statement for the 1998 Annual Meeting of Stockholders.

                                    PART IV.

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

(a) 1. FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                                          PAGE
                                                                                                          ----
          <S>                                                                                             <C>
          Report of Independent Public Accountants  . . . . . . . . . . . . . . . . . . . . . . . . . .   F-1
          Independent Auditors' Report  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   F-2
          Consolidated Balance Sheets -- August 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . .   F-3
          Consolidated Statements of Operations for the years ended August 31, 1997, 1996 and 1995  . .   F-4
          Consolidated Statements of Stockholders' Equity  for the years ended August 31, 1997, 1996 and
          1995  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   F-5
          Consolidated Statements of Cash Flows for the years ended August 31, 1997, 1996 and 1995 .  .   F-6
          Notes to Consolidated Financial Statements  . . . . . . . . . . . . . . . . . . . . . . . . .   F-8
</TABLE>





                                       14
<PAGE>   15
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of
Ponder Industries, Inc.:

         We have audited the accompanying consolidated balance sheets of Ponder
Industries, Inc. (a Delaware corporation), and subsidiaries as of August 31,
1997 and 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

         In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Ponder Industries,
Inc., and subsidiaries as of August 31, 1997 and 1996, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.

         The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has suffered recurring losses
from operations, has negative cash flows from operations, has negative working
capital at August 31, 1997, has an accumulated deficit and has limited access to
capital resources. These matters raise substantial doubt about the Company's
ability to continue as a going concern. The Company's management believes that
it is likely the Company's operating results for fiscal 1998 will significantly
improve over fiscal 1997 and will generate sufficient working capital to sustain
its operations throughout the year. There are no assurances that the Company can
achieve such operating improvements or that the Company will be able to achieve
future cash flows sufficient to support operations. Management's plans in regard
to these matters are also described in Note 2. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.


                                                         /s/ ARTHUR ANDERSEN LLP

San Antonio, Texas
October 17, 1997
(except with respect to the matters discussed
in Note 19, as to which the date is February 4, 1998)





                                      F-1
<PAGE>   16



                          INDEPENDENT AUDITORS' REPORT

Board of Directors and Stockholders of
Ponder Industries, Inc.:

         We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of Ponder Industries, Inc., and subsidiaries
for the year ended August 31, 1995. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on the financial statements based on our audit.

         We conducted our audit 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 audit provides a reasonable basis for our opinion.

         In our opinion, such consolidated financial statements present fairly,
in all material respects, the results of operations and cash flows of Ponder
Industries, Inc., and subsidiaries for the year ended August 31, 1995, in
conformity with generally accepted accounting principles.

         The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from continuing
operations, which raise substantial doubt about its ability to continue as a
going concern. Management's plans regarding those matters also are described in
Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

         As discussed in Note 17 to the financial statements, the Company
changed its method of accounting for parts used in conjunction with its rental
tools for the year ended August 31, 1995.

                                       /s/ HAIRSTON, KEMP, SANDERS & STICH, P.C.

San Antonio, Texas
November 20, 1995



                                      F-2
<PAGE>   17



                    PONDER INDUSTRIES, INC., AND SUBSIDIARIES

             CONSOLIDATED BALANCE SHEETS -- AUGUST 31, 1997 AND 1996
                    (IN THOUSANDS, EXCEPT SHARE INFORMATION)

                                     ASSETS


<TABLE>
<CAPTION>
                                                                  1997          1996
                                                                --------      --------
<S>                                                             <C>           <C>     
CURRENT ASSETS:
  Cash and cash equivalents ..................................  $      4      $    398
  Receivables, net of allowance for doubtful accounts of
    $657 and $138 in 1997 and 1996, respectively .............     4,134         3,647
  Parts and supplies .........................................     2,622         2,077
  Available for sale securities ..............................       800            --
  Prepaid expenses and other .................................        46           514
                                                                --------      --------
         Total current assets ................................     7,606         6,636
                                                                --------      --------
AVAILABLE FOR SALE SECURITIES ................................        --           900
                                                                --------      --------
OTHER RECEIVABLE .............................................        --           500
                                                                --------      --------
PROPERTY AND EQUIPMENT .......................................    31,383        29,140
                                                                --------      --------
  Less-- Accumulated depreciation and amortization ...........   (14,278)      (12,645)
                                                                --------      --------
                                                                  17,105        16,495
                                                                --------      --------
OTHER ASSETS .................................................       122         1,284
DEFERRED ASSETS, net .........................................       423           854
GOODWILL, net of accumulated amortization of $393 and $346
  in 1997 and 1996, respectively .............................     1,361         1,233
                                                                --------      --------
                                                                   1,906         3,371
                                                                --------      --------
TOTAL ASSETS .................................................  $ 26,617      $ 27,902
                                                                ========      ========
                       LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  Current maturities of long-term debt .......................  $  1,899      $  1,393
  Accounts and notes payable, trade ..........................     5,562         2,863
  Accrued liabilities and other ..............................     2,203         2,653
                                                                --------      --------
         Total current liabilities ...........................     9,664         6,909
                                                                --------      --------
LONG-TERM DEBT, less current maturities ......................     7,458         4,148
                                                                --------      --------
OTHER LONG-TERM LIABILITIES ..................................       765           449
                                                                --------      --------
DEFERRED TAXES PAYABLE .......................................       881           233
                                                                --------      --------
CONVERTIBLE DEBENTURES .......................................     6,380         9,150
                                                                --------      --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
  Common stock, $.01 par value; authorized 50,000,000
    shares, issued 17,571,021 and 12,131,347 shares as of
    August 31, 1997 and 1996, respectively, of which 0 and
    289,873 are held in treasury as of August 31, 1997 and
    1996, respectively .......................................       176           121
  Additional paid-in capital .................................    25,307        21,880
  Cumulative foreign currency translation adjustment .........        49            24
  Accumulated deficit ........................................   (23,696)      (13,775)
  Note receivable for common stock ...........................       (66)          (63)
  Deferred compensation ......................................        (1)         (146)
  Unrealized loss on available for sale securities ...........      (300)           --
  Treasury stock .............................................        --        (1,028)
                                                                --------      --------
         Total stockholders' equity ..........................     1,469         7,013
                                                                --------      --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ...................  $ 26,617      $ 27,902
                                                                ========      ========
</TABLE>


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





                                      F-3
<PAGE>   18



                    PONDER INDUSTRIES, INC., AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
               FOR THE YEARS ENDED AUGUST 31, 1997, 1996 AND 1995
                    (IN THOUSANDS, EXCEPT SHARE INFORMATION)


<TABLE>
<CAPTION>
                                                                1997              1996              1995
                                                            ------------      ------------      ------------
<S>                                                         <C>               <C>               <C>         
TOOL RENTALS AND SALES ...................................  $     21,875      $     11,961      $      6,757
COSTS OF SERVICE AND SALES ...............................         9,555             5,320             3,361
                                                            ------------      ------------      ------------
          Gross profit ...................................        12,320             6,641             3,396
                                                            ------------      ------------      ------------
EXPENSES:
  Operating ..............................................        10,900             4,941             2,230
  General and administrative .............................         6,250             6,478             2,603
                                                            ------------      ------------      ------------
                                                                  17,150            11,419             4,833
                                                            ------------      ------------      ------------
          Operating loss .................................        (4,830)           (4,778)           (1,437)
OTHER INCOME (EXPENSE):
  Interest, net ..........................................        (2,402)             (673)             (471)
  Gain (loss) on sale of assets ..........................          (534)              (12)            1,320
  Loss on write-down of assets ...........................        (2,178)               --                --
  Other ..................................................            23               260               148
                                                            ------------      ------------      ------------
LOSS FROM CONTINUING OPERATIONS
  BEFORE INCOME TAXES ....................................        (9,921)           (5,203)             (440)
INCOME TAX EXPENSE .......................................            --               (67)               --
                                                            ------------      ------------      ------------
LOSS FROM CONTINUING OPERATIONS ..........................        (9,921)           (5,270)             (440)
                                                            ------------      ------------      ------------
INCOME (LOSS) FROM DISCONTINUED OPERATIONS:
  Operations .............................................            --               (22)             (389)
  Disposal of assets including operations in disposal
     period ..............................................            --                --            (3,402)
  Gain on sale of discontinued operations ................            --             1,400                --
                                                            ------------      ------------      ------------
INCOME (LOSS) FROM DISCONTINUED
  OPERATIONS .............................................            --             1,378            (3,791)
                                                            ------------      ------------      ------------
LOSS BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
  PRINCIPLE ..............................................        (9,921)           (3,892)           (4,231)
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE ....            --                --             1,139
                                                            ------------      ------------      ------------
NET LOSS .................................................  $     (9,921)     $     (3,892)     $     (3,092)
                                                            ============      ============      ============
EARNINGS (LOSS) PER SHARE:
  Loss from continuing operations ........................  $       (.73)     $       (.61)     $       (.07)
  Income (loss) from discontinued operations .............            --               .16              (.59)
  Cumulative effect of a change in accounting
     principle ...........................................            --                --               .18
                                                            ------------      ------------      ------------
NET LOSS PER SHARE .......................................  $       (.73)     $       (.45)     $       (.48)
                                                            ============      ============      ============
WEIGHTED AVERAGE COMMON SHARES AND COMMON SHARE
  EQUIVALENTS OUTSTANDING ................................    13,641,558         8,717,912         6,377,564
                                                            ============      ============      ============
</TABLE>

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





                                      F-4
<PAGE>   19



                    PONDER INDUSTRIES, INC., AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
               FOR THE YEARS ENDED AUGUST 31, 1997, 1996 AND 1995
                    (IN THOUSANDS, EXCEPT SHARE INFORMATION)


   
<TABLE>
<CAPTION>
                                                                                             CUMULATIVE                
                                                                                              FOREIGN                 
                                                      COMMON STOCK           ADDITIONAL       CURRENCY                 
                                               -------------------------      PAID-IN        TRANSLATION     ACCUMULATED 
                                                 SHARES       PAR VALUE       CAPITAL        ADJUSTMENT        DEFICIT   
                                               ----------     ----------     ----------      -----------     -----------
<S>                                            <C>            <C>            <C>             <C>             <C>        
BALANCE, August 31, 1994 .................      6,667,437     $       67     $   13,217              --      $   (6,791)     
 Interest on note receivable for common
   stock .................................             --             --             --              --              -- 
 Net loss ................................             --             --             --              --          (3,092)
                                               ----------     ----------     ----------      ----------      ---------- 
BALANCE, AUGUST 31, 1995 .................      6,667,437             67         13,217              --          (9,883)
 Shares issued under employment
   agreement .............................        459,333              4            182              --              -- 
 Compensation expense ....................             --             --             --              --              -- 
 Shares issued in connection with
   acquisitions ..........................      1,551,455             16          3,743              --              -- 
 Shares issued as employee bonus .........         25,000             --             13              --              -- 
 Shares sold with warrants attached ......      1,500,000             15            897              --              -- 
 Exercise of warrants ....................      1,000,000             10          1,490              --              -- 
 Shares sold .............................         83,333              1            249              --              -- 
 Shares issued under option exercise .....         16,500             --             37              --              -- 
 Debentures converted into shares ........        828,289              8          1,652              --              -- 
 Compensation accrual for stock
   grant .................................             --             --            400              --              -- 
 Interest on note receivable for common
   stock .................................             --             --             --              --              -- 
 Foreign currency translation
   adjustment ............................             --             --             --              24              -- 
 Net loss ................................             --             --             --              --          (3,892)
                                               ----------     ----------     ----------      ----------      ---------- 
BALANCE, AUGUST 31, 1996 .................     12,131,347            121         21,880              24         (13,775)
 Compensation expense, net ...............             --             --             47              --              -- 
 Shares issued in connection with
   acquisitions ..........................          4,650             --             18              --              -- 
 Shares issued in settlement of
   lawsuit ...............................         77,922              1             41              --              -- 
 Shares issued in settlement of
   payables ..............................        429,570              4            367              --              -- 
 Shares sold, including 289,873
   treasury shares .......................      1,543,231             16            151              --              -- 
 Shares issued under stock grant .........        500,000              5             (5)             --              -- 
 Debentures converted into shares ........      2,841,773             28          2,770              --              -- 
 Shares contributed to 401(k) plan .......         42,528              1             38              --              -- 
 Interest on note receivable for common
   stock .................................             --             --             --              --              -- 
 Foreign currency translation
   adjustment ............................             --             --             --              25              -- 
 Unrealized loss on available for sale
   securities ............................             --             --             --              --              -- 
 Net loss ................................             --             --             --              --          (9,921)
                                               ----------     ----------     ----------      ----------      ---------- 
BALANCE, AUGUST 31, 1997 .................     17,571,021     $      176     $   25,307      $       49      $  (23,696)
                                               ==========     ==========     ==========      ==========      ========== 
<CAPTION>
                                                  NOTE                         UNREALIZED                            
                                               RECEIVABLE                       LOSS ON                             
                                                  FOR                          AVAILABLE                            
                                                 COMMON         DEFERRED        FOR SALE       TREASURY               
                                                 STOCK        COMPENSATION     SECURITIES       STOCK             TOTAL  
                                               ----------      ----------      ----------      --------        ----------
<S>                                            <C>             <C>             <C>             <C>             <C>       
BALANCE, August 31, 1994 .................     $      (57)     $       --      $       --      $   (1,028)     $    5,408
 Interest on note receivable for common
   stock .................................             (3)             --              --              --              (3)
 Net loss ................................             --              --              --              --          (3,092)
                                               ----------      ----------      ----------      --------        ----------
BALANCE, AUGUST 31, 1995 .................            (60)             --              --          (1,028)          2,313
 Shares issued under employment
   agreement .............................             --            (186)             --              --              --
 Compensation expense ....................             --              40              --              --              40
 Shares issued in connection with
   acquisitions ..........................             --              --              --              --           3,759
 Shares issued as employee bonus .........             --              --              --              --              13
 Shares sold with warrants attached ......             --              --              --              --             912
 Exercise of warrants ....................             --              --              --              --           1,500
 Shares sold .............................             --              --              --              --             250
 Shares issued under option exercise .....             --              --              --              --              37
 Debentures converted into shares ........             --              --              --              --           1,660
 Compensation accrual for stock
   grant .................................             --              --              --              --             400
 Interest on note receivable for common
   stock .................................             (3)             --              --              --              (3)
 Foreign currency translation
   adjustment ............................             --              --              --              --              24
 Net loss ................................             --              --              --              --          (3,892)
                                               ----------      ----------      ----------      --------        ----------
BALANCE, AUGUST 31, 1996 .................            (63)           (146)             --          (1,028)          7,013
 Compensation expense, net ...............             --             145              --              --             192
 Shares issued in connection with
   acquisitions ..........................             --              --              --              --              18
 Shares issued in settlement of
   lawsuit ...............................             --              --              --              --              42
 Shares issued in settlement of
   payables ..............................             --              --              --              --             371
 Shares sold, including 289,873
   treasury shares .......................             --              --              --           1,028           1,195
 Shares issued under stock grant .........             --              --              --              --              --
 Debentures converted into shares ........             --              --              --              --           2,798
 Shares contributed to 401(k) plan .......             --              --              --              --              39
 Interest on note receivable for common
   stock .................................             (3)             --              --              --              (3)
 Foreign currency translation
   adjustment ............................             --              --              --              --              25
 Unrealized loss on available for sale
   securities ............................             --              --            (300)             --            (300)
 Net loss ................................             --              --              --              --          (9,921)
                                               ----------      ----------      ----------      --------        ----------
BALANCE, AUGUST 31, 1997 .................     $      (66)     $       (1)     $     (300)     $       --      $    1,469
                                               ==========      ==========      ==========      ========        ==========
</TABLE>
    

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





                                      F-5
<PAGE>   20



                                     PONDER INDUSTRIES, INC., AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
               FOR THE YEARS ENDED AUGUST 31, 1997, 1996 AND 1995
                    (IN THOUSANDS, EXCEPT SHARE INFORMATION)
   
<TABLE>
<CAPTION>
                                                                              1997          1996          1995
                                                                            --------      --------      -------- 
<S>                                                                         <C>           <C>           <C>      
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net loss ..............................................................  $ (9,921)     $ (3,892)     $ (3,092)
   (Income) loss from discontinued operations ............................        --        (1,378)        3,791
   Cumulative effect of a change in accounting principle .................        --            --        (1,139)
                                                                            --------      --------      -------- 
              Loss from continuing operations ............................    (9,921)       (5,270)         (440)
   Adjustments to reconcile net loss to net cash used in operating
        activities --
        Depreciation and amortization ....................................     2,384         1,401           959
        (Gain) loss on sale of assets ....................................       534            12        (1,320)
        Noncash compensation expense .....................................       145           454            -- 
        Loss on write-down of assets .....................................     2,178            --            --
        Other noncash expenses ...........................................       421            46           109
   Net change in operating assets and liabilities --
        Receivables, net .................................................      (487)       (1,000)          327
        Parts and supplies ...............................................      (545)         (985)           11
        Prepaid expenses and other .......................................       468          (131)           43
       Accounts and notes payable, trade .................................     2,699         2,191          (733)
       Accrued liabilities and other .....................................      (612)        1,734          (124)
                                                                            --------      --------      -------- 
               Net cash used in continuing operating activities               (2,736)       (1,548)       (1,168)
                                                                            --------      --------      -------- 
CASH FLOWS FROM DISCONTINUED OPERATIONS:
    Income (loss) from discontinued operations ...........................        --         1,378        (3,791)
    Add (deduct) --
       Depreciation expense ..............................................        --            --           250
       Asset additions ...................................................        --            --           (27)
       Write-down of costs ...............................................        --            --         3,002
       Accrued liabilities, estimated operating cost for disposal ........        --          (510)          510
       Gain on sale of discontinued operations ...........................        --        (1,400)           -- 
                                                                            --------      --------      -------- 
              Net cash used in discontinued operations ...................        --          (532)          (56)
                                                                            --------      --------      -------- 
              Net cash used in operating activities ......................    (2,736)       (2,080)       (1,224)
                                                                            --------      --------      -------- 
CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchases of property and equipment ...................................    (3,595)       (6,430)         (293)
   Acquisitions, net of cash acquired ....................................        --        (2,471)           -- 
   Other asset additions .................................................        10        (1,696)           -- 
   Proceeds from asset sales and notes receivable ........................       965            19         2,700
                                                                            --------      --------      -------- 
              Net cash provided by (used in) investing activities ........    (2,620)      (10,578)        2,407
                                                                            --------      --------      -------- 
CASH FLOWS FROM FINANCING ACTIVITIES:
   Principal payments of long-term debt ..................................   (18,159)       (4,051)      (10,410)
   Financing and debt collateral payments ................................        --          (926)         (225)
   Proceeds from long-term debt borrowings ...............................    21,764         3,673         9,677
   Proceeds from convertible debentures ..................................        --        10,950            --
   Bank overdraft ........................................................       162           530           (45)
   Proceeds from issuance of common stock ................................     1,195         2,700            --
                                                                            --------      --------      --------
              Net cash provided by (used in) financing activities              4,962        12,876        (1,003)
                                                                            --------      --------      --------

CASH AND CASH EQUIVALENTS:
  Increase (decrease) ....................................................      (394)          218           180
  Beginning of year ......................................................       398           180            --
                                                                            --------      --------      --------
  End of year ............................................................  $      4      $    398      $    180
                                                                            ========      ========      ======== 
</TABLE>
    




                                      F-6



<PAGE>   21

<TABLE>
<CAPTION>

                                                                          1997        1996        1995
                                                                          ----        ----        ----
<S>                                                                     <C>          <C>          <C>  
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
    INFORMATION:
    Cash paid during the year for --
       Interest ...................................................     $  1,762     $    458     $ 472
                                                                        ========     ========     =====
       Income taxes ...............................................     $     --     $     --     $  --
                                                                        ========     ========     =====
SUPPLEMENTAL DISCLOSURES OF NONCASH
     INVESTING AND FINANCING ACTIVITIES:
    Assets acquired in connection with acquisitions ...............     $    845     $  9,636     $ 205
                                                                        ========     ========     =====
    Liabilities assumed in connection with acquisitions ...........     $    845     $  1,690     $  --
                                                                        ========     ========     =====
    Common stock issued in connection with acquisitions ...........     $     18     $  3,759     $  --
                                                                        ========     ========     =====
    Debt incurred in connection with acquisitions .................     $     --     $  2,177     $  --
                                                                        ========     ========     =====
    Capital lease obligations incurred ............................     $     36     $    294     $  --
                                                                        ========     ========     =====
    Common stock issued in connection with debenture conversions ..     $  2,798     $  1,660     $  --
                                                                        ========     ========     =====
    Common stock issued to officers, directors and employees ......     $    400     $    346     $  --
                                                                        ========     ========     =====
    Common stock issued in settlement of lawsuit ..................     $     42     $     --     $  --
                                                                        ========     ========     =====
    Common stock issued in settlement of payables .................     $    371     $     --     $  --
                                                                        ========     ========     =====
    Common stock contributed to 401(k) plan .......................     $     39     $     --     $  --
                                                                        ========     ========     =====
    Sale of discontinued operations in exchange for shares of Titan
       stock ......................................................     $     --     $  1,400     $  --
                                                                        ========     ========     =====
    Compensation accrual for stock grant ..........................     $     --     $    400     $  --
                                                                        ========     ========     =====
    Unrealized loss on available for sale securities ..............     $    300     $     --     $  --
                                                                        ========     ========     =====
</TABLE>

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





                                      F-7

<PAGE>   22



                    PONDER INDUSTRIES, INC., AND SUBSIDIARIES

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

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Principles of Consolidation and Basis of Presentation

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

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

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

Business

         The Company specializes in the downhole recovery of unwanted
obstructions in the bore holes of oil and gas wells through the utilization of
specifically designed tools, known as "fishing tools." The Company is engaged in
the business of renting fishing tools as well as providing supervisory personnel
for fishing operations. The Company also rents specialized oilfield equipment
such as pressure control equipment, tools, pipe, tubing and whipstocks used in
the drilling, completion and workover of wells. As of August 31, 1997, the
Company operated out of its principal executive offices in Houston, Texas, its
administrative headquarters in Alice, Texas, and "stores" located in Texas,
Louisiana, Oklahoma, Arkansas, Illinois and Mississippi. The Company also
operates in the United Kingdom (UK) through certain acquisitions during fiscal
1996 as discussed in Note 15.

Cash and Cash Equivalents

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

Parts and Supplies

         Parts and supplies for the manufacturing and repair of rental tools and
parts used in conjunction with the rental of tools are stated at the lower of
average cost or market with cost determined by the first-in, first-out method.
These parts and supplies have been classified as a current asset on the
accompanying consolidated balance sheets consistent with industry practice. (See
Note 17.)

Property and Equipment

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

Goodwill

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





                                      F-8
<PAGE>   23



                    PONDER INDUSTRIES, INC., AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Long-Lived Assets

         Effective for the fiscal year beginning September 1, 1996, the Company
has adopted Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." SFAS No. 121 requires an assessment of the recoverability of
the Company's investment in long-lived assets to be held and used in operations
whenever events or circumstances indicate that their carrying amounts may not be
recoverable. Such assessment requires that the future cash flows associated with
the long-lived assets be estimated over their remaining useful lives and an
impairment loss be recognized when the future cash flows are less than the
carrying value of such assets. As of August 31, 1997, the Company has determined
that the estimated future cash flows associated with its long-lived assets used
in operations are greater than the carrying value of such assets and that no
impairment loss is required.

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

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

Foreign Currency Translation

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

Fair Value of Financial Instruments

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

Revenue Recognition

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

Concentration of Credit Risk

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

Income Taxes

         The Company accounts for income taxes using SFAS No. 109, "Accounting
for Income Taxes," which requires the establishment of a deferred tax asset or
liability for the recognition of future deductible or taxable amounts and
operating loss and tax credit carry forwards. Deferred tax expense or benefit is
recognized as a result of the changes in





                                      F-9
<PAGE>   24



                    PONDER INDUSTRIES, INC., AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


the assets and liabilities during the year. The Company has established a
valuation allowance equal to its net domestic deferred tax asset.

Loss Per Share

         Loss per share is computed by dividing net loss by the weighted-average
number of common shares outstanding during each year. Common stock equivalents,
which consist of options and warrants, were excluded from the computation of the
weighted average number of common shares outstanding because their effect was
antidilutive.


New Accounting Pronouncements

         The Financial Accounting Standards Board (FASB) issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," in June 1996. This statement provides accounting and reporting
standards for, among other things, the transfer and servicing of financial
assets. This statement is effective for transactions occurring after December
31, 1996, and is to be applied prospectively. Earlier or retroactive application
is not permitted. In December 1996, the FASB issued SFAS No. 127, "Deferral of
the Effective Date of Certain Provisions of SFAS No. 125." SFAS No. 127
postpones some, but not all, of the provisions of SFAS No. 125 to December 31,
1997. The Company believes the adoption of these statements will not have an
impact on the financial condition or results of operations of the Company.

         In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share"
(EPS). SFAS No. 128 replaces the presentation of Primary EPS with Basic EPS and
requires dual presentation of Basic and Diluted EPS on the face of the
statements of operations and requires a reconciliation of the numerator and
denominator of the Basic EPS computation to the numerator and denominator of the
Diluted EPS computation. Basic EPS excludes dilution and is computed by dividing
income available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the Company. Diluted EPS is computed
similarly to Fully Diluted EPS pursuant to Accounting Principles Board Opinion
No. 15, "Earnings Per Share." SFAS No. 128 is effective for financial statements
issued after December 15, 1997, and earlier application is not permitted. SFAS
No. 128 requires restatement of all prior period EPS data presented. Management
has determined that SFAS No. 128 will not impact EPS for the years ended August
31, 1997, 1996 and 1995, because common stock equivalents were excluded from the
computation as their effect was antidilutive.

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

         In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information," which establishes standards for
reporting information about operating segments in annual and interim financial
statements. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. SFAS No. 131 supersedes SFAS
No. 14, "Financial Reporting for Segments of a Business Enterprise." Generally,
financial information is required to be reported on the basis that it is used
internally for evaluating segment performance and deciding how to allocate
resources to segments. SFAS No. 131 is effective for financial statements for
periods beginning after December 15, 1997. In the initial year of application,
comparative information for earlier periods is to be restated.





                                      F-10
<PAGE>   25



                   PONDER INDUSTRIES, INC., AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

2.  FUTURE OPERATIONS, LIQUIDITY, CAPITAL RESOURCES AND VULNERABILITY DUE
    TO CERTAIN CONCENTRATIONS:

         The accompanying consolidated financial statements of the Company have
been prepared on the basis of accounting principles applicable to a going
concern. During the years ended August 31, 1997, 1996 and 1995, the Company
incurred net losses from continuing operations of $9,921, $5,270 and $440,
respectively, and had negative cash flows from continuing operating activities
of $2,736, $1,548 and $1,168, respectively. At August 31, 1997 and 1996, the
Company had negative working capital of approximately $2,058 and $273,
respectively. These losses have been funded primarily through issuances of
common stock and convertible debentures and debt financing. As discussed in Note
6, the Company was not in compliance with certain of its debt covenants.
Subsequent to August 31, 1997, the Company was able to obtain certain additional
capital resources and amend certain of the covenants governing its debt
agreements which has allowed the Company to classify a substantial portion of
its indebtedness as long-term at August 31, 1997 (see Note 19). However, these
resources are limited and may not be sufficient to support its ongoing
operations until such time as the Company is able to generate positive cash
flows from operations. There is no assurance the Company will be able to achieve
future positive cash flows sufficient to support operations. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
The ability of the Company to continue as a going concern is dependent upon the
ongoing support of its customers, its ability to obtain capital resources to
support operations and its ability to successfully market its products and
services. If the Company is unable to obtain additional capital resources, or if
the funds obtained in such efforts are not adequate to support the Company until
a successful level of operations is attained, the Company would likely be unable
to continue operating as a going concern.

         The Company has taken steps to improve its 1998 fiscal year operating
results. In April 1997, the Company commenced a major cost reduction program
which included a 10 percent reduction in personnel, closing two of its
unsuccessful operating locations in North Louisiana, the sale of certain
nonproductive equipment to reduce debt, resolving the litigation involving its
convertible debenture holders and substantially reducing general and
administrative expenses. This cost reduction program had a positive impact on
the quarter ended August 31, 1997.

         Subsequent to August 31, 1997, a $2,500 bridge loan (Note 19) was
obtained from White Owl Capital Partners ("White Owl") and certain others with
the intention of providing additional capital for acquisitions and expansion of
the Company's business. The Company, in October 1997, signed a letter of intent
to purchase Fishing Tools, Inc. (FTI), for $6,500 cash and $1,000 in stock. This
acquisition was completed in January 1998 and was funded with the proceeds from
the sale of 11 million shares of common stock at $1 per share (Note 19).

         The Company's management believes that it is likely the Company's
operating results for fiscal 1998 will significantly improve over fiscal 1997
and will generate sufficient working capital to sustain its operations
throughout the year. However, there are no assurances that the Company can
achieve such operating improvements.

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

         Approximately 3 percent and 5 percent of the Company's total assets and
54 percent and 20 percent of its total stockholders' equity at August 31, 1997
and 1996, respectively, relate to the Company's available for sale securities
related to Titan Resources, Inc. (Titan), as described in Note 3. While
management of the Company believes such amounts are recorded at their fair
market values based upon quoted sales prices for Titan at August 31, 1997 and
1996, with an appropriate deduction because the Titan stock is a restricted
security. Due to the thinly traded nature and volatility of this security, there
can be no assurance that the Company will realize the book value of its Titan
related investments. The inability of the Company to realize its Titan related
investments could have a material adverse effect on the Company's future results
of operations and its financial position. At October 17, 1997, the last quoted
sales price for Titan was $.47 per share.





                                      F-11
<PAGE>   26

                    PONDER INDUSTRIES, INC., AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

3.  DISCONTINUED -- AZERBAIJAN OPERATIONS:

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

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

         In February of 1996, the Company sold its operations in Azerbaijan to
Titan for 2,000,000 shares of Titan stock and recognized a gain of $1,400. The
Company sold 500,000 shares of Titan stock to an investment company for a $500
receivable, which is presented as an Other Receivable on the 1996 consolidated
balance sheet. The remaining 1,500,000 shares of Titan stock were valued at an
estimated fair market value of $900 ($.60 per share). During the year ended
August 31, 1997, the investment company returned the 500,000 shares of Titan
stock in settlement of its receivable. The Titan stock was estimated to have a
fair market value of $200 when returned resulting in a loss of $300. The Titan
stock is shown as available for sale securities on the accompanying consolidated
balance sheets at August 31, 1997 and 1996, in accordance with the guidelines of
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." At August 31, 1996, the estimated fair market value of Titan was
$.60 per share and, thus, no unrealized holding gain or loss was reported as a
separate component of stockholders' equity. At August 31, 1997, the estimated
fair market value of Titan was $.40 per share and an unrealized holding loss of
$300 is reported as a separate component of stockholders' equity.

4.  PROPERTY AND EQUIPMENT:

Property and equipment consists of the following:

<TABLE>
<CAPTION>

                                             AUGUST 31,
                                       ---------------------
                                         1997         1996      ASSET LIFE
                                       --------     --------    ----------
<S>                                       <C>         <C>       <C>     
Property not in service ...........    $    641     $   969
Land ..............................         188         205
Buildings and improvements ........       1,645       1,848     20 years
Rental tools and equipment ........      24,468      21,733     5-10 years
Shop equipment and tools ..........       1,954       1,894     5 years
Transportation equipment ..........       1,742       1,694     3-5 years
Furniture and fixtures ............         621         534     5 years
Capital leases ....................         124         263     3-5 years
                                        -------     -------
                                        $31,383     $29,140
                                        ======      =======
</TABLE>




                                      F-12
<PAGE>   27



                    PONDER INDUSTRIES, INC., AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

         During May of 1995, the Company conducted an auction of certain rental
tools and equipment. Such sale resulted in proceeds of approximately $2,658 and
a gain on disposition of assets of approximately $1,358. During June of 1997,
the Company conducted an auction of certain rental tools and equipment. Such
sale resulted in proceeds of approximately $750 and a loss on disposition of
assets of approximately $274, including $150 resulting from the issuance of
approximately 150,000 shares of the Company's common stock in settlement of a
payable owed to the auction company. The common stock was valued at the carrying
value of the payable which approximated the fair market value of the common
stock.

5.  ACCOUNTS AND NOTES PAYABLE, ACCRUED LIABILITIES AND OTHER:

         Included in accounts and notes payable-trade on the accompanying
balance sheet at August 31, 1996, is a $502 note payable. This note was for
insurance and was due in equal monthly installments during the 1997 fiscal year.

         Accrued liabilities and other consist of the following:

<TABLE>
<CAPTION>
                                                             AUGUST 31
                                                           --------------
                                                           1997      1996
                                                           ----      ----
<S>                                                      <C>        <C>   
Accrued bonuses......................................... $     9    $  350
Accrued legal and professional fees.....................     476       850
Accrued interest expense................................      31        27
Accrued taxes...........................................     355       190
Accrued insurance expense...............................     201       150
Accrued consulting fees.................................     107       107
Accrued commissions.....................................      --       124
Bank overdraft..........................................     692       530
Other...................................................     332       325
                                                             ---       ---
                                                         $ 2,203    $2,653
                                                         =======    ======
</TABLE>


         Included in other long-term liabilities at August 31, 1997 and 1996, is
$676 and $254, respectively, of accrued interest expense related to the
convertible debentures described in Note 7.


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

         Long-term debt consists of the following:
   
<TABLE>
<CAPTION>
                                                              AUGUST 31
                                                            --------------
                                                            1997      1996

                                                            ----      ----
<S>                                                      <C>        <C>     
  Notes payable  
  Term loan with financial institution.................  $  3,384   $     --
  Inventory revolver with financial institution........     2,500         --
  Receivable revolver with financial institution.......     1,425         --
  Bank term note.......................................        --      2,174
  Real estate..........................................        68         72
  Bank note assumed in Bosco acquisition...............        --        650
  Bosco................................................       330        550
  Bank note to fund Apex Tool acquisition..............        --        176
  Apex Tool............................................        --        200
  Capital lease obligations and vehicle notes..........     1,478      1,392
  Related-party promissory note........................        --        327
  Former officer.......................................       172         --
                                                           ------     ------
                                                            9,357      5,541
  Less-- Current maturities............................    (1,899)    (1,393)
                                                           ------     ------
Long-term debt, excluding current maturities...........  $  7,458   $  4,148
                                                         ========   ========
</TABLE>
    





                                      F-13
<PAGE>   28



                    PONDER INDUSTRIES, INC., AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


         Maturities of long-term debt as of August 31, 1997, were as follows:

   
<TABLE>
<S>                                                <C>    
1998.............................................. $ 1,899
1999..............................................   1,173
2000..............................................     741
2001..............................................     824
2002..............................................   4,672
Thereafter........................................      48
                                                   -------
                                                   $ 9,357
                                                   =======
</TABLE>
    

         On July 27, 1995, the Company signed a revolving loan agreement with a
bank. The revolving line of credit bore interest at 2.5 percent above a defined
reference lending rate. At August 31, 1996 and 1995, the Company had $0 and
$200, respectively, borrowed against this line of credit that provided a maximum
borrowing limit of $500. Borrowings were further limited to 80 percent of
certain defined accounts receivable, up to the maximum limit. The line of credit
was secured under the same agreement as the long-term note payable to the same
lender as described below. Also as discussed below, the Company was not in
compliance with certain of the lender's required covenants at August 31, 1996.
Subsequent to August 31, 1996, the line of credit and the note payable were
replaced with new financing. The weighted average interest rates on these
short-term borrowings were 9.3 percent and 11.5 percent, respectively, for the
years ended August 31, 1996 and 1995.

         On July 27, 1995, the Company entered into a loan agreement with this
bank that provided both a revolving line of credit and a term facility. See
above for a description of the revolving credit line. The term note bore
interest at 2.5 percent above a reference rate (8.25 percent at August 31, 1996)
and was payable in monthly installments of $55 commencing December of 1995. The
agreement was to remain in force for a three-year period. Both the revolving and
term notes were secured by the Company's assets, not otherwise pledged as
collateral under other debt agreements and were guaranteed by the Company's
former chairman of the board and chief executive officer, the Company's former
president and one of the Company's subsidiaries. The agreement contained
covenants for compliance with reporting and prompt payment of certain items and
required prior approval from the lender before entering into certain
transactions. At August 31, 1996, and subsequent thereto, the Company was not in
compliance with certain of the agreement's covenants and, thus, was in technical
default on the term note. During the year ended August 31, 1997, the Company
obtained new financing from KBK Financial, Inc. ("KBK") and paid off the term
note. Accordingly, the term note described above has been classified in
accordance with the terms of the new financing on the accompanying balance sheet
at August 31, 1996.

         The new financing provides for a $2.5 million inventory based line of
credit (Inventory Revolver), a $4 million receivable based revolver (Receivable
Revolver) and a $3.5 million term loan (Term Loan) (collectively "Notes"). The
Inventory Revolver allows for periodic borrowings, repayments and reborrowings
up to the lesser of $2.5 million or an inventory and rental tools supported
Borrowing Base, as defined, provides for monthly interest payments at a variable
rate (15 percent at August 31, 1997) and matures in full in November 2001. The
Receivable Revolver allows the Company to borrow up to $4 million of its
eligible accounts receivable at a discount rate equal to the higher of 7 percent
or the Base Rate, as defined, plus 5.5 percent (14 percent at August 31, 1997)
and matures in full in December 1998. The Term Loan allows for borrowings up to
the lesser of $3.5 million or the Borrowing Base, less the outstanding principal
balance of the Inventory Revolver. The Term Loan bears interest at a variable
rate (15 percent at August 31, 1997) and required monthly payments of interest
only through May 1997. Beginning in June 1997, the Term Loan requires monthly
principal and interest payments of $83 through May 2002 with a final payment of
all unpaid principal and interest due in June 2002. The Notes are secured by
substantially all of the assets of the Company and prohibit the payment of
dividends on the Company's common stock. The loan agreement under the Notes
requires compliance with various covenants including maintenance of a debt
service coverage ratio, as defined, of 1.15:1 as of the fiscal quarter ended
August 31, 1997, and increasing to 1.25:1 for each quarter ending November 30,
1997, through May 31, 1998, and 1.5:1 for the quarters ending August 31, 1998,
and thereafter. Additionally, the Company must maintain a tangible net worth, as
defined and amended, of not less than $10.5 million at all times. The tangible
net worth requirement allows




                                      F-14
<PAGE>   29



                    PONDER INDUSTRIES, INC., AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


subordinated indebtedness, as defined, to be treated as a component of net
worth. For purposes of this requirement, the convertible debentures as described
in Note 7 are treated as tangible net worth. As a result of continuing operating
losses during the year ended August 31, 1997, certain of the Company's covenants
were not met at August 31, 1997. Subsequent to August 31, 1997, the Company
amended certain of the covenants governing the Notes (see Note 19).

         The real estate note is to an individual, bears interest at 6.5 percent
and is payable in monthly installments of $0.8, including interest, through
October of 2009. The note is secured by land and a building.

         The bank note assumed in the Bosco acquisition (see Note 15) bore
interest at 8.25 percent and matured in December 1996. The Bosco note represents
amounts due certain creditors of Bosco.

         The bank note to fund the Apex Tool acquisition (see Note 15) bore
interest at 2.5 percent above a reference rate (8.25 percent at August 31, 1996)
and was secured by certain real estate in Oklahoma. This note was paid in full
during the fiscal year ended August 31, 1997. The Apex Tool note was assumed in
the acquisition (see Note 15).

         The Company leases vehicles and equipment under capital lease
obligations that have varying terms from 24 to 59 months. Minimum lease payments
are capitalized at implicit rates ranging from 9.8 percent to 11.5 percent. The
vehicle notes payable have varying terms from 12 to 48 months and bear interest
at rates ranging from 4.8 percent to 15.8 percent.

         The related-party promissory note was issued by the Company in the
Armstrong acquisition (see Note 15), is noninterest bearing and has no stated
maturity date. During the year ended August 31, 1997, the Company entered into
an agreement for a final payment under this note as discussed below.

         During the year ended August 31, 1997, the Company's president and
chief executive officer resigned. The Company and the former officer entered
into an agreement in May 1997 whereby the Company agreed to a final payment
schedule for its September 1995 purchase of Armstrong Tool, Inc. (see Note 15),
which was previously wholly owned by the former officer and his spouse.
Additionally, the agreement stipulated the payout provisions under the former
officer's employment agreement entered into in September of 1995 and the
cancellation of an option held by the former officer to purchase 145,455 shares
of the Company's common stock. The final payment schedule for the purchase of
Armstrong Tool, Inc., requiring monthly payments of approximately $12 through
August 1998 (subsequently settled through the issuance of common stock as
described below), and the severance agreement payments of approximately $8 per
month through August 1999, are both noninterest bearing. The Company has imputed
interest on the severance agreement payments at 15 percent per annum, its
estimated incremental borrowing rate. As a result of the agreement entered into
with the former officer, as well as the acceleration of deferred compensation
associated with an award of 459,333 shares of the Company's common stock to the
former officer in fiscal 1996, the Company was required to accrue for and
recognize approximately $450 in compensation expense during the year ended
August 31, 1997, including the amount by which the final payment schedule for
the purchase of Armstrong Tool exceeded the carrying value of the original
Armstrong Tool note payable. In August 1997, indebtedness to the former officer
of $219, including interest, related to the purchase of Armstrong Tool, Inc.,
was settled through the issuance of approximately 280,000 shares of the
Company's common stock. The common stock was valued at the carrying value of the
indebtedness which approximated the fair market value of the common stock.





                                      F-15
<PAGE>   30



                    PONDER INDUSTRIES, INC., AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

7.  CONVERTIBLE DEBENTURES:

         Effective April 26, 1996, the Company completed a $10,950 placement of
eight percent convertible debentures. The debenture issue resulted in proceeds
of $9,855, net of issuance costs. Issuance costs are a component of deferred
assets on the consolidated balance sheet and are being amortized over a
three-year period. As of August 31, 1997 and 1996, debentures in the aggregate
principal amount of $4,570 and $1,800, respectively, had been converted into
3,670,062 and 828,289 shares of common stock, respectively. As discussed in Note
13, claims and counterclaims were filed between certain convertible debenture
holders and the Company. In September 1997, the Company and the holders of the
then outstanding convertible debentures entered into a settlement agreement
whereby all of the then outstanding convertible debentures were converted into
shares of the Company's common stock as further described in Note 13.

8.  EMPLOYEE STOCK PLANS:

         In June 1992, the Company filed with the Securities and Exchange
Commission a Registration Statement on Form S-8 registering 859,740 shares of
common stock for various stock option plans. The shares have been registered as
follows: 200,000 shares to Incentive Stock Option Plan; 200,000 shares to Non-
Qualified Stock Option Plan; 200,000 shares to Stock Bonus Plan; and 259,740
shares to the 1989 Keyman Stock Option Plan.

         On March 1, 1994, shareholders approved the 1994 Incentive Stock Option
Plan (Incentive Plan) and 1994 Directors' Stock Option Plan (Directors' Plan).
In August 1995, the Company filed with the Securities and Exchange Commission a
Registration Statement on Form S-8 registering 500,000 shares of common stock as
follows: 250,000 shares to the Incentive Plan and 250,000 shares to the
Directors' Plan. The Incentive Plan provides that options may be granted to
employees for up to 250,000 shares. Any one employee is limited to $100 of fair
market value of stock at the time the option is granted. The purchase price of
each option shall not be less than 100 percent of the fair market value of the
Company's stock at the time the option is granted. The Directors' Plan provides
that an option to acquire 5,500 shares be granted to each director of the
Company as of the annual stockholders' meeting date in the years 1994 through
1998. The option price is the fair market value of the Company's stock at the
time of the grant. The options are exercisable when granted. The aggregate
number of shares that may be granted under this plan is limited to 250,000
shares.

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

<TABLE>
<CAPTION>

                                                      TOTAL                   EXERCISE
                                                     SHARES                     PRICE
                                                    RESERVED      ACTIVITY    PER SHARE
                                                    --------      --------    ---------
<S>                                                  <C>           <C>        <C> 
Balances, August 31, 1994.........................   217,000       33,000
  Granted.........................................   (44,000)      44,000     $1.0156
                                                     -------       ------
Balances, August 31, 1995.........................   173,000       77,000
  Granted.........................................   (49,500)      49,500     $3.6875
  Exercised.......................................        --       (5,500)    $2.1875
  Exercised.......................................        --       (5,500)    $1.0156
  Exercised.......................................        --       (5,500)    $3.6875
                                                     -------      -------  
Balances, August 31, 1996.........................   123,500      110,000
  Granted.........................................   (44,000)      44,000     $1.0938
                                                     -------       ------
Balances, August 31, 1997.........................    79,500      154,000
                                                      ======      =======

Issued and exercisable, August 31, 1997
  1994 grants.....................................                 27,500     $2.1875
  1995 grants.....................................                 38,500     $1.0156
  1996 grants.....................................                 44,000     $3.6875
  1997 grants.....................................                 44,000     $1.0938
                                                                  -------
                                                                  154,000
                                                                  =======
</TABLE>

         In October 1996, options to acquire 455,000 shares of the Company's
common stock at an exercise price of $1.75 per share were granted to certain key
employees of the Company. The options vest at the rate of 20 percent per year
and expire 10 years from date of grant. During the year ended August 31, 1997,
160,000 of these options were forfeited. At August 31, 1997, 295,000 of these
options were outstanding with none exercisable.





                                      F-16
<PAGE>   31



                    PONDER INDUSTRIES, INC., AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

         The weighted average exercise price per share of options outstanding
was $1.84, $2.38, $1.52 and $2.19 as of August 31, 1997, 1996, 1995 and 1994,
respectively.

         At August 31, 1997, the following are weighted-average remaining
contractual lives of options for each exercise price:

<TABLE>
<CAPTION>
                    EXERCISE PRICE            WEIGHTED-AVERAGE REMAINING
                       PER SHARE                   CONTRACTUAL LIFE
                    --------------            --------------------------
                    <S>                              <C>     
                        $2.1875                        6.5 years
                        $1.0156                        7.5 years
                        $3.6875                        8.5 years
                        $1.0938                        9.5 years
                        $  1.75                        9.1 years
</TABLE>

         Subsequent to August 31, 1997, options to acquire 2,050,000 shares of
the Company's common stock at an exercise price of $.50 per share were granted
to certain key employees of the Company. Options on 810,000 of these shares were
immediately vested while the remainder vest at the rate of 20 percent per year.
The options expire 10 years from date of grant.

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

<TABLE>
<CAPTION>
                                                              AUGUST 31,
                                                     -------------------------
                                                       1997             1996
                                                       ----             ----
<S>                                                  <C>              <C>     
Net loss ................  As Reported               $( 9,921)        $(3,892)
                           Pro Forma                 $(10,054)        $(4,020)
Net loss per share ......  As Reported               $(.73)           $  (.45)
                           Pro Forma                 $(.74)           $  (.46)
</TABLE>

         The weighted-average grant-date fair value of options granted during
fiscal 1997 was $1.47 per option. This value was determined using an option
pricing model with an expected term of five years, expected volatility of 132
percent, expected annual rate of quarterly dividends of zero and a risk-free
discount rate of 6.25 percent.

         The weighted-average grant-date fair value of options granted during
fiscal 1996 was $2.92 per option. This value was determined using an option
pricing model with an expected term of five years, expected volatility of 104
percent, expected annual rate of quarterly dividends of zero and a risk-free
discount rate of 6.20 percent.

         During the year ended August 31, 1995, the board of directors rescinded
warrants issued to the Company's former chairman of the board and chief
executive officer to purchase 2,000,000 shares at $5.25 per share. During the
year ended August 31, 1996, 500,000 shares of the Company's restricted common
stock was granted to the former chairman and officer in consideration of his
years of service to the Company, his past personal guarantees of Company
indebtedness and his return to the Company of the warrants referred to above as
well as his return of options to purchase up to 2,000,000 shares of the
Company's common stock at an exercise price of $5.25 per share. These options
were granted in December 1995.





                                      F-17
<PAGE>   32

                    PONDER INDUSTRIES, INC., AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

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

9.  INCOME TAXES:

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

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

   
<TABLE>
<CAPTION>

                                                   1997        1996
                                                   ----        ----
<S>                                              <C>          <C>    
Deferred tax assets --
  Net operating loss carryforwards .........     $ 8,126      $ 4,315
  Tax credit carryforwards .................         211          624
  Property and equipment ...................          --          145
  Allowance for receivables ................         278           75
  Liabilities ..............................         216          464
                                                 -------      -------
          Gross deferred tax assets ........       8,831        5,623
Deferred tax liabilities --
  Property and equipment (domestic) ........        (114)          --
  Property and equipment (foreign)  ........        (881)        (233)
                                                 -------      -------
                                                   7,836        5,390
Total valuation allowance ..................      (8,717)      (5,623)
                                                 -------      -------
Net deferred tax liabilities ...............     $  (881)     $  (233)
                                                 =======      =======
</TABLE>
    


         Income tax expense (all foreign) for the fiscal years ended August 31,
1997 and 1996, was $0 and $67, respectively, and relates to taxes on the
Company's UK operations related to 1996 acquisitions as discussed in Note 15.
The deferred taxes payable are the result of book and tax basis differentials
existing at the date of the UK acquisitions.

         At August 31, 1997, the Company had net operating loss (NOL) carry
forwards of approximately $23,900 for income tax purposes. Such losses will
expire in the years ending August 31, 2007 ($2,404), 2008 ($1,796), 2009
($3,668), 2010 ($2,704), 2011 ($5,149) and 2012 ($8,179). The Company has
approximately $86 of unused foreign income tax credits and unused investment tax
credit carry forwards of approximately $125 to reduce future income taxes
payable. The Company must first use its available NOL carry forwards to offset
future taxable income before utilizing its available tax credits.

         The Company's ability to use its NOL and tax credit carry forwards to
offset future taxable income is subject to the restrictions of Section 382 of
the Internal Revenue Code (Code). Section 382 of the Code provides for annual
limitations on the utilization of the NOL and tax credit carry forwards when the
beneficial stock ownership of a corporation changes by more than 50 percentage
points within a three-year period (an Ownership Change). As of August 31, 1997,
the Company had incurred an Ownership Change. Additionally, because U.S. tax
laws limit the time during which NOL and tax credit carry forwards may be
applied against future taxable income and tax liabilities, the Company may not
be able to take full advantage of its NOL and tax credits for federal income tax
purposes.





                                      F-18
<PAGE>   33

                    PONDER INDUSTRIES, INC., AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

10.  RELATED-PARTY TRANSACTIONS:


         Certain stockholders of the Company are also independent fishing tool
operators who provided services to the Company on a commission basis. The
Company incurred $1,176 and $1,483 of commission expense in 1996 and 1995,
respectively, of which $38 and $594, respectively, were related to these
individuals. Management of the Company believes these services were performed at
rates consistent with those charged by independent third parties. In fiscal
1997, the Company conducted substantially all of its fishing tool operations
with noncommissioned operators.

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

         The Company has a note receivable from an employee totaling $66 and $63
at August 31, 1997 and 1996, respectively. The note relates to the purchase of
shares of the Company's stock, earns interest at a rate of 6 percent annually
and matures August 31, 1998. Interest earned on the note has been added to the
principal balance on an annual basis.

11. OPERATING LEASES:

         The Company leases certain property and equipment under operating
leases. Minimum payments for operating leases having initial or remaining
noncancelable terms in excess of one year as of August 31, 1997, are as follows:

   
<TABLE>
<S>                            <C>   
1998.......................... $  210
1999..........................    158
2000..........................     16
2001..........................      1
2002..........................     --
                                   --
                               ------    
Total minimum lease payments.. $  385
                               ======
</TABLE>
    

         Total rent expense for all operating leases amounted to $329, $81 and
$62 for the years ended August 31, 1997, 1996 and 1995, respectively.

12.  401(K) EMPLOYEE BENEFIT PLAN:

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

13.  CONTINGENCIES:

         In October 1995, the Securities and Exchange Commission (the
Commission) notified the Company that the staff of the Commission intended to
recommend that the Commission institute a cease and desist proceeding against
the Company and various former officers and directors of the Company on the
basis of alleged violations of the Securities Act of 1934 (the Exchange Act),
primarily related to the Company's accounting treatment with respect to revenue
recognition for the Company's former operations in Azerbaijan in the Company's
periodic reports filed with the Commission in late fiscal 1992 and fiscal 1993
and the Company's press release in August 1992 concerning the results of the
Azerbaijan operations. In July 1997, the Commission accepted the Company's and
the various former officers' and directors' offer of a noncash settlement
whereby the Commission ordered that the Company and the various former officers
and directors cease and desist from committing or causing any violations of the
Exchange Act.





                                      F-19
<PAGE>   34



                    PONDER INDUSTRIES, INC., AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

         The Company had been a defendant in a lawsuit filed by a former
employee in December 1993 seeking damages for a wrongful termination. The suit
sought approximately $317 in unpaid wages and value of $143 for 38,052 shares of
stock he would have earned during the remainder of his contract term. In April
1997, a final judgment was issued whereby the former employee recovered the sum
of $200 and 77,922 shares of restricted common stock of the Company was issued
to the former employee. Included in general and administrative expenses for the
year ended August 31, 1997, is $265 of settlement costs relating to disposition
of this suit.

         In August 1996, a case was filed in the United States District Court
for the Western District of New York alleging that the Company breached an
obligation to convert certain debentures held by the plaintiff into the
Company's common stock. In September 1997, the Company reached a settlement with
those convertible debenture holders who had not previously converted their
debentures whereby the Company agreed to convert all of such debenture holders'
then outstanding debenture debt of approximately $7,060, including accrued
interest, into 10,633,333 shares of the Company's common stock. The Company also
agreed to issue to such debenture holders five-year warrants to purchase an
additional 957,000 shares of the Company's common stock at $1 per share. At
August 31, 1997, the Company had accrued approximately $100 as its estimate of
the fair value of the warrants issued in settlement of this matter.

         In 1996, the Company sued its placement agent and its principal and
related entities (the "placement agent") in the Company's 1996 convertible
debenture offering and the debenture holders in the United States District Court
for the Western District of New York. In mid-1997, the Company settled with all
of the debenture holders, and the judge ordered the case against the placement
agent transferred to the United States District Court for the Northern District
of Georgia. In response, in September 1997, a case was filed against the Company
in Georgia State Court, which the Company removed to the United States District
Court for the Northern District of Georgia, Atlanta Division, by the placement
agent alleging that, in connection with such offering, the Company tortiously
interfered with its business relationships, breached a Proprietary Information,
Non-Circumvention and Indemnification Agreement between the Company and the
placement agent, defamed the placement agent and engaged in conduct giving rise
to an indemnification in favor of the placement agent. The Federal Court has now
consolidated the two lawsuits. The Company is seeking unspecified millions of
dollars in actual and punitive damages form the placement agent and the
placement agent seeks actual damages in an amount not less than $1,000 per
breach, exemplary damages in an amount not less than $2,500, interest, costs and
attorney's fees. Although no assurance can be given, the Company believes it has
meritorious claims against the transfer agent which it intends to prosecute
vigorously and that it has meritorious defenses to the above action and intends
to defend itself vigorously.

         The Company is also a party to additional claims and legal proceedings
arising in the ordinary course of business. The Company believes it is unlikely
that the final outcome of any of the claims or proceedings to which the Company
is a party, including those described above, would have a material adverse
effect on the Company's financial statements; however, due to the inherent
uncertainty of litigation, the range of possible loss, if any, cannot be
estimated with a reasonable degree of precision and there can be no assurance
that the resolution of any particular claim or proceeding would not have an
adverse effect on the Company's results of operations for the interim period in
which such resolution occurred. The Company had accrued $500 at August 31, 1996,
as its estimate of costs it expected to incur in defense of the above actions.
At August 31, 1997, approximately $170 of the accrued amount was remaining.

14.  EMPLOYMENT AGREEMENTS:

         Effective September 1, 1995, the Company entered into an employment
agreement with the Company's former president and chief operating officer. Since
July 1995, he had served the Company in such capacity without a contractual
agreement. The agreement provided for an annual salary of $100 payable in
monthly increments for four years. In addition, he received 459,333 shares of
the Company's stock for services to be provided to the Company. This was
recorded as deferred compensation and is shown as a separate component of
stockholders' equity. Unearned compensation was being amortized to expense over
a four-year period. As discussed in Note 6, the former officer resigned, and the
Company was required to accelerate the recognition of the deferred compensation.




                                      F-20
<PAGE>   35



                    PONDER INDUSTRIES, INC., AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

         In April 1996, the Company's former chairman of the board and chief
executive officer was granted 500,000 shares of the Company's restricted common
stock. At August 31, 1996, the Company had recognized $400 in compensation
expense and additional paid-in capital associated with this stock grant.

         In connection with certain of the acquisitions described in Note 15,
the Company entered into various employment agreements which provide for
combined future compensation of approximately $164 and $54 in fiscal years 1998
and 1999, respectively.

15.  ACQUISITIONS:

         The following describes acquisitions by the Company during the year
ended August 31, 1996. The Company had no significant acquisitions during the
years ended August 31, 1997 and 1995.

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

         Effective October 1995, the Company acquired certain real property,
vehicles and rental tools and equipment from Apex Tool (Apex), a sole
proprietorship. Apex is located in Healdton, Oklahoma, and provides fishing and
rental tool services in the South Central Oklahoma and North Texas region. The
assets were acquired for $600, of which $200 was paid at closing. The amount
paid at closing was funded through borrowings from a commercial bank as
described in Note 6. A $400 note payable, bearing interest at 9 percent per
annum was paid in two installments of $200, due March 15, 1996 and 1997, to the
owner of Apex.

         Effective April 1996, the Company completed the acquisition of Panther
Oil Tools, (UK) Ltd. (Panther) (an English company), and substantially all of
the assets of Villain Ltd. (Villain) (a Guernsey company) for $1,250 and
1,200,000 shares of the Company's restricted common stock which were valued on
the date of issuance at $3,060.

         Effective May 1996, the Company acquired Runyon Oil Tools, Inc. (Olney,
Illinois), and DiKor, Inc. (Carmi, Illinois), and effective March 1996, the
Company acquired C&F Fishing Tools, Inc. (Maysville, Oklahoma), in separate
transactions in consideration for an aggregate of $283 and 331,455 shares of the
Company's restricted common stock which were valued on the date of issuance at
approximately $640.

         Effective June 1996, the Company acquired substantially all of the
assets of Reeled Tubular Components, Inc. (Houston, Texas), including the
intellectual property rights to an obstruction removing device, for a cash
payment of $50 and 20,000 shares of the Company's restricted common stock which
were valued at $60 on the date of issuance.

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

         In August 1996, the Company acquired all of the issued ordinary shares
of Prime Pipe Limited (a UK company) for approximately $105 and the issuance of
4,650 shares of the Company's common stock.

         The results of operations of all acquisitions after the respective
acquisition dates are included in the consolidated statements of operations. All
acquisitions were recorded using the purchase method of accounting. The
following unaudited pro forma information has been prepared assuming that the
Panther, Villain, Bosco and Armstrong acquisitions had taken place at the
beginning of the period presented. The remaining acquisitions were not
considered to have a significant effect on the unaudited pro forma information.
The cash portion of the Panther and Villain purchase





                                      F-21
<PAGE>   36



                    PONDER INDUSTRIES, INC., AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

price and acquisition related costs were funded by a portion of the net proceeds
from the placement of convertible debentures as discussed in Note 7. The
unaudited pro forma information includes adjustments to reflect the effect on
depreciation expense of recording the fair value of property and equipment
acquired and the pro rata portion of interest expense on the convertible
debentures and debt assumed related to the acquisitions:

<TABLE>
<CAPTION>
                                                      YEAR ENDED
                                                   AUGUST 31, 1996
                                                   ---------------
                                                      (UNAUDITED)
<S>                                                    <C>     
Sales ............................................     $ 14,710
Cost of sales ....................................       (6,344)
                                                       --------
Gross profit .....................................     $  8,366
                                                       --------
Loss from continuing operations ..................     $ (5,018)
                                                       ========
Loss per share from continuing operations ........     $   (.58)
                                                       ========
</TABLE>

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

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

16. GEOGRAPHIC INFORMATION:

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

<TABLE>
<CAPTION>
                                                     YEAR ENDED
                                                      AUGUST 31
                                                ----------------------
                                                   1997       1996
<S>                                             <C>           <C>     
Net sales --
  Domestic ................................     $ 16,598      $ 10,857
  Foreign .................................        5,277         1,104
                                                --------      --------
          Total ...........................     $ 21,875      $ 11,961
                                                ========      ========
Loss from continuing operations--
  Domestic ................................     $ (9,584)     $ (5,123)
  Foreign .................................         (337)         (147)
                                                --------      --------
          Total ...........................     $ (9,921)     $ (5,270)
                                                ========      ========
Identifiable assets--
  Domestic ................................     $ 17,585      $ 21,552
  Foreign .................................        9,032         6,350
                                                --------      --------
          Total ...........................     $ 26,617      $ 27,902
                                                ========      ========
</TABLE>

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

17.  CHANGE IN ACCOUNTING PRINCIPLE -- PARTS AND SUPPLIES INVENTORY:

         During fiscal 1995, the Company's management concluded that a more
appropriate accounting principle for parts and supplies is to recognize the cost
of such items as an asset. The usage of these items are such that they are
normally consumed in the performance of services on a one-time basis and are
charged to the customer. As of August 31, 1995, the physical quantity of these
items was valued at cost, determined by a method approximating average cost





                                      F-22
<PAGE>   37



                    PONDER INDUSTRIES, INC., AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

with appropriate allowance for excess, obsolescence and market value declines.
Previously, these items were accounted for as equipment and amortized to
operations over a 24-month period. The difference between parts and supplies
determined as previously described and the unamortized cost as of August 31,
1995, was $1,139. This amount is shown in the accompanying statement of
operations as the cumulative effect of a change in accounting principle. The
effect on retained earnings (deficit) at the beginning of the 1995 fiscal year
and pro forma amounts on operating results of the prior years presented was not
determinable. Management does not believe that the change had a significant
effect on the operations for the year ended August 31, 1995. Management believes
the new accounting principle provides a better matching of cost against revenue
in future years and better reflects the assets of the Company.

18.  QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):

         The results of operations by quarter for the fiscal years ended August
31, 1997 and 1996, were as follows:

<TABLE>
<CAPTION>

                                                                 INCOME (LOSS)
                                                 INCOME (LOSS)     PER SHARE
                                                     FROM            FROM
                             NET       GROSS      CONTINUING      CONTINUING
                            SALES     PROFIT      OPERATIONS      OPERATIONS
                            -----     ------     ------------    ------------
<S>                       <C>        <C>            <C>              <C>   
1997 -- quarter ended --
  November 30............ $  5,141   $  2,939       $ (882)          $(.07)
  February 28............    5,248      2,971       (2,053)           (.17)
  May 31.................    5,614      3,285       (2,111)           (.16)
  August 31..............    5,872      3,125       (4,875)           (.29)
                             -----      -----       ------
          Total.......... $ 21,875   $ 12,320       $(9,921)
                          ========   ========       =======
1996-- quarter ended--
  November 30............ $  2,146   $  1,299       $   12           $  --
  February 29............    2,036        950         (723)           (.08)
  May 31.................    3,003      1,815         (635)           (.07)
  August 31..............    4,776      2,577       (3,924)           (.34)
                             -----      -----       ------
     Total............... $ 11,961   $  6,641       $(5,270)
                          ========   ========       =======
</TABLE>

         During the second quarter of 1997, the Company recognized $265 in
general and administrative costs in connection with a court ordered judgment in
a lawsuit brought by a former employee as discussed in Note 13. During the third
quarter of 1997, an expense of $150 was recognized relating to an increase in
the allowance for doubtful accounts. The Company recognized $450 in compensation
expense in the third quarter of 1997 related to acceleration of deferred
compensation and other matters with a former office as described in Note 6. The
Company realized a loss on disposition of assets sold at auction of $274 in the
fourth quarter of 1997 as discussed in Note 4. During the fourth quarter of
1997, the Company recognized a loss of $446 related to its investment in a joint
venture and an additional $260 related to a write-down of property not in
service. Additionally, the Company recognized approximately $100 in general and
administrative expense in the 1997 fourth quarter related to a settlement with
the Company's convertible debenture holders as discussed in Note 13 and a loss
of $300 on the return of Titan stock as discussed in Note 3. As discussed in
Note 15, the Company recognized a loss of $1,172 in the fourth quarter of 1997
as a result of the write-off of a forfeitable deposit and other assets relating
to a proposed acquisition. In the fourth quarter of 1997, approximately $751 was
recognized as an expense relating to the write-off of receivables and an
increase in the allowance for doubtful accounts.

         During the second quarter of 1996, the Company recognized a gain of
$1,400 on the sale of its former operations in Azerbaijan as discussed in Note
3. During the fourth quarter of 1996, the Company accrued $500 as its estimate
of costs it expects to incur in defense of certain contingencies as discussed in
Note 13.

         Also, in the fourth quarter of 1996, the Company recognized $400 in
compensation expense related to a stock grant to a former officer and director
of the Company as discussed in Note 14. Additional compensation expense of $350
related to employee bonuses and approximately $300 related to a consulting
arrangement with the Company's former chairman of the board and chief executive
officer was recognized in the fourth quarter of 1996.





                                      F-23
<PAGE>   38

                    PONDER INDUSTRIES, INC., AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

19.  SUBSEQUENT EVENTS:

         At August 31, 1997, the Company had borrowed approximately $7,300 under
a $10,000 financing agreement with KBK. The financing agreement requires
compliance with various financial covenants. As a result of continued losses,
the Company was not in compliance with certain covenants at August 31, 1997. In
January 1998, the Company and KBK amended certain of the covenants governing the
financing agreement which has allowed the Company to classify a substantial
portion of the indebtedness due this financial institution as long-term at
August 31, 1997. The amended covenants provide that the Company must maintain a
debt service coverage ratio, as defined and amended, of not less than 1.0 to 1.0
as of the fiscal quarter ending February 28, 1998, and 1.25 to 1.0 as of the end
of each fiscal quarter thereafter. The debt service coverage ratio requirement
for the quarter ended November 30, 1997, was waived. The Company must also
maintain a tangible net worth, as defined and amended, of not less than $8,500
as of the fiscal quarter ended November 30, 1997, and $18,000 as of the end of
each fiscal quarter thereafter.

         In October 1997, the Company completed a private placement of $2,500
Senior Convertible Notes ("Senior Notes") and warrants to purchase 4 million
shares of the Company's common stock at a purchase price of $.625 per share with
White Owl and affiliates. The warrants expire on January 1, 2001. The Senior
Notes were originally scheduled to mature on January 1, 1999, were interest free
until June 30, 1998, and then were originally scheduled to bear interest at the
prime rate, as defined, plus 2 percent. In January 1998, the Senior Notes were
converted into 4 million shares of the Company's common stock concurrent with
the equity placement described below.

         In January 1998, the Company acquired all of the outstanding stock of
Fishing Tools, Inc., for $6,500 cash and the issuance of approximately 645,000
shares of the Company's common stock valued at $1,000. The cash consideration
was provided through an equity placement with affiliates of the purchasers of
the Senior Notes described above. The equity placement consisted of the sale of
11 million shares of the Company's common stock at $1 per share.




                                      F-24
<PAGE>   39

2.  FINANCIAL STATEMENT SCHEDULES

         None

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

3. EXHIBIT INDEX

<TABLE>
<CAPTION>
         EXHIBIT
         NUMBER                                         IDENTIFICATION OF EXHIBIT
       <S>         <C>  <C>
         3.1(i)    --   Certificate of Incorporation of Ponder Industries, Inc. (incorporated herein by
                           reference to Exhibit 3 filed to Registration Statement on Form S-1 
                           [Commission File No. 33-33190]).

         3.1(ii)   --   Bylaws of Ponder Industries, Inc. (incorporated herein by reference to Exhibit 3 filed
                           to Registration Statement on Form S-1 [Commission File No. 33-33190]).

          10.1     --   Loan Agreement with KBK Financial, Inc. (incorporated herein by reference to Form 10-Q
                           for quarter ending February 28, 1997).

          10.2     --   Collateral Security Agreement with KBK Financial, Inc. Dated November 27, 1996
                           (incorporated herein by reference to Form 10-Q for quarter ending February 28, 1997).

          10.3     --   Security Agreement--Pledge with KBK Financial, Inc. (incorporated herein by reference
                           to Form 10-Q for quarter ending February 28, 1997).

          10.4     --   Revolving Account Transfer and Purchase Agreement with KBK Financial, Inc.
                           (incorporated herein by reference to Form 10-Q for quarter ending February 28, 1997).

          10.5     --   Regulation S Subscription Agreement dated March 31, 1997 between Ponder Industries,
                           Inc. and Optimum Fund (incorporated herein by reference to Form 8-K filed April 15,
                           1997).

          10.6     --   Regulation S Subscription Agreement dated April 23, 1997 between Ponder Industries,
                           Inc. and Orez Ltd. (incorporated herein by reference to Form 8-K filed May 7, 1997).

          10.7     --   Regulation S Subscription Agreement dated June 19, 1997 between Ponder Industries, Inc.
                           and Charles Kucey (incorporated herein by reference to Form 8-K filed June 26, 1997).

           *11     --   Computation of Earnings (Loss) Per Share

           21      --   Subsidiaries


                                                                                                      NAME UNDER
                                                                                 STATE OF                WHICH
                    NAME                                                       INCORPORATION        DOING BUSINESS
                    ----                                                       -------------        --------------
                    Ponder Energy Services, Inc.  . . . . . . . . . .            Delaware           Ponder Energy 
                                                                                                    Services, Inc.

       *23.1   --   Consent of Arthur Andersen LLP
       *23.2   --   Consent of Hairston, Kemp, Sanders & Stich, P.C.

       *27     --   Financial Data Schedule
----------                                 
</TABLE>

* Filed herewith



                                     F-25
<PAGE>   40
(b) REPORTS ON FORM 8-K.

         Form 8-K filed April 15, 1997, reporting Regulation S Subscription
Agreement dated March 31, 1997 between Ponder Industries, Inc. and Optimum
Fund.

         Form 8-K filed May 7, 1997, reporting Regulation S Subscription
Agreement dated April 23, 1997 between Ponder Industries, Inc. and Orez Ltd.

         Form 8-K filed June 26, 1997, reporting Regulation S Subscription
Agreement dated June 19, 1997 between Ponder Industries, Inc. and Charles
Kucey.

                                     F-26
<PAGE>   41
                                  SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in Houston, Texas,
on November 24, 1997.

                              PONDER INDUSTRIES, INC.
                              
                              
                              
                              By: /s/ Eugene L. Butler                   
                                  ----------------------------------------------
                                                Eugene L. Butler,
                                     President, Chief Executive Officer and
                                       Chairman of the Board of Directors
                              
                              
                              
                              By: /s/ Gerald A. Slaughter                    
                                  ----------------------------------------------
                                              Gerald A. Slaughter,
                                 Senior Vice President, Chief Financial Officer
                                    (Chief Financial and Accounting Officer)


         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Act of 1934, this report has been signed below by the following persons in the
capacities indicated on November 24, 1997.

<TABLE>
<CAPTION>
                                      Signature                                    Title
                                      ---------                                    -----
                 <S>                                        <C>
                 /s/ Eugene L. Butler                       President, Chief Executive Officer and Chairman of
                 ----------------------------------         the Board of Directors                            
                     Eugene L. Butler                               
                                                   
                 /s/ Frank J. Wall                          Senior Vice President of Operations and Director
                 ----------------------------------
                     Frank J. Wall                 
                                                   
                 /s/ Joe R. Nemec                           Director
                 ----------------------------------
                     Joe R. Nemec                  
                                                   
                 /s/ John Roane                             Director
                 ----------------------------------
                     John Roane                    
                                                   
                 /s/ Rittie W. Milliman, Sr.                Director
                 ----------------------------------
                     Rittie W. Milliman, Sr.       
                                                   
                 /s/ John Le Seelleur                       Director
                 ----------------------------------
                     John Le Seelleur                          
</TABLE>
<PAGE>   42
                                  INDEX TO EXHIBITS

<TABLE>
<CAPTION>
Exhibit
 Number                    Identification of                    Exhibit      
-------         ---------------------------------------  --------------------
<S>       <C>
  3.1(i)  -- Certificate of Incorporation of Ponder Industries, Inc. (incorporated herein by
                reference to Exhibit 3 filed to Registration Statement on Form S-1
                [Commission File No. 33-33190]).

  3.1(ii) -- Bylaws of Ponder Industries, Inc. (incorporated herein by reference to Exhibit
         
                3 filed to Registration Statement on Form S-1 [Commission File No.
                33-33190]).
 10.1     -- Loan Agreement with KBK Financial, Inc. (incorporated herein by reference to
                Form 10-Q for quarter ending February 28, 1997).

 10.2     -- Collateral Security Agreement with KBK Financial, Inc. Dated November 27, 1996
                (incorporated herein by reference to Form 10-Q for quarter ending February 28,
                1997).
 10.3     -- Security Agreement -- Pledge with KBK Financial, Inc. (incorporated herein by
                reference  to Form  10-Q  for  quarter  ending  February  28,
                1997).

 10.4     -- Revolving Account Transfer and Purchase Agreement with KBK Financial, Inc.
                (incorporated herein by reference to Form 10-Q for quarter ending February 28,
                1997).
 10.5     -- Regulation S Subscription Agreement dated March 31, 1997 between Ponder
                Industries, Inc. and Optimum fund (incorporated herein by reference to Form 8-K
                filed April 15, 1997).

 10.6     -- Regulation S Subscription Agreement dated April 23, 1997 between Ponder
                Industries, Inc. and Orez Ltd. (incorporated herein by reference to Form 8-K
                filed May 7, 1997).
 10.7     -- Regulation S Subscription Agreement dated June 19, 1997 between Ponder
                Industries, Inc. and Charles Kucey (incorporated herein by reference to Form
                8-K filed June 26, 1997).
 *11      -- Computation of Earnings (Loss) Per Share
  21      -- Subsidiaries
                                                         STATE OF              NAME UNDER WHICH
                NAME                                     INCORPORATION         DOING BUSINESS
                ----                                     -------------         --------------
                                                                                             
                Ponder Energy Services, Inc              Delaware              PONDER ENERGY 
                                                                               Services, Inc.

*23.1     -- Consent of Arthur Andersen LLP
*23.2     -- Consent of Hairston, Kemp, Sanders & Stich, P.C.
 *27      -- Financial Data Schedule
</TABLE>

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* Filed herewith